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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, 2023
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 Nox
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. ☐
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 firm that prepared or issued its audit report.☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  o   No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, computed by reference to the $17.40 per share selling price of the common stock on June 30, 2022 was $57,243,887
The registrant had outstanding 4,134,964 shares of common stock as of March 18, 2024.


BayFirst Financial Corp.
Table of Contents
Page
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.


Table of Contents

Glossary of Acronyms and Abbreviations
The acronyms and abbreviations identified below may be used throughout this Annual 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.
ACL: Allowance for Credit LossesFDIA: Federal Deposit Insurance Act
AFS: Available for SaleFDIC: Federal Deposit Insurance Corporation
AIO: Architecture, Infrastructure, and OperationsFFIEC: Federal Financial Institutions Examination Council
ALCO: Asset-Liability CommitteeFHLB: Federal Home Loan Bank
ALLL: Allowance for Loan LossesFNBB: First National Bankers Bank
AOCI: Accumulated Other Comprehensive Income
FOMC: Federal Open Market Committee
ASC: FASB Accounting Standards CodificationFRB: Federal Reserve Bank
ASU: FASB Accounting Standards UpdateFVO: Fair Value Option
BHCA: Bank Holding Company Act of 1956, as amended
GAAP: Generally Accepted Accounting Principles
BOLI: Bank Owned Life InsuranceHFI: Held for Investment
BSA: Bank Secrecy Act of 1970HTM: Held to Maturity
CAA: Consolidated Appropriations ActIRA: Individual Retirement Account
CARES Act: Coronavirus Aid, Relief, and Economic Security ActISO: Information Security Officer
CBLR: Community Bank Leverage RatioIT: Information Technology
CDARS: Certificate of Deposit Account Registry ServicesJOBS Act: Jumpstart Our Business Startups Act of 2012
CECL: Current Expected Credit LossesLGD: Loss Given Default
CEO: Chief Executive OfficerLHFS: Loans Held for Sale
CET1: Common Equity Tier 1 Capital
MMDA: Money Market Deposit Account
CFPB: Consumer Financial Protection BureauNOW: Negotiable Order of Withdrawal
C&I: Commercial and IndustrialNSPP: Non-Qualified Stock Purchase Plan
CIK: Central Index KeyOCC: Office of the Comptroller of the Currency
COVID-19: Coronavirus Disease 2019OLC: Officer Loan Committee
CRO: Chief Risk OfficerOREO: Other Real Estate Owned
CTO: Chief Technology OfficerOTTI: Other-Than-Temporary Impairment
DCLC: Directors’ Credit and Loan CommitteePCAOB: Public Company Accounting Oversight Board
DEI: Diversity, Equity, and InclusionPD: Probability of Default
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010PPP: Paycheck Protection Program
DRIP: Dividend Reinvestment PlanPPPLF: Paycheck Protection Program Liquidity Facility
EGC: Emerging Growth CompanyQIB: Qualified Institutional Buyer
EPS: Earnings per ShareROU: Right of Use
Equity Plan: The Amended and Restated 2017 Equity Incentive PlanSBA: Small Business Administration
ESG: Environmental, Social, and GovernanceSEC: U.S. Securities and Exchange Commission
ESOP: Employee Stock Ownership PlanSOFR: Secured Overnight Financing Rate
ESPP: Employee Stock Purchase PlanU.S.: United States
Exchange Act: Securities Exchange Act of 1934USDA: United States Department of Agriculture
FASB: Financial Accounting Standards BoardUSDA B&I: United States Department of Agriculture Business and Industry
FBCA: Florida Business Corporation ActWARM: Weighted Average Remaining Life
2
Table of Contents

Part I
Item 1. Business 
BayFirst Financial Corp.
BayFirst Financial Corp. is a bank holding company that operates through its wholly owned subsidiary, BayFirst National Bank (the “Bank”), together referred to as “the Company or “BayFirst”. 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 consumers and small businesses in the Tampa Bay region and is supported by a national government guaranteed lending business line. BayFirst utilizes this national business line to provide financial support for the delivery and expansion of traditional banking services, and to serve as a specialized lead product to introduce the Bank to new customers in the Tampa Bay region. BayFirst strives to be a progressive institution in its products and services, technology, design, and social responsibility. As of December 31, 2023, BayFirst had consolidated total assets of $1.12 billion, total loans held for investment of $915.7 million, total deposits of $985.1 million, and total shareholders’ equity of $100.7 million. BayFirst’s corporate office is located at the BayFirst Executive Center, 700 Central Avenue, St. Petersburg, Florida 33701.
BayFirst National Bank
The Bank commenced operations on February 12, 1999, as a Florida state-chartered commercial bank. In 2022, the Bank converted its charter to a national banking association. The Bank currently operates out of its main office and eleven additional banking centers located in the Tampa Bay/Sarasota area. The Bank’s main office is located at the BayFirst 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 separately branded loan origination platform, CreditBench. CreditBench is a government guaranteed lender with specific expertise in originating SBA 7(a) loans and USDA loans throughout the nation. During the second quarter of 2022, the Bank began the Bolt loan program, an SBA 7(a) loan product designed to expeditiously provide working capital loans of $150 thousand or less to businesses. The Bank has originated 3,408 Bolt loans totaling $441.8 million through December 31, 2023.
CreditBench also has an advanced technology platform for our SBA 7(a) Small Loan Program that enables the Bank to utilize 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. Retail investment services are facilitated through an independent broker-dealer through a relationship with a shared service organization.
The Bank also offers customary community bank deposit products, including interest-bearing and noninterest-bearing checking accounts, MMDAs, savings accounts, certificates of deposit and IRAs. The consumer product offering also includes unique programs, including, among others: 1) the Essential 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 checking accounts, interest-bearing checking accounts, savings accounts, MMDA, and access to business mobile and online banking, treasury management, cash management, merchant processing services, remote deposit capture, and night depository.
A wide range of loans are also offered, including commercial, consumer, and real estate loans. The 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. In addition, the Bank has a minority lending program for women or minority business owners looking to take their business to the next level. BayFirst focuses its government guaranteed and commercial lending divisions on providing the customer quick turnaround, competitive rates, and an easy application process. The Bank offers personal lines of credit,
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auto, boat, and recreational vehicle loans, residential mortgages, and home equity lines of credit. The Bank has been particularly successful in penetrating the small business community. The Bank participates in interbank credit arrangements to permit the Bank to take part in corporate or other business entity loans for amounts which are greater than its lending limits.
As of December 31, 2023, the Community Banking Division operated from eleven banking centers in the Tampa Bay area: five in Pinellas County, two in Hillsborough County, one in Manatee County, and three in Sarasota County. Additionally, in February 2024, the Bank opened the twelfth banking center which is located in Sarasota.
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. Government guaranteed loans are designed to assist small businesses in obtaining financing. 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. Deposit products are also marketed to borrowers, particularly those borrowers in the Bank's primary market area.
CreditBench originates loans through two distinct channels. One is its team of government guaranteed lenders, known as the Core Government Guaranteed Loan Team. The other is for smaller loans that are processed through financial technology platforms, collectively known and branded as FlashCap. CreditBench’s Core Government Guaranteed Loan Team makes government guaranteed loans throughout the U.S., with a particular emphasis on business acquisition financing. Currently, the Core Government Guaranteed Loan 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 government guaranteed loans nationwide. Underwriting, quality control, and technology are centralized and scalable for potential increases in loan volume. During the second quarter of 2022, the Company launched Bolt, an SBA 7(a) loan product designed to expeditiously provide working capital loans of $150 thousand or less to businesses throughout the country. 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 maximum limit for USDA loans is $25.0 million. Both can be priced competitively relative to conventional financing.
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 revenue generated from CreditBench’s loan originations is 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.
In addition, the Bank may also sell a portion of the unguaranteed balance of certain government guaranteed loans, depending on a loan’s terms, the offer price, its liquidity and capital positions, and the perceived credit risk.
Residential Mortgage Division
In the third quarter of 2022, management decided to discontinue its nationwide residential lending business. Prior to those decisions, the Residential Mortgage Division operated from the banking centers in the Tampa Bay area and loan production offices nationwide. As a result of the discontinuance, the nationwide residential line of business was reclassified as a discontinued operation and reported in the financial statements as such. The Bank continues to offer fixed and variable rate home mortgages for the purchase and refinance of residential properties through the community banking centers.
The Bank sells most of the residential mortgage loans which are originated into the secondary market through a broker arrangement. The Bank also originates loans to be held in its loan portfolio. The portfolio loans are generally high quality, adjustable rate, non-conforming mortgages located in the primary service area where there is a greater opportunity to cross-
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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.
The Bank’s residential mortgages are originated, processed, underwritten, and closed to secondary market standards or Bank policy. In connection with the origination of mortgage loans intended for sale, the Bank uses a broker to underwrite, close, and sell the loans. For loans held in its loan portfolio, the Bank underwrites and closes these loans in-house utilizing the brokers’ technology system. There are no free-standing derivatives associated with the current lending process.
The Bank engages a subservicer for residential mortgage loans that is currently servicing most portfolio residential mortgage loans.
Competition
All phases of the Bank’s operations are highly competitive. Many commercial banks and other competitors have assets, capital, lending limits, and name recognition that are materially larger than the Bank’s. The Bank competes with other financial service providers for loans and deposits. These competitors include:
•national, super-regional, and regional financial institutions that have well-established branches and significant market share in the communities the Bank serves;
•non-bank government guaranteed 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 the Bank for clients desiring a high level of service; and
•technology-based financial institutions, including large national, super-regional, and regional banks offering online deposit, bill payment and mortgage loan application services.
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 the larger competitors have over the Bank are their ability to finance wide-ranging marketing campaigns and to allocate their investment assets to products with the highest yields and demands. Several of the competitors offer certain services, such as trust departments, that the Bank does not offer. By virtue of their greater total capital, these financial service providers have substantially higher loan-to-one borrower limits than the Bank (loans-to-one borrower limits apply to an individual customer’s total extension of credit as a percentage of a bank’s total capital). These competitors may intensify their advertising and other marketing activities to counter any efforts by the Bank to attract new business.
To compete with the financial institutions in its primary service area, the Bank capitalizes upon the flexibility that its independent status allows, including making decisions locally. This includes solicitation of business, professional, and personal accounts through the personal efforts of the Bank’s directors and officers. The Bank believes 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, its customers expect that the Bank will be able to make prudent lending decisions quicker and with a better understanding of the market than larger competitors. The Bank focuses 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. The Bank 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 the Bank’s loan limits, the Bank 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 the Bank’s target markets. In addition, recent legislative and regulatory changes and technological advances have enabled customers to conduct banking activities without regard to geographic barriers, through internet and telephone-based banking and similar services. There can be no assurance that the
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United States Congress, the Florida Legislature, or the applicable bank regulatory agencies will not enact legislation or promulgate regulations that may further increase competitive pressures on the Bank.
Lending Philosophy and Credit Risk Management
Historically, the Company believes they have made sound, high-quality loans while recognizing that lending involves a degree of risk. The Bank’s centralized credit approval process and loan policies are designed to assist management in managing this risk. The 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. The loan approval process begins with obtaining detailed financial and other information from the Bank’s borrowers. The Bank also relies on its loan and executive officers’ in-depth knowledge of its markets and borrowers.
Regardless of the loan type or amount, no single individual has sole loan approval authority. The objective of the 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, the evaluation of the repayment source and associated risks, the evaluation of collateral, loan covenants, loan monitoring requirements, and the risk rating rationale. The Bank’s 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 the 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.
The 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, the 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 credit loss reserve, and other matters relating to lending practices.
The community banking centers originate residential mortgage, consumer and commercial loans. The Bank utilizes a broker arrangement to originate residential mortgage loans to be sold in the secondary market. These residential mortgage loans are underwritten to meet secondary market standards so that loans can be sold into the secondary market. Some residential mortgage loans are held for the Bank’s portfolio. Portfolio loans are primarily underwritten by the Bank on the borrowers’ financial strength and cash flow, with conservative loan-to-value requirements. Consumer loans include loans to individuals for automobiles, boats, and other major 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 its 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. Within the FlashCap program, we offer Bolt loans up to $150,000 for working capital purposes. Bolt loans are guaranteed up to 85% by the SBA and are primarily underwritten based upon predictive scores and character analysis of the business and its principals.
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All CreditBench loans regardless of size which 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.
Risk Management
The Company believes that effective risk management and control processes are critical to safety and soundness of the Bank, the ability to predict and manage the challenges that they face, and, ultimately, the long-term corporate success. Risk management refers to the activities by which the Company identifies, measures, monitors, evaluates, and manages the risks they face in the course of banking activities. These risks include liquidity, interest rate, credit, operational, compliance, regulatory, strategic, financial, and reputational risk exposures. The Board of Directors, both directly and through their committees, are responsible for overseeing the 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 the Board of Directors assuming a different and important role in overseeing the management of the risks.
The Audit and Risk Management Committees of the Board of Directors are 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 risks. The Compensation Committee of the Board of Directors has primary responsibility for risks and exposures associated with the compensation policies, plans, and practices regarding both executive compensation, Board compensation, and the compensation structure generally. The Compensation Committee, in conjunction with the Chief Executive Officer and other members of the management team, as appropriate, reviews the 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 the employees. The Nominating Committee of the Board of Directors oversees risks associated with the independence of the Board of Directors and potential conflicts of interest.
The senior management team is responsible for implementing the 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 the Board of Directors regarding the risk management processes. The senior management team is also responsible for creating and recommending to the Board of Directors for approval of appropriate risk appetite metrics reflecting the aggregate levels and types of risk they are willing to accept in connection with the operation of the business and pursuit of the business objectives.
The role of the Board of Directors in the Company’s risk oversight is consistent with the leadership structure, with the Chief Executive Officer and the other members of senior management having responsibility for assessing and managing the risk exposure, and the Board of Directors and their committees providing oversight in connection with those efforts. The Company believes this division of risk management responsibilities presents a consistent, systemic, and effective approach for identifying, managing, and mitigating risks throughout the Company’s operations.
Information Technology Systems
The Company has made, and continues to make, significant investments in its information technology systems and staff to support banking activities. The Company believes this investment will support continued growth and enable them to enhance the capabilities to offer new products, improve overall customer experience, improve profitability through efficiencies, maintain and improve cybersecurity, and provide scalability for future growth. The Company utilizes nationally recognized software vendors and their cloud/hosted models, which allow them to outsource the processing of data. The Company’s internal network and e-mail systems are administered by a managed service provider specializing in financial institutions, and they maintain production infrastructure in a data center facility near Tampa, Florida. This site provides for power and connectivity redundancy, and they maintain a disaster recovery program, including a cloud-based recovery environment.
The majority of the other systems, including electronic funds transfer, transaction processing, and online banking services are hosted by third-party service providers. The scalability of this infrastructure will support the Bank’s growth strategy. In addition, the tested capability of these vendors to automatically switch over to standby systems should allow the Bank to recover the systems and provide business continuity quickly in case of a disaster.
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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 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 the 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 review an institution’s information technology program and its ability to prevent cyberattacks. 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 for computer-security incident notification requirements for banking organizations and their bank service providers. 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, BayFirst has grown significantly without losing sight of its commitment to making an impact in the communities served and being Here for What’s Next® in the lives of the Company’s customers, communities, employees, and investors. As of December 31, 2023, BayFirst had 306 employees (304 full-time and 2 part-time) and recognizes that they are its greatest asset. Providing a work environment that is inclusive, transparent, and comfortable for all is foundational to the Bank’s core beliefs. The Company is an organization that values open communication and collaboration in a professional and challenging, yet informal atmosphere.
Total Rewards
The Bank’s competitive compensation and benefits package helps attract and retain top talent throughout the U.S. and demonstrates its belief that engaged and satisfied employees directly correlate to engaged and satisfied customers, generating long-term value for the Company’s stakeholders.
The Bank’s goal is to provide the most competitive compensation and benefit plans possible. In 2023, BayFirst established a living minimum wage of $20 per hour. The Bank has a generous 401(k) plan, plus a discretionary profit-sharing contributions to its Employee Stock Ownership Plan. Most employees are shareholders through their participation in the ESOP. Additionally, employees have the opportunity to grow their ownership through a discounted non-qualified Employee Stock Purchase Plan.
BayFirst offers a wide range of health and welfare plans designed to fit its diverse population. The Bank provides 100% employer-paid premiums for medical, dental, vision, disability, and life insurance for the employee. The Bank offers an employee wellness program designed to support the whole employee which encompasses physical, mental, social, and financial wellness.
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BayFirst provides both paid maternity and paternity leave through the parental leave program. In addition, the Banks’ no-cost, short-term disability policy is administered in-house and provides up to 12 weeks of medical leave at 100% pay. The Bank recognizes the burdensome expense of dependent care and provides a company match to employees’ dependent care FSA accounts. The Bank provides paid volunteer time off to all employees building engagement and pride in the organization while encouraging teams to give back to their communities.
Training and Development
As part of the commitment to being a top employer in the industry and the premier community bank of Tampa Bay, BayFirst 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.
The Bank offers both a tuition reimbursement and student loan assistance program to all eligible employees. The Bank offers these programs to nurture the professional development of the Bank’s colleagues and ease the financial burden associated with continuing education.
Social Governance: Diversity, Equity, and Inclusion
The Bank’s cultural foundation of being current and comfortable for all drives the Diversity, Equity, and Inclusion committee’s efforts throughout the entire organization. The diversity enhances its workforce, expands the markets and fosters a culture of belonging for its employees, customers and communities in which the Bank serves.
As of December 31, 2023, the Bank’s employee base was comprised of individuals from all walks of life, genders, ethnicities, races, ages and differing economic and social backgrounds. Females represented 59% of the Company’s employee base while minorities represented 32% of its population. The officer base was 50% female and 19% minority.
BayFirst has an active Diversity, Equity, and Inclusion council with a purpose of ensuring BayFirst 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 works to fulfill its obligation to be the voice for all associated with BayFirst.
Employee Engagement
The Bank believes employee engagement is what sets the Bank apart from the competition. The Bank endeavors to recruit and retain some of the best and brightest talent across the U.S. When highly talented, skilled and driven individuals join the organization, they bring with them some of the best ideas, strategies, procedures and thoughts.
BayFirst understands that harnessing this level of engagement is critical to its success and has developed several channels to do so. The Bank’s 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 the organization. To ensure employees understand the commitment of listening to feedback, each Bright Idea submission is reviewed by the CEO and executive team.
The 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. The Bank also completes periodic Officer’s Surveys where each officer is asked to provide feedback on specific areas of the organization and its strategy.
One of the greatest engagement and communication tools is the “What’s Next” call where ALL employees are invited to a weekly video conference where ideas are exchanged, updates are provided, and business and individual recognitions are communicated.
The Bank’s efforts were recognized through an anonymous employee survey which ranked BayFirst in the top 15 of the 2022 Best Places to Work in Tampa Bay.
Corporate Social Responsibility Policy
In 2021, BayFirst advanced its Corporate Social Responsibility 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
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standards in all aspects of its operations. As both a Tampa Bay community bank and a nationwide lender, the Company believes it is their responsibility to take an important role in advancing the values they hold, including being an exemplary corporate citizen, providing fair and equitable access to the banking system, engaging with the communities, addressing climate change, providing full disclosure and transparency, providing a safe and secure banking experience, and offering the team the best possible workplace and opportunity for advancement. The main pillars of BayFirst’s Corporate Social Responsibility 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
General
As a bank holding company, the Company is subject to an extensive body of state and federal banking laws and regulations that impose specific requirements and restrictions on virtually all aspects of the Company’s operations. The Company is 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 the 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 applicable statutes or regulations. Any change in applicable laws or regulations may have a material adverse effect on the business.
BayFirst Financial Corp.
BayFirst is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended. As such, the Company is required to file annual reports and other information with the Federal Reserve regarding the Company’s business operations and those of the subsidiary. The Company is also subject to the supervision of, and to periodic inspections by, the Federal Reserve.
The BHCA generally requires every bank holding company to obtain approval from 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, 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
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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.
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, the Company may be required to provide financial support to the 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.
National Banks
National Banks are subject to regulation, periodic examination, enforcement authority and oversight by the OCC extending to all aspects of the bank’s operations. OCC regulations govern permissible activities, capital requirements, dividend limitations, investments, loans and other matters. 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 FDIA 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 but are not limited to requirements concerning 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
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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 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 reaches $3 billion in assets, 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. CET1 Capital is the sum of common stock instruments and related surplus net of treasury stock, retained earnings, 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, and ACL not exceeding 1.25% percent of risk-weighted assets, less applicable regulatory adjustments and deductions.
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Smaller banks are subject to the following capital level threshold requirements:
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 conservation buffer2.5%
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 its 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 undercapitalized,” 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, the Company 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 the Company 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 rule, 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.
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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. Congressional bills and other proposals could result in additional significant changes to the financial services and banking system, including, but not limited to, provisions for limitations on deposit insurance coverage or changing the timing and method financial institutions use to pay for deposit insurance. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business or change the Corporation’s competitive landscape. Whether any future legislation will be enacted or additional regulations will be adopted, and how they might impact the Company, cannot be determined at this time.
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 the Company. Additionally, the FBCA provides that the Company may only pay dividends if the dividend payment would not render BayFirst insolvent, or cause BayFirst to be unable to meet obligations as they come due. These provisions could have the effect of limiting the ability to pay dividends.
Banking regulations limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits of the Bank for that year combined with the retained net profits for the preceding two years.
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%
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 the Bank to maintain privacy policies intended to safeguard consumer financial information, to disclose these policies to the 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
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•banks enjoy a safe harbor from civil liability to customers for banks’ activities under anti-money laundering laws and regulation.
The U.S. 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;
•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 framework of authority to conduct systemic risk oversight within the financial system to be distributed among 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 the 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. An 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.
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
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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.bayfirstfinancial.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 political, environmental, or 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;
•Recruitment, retention, development, performance, and potential bad acts of our key executives and other employees, as well as transactions with them and our directors;
•Dividend and other restrictions placed on us by our outstanding preferred stock, restrictions that may be imposed by future issuances of preferred stock, and our pledging of the stock in the Bank to secure a loan;
•Rapidly developing technology;
•Estimates used in certain valuations, including our allowance for credit losses; and
•Features of our stock, such as liquidity, dilution, the lack of preemptive rights, our SEC reporting status, and the concentration of ownership among our insiders.
Risk Factors Related to Our Business
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.
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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, 2023, our one-year interest rate sensitivity position was asset sensitive, such that a gradual increase in interest rates during the next twelve months would have a positive impact on our net interest income. Our results of operations are affected by changes in interest rates and our ability to manage this risk. The difference between interest rates charged on interest-earning assets and interest rates paid on interest-bearing liabilities may be affected by changes in market interest rates, changes in relationships between interest rate indices, and changes in the relationships between long-term and short-term market interest rates. Our net interest income may be reduced if: (i) more interest-earning assets than interest-bearing liabilities reprice or mature during a time when interest rates are declining; or (ii) more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising. In addition, the mix of assets and liabilities could change as varying levels of market interest rates might present our customer base with more attractive options.
Loss of deposits or a change in deposit mix could increase our funding costs and adversely affect our performance.
Deposits are a low cost and stable source of funding. We compete with banks and other financial institutions for deposits and as a result, the Company could lose deposits in the future, clients may shift their deposits into higher cost products, or the Company may need to raise interest rates to avoid deposit attrition. Funding costs may also increase if deposits lost are replaced with wholesale funding. Higher funding costs reduce our net interest margin, net interest income, and net income. In recent months, the environment for maintaining and growing deposits has become more challenging. This is partially attributable to the FRB reducing the size of its balance sheet through quantitative tightening and continues to increase interest rates giving depositors an incentive to move deposits to money market funds and other higher-yielding alternatives. In addition, recent unusually high levels of withdrawals from other, larger banks, which in some cases has resulted in bank failure, may result in similar withdrawal patterns at the Company. Should we experience any of these events, we may need to rely on higher cost wholesale funding, which would adversely affect our financial performance and net income.
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.
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 ACL. The Bank adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments effective January 1, 2023. This standard required financial institutions to determine periodic estimates of lifetime expected credit
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losses on financial instruments and other commitments to extend credit. This changed the current method of providing allowances for credit losses that are probable.
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 ACL, either of which would adversely affect our credit quality and net income. We may also become subject to heightened regulatory scrutiny for making loans to such borrowers and may be required to dedicate time and other resources to addressing regulatory concerns.
Our loan referral sources operate independently from us and may take actions for which we may be held responsible.
Our referral sources for SBA and other government guaranteed loans operate independently from us and have the initial interactions with many loan applicants and borrowers. As part of those interactions, our referral sources may take actions which violate laws, regulations, or our policies. These may include, among other things, charging impermissible fees, failing to provide or properly complete required documentation or disclosures, making false or misleading statements, or encouraging an applicant to make misrepresentations. In certain instances, the Bank may be held responsible by an applicant or a government agency for such actions. If that were to happen, the Bank may be required to pay restitution or fines, be subject to regulatory enforcement actions, or lose certain statuses with the SBA or other government agencies.
We rely heavily on technology partners and other referral sources in our government guaranteed loan origination process.
As part of our government guaranteed 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 government guaranteed 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 government guaranteed 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 government guaranteed lending operations are expanding at a rapid pace. As a result, we may not be able to provide comprehensive or timely training to staff.
We may also not develop appropriate operational protocols 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.
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, Ukraine, the Middle East, and South America may 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
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markets, and changes in oil production and supply in those and other areas, 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 some of the loans we make, will be unable to process those loans and sell 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 originate or sell them, could result in decreased fee and interest income, which would adversely affect our financial performance.
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 or the need to sell investment securities at a loss, which could have a material adverse effect on our business, financial condition and results of operations.
Unrealized losses in the Bank’s investment portfolio could affect liquidity.
As market interest rates increase, the unrealized losses on the Bank’s investment portfolio also increase. As market interest rates decrease, the unrealized losses on the Bank’s investment portfolio also decrease. The increase or decrease in unrealized losses is reflected in Accumulated Other Comprehensive Income (“AOCI”) on the balance sheet and increases or reduces book capital, and therefore, the tangible common equity ratio. Unrealized losses do not affect regulatory capital ratios.
The Bank’s access to liquidity sources could be affected by unrealized losses if investments must be sold at a loss, tangible capital ratios continue to decline from an increase in unrealized losses or realized credit losses, the FHLB or other sources reduce capacity or bank regulators impose restrictions on the Bank such as a limit on interest rates it may pay on deposits or its ability to access brokered deposits.
We have expanded into new markets with which we have less familiarity with than our historic markets.
We intend to continue to expand the location and number of our Florida banking centers and the national scope of our SBA and USDA loan origination efforts when we identify attractive opportunities. Our senior management and Board of Directors have less familiarity with out of state markets and may not fully understand the nuances of our new Florida markets. We are dependent on the expertise and actions of the bankers we have hired to be successful in these 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. On December 31,2023, our Chief Executive Officer Anthony Leo retired. Our Boards
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selected the current Bank President Thomas Zernick to become Chief Executive Officer of the Company and Robin Oliver to become President and COO of the Company. If this transition is not effective or if we encounter problems in implementing it, our performance may suffer.
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 $2.4 million as of December 31, 2023. 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.
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.
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 clients’ 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. Our clients’ or our websites or 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.
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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.
Most expansion activities require approval of our regulators, which we may not be able to obtain, or that may impose conditions that we find to be unacceptable.
Branch openings, and other expansion activities, generally require the approval of our regulators. We may not be able to obtain such approvals if our regulators do not believe we are financially or managerially strong enough to integrate or manage such activities. In addition, our regulators consider our capital, liquidity, profitability, regulatory compliance, including with the Community Reinvestment Act and the Bank Secrecy Act, and levels of goodwill and intangibles when considering acquisition and expansion proposals. Our regulators may also impose conditions in approvals that we find to be unacceptable, prohibitive, or otherwise undesirable. In any of those instances, we may be unable or unwilling to consummate a transaction or undertake an expansionary activity.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties and have negative effects on our business.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations impose obligations and nondiscriminatory lending requirements on financial institutions. The banking regulators and the U.S. Department of Justice are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on branch expansion, merger and acquisition activity, and restrictions on entering new business lines. Private parties may also have the ability to challenge our performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations, and future prospects.
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We may be required to make increases in our credit loss reserve and to charge off loans in the future, which could adversely affect our results of operations.
The determination of the appropriate level of the credit loss reserve 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 credit loss reserve. In addition, our regulators periodically review our credit loss reserve and may request an increase in the provision for credit 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 implemented this new standard on January 1, 2023 and we will recognize a one-time adjustment to the allowance of $3.1 million. 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, Pasco, 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 credit 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 supply or demand for products and services resulting from new laws, regulations, and changing consumer and investor preferences regarding responses to climate change.
The Florida property insurance market is in crises and the inability of our borrowers to obtain insurance on properties securing our loans may adversely affect the value of the collateral, the performance of our loan portfolio, and our ability to make loans secured by real estate.
Florida is susceptible to hurricanes, tropical storms and related flooding and wind damage and other similar weather events. Such events can disrupt operations, result in damage to properties and negatively affect the local economies in our markets. As a result of the potential for such weather events, many of our customers have incurred significantly higher insurance premiums, or been unable to secure insurance, on their properties. This may adversely affect real estate sales and values in our markets and leave our borrowers without funds to repay their loans in the event of destructive weather events. Such events could result in a decline in loan originations, a decline in the value or destruction of properties securing loans and a decrease in credit quality, negatively impacting our business and results of operations.
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Public health emergencies could hurt our business.
The COVID pandemic and the governmental and public response disrupted day-to-day life and the normal functioning of the domestic and global economy. Future developments or new emergencies will be highly uncertain and cannot be predicted, including the effectiveness of remote working arrangements, third party providers’ abilities to continue to support our and our customer’s operations, and any further actions taken by governmental authorities and other third parties. Accordingly, public health crises could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels. Further, it is impossible to effectively predict future events relative to the nature, duration, or severity of recent events. Therefore, we cannot provide guidance as to the effect a global pandemic or other health crisis may have on us, Florida, the remainder of the U.S., or the global economy.
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 credit loss reserve 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.
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, possible dilution to our existing shareholders, the diversion of our management’s attention to the
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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 activities. 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. New laws and regulations may increase costs of regulatory compliance. Further, additional legislation and regulations that could significantly affect our power and authority, and operations may be enacted or adopted in the future which could have a material adverse effect on our financial condition and results of operations.
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 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.
Inflation could negatively impact our business and our profitability.
Significant or prolonged inflation may impact our profitability by negatively impacting our fixed costs and expenses, including increasing funding costs and executive and other employee compensation expense, and negatively impacting the demand for banking products and services. Additionally, inflation may lead to a decrease in client purchasing power and negatively affect the need or demand for loans or deposit accounts. If significant inflation continues, our business could also be negatively affected by, among other things, increased loan default and losses. If we experience such effects of inflation, our results of operations could suffer.
ESG risks could adversely affect our reputation and shareholder, employee, client and third party relationships.
As a publicly traded company, we face increasing public scrutiny related to ESG activities. If we fail to act responsibly in areas, such as DEI, environmental stewardship, human capital management, support for our local communities, corporate governance, and transparency, or fail to consider ESG factors in our business operations, our reputation may be adversely affected. Furthermore, as a result of the diversity of our clients and business partners, we may face negative publicity because of the identity of our clients or business partners and the public’s view of those entities. Additionally, we may face pressure to not do business in certain industries that are viewed as harmful to the environment or are otherwise negatively perceived, which could impact our growth. If we, or our clients or business partners, become the subject of such negative
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publicity, our ability to attract and retain clients, employees, and business partners, may be negatively impacted, which could affect our results of operation or growth prospects.
Additionally, investors and shareholder advocates are increasing their emphasis on how corporations address ESG issues in their business strategies.
An economic downturn could have a material adverse effect on our capital, financial condition, results of operations, and future growth.
We monitor market conditions and economic factors throughout, and beyond, our geographic markets. If economic conditions were to worsen nationally, regionally, or locally, we could experience a decline in credit quality and loan and deposit demand. Such declines could negatively affect our business and have a material adverse effect on our capital, financial condition, results of operations, and future growth. In addition, international economic and political uncertainty could impact the U.S. financial markets by potentially suppressing stock prices, including ours, and adding to overall market volatility, which could adversely affect our business. The effects of any economic downturn on our business could continue for many years after the downturn is considered to have ended.
We may incur losses if asset values decline, including due to changes in interest rates and prepayment speeds.
We have a large portfolio of financial instruments, including loans and loan commitments, debt securities, and certain other assets and liabilities that we measure at fair value that are subject to valuation and impairment assessments. We determine these values based on applicable accounting guidance. For financial instruments measured at fair value, this requires us to base fair value on exit price and to maximize the use of observable inputs and minimize the use of unobservable inputs in fair value measurements. The fair values of financial instruments include adjustments for market liquidity, credit quality, and other transaction-specific factors, if appropriate. Gains or losses on these instruments can have a direct impact on our results of operations. Increases in interest rates or changes in spreads may adversely impact the fair value of loans or debt securities and, accordingly, for debt securities classified as available for sale, may adversely affect accumulated other comprehensive income and, thus, capital levels. These market factors also may adversely impact the value of debt securities we hold to meet regulatory liquidity requirements. Decreases in interest rates may increase prepayments of certain assets, and, therefore, may adversely affect net interest income.
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
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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, this listing has not yet resulted in a substantially liquid market for our common stock. We cannot be certain if or when such a market may develop. 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. 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.
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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, 2023, BayFirst’s directors and named executive officers as a group owned approximately 14.42% of our outstanding common stock. In addition, the directors and named executive officers have stock options to acquire shares of common stock, which, if fully exercised within sixty days of December 31, 2023, would have resulted in them owning approximately 18.83% of our outstanding common stock. Our directors and executive officers are expected to exert a significant influence on the election of Board members and on the direction of the Company. This influence could negatively affect the price of our shares or be inconsistent with other shareholders’ desires.
We have outstanding preferred stock and our Board may authorize the issuance of additional series of preferred stock.
We have 1,000,000 shares of authorized preferred stock, no par value. Of those, shares in three classes are issued and outstanding. The terms of those shares currently require us to pay quarterly dividends of $385 thousand (subject to increase if we do not timely redeem them) and prohibit us from paying common stock dividends if we are delinquent in payment of preferred stock dividends. 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, 2023, BayFirst had a $2.39 million term loan and $5.95 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 in 2019), 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 in 2020 and 2021), and the holders of our Series C Cumulative Convertible Preferred Stock are entitled to receive quarterly cash dividends at 11% per annum (subject to increase to 12% if we have not redeemed the shares by the tenth anniversary of their issuance in 2023). 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.
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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 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.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
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Cybersecurity Risk Management and Strategy
Cybersecurity risks are constantly evolving and becoming increasingly pervasive across all industries. We use people, process, and technology controls to manage and mitigate cybersecurity risk. The Company’s Board of Directors delegates oversight of the Bank's processes for identifying, assessing, and mitigating material risks, including cybersecurity risks, to the Board Audit and Risk Management Committee. Senior Leadership, including the CTO and CRO, managed third-party service providers and advisors to maintain and continuously enhance the Bank's Information Security Program. The CTO, CRO, and the Bank's third-party virtual ISO regularly present to the Board Audit and Risk Management Committee on the state of cybersecurity at the Bank, including any business-impacting incidents and emerging industry risks. The virtual ISO has over 30 years of experience in IT, Information Security, Business Continuity, and Technology Risk in the Financial Services sector and maintains several industry-recognized security, audit, privacy and governance certifications.
Key elements of the comprehensive Information Security Program include:
•A mix of administrative and technical tools and controls appropriate to the size and complexity of the Bank to protect the confidentiality, integrity, and availability of critical systems and data, including the privacy of customer data, in compliance with applicable laws and regulations.
•Risk assessments are conducted to: (a) identify reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of critical Bank systems and data, (b) determine the likelihood and potential impact of the threats, and (c) determine the sufficiency of controls and mitigating factors to reduce the risks identified.
•A detailed Cyber Incident Response Plan which includes engagement of a third-party that specializes in cybersecurity for financial institutions to assist in incident response and recovery and communications with the Board, regulators, law enforcement and Federal and State Government offices, as required. While the Bank has not experienced a business-impacting cyber incident to date, the Cyber Incident Response Plan is tested at least annually and updated as required so that personnel are prepared for an actual incident.
•Security Awareness training to help employees understand their information protection and cybersecurity responsibilities, including targeted campaigns on common social engineering techniques utilized by threat actors.
•A third-party risk management program to classify suppliers according to risk and identify those that require enhanced cyber due diligence.
•Annual independent third-party penetration tests, vulnerability scans, assessments and audits of the Bank's Information Security Program elements.
While cybersecurity risks have the potential to materially affect the Company's business, financial condition, and results of operations, the Company does not believe that risks from cybersecurity threats or attacks have materially affected the Company, including its business strategy, results of operations or financial condition. As of the date of this Form 10-K, the Company is not aware of any cybersecurity incidents that have materially affected or are reasonably likely to materially affect the Company, including its business strategy, results of operations, or financial condition that are required to be reported in this Form 10-K. For further discussion, please see Item 1A. “Risk Factors” for a discussion of cybersecurity risks.
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Item 2. Properties 
The following table contains information concerning the current locations of the Bank’s full-service banking centers.
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
2102 59th Street West
Bradenton, FL 34209
Banking CenterOwn2022
16002 N. Dale Mabry Highway
Tampa, FL 33618
Banking CenterOwn2023
5600 Bee Ridge Road
Sarasota, FL 34233		Banking CenterOwn2023
1782 Dr. Martin Luther King Way
Sarasota, FL 34240
Banking CenterOwn2023
2075 S. Tamiami Trail
Sarasota, FL 34239
Banking CenterOwn2024
Item 3. Legal Proceedings
In the normal course of business, the Company is named or threatened to be named as a defendant in various lawsuits, none of which they 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 its business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, anti-money laundering and anti-terrorism), the Company, like all banking organizations, is 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 the Company is a party or to which its property is the subject.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The common stock began trading on the Nasdaq under the symbol “BAFN” on November 30, 2021. Prior to that, the common stock was traded on the OTC Markets Group Inc. (OTCQX) under the symbol “FHBI”.
Issuer Purchases of Equity Securities
Share Buyback Program. On February 28, 2023, the Board of Directors approved the Company’s 2023 Stock Repurchase Program (“Repurchase Program”). The Repurchase Program permits the Company to repurchase up to $1,000,000 of the Company’s issued and outstanding common stock. The Repurchase Program ended as of December 31, 2023.
The Inflation Reduction Act of 2022 created a new nondeductible 1% excise tax on repurchases of corporate stock by certain publicly traded corporations or their specified affiliates after December 31, 2022. The tax is imposed on the fair
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value of the stock of a covered corporation that is repurchased in a given year, less the fair market value of any stock issued in that year. A “covered corporation” is any domestic corporation whose stock is traded on an established securities market, such as Nasdaq. The excise tax applies to all of the stock of a covered corporation regardless of whether the corporation has profits or losses. The act contains several exceptions to the excise tax, including, but not limited to, any repurchase of stock: in which the total value of the repurchased stock in a given year does not exceed $1,000,000; that is contributed to an employer sponsored retirement plan or other similar stock compensation plan; that is taxed as a dividend. The impact of the Inflation Reduction Act of 2022 on our consolidated financial statements will be dependent on the extent of stock repurchases made in future periods.
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, 2023.
Period
Number of Shares
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, 2023— $— 900 $987,178 
November 1-30, 2023— — 900 $987,178 
December 1-31, 2023— — 900 $987,178 
Total— $— 
Under applicable state law, Florida corporations are not permitted to retain treasury stock. As such, the price paid for the repurchased shares reduces the amount of common stock on the consolidated balance sheet. As of December 31, 2023, total shares repurchased for $12,822 had been redeemed since the Repurchase Program was implemented. The repurchased shares remain authorized, unissued shares.
Item 6. {Reserved}
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is an analysis of the results of operations for the fiscal years ended December 31, 2023 and December 31, 2022 and financial condition as of December 31, 2023 and December 31, 2022. This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes.
In addition to the historical information contained herein, this Form 10-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 health crises, global military hostilities, or climate changes, including its effects on the economic environment, its customers and its operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with them; the ability of the Company to implement its strategy and expand its banking operations; changes in interest rates and other general economic, business and political conditions, including changes in the financial markets or global military hostilities; changes in business plans as circumstances warrant; risks related to mergers and acquisitions; changes in benchmark interest rates used to price loans and deposits, changes in tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements.
Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and the Company does not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
Selected Financial Data - Unaudited
As of and for the Three Months Ended
As of and for the Year Ended
(Dollars in thousands, except for share data)12/31/20239/30/202312/31/202212/31/202312/31/2022
Income Statement Data:
Net interest income$8,877 $8,393 $8,574 $36,431 $30,000 
Provision for credit losses(1)
2,737 3,001 700 10,445 (700)
Noninterest income14,691 14,679 8,404 49,755 31,550 
Noninterest expense18,466 17,427 13,493 67,707 55,212 
Income tax expense704 674 672 2,119 1,560 
Net income from continuing operations1,661 1,970 2,113 5,915 5,478 
Net loss from discontinued operations(6)(47)(791)(213)(5,827)
Net income (loss)1,655 1,923 1,322 5,702 (349)
Preferred stock dividends341 208 208 965 832 
Net income available to (loss attributable to) common shareholders$1,314 $1,715 $1,114 $4,737 $(1,181)
Balance Sheet Data:
Average loans HFI, excluding PPP loans$900,289 $841,920 $703,193 $829,012 $608,563 
Average loans HFI at amortized cost, excluding PPP loans812,446 773,749 677,172 754,612 580,308 
Average total assets1,108,550 1,088,517 925,194 1,058,124 904,546 
Average common shareholders’ equity82,574 81,067 80,158 80,718 82,589 
Total loans HFI915,726 878,447 728,652 915,726 728,652 
Total loans HFI, excluding PPP loans912,524 863,203 709,479 912,524 709,479 
Total loans HFI, excluding government guaranteed loan balances698,106 687,141 569,892 698,106 569,892 
Allowance for credit losses(1)
13,497 13,365 9,046 13,497 9,046 
Total assets1,117,766 1,133,979 938,895 1,117,766 938,895 
Common shareholders’ equity84,656 82,725 82,279 84,656 82,279 
Per Share Data:
Basic earnings (loss) per common share$0.32 $0.42 $0.28 $1.16 $(0.29)
Diluted earnings (loss) per common share$0.32 $0.41 $0.28 $1.12 $(0.22)
Dividends per common share$0.08 $0.08 $0.08 $0.32 $0.32 
Book value per common share$20.60 $20.12 $20.35 $20.60 $20.35 
Tangible book value per common share(2)
$20.60 $20.12 $20.35 $20.60 $20.35 
Performance Ratios:
Return on average assets(3)
0.60 %0.71 %0.57 %0.54 %(0.04)%
Return on average common equity(3)
6.37 %8.46 %5.56 %5.87 %(1.43)%
Net interest margin(3)
3.48 %3.36 %4.19 %3.78 %3.97 %
Dividend payout ratio25.03 %19.15 %28.99 %27.70 %(108.95)%
Asset Quality Data:
Net charge-offs$2,612 $2,234 $1,393 $8,987 $3,706 
Net charge-offs/average loans HFI at amortized cost, excluding PPP(3)
1.29 %1.15 %0.82 %1.19 %0.64 %
Nonperforming loans(4)
$9,688 $9,518 $10,468 $9,688 $10,468 
Nonperforming loans (excluding government guaranteed balance)(4)
$8,264 $7,997 $3,671 $8,264 $3,671 
Nonperforming loans/total loans HFI(4)
1.18 %1.20 %1.49 %1.18 %1.49 %
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
As of and for the Three Months Ended
As of and for the Year Ended
(Dollars in thousands, except for share data)12/31/20239/30/202312/31/202212/31/202312/31/2022
Nonperforming loans (excluding gov’t guaranteed balance)/total loans HFI(4)
1.00 %1.01 %0.52 %1.00 %0.52 %
ACL/Total loans HFI at amortized cost(1)
1.64 %1.68 %1.29 %1.64 %1.29 %
ACL/Total loans HFI at amortized cost, excluding PPP loans(1)
1.64 %1.72 %1.33 %1.64 %1.33 %
Other Data:
Full-time equivalent employees
305307291305291
Banking centers11108118
(1) Prior to January 1, 2023, the incurred loss methodology was used to estimate credit losses. Beginning with that date, credit losses are estimated using the CECL methodology.
(2) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent.
(3) Annualized
(4) Excludes loans accounted for at fair value
.
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. The management team uses these non-GAAP financial measures in its analysis of its performance, and they believe that providing this information to financial analysts and investors allows them to evaluate capital adequacy.
The following presents 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 (Unaudited)
As of
(Dollars in thousands, except for share data)December 31, 2023September 30, 2023December 31, 2022
Total shareholders’ equity$100,707 $94,165 $91,884 
Less: Preferred stock liquidation preference(16,051)(11,440)(9,605)
Total equity available to common shareholders84,656 82,725 82,279 
Less: Goodwill— — — 
Tangible common shareholders' equity$84,656 $82,725 $82,279 
Common shares outstanding4,110,470 4,110,650 4,042,474 
Tangible book value per common share$20.60 $20.12 $20.35 
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
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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, 2023, the most critical of these significant accounting policies in understanding the estimates and assumptions involved in preparing the consolidated financial statements were the policies related to the ACL, fair value measurement of government guaranteed loan servicing rights and government guaranteed loans HFI at fair value, which are discussed more fully below.
Allowance for Credit Losses
The ACL is calculated with the objective of maintaining a reserve sufficient to absorb estimated 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 for internal risk ratings, collateral values, and the amounts and timing of expected future cash flows. The Company’s ACL on loans is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. 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 ACL.
Fair Value Measurements - Government Guaranteed Loan Servicing Rights
The fair value of servicing assets is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed and discount rate assumptions typically have the most significant impacts on the fair value of servicing rights. Generally, as interest rates decrease on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets. The discount rate used in the estimation process is tied to a benchmark risk-free rate with a risk premium added using a build-up method. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.
Fair Value Measurements - Government Guaranteed Loans HFI
Certain government guaranteed loans HFI are recorded at fair value on a recurring basis. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. The fair value for government guaranteed loans HFI is calculated based on the present value of estimated future payments. The valuation model uses interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future payments. Whenever available, the present value is validated against available market data. 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. The Company has elected to take advantage of this extended transition period. This means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private
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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 the financial condition and results of operations on a consolidated basis. However, because the Company conducts all of its material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level. The following discussion should be read in conjunction with the consolidated financial statements.
As a one-bank holding company, the Company generates most of its revenue from interest on loans and gain-on-sale income derived from the sale of government guaranteed loans into the secondary market. The primary source of funding for its loans is deposits. The Company is dependent on noninterest income, which is derived primarily from net gain on the sales of the guaranteed portion of government guaranteed loans. The largest expenses are interest on those deposits and borrowings, professional fees, and salaries and commissions plus related employee benefits. The Company measures its performance through its net interest income after provision for credit losses, return on average assets, and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.
Recent Developments
Preferred Stock Offering. On September 30, 2023, the Company issued 1,835 shares of 11.0% Series C Cumulative Convertible Preferred Stock. These shares have no par value and a liquidation preference of $1,000 per share plus an amount equal to all accumulated dividends thereon (whether or not earned or declared but without interest) to the date payment of such distribution is made in full. An additional 4,611 shares were issued during the fourth quarter of 2023. Total gross proceeds from the preferred stock offering currently totals $6.45 million, which will be used for operating expenses or to contribute capital to BayFirst National Bank to support its growth and operations.
First Quarter Common Stock Dividend. On January 23, 2024, BayFirst’s Board of Directors declared a first quarter 2024 cash dividend of $0.08 per common share, payable March 15, 2024 to common shareholders of record as of March 1, 2024. This dividend marks the 31st consecutive quarterly cash dividend paid since BayFirst initiated cash dividends in 2016.
First Quarter Preferred Series A Stock Dividend. BayFirst’s Board of Directors declared a quarterly cash dividend of $22.50 on the Series A Preferred Stock. The dividend was payable March 1, 2024 to shareholders of record as of January 15, 2024. The amount and timing of the dividend is in accordance with the terms of the Series A Preferred Stock.
First Quarter Preferred Series B Stock Dividend. BayFirst’s Board of Directors declared a quarterly cash dividend of $20.00 on the Series B Convertible Preferred Stock. The dividend was payable March 1, 2024 to shareholders of record as of January 15, 2024. The amount and timing of the dividend is in accordance with the terms of the Series B Convertible Preferred Stock.
First Quarter Preferred Series C Stock Dividend. BayFirst’s Board of Directors declared a quarterly cash dividend of $27.50 on the Series C Cumulative Convertible Preferred Stock. The dividend was payable March 1, 2024 to shareholders of record as of January 15, 2024. The amount and timing of the dividend is in accordance with the terms of the Series C Cumulative Convertible Preferred Stock.
Results of Operations
BayFirst’s operating results depend on its net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities, consisting primarily of deposits. Net interest income is determined by the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and the relative amounts of interest-earning assets and interest-bearing liabilities. The interest rate spread is affected by regulatory, economic, and competitive factors which influence interest rates, loan demand, and deposit flows. In addition, the Company’s operating results can be affected by the level of nonperforming assets, as well as the level of the noninterest income and the noninterest expenses, such as salaries and employee benefits, and occupancy and equipment costs, as well as income taxes.
The Company is dependent on noninterest income, which is derived primarily from net gain on the sales of the guaranteed portion of government guaranteed loans, as well as fair value adjustments for certain loans which management has elected the fair value option. While the Company retains some of its government guaranteed loans on the balance sheet, the
36
Company may sell both the guaranteed balance of its government guaranteed loans, as well as a percentage of the unguaranteed portions of such loans.
In the second quarter of 2022, the Bank discontinued its primary consumer direct residential mortgage business line. In the third quarter of 2022, management decided to discontinue the nationwide residential lending business. As a result of the discontinuance, the nationwide residential line of business was reclassified as a discontinued operation and reported in the financial statements as such.
Net Income
For the year ended 2023, net income was $5.7 million, or $1.12 per diluted common share, an increase of $6.0 million from the net loss of $0.3 million, or $0.22 per diluted common share, for the year ended 2022. The increase was primarily the result of a $5.8 million net loss from discontinued operations in 2022, as well as an increase in net income from continuing operations of $0.4 million primarily as a result of increased loan origination volume.

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Net Interest Income
Net interest income from continuing operations was $36.4 million for the year ended December 31, 2023, an increase of $6.4 million or 21.4% from $30.0 million for the year ended December 31, 2022. The increase was mainly due to an increase in loan interest income, including fees, of $26.7 million, partially offset by an increase in deposit interest expense of $23.0 million.
Net interest margin including discontinued operations decreased to 3.78% for the year ended December 31, 2023, compared to 3.97% for the year ended December 31, 2022.
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Average Balance Sheet and Analysis of Net Interest Income
The following table sets forth, for the periods indicated, information regarding: (i) the total dollar amount of interest and dividend income of BayFirst from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; (v) net interest margin; and (vi) ratio of average interest-earning assets to average interest-bearing liabilities. Loans in nonaccrual status, for the purposes of the following computations, are included in the average loan balances. FRB,
FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.
For the Year Ended December 31,
20232022
(Dollars in thousands)Average  BalanceInterestYieldAverage  BalanceInterestYield
Interest-earning assets:
Investment securities
$44,108 $1,847 4.19 %$43,768 $1,065 2.43 %
Loans, excluding PPP (1) (2)
829,054 62,924 7.59 667,088 38,280 5.74 
PPP loans
16,181 266 1.64 39,959 959 2.40 
Other
74,905 3,481 4.65 73,867 1,009 1.37 
Total interest-earning assets
964,248 68,518 7.11 824,682 41,313 5.01 
Noninterest-earning assets
93,876 79,864 
Total assets
$1,058,124 $904,546 
Interest-bearing liabilities:
NOW, MMDA and savings
$617,467 $21,817 3.53 $602,491 $6,175 1.02 
Time deposits
206,978 8,978 4.34 72,603 1,669 2.30 
PPPLF advances
— — — 5,667 20 0.35 
Other borrowings
28,130 1,291 4.59 22,708 702 3.09 
Total interest-bearing liabilities
852,575 32,086 3.76 703,469 8,566 1.22 
Demand deposits
101,740 101,193 
Noninterest-bearing liabilities
12,262 7,690 
Shareholders’ equity
91,547 92,194 
Total liabilities and shareholders’ equity
$1,058,124 $904,546 
Net interest income
$36,432 $32,747 
Interest rate spread
3.35 3.79 
Net interest margin (3)
3.78 3.97 
Ratio of average interest-earning assets to average interest-bearing liabilities
113.10 %117.23 %
(1) Includes nonaccrual loans.
(2) Includes $42 at an average yield of 2.02% and $58,525 at an average yield of 4.69% of residential loans held for sale from discontinued operations as of December 31, 2023 and December 31, 2022, respectively.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The table below presents the effects of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous period’s average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the
39
combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB, FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.
(Dollars in thousands)RateVolumeTotal
Year Ended December 31, 2023 vs. December 31, 2022:
Interest-earning assets:
Investment securities$774 $8 $782 
Loans, excluding PPP(1)
14,062 10,582 24,644 
PPP loans
(240)(453)(693)
Other interest-earning assets
2,458 14 2,472 
Total interest-earning assets
17,054 10,151 27,205 
Interest-bearing liabilities:
NOW, MMDA, and savings
15,485 157 15,642 
Time deposits
2,368 4,941 7,309 
PPPLF advances
— (20)(20)
Other borrowings
395 194 589 
Total interest-bearing liabilities
18,248 5,272 23,520 
Net change in net interest income
$(1,194)$4,879 $3,685 
(1) Includes $1 and $2,747 of interest income on residential loans held for sale from discontinued operations as of December 31, 2023 and December 31, 2022, respectively.
Provision for Credit Losses
The provision for credit losses is charged to operations to adjust the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending the Bank conducts, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to its market area, economic forecasts, and other factors that may affect the ability to collect on the loans in its portfolio.
The Company recorded a provision for credit losses for the year ended December 31, 2023 of $10.4 million compared to a $0.7 million negative provision under the incurred loss methodology for the year ended December 31, 2022. The increase of $11.1 million in the provision for credit losses expense was primarily due to loan growth, higher charge-offs, and the Company having reduced its ALLL under the incurred loss methodology in 2022 from the historic high levels reached in 2020 at the onset of the COVID-19 pandemic. During the year ended December 31, 2023, net loan charge offs totaled $9.0 million compared to $3.7 million during the year ended December 31, 2022. Net charge-offs for the year ended December 31, 2023 were elevated by $2.8 million due to the performance from a purchased portfolio of unsecured consumer loans. As of December 31, 2023, this portfolio had $1.0 million of loans 30-89 days past due and $0.3 million of loans 90+ days past due. The Company stopped purchasing these loans at the end of 2022 and the portfolio balances decreased from $30.9 million to $17.0 million during 2023.
The ACL was $13.5 million at December 31, 2023 and $9.0 million using the incurred losses methodology at December 31, 2022.
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Noninterest Income
The following table presents noninterest income from continuing operations for the year ended December 31, 2023 and December 31, 2022.
For the Year Ended December 31,
(Dollars in thousands)20232022
Noninterest income:
Loan servicing income, net
$2,826 $2,040 
Gain on sale of government guaranteed loans, net24,553 21,720 
Service charges and fees
1,721 1,306 
Government guaranteed loan fair value gain
15,718 4,756 
Government guaranteed loan packaging fees3,664 774 
Other noninterest income
1,273 954 
Total noninterest income
$49,755 $31,550 
Noninterest income from continuing operations was $49.8 million for the year ended December 31, 2023, an increase of $18.2 million or 57.7% from $31.6 million for the year ended December 31, 2022. The increase was primarily due to higher gains on the sale of government guaranteed loans of $2.8 million, an $11.0 million increase in fair value gains related to HFI government guaranteed loans, and an increase in other noninterest income of $3.2 million. The increase in other noninterest income was primarily due to higher government guaranteed loan packaging fees of $2.9 million. The increase in fair value gains related to HFI government guaranteed loans was primarily related to an increase in the volume of loans held at fair value. As of December 31, 2023, the Company had $91.5 million of loans held at fair value compared to $27.1 million at December 31, 2022.
Noninterest Expense 
The following table presents noninterest expense from continuing operations for the year ended December 31, 2023 and December 31, 2022.
For the Year Ended December 31,
(Dollars in thousands)20232022
Noninterest expense:
Salaries and benefits
$30,973 $27,422 
Bonus, commissions, and incentives
5,726 2,394 
Occupancy and equipment
4,758 3,995 
Data processing
5,611 4,828 
Marketing and business development
3,336 2,660 
Professional services
3,657 4,083 
Loan origination and collection
7,425 3,711 
Employee recruiting and development
2,177 2,230 
Regulatory assessments
881 457 
Director compensation575 686 
Liability and fidelity bond insurance546 463 
ATM and interchange534 381 
Telecommunication387 367 
Other noninterest expense
1,121 1,535 
Total noninterest expense
$67,707 $55,212 
41
Noninterest expense was $67.7 million during the year ended December 31, 2023, an increase of $12.5 million or 22.6% from $55.2 million for the year ended December 31, 2022. The increase was primarily the result of higher compensation costs and loan origination and collection expense.
Discontinued Operations
Net loss from discontinued operations was $213 thousand for the year ended December 31, 2023, which was a $5.6 million reduction from a net loss of $5.8 million for the year ended December 31, 2022. The majority of the discontinued loss in 2022 was recorded in the third quarter of 2022. As such, the net loss from discontinued operations for the year ended 2022 included restructuring charges of $4.3 million and the discontinued loss in the year ended of 2023 represented a modest amount of trailing expenses from the discontinuation.
Income Taxes 
Income tax expense from continuing operations was $2.1 million for the year ended December 31, 2023, an increase of $0.6 million from income tax expense of $1.6 million for the year ended December 31, 2022. The increase was primarily due to the increase in pre-tax earnings from continuing operations. Income tax benefit from discontinued operations was $70 thousand for the year ended December 31, 2023, a change of $1.9 million from income tax benefit of $1.9 million for the year ended December 31, 2022. The change was primarily due to the decrease in pre-tax loss from discontinued operations.
At December 31, 2023, the Company had $1.8 million of federal net operating loss carryforward and $0.4 million of state net operating loss carryforward. The net operating loss carryforwards do not expire. At December 31, 2022, the Company had $2.2 million of federal net operating loss carryforward and $0.4 million of state net operating loss carryforward.
The effective income tax rate was 26.44% for the year ended December 31, 2023 and 51.60% for the year ended December 31, 2022.
Financial Condition
Investment Securities
The following table presents the fair value of the Company's investment securities portfolio classified as available for sale as of December 31, 2023 and December 31, 2022.
(Dollars in thousands)December 31, 2023December 31, 2022
Investment securities available for sale:
Asset-backed securities
$7,933 $9,605 
Mortgage-backed securities:
U.S. Government-sponsored enterprises
3,236 3,440 
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises
17,098 18,220 
Corporate bonds
11,308 11,084 
Total investment securities available for sale
$39,575 $42,349 
The net unrealized loss on the investment securities AFS at December 31, 2023, was $4.0 million compared with a net unrealized loss on investment securities AFS of $5.0 million at December 31, 2022. The change in unrealized loss on
42
investment securities AFS from December 31, 2022 to December 31, 2023 was primarily due to the change in the interest rate environment.
The following table presents the amortized cost of the Company's investment securities portfolio classified as held to maturity as of December 31, 2023 and December 31, 2022.
(Dollars in thousands)December 31, 2023December 31, 2022
Investment securities held to maturity:
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$1 $2 
Corporate bonds
2,500 5,000 
Total investment securities held to maturity
$2,501 $5,002 
There was a $17 thousand ACL on the corporate bonds HTM as of December 31, 2023 and no ACL as of December 31, 2022. The net unrealized loss on the investment securities HTM at December 31, 2023, was $238 thousand compared with a net unrealized loss on investment securities HTM of $247 thousand at December 31, 2022.
No investment securities were pledged as of December 31, 2023 or December 31, 2022, and there were no sales of investment securities during the year ended December 31, 2023 or year ended December 31, 2022.
The investment securities available for sale presented in the following tables are reported at amortized cost and by contractual maturity as of December 31, 2023 and December 31, 2022. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below.
December 31, 2023
One year or lessOne to five yearsFive to ten yearsAfter ten years
(Dollars in thousands)Amortized
Cost		Average YieldAmortized
Cost		Average YieldAmortized
Cost		Average YieldAmortized
Cost		Average Yield
Asset-backed securities
$— — %$— — %$— — %$8,041 6.25 %
Mortgage-backed securities:
U.S. Government-sponsored enterprises
— — — — — — 3,842 1.58 
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises— — — — — — 20,382 1.82 
Corporate bonds
— — 11,332 6.23 — — — — 
Total investment securities available for sale
$— — %$11,332 6.23 %$— — %$32,265 2.90 %
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December 31, 2022
One year or lessOne to five yearsFive to ten yearsAfter ten years
(Dollars in thousands)Amortized
Cost		Average YieldAmortized
Cost		Average YieldAmortized
Cost		Average YieldAmortized
Cost		Average Yield
Asset-backed securities
$— — %$— — %$— — %$9,873 5.40 %
Mortgage-backed securities:
U.S. Government-sponsored enterprises
— — — — — — 4,133 1.55 
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises— — — — — — 22,031 1.89 
Corporate bonds
— — 9,981 3.70 1,356 4.34 — — 
Total investment securities available for sale
$— — %$9,981 3.70 %$1,356 4.34 %$36,037 2.81 %
The investment securities held to maturity presented in the following tables are reported at amortized cost and by contractual maturity as of December 31, 2023 and December 31, 2022. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities receive monthly principal payments, which are not reflected below.
December 31, 2023
One year or lessOne to five yearsFive to ten yearsAfter ten years
(Dollars in thousands)Amortized
Cost		Average YieldAmortized
Cost		Average YieldAmortized
Cost		Average YieldAmortized
Cost		Average Yield
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$— — %$— — %$— — %$1 4.30 %
Corporate bonds
— — 1,500 4.38 1,000 4.38 — — 
Total investment securities held to maturity
$— — %$1,500 4.38 %$1,000 4.38 %$1 4.30 %
December 31, 2022
One year or lessOne to five yearsFive to ten yearsAfter ten years
(Dollars in thousands)Amortized
Cost		Average YieldAmortized
Cost		Average YieldAmortized
Cost		Average YieldAmortized
Cost		Average Yield
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$— — %$— — %$— — %$2 2.65 %
Corporate bonds
— — 4,000 5.79 1,000 4.38 — — 
Total investment securities held to maturity
$— — %$4,000 5.79 %$1,000 4.38 %$2 2.65 %
Loan Portfolio Composition
The Company offers a variety of products designed to meet the credit needs of our borrowers. Our lending activities primarily consist of government guaranteed loans, real estate loans, commercial business loans, residential mortgage, and consumer loans. Senior management and loan officers have continued to develop new sources of loan referrals, particularly among centers of local influence and real estate professionals, and have also enjoyed repeat business from loyal customers in the markets the Bank serves. The Bank has no concentration of credit in any industry that represents 10% or more of its loan portfolio. Additionally, the loan portfolio is well-diversified across major loan types with a low concentration of non owner-occupied commercial real estate loans which makes up 8% of the total portfolio. The following table sets forth the composition of its loan portfolio, including LHFS as of the dates indicated.
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December 31, 2023December 31, 2022
(Dollars in thousands)Amount% of TotalAmount% of Total
Residential loans held for sale from discontinued operations
$— $449 
Government guaranteed loans, held for sale
$— $— 
Government guaranteed loans HFI, at fair value$91,508 $27,078 
Loans HFI, at amortized cost:
Residential real estate
$264,126 32.5 %$202,329 29.1 %
Commercial real estate
293,595 36.2 231,281 33.3 
Construction and land
26,272 3.2 9,320 1.3 
Commercial and industrial
177,566 21.9 194,643 28.0 
Commercial and industrial – PPP
3,202 0.4 19,293 2.8 
Consumer and other
47,287 5.8 37,288 5.5 
Loans HFI, at amortized cost, gross
812,048 100.0 %694,154 100.0 %
Discount on government guaranteed loans sold(7,040)(5,621)
Premium on loans purchased, net
4,503 2,301 
Deferred loan costs, net
14,707 10,740 
Allowance for credit losses(1)
(13,497)(9,046)
Loans HFI, at amortized cost, net
$810,721 $692,528 
(1) Prior to January 1, 2023, the incurred loss methodology was used to estimate credit losses. Beginning with that date, credit losses are estimated using the CECL methodology.
During the year ended December 31, 2023, the Bank originated approximately $216.9 million in loans through conventional lending channels and $547.5 million in loans through CreditBench (its government guaranteed lending function). In addition, the Bank sold guaranteed loan balances of $437.9 million and unguaranteed loan balances of $13.7 million of government guaranteed loans. The Bank purchased $111.8 million of government guaranteed loans. Of the loans purchased during the year, $75.8 million were sold or paid off as of December 31, 2023.
During the year ended December 31, 2022, the Bank originated approximately $254.9 million in loans through conventional lending channels, $386.0 million through CreditBench, and $946.1 million through the Residential Mortgage Lending Division, which is a discontinued operation. Additionally, the Bank sold guaranteed loan balances of $311.8 million and unguaranteed loan balances of $13.8 million of government guaranteed loans. The Bank purchased $16.6 million of government guaranteed loans and $37.2 million of unsecured consumer loans.
Loan Maturity/Rate Sensitivity
The following table shows the contractual maturities of our loans at December 31, 2023. Loan balances in this table include loans HFI at fair value, loans HFI at amortized cost, discount on retained balances of loans sold, premium and discount on loans purchased, and deferred loan costs, net.
 (Dollars in thousands)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
$2,423 $906 $15,281 $245,978 $264,588 
Commercial
8,988 4,180 48,358 257,918 319,444 
Construction and land
5,561 3,281 84 17,345 26,271 
Commercial and industrial
9,872 22,832 210,868 9,477 253,049 
Commercial and industrial - PPP
345 2,857 — — 3,202 
Consumer and other
1,618 28,624 13,469 5,461 49,172 
Total loans HFI
$28,807 $62,680 $288,060 $536,179 $915,726 
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The following table shows the loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at December 31, 2023.
(Dollars in thousands)
Fixed
Interest Rate
Adjustable
Interest Rate
Real estate:
Residential
$62,109 $200,056 
Commercial
13,958 296,498 
Construction and land
— 20,710 
Commercial and industrial
7,980 235,197 
Commercial and industrial - PPP
2,857 — 
Consumer and other
28,477 19,077 
Total loans HFI
$115,381 $771,538 
Credit Risk
The Bank’s primary business is making commercial, consumer, and real estate loans. This activity inevitably has risks for potential credit losses, the magnitude of which depends on a variety of economic factors affecting borrowers, which are beyond its control. The Bank has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about the economic environment that it believes impacts credit quality as of the balance sheet date that it believes to be reasonable, but which may or may not prove accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the ACL, or that additional increases in the ACL will not be required.
Allowance for Credit Losses. In accordance with changes in generally accepted accounting principles, the Company adopted the new credit loss accounting standard known as CECL on January 1, 2023. At the time of adoption, the ACL for loans increased by $3.1 million to 1.73% of loans, the reserve on unfunded commitments increased $213 thousand, and an $18 thousand reserve was established for held to maturity investment securities.These one-time increases resulted in an after tax decrease to capital of $2.5 million, with no impact to earnings. Under CECL, the ACL is based on expected credit losses rather than on incurred losses.
The Bank must maintain an adequate ACL based on a comprehensive methodology that assesses the probable losses inherent in its loan portfolio. The Bank maintains an ACL based on a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, asset classifications, change in volume and mix of loans, collateral value, historical loss experience, size and complexity of individual credits, and economic conditions. In addition to this, the Company uses reasonable and supportable forecasts utilizing data from the FOMC’s median forecasts of change in national GDP and of national unemployment. Provisions for credit losses are provided on both a specific and general basis. Specific allowances are provided for individual loans that do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. General valuation allowances are determined by loan pools with a further evaluation of various quantitative and qualitative factors noted above.
The Bank periodically reviews the assumptions and formulates methodologies by which changes are made to the specific and general valuation ACL in an effort to refine such allowances in light of the current status of the factors described above.
All nonaccrual loans and modifications to loans for borrowers experiencing financial difficulty are reviewed to determine if the loans share the same risk characteristics as the pooled loans. If the loan does not share the same risk characteristics, the loan is evaluated individually for credit losses. Specific allocation of reserves for individually evaluated loans considers the value of the collateral, the financial condition of the borrower, and industry and current economic trends. The Bank reviews the collateral value, cash flow, and tertiary support on each individually evaluated credit. Any deficiency outlined by a real estate collateral evaluation analysis, or cash flow shortfall, is accounted for through a specific allocation for the loan.
Prior to January 1, 2023, the incurred loss methodology was used to estimate credit losses. Beginning with that date, the credit losses are estimated using the CECL methodology.
Nonperforming Assets. At December 31, 2023, the Company had $8.3 million in nonperforming assets, excluding government guaranteed loan balances, and their ACL represented 1.64% of total loans HFI at amortized cost. At
46
December 31, 2022, the Company had $3.7 million in nonperforming assets, excluding government guaranteed loan balances, and their ALLL represented 1.29% of total loans HFI at amortized cost. Total loans HFI at December 31, 2023 and December 31, 2022 included government guaranteed loans and loans measured at fair value, which had no reserves allocated to them. ACL as a percentage of loans HFI at amortized cost, not including government guaranteed loan balances, was 2.03% under CECL at December 31, 2023, compared to 1.62% under the incurred loss method at December 31, 2022.
The following table sets forth certain information on nonaccrual loans and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related information.
(Dollars in thousands)December 31,
2023		December 31,
2022
Nonperforming loans (government guaranteed balances), at amortized cost, gross
$1,424 $6,797 
Nonperforming loans (unguaranteed balances), at amortized cost, gross
8,264 3,671 
Total nonperforming loans, at amortized cost, gross
9,688 10,468 
Nonperforming loans (government guaranteed balances), at fair value
— — 
Nonperforming loans (unguaranteed balances), at fair value
648 — 
Total nonperforming loans, at fair value
648 — 
OREO
— 56 
Total nonperforming assets, gross
$10,336 $10,524 
Nonperforming loans as a percentage of total loans HFI(1)
1.18 %1.49 %
Nonperforming loans (excluding government guaranteed balances) to total loans HFI(1)
1.00 %0.52 %
Nonperforming assets as a percentage of total assets
0.92 %1.12 %
Nonperforming assets (excluding government guaranteed balances) to total assets
0.74 %0.40 %
ACL to nonperforming loans(1)
139.32 %86.42 %
ACL to nonperforming loans (excluding government guaranteed balances)(1)
163.32 %246.42 %
(1) Excludes loans accounted for at fair value

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The following table sets forth information with respect to activity in the ACL for loans for the periods shown:
(Dollars in thousands)
At and for the Year Ended December 31,
20232022
Allowance at beginning of period
$9,046 $13,452 
Impact of adopting ASC 3263,107 — 
Charge-offs:
Commercial real estate
(108)(42)
Commercial and industrial
(6,240)(3,632)
Commercial and industrial - PPP
(223)— 
Consumer and other
(3,280)(669)
Total charge-offs
(9,851)(4,343)
Recoveries:
Commercial real estate
87 80 
Commercial and industrial
435 503 
Consumer and other
334 54 
Total recoveries
864 637 
Net charge-offs
(8,987)(3,706)
Provision for credit losses
10,331 (700)
Allowance at end of period
$13,497 $9,046 
Net charge-offs to average loans HFI at amortized cost
1.17 %0.60 %
Allowance as a percent of total loans HFI at amortized cost
1.64 %1.29 %
Allowance as a percent of loans HFI at amortized cost, not including government guaranteed loans
2.03 %1.62 %
Allowance as a percent of nonperforming loans at amortized cost, gross
139.32 %86.42 %
Total loans HFI
$915,726 $728,652 
Average loans HFI at amortized cost
$770,793 $620,267 
Nonperforming loans (including government guaranteed balances) at amortized cost, gross
$9,688 $10,468 
Nonperforming loans (excluding government guaranteed balances) at amortized cost, gross
$8,264 $3,671 
Guaranteed balance of government guaranteed loans
$217,620 $158,760 
The following table details net charge-offs to average loans outstanding by loan category for the years ended December 31, 2023 and December 31, 2022.
Year Ended December 31, 2023Year Ended December 31, 2022
(Dollars in thousands)Net (Charge-off) RecoveryAverage Loans HFI at amortized costNet (Charge-off) Recovery RatioNet (Charge-off) RecoveryAverage Loans HFI at amortized costNet (Charge-off) Recovery Ratio
Residential real estate
$8 $218,727 — %$— $120,287 — %
Commercial real estate
(21)293,635 (0.01)38 242,351 0.02 
Commercial and industrial
(5,805)203,305 (2.86)(3,129)152,094 (2.06)
Commercial and industrial - PPP
(223)16,181 (1.38)— 79,864 — 
Consumer and other
(2,946)38,945 (7.56)(615)25,671 (2.40)
Total loans HFI, at amortized cost
$(8,987)$770,793 (1.17)%$(3,706)$620,267 (0.60)%
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Nonperforming assets to total assets, excluding government guaranteed loan balances, were 0.74% as of December 31, 2023, as compared to 0.40% as of December 31, 2022.
SBA and Other Government Guaranteed Loans
The following table sets forth, for the periods indicated, information regarding the SBA and other government guaranteed lending activity, excluding PPP loans.
(Dollars in thousands)
At and for the Year Ended December 31,
Government Guaranteed, Excluding PPP20232022
Number of loans originated
2,8171,364
Amount of loans originated
$547,469 $386,024 
Average loan size originated
$194 $283 
Government guaranteed loan balances sold
$437,935 $311,783 
Government unguaranteed loan balances sold
$13,669 $13,803 
Total government guaranteed loans
$395,877 $300,219 
Government guaranteed loan balances
$214,418 $139,587 
Government unguaranteed loan balances
$181,459 $160,632 
Government guaranteed loans serviced for others
$855,756 $660,600 
The Bank makes government guaranteed loans throughout the United States. The following table sets forth, at the dates indicated, information regarding the geographic disbursement of its government guaranteed loan portfolio. The “All Other” category includes states with less than 5% in any period presented.
December 31,
20232022
(Dollars in thousands)Amount% of TotalAmount% of Total
Florida
$123,418 31 %$91,760 31 %
California
45,661 12 35,365 12 
Tennessee32,185 8 22,378 7 
Texas
24,861 6 19,598 7 
All Other
169,752 43 131,118 43 
Total government guaranteed loans, excluding PPP loans
$395,877 100 %$300,219 100 %
Deposits
General. In addition to deposits, sources of funds available for lending and for other purposes include loan repayments and proceeds from the sales of loans. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and market conditions. Borrowings, as well as available lines of credit, may be used on a short-term basis to compensate for reductions in other sources, such as deposits at less than projected levels.
Deposits. Deposits are sourced principally from within its primary service area of Pinellas, Hillsborough, Manatee, Pasco, and Sarasota Counties, Florida. The Bank offers a wide selection of deposit instruments including demand deposit accounts, NOW accounts, money-market accounts, regular savings accounts, certificate of deposit accounts, and retirement savings plans (such as IRA accounts).
Certificate of deposit rates are set to encourage longer maturities as cost and market conditions will allow. Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit, and the interest rate.
49
The Bank emphasizes commercial banking relationships in an effort to increase demand deposits as a percentage of total deposits. Deposit interest rates are set by management at least monthly or more often if conditions require it, based on a review of loan demand, recent cash flows and a survey of rates among competitors.
Brokered deposits. At times, the Bank has brokered time deposit and non-maturity deposit relationships available to diversify its funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current retail market, deposit gathering outside the market of the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. The Bank’s internal policy limits the use of brokered deposits as a funding source to no more than 15% of total assets. The Company's ability to accept or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well capitalized." At December 31, 2023 and December 31, 2022, the Company had $30.0 million and $746 thousand, respectively, of brokered deposits.
The amount of each of the following categories of deposits, at the dates indicated, are as follows:
(Dollars in thousands)December 31, 2023December 31, 2022
Noninterest-bearing deposits
$93,708 9.5 %$93,235 11.8 %
Interest-bearing transaction accounts
259,422 26.3 202,656 25.5 
Money market accounts
355,946 36.2 345,200 43.4 
Savings
17,054 1.7 17,853 2.2 
Subtotal
726,130 73.7 658,944 82.9 
Total time deposits
259,008 26.3 136,126 17.1 
Total deposits
$985,138 100.0 %$795,070 100.0 %
At December 31, 2023, the Company held approximately $162.3 million of deposits that exceeded the FDIC insurance limit which was 16% of total deposits.
The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit of $250 thousand as of December 31, 2023.
(Dollars in thousands)
Three months or less
$11,804 
Over three months through six months
15,724 
Over six months through 12 months
32,385 
Over 12 months
48,056 
Total
$107,969 
Deposits increased $190.1 million or 23.91% during the year ended 2023, with growth in all deposit types. There was growth in transaction accounts (noninterest bearing and interest bearing transaction accounts) of $57.2 million or 19.3%, savings and money market account balances of $9.9 million or 2.7%, and time deposit balances of $122.9 million, or 90.3%.
Other Borrowings
At December 31, 2023, the Company had $10.0 million of borrowings at 5.57% from the FHLB and no borrowings from the FRB. There was $25.0 million of borrowings at 4.50% from the FRB and no borrowings from the FHLB at December 31, 2022.
The Bank is a member of the FHLB of Atlanta, which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rates set by the FHLB. Any advances that the bank were to obtain would be secured by a blanket lien on $285.9 million of real estate-related loans as of December 31, 2023. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to $153.5 million from the FHLB at December 31, 2023.
In addition, the Bank has a line of credit with the Federal Reserve Bank of Atlanta which was secured by $57.7 million of commercial loans as of December 31, 2023. FRB short-term borrowings bear interest at variable rates based on the FOMC's target range for the federal funds rate. Based on this collateral, the Company was eligible to borrow up to $40.4 million from the FRB at December 31, 2023.
50
In June 2021, the Company issued $6.0 million of Subordinated Debentures (the “Debentures”) that mature June 30, 2031 and are redeemable after 5 years. The Debentures carry interest at a fixed rate of 4.50% per annum for the initial 5 years of term and carry interest at a floating rate for the final 5 years of term. Under the debt agreements, the floating rates are based on a SOFR benchmark plus 3.78% per annum. The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $5.9 million and $6.0 million at December 31, 2023 and December 31, 2022, respectively.
The Company has a term note with quarterly principal and interest payments with interest at Prime (8.50% at December 31, 2023). The note matures on March 10, 2029 and the balance of the note was $2.4 million and $2.8 million at December 31, 2023 and December 31, 2022, respectively. The note is secured by 100% of the stock of the Company and requires the Company to comply with certain loan covenants during the term of the note. As of December 31, 2023, the Company was in compliance with all financial debt covenants.
Capital Resources
Shareholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common and preferred stock, and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available for sale investment securities.
Shareholders' equity increased $8.8 million to $100.7 million at December 31, 2023 as compared to $91.9 million at December 31, 2022. The increase was primarily due to net income of $5.7 million and the issuance of preferred stock of $6.4 million. This was partially offset by the implementation of the new credit loss accounting standard. As a result of the accounting change, equity was reduced by $2.5 million.
The Company strives to maintain an adequate capital base to support its activities in a safe and sound manner while at the same time attempting to maximize shareholder value. Management assesses capital adequacy against the risk inherent in the balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.
The Bank is subject to regulatory capital requirements imposed by various regulatory banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by banking regulators that, if undertaken, could have a direct material effect on BayFirst’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
In 2020, the Federal banking regulatory agencies adopted a rule to simplify the methodology for measuring capital adequacy for smaller, uncomplicated banks. This CBLR is calculated as the ratio of tangible equity capital divided by average total consolidated assets. CBLR tangible equity is defined as total equity capital, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carryforwards, goodwill, and other intangible assets (other than mortgage servicing assets). Under the proposal, a qualifying organization may elect to use the CBLR framework if its CBLR is greater than 9%. The Bank elected not to use the CBLR framework.
At December 31, 2023 and December 31, 2022, the Bank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory guidelines.
51
As of the dates indicated, the Bank met all capital adequacy requirements to which it is subject. The Bank’s actual capital amounts and percentages are as shown in the table below:
 Actual
Minimum(1)
Well Capitalized(2)
(Dollars in thousands)AmountPercentAmountPercentAmountPercent
As of December 31, 2023
Total Capital (to risk-weighted assets)
$114,256 13.03 %$70,169 8.00 %$87,711 10.00 %
Tier 1 Capital (to risk-weighted assets)
103,274 11.77 52,627 6.00 70,169 8.00 
Common Equity Tier 1 Capital (to risk-weighted assets)
103,274 11.77 39,470 4.50 57,012 6.50 
Tier 1 Capital (to total assets)
103,274 9.38 44,024 4.00 55,030 5.00 
As of December 31, 2022
Total Capital (to risk-weighted assets)
108,307 15.00 57,767 8.00 72,209 10.00 
Tier 1 Capital (to risk-weighted assets)
99,269 13.75 43,325 6.00 57,767 8.00 
Common Equity Tier 1 Capital (to risk-weighted assets)
99,269 13.75 32,494 4.50 46,936 6.50 
Tier 1 Capital (to total assets)
99,269 10.79 36,816 4.00 46,020 5.00 
(1) Minimum to be considered “adequately capitalized” under Basel III Capital Adequacy.
(2) Minimum to be considered “well capitalized” under Prompt Corrective Actions Provisions.
Off-Balance Sheet Arrangements
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily include unfunded loan commitments, unfunded lines of credit, and standby letters of credit. The Bank uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not present unusual risks and management does not anticipate any accounting losses that would have a material effect on the Bank.
A summary of the amounts of the Bank’s financial instruments, with off-balance sheet risk as of the dates indicated, is as follows:
(Dollars in thousands)December 31,
2023		December 31,
2022
Unfunded loan commitments
$7,392 $23,512 
Unused lines of credit
178,440 134,366 
Standby letters of credit
186 244 
Total
$186,018 $158,122 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Management evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the customer.
Standby letters-of-credit are conditional lending commitments that the Bank issues to guarantee the performance of a customer to a third party and to support private borrowing arrangements. Essentially, letters of credit have expiration dates within one year of the issue date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit. The Bank may hold collateral supporting those commitments.
In general, loan commitments and letters of credit are made on the same terms, including with respect to collateral, as outstanding loans. Each customer’s creditworthiness and the collateral required are evaluated on a case-by-case basis.
The Company maintains an ACL for its off-balance sheet loan commitments which is calculated by loan type using estimated line utilization rates based on historical usage. Loss rates for outstanding loans is applied to the estimated
52
utilization rates to calculate the ACL for off-balance sheet loan commitments. At December 31, 2023 and December 31, 2022, ACL for off-balance sheet loan commitments totaled $839 thousand and $511 thousand, respectively.
Contractual Obligations
In the ordinary course of its operations, the Company enters into certain contractual obligations. Total contractual obligations at December 31, 2023 were $280.7 million, an increase of $105.8 million from $174.9 million at December 31, 2022. The increase was primarily due to an increase in time deposits of $122.9 million.
The following tables present our contractual obligations as of December 31, 2023 and December 31, 2022.
Contractual Obligations as of December 31, 2023
(Dollars in thousands)Less than One YearOne to Three YearsThree to Five YearsOver Five YearsTotal
Operating lease obligations$1,105 $1,861 $413 $— $3,379 
Short-term borrowings10,000 — — — 10,000 
Long-term borrowings456 912 912 109 2,389 
Subordinated notes— — — 5,949 5,949 
Time deposits173,887 84,552 569 — 259,008 
Total$185,448 $87,325 $1,894 $6,058 $280,725 
Contractual Obligations as of December 31, 2022
(Dollars in thousands)Less than One YearOne to Three YearsThree to Five YearsOver Five YearsTotal
Operating lease obligations$1,450 $2,267 $1,245 $— $4,962 
Short-term borrowings25,000 — — — 25,000 
Long-term borrowings456 912 912 564 2,844 
Subordinated notes50 — — 5,942 5,992 
Time deposits120,240 15,587 299 — 136,126 
Total$146,740 $17,854 $1,544 $8,786 $174,924 
Liquidity
Liquidity management is the process by which the Bank manages the flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of the operations, and capital expenditures. The Bank generally maintains a liquidity ratio of liquid assets to total assets of at least 7.0%. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered investment securities available for sale. The on-balance sheet liquidity ratio at December 31, 2023 was 9.33%, as compared to 12.58% at December 31, 2022.
During 2022, the Bank paid quarterly dividends totaling $1.75 million to BayFirst. During the first two quarters of 2023, the Bank paid quarterly dividends totaling $2.50 million to BayFirst. In 2023, BayFirst issued 6,446 shares of 11.0% Series C Cumulative Convertible Preferred Stock with gross proceeds of $6.4 million of which $4.3 million of the capital was injected to the Bank to support its growth and operations. Prior to 2021, the Bank retained its earnings to support its growth. BayFirst’s liquidity had historically been dependent solely on funds received from the issuance and sale of subordinated debt and preferred stock. BayFirst’s liquidity needs are to make interest payments on its debt obligations, dividends on shares of its Series A Preferred Stock, Series B Convertible Preferred Stock, Series C Cumulative Convertible Preferred Stock, and common stock, and payment of certain operating expenses. As of December 31, 2023, BayFirst Financial Corp. held $954 thousand in cash and cash equivalents.
The Company expects that all the liquidity needs, including the contractual commitments can be met by currently available liquid assets and cash flows. In the event any unforeseen demand or commitments were to occur, the Company would access the borrowing capacity with the FHLB, FRB, and lines of credit with other financial institutions. The Company does
53
not rely on investment securities as the main source of liquidity and does not foresee the need to sell investment securities for cash flow purposes. In addition, the Company has the ability to obtain wholesale deposits as another source of liquidity. The Company expects that the currently available liquid assets and the ability to borrow from the FHLB, FRB, and other financial institutions would be sufficient to satisfy the liquidity needs without any material adverse effect on the Company’s liquidity.
A description of BayFirst’s and the Bank’s debt obligations is set forth above under the heading “Other Borrowings.”
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk and Interest Rate Sensitivity
Market risk is the risk of loss from adverse changes in market prices and rates. Market risk arises primarily from interest-rate risk inherent in loan and deposit taking activities. To that end, the Company actively monitors and manages its interest-rate risk exposure. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, should also be considered.
The objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on net interest income and capital, while adjusting the asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. A sudden or substantial increase in interest rates may impact its earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same rate, to the same extent, or on the same basis.
The Company established a comprehensive interest rate risk management policy which is administered by management’s Asset-Liability Committee. The policy establishes risk limits, which are quantitative measures of the percentage change in net interest income (net interest income at risk) and the fair value of equity capital (economic value of equity at risk) resulting from a hypothetical change in interest rates for maturities from one day to 30 years. Management measures the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity with computer-generated simulation analysis. The simulation model is designed to capture call features and interest rate caps and floors embedded in investment and loan contracts. As with any method of analyzing interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from the assumptions used in modeling. The methodology does not measure the impact that higher rates may have on borrowers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.
To minimize the potential for adverse effects of changes in interest rates on the results of the operations, the Company monitors assets and liabilities to better match the maturities and repricing terms of the interest-earning assets and interest-bearing liabilities. To do this, the Company (i) emphasizes the origination of adjustable-rate and variable-rate loans to be HFI; (ii) maintains a stable core deposit base; and (iii) maintains a significant portion of liquid assets (cash, interest-bearing deposits with other banks, and available for sale investment securities).
Management regularly reviews its exposure to changes in interest rates. Among the factors they consider are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. ALCO reviews, on at least a quarterly basis, its interest rate risk position.
The interest rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that captures both short-term and long-term interest-rate risk exposure.
Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of its loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The analysis provides a framework as to what the overall sensitivity position is as of the most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of its equity.
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Table of Contents
Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.
The estimated impact on the net interest income as of December 31, 2023 and December 31, 2022, assuming immediate parallel moves in interest rates, is presented in the table below.
December 31, 2023December 31, 2022
Change in ratesFollowing 12 monthsFollowing 24 monthsFollowing 12 monthsFollowing 24 months
+400 basis points14.7 %12.8 %11.0 %11.9 %
+300 basis points12.7 12.1 9.4 10.5 
+200 basis points7.6 7.4 5.4 6.1 
+100 basis points2.5 2.6 1.3 1.8 
-100 basis points(4.5)(4.5)(3.8)(4.4)
-200 basis points(9.1)(9.1)(8.3)(9.5)
Management strategies may impact future reporting periods, as the actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience and the characteristics assumed, as well as changes in market conditions. Market-based prepayment speeds are factored into the analysis for loan and investment securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.
The Company uses economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios.
The table below presents the change in the economic value of equity as of December 31, 2023 and December 31, 2022, assuming immediate parallel shifts in interest rates. Changes noted between the two periods reflect recent enhancements in the asset/liability modeling, including projected values for non-maturity deposits in changing interest rate environments.
Change in ratesDecember 31, 2023December 31, 2022
+400 basis points(6.3)%(12.7)%
+300 basis points(4.1)(9.5)
+200 basis points(3.3)(7.0)
+100 basis points(2.7)(4.3)
-100 basis points0.2 2.6 
-200 basis points(0.3)5.0 
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Table of Contents
Item 8. Financial Statements
Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors
BayFirst Financial Corp.
St. Petersburg, Florida

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of BayFirst Financial Corp. (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Change in Accounting Principle

As discussed in Notes 1 and 5 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Accounting Standards Codification (ASC) Topic 326, Financial Instruments - Credit Losses.

/s/ FORVIS, LLP

We have served as the Company's auditor since 2018.

Tampa, Florida
March 28, 2024
56
BAYFIRST FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31, 2023December 31, 2022
ASSETS
Cash and due from banks
$4,099 $3,649 
Interest-bearing deposits in banks
54,286 62,397 
Cash and cash equivalents
58,385 66,046 
Time deposits in banks
4,646 4,881 
Investment securities available for sale, at fair value (amortized cost: $43,597 and $47,374 at December 31, 2023 and December 31, 2022, respectively)
39,575 42,349 
Investment securities held to maturity, at amortized cost, net of allowance for credit losses of $17 and $0 (fair value: $2,263 and $4,755 at December 31, 2023 and December 31, 2022, respectively)
2,484 5,002 
Nonmarketable equity securities
4,770 4,037 
Government guaranteed loans HFI, at fair value
91,508 27,078 
Loans HFI, at amortized cost, net of allowance for credit losses of $13,497 and $9,046 at December 31, 2023 and December 31, 2022, respectively
810,721 692,528 
Accrued interest receivable
7,130 4,452 
Premises and equipment, net
38,874 35,440 
Loan servicing rights
14,959 10,906 
Deferred income tax asset
— 980 
Right-of-use operating lease assets
2,416 3,177 
Bank owned life insurance
25,800 25,159 
Other assets
16,150 15,649 
Assets from discontinued operations348 1,211 
Total assets
$1,117,766 $938,895 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Noninterest-bearing deposits
$93,708 $93,235 
Interest-bearing transaction accounts
259,422 202,656 
Savings and money market deposits
373,000 363,053 
Time deposits
259,008 136,126 
Total deposits
985,138 795,070 
FRB and FHLB borrowings10,000 25,000 
Subordinated debentures
5,949 5,992 
Notes payable
2,389 2,844 
Accrued interest payable
882 704 
Operating lease liabilities
2,619 3,538 
Deferred income tax liabilities
482 — 
Accrued expenses and other liabilities
8,980 12,205 
Liabilities from discontinued operations620 1,658 
Total liabilities
1,017,059 847,011 
57
BAYFIRST FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS CONTINUED
(Dollars in thousands, except per share data)
December 31, 2023December 31, 2022
Shareholders’ equity:
Preferred stock, Series A; no par value, 10,000 shares authorized, 6,395 shares issued and outstanding at December 31, 2023 and December 31, 2022; aggregate liquidation preference of $6,395
6,161 6,161 
Preferred stock, Series B; no par value, 20,000 shares authorized, 3,210 shares issued and outstanding at December 31, 2023 and December 31, 2022; aggregate liquidation preference of $3,210
3,123 3,123 
Preferred stock, Series C; no par value, 10,000 shares authorized, 6,446 shares issued and outstanding at December 31, 2023 and no shares issued and outstanding at December 31, 2022; aggregate liquidation preference of $6,446 at December 31, 2023
6,446 — 
Common stock and additional paid-in capital; no par value, 15,000,000 shares authorized, 4,110,470 and 4,042,474 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively
54,521 53,023 
Accumulated other comprehensive loss, net
(2,981)(3,724)
Unearned compensation
(958)(178)
Retained earnings
34,395 33,479 
Total shareholders’ equity
100,707 91,884 
Total liabilities and shareholders’ equity
$1,117,766 $938,895 
See accompanying notes.
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Year Ended December 31,
20232022
Interest income:
Loans, including fees
$63,189 $36,492 
Interest-bearing deposits in banks and other
5,328 2,074 
Total interest income
68,517 38,566 
Interest expense:
Deposits
30,795 7,844 
Borrowings
1,291 722 
Total interest expense
32,086 8,566 
Net interest income
36,431 30,000 
Provision for credit losses
10,445 (700)
Net interest income after provision for credit losses
25,986 30,700 
Noninterest income:
Loan servicing income, net
2,826 2,040 
Gain on sale of government guaranteed loans, net24,553 21,720 
Service charges and fees
1,721 1,306 
Government guaranteed loans fair value gain
15,718 4,756 
Other noninterest income
4,937 1,728 
Total noninterest income
49,755 31,550 
Noninterest expense:
Salaries and benefits
30,973 27,422 
Bonus, commissions, and incentives
5,726 2,394 
Occupancy and equipment
4,758 3,995 
Data processing
5,611 4,828 
Marketing and business development
3,336 2,660 
Professional services
3,657 4,083 
Loan origination and collection
7,425 3,711 
Employee recruiting and development
2,177 2,230 
Regulatory assessments
881 457 
Other noninterest expense
3,163 3,432 
Total noninterest expense
67,707 55,212 
Income from continuing operations before income taxes
8,034 7,038 
Income tax expense from continuing operations
2,119 1,560 
Net income from continuing operations5,915 5,478 
Loss from discontinued operations before income taxes(283)(7,759)
Income tax benefit from discontinued operations(70)(1,932)
Net loss from discontinued operations(213)(5,827)
Net income (loss)
5,702 (349)
Preferred stock dividends
965 832 
Net income available to (loss attributable to) common shareholders
$4,737 $(1,181)
59
BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME CONTINUED
(Dollars in thousands, except per share data)
Year Ended December 31,
20232022
Basic earnings (loss) per common share:
Continuing operations$1.21 $1.16 
Discontinued operations(0.05)(1.45)
Total basic earnings (loss) per common share
$1.16 $(0.29)
Diluted earnings (loss) per common share:
Continuing operations$1.17 $1.16 
Discontinued operations(0.05)(1.38)
Total diluted earnings (loss) per common share
$1.12 $(0.22)
See accompanying notes.
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Year Ended December 31,
20232022
Net income (loss)
$5,702 $(349)
Net unrealized gains (losses) on investment securities available for sale
1,003 (4,454)
Deferred income tax (expense) benefit
(260)1,150 
Other comprehensive income (loss), net
743 (3,304)
Comprehensive income (loss)
$6,445 $(3,653)
See accompanying notes.
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
Preferred
Stock, Series A		Preferred
Stock, Series B		Preferred
Stock, Series C		Common Stock, Additional
Paid-in Capital, and Unearned Compensation		Accumulated
Other
Comprehensive
Income (Loss)		Retained
Earnings		Total
Balance at January 1, 2022
$6,161 $3,123 $— $51,479 $(420)$35,947 $96,290 
Net loss
— — — — — (349)(349)
Issuance of common stock under:
Non-qualified stock purchase plan
— — — 334 — — 334 
Dividend reinvestment plan
— — — 252 — — 252 
Employee stock ownership plan
— — — 71 — — 71 
Repurchase of common stock— — — (49)— — (49)
Issuance of common stock, net— — — 13 — — 13 
Reclassification of unearned ESOP shares allocation— — — (15)— — (15)
Stock-based awards - common stock:
Restricted stock expense, net of tax impact
— — — 457 — — 457 
Stock option expense
— — — 303 — — 303 
Other comprehensive loss, net— — — — (3,304)— (3,304)
Dividends declared on:
— 
Preferred stock
— — — — — (832)(832)
Common stock ($0.32 per share)
— — — — — (1,287)(1,287)
Balance at December 31, 2022
$6,161 $3,123 $— $52,845 $(3,724)$33,479 $91,884 
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
Preferred
Stock, Series A		Preferred
Stock, Series B		Preferred
Stock, Series C		Common Stock, Additional
Paid-in Capital, and Unearned Compensation		Accumulated
Other
Comprehensive
Income (Loss)		Retained
Earnings		Total
Balance at January 1, 2023
$6,161 $3,123 $— $52,845 $(3,724)$33,479 $91,884 
Net income
— — — — — 5,702 5,702 
Impact of ASC 326 Adoption— — — — — (2,508)(2,508)
Issuance of common stock under:
Non-qualified stock purchase plan
— — — 206 — — 206 
Dividend reinvestment plan
— — — 159 — — 159 
Issuance of preferred stock, net
— — 6,446 — — — 6,446 
Repurchase of common stock— — — (13)— — (13)
Exercise of stock options, net— — — (49)— — (49)
Unearned ESOP shares allocation— — — (189)— — (189)
Stock-based awards - common stock:
Restricted stock expense, net of tax impact
— — — 496 — — 496 
Stock option expense
— — — 108 — — 108 
Other comprehensive income, net
— — — — 743 — 743 
Dividends declared on:
Preferred stock
— — — — — (965)(965)
Common stock ($0.32 per share)
— — — — — (1,313)(1,313)
Balance at December 31, 2023
$6,161 $3,123 $6,446 $53,563 $(2,981)$34,395 $100,707 

See accompanying notes.
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
20232022
Cash flows from operating activities:
Net income from continuing operations$5,915 $5,478 
Net loss from discontinued operations(213)(5,827)
Net income (loss)
5,702 (349)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation of fixed assets2,245 1,715 
Net securities premium amortization95 122 
Amortization of debt issuance costs7 7 
Amortization of premium on loans purchased, net591 199 
Provision for credit losses10,445 (700)
Accretion of discount on unguaranteed loans
(2,993)(2,665)
Deferred tax expense2,119 424 
Origination of government guaranteed loans held for sale
(4,276)(2,018)
Proceeds from sales of government guaranteed loans held for sale
484,021 354,105 
Net gains on sales of government guaranteed loans
(24,553)(21,720)
Change in fair value of government guaranteed loans HFI, at fair value
(15,718)(4,756)
Amortization of loan servicing rights
4,507 3,258 
Net gain on sale of other real estate owned(355)— 
Non-qualified stock purchase plan expense
27 87 
Stock based compensation expense
604 763 
Income from bank owned life insurance
(641)(612)
Changes in:
Accrued interest receivable
(2,678)(920)
Other assets
117 (1,782)
Accrued interest payable
178 378 
Other liabilities
(4,472)3,347 
Net cash provided by operating activities of continuing operations455,185 334,710 
Net cash provided by (used in) operating activities of discontinued operations(388)105,541 
Net cash provided by operating activities454,797 440,251 
Cash flows from investing activities:
Purchase of investment securities available for sale
— (20,326)
Principal payments on investment securities available for sale
3,682 2,812 
Purchase of investment securities held to maturity
— (3,568)
Principal payments on investment securities held to maturity
1 50 
Call of investment securities held to maturity2,500 — 
Net purchase of nonmarketable equity securities
(733)(1,210)
Purchase of time deposits in banks(1,000)(2,500)
Maturity of time deposits in banks1,235 — 
Purchase of government guaranteed and consumer loans(111,842)(53,845)
Loan (originations) and payments, net
(529,851)(423,954)
Purchase of premises and equipment
(7,582)(8,064)
Proceeds on sales of other real estate owned2,314 — 
Net cash used in investing activities(641,276)(510,605)
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
(Dollars in thousands)
Year Ended December 31,
20232022
Cash flows from financing activities:
Net change in deposits
190,068 73,385 
Net increase (decrease) in short-term borrowings(15,000)25,000 
Payments on notes payable
(455)(455)
Net repayments of PPP Liquidity Facility borrowings
— (69,654)
Proceeds from issuance of preferred stock, net
6,446 — 
Repayment of subordinated debt
(50)— 
Proceeds from issuance of common stock for benefit plans, net
289 509 
Common share buyback - redeemed stock(13)(49)
ESOP contribution
— 71 
Unearned ESOP shares(189)(15)
Dividends paid on common stock
(1,313)(1,287)
Dividends paid on preferred stock
(965)(832)
Net cash provided by financing activities
178,818 26,673 
Net change in cash and cash equivalents
(7,661)(43,681)
Cash and cash equivalents, beginning of period
66,046 109,727 
Cash and cash equivalents, end of period
$58,385 $66,046 
Supplemental cash flow information
Interest paid
$31,908 $8,188 
Income taxes paid
97 248 
Supplemental noncash disclosures
Impact to retained earnings from adoption of ASC 326, net of tax(2,508)— 
Net change in unrealized holding losses on investment securities available for sale, net of tax effect743 (3,304)
Transfer of available for sale debt securities to held to maturity securities at fair value— 1,500 
Transfer of government guaranteed loans HFI to loans HFS463,752 336,664 
Transfer of loans HFI to OREO— 53 
Transfer of premises and equipment to OREO(1,903)— 
Recognition of right of use asset and operating lease liability
— 627 
See accompanying notes.
65
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The accompanying consolidated financial statements include BayFirst Financial Corp. and its wholly owned subsidiary, BayFirst National Bank, together referred to as “the Company”.
BayFirst Financial Corp. is a registered bank holding company, incorporated under the laws of the State of Florida. The Company owns all outstanding stock of BayFirst National Bank (the “Bank”), a national banking association bank. A significant portion of the Company’s assets and revenues are derived from the operations of the Bank.
The Company provides a variety of traditional community banking services through its full-service banking centers located in the Tampa/Sarasota, Florida region. The Bank’s primary deposit products are demand deposits, NOW accounts, money market accounts, savings deposits, and time deposits and its primary lending products are residential mortgage, commercial, and consumer loans. In addition, the Company provides lending services nationwide to small business customers, and as such, a significant portion of the loans originated by the Bank are guaranteed by the SBA/USDA (“government guaranteed loans”). The guaranteed portion of the SBA/USDA loan can be sold in the secondary market, and the Bank engages in the sale of participating interests of the non-guaranteed portion. The Company previously engaged in mortgage banking activities with offices located in a number of states and as such, originated and sold one-to-four family residential mortgage loans in the secondary market. The nationwide residential mortgage lending operations were discontinued in 2022.
The Company currently operates one business segment. In the third quarter of 2022, the Company discontinued the Bank’s nationwide residential mortgage lending segment. The operations of this segment are reported as discontinued operations.
Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The most significant estimates relate to the ACL, government guaranteed loan servicing rights, and fair value of government guaranteed loans.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased.
Emerging Growth Company Status: The Company is expected to remain an "emerging growth company," as defined in the JOBS Act, through December 31, 2026. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period when complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of this extended transition period, which means these financial statements, as well as financial statements they file in the future for as long as the Company remains an emerging growth company, will be subject to all new or revised accounting standards generally applicable to private companies.
Contingencies: Due to the nature of their activities, the Company and its subsidiary are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of December 31, 2023. Although the ultimate outcome of all claims and lawsuits outstanding as of December 31, 2023 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on the Company’s results of operations or financial condition.
Adoption of New Accounting Standards:
On January 1, 2023, the Company adopted ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) along with its amendments, which replaces the incurred loss impairment methodology in past standards with the CECL methodology and requires consideration of a broader range of information to determine credit loss estimates. The measurement of expected losses under the CECL methodology is applicable to financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an
66
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning January 1, 2023 and after are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a decrease to retained earnings of $2,508, net of tax, comprised of a $3,107 pretax increase in the ACL for loans and $18 for HTM securities combined with a $213 pretax increase in reserve on unfunded commitments, as of January 1, 2023 for the cumulative effect of adopting ASC 326.
The pre-tax impact of the January 1, 2023 adoption is summarized in the table below:
January 1, 2023December 31, 2022
Allowance for credit lossesAs Reported UnderPre-ASC 326Impact of
ASC 326AdoptionASC 326 Adoption
Assets
Investment securities HTM - corporate bonds$18 $— $18 
Loans HFI, at amortized cost
Real estate - residential2,210 731 1,479 
Real estate - commercial1,569 956 613 
Real estate - construction and land309 28 281 
Commercial and industrial7,298 6,182 1,116 
Consumer and other767 1,090 (323)
Unallocated— 59 (59)
Loans HFI, at amortized cost total12,153 9,046 3,107 
Liabilities
Allowance for credit loss for unfunded commitments724 511 213 
Total$12,877 $9,557 $3,320 
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans. The amendments in this Update became effective for the Company on January 1, 2023 for all interim and annual periods. The adoption of the provisions in this Update are applied prospectively and have resulted in additional disclosures concerning modifications of loans to borrowers experiencing financial difficulty, as well as disaggregated disclosure of charge-offs on loans. Please also see Note 5 – Allowance for Credit Losses for added disclosure concerning modifications of loans to borrowers experiencing financial difficulty, as well as current period gross charge-offs on financing receivables by year of origination and class of financing receivable.
Allowance for Credit Losses - Investment Securities:
The ACL on held-to-maturity securities is a contra-asset valuation determined in accordance with ASC 326, which is deducted from the securities' amortized cost basis at the balance sheet date as a result of management's assessment of the net amount expected to be collected. The allowance is measured on a pooled basis for securities with similar risk characteristics using historical credit loss information, adjusted for current conditions and reasonable and supportable forecasts. Securities that are determined to be uncollectible are written off against the allowance.
For available-for-sale securities in an unrealized loss position ("impaired security"), we assess whether 1) we intend to sell the security, or, 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. Under either of these scenarios above, the security's amortized cost is written down to fair value through a charge to previously recognized allowances or earnings, as applicable. For impaired securities that do not meet these
67
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
conditions, we assess whether the decline in fair value was due to credit loss or other factors. This assessment considers, among other things: 1) the extent to which the fair value is less than amortized cost, 2) the financial condition and near-term prospects of the issuer, 3) any changes to the rating of the security by a rating agency, and 4) our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss component. Any impairment due to non-credit-related factors that has not been recorded through an ACL is recognized in other comprehensive income (loss). The discount rate used in determining the present value of the expected cash flows is based on the effective interest rate implicit in the security at the date of purchase.
The ACL on investment securities HTM is a contra-asset valuation that is deducted from the carrying amount of investment securities HTM to present the net amount expected to be collected. Investment securities HTM are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in our Consolidated Statements of Income in provision for credit losses. We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics, and consider historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these investment securities are issued by a U.S.government-sponsored entity and have an implicit or explicit government guarantee; therefore, no ACL has been recorded for these investment securities. With regard to corporate bonds HTM, we consider the issuer’s bond rating or the average expected default frequency of the similar investment securities based on company size and industry for those investment securities that are not rated. Historical loss rates associated with investment securities having similar grades as those in our portfolio have been insignificant.
Accrued interest receivable is excluded from the amortized costs and fair values of both held-to-maturity and available-for-sale securities and included in accrued interest receivable on the Consolidated Balance Sheets. Investment securities are placed on non-accrual status when principal or interest is contractually past due more than ninety days, or management does not expect full payment of principal and interest. We do not record an ACL for accrued interest receivable on investment securities, as the amounts are written-off when the investment is placed on non-accrual status. There were no non-accrual investment securities in any of the periods presented in the consolidated financial statements.
Allowance for Credit Losses - Loans HFI and Unfunded Commitments:
The ACL is a valuation account that is deducted from the amortized cost basis of loans to present a net amount expected to be collected. The ACL excludes loans held for sale and loans accounted for under the fair value option. Loans are charged-off against the ACL when management believes the uncollectibility of a loan balance is confirmed.
The Company’s ACL on loans is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. Management adjusts historical loss information for differences in current risk characteristics such as portfolio risk grading, delinquency levels, or portfolio mix as well as for changes in environmental conditions such as changes in unemployment rates. The ACL on unfunded loan commitments is based on estimates of probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity and loss rates as determined for pooled funded loans. The ACL on unfunded commitments is a liability account included in other liabilities. Management estimates these allowances quarterly.
The ACL is measured on a pooled basis when similar risk characteristics are present in the portfolio. The Company has identified portfolio segments based on loan pools with similar credit risk characteristics, which generally correspond to federal regulatory reporting codes, with separate consideration for the government guaranteed loans. The ACL model utilizes a PD/LGD methodology to measure the expected credit losses on government guaranteed loans and a WARM methodology for the remaining loans. The PD/LGD method estimates losses by utilizing estimated PD, LGD, and individual loan level exposure at default. The WARM model contemplates expected losses at a pool-level, utilizing historical loss information. Portions of government guaranteed loans have a government guarantee for credit losses, therefore, no ACL has been recorded for those loan balances. In order to quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled estimated loss approaches. These qualitative adjustments include: changes in lending policies, procedures, and strategies; changes in nature and volume of portfolio; staff experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; trends in underlying collateral value; external factors such as competition, legal, regulatory; changes in quality of the loan review system; and economic conditions. Additionally, the Company uses reasonable and supportable forecasts utilizing data from the FOMC’s median forecasts of change in national GDP and of national unemployment. The
68
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
FOMC’s forecast of GDP and unemployment for the next calendar year is used in conjunction with the most recent 4 quarters of historical data from FRED (Federal Reserve Economic Data) to determine changes in certain qualitative factors used in calculating loss rates.
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan agreement.
Individually evaluated loans are evaluated for impairment and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the rate implicit in the original loan agreement or at the fair value of collateral if repayment is expected solely from the collateral.
Expected credit losses are estimated over the contractual term of the loan, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a modification will be executed with an individual borrower or the extension or renewal options are included in the contract at the reporting date by the Company.
Past due status of loans is determined based on contractual terms. Commercial and residential loans are placed in nonaccrual status and interest accrual is discontinued if they become 90 days delinquent or there is evidence that the borrower’s ability to make the required payments is impaired. Other consumer and personal loans continue to accrue interest and are typically charged off no later than 120 days past due.
When interest accrual is discontinued, all unpaid accrued interest is reversed unless all or some interest accrued to date is guaranteed by the USDA, in which case the guaranteed amount is not reversed. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.
The determination of the appropriate level of the ACL inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Although management believes that the processes in place for assessing the appropriate level of the ACL are robust, such policies and procedures have limitations, including judgment errors in management’s risk analysis, and may not prevent unexpected losses in the future. Moreover, the CECL methodology may create more volatility in the level of our ACL from quarter to quarter as changes in the level of ACL will be dependent upon, among other things, macroeconomic forecasts and conditions, loan portfolio volumes and credit quality. These factors could have a material adverse effect on the Company’s business, financial condition and results of operations.
Time Deposits in Banks: Time deposits with other banks have maturities ranging from January 2024 through December 2025 and bear interest at rates ranging from 1.70% to 2.27%. None of the time deposits had maturities of 90 days or less at the time of origination. All investments in time deposits are with FDIC insured financial institutions and none exceed the maximum insurable amount of $250.
Investment Securities: Investment securities transactions are recorded on a trade date basis. The company has some debt securities classified as held-to-maturity since management has the intent and ability to hold the securities to maturity. The remaining investment securities are classified as available for sale since the Company may sell them before maturity. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are included in other comprehensive income and the related accumulated unrealized holding gains and losses are reported as a separate component of shareholders’ equity until realized. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments.
Nonmarketable Equity Securities: Nonmarketable equity securities include equity securities that are not publicly traded and securities acquired for various purposes which are periodically evaluated for impairment. Nonmarketable equity securities consist of FHLB Stock, FRB Stock, stock in a correspondent bank, and preferred stock in a nonaffiliated company. The Bank is required to maintain certain minimum levels of equity investments with certain regulatory and other entities in which the Bank has an ongoing business relationship. These restricted equity securities are accounted for at cost which equals par or redemption value. These securities do not have a readily determinable fair value as their ownership is restricted and there is no market for these securities. These securities can only be redeemed or sold at their par value and
69
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
only to the respective issuing government supported institution or to another member institution. Management considers these nonmarketable equity securities to be long-term investments. Accordingly, when evaluating some of these securities without readily determinable fair values for impairment, management considers the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The investment in preferred stock of the nonaffiliated company does not have a readily determinable value and is carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Loans Held for Sale: The Company may designate government guaranteed loans as held for sale based on its intent to sell guaranteed or non-guaranteed portions of these loans in the secondary market. Government guaranteed loans held for sale are accounted for at lower of cost or fair value. Gains or losses on the sale of these loans are recorded in noninterest income on the Consolidated Statements of Income.
Loans: Except for certain loans for which the fair value option was elected, as discussed in Note 6, all other loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for credit losses. Interest income is accrued on the unpaid principal balances. Loan origination fees, net of direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
In general, interest income is discontinued, and the loan is placed on nonaccrual status, at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Mortgage and commercial loans are evaluated on a loan-by-loan basis and are charged off to the extent principal is deemed uncollectible. Other consumer and personal loans continue to accrue interest and are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due more than 89 days and still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually evaluated loans.
All interest accrued but not collected for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until the loan returns to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future contractual payments are reasonably assured.
Concentration of Credit: The Company grants residential and commercial real estate, construction and land, commercial and industrial, and consumer loans in the State of Florida with primary concentration being the Tampa Bay region. The Company also grants government guaranteed commercial real estate, construction and land, commercial and industrial, and consumer loans nationwide. Although the Company’s loan portfolio is diversified, a significant portion of its loans are secured by real estate. The following loan segments have been identified:
Residential Real Estate – The Bank originates residential real estate loans for the purchase or refinance of a mortgage in the Tampa Bay region. These loans are primarily collateralized by owner and non-owner occupied properties located in the Tampa Bay region and are held at amortized cost in the Company’s loan portfolio. Prior to discontinuing the nationwide residential loan operation, the Bank also originated residential real estate loans nationwide for the purchase or refinance of a mortgage. These loans are primarily collateralized by owner and non-owner occupied properties located in the area in which they were originated, and these loans are sold into the secondary market.
Commercial Real Estate – Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties to finance real estate purchases, refinancings, and expansions and improvements to commercial properties. These loans are secured primarily by first liens and may include office buildings, apartments, retail and mixed-use properties, churches, warehouses, and restaurants. Commercial real estate loans are generally larger than residential real estate loans and involve greater credit risk. The repayment of these loans largely depends on the results of operations and management of these properties.
Construction and Land – Construction and land loans consist of loans to individuals for the construction of a primary or secondary residence and, in some cases, to real estate investors to acquire and develop land. To the extent construction loans are not made to owner-occupants of single-family homes, they are more vulnerable to changes in economic conditions. Further, the nature of these loans is such that they are more difficult to evaluate and monitor. The risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost, including interest, of the project.
70
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Commercial and Industrial – Commercial and industrial loans consist of business loans to small and medium sized businesses in the Tampa Bay region and nationwide government guaranteed loans. Commercial and industrial loans are generally used for working capital purposes or for acquiring equipment, inventory, or furniture. These loans are generally secured by accounts receivable, inventory, and equipment. Commercial and industrial loans are typically made based on the borrower’s ability to make repayment from the cash flow of the borrower’s business, which makes them of higher risk than residential real estate loans, and the collateral securing loans may be difficult to appraise and may fluctuate in value based on the success of the business.
Commercial and Industrial - PPP – Commercial and industrial PPP loans consist of all loans originated under the SBA 7(a) loan PPP pursuant to the CARES Act and carry a 100% government guarantee.
Consumer and Other – Consumer and other loans mainly consist of automobile, revolving credit plans, and other loans. The Bank’s consumer loans may be uncollateralized and rely on the borrower’s income for repayment. The Bank also purchased a portfolio of unsecured consumer loans.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 15 to 40 years. Leasehold improvements are amortized using the straight-line method with useful lives ranging from 3 to 10 years based on the lesser of the useful life of the asset or the remaining expected term of the lease. Furniture, fixtures, and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.
Loan Servicing Rights: When the Company sells the guaranteed portion of a government guaranteed loan or a portion of the non-guaranteed portion of a government guaranteed loan, the Company generally retains the servicing, and a servicing right asset is created. Loan servicing rights are initially recorded at fair value in gain on sale of government guaranteed loans, net. Fair value is based on market prices for comparable servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires loan servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is determined based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported through gain on sale of government guaranteed loans, net on the Consolidated Statements of Income. The fair values of loan servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. There was no valuation allowance recorded on loan servicing rights at December 31, 2023 and December 31, 2022.
Loan servicing income, which is reported on the Consolidated Statements of Income in noninterest income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal. The amortization of loan servicing rights is netted against loan servicing fee income.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Leases: The Company enters into leases in the normal course of business primarily for branch, corporate office, and loan production office locations. The Company’s leases have remaining terms ranging from 10 months up to 3.4 years, some of which include renewal or termination options to extend the lease for up to 4.5 years. The Company’s leases do not include residual value guarantees or covenants.
The Company includes lease extension and termination options in the lease terms if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (i.e., short-term leases) on the Consolidated Balance Sheets.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Leases are classified as operating or finance leases at the lease commencement date; however, the Company has not entered into any finance leases. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company’s incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors.
Bank Owned Life Insurance: The Company, through the Bank, has purchased life insurance policies on certain key officers. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Other Real Estate Owned: OREO is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of real estate property collateralizing a mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are also expensed.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is used to estimate the fair value of stock options, while market price of the Company’s common stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as a reversal of compensation cost expenses in the period that they occur.
Advertising: Advertising costs are expensed as incurred. These costs are included in marketing and business development expense or expenses from discontinued operations in the Consolidated Statements of Income.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. There was no valuation allowance recognized at December 31, 2023 and December 31, 2022.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Employee 401(k) Plan: The Company has a 401(k) plan that covers all employees subject to certain age and service requirements. The Company contributes 3% of eligible employees’ salary each pay period as a safe harbor contribution. The Company may also match employee contributions each year at the discretion of the Board of Directors. Employee 401(k) expense is the amount of safe harbor and employee matching contributions to the 401(k) plan.
Non-Qualified Stock Purchase Plan: Under the NSPP, all employees and Directors are eligible to participate in the plan. Employees may purchase available shares of common stock with post-tax dollars as of the grant date at a 10% discount to the price of shares offered under the NSPP with limitations on deductions from employees’ income. Directors may purchase available shares of common stock with post-tax dollars as of the grant date at the price of shares offered under the
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NSPP, with no minimum deduction and a maximum deduction of the Directors’ board fees. NSPP compensation expense is recorded based on the 10% discount offered to employees and the number of shares purchased by employees.
Employee Stock Ownership Plan: The Company has an ESOP for eligible employees. The amount of profit-sharing contributions to the ESOP is approved by the Board of Directors, and the Company purchases shares of the Company’s common stock based on the amount of approved contributions. Profit-sharing expense is the amount of contributions to the ESOP. The discontinuation of the nationwide residential lending division during 2022 triggered a partial plan termination and all affected employees were 100% vested in the Company’s contributions into the ESOP. See Note 12 - Other Benefits Plans for information.
Preferred Stock: The Company has issued cumulative nonconvertible Series A shares of preferred stock, on which it pays cash dividends at a rate of 9% (unless the Company has not redeemed the shares by the tenth anniversary of their issuance in 2019, in which event the rate is subject to be increased to 11%). The Company has also issued cumulative convertible Series B shares of preferred stock, on which it pays cash dividends at a rate of 8% (unless the Company has not redeemed the shares by the tenth anniversary of their issuance in 2020 and 2021, in which event the rate is subject to be increased to 9%). The Series B shares are convertible at a ratio of liquidation value to tangible book value at the option of the shareholder. All preferred stock has liquidation preference relative to the Company’s common stock.
On September 30, 2023, the Company issued 1,835 shares of 11.0% Series C Cumulative Convertible Preferred Stock through a private offering. These shares have no par value and a liquidation preference of $1 per share plus an amount equal to all accumulated dividends thereon (whether or not declared but without interest) to the date payment of such distribution is made in full. In the fourth quarter of 2023, the company issued an additional 4,611 shares. Total gross proceeds from the preferred stock offering totals $6,446 which will be used for operating expenses or to contribute capital to BayFirst National Bank to support its growth and operations.
Series C Preferred Shareholders are entitled to receive quarterly cash dividends at 11% per annum (unless the Company has not redeemed the shares by the tenth anniversary of their issuance, in which event the rate is subject to be increased to 12%). The holders of shares of Series C Preferred Stock have the right to convert such shares into shares of common stock at a conversion value equal to the quotient of: (i) the $1 liquidation preference; divided by (ii) the tangible book value per share of common stock, calculated on the basis of the Company’s financial statements, as of the last day of the calendar quarter occurring prior to the date on which a holder exercises the conversion right; provided, however, that tangible book value shall be adjusted to reflect a subsequent quarter end only on the last day of the month succeeding such quarter end.
On the tenth anniversary of the issuance of any Series C Preferred Stock, the Company must redeem such shares; provided, however, that the Company will not be so obligated if it does not have adequate funds to pay the redemption price or is prohibited by law or otherwise from redeeming the shares. The Company may redeem any portion of the outstanding shares of Series C Preferred Stock at any time after the third anniversary of their issuance. The redemption price in either instance will be $1 per share plus an amount equal to all accumulated dividends thereon (whether or not earned or declared but without interest) to the date of payment of such distribution.
Earnings per Common Share: Basic earnings per common share is net income less preferred stock dividends (i.e., net income available to common shareholders) divided by the weighted average number of common shares outstanding during the year. Diluted earnings per common share includes the dilutive effect of vested stock options that are considered in-the-money and the dilutive effect of the potential conversion of Series B preferred stock and Series C preferred stock to common stock.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Restrictions on Cash: The Federal Reserve Board reduced reserve requirement ratios to 0% effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. Cash was required to be pledged as collateral with a broker-dealer for trading mortgage banking derivatives. There are no balances of cash pledged at December 31, 2023 and December 31, 2022.
Revenue Recognition: Revenue earned on interest-earning assets is recognized based on the effective yield of the financial instrument. Revenue recognized from contracts with customers, which is accounted for under ASC 606, “Revenue from Contracts with Customers”, is primarily included in the Company’s noninterest income. Interest income and certain other types of noninterest income are accounted for under other applicable accounting standards.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
A description of the Company’s revenue streams accounted for under ASC 606 are as follows:
Service Charges on Deposit Accounts – The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include but are not limited to services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Debit Card Interchange Fees – The Company earns interchange fees from debit cardholder transactions through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Government Guaranteed Loan Packaging Fees – The Company earns government guaranteed loan packaging fees for organizing loan documents for approval of government guaranteed loans. The revenue is recognized when the loan packaging services are performed.
Gains/Losses on Sales of OREO – The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. 
NOTE 2 – DISCONTINUED OPERATIONS
During the third quarter of 2022, the Company discontinued the Bank’s nationwide residential mortgage loan production operations. The decision was based on a number of strategic priorities and other factors, including the precipitous decline in mortgage volumes and the uncertain outlook for mortgage lending over future periods. As a result of these actions, the Company classified the operations of the residential mortgage lending division as discontinued under ASC 205-20. The Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows present discontinued operations for the current period and retrospectively for prior periods.
The following is a summary of the assets and liabilities of the discontinued operations of the residential mortgage lending division at December 31, 2023 and December 31, 2022:
December 31, 2023December 31, 2022
Assets
Loans held for sale, at fair value$— $449 
Loan servicing rights— 201 
Right-of-use operating lease asset348 559 
Accrued interest receivable— 2 
Total assets$348 $1,211 
Liabilities
Operating lease liability$620 $1,189 
Other liabilities— 469 
Total liabilities$620 $1,658 
74
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following presents operating results of the discontinued operations of the residential mortgage lending division for the years ended December 31, 2023 and December 31, 2022:
Year Ended December 31,
20232022
Interest income$1 $2,747 
Noninterest income(2)31,442 
Total net revenue(1)34,189 
Noninterest expense282 41,948 
Loss from discontinued operations before income taxes(283)(7,759)
Income tax benefit(70)(1,932)
Net loss from discontinued operations$(213)$(5,827)
NOTE 3 – INVESTMENT SECURITIES
The amortized costs, gross unrealized gains and losses, and estimated fair values of investment securities available for sale and investment securities held to maturity at December 31, 2023 and December 31, 2022 as well as the ACL for investment securities held to maturity at December 31, 2023 are summarized as follows:
December 31, 2023Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Investment securities available for sale:
Asset-backed securities
$8,041 $6 $(114)$7,933 
Mortgage-backed securities:
U.S. Government-sponsored enterprises
3,842 — (606)3,236 
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises
20,382 — (3,284)17,098 
Corporate bonds11,332 — (24)11,308 
Total investment securities available for sale
$43,597 $6 $(4,028)$39,575 
December 31, 2023Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		ACL
Investment securities held to maturity:
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$1 $— $— $1 $— 
Corporate bonds2,500 — (238)2,262 17 
Total investment securities held to maturity
$2,501 $— $(238)$2,263 $17 
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
December 31, 2022Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Investment securities available for sale:
Asset-backed securities
$9,873 $— $(268)$9,605 
Mortgage-backed securities:
U.S. Government-sponsored enterprises
4,133 — (693)3,440 
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises
22,031 — (3,811)18,220 
Corporate bonds11,337 — (253)11,084 
Total investment securities available for sale
$47,374 $— $(5,025)$42,349 
December 31, 2022Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Investment securities held to maturity:
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$2 $— $— $2 
Corporate bonds5,000 — (247)4,753 
Total investment securities held to maturity
$5,002 $— $(247)$4,755 
The amortized cost and fair value of investment securities as of December 31, 2023 are shown in the table below by contractual maturity. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Available for SaleHeld to Maturity
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
One to five years$11,332 $11,308$1,500 $1,440
Five to ten years— —1,000 822
Beyond ten years32,265 28,2671 1
Total$43,597 $39,575$2,501 $2,263
No ACL for investment securities AFS was needed at December 31, 2023. Declines in the fair value of the AFS investment portfolio are believed by management to be temporary in nature. When evaluating an investment for credit loss, management considers, among other things, the length of time and the extent to which the fair value has been in a loss position; the financial condition of the issuer through the review of credit ratings and, if necessary, corporate financial statements; adverse conditions specifically related to the security such as past due principal or interest; underlying assets that collateralize the debt security; other economic conditions and demographics; and the intent and ability of the Company to hold the investment until the loss position is recovered. Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. At December 31, 2023, the Company did not intend to sell and believed it was not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.
As of December 31, 2023, there were no past due principal and interest payments associated with the HTM securities. The Company monitors the credit quality of debt securities held to maturity quarterly through the use of credit ratings. However, the corporate bonds that are held to maturity have no credit rating and the corporate bonds in an unrealized loss position at December 31, 2023 are not material to the financial statements.There was an ACL of $17 on corporate bonds HTM based on applying the long-term historical credit loss rate for similarly rated securities.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following table presents the activity in the ACL for investment securities HTM by major security type for the year ended December 31, 2023:
For the Year Ended
Corporate BondsDecember 31, 2023
Balance at beginning of period$— 
Impact of adopting ASC 32618 
Provision for credit losses(1)
Investment securities charge-offs/recoveries— 
Investment securities recoveries— 
Balance at end of period$17 
The following table summarizes investment securities with unrealized losses at December 31, 2023 aggregated by security type and length of time in a continuous unrealized loss position:
Less than 12 Months12 Months or LongerTotal
December 31, 2023Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized LossesNumber of Securities
Investment securities available for sale:
Asset-backed securities$— $— $5,967 $(114)$5,967 $(114)2
Mortgage-backed securities:
U.S. Government-sponsored enterprises— — 3,236 (606)3,236 (606)2
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises— — 17,098 (3,284)17,098 (3,284)7
Corporate bonds11,308 (24)— — 11,308 (24)5
Total investment securities available for sale$11,308 $(24)$26,301 $(4,004)$37,609 $(4,028)16
Investment securities held to maturity:
Corporate bonds$— $— $2,262 $(238)$2,262 $(238)3
Total investment securities held to maturity$— $— $2,262 $(238)$2,262 $(238)3
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following table summarizes investment securities with unrealized losses at December 31, 2022 aggregated by security type and length of time in a continuous unrealized loss position:
Less than 12 Months12 Months or LongerTotal
December 31, 2022Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized LossesNumber of Securities
Investment securities available for sale:
Asset-backed securities$2,156 $(103)$7,449 $(165)$9,605 $(268)3
Mortgage-backed securities:
U.S. Government-sponsored enterprises— — 3,440 (693)3,440 (693)2
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises4,188 (383)14,103 (3,428)18,291 (3,811)7
Corporate bonds11,085 (253)— — 11,085 (253)5
Total investment securities available for sale$17,429 $(739)$24,992 $(4,286)$42,421 $(5,025)17
Investment securities held to maturity:
Corporate bonds$4,982 $(247)$— $— $4,982 $(247)4
Total investment securities held to maturity$4,982 $(247)$— $— $4,982 $(247)4
No investment securities were pledged as of December 31, 2023 or December 31, 2022, and there were no sales of investment securities during the years ended December 31, 2023 and December 31, 2022.
NOTE 4 – LOANS
Loans HFI, at amortized cost, at December 31, 2023 and December 31, 2022 were as follows:
December 31,
2023		December 31,
2022
Real estate:
Residential
$264,126 $202,329 
Commercial
293,595 231,281 
Construction and land
26,272 9,320 
Commercial and industrial
177,566 194,643 
Commercial and industrial - PPP
3,202 19,293 
Consumer and other
47,287 37,288 
Loans HFI, at amortized cost, gross
812,048 694,154 
Deferred loan costs, net
14,707 10,740 
Discount on government guaranteed loans sold(1)
(7,040)(5,621)
Premium on loans purchased, net
4,503 2,301 
Allowance for credit losses
(13,497)(9,046)
Loans HFI, at amortized cost
$810,721 $692,528 
(1) The Company allocates the retained portion of loans sold based on relative fair value of the retained portion and the sold portion, which results in a discount on the retained portion.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 5 - ALLOWANCE FOR CREDIT LOSSES
On January 1, 2023, the Company adopted ASU 2016-13, or CECL, using the modified retrospective method for all of its loans measured at amortized cost. With the adoption of CECL, the Company elected to exclude accrued interest receivable from the amortized cost basis of loans.
The following schedules present the activity in the ACL by loan segment for the years ended December 31, 2023 and December 31, 2022:
Real Estate - ResidentialReal Estate - CommercialReal Estate - Construction and LandCommercial and IndustrialCommercial and Industrial - PPP
Consumer and Other(1)
UnallocatedTotal
Year Ended
December 31, 2023
Beginning Balance$731 $956 $28 $6,182 $— $1,090 $59 $9,046 
Impact of adopting ASC 3261,479 613 281 1,116 — (323)(59)3,107 
Charge-offs— (108)— (6,240)(223)(3,280)— (9,851)
Recoveries8 87 — 435 — 334 — 864 
Provision(231)270 210 5,086 223 4,773 — 10,331 
Ending Balance$1,987 $1,818 $519 $6,579 $— $2,594 $— $13,497 
December 31, 2022
Beginning Balance$1,437 $2,349 $241 $9,202 $— $154 $69 $13,452 
Impact of adopting ASC 326— — — — — — — — 
Charge-offs— (42)— (3,632)— (669)— (4,343)
Recoveries— 80 — 503 — 54 — 637 
Provision(706)(1,431)(213)109 — 1,551 (10)(700)
Ending Balance$731 $956 $28 $6,182 $— $1,090 $59 $9,046 
(1) During the fourth quarter of 2023, the ACL by loan segment was analyzed and further segmented within the model to better capture the credit risk in the underlying portfolios and refinements were made to certain quantitative and qualitative loss assumptions as warranted. As a result of these refinements, the ACL for the Consumer and Other loan segment was increased reflecting the continued higher credit risk and recent credit loss history experienced related to the unsecured consumer loan portfolio acquired from and serviced by a third-party originator.
CECL significantly changed the credit losses estimation model for loans. The ACL represents management’s best estimate of future lifetime expected losses on its HFI loan portfolio. The Company calculates its ACL by estimating expected credit losses on a collective basis for loans that share similar risk characteristics. Loans that do not share similar risk characteristics with other loans are evaluated for credit losses on an individual basis. The Company uses a combination of modeled and non-modeled approaches that incorporates current and future economic conditions to estimate lifetime expected losses on a collective basis.
The Company’s ACL model utilizes a PD/LGD methodology to measure the expected credit losses on government guaranteed loans and a WARM methodology for the remaining loans. The PD/LGD method estimates losses by utilizing estimated PD, LGD, and individual loan level exposure at default. The WARM model contemplates expected losses at a pool-level, utilizing historical loss information. Portions of government guaranteed loans have a government guarantee for credit losses, therefore, no ACL has been recorded for those loan balances. In order to quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled estimated loss approaches. These qualitative adjustments include: changes in lending policies, procedures, and strategies; changes in nature and volume of portfolio; staff experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; trends in underlying collateral value; external factors such as competition, legal, regulatory; changes in quality of the loan review system; and economic conditions. In addition to this, the Company uses reasonable and supportable forecasts utilizing data from the FOMC’s median forecasts of change in national GDP and of national
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
unemployment. The FOMC’s forecast of GDP and unemployment for the next calendar year is used in conjunction with the most recent 4 quarters of historical data from FRED (Federal Reserve Economic Data) to determine changes in certain qualitative factors used in calculating loss rates.
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan agreement.
Individually evaluated loans are evaluated for impairment and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the rate implicit in the original loan agreement or at the fair value of collateral if repayment is expected solely from the collateral.
See Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s ACL methodology.
The Company maintains a separate ACL for its off-balance sheet unfunded loan commitments. The ACL on unfunded loan commitments is based on estimates of probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity and loss rates as determined for pooled funded loans. As of December 31, 2023 and December 31, 2022, the ACL for unfunded commitments recorded in other liabilities was $839 and $511, respectively.
The following table presents the activity in the ACL for unfunded commitments for the year ended December 31, 2023:
For the Year Ended
December 31, 2023
Balance at beginning of period$511 
Impact of adopting ASC 326213 
Provision for credit losses115 
Unfunded commitments charge-offs— 
Unfunded commitments recoveries— 
Balance at end of period$839 
The following tables present the recorded investment in nonaccrual loans and loans past due over 89 days still on accrual by loan segment at December 31, 2023 and December 31, 2022. In the following tables, the recorded investment does not include the government guaranteed balance.
December 31, 2023
Nonaccrual with no ACL(1)
Nonaccrual with ACL(1)
Loans Past Due Over
89 Days Still Accruing(1)
Real estate - residential
$— $4,654 $583 
Real estate - commercial
— 1,159 — 
Commercial and industrial
— 1,587 — 
Consumer and other
— — 282 
Total
$— $7,400 $865 
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
December 31, 2022
Nonaccrual(1)
Loans Past Due Over
89 Days Still Accruing(1)
Real estate - commercial
$1,563 $— 
Commercial and industrial
1,854 — 
Consumer and other— 254 
Total
$3,417 $254 
(1) Excludes nonaccrual loans accounted for under the fair value option. See Note 6. Fair Value for additional information.
A financial asset is considered collateral dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraised value. The following table presents the amortized cost basis of individually analyzed collateral dependent loans by loan portfolio segment as of December 31, 2023:

Type of CollateralACL
Business Assets
Commercial and industrial$390 $255 

The following table presents the aging of the recorded investment in past due gross loans HFI at amortized cost at December 31, 2023 by loan segment:
30-89 Days
Past Due		Greater Than
89 Days
Past Due
Total
Past Due
Loans Not
Past Due (1)
Total
Loans
Real estate - residential
$1,840 $5,184 $7,024 $257,102 $264,126 
Real estate - commercial
2,870 791 3,661 289,934 293,595 
Real estate - construction and land
— — — 26,272 26,272 
Commercial and industrial
3,970 603 4,573 172,993 177,566 
Commercial and industrial - PPP
— — — 3,202 3,202 
Consumer and other
1,221 282 1,503 45,784 47,287 
Total
$9,901 $6,860 $16,761 $795,287 $812,048 
(1) $1,469 of balances 30-89 days past due and $638 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guarantee. Of those loans, $261 of commercial and industrial PPP loans were delinquent as of December 31, 2023.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following table presents the aging of the recorded investment in past due gross loans HFI at amortized cost at December 31, 2022 by loan segment:
30-89 Days
Past Due		Greater Than
89 Days
Past Due
Total
Past Due
Loans Not
Past Due (1)
Total
Loans
Real estate - residential
$719 $— $719 $201,610 $202,329 
Real estate - commercial
586 639 1,225 230,056 231,281 
Real estate - construction and land
— — — 9,320 9,320 
Commercial and industrial
1,927 1,760 3,687 190,956 194,643 
Commercial and industrial - PPP
— — — 19,293 19,293 
Consumer and other
669 254 923 36,365 37,288 
Total
$3,901 $2,653 $6,554 $687,600 $694,154 
(1) $1,803 of balances 30-89 days past due and $4,288 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guarantee, and $3,675 of past due commercial and industrial PPP loans were primarily due to delinquencies from borrowers with only a PPP loan and no other Bank product. These borrowers were non-responsive to requests for forgiveness applications and payments, and applications were subsequently submitted to the SBA for their 100% guarantee purchase from the Bank.
Modifications to Borrowers Experiencing Financial Difficulty
For the year ended December 31, 2023, there were no loan modifications to borrowers experiencing financial difficulty and no loan modifications that subsequently defaulted during the period.
Troubled Debt Restructurings
At December 31, 2022, the Company had no loans classified as a troubled debt restructuring. See Note 1 for additional discussion on TDRs.
Credit Quality Indicators
Internal risk-rating grades are assigned to loans by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other statistics and factors such as delinquency, to track the migration performance of the portfolio balances. This analysis is performed at least annually. The Bank uses the following definitions for its risk ratings:
Pass – Loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.
Special Mention – These credits have potential weaknesses that may, if not checked or corrected, weaken the asset, or inadequately protect the Company’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a “Substandard” classification.
Substandard – These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – These loans have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The table below sets forth gross credit exposure for the commercial loan portfolio disaggregated by loan segment based on internally assigned risk ratings at December 31, 2023 and gross write offs for the year ended December 31, 2023:
RevolvingRevolving
LoansLoans
Term Loans Amortized Cost Basis by Origination YearAmortizedConverted
202320222021PriorCost Basisto TermTotal
Real estate - commercial
Risk Rating
Pass$94,092 $79,712 $50,985 $64,648 $2,439 $— $291,876 
Special mention— 482 78 — — — 560 
Substandard— 195 31 933 — — 1,159 
Doubtful— — — — — — — 
Total real estate - commercial loans, at amortized cost, gross$94,092 $80,389 $51,094 $65,581 $2,439 $— $293,595 
Gross write offs$— $101 $— $7 $— $— $108 
Real estate - construction and land
Risk Rating
Pass$11,366 $12,755 $2,151 $— $— $— $26,272 
Special mention— — — — — — — 
Substandard— — — — — — — 
Doubtful— — — — — — — 
Total real estate - construction and land loans, at amortized cost, gross$11,366 $12,755 $2,151 $— $— $— $26,272 
Gross write offs$— $— $— $— $— $— $— 
Commercial and industrial
Risk Rating
Pass$51,212 $45,325 $13,807 $54,003 $10,750 $— $175,097 
Special mention— 150 43 671 — — 864 
Substandard— 1,004 14 587 — — 1,605 
Doubtful— — — — — — — 
Total commercial and industrial loans, at amortized cost, gross$51,212 $46,479 $13,864 $55,261 $10,750 $— $177,566 
Gross write offs$325 $1,543 $259 $4,113 $— $— $6,240 
Commercial and industrial - PPP
Risk Rating
Pass$— $— $135 $3,067 $— $— $3,202 
Special mention— — — — — — — 
Substandard— — — — — — — 
Doubtful— — — — — — — 
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
RevolvingRevolving
LoansLoans
Term Loans Amortized Cost Basis by Origination YearAmortizedConverted
202320222021PriorCost Basisto TermTotal
Total commercial and industrial - PPP loans, at amortized cost, gross$— $— $135 $3,067 $— $— $3,202 
Gross write offs$— $— $— $223 $— $— $223 
The Company considers the performance of the loan portfolio to determine its impact on the ACL. For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan by payment activity. The following table presents the amortized costs at December 31, 2023 in residential and consumer loans, gross based on payment activity as well as gross write offs for the year ended December 31, 2023.
RevolvingRevolving
LoansLoans
Term Loans Amortized Cost Basis by Origination YearAmortizedConverted
202320222021PriorCost Basisto TermTotal
Real estate - residential
Payment Performance
Performing$31,377 $83,951 $24,524 $19,709 $99,328 $— $258,889 
Nonperforming— 1,197 286 2,951 803 — 5,237 
Total real estate - residential loans, at amortized cost, gross$31,377 $85,148 $24,810 $22,660 $100,131 $— $264,126 
Gross write offs$— $— $— $— $— $— $— 
Consumer and other
Payment Performance
Performing$25,491 $19,390 $930 $204 $990 $— $47,005 
Nonperforming— 258 24 — — — 282 
Total consumer and other loans, at amortized cost, gross$25,491 $19,648 $954 $204 $990 $— $47,287 
Gross write offs$79 $3,182 $11 $8 $— $— $3,280 
The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at December 31, 2022:
PassSpecial
Mention
Substandard
Doubtful
Total
Loans
Real estate - residential
$202,275 $— $54 $— $202,329 
Real estate - commercial
227,367 2,351 1,563 — 231,281 
Real estate - construction and land
9,320 — — — 9,320 
Commercial and industrial
192,226 100 2,317 — 194,643 
Commercial and industrial - PPP
19,293 — — — 19,293 
Consumer and other
37,288 — — — 37,288 
Loans HFI, at amortized cost, gross
$687,769 $2,451 $3,934 $— $694,154 
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the ALLL using incurred losses methodology. The following tables are disclosures related to loans in prior periods.
The following table presents the balance in the ALLL and the recorded investment in loans HFI at amortized cost, gross by loan segment and based on impairment method at December 31, 2022. The government guaranteed loan balances are included in the collectively evaluated for impairment balances.
Real Estate-
Residential		Real Estate-
Commercial		Real Estate -
Construction
and Land		Commercial
and
Industrial		Commercial
and
Industrial -
PPP		Consumer
and Other		UnallocatedTotal
Allowance for loan losses:
Individually evaluated for impairment
$— $74 $— $499 $— $— $— $573 
Collectively evaluated for impairment
731 882 28 5,683 — 1,090 59 8,473 
Total
$731 $956 $28 $6,182 $— $1,090 $59 $9,046 
Loans:
Individually evaluated for impairment
$— $1,563 $— $1,854 $— $— $— $3,417 
Collectively evaluated for impairment
202,329 229,718 9,320 192,789 19,293 37,288 — 690,737 
Total HFI at amortized cost, gross
$202,329 $231,281 $9,320 $194,643 $19,293 $37,288 $— $694,154 
For purposes of the impaired loans by loan segment table above, the unpaid principal balance and recorded investment do not include the government guaranteed balance. The government guaranteed balances of impaired loans at December 31, 2022 were $6,797.
The following table presents information related to impaired loans HFI, at amortized cost by loan segment at and for the year ended December 31, 2022:
Unpaid
Principal
Balance		Recorded
Investment
Allowance
for Credit
Losses
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
Cash Basis
Interest
Recognized
With no related allowance recorded:
Real estate - residential
$— $— $— $92 $— $— 
Real estate - commercial
1,489 1,489 — 1,642 15 15 
Subtotal
1,489 1,489 — 1,734 15 15 
With an allowance recorded:
Real estate - commercial
74 74 — 61 — — 
Commercial and industrial
1,854 1,854 949 1,726 — — 
Subtotal
1,928 1,928 949 1,787 — — 
Total
$3,417 $3,417 $949 $3,521 $15 $15 
NOTE 6 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Investment Securities Available for Sale: The fair values of investment securities available for sale are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific investment securities, but rather by relying on the investment securities’ relationship to other benchmark quoted investment securities (Level 2). Management obtains the fair values of investment securities available for sale on a monthly basis from a third party pricing service.
Residential Loans Held for Sale: The Company had elected to account for residential loans held for sale at fair value. The fair value of loans held for sale was determined using either actual quoted prices for the assets (Level 1) whenever possible or quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). The fair value gain (loss) on loans held for sale is included in discontinued operations in the Consolidated Statements of Income.
Government Guaranteed Loans HFI, at Fair Value: The Company has elected to account for certain government guaranteed loans HFI at fair value. Fair value is calculated based on the present value of estimated future payments (Level 3). The valuation model uses interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future payments. Whenever available, the present value is validated against available market data.
Individually Evaluated Loans: Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the ACL. Loans are considered collateral dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral dependent loans are generally classified as Level 3 based on management’s judgment and estimation.
Government Guaranteed Loan Servicing Rights: The fair value of government guaranteed loan servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. There were no government guaranteed loan servicing rights carried at fair value at December 31, 2023 and December 31, 2022. On a quarterly basis, government guaranteed loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the cost. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value.
Assets measured at fair value on a recurring basis at December 31, 2023 are summarized below. There were no liabilities carried at fair value on a recurring basis at December 31, 2023.
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Financial assets
Investment securities available for sale
$— $39,575 $— $39,575 
Government guaranteed loans HFI, at fair value
— — 91,508 91,508 
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Assets measured at fair value on a recurring basis at December 31, 2022 are summarized below. There were no liabilities carried at fair value on a recurring basis at December 31, 2022.
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Financial assets
Investment securities available for sale
$— $42,349 $— $42,349 
Residential loans held for sale (1)
449 — — 449 
Government guaranteed loans HFI, at fair value
— — 27,078 27,078 
(1) Classified as assets from discontinued operations or liabilities from discontinued operations on the consolidated balance sheet.
There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the reported periods.
Financial Instruments Recorded Using Fair Value Option
The Company has elected the fair value option for residential loans held for sale. These loans are intended for sale and are classified as assets from discontinued operations on the consolidated balance sheet. The Company believes that the fair value is the best indicator of the resolution of these loans. Interest income from discontinued operations is recorded based on the contractual term of the loan and in accordance with the Company’s policy on loans HFI. There were no residential loans held for sale as of December 31, 2023. None of the loans were 90 days or more past due or on nonaccrual at December 31, 2022.
The aggregate fair value, contractual balance, and gain at December 31, 2022 for residential loans held for sale from discontinued operations were as follows:
December 31, 2022
Aggregate fair value
$449 
Contractual balance
434 
Gain
$15 
The total amounts of interest income from discontinued operations and losses from changes in fair value included in earnings for the years ended December 31, 2023 and December 31, 2022 for residential loans held for sale from discontinued operations were as follows:
Year Ended December 31,
20232022
Interest income
$1 $2,747 
Change in fair value
(15)(3,781)
Total loss
$(14)$(1,034)
The Company also elected the fair value option for certain of its government guaranteed loans HFI as the Company believed that fair value was the best indicator of the resolution of those loans at that time. Depending on market conditions and liquidity needs of the Company, management determines whether it is advantageous to hold or sell government guaranteed loans on a loan-by-loan basis. The portion of these loans guaranteed by the government are generally readily marketable in the secondary market and the portion of the loans that are not guaranteed may be sold periodically to other third party financial institutions. Interest income on these loans is recorded based on the contractual term of the loan and in accordance with the Company’s policy on other loans HFI.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of HFI government guaranteed loans accounted for under the fair value option at December 31, 2023 and December 31, 2022.
December 31, 2023
Total Loans
Nonaccrual(1)
90 Days or More Past Due(1)
Fair Value Carrying AmountUnpaid Principal BalanceFair Value Gain (Loss)Fair Value Carrying AmountUnpaid Principal BalanceFair Value Gain (Loss)Fair Value Carrying AmountUnpaid Principal BalanceFair Value Gain (Loss)
Real estate - commercial
$19,156 $19,219 $63 $— $— $— $— $— $— 
Commercial and industrial
68,777 72,289 3,512 585 485 (100)182 162 (20)
Total loans HFI, at fair value$87,933 $91,508 $3,575 $585 $485 $(100)$182 $162 $(20)
December 31, 2022
Total Loans
Nonaccrual(1)
90 Days or More Past Due(1)
Fair Value Carrying AmountUnpaid Principal BalanceFair Value Gain (Loss)Fair Value Carrying AmountUnpaid Principal BalanceFair Value Gain (Loss)Fair Value Carrying AmountUnpaid Principal BalanceFair Value Gain (Loss)
Real estate - commercial
$4,978 $4,919 $(59)$— $— $— $— $— $— 
Commercial and industrial
21,223 22,159 936 — — — — — — 
Total loans HFI, at fair value$26,201 $27,078 $877 $— $— $— $— $— $— 
(1) The nonaccrual and 90 days or more past due loan balances do not include the government guaranteed balance
The total amount of gains and losses from changes in fair value and interest income included in earnings for the years ended December 31, 2023 and December 31, 2022 for government guaranteed loans HFI, at fair value, were as follows:
Year Ended December 31,
20232022
Interest income$5,254 $1,643 
Change in fair value15,718 4,756 
Total gain
$20,972 $6,399 
Changes in fair value for government guaranteed loans HFI, at fair value, were included in Government guaranteed loans fair value gain on the Consolidated Statements of Income.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The table below presents a reconciliation of government guaranteed loans HFI, at fair value, which were valued on a recurring basis and used significant unobservable inputs (Level 3) for the years ended December 31, 2023 and December 31, 2022:
 Year Ended December 31,
20232022
Balance of government guaranteed loans HFI at fair value, beginning of period
$27,078 $9,614 
New government guaranteed originations at fair value195,182 66,060 
Loans sold(139,784)(49,716)
Principal payments
(6,686)(3,587)
Charge-offs
— (49)
Total gains during the period
15,718 4,756 
Balance of government guaranteed loans HFI at fair value, end of period
$91,508 $27,078 
The Company’s valuation of government guaranteed loans HFI, at fair value, was supported by an analysis prepared by an independent third party and approved by management. The approach to determine fair value involved several steps: 1) identifying each loan’s unique characteristics, including balance, payment type, term, coupon, age, and principal and interest payment; 2) projecting these loan level characteristics for the life of each loan; and 3) performing discounted cash flow modeling.
The following table provides information about the valuation techniques and unobservable inputs used in the valuation of government guaranteed loans HFI fall within Level 3 of the fair value hierarchy at December 31, 2023 and December 31, 2022:
Fair ValueValuation
Technique		Unobservable InputsRange (Weighted Average)
December 31, 2023
Government guaranteed loans HFI at fair value
$91,508 DiscountedDiscount rate
7.36%-10.86% (8.74%)
cash flowConditional prepayment rate
10.38%-15.69% (13.91%)
December 31, 2022
Government guaranteed loans HFI, at fair value
$27,078 DiscountedDiscount rate
5.50%-10.00% (8.00%)
cash flowConditional prepayment rate
8.66%-10.15% (8.95%)
The significant unobservable inputs impacting the fair value measurement of government guaranteed loans HFI, at fair value, include discount rates and conditional prepayment rates. Increases in discount rates or prepayment rates would result in a lower fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they -generally move in opposite directions. The discount rates and conditional prepayment rates were weighted by the relative principal balance outstanding of these loans.
Assets measured at fair value on a nonrecurring basis at December 31, 2023 are summarized below:
 Fair ValueValuation Technique(s)Significant
Unobservable
Input(s)		Discount % Amount
Individually evaluated loans
$135 Discounted appraisals, estimated net realizable value of collateralCollateral discounts10%
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Assets measured at fair value on a nonrecurring basis at December 31, 2022 are summarized below:
Fair ValueValuation Technique(s)Significant
Unobservable
Input(s)		Discount % Amount
Impaired loans
$1,355 Discounted appraisals, estimated net realizable value of collateralCollateral discounts
10%
Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments not carried at fair value, at December 31, 2023 and December 31, 2022 are as follows:
December 31, 2023December 31, 2022
LevelCarrying ValueFair ValueCarrying ValueFair Value
Assets:
Cash and cash equivalents
1$58,385 $58,385 $66,046 $66,046 
Time deposits in banks
24,646 4,561 4,881 4,714 
Investment securities held to maturity
22,484 2,263 5,002 4,755 
Nonmarketable equity securities, at cost
24,770 4,770 5,537 5,537 
Loans HFI, at amortized cost
3810,721 786,350 692,528 687,365 
Accrued interest receivable (1)
27,130 7,130 4,454 4,454 
Government guaranteed loan servicing rights
314,959 16,318 10,906 13,051 
Mortgage loan servicing rights(2)
3— — 201 201 
Liabilities:
Noninterest-bearing deposits
2$93,708 $93,708 $93,235 $93,235 
Interest-bearing transaction accounts
2259,422 259,422 202,656 202,656 
Savings and money market deposits
2373,000 373,000 363,053 363,053 
Time deposits
2259,008 255,372 136,126 134,564 
FRB and FHLB borrowings210,000 10,000 25,000 25,000 
Subordinated debentures
25,949 5,215 5,992 5,270 
Notes payable
22,389 2,369 2,844 2,843 
Accrued interest payable
2882 882 704 704 
(1) Includes balances of $2 classified as assets from discontinued operations on the consolidated balance sheet as of December 31, 2022.
(2) Classified as assets from discontinued operations on the consolidated balance sheet.
NOTE 7 – GOVERNMENT GUARANTEED LOAN SERVICING ACTIVITIES
At December 31, 2023 and December 31, 2022, the principal balance of government guaranteed loans, excluding PPP loans, retained by the Company was $395,877 and $300,219, respectively, of which $214,418 and $139,587 represented the guaranteed portion of the loans. Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of government guaranteed loans serviced for others requiring recognition of a servicing asset were $855,756 and $660,600 at December 31, 2023 and December 31, 2022, respectively.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Activity for government guaranteed loan servicing rights for the years ended December 31, 2023 and December 31, 2022 follows:
Year Ended
December 31, 2023December 31, 2022
Beginning of period
$10,906 $6,407 
Additions
8,560 7,757 
Amortization
(4,507)(3,258)
End of period
$14,959 $10,906 
The fair value of government guaranteed loan servicing rights was $16,318 and $13,051 at December 31, 2023 and December 31, 2022, respectively. Fair value was determined using a weighted average discount rate of 14.50% and a weighted average prepayment speed of 11.42% at December 31, 2023. Fair value was determined using a weighted average discount rate of 14.88% and a weighted average prepayment speed of 9.93% at December 31, 2022. The government guaranteed loan servicing rights are amortized over the life of a loan on a loan-by-loan basis.
The following table presents the components of net gain on sale of government guaranteed loans for the years ended December 31, 2023 and December 31, 2022:
Year Ended
December 31, 2023December 31, 2022
Gain on sale of guaranteed portion of government guaranteed loans
$16,852 $14,512 
Loss on sale of unguaranteed portion of government guaranteed loans(759)(411)
Costs recognized on sale of government guaranteed loans
(100)(138)
Fair value of loan servicing rights created
8,560 7,757 
Gain on sale of government guaranteed loans, net
$24,553 $21,720 
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2023 and December 31, 2022 were as follows:
December 31, 2023December 31, 2022
Land and improvements$6,491 $4,488 
Building and improvements22,557 13,131 
Leasehold improvements3,127 2,833 
Furniture, fixtures, and equipment7,205 6,520 
Fixed assets in process6,882 14,716 
Total premises and equipment46,262 41,688 
Accumulated depreciation and amortization(7,388)(6,248)
Net premises and equipment (1)
$38,874 $35,440 
(1)There were no premises and equipment assets classified as assets from discontinued operations as of December 31, 2023 or December 31, 2022.
Depreciation and amortization expense including expense from discontinued operations was $2,245 and $1,980 for the years ended December 31, 2023 and December 31, 2022, respectively.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 9 – LEASES
For the years ended December 31, 2023 and December 31, 2022, the components of total lease cost and supplemental information related to operating leases were as follows:
Year Ended
December 31,
20232022
Operating lease cost
$1,202 $1,497 
Short-term lease cost
(88)419 
Total lease cost, net (1)
$1,114 $1,916 
(1) Includes lease costs reported as discontinued operations of $136 and $893 for the years ended December 31, 2023 and December 31, 2022, respectively.
Year Ended
December 31,
20232022
Cash flows related to operating lease liabilities
$1,149 $1,546 
Right-of-use assets obtained in exchange for new operating lease liabilities
— 627 
At December 31, 2023, the weighted average discount rate of operating leases was 2.37% and the weighted average remaining life of operating leases was 3.14 years.
The future minimum lease payments for operating leases, subsequent to December 31, 2023, as recorded on the balance sheet, are summarized as follows:
2024$1,105 
20251,029 
2026832 
2027413 
2028— 
Thereafter— 
Total undiscounted lease payments
$3,379 
Less: imputed interest
(140)
Net lease liabilities
$3,239 
Impairment of ROU Assets
ROU assets from operating leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, and are reviewed for impairment when indicators of impairment are present. ASC 360 requires three steps to identify, recognize and measure impairment. If indicators of impairment are present (Step 1), the Company performs a recoverability test (Step 2) comparing the sum of the estimated undiscounted cash flows attributable to the ROU asset in question to the carrying amount. The Company estimates the fair value of the ROU asset and recognizes an impairment loss when the carrying amount exceeds the estimated fair value (Step 3).
During 2022, the Company closed leased mortgage lending offices as part of its discontinuance of the nationwide residential lending operation. The mortgage lending offices were evaluated as outlined above to determine whether the operating leases were impaired. As part of the recoverability test, the Company elected to exclude operating lease liabilities from the carrying amount of the asset group. The undiscounted future cash flows used in the recoverability test were based on assumptions made by the Company rather than market participant assumptions. Since an election was made to exclude operating lease liabilities from the asset or asset group, all future cash lease payments for the lease were also excluded. In addition, the Company elected to exclude operating lease liabilities from the estimated fair value, consistent with the recoverability test. When determining the fair value of the ROU asset, the Company estimated what market participants would pay to lease the assets assuming the highest and best use in the assets’ current forms.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Based on the analysis, the Company concluded that the ROU assets for these offices were impaired and had a remaining ROU carrying value of $348 as of December 31, 2023. The analyses resulted in no additional impairment for the year ended December 31, 2023.
NOTE 10 - DEPOSITS
The amount of each of the following categories of deposits at December 31, 2023 and December 31, 2022 was as follows:
December 31, 2023December 31, 2022
Noninterest-bearing deposits
$93,708 $93,235 
Interest-bearing transaction accounts
259,422 202,656 
Money market accounts
355,946 345,200 
Savings
17,054 17,853 
Subtotal
726,130 658,944 
Total time deposits
259,008 136,126 
Total deposits
$985,138 $795,070 
The aggregate amount of time deposits in denominations of $250 or more at December 31, 2023 and December 31, 2022 was approximately $107,969 and $55,278, respectively. At December 31, 2023 the scheduled maturities of total time deposits were as follows:
Year
2024$173,887 
202584,488 
202664 
202782 
2028487 
Thereafter— 
Total$259,008 
NOTE 11 – OTHER BORROWINGS
At December 31, 2023, the Company had $10,000 of borrowings at 5.57% from the FHLB and no borrowings from the FRB. There were $25,000 of borrowings at 4.50% from the FRB and no borrowings from the FHLB at December 31, 2022.
The Bank is a member of the FHLB of Atlanta, which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rates set by the FHLB. Any advances that the bank were to obtain would be secured by a blanket lien on $285,852 of real estate-related loans as of December 31, 2023. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to
$153,456 from the FHLB at December 31, 2023.
In addition, the Bank has a secured line of credit with the Federal Reserve Bank of Atlanta which was secured by $57,696 of commercial loans as of December 31, 2023. FRB short-term borrowings bear interest at variable rates based on the FOMC's target range for the federal funds rate. Based on this collateral, the Company was eligible to borrow up to $40,428 from the FRB at December 31, 2023.
In June 2021, the Company issued $6,000 of Subordinated Debentures (the “Debentures”) that mature June 30, 2031 and are redeemable after 5 years. The Debentures carry interest at a fixed rate of 4.50% per annum for the initial 5 years of term and carry interest at a floating rate for the final 5 years of term. Under the debt agreements, the floating rates are based on a SOFR benchmark plus 3.78% per annum. The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $5,949 and $5,992 at December 31, 2023 and December 31, 2022, respectively.
The Company has a term note with quarterly principal and interest payments with interest at Prime (8.50% at December 31, 2023). The note matures on March 10, 2029 and the balance of the note was $2,389 and $2,844 at December 31, 2023 and December 31, 2022, respectively. The note is secured by 100% of the stock of the Bank and requires the Company to comply with certain loan covenants during the term of the note. As of December 31, 2023, the Company was in compliance with all financial debt covenants.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 12 – STOCK-BASED COMPENSATION
The Equity Plan governs the Company’s restricted stock grants and stock options. Total compensation cost charged against income related to the Equity Plan was $651 and $763 for the years ended December 31, 2023 and December 31, 2022, respectively.
Restricted Stock
The Company awarded shares of restricted common stock to certain employees and non-employee directors for which compensation expense is recognized ratably over the vesting period of the awards based on the fair value of the stock at issue date.
A summary of changes in the Company’s nonvested restricted shares for the years ended December 31, 2023 follows:
SharesWeighted-Average
Grant-Date
Fair Value, per share
Nonvested at January 1, 2023
22,000 $21.52 
Granted
46,175 18.30 
Vested
(13,935)(20.01)
Forfeited
(2,045)(19.41)
Nonvested at December 31, 2023
52,195 $18.75 
At December 31, 2023, there was $454 of total unrecognized compensation cost related to nonvested restricted shares granted under the Equity Plan that is expected to be recognized over a weighted average period of 3.2 years. The total fair value of shares vested during the years ended December 31, 2023 and December 31, 2022 was $252 and $209, respectively.
Stock Options
The Equity Plan permits the grant of stock options to the Company’s employees and non-employee directors for up to 15% of the total number of shares of Company common stock issued and outstanding, up to 1,500,000 shares. Option awards are
granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The market price of the Company’s common stock is the closing sales price of the Common Stock on Nasdaq on the date of the grant. Those option awards generally have a vesting period of 5 years for employees and 3 years for non-employee directors and have 10-year contractual terms.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of peer financial institutions. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of the activity in the Equity Plan for the year ended December 31, 2023 follows:
SharesWeighted
Average
Exercise
Price		Weighted
Average
Remaining
Contractual
Term (in years)		Aggregate
Intrinsic
Value
Outstanding at January 1, 2023
405,688 $15.67 
Exercised
(30,375)(15.71)
Forfeited
(8,280)(15.46)
Outstanding at December 31, 2023
367,033 $15.68 5.67$— 
Vested and exercisable at December 31, 2023
322,902 $15.79 5.53$— 
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
There were no options granted during the years ended December 31, 2023 or December 31, 2022. Total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan was $56 at December 31, 2023. This cost is expected to be recognized over a weighted average period of 1.62 years.
NOTE 13 – OTHER BENEFIT PLANS
The Company has established a stock dividend reinvestment and stock purchase plan. Under the DRIP, eligible shareholders can voluntarily purchase stock with their dividend or can make additional stock purchases. During the year ended December 31, 2023, 10,589 shares were purchased at an average price of $14.98. During the year ended December 31, 2022, 15,290 shares were purchased at an average price of $17.22.
All employees and Directors are eligible to participate in the NSPP. Expense recognized in relation to the NSPP for the years ended December 31, 2023 and December 31, 2022 was $27 and $87, respectively.
The Company has a Salary Continuation Agreement (the “Agreement”) with the Company’s retired CEO. In accordance with the Agreement, the executive will receive an annual benefit of $25 for twenty years following separation of service. The liability recorded for the Agreement was $351 and $336 at December 31, 2023 and December 31, 2022, respectively, and the related expense for the years ended December 31, 2023 and December 31, 2022 was $15 and $23, respectively. Payments are expected to begin in July 2024 from the retirement of the CEO on December 31, 2023.
The Company has a 401(k) plan that covers all employees subject to certain age and service requirements. The Company contributes 3% of each employee’s salary each pay period as a safe harbor contribution. The Company may also match employee contributions each year at the discretion of the Board of Directors. However, there was no match of contributions in 2023. Expense recognized in relation to the 401(k) plan was $906 and $1,580 for the years ended December 31, 2023 and December 31, 2022, respectively. The discontinuation of the nationwide residential lending division during 2022 triggered a partial plan termination and all affected employees were 100% vested in the Company’s contributions into the plan.
The Company has an ESOP for eligible employees. Each year, the Company’s Board of Directors may approve a discretionary percentage of employees’ salaries to be contributed to the ESOP for eligible employees. In 2021, the ESOP trust acquired 14,154 shares of the Company’s stock. As this is a leveraged plan, unallocated shares are distributed to employees annually. There were 8,493 unallocated shares with a fair value of $111 and 11,323 unallocated shares with a fair value of $197 remaining as of December 31, 2023 and December 31, 2022, respectively. The ESOP trust’s outstanding loan, which is secured by the unallocated shares, bears a fixed interest rate equal to Prime Rate as of the note date, which was 3.25%. The note requires an annual payment of principal and interest through December 2026. The Company’s ESOP, which is internally leveraged, does not report the loan receivable extended to the ESOP as an asset and does not report the ESOP debt due to the Company.
The discontinuation of the nationwide residential lending division during 2022 triggered a partial plan termination and all affected employees were 100% vested in the Company’s contributions into the ESOP. As a result of the exit of affected participants from the plan, the plan acquired 23,383 shares of the Company’s stock. As this is a leveraged plan, unallocated shares are distributed to employees annually. There were 18,706 unallocated shares with a fair value of $244 remaining as of December 31, 2023. The ESOP trust was issued a five year loan bearing an interest rate equal to Prime Rate as of the note date, which was 8.25% and adjusts annually as of the first day of each succeeding calendar year to reflect the Prime Rate as of the first business day of the calendar year. The note requires an annual payment of principal and interest through December 2027. The Company’s ESOP, which is internally leveraged, does not report the loan receivable extended to the ESOP as an asset and does not report the ESOP debt due to the Company.
The Board did not approve any contributions in 2023 and 2022. There was $133 and $71 of expense related to the ESOP for the years ended December 31, 2023 and December 31, 2022, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 14 – INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2023 and December 31, 2022 was as follows:
20232022
Current tax provision from continuing operations:
Federal
$—$820
State
—316
Total current tax provision from continuing operations—1,136
Deferred expense (benefit) from continuing operations:
Federal
1,758430
State
361(6)
Total deferred expense from continuing operations2,119424
Income tax expense from continuing operations2,1191,560
Income tax benefit from discontinued operations(70)$(1,932)
Total$2,049$(372)
The effective tax rate differed from the federal statutory rate of 21% in 2023 and 2022 as follows:
20232022
Federal tax based on federal corporate statutory rate$1,698$1,478
State tax, net of federal effect361250
Changes resulting from:
BOLI income(134)(129)
Nondeductible Expenses141111
Other, net53(150)
Income tax expense from continuing operations2,1191,560
Income tax expense (benefit) from discontinued operations(70)(1,932)
Total income tax expense (benefit)$2,049$(372)

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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Deferred tax assets and liabilities at December 31, 2023 and December 31, 2022 were due to the following:
20232022
Deferred tax assets:
Allowance for credit losses
$3,636$2,379
Net operating loss carryforward2,1612,577
Deferred loan fees
226216
Discount on loans sold
643826
Unrealized loss on available for sale securities1,0411,301
Operating lease liabilities
8211,177
Accrued bonuses
393256
Other
1,202621
Total gross deferred tax assets10,1239,353
Deferred tax liabilities:
Fair value adjustments on HFI government guaranteed loans and HFS loans
(906)(221)
Government guaranteed loan servicing rights
(3,794)(2,764)
Deferred loan costs
(3,956)(2,889)
Right-of-use operating lease assets
(701)(930)
Depreciation
(1,248)(1,516)
Other
—(53)
Total gross deferred tax liabilities(10,605)(8,373)
Net deferred tax asset (liabilities)$(482)$980
At December 31, 2023, the Company had $1,787 of federal net operating loss carryforward and $374 of state net operating loss carryforward. At December 31, 2022, the Company had $2,215 of federal net operating loss carryforward and $362 of state net operating loss carryforward. The net operating loss carryforwards do not expire.
The Company and its subsidiary file a consolidated U.S. Corporation federal income tax return which is subject to examination by taxing authorities for years 2020 and later. There were no unrecognized tax benefits at December 31, 2023, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense when applicable. The Company did not record any interest and penalties for 2023 and 2022.
NOTE 15 – REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes that the Bank met all capital adequacy requirements to which it was subject at December 31, 2023 and December 31, 2022.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s classification.
In February 2019, the federal bank regulatory agencies issued a final rule that revised certain capital regulations under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and included a transition option that allows banking organizations to phase in, over a three year period, the day one adverse effects of adoption on their regulatory capital ratios (three year transition option). In connection with the adoption of ASC
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
326 on January 1, 2021, the Company recognized an after-tax cumulative effect reduction to retained earnings. The Company elected to adopt the three year transition option and the deferral has been applied in capital ratios presented below. Actual and required capital amounts and ratios for the Bank are presented below at December 31, 2023:
Actual
Required for Capital
Adequacy Purposes
To be Well
Capitalized Under
Prompt Corrective
Action Regulations
AmountRatioAmount
Ratio
AmountRatio
Total Capital
(to Risk Weighted Assets)
$114,256 13.03 %$70,169 8.00 %$87,711 10.00 %
Tier 1 Capital
(to Risk Weighted Assets)
$103,274 11.77 %$52,627 6.00 %$70,169 8.00 %
Common Equity Tier 1 Capital
(to Risk Weighted Assets)
$103,274 11.77 %$39,470 4.50 %$57,012 6.50 %
Tier 1 Capital
(to Average Assets)
$103,274 9.38 %$44,024 4.00 %$55,030 5.00 %
Actual and required capital amounts and ratios for the Bank are presented below at December 31, 2022:
Actual
Required for Capital
Adequacy Purposes
To be Well
Capitalized Under
Prompt Corrective
Action Regulations
AmountRatioAmountRatioAmountRatio
Total Capital
(to Risk Weighted Assets)
$108,307 15.00 %$57,767 8.00 %$72,209 10.00 %
Tier 1 Capital
(to Risk Weighted Assets)
$99,269 13.75 %$43,325 6.00 %$57,767 8.00 %
Common Equity Tier 1 Capital
(to Risk Weighted Assets)
$99,269 13.75 %$32,494 4.50 %$46,936 6.50 %
Tier 1 Capital
(to Average Assets)
$99,269 10.79 %$36,816 4.00 %$46,020 5.00 %
Dividend Restrictions
Banking regulations limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits of the Bank for that year combined with the retained net profits for the preceding two years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 16 – MORTGAGE BANKING ACTIVITIES - DISCONTINUED OPERATIONS
The following table presents the components of the residential loan fee income from discontinued operations for the years ended December 31, 2023 and December 31, 2022:
Year Ended
December 31,
20232022
Net gain realized on sale of residential loans held for sale
$13 $19,838 
Net change in fair value recognized on residential loans held for sale
(15)(3,781)
Net change in fair value recognized on interest rate lock commitments
— (1,437)
Net change in fair value recognized on mandatory and best efforts forward sales contracts
— 12,620 
Mortgage banking fees
— 4,162 
Residential loan fee income from discontinued operations
$(2)$31,402 
Prior to the discontinuance of the nationwide mortgage operations, the Company entered into interest rate lock commitments, which were commitments to originate loans where the interest rate on the loan was determined prior to funding and the clients had locked into that interest rate. The Company then locked in the loan and interest rate with an investor and committed to deliver the loan if settlement occurred (“best efforts”) or committed to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. It was the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments were entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. Interest rate lock commitments and mandatory commitments to deliver loans to investors were considered derivatives.
There were no mortgage banking derivatives outstanding as of December 31, 2023. The following table reflects the amount and fair value of mortgage banking derivatives included in the assets and liabilities from discontinued operations on the Consolidated Balance Sheets at December 31, 2022:
December 31, 2022
Notional
Amount		Fair
Value
Included in other assets from discontinued operations:
Best efforts forward sales contracts
$221 $— 
NOTE 17 – RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates during 2023 and 2022 were as follows:
20232022
Balance at January 1$5,649$7,314
New loans38 576 
Repayments(645)(638)
Effect of changes in composition of related parties— (1,603)
Balance at December 31$5,042 $5,649 
Deposits from principal officers, directors, and their affiliates at December 31, 2023 and December 31, 2022 were $8,337 and $5,518, respectively.
The Company leases a portion of an office building from a related party of a Company Director. Rent payments related to these leases amounted to $709 and $647 for the years ended December 31, 2023 and December 31, 2022.
The Company entered into transactions during the normal course of business with an insurance agency that is a related party of a Company Director. Payments to the insurance agency amounted to $405 and $316 for the years ended December 31, 2023 and December 31, 2022.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 18 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, and letters of credit, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies that are used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance sheet risk at December 31, 2023 and December 31, 2022 were as follows:
December 31, 2023December 31, 2022
Unfunded loan commitments
$7,392 $23,512 
Unused lines of credit
178,440 134,366 
Standby letters of credit
186 244 
All unused lines of credit at December 31, 2023 and December 31, 2022 were variable rate lines of credit and the majority of unfunded loan commitments at December 31, 2023 and December 31, 2022 were commitments to fund variable rate loans. Unfunded loan commitments are generally entered into for periods of 90 days or less.
The Company maintains an ACL for its off-balance sheet loan commitments which is calculated by loan type using estimated line utilization rates based on historical usage. Loss rates for outstanding loans is applied to the estimated utilization rates to calculate the ACL for off-balance sheet loan commitments. At December 31, 2023 and December 31, 2022, ACL for off-balance sheet loan commitments totaled $839 and $511, respectively.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
`NOTE 19 – EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share for the years ended December 31, 2023 and December 31, 2022:
Year Ended
December 31,
20232022
Basic:
Income from continuing operations
$5,915 $5,478 
Loss from discontinued operations
(213)(5,827)
Net income (loss)
5,702 (349)
Less: Preferred stock dividends
965 832 
Net income available to (loss attributable to) common shareholders
$4,737 $(1,181)
Weighted average common shares outstanding
4,100,114 4,020,933 
Basic earnings (loss) per common share:
Continuing operations
$1.21 $1.16 
Discontinued operations
(0.05)(1.45)
Total
$1.16 $(0.29)
Diluted:
Income from continuing operations$5,915 $5,478 
Loss from discontinued operations(213)(5,827)
Net income (loss)
5,702 (349)
Less: Preferred stock dividends
965 832 
Add: Series B preferred stock dividends
389 257 
Net income available to (loss attributable to) common shareholders
$5,126 $(924)
Weighted average common shares outstanding for basic earnings per common share
4,100,114 4,020,933 
Add: Dilutive effects of conversion of Series B preferred stock to common stock
481,099 155,692 
Add: Dilutive effects of assumed exercises of stock options and warrants
604 44,000 
Average shares and dilutive potential common shares
4,581,817 4,220,625 
Diluted earnings (loss) per common share:
Continuing operations
$1.17 $1.16 
Discontinued operations
(0.05)(1.38)
Total
$1.12 $(0.22)
The following securities outstanding at December 31, 2023 and December 31, 2022 have been excluded from the calculation of weighted average shares outstanding as their effect on the calculation of earnings (loss) per share are antidilutive:
Year Ended
December 31,
20232022
Common stock options
372,8921,500

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 20 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of BayFirst Financial Corp. follows:
BALANCE SHEETS - PARENT COMPANY
December 31,
20232022
Assets:
Cash on deposit with subsidiary$954$559
Loans to bank subsidiary1752
Loans HFI, at amortized cost—36
Investment in subsidiary107,737100,225
Other assets911146
Total Assets$109,619$101,018
Liabilities:
Subordinated debentures$5,949$5,992
Notes payable2,3892,844
Accrued interest payable1314
Accrued expenses and other liabilities561284
Total liabilities8,9129,134
Stockholders' equity:
Preferred stock, Series A; no par value, 10,000 shares authorized, 6,395 shares issued and outstanding; aggregate liquidation preference of $6,395
6,161 6,161
Preferred stock, Series B; no par value, 20,000 shares authorized, 3,210 shares issued and outstanding; aggregate liquidation preference of $3,210
3,123 3,123
Preferred stock, Series C; no par value, 10,000 shares authorized, 6,446 shares issued and outstanding at December 31, 2023 and no shares issued and outstanding at December 31, 2022; aggregate liquidation preference of $6,446 at December 31, 2023
6,446 —
Common stock and additional paid-in capital; no par value, 15,000,000 shares authorized, 4,110,470 and 4,042,474 shares issued and outstanding
54,521 53,023
Accumulated other comprehensive loss, net
(2,981)(3,724)
Unearned compensation(958)(178)
Retained earnings34,395 33,479
Total stockholders' equity
100,707 91,884
Total liabilities and stockholders' equity$109,619 $101,018
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
STATEMENTS OF INCOME - PARENT COMPANY
For the Year Ended December 31,
20232022
Income:
Dividend and interest income from bank subsidiary$2,525$1,764
Expense:
Interest expense496430
Other expenses9931,436
Total expense1,4891,866
Income (loss) before taxes and equity in earnings of subsidiary1,036(102)
Income tax benefits(376)(435)
Income before equity in earnings of subsidiary1,412333
Equity in undistributed earnings of subsidiary4,290(682)
Net income (loss)$5,702 $(349)

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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
STATEMENTS OF CASH FLOWS - PARENT COMPANY
For the Year Ended December 31,
20232022
Cash flows from operating activities:
Net income (loss)$5,702$(349)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Equity in earnings (loss) from subsidiary(4,290)682
Amortization of debt issuance costs77
Change in other assets(765)12
Change in other liabilities and accrued interest payable255(234)
Net cash from operating activities909118
Cash flows from investing activities:
Loan origination and payments, net36—
Capital infusion to subsidiaries(4,335)—
Net cash from investing activities(4,299)—
Cash flows from financing activities:
Net increase of loans to bank subsidiary35(52)
Payments on notes payable(455)(455)
Repayment of subordinated debt(50)—
Proceeds from issuance of preferred stock, net6,446—
Proceeds from sale of common stock, net289509
Share buyback - redeemed stock(13)(49)
ESOP contribution—71
Unearned ESOP shares allocation(189)(15)
Dividends paid on common stock(1,313)(1,287)
Dividends paid on preferred stock(965)(832)
Net cash from financing activities3,785(2,110)
Net change in cash395(1,992)
Cash at beginning of year5592,551
Cash at end of year$954$559

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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures 
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of December 31, 2023, the last day of the period covered by this Annual Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of December 31, 2023, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance 
Information required by this item is set forth under the headings “Proposal 1 – Election of Directors”, “Meetings”, and “Nominating Committee” appearing in the Company’s Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which is incorporated herein by reference.
Item 11. Executive Compensation 
Information required by this item is set forth under the headings "Executive and Director Compensation” appearing in the Company's Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which is incorporated herein by reference.

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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 
Equity Compensation Plans. The following table discloses the number of outstanding options, warrants and rights granted to participants by the Company under the equity compensation plans, as well as the number of securities remaining available for future issuance under these plans as of December 31, 2023. The Company does not have any outstanding warrants. Additional information regarding stock incentive plans is presented in Note 11 to the consolidated financial statements included pursuant to Item 8 to this Form 10-K.
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
Weighted average
exercise price of
outstanding options, warrants and rights
(b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders367,033 $15.68 98,459 
Equity compensation plans not approved by security holders— — — 
Total367,033 $15.68 98,459 
Other information required by this item is set forth under the heading “Security Ownership of Certain Beneficial Owners and Management” appearing in the Company’s Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence 
Information required by this item is set forth under the headings “Transactions with Related Persons” and “Director Independence” appearing in the Company’s Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services 
Information required by this item is set forth under the heading "Fees Paid to Auditors” and “Audit Committee Report" appearing in the Company's Proxy Statement for the 2024 annual meeting of shareholders to be filed with the SEC within 120 days after December 31, 2023, which is incorporated herein by reference. The Independent Registered Public Accounting Firm is FORVIS, LLP (PCAOB Firm ID No. 686) located in Tampa, Florida.

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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Part IV
ITEM 15. EXHIBITS
(a)Exhibits.
Exhibit
Number		Exhibit Name
*3.1
*3.2
*3.3
*4.1
*4.2
*4.3
*4.4
*10.1
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
*14.1
*21.1
23.1
31.1
31.2
32.1
32.2
97
101
Financial information from the Company’s Annual Report on Form 10-K for the year ended
December 31, 2023, formatted in iXBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements – filed herewith.
104
Item 16. Form 10-K Summary 
None.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BAYFIRST FINANCIAL CORP.
Date:March 28, 2024
By:/s/ Thomas G. Zernick
Thomas G. Zernick
Chief Executive Officer
(Principal Executive Officer)
Date:March 28, 2024
By:/s/ Scott J. McKim
Scott J. McKim
Chief Financial Officer
(Principal Financial Officer)

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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SignatureTitleDate
/s/ Derek S. Berset        
Derek S. Berset
Director3/28/2024
/s/ Mark S. Berset        
Mark S. Berset
Director3/28/2024
/s/ Dennis R. DeLoach, III    
Dennis R. DeLoach, III

Director
3/28/2024
/s/ Alexander Harris        
Alexander Harris

Director
3/28/2024
/s/ Tarek Helal     
Tarek Helal
Director3/28/2024
/s/ Anthony N. Leo        
Anthony N. Leo
Director
3/28/2024
/s/ Scott J. McKim        
Scott J. McKim
Chief Financial Officer
(Principal Financial Officer)
3/28/2024
/s/ Christos Politis, M.D.    
Christos Politis, M.D.
Director3/28/2024
/s/ Anthony Saravanos        
Anthony Saravanos
Director3/28/2024
/s/ Bradly W. Spoor        
Bradly W. Spoor
Director3/28/2024
/s/ Rhonda S. Tudor        
Rhonda S. Tudor
Chief Accounting Officer
(Principal Accounting Officer)
3/22/2024
/s/ Sheryl WuDunn        
Sheryl WuDunn
Director3/28/2024
/s/ Thomas G. Zernick        
Thomas G. Zernick
Chief Executive Officer and Director
(Principal Executive Officer)
3/28/2024
/s/ Barbara Zipperian        
Barbara Zipperian
Director3/28/2024
109

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-261064) of BayFirst Financial Corp. of our report dated March 28, 2024, with respect to the consolidated financial statements of BayFirst Financial Corp. included in this Annual Report on Form 10-K for the year ended December 31, 2023.

/s/ FORVIS, LLP

Tampa, Florida
March 28, 2024

CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas G. Zernick, certify that:
1.    I have reviewed this Annual Report on Form 10-K (the “Report”) of BayFirst Financial Corp., Inc. (the “Registrant”);
2.    Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3.    Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.    The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the Registrant and have:
a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b)    Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
c)    Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
d)    Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.    The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
BAYFIRST FINANCIAL CORP.
Date:    March 28, 2024
By:    /s/ Thomas G. Zernick            
    Thomas G. Zernick
    Chief Executive Officer
    (principal executive officer)

CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott J. McKim, certify that:
1.    I have reviewed this Annual Report on Form 10-K (the “Report”) of BayFirst Financial Corp., Inc. (the “Registrant”);
2.    Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3.    Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.    The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the Registrant and have:
a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b)    Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
c)    Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
d)    Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.    The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
BAYFIRST FINANCIAL CORP.
Date:    March 28, 2024
By:    /s/ Scott J. McKim        
    Scott J. McKim
    Chief Financial Officer
    (principal financial officer)

CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas G. Zernick, Chief Executive Officer of BayFirst Financial Corp. (the “Company”) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1)The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2023 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

BAYFIRST FINANCIAL CORP.
Date:    March 28, 2024
By:    /s/ Thomas G. Zernick            
    Thomas G. Zernick
    Chief Executive Officer
    (principal executive officer)

CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott J. McKim, Chief Financial Officer of BayFirst Financial Corp. (the “Company”) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1)    The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2023 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


BAYFIRST FINANCIAL CORP.
Date:    March 28, 2024
By:    /s/ Scott J. McKim        
    Scott J. McKim
    Chief Financial Officer
    (principal financial officer)
POLICY 1685
Approved November 28, 2023

Executive Incentive Compensation Clawback Policy
DEFINITION AND PURPOSE
Pursuant to Securities and Exchange Commission Rule 10D-1 and Nasdaq Marketplace Rule 5608, the Board of Directors of BayFirst Financial Corp. (the “Company”) has adopted this Executive Incentive Compensation Clawback Policy (this “Policy”).
Pursuant to this Policy, the Company will recover reasonably promptly the amount of erroneously awarded incentive-based compensation in the event that the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
This Policy applies to all incentive-based compensation received by a person:
A.After beginning service as an executive officer;
B.Who served as an executive officer at any time during the performance period for that incentive-based compensation;
C.While the Company has a class of securities listed on Nasdaq; and
D.During the three completed fiscal years immediately preceding the date that the Company is required to prepare an accounting restatement.1
RESPONSIBILITIES AND ACTION
Notwithstanding the foregoing, the Company’s obligation to recover erroneously awarded compensation is not dependent on if or when the restated financial statements are filed.
For purposes of determining the relevant recovery period, the date that the Company is required to prepare an accounting restatement is the earlier to occur of:
A.The date the Company’s board of directors, a committee of the board of directors, or the officer or officers of the Company authorized to take such action if board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an accounting restatement; or
B.The date a court, regulator, or other legally authorized body directs the Company to prepare an accounting restatement.
The amount of incentive-based compensation that is subject to this Policy (“erroneously awarded compensation”) is the amount of incentive-based compensation received that exceeds the amount of incentive-based compensation that otherwise would have been received had it been determined based on the restated amounts, and must be computed without regard to any taxes paid. For incentive-based compensation based on stock price or total shareholder return, where the amount of erroneously awarded compensation is not subject to mathematical recalculation directly from the information in an accounting restatement:
A.The amount must be based on a reasonable estimate of the effect of the accounting restatement on the stock price or total shareholder return upon which the incentive-based compensation was received; and
B.The Company must maintain documentation of the determination of that reasonable estimate and provide such documentation to Nasdaq.

1 (A) This Policy also applies to any transition period (that results from a change in the Company’s fiscal year) within or immediately following those three completed fiscal years. However, a transition period between the last day of the Company’s previous fiscal year end and the first day of its new fiscal year that comprises a period of nine to 12 months would be deemed a completed fiscal year.

POLICY 1685
Approved November 28, 2023

Executive Incentive Compensation Clawback Policy
The Company shall recover erroneously awarded compensation in compliance with this Policy except to the extent that the conditions of paragraphs (b)(1)(iv)(A) or (C) of Nasdaq Marketplace 56082 are met, and the Company’s Compensation Committee, or in the absence of such a committee, a majority of the independent directors serving on the board, has made a determination that recovery would be impracticable.
The Company shall not indemnify any executive officer or former executive officer against the loss of erroneously awarded compensation.
The Company shall file all disclosures with respect to this Policy in accordance with the requirements of the Federal securities laws.
OFFICER POSITIONS DIRECTLY GOVERNED BY THIS POLICY
Chief Executive Officer
President
Chief Financial Officer
Chief Operating Officer
Chief Accounting Officer
2 (A) The direct expense paid to a third party to assist in enforcing the policy would exceed the amount to be recovered. Before concluding that it would be impracticable to recover any amount of erroneously awarded compensation based on expense of enforcement, the Company must make a reasonable attempt to recover such erroneously awarded compensation, document such reasonable attempt(s) to recover, and provide that documentation to Nasdaq.
(C) Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the registrant, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.