The following discussion explains our financial condition and results of
operations as of and for the three and nine months ended September 30, 2022. The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes presented elsewhere in this
report and our Annual Report on Form 10-K for the year ended December 31, 2021,
filed with the SEC on March 30, 2022. Annualized results for these interim
periods may not be indicative of results for the full year or future periods.

In addition to the historical information contained herein, this Form 10-Q
includes "forward-looking statements" within the meaning of such term in the
Private Securities Litigation Reform Act of 1995. These statements are subject
to many risks and uncertainties, including, but not limited to, the effects of
the COVID-19 pandemic, global military hostilities, or climate changes,
including its effects on the economic environment, our customers and our
operations, as well as any changes to federal, state or local government laws,
regulations or orders in connection with 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 we do not undertake any obligation to update or
revise any forward-looking statements to reflect changes in assumptions, the
occurrence of unanticipated events, or otherwise.

                                    Overview

The following discussion and analysis presents our financial condition and
results of operations on a consolidated basis. However, because we conduct all
of our material business operations through the Bank, the discussion and
analysis relates to activities primarily conducted at the subsidiary level. The
following discussion should be read in conjunction with our consolidated
financial statements.

As a one-bank holding company, we generate most of our revenue from interest on
loans and gain-on-sale income derived from the sale of loans into the secondary
market. Our primary source of funding for our loans is deposits. We are
dependent on noninterest income, which is derived primarily from net gain on the
sales of the guaranteed portion of government guaranteed loans. Our largest
expenses are interest on those deposits and borrowings, professional fees, and
salaries and commissions plus related employee benefits. We measure our
performance through our net interest income after provision for loan losses,
return on average assets, and return on average common equity, while maintaining
appropriate regulatory leverage and risk-based capital ratios.

           Application of Critical Accounting Policies and Estimates

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

Accounting policies, as described in detail in the notes to the Company's
consolidated financial statements, are an integral part of the Company's
consolidated financial statements. A thorough understanding of these accounting
policies is essential when reviewing the Company's reported results of
operations and financial position. Management believes that the critical
accounting policies and estimates listed below require the Company to make
difficult, subjective or complex judgments about matters that are inherently
uncertain. At September 30, 2022, the most critical of these significant
accounting policies in understanding the estimates and assumptions involved in
preparing our consolidated financial statements were the
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policies related to the allowance for loan losses, and fair value measurement of
SBA servicing rights, residential loans held for sale, SBA loans held for
investment at fair value, and residential derivatives, which are discussed more
fully below.

Allowance for Loan Losses

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

Fair value measurements

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

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

Further, the Company is an emerging growth company. The JOBS Act exempts
emerging growth companies from being required to comply with new or revised
financial accounting standards until private companies are required to comply
with the new or revised financial accounting standards. The JOBS Act provides
that an emerging growth company can elect to opt out of the extended transition
period and comply with the requirements that apply to non-emerging growth
companies but any such election to opt out is irrevocable. We have elected to
take advantage of this extended transition period. This means that when a
standard is issued or revised and it has different application dates for public
or private companies, the Company, as an emerging growth company, can adopt the
new or revised standard at the time private companies do so. This may make the
Company's financial statements not comparable with those of public companies
which are neither an emerging growth company nor an emerging growth company
which has opted out of using the extended transition period because of the
potential differences in accounting standards used.

                              Recent Developments

Discontinuation of the Nationwide Residential Mortgage Division. On September
21, 2022, the Company announced the discontinuation of the Bank's nationwide
network of residential mortgage loan production offices due to the precipitous
decline in mortgage volumes and the uncertain outlook for mortgage lending in
the future. The Bank will continue to originate mortgage loans in its local
Florida market areas.

Hurricane Ian: Hurricane Ian was a destructive Category 4 hurricane that struck
the southwest coast of Florida in September 2022. The Company did not sustain
significant damage to facilities or disruption to operations. No allowance for
credit loss was recognized. Based on information collected to date, we do not
expect the impact of the storm to be material to our financial condition or
results of operations.

Fourth quarter common stock dividend. On October 25, 2022BayFirst’s board of directors declared a cash dividend in the fourth quarter of 2022 of $0.08 per ordinary share. The dividend will be payable December 15, 2022 to ordinary shareholders

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of registration dated December 1, 2022. This dividend marks the 26th consecutive quarterly cash dividend paid since BayFirst launched cash dividends in 2016.

Fourth Quarter Preferred Series A Stock Dividend. BayFirst's Board of Directors
declared a quarterly cash dividend of $22.50 on our Series A Preferred Stock.
The dividend will be payable January 3, 2022 to shareholders of record as of
October 14, 2022. The amount and timing of the dividend is in accordance with
the terms of the Series A Preferred Stock.

Fourth Quarter Preferred Series B Stock Dividend. BayFirst's Board of Directors
declared a quarterly cash dividend of $20.00 on our Series B Convertible
Preferred Stock. The dividend will be payable January 3, 2022 to shareholders of
record as of October 14, 2022. The amount and timing of the dividend is in
accordance with the terms of the Series B Convertible Preferred Stock.
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                      Selected Financial Data - Unaudited
                                                                                                             As of and for the Nine Months
                                                      As of and for the Three Months Ended                               Ended
(Dollars in thousands, except per share
data)                                           9/30/2022            6/30/2022          9/30/2021            9/30/2022           9/30/2021
Income Statement Data:
Net interest income                          $      9,170           $  6,587          $     7,276             21,426                30,780
Provision for loan losses                             750                250               (3,000)            (1,400)               (1,000)
Noninterest income                                  9,804              7,678                  610             23,146                16,377
Noninterest expense                                14,158             13,692               12,566             41,719                37,016
Income tax expense (benefit)                          983                (68)                (362)               888                 2,968
Net income (loss) from continuing operations        3,083                391               (1,318)             3,365                 8,173
Net (loss) income from discontinued
operations                                         (4,485)              (673)               2,598             (5,036)               13,634
Net income (loss)                                  (1,402)              (282)               1,280             (1,671)               21,807
Preferred stock dividends                             208                208                  230                624                   797
Net income available to (loss attributable
to) common shareholders                      $     (1,610)          $   (490)         $     1,050          $  (2,295)          $    21,010
Balance Sheet Data:
Average loans held for investment, excluding
PPP loans                                         663,716            561,455              467,283            582,432               457,111
Average total assets                              939,847            879,868            1,086,377            897,588             1,419,264
Average common shareholders' equity                83,014             83,235               81,989             83,408                69,574
Total loans held for investment                   680,805            641,737              656,294            680,805               656,294
Total loans held for investment, excluding
PPP loans                                         658,669            610,527              500,647            658,669               500,647
Total loans held for investment, excluding
government guaranteed loan balances               520,408            458,624              316,528            520,408               316,528
Allowance for loan losses                           9,739              9,564               16,616              9,739                16,616
Total assets                                      930,275            921,377              943,743            930,275               943,743
Common shareholders' equity                        81,032             83,690               83,593             81,032                83,593
Per Share Data:
Basic earnings (loss) per common share       $      (0.40)          $  (0.12)         $      0.26          $   (0.57)          $      5.60
Diluted earnings (loss) per common share     $      (0.35)          $  (0.10)         $      0.26          $   (0.48)          $      5.13
Dividends per common share                   $      0.080           $  0.080          $     0.070          $   0.240           $     0.207
Book value per common share                  $      20.10           $  20.82          $     21.32          $   20.10           $     21.32
Tangible book value per common share (1)     $      20.10           $  20.80          $     21.30          $   20.10           $     21.30
Performance Ratios:
Return on average assets                            (0.60)  %          (0.13) %              0.47  %           (0.25)  %              2.05  %
Return on average common equity                     (7.76)  %          (2.35) %              5.12  %           (3.67)  %             40.26  %
Net interest margin                                  4.63   %           3.73  %              3.04  %            3.90   %              3.26  %
Dividend payout ratio                              (20.02)  %         (65.54) %             26.09  %          (41.99)  %              3.69  %
Asset Quality Data:
Net charge-offs                              $        575           $    856          $     1,181          $   2,313           $     3,546
Net charge-offs/average loans held for
investment excluding PPP                             0.35   %           0.61  %              1.01  %            0.53   %              1.03  %
Nonperforming loans                          $     10,267           $ 10,437          $    10,495          $  10,267           $    10,495
Nonperforming loans (excluding government
guaranteed balance)                          $      4,015           $  4,245          $     3,756          $   4,015           $     3,756
Nonperforming loans/total loans held for
investment                                           1.51   %           1.63  %              1.60  %            1.51   %              1.60  %


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                                                        As of and for the Three Months Ended                        As of and for the Nine Months Ended
(Dollars in thousands, except per share
data)                                        9/30/2022               6/30/2022               9/30/2021               9/30/2022               

09/30/2021

Nonperforming loans (excluding gov't
guaranteed balance)/total loans held for
investment                                         0.59  %                 0.66  %                 0.57  %                 0.59  %                 0.57  %
ALLL/Total loans held for investment at
amortized cost                                     1.48  %                 1.62  %                 2.57  %                 1.48  %                 2.57  %
ALLL/Total loans held for investment at
amortized cost, excluding PPP loans                1.54  %                 1.71  %                 3.39  %                 1.54  %                 3.39  %
Other Data:
Full-time equivalent employees (2)                     524                     485                     651                     524                     651
Banking center offices                                   8                       7                       6                       8                       6
Loan production offices (3)                             20                      19                      22                      20                     

22

(1) See the section entitled “GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures” below for a reconciliation to most comparable GAAP equivalents. (2) Of which 254 FTEs from discontinued operations as of September 30, 2022. (3) All national home loan origination offices have been closed.

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GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures

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

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

                       Tangible Common Shareholders' Equity and Tangible 

Book value per common share

                                                                                   As of
(Dollars in thousands, except per share
data)                                             September 30, 2022           June 30, 2022           September 30, 2021
                                                     (Unaudited)                (Unaudited)               (Unaudited)
Total shareholders' equity                      $            90,637          $       93,295          $            94,298
Less: Preferred stock liquidation
preference                                                   (9,605)                 (9,605)                     (10,705)
Total equity available to common
shareholders                                                 81,032                  83,690                       83,593
Less: Goodwill                                                    -                    (100)                        (100)
Tangible common shareholders' equity            $            81,032          $       83,590          $            83,493

Common shares outstanding                                 4,031,937               4,019,023                    3,919,977
Tangible book value per common share            $             20.10          $        20.80          $             21.30


                             Results of Operations

BayFirst's operating results depend on our net interest income, which is the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities, consisting primarily of deposits. Net
interest income is determined by the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities
("interest rate spread") and the relative amounts of interest-earning assets and
interest-bearing liabilities. Our interest rate spread is affected by
regulatory, economic, and competitive factors which influence interest rates,
loan demand, and deposit flows. In addition, our operating results can be
affected by the level of nonperforming loans, as well as the level of
our noninterest income, and our noninterest expenses, such as salaries and
employee benefits, occupancy and equipment costs, and income taxes.

We are dependent on noninterest income, which is derived primarily from net gain
on the sales of the guaranteed portion of government guaranteed loans. While we
retain some of our government guaranteed loans on our balance sheet, we sell
both the guaranteed balance of our government guaranteed loans, as well as a
percentage of the unguaranteed portions of such loans. This activity generates
gains on sale of the guaranteed portions of the 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 profit (net loss)

We had net loss for the three months ended September 30, 2022 of $1.4 million,
or $(0.35) per diluted common share, compared to net income for the three months
ended September 30, 2021 of $1.3 million, or $0.26 per diluted common share. The
decrease of $2.7 million was the result of the a decrease of $7.1 million
unfavorable change from discontinued operations and an unfavorable change in
provision for loan losses of $3.8 million as a result of recording a negative
provision of $3.0 million in the third quarter 2021. This was partially offset
by an increase of $1.9 million in net interest income and an increase of $7.8
million in gain on sale of SBA loans.

We had net loss for the nine months ended September 30, 2022 of $1.7 million, of
$(0.48) per diluted common share, compared to net income for the nine months
ended September 30, 2021 of $21.8 million or $5.13 per diluted common share. The
decrease of $23.5 million in net income was the result of an increase in the net
loss from discontinued operations of $18.7 million, a $13.8 million gain on sale
of PPP loans in 2021 which did not recur in 2022, an increase in
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non-interest expense on continuing operations of $4.7 million, and lower PPP
income. These items were partially offset by a $3.4 million increase related to
held for investment SBA loan fair value gains and higher gains on non-PPP SBA
loan sales of $16.3 million. The increase in the net loss from discontinued
operations was primarily the result a decrease of in gain on sale of residential
mortgage loans of $46.4 million and the recognition of restructuring charges of
$4.3 million for the discontinuation of the nationwide residential mortgage
division, partially offset by lower non-interest expense of $26.1 million.

Net interest income

Net interest income from continuing operations was $9.2 million in the third
quarter of 2022, an increase of $1.9 million or 26.0% from $7.3 million in the
third quarter of 2021. The increase was mainly due to the increase in loan
interest and fee income of $2.0 million.

Net interest income from continuing operations was $21.4 million in the first
nine months of 2022, a decrease of $9.4 million or 30.4% from $30.8 million in
the first nine months of 2021. The decrease was mainly due to a decline in net
PPP loan interest income of $17.8 million, partially offset by increases in
non-PPP loan interest income .

Net interest margin including discontinued operations improved to 4.63% for the
third quarter of 2022, which represented an increase of 159 basis points over
3.04% for the third quarter of 2021. Net interest margin including discontinued
operations improved to 3.90% for the first nine months of 2022, compared to
3.26% for the first nine months of 2021. With recent rate increases, the Company
anticipates further improvement in its net interest margin as its SBA loan
portfolio rates are tied to the prime lending rate with the vast majority
resetting at the beginning of each calendar quarter.
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Average Balance Sheet and Net Interest Income Analysis

The following tables set forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest and dividend income of
BayFirst from interest-earning assets and the resultant average yields; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest income; (iv) interest rate spread;
(v) net interest margin; and (vi) ratio of average interest-earning assets to
average interest-bearing liabilities. Loans in nonaccrual status, for the
purposes of the following computations, are included in the average loan
balances. FRB, FHLB, and FNBB restricted equity holdings are included in other
interest-earning assets. The Company did not have a significant amount of
tax-exempt assets.

                                                                            

Three months completed September 30,

                                                           2022                                                                2021
(Dollars in thousands)           Average  Balance           Interest              Yield             Average  Balance           Interest              Yield
Interest-earning assets:
Investment securities          $          50,196           $    316                  2.50  %       $         23,055          $      76                  1.31  %
Loans, excluding PPP (1) (2)             723,284             11,371                  6.24                   562,095              7,892                  5.57
PPP loans                                 28,102                141                  1.99                   288,406              1,465                  2.02
Other                                     57,583                318                  2.19                   171,208                112                  0.26
Total interest-earning assets            859,165             12,146                  5.61                 1,044,764              9,545                  3.62
Noninterest-earning assets                80,682                                                             41,613
Total assets                   $         939,847                                                   $      1,086,377
Interest-bearing liabilities:
NOW, MMDA and savings          $         587,331           $  1,290                  0.87          $        518,243          $     974                  0.75
Time deposits                             97,693                566                  2.30                    52,729                178                  1.34
PPPLF advances                                 -                  -                     -                   315,875                278                  0.35
Other borrowings                          44,929                258                  2.28                     9,484                 99                  4.14
Total interest-bearing
liabilities                              729,953              2,114                  1.15                   896,331              1,529                  0.68
Demand deposits                          106,846                                                             87,248
Noninterest-bearing
liabilities                               10,429                                                              9,969
Shareholders' equity                      92,619                                                             92,829
Total liabilities and
shareholders' equity           $         939,847                                                   $      1,086,377
Net interest income                                        $ 10,032                                                          $   8,016
Interest rate spread                                                                 4.46                                                               2.95
Net interest margin (3)                                                              4.63                                                               3.04
Ratio of average
interest-earning assets to
average interest-bearing
liabilities                               117.70  %                                                          116.56  %

(1) Includes nonaccrual loans.
(2) Includes $59,568 at an average yield of 5.74% and $94,812 at an average yield of 3.10% of residential loans held for sale from discontinued operations as
of September 30, 2022 and September 30, 2021, respectively.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.



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                                                                                Nine Months Ended September 30,
                                                             2022                                                              2021
(Dollars in thousands)             Average  Balance           Interest             Yield             Average  Balance          Interest             Yield
Interest earning-assets:
Investment securities            $          42,474           $    642                 2.02  %       $         12,500          $    123                 1.32  %
Loans, excluding PPP (1) (2)               654,604             26,398                 5.39                   582,352            21,243                 4.88
PPP loans                                   40,566                880                 2.90                   613,768            17,771                 3.87
Other                                       82,239                592                 0.96                   166,918               297                 0.24
Total interest-earning assets              819,883             28,512                 4.65                 1,375,538            39,434                 3.83
Noninterest-earning assets                  77,705                                                            43,726
Total assets                     $         897,588                                                  $      1,419,264
Interest-bearing liabilities:
NOW, MMDA and savings            $         613,613           $  3,350                 0.73          $        484,985          $  2,987                 0.82
Time deposits                               54,714                783                 1.91                    82,422               679                 1.10
PPPLF advances                               7,577                 20                 0.35                   648,158             1,699                 0.35
Other borrowings                            22,177                467                 2.82                    30,692               519                 2.26
Total interest-bearing
liabilities                                698,081              4,620                 0.88                 1,246,257             5,884                 0.63
Demand deposits                             99,234                                                            82,321
Noninterest-bearing liabilities              7,260                                                             8,441
Shareholders' equity                        93,013                                                            82,245
Total liabilities and
shareholders' equity             $         897,588                                                  $      1,419,264
Net interest income                                          $ 23,892                                                         $ 33,550
Interest rate spread                                                                  3.76                                                             3.20
Net interest margin (3)                                                               3.90                                                             3.26
Ratio of average
interest-earning assets to
average interest-bearing
liabilities                                 117.45  %                                                         110.37  %

(1) Includes nonaccrual loans.
(2) Includes $72,172 at an average yield of 4.57% and $125,241 at an average yield of 2.96% of residential loans held for sale from discontinued operations as
of September 30, 2022 and September 30, 2021, respectively.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.


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Rate/volume analysis

The tables below present the effects of volume and rate changes on interest
income and expense for the periods indicated. Changes in volume are changes in
the average balance multiplied by the previous period's average rate. Changes in
rate are changes in the average rate multiplied by the average balance from the
previous period. The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate. Loans in nonaccrual status, for the purpose of the
following computations, are included in the average loan balances. FRB, FHLB,
and FNBB restricted equity holdings are included in other interest-earning
assets. The Company did not have a significant amount of tax-exempt assets.

(Dollars in thousands)                                        Rate             Volume             Total
Three Months Ended September 30, 2022 vs. September 30,
2021:
Interest-earning assets:
Investment securities                                      $    105          $    135          $    240
Loans, excluding PPP                                          1,025             2,454             3,479
PPP loans                                                       (18)           (1,306)           (1,324)
Other interest-earning assets                                   326              (120)              206
Total interest-earning assets                                 1,438             1,163             2,601
Interest-bearing liabilities:
NOW, MMDA and savings                                           176               140               316
Time deposits                                                   177               211               388
PPPLF                                                             -              (278)             (278)
Other borrowings                                                (62)              221               159
Total interest-bearing liabilities                              291               294               585
Net change in net interest income                          $  1,147          $    869          $  2,016
Nine Months Ended September 30, 2022 vs. September 30,
2021:
Interest-earning assets:
Investment securities                                      $     95          $    424          $    519
Loans, excluding PPP                                          2,369             2,786             5,155
PPP loans                                                    (3,575)          (13,316)          (16,891)
Other interest-earning assets                                   511              (216)              295
Total interest-earning assets                                  (600)          (10,322)          (10,922)
Interest-bearing liabilities:
NOW, MMDA, and savings                                         (366)              729               363
Time deposits                                                   385              (281)              104
PPPLF advances                                                    -            (1,679)           (1,679)
Other borrowings                                                111              (163)              (52)
Total interest-bearing liabilities                              130            (1,394)           (1,264)
Net change in net interest income                          $   (730)        

($8,928) ($9,658)

Allowance for loan losses

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

Asset quality remained stable in the third quarter of 2022. As the financial
impact of the COVID-19 pandemic became more predictable throughout 2021 and
2022, the Company began adjusting downward its allowance for loan losses from
the historic high levels reached in 2020 at the onset of the pandemic. The
Company's loan portfolio has grown during the year which warrants an increase in
allowance of loan losses. The Company recorded a provision for the three months
ended September 30, 2022 of $750 thousand. This compared to a negative provision
of $3.0 million for the three months ended
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September 30, 2021. In the three months ended September 30, 2022, $575,000 net allocations to credits were recorded in relation to $1.2 million
in the three months ended September 30, 2021. Our ALLL was $9.7 million at
September 30, 2022 and $16.6 million at September 30, 2021.

We recorded a negative provision for loan losses for the nine months ended
September 30, 2022 of $1.4 million compared to a $1.0 million negative provision
for the nine months ended September 30, 2021. The decrease of $0.4 million in
the provision for loan losses was primarily due to the same factors mentioned
above. During the nine months ended September 30, 2022, we charged off $2.3
million in loans compared to $3.5 million during the nine months ended
September 30, 2021.

Non-interest income

The following table presents non-interest income from continuing operations for the three and nine months ended September 30, 2022 and September 30, 2021.

                                                      For the Three Months Ended               For the Nine Months Ended
                                                            September 30,                            September 30,
(Dollars in thousands)                                 2022                 2021                2022                2021
Noninterest income:

Loan servicing income, net                                 620                412                1,508              1,441
Gain (loss) on sale of government guaranteed
loans, net                                               7,446               (338)              15,915             13,460
Service charges and fees                                   347                261                  951                730
SBA loan fair value gain                                   999                 72                3,510                151
Other noninterest income                                   392                203                1,262                595
Total noninterest income                          $      9,804          $     610          $    23,146          $  16,377


Noninterest income from continuing operations was $9.8 million during the three
months ended September 30, 2022, a increase of $9.2 million from $610 thousand
during the three months ended September 30, 2021. The increase was primarily due
to an increase in gains on SBA loan sales of $7.8 million and an increase in the
SBA loan fair value gain of $927 thousand.

Noninterest income from continuing operations was $23.1 million during the nine
months ended September 30, 2022, a increase of $6.8 million or 41.3% from $16.4
million during the nine months ended September 30, 2021. The increase was
primarily due to higher gains on the sale of non-PPP SBA loans of $16.3 million
and an increase related to held for investment SBA loan fair value gains of $3.4
million, partially offset by the $13.8 million gain on sale of PPP loans in 2021
which did not recur in 2022.
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Non-interest expenses

The following table shows non-interest expense from continuing operations for the three and nine months ended September 30, 2022 and September 30, 2021.

                                                              For the Three Months Ended               For the Nine Months Ended
                                                                     September 30,                           September 30,
(Dollars in thousands)                                          2022                2021                2022                2021
Noninterest expense:
Salaries and benefits                                      $     6,758      

$6,481 $21,177 $18,047
Bonuses, commissions and incentives

                                 883                414                1,833              2,376

Occupancy and equipment                                          1,070                790                3,010              2,362
Data processing                                                  1,247              1,047                3,486              4,266
Marketing and business development                                 662                693                2,100              1,727
Professional services                                              956              1,267                3,089              2,554
Loan origination and collection                                  1,068                683                2,486              2,284
Employee recruiting and development                                518                441                1,653              1,213
Regulatory assessments                                             110                138                  299                340

Other noninterest expense                                          886                612                2,586              1,847
Total noninterest expense                                  $    14,158          $  12,566          $    41,719          $  37,016


Noninterest expense from continuing operations was $14.2 million during the
three months ended September 30, 2022, a increase of $1.6 million or 12.7% from
$12.6 million during the three months ended September 30, 2021. The increase was
primarily due to higher compensation expense, occupancy expense, data processing
expense and loan origination expense, partially offset by lower professional
services expense.

Noninterest expense was $41.7 million during the nine months ended September 30,
2022, a increase of $4.7 million or 12.7% from $37.0 million during the nine
months ended September 30, 2021. The increase was primarily due to higher
salaries and benefits and occupancy expense.

Discontinued operations

Net loss on discontinued operations was $4.5 million in the third quarter of
2022, which was a $3.8 million increase from a loss of $673 thousand in the
second quarter of 2022. The company recorded net income on discontinued
operations of $2.6 million in the third quarter of 2021. The increase in the net
loss from the previous quarter was the result of a decrease in gains on sale of
residential mortgage loans of $3.1 million and an increase in restructuring
charges of $3.1 million for the discontinuation of the nationwide residential
mortgage division, partially offset by a decrease in noninterest expense,
excluding restructuring charges, of $1.2 million and a decrease in income tax
benefit of $1.3 million. The pre-tax restructuring charge incurred in the third
quarter, consisted of approximately $1.3 million of severance and related
payments, $214 thousand of write-offs of fixed assets, $663 thousand of
valuation adjustments on the leased branch facilities, $1.3 million of contract
write-offs, and $167 thousand of goodwill and mortgage servicing rights
impairment. The $7.1 million decrease in income from the year ago quarter was
primarily due to a decrease in residential loan fee income of $14.3 million and
the restructuring charges for the discontinuation of residential mortgage
division of $3.7 million recorded in the third quarter of 2022. This was
partially offset by a decrease in noninterest expense, excluding the
restructuring charges, of $8.4 million and a decrease in income tax expense of
$2.3 million.

Net loss from discontinued operations was $5.0 million in the first nine months
of 2022, which was an $18.6 million reduction from net income of $13.6 million
in the first nine months of 2021. The reduction in net income was primarily the
result of a decrease in residential loan fee income of $46.4 million and the
restructuring charges for the discontinuation of residential mortgage division
of $4.3 million recorded in the second and third quarters of 2022. This was
partially offset by a $26.1 million decrease in noninterest expense excluding
the restructuring charge and a decrease in income tax expense of $6.2 million.

Income taxes

The income tax expense from continuing operations was $983,000 for the three months ended September 30, 2022an augmentation of $1.3 million the tax benefit of $362,000 for the three months ended September 30, 2021. The

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increase was primarily due to the increase in pre-tax earnings from continuing
operations. Income tax benefit from discontinued operations was $1.5 million for
the three months ended September 30, 2022, a change of $2.3 million from income
tax expense of $861 thousand for the three months ended September 30, 2021. The
change was primarily due to the decrease in pre-tax earnings from discontinued
operations.

Income tax expense from continuing operations was $888 thousand for the nine
months ended September 30, 2022, a decrease of $2.1 million from income tax
expense of $3.0 million for the nine months ended September 30, 2021. The
decrease was primarily due to the decrease in pre-tax earnings from continuing
operations. Income tax benefit from discontinued operations was $1.7 million for
the nine months ended September 30, 2022, a change of $6.2 million from income
tax expense of $4.5 million for the nine months ended September 30, 2021. The
change was primarily due to the decrease in pre-tax earnings from discontinued
operations.

The effective tax rate was 31.88% for the nine months ended September 30, 2022 and 25.56% for the nine months ended September 30, 2021.

                              Financial Condition

Investment security

The following table shows the fair value of the Company’s portfolio of marketable securities classified as available for sale at September 30, 2022
and December 31, 2021.

(Dollars in thousands)                                           September 30, 2022           December 31, 2021
Investment securities available for sale:
Asset-backed securities                                        $             9,785          $            7,535
Mortgaged-backed securities:
U.S. Government-sponsored enterprises                                        3,468                       4,394
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises                                       18,545                      18,964
Corporate bonds                                                             11,117                           -
Total investment securities available for sale                 $            42,915          $           30,893


The following table shows the fair value of the Company’s investment securities portfolio classified as held to maturity as of September 30, 2022 and
December 31, 2021.

(Dollars in thousands)                                           September 30, 2022           December 31, 2021

Investment securities held to maturity:

Mortgaged-backed securities:
U.S. Government-sponsored enterprises                          $                 2          $                2

Corporate bonds                                                              4,993                           -
Total investment securities held to maturity                   $             4,995          $                2


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

During the second quarter of 2022, the Company transferred a $1.5 million
previously designated available for sale investment security to a held to
maturity designation at estimated fair value. The reclassification was permitted
as the Company has appropriately determined the ability and intent to hold the
investment security as an investment until maturity or call. The investment
security had no unrealized net gain or loss at the time of transfer since it was
purchased near the end of the first quarter of 2022.
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The investment securities available for sale presented in the following tables
are reported at amortized cost and by contractual maturity as of September 30,
2022 and December 31, 2021. Actual timing may differ from contractual maturities
if borrowers have the right to call or prepay obligations with or without call
or prepayment penalties. Additionally, residential mortgage-backed securities
and collateralized mortgage obligations receive monthly principal payments,
which are not reflected below.

                                                                                                            September 30, 2022
                                         One year or less                            One to five years                             Five to ten years                             After ten years
                                   Amortized                                   Amortized                                     Amortized                                    Amortized
(Dollars in thousands)               Cost             Average Yield              Cost               Average Yield              Cost               Average Yield             Cost              Average Yield
Asset-backed securities         $          -                   -  %       $              -                   -  %       $              -                   -  %       $        9,992                3.02  %
Mortgaged-backed securities:
U.S. Government-sponsored
enterprises                                -                   -                         -                   -                         -                   -                   4,209                1.52
Collateralized mortgage
obligations:
U.S. Government-sponsored
enterprises                                -                   -                         -                   -                         -                   -                  22,477                1.86
Corporate bonds                            -                   -                     9,982                2.21                     1,356                2.90                       -                   -
Total investment securities
available for sale              $          -                   -  %       $          9,982                2.21  %       $          1,356                2.90  %       $       36,678                2.14  %


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

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


The investment securities held to maturity presented in the following tables are
reported at amortized cost and by contractual maturity as of September 30, 2022
and December 31, 2021. Actual timing may differ from contractual maturities if
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Additionally, residential mortgage-backed securities and
collateralized mortgage obligations receive monthly principal payments, which
are not reflected below.

                                                                                                             September 30, 2022
                                         One year or less                            One to five years                              Five to ten years                              After ten years
                                  Amortized                                    Amortized                                      Amortized                                    Amortized
(Dollars in thousands)              Cost             Average Yield               Cost               Average Yield               Cost               Average Yield              Cost             Average Yield

Mortgaged-backed securities:
U.S. Government-sponsored
enterprises                    $          -                    -  %       $              -                    -  %       $              -                    -  %       $           2                 0.74  %

Corporate bonds                           -                    -                     4,006                 3.40                     1,000                 4.38                      -                    -
Total investment securities
held to maturity               $          -                    -  %       $          4,006                 3.40  %       $          1,000                 4.38  %       $           2                 0.74  %


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                                                                                                            December 31, 2021
                                          One year or less                            One to five years                            Five to ten years                             After ten years
                                   Amortized                                    Amortized                                    Amortized                                   Amortized
(Dollars in thousands)               Cost              Average Yield              Cost              Average Yield              Cost              Average Yield              Cost             Average Yield

Mortgaged-backed securities:
U.S. Government-sponsored
enterprises                    $            -                    -  %       $            -                    -  %       $            -                    -  %       $           2                 0.80  %

Total investment securities
held to maturity               $            -                    -  %       $            -                    -  %       $            -                    -  %       $           2                 0.80  %


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Composition of loan portfolio

Through the efforts of our management and loan officers, strong loan production
resulted from our ability to take advantage of the economic recovery and
consolidation in our markets. Senior management and loan officers have continued
to develop new sources of loan referrals, particularly among centers of local
influence and real estate professionals, and have also enjoyed repeat business
from loyal customers in the markets the Bank serves. We have no concentration of
credit in any industry that represents 10% or more of our loan portfolio. The
following table sets forth the composition of our loan portfolio, including LHFS
as of the dates indicated.

                                                     September 30, 2022                             December 31, 2021
(Dollars in thousands)                       Amount                % of Total               Amount                % of Total
Residential loans held for sale from
discontinued operations                   $   71,553                                     $  114,131
Government guaranteed loans, held for
sale                                      $      573                                     $    1,460
SBA loans held for investment, at fair
value                                     $   24,965                                     $    9,614
Loans held for investment, at amortized
cost:
Residential real estate                   $  176,574                       27.2  %       $   87,235                       15.3  %
Commercial real estate                       220,210                       33.9             163,477                       28.7
Construction and land                          9,259                        1.4              18,632                        3.3
Commercial and industrial                    183,631                       28.3             217,155                       38.0
Commercial and industrial - PPP               22,286                        3.4              80,158                       14.1
Consumer and other                            37,595                        5.8               3,581                        0.6
Loans held for investment, at amortized
cost, gross                                  649,555                      100.0  %          570,238                      100.0  %
Discount on SBA 7(a) loans sold               (5,068)                                        (3,866)
Premium (discount) on loans purchased          2,306                                            (13)
Deferred loan costs, net                       9,047                                          7,975
Allowance for loan losses                     (9,739)                                       (13,452)
Loans held for investment, at amortized
cost, net                                 $  646,101                                     $  560,882


In general, construction loans are created as permanent construction loans. Third-party financing, if required, generally takes the form of permanent loans consistent with the first mortgage.

During the nine months ended September 30, 2022, we originated approximately
$206.8 million in loans through conventional lending channels, $276.6 million in
loans through CreditBench (our SBA lending function), and $886.6 million through
the Residential Mortgage Lending Division. During the nine months ended
September 30, 2021, we originated approximately $70.7 million in loans through
conventional lending channels, $110.2 million through CreditBench, exclusive of
PPP loans, $329.3 million of PPP loans, and $1.74 billion through the
Residential Mortgage Lending Division. During the nine months ended
September 30, 2022, the Company sold guaranteed balances of SBA loans of $233.1
million. Additionally, the Company purchased $16.6 million government guaranteed
loans and $34.1 million consumer loans.

In 2021, we created approximately $94.9 million new loans via conventional lending channels, $169.5 million in loans via CreditBench, excluding PPP loans, $329.3 million PPP loans, and $2.22 billion through the Residential Mortgage Division.

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Loan Maturity/Rate Sensitivity

The following table shows the contractual maturities of our loans at
September 30, 2022. Loan balances in this table include loans held for
investment at fair value, loans held for investment at amortized cost, discount
on retained balances of loans sold, premium and discount on loans purchased, and
deferred loan costs, net.

                                                            Due After One
                                  Due in One Year           Year to Five             Due After Five             Due After 15
 (Dollars in thousands)               or Less                   Years               Years to 15 Years              Years                Total
Real estate:
Residential                     $          3,633          $        1,943          $           10,863          $     160,591          $ 177,030
Commercial                                 4,777                   2,047                      26,950                194,914            228,688
Construction and land                      2,359                     260                         979                  5,660              9,258
Commercial and industrial                  7,667                  15,958                     174,782                  7,392            205,799
Commercial and industrial - PPP            2,363                  19,773                           -                      -             22,136
Consumer and other                         2,526                  27,693                       7,675                      -             37,894

Total loans held for investment $23,325 $67,674

$221,249 $368,557 $680,805


The following table shows our loans with contractual maturities of greater than
one year that have fixed or adjustable interest rates at September 30, 2022.

                                        Fixed             Adjustable
(Dollars in thousands)              Interest Rate       Interest Rate
Real estate:
Residential                        $       47,319      $      126,078
Commercial                                  6,448             217,463
Construction and land                           -               6,899
Commercial and industrial                  22,066             176,066
Commercial and industrial - PPP            19,773                   -
Consumer and other                          5,149              30,219

Total loans held for investment purposes $100,755 $556,725

Credit risk

The Bank's primary business is making commercial, consumer, and real estate
loans. This activity inevitably has risks for potential loan losses, the
magnitude of which depends on a variety of economic factors affecting borrowers,
which are beyond our control. We have developed policies and procedures for
evaluating the overall quality of our credit portfolio and the timely
identification of potential problem loans. Management's judgment as to the
adequacy of the allowance is based upon a number of assumptions about the
economic environment that it believes impacts credit quality as of the balance
sheet date that it believes to be reasonable, but which may or may not prove
accurate. Thus, there can be no assurance that charge-offs in future periods
will not exceed the ALLL, or that additional increases in the ALLL will not be
required.

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

We periodically review the assumptions and formulate methodologies by which
additions are made to the specific and general valuation allowances for loan
losses in an effort to refine such allowances in light of the current status of
the factors described above. The methodology is presented to and approved by the
Bank's Board of Directors. Future additional
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Provisions for the loan loss reserve may be established, if necessary, as new loans are granted or as existing loans may deteriorate.

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

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

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

Although management believes our ALLL to be adequate as of September 30, 2022future adjustments to our provision may be required if economic conditions differ materially from the assumptions used for the determination.

Nonperforming Assets. At September 30, 2022, we had $4.1 million in
nonperforming assets, excluding government guaranteed loan balances, and our
ALLL represented 1.48% of total loans held for investment at amortized cost. At
September 30, 2021, we had $3.8 million in nonperforming assets, excluding
government guaranteed loan balances, and our ALLL represented 2.57% of total
loans held for investment at amortized cost. Total loans held for investment at
September 30, 2022 and September 30, 2021 included government guaranteed loans
and loans measured at fair value, which had no reserves allocated to them. ALLL
as a percentage of loans held for investment at amortized cost, not including
government guaranteed loan balances, was 1.90% at September 30, 2022, compared
to 5.29% at September 30, 2021. The decrease was the result of the reduction in
qualitative factors which were elevated as a result of the uncertainity of the
impact of the COVID pandemic.

At December 31, 2021, we had $4.0 million in nonperforming assets, excluding
government guaranteed loan balances, and our ALLL represented 2.34% of total
loans held for investment, including PPP loans. Total loans at December 31, 2021
included government guaranteed loans and loans measured at fair value which had
no reserves allocated to them. ALLL as a percentage of loans at amortized cost,
not including government guaranteed loan balances was 4.07% at December 31,
2021.
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The following table sets forth certain information about outstanding loans and foreclosed assets, the ratio of those loans and foreclosed assets to total assets as of the dates indicated, and certain other related information.

                                                        September 30,          September 30,          December 31,
(Dollars in thousands)                                       2022                   2021                  2021

Non-performing loans (balances guaranteed by the government) $6,252

   $       6,739          $      7,942
Nonperforming loans (unguaranteed balances)                    4,015                  3,756                 3,967
Total nonperforming loans                                     10,267                 10,495                11,909
OREO                                                              56                      3                     3
Total nonperforming assets                             $      10,323       

$10,498 $11,912
Non-performing loans as a percentage of total loans held for investment purposes

                                             1.51  %                1.60  %               2.04  %

Non-performing loans (excluding government guaranteed balances)/total loans held for investment purposes

                    0.59  %                0.57  %               0.68  %
Nonperforming assets as a percentage of total assets            1.11  %                1.11  %               1.30  %

Non-performing assets (excluding government guaranteed balances)/total assets

                                       0.44  %                0.40  %               0.43  %
ALLL to nonperforming loans                                    94.86  %              158.32  %             112.96  %
ALLL to nonperforming loans (excluding government
guaranteed balances)                                          242.57  %              442.39  %             339.10  %


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The following table presents information on ALLL activity for the periods indicated:

                                             At and for the Three Months Ended          At and for the Nine Months Ended
(Dollars in thousands)                                 September 30,                              September 30,
                                                  2022                 2021                 2022                  2021
Allowance at beginning of period            $     9,564            $  20,797          $    13,452            $    21,162
Charge-offs:

Commercial real estate                               36                 (173)                 (17)                  (173)
Commercial and industrial                          (697)              (1,500)              (2,667)                (4,090)
Consumer and other                                  (68)                 (20)                (109)                   (48)
Total charge-offs                                  (729)              (1,693)              (2,793)                (4,311)
Recoveries:

Commercial real estate                               13                   73                   74                     73
Commercial and industrial                           105                  439                  365                    688
Consumer and other                                   36                    -                   41                      4
Total recoveries                                    154                  512                  480                    765
Net charge-offs                                    (575)              (1,181)              (2,313)                (3,546)
Provision for loan losses                           750               (3,000)              (1,400)                (1,000)
Allowance at end of period                  $     9,739            $  16,616          $     9,739            $    16,616
Net charge-offs to average loans held for
investment                                         0.33    %            0.63  %              0.50    %              0.44  %
Allowance as a percent of total loans held
for investment at amortized cost                   1.48    %            2.57  %              1.48    %              2.57  %
Allowance as a percent of loans held for
investment at amortized cost, not including
government guaranteed loans                        1.90    %            5.29  %              1.90    %              5.29  %
Allowance as a percent of nonperforming
loans                                             94.86    %          158.32  %             94.86    %            158.32  %
Total loans held for investment             $   680,805            $ 656,294          $   680,805            $   656,294
Average loans held for investment           $   691,818            $ 755,689          $   622,998            $ 1,070,879
Nonperforming loans (including government
guaranteed balances)                        $    10,267            $  10,495          $    10,267            $    10,495
Nonperforming loans (excluding government
guaranteed balances)                        $     4,015            $   3,756          $     4,015            $     3,756
Guaranteed balance of government guaranteed
loans                                       $   160,397            $ 339,766          $   160,397            $   339,766


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The following table details the net charge to average outstanding loans by loan category for the three months ended September 30, 2022 and September 30, 2021.

                                                              Three Months Ended September 30, 2022                                                                Three Months Ended September 30, 2021
                                                                                                                                                 Net
(Dollars in thousands)            Net Charge-off/(Recovery)         Average 

HFI loans Net charge/(recovery) ratio Charge/(recovery)

           Average Loans HFI          Net Charge-off/(Recovery) Ratio
Residential real estate           $                    -          $          131,536                                        -  %       $                   -          $           63,421                                        -  %
Commercial real estate                               (49)                    276,226                                    (0.07)                           100                     185,273                                     0.22
Commercial and industrial                            592                     219,005                                     1.08                          1,061                     216,578                                     1.96
Commercial and industrial - PPP                        -                      28,102                                        -                              -                     288,406                                        -
Consumer and other                                    32                      36,949                                     0.35                             20                       2,011                                     3.98
Total loans held for investment   $                  575          $          691,818                                     0.33  %       $               1,181          $          755,689                                     0.63  %

The following table details the net charge to average outstanding loans by loan category for the nine months ended September 30, 2022 and September 30, 2021.

                                                              Nine Months Ended September 30, 2022                                                                Nine Months Ended September 30, 2021
                                            Net                                                                                                 Net
(Dollars in thousands)             Charge-off/(Recovery)           Average 

HFI loans Net charge/(recovery) ratio Charge/(recovery)

           Average Loans HFI          Net Charge-off/(Recovery) Ratio
Residential real estate           $                   -          $          102,486                                        -  %       $                   -          $           60,050                                        -  %
Commercial real estate                              (57)                    246,341                                    (0.03)                           100                     168,063                                     0.08
Commercial and industrial                         2,302                     211,950                                     1.45                          3,402                     227,304                                     2.00
Commercial and industrial - PPP                       -                      40,566                                        -                              -                     613,768                                        -
Consumer and other                                   68                      21,655                                     0.42                             44                       1,694                                     3.46
Total loans held for investment   $               2,313          $          622,998                                     0.50  %       $               3,546          $        1,070,879                                     0.44  %


We recorded a provision of $750 thousand during the three months ended
September 30, 2022, compared to a negative provision of $3.0 million for the
same period in 2021. We recorded a negative provision of $1.4 million during the
nine months ended September 30, 2022, compared to a negative provision of $1.0
million for the same period in 2021. For the year ended 2021, the negative
provision for loan losses was $3.5 million. During 2020 and the first quarter of
2021, we increased the qualitative factors in the allowance for loan losses
calculation to reflect the decline in economic indicators caused by
the COVID-19 pandemic, resulting in significant provision expense in those
periods. As asset quality has remained stable and as many of the Company's SBA
loans were bolstered by additional government support, the current year decrease
in the allowance is deemed appropriate. Since 2016, the Company's loan losses
have been incurred primarily in its SBA unguaranteed loan portfolio,
particularly loans originated under the SBA 7(a) Small Loan Program. The Small
Loan Program represents loans of $350 thousand or less and such loans carry an
SBA guarantee of 75% to 90% of the loan, depending on the original principal
balance. The default rate on loans originated in the SBA 7(a) Small Loan Program
is significantly higher than the Bank's other SBA 7(a) loans, conventional
commercial loans, or residential mortgage loans.

Nonperforming assets to total assets, excluding government guaranteed loan
balances, were 0.44% as of September 30, 2022, as compared to 0.40% as of
September 30, 2021. This percentage was 0.43% as of December 31, 2021. Since the
majority of the Company's loan portfolio consisted of SBA loans, most of which
received from the SBA principal and interest payments under Section 1112 of the
CARES Act during 2020 and 2021, asset quality trends may appear more favorable
than they otherwise would without the SBA's support under the CARES Act.

As of September 30, 2022, a total of 15 loans with principal balances of $946
thousand were under payment deferrals. Of those, 14 were government guaranteed
loans with $579 thousand in outstanding unguaranteed balances. As expected, the
level of SBA loans on deferral increased with the expiration of the Section 1112
payment support afforded under the
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CARES Act at which point certain borrowers requested payment deferrals. With the
Economic Aid Act signed into law on December 27, 2020, Section 1112 CARES Act
payments were extended, with some stipulations, which assisted the majority of
our SBA borrowers for three months and, depending on the type of business, up to
eight months of additional principal and interest payments with a cap of $9
thousand per month per borrower, beginning in February 2021. Although the
Company's asset quality trends indicate minimal stress on the portfolio,
management incorporated a qualitative measure in the allowance for loan losses
calculation.

SBA and other government guaranteed loans

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

                                                                                                   At and for the
                                                         At and for the Nine Months Ended            Year Ended
(Dollars in thousands)                                             September 30,                    December 31,
Government Guaranteed, Excluding PPP                         2022                 2021                  2021
Number of loans originated                                          825                 272                     374
Amount of loans originated                              $    276,583          $  110,185          $      169,467
Average loan size originated                            $        335          $      405          $          453
Government guaranteed loan balances sold                $    233,105          $        -          $       44,854
Government unguaranteed loan balances sold              $     13,803          $    5,034                   5,034
Total government guaranteed loans                       $    286,798          $  314,015          $      300,415
Government guaranteed loan balances                     $    138,261          $  184,119          $      171,548
Government unguaranteed loan balances                   $    148,537          $  129,896          $      128,867
Government guaranteed loans serviced for others         $    616,419        

$443,764 $459,670


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

                                                                     September 30,                                                       December 31,
                                                   2022                                        2021                                          2021
(Dollars in thousands)                Amount              % of Total              Amount              % of Total               Amount                % of Total
Florida                            $  89,373                       31  %       $  87,563                       28  %       $     89,143                       30  %
California                            31,930                       11             40,795                       13                32,924                       11
Texas                                 21,478                        7             21,290                        7                20,976                        7
Tennessee                             18,672                        7              2,995                        1                 2,629                        1
Georgia                                9,665                        3             14,875                        5                13,894                        5
All Other                            115,680                       41            146,497                       46               140,849                       46
Total government guaranteed
loans, excluding PPP loans         $ 286,798                      100  %       $ 314,015                      100  %       $    300,415                      100  %


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Residential mortgages

The following table sets forth, for the periods indicated, information regarding our residential mortgage lending business from discontinued operations.

                                        For the Three Months Ended 

September

                                                         30,                           For the Nine Months Ended September 30,
(Dollars in thousands)                       2022                   2021                     2022                     2021
Number of loans originated                           690                 1,620                       2,600                 5,745
Amount of loans originated             $      245,434          $    506,701          $          886,570          $  1,744,630
Average loan size originated           $          356          $        313          $              341          $        304
Loan balances sold                     $      250,271          $    540,290          $          926,818          $  1,855,685


Deposits

General. In addition to deposits, sources of funds available for lending and for
other purposes include loan repayments and proceeds from the sales of loans.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows are influenced significantly by general interest rates and market
conditions. Borrowings, as well as available lines of credit, may be used on a
short-term basis to compensate for reductions in other sources, such as deposits
at less than projected levels.

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

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

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 September 30, 2022 and December 31, 2021, the Company had
approximately $746 thousand and $759 thousand, respectively, of brokered
deposits.

The amounts of each of the following categories of deposits, at the dates
indicated, are as follows:

(Dollars in thousands)                                    September 30, 2022                            December 31, 2021
Noninterest-bearing deposits                     $   104,215                  13.2  %       $         83,638                  11.6  %
Interest-bearing transaction accounts                190,985                  24.3                   163,495                  22.7
Money market accounts                                363,446                  46.3                   408,257                  56.5
Savings                                               17,130                   2.2                    15,607                   2.2
Subtotal                                             675,776                  86.0                   670,997                  93.0
Total time deposits                                  109,960                  14.0                    50,688                   7.0
Total deposits                                   $   785,736                 100.0  %       $        721,685                 100.0  %


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To September 30, 2022we held about $303.5 million deposits that exceeded the FDIC insurance limit.

The following table provides information on the breakdown by maturity of term deposits exceeding the FDIC insurance limit of $250,000 of the
September 30, 2022.

                  (Dollars in thousands)
                  Three months or less                   $    380
                  Over three months through six months      3,386
                  Over six months through 12 months        20,354
                  Over 12 months                           15,159
                  Total                                  $ 39,279


Other Borrowings

To September 30, 2022the Company had short-term FRB loans of $28.0 million at 3.25% and no borrowing from the FHLB. There was no borrowing from the FHLB or the FRB at December 31, 2021.

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
$223.6 million of real estate-related loans as of September 30, 2022. Based on
this collateral and the Company's holdings of FHLB stock, the Company was
eligible to borrow up to an additional $144.5 million from the FHLB at
September 30, 2022.

In addition, the Bank has a secured line of credit with the Federal Reserve Bank
and was secured by $47.6 million of commercial loans as of September 30, 2022.
FRB short-term borrowings bear interest at variable rates based on the Federal
Open Market Committee's target range for the federal funds rate. Based on this
collateral, the Company was eligible to borrow up to an additional $4.7 million
from the FRB at September 30, 2022.

In June 2021, the Company issued $6.0 million of Subordinated Debentures (the
"Debentures") that mature June 30, 2031 and are redeemable after five years. The
Debentures carry interest at a fixed rate of 4.50% per annum for the initial
five years of their term and carry interest at a floating rate for the final
five years of their term. Under the terms of the Debentures, the floating rates
are based on a SOFR benchmark plus 3.78% per annum. The Debentures were issued
to redeem a $6.0 million Subordinated Debenture which was issued in December
2018 and which carried interest at a fixed rate of 6.875% per annum.

The balance of Subordinated Debentures outstanding at the Company, net of
offering costs, amounted to $6.0 million and $6.0 million at September 30, 2022
and December 31, 2021, respectively. In March 2020, the Company renegotiated the
terms of its outstanding senior debt and combined its line of credit and term
note into one amortizing note with quarterly principal and interest payments
with interest at Prime (6.25% at September 30, 2022). The new note matures on
March 10, 2029 and the balance of the note was $3.0 million and $3.3 million at
September 30, 2022 and December 31, 2021, 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.

In April 2020, the Company entered into the Federal Reserve Bank's PPPLF. Under
the PPPLF, advances were secured by pledges of loans to small businesses
originated by the Company under the PPP. The PPPLF accrued interest at 0.35% per
annum and matured at various dates equal to the maturity date of the PPPLF
collateral pledged to secure the advance, and accelerated on and to the extent
of any PPP loan forgiveness reimbursement by the SBA for any PPPLF collateral or
the date of purchase by the SBA from the borrower of any PPPLF collateral. On
the maturity date of each advance, the Company repaid the advance plus accrued
interest. The balance outstanding on this facility was $69.7 million at
December 31, 2021. In the first quarter of 2022, the Company repaid the
remaining balance of the advance.

Capital resources

Equity is influenced primarily by earnings, dividends, sales and redemptions by the Company of its common and preferred shares and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses , net of tax, on available-for-sale investment securities.

Shareholders' equity decreased $5.7 million to $90.6 million at September 30,
2022 as compared to $96.3 million at December 31, 2021. The decrease was the
result of decreases of $3.4 million of accumulated other comprehensive income
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due to increases in net unrealized losses on available for sale investment
securities, $1.7 million net loss, $624 thousand of dividends declared on our
preferred stock, and $966 thousand of dividends declared on our common stock
during the nine months ended September 30, 2022.

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

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

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

To September 30, 2022 and the 31st of December2021, the Bank’s capital ratios exceeded the requirement to be “well capitalized” under regulatory guidelines.

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

                                                     Actual                                 Minimum(1)                               Well Capitalized(2)
(Dollars in thousands)                    Amount              Percent              Amount              Percent                  Amount                   Percent
As of September 30, 2022
Total Capital (to risk-weighted
assets)                                $ 106,855                 15.02  %       $  56,896                  8.00  %       $           71,119                 10.00  %
Tier 1 Capital (to risk-weighted
assets)                                   97,940                 13.77             42,672                  6.00                      56,896             

8.00

Common Equity Tier 1 Capital (to
risk-weighted assets)                     97,940                 13.77             32,004                  4.50                      46,228             

6.50

Tier 1 Capital (to total assets)          97,940                 10.48             37,392                  4.00                      46,740             

5.00

As of December 31, 2021
Total Capital (to risk-weighted
assets)                                  106,002                 21.25             39,909                  8.00                      49,886             

10.00

Tier 1 Capital (to risk-weighted
assets)                                   99,656                 19.98             29,932                  6.00                      39,909             

8.00

Common Equity Tier 1 Capital (to
risk-weighted assets)                     99,656                 19.98             22,449                  4.50                      32,426             

6.50

Tier 1 Capital (to total assets)          99,656                 12.22             32,619                  4.00                      40,774             

5.00

(1) To be considered “adequately capitalized” under the FDIC Quick Remedies Regulations.

(2) To be considered as “well capitalized” according to the FDIC Quick Remedies Regulations.

Contractual obligations

In the ordinary course of our operations, we enter into certain contractual
obligations. Total contractual obligations at September 30, 2022 were $151.8
million, a increase of $16.8 million from $135.0 million at December 31, 2021.
The increase was primarily due to an increase in time deposits of $59.3 million
and an increase in short-term FRB borrowings of $28.0 million, partially offset
by the payoff of $69.7 million in PPP Liquidity Facility
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The following tables present our contractual obligations as of September 30, 2022 and December 31, 2021.

Contractual obligations from September 30, 2022

                                            Less than One        One to Three        Three to Five
(Dollars in thousands)                           Year                Years               Years              Over Five Years            Total
Operating lease obligations                 $     1,402          $    2,162          $     1,350          $              -          $   4,914
Short-term borrowings                            28,000                   -                    -                         -             28,000
Long-term borrowings                                  -                   -                    -                     2,958              2,958

Subordinated notes                                   50                   -                    -                     5,940              5,990
Time deposits                                    50,595              58,562                  803                         -            109,960
Total                                       $    80,047          $   60,724          $     2,153          $          8,898          $ 151,822

                                                                     

Contractual obligations from December 31, 2021

                                            Less than One        One to Three        Three to Five
(Dollars in thousands)                           Year                Years               Years              Over Five Years            Total
Operating lease obligations                 $     1,454          $    2,249          $     1,279          $            301          $   5,283

Long-term borrowings                                  -                   -                    -                     3,299              3,299
PPP Liquidity Facility                           44,647                   -               25,007                         -             69,654
Subordinated notes                                    -                  50                    -                     6,000              6,050
Time deposits                                    40,868               9,210                  610                         -             50,688
Total                                       $    86,969          $   11,459          $    26,896          $          9,650          $ 134,974

Off-balance sheet arrangements

The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business. These financial instruments primarily include
unfunded loan commitments, undisbursed loans in process, unfunded lines of
credit, and standby letters of credit. The Bank uses these financial instruments
to meet the financing needs of its customers. These financial instruments
involve, to varying degrees, elements of credit, interest rate, and liquidity
risk. These do not present unusual risks and management does not anticipate any
accounting losses that would have a material effect on the Bank.

A summary of the amounts of the Bank’s financial instruments presenting an off-balance sheet risk on the dates indicated is as follows:

                                           September 30,       December 31,
              (Dollars in thousands)            2022               2021
              Unfunded loan commitments   $       28,340      $      18,567
              Unused lines of credit             107,338             52,076
              Standby letters of credit               68                 68
              Total                       $      135,746      $      70,711


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

Standby letters-of-credit are conditional lending commitments that we issue to
guarantee the performance of a customer to a third party and to support private
borrowing arrangements. Essentially, letters of credit issued have expiration
dates within one year of the issue date. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
credit. The Bank may hold collateral supporting those commitments. Newly issued
or modified guarantees that are not derivative contracts have been recorded on
the Bank's balance sheet at their fair value at inception.
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Generally, loan commitments and letters of credit are entered into on the same terms, including security, as outstanding loans. The solvency of each client and the guarantees required are assessed on a case-by-case basis.

Liquidity

Liquidity management is the process by which we manage the flow of funds
necessary to meet our financial commitments on a timely basis and at a
reasonable cost to take advantage of earnings enhancement opportunities. These
financial commitments include withdrawals by depositors, credit commitments to
borrowers, expenses of our operations, and capital expenditures. The Bank
generally maintains a liquidity ratio of liquid assets to total assets of at
least 7.0%. Liquid assets include cash and due from banks, federal funds sold,
interest-bearing deposits with banks and unencumbered investment securities
available for sale. Our on-balance sheet liquidity ratio at September 30, 2022
was 9.40%, as compared to 16.76% at December 31, 2021.

During the nine months ended September 30, 2022, the Bank purchased additional
investment securities, some of which were classified as investment securities
available for sale. The fair value of all of our investment securities available
for sale totaled $42.9 million at September 30, 2022.

During each of the quarters of 2021 and 2022, the Bank paid a dividend of $250
thousand to BayFirst. Prior to that, the Bank retained its earnings to support
its growth. Therefore, BayFirst's liquidity had historically been dependent
solely on funds received from the issuance and sale of debt and equity
securities. BayFirst's liquidity needs are to make interest payments on its debt
obligations, dividends on shares of its Series A Preferred Stock, Series B
Convertible Preferred Stock, and common stock, and payment of certain operating
expenses. As of September 30, 2022, BayFirst Financial Corp. held $649 thousand
in cash and cash equivalents.

A description of the debt securities of BayFirst and the Bank is set out above under “Other Borrowings”.

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