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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
For the quarterly period ended Commission file
September 30, 2022
number 001-39215
Professional Holding Corp.
(Exact name of Registrant as specified in its charter)
FL
46-5144312
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification Number)
396 Alhambra Circle, Suite 255,
Coral Gables, FL 33134 786 483-1757
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading SymbolName of each exchange on which registered:
Class A Common StockPFHD
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Smaller reporting company
x
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Number of shares of common stock outstanding as of November 4, 2022: 13,814,427

TABLE OF CONTENTS
2
PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited).
PROFESSIONAL HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands, except share data)
September 30,
2022		December 31,
2021
ASSETS 
Cash and due from banks$43,863 $38,469 
Interest earning deposits113,641 545,521 
Federal funds sold15,762 13,477 
Cash and cash equivalents173,266 597,467 
Securities available for sale, at fair value - taxable150,517 175,536 
Securities available for sale, at fair value - tax-exempt26,863 18,765 
Securities held to maturity (fair value September 30, 2022 – $178, December 31, 2021 – $242)
194 236 
Equity securities6,182 6,638 
Loans, net of allowance of $16,485 and $12,704 as of September 30, 2022 and December 31, 2021, respectively
1,988,410 1,764,460 
Loans held for sale— 165 
Premises and equipment, net7,867 9,020 
Bank owned life insurance54,534 38,485 
Goodwill and intangibles25,579 25,766 
Other assets41,465 27,573 
Total assets$2,474,877 $2,664,111 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand – noninterest bearing$758,042 $674,003 
Demand – interest bearing308,167 310,362 
Money market and savings976,766 1,121,330 
Time deposits145,316 265,693 
Total deposits2,188,291 2,371,388 
Federal Home Loan Bank advances— 35,000 
Official checks5,350 4,125 
Other borrowings— 10,000 
Subordinated debt24,467 — 
Accrued interest and other liabilities18,905 12,074 
Total liabilities2,237,013 2,432,587 
Stockholders’ equity
Preferred stock, 10,000,000 shares authorized, none issued
— — 
Class A Voting Common stock, $0.01 par value; authorized 50,000,000 shares, issued 14,769,354 and outstanding 13,811,084 shares as of September 30, 2022, and authorized 50,000,000 shares, issued 14,393,750 and outstanding 13,446,400 shares at December 31, 2021
148 144 
Class B Non-Voting Common stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding on September 30, 2022 and December 31, 2021
— — 
Treasury stock, at cost(16,214)(16,003)
Additional paid-in capital216,703 212,012 
Retained earnings54,006 36,120 
Accumulated other comprehensive loss(16,779)(749)
Total stockholders’ equity237,864 231,524 
Total liabilities and stockholders' equity$2,474,877 $2,664,111 
See accompanying notes to consolidated financial statements.
3
PROFESSIONAL HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended September 30,Nine Months Ended September 30,
2022 2021 2022 2021
Interest income
Loans, including fees$25,222 $20,209 $66,602 $57,753 
Investment securities - taxable736 186 2,078 526 
Investment securities - tax-exempt228 177 673 569 
Dividend income on restricted stock108 96 310 290 
Other871 222 2,194 486 
Total interest income27,165 20,890 71,857 59,624 
Interest expense
Deposits2,170 1,476 5,247 4,223 
Federal Home Loan Bank advances— 182 137 568 
Subordinated debt198 128 696 335 
Other borrowings— — 24 313 
Total interest expense2,368 1,786 6,104 5,439 
Net interest income24,797 19,104 65,753 54,185 
Provision for loan losses1,343 1,060 4,434 2,860 
Net interest income after provision for loan losses23,454 18,044 61,319 51,325 
Noninterest income
Service charges on deposit accounts542 643 1,636 2,237 
Income from bank owned life insurance400 281 1,049 844 
SBA origination fees90 21 138 166 
Swap fee income— 208 112 781 
Loans held for sale income6 161 122 462 
Gain on sale and call of securities— 1 13 23 
Other185 161 1,207 384 
Total noninterest income1,223 1,476 4,277 4,897 
Noninterest expense
Salaries and employee benefits8,003 7,350 26,696 21,233 
Occupancy and equipment1,001 935 3,013 2,942 
Data processing257 303 875 869 
Marketing565 420 886 738 
Professional fees830 689 2,635 2,087 
Acquisition expenses957 — 957 684 
Regulatory assessments254 481 1,276 1,248 
Other1,986 1,446 6,614 4,565 
Total noninterest expense13,853 11,624 42,952 34,366 
Income before income taxes10,824 7,896 22,644 21,856 
Income tax provision2,351 1,608 4,758 4,452 
Net income$8,473 $6,288 $17,886 $17,404 
Earnings per share:
Basic$0.63 $0.48 $1.33 $1.30 
Diluted$0.60 $0.45 $1.27 $1.25 
Other comprehensive income:
Unrealized holding loss on securities available for sale(7,176)(288)(21,484)(1,081)
Tax effect1,819 71 5,454 265 
Other comprehensive loss, net of tax(5,357)(217)(16,030)(816)
Comprehensive income$3,116 $6,071 $1,856 $16,588 
See accompanying notes to consolidated financial statements.
4
PROFESSIONAL HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(Dollar amounts in thousands, except share data)
Common StockTreasury
Stock		Additional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
SharesAmount
Balance on December 31, 202013,534,829 $141 $(9,209)$208,995 $14,756 $882 $215,565 
Employee stock purchase plan1,851 — — 34 — — 34 
Stock based compensation— — — 1,068 — — 1,068 
Exercise of stock options92,710 1 — 811 — — 812 
Restricted stock issued128,644 1 — — — — 1 
Treasury stock(341,367)— (6,037)(10)— — (6,047)
Net income— — — — 17,404 — 17,404 
Other comprehensive loss— — — — — (816)(816)
Balance on September 30, 2021
13,416,667 $143 $(15,246)$210,898 $32,160 $66 $228,021 
Balance on December 31, 202113,446,400 $144 $(16,003)$212,012 $36,120 $(749)$231,524 
Stock based compensation— — — 2,776 — — 2,776 
Exercise of stock options169,058 2 — 1,917 — — 1,919 
Restricted stock issued206,546 2 — (2)— — — 
Treasury stock(10,920)— (211)— — — (211)
Net income— — — — 17,886 — 17,886 
Other comprehensive loss— — — — — (16,030)(16,030)
September 30, 202213,811,084 $148 $(16,214)$216,703 $54,006 $(16,779)$237,864 
Balance on June 30, 202113,475,781 $143 $(13,544)$210,274 $25,872 $283 $223,028 
Stock based compensation expense— — — 359 — — 359 
Exercise of stock options28,296 — — 268 — — 268 
Restricted stock issued6,189 — — — — — — 
Treasury stock(93,599)— (1,702)(3)— — (1,705)
Net income— — — — 6,288 — 6,288 
Other comprehensive loss— — — — — (217)(217)
Balance on September 30, 2021
13,416,667 $143 $(15,246)$210,898 $32,160 $66 $228,021 
Balance on June 30, 202213,742,381 $147 $(16,201)$215,541 $45,533 $(11,422)$233,598 
Stock based compensation expense— — — 547 — — 547 
Exercise of stock options53,586 1 — 615 — — 616 
Restricted stock issued15,793 — — — — — — 
Treasury stock(676)— (13)— — — (13)
Net income— — — — 8,473 — 8,473 
Other comprehensive loss— — — — — (5,357)(5,357)
Balance on September 30, 2022
13,811,084 $148 $(16,214)$216,703 $54,006 $(16,779)$237,864 
See accompanying notes to consolidated financial statements

5
PROFESSIONAL HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands, except share data)
Nine Months Ended September 30,
20222021
Cash flows from operating activities  
Net income$17,886$17,404
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses4,434 2,860 
Amortization of purchase accounting adjustments(4,752)(4,651)
Depreciation and amortization465 1,023 
Gain on call of securities(13)(23)
Gain on loans held for sale(122)(462)
Equity unrealized change in market value513 102 
Net amortization of securities1,111 2,137 
Net amortization of deferred loan fees(3,577)(6,589)
Originations of loans held for sale(7,973)(22,367)
Proceeds from sales of loans held for sale8,260 23,815 
Income from bank-owned life insurance(1,049)(844)
Loss on disposal of premises and equipment4 140 
Employee stock purchase plan— 34 
Stock compensation2,776 1,069 
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable(637)1,330 
Other assets(8,178)(5,269)
Official checks, accrued interest, and other liabilities8,188 1,586 
Net cash provided by operating activities17,336 11,295 
Cash flows from investing activities
Proceeds from maturities and paydowns of securities available for sale20,942 16,749 
Proceeds from calls of securities available for sale4,135 4,812 
Proceeds from paydowns of securities held to maturity40 1,282 
Purchase of securities available for sale(30,736)(50,922)
Purchase of equity securities(57)(800)
Loans originations, net of principal repayments(220,284)(38,098)
Purchase of Federal Reserve Bank stock(604)(654)
Redemption of Federal Home Loan Bank Stock981 888 
Purchase of bank-owned life insurance(15,000)— 
Disposals (purchases) of premises and equipment, net145 (1,632)
Net cash used in investing activities(240,438)(68,375)
Cash flows from financing activities
Net increase (decrease) in deposits(182,807)695,844 
Proceeds from issuance of stock, net of issuance costs1,919 812 
Purchase of treasury stock(211)(6,047)
Repayments of Federal Home Loan advances(35,000)(5,000)
Net proceeds from issuance of subordinated notes payable25,000 — 
Repayment of line of credit(10,000)— 
Repayments of PPPLF advances— (101,358)
Net cash provided by (used in) financing activities(201,099)584,251
6
Increase (decrease) in cash and cash equivalents(424,201)527,171
Cash and cash equivalents at beginning of period597,467216,972
Cash and cash equivalents at end of period$173,266$744,143
Supplemental cash flow information:
Cash paid during the period for interest$6,114$6,192
Cash paid during the period for taxes, net of refunds6,3594,200
 See accompanying notes to consolidated financial statements
7
PROFESSIONAL HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tables in thousands, except share data)
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying unaudited consolidated financial statements of Professional Holding Corp. and its subsidiary, Professional Bank (the “Bank” and collectively with Professional Holding Corp., the “Company”), have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current period presentation.
Operating results for the nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Use of Estimates:
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
New accounting standards that have not yet been adopted:
The following provides a brief description of accounting standards that have been issued but are not yet adopted that could have a material effect on the Company’s financial statements:
ASU 2022-02, Financial Instruments – Credit Losses (Topic 326)
DescriptionIn March 2022, FASB issued ASU 2022-02 which eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases.
Date of AdoptionASU 2022-02 is effective January 1, 2023.
Effect on the Consolidated Financial StatementsThis ASU will have an impact on our financial statement disclosures but not a material impact on our financial statements.
ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions
DescriptionIn June 2022, FASB issued ASU 2022-03 which clarifies that a contractual sale restriction should not be considered in measuring fair value. ASU 2022-03 also requires that entities disclose certain qualitative and quantitative information about securities with contractual sale restrictions.
Date of Adoption
ASU 2022-03 is effective January 1, 2023.
Effect on the Consolidated Financial StatementsWe are evaluating the impact of this ASU, but it is not believed to be material.
8
NOTE 2 — EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding plus the effect of employee stock awards during the year.
Three Months Ended September 30,Nine Months Ended September 30,
(Dollar amounts in thousands, except per share data)2022202120222021
Basic earnings per share:    
Net income$8,473 $6,288 $17,886 $17,404 
Total weighted average common stock outstanding13,498,007 13,196,025 13,430,536 13,344,470 
Basic earnings per common share$0.63 $0.48 $1.33 $1.30 
Diluted earnings per share:
Net income$8,473 $6,288 $17,886 $17,404 
Total weighted average common stock outstanding13,498,007 13,196,025 13,430,536 13,344,470 
Add: dilutive effect of employee restricted stock and options742,008 659,402 661,214 568,613 
Total weighted average diluted stock outstanding14,240,015 13,855,427 14,091,750 13,913,083 
Dilutive earnings per common share$0.60 $0.45 $1.27 $1.25 
Anti-dilutive restricted stock and options$16,874 $7,357 $49,167 $278,007 
NOTE 3 — SECURITIES
The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity on September 30, 2022, and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss and gross unrecognized gains and losses:
(Dollars in thousands)
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
September 30, 2022
Available for sale - taxable
Small Business Administration loan pools$31,902 $32 $(420)$31,514 
Mortgage-backed securities (1)
135,017 — (20,183)114,834 
United States agency obligations2,947 — (280)2,667 
Corporate bonds1,500 2 — 1,502 
Total available for sale - taxable$171,366 $34 $(20,883)$150,517 
Available for sale - tax-exempt
Community Development District bonds$25,343 $1 $(1,330)$24,014 
Municipals3,148 — (299)2,849 
Total available for sale - tax-exempt$28,491 $1 $(1,629)$26,863 
Amortized
Cost		Gross
Unrecognized
Gains		Gross
Unrecognized
Losses		Fair Value
Held to Maturity    
Residential mortgage-backed securities$194 $— $(16)$178 
Total Held to Maturity$194 $— $(16)$178 
(1)$91.1 million is residential mortgage-backed and $23.7 million is commercial mortgage-backed.
9
Amortized
Cost		Gross
Unrecognized
Gains		Gross
Unrecognized
Losses		Fair Value
Equity
Mutual Funds$5,325 $— $— $5,325 
Other equity securities857 — — 857 
Total Equity$6,182 $— $— $6,182 

(Dollars in thousands)
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
December 31, 2021
Available for sale - taxable    
Small Business Administration loan pools$40,368$38$(472)$39,934
Mortgage-backed securities (1)
131,27370(1,240)130,103
United States agency obligations3,93954(7)3,986
Corporate bonds1,50013—1,513
Total available for sale - taxable$177,080$175$(1,719)$175,536
Available for sale - tax-exempt
Community development district bonds$17,163$512$(1)$17,674
Municipals1,05140—1,091
Total available for sale - tax-exempt$18,214$552$(1)$18,765
Amortized
Cost		Gross
Unrecognized
Gains		Gross
Unrecognized
Losses		Fair
Value
Held to Maturity    
Residential mortgage-backed securities$236$6$—$242
Total held to maturity$236$6$—$242
(1)$104.0 million is residential mortgage-backed and $26.1 million is commercial mortgage-backed.
Amortized
Cost		Gross
Unrecognized
Gains		Gross
Unrecognized
Losses		Fair Value
Equity
Mutual funds$5,838 $— $— $5,838 
Other equity securities800 — — 800 
Total equity$6,638 $— $— $6,638 
As of September 30, 2022, and December 31, 2021, corporate bonds were comprised of investments in the financial services industry. During the nine months ended September 30, 2022, the net investment portfolio decreased by $17.4 million primarily due to $25.1 million in investment calls, redemptions and paydowns, coupled with unrealized losses of $21.5 million during the year, partially offset by purchases of approximately $30.7 million in mortgage-backed securities ("MBS"), community development district bonds ("CDD"), and municipal bonds.
Total securities pledged as of September 30, 2022, and December 31, 2021, were $27.0 million and $2.4 million, respectively, which included securities pledged for derivative swap transactions and pledged for public funds.
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
10
Securities not due at a single maturity date are shown separately. The scheduled maturities of securities as of September 30, 2022, are as follows:
September 30, 2022
(Dollars in thousands) Amortized
Cost		Fair
Value
Available for sale
Due in one year or less$5,289 $5,269 
Due after one year through five years22,956 21,666 
Due after five years through ten years4,693 4,097 
Due after ten years— — 
Subtotal32,938 31,032 
Small Business Administration loan pools31,902 31,514 
Mortgage-backed securities135,017 114,834 
Total available for sale$199,857 $177,380 
Held to maturity
Due in one year or less$— $— 
Due after one year through five years— — 
Subtotal$— $— 
Mortgage-backed securities$194 $178 
Total held to maturity$194 $178 
On September 30, 2022, and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity. On September 30, 2022, and December 31, 2021, the number of investment positions that are in an unrealized loss position were 210 and 92, respectively.
11
The tables below indicate the fair value of debt securities with unrealized losses and for the period of time of which these losses were outstanding on September 30, 2022, and December 31, 2021, respectively, aggregated by major security type and length of time in a continuous unrealized loss position:
Less Than 12 Months12 Months or LongerTotal
(Dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
September 30, 2022
Available for sale - taxable
Small Business Administration loan pools$1,613 $(90)$20,468 $(330)$22,081 $(420)
Mortgage-backed securities90,835 (15,684)24,178 (4,499)115,013 (20,183)
United States agency obligations2,667 (280)— — 2,667 (280)
Total available for sale - taxable$95,115 $(16,054)$44,646 $(4,829)$139,761 $(20,883)
Available for sale - tax-exempt
Community Development District bonds$23,020 $(1,330)$— $— $23,020 $(1,330)
Municipals2,849 (299)— — 2,849 (299)
Total available for sale - tax-exempt$25,869 $(1,629)$— $— $25,869 $(1,629)
December 31, 2021
Available for sale - taxable
Small Business Administration loan pools$17,428 $(335)$14,872 $(136)$32,300 $(471)
Mortgage-backed securities109,621 (1,168)1,710 (73)111,331 (1,241)
United States agency obligations1,930 (7)— — 1,930 (7)
Total available for sale - taxable$128,979 $(1,510)$16,582 $(209)$145,561 $(1,719)
Available for sale - tax-exempt
Community Development District bonds$809 $(1)$— $— $809 $(1)
Total available for sale - tax-exempt$809 $(1)$— $— $809 $(1)
The unrealized holding losses within the investment portfolio are considered to be temporary and mainly reflect changes in the interest rate cycle. The unrealized loss positions may fluctuate positively or negatively with changes in interest rates or spreads. Since Small Business Association ("SBA") loan pools and mortgage-backed securities are government sponsored entities that are highly rated, the decline in fair value is attributable to changes in interest rates and not credit quality. The Company does not have any securities in an Other Than Temporary Impairment (“OTTI”) position. The Company does not intend to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. No credit losses were recognized during the nine months ended September 30, 2022, or during the year ended December 31, 2021.
12
NOTE 4 — LOANS
Loans on September 30, 2022, and December 31, 2021, were as follows:
(Dollars in thousands)September 30, 2022December 31, 2021
Loans held for investment:
Commercial real estate$997,478$902,654
Residential real estate452,521377,511
Commercial (non-PPP)397,725325,415
Commercial (PPP)2,61858,615
Construction and land development128,57091,520
Consumer and other25,98321,449
Total loans held for investment, gross2,004,8951,777,164
Allowance for loan losses(16,485)(12,704)
Loans held for investment, net$1,988,410$1,764,460
Loans held for sale:
Loans held for sale$—$165
Total loans held for sale$—$165
The recorded investment in loans excludes accrued interest receivable due to immateriality.
On September 30, 2022, and December 31, 2021, there were $265.3 million and $235.3 million, respectively in total loans pledged to the Federal Home Loan Bank (“FHLB”).

Loan premiums for loans purchased are amortized over the life of the loan with acceleration upon the increase in principal paydowns or payoffs. On September 30, 2022, and December 31, 2021, loan premiums for purchased loans were $0.3 million and $0.4 million, respectively. Net discounts for loans acquired through business acquisitions totaled $8.5 million and $13.0 million, as of September 30, 2022, and December 31, 2021, respectively.
There are no loans over 90 days past due and accruing as of September 30, 2022, or December 31, 2021.
The following table presents the aging of the recorded investment in past due loans as of September 30, 2022, and December 31, 2021, by class of loans:
(Dollars in thousands)30 – 59
Days
Past Due		60 – 89
Days
Past Due		Greater than
90 Days
Past Due		NonaccrualTotal
Past Due		Loans Not
Past Due		Total
September 30, 2022 
Commercial real estate$—$—$—$297$297$997,181$997,478
Residential real estate—————452,521452,521
Commercial (non-PPP)—400—1,4681,868395,857397,725
Commercial (PPP)221———2212,3972,618
Construction and land development—————128,570128,570
Consumer and other—————25,98325,983
Total$221$400$—$1,765$2,386$2,002,509$2,004,895
13
(Dollars in thousands)30 – 59
Days
Past Due		60 – 89
Days
Past Due		Greater than
90 Days
Past Due		NonaccrualTotal
Past Due		Loans Not
Past Due		Total
December 31, 2021
Commercial real estate$292$—$—$—$292$902,362$902,654
Residential real estate—————377,511377,511
Commercial (non-PPP)449——1,4681,917323,498325,415
Commercial (PPP)7———758,60858,615
Construction and land development—————91,52091,520
Consumer and other———65465420,79521,449
Total$748$—$—$2,122$2,870$1,774,294$1,777,164
Troubled Debt Restructurings:
The principal carrying balances of loans that met the criteria for consideration as troubled debt restructurings (“TDR”) were $2 thousand and $55 thousand as of September 30, 2022, and December 31, 2021, respectively. The Company has allocated no specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2022, and December 31, 2021. The Company has not committed any additional amounts to customers whose loans are classified as a troubled debt restructuring.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt including: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, all credits greater than $1.0 million are reviewed at least annually to monitor and adjust, if necessary, the credit risk profile. Loans classified as substandard or special mention are reviewed quarterly by the Company for further evaluation to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will determine the appropriate loan grade.
Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the creditworthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard, doubtful, or even charged-off. The Company uses the following definitions for risk ratings:
Pass: A Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary. The pass category includes the following:
•Riskless: Loans that are fully secured by liquid, properly margined collateral (listed stock, bonds, or other securities; savings accounts; certificates of deposit; loans or portions thereof that are guaranteed by the U.S. Government or agencies backed by the “full faith and credit” thereof; loans secured by properly executed letters of credit from prime financial institutions).
•High Quality Risk: Loans to recognized national companies and well-seasoned companies that enjoy ready access to major capital markets or to a range of financing alternatives. Borrower’s public debt offerings are accorded highest ratings by recognized rating agencies, e.g., Moody’s or Standard & Poor’s. Companies display sound financial conditions and consistent superior income performance. The borrower’s trends and those of the industry to which it belongs are positive.
•Satisfactory Risk: Loans to borrowers, reasonably well established, that display satisfactory financial conditions, operating results, and excellent future potential. Capacity to service debt is amply demonstrated. Current financial strength, while financially adequate, may be deficient in a number of respects. Normal comfort levels are achieved through a closely monitored collateral position and/or the strength of outside guarantors.
•Moderate Risk: Loans to borrowers that are in non-compliance with periodic reporting requirements of the loan agreement, and any other credit file documentation deficiencies, that do not otherwise affect the borrower’s credit risk
14
profile. This may include borrowers who fail to supply updated financial information that supports the adequacy of the primary source of repayment to service the Bank’s debt and prevents bank management from evaluating the borrower’s current debt service capacity. Existing loans will include those with consistent track record of timely loan payments, no material adverse changes to underlying collateral, and no material adverse change to guarantor's(s') financial capacity, evidenced by public record searches.
Special mention: A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard: A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: A loan classified Doubtful has all the weaknesses inherent in one classified Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss: A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
(Dollars in thousands)PassSpecial
Mention		SubstandardDoubtfulTotal
September 30, 2022
Commercial real estate$994,933$—$2,545$—$997,478
Residential real estate452,521———452,521
Commercial (non-PPP)395,857841,784—397,725
Commercial (PPP)2,618———2,618
Construction and land development128,570———128,570
Consumer25,91469——25,983
Total$2,000,413$153$4,329$—$2,004,895
December 31, 2021
Commercial real estate$900,364$—$2,290$—$902,654
Residential real estate377,511———377,511
Commercial (non-PPP)323,6572901,468—325,415
Commercial (PPP)58,615———58,615
Construction and land development91,520———91,520
Consumer20,71283—65421,449
Total$1,772,379$373$3,758$654$1,777,164
15
Purchased Credit Impaired Loans:
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:
(Dollars in thousands)September 30,
2022		December 31, 2021
Commercial real estate$5,795$5,845 
Residential real estate—89 
Commercial200410 
Construction and development—— 
Consumer and other loans—— 
Carrying amount$5,995$6,344
Accretable yield for all purchased credit impaired loans were as follows for the nine months ended September 30, 2022 and 2021:
(Dollars in thousands)20222021
Balance at January 1(573)(630)
New loans purchased——
Adjustment of income——
Accretion202296
Reclassifications from nonaccretable difference(407)(136)
Disposals37416
Balance on September 30$(404)$(454)
For those purchased credit impaired loans disclosed above, no allowances for loan losses were recorded or reversed during the nine months ended September 30, 2022.
Non-Performing Assets
As of September 30, 2022, the Company had nonperforming assets of $1.8 million, or 0.07% of total assets, compared to nonperforming assets of $2.1 million, or 0.08% of total assets, on December 31, 2021. The Bank’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when a determination of a confirmed loss is made on a loan. There was one charge-off of an impaired loan of $0.7 million in the consumer loan category for the nine months ended September 30, 2022, compared to a partial charge-off of $7.6 million for the nine months ended September 30, 2021 on a commercial loan.
16
NOTE 5 — ALLOWANCE FOR LOAN LOSSES
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method for the three and nine months ended September 30, 2022, and 2021.
Three Months Ended September 30, 2022
(Dollars in thousands)Commercial
Real Estate		Residential
Real Estate		CommercialConstruction
and land
Development		Consumer
and Other		Total
September 30, 2022
Allowance for loan losses:
Beginning balance$5,929 $2,966 $5,425 $677 $145 $15,142 
Provision for loan losses(40)614 545 199 25 1,343 
Loans charged-off— — — — — — 
Recoveries— — — — — — 
Total ending allowance balance$5,889$3,580$5,970$876 $170$16,485
Three Months Ended September 30, 2021
(Dollars in thousands)Commercial
Real Estate		Residential
Real Estate		CommercialConstruction
and land
Development		Consumer
and Other		Total
September 30, 2021
Allowance for loan losses:
Beginning balance$4,285 $2,269 $3,423 $361 $80 $10,418 
Provision for loan losses(206)(47)674 (28)667 1,060 
Loans charged-off— — — — — — 
Recoveries— — — — — — 
Total ending allowance balance$4,079$2,222$4,097$333 $747$11,478
Nine Months Ended September 30, 2022
(Dollars in thousands)Commercial
Real Estate		Residential
Real Estate		CommercialConstruction and Land DevelopmentConsumer
and Other		Total
September 30, 2022      
Allowance for loan losses:      
Beginning balance$4,471 $2,339 $4,637 $471 $786 $12,704 
Provision for loan losses1,418 1,241 1,333 405 37 4,434 
Loans charged-off— — — — (653)(653)
Recoveries— — — — — — 
Total ending allowance balance$5,889$3,580$5,970$876 $170$16,485
17
Nine Months Ended September 30, 2021
(Dollars in thousands)Commercial
Real Estate		Residential
Real Estate		CommercialConstruction
and Land
Development		Consumer
and Other		Total
September 30, 2021      
Allowance for loan losses:      
Beginning balance$3,159$2,177$10,462$388$73$16,259
Provision for loan losses92045 1,276(55)6742,860
Loans charged-off—— (7,641)——(7,641)
Recoveries——————
Total ending allowance balance$4,079$2,222$4,097$333$747$11,478
(Dollars in thousands)Commercial
Real Estate		 Residential
Real Estate		 Commercial Construction
and Land
Development		 Consumer
and Other		 Total
September 30, 2022
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment$99 $— $1,018 $— $— $1,117 
Purchased Credit Impaired (PCI) loans— — — — — — 
Collectively evaluated for impairment5,790 3,580 4,952 876 170 15,368 
Total ending allowance balance$5,889$3,580$5,970$876$170$16,485
Loans:
Loans individually evaluated for impairment$2,545 $— $1,784 $— $— $4,329 
Loans collectively evaluated for impairment994,933 452,521 398,559 128,570 25,983 2,000,566 
Total ending loans balance$997,478$452,521$400,343$128,570$25,983$2,004,895
December 31, 2021
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment$— $— $671 $— $654 $1,325 
Purchased Credit Impaired (PCI) loans— — — — — — 
Collectively evaluated for impairment4,471 2,339 3,966 471 132 11,379 
Total ending allowance balance$4,471$2,339$4,637$471$786$12,704
Loans:
Loans individually evaluated for impairment$2,290 $— $1,468 $— $654 $4,412 
Loans collectively evaluated for impairment900,364 377,511 382,562 91,520 20,795 1,772,752 
Total ending loans balance$902,654 $377,511 $384,030 $91,520 $21,449 $1,777,164 
18
NOTE 6 — DEPOSITS
The Company’s total deposits are comprised of the following at the dates indicated:
September 30, 2022
December 31, 2021
(Dollars in thousands)Ending
Balance
% of Total
Ending
Balance
% of Total
NOW accounts$308,16714.1%$310,36213.1%
Money market accounts944,72843.2%1,055,03344.5%
Brokered deposits (1)
18,4070.8%58,3652.5%
Savings accounts16,9660.8%12,5580.5%
Certificates of deposit141,9816.5%261,06711.0%
Total interest-bearing deposits1,430,24965.4%1,697,38571.6%
Noninterest-bearing deposits758,04234.6%674,00328.4%
Total deposits$2,188,291100.0%$2,371,388100.0%
_______________________________________________
(1)Balance Sheet does not illustrate brokered deposits as presented above.
The following table presents the maturities of our time deposits including time deposits that meet or exceed the $250,000 FDIC insurance limit as of September 30, 2022.
(Dollars in thousands)Three
Months or
Less		Over
Three
Through
Six Months		Over Six
Months
Through
12 Months		Over
12 Months		Total
Time deposits of $250,000 or less
$15,108$10,501$21,453$4,276$51,338
Time deposits of more than $250,000
30,67615,60541,3666,33193,978
Total$45,784$26,106$62,819$10,607$145,316
The following tables present the maturities of our time deposits including time deposits that meet or exceed the $250,000 FDIC insurance limit as of December 31, 2021.
(Dollars in thousands)Three
Months or
Less		Over
Three
Through
Six Months		Over Six
Months
Through
12 Months		Over
12 Months		Total
Time deposits of $250,000 or less
$17,431$26,721$44,373$4,631$93,156
Time deposits of more than $250,000
32,05854,42983,2902,760172,537
Total$49,489$81,150$127,663$7,391$265,693
As of September 30, 2022, and December 31, 2021, the Company had time deposits that exceed the $250,000 FDIC insurance limit of $94.0 million and $172.5 million, respectively. Securities, mortgage loans or other financial instruments pledged as collateral for certain deposits were $53.9 million, and $28.7 million on September 30, 2022, and December 31, 2021, respectively. The aggregate amount of demand deposits that have been re-classified as loan balances on September 30, 2022, and December 31, 2021, were $1.2 million, and $0.4 million, respectively. Deposits from principal officers, directors and their affiliates at September 30, 2022, and December 31, 2021, were $2.3 million and $18.9 million, respectively.
19
For time deposits having a remaining term of more than one year, the aggregate amount of maturities for each of the five years at the dates indicated.
(Dollars in thousands)September 30, 2022December 31, 2021
1 year or less$134,709$258,302
Over 1 through 2 years10,4576,669
Over 2 through 3 years150722
Over 3 through 4 years——
Over 4 through 5 years——
Over 5 years——
Total$145,316$265,693
Banks may be required to maintain cash reserves in the form of vault cash or in an account with the Federal Reserve Bank or in noninterest-earning accounts with other qualified banks. This requirement is based on the Bank’s amount of transaction deposit accounts. Due to the amount of transaction deposit accounts, the Bank was not required to have cash reserve requirements on September 30, 2022, and December 31, 2021. Additionally, the Company had $90.5 million and $84.4 million, in Qualified Public Deposits that require a portion of the deposit to be pledged as collateral as of September 30, 2022, and December 31, 2021.
NOTE 7 — DEBT AND BORROWINGS
Subordinated Debt.
On January 13, 2022, the Company completed a private placement of $25.0 million in fixed-to-floating rate subordinated notes payable due 2032. The Notes will bear interest at a fixed annual rate of 3.38% for the first five years and will reset quarterly thereafter to the then current three-month Secured Overnight Financing Rate plus 203 basis points. The Notes are redeemable by the Company at its option, in whole or in part, on and after the fifth anniversary of the issue date. The Company used the net proceeds from the sale of the subordinate notes for general corporate purposes.
Valley National Line of Credit.
The Company maintains a $25.0 million secured revolving line of credit with Valley National Bank, N.A. with a maturity date of March 1, 2023. Amounts drawn under this line of credit bear interest at the Prime Rate, as announced by The Wall Street Journal from time to time as its prime rate, and its obligations under this line of credit are secured by shares of the capital stock of the Bank, which we have pledged as security. On September 30, 2022, there were no outstanding borrowings under this line of credit compared to $10.0 million on December 31, 2021.
The Company uses short-term and long-term borrowings to supplement deposits to fund lending and investment activities.
Federal Home Loan Bank Advances
The FHLB allows the Company to borrow up to 25% of its assets on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2022, approximately $265.3 million in total loans were pledged as collateral for potential FHLB borrowings and FHLB letters of credit. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As of September 30, 2022, we had no outstanding advances, $28.7 million in outstanding letters of credit, and $163.9 million in additional available borrowing capacity from the FHLB based on the collateral that we have currently pledged.
20
(Dollars in thousands)September 30,
2022		December 31,
2021
Amount outstanding at period-end$—$35,000
Weighted average interest rate at period-end—%2.04%
Maximum month-end balance during period$35,000$35,000
Average balance outstanding during period$9,121$36,918
Weighted average interest rate during period1.98%2.01%
Federal Reserve Bank of Atlanta
The Federal Reserve Bank of Atlanta has an available borrower in custody arrangement which allows us to borrow on a collateralized basis. There were no advances outstanding under this facility as of September 30, 2022 and December 31, 2021.
NOTE 8 — COMMON STOCK AND PREFERRED STOCK
Class A Voting Common Stock
The Company has Class A voting common stock with a par value of $0.01 per share. As of September 30, 2022, there are 50,000,000 shares of Class A voting common stock authorized of which 13,811,084 are outstanding. During the nine months ended September 30, 2022, the Company issued 387,082 shares of Class A voting common stock, inclusive of 218,024 shares of restricted stock grants and 169,058 shares of options exercised.
During the nine months ended September 30, 2022, treasury shares increased by 10,920 in connection with the net settlement of equity awards exercised or vested for tax purposes. In addition, there were 11,478 shares in restricted stock cancellations. During the nine months ended September 30, 2021, the Company repurchased 341,367 shares of Class A voting common stock, inclusive of 3,210 shares in connection with the net settlement of equity awards exercised or vested for tax purposes and had 3,002 shares in restricted stock cancellations. The Company did not repurchase any shares for the nine months ended September 30, 2022.
Class B Non-voting Common Stock
The Company has authorized 10,000,000 shares of Class B non-voting common stock with a par value of $0.01 per share. As of September 30, 2022, and December 31, 2021, no shares of Class B non-voting common stock were outstanding.
Preferred Stock
The Company has 10,000,000 shares of undesignated and unissued preferred stock As of September 30, 2022, and December 31, 2021, no shares of preferred stock were outstanding.
NOTE 9 — FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
21
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate their fair value.
Securities available for sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations, corporate bonds, municipal bonds and U.S. agency notes. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 might include certain residual interests in securitizations and other less liquid securities. As of September 30, 2022 and December 31, 2021, all securities available for sale were Level 2.
Securities held to maturity: Measured at fair value utilizing Level 2 inputs. The estimated fair value is determined based on market quotes when available. If not available, quoted market prices of similar securities, discounted cash flow analysis, pricing models and observable market data are used in determining fair market value.
Equity securities: The Company values equity securities at readily determinable market values based on the closing price at the end of each period. Changes in fair value are recognized through net income.
Loans: Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type, such as commercial or residential mortgage. Each loan category is further segmented into fixed and adjustable rate interest terms as well as performing and non-performing categories. The fair value of loans is calculated by discounting scheduled cash flows through the estimated life including prepayment considerations and estimated market discount rates that reflect the risks inherent to the loan. The calculation of the fair value considers market driven variables including credit related factors and reflects an exit price as defined in ASC Topic 820.
Loans held for sale: The carrying amounts of loans held for sale approximate their fair values.
Federal Home Loan Bank stock: It is not practical to determine fair value due to restrictions placed on transferability.
Federal Reserve Bank stock: It is not practical to determine fair value due to restrictions placed on transferability.
Accrued interest receivable: The carrying amounts of accrued interest approximate their fair values.
Deposits: The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a current market rates offered for remaining or similar maturities.
Federal Home Loan Bank advances: Fair values are estimated using discounted cash flow analysis based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements.
Subordinated debt: The fair value was determined by using a discounted cash flow method using a market participant discount rate for similar instruments.
Line of credit: The carrying amounts of the line of credit approximate their fair values.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Interest rate swaps: The fair value of interest rate swaps is estimated using inputs that are observable or that can be corroborated by observable market data and therefore are classified as Level 2. The fair value estimations include primarily market observable inputs.
There were no securities reclassified into or out of Level 3 during the nine months ended September 30, 2022, or for the year ended December 31, 2021.
22
Assets and Liabilities Measured at Fair Value on a Recurring Basis:
Assets and liabilities measured at fair value on a recurring basis, are summarized below:
Fair Value Measurements
on September 30, 2022 Using:
(Dollars in thousands)Fair
Value		Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
ASSETS:
Securities available for sale - taxable
Small Business Administration loan pools$31,514 $— $31,514 $— 
Mortgage-backed securities114,834 — 114,834 — 
United States agency obligations2,667 — 2,667 — 
Corporate bonds1,502 — 1,502 — 
Securities available for sale - tax-exempt
Community Development District bonds24,014 — 24,014 — 
Municipals2,849 — 2,849 — 
Equity securities - mutual funds5,325 5,325 — — 
Equity Securities - other857 857 — — 
Customer derivatives - interest rate swaps6,610 — 6,610 — 
LIABILITIES:
Customer derivatives - interest rate swaps$6,610 $— $6,610 $— 
Fair Value Measurements
on December 31, 2021 Using:
(Dollars in thousands)Fair
Value		Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
ASSETS:
Securities available for sale - taxable
Small Business Administration loan pools$39,934 $— $39,934 $— 
Mortgage-backed securities130,103 — 130,103 — 
United States agency obligations3,986 — 3,986 — 
Corporate bonds1,513 — 1,513 — 
Securities available for sale - tax-exempt
Community Development District bonds17,674 — 17,674 — 
Municipals1,091 — 1,091 — 
Equity securities - mutual funds5,838 5,838 — — 
Loans held for sale165 165 — — 
Customer derivatives - interest rate swaps1,144 — 1,144 — 
LIABILITIES:
Customer derivatives - interest rate swaps$1,144 $— $1,144 $— 
23
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis:
Impaired loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements
on September 30, 2022 Using:
(Dollars in thousands)
Total at
September 30,
2022
Quoted Prices in Active Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)		Total Gains
(Losses)
Impaired Loans:
Commercial real estate$2,449$—$—$2,449$(99)
Residential real estate—————
Commercial766——766(1,018)
Construction and land development—————
Consumer and other—————
Total$3,215$—$—$3,215$(1,117)
Fair Value Measurements
on December 31, 2021 Using:
(Dollars in thousands)
Total at
December 31,
2021
Quoted Prices in Active Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)		Total Gains
(Losses)
Impaired Loans:
Commercial real estate$— $— $— $— $— 
Residential real estate— — — — — 
Commercial797 — — 797 (671)
Construction and land development— — — — — 
Consumer and other— — — — (654)
Total$797 $— $— $797 $(1,325)
As shown above, our impaired loans consist solely of commercial loans considered to be Level 3. These Level 3 loans have significant unobservable inputs such as appraisal adjustments for local market conditions and economic factors that may result in changes in value of assets over time.
24
The table below presents the approximate carrying amount and estimated fair value of the Company’s financial instruments (in thousands):
September 30, 2022
(Dollars in thousands)Carrying
Amount		Fair
Value		Fair Value
Hierarchy
Financial Assets: 
Cash & due from banks, including interest bearing deposits$157,504$157,504Level 1
Federal funds sold15,76215,762Level 1
Securities, available for sale - taxable171,366150,517Level 2
Securities, available for sale - tax-exempt28,49126,863Level 2
Securities, held to maturity194178Level 2
Securities, equity5,3255,325Level 1
Securities, other equity857857Level 1
Loans, net1,988,4101,975,085Level 3
Bank owned life insurance54,53454,534Level 2
Customer derivatives - interest rate swaps6,6106,610Level 2
Accrued interest receivable5,9095,909Level 1, 2 & 3
Financial Liabilities:
Deposits$2,188,291$2,006,303Level 2
Subordinated debt24,46724,467Level 2
Customer derivatives - interest rate swaps6,6106,610Level 2
Accrued interest payable252252Level 2
December 31, 2021
(Dollars in thousands)Carrying
Amount		Fair
Value		Fair Value
Hierarchy
Financial Assets: 
Cash & due from banks, including interest bearing deposits$583,990$583,990Level 1
Federal funds sold13,47713,477Level 1
Securities, available for sale - taxable177,080175,536Level 2
Securities, available for sale - tax-exempt18,21418,765Level 2
Securities, held to maturity236242Level 2
Securities, equity5,8385,838Level 1
Securities, other equity800800Level 1
Loans, net1,764,4601,779,968Level 3
Loans held for sale165165Level 1
Bank owned life insurance38,48538,485Level 2
Customer derivatives - interest rate swaps1,1441,144Level 2
Accrued interest receivable5,2725,272Level 1, 2 & 3
Financial Liabilities:
Deposits$2,371,388$2,372,372Level 2
Federal Home Loan Bank advances35,00034,274Level 2
Line of credit10,00010,000Level 2
Customer derivatives - interest rate swaps1,1441,144Level 2
Accrued interest payable263263Level 2
25
NOTE 10 — CUSTOMER DERIVATIVES — INTEREST RATE SWAPS
During the first quarter of 2021, the Company established a program whereby it originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a swap dealer. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The swaps are not designated as hedges under FASB ASC Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurement and Disclosure (“ASC 820”). As of September 30, 2022, the Company recorded 13 swap transactions with clients having a total notional amount of $54.6 million, offset by 13 swap transactions with dealers having a total notional amount of $54.6 million. Additionally, we recorded $0.1 million in back-to-back swap fee income for the nine months ended September 30, 2022. The fair value of these derivatives is based on a market standard discounted cash flow approach. The Company incorporates credit value adjustments on derivatives to properly reflect the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. As of September 30, 2022, the Bank’s asset fair value position in other assets was $6.6 million and liability fair value position in other liabilities was $6.6 million, and were fully collateralized with pledged securities held with the counterparty in excess of the exposure amount at quarter end.
NOTE 11 — LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
On April 8, 2021, the Company formed a separately capitalized subsidiary, Pro Opp Fund LLC. As of September 30, 2022, Pro Opp Fund LLC has committed to investments of approximately $0.9 million in businesses directly, and indirectly related to the Company’s core business as permitted under the U.S. Bank Holding Company Act. Pro Opp Fund LLC has an additional $0.8 million of unfunded investments outstanding.
The contractual amounts of financial instruments with off-balance-sheet risk on September 30, 2022, and December 31, 2021, were as follows:
(Dollars in thousands)September 30,
2022		December 31,
2021
Available lines of credit$529,519 $415,402 
Unfunded loan commitments – fixed70,375 62,126 
Unfunded loan commitments – variable22,903 46,698 
Standby letters of credit10,972 12,095 
Commercial letters of credit394 2,765 
Total credit extension commitments$634,163 $539,086 
NOTE 12 — REGULATORY CAPITAL MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision’s capital guidelines for United States banks (Basel III rules), the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2022 and 2021 was 2.50%. The Company opted not to include net unrealized gains or losses on available for sale securities in computing regulatory capital. As of September 30, 2022, the Bank met all capital adequacy requirements to which it was subject.
26
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. On September 30, 2022, and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed the institution’s category. Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.
Actual and required capital amounts and ratios are presented below on September 30, 2022 and December 31, 2021. The required amounts for capital adequacy shown below do not include the capital conservation buffer previously discussed.

(Dollars in thousands)ActualRequired for
Capital Adequacy
Purposes		Well Capitalized
Prompt Corrective
Action Regulations
AmountRatio AmountRatio AmountRatio
September 30, 2022      
Total Capital ratio      
Bank$257,261 12.5 %$164,087 8.0 %$205,109 10.0 %
Company271,324 13.2 %164,087 8.0 %N/AN/A
Tier 1 Capital ratio
Bank239,468 11.7 %123,066 6.0 %164,087 8.0 %
Company229,064 11.1 %123,066 6.0 %N/AN/A
Tier 1 Leverage ratio
Bank239,468 9.6 %99,364 4.0 %124,205 5.0 %
Company229,064 9.2 %99,364 4.0 %N/AN/A
Common Equity Tier 1
Bank239,468 11.7 %92,299 4.5 %133,321 6.5 %
Company229,064 11.1 %92,299 4.5 %N/AN/A
December 31, 2021
Total Capital ratio
Bank$222,696 12.9 %$138,435 8.0 %$173,043 10.0 %
Company220,206 12.7 %138,435 8.0 %N/AN/A
Tier 1 Capital ratio
Bank208,997 12.1 %103,826 6.0 %138,435 8.0 %
Company206,507 11.9 %103,826 6.0 %N/AN/A
Tier 1 Leverage ratio
Bank208,997 7.7 %107,877 4.0 %134,846 5.0 %
Company206,507 7.7 %107,877 4.0 %N/AN/A
Common Equity Tier 1
Bank208,997 12.1 %77,869 4.5 %112,478 6.5 %
Company206,507 11.9 %77,869 4.5 %N/AN/A

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NOTE 13 — SUBSEQUENT EVENTS
Proposed Merger with Seacoast Banking Corporation of Florida

As previously reported, on August 8, 2022, the Company and the Bank entered into an Agreement and Plan of Merger (the “Agreement”) providing for the merger (the “Merger”) of the Company with and into Seacoast Banking Corporation of Florida (“SBCF”), the parent company of Seacoast National Bank (“Seacoast Bank”), and the merger of Professional Bank with and into Seacoast Bank. In accordance with and subject to the terms of the Agreement, upon completion of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time (excluding Dissenting Shares and subject to certain adjustments set forth in the Agreement) will be converted into the right to receive 0.8909 shares of SBCF common stock. Completion of the Merger remains subject to the approval of our shareholders, the registration under the Securities Act of 1933, as amended, of the SBCF shares to be issued in the Merger and the approval for listing of the SBC common stock to be issued in the Merger on NASDAQ, and other customary closing conditions and is expected to occur in the first quarter of 2023. Capitalized terms used above have the meanings ascribed to such terms in the Agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following discussion and analysis is presented to aid in understanding our financial position and results of operations and should be read together with the financial information contained in the Form 10-K. See Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of September 30, 2022, compared to December 31, 2021. As used in this discussion and analysis the term "Company" refers to Professional Holding Corp.
Proposed Merger with Seacoast Banking Corporation of Florida

On August 8, 2022, Seacoast Banking Corporation of Florida (“Seacoast”), Seacoast National Bank (“SNB”), the Company, and Professional Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) that provides for the combination of Seacoast and Professional and their two banks. Under the Merger Agreement, the Company will merge with and into Seacoast, with Seacoast as the surviving corporation (the “Merger”). Immediately following the Merger, Professional Bank will merge with and into SNB, with SNB as the surviving bank (collectively, with the Merger, the “Mergers”). The transaction is subject to approval of the Company’s shareholders, other customary conditions set forth in the Merger Agreement, and is expected to be completed in the first quarter of 2023.

Subject to the terms of the Merger Agreement, the Company's shareholders will have the right to receive 0.8909 shares of Seacoast common stock for each outstanding share of the Company's common stock.
Cautionary Note Regarding Forward Looking Information
This communication contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained in this communication that are not statements of historical fact may be deemed to be forward-looking statements, including, without limitation, statements preceded by, followed by or including words such as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” "target," "goal," “may,” “will,” “would,” “could” or “should” and similar expressions. Forward-looking statements represent the Company’s current expectations, plans or forecasts; involve assumptions, risks and uncertainties; and are not guarantees. Several important factors could cause actual results to differ materially from those in forward-looking statements and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Those factors include, without limitation:
•general business and economic conditions, either globally, nationally, in the State of Florida, or in the specific markets in which we operate, including the negative impacts and disruptions resulting from rising interest rates, political instability from acts of war, including the ongoing conflict between Russia and Ukraine, supply chain challenges and inflation, which have had and may likely continue to have an adverse impact on our business operations and performance, and could continue to have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically;
•the impact of Hurricane Ian on Florida generally, as well as certain of the communities we serve, and which could continue to have a negative impact on our business, credit portfolio, borrowers and our stock price;
•the effects of our lack of a diversified loan portfolio and concentration in the South Florida market including the risks of geographic, depositor, and industry concentrations, including our concentration in loans secured by real estate;
• the frequency and magnitude of foreclosure of our loans;
•changes in the securities, real estate markets and commodities markets (including fluctuations in the price of coffee or oil);
•the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss reserve and deferred tax asset valuation allowance;
•increased competition and its effect on pricing of our products and services as well as our margins;
•our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;
•Professional Bank’s ability to make cash distributions to us and our ability to declare and pay dividends, the payment of which is subject to our capital and other requirements;
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•changes in accounting principles, policies, practices or guidelines, including the effects of forthcoming CECL implementation;
•our ability to fund and manage our growth, both organic growth as well as growth through other means, such as future acquisitions;
•negative publicity and the impact on our reputation;
•our ability to attract and retain highly qualified personnel;
•technological changes;
•cybersecurity risks including security breaches, computer viruses, and data processing system failures and errors;
•our ability to manage operational risks, including, but not limited to, client, employee, or third-party fraud;
•changes in monetary and fiscal policies of the U.S. Government and the Federal Reserve;
•inflation, interest rate, unemployment rate, market, and monetary fluctuations;
•the efficiency and effectiveness of our internal control environment;
•the ability of our third-party service providers to continue providing services to us and clients without interruption;
•geopolitical developments;
•the effects of harsh weather conditions, including hurricanes, and other natural disasters (including pandemics such as COVID-19) and man-made disasters;
•potential business interruptions from catastrophic events such as terrorist attacks, active shooter situations, and advanced persistent threat groups;
•the willingness of clients to accept third-party products and services rather than our products and services and vice versa;
•changes in consumer spending and saving habits;
•growth and profitability of our noninterest income; and
•anti-takeover provisions under federal and state law as well as our governing documents;
•the risk that our proposed merger with Seacoast may not be completed in a timely manner or at all, which may adversely affect our business and the price of our common stock;
•the diversion of management time on issues related to the merger with Seacoast;
•the effect of the announcement or pendency of the merger on Seacoast’s customer, employee and business relationships, operating results, and business generally;
•changes in laws or regulations;
•changes in interest rates, deposit flows, loan demand and real estate values;
•the ongoing impacts and disruptions resulting from COVID-19 or other variants on the economies and communities we serve, which has had and may likely continue to have an adverse impact on our business operations and performance, and could continue to have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically; and
•other factors described in our Annual Report on Form 10-K for the year ended December 31, 2021, and other filings with the Securities and Exchange Commission.
Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in forward-looking statements. We caution investors not to rely unduly on any forward-looking statements and urge investors to carefully consider the risks described in our filings with the Securities and Exchange Commission, referred to above, which are available on www.proholdco.com and the SEC’s website at www.sec.gov. The Company expressly disclaims any obligation to update any of the forward-looking statements included herein to reflect future events or developments or changes in expectations, except as may be required by law.
Executive Overview
Highlights of our performance and financial condition as of and for the three and nine months ended September 30, 2022, and other key events that have occurred during 2022 are provided below.
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Results of Operations for the Three Months Ended September 30, 2022
•Net income increased by $2.2 million, or 34.7%, to $8.5 million compared to $6.3 million during the three months ended September 30, 2021, due to an increase in net interest income of $5.7 million, partially offset by an increase in provision expense of $0.3 million, a decrease in noninterest income of $0.3 million, an increase in noninterest expense of $2.2 million, and an increase in income tax provision of $0.7 million.
•Net interest income increased by $5.7 million, or 29.8%, to $24.8 million compared to $19.1 million during the three months ended September 30, 2021, due to the impact of the Federal Reserve’s target Federal Funds Rate increases during the third quarter and new loan production in a higher rate environment on the Company’s asset sensitive balance sheet.
•Provision for loan losses increased $0.3 million, or 26.7%, to $1.3 million compared to $1.1 million during the three months ended September 30, 2021, primarily due to loan growth. There were no net charge-offs for the three months ended September 30, 2022 and 2021.
•Noninterest income decreased $0.3 million, or 17.1% to $1.2 million compared to the three months ended September 30, 2021. The decrease was comprised of lower swap fee income of $0.2 million, lower loans held for sale income of $0.2 million, and lower service charges of $0.1 million on deposit accounts compared to the three months ended September 30, 2021. These decreases were partially offset by an increase of $0.1 million in income from bank owned life insurance as a result of prior quarter's additional bank owned life insurance purchase of $15.0 million.
•Noninterest expense increased $2.2 million, or 19.2%, to $13.9 million compared to $11.6 million during the three months ended September 30, 2021. The increase was comprised of acquisition expenses of $1.0 million in connection with the pending merger with Seacoast, higher salaries and benefits of $0.7 million, and higher other noninterest expense of $0.5 million, partially offset by lower regulatory assessments expense of $0.2 million. The increase in salaries and benefits was due to higher sales incentives resulting from higher net income and loans as well as enhancements to our regulatory and compliance areas. The increase in noninterest expense was primarily comprised of an increase in provision for unfunded commitments and the Community Reinvestment Act (“CRA”) mutual fund investment valuation.
Results of Operations for the Nine Months Ended September 30, 2022
•Net income increased by $0.5 million, or 2.8%, to $17.9 million compared to $17.4 million in the prior year period, due to an increase in net interest income of $11.6 million, partially offset by an increase in provision expense of $1.6 million, a decrease in noninterest income of $0.6 million, an increase in noninterest expense of $8.6 million, and an increase in income tax provision of $0.3 million.
•Net interest income increased by $11.6 million, or 21.3%, to $65.8 million compared to $54.2 million in the prior year period, primarily due to the impact of the Federal Reserve’s target Federal Funds Rate increases in 2022 on the Company’s asset sensitive balance sheet, in addition to an increase in average loans from $1.7 billion in 2021 to $1.9 billion in 2022. Interest income also benefited from increased average balances and higher yields in the investment portfolio.
•Provision for loan losses increased by $1.6 million, or 55.0%, to $4.4 million compared to $2.9 million in the prior year period primarily due to loan growth. The ratio of annualized charge-offs to average loans was 0.05% during the nine months ended September 30, 2022, compared to 0.61% in the prior year period.
•Noninterest income decreased by $0.6 million, or 12.7% to $4.3 million compared to the prior year period. The decrease primarily reflected lower service charges of $0.6 million on deposit accounts compared to prior year due to service charges of approximately $0.7 million, associated with acting as a correspondent bank for a Payroll Protection Program ("PPP") lender, and lower swap fee income of $0.7 million. These decreases were partially offset by an increase of $0.8 million in other noninterest income, comprised of $0.5 million of expected insurance proceeds on a previously recognized contingency and a $0.2 million loss on fixed asset disposals recorded in 2021.
•Noninterest expense increased by $8.6 million, or 25.0%, to $43.0 million compared to $34.4 million in the prior year period primarily due to higher salaries and employee benefits of $5.5 million and higher other noninterest expense of $2.0 million. The increase in salaries and benefits was driven by the $2.9 million expense related to the departure of the Company’s former Chief Executive Officer, and higher employee compensation costs from higher headcount and bonus and sales incentives. The increase in other noninterest expense was primarily comprised of a $0.7 million loss
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related to a previously recognized contingency from the first quarter, a $0.3 million increase related to our CRA mutual fund investment valuation, and a $0.5 million increase in the provision for unfunded commitments.
Financial Condition
At September 30, 2022:
•Total assets decreased $0.2 billion, or 7.1%, to $2.5 billion compared to December 31, 2021, primarily as a result of decreases in cash and cash equivalents of $0.4 billion, partially offset by an increase in net loans of $0.2 billion.
•Total loans increased $0.2 billion, or 12.8%, to $2.0 billion compared to December 31, 2021. The increase was driven by loan originations of approximately $708.7 million, partially offset by paydowns and prepayments. The Professional Bank PPP loan balance decreased $56.0 million, or 95.5%, to $2.6 million from December 31, 2021.
•Total deposits decreased $0.2 billion, or 7.7%, to $2.2 billion compared to December 31, 2021 primarily due a decrease in money market and savings and time deposits, partially offset by an increase in noninterest bearing demand deposits.
•As of September 30, 2022, the Company had nonperforming assets of $1.8 million, or 0.07% of total assets, compared to nonperforming assets of $2.1 million at December 31, 2021. The decrease was due to the charge-off of a $0.7 million impaired loan in the consumer loan category, partially offset by the addition of a $0.3 million nonaccrual commercial real estate loan during the nine months ended September 30, 2022.
Operating Results
Results of Operations for the three months ended September 30, 2022, and 2021
The following table sets forth the principal components of net income for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands)20222021Change
Interest income$27,165$20,89030.0 %
Interest expense2,3681,78632.6 %
Net interest income24,79719,10429.8 %
Provision for loan losses1,3431,06026.7 %
Net interest income after provision23,45418,04430.0 %
Noninterest income1,2231,476(17.1)%
Noninterest expense13,85311,62419.2 %
Income before income taxes10,8247,89637.1 %
Income tax expense 2,3511,60846.2 %
Net income$8,473$6,28834.7 %
Net Interest Income and Net Interest Margin Analysis
We analyze our ability to maximize income generated from interest earning assets and control the interest expenses associated with our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between the interest and fees earned on interest earning assets, such as loans and securities, and the interest expense paid on interest bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as annualized net interest income divided by average interest earning assets for the same period. Net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest-bearing liabilities.
Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest earning assets, interest bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation,
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macroeconomic developments, changes in unemployment rates, the money supply, political and international conditions, and circumstances, in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, the economic and competitive conditions in the Miami-Dade MSA, as well as developments affecting the real estate, technology, government services, hospitality and tourism, and financial services sectors within the Miami-Dade MSA. Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of our net interest income and net interest margin as our primary sources of earnings.
The following table shows the average outstanding balance of each principal category of our assets, liabilities, and stockholders’ equity, together with the average yields on our assets and the average costs of our liabilities for the periods indicated. Such yields and costs are calculated by dividing the annualized income or expense by the average daily balances of the corresponding assets or liabilities for the same period.
For the Three Months Ended September 30,
20222021
(Dollars in thousands)Average
Outstanding
Balance
Interest
Income/
Expense(4)
Average
Yield/Rate		Average
Outstanding
Balance
Interest
Income/
Expense(4)
Average
Yield/Rate
Assets
Interest earning assets
Interest-earning deposits$137,355 $747 2.16 %$561,082 $212 0.15 %
Federal funds sold21,895 124 2.25 %36,264 10 0.11 %
Federal Reserve Bank stock, FHLB stock and other corporate stock7,384 108 5.80 %7,521 96 5.06 %
Investment securities - taxable168,662 736 1.73 %105,498 186 0.70 %
Investment securities - tax-exempt27,572 228 3.28 %19,402 177 3.62 %
Loans (1)
1,979,132 25,222 5.06 %1,702,137 20,209 4.71 %
Total interest earning assets2,342,000 27,165 4.60 %2,431,904 20,890 3.41 %
Loans held for sale31 1,478 
Noninterest earning assets156,584 125,751 
Total assets$2,498,615 $2,559,133 
Liabilities and shareholders’ equity
Interest-bearing liabilities
Interest-bearing deposits$1,453,653 2,170 0.59 %$1,463,138 1,476 0.40 %
Borrowed funds24,447 198 3.21 %45,046 310 2.73 %
Total interest-bearing liabilities1,478,100 2,368 0.64 %1,508,184 1,786 0.47 %
Noninterest-bearing liabilities
Noninterest-bearing deposits758,135 810,042 
Other noninterest-bearing liabilities24,492 16,746 
Shareholders’ equity237,888 224,161 
Total liabilities and shareholders’ equity$2,498,615 $2,559,133 
Net interest income$24,797 $19,104 
Net interest spread (2)
3.96 %2.94 %
Net interest margin (3)
4.20 %3.12 %
__________________________________
(1)Includes nonaccrual loans.
(2)Net interest spread is the difference between interest earned on interest earning assets and interest paid on interest-bearing liabilities.
(3)Net interest margin is a ratio of net interest income to average interest earning assets for the same period.
(4)Interest income on loans includes loan fees of $0.9 million and $2.3 million for the three months ended September 30, 2022 and 2021, respectively.
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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been proportionately allocated to both volume and rate.
For the Three Months Ended September 30, 2022 Compared to 2021
Change Due To
(Dollars in thousands)VolumeRateTotal
Interest income
Interest earning deposits$(160)$695 $535 
Federal funds sold(4)118 114 
Federal Reserve Bank stock, Federal Home Loan Bank stock and other corporate stock(2)14 12 
Investment securities - taxable111 439 550 
Investment securities - tax-exempt75 (24)51 
Loans3,289 1,724 5,013 
Total$3,309 $2,966 $6,275 
Interest expense
Interest-bearing deposits(10)704 694 
Borrowed funds(142)30 (112)
Total$(151)$733 $582 
Net interest income increased by $5.7 million to $24.8 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. Our total net interest income was impacted by increases in the Federal Reserve’s target Federal Funds Rate and increased average balances on loans and investments. Average total interest earning assets were $2.3 billion for the three months ended September 30, 2022, compared to $2.4 billion for the three months ended September 30, 2021. The annualized yield on interest earning assets increased 119 basis points for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to increases in the Federal Reserve's target Federal Fund Rate. The decrease in the average balance of interest earning assets was driven primarily by lower average balances in our interest earning deposits of $0.4 billion, or 75.5%, partially offset by growth in our average loan portfolio of $0.3 billion, or 16.3%, compared to three months ended September 30, 2021. The growth in our loan portfolio was due to organic loan originations.
Average interest-bearing liabilities for the three months ended September 30, 2022, decreased due to lower average interest bearing deposits and average borrowings compared to the three months ended September 30, 2021. The decrease in the average balance of interest-bearing deposits was primarily due to a decrease of $88.4 million, or 34.3%, in our average certificates of deposit accounts, and a decrease of $28.1 million, or 57.9% in our average brokered deposit accounts, partially offset by an increase in money market accounts of $90.5 million, or 10.7% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The annualized average interest rate paid on average interest-bearing liabilities increased to 0.64%, for the three months ended September 30, 2022, compared to 0.47% for the three months ended September 30, 2021. The annualized average interest rate paid on interest-bearing deposits increased 19 basis points to 0.59%, and the annualized average interest rate paid on borrowed funds increased by 48 basis points to 3.21%. The average interest rate on borrowings during the three months ended September 30, 2022, increased due to lower rate borrowings that were paid down and the remaining balances make up a larger weighted average rate. For the three months ended September 30, 2022, our average other noninterest-bearing liabilities increased $7.7 million, or 46.3%, compared to the three months ended September 30, 2021. Average noninterest-bearing deposits decreased $51.9 million, or 6.4%, compared to the three months ended September 30, 2021. For the three months ended September 30, 2022, our net interest margin was 4.20% and net interest spread was 3.96%. For the three months ended September 30, 2021, net interest margin was 3.12% and net interest spread was 2.94%.
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Provision for Loan Losses
The provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by our management in determining the allowance for loan losses see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Loan Losses.”
Our provision for loan losses amounted to $1.3 million for the three months ended September 30, 2022, and $1.1 million for the three months ended September 30, 2021. We recorded no net charge-offs for the three months ended September 30, 2022 and 2021.
Noninterest Income
Our primary sources of recurring noninterest income are service charges on deposit accounts, mortgage banking revenue, interest rate swap fee income, origination fees for SBA loans, and other fees and charges. Noninterest income does not include loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.
The following table presents the major categories of noninterest income for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands)20222021Increase (Decrease)
Noninterest income
Service charges on deposit accounts$542$643(15.7)%
Income from bank owned life insurance40028142.3%
SBA origination fees9021100.0%
Swap fee income—208(100.0)%
Loans held for sale income6161(96.3)%
Gain on sale and call of securities—1(100.0)%
Other18516114.9%
Total noninterest income$1,223$1,476(17.1)%
Noninterest income for the three months ended September 30, 2022, was $1.2 million, a $0.3 million, or 17.1%, decrease compared to the three months ended September 30, 2021. The decrease was primarily comprised of a decrease of $0.2 million in swap fee income, a decrease of $0.2 million in loans held for sale income, and a decrease in service charges on deposit accounts of $0.1 million due to lower service charges from the Correspondent Banking Relationship. These decreases were partially offset by higher income from bank owned life insurance as a result of as a result from of our prior quarter purchases of approximately $15.0 million.
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining client relationships, and providing banking services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy and equipment expenses, professional fees, data processing expenses, advertising expenses, loan processing expenses, and other general and administrative expenses, including FDIC assessments, communications, travel, meals, training, supplies, and postage.
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The following table presents the major categories of noninterest expense for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands)20222021Increase (Decrease)
Noninterest expense
Salaries and employee benefits$8,003$7,3508.9%
Occupancy and equipment1,0019357.1%
Data processing257303(15.2)%
Marketing56542034.5%
Professional fees83068920.5%
Acquisition expenses957——%
Regulatory assessments254481(47.2)%
Other1,9861,44637.3%
Total noninterest expense$13,853$11,62419.2%

Noninterest expense amounted to $13.9 million for the three months ended September 30, 2022, an increase of $2.2 million, or 19.2%, compared to the three months ended September 30, 2021. The increase was primarily due to acquisition expenses of $1.0 million in connection with the pending merger with Seacoast, higher salaries and employee benefits of $0.7 million, and higher other noninterest expense of $0.5 million, partially offset by lower regulatory assessments expense of $0.2 million. Salaries and employee benefits increased due to higher sales incentives resulting from higher net income and loans as well as enhancements to our regulatory and compliance areas. The increase in other noninterest expense was primarily comprised of a $0.3 million increase in provision for unfunded commitments and a $0.1 million increase in our CRA mutual fund investment valuation.
Income Tax Expense
The amount of income tax expense we incur is influenced by the amounts of our pre-tax income, tax-exempt income, and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, such as the Tax Act, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense was $2.4 million for the three months ended September 30, 2022, compared to $1.6 million for the three months ended September 30, 2021. Our effective tax rates for those periods were 21.7% and 20.4%, respectively. The increase in the effective tax rate from the quarter ended September 30, 2021, to the quarter ended September 30, 2022 was primarily due to an increase in the state tax rate and an increase in non-deductible expenses.
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Results of Operations for the nine months ended September 30, 2022 and 2021
The following table sets forth the principal components of net income for the periods indicated.
Nine Months Ended September 30,
(Dollars in thousands)20222021Change
Interest income$71,857$59,62420.5%
Interest expense6,1045,43912.2 %
Net interest income65,75354,18521.3 %
Provision for loan losses4,4342,86055.0 %
Net interest income after provision61,31951,32519.5 %
Noninterest income4,2774,897(12.7)%
Noninterest expense42,95234,36625.0 %
Income before income taxes22,64421,8563.6 %
Income tax expense4,7584,4526.9 %
Net income$17,886$17,4042.8 %
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Net Interest Income and Net Interest Margin Analysis
The following table shows the average outstanding balance of each principal category of our assets, liabilities, and stockholders’ equity, together with the average yields on our assets and the average costs of our liabilities for the periods indicated. Such yields and costs are calculated by dividing the annualized income or expense by the average daily balances of the corresponding assets or liabilities for the same period.
Nine Months Ended September 30
20222021
(Dollars in thousands)Average
Outstanding
Balance
Interest
Income/
Expense(4)
Average
Yield/Rate		Average
Outstanding
Balance
Interest
Income/
Expense(4)
Average
Yield/Rate
Assets
Interest earning assets
Interest earning deposits$394,614 $1,985 0.67 %$441,679 $436 0.13 %
Federal funds sold27,215 209 1.03 %49,982 50 0.13 %
Federal Reserve Bank stock, FHLB stock and other corporate stock7,433 310 5.58 %7,624 290 5.09 %
Investment securities - taxable177,604 2,078 1.56 %81,941 526 0.86 %
Investment securities - tax-exempt27,305 673 3.30 %20,396 569 3.73 %
Loans (1)
1,869,450 66,602 4.76 %1,688,499 57,753 4.57 %
Total interest earning assets2,503,621 71,857 3.84 %2,290,121 59,624 3.48 %
Loans held for sale452 1,824 
Noninterest earning assets148,404 122,306 
Total assets$2,652,477 $2,414,251 
Liabilities and shareholders’ equity
Interest-bearing liabilities
Interest-bearing deposits1,595,585 5,247 0.44 %1,350,795 4,223 0.42 %
Borrowed funds33,463 857 3.42 %82,229 1,216 1.98 %
Total interest-bearing liabilities1,629,048 6,104 0.50 %1,433,024 5,439 0.51 %
Noninterest-bearing liabilities
Noninterest-bearing deposits769,026 742,530 
Other noninterest-bearing liabilities20,781 17,769 
Shareholders’ equity233,622 220,928 
Total liabilities and shareholders’ equity$2,652,477 $2,414,251 
Net interest income$65,753 $54,185 
Net interest spread (2)
3.34 %2.97 %
Net interest margin (3)
3.51 %3.16 %
__________________________________
(1)Includes nonaccrual loans.
(2)Net interest spread is the difference between interest earned on interest earning assets and interest paid on interest-bearing liabilities.
(3)Net interest margin is a ratio of net interest income to average interest earning assets for the same period.
(4)Interest income on loans includes loan fees of $3.9 million and $6.7 million for the nine months ended September 30, 2022, and 2021, respectively.
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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been proportionately allocated to both volume and rate.
For the Nine Months Ended September 30, 2022 Compared to 2021
Change Due To
(Dollars in thousands)VolumeRateTotal
Interest income
Interest-bearing deposits$(46)$1,595 $1,549 
Federal funds sold(23)182 159 
Federal Reserve Bank stock, Federal Home Loan Bank stock and other corporate stock(7)27 20 
Investment securities - taxable614 938 1,552 
Investment securities - tax-exempt193 (89)104 
Loans6,189 2,660 8,849 
Total$6,920 $5,313 $12,233 
Interest expense
Interest-bearing deposits765 259 1,024 
Borrowed funds(721)362 (359)
Total$44 $621 $665 
Net interest income increased by $11.6 million to $65.8 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. Our total net interest income was impacted by increases in our average interest earning assets coupled with the increases in the Federal Reserve’s target Federal Funds Rate during the nine months ended September 30, 2022. Average total interest earning assets were $2.5 billion for the nine months ended September 30, 2022, compared to $2.3 billion for the nine months ended September 30, 2021. The annualized yield on those interest earning assets increased 36 basis points to 3.84% for the nine months ended September 30, 2022, due to the increases in the Federal Reserve's target Funds rate. The increase in the average balance of interest earning assets was driven primarily by growth in our average loan portfolio of $0.2 billion, or 10.7%, and growth in our average investment securities portfolio of $0.1 billion, or 100.2%, compared to the nine months ended September 30, 2021. The growth in the loan portfolio was due to organic loan originations during the nine months ended September 30, 2022.
Average interest-bearing liabilities increased by $0.2 billion, or 13.7%, to $1.6 billion, for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase was due to a $0.2 billion, or 18.1%, increase in the average balance of interest-bearing deposits, partially offset by a decrease of $48.8 million, or 59.3%, in our borrowed funds due to the paydown of our Federal Home Loan Bank advances. The increase in the average balance of interest-bearing deposits was primarily due to increases in our average money market balances for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The annualized average interest rate paid on average interest-bearing liabilities decreased to 0.50% for the nine months ended September 30, 2022, compared to 0.51% for the nine months ended September 30, 2021. Annualized average interest rate paid on interest-bearing deposits increased 2 basis points to 0.44%, and the annualized average interest rate paid on borrowed funds increased by 144 basis points to 3.42%. The average interest rate on borrowings during the nine months ended September 30, 2022, increased as a result of paying off lower cost advances and replacing them with a larger balance of subordinated debt. Average noninterest-bearing deposits increased $26.5 million, or 3.6%, compared to the nine months ended September 30, 2021. Average other noninterest-bearing liabilities also increased $3.0 million, or 17.0%, compared to the nine months ended September 30, 2021. For the nine months ended September 30, 2022, our annual net interest margin was 3.51% and net interest spread was 3.34%. For the nine months ended September 30, 2021, annual net interest margin was 3.16% and net interest spread was 2.97%.
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Provision for Loan Losses
Our provision for loan losses amounted to $4.4 million for the nine months ended September 30, 2022, and $2.9 million for the nine months ended September 30, 2021. The increase from 2021 to 2022 was primarily related to loan growth. Our allowance for loan losses as a percentage of total loans was 0.82% on September 30, 2022, compared to 0.74% on December 31, 2021.
Noninterest Income
The following table presents the major categories of noninterest income for the periods indicated.
Nine Months Ended September 30,
(Dollars in thousands)20222021Increase (Decrease)
Noninterest income
Service charges on deposit accounts$1,636$2,237(26.9)%
Income from bank owned life insurance1,04984424.3%
SBA origination fees138166(16.9)%
Swap fee income112781(85.7)%
Loans held for sale income122462(73.6)%
Gain on sale and call of securities1323(43.5)%
Other1,207384214.3%
Total noninterest income$4,277$4,897(12.7)%
Noninterest income for the nine months ended September 30, 2022, was $4.3 million, a $0.6 million, or 12.7%, decrease compared to for the nine months ended September 30, 2021. The decrease primarily reflected lower service charges of $0.6 million on deposit accounts compared to prior year due to service charges of approximately $0.7 million, associated with acting as a correspondent bank for a Payroll Protection Program lender, and lower swap fee income of $0.7 million. These decreases were partially offset by an increase of $0.8 million in other noninterest income, comprised of $0.5 million of expected insurance proceeds on a previously recognized contingency and a $0.2 million loss on fixed asset disposals recorded in 2021.
Noninterest Expense
The following table presents the major categories of noninterest expense for the periods indicated.
Nine Months Ended September 30,
(Dollars in thousands)20222021Increase (Decrease)
Noninterest expense
Salaries and employee benefits$26,696$21,23325.7%
Occupancy and equipment3,0132,9422.4%
Data processing8758690.7%
Marketing88673820.1%
Professional fees2,6352,08726.3%
Acquisition expenses95768439.9%
Regulatory assessments1,2761,2482.2%
Other6,6144,56544.9%
Total noninterest expense$42,952$34,36625.0%
Noninterest expense amounted to $43.0 million for the nine months ended September 30, 2022, an increase of $8.6 million, or 25.0%, compared to the nine months ended September 30, 2021. The increase in salaries and benefits was driven by the $2.9 million expense related to the departure of the Company’s former Chief Executive Officer, and higher employee compensation costs from higher headcount and bonus and sales incentives. The increase in other noninterest expense was primarily comprised of a $0.7 million loss related to a previously recognized contingency from the first quarter, a $0.3 million
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increase related to our CRA mutual fund investment valuation, and a $0.5 million increase in the provision for unfunded commitments.
Income Tax Expense
Income tax expense was $4.8 million for the nine months ended September 30, 2022, compared to $4.5 million for the nine months ended September 30, 2021. Our effective tax rates for those periods were 21.0% and 20.4%, respectively.
Financial Condition
Balance Sheet Analysis
The following sections provide expanded discussion of the significant changes in certain line items in asset, liability, and stockholder’s equity categories.
As of September 30, 2022, our total assets decreased 7.1%, or $0.2 billion, compared to December 31, 2021, primarily as a result of decreases in cash and cash equivalents, partially offset by an increase in net loans. Net loans increased 12.7%, or $0.2 billion, compared to December 31, 2021, driven by loan originations of approximately $0.7 billion, partially offset by paydowns and prepayments. The Professional Bank PPP loan balance decreased $56.0 million, or 95.5%, to $2.6 million from December 31, 2021. Stockholders’ equity increased $6.3 million, or 2.7%, compared to December 31, 2021, primarily due to an increase in retained earnings of $17.9 million and an increase in additional paid in capital of $4.7 million for the nine months ended September 30, 2022, partially offset by a decrease of $16.0 million in accumulated other comprehensive net income.
Cash and Cash Equivalents
Cash that is not immediately needed to fund loans by the Bank is invested in liquid assets that also earn interest, including deposits with other financial institutions. Cash and cash equivalents decreased $0.4 billion, or 71.0%, to $0.2 billion, compared to $0.6 billion on December 31, 2021, primarily due to a decrease in interest-bearing deposits.
Banks may be required to maintain cash reserves in the form of vault cash or in an account with the Federal Reserve Bank or in noninterest-earning accounts with other qualified banks. This requirement is based on the Bank’s amount of transaction deposit accounts. The Bank’s cash reserve requirements was $0 on September 30, 2022, and December 31, 2021, respectively.
Investment Securities
We use our securities portfolio to provide a secondary source of liquidity, achieve additional interest income through higher yields on funds invested (compared to other options, such as interest-bearing deposits at other banks or fed funds sold), manage interest rate risk, and meet both collateral and regulatory capital requirements.
Securities may be classified as either trading, held to maturity, available for sale, or equity. Trading securities (if any) are held principally for resale and recorded at their fair value with changes in fair value included in income. Held to maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Equity securities with readily determinable fair values, are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. Available for sale securities consist of securities not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses on available for sale securities are excluded from income and reported in comprehensive income or loss. Gains and losses on the sale of available for sale securities are recorded on the trade date and are determined using the specific-identification method. Premiums and discounts on securities available for sale are recognized in interest income using the interest method.
Our investment portfolio decreased $17.4 million, or 8.7%, to $183.8 million compared to December 31, 2021, due to $25.1 million in investment calls, redemptions and paydowns, coupled with unrealized losses of $21.5 million during the year, partially offset by purchases of approximately $30.7 million in MBS CDD, and municipal bonds. To supplement interest income earned on the Company’s loan portfolio, the Company invests in mortgage-backed securities, government agency bonds, corporate bonds, community development district bonds, and equity securities (including mutual funds).
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The following tables summarize the book value, fair value, contractual maturities and weighted-average yields of investment securities as of September 30, 2022, and December 31, 2021.
September 30, 2022December 31, 2021
(Dollars in thousands)Book ValueFair ValueBook ValueFair Value
Securities Available for Sale - taxable
Small Business Administration loan pools$31,902$31,514$40,368$39,934
Mortgage-backed securities (1)
135,017114,834131,273130,103
United States agency obligations2,9472,6673,9393,986
Corporate bonds1,5001,5021,5001,513
Total$171,366$150,517$177,080$175,536
Securities Available for Sale - tax-exempt
Community Development District bonds$25,343$24,014$17,163$17,674
Municipals3,1482,8491,0511,091
Total$28,491$26,863$18,214$18,765
Securities Held to Maturity
Mortgage-backed securities$194$178$236$242
Total$194$178$236$242
Equity Securities
Mutual Funds$5,325$5,325$5,838$5,838
Other equity securities857857800800
Total$6,182$6,182$6,638$6,638
(1) As of September 30, 2022 residential mortgage-backed is $91.1 million and commercial mortgage-backed is $23.7 million. As of December 31, 2021 residential mortgage-backed is $104.0 million and commercial mortgage-backed is $26.1 million.

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One Year or LessMore than One Year
Through Five Years		More than Five Years
Through 10 Years		More than 10 YearsTotal
As of September 30, 2022
(Dollars in thousands)
Book Value
Weighted
Average
Yield (1)
Book Value
Weighted
Average
Yield (1)
Book Value
Weighted
Average
Yield (1)
Book Value
Weighted
Average
Yield (1)
Book ValueFair Value
Weighted
Average
Yield (1)
Available for Sale - taxable
SBA loan pools$— — %$333 2.09 %$16,111 2.52 %$15,458 2.74 %$31,902 $31,514 2.62 %
Mortgage-backed securities— — %1,064 1.23 %3,485 1.01 %130,468 1.84 %135,017 114,834 1.82 %
United States agency obligations— — %1,002 2.66 %1,945 1.31 %— — %2,947 2,667 1.77 %
Corporate bonds1,500 4.62 %— — %— — %— — %1,500 1,502 4.62 %
Total$1,500 4.62 %$2,399 1.95 %$21,541 2.17 %$145,926 1.93 %$171,366 $150,517 1.99 %
Available for Sale - tax-exempt
CDD bonds$3,789 4.12 %$20,914 4.07 %$640 3.50 %$— — %$25,343 $24,014 4.07 %
Municipals— — %1,041 2.27 %2,107 4.20 %— — %3,148 2,849 3.56 %
Total$3,789 4.12 %$21,955 3.98 %$2,747 4.04 %$— — %$28,491 $26,863 4.01 %
Held to Maturity
Mortgage-backed securities— — %— — %— — %194 2.91 %194 178 2.91 %
Total$— — %$— — %$— — %$194 2.91 %$194 $178 2.91 %
Equity Securities
Mutual Funds5,325 1.41 %— — %— — %— — %5,325 5,325 1.41 %
Other equity securities857 — %— — %— — %— — %857 857 — %
Total$6,182 1.21 %$— — %$— — %$— — %$6,182 $6,182 1.21 %
(1)Weighted average yield is calculated by assigning a weight amount to each investment by type and multiplying the weight amount times the outstanding yield to obtain the individual yield.
Loan Portfolio
Our primary source of income is derived from interest earned on loans. Our loan portfolio consists of loans secured by real estate as well as commercial business loans, construction and development and other consumer loans. Our loan clients primarily consist of small to medium sized businesses, the owners and operators of these businesses as well as other professionals, entrepreneurs, and high net worth individuals. Our owner-occupied and investment commercial real estate loans, residential construction loans and commercial business loans provide us with higher risk-adjusted returns, shorter maturities, and more sensitivity to interest rate fluctuations, and are complemented by our relatively lower risk residential real estate loans to individuals.
Commercial Real Estate Loans. We originate both owner-occupied and non-owner-occupied commercial real estate loans. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. Commercial real estate loans that are secured by owner-occupied commercial real estate and primarily supported by operating cash flows are also included in this category of loans. As of September 30, 2022, we had $371.1 million of owner-occupied commercial real estate loans and $626.4 million of investment commercial real estate loans, representing 37.2% and 62.8%, respectively, of our commercial real estate portfolio. As of September 30, 2022, the average loan balance of loans in our commercial real estate loan portfolio was approximately $1.5 million for owner-occupied and $2.7 million for non-owner occupied. Commercial real estate loan terms are generally extended for 10 years or less and amortize generally over 25 years or less. Terms of 15 years are permitted where the loan is fully amortized over the term of the loan. The maximum loan to value is generally, 80% of the market value or purchase price, but may be as high as 90% for SBA 504 owner-occupied loans. As of September 30, 2022, we did not have any commercial real estate loans with a loan to value over 100%. Our credit policy also usually requires a minimum debt service coverage ratio of 1.20x. As of September 30, 2022, our weighted-average loan-to-value ratios for owner-occupied and non-owner-occupied commercial real estate were 49.0% and 51.2%, respectively and debt service coverage ratios were 3.04x and 2.03x, respectively. The interest rates on our commercial real estate loans have initial fixed rate terms that adjust typically at five years, and we routinely charge an origination fee for our services. We generally require personal guarantees from the principal owners of the business, supported by a review of the principal owners’ personal financial statements and global debt service obligations. All commercial real estate loans with an outstanding balance of $1.0 million or more are reviewed at least annually. The properties securing the portfolio are located primarily throughout our market and are
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generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.
As of September 30, 2022As of December 31, 2021
(Dollars in thousands)AmountPercentAmountPercent
Commercial Real Estate
Auto (Car Lot/Auto Repair)$26,4152.6%$27,4193.0%
Educational Facility28,3982.8%32,2813.6%
Gas Station67,7406.8%60,8546.7%
Hotel98,1689.8%75,6178.4%
Mixed Use55,1705.5%28,7623.2%
Multifamily140,37714.1%140,49615.6%
Office138,19913.9%109,01012.1%
Other / Special Use63,1916.3%56,2766.2%
Religious Facility9,5941.0%10,6791.2%
Retail226,07822.7%209,28323.2%
Vacant Land5,8000.6%6,5230.7%
Warehouse138,34813.9%145,45416.1%
Total$997,478100.0%$902,654100.0%
As of September 30, 2022As of December 31, 2021
(Dollars in thousands)AmountPercentAmountPercent
Commercial Real Estate
Broward$151,82715.2%$111,22412.3%
Miami-Dade536,93253.9%559,96662.0%
Palm Beach188,47618.9%139,51715.5%
Other FL County111,06011.1%49,8925.5%
Out of State9,1830.9%42,0554.7%
Total$997,478100%$902,654100.0%
As of September 30, 2022, non-owner occupied commercial real estate loans of $626.4 million represented 30.5% of total risk-weighted assets.
Construction and Development Loans. The majority of our construction loans are offered within the Miami-Dade MSA to builders primarily for the construction of single-family homes and condominium and townhouse conversions or renovations and, to a lesser extent, to individuals. Our construction loans typically have terms of 12 to 18 months with the goal of transitioning the borrowers to permanent financing or re-underwriting and selling into the secondary market. According to our credit policy, the loan to value ratio may not exceed the lesser of 80% of the appraised value, as established by an independent appraisal, or 85% of costs for residential construction and 90% of costs for SBA 504 loans. As of September 30, 2022, our weighted average loan-to-value ratio on our construction, vacant land, and land development loans were 51.8%, 48.2%, and 49.4%, respectively. We require construction and development loans to establish an interest reserve account, which is sufficient to pay the loan through completion of the project. We conduct semi-annual stress testing of our construction loan portfolio and closely monitor underlying real estate conditions as well as our borrowers’ trends of sales valuations as compared to underwriting valuations as part of our ongoing risk management efforts. We also closely monitor our borrowers’ progress in construction build out and strictly enforce our original underwriting guidelines for construction milestones and completion timelines.
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As of September 30, 2022As of December 31, 2021
(Dollars in thousands)AmountPercent AmountPercent
Construction & Development
1 – 4 Family Construction$61,946 48.1 %$47,164 51.5 %
Land Development20,946 16.3 %9,620 10.5 %
Vacant Land45,848 35.7 %34,736 38.0 %
Total$128,570 100.0 %$91,520 100.0 %
As of September 30, 2022As of December 31, 2021
(Dollars in thousands)AmountPercentAmountPercent
Construction & Development
Broward$3,8873.0%$1,1941.3%
Miami-Dade89,25669.4%67,56273.9%
Palm Beach25,65220.0%21,08023.0%
Other FL County4,0703.2%1,6841.8%
Out of State5,7054.4%——%
Total$128,570 100.0%$91,520 100.0%
As of September 30, 2022, total construction and land development loans of $128.6 million represented 6.3% of total risk-weighted assets.
Residential Real Estate Loans. We offer one-to-four family mortgage loans primarily on owner-occupied primary residences and, to a lesser extent, investor-owned residences, which make up approximately 14.2% of our residential loan portfolio. Our residential loans also include home equity lines of credit, which totaled approximately $44.0 million, or approximately 9.7% of our residential loan portfolio as of September 30, 2022. The average loan balance of closed-end residential loans in our residential portfolio was approximately $0.9 million as of September 30, 2022. As of September 30, 2022, we did not have any residential real estate loans with a loan to value over 100%. Our one-to-four family residential loans have a relatively small balance spread between many individual borrowers compared to our other loan categories. Our owner-occupied residential real estate loans usually have fixed rates for five, seven or ten years and adjust on an annual basis after the initial term based on a typical maturity of 30 years. Upon the implementation of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the origination, closing and servicing of the traditional residential loan products became much more complex, which led to increased cost of compliance and training. As a result, many banks exited the business, which created an opportunity for the banks that remained in the space. While the use of technology, and other related origination strategies have allowed non-bank originators to gain significant market share over the last several years, traditional banks that made investments in personnel and technology to comply with the new requirements have typically experienced loan growth. Unlike many of our competitors, we have been able to effectively compete in the residential loan market, while simultaneously doing the same in the commercial loan market which has enabled us to establish a broader and deeper relationship with our borrowers. Additionally, by offering a full line of residential loan products, the owners of the many small to medium sized businesses that we lend to use us, instead of a competitor, for financing a personal residence. This greater bandwidth to the same market has been a significant contributor to our growth and market share in South Florida. The following table shows our residential real estate portfolio by loan type and the weighted average loan-to-value ratio for each loan type.
As of September 30, 2022As of December 31, 2021
(Dollars in thousands)AmountPercentLTV (%)AmountPercentLTV (%)
Residential Real Estate
Owner Occupied$344,292 76.1%55.7 %$272,858 72.3%57.8 %
Investor Owned Residences64,202 14.2%53.4 %54,698 14.5%50.7 %
HELOC44,027 9.7%56.6 %49,955 13.2%57.1 %
Total$452,521 100.0%$377,511 100.0%
Loans held for sale$— 100.0%$165 100.0%

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Commercial Loans (non-PPP). In addition to our other loan products, we provide general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products, primarily in our market, and underwritten based on each borrower’s ability to service debt from income. These loans are primarily made based on the identified cash flows of the borrower, as determined based on a review of the client’s financial statements, and secondarily, on the underlying collateral provided by the borrower. The average loan balance of the loans in our commercial loan portfolio, excluding Professional Bank PPP loans was $0.9 million as of September 30, 2022. As of September 30, 2022, non-Professional Bank PPP commercial loans totaled $397.7 million, and Professional Bank PPP commercial loans totaled $2.6 million. For commercial loans over $0.5 million, a global cash flow analysis is generally required, when appropriate, which forms provides for a part of the basis for the credit approval. “Global cash flow” is defined as a cash flow calculation which includes all income sources of all principals in the transaction as well as all debt payments, including the debt service associated with the proposed transaction. In general, a minimum 1.20x debt service coverage is preferred, but in no event may the debt service coverage ratio be less than 1.00x. As of September 30, 2022, the debt service coverage ratio for our Bank commercial loan portfolio was approximately 2.51x for non-Professional Bank PPP loans, excluding approximately 2.7% of the commercial loan portfolio that is cash secured. Most commercial business loans, which exclude Professional Bank PPP loans, are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment, and we generally obtain a personal guaranty from the borrower or other principal. The following table shows our commercial loan portfolio by industry segment as of September 30, 2022 and December 31, 2021.
As of September 30, 2022As of December 31, 2021
(Dollars in thousands)AmountPercentAmountPercent
Commercial Loans (non-PPP)
Business Products$4,5291.1%$13—%
Business Services69,31917.4%73,86822.7%
Communication13,4953.4%3890.1%
Construction40,84910.3%31,2859.6%
Finance130,27132.8%100,84931.1%
Healthcare22,8275.7%23,5647.2%
Services53,15613.4%34,11210.5%
Technology6,9901.8%2,9790.9%
Trade43,80011.0%47,52214.6%
Transportation1,2960.3%1,5930.5%
Other11,1932.8%9,2412.8%
Total$397,725100.0%$325,415100.0%
Consumer and Other Loans. We offer consumer, or retail credit, to individuals for household, family, or other personal expenditures. Generally, these are either in the form of closed-end/installment credit loans or open-end/revolving credit loans. Occasionally, we will make unsecured consumer loans to highly qualified clients in amounts up to $250,000 with up to three-year repayment terms.
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The repayment of loans is a source of additional liquidity for us. The following table details maturities and sensitivity to interest rate changes for our loan portfolio on September 30, 2022 and December 31, 2021.
September 30, 2022
(Dollars in thousands)Due in One
Year or Less		Due in One to
Five Years		Due in Five to
Fifteen Years		Due After
Fifteen Years		Total
Commercial Real Estate$76,961 $235,371 $663,383 $21,763 $997,478
Residential Real Estate21,439 16,755 18,814 395,513 452,521
Commercial*116,176 114,114 142,215 27,838 400,343
Construction and Development78,238 11,538 5,373 33,421 128,570
Consumer and Other5,560 7,416 13,007 — 25,983
Total loans$298,374$385,194$842,792$478,535$2,004,895
Amounts with fixed rates$104,668 $302,817 $824,873 $455,372 $1,687,730
Amounts with floating rates$193,706 $82,377 $17,919 $23,163 $317,165
*Includes Paycheck Protection Program (PPP) loans.
December 31, 2021
(Dollars in thousands)Due in One
Year or Less		Due in One to
Five Years		Due in Five to
Fifteen Years		Due After
Fifteen Years		Total
Commercial Real Estate$87,405 $233,829 $567,349 $14,071 $902,654
Residential Real Estate10,201 21,210 15,904 330,196 377,511
Commercial*113,129 131,332 111,645 27,924 384,030
Construction and Development40,851 17,029 3,141 30,499 91,520
Consumer and Other4,226 7,444 9,779 — 21,449
Total loans$255,812$410,844$707,818$402,690$1,777,164
Amounts with fixed rates$98,992 $327,126 $673,381 $385,663 $1,485,162
Amounts with floating rates$156,820 $83,718 $34,437 $17,027 $292,002
*Includes Paycheck Protection Program (PPP) loans.
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured. Any loan which the Bank deems to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. Loans that are past due for 180 days or more are charged off unless the loan is well secured and in the process of collection. We currently have no loans accruing over 90 days or greater past due as of September 30, 2022.
We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio, such as annual reviews of the underlying financial performance of all commercial loans in excess of $1.0 million. We also engage in semi-annual stress testing of the loan portfolio, and proactive collection and timely disposition of past due loans. Our bankers follow established underwriting guidelines, and we also monitor our delinquency levels for any negative trends. As a result, we have, in recent years, experienced a relatively low level of nonperforming assets. We had nonperforming assets of $1.8 million as of September 30, 2022, or 0.07% of total assets. We had nonperforming assets
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of $2.1 million as of December 31, 2021, or 0.08% of total assets. We believe that our low loan-to-value loan portfolio is well positioned to withstand these types of discrete events as they occur from time to time. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
(Dollars in thousands)September 30,
2022		December 31,
2021
Nonaccrual Loans
Commercial real estate$297$—
Residential real estate——
Commercial1,4681,468
Construction and development——
Consumer and other loans—654
Accruing loans 90 or more days past due——
Total nonperforming loans$1,765$2,122
Other real estate owned——
Total nonperforming assets$1,765$2,122
Restructured loans-nonaccrual$—$—
Restructured loans-accruing$2$55
Ratio of nonperforming loans to total loans0.09%0.12%
Ratio of nonperforming assets to total assets0.07%0.08%
Credit Quality Indicators
We strive to manage and control credit risk in our loan portfolio by adhering to well-defined underwriting criteria and account administration standards established by our management team and approved by our Board of Directors (“Board”). We employ a dedicated Chief Credit Officer and have established a Risk Committee at the Bank level which oversees, among other things, risks associated with our lending activities and enterprise risk management. Our written loan policies document underwriting standards, approval levels, exposure limits and other limits or standards that our management team and Board deem appropriate for an institution of our size and character. Loan portfolio diversification at the obligor, product and geographic levels are actively managed to mitigate concentration risk, to the extent possible. In addition, credit risk management includes an independent credit review process that assesses compliance with policies, risk rating standards and other critical credit information. In addition, we adhere to sound credit principles and evaluate our clients’ borrowing needs and capacity to repay, in conjunction with their character and financial history. Our management team and Board place significant emphasis on balancing a healthy risk profile and sustainable growth. Specifically, our approach to lending seeks to balance the risks necessary to achieve our strategic goals while ensuring that our risks are appropriately managed and remain within our defined limits. We believe that our credit culture is a key factor in our relatively low levels of nonperforming loans and nonperforming assets compared to other institutions within our market.
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt including: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, all credits greater than $1.0 million, other than residential real estate loans, are reviewed no less than annually to monitor and adjust, if necessary, the credit risk profile. Loans classified as “substandard” or “special mention” are reviewed quarterly for further evaluation to determine if they are appropriately classified and whether there is any impairment. Beyond the annual review, all loans are graded at initial issuance. In addition, during the renewal process of any loan, as well as if a loan becomes past due, we will determine the appropriate loan grade. Loans excluded from the review process above are generally classified as “pass” credits until: (a) they become past due; (b) management becomes aware of deterioration in the creditworthiness of the borrower; or (c) the client contacts us for a modification. In these circumstances, the loan is specifically evaluated for potential reclassification to special mention, substandard, doubtful, or even a charged-off status. See Note 4 - Loans to the Consolidated Financial Statements (unaudited) dated September 30, 2022, for additional information regarding risk category of loans by class of loans.
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Allowance for Loan Losses
We believe that we maintain our allowance for loan losses at a level sufficient to provide for probable incurred credit losses inherent in the loan portfolio as of the balance sheet date. Credit losses arise from the borrowers’ inability or unwillingness to repay, and from other risks inherent in the lending process including collateral risk, operations risk, concentration risk, and economic risk. We consider all of these risks of lending when assessing the adequacy of our allowance. The allowance for loan losses is established through a provision charged to expense. Loans are charged-off against the allowance when losses are probable and reasonably quantifiable. Our allowance for loan losses is based on management’s judgment of overall credit quality, which is a significant estimate based on a detailed analysis of the loan portfolio. Our allowance can and will change based on revisions to our assessment of our loan portfolio’s overall credit quality and other risk factors both internal and external to us.
We evaluate the adequacy of the allowance for loan losses on a quarterly basis. The allowance consists of two components. The first component consists of those amounts reserved for impaired loans. A loan is deemed impaired when, based on current information and events, it is probable that the Bank will not be able to collect all amounts due (principal and interest), according to the contractual terms of the loan agreement. Loans are monitored for potential impairment through our ongoing loan review procedures and portfolio analysis. Classified loans and past due loans over a specific dollar amount, and all troubled debt restructurings are individually evaluated for impairment.
The approach for assigning reserves for the impaired loans is determined by the dollar amount of the loan and loan type. Impairment measurement for loans over a specific dollar are determined on an individual loan basis with the amount reserved dependent on whether repayment of the loan is dependent on the liquidation of collateral or from some other source of repayment. If repayment is dependent on the sale of collateral, the reserve is equivalent to the recorded investment in the loan less the fair value of the collateral after estimated sales expenses. If repayment is not dependent on the sale of collateral, the reserve is equivalent to the recorded investment in the loan less the estimated cash flows discounted using the loan’s effective interest rate. The discounted value of the cash flows is based on the anticipated timing of the receipt of cash payments from the borrower. The reserve allocations for individually measured impaired loans are sensitive to the extent market conditions or the actual timing of cash receipts change. Impairment reserves for smaller-balance loans under a specific dollar amount are assigned on a pooled basis utilizing loss factors for impaired loans of a similar nature.
The second component is a general reserve on all loans other than those identified as impaired. General reserves are assigned to various homogenous loan pools, including commercial, commercial real estate, construction and development, residential real estate, and consumer. General reserves are assigned based on historical loan loss ratios determined by loan pool and internal risk ratings that are adjusted for various internal and external risk factors unique to each loan pool.
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The following table analyzes the activity in the allowance for the three and nine months ended September 30, 2022, and 2021.
For the Three Months Ended September 30,For the Nine Months Ended September 30,
(Dollars in thousands)2022202120222021
Balance at beginning of period$15,142 $10,418 $12,704 $16,259 
Charge-offs
Commercial real estate— — — — 
Residential real estate— — — — 
Commercial— — — (7,641)
Construction and development— — — — 
Consumer and other— — (653)— 
Total Charge-offs— — (653)(7,641)
Recoveries
Commercial real estate— — — — 
Residential real estate— — — — 
Commercial— — — — 
Construction and development— — — — 
Consumer and other— — — — 
Total recoveries— — — — 
Net charge-offs— — (653)(7,641)
Provision for loan losses1,343 1,060 4,434 2,860 
Balance at end of period$16,485 $11,478 $16,485 $11,478 
Ratio of net charge-offs to average loans— %— %0.05 %0.61 %
September 30,
2022		December 31,
2021
ALLL as a percentage of total loans at end of period0.82 %0.74 %
ALLL as a percentage of loans (excluding PPP loans) at end of period0.82 %0.76 %
ALLL as a multiple of net charge-offs (1)
18.41.5
ALLL as a percentage of nonperforming loans934.0 %598.7 %
(1) Calculated for the September 30, 2022 period based on the year-to-date net charge-offs, annualized.
Our allowance for loan losses was $16.5 million on September 30, 2022, compared to $12.7 million on December 31, 2021, an increase of 29.8%. The increase was primarily due to higher loan production volume during the nine months ended September 30, 2022. We had charge-offs of $0.7 million during the nine months ended September 30, 2022, compared to charge-offs of $7.6 million during the same period in 2021. There were minimal changes to qualitative loss factors and historical loss factors for the current period with the principal driver for the increased allowance being loan growth. On September 30, 2022, our allowance for loan losses was 0.82% of total gross loans (excluding Professional Bank PPP loans) and provided coverage of 934.0% of our nonperforming loans, compared to an allowance for loan losses to total gross loans (net of overdrafts) ratio of 0.76% as of December 31, 2021. See Reconciliation of non-GAAP Financial Measures. We believe our allowance on September 30, 2022, was adequate to absorb probable incurred losses inherent in our loan portfolio. The following table provides an allocation of the allowance for loan losses to specific loan types as of September 30, 2022, and December 31, 2021.
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September 30, 2022December 31, 2021
(Dollars in thousands)AllowancePercentAllowancePercent
Commercial real estate$5,88935.7%$4,47135.2%
Residential real estate3,58021.7%2,33918.4%
Commercial5,97036.3%4,63736.5%
Construction and development8765.3%4713.7%
Consumer and other1701.0%7866.2%
Total allowance for loan losses$16,485100.0%$12,704100.0%
On September 30, 2022, the recorded investment in impaired loans (consisting of nonaccrual loans, troubled debt restructured loans, loans past due 90 days or more and still accruing interest and other loans based on management’ judgment) was $1.8 million, of which $1.8 million required a specific reserve of $0.8 million, compared to a recorded investment in impaired loans of $2.1 million, with a recorded investment of $2.1 million, on nonaccrual with a required specific reserve of $1.3 million on December 31, 2021. There was also a substandard accruing loan with a recorded investment of $2.3 million, with no allowance on December 31, 2021.
On September 30, 2022, we had one loan amounting to $2.0 thousand that was considered to be a troubled debt restructuring (“TDR”), compared to one loan amounting to $55 thousand on December 31, 2021. We did not allocate any specific reserves to loans that have been modified as TDRs as of September 30, 2022, and December 31, 2021.
Deposits
Deposits are our primary source of funding. We offer a variety of deposit products including checking, NOW, savings, money market, and time deposit accounts all of which we actively market at competitive pricing. We generate deposits from our consumer and commercial clients through the efforts of our private bankers. We had public deposits of $90.5 million and $84.4 million, on September 30, 2022, and December 31, 2021, respectively. Additionally, we supplement our deposits with wholesale funding sources such as Qwickrate and brokered deposits. However, we do not significantly rely on wholesale funding sources, which are generally viewed as less stable compared to core deposits due to the relatively higher price elasticity of demand for deposits from wholesale sources. As of September 30, 2022, and December 31, 2021, these wholesale deposits represented 0.8% and 3.9%, respectively, of our total deposits.
Average interest-bearing deposits decreased $9.5 million, or 0.6%, during the three months ended September 30, 2022, compared to the same time period in 2021, primarily due to a $88.4 million decrease in certificates of deposit account balances and a $28.1 million decrease in brokered deposits, partially offset by a $90.5 million increase in money market account balances and a $13.3 million increase in NOW accounts from organic growth. In order to fund our loan growth, our bankers are actively involved with our strategic efforts and are incentivized to grow core deposits. The average rate paid on interest-bearing deposits increased 19 basis points to for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
For the Three Months Ended September 30, 2022For the Three Months Ended September 30, 2021
(Dollars in thousands)Average
Balance		Average RateAverage
Balance		Average Rate
NOW accounts$309,3860.22%$296,0660.19%
Money market accounts938,8980.71%848,4080.39%
Brokered deposits20,4221.27%48,5170.48%
Savings accounts16,0400.10%12,8670.10%
Certificates of deposit168,9070.61%257,2800.68%
Total interest-bearing deposits1,453,6530.59%1,463,1380.40%
Noninterest-bearing deposits758,135—%810,042—%
Total deposits$2,211,7880.39%$2,273,1800.26%
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Average interest-bearing deposits increased $244.8 million, or 18.1%, during the nine months ended September 30, 2022, compared to the same time period in 2021 primarily due to $217.7 million increase in money market account balances and a $48.0 million increase in NOW accounts from organic growth, partially offset by a $29.3 million decrease in certificate of deposit account balances. The average rate paid on interest-bearing deposits increased 2 basis points to for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
For the Nine Months Ended September 30, 2022For the Nine Months Ended September 30, 2021
(Dollars in thousands)Average
Balance		Average RateAverage
Balance		Average Rate
NOW accounts$321,5870.18%$273,5900.20%
Money market accounts998,5300.48%780,8250.40%
Brokered deposits42,1670.59%36,5550.56%
Savings accounts14,1770.10%11,3580.10%
Certificates of deposit219,1240.62%248,4670.71%
Total interest-bearing deposits1,595,5850.44%1,350,7950.42%
Noninterest-bearing deposits769,026—%742,530—%
Total deposits$2,364,6110.30%$2,093,3250.27%
The following table presents the ending balances and percentage of total deposits for the periods indicated. As of September 30, 2022, we had approximately $18.4 million in brokered deposits representing 0.8% of total deposits. Brokered deposits decreased approximately $40.0 million, or 68.5%, compared to December 31, 2021. We did not obtain these brokered deposits through a deposit listing agency, but rather through an existing relationship with the Bank. However, these deposits meet the regulatory definition of brokered deposits and are reported accordingly.
September 30, 2022December 31, 2021
(Dollars in thousands)Ending
Balance		% of TotalEnding
Balance		% of Total
NOW accounts$308,167 14.1 %$310,362 13.1 %
Money market accounts944,728 43.2 %1,055,033 44.5 %
Brokered deposits18,407 0.8 %58,365 2.5 %
Savings accounts16,966 0.8 %12,558 0.5 %
Certificates of deposit141,981 6.5 %261,067 11.0 %
Total interest-bearing deposits1,430,249 65.4 %1,697,385 71.6 %
Noninterest-bearing deposits758,042 34.6 %674,003 28.4 %
Total deposits(1)
$2,188,291 100.0 %$2,371,388 100.0 %
__________________________________
(1)Balance Sheet does not illustrate brokered deposits as presented above.
For more information regarding the maturities of our time deposits including time deposits that meet or exceed the $250,000 FDIC insurance limit as of September 30, 2022, and December 31, 2021, refer to Note 6 - Deposits to the Consolidated Financial Statements (unaudited) dated September 30, 2022.
Debt
See Note 7 - Debt and Borrowings to the Consolidated Financial Statements (unaudited) dated September 30, 2022, for additional information regarding our Subordinated Debt and Valley National Line of Credit.
Borrowings
We primarily use short-term and long-term borrowings to supplement deposits to fund our lending and investment activities.
FHLB Advances. The FHLB allows us to borrow up to 25% of our assets on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2022, approximately $265.3 million in total loans that were pledged as
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collateral for potential FHLB borrowings and FHLB letters of credit. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As of September 30, 2022, we had no outstanding advances, compared to $35.0 million as of December 31, 2021. As of September 30, 2022 and December 31, 2021, we had $163.9 million and $113.0 million, respectively, in additional available borrowing capacity from the FHLB based on the collateral that we have currently pledged.
The following table sets forth certain information on our FHLB borrowings during the periods presented.
September 30, 2022December 31, 2021
(Dollars in thousands)
Weighted average interest rate at period-end—%2.04%
Maximum month-end balance during period$35,000$35,000
Average balance outstanding during period9,12136,918
Weighted average interest rate during period1.98%2.01%
Federal Reserve Bank of Atlanta. The Federal Reserve Bank of Atlanta has an available borrower in custody arrangement which allows us to borrow on a collateralized basis. No advances were outstanding under this facility as of September 30, 2022 and December 31, 2021.
Liquidity and Capital Resources
Capital Resources
Stockholders’ equity increased $6.3 million, or 2.7%, to $237.9 million on September 30, 2022, compared to December 31, 2021, primarily due an increase in retained earnings of $17.9 million and an increase in additional paid in capital of $4.7 million for the nine months ended September 30, 2022, partially offset by a decrease of $16.0 million in accumulated other comprehensive net income.
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our 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. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum ratios of common equity Tier 1, Tier 2, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. We are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.
As of September 30, 2022, we were in compliance with all applicable regulatory capital requirements to which we were subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we intend to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us. Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. During the nine months ended September 30, 2022, the Company infused $7.5 million of capital into the Bank to support asset growth and maintain well capitalized ratios at the Bank.
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The following table presents our regulatory capital ratios as of September 30, 2022, and December 31, 2021. The amounts presented exclude the capital conservation buffer.
ActualMinimum for capital adequacyMinimum to be well
capitalized
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
September 30, 2022
Total capital ratio
Bank$257,261 12.5 %$164,087 8.0 %$205,109 10.0 %
Company271,324 13.2 %164,087 8.0 %N/AN/A
Tier 1 Capital ratio
Bank239,468 11.7 %123,066 6.0 %164,087 8.0 %
Company229,064 11.1 %123,066 6.0 %N/AN/A
Tier 1 Leverage ratio
Bank239,468 9.6 %99,364 4.0 %124,205 5.0 %
Company229,064 9.2 %99,364 4.0 %N/AN/A
Common Equity Tier 1
Bank239,468 11.7 %92,299 4.5 %133,321 6.5 %
Company229,064 11.1 %92,299 4.5 %N/AN/A
ActualMinimum for capital adequacyMinimum to be well
capitalized
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
December 31, 2021
Total capital ratio
Bank$222,69612.9%$138,4358.0%$173,04310.0%
Company220,20612.7%138,4358.0%N/AN/A
Tier 1 capital ratio
Bank208,99712.1%103,8266.0%138,4358.0%
Company206,50711.9%103,8266.0%N/AN/A
Tier1 leverage ratio
Bank208,9977.7%107,8774.0%134,8465.0%
Company206,5077.7%107,8774.0%N/AN/A
Common equity tier 1 capital ratio
Bank208,99712.1%77,8694.5%112,4786.5%
Company206,50711.9%77,8694.5%N/AN/A
Liquidity
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to fund loan commitments, purchase securities, accommodate deposit withdrawals or repay other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our Asset Liability Management Committee, or ALCO, and senior management, including our Liquidity Contingency Policy, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our clients’ deposits, supplemented by our short-term borrowings, primarily from FHLB borrowings. We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements.
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On September 30, 2022, we had the ability to generate approximately $459.3 million in additional liquidity through all of our available resources beyond our overnight funds sold position. During the nine months ended September 30, 2022, the Company issued $25.0 million in subordinated notes payable due 2032 and also increased the availability under its revolving line of credit at Valley National Bank, N.A. from $10.0 million to $25.0 million. In addition to the primary borrowing outlets mentioned above, we also have the ability to generate liquidity by borrowing from the Federal Reserve Discount Window and through brokered deposits. We recognize the importance of maintaining liquidity and have developed a Contingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity. We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases, certain credit facilities may no longer be available. We conduct quarterly liquidity stress tests and the results are reported to our Asset-Liability Management Committee and our Board. We believe the liquidity available to us is currently sufficient to meet our ongoing needs.
We also view our investment portfolio as a liquidity source and have the option to pledge securities in our portfolio as collateral for borrowings or deposits, and/or sell selected securities. On September 30, 2022, and December 31, 2021, there were $265.3 million and $235.3 million in total loans pledged to the FHLB for liquidity. Our investment portfolio primarily consists of debt issued by the federal government and governmental agencies. The weighted-average life of our investment portfolio was 5.90 years and 4.41 years on September 30, 2022, and December 31, 2021, respectively. The duration of our investment portfolio was 4.75 years and 4.08 years on September 30, 2022, and December 31, 2021, respectively.
As we deploy our capital and continue to grow our operations, we maintain cash in our holding company for added liquidity. As of September 30, 2022, cash held at the holding company was approximately $9.2 million. Our average net overnight funds sold position (defined as funds sold plus interest-bearing deposits with other banks less funds purchased) was $21.9 million during three months ended September 30, 2022, compared to an average net overnight funds sold position of $42.9 million for the year ended December 31, 2021. As of September 30, 2022, cash held at the Federal Reserve was approximately $111.9 million compared to $544.0 million as of December 31, 2021.
We expect our capital expenditures over the next 12 months to be approximately $1.1 million, which will consist primarily of investments in digital capabilities, technology purchases for our new banking offices, business applications and information technology security needs. We expect that these capital expenditures will be funded with existing resources without impairing our ability to meet our ongoing obligations.
Inflation
We are experiencing and may continue to experience labor cost inflation and constraints in hiring qualified employees. We aim to offset the potential unfavorable impact of these items with automation, productivity improvements, and other initiatives. In general, the impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment. Assets and liabilities of financial institutions are primarily all monetary in nature, and therefore are principally impacted by interest rates rather than changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. At September 30, 2022, inflation was rising at a higher and more sustained level than anticipated by the Federal Reserve. As a result, there were five rate increases for the nine months ended September 30, 2022, totaling an upward increase of 300 basis points. Another increase of 75 bps occurred on November 2, 2022, and the current market expects another interest rate increase in 2022 that could lead to greater market volatility.
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Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. While our liquidity monitoring and management consider both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as of September 30, 2022.
(Dollars in thousands)Due in One
Year or Less		Due after One
Through Three
Years		Due After
Three
Through
Five Years		Due After
Five Years		Total
Time deposits of $250,000 or less$47,062 $4,276 $— $— $51,338 
Time deposits of more than $250,00087,647 6,331 — — 93,978 
Operating leases1,394 2,252 1,060 325 5,031 
Subordinated debt— — — 24,467 24,467 
Total$136,103 $12,859 $1,060 $24,792 $174,814 
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions that, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our clients. These transactions include commitments to extend credit and issue letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. We are not aware of any accounting loss to be incurred by funding these commitments, however we maintain an allowance for off-balance sheet credit risk which is recorded in other liabilities on the consolidated balance sheet.
Our commitments associated with outstanding letters of credit and commitments to extend credit as of the date indicated are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
(Dollars in thousands)September 30,
2022		December 31, 2021
Unfunded lines of credit529,519 415,402 
Commitments to extend credit93,278 108,824 
Standby letters of credit10,972 12,095 
Commercial letters of credit394 2,765 
Total credit extension commitments$634,163 $539,086 
Unfunded lines of credit represent unused portions of credit facilities to our current borrowers that represent no change in credit risk in our portfolio. Lines of credit generally have variable interest rates. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment, less the amount of any advances made.
Letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. In the event of nonperformance by the client in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. If the commitment is funded, we would be entitled to seek recovery from the client from the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash, or marketable securities.
Our policies generally require that letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements and our credit risk associated with issuing letters of credit is similar to the credit risk involved in extending loan facilities to our clients. The effect on our revenue, expenses, cash flows, and liquidity of the unused portions of these letters of credit commitments and letters of credit cannot be precisely predicted because there is no guarantee that the lines of credit will be used.
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Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition established in the contract, for a specific purpose. Commitments generally have variable interest rates, fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each client’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit is based on management’s credit evaluation of the client.
We enter into forward commitments for the delivery of mortgage loans in our current pipeline. Interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitments to fund the loans. These commitments to fund mortgage loans, to be sold into the secondary market, (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. We attempt to minimize our exposure to loss under credit commitments by subjecting them to the same credit approval and monitoring procedures as we do for on-balance sheet instruments.
Certain Performance Metrics
The following table shows the return on average assets (computed as annualized net income divided by average total assets), return on average equity (computed as annualized net income divided by average equity) and average equity to average assets ratios for the three months ended September 30, 2022, and 2021 and nine months ended September 30, 2022, and 2021.
(Dollars in thousands)Three Months Ended September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Return on average assets1.35 %0.97 %0.90 %0.96 %
Return on average equity14.13 %11.13 %10.24 %10.53 %
Average equity to average assets9.52 %8.76 %8.81 %9.15 %
Market Risk and Interest Rate Sensitivity
Overview
Market risk arises from changes in interest rates, exchange rates, commodity prices, and equity prices. We have risk management policies designed to monitor and limit exposure to market risk and we do not participate in activities that give rise to significant market risk involving exchange rates, commodity prices, or equity prices. In asset and liability management activities, our policies are designed to minimize structural interest rate risk.
Interest Rate Risk Management
Our net income is largely dependent on net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest earning assets. When interest-bearing liabilities mature or reprice more quickly than interest earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest earning assets mature or reprice more quickly than interest-bearing liabilities, falling market interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders’ equity.
We have established what we believe to be a comprehensive interest rate risk management policy, which is administered by ALCO. The policy establishes limits of risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity, or EVE, at risk) resulting from a hypothetical change in interest rates for maturities from one day to 30 years. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by us. When interest rates change, actual movements in different categories of interest earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.
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The balance sheet is subject to testing for interest rate shock possibilities to indicate the inherent interest rate risk. We prepare a current base case and several alternative interest rate simulations (-400, -300, -200, -100, +100, +200, +300 and +400 basis points (bps)), at least once per quarter, and report the analysis to ALCO and our Board. We augment our interest rate shock analysis with alternative interest rate scenarios on a quarterly basis that may include ramps, parallel shifts, and a flattening or steepening of the yield curve (non-parallel shift). In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when other business conditions so dictate.
Our goal is to structure the balance sheet so that net interest earnings at risk over a 12-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels. We attempt to achieve this goal by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets, by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by managing the mix of our core deposits, and by adjusting our rates to market conditions on a continuing basis.
Analysis
The following table indicates that, for periods less than one year, rate-sensitive assets exceeded rate-sensitive liabilities, resulting in a slightly asset-sensitive position. For a bank with an asset-sensitive position, otherwise referred to as a positive gap, rising interest rates would generally be expected to have a positive effect on net interest income, and falling interest rates would generally be expected to have the opposite effect.
REPRICING GAP
September 30, 2022
(Dollars in thousands)		Within One
Month		After One
Month
Through Three
Months		After Three
Months
Through
12 Months		Within One
Year		Greater than
One Year
or Nonsensitive		Total
Interest Earning Assets
Loans$457,601 $61,612 $262,215 $781,428 $1,206,982 $1,988,410 
Loans held for sale— — — — — — 
Securities42,934 6,052 10,422 59,408 124,348 183,756 
Interest earning deposits at other financial institutions112,571 — — 112,571 44,933 157,504 
Federal funds sold15,762 — — 15,762 — 15,762 
FHLB & FRB stock7,390 — — 7,390 — 7,390 
Total interest earning assets$636,258 $67,664 $272,637 $976,559 $1,376,263 $2,352,822 
Interest-Bearing Liabilities
Interest-bearing deposits$612,935 $22,740 $102,333 $738,008 $546,925 $1,284,933 
Time deposits16,548 29,235 88,926 134,709 10,607 145,316 
Total interest-bearing deposits$629,483 $51,975 $191,259 $872,717 $557,532 $1,430,249 
FHLB advances— — — — — — 
Subordinated debt— — — — 24,467 24,467 
Total interest-bearing liabilities$629,483 $51,975 $191,259 $872,717 $581,999 $1,454,716 
Period gap$6,775 $15,689 $81,378 $103,842 $794,264 
Cumulative gap$6,775 $22,464 $103,842 $103,842 $898,106 
Ratio of cumulative gap to total earning assets1.06 %33.20 %38.09 %10.63 %65.26 %
Ratio of cumulative gap to cumulative total earning assets0.29 %0.95 %4.41 %4.41 %38.17 %

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CASH FLOW GAP
September 30, 2022
(Dollars in thousands)		Within One
Month		After One
Month
Through Three
Months		After Three
Months
Through
12 Months		Within One
Year		Greater than
One Year
or Nonsensitive		Total
Interest Earning Assets
Loans$118,656 $111,893 $288,441 $518,990 $1,469,420 $1,988,410 
Loans held for sale— — — — — — 
Securities9,001 3,075 14,674 26,750 157,006 183,756 
Interest earning deposits at other financial institutions112,570 — — 112,570 44,934 157,504 
Federal funds sold15,762 — — 15,762 — 15,762 
FHLB & FRB stock (1)
— — — — 7,390 7,390 
Total interest earning assets$255,989 $114,968 $303,115 $674,072 $1,678,750 $2,352,822 
Interest-Bearing Liabilities
Interest-bearing deposits$24,485 $48,976 $220,398 $293,859 $991,074 $1,284,933 
Time deposits16,548 29,235 88,926 134,709 10,607 145,316 
Total interest-bearing deposits41,033 78,211 309,324 428,568 1,001,681 1,430,249 
FHLB advances— — — — — — 
Subordinated debt— — — — 24,467 24,467 
Total interest-bearing liabilities$41,033 $78,211 $309,324 $428,568 $1,026,148 $1,454,716 
Period gap$214,956 $36,757 $(6,209)$245,504 $652,602 
Cumulative gap$214,956 $251,713 $245,504 $245,504 $898,106 
Ratio of cumulative gap to total earning assets83.97 %218.94 %80.99 %36.42 %53.50 %
Ratio of cumulative gap to cumulative total earning assets9.14 %10.70 %10.43 %10.43 %38.17 %
(1)Includes FRB and FHLB stock, which has been historically redeemable at par.
Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, and do not necessarily indicate the long-term prospects or economic value of the institution.
The following table summarizes the results of our net interest income at risk analysis in simulating the change in net interest income and fair value of equity over a 12-month and 24-month horizon as of September 30, 2022, and December 31, 2021.
Net Interest Income at Risk – 12 months-400bps-300bps-200bps-100bpsFlat+100bps+200bps+300bps+400bps
Policy Limit(20.0)%(15.0)%(10.0)%(5.0)%— %(5.0)%(10.0)%(15.0)%(20.0)%
September 30, 2022(15.1)%(11.7)%(5.6)%(1.9)%— %1.7 %3.3 %5.0 %6.6 %
December 31, 2021(6.0)%(4.0)%(1.5)%1.3 %— %4.2 %8.4 %12.4 %16.2 %
Net Interest Income at Risk – 24 months-400bps-300bps-200bps-100bpsFlat+100bps+200bps+300bps+400bps
Policy Limit(20.0)%(15.0)%(10.0)%(5.0)%— %(5.0)%(10.0)%(15.0)%(20.0)%
September 30, 2022(24.4)%(19.6)%(11.2)%(4.8)%— %4.3 %8.3 %12.4 %16.6 %
December 31, 2021(15.6)%(12.5)%(9.1)%(4.7)%— %6.5 %12.7 %18.6 %24.4 %
Using an EVE, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model. This measures the difference between the economic value of our assets and the economic value of our liabilities, which is an estimate of liquidation value. While this provides some value as a risk measurement tool, management believes net interest income at risk is more appropriate in accordance with the going concern principle.
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The following table illustrates the results of our EVE analysis as of September 30, 2022, and December 31, 2021.
Economic Value of Equity-400bps-300bps-200bps-100bpsFlat+100bps+200bps+300bps+400bps
Policy Limit(30.0)%(20.0)%(15.0)%(10.0)%— %(10.0)%(15.0)%(20.0)%(30.0)%
September 30, 2022(1.9)%(0.4)%2.3 %2.6 %— %(3.1)%(6.3)%(9.6)%(13.3)%
December 31, 20216.7 %6.2 %5.9 %4.8 %— %(3.7)%(7.3)%(11.1)%(15.4)%
Critical Accounting Policies and Estimates
Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Our financial position and results of operations are affected by management's application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include our accounting for the allowance for loan losses and fair value measurements. Significant accounting policies are discussed in the Notes to Consolidated Financial Statements within our Annual Report. There have been no changes in such policies or the application of such policies during the nine months ended September 30, 2022.
In June 2016, FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) to replace the incurred loss model with an expected loss model, which is referred to as the current expected CECL model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (i.e. loan commitments, standby letters of credit, financial guarantees and other similar instruments). For Public Business Entities that are non-SEC filers and for SEC filers that are considered small reporting companies, it is effective for January 1, 2023. The Company's management has selected a credit loss estimation model. Initial data integration with the model is complete, and the Credit Department has performed several test runs with no material differences. The Company established a CECL committee that reviewed a parallel run using June 30, 2022 data during the third quarter. The committee is refining the qualitative factors under CECL and finalizing the structural overview document. The Company may recognize an increase in the allowance for credit losses upon adoption, recorded as a one-time cumulative adjustment to retained earnings. However, the magnitude of the impact on the Company's consolidated financial statements has not yet been determined. The Company will adopt this accounting standard effective January 1, 2023.
Explanation of Certain unaudited non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains financial information determined by methods other than U.S. GAAP, which we refer to “non-GAAP financial measures.” The table below provides a reconciliation between these non-GAAP measures and net interest income and total loans held for investment, which are the most comparable GAAP measures.
Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these measures are useful supplemental information that can enhance investors’ understanding of the Company’s business and performance without considering taxes or provisions for loan losses and can be useful when comparing performance with other financial institutions. However, these non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable GAAP measures.
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Reconciliation of non-GAAP Financial Measures
Three Months EndedNine Months Ended
(Dollar amounts in thousands, except per share data)September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Net interest income (GAAP)$24,797 $19,104 $65,753 $54,185 
Total noninterest income1,223 1,476 4,277 4,897 
Total noninterest expense13,853 11,624 42,952 34,366 
Pre-tax pre-provision earnings (non-GAAP)$12,167 $8,956 $27,078 $24,716 
Total adjustments to noninterest expense (1)
$(957)$— $(3,872)$(684)
Adjusted pre-tax pre-provision earnings
(non-GAAP)		$13,124 $8,956 $30,950 $25,400 
Return on average assets (GAAP)1.35 %0.97 %0.90 %0.96 %
Annualized pre-tax pre-provision ROAA
(non-GAAP)		1.93 %1.39 %1.36 %1.37 %
Adjusted annualized pre-tax pre-provision ROAA (non-GAAP)2.08 %1.39 %1.56 %1.41 %
(1)Adjustments to noninterest expense for the three months ended September 30, 2022 were related to acquisition expenses. Adjustments for the nine months ended September 30, 2022, were related to acquisition expenses and severance and accelerated vesting expense related to the departure of the former Chief Executive Officer. Adjustments to noninterest expense for the nine months ended September 30, 2021 were related to change in control payments to two former Marquis employees.
(Dollar amounts in thousands, except per share data)September 30, 2022December 31, 2021
Total loans held for investment, net (GAAP)$1,988,410 $1,764,460 
Add allowance for loan loss 16,485 12,704 
Total gross loans held for investment 2,004,895 1,777,164 
Less Professional Bank net PPP loans $2,618 $58,615 
Total gross LHFI excluding net PPP loans (non-GAAP)2,002,277 1,718,549 
Add purchase accounting loan marks 8,480 13,003 
$2,010,757 $1,731,552 
Total gross LHFI excluding net PPP loans (non-GAAP) + PA marks
ALLL as a % of LHFI (GAAP)0.82 %0.71 %
ALLL as a % of total LHFI excluding net PPP loans (non-GAAP)0.82 %0.74 %
PA marks + ALLL / LHFI excluding net PPP loans (non-GAAP)1.24 %1.48 %
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(Dollar amounts in thousands, except per share data)Three Months EndedNine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Net interest income (GAAP)$24,797 $19,104 $65,753 $54,185 
Less: PPP net interest income recognized(200)(2,151)(2,077)(7,048)
Net interest income excluding PPP
(non-GAAP)		24,597 16,953 63,676 47,137 
Less: PA premium/discounts(1,504)(1,969)(4,813)(1,969)
Net interest income excluding PPP and PA
(non-GAAP)		$23,093 $14,984 $58,863 $45,168 
Average interest earning assets (GAAP)2,342,000 2,431,904 2,503,621 2,290,121 
Less: average PPP loans(4,796)(117,256)(22,890)(164,691)
Average interest earning assets, excluding PPP (non-GAAP)2,337,204 2,314,648 2,480,731 2,125,430 
Add: average PA marks9,178 14,317 10,631 16,823 
Average interest earning assets, excluding PPP and PA (non-GAAP)$2,346,382 $2,328,965 $2,491,362 $2,142,253 
Net interest margin (GAAP)4.20 %3.12 %3.51 %3.16 %
Net interest margin excluding PPP
(non-GAAP)		4.18 %2.91 %3.43 %2.97 %
Net interest margin excluding PPP and PA
(non-GAAP)		3.90 %2.55 %3.16 %2.82 %
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Control Procedures
As required under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2022. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There have been no changes to the Company’s internal control over financial reporting that have occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is periodically party to or otherwise involved in legal proceedings arising in the normal course of business. The Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and related contingencies. In management’s opinion, there are no known pending legal proceedings, the outcome of which would, individually or in the aggregate, have a material adverse effect on our consolidated results of operations or consolidated financial position.
Item 1A. Risk Factors.
The section titled Risk Factors in Part I, Item 1A of our 2021 Form 10-K included a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. Additionally, risks and uncertainties not currently known to us, or that we presently deem to be immaterial, also may materially adversely affect our business, financial condition, and results of operations. Our proposed merger with Seacoast poses further risks that are described in detail in the Registration Statement on Form S-4 filed by Seacoast on October 4, 2022, which can be found on the SEC's website, www.sec.gov.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a)Not applicable.
(b)Not applicable.
(c)Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
EXHIBIT INDEX
Exhibit No.Description of Exhibit
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, in the capacities set forth opposite their names on November 9, 2022.
SignatureTitleDate
/s/ Abel L. IglesiasChief Executive OfficerNovember 09, 2022
Abel L. Iglesias(Principal Executive Officer)
/s/ Mary UsateguiChief Financial OfficerNovember 09, 2022
Mary Usategui(Principal Financial and Accounting Officer)
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