Professional Holding Corp. - Quarter Report: 2022 June (Form 10-Q)

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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 June 30, 2022

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
June 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 Symbol

Name of each exchange on which registered:

Class A Common Stock

PFHD

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 August 10, 2022: 13,773,115

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TABLE OF CONTENTS


Part I	Financial Information	3

Item 1	Consolidated Financial Statements (unaudited)	3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3	Quantitative and Qualitative Disclosures About Market Risk	63

Item 4	Controls and Procedures	63

Part II	Other Information	64

Item 1	Legal Proceedings	64

Item 1A	Risk Factors	64

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3	Defaults Upon Senior Securities	64

Item 4	Mine Safety Disclosures	64

Item 5	Other Information	64

Item 6	Exhibits	65

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PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited).

PROFESSIONAL HOLDING CORP.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollar amounts in thousands, except share data)


	June 30, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	41,202	$	38,469
Interest earning deposits	299,834		545,521
Federal funds sold	27,043		13,477
Cash and cash equivalents	368,079		597,467
Securities available for sale, at fair value - taxable	164,354		175,536
Securities available for sale, at fair value - tax-exempt	27,453		18,765
Securities held to maturity (fair value June 30, 2022 – $197, December 31, 2021 – $242)	204		236
Equity securities	6,359		6,638
Loans, net of allowance of $15,142 and $12,704 as of June 30, 2022 and December 31, 2021, respectively	1,972,091		1,764,460
Loans held for sale	—		165
Premises and equipment, net	8,570		9,020
Bank owned life insurance	54,134		38,485
Goodwill and intangibles	25,639		25,766
Other assets	34,631		27,573
Total assets	$	2,661,514	$	2,664,111
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand – noninterest bearing	$	777,501	$	674,003
Demand – interest bearing	339,942		310,362
Money market and savings	1,055,813		1,121,330
Time deposits	208,479		265,693
Total deposits	2,381,735		2,371,388
Federal Home Loan Bank advances	—		35,000
Official checks	5,815		4,125
Other borrowings	—		10,000
Subordinated debt	24,436		—
Accrued interest and other liabilities	15,930		12,074
Total liabilities	2,427,916		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 14,699,975 and outstanding 13,742,381 shares as of June 30, 2022, and authorized 50,000,000 shares, issued 14,393,750 and outstanding 13,446,400 shares at December 31, 2021	147		144
Class B Non-Voting Common stock, $0.01par value; 10,000,000 shares authorized, none issued and outstanding on June 30, 2022 and December 31, 2021	—		—
Treasury stock, at cost	(16,201)		(16,003)
Additional paid-in capital	215,541		212,012
Retained earnings	45,533		36,120
Accumulated other comprehensive income (loss)	(11,422)		(749)
Total stockholders’ equity	233,598		231,524
Total liabilities and stockholders' equity	$	2,661,514	$	2,664,111

See accompanying notes to consolidated financial statements.

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PROFESSIONAL HOLDING CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (Unaudited)

(Dollar amounts in thousands, except share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Interest income
Loans, including fees	$	21,600	$	18,311	$	41,380	$	37,544
Investment securities - taxable	704		161		1,342		340
Investment securities - tax-exempt	232		189		445		392
Dividend income on restricted stock	105		99		202		194
Other	1,029		202		1,323		264
Total interest income	23,670		18,962		44,692		38,734

Interest expense
Deposits	1,491		1,430		3,077		2,747
Federal Home Loan Bank advances	3		190		137		386
Subordinated debt	266		77		498		207
Other borrowings	1		63		24		313
Total interest expense	1,761		1,760		3,736		3,653

Net interest income	21,909		17,202		40,956		35,081
Provision for loan losses	2,240		762		3,091		1,800
Net interest income after provision for loan losses	19,669		16,440		37,865		33,281

Noninterest income
Service charges on deposit accounts	577		1,199		1,094		1,594
Income from bank owned life insurance	376		281		649		563
SBA origination fees	48		—		48		145
Swap fee income	—		364		112		573
Loans held for sale income	45		226		116		301
Gain on sale and call of securities	13		21		13		22
Other	722		211		1,022		223
Total noninterest income	1,781		2,302		3,054		3,421

Noninterest expense
Salaries and employee benefits	7,473		7,099		18,693		13,883
Occupancy and equipment	1,010		905		2,012		2,007
Data processing	304		276		618		566
Marketing	125		165		321		318
Professional fees	886		770		1,805		1,398
Acquisition expenses	—		—		—		684
Regulatory assessments	473		418		1,022		767
Other	2,333		1,321		4,628		3,119
Total noninterest expense	12,604		10,954		29,099		22,742

Income before income taxes	8,846		7,788		11,820		13,960
Income tax provision	1,852		1,457		2,407		2,844
Net income	$	6,994	$	6,331	$	9,413	$	11,116

Earnings per share:
Basic	$	0.52	$	0.47	$	0.70	$	0.83
Diluted	$	0.50	$	0.45	$	0.67	$	0.80

Other comprehensive income:
Unrealized holding gain (loss) on securities available for sale	(5,841)		(505)		(14,308)		(794)
Tax effect	1,481		124		3,635		195
Other comprehensive gain (loss), net of tax	(4,360)		(381)		(10,673)		(599)
Comprehensive income (loss)	$	2,634	$	5,950	$	(1,260)	$	10,517

See accompanying notes to consolidated financial statements.

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PROFESSIONAL HOLDING CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(Dollar amounts in thousands, except share data)


	Common Stock			Treasury Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Amount
Balance on December 31, 2020	13,534,829	$	141	$	(9,209)	$	208,995	$	14,756	$	882	$	215,565

Employee stock purchase plan	1,851	—		—		34		—		—		34
Stock based compensation	—	1		—		709		—		—		710
Exercise of stock options	64,414	—		—		—		—		—		—
Restricted stock issued	122,455	1		—		543		—		—		544
Treasury stock	(247,768)	—		(4,335)		(7)		—		—		(4,342)
Net income	—	—		—		—		11,116		—		11,116
Other comprehensive income (loss)	—	—		—		—		—		(599)		(599)
Balance on June 30, 2021	13,475,781	$	143	$	(13,544)	$	210,274	$	25,872	$	283	$	223,028

Balance on December 31, 2021	13,446,400	$	144	$	(16,003)	$	212,012	$	36,120	$	(749)	$	231,524


Stock based compensation	—	—		—		2,230		—		—		2,230
Exercise of stock options	115,472	1		—		1,301		—		—		1,302
Restricted stock issued	190,753	2		—		(2)		—		—		—
Treasury stock	(10,244)	—		(198)		—		—		—		(198)
Net income	—	—		—		—		9,413		—		9,413
Other comprehensive income (loss)	—	—		—		—		—		(10,673)		(10,673)
June 30, 2022	13,742,381	$	147	$	(16,201)	$	215,541	$	45,533	$	(11,422)	$	233,598

Balance on March 31, 2021	13,661,567	$	143	$	(10,087)	$	209,770	$	19,541	$	664	$	220,031

Employee stock purchase plan	978	—		—		18		—		—		18
Stock based compensation expense	—	—		—		385		—		—		385
Exercise of stock options	8,359	—		—		—		—		—		—
Restricted stock issued	(1,834)	—		—		107		—		—		107
Treasury stock	(193,289)	—		(3,457)		(6)		—		—		(3,463)
Net income	—	—		—		—		6,331		—		6,331
Other comprehensive income (loss)	—	—		—		—		—		(381)		(381)
Balance on June 30, 2021	13,475,781	$	143	$	(13,544)	$	210,274	$	25,872	$	283	$	223,028

Balance on March 31, 2022	13,665,801	$	146	$	(16,201)	$	214,351	$	38,539	$	(7,062)	$	229,773


Stock based compensation expense	—	—		—		505		—		—		505
Exercise of stock options	55,807	1		—		685		—		—		686
Restricted stock issued	20,773	—		—		—		—		—		—

Net income	—	—		—		—		6,994		—		6,994
Other comprehensive income (loss)	—	—		—		—		—		(4,360)		(4,360)
Balance on June 30, 2022	13,742,381	$	147	$	(16,201)	$	215,541	$	45,533	$	(11,422)	$	233,598

See accompanying notes to consolidated financial statements

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PROFESSIONAL HOLDING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollar amounts in thousands, except share data)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities
Net income	$	9,413	$	11,116
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	3,091		1,800
Amortization of purchase accounting adjustments	(3,262)		(2,581)

Depreciation and amortization	89		702

Gain on call of securities	(13)		(22)
Gain on loans held for sale	(116)		(301)
Equity unrealized change in market value	336		63
Net amortization of securities	726		1,396
Net amortization of deferred loan fees	(2,865)		(4,400)
Originations of loans held for sale	(7,713)		(15,728)
Proceeds from sales of loans held for sale	7,994		15,260
Income from bank-owned life insurance	(649)		(563)
Loss (gain) on disposal of premises and equipment	(1)		137
Employee stock purchase plan	—		34
Stock compensation	2,230		710
Changes in operating assets and liabilities:
Accrued interest receivable	8		1,217
Other assets	(3,823)		811
Official checks, accrued interest, interest payable and other liabilities	5,630		(1,227)
Net cash provided by (used in) operating activities	11,075		8,424

Cash flows from investing activities
Proceeds from maturities and paydowns of securities available for sale	14,036		11,123
Proceeds from calls of securities available for sale	4,175		4,648
Proceeds from paydowns of securities held to maturity	31		257
Purchase of securities available for sale	(30,737)		(50,922)

Purchase of equity securities	(57)		—
Loans originations, net of principal repayments	(204,791)		(45,437)

Redemption of Federal Reserve Bank stock	(589)		—
Purchase of Federal Home Loan Bank Stock	—		(192)
Net redemption of Federal Home Loan Bank Stock	981		888
Purchase of bank-owned life insurance	(15,000)		—
Purchases of premises and equipment, net	(206)		(1,376)

Net cash used in investing activities	(232,157)		(81,011)

Cash flows from financing activities
Net increase in deposits	10,590		618,107
Proceeds from issuance of stock, net of issuance costs	1,302		544

Purchase of treasury stock	(198)		(4,342)

Repayments of Federal Home Loan advances	(35,000)		(5,000)
Net proceeds from issuance of subordinated notes payable	25,000		—


Repayment of line of credit	(10,000)		—

Repayments of PPPLF advances	—		(101,358)
Net cash provided by (used in) financing activities	(8,306)		507,951

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Increase (decrease) in cash and cash equivalents	(229,388)		435,364
Cash and cash equivalents at beginning of period	597,467		216,972
Cash and cash equivalents at end of period	$	368,079	$	652,336

Supplemental cash flow information:
Cash paid during the period for interest	$	3,872	$	4,425
Cash paid during the period for taxes	3,956		3,000

See accompanying notes to consolidated financial statements

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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, 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 six months ended June 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)
Description			In 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 Adoption			ASU 2022-02 is effective January 1, 2023.
Effect on the Consolidated Financial Statements			This 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
Description			In 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 Statements			We are evaluating the impact of this ASU, however it is not believed to be material.

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

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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 June 30,				Six Months Ended June 30,
(Dollar amounts in thousands, except per share data)	2022		2021		2022		2021
Basic earnings per share:
Net income	$	6,994	$	6,331	$	9,413	$	11,116
Total weighted average common stock outstanding	13,446,335		13,397,747		13,396,240		13,419,929
Net income per share	$	0.52	$	0.47	$	0.70	$	0.83
Diluted earnings per share:
Net income	$	6,994	$	6,331	$	9,413	$	11,116
Total weighted average common stock outstanding	13,446,335		13,397,747		13,396,240		13,419,929
Add: dilutive effect of employee restricted stock and options	628,550		564,822		614,006		521,900
Total weighted average diluted stock outstanding	14,074,885		13,962,569		14,010,246		13,941,829
Net income per share	$	0.50	$	0.45	$	0.67	$	0.80

Anti-dilutive restricted stock and options	29,250		270,850		65,672		270,850

NOTE 3 — SECURITIES

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity on June 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
June 30, 2022
Available for sale - taxable
Small Business Administration loan pools	$	35,355	$	33	$	(442)	$	34,946
Mortgage-backed securities (1)	138,666		—		(13,529)		125,137
United States agency obligations	2,945		—		(178)		2,767
Corporate bonds	1,500		4		—		1,504
Total available for sale - taxable	$	178,466	$	37	$	(14,149)	$	164,354
Available for sale - tax-exempt
Community Development District bonds	$	25,488	$	13	$	(1,069)	$	24,432
Municipals	3,155		—		(134)		3,021
Total available for sale - tax-exempt	$	28,643	$	13	$	(1,203)	$	27,453

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Held to Maturity
Residential mortgage-backed securities	$	204	$	—	$	(7)	$	197


Total Held to Maturity	$	204	$	—	$	(7)	$	197

(1)$100.0 million is residential mortgage-backed and $25.2 million is commercial mortgage-backed.

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	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Equity
Mutual Funds	$	5,502	$	—	$	—	$	5,502
Other equity securities	857		—		—		857
Total Equity	$	6,359	$	—	$	—	$	6,359


(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)	131,273		70		(1,240)		130,103
United States agency obligations	3,939		54		(7)		3,986
Corporate bonds	1,500		13		—		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

Municipals	1,051		40		—		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 securities	800		—		—		800
Total equity	$	6,638	$	—	$	—	$	6,638

As of June 30, 2022, and December 31, 2021, corporate bonds were comprised of investments in the financial services industry. During the six months ended June 30, 2022, the net investment portfolio decreased by $2.8 million primarily due to $18.2 million in investment calls, redemptions and paydowns, coupled with unrealized losses of $14.3 million during the year with a related tax effect of $3.6 million, 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 June 30, 2022, and December 31, 2021, were $1.9 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.

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Securities not due at a single maturity date are shown separately. The scheduled maturities of securities as of June 30, 2022, are as follows:


	June 30, 2022
(Dollars in thousands)	Amortized Cost		Fair Value
Available for sale
Due in one year or less	$	5,440	$	5,426
Due after one year through five years	22,955		21,971
Due after five years through ten years	4,693		4,327
Due after ten years	—		—
Subtotal	33,088		31,724

Small Business Administration loan pools	35,355		34,946
Mortgage-backed securities	138,666		125,137
Total available for sale	$	207,109	$	191,807

Held to maturity




Mortgage-backed securities	$	204	$	197
Total held to maturity	$	204	$	197

On June 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 June 30, 2022, and December 31, 2021, the number of investment positions that are in an unrealized loss position were 198 and 92, respectively.

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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 June 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 Months				12 Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2022
Available for sale - taxable
Small Business Administration loan pools	$	4,145	$	(79)	$	24,445	$	(363)	$	28,590	$	(442)
Mortgage-backed securities	114,856		(12,206)		10,375		(1,323)		125,231		(13,529)
United States agency obligations	2,767		(178)		—		—		2,767		(178)

Total available for sale - taxable	$	121,768	$	(12,463)	$	34,820	$	(1,686)	$	156,588	$	(14,149)
Available for sale - tax-exempt
Community Development District bonds	$	20,627	$	(1,069)	$	—	$	—	$	20,627	$	(1,069)
Municipals	3,020		(134)		—		—		3,020		(134)
Total available for sale - tax-exempt	$	23,647	$	(1,203)	$	—	$	—	$	23,647	$	(1,203)

December 31, 2021
Available for sale - taxable
Small Business Administration loan pools	$	17,428	$	(335)	$	14,872	$	(136)	$	32,300	$	(471)
Mortgage-backed securities	109,621		(1,168)		1,710		(73)		111,331		(1,241)
United States agency obligations	1,930		(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 are mainly due to changes in the interest rate cycle. The unrealized loss positions may fluctuate positively or negatively with changes in interest rates or spreads. Since 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 six months ended June 30, 2022, or during the year ended December 31, 2021.

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NOTE 4 — LOANS

Loans on June 30, 2022, and December 31, 2021, were as follows:


(Dollars in thousands)	June 30, 2022		December 31, 2021
Loans held for investment:
Commercial real estate	$	1,034,487	$	902,654
Residential real estate	422,239		377,511
Commercial (non-PPP)	387,317		325,415
Commercial (PPP)	8,176		58,615
Construction and land development	114,938		91,520
Consumer and other	20,076		21,449
Total loans held for investment, gross	1,987,233		1,777,164
Allowance for loan losses	(15,142)		(12,704)
Loans held for investment, net	$	1,972,091	$	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 June 30, 2022, and December 31, 2021, there were $245.4 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 June 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 $9.9 million and $13.0 million, as of June 30, 2022, and December 31, 2021, respectively.

There are no loans over 90 days past due and accruing as of June 30, 2022, or December 31, 2021.

The following table presents the aging of the recorded investment in past due loans as of June 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		Nonaccrual		Total Past Due		Loans Not Past Due		Total
June 30, 2022
Commercial real estate	$	—	$	284	$	—	$	—	$	284	$	1,034,203	$	1,034,487
Residential real estate	—		—		—		—		—		422,239		422,239
Commercial (non-PPP)	326		88		—		1,468		1,882		385,435		387,317
Commercial (PPP)	178		7		—		—		185		7,991		8,176
Construction and land development	—		—		—		—		—		114,938		114,938
Consumer and other	—		—		—		—		—		20,076		20,076
Total	$	504	$	379	$	—	$	1,468	$	2,351	$	1,984,882	$	1,987,233

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(Dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Nonaccrual		Total Past Due		Loans Not Past Due		Total
December 31, 2021
Commercial real estate	$	292	$	—	$	—	$	—	$	292	$	902,362	$	902,654
Residential real estate	—		—		—		—		—		377,511		377,511
Commercial (non-PPP)	449		—		—		1,468		1,917		323,498		325,415
Commercial (PPP)	7		—		—		—		7		58,608		58,615
Construction and land development	—		—		—		—		—		91,520		91,520
Consumer and other	—		—		—		654		654		20,795		21,449
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 $1.0 million and $55 thousand as of June 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 June 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. Beyond the annual review, 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 that portion thereof which 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 who are in non-compliance with periodic reporting requirements of the loan agreement, and any other credit file documentation deficiencies, which do not otherwise affect the borrower’s credit

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risk 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 to evaluate 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) 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 affected 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)	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2022
Commercial real estate	$	1,031,944	$	285	$	2,258	$	—	$	1,034,487
Residential real estate	421,199		1,040		—		—		422,239
Commercial (non-PPP)	385,435		414		1,468		—		387,317
Commercial (PPP)	8,176		—		—		—		8,176
Construction and land development	114,938		—		—		—		114,938
Consumer	20,004		72		—		—		20,076
Total	$	1,981,696	$	1,811	$	3,726	$	—	$	1,987,233

December 31, 2021
Commercial real estate	$	900,364	$	—	$	2,290	$	—	$	902,654
Residential real estate	377,511		—		—		—		377,511
Commercial (non-PPP)	323,657		290		1,468		—		325,415
Commercial (PPP)	58,615		—		—		—		58,615
Construction and land development	91,520		—		—		—		91,520
Consumer	20,712		83		—		654		21,449
Total	$	1,772,379	$	373	$	3,758	$	654	$	1,777,164

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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)	June 30, 2022		December 31, 2021
Commercial real estate	$	5,804	$	5,845
Residential real estate	—		89
Commercial	202		410
Construction and development	—		—
Consumer and other loans	—		—
Carrying amount	$	6,006	$	6,344

Accretable yield for all purchased credit impaired loans were as follows for the six months ended June 30, 2022 and 2021 :


(Dollars in thousands)	2022		2021
Balance at January 1	(573)		(630)
New loans purchased	—		—
Adjustment of income	—		—
Accretion	135		195
Reclassifications from nonaccretable difference	(397)		(136)
Disposals	373		—
Balance on June 30	$	(462)	$	(571)

For those purchased credit impaired loans disclosed above, no allowances for loan losses were recorded or reversed during the six months ended June 30, 2022.

Non-Performing Assets

As of June 30, 2022, the Company had nonperforming assets of $1.5 million, or 0.06% 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 six months ended June 30, 2022, compared to a partial charge-off of $7.6 million for the six months ended June 30, 2021 on a commercial loan.

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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 six months ended June 30, 2022, and 2021.


	Three Months Ended June 30, 2022
(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and land Development		Consumer and Other		Total
June 30, 2022
Allowance for loan losses:
Beginning balance	$	4,735	$	2,382	$	5,133	$	511	$	794	$	13,555
Provision for loan losses	1,194		584		292		166		4		2,240
Loans charged-off	—		—		—		—		(653)		(653)
Recoveries	—		—		—		—		—		—
Total ending allowance balance	$	5,929	$	2,966	$	5,425	$	677	$	145	$	15,142


	Three Months Ended June 30, 2021
(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and land Development		Consumer and Other		Total
June 30, 2021
Allowance for loan losses:
Beginning balance	$	3,482	$	2,188	$	3,521	$	404	$	61	$	9,656
Provision for loan losses	803		81		(98)		(43)		19		762
Loans charged-off	—		—		—		—		—		—
Recoveries	—		—		—		—		—		—
Total ending allowance balance	$	4,285	$	2,269	$	3,423	$	361	$	80	$	10,418


	Six Months Ended June 30, 2022
(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and Land Development		Consumer and Other		Total
June 30, 2022
Allowance for loan losses:
Beginning balance	$	4,471	$	2,339	$	4,637	$	471	$	786	$	12,704
Provision for loan losses	1,458		627		788		206		12		3,091
Loans charged-off	—		—		—		—		(653)		(653)
Recoveries	—		—		—		—		—		—
Total ending allowance balance	$	5,929	$	2,966	$	5,425	$	677	$	145	$	15,142

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	Six Months Ended June 30, 2021
(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and Land Development		Consumer and Other		Total
June 30, 2021
Allowance for loan losses:
Beginning balance	$	3,159	$	2,177	$	10,462	$	388	$	73	$	16,259
Provision for loan losses	1,126		92		602		(27)		7		1,800
Loans charged-off	—		—		(7,641)		—		—		(7,641)
Recoveries	—		—		—		—		—		—
Total ending allowance balance	$	4,285	$	2,269	$	3,423	$	361	$	80	$	10,418


(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and Land Development		Consumer and Other		Total
June 30, 2022
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	—	$	—	$	702	$	—	$	—	$	702
Purchased Credit Impaired (PCI) loans	—		—		—		—		—		—
Collectively evaluated for impairment	5,929		2,966		4,723		677		145		14,440
Total ending allowance balance	$	5,929	$	2,966	$	5,425	$	677	$	145	$	15,142

Loans:
Loans individually evaluated for impairment	$	2,258	$	—	$	1,468	$	—	$	—	$	3,726
Loans collectively evaluated for impairment	1,032,229		422,239		394,025		114,938		20,076		1,983,507
Total ending loans balance	$	1,034,487	$	422,239	$	395,493	$	114,938	$	20,076	$	1,987,233

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 impairment	4,471		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 impairment	900,364		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

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NOTE 6 — DEPOSITS

The Company’s total deposits are comprised of the following at the dates indicated:


	June 30, 2022			December 31, 2021
(Dollars in thousands)	Ending Balance		% of Total	Ending Balance		% of Total
NOW accounts	$	339,942	14.3%	$	310,362	13.1%
Money market accounts	1,026,457		43.1%	1,055,033		44.5%
Brokered deposits	15,032		0.6%	58,365		2.5%
Savings accounts	14,324		0.6%	12,558		0.5%
Certificates of deposit	208,479		8.8%	261,067		11.0%
Total interest-bearing deposits	1,604,234		67.4%	1,697,385		71.6%
Noninterest-bearing deposits	777,501		32.6%	674,003		28.4%
Total deposits	$	2,381,735	100.0%	$	2,371,388	100.0%

_______________________________________________

(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 June 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	$	35,131	$	15,319	$	17,928	$	3,512	$	71,890
Time deposits of more than $250,000	65,749		27,793		38,858		4,189		136,589
Total	$	100,880	$	43,112	$	56,786	$	7,701	$	208,479

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	32,058		54,429		83,290		2,760		172,537
Total	$	49,489	$	81,150	$	127,663	$	7,391	$	265,693

As of June 30, 2022, and December 31, 2021, the Company had time deposits that exceed the $250,000 FDIC insurance limit of $136.6 million and $172.5 million, respectively. Securities, mortgage loans or other financial instruments pledged as collateral for certain deposits were $28.7 million, and $28.7 million on June 30, 2022, and December 31, 2021, respectively. The aggregate amount of demand deposits that have been re-classified as loan balances on June 30, 2022, and December 31, 2021, were $0.6 million, and $0.4 million, respectively. Deposits from principal officers, directors and their affiliates at June 30, 2022, and December 31, 2021, were $2.4 million and $18.9 million, respectively.

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For time deposits having a remaining term of more than on year, the aggregate amount of maturities for each of the five years at the dates indicated.


(Dollars in thousands)	June 30, 2022		December 31, 2021
1 year or less	$	200,778	$	258,302
Over 1 through 2 years	7,461		6,669
Over 2 through 3 years	240		722
Over 3 through 4 years	—		—
Over 4 through 5 years	—		—
Over 5 years	—		—
Total	$	208,479	$	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 June 30, 2022, and December 31, 2021. Additionally, the Company had $92.5 million and $84.4 million, in Qualified Public Deposits (“QPD”) that require a portion of the deposit to be pledged as collateral as of June 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 (SOFR) plus 203 basis points. The Notes are redeemable by the Company at its option, in whole or in part, on or 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 June 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

FHLB 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 June 30, 2022, approximately $245.4 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 June 30, 2022, we had no outstanding advances, $28.7 million in outstanding letters of credit, and $153.3 million in additional available borrowing capacity from the FHLB based on the collateral that we have currently pledged.


(Dollars in thousands)	June 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	$	13,757	$	36,918
Weighted average interest rate during period	1.98%		2.01%

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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 June 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 June 30, 2022, there are 50,000,000 shares authorized as Class A voting common stock of which 13,742,381 are outstanding. During the six months ended June 30, 2022, the Company issued 315,369 shares of Class A voting common stock, inclusive of 199,897 shares of restricted stock grants and 115,472 shares of options exercised.

During the six months ended June 30, 2022, treasury shares increased 10,244 in connection with the net settlement of equity awards exercised or vested for tax purposes and had 9,144 in restricted stock cancellations. During the six months ended June 30, 2021, the Company repurchased 247,768 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. The Company did not repurchase any shares for the six months ended June 30, 2022.

Class B Non-voting Common Stock

The Company has authorized Class B non-voting common stock with a par value of $0.01 per share. As of June 30, 2022, and December 31, 2021, there are 10,000,000 shares authorized as Class B non-voting common stock, none of which were outstanding.

Preferred Stock

The Company has 10,000,000 shares of undesignated and unissued preferred stock.

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:

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

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might include certain residual interests in securitizations and other less liquid securities. As of June 30, 2022, and December 31, 2021, all securities available for sale were Level 2.

Securities held to maturity: Reported 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 six months ended June 30, 2022, or for the year ended December 31, 2021.

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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 June 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	$	34,946	$	—	$	34,946	$	—
Mortgage-backed securities	125,137		—		125,137		—
United States agency obligations	2,767		—		2,767		—
Corporate bonds	1,504		—		1,504		—
Securities available for sale - tax-exempt
Community Development District bonds	24,432		—		24,432		—
Municipals	3,021		—		3,021		—
Equity securities - mutual funds	$	5,502	$	5,502	$	—	$	—

Customer derivatives - interest rate swaps	$	3,926	$	—	$	3,926	$	—

LIABILITIES:
Customer derivatives - interest rate swaps	$	3,926	$	—	$	3,926	$	—


			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 securities	130,103		—		130,103		—
United States agency obligations	3,986		—		3,986		—
Corporate bonds	1,513		—		1,513		—
Securities available for sale - tax-exempt
Community Development District bonds	17,674		—		17,674		—
Municipals	1,091		—		1,091		—
Equity securities - mutual funds	$	5,838	$	5,838	$	—	$	—
Loans held for sale	$	165	$	165	$	—	$	—
Customer derivatives - interest rate swaps	$	1,144	$	—	$	1,144	$	—

LIABILITIES:
Customer derivatives - interest rate swaps	$	1,144	$	—	$	1,144	$	—

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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 June 30, 2022 Using:
(Dollars in thousands)	Total at June 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	$	—	$	—	$	—	$	—	$	—
Residential real estate	—		—		—		—		—
Commercial	766		—		—		766		(702)
Construction and land development	—		—		—		—		—
Consumer and other	—		—		—		—		—
Total	$	766	$	—	$	—	$	766	$	(702)


			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	—		—		—		—		—
Commercial	797		—		—		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.

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The table below presents the approximate carrying amount and estimated fair value of the Company’s financial instruments (in thousands):


	June 30, 2022
(Dollars in thousands)	Carrying Amount		Fair Value		Fair Value Hierarchy
Financial Assets:
Cash & due from banks, including interest bearing deposits	$	341,036	$	341,036	Level 1
Federal funds sold	27,043		27,043		Level 1
Securities, available for sale - taxable	178,465		164,354		Level 2
Securities, available for sale - tax-exempt	28,642		27,453		Level 2
Securities, held to maturity	204		197		Level 2
Securities, equity	5,502		5,502		Level 1
Securities, other equity	857		857		Level 1
Loans, net	1,972,091		1,969,111		Level 3

Bank owned life insurance	54,134		54,134		Level 2
Customer derivatives - interest rate swaps	3,926		3,926		Level 2
Accrued interest receivable	5,264		5,264		Level 1, 2 & 3

Financial Liabilities:
Deposits	$	2,381,735	$	2,231,981	Level 2

Subordinated debt	24,436		24,436		Level 2



Customer derivatives - interest rate swaps	3,926		3,926		Level 2
Accrued interest payable	564		564		Level 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	$	583,990	Level 1
Federal funds sold	13,477		13,477		Level 1
Securities, available for sale - taxable	177,080		175,536		Level 2
Securities, available for sale - tax-exempt	18,214		18,765		Level 2
Securities, held to maturity	236		242		Level 2
Securities, equity	5,838		5,838		Level 1
Securities, other equity	800		800		Level 1
Loans, net	1,764,460		1,779,968		Level 3
Loans held for sale	165		165		Level 1
Bank owned life insurance	38,485		38,485		Level 2
Customer derivatives - interest rate swaps	1,144		1,144		Level 2
Accrued interest receivable	5,272		5,272		Level 1, 2 & 3

Financial Liabilities:
Deposits	$	2,371,388	$	2,372,372	Level 2
Federal Home Loan Bank advances	35,000		34,274		Level 2

Line of credit	10,000		10,000		Level 2


Customer derivatives - interest rate swaps	1,144		1,144		Level 2

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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 June 30, 2022, the Company recorded 13 swap transactions with clients having a total notional amount of $54.8 million, offset by 13 swap transactions with dealers having a total notional amount of $54.8 million. Additionally, we recorded $0.1 million in back-to-back swap fee income for the six months ended June 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 June 30, 2022, the Bank’s asset fair value position in other assets was $3.9 million and liability fair value position in other liabilities was $3.9 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. Subsequent to June 30, 2022, Pro Opp Fund LLC 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 June 30, 2022, and December 31, 2021, were as follows:


(Dollars in thousands)	June 30, 2022		December 31, 2021
Available lines of credit	$	471,356	$	415,402
Unfunded loan commitments – fixed	34,058		62,126
Unfunded loan commitments – variable	73,081		46,698
Standby letters of credit	11,974		12,095
Commercial letters of credit	3,664		2,765
Total credit extension commitments	$	594,133	$	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 June 30, 2022, the Bank met all capital adequacy requirements to which it was subject.

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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 June 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 are 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 June 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)	Actual				Required for Capital Adequacy Purposes				Well Capitalized Prompt Corrective Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2022
Total Capital ratio
Bank	$	245,543	12.1	%	$	162,036	8.0	%	$	202,545	10.0	%
Company	260,097		12.8	%	162,036		8.0	%	N/A		N/A
Tier 1 Capital ratio
Bank	229,263		11.3	%	121,527		6.0	%	162,036		8.0	%
Company	219,381		10.8	%	121,527		6.0	%	N/A		N/A
Tier 1 Leverage ratio
Bank	229,263		8.5	%	108,401		4.0	%	135,501		5.0	%
Company	219,381		8.1	%	108,401		4.0	%	N/A		N/A
Common Equity Tier 1
Bank	229,263		11.3	%	91,145		4.5	%	131,654		6.5	%
Company	219,381		10.8	%	91,145		4.5	%	N/A		N/A

December 31, 2021
Total Capital ratio
Bank	$	222,696	12.9	%	$	138,435	8.0	%	$	173,043	10.0	%
Company	220,206		12.7	%	138,435		8.0	%	N/A		N/A
Tier 1 Capital ratio
Bank	208,997		12.1	%	103,826		6.0	%	138,435		8.0	%
Company	206,507		11.9	%	103,826		6.0	%	N/A		N/A
Tier 1 Leverage ratio
Bank	208,997		7.7	%	107,877		4.0	%	134,846		5.0	%
Company	206,507		7.7	%	107,877		4.0	%	N/A		N/A
Common Equity Tier 1
Bank	208,997		12.1	%	77,869		4.5	%	112,478		6.5	%
Company	206,507		11.9	%	77,869		4.5	%	N/A		N/A

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NOTE 13 — SUBSEQUENT EVENTS

Proposed Merger with Seacoast Banking Corporation of Florida

On August 8, 2022, Professional Holding Corp. and Seacoast Banking Corporation of Florida (“Seacoast”) entered into an Agreement and Plan of Merger pursuant to which Professional will merge with and into Seacoast, with Seacoast as the surviving corporation, in an all-stock transaction. The merger was approved by the board of directors of each of Professional and Seacoast. Completion of the merger is subject to customary closing conditions, including receipt of regulatory approvals and the approval by the shareholders of Professional. The transaction is expected to close in the first quarter of 2023.

Subject to the terms of the merger agreement, Professional shareholders will have the right to receive 0.8909 shares of Seacoast common stock for each outstanding share of Professional common stock.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

The following discussion and analysis are part of Professional Holding Corp.’s (the “Company”) Quarterly Report on Form 10-Q filed with the SEC and updates the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was previously filed with the SEC. This financial information is presented to aid in understanding the Company’s 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 six months ended June 30, 2022, compared to the three and six months ended June 30, 2021, for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of June 30, 2022, compared to December 31, 2021.

Proposed Merger with Seacoast Banking Corporation of Florida

On August 8, 2022, Professional Holding Corp. and Seacoast Banking Corporation of Florida (“Seacoast”) entered into an Agreement and Plan of Merger as detailed in Note 13 to the Financial Statements..

Subject to the terms of the merger agreement, Professional shareholders will have the right to receive 0.8909 shares of Seacoast common stock for each outstanding share of Professional common stock.

Cautionary Note Regarding Forward Looking Information

This Quarterly Report on Form 10-Q contains certain forward-looking statements, as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements reflect our current opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding, among other things, future events or future results, in contrast with statements that reflect historical facts. These statements are often, but not always, made through the use of conditional words such as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” “may,” “will,” “would,” “could” or “should” or the negative versions of these terms or other comparable terminology. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

Important factors related to forward-looking statements may include, among others, risks and assumptions regarding:

•the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

•general economic, industry, and market conditions, including the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war, including the ongoing conflict between Russia and Ukraine and related increasing oil prices and supply chain interruptions;

•our ability to successfully manage interest rate risk, credit risk, liquidity risk, and other risks inherent to our industry;

•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;

•potential disruptions from viruses and pandemics, including the duration and severity of the on-going COVID-19 pandemic, including global supply chain disruptions and the related inflationary environment, both in our principal area of operations and nationally, including the ultimate impact of the pandemic on the economy in general and on our operations;

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•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;

•legislative or regulatory changes;

•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 (the “Bank”) 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;

•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.

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If one or more events related to these or other risks or uncertainties materialize or intensify, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included in this prospectus are made only as of the date of the Quarterly Report on Form 10-Q. New factors emerge from time to time, and it is not possible for us to predict which will arise. We do not undertake, and specifically decline, any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments, except as may be required by law.

Executive Overview

Highlights of our performance and financial condition as of and for the three and six months ended June 30, 2022, and other key events that have occurred during 2022 are provided below.

Results of Operations for the Three Months Ended June 30, 2022

•Net income increased $0.7 million, or 10.5%, to $7.0 million compared to $6.3 million during the three months ended June 30, 2021, due to higher net interest income, partially offset by increased provision expense, lower noninterest income, and higher noninterest expense.

•Net interest income increased $4.7 million, or 27.4%, to $21.9 million compared to $17.2 million during the three months ended June 30, 2021, primarily as a result of the Federal Reserve’s target Federal Funds Rate increases during the three months ended June 30, 2022, as the Company maintains an asset sensitive balance sheet, in addition to an increase in average loans of $153.7 million to $1.9 billion compared to $1.7 billion in the prior year quarter

•Provision for loan losses increased $1.5 million, or 194.0%, to $2.2 million compared to $0.8 million during the three months ended June 30, 2021, primarily due to loan growth. The ratio of annualized charge-offs to average loans was 0.14% during the three months ended June 30, 2022, compared to 0% during the three months ended June 30, 2021.

•Noninterest income decreased $0.5 million, or 22.6% to $1.8 million compared to the three months ended June 30, 2021. The decrease was comprised of lower service charges of $0.6 million on deposit accounts compared to prior year quarter due to service charges of approximately $0.7 million, associated with acting as a correspondent bank for a Payroll Protection Program lender (the "Correspondent Banking Relationship"). Swap fee income and loans held for sale income both decreased $0.4 million and $0.2 million, respectively compared to prior year quarter. These decreases were offset by an increase of $0.5 million in other noninterest income that was primarily due to expected insurance proceeds from a previously recognized contingency.

•Noninterest expense increased $1.7 million, or 15.1%, to $12.6 million compared to $11.0 million during the three months ended June 30, 2021, primarily due to increased other noninterest expense of $1.0 million related to a previously recognized contingency, an increase in provision for off balance sheet items and an increase related to the Community Reinvestment Act (“CRA”) mutual fund investment valuation. Salaries and benefits also increased $0.4 million due to higher headcount.

Results of Operations for the Six Months Ended June 30, 2022

•Net income decreased $1.7 million, or 15.3%, to $9.4 million compared to $11.1 million in the prior year, due to increased noninterest expense driven by the expenses associated with the departure of the Company’s former Chief Executive Officer and higher provision expense, partially offset by higher net interest income.

•Net interest income increased $5.9 million, or 16.7%, to $41.0 million compared to $35.1 million in the prior year, primarily as a result of the Federal Reserve’s target Federal Funds Rate increases in 2022 as the Company maintains an asset sensitive balance sheet, in addition to an increase in average loans from $1.7 billion in 2021 to $1.8 billion in 2022. Interest income also benefited from increased average balances and higher yields in the investment portfolio.

•Provision for loan losses increased $1.3 million, or 71.7%, to $3.1 million compared to $1.8 million in the prior year primarily due to loan growth. The ratio of annualized charge-offs to average loans was 0.07% during the six months ended June 30, 2022, compared to 1.80% in the prior year.

•Noninterest income decreased $0.4 million, or 10.7% to $3.1 million compared to the prior year. The decrease primarily reflected lower service charges of $0.5 million on deposit accounts compared to prior year due to service

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charges of approximately $0.7 million, associated with acting as a correspondent bank for a Payroll Protection Program lender. Swap fee income and loans held for sale income also decreased $0.5 million and $0.2 million, respectively in 2022 compared to 2021 due to lower volume in both noninterest income categories. 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 $6.4 million, or 28.0%, to $29.1 million compared to $22.7 million in the prior year primarily due to higher salaries and employee benefits of $4.8 million and higher other noninterest expense of $1.5 million, partially offset by prior year acquisition costs of $0.7 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 paid out during the 2022 period. 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, and a $0.3 million increase related to our Community Reinvestment Act (“CRA”) mutual fund investment valuation.

Financial Condition

At June 30, 2022:

•Total assets decreased $2.6 million, or 0.1%, to $2.7 billion compared to December 31, 2021, primarily as a result of decreases in cash and cash equivalents of $229.4 million, partially offset by an increase in net loans of $207.6 million, an increase in bank owned life insurance of $15.6 million, and an increase in other assets of $7.1 million.

•Total loans increased $0.2 billion, or 11.8%, to $2.0 billion compared to December 31, 2021. The increase was driven by loan originations of approximately $515.2 million, partially offset by paydowns and prepayments of $181.5 million. The Professional Bank PPP loan balance decreased $50.4 million, or 86.1%, to $8.2 million from December 31, 2021.

•Total deposits increased $10.3 million, or 0.4%, to $2.4 billion compared to December 31, 2021 primarily due to an increase in noninterest bearing demand deposit accounts, partially offset by a decrease in money market and savings and time deposits.

•As of June 30, 2022, the Company had nonperforming assets of $1.5 million, or 0.06% 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 during the three months ended June 30, 2022.

Operating Results

Results of Operations for the three months ended June 30, 2022, and 2021

The following table sets forth the principal components of net income for the periods indicated.


	Three Months Ended June 30,
(Dollars in thousands)	2022		2021		Change
Interest income	$	23,670	$	18,962	24.8	%
Interest expense	1,761		1,760		0.1	%
Net interest income	21,909		17,202		27.4	%
Provision for loan losses	2,240		762		194.0	%
Net interest income after provision	19,669		16,440		19.6	%
Noninterest income	1,781		2,302		(22.6)	%
Noninterest expense	12,604		10,954		15.1	%
Income before income taxes	8,846		7,788		13.6	%
Income tax expense	1,852		1,457		27.1	%
Net income	$	6,994	$	6,331	10.5	%

Table of Contents

Net income for the three months ended June 30, 2022, was $7.0 million, an increase of $0.7 million, or 10.5%, compared to the three months ended June 30, 2021. Net interest income increased $4.7 million for the three months ended June 30, 2022, compared to the same period in the prior year. Provision for loan losses increased by $1.5 million for the three months ended June 30, 2022, compared to the same period in the prior year. Noninterest income decreased $0.5 million for the three months ended June 30, 2022, compared to the same period in the prior year. Noninterest expense increased $1.7 million for the three months ended June 30, 2022, compared to the same period in the prior year.

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, 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.

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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 June 30,
	2022						2021
(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	$	474,835	$	963	0.81	%	$	580,632	$	178	0.12	%
Federal funds sold	31,584		66		0.84	%	69,506		24		0.14	%
Federal Reserve Bank stock, FHLB stock and other corporate stock	7,318		105		5.76	%	7,391		99		5.37	%
Investment securities - taxable	177,082		704		1.59	%	70,137		161		0.92	%
Investment securities - tax-exempt	28,422		232		3.27	%	20,172		189		3.76	%
Loans (1)	1,853,077		21,600		4.68	%	1,699,403		18,311		4.32	%
Total interest earning assets	2,572,318		23,670		3.69	%	2,447,241		18,962		3.11	%
Loans held for sale	639						2,638
Noninterest earning assets	152,134						115,358
Total assets	$	2,725,091					$	2,565,237
Liabilities and shareholders’ equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,663,120	1,491		0.36	%	$	1,377,712	1,430		0.42	%
Borrowed funds	25,735		270		4.21	%	56,347		330		2.35	%
Total interest-bearing liabilities	1,688,855		1,761		0.42	%	1,434,059		1,760		0.49	%
Noninterest-bearing liabilities
Noninterest-bearing deposits	784,252						890,292
Other noninterest-bearing liabilities	21,098						17,690
Shareholders’ equity	230,886						223,196
Total liabilities and shareholders’ equity	$	2,725,091					$	2,565,237
Net interest income			$	21,909					$	17,202
Net interest spread (2)					3.27	%					2.62	%
Net interest margin (3)					3.42	%					2.82	%

__________________________________

(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 $1.4 million and $1.6 million for the three months ended June 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 June 30, 2022 Compared to 2021
	Change Due To
(Dollars in thousands)	Volume		Rate		Total
Interest income
Interest earning deposits	$	(32)	$	817	$	785
Federal funds sold	(13)		55		42
Federal Reserve Bank stock, Federal Home Loan Bank stock and other corporate stock	(1)		7		6
Investment securities - taxable	245		298		543
Investment securities - tax-exempt	77		(34)		43
Loans	1,656		1,633		3,289
Total	$	1,932	$	2,776	$	4,708
Interest expense
Interest-bearing deposits	296		(235)		61
Borrowed funds	(179)		119		(60)
Total	$	117	$	(116)	$	1

Net interest income increased by $4.7 million to $21.9 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. Our total net interest income was impacted by an increase in interest earning assets and increases in the Federal Reserve’s target Federal Funds Rate. Average total interest earning assets were $2.6 billion for the three months ended June 30, 2022, compared to $2.4 billion for the three months ended June 30, 2021. The annualized yield on interest earning assets increased 58 basis points for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to increases in the Federal Reserve's target Federal Fund Rate. The increase in the average balance of interest earning assets was driven primarily by growth in our loan portfolio of $153.7 million, or 9.0%, compared to three months ended June 30, 2021. The growth in our loan portfolio was due to organic loan originations.

Average interest-bearing liabilities for the three months ended June 30, 2022, increased due to organic deposit growth and grew by $254.8 million, or 17.8%, from the three months ended June 30, 2021. The increase in the average balance of interest-bearing deposits was primarily due to an increase in money market accounts for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, and, to a lesser extent, increases in negotiable orders of withdrawal (“NOW”) certificates of deposit. The annualized average interest rate paid on average interest-bearing liabilities decreased to 0.42%, for the three months ended June 30, 2022, compared to 0.49% for the three months ended June 30, 2021. Annualized average interest rate paid on interest-bearing deposits decreased 6 basis points to 0.36%, and the annualized average interest rate paid on borrowed funds increased by 186 basis points to 4.21%. The average interest rate on borrowings during the three months ended June 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 June 30, 2022, our average other noninterest-bearing liabilities increased $3.4 million, or 19.3%, compared to the three months ended June 30, 2021. Average noninterest-bearing deposits decreased $106.0 million, or 11.9%, compared to the three months ended June 30, 2021. For the three months ended June 30, 2022, our net interest margin was 3.42% and net interest spread was 3.27%. For the three months ended June 30, 2021, net interest margin was 2.82% and net interest spread was 2.62%.

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.”

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Our provision for loan losses amounted to $2.2 million for the three months ended June 30, 2022, and $0.8 million for the three months ended June 30, 2021. We recorded net charge-offs of $0.7 million for the three months ended June 30, 2022, compared to no net charge-offs for the three months ended June 30, 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 June 30,
(Dollars in thousands)	2022		2021		Increase (Decrease)
Noninterest income
Service charges on deposit accounts	$	577	$	1,199	(51.9)%
Income from bank owned life insurance	376		281		33.8%
SBA origination fees	48		—		100.0%
Swap fee income	—		364		(100.0)%
Loans held for sale income	45		226		(80.1)%
Gain on sale and call of securities	13		21		(38.1)%
Other	722		211		242.2%
Total noninterest income	$	1,781	$	2,302	(22.6)%

Noninterest income for the three months ended June 30, 2022, was $1.8 million, a $0.5 million, or 22.6%, decrease compared to the three months ended June 30, 2021. The decrease was primarily comprised of a decrease in service charges on deposit accounts of $0.6 million due to lower service charges from the Correspondent Banking Relationship, a decrease of $0.4 million in swap fee income, and a decrease of $0.2 million in loans held for sale income. The decreases in noninterest income were partially offset by an increase in other noninterest income of $0.5 million, that was primarily due to expected insurance proceeds from a previously recognized contingency.

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.

Table of Contents

The following table presents the major categories of noninterest expense for the periods indicated.


	Three Months Ended June 30,
(Dollars in thousands)	2022		2021		Increase (Decrease)
Noninterest expense
Salaries and employee benefits	$	7,473	$	7,099	5.3%
Occupancy and equipment	1,010		905		11.6%
Data processing	304		276		10.1%
Marketing	125		165		(24.2)%
Professional fees	886		770		15.1%

Regulatory assessments	473		418		13.2%
Other	2,333		1,321		76.6%
Total noninterest expense	$	12,604	$	10,954	15.1%

Noninterest expense amounted to $12.6 million for the three months ended June 30, 2022, an increase of $1.7 million, or 15.1%, compared to the three months ended June 30, 2021. The increase was primarily due to other noninterest expense of $1.0 million which included a previously recognized contingency loss of approximately $0.5 million, an increase in provision for off balance sheet items of approximately $0.2 million and an increase related to the Community Reinvestment Act (“CRA”) mutual fund investment valuation of approximately $0.2 million. During the second quarter of 2022, we reclassified $0.5 million in expected insurance proceeds related to the contingency from other noninterest expense to other noninterest income. Salaries and benefits also increased $0.4 million due to higher headcount of 212 at June 30, 2022, compared to 194 at June 30, 2021.

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 $1.9 million for the three months ended June 30, 2022, compared to $1.5 million for the three months ended June 30, 2021. Our effective tax rates for those periods were 20.9% and 18.7%, respectively. The increase in the effective tax rate from the quarter ended June 30, 2021, to the quarter ended June 30, 2022 was primarily due to an increase in the state tax rate and an increase in non-deductible expenses.

Results of Operations for the six months ended June 30, 2022 and 2021

The following table sets forth the principal components of net income for the periods indicated.


	Six Months Ended June 30,
(Dollars in thousands)	2022		2021		Change
Interest income	$	44,692	$	38,734	15.4%
Interest expense	3,736		3,653		2.3	%
Net interest income	40,956		35,081		16.7	%
Provision for loan losses	3,091		1,800		71.7	%
Net interest income after provision	37,865		33,281		13.8	%
Noninterest income	3,054		3,421		(10.7)	%
Noninterest expense	29,099		22,742		28.0	%
Income before income taxes	11,820		13,960		(15.3)	%
Income tax expense	2,407		2,844		(15.4)	%
Net income	$	9,413	$	11,116	(15.3)	%

Table of Contents

Net income for the six months ended June 30, 2022, was $9.4 million, a decrease of $1.7 million, or 15.3%, compared to the six months ended June 30, 2021. Interest income increased $6.0 million while interest expense increased $0.1 million, resulting in a net interest income increase of $5.9 million for the six months ended June 30, 2022, compared to the same period in the prior year. The increase in our net interest income was primarily due to the impact of the Federal Reserve’s target Federal Funds Rate increases and an increase in our average interest earning assets during the six months ended June 30, 2022. Provision for loan losses increased by $1.3 million for the six months ended June 30, 2022, compared to the same period in the prior year primarily due to loan growth. The increase in noninterest expense for the six months ended June 30, 2022, compared to the same period in the prior year was primarily driven by the expenses associated with the departure of the Company’s former Chief Executive Officer, as well as higher headcount and incentives. The Bank’s number of employees increased from 194 as of June 30, 2021, to 212 as of June 30, 2022.

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Net Interest Income and Net Interest Margin Analysis


	Six Months Ended June 30
	2022						2021
(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	$	525,376	$	1,238	0.48	%	$	380,989	$	224	0.12	%
Federal funds sold	29,918		85		0.57	%	56,955		40		0.14	%
Federal Reserve Bank stock, FHLB stock and other corporate stock	7,457		202		5.46	%	7,676		194		5.10	%
Investment securities - taxable	182,150		1,342		1.49	%	69,968		340		0.98	%
Investment securities - tax-exempt	27,169		445		3.30	%	20,902		392		3.78	%
Loans (1)	1,813,701		41,380		4.60	%	1,681,566		37,544		4.50	%
Total interest earning assets	2,585,771		44,692		3.49	%	2,218,056		38,734		3.52	%
Loans held for sale	666						1,999
Noninterest earning assets	144,246						122,420
Total assets	$	2,730,683					$	2,342,475
Liabilities and shareholders’ equity
Interest-bearing liabilities
Interest-bearing deposits	1,667,728		3,077		0.37	%	1,293,693		2,747		0.43	%
Borrowed funds	38,046		659		3.49	%	101,129		906		1.81	%
Total interest-bearing liabilities	1,705,774		3,736		0.44	%	1,394,822		3,653		0.53	%
Noninterest-bearing liabilities
Noninterest-bearing deposits	774,562						708,215
Other noninterest-bearing liabilities	18,894						18,288
Shareholders’ equity	231,453						221,150
Total liabilities and shareholders’ equity	$	2,730,683					$	2,342,475
Net interest income			$	40,956					$	35,081
Net interest spread (2)					3.05	%					2.99	%
Net interest margin (3)					3.19	%					3.19	%

__________________________________

(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 $3.0 million and $4.4 million for the six months ended June 30, 2022, and 2021, respectively.

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	For the Six Months Ended June 30, 2022 Compared to 2021
	Change Due To
(Dollars in thousands)	Volume		Rate		Total
Interest income
Interest-bearing deposits	$	85	$	929	$	1,014
Federal funds sold	(19)		64		45
Federal Reserve Bank stock, Federal Home Loan Bank stock and other corporate stock	(6)		14		8
Investment securities - taxable	545		457		1,002
Investment securities - tax-exempt	118		(65)		53
Loans	2,950		886		3,836
Total	$	3,673	$	2,285	$	5,958
Interest expense
Interest-bearing deposits	794		(464)		330
Borrowed funds	(565)		318		(247)
Total	$	229	$	(146)	$	83

Net interest income increased by $5.9 million to $41.0 million for the six months ended June 30, 2022, compared to the six months ended June 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 six months ended June 30, 2022. Average total interest earning assets were $2.6 billion for the six months ended June 30, 2022, compared to $2.2 billion for the six months ended June 30, 2021. The annualized yield on those interest earning assets decreased 3 basis points to 3.49% for the six months ended June 30, 2022, due to higher yielding loan payoffs. The increase in the average balance of interest earning assets was driven primarily by growth in our average loan portfolio of $0.1 billion, or 7.9%, compared to the six months ended June 30, 2021. The growth in the loan portfolio was due to organic loan originations during the six months ended June 30, 2022.

Average interest-bearing liabilities increased by $0.3 billion, or 22.3% to $1.7 billion, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase was due to a $0.4 billion, or 28.9%, increase in the average balance of interest-bearing deposits, partially offset by a decrease of $63.1 million, or 62.4% 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 money market and NOW accounts for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The annualized average interest rate paid on average interest-bearing liabilities decreased to 0.44% for the six months ended June 30, 2022, compared to 0.53% for the six months ended June 30, 2021. Annualized average interest rate paid on interest-bearing deposits decreased 6 basis points to 0.37%, and the annualized average interest rate paid on borrowed funds increased by 168 basis points to 3.49%. The average interest rate on borrowings during the six months ended June 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 $66.3 million, or 9.4%, compared to the six months ended June 30, 2021. Average other noninterest-bearing liabilities also increased $0.6 million, or 3.3%, compared to the six months ended June 30, 2021. For the six months ended June 30, 2022, our annual net interest margin was 3.19% and net interest spread was 3.05%. For the six months ended June 30, 2021, annual net interest margin was 3.19% and net interest spread was 2.99%.

Provision for Loan Losses

Our provision for loan losses amounted to $3.1 million for the six months ended June 30, 2022, and $1.8 million for the six months ended June 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 0.76% on June 30, 2022, compared to 0.71% on December 31, 2021.

Table of Contents

Noninterest Income

The following table presents the major categories of noninterest income for the periods indicated.


	Six Months Ended June 30,
(Dollars in thousands)	2022		2021		Increase (Decrease)
Noninterest income
Service charges on deposit accounts	$	1,094	$	1,594	(31.4)%
Income from bank owned life insurance	649		563		15.3%
SBA origination fees	48		145		(66.9)%
Swap fee income	112		573		(80.5)%
Loans held for sale income	116		301		(61.5)%
Gain on sale and call of securities	13		22		(40.9)%
Other	1,022		223		358.3%
Total noninterest income	$	3,054	$	3,421	(10.7)%

Noninterest income for the six months ended June 30, 2022, was $3.1 million, a $0.4 million, or 10.7%, decrease compared to for the six months ended June 30, 2021. The decrease reflected lower service charges of $0.5 million on deposit accounts compared to prior year due to service charges of approximately $0.7 million, associated with the Correspondent Banking Relationship. Swap fee income and loans held for sale income also decreased $0.5 million and $0.2 million, respectively in 2022 compared to 2021 due to lower volume. 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 from a previously recognized contingency for the six months ended June 30, 2022, 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.


	Six Months Ended June 30,
(Dollars in thousands)	2022		2021		Increase (Decrease)
Noninterest expense
Salaries and employee benefits	$	18,693	$	13,883	34.6%
Occupancy and equipment	2,012		2,007		0.2%
Data processing	618		566		9.2%
Marketing	321		318		0.9%
Professional fees	1,805		1,398		29.1%
Acquisition expenses	—		684		(100.0)%
Regulatory assessments	1,022		767		33.2%
Other	4,628		3,119		48.4%
Total noninterest expense	$	29,099	$	22,742	28.0%

Noninterest expense amounted to $29.1 million for the six months ended June 30, 2022, an increase of $6.4 million, or 28.0%, compared to the six months ended June 30, 2021. The increase was primarily due to higher salaries and employee benefits of $4.8 million and higher other noninterest expense of $1.5 million, partially offset by prior year acquisition costs of $0.7 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 paid out during the 2022 period. 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, and a $0.3 million increase related to the CRA mutual fund investment valuation. During the second quarter of 2022, we reclassified $0.5 million in expected insurance proceeds related to the contingency from other noninterest expense to other noninterest income.

Table of Contents

Income Tax Expense

Income tax expense was $2.4 million for the six months ended June 30, 2022, compared to $2.8 million for the six months ended June 30, 2021. Our effective tax rates for those periods were 20.4% 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 June 30, 2022, our total assets decreased 0.1%, or $2.6 million, 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 11.8%, or $207.6 million, compared to December 31, 2021, driven by loan originations of approximately $515.2 million, partially offset by paydowns and prepayments of $181.5 million. The Professional Bank PPP loan balance decreased $50.4 million, or 86.1%, to $8.2 million from December 31, 2021. Stockholders’ equity increased $2.1 million, or 0.9%, compared to December 31, 2021, primarily due to an increase in retained earnings of $9.4 million and an increase in additional paid in capital of $3.5 million for the six months ended June 30, 2022, partially offset by a decrease of $10.7 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 $229.4 million, or 38.4%, to $0.4 billion, compared to $0.6 billion on December 31, 2021, primarily due to a decrease in interest-bearing deposits.

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 $2.8 million, or 1.4%, to $198.4 million compared to December 31, 2021, due to $18.2 million in investment calls, redemptions and paydowns, coupled with unrealized losses of $14.3 million during the year with a related tax effect of $3.6 million, partially offset by purchases of approximately $30.7 million in mortgage-backed securities ("MBS") community development district bonds ("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).

Table of Contents

The following tables summarize the book value, fair value, contractual maturities and weighted-average yields of investment securities as of June 30, 2022, and December 31, 2021.


	June 30, 2022				December 31, 2021
(Dollars in thousands)	Book Value		Fair Value		Book Value		Fair Value
Securities Available for Sale - taxable
Small Business Administration loan pools	$	35,355	$	34,946	$	40,368	$	39,934
Mortgage-backed securities(1)	138,666		125,137		131,273		130,103
United States agency obligations	2,945		2,767		3,939		3,986
Corporate bonds	1,500		1,504		1,500		1,513
Total	$	178,466	$	164,354	$	177,080	$	175,536
Securities Available for Sale - tax-exempt
Community Development District bonds	$	25,488	$	24,432	$	17,163	$	17,674
Municipals	3,155		3,021		1,051		1,091
Total	$	28,643	$	27,453	$	18,214	$	18,765
Securities Held to Maturity
Mortgage-backed securities	$	204	$	197	$	236	$	242


Total	$	204	$	197	$	236	$	242
Equity Securities
Mutual Funds	$	5,502	$	5,502	$	5,838	$	5,838
Other equity securities	857		857		800		800
Total	$	6,359	$	6,359	$	6,638	$	6,638

(1) As of June 30, 2022 residential mortgage-backed is $100.0 million and commercial mortgage-backed is $25.2 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 Less				More than One Year Through Five Years				More than Five Years Through 10 Years				More than 10 Years				Total
On June 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 Value		Fair Value		Weighted Average Yield (1)
Available for Sale - taxable
SBA loan pools	$	—	—	%	$	373	1.02	%	$	17,932	1.59	%	$	17,050	1.73	%	$	35,355	$	34,946	1.65	%
Mortgage-backed securities	—		—	%	570		1.10	%	4,360		1.04	%	133,736		1.76	%	138,666		125,137		1.74	%
United States agency obligations	—		—	%	1,002		2.66	%	1,943		1.31	%	—		—	%	2,945		2,767		1.77	%
Corporate bonds	1,500		3.15	%	—		—	%	—		—	%	—		—	%	1,500		1,504		3.15	%
Total	$	1,500	3.15	%	$	1,945	1.89	%	$	24,235	1.47	%	$	150,786	1.76	%	$	178,466	$	164,354	1.73	%
Available for Sale - tax-exempt
CDD bonds	$	3,940	4.13	%	$	20,909	4.07	%	$	640	3.50	%	$	—	—	%	$	25,489	$	24,432	4.07	%
Municipals	—		—	%	1,044		2.27	%	2,110		4.20	%	—		—	%	3,154		3,021		3.56	%
Total	$	3,940	4.13	%	$	21,953	3.98	%	$	2,750	4.04	%	$	—	—	%	$	28,643	$	27,453	4.01	%
Held to Maturity
Mortgage-backed securities	—		—	%	—		—	%	—		—	%	204		2.89	%	204		197		2.89	%


Total	$	—	—	%	$	—	—	%	$	—	—	%	$	204	2.89	%	$	204	$	197	2.89	%
Equity Securities
Mutual Funds	5,502		1.35	%	—		—	%	—		—	%	—		—	%	5,502		5,502		1.35	%
Other equity securities	857		—	%	—		—	%	—		—	%	—		—	%	857		857		—	%
Total	$	6,359	1.17	%	$	—	—	%	$	—	—	%	$	—	—	%	$	6,359	$	6,359	1.17	%

(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 June 30, 2022, we had $380.9 million of owner-occupied commercial real estate loans and $653.6 million of investment commercial real estate loans, representing 36.8% and 63.2%, respectively, of our commercial real estate portfolio. As of June 30, 2022, the average loan balance of loans in our commercial real estate loan portfolio was approximately $1.5 million for owner-occupied and $2.8 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 June 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 June 30, 2022, our weighted-average loan-to-value ratios for owner-occupied and non-owner-occupied commercial real estate were 49.4% and 51.2%, respectively and debt service coverage ratios were 3.11x and 1.94x, 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

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annually. The properties securing the portfolio are located primarily throughout our market and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.


	As of June 30, 2022			As of December 31, 2021
(Dollars in thousands)	Amount		Percent	Amount		Percent
Commercial Real Estate
Auto (Car Lot/Auto Repair)	$	26,356	2.5%	$	27,419	3.0%
Educational Facility	28,726		2.8%	32,281		3.6%
Gas Station	68,991		6.7%	60,854		6.7%
Hotel	107,430		10.4%	75,617		8.4%
Mixed Use	59,226		5.7%	28,762		3.2%
Multifamily	134,614		13.0%	140,496		15.6%
Office	139,604		13.5%	109,010		12.1%
Other / Special Use	69,861		6.8%	56,276		6.2%
Religious Facility	9,699		0.9%	10,679		1.2%
Retail	236,490		22.9%	209,283		23.2%
Vacant Land	8,521		0.8%	6,523		0.7%
Warehouse	144,969		14.0%	145,454		16.1%
Total	$	1,034,487	100.0%	$	902,654	100.0%


	As of June 30, 2022			As of December 31, 2021
(Dollars in thousands)	Amount		Percent	Amount		Percent
Commercial Real Estate
Broward	$	156,448	15.1%	$	111,224	12.3%
Miami-Dade	551,186		53.3%	559,966		62.0%
Palm Beach	205,813		19.9%	139,517		15.5%
Other FL County	111,812		10.8%	49,892		5.5%
Out of State	9,228		0.9%	42,055		4.7%
Total	$	1,034,487	100%	$	902,654	100.0%

As of June 30, 2022, non-owner occupied commercial real estate loans of $653.6 million represented 32.2% 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 June 30, 2022, our weighted average loan-to-value ratio on our construction, vacant land, and land development loans were 50.1%, 48.1% and 50.1%, 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 June 30, 2022				As of December 31, 2021
(Dollars in thousands)	Amount		Percent		Amount		Percent
Construction & Development
1 – 4 Family Construction	$	52,063	45.3	%	$	47,164	51.5	%

Land Development	22,426		19.5	%	9,620		10.5	%
Vacant Land	40,449		35.2	%	34,736		38.0	%
Total	$	114,938	100.0	%	$	91,520	100.0	%


	As of June 30, 2022			As of December 31, 2021
(Dollars in thousands)	Amount		Percent	Amount		Percent
Construction & Development
Broward	$	2,924	2.5%	$	1,194	1.3%
Miami-Dade	86,672		75.4%	67,562		73.9%
Palm Beach	15,730		13.7%	21,080		23.0%
Other FL County	3,901		3.4%	1,684		1.8%
Out of State	5,711		5.0%	—		—%
Total	$	114,938	100.0%	$	91,520	100.0%

As of June 30, 2022, total construction and land development loans of $114.9 million represented 5.7% 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 17.0% of our residential loan portfolio. Our residential loans also include home equity lines of credit, which totaled approximately $50.0 million, or approximately 11.8% of our residential loan portfolio as of June 30, 2022. The average loan balance of closed-end residential loans in our residential portfolio was approximately $0.9 million as of June 30, 2022. As of June 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 June 30, 2022					As of December 31, 2021
(Dollars in thousands)	Amount		Percent	LTV (%)		Amount		Percent	LTV (%)
Residential Real Estate
Owner Occupied	$	300,524	71.2%	56.1	%	$	272,858	72.3%	57.8	%
Investor Owned Residences	71,694		17.0%	53.4	%	54,698		14.5%	50.7	%
HELOC	50,021		11.8%	57.2	%	49,955		13.2%	57.1	%
Total	$	422,239	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 June 30, 2022. As of June 30, 2022, non-Professional Bank PPP commercial loans totaled $387.3 million, and Professional Bank PPP commercial loans totaled $8.2 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 June 30, 2022, the debt service coverage ratio for our Bank commercial loan portfolio was approximately 2.49x for non-Professional Bank PPP loans, excluding approximately 2.6% 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 June 30, 2022.


	As of June 30, 2022			As of December 31, 2021
(Dollars in thousands)	Amount		Percent	Amount		Percent
Commercial Loans (non-PPP)
Business Products	$	4,462	1.2%	$	13	—%
Business Services	74,382		19.2%	73,868		22.7%
Communication	13,869		3.6%	389		0.1%
Construction	36,947		9.5%	31,285		9.6%
Finance	119,816		30.9%	100,849		31.1%
Healthcare	23,950		6.2%	23,564		7.2%
Services	52,539		13.6%	34,112		10.5%
Technology	7,140		1.8%	2,979		0.9%
Trade	42,080		10.9%	47,522		14.6%
Transportation	1,230		0.3%	1,593		0.5%
Other	10,902		2.8%	9,241		2.8%
Total	$	387,317	100.0%	$	325,415	100.0%

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 June 30, 2022.


	June 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	$	97,603	$	241,751	$	682,106	$	13,027	$	1,034,487
Residential Real Estate	24,306		17,203		19,578		361,152		422,239
Commercial*	105,347		112,801		149,618		27,727		395,493
Construction and Development	67,710		10,408		4,647		32,173		114,938
Consumer and Other	2,094		6,005		11,977		—		20,076
Total loans	$	297,060	$	388,168	$	867,926	$	434,079	$	1,987,233

Amounts with fixed rates	$	116,339	$	303,630	$	850,006	$	410,149	$	1,680,124
Amounts with floating rates	$	180,721	$	84,538	$	17,920	$	23,930	$	307,109
*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 Estate	10,201		21,210		15,904		330,196		377,511
Commercial*	113,129		131,332		111,645		27,924		384,030
Construction and Development	40,851		17,029		3,141		30,499		91,520
Consumer and Other	4,226		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 June 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 $1.5 million as of June 30, 2022, or 0.06% of total assets. We had nonperforming assets of

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$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)	June 30, 2022		December 31, 2021
Nonaccrual Loans
Commercial real estate	$	—	$	—
Residential real estate	—		—
Commercial	1,468		1,468
Construction and development	—		—
Consumer and other loans	—		654
Accruing loans 90 or more days past due	—		—
Total nonperforming loans	$	1,468	$	2,122
Other real estate owned	—		—
Total nonperforming assets	$	1,468	$	2,122
Restructured loans-nonaccrual	$	—	$	—
Restructured loans-accruing	$	1,042	$	55
Ratio of nonperforming loans to total loans	0.07%		0.12%
Ratio of nonperforming assets to total assets	0.06%		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 June 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 six months ended June 30, 2022, and 2021.


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	2022			2021			2022			2021
Balance at beginning of period	$	13,555		$	9,656		$	12,704		$	16,259
Charge-offs
Commercial real estate	—			—			—			—
Residential real estate	—			—			—			—
Commercial	—			—			—			(7,641)
Construction and development	—			—			—			—
Consumer and other	(653)			—			(653)			—
Total Charge-offs	(653)			—			(653)			(7,641)
Recoveries
Commercial real estate	—			—			—			—
Residential real estate	—			—			—			—
Commercial	—			—			—			—
Construction and development	—			—			—			—
Consumer and other	—			—			—			—
Total recoveries	—			—			—			—
Net charge-offs	(653)			—			(653)			(7,641)
Provision for loan losses	2,240			762			3,091			1,800
Balance at end of period	$	15,142		$	10,418		$	15,142		$	10,418
Ratio of net charge-offs to average loans	0.14		%	—		%	0.07		%	1.80		%


	June 30, 2022		December 31, 2021
ALLL as a percentage of total loans at end of period	0.76	%	0.71	%
ALLL as a percentage of loans (excluding PPP loans) at end of period	0.77	%	0.74	%
ALLL as a multiple of net charge-offs	23.2		1.5
ALLL as a percentage of nonperforming loans	1031.5	%	598.7	%

Our allowance for loan losses was $15.1 million on June 30, 2022, compared to $12.7 million on December 31, 2021, an increase of 19.2%. The increase was primarily due to higher loan production volume during the six months ended June 30, 2022, as well as a $0.7 million charge-off of a previously disclosed impaired loan. There were minimal changes to qualitative loss factors to address rising inflation and threats of a recessionary environment and minimal change in the historical loss factors for the current period with the principal driver for the increased allowance being loan growth. On June 30, 2022, our allowance for loan losses was 0.77% of total gross loans (excluding Professional Bank PPP loans) and provided coverage of 1031.5% of our nonperforming loans, compared to an allowance for loan losses to total gross loans (net of overdrafts) ratio of 0.74% as of December 31, 2021. See Reconciliation of non-GAAP Financial Measures. We believe our allowance on June 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 June 30, 2022, and December 31, 2021.


	June 30, 2022			December 31, 2021
(Dollars in thousands)	Allowance		Percent	Allowance		Percent
Commercial real estate	$	5,929	39.2%	$	4,471	35.2%
Residential real estate	2,966		19.6%	2,339		18.4%
Commercial	5,425		35.7%	4,637		36.5%
Construction and development	677		4.5%	471		3.7%
Consumer and other	145		1.0%	786		6.2%
Total allowance for loan losses	$	15,142	100.0%	$	12,704	100.0%

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On June 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 $1.5 million, of which $1.5 million required a specific reserve of $0.7 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.

Impaired loans also include certain loans that were modified as troubled debt restructurings (“TDR”). On June 30, 2022, we had three loans amounting to $1.0 million that were considered to be TDRs, compared 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 June 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 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 $92.5 million and $84.4 million, on June 30, 2022, and December 31, 2021, respectively. Additionally, we supplement our deposits with wholesale funding sources such as Qwickrate 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 June 30, 2022, and December 31, 2021, these wholesale deposits represented 0.8% and 3.9%, respectively, of our total deposits.

Average interest-bearing deposits increased $285.4 million, or 20.7%, during the three months ended June 30, 2022, compared to the same time period in 2021, primarily due to a $231.2 million increase in money market account balances and a $55.6 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 decreased 6 basis points to for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.


	For the Three Months Ended June 30, 2022			For the Three Months Ended June 30, 2021
(Dollars in thousands)	Average Balance		Average Rate	Average Balance		Average Rate
NOW accounts	$	335,718	0.15%	$	280,077	0.20%
Money market accounts	1,035,048		0.37%	803,873		0.40%
Brokered deposits	47,949		0.46%	30,471		0.53%
Savings accounts	13,271		0.10%	11,818		0.10%
Certificates of deposit	231,134		0.61%	251,473		0.71%
Total interest-bearing deposits	1,663,120		0.36%	1,377,712		0.42%
Noninterest-bearing deposits	784,252		—%	890,292		—%
Total deposits	$	2,447,372	0.24%	$	2,268,004	0.25%

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Average interest-bearing deposits increased $374.0 million, or 28.9%, during the six months ended June 30, 2022, compared to the same time period in 2021 prior year primarily due to $282.4 million increase in money market account balances and a $65.6 million increase in NOW accounts from organic growth. The average rate paid on interest-bearing deposits decreased 6 basis points to for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.


	For the Six Months Ended June 30, 2022			For the Six Months Ended June 30, 2021
(Dollars in thousands)	Average Balance		Average Rate	Average Balance		Average Rate
NOW accounts	$	327,789	0.16%	$	262,165	0.21%
Money market accounts	1,028,841		0.38%	746,474		0.40%
Brokered deposits	53,220		0.46%	30,475		0.63%
Savings accounts	13,230		0.10%	10,590		0.10%
Certificates of deposit	244,648		0.63%	243,989		0.73%
Total interest-bearing deposits	1,667,728		0.37%	1,293,693		0.43%
Noninterest-bearing deposits	774,562		—%	708,215		—%
Total deposits	$	2,442,290	0.25%	$	2,001,908	0.28%

The following table presents the ending balances and percentage of total deposits for the periods indicated. As of June 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.


	June 30, 2022				December 31, 2021
(Dollars in thousands)	Ending Balance		% of Total		Ending Balance		% of Total
NOW accounts	$	339,942	14.3	%	$	310,362	13.1	%
Money market accounts	1,026,457		43.1	%	1,055,033		44.5	%
Brokered deposits	18,366		0.8	%	58,365		2.5	%
Savings accounts	14,324		0.6	%	12,558		0.5	%
Certificates of deposit	205,145		8.6	%	261,067		11.0	%
Total interest-bearing deposits	1,604,234		67.4	%	1,697,385		71.6	%
Noninterest-bearing deposits	777,501		32.6	%	674,003		28.4	%
Total deposits(1)	$	2,381,735	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 June 30, 2022, and December 31, 2021, refer to Note 6 - Deposits to the Consolidated Financial Statements (unaudited) dated June 30, 2022.

Debt

See Note 7 - Debt and Borrowings to the Consolidated Financial Statements (unaudited) dated June 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 June 30, 2022, approximately $245.4 million in total loans that 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

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fixed rate loans in our portfolio. As of June 30, 2022, we had no outstanding advances, compared to $35.0 million as of December 31, 2021. As of June 30, 2022 and December 31, 2021, we had $153.3 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.


	June 30, 2022		December 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 period	13,757		36,918
Weighted average interest rate during period	1.98%		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 June 30, 2022 and December 31, 2021.

Liquidity and Capital Resources

Capital Resources

Stockholders’ equity increased $2.1 million, or 0.9%, to $233.6 million on June 30, 2022, compared to December 31, 2021, primarily due an increase in retained earnings of $9.4 million and an increase in additional paid in capital of $3.5 million for the six months ended June 30, 2022, partially offset by a decrease of $10.7 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 June 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 six months ended June 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 June 30, 2022, and December 31, 2021. The amounts presented exclude the capital conservation buffer.


	Actual				Minimum for capital adequacy				Minimum to be well capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2022
Total capital ratio
Bank	$	245,543	12.1	%	$	162,036	8.0	%	$	202,545	10.0	%
Company	260,097		12.8	%	162,036		8.0	%	N/A		N/A
Tier 1 Capital ratio
Bank	229,263		11.3	%	121,527		6.0	%	162,036		8.0	%
Company	219,381		10.8	%	121,527		6.0	%	N/A		N/A
Tier 1 Leverage ratio
Bank	229,263		8.5	%	108,401		4.0	%	135,501		5.0	%
Company	219,381		8.1	%	108,401		4.0	%	N/A		N/A
Common Equity Tier 1
Bank	229,263		11.3	%	91,145		4.5	%	131,654		6.5	%
Company	219,381		10.8	%	91,145		4.5	%	N/A		N/A


	Actual			Minimum for capital adequacy			Minimum to be well capitalized
(Dollars in thousands)	Amount		Ratio	Amount		Ratio	Amount		Ratio
December 31, 2021
Total capital ratio
Bank	$	222,696	12.9%	$	138,435	8.0%	$	173,043	10.0%
Company	220,206		12.7%	138,435		8.0%	N/A		N/A
Tier 1 capital ratio
Bank	208,997		12.1%	103,826		6.0%	138,435		8.0%
Company	206,507		11.9%	103,826		6.0%	N/A		N/A
Tier1 leverage ratio
Bank	208,997		7.7%	107,877		4.0%	134,846		5.0%
Company	206,507		7.7%	107,877		4.0%	N/A		N/A
Common equity tier 1 capital ratio
Bank	208,997		12.1%	77,869		4.5%	112,478		6.5%
Company	206,507		11.9%	77,869		4.5%	N/A		N/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 June 30, 2022, we had the ability to generate approximately $488.1 million in additional liquidity through all of our available resources beyond our overnight funds sold position. During the six months ended June 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 June 30, 2022, and December 31, 2021, there were $245.4 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 maturity of our investment portfolio was 5.74 years and 4.41 years on June 30, 2022, and December 31, 2021, respectively. The duration of our investment portfolio was 4.86 years and 4.08 years on June 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 June 30, 2022, cash held at the holding company was approximately $10.5 million. Our average net overnight funds sold position (defined as funds sold plus interest-bearing deposits with other banks less funds purchased) was $31.6 million during three months ended June 30, 2022, compared to an average net overnight funds sold position of $42.9 million for the year ended December 31, 2021. As of June 30, 2022, cash held at the Federal Reserve was approximately $297.4 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 June 30, 2022, inflation was rising at a higher and more sustained level than anticipated by the Federal Reserve. As a result, there were three rate increases for the six months ended June 30, 2022 totaling an upward increase of 150 basis points and the current market expects another change in monetary policy, which would include further interest rate increases in 2022 and 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 June 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	$	68,378	$	3,512	$	—	$	—	$	71,890
Time deposits of more than $250,000	132,400		4,189		—		—		136,589
Operating leases	1,343		2,310		1,276		385		5,314
Subordinated debt	—		—		—		24,436		24,436
Total	$	202,121	$	10,011	$	1,276	$	24,821	$	238,229

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)	June 30, 2022		December 31, 2021
Unfunded lines of credit	471,356		415,402
Commitments to extend credit	107,139		108,824
Standby letters of credit	11,974		12,095
Commercial letters of credit	3,664		2,765
Total credit extension commitments	$	594,133	$	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 June 30, 2022, and 2021 and six months ended June 30, 2022, and 2021.


(Dollars in thousands)	Three Months Ended June 30, 2022		Three Months Ended June 30, 2021		Six Months Ended June 30, 2022		Six Months Ended June 30, 2021
Return on average assets	1.03	%	0.99	%	0.70	%	0.96	%
Return on average equity	12.15	%	11.38	%	8.20	%	10.14	%
Average equity to average assets	8.47	%	8.70	%	8.48	%	9.44	%

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


June 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	$	440,573		$	70,581		$	288,875		$	800,029		$	1,172,062		$	1,972,091
Loans held for sale	—			—			—			—			—			—
Securities	46,431			5,855			11,224			63,510			134,860			198,370
Interest earning deposits at other financial institutions	298,764			—			—			298,764			42,272			341,036
Federal funds sold	27,043			—			—			27,043			—			27,043
FHLB & FRB stock	7,375			—			—			7,375			—			7,375
Total interest earning assets	$	820,186		$	76,436		$	300,099		$	1,196,721		$	1,349,194		$	2,545,915
Interest-Bearing Liabilities
Interest-bearing deposits	$	679,503		$	23,908		$	107,580		$	810,991		$	584,764		$	1,395,755
Time deposits	44,005			56,875			99,899			200,779			7,700			208,479
Total interest-bearing deposits	723,508			80,783			207,479			1,011,770			592,464			1,604,234

FHLB advances	—			—			—			—			—			—


Subordinated debt	—			—			—			—			24,436			24,436
Total interest-bearing liabilities	$	723,508		$	80,783		$	207,479		$	1,011,770		$	616,900		$	1,628,670
Period gap	$	96,678		$	(4,347)		$	92,620		$	184,951		$	732,294
Cumulative gap	$	96,678		$	92,331		$	184,951		$	184,951		$	917,245
Ratio of cumulative gap to total earning assets	11.79		%	120.80		%	61.63		%	15.45		%	67.98		%
Ratio of cumulative gap to cumulative total earning assets	3.80		%	3.63		%	7.26		%	7.26		%	36.03		%

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CASH FLOW GAP


June 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	$	107,083		$	84,630		$	344,769		$	536,482		$	1,435,609		$	1,972,091
Loans held for sale	—			—			—			—			—			—
Securities	9,283			2,945			15,787			28,015			170,355			198,370
Interest earning deposits at other financial institutions	298,764			—			—			298,764			42,272			341,036
Federal funds sold	27,043			—			—			27,043			—			27,043
FHLB & FRB stock (1)	—			—			—			—			7,375			7,375
Total interest earning assets	$	442,173		$	87,575		$	360,556		$	890,304		$	1,655,611		$	2,545,915
Interest-Bearing Liabilities
Interest-bearing deposits	$	26,610		$	53,220		$	239,496		$	319,326		$	1,076,429		$	1,395,755
Time deposits	44,005			56,875			99,899			200,779			7,700			208,479
Total interest-bearing deposits	70,615			110,095			339,395			520,105			1,084,129			1,604,234

FHLB advances	—			—			—			—			—			—


Subordinated debt	—			—			—			—			24,436			24,436
Total interest-bearing liabilities	$	70,615		$	110,095		$	339,395		$	520,105		$	1,108,565		$	1,628,670
Period gap	$	371,558		$	(22,520)		$	21,161		$	370,199		$	547,046
Cumulative gap	$	371,558		$	349,038		$	370,199		$	370,199		$	917,245
Ratio of cumulative gap to total earning assets	84.03		%	398.56		%	102.67		%	41.58		%	55.40		%
Ratio of cumulative gap to cumulative total earning assets	14.59		%	13.71		%	14.54		%	14.54		%	36.03		%

(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 June 30, 2022, and December 31, 2021.


Net Interest Income at Risk – 12 months	-400bps		-300bps		-200bps		-100bps		Flat		+100bps		+200bps		+300bps		+400bps
Policy Limit	(20.0)	%	(15.0)	%	(10.0)	%	(5.0)	%	—	%	(5.0)	%	(10.0)	%	(15.0)	%	(20.0)	%
June 30, 2022	(15.1)	%	(18.1)	%	(14.1)	%	(5.4)	%	—	%	2.4	%	4.7	%	7.0	%	9.3	%
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		-100bps		Flat		+100bps		+200bps		+300bps		+400bps
Policy Limit	(20.0)	%	(15.0)	%	(10.0)	%	(5.0)	%	—	%	(5.0)	%	(10.0)	%	(15.0)	%	(20.0)	%
June 30, 2022	(22.9)	%	(26.9)	%	(20.6)	%	(8.2)	%	—	%	5.1	%	10.1	%	15.0	%	19.9	%
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 June 30, 2022, and December 31, 2021.


Economic Value of Equity	-400bps		-300bps		-200bps		-100bps		Flat		+100bps		+200bps		+300bps		+400bps
Policy Limit	(30.0)	%	(20.0)	%	(15.0)	%	(10.0)	%	—	%	(10.0)	%	(15.0)	%	(20.0)	%	(30.0)	%
June 30, 2022	(6.2)	%	(9.1)	%	(5.5)	%	(0.1)	%	—	%	(3.0)	%	(5.9)	%	(9.0)	%	(12.6)	%
December 31, 2021	6.7	%	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 six months ended June 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 credit loss ("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. Early adoption is still permitted. 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. A parallel run using March 31, 2022 data was performed during the second quarter. Next steps include fine tuning the inputs based on the bank’s specific risk profile (ex: geography, portfolio composition, credit standards, etc.) and performing additional parallel runs with the bank’s existing ALLL calculation. Additionally, the Credit Team has started work on the Structural Overview Document and developing key controls and procedures.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 income and net income per share, 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 Ended									Six Months Ended
(Dollar amounts in thousands, except per share data)	June 30, 2022			March 31, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Net interest income (GAAP)	$	21,909		$	19,047		$	17,202		$	40,956		$	35,081
Total noninterest income	1,781			1,273			2,302			3,054			3,421
Total noninterest expense	12,604			16,495			10,954			29,099			22,742
Pre-tax pre-provision earnings (non-GAAP)	$	11,086		$	3,825		$	8,550		$	14,911		$	15,760
Total adjustments to noninterest expense (1)	—			(2,915)			—			(2,915)			(684)
Adjusted pre-tax pre-provision earnings (non-GAAP)	$	11,086		$	6,740		$	8,550		$	17,826		$	16,444









Return on average assets (GAAP)	1.03		%	0.36		%	0.99		%	0.70		%	0.96		%
Annualized pre-tax pre-provision ROAA (non-GAAP)	1.63		%	0.57		%	1.33		%	1.10		%	1.36		%
Adjusted annualized pre-tax pre-provision ROAA (non-GAAP)	1.63		%	1.00		%	1.33		%	1.32		%	1.42		%

(1)Adjustments to noninterest expense for the six months ended June 30, 2022 were related to severance and accelerated vesting expense related to the departure of the former Chief Executive Officer. Adjustments to noninterest expense for the six months ended June 30, 2021 were related to change in control payments to two former Marquis employees.


(Dollar amounts in thousands, except per share data)	June 30, 2022			December 31, 2021
Total loans held for investment, net (GAAP)	$	1,972,091		$	1,764,460
Add allowance for loan loss ("ALLL")	15,142			12,704
Total gross loans held for investment ("LHFI")	1,987,233			1,777,164
Less Professional Bank net PPP loans ("PPP")	$	8,176		$	58,615
Total gross LHFI excluding net PPP loans (non-GAAP)	$	1,979,057		$	1,718,549
Add purchase accounting loan marks ("PA")	9,937			13,003
Total gross LHFI excluding net PPP loans (non-GAAP) + PA marks	$	1,988,994		$	1,731,552

ALLL as a % of LHFI (GAAP)	0.76		%	0.71		%
ALLL as a % of total LHFI excluding net PPP loans (non-GAAP)	0.77		%	0.74		%
PA marks + ALLL / LHFI excluding net PPP loans (non-GAAP)	1.26		%	1.48		%

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(Dollar amounts in thousands, except per share data)	Three Months Ended									Six Months Ended
	June 30, 2022			March 31, 2022			June 30, 2021			June 30, 2022			June 30, 2021

Net interest income (GAAP)	$	21,909		$	19,047		$	17,202		$	40,956		$	35,081
Less: PPP net interest income recognized	(818)			(1,059)			(1,844)			(1,877)			(4,897)
Net interest income excluding PPP (non-GAAP)	21,091			17,988			15,358			39,079			30,184
Less: PA premium/discounts	(1,648)			(1,661)			(1,192)			(3,309)			(2,460)
Net interest income excluding PPP and PA (non-GAAP)	$	19,443		$	16,327		$	14,166		$	35,770		$	27,724
Average interest earning assets (GAAP)	2,572,318			2,599,372			2,447,242			2,585,771			2,218,056
Less: average PPP loans	(19,727)			(44,585)			(186,912)			(32,088)			(188,802)
Average interest earning assets, excluding PPP (non-GAAP)	2,552,591			2,554,787			2,260,330			2,553,683			2,029,254
Add: average PA marks	10,436			12,314			16,649			11,370			18,459
Average interest earning assets, excluding PPP and PA (non-GAAP)	$	2,563,027		$	2,567,101		$	2,276,979		$	2,565,053		$	2,047,713
Net interest margin (GAAP)	3.42		%	2.97		%	2.82		%	3.19		%	3.19		%
Net interest margin excluding PPP (non-GAAP)	3.31		%	2.86		%	2.73		%	3.09		%	3.00		%
Net interest margin excluding PPP and PA (non-GAAP)	3.04		%	2.58		%	2.50		%	2.81		%	2.73		%

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 June 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 June 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. Other than as noted below, there have been no material changes to our risk factors as previously described under Item 1A of our 2021 Form 10-K.

Factors related to Merger and Acquisition Activity

On August 8, 2022, Professional Holding Corp. and Seacoast Banking Corporation of Florida (“Seacoast”) entered into an Agreement and Plan of Merger pursuant to which Professional will merge with and into Seacoast, with Seacoast as the surviving corporation, in an all-stock transaction. Risks associated with this transaction may include but not be limited to: (i) the risk that regulatory approval of the transaction will not be obtained or is obtained subject to conditions that are not anticipated or that cannot be satisfied, (ii) the possibility that our shareholders will not approve the transaction, (iii) the risk that a condition of closing may not be satisfied, and (iv) uncertainty as to whether and when the transaction is completed..

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						Certification of the CEO pursuant to Sec. 301 of the Sarbanes Oxley Act of 2002.
31.2						Certification of the CFO pursuant to Sec. 301 of the Sarbanes Oxley Act of 2002.
31.3						Certification of the CAO pursuant to Sec. 301 of the Sarbanes Oxley Act of 2002.
32.1						Certification of the CEO pursuant to 18 USC Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2						Certification of the CFO pursuant to 18 USC Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3						Certification of the CAO pursuant to 18 USC Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS						XBRL 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.SCH						XBRL Taxonomy Extension Schema Document
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						XBRL Taxonomy Extension Label Linkbase Document
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104						Cover 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 August 12, 2022.

Signature

Title

Date

/s/ Abel L. Iglesias

Chief Executive Officer

August 12, 2022

Abel L. Iglesias

(Principal Executive Officer)

/s/ Mary Usategui

Chief Financial Officer

August 12, 2022

Mary Usategui

(Principal Financial Officer)

/s/ Jennifer Boyd

Chief Accounting Officer

August 12, 2022

Jennifer Boyd

(Principal Accounting Officer)