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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________


For the quarterly period ended						Commission file
September 30, 2022						number 001-39215

Professional Holding Corp.

(Exact name of Registrant as specified in its charter)


FL						46-5144312
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

396 Alhambra Circle, Suite 255,

Coral Gables, FL 33134 786 483-1757

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading 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 November 4, 2022: 13,814,427

Table of Contents

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	62

Item 4	Controls and Procedures	62

Part II	Other Information	63

Item 1	Legal Proceedings	63

Item 1A	Risk Factors	63

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3	Defaults Upon Senior Securities	63

Item 4	Mine Safety Disclosures	63

Item 5	Other Information	63

Item 6	Exhibits	64

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited).

PROFESSIONAL HOLDING CORP.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollar amounts in thousands, except share data)


	September 30, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	43,863	$	38,469
Interest earning deposits	113,641		545,521
Federal funds sold	15,762		13,477
Cash and cash equivalents	173,266		597,467
Securities available for sale, at fair value - taxable	150,517		175,536
Securities available for sale, at fair value - tax-exempt	26,863		18,765
Securities held to maturity (fair value September 30, 2022 – $178, December 31, 2021 – $242)	194		236
Equity securities	6,182		6,638
Loans, net of allowance of $16,485 and $12,704 as of September 30, 2022 and December 31, 2021, respectively	1,988,410		1,764,460
Loans held for sale	—		165
Premises and equipment, net	7,867		9,020
Bank owned life insurance	54,534		38,485
Goodwill and intangibles	25,579		25,766
Other assets	41,465		27,573
Total assets	$	2,474,877	$	2,664,111
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand – noninterest bearing	$	758,042	$	674,003
Demand – interest bearing	308,167		310,362
Money market and savings	976,766		1,121,330
Time deposits	145,316		265,693
Total deposits	2,188,291		2,371,388
Federal Home Loan Bank advances	—		35,000
Official checks	5,350		4,125
Other borrowings	—		10,000
Subordinated debt	24,467		—
Accrued interest and other liabilities	18,905		12,074
Total liabilities	2,237,013		2,432,587
Stockholders’ equity
Preferred stock, 10,000,000 shares authorized, none issued	—		—
Class A Voting Common stock, $0.01 par value; authorized 50,000,000 shares, issued 14,769,354 and outstanding 13,811,084 shares as of September 30, 2022, and authorized 50,000,000 shares, issued 14,393,750 and outstanding 13,446,400 shares at December 31, 2021	148		144
Class B Non-Voting Common stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding on September 30, 2022 and December 31, 2021	—		—
Treasury stock, at cost	(16,214)		(16,003)
Additional paid-in capital	216,703		212,012
Retained earnings	54,006		36,120
Accumulated other comprehensive loss	(16,779)		(749)
Total stockholders’ equity	237,864		231,524
Total liabilities and stockholders' equity	$	2,474,877	$	2,664,111

See accompanying notes to consolidated financial statements.

Table of Contents

PROFESSIONAL HOLDING CORP.

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

(Dollar amounts in thousands, except share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest income
Loans, including fees	$	25,222	$	20,209	$	66,602	$	57,753
Investment securities - taxable	736		186		2,078		526
Investment securities - tax-exempt	228		177		673		569
Dividend income on restricted stock	108		96		310		290
Other	871		222		2,194		486
Total interest income	27,165		20,890		71,857		59,624

Interest expense
Deposits	2,170		1,476		5,247		4,223
Federal Home Loan Bank advances	—		182		137		568
Subordinated debt	198		128		696		335
Other borrowings	—		—		24		313
Total interest expense	2,368		1,786		6,104		5,439

Net interest income	24,797		19,104		65,753		54,185
Provision for loan losses	1,343		1,060		4,434		2,860
Net interest income after provision for loan losses	23,454		18,044		61,319		51,325

Noninterest income
Service charges on deposit accounts	542		643		1,636		2,237
Income from bank owned life insurance	400		281		1,049		844
SBA origination fees	90		21		138		166
Swap fee income	—		208		112		781
Loans held for sale income	6		161		122		462
Gain on sale and call of securities	—		1		13		23
Other	185		161		1,207		384
Total noninterest income	1,223		1,476		4,277		4,897

Noninterest expense
Salaries and employee benefits	8,003		7,350		26,696		21,233
Occupancy and equipment	1,001		935		3,013		2,942
Data processing	257		303		875		869
Marketing	565		420		886		738
Professional fees	830		689		2,635		2,087
Acquisition expenses	957		—		957		684
Regulatory assessments	254		481		1,276		1,248
Other	1,986		1,446		6,614		4,565
Total noninterest expense	13,853		11,624		42,952		34,366

Income before income taxes	10,824		7,896		22,644		21,856
Income tax provision	2,351		1,608		4,758		4,452
Net income	$	8,473	$	6,288	$	17,886	$	17,404

Earnings per share:
Basic	$	0.63	$	0.48	$	1.33	$	1.30
Diluted	$	0.60	$	0.45	$	1.27	$	1.25

Other comprehensive income:
Unrealized holding loss on securities available for sale	(7,176)		(288)		(21,484)		(1,081)
Tax effect	1,819		71		5,454		265
Other comprehensive loss, net of tax	(5,357)		(217)		(16,030)		(816)
Comprehensive income	$	3,116	$	6,071	$	1,856	$	16,588

See accompanying notes to consolidated financial statements.

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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	—	—		—		1,068		—		—		1,068
Exercise of stock options	92,710	1		—		811		—		—		812
Restricted stock issued	128,644	1		—		—		—		—		1
Treasury stock	(341,367)	—		(6,037)		(10)		—		—		(6,047)
Net income	—	—		—		—		17,404		—		17,404
Other comprehensive loss	—	—		—		—		—		(816)		(816)
Balance on September 30, 2021	13,416,667	$	143	$	(15,246)	$	210,898	$	32,160	$	66	$	228,021

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


Stock based compensation	—	—		—		2,776		—		—		2,776
Exercise of stock options	169,058	2		—		1,917		—		—		1,919
Restricted stock issued	206,546	2		—		(2)		—		—		—
Treasury stock	(10,920)	—		(211)		—		—		—		(211)
Net income	—	—		—		—		17,886		—		17,886
Other comprehensive loss	—	—		—		—		—		(16,030)		(16,030)
September 30, 2022	13,811,084	$	148	$	(16,214)	$	216,703	$	54,006	$	(16,779)	$	237,864

Balance on June 30, 2021	13,475,781	$	143	$	(13,544)	$	210,274	$	25,872	$	283	$	223,028


Stock based compensation expense	—	—		—		359		—		—		359
Exercise of stock options	28,296	—		—		268		—		—		268
Restricted stock issued	6,189	—		—		—		—		—		—
Treasury stock	(93,599)	—		(1,702)		(3)		—		—		(1,705)
Net income	—	—		—		—		6,288		—		6,288
Other comprehensive loss	—	—		—		—		—		(217)		(217)
Balance on September 30, 2021	13,416,667	$	143	$	(15,246)	$	210,898	$	32,160	$	66	$	228,021

Balance on June 30, 2022	13,742,381	$	147	$	(16,201)	$	215,541	$	45,533	$	(11,422)	$	233,598


Stock based compensation expense	—	—		—		547		—		—		547
Exercise of stock options	53,586	1		—		615		—		—		616
Restricted stock issued	15,793	—		—		—		—		—		—
Treasury stock	(676)	—		(13)		—		—		—		(13)
Net income	—	—		—		—		8,473		—		8,473
Other comprehensive loss	—	—		—		—		—		(5,357)		(5,357)
Balance on September 30, 2022	13,811,084	$	148	$	(16,214)	$	216,703	$	54,006	$	(16,779)	$	237,864

See accompanying notes to consolidated financial statements

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PROFESSIONAL HOLDING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollar amounts in thousands, except share data)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities
Net income	$	17,886	$	17,404
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	4,434		2,860
Amortization of purchase accounting adjustments	(4,752)		(4,651)

Depreciation and amortization	465		1,023

Gain on call of securities	(13)		(23)
Gain on loans held for sale	(122)		(462)
Equity unrealized change in market value	513		102
Net amortization of securities	1,111		2,137
Net amortization of deferred loan fees	(3,577)		(6,589)
Originations of loans held for sale	(7,973)		(22,367)
Proceeds from sales of loans held for sale	8,260		23,815
Income from bank-owned life insurance	(1,049)		(844)
Loss on disposal of premises and equipment	4		140
Employee stock purchase plan	—		34
Stock compensation	2,776		1,069
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable	(637)		1,330
Other assets	(8,178)		(5,269)
Official checks, accrued interest, and other liabilities	8,188		1,586
Net cash provided by operating activities	17,336		11,295

Cash flows from investing activities
Proceeds from maturities and paydowns of securities available for sale	20,942		16,749
Proceeds from calls of securities available for sale	4,135		4,812
Proceeds from paydowns of securities held to maturity	40		1,282
Purchase of securities available for sale	(30,736)		(50,922)

Purchase of equity securities	(57)		(800)
Loans originations, net of principal repayments	(220,284)		(38,098)

Purchase of Federal Reserve Bank stock	(604)		(654)

Redemption of Federal Home Loan Bank Stock	981		888
Purchase of bank-owned life insurance	(15,000)		—
Disposals (purchases) of premises and equipment, net	145		(1,632)

Net cash used in investing activities	(240,438)		(68,375)

Cash flows from financing activities
Net increase (decrease) in deposits	(182,807)		695,844
Proceeds from issuance of stock, net of issuance costs	1,919		812

Purchase of treasury stock	(211)		(6,047)

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


Repayment of line of credit	(10,000)		—

Repayments of PPPLF advances	—		(101,358)
Net cash provided by (used in) financing activities	(201,099)		584,251

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Increase (decrease) in cash and cash equivalents	(424,201)		527,171
Cash and cash equivalents at beginning of period	597,467		216,972
Cash and cash equivalents at end of period	$	173,266	$	744,143

Supplemental cash flow information:
Cash paid during the period for interest	$	6,114	$	6,192
Cash paid during the period for taxes, net of refunds	6,359		4,200

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, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current period presentation.

Operating results for the nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Use of Estimates:

The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

New accounting standards that have not yet been adopted:

The following provides a brief description of accounting standards that have been issued but are not yet adopted that could have a material effect on the Company’s financial statements:


ASU 2022-02, Financial Instruments – Credit Losses (Topic 326)
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, but it is not believed to be material.

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NOTE 2 — EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding plus the effect of employee stock awards during the year.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollar amounts in thousands, except per share data)	2022		2021		2022		2021
Basic earnings per share:
Net income	$	8,473	$	6,288	$	17,886	$	17,404
Total weighted average common stock outstanding	13,498,007		13,196,025		13,430,536		13,344,470
Basic earnings per common share	$	0.63	$	0.48	$	1.33	$	1.30
Diluted earnings per share:
Net income	$	8,473	$	6,288	$	17,886	$	17,404
Total weighted average common stock outstanding	13,498,007		13,196,025		13,430,536		13,344,470
Add: dilutive effect of employee restricted stock and options	742,008		659,402		661,214		568,613
Total weighted average diluted stock outstanding	14,240,015		13,855,427		14,091,750		13,913,083
Dilutive earnings per common share	$	0.60	$	0.45	$	1.27	$	1.25

Anti-dilutive restricted stock and options	$	16,874	$	7,357	$	49,167	$	278,007

NOTE 3 — SECURITIES

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity on September 30, 2022, and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss and gross unrecognized gains and losses:


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2022
Available for sale - taxable
Small Business Administration loan pools	$	31,902	$	32	$	(420)	$	31,514
Mortgage-backed securities (1)	135,017		—		(20,183)		114,834
United States agency obligations	2,947		—		(280)		2,667
Corporate bonds	1,500		2		—		1,502
Total available for sale - taxable	$	171,366	$	34	$	(20,883)	$	150,517
Available for sale - tax-exempt
Community Development District bonds	$	25,343	$	1	$	(1,330)	$	24,014
Municipals	3,148		—		(299)		2,849
Total available for sale - tax-exempt	$	28,491	$	1	$	(1,629)	$	26,863

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Held to Maturity
Residential mortgage-backed securities	$	194	$	—	$	(16)	$	178


Total Held to Maturity	$	194	$	—	$	(16)	$	178

(1)$91.1 million is residential mortgage-backed and $23.7 million is commercial mortgage-backed.

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	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Equity
Mutual Funds	$	5,325	$	—	$	—	$	5,325
Other equity securities	857		—		—		857
Total Equity	$	6,182	$	—	$	—	$	6,182


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2021
Available for sale - taxable
Small Business Administration loan pools	$	40,368	$	38	$	(472)	$	39,934
Mortgage-backed securities (1)	131,273		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 September 30, 2022, and December 31, 2021, corporate bonds were comprised of investments in the financial services industry. During the nine months ended September 30, 2022, the net investment portfolio decreased by $17.4 million primarily due to $25.1 million in investment calls, redemptions and paydowns, coupled with unrealized losses of $21.5 million during the year, partially offset by purchases of approximately $30.7 million in mortgage-backed securities ("MBS"), community development district bonds ("CDD"), and municipal bonds.

Total securities pledged as of September 30, 2022, and December 31, 2021, were $27.0 million and $2.4 million, respectively, which included securities pledged for derivative swap transactions and pledged for public funds.

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

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


	September 30, 2022
(Dollars in thousands)	Amortized Cost		Fair Value
Available for sale
Due in one year or less	$	5,289	$	5,269
Due after one year through five years	22,956		21,666
Due after five years through ten years	4,693		4,097
Due after ten years	—		—
Subtotal	32,938		31,032

Small Business Administration loan pools	31,902		31,514
Mortgage-backed securities	135,017		114,834
Total available for sale	$	199,857	$	177,380

Held to maturity
Due in one year or less	$	—	$	—
Due after one year through five years	—		—
Subtotal	$	—	$	—

Mortgage-backed securities	$	194	$	178
Total held to maturity	$	194	$	178

On September 30, 2022, and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity. On September 30, 2022, and December 31, 2021, the number of investment positions that are in an unrealized loss position were 210 and 92, respectively.

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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 September 30, 2022, and December 31, 2021, respectively, aggregated by major security type and length of time in a continuous unrealized loss position:


	Less Than 12 Months				12 Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2022
Available for sale - taxable
Small Business Administration loan pools	$	1,613	$	(90)	$	20,468	$	(330)	$	22,081	$	(420)
Mortgage-backed securities	90,835		(15,684)		24,178		(4,499)		115,013		(20,183)
United States agency obligations	2,667		(280)		—		—		2,667		(280)

Total available for sale - taxable	$	95,115	$	(16,054)	$	44,646	$	(4,829)	$	139,761	$	(20,883)
Available for sale - tax-exempt
Community Development District bonds	$	23,020	$	(1,330)	$	—	$	—	$	23,020	$	(1,330)
Municipals	2,849		(299)		—		—		2,849		(299)
Total available for sale - tax-exempt	$	25,869	$	(1,629)	$	—	$	—	$	25,869	$	(1,629)

December 31, 2021
Available for sale - taxable
Small Business Administration loan pools	$	17,428	$	(335)	$	14,872	$	(136)	$	32,300	$	(471)
Mortgage-backed 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 mainly reflect changes in the interest rate cycle. The unrealized loss positions may fluctuate positively or negatively with changes in interest rates or spreads. Since Small Business Association ("SBA") loan pools and mortgage-backed securities are government sponsored entities that are highly rated, the decline in fair value is attributable to changes in interest rates and not credit quality. The Company does not have any securities in an Other Than Temporary Impairment (“OTTI”) position. The Company does not intend to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. No credit losses were recognized during the nine months ended September 30, 2022, or during the year ended December 31, 2021.

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NOTE 4 — LOANS

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


(Dollars in thousands)	September 30, 2022		December 31, 2021
Loans held for investment:
Commercial real estate	$	997,478	$	902,654
Residential real estate	452,521		377,511
Commercial (non-PPP)	397,725		325,415
Commercial (PPP)	2,618		58,615
Construction and land development	128,570		91,520
Consumer and other	25,983		21,449
Total loans held for investment, gross	2,004,895		1,777,164
Allowance for loan losses	(16,485)		(12,704)
Loans held for investment, net	$	1,988,410	$	1,764,460

Loans held for sale:
Loans held for sale	$	—	$	165
Total loans held for sale	$	—	$	165

The recorded investment in loans excludes accrued interest receivable due to immateriality.

On September 30, 2022, and December 31, 2021, there were $265.3 million and $235.3 million, respectively in total loans pledged to the Federal Home Loan Bank (“FHLB”).

Loan premiums for loans purchased are amortized over the life of the loan with acceleration upon the increase in principal paydowns or payoffs. On September 30, 2022, and December 31, 2021, loan premiums for purchased loans were $0.3 million and $0.4 million, respectively. Net discounts for loans acquired through business acquisitions totaled $8.5 million and $13.0 million, as of September 30, 2022, and December 31, 2021, respectively.

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

The following table presents the aging of the recorded investment in past due loans as of September 30, 2022, and December 31, 2021, by class of loans:


(Dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Nonaccrual		Total Past Due		Loans Not Past Due		Total
September 30, 2022
Commercial real estate	$	—	$	—	$	—	$	297	$	297	$	997,181	$	997,478
Residential real estate	—		—		—		—		—		452,521		452,521
Commercial (non-PPP)	—		400		—		1,468		1,868		395,857		397,725
Commercial (PPP)	221		—		—		—		221		2,397		2,618
Construction and land development	—		—		—		—		—		128,570		128,570
Consumer and other	—		—		—		—		—		25,983		25,983
Total	$	221	$	400	$	—	$	1,765	$	2,386	$	2,002,509	$	2,004,895

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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 $2 thousand and $55 thousand as of September 30, 2022, and December 31, 2021, respectively. The Company has allocated no specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2022, and December 31, 2021. The Company has not committed any additional amounts to customers whose loans are classified as a troubled debt restructuring.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt including: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, all credits greater than $1.0 million are reviewed at least annually to monitor and adjust, if necessary, the credit risk profile. Loans classified as substandard or special mention are reviewed quarterly by the Company for further evaluation to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will determine the appropriate loan grade.

Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the creditworthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard, doubtful, or even charged-off. The Company uses the following definitions for risk ratings:

Pass: A Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary. The pass category includes the following:

•Riskless: Loans that are fully secured by liquid, properly margined collateral (listed stock, bonds, or other securities; savings accounts; certificates of deposit; loans or portions thereof that are guaranteed by the U.S. Government or agencies backed by the “full faith and credit” thereof; loans secured by properly executed letters of credit from prime financial institutions).

•High Quality Risk: Loans to recognized national companies and well-seasoned companies that enjoy ready access to major capital markets or to a range of financing alternatives. Borrower’s public debt offerings are accorded highest ratings by recognized rating agencies, e.g., Moody’s or Standard & Poor’s. Companies display sound financial conditions and consistent superior income performance. The borrower’s trends and those of the industry to which it belongs are positive.

•Satisfactory Risk: Loans to borrowers, reasonably well established, that display satisfactory financial conditions, operating results, and excellent future potential. Capacity to service debt is amply demonstrated. Current financial strength, while financially adequate, may be deficient in a number of respects. Normal comfort levels are achieved through a closely monitored collateral position and/or the strength of outside guarantors.

•Moderate Risk: Loans to borrowers that are in non-compliance with periodic reporting requirements of the loan agreement, and any other credit file documentation deficiencies, that do not otherwise affect the borrower’s credit risk

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profile. This may include borrowers who fail to supply updated financial information that supports the adequacy of the primary source of repayment to service the Bank’s debt and prevents bank management from evaluating the borrower’s current debt service capacity. Existing loans will include those with consistent track record of timely loan payments, no material adverse changes to underlying collateral, and no material adverse change to guarantor's(s') financial capacity, evidenced by public record searches.

Special mention: A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard: A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: A loan classified Doubtful has all the weaknesses inherent in one classified Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2022
Commercial real estate	$	994,933	$	—	$	2,545	$	—	$	997,478
Residential real estate	452,521		—		—		—		452,521
Commercial (non-PPP)	395,857		84		1,784		—		397,725
Commercial (PPP)	2,618		—		—		—		2,618
Construction and land development	128,570		—		—		—		128,570
Consumer	25,914		69		—		—		25,983
Total	$	2,000,413	$	153	$	4,329	$	—	$	2,004,895

December 31, 2021
Commercial real estate	$	900,364	$	—	$	2,290	$	—	$	902,654
Residential real 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)	September 30, 2022		December 31, 2021
Commercial real estate	$	5,795	$	5,845
Residential real estate	—		89
Commercial	200		410
Construction and development	—		—
Consumer and other loans	—		—
Carrying amount	$	5,995	$	6,344

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


(Dollars in thousands)	2022		2021
Balance at January 1	(573)		(630)
New loans purchased	—		—
Adjustment of income	—		—
Accretion	202		296
Reclassifications from nonaccretable difference	(407)		(136)
Disposals	374		16
Balance on September 30	$	(404)	$	(454)

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

Non-Performing Assets

As of September 30, 2022, the Company had nonperforming assets of $1.8 million, or 0.07% of total assets, compared to nonperforming assets of $2.1 million, or 0.08% of total assets, on December 31, 2021. The Bank’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when a determination of a confirmed loss is made on a loan. There was one charge-off of an impaired loan of $0.7 million in the consumer loan category for the nine months ended September 30, 2022, compared to a partial charge-off of $7.6 million for the nine months ended September 30, 2021 on a commercial loan.

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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 nine months ended September 30, 2022, and 2021.


	Three Months Ended September 30, 2022
(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and land Development		Consumer and Other		Total
September 30, 2022
Allowance for loan losses:
Beginning balance	$	5,929	$	2,966	$	5,425	$	677	$	145	$	15,142
Provision for loan losses	(40)		614		545		199		25		1,343
Loans charged-off	—		—		—		—		—		—
Recoveries	—		—		—		—		—		—
Total ending allowance balance	$	5,889	$	3,580	$	5,970	$	876	$	170	$	16,485


	Three Months Ended September 30, 2021
(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and land Development		Consumer and Other		Total
September 30, 2021
Allowance for loan losses:
Beginning balance	$	4,285	$	2,269	$	3,423	$	361	$	80	$	10,418
Provision for loan losses	(206)		(47)		674		(28)		667		1,060
Loans charged-off	—		—		—		—		—		—
Recoveries	—		—		—		—		—		—
Total ending allowance balance	$	4,079	$	2,222	$	4,097	$	333	$	747	$	11,478


	Nine Months Ended September 30, 2022
(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and Land Development		Consumer and Other		Total
September 30, 2022
Allowance for loan losses:
Beginning balance	$	4,471	$	2,339	$	4,637	$	471	$	786	$	12,704
Provision for loan losses	1,418		1,241		1,333		405		37		4,434
Loans charged-off	—		—		—		—		(653)		(653)
Recoveries	—		—		—		—		—		—
Total ending allowance balance	$	5,889	$	3,580	$	5,970	$	876	$	170	$	16,485

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	Nine Months Ended September 30, 2021
(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and Land Development		Consumer and Other		Total
September 30, 2021
Allowance for loan losses:
Beginning balance	$	3,159	$	2,177	$	10,462	$	388	$	73	$	16,259
Provision for loan losses	920		45		1,276		(55)		674		2,860
Loans charged-off	—		—		(7,641)		—		—		(7,641)
Recoveries	—		—		—		—		—		—
Total ending allowance balance	$	4,079	$	2,222	$	4,097	$	333	$	747	$	11,478


(Dollars in thousands)	Commercial Real Estate		Residential Real Estate		Commercial		Construction and Land Development		Consumer and Other		Total
September 30, 2022
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	99	$	—	$	1,018	$	—	$	—	$	1,117
Purchased Credit Impaired (PCI) loans	—		—		—		—		—		—
Collectively evaluated for impairment	5,790		3,580		4,952		876		170		15,368
Total ending allowance balance	$	5,889	$	3,580	$	5,970	$	876	$	170	$	16,485

Loans:
Loans individually evaluated for impairment	$	2,545	$	—	$	1,784	$	—	$	—	$	4,329
Loans collectively evaluated for impairment	994,933		452,521		398,559		128,570		25,983		2,000,566
Total ending loans balance	$	997,478	$	452,521	$	400,343	$	128,570	$	25,983	$	2,004,895

December 31, 2021
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	—	$	—	$	671	$	—	$	654	$	1,325
Purchased Credit Impaired (PCI) loans	—		—		—		—		—		—
Collectively evaluated for 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:


	September 30, 2022			December 31, 2021
(Dollars in thousands)	Ending Balance		% of Total	Ending Balance		% of Total
NOW accounts	$	308,167	14.1%	$	310,362	13.1%
Money market accounts	944,728		43.2%	1,055,033		44.5%
Brokered deposits (1)	18,407		0.8%	58,365		2.5%
Savings accounts	16,966		0.8%	12,558		0.5%
Certificates of deposit	141,981		6.5%	261,067		11.0%
Total interest-bearing deposits	1,430,249		65.4%	1,697,385		71.6%
Noninterest-bearing deposits	758,042		34.6%	674,003		28.4%
Total deposits	$	2,188,291	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 September 30, 2022.


(Dollars in thousands)	Three Months or Less		Over Three Through Six Months		Over Six Months Through 12 Months		Over 12 Months		Total
Time deposits of $250,000 or less	$	15,108	$	10,501	$	21,453	$	4,276	$	51,338
Time deposits of more than $250,000	30,676		15,605		41,366		6,331		93,978
Total	$	45,784	$	26,106	$	62,819	$	10,607	$	145,316

The following tables present the maturities of our time deposits including time deposits that meet or exceed the $250,000 FDIC insurance limit as of December 31, 2021.


(Dollars in thousands)	Three Months or Less		Over Three Through Six Months		Over Six Months Through 12 Months		Over 12 Months		Total
Time deposits of $250,000 or less	$	17,431	$	26,721	$	44,373	$	4,631	$	93,156
Time deposits of more than $250,000	32,058		54,429		83,290		2,760		172,537
Total	$	49,489	$	81,150	$	127,663	$	7,391	$	265,693

As of September 30, 2022, and December 31, 2021, the Company had time deposits that exceed the $250,000 FDIC insurance limit of $94.0 million and $172.5 million, respectively. Securities, mortgage loans or other financial instruments pledged as collateral for certain deposits were $53.9 million, and $28.7 million on September 30, 2022, and December 31, 2021, respectively. The aggregate amount of demand deposits that have been re-classified as loan balances on September 30, 2022, and December 31, 2021, were $1.2 million, and $0.4 million, respectively. Deposits from principal officers, directors and their affiliates at September 30, 2022, and December 31, 2021, were $2.3 million and $18.9 million, respectively.

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


(Dollars in thousands)	September 30, 2022		December 31, 2021
1 year or less	$	134,709	$	258,302
Over 1 through 2 years	10,457		6,669
Over 2 through 3 years	150		722
Over 3 through 4 years	—		—
Over 4 through 5 years	—		—
Over 5 years	—		—
Total	$	145,316	$	265,693

Banks may be required to maintain cash reserves in the form of vault cash or in an account with the Federal Reserve Bank or in noninterest-earning accounts with other qualified banks. This requirement is based on the Bank’s amount of transaction deposit accounts. Due to the amount of transaction deposit accounts, the Bank was not required to have cash reserve requirements on September 30, 2022, and December 31, 2021. Additionally, the Company had $90.5 million and $84.4 million, in Qualified Public Deposits that require a portion of the deposit to be pledged as collateral as of September 30, 2022, and December 31, 2021.

NOTE 7 — DEBT AND BORROWINGS

Subordinated Debt.

On January 13, 2022, the Company completed a private placement of $25.0 million in fixed-to-floating rate subordinated notes payable due 2032. The Notes will bear interest at a fixed annual rate of 3.38% for the first five years and will reset quarterly thereafter to the then current three-month Secured Overnight Financing Rate plus 203 basis points. The Notes are redeemable by the Company at its option, in whole or in part, on and after the fifth anniversary of the issue date. The Company used the net proceeds from the sale of the subordinate notes for general corporate purposes.

Valley National Line of Credit.

The Company maintains a $25.0 million secured revolving line of credit with Valley National Bank, N.A. with a maturity date of March 1, 2023. Amounts drawn under this line of credit bear interest at the Prime Rate, as announced by The Wall Street Journal from time to time as its prime rate, and its obligations under this line of credit are secured by shares of the capital stock of the Bank, which we have pledged as security. On September 30, 2022, there were no outstanding borrowings under this line of credit compared to $10.0 million on December 31, 2021.

The Company uses short-term and long-term borrowings to supplement deposits to fund lending and investment activities.

Federal Home Loan Bank Advances

The FHLB allows the Company to borrow up to 25% of its assets on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2022, approximately $265.3 million in total loans were pledged as collateral for potential FHLB borrowings and FHLB letters of credit. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As of September 30, 2022, we had no outstanding advances, $28.7 million in outstanding letters of credit, and $163.9 million in additional available borrowing capacity from the FHLB based on the collateral that we have currently pledged.

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(Dollars in thousands)	September 30, 2022		December 31, 2021
Amount outstanding at period-end	$	—	$	35,000
Weighted average interest rate at period-end	—%		2.04%
Maximum month-end balance during period	$	35,000	$	35,000
Average balance outstanding during period	$	9,121	$	36,918
Weighted average interest rate during 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. There were no advances outstanding under this facility as of September 30, 2022 and December 31, 2021.

NOTE 8 — COMMON STOCK AND PREFERRED STOCK

Class A Voting Common Stock

The Company has Class A voting common stock with a par value of $0.01 per share. As of September 30, 2022, there are 50,000,000 shares of Class A voting common stock authorized of which 13,811,084 are outstanding. During the nine months ended September 30, 2022, the Company issued 387,082 shares of Class A voting common stock, inclusive of 218,024 shares of restricted stock grants and 169,058 shares of options exercised.

During the nine months ended September 30, 2022, treasury shares increased by 10,920 in connection with the net settlement of equity awards exercised or vested for tax purposes. In addition, there were 11,478 shares in restricted stock cancellations. During the nine months ended September 30, 2021, the Company repurchased 341,367 shares of Class A voting common stock, inclusive of 3,210 shares in connection with the net settlement of equity awards exercised or vested for tax purposes and had 3,002 shares in restricted stock cancellations. The Company did not repurchase any shares for the nine months ended September 30, 2022.

Class B Non-voting Common Stock

The Company has authorized 10,000,000 shares of Class B non-voting common stock with a par value of $0.01 per share. As of September 30, 2022, and December 31, 2021, no shares of Class B non-voting common stock were outstanding.

Preferred Stock

The Company has 10,000,000 shares of undesignated and unissued preferred stock As of September 30, 2022, and December 31, 2021, no shares of preferred stock were outstanding.

NOTE 9 — FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

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Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate their fair value.

Securities available for sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations, corporate bonds, municipal bonds and U.S. agency notes. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 might include certain residual interests in securitizations and other less liquid securities. As of September 30, 2022 and December 31, 2021, all securities available for sale were Level 2.

Securities held to maturity: Measured at fair value utilizing Level 2 inputs. The estimated fair value is determined based on market quotes when available. If not available, quoted market prices of similar securities, discounted cash flow analysis, pricing models and observable market data are used in determining fair market value.

Equity securities: The Company values equity securities at readily determinable market values based on the closing price at the end of each period. Changes in fair value are recognized through net income.

Loans: Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type, such as commercial or residential mortgage. Each loan category is further segmented into fixed and adjustable rate interest terms as well as performing and non-performing categories. The fair value of loans is calculated by discounting scheduled cash flows through the estimated life including prepayment considerations and estimated market discount rates that reflect the risks inherent to the loan. The calculation of the fair value considers market driven variables including credit related factors and reflects an exit price as defined in ASC Topic 820.

Loans held for sale: The carrying amounts of loans held for sale approximate their fair values.

Federal Home Loan Bank stock: It is not practical to determine fair value due to restrictions placed on transferability.

Federal Reserve Bank stock: It is not practical to determine fair value due to restrictions placed on transferability.

Accrued interest receivable: The carrying amounts of accrued interest approximate their fair values.

Deposits: The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a current market rates offered for remaining or similar maturities.

Federal Home Loan Bank advances: Fair values are estimated using discounted cash flow analysis based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements.

Subordinated debt: The fair value was determined by using a discounted cash flow method using a market participant discount rate for similar instruments.

Line of credit: The carrying amounts of the line of credit approximate their fair values.

Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Interest rate swaps: The fair value of interest rate swaps is estimated using inputs that are observable or that can be corroborated by observable market data and therefore are classified as Level 2. The fair value estimations include primarily market observable inputs.

There were no securities reclassified into or out of Level 3 during the nine months ended September 30, 2022, or for the year ended December 31, 2021.

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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 September 30, 2022 Using:
(Dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
ASSETS:
Securities available for sale - taxable
Small Business Administration loan pools	$	31,514	$	—	$	31,514	$	—
Mortgage-backed securities	114,834		—		114,834		—
United States agency obligations	2,667		—		2,667		—
Corporate bonds	1,502		—		1,502		—
Securities available for sale - tax-exempt
Community Development District bonds	24,014		—		24,014		—
Municipals	2,849		—		2,849		—
Equity securities - mutual funds	5,325		5,325		—		—
Equity Securities - other	857		857		—		—

Customer derivatives - interest rate swaps	6,610		—		6,610		—

LIABILITIES:
Customer derivatives - interest rate swaps	$	6,610	$	—	$	6,610	$	—


			Fair Value Measurements on December 31, 2021 Using:
(Dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
ASSETS:
Securities available for sale - taxable
Small Business Administration loan pools	$	39,934	$	—	$	39,934	$	—
Mortgage-backed 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 September 30, 2022 Using:
(Dollars in thousands)	Total at September 30, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial real estate	$	2,449	$	—	$	—	$	2,449	$	(99)
Residential real estate	—		—		—		—		—
Commercial	766		—		—		766		(1,018)
Construction and land development	—		—		—		—		—
Consumer and other	—		—		—		—		—
Total	$	3,215	$	—	$	—	$	3,215	$	(1,117)


			Fair Value Measurements on December 31, 2021 Using:
(Dollars in thousands)	Total at December 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial real estate	$	—	$	—	$	—	$	—	$	—
Residential real estate	—		—		—		—		—
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):


	September 30, 2022
(Dollars in thousands)	Carrying Amount		Fair Value		Fair Value Hierarchy
Financial Assets:
Cash & due from banks, including interest bearing deposits	$	157,504	$	157,504	Level 1
Federal funds sold	15,762		15,762		Level 1
Securities, available for sale - taxable	171,366		150,517		Level 2
Securities, available for sale - tax-exempt	28,491		26,863		Level 2
Securities, held to maturity	194		178		Level 2
Securities, equity	5,325		5,325		Level 1
Securities, other equity	857		857		Level 1
Loans, net	1,988,410		1,975,085		Level 3

Bank owned life insurance	54,534		54,534		Level 2
Customer derivatives - interest rate swaps	6,610		6,610		Level 2
Accrued interest receivable	5,909		5,909		Level 1, 2 & 3

Financial Liabilities:
Deposits	$	2,188,291	$	2,006,303	Level 2

Subordinated debt	24,467		24,467		Level 2



Customer derivatives - interest rate swaps	6,610		6,610		Level 2
Accrued interest payable	252		252		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
Accrued interest payable	263		263		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 September 30, 2022, the Company recorded 13 swap transactions with clients having a total notional amount of $54.6 million, offset by 13 swap transactions with dealers having a total notional amount of $54.6 million. Additionally, we recorded $0.1 million in back-to-back swap fee income for the nine months ended September 30, 2022. The fair value of these derivatives is based on a market standard discounted cash flow approach. The Company incorporates credit value adjustments on derivatives to properly reflect the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. As of September 30, 2022, the Bank’s asset fair value position in other assets was $6.6 million and liability fair value position in other liabilities was $6.6 million, and were fully collateralized with pledged securities held with the counterparty in excess of the exposure amount at quarter end.

NOTE 11 — LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

On April 8, 2021, the Company formed a separately capitalized subsidiary, Pro Opp Fund LLC. As of September 30, 2022, Pro Opp Fund LLC has committed to investments of approximately $0.9 million in businesses directly, and indirectly related to the Company’s core business as permitted under the U.S. Bank Holding Company Act. Pro Opp Fund LLC has an additional $0.8 million of unfunded investments outstanding.

The contractual amounts of financial instruments with off-balance-sheet risk on September 30, 2022, and December 31, 2021, were as follows:


(Dollars in thousands)	September 30, 2022		December 31, 2021
Available lines of credit	$	529,519	$	415,402
Unfunded loan commitments – fixed	70,375		62,126
Unfunded loan commitments – variable	22,903		46,698
Standby letters of credit	10,972		12,095
Commercial letters of credit	394		2,765
Total credit extension commitments	$	634,163	$	539,086

NOTE 12 — REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision’s capital guidelines for United States banks (Basel III rules), the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2022 and 2021 was 2.50%. The Company opted not to include net unrealized gains or losses on available for sale securities in computing regulatory capital. As of September 30, 2022, the Bank met all capital adequacy requirements to which it was subject.

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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 September 30, 2022, and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed the institution’s category. Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.

Actual and required capital amounts and ratios are presented below on September 30, 2022 and December 31, 2021. The required amounts for capital adequacy shown below do not include the capital conservation buffer previously discussed.


(Dollars in thousands)	Actual				Required for Capital Adequacy Purposes				Well Capitalized Prompt Corrective Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2022
Total Capital ratio
Bank	$	257,261	12.5	%	$	164,087	8.0	%	$	205,109	10.0	%
Company	271,324		13.2	%	164,087		8.0	%	N/A		N/A
Tier 1 Capital ratio
Bank	239,468		11.7	%	123,066		6.0	%	164,087		8.0	%
Company	229,064		11.1	%	123,066		6.0	%	N/A		N/A
Tier 1 Leverage ratio
Bank	239,468		9.6	%	99,364		4.0	%	124,205		5.0	%
Company	229,064		9.2	%	99,364		4.0	%	N/A		N/A
Common Equity Tier 1
Bank	239,468		11.7	%	92,299		4.5	%	133,321		6.5	%
Company	229,064		11.1	%	92,299		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

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

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

Introduction

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

Proposed Merger with Seacoast Banking Corporation of Florida

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

Subject to the terms of the Merger Agreement, the Company's shareholders will have the right to receive 0.8909 shares of Seacoast common stock for each outstanding share of the Company's common stock.

Cautionary Note Regarding Forward Looking Information

This communication contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained in this communication that are not statements of historical fact may be deemed to be forward-looking statements, including, without limitation, statements preceded by, followed by or including words such as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” "target," "goal," “may,” “will,” “would,” “could” or “should” and similar expressions. Forward-looking statements represent the Company’s current expectations, plans or forecasts; involve assumptions, risks and uncertainties; and are not guarantees. Several important factors could cause actual results to differ materially from those in forward-looking statements and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Those factors include, without limitation:

•general business and economic conditions, either globally, nationally, in the State of Florida, or in the specific markets in which we operate, including the negative impacts and disruptions resulting from rising interest rates, political instability from acts of war, including the ongoing conflict between Russia and Ukraine, supply chain challenges and inflation, which have had and may likely continue to have an adverse impact on our business operations and performance, and could continue to have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically;

•the impact of Hurricane Ian on Florida generally, as well as certain of the communities we serve, and which could continue to have a negative impact on our business, credit portfolio, borrowers and our stock price;

•the effects of our lack of a diversified loan portfolio and concentration in the South Florida market including the risks of geographic, depositor, and industry concentrations, including our concentration in loans secured by real estate;

• the frequency and magnitude of foreclosure of our loans;

•changes in the securities, real estate markets and commodities markets (including fluctuations in the price of coffee or oil);

•the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss reserve and deferred tax asset valuation allowance;

•increased competition and its effect on pricing of our products and services as well as our margins;

•our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;

•Professional Bank’s ability to make cash distributions to us and our ability to declare and pay dividends, the payment of which is subject to our capital and other requirements;

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•changes in accounting principles, policies, practices or guidelines, including the effects of forthcoming CECL implementation;

•our ability to fund and manage our growth, both organic growth as well as growth through other means, such as future acquisitions;

•negative publicity and the impact on our reputation;

•our ability to attract and retain highly qualified personnel;

•technological changes;

•cybersecurity risks including security breaches, computer viruses, and data processing system failures and errors;

•our ability to manage operational risks, including, but not limited to, client, employee, or third-party fraud;

•changes in monetary and fiscal policies of the U.S. Government and the Federal Reserve;

•inflation, interest rate, unemployment rate, market, and monetary fluctuations;

•the efficiency and effectiveness of our internal control environment;

•the ability of our third-party service providers to continue providing services to us and clients without interruption;

•geopolitical developments;

•the effects of harsh weather conditions, including hurricanes, and other natural disasters (including pandemics such as COVID-19) and man-made disasters;

•potential business interruptions from catastrophic events such as terrorist attacks, active shooter situations, and advanced persistent threat groups;

•the willingness of clients to accept third-party products and services rather than our products and services and vice versa;

•changes in consumer spending and saving habits;

•growth and profitability of our noninterest income; and

•anti-takeover provisions under federal and state law as well as our governing documents;

•the risk that our proposed merger with Seacoast may not be completed in a timely manner or at all, which may adversely affect our business and the price of our common stock;

•the diversion of management time on issues related to the merger with Seacoast;

•the effect of the announcement or pendency of the merger on Seacoast’s customer, employee and business relationships, operating results, and business generally;

•changes in laws or regulations;

•changes in interest rates, deposit flows, loan demand and real estate values;

•the ongoing impacts and disruptions resulting from COVID-19 or other variants on the economies and communities we serve, which has had and may likely continue to have an adverse impact on our business operations and performance, and could continue to have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically; and

•other factors described in our Annual Report on Form 10-K for the year ended December 31, 2021, and other filings with the Securities and Exchange Commission.

Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in forward-looking statements. We caution investors not to rely unduly on any forward-looking statements and urge investors to carefully consider the risks described in our filings with the Securities and Exchange Commission, referred to above, which are available on www.proholdco.com and the SEC’s website at www.sec.gov. The Company expressly disclaims any obligation to update any of the forward-looking statements included herein to reflect future events or developments or changes in expectations, except as may be required by law.

Executive Overview

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

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

•Net income increased by $2.2 million, or 34.7%, to $8.5 million compared to $6.3 million during the three months ended September 30, 2021, due to an increase in net interest income of $5.7 million, partially offset by an increase in provision expense of $0.3 million, a decrease in noninterest income of $0.3 million, an increase in noninterest expense of $2.2 million, and an increase in income tax provision of $0.7 million.

•Net interest income increased by $5.7 million, or 29.8%, to $24.8 million compared to $19.1 million during the three months ended September 30, 2021, due to the impact of the Federal Reserve’s target Federal Funds Rate increases during the third quarter and new loan production in a higher rate environment on the Company’s asset sensitive balance sheet.

•Provision for loan losses increased $0.3 million, or 26.7%, to $1.3 million compared to $1.1 million during the three months ended September 30, 2021, primarily due to loan growth. There were no net charge-offs for the three months ended September 30, 2022 and 2021.

•Noninterest income decreased $0.3 million, or 17.1% to $1.2 million compared to the three months ended September 30, 2021. The decrease was comprised of lower swap fee income of $0.2 million, lower loans held for sale income of $0.2 million, and lower service charges of $0.1 million on deposit accounts compared to the three months ended September 30, 2021. These decreases were partially offset by an increase of $0.1 million in income from bank owned life insurance as a result of prior quarter's additional bank owned life insurance purchase of $15.0 million.

•Noninterest expense increased $2.2 million, or 19.2%, to $13.9 million compared to $11.6 million during the three months ended September 30, 2021. The increase was comprised of acquisition expenses of $1.0 million in connection with the pending merger with Seacoast, higher salaries and benefits of $0.7 million, and higher other noninterest expense of $0.5 million, partially offset by lower regulatory assessments expense of $0.2 million. The increase in salaries and benefits was due to higher sales incentives resulting from higher net income and loans as well as enhancements to our regulatory and compliance areas. The increase in noninterest expense was primarily comprised of an increase in provision for unfunded commitments and the Community Reinvestment Act (“CRA”) mutual fund investment valuation.

Results of Operations for the Nine Months Ended September 30, 2022

•Net income increased by $0.5 million, or 2.8%, to $17.9 million compared to $17.4 million in the prior year period, due to an increase in net interest income of $11.6 million, partially offset by an increase in provision expense of $1.6 million, a decrease in noninterest income of $0.6 million, an increase in noninterest expense of $8.6 million, and an increase in income tax provision of $0.3 million.

•Net interest income increased by $11.6 million, or 21.3%, to $65.8 million compared to $54.2 million in the prior year period, primarily due to the impact of the Federal Reserve’s target Federal Funds Rate increases in 2022 on the Company’s asset sensitive balance sheet, in addition to an increase in average loans from $1.7 billion in 2021 to $1.9 billion in 2022. Interest income also benefited from increased average balances and higher yields in the investment portfolio.

•Provision for loan losses increased by $1.6 million, or 55.0%, to $4.4 million compared to $2.9 million in the prior year period primarily due to loan growth. The ratio of annualized charge-offs to average loans was 0.05% during the nine months ended September 30, 2022, compared to 0.61% in the prior year period.

•Noninterest income decreased by $0.6 million, or 12.7% to $4.3 million compared to the prior year period. The decrease primarily reflected lower service charges of $0.6 million on deposit accounts compared to prior year due to service charges of approximately $0.7 million, associated with acting as a correspondent bank for a Payroll Protection Program ("PPP") lender, and lower swap fee income of $0.7 million. These decreases were partially offset by an increase of $0.8 million in other noninterest income, comprised of $0.5 million of expected insurance proceeds on a previously recognized contingency and a $0.2 million loss on fixed asset disposals recorded in 2021.

•Noninterest expense increased by $8.6 million, or 25.0%, to $43.0 million compared to $34.4 million in the prior year period primarily due to higher salaries and employee benefits of $5.5 million and higher other noninterest expense of $2.0 million. The increase in salaries and benefits was driven by the $2.9 million expense related to the departure of the Company’s former Chief Executive Officer, and higher employee compensation costs from higher headcount and bonus and sales incentives. The increase in other noninterest expense was primarily comprised of a $0.7 million loss

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related to a previously recognized contingency from the first quarter, a $0.3 million increase related to our CRA mutual fund investment valuation, and a $0.5 million increase in the provision for unfunded commitments.

Financial Condition

At September 30, 2022:

•Total assets decreased $0.2 billion, or 7.1%, to $2.5 billion compared to December 31, 2021, primarily as a result of decreases in cash and cash equivalents of $0.4 billion, partially offset by an increase in net loans of $0.2 billion.

•Total loans increased $0.2 billion, or 12.8%, to $2.0 billion compared to December 31, 2021. The increase was driven by loan originations of approximately $708.7 million, partially offset by paydowns and prepayments. The Professional Bank PPP loan balance decreased $56.0 million, or 95.5%, to $2.6 million from December 31, 2021.

•Total deposits decreased $0.2 billion, or 7.7%, to $2.2 billion compared to December 31, 2021 primarily due a decrease in money market and savings and time deposits, partially offset by an increase in noninterest bearing demand deposits.

•As of September 30, 2022, the Company had nonperforming assets of $1.8 million, or 0.07% of total assets, compared to nonperforming assets of $2.1 million at December 31, 2021. The decrease was due to the charge-off of a $0.7 million impaired loan in the consumer loan category, partially offset by the addition of a $0.3 million nonaccrual commercial real estate loan during the nine months ended September 30, 2022.

Operating Results

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

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


	Three Months Ended September 30,
(Dollars in thousands)	2022		2021		Change
Interest income	$	27,165	$	20,890	30.0	%
Interest expense	2,368		1,786		32.6	%
Net interest income	24,797		19,104		29.8	%
Provision for loan losses	1,343		1,060		26.7	%
Net interest income after provision	23,454		18,044		30.0	%
Noninterest income	1,223		1,476		(17.1)	%
Noninterest expense	13,853		11,624		19.2	%
Income before income taxes	10,824		7,896		37.1	%
Income tax expense	2,351		1,608		46.2	%
Net income	$	8,473	$	6,288	34.7	%

Net Interest Income and Net Interest Margin Analysis

We analyze our ability to maximize income generated from interest earning assets and control the interest expenses associated with our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between the interest and fees earned on interest earning assets, such as loans and securities, and the interest expense paid on interest bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as annualized net interest income divided by average interest earning assets for the same period. Net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest-bearing liabilities.

Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest earning assets, interest bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation,

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macroeconomic developments, changes in unemployment rates, the money supply, political and international conditions, and circumstances, in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, the economic and competitive conditions in the Miami-Dade MSA, as well as developments affecting the real estate, technology, government services, hospitality and tourism, and financial services sectors within the Miami-Dade MSA. Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of our net interest income and net interest margin as our primary sources of earnings.

The following table shows the average outstanding balance of each principal category of our assets, liabilities, and stockholders’ equity, together with the average yields on our assets and the average costs of our liabilities for the periods indicated. Such yields and costs are calculated by dividing the annualized income or expense by the average daily balances of the corresponding assets or liabilities for the same period.


	For the Three Months Ended September 30,
	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	$	137,355	$	747	2.16	%	$	561,082	$	212	0.15	%
Federal funds sold	21,895		124		2.25	%	36,264		10		0.11	%
Federal Reserve Bank stock, FHLB stock and other corporate stock	7,384		108		5.80	%	7,521		96		5.06	%
Investment securities - taxable	168,662		736		1.73	%	105,498		186		0.70	%
Investment securities - tax-exempt	27,572		228		3.28	%	19,402		177		3.62	%
Loans (1)	1,979,132		25,222		5.06	%	1,702,137		20,209		4.71	%
Total interest earning assets	2,342,000		27,165		4.60	%	2,431,904		20,890		3.41	%
Loans held for sale	31						1,478
Noninterest earning assets	156,584						125,751
Total assets	$	2,498,615					$	2,559,133
Liabilities and shareholders’ equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,453,653	2,170		0.59	%	$	1,463,138	1,476		0.40	%
Borrowed funds	24,447		198		3.21	%	45,046		310		2.73	%
Total interest-bearing liabilities	1,478,100		2,368		0.64	%	1,508,184		1,786		0.47	%
Noninterest-bearing liabilities
Noninterest-bearing deposits	758,135						810,042
Other noninterest-bearing liabilities	24,492						16,746
Shareholders’ equity	237,888						224,161
Total liabilities and shareholders’ equity	$	2,498,615					$	2,559,133
Net interest income			$	24,797					$	19,104
Net interest spread (2)					3.96	%					2.94	%

Professional Holding Corp. 10-Q