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Table of Contents
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, 2021
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
For the quarterly period ended Commission file
September 30, 2021
number 001-39215
Professional Holding Corp.
(Exact name of Registrant as specified in its charter)
FL
46-5144312
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)

396 Alhambra Circle, Suite 255,
Coral Gables, FL 33134 786 483-1757
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading SymbolName of each exchange on which registered:
Class A Common StockPFHD
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Smaller reporting company
x
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Number of shares of common stock outstanding as of November 9, 2021: 13,426,141


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TABLE OF CONTENTS
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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,
2021
December 31,
2020
ASSETS  
Cash and due from banks$40,074 $62,305 
Interest-bearing deposits680,333 129,291 
Federal funds sold23,736 25,376 
Cash and cash equivalents744,143 216,972 
Securities available for sale, at fair value - taxable94,218 65,110 
Securities available for sale, at fair value - tax exempt19,462 22,398 
Securities held to maturity (fair value September 30, 2021 – $269, December 31, 2020 – $1,561)
259 1,547 
Equity securities6,703 6,005 
Loans, net of allowance of $11,478 and $16,259 as of September 30, 2021, and December 31, 2020, respectively
1,675,773 1,641,422 
Loans held for sale284 1,270 
Federal Home Loan Bank stock, at cost2,341 3,229 
Federal Reserve Bank stock, at cost5,416 4,762 
Accrued interest receivable5,336 6,666 
Premises and equipment, net3,807 4,370 
Bank owned life insurance38,204 37,360 
Deferred tax asset9,283 10,525 
Goodwill24,621 24,621 
Core deposit intangibles1,212 1,422 
Other assets15,174 9,591 
Total assets$2,646,236 $2,057,270 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand – noninterest bearing$799,389 $475,598 
Demand – interest bearing328,667 232,367 
Money market and savings959,066 715,003 
Time deposits267,624 236,575 
Total deposits2,354,746 1,659,543 
Official checks4,194 4,447 
Federal Home Loan Bank advances35,000 40,000 
Other borrowings 114,573 
Subordinated debt10,016 10,153 
Accrued interest and other liabilities14,259 12,989 
Total liabilities2,418,215 1,841,705 
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 14,323,965 and outstanding 13,416,667 shares as of September 30, 2021, and authorized 50,000,000 shares, issued 14,100,760 and outstanding 13,534,829 shares on December 31, 2020
143 141 
Class B Non-Voting Common stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding on September 30, 2021, and December 31, 2020
  
Treasury stock, at cost(15,246)(9,209)
Additional paid-in capital210,898 208,995 
Retained earnings32,160 14,756 
Accumulated other comprehensive income66 882 
Total stockholders’ equity228,021 215,565 
Total liabilities and stockholders' equity$2,646,236 $2,057,270 
3

Table of Contents
PROFESSIONAL HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended September 30,Nine Months Ended September 30,
2021 2020 2021 2020
Interest income
Loans, including fees$20,209 $18,488 $57,753 $46,400 
Investment securities - taxable186 209 526 663 
Investment securities - tax exempt177 224 569 430 
Dividend income on restricted stock96 103 290 313 
Other222 77 486 837 
Total interest income20,890 19,101 59,624 48,643 
Interest expense
Deposits1,476 1,165 4,223 5,408 
Federal Home Loan Bank advances182 197 568 762 
Subordinated debt128 79 335 324 
Other borrowings 200 313 337 
Total interest expense1,786 1,641 5,439 6,831 
Net interest income19,104 17,460 54,185 41,812 
Provision for loan losses1,060 5,957 2,860 8,552 
Net interest income after provision for loan losses18,044 11,503 51,325 33,260 
Non-interest income
Service charges on deposit accounts643 319 2,237 848 
Income from Bank owned life insurance281 123 844 378 
SBA origination fees21  166 114 
SWAP fee income208 149 781 622 
Third party loan sales161 252 462 519 
Gain on sale and call of securities1 1 23 16 
Other161 119 384 290 
Total non-interest income1,476 963 4,897 2,787 
Non-interest expense
Salaries and employee benefits7,350 6,433 21,233 18,608 
Occupancy and equipment935 1,196 2,942 3,051 
Data processing303 374 869 971 
Marketing420 435 738 723 
Professional fees689 562 2,087 1,723 
Acquisition expenses 1,078 684 3,301 
Regulatory assessments481 250 1,248 764 
Other1,446 1,385 4,565 3,606 
Total non-interest expense11,624 11,713 34,366 32,747 
Income before income taxes7,896 753 21,856 3,300 
Income tax provision (benefit)1,608 (197)4,452 536 
Net income6,288 950 17,404 2,764 
Earnings per share:
Basic$0.48 $0.07 $1.30 $0.24 
Diluted$0.45 $0.07 $1.25 $0.21 
Other comprehensive income:
Unrealized holding gain (loss) on securities available for sale(288)171 (1,081)1,240 
Tax effect71 (43)265 (315)
Other comprehensive gain (loss), net of tax(217)128 (816)925 
Comprehensive income$6,071 $1,078 $16,588 $3,689 
4

Table of Contents
PROFESSIONAL HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(Dollar amounts in thousands, except share data)
Common StockTreasury
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance on July 1, 202013,444,635 $139 $(9,132)$202,438 $8,265 $724 $202,434 
Issuance of common stock, net of issuance cost37,891  — 346 — — 346 
Employee stock purchase plan— — — 24 — — 24 
Stock based compensation— — — 233 — — 233 
Treasury stock —   — —  
Net income— — — — 950 — 950 
Other comprehensive income— — — — — 128 128 
Balance on September 30, 2020
13,482,526 $139 $(9,132)$203,041 $9,215 $852 $204,115 
Balance on July 1, 202113,475,781 $143 $(13,544)$210,274 $25,872 $283 $223,028 
Issuance of common stock, net of issuance cost28,296 — — 268 — — 268 
Employee stock purchase plan — —  — —  
Stock based compensation6,189 — — 359 — — 359 
Treasury stock(93,599)— (1,702)(3)— — (1,705)
Net income— — — — 6,288 — 6,288 
Other comprehensive income— — — — — (217)(217)
Balance on September 30, 2021
13,416,667 $143 $(15,246)$210,898 $32,160 $66 $228,021 
Balance on January 1, 20205,867,446 $60 $(4,155)$77,019 $6,451 $(73)$79,302 
Issuance of common stock, net of issuance cost3,702,558 37 — 60,567 — — 60,604 
Marquis Bancorp (MBI) acquisition4,227,816 42 — 64,657 — — 64,699 
Employee stock purchase plan— — — 82 — — 82 
Stock based compensation— — — 725 — — 725 
Treasury stock(315,294)— (4,977)(9)— — (4,986)
Net income— — — — 2,764 — 2,764 
Other comprehensive income— — — — — 925 925 
Balance on September 30, 2020
13,482,526 $139 $(9,132)$203,041 $9,215 $852 $204,115 
Balance on January 1, 202113,534,829 $141 $(9,209)$208,995 $14,756 $882 $215,565 
Issuance of common stock, net of issuance cost89,500 1 — 811 — — 812 
Employee stock purchase plan1,851 — — 34 — — 34 
Stock based compensation131,854 1 — 1,068 — — 1,069 
Treasury stock(341,367)— (6,037)(10)— — (6,047)
Net income— — — — 17,404 — 17,404 
Other comprehensive income— — — — — (816)(816)
Balance on September 30, 2021
13,416,667 $143 $(15,246)$210,898 $32,160 $66 $228,021 
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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,
20212020
Cash flows from operating activities  
Net income$17,404$2,764
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses2,860 8,552 
Deferred income tax benefit (expense)1,221 (2,981)
Depreciation and amortization1,084 1,132 
Gain on sale of securities (4)
Gain on call of securities(23)(12)
Equity unrealized change in market value102 (24)
Net amortization of securities2,137 (287)
Net amortization of deferred loan fees(6,589)(2,371)
Loans held for sale986  
Income from bank owned life insurance(844)(378)
Loss on disposal of premises and equipment140  
Employee stock purchase plan34 82 
Stock compensation1,069 725 
Changes in operating assets and liabilities:
Accrued interest payable (receivable)1,330 (2,524)
Other assets(7,534)3,110 
Official checks, accrued interest, interest payable and other liabilities1,303 (2,054)
Net cash provided by operating activities14,680 5,730 
Cash flows from investing activities
Proceeds from maturities and paydowns of securities available for sale16,74910,407
Proceeds from calls of securities available for sale4,8128,500
Proceeds from maturities and paydowns of securities held to maturity1,28284
Purchase of securities available for sale(50,922)(60,693)
Proceeds from sale of securities available for sale1,739
Purchase of equity securities(800) 
Loans originations, net of principal repayments(41,886)(299,867)
Purchase (redemption) of Federal Reserve Bank stock(654)10,540 
Proceeds from maturities of Federal Home Loan Bank Stock888(2,688)
Purchase of Federal Home Loan Bank Stock(660)
Purchases of premises and equipment(588)(486)
Proceeds from acquisition26,860
Net cash used in investing activities(71,119)(306,264)
Cash flows from financing activities
Net increase (decrease) in deposits695,203176,160
Proceeds from issuance of stock, net of issuance costs81260,604
Purchase of treasury stock(6,047)(4,986)
Proceeds from Federal Home Loan Bank advances10,000
Repayments of Federal Home Loan advances(5,000)(40,000)
Repayment of line of credit(9,999)
Proceeds from PPPLF advances224,341
Repayments of PPPLF advances(101,358)
Net cash provided by financing activities583,610416,120
Increase in cash and cash equivalents527,171115,586
Cash and cash equivalents at beginning of period216,972198,950
Cash and cash equivalents at end of period$744,143$314,536
Supplemental cash flow information:
Cash paid during the period for interest$6,192$6,233
Cash paid during the period for taxes4,2002,186
Supplemental noncash disclosures:
Lease liabilities arising from obtaining right of use assets$$1,680
Total assets acquired589,760
Total liabilities assumed540,712
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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 nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, 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, 2020.
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.
Adoption of new accounting standards:
ASU 2019-12, Income Taxes (Topic 740)
In December 2019, FASB issued guidance which simplifies the accounting for income taxes by removing multiple exceptions to the general principals in Topic 740. The standard is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The new guidance did not materially impact the Company’s Consolidated Financial Statements or disclosures.
ASU 2020-04, Reference Rate Reform (Topic 848)
In March 2020, FASB issued guidance which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the London Interbank Offered Rate ("LIBOR") likely being discontinued as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying U.S. Generally Accepted Accounting Principles (“GAAP”) to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020, and December 31, 2022. The Company has established a cross-functional working group to guide the Company’s transition from LIBOR and has begun efforts to transition to alternative rates consistent with industry timelines. The Company has identified its products that utilize LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates. The new guidance did not materially impact the Company’s Consolidated Financial Statements or disclosures.
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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 2016-13, Financial Instruments – Credit Losses (Topic 326)
DescriptionIn June 2016, FASB issued guidance 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).
Date of AdoptionFor PBEs 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.
Effect on the Consolidated Financial StatementsThe Company's management is in the process of evaluating credit loss estimation models. Updates to business processes and the documentation of accounting policy decisions are ongoing. 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.
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 options during the year.
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Basic earnings per share:    
Net income$6,288 $950 $17,404 $2,764 
Total weighted average common stock outstanding13,196,025 13,438,652 13,344,470 11,694,764 
Net income per share$0.48 $0.07 $1.30 $0.24 
Diluted earnings per share:
Net income$6,288 $950 $17,404 $2,764 
Total weighted average common stock outstanding13,196,025 13,438,652 13,344,470 11,694,764 
Add: Dilutive effect of employee stock options659,402 1,117,563 568,613 1,290,819 
Total weighted average diluted stock outstanding13,855,427 14,556,215 13,913,083 12,985,583 
Net income per share$0.45 $0.07 $1.25 $0.21 
For the three months ended September 30, 2021, there were seven thousand stock options that were anti-dilutive and for the three months ended September 30, 2020, there were 326 thousand stock options that were anti-dilutive. For the nine months ended September 30, 2021, there were 278 thousand stock options that were anti-dilutive and for the nine months ended September 30, 2020, there were 133 thousand stock options that were anti-dilutive.
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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, 2021, and December 31, 2020, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss and gross unrecognized gains and losses:
September 30, 2021Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Available-for-sale - taxable
Small Business Administration loan pools$40,131 $62 $(490)$39,703 
Mortgage-backed securities51,105 162 (340)50,927 
United States agency obligations2,002 77  2,079 
Corporate bonds1,500 9  1,509 
Total available-for-sale - taxable$94,738 $310 $(830)$94,218 
Available-for-sale - tax exempt
Community Development District bonds$17,800 $564 $ $18,364 
Municipals 1,054 44  1,098 
Total available-for-sale - tax exempt$18,854 $608 $ $19,462 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair Value
Held-to-Maturity    
Mortgage-backed securities$259 $10 $ $269 
Total Held-to-Maturity$259 $10 $ $269 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair Value
Equity
Mutual Funds$5,903 $— $— $5,903 
Other equity securities800 — — 800 
Total Equity$6,703 $— $— $6,703 
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December 31, 2020Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available-for-sale - taxable    
Small Business Administration loan pools$30,678$77$(199)$30,556
Mortgage-backed securities28,514438(30)28,922
United States agency obligations3,0001223,122
Corporate bonds2,50192,510
Total available-for-sale - taxable$64,693$646$(229)$65,110
Available-for-sale - tax exempt
Community Development District bonds$20,582$717$$21,299
Municipals 1,064351,099
Total available-for-sale - tax exempt$21,646$752$$22,398
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Held-to-Maturity    
Mortgage-backed securities$345$14$$359
United States Treasury 202202
Foreign Bonds 1,0001,000
Total Held-to-Maturity$1,547$14$$1,561
As of September 30, 2021, and December 31, 2020, Corporate bonds were comprised of investments in the financial services industry. During the nine months ended September 30, 2021, the net investment portfolio increased by $25.6 million as a result of increases from purchases of $50.9 million in SBA and MBS securities combined with decreases of $24.9 million from paydowns, maturities and calls, as well as the unrealized holding loss on securities available for sale of $1.2 million with a related tax effect of $0.1 million. Proceeds from the maturity and redemption of securities during the three and nine months ended September 30, 2021, were $1.2 million and $4.8 million, with gross realized gains of $0 and $23 thousand, respectively. Proceeds from the sales of securities during the year ended December 31, 2020, were $1.7 million, with gross realized gains of $4 thousand. Proceeds from redemption of securities for the year ended December 31, 2020, were $9.1 million, with gross realized gains of $33 thousand. Total securities pledged as of September 30, 2021, and December 31, 2020, were $1.9 million and $12.5 million, respectively. Securities pledged for derivative SWAP transactions as of September 30, 2021, were $1.9 million which were included in the total securities pledged, such securities were generally pledged for public funds. There were no securities pledged for derivative SWAP transactions on December 31, 2020.
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, 2021, are as follows:
September 30, 2021
Amortized
Cost
Fair
Value
Available-for-sale
Due in one year or less
$1,188 $1,202 
Due after one year through five years
20,853 21,523 
Due after five years through ten years
315 325 
Due after ten years
  
Subtotal$22,356 $23,050 
Small Business Administration loan pools$40,131 $39,703 
Mortgage-backed securities51,105 50,927 
Total available-for-sale$113,592 $113,680 
Mortgage-backed securities$259 $269 
Total held-to-maturity$259 $269 
On September 30, 2021, and December 31, 2020, 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, 2021, and December 31, 2020, the number of investment positions that are in an unrealized loss position were 51 and 36, respectively. 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, 2021, and December 31, 2020, respectively, aggregated by major security type and length of time in a continuous unrealized loss position:
Less Than 12 Months12 Months or LongerTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
September 30, 2021
Available-for-sale - taxable
Small Business Administration loan pools$14,640 $(359)$16,127 $(131)$30,767 $(490)
Mortgage-backed securities33,019 (340)  33,019 (340)
Total available-for-sale - taxable$47,659 $(699)$16,127 $(131)$63,786 $(830)
December 31, 2020
Available-for-sale - taxable
Small Business Administration loan pools$18,849 $(133)$8,945 $(66)$27,794 $(199)
Mortgage-backed securities5,839  2,510 (30)8,349 (30)
United States agency obligations227    227  
Total available-for-sale - taxable$24,915 $(133)$11,455 $(96)$36,370 $(229)
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 in operations during the nine months ended September 30, 2021, or during the year ended December 31, 2020.
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NOTE 4 — LOANS
Loans on September 30, 2021, and December 31, 2020, were as follows:
September 30, 2021December 31, 2020
Loans held for investment:
Commercial real estate$856,194$777,025
Residential real estate371,469379,534
Commercial (Non-PPP)288,177206,095
Commercial (PPP)85,133185,748
Construction and land development69,53499,590
Consumer and other16,7449,689
Total loans held for investment, gross1,687,2511,657,681
Allowance for loan loss(11,478)(16,259)
Loans held for investment, net$1,675,773$1,641,422
Loans held for sale:
Loans held for sale$284$1,270
Total loans held for sale$284$1,270
The recorded investment in loans excludes accrued interest receivable due to immateriality.
On September 30, 2021, and December 31, 2020, there were $238.7 million and $264.2 million, respectively in total loans pledged to the Federal Home Loan Bank (“FHLB”) for liquidity.
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, 2021, and December 31, 2020, loan premiums for purchased loans were $0.4 million and $0.6 million, respectively.
There are no loans over 90 days past due and accruing as of September 30, 2021, or December 31, 2020. The following table presents the aging of the recorded investment in past due loans as of September 30, 2021, and December 31, 2020, by class of loans:
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater than
89 Days
Past Due
NonaccrualTotal
Past Due
Loans Not
Past Due
Total
September 30, 2021 
Commercial real estate$$$$$$856,194$856,194
Residential real estate2222371,447371,469
Commercial (Non-PPP)3691,4681,837286,340288,177
Commercial (PPP)85,13385,133
Construction and land development69,53469,534
Consumer and other881,3071,39515,34916,744
Total$479$$$2,775$3,254$1,683,997$1,687,251
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30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater than
89 Days
Past Due
NonaccrualTotal
Past Due
Loans Not
Past Due
Total
December 31, 2020
Commercial real estate$$$$$$777,025$777,025
Residential real estate1,3171,317378,217379,534
Commercial (Non-PPP)2789,127278205,817206,095
Commercial (PPP)185,748185,748
Construction and land development99,59099,590
Consumer and other1,3079,6899,689
Total$1,595$$$10,434$1,595$1,656,086$1,657,681
On September 30, 2021, there were five 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’s judgment) with both unpaid principal balance and recorded investments totaling $3.0 million. Three of these loans were impaired loans with a recorded investment of $2.8 million with an allowance of $1.3 million and one substandard accruing loan with a recorded investment of $2.3 million with no allowance. The average net investment on the impaired residential real estate and commercial loans during the three months ended September 30, 2021, were $0.9 million. Residential real estate loans had $2.2 million and $7 thousand interest income recognized for the three and nine months ended September 30, 2021, and 2020, respectively, which was equal to the cash basis interest income. On December 31, 2020, there were six impaired loans with recorded investments totaling $13.1 million, of which there were three impaired loans with a recorded investment of $10.4 million on nonaccrual with an allowance of $8.3 million and one substandard accruing loan with a recorded investment of $2.4 million with no allowance. The average net investment on the impaired residential real estate and commercial loans during the year ended December 31, 2020, was $2.2 million. The residential real estate loans had $13 thousand of interest income recognized during the year ended December 31, 2020, which was equal to the cash basis interest income.
Troubled Debt Restructurings:
The principal carrying balances of loans that met the criteria for consideration as troubled debt restructurings (“TDR”) were $227 thousand and $299 thousand as of September 30, 2021, and December 31, 2020, respectively. The Company has allocated no specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2021, and December 31, 2020. 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
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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 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.
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Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
(Dollars in thousands)PassSpecial
Mention
SubstandardDoubtfulTotal
September 30, 2021
Commercial real estate$853,888$$2,306$$856,194
Residential real estate371,469371,469
Commercial (Non-PPP)286,3343751,468288,177
Commercial (PPP)85,13385,133
Construction and land development69,53469,534
Consumer15,349881,30716,744
Total$1,681,707$463$5,081$$1,687,251
December 31, 2020
Commercial real estate$774,674$$2,351$$777,025
Residential real estate379,104430379,534
Commercial (Non-PPP)196,8561129,127206,095
Commercial (PPP)185,748185,748
Construction and land development99,59099,590
Consumer8,3821,3079,689
Total$1,644,354$542$12,785$$1,657,681
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, 2021December 31, 2020
Commercial real estate(1)
$5,869$
Residential real estate451405
Commercial556746
Construction and development(1)
3,732
Carrying amount, net of total discounts$6,876$4,883
_________________________________________________________________
(1)During the three months ended September 30, 2021, construction was completed on a construction loan and recategorized as a non-owner occupied commercial real estate loan.
Changes in the carrying amount of the accretable yield for all purchased credit impaired loans were as follows for the nine months ended September 30, 2021:
(Dollars in thousands)2021
Balance at beginning of period$(630)
Adjustment of income
Accretion296
Reclassifications from nonaccretable difference(136)
Disposals16
Balance at end of period$(454)
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For those purchased credit impaired loans disclosed above, no allowances for loan losses were recorded or reversed during the nine months ended September 30, 2021.
The credit fair value adjustment on purchased credit impairment (“PCI”) loans represents the portion of the loan balances that have been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan. PCI loans purchased on March 26, 2020, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
(Dollars in thousands)March 26, 2020
Contractually required principal and interest by loan type
Commercial real estate$427
Residential real estate604
Commercial2,176
Construction and development5,614
Consumer and other loans
Total$8,821
Contractual cash flows not expected to be collected (nonaccretable discount)
Commercial real estate$80
Residential real estate138
Commercial1,123
Construction and development2,297
Consumer and other loans
Total$3,638
Expected cash flows$5,183
Interest component of expected cash flows (accretable discount)(545)
Fair value of PCI loans accounted for under ASC 310-30$4,638
Non-Performing Assets
As of September 30, 2021, the Company had nonperforming assets of $2.8 million, or 0.10% of total assets, compared to nonperforming assets of $10.4 million, or 0.51% of total assets, on December 31, 2020. 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. In March 2021, the Company charged-off $7.6 million of the Coex Coffee International, Inc. (“Coex”) loan, which amount was previously reserved during the third quarter of 2020. Based on a review of the estimated receivables collected by the assignee in the Florida case for the benefit of creditors (the “Assignee”), the remaining book balance of $0.6 million for the Coex loan appears to be collectable by the Company, subject to final accounting by the Assignee.
Paycheck Protection Program
As of September 30, 2021, the Company participated in all three rounds of the Payroll Protection Program ("PPP") and funded 2,287 small business loans representing approximately $340.5 million in relief proceeds, of which 1,745 loans totaling $251.4 million were forgiven by the SBA and the balance was $85.1 million as of September 30, 2021.. Most of the PPP loans were initially pledged to the Federal Reserve as part of the Payroll Protection Program Liquidity Facility ("PPPLF"). The PPPLF pledged loans are non-recourse to the Company. However, the Company paid off all of the PPPLF advances during the first and second quarter of 2021.
Debt Service Relief Requests Related to COVID-19
As a result of the COVID-19 pandemic the Company has reviewed and processed numerous debt service relief requests in accordance with Section 4013 of the CARES Act and interagency guidelines published by federal banking regulators on March 13, 2020. As currently interpreted by the agencies, the guidelines assert that short-term modifications made on good faith for
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reasons related to the COVID-19 pandemic to borrowers who were current prior to such relief are not considered TDRs. These modifications include deferrals of principal and interest, modification to interest only, and deferrals to escrow requirements. The modifications have varying terms up to six months. As of September 30, 2021, all these loans had returned to normal payment schedules.
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 nine months ended September 30, 2021, and the year ended December 31, 2020:
Commercial
Real Estate
Residential
Real Estate
CommercialConstruction and Land DevelopmentConsumer
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 920451,276(55)6742,860
Loans charged-off (7,641)(7,641)
Recoveries
Total ending allowance balance$4,079$2,222$4,097$333$747$11,478
Commercial
Real Estate
Residential
Real Estate
CommercialConstruction
and Land
Development
Consumer
and Other
Total
December 31, 2020      
Allowance for loan losses:      
Beginning balance $1,845$3,115$1,235$272$81$6,548
Provision for loan losses 1,314(731)9,326116(8)10,017
Loans charged-off(207)(99)(306)
Recoveries
Total ending allowance balance $3,159$2,177$10,462$388$73$16,259
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Commercial
Real Estate
 Residential
Real Estate
 Commercial Construction
and Land
Development
 Consumer
and Other
 Total
September 30, 2021
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment$ $ $669 $ $653 $1,322 
Purchased Credit Impaired (PCI) loans      
Collectively evaluated for impairment4,079 2,222 3,428 333 94 10,156 
Total ending allowance balance$4,079 $2,222 $4,097 $333 $747 $11,478 
Loans:
Loans individually evaluated for impairment$2,306 $227 $1,468 $ $1,307 $5,308 
Loans collectively evaluated for impairment853,888 371,242 371,842 69,534 15,437 1,681,943 
Total ending loans balance$856,194 $371,469 $373,310 $69,534 $16,744 $1,687,251 
December 31, 2020
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment$ $ $8,309 $ $ $8,309 
Purchased Credit Impaired (PCI) loans     
Collectively evaluated for impairment3,159 2,177 2,153 388 73 7,950 
Total ending allowance balance$3,159 $2,177 $10,462 $388 $73 $16,259 
Loans:
Loans individually evaluated for impairment$2,351 $299 $9,127 $ $1,307 $13,084 
Loans collectively evaluated for impairment774,674 379,235 382,716 99,590 8,382 1,644,597 
Total ending loans balance$777,025 $379,534 $391,843 $99,590 $9,689 $1,657,681 
NOTE 6 — DEPOSITS
The Company’s total deposits are comprised of the following at the dates indicated:
For the Nine Months Ended
September 30, 2021
For the Year Ended
December 31, 2020
(Dollars in thousands)Ending
Balance
% of Total
Ending
Balance
% of Total
NOW accounts$328,66714.0%$232,36714.0%
Money market accounts893,44137.9%679,76141.0%
Brokered deposits56,4182.4%30,1371.8%
Savings accounts13,8330.6%9,7270.6%
Certificates of deposit262,99811.2%231,95314.0%
Total interest-bearing deposits1,555,35766.1%1,183,94571.3%
Noninterest-bearing deposits799,38933.9%475,59828.7%
Total deposits$2,354,746100.0%$1,659,543100.0%
_______________________________________________
(1)Balance Sheet does not illustrate brokered deposits as presented above .
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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, 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
$13,123$18,043$57,678$6,444$95,288
Time deposits of more than $250,000
25,53930,762111,2044,831172,336
Total$38,662$48,805$168,882$11,275$267,624
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, 2020.
(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
$20,767$13,258$24,805$19,240$78,070
Time deposits of more than $250,000
40,18935,31442,84540,157158,505
Total$60,956$48,572$67,650$59,397$236,575
As of September 30, 2021, and December 31, 2020, the Company had time deposits that exceed the $250,000 FDIC insurance limit of $172.3 million and $158.5 million, respectively. Securities, mortgage loans or other financial instruments pledged as collateral for certain deposits were $28.7 million, and $54.7 million on September 30, 2021, and December 31, 2020, respectively. The aggregate amount of demand deposits that have been re-classified as loan balances on September 30, 2021, and December 31, 2020, were $0.4 million, and $0.1 million, respectively. Deposits from principal officers, directors and their affiliates on September 30, 2021, and December 31, 2020, were $22.4 million, and $12.1 million, respectively.
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.
September 30, 2021December 31, 2020
Less than 1 year
$256,349$177,178
Over 1 through 2 years
10,15357,034
Over 2 through 3 years
1,0821,658
Over 3 through 4 years
40705
Over 4 through 5 years
Over 5 years
Total$267,624$236,575
Banks are 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, 2021, and December 31, 2020. Additionally, the Company had $77.8 million and $98.2 million, in Qualified Public Deposits (“QPD”) that require a portion of the deposit to be pledged as collateral as of September 30, 2021, and December 31, 2020.
NOTE 7 — DEBT
Subordinated Debt. On March 26, 2020, pursuant to terms of the acquisition, the Company assumed the subordinated notes payable of Marquis Bancorp, Inc. (“MBI”) at its fair value of $10.3 million. According to the terms of the subordinated note, the principal amount due is $10.0 million with a 7% fixed rate until October 30, 2021, and a variable rate thereafter at LIBOR plus 576 basis points. The note matures on October 30, 2026, and can be redeemed by the Company anytime on or after
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October 30, 2021. Pursuant to its contractual terms, the Company redeemed in full, the amount of its subordinated notes payable of $10.0 million on October 30, 2021. The subordinated debt was fair valued at a premium of $0.3 million and is being amortized over the expected life.
Valley National Line of Credit. On December 19, 2019, the Company entered into a $10.0 million secured revolving line of credit with Valley National Bank, N.A. Amounts drawn under this line of credit bears 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 January 7, 2021, (the “Closing Date”) the Company and Valley National Bank entered an amendment, which among other things, extended the maturity date of the note to March 19, 2021. No other material terms of the note changed. The principal balance outstanding pursuant to the note on the Closing Date was $0. On May 10, 2021, the Company and Valley National Bank entered into an extension agreement, which among other things, extended the maturity date of the note to March 1, 2022. As of September 30, 2021, and December 31, 2020, there were no outstanding borrowings under this line of credit.
NOTE 8 — BORROWINGS
The Company uses short-term and long-term borrowings to supplement deposits to fund lending and investment activities.
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 September 30, 2021, approximately $238.7 million in total loans that were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As of September 30, 2021, we had $35.0 million in outstanding advances and $129.3 million 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.
(Dollars in thousands)Nine Months Ended
September 30, 2021
Year Ended
December 31, 2020
Amount outstanding at period-end$35,000$40,000
Weighted average interest rate at period-end2.04%1.96%
Maximum month-end balance during period$40,000$70,000
Average balance outstanding during period37,56458,210
Weighted average interest rate during period2.00%1.63%
Federal Reserve Bank of Atlanta. The Federal Reserve Bank of Atlanta has an available borrower in custody arrangement which allows us to borrow on a collateralized basis. No advances were outstanding under this facility as of September 30, 2021.
PPPLF Advances. The Company initially funded PPP loans with the PPPLF. Most of the PPP loans were initially pledged to the Federal Reserve as part of the PPPLF. The PPPLF pledged loans are non-recourse to the Company. As of September 30, 2021, the balance of PPPLF advances were $0.
NOTE 9 — 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, 2021, there are 50,000,000 shares authorized as Class A voting common stock of which 13,416,667 are outstanding. During the nine months ended September 30, 2021, the Company issued 229,417 shares of Class A voting common stock, inclusive of 134,856 shares of restricted stock grants, 92,710 shares of options exercised, and 1,851 shares pursuant to the employee stock purchase program.
During the nine months ended September 30, 2021, the Company repurchased 341,367 shares of Class A common stock. Further, during the same nine-month period, upon the vesting of a portion of restricted stock, employees of the Company elected to have 3,210 shares of Class A common voting stock withheld for tax purposes and had 3,002 in restricted stock cancellations.
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Class B Non-voting Common Stock
The Company has Class B non-voting common stock with a par value of $0.01 per share. As of September 30, 2021, there are 10,000,000 shares authorized as Class B non-voting common stock, none of which are outstanding.
Preferred Stock
The Company has 10,000,000 shares of undesignated and unissued preferred stock.
NOTE 10 — 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 might include certain residual interests in securitizations and other less liquid securities. As of September 30, 2021, and December 31, 2020, 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.
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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.
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.
Assets and Liabilities Measured on a Recurring Basis:
Assets and liabilities measured at fair value on a recurring basis, are summarized below:
There were no securities reclassified into or out of Level 3 during the nine months ended September 30, 2021, or for the year ended December 31, 2020.
Fair Value Measurements
on September 30, 2021 Using:
September 30, 2021Fair
Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale - taxable
Small Business Administration loan pools$39,703$$39,703$
Mortgage-backed securities50,92850,928
United States agency obligations2,0782,078
Corporate bonds1,5091,509
Total$94,218$$94,218$
Available-for-sale - tax exempt
Community Development District bonds$18,364$$18,364$
Municipals1,0981,098
Total$19,462$$19,462$
Equity
Mutual funds$5,903$5,903$$
Other equity securities800800
Total$6,703$6,703$$
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Fair Value Measurements
on December 31, 2020 Using:
December 31, 2020Fair
Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale - taxable
Small Business Administration loan pools$30,556 $ $30,556 $ 
Mortgage-backed securities28,922  28,922  
United States agency obligations3,122  3,122  
Corporate bonds2,510  2,510  
Total$65,110 $ $65,110 $ 
Available-for-sale - tax exempt
Community Development District bonds$21,299 $ $21,299 $ 
Municipals1,099  1,099  
Total$22,398 $ $22,398 $ 
Equity
Mutual funds$6,005 $6,005 $ $ 
Total$6,005 $6,005 $ $ 
on September 30, 2021 Using:
September 30, 2021 Fair
Value
 Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
Customer Derivatives - Interest Rate SWAPs
Customer Derivatives - Interest Rate SWAPs Asset$1,300 $$1,300 $
Customer Derivatives - Interest Rate SWAPs Liability(1,300)(1,300)
Total$$$$
As of December 31, 2020, the Company did not hold any interest rate SWAPs.
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.
Specifically, regarding the Coex loan, the carrying amount of the loan for impairment purposes was determined based on the note outstanding balance on September 30, 2021, less the non-recourse amount sold to our participant, yielding a carrying value of $0.6 million. The fair value of the collateral was determined based on a review of information obtained from the Assignee related to the collectability of the collateral adjusted for legal and disposition costs. When netted in the same percentage as the non-recourse portion of the loan, the net fair value of collateral was noted as $0.6 million. The net result of these calculations provides for no specific reserve within the Allowance for Loan and Lease Losses (“ALLL”) associated with the Coex loan or approximately 0% of the carrying value of the loan.
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Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements
on September 30, 2021 Using:
(Dollars in thousands)
Total at
September 30,
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$$$$$
Residential real estate
Commercial 799799(669)
Construction and land development
Consumer and other654654(654)
Total$1,453$$$1,453$(1,323)
Fair Value Measurements
on December 31, 2020 Using:
(Dollars in thousands)
Total at
December 31,
2020
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Gains
(Losses)
Impaired Loans:
Commercial real estate$ $ $ $ $ 
Residential real estate     
Commercial 818   818 (8,309)
Construction and land development     
Consumer and other     
Total$818 $ $ $818 $(8,309)
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 an 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, 2021
Carrying
Amount
Fair
Value
Fair Value
Hierarchy
Financial Assets: 
Cash & Due from Banks, including interest bearing deposits$720,407$720,407Level 1
Federal Funds Sold23,73623,736Level 1
Securities, Available for Sale - taxable94,73994,218Level 2
Securities, Available for Sale - tax exempt18,85419,462Level 2
Securities, Held to Maturity259269Level 2
Securities, Equity5,9035,903Level 1
Securities, Other Equity800800Level 1
Loans, net1,675,7731,691,673Level 3
Loans Held For Sale284284Level 1
Bank Owned Life Insurance38,20438,204Level 2
Accrued Interest Receivable5,3365,336Level 1, 2 & 3
Customer Derivatives - Interest Rate SWAPs1,3001,300Level 2
Financial Liabilities:
Deposits2,354,7462,325,899Level 2
Federal Home Loan Bank Advances35,00033,809Level 2
Subordinated Debt10,01610,016Level 2
Customer Derivatives - Interest Rate SWAPs1,3001,300Level 2
Accrued Interest Payable266266Level 2
December 31, 2020
Carrying
Amount
Fair
Value
Fair Value
Hierarchy
Financial Assets: 
Cash & Due from Banks, including interest bearing deposits $191,597$191,597Level 1
Federal Funds Sold25,37525,375Level 1
Securities, Available for Sale - taxable65,11065,110Level 2
Securities, Available for Sale - tax exempt22,39822,398Level 2
Securities, Held to Maturity1,5471,561Level 2
Securities, Equity6,0056,005Level 1
Loans, net1,641,4221,653,401Level 3
Loans Held For Sale1,2701,270Level 1
Bank Owned Life Insurance 37,36037,360Level 2
Accrued Interest Receivable6,6666,666Level 1, 2 & 3
Financial Liabilities:
Deposits1,659,5431,693,331Level 2
Federal Home Loan Bank Advances40,00037,927Level 2
Subordinated Debt10,15310,153Level 2
PPPLF Advances101,358101,519Level 2
Loan Participations13,21513,215Level 2
Accrued Interest Payable546546Level 2
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NOTE 11 — 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 with both the customers and third parties 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”). During the nine months ended September 30, 2021, the Company recorded eight SWAP transactions with clients having a total notional amount of $69.7 million, offset by eight SWAP transactions with dealers having a total notional amount of $69.7 million. Additionally, we recorded $0.5 million in back-to-back SWAP fee income. 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, 2021, the Bank’s asset fair value position in other assets was $1.3 million and liability fair value position in other liabilities was $1.3 million, which were fully collateralized with pledged securities held with counterparty in excess of the exposure amount at quarter end.
NOTE 12 — 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.
The contractual amounts of financial instruments with off-balance-sheet risk on September 30, 2021, and December 31, 2020, were as follows:
(Dollars in thousands)September 30, 2021December 31, 2020
Unfunded lines of credit$368,117$356,955
Commitments to extend credit97,25140,629
Letters of credit11,30813,036
Total credit extension commitments$476,676$410,620
NOTE 13 — 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. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for United States banks (Basel III rules) became effective for the Bank on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for September 30, 2021, is 2.50% and for December 31, 2020, was 2.50% The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of September 30, 2021, the Bank met all capital adequacy requirements to which it was subject.
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
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distributions are limited, as is asset growth and expansion, and capital restoration plans are required. On September 30, 2021, and December 31, 2020, 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 September 30, 2021, and December 31, 2020. The required amounts for capital adequacy shown below do not include the capital conservation buffer previously discussed.
ActualMinimum for capital adequacyMinimum to be well
capitalized
(Dollars in thousands)AmountRatio AmountRatio AmountRatio
September 30, 2021      
Total capital ratio      
Bank$206,77612.9%$127,8608.0%$159,82410.0%
Company224,53714.0%127,8608.0%N/AN/A
Tier 1 capital ratio
Bank194,37712.2%95,8956.0%127,8608.0%
Company202,12212.6%95,8956.0%N/AN/A
Tier1 leverage ratio
Bank194,3777.7%101,3534.0%126,6915.0%
Company202,1228.0%101,3534.0%N/AN/A
Common equity tier 1 capital ratio
Bank194,37712.2%71,9214.5%103,8866.5%
Company202,12212.6%71,9214.5%N/AN/A
ActualMinimum for capital adequacyMinimum to be well
capitalized
(Dollars in thousands)AmountRatio AmountRatio AmountRatio
December 31, 2020
Total capital ratio
Bank$176,63312.0%$117,2988.0%$146,62310.0%
Company215,97714.7%117,2988.0%N/AN/A
Tier 1 capital ratio
Bank159,44810.9%87,9746.0%117,2988.0%
Company188,63912.9%87,9746.0%N/AN/A
Tier1 leverage ratio
Bank159,4488.4%75,7234.0%94,6545.0%
Company 188,63910.0%75,7234.0%N/AN/A
Common equity tier 1 capital ratio
Bank159,44810.9%65,9804.5%95,3056.5%
Company188,63912.9%65,9804.5%N/AN/A
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NOTE 14 — STOCK BASED COMPENSATION
Restricted Stock
An award of restricted stock involves the immediate transfer by the Company to the participant of a specific number of shares of our Class A voting common stock, which are subject to a risk of forfeiture and a restriction on transferability. This restriction will lapse following a stated period of time. The participant does not pay for the restricted stock and has all of the rights of a holder of a share of our Class A voting common stock (except for the restriction on transferability), including the right to vote and receive dividends unless otherwise determined by the Compensation Committee and set forth in the award agreement.
The Company initially limited the aggregate number of shares of our Class A voting common stock to be awarded under the 2019 Equity Incentive Plan (the "2019 Plan") as restricted stock to 682,955 shares. However, the 2019 Plan provides for the automatic increase (but not decrease) on the first day of each fiscal year. Thus, for 2021 the total share reserve is 682,955. The Company has 227,590 shares of restricted stock outstanding, at a weighted average exercise price of $16.87, to employees and directors under the 2019 Equity Incentive Plan as of September 30, 2021, for which the Company did not receive, nor will it receive, any monetary consideration. Therefore, there were 455,365 restricted shares available to be issued on September 30, 2021. As of September 30, 2021, there was approximately $2.7 million in unrecognized compensation expense in regard to restricted stock that will be recognized over a three-year period.
NOTE 15 — LEASES
Operating leases in which the Company is the lessee are recorded as right-of-use (“ROU”) assets and operating lease liabilities, including premises and equipment and other liabilities, respectively on the Consolidated Balance Sheets. Currently the Company does not have any lessor leases (formerly known as capital leases) to report on its financials.
The Company’s ROU assets are classified under premises and equipment on the Balance Sheet. The ROU liabilities are classified under other liabilities. The Company recorded $0.2 million new ROU assets during the nine months ended September 30, 2021, and recorded $2.0 million during the year ended December 31, 2020. The total amount of ROU was $5.5 and $6.5 million on September 30, 2021, and December 31, 2020, respectively.
The majority of the Company’s lessee leases are operating leases and consist of leased real estate for branches and operations centers. The Company elected the short term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months. The ROU assets represent the Company’s right to use the underlying assets during the lease term and operating liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement. Options to extend and renew leases are generally exercised under normal circumstances. Advance notification is required prior to termination, and any noticing period is often limited to the months prior to renewal. Variable payments generally consist of common area maintenance and taxes. Rent escalations are generally specified by a payment schedule or are subject to a defined formula. The Company also does not separate lease and non-lease components for all leases, the majority of which consist of real estate common area maintenance expenses. Generally, leases do not include guaranteed residual values, but instead typically specify that the leased premises are to be returned in satisfactory condition with the Company liable for damages.
Lease cost for the three and nine months ended September 30, 2021, and 2020 consists of:
Three Months Ended
September 30, 2021
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2021
Nine Months Ended
September 30, 2020
Operating Lease and Interest Cost$335$507$1,128$1,264
Variable Lease Cost106120305369
Total Lease Cost$441$627$1,433$1,633
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The following table provides supplemental information related to leases for the three and nine months ended September 30, 2021, and 2020:
Three Months Ended
September 30, 2021
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2021
Nine Months Ended
September 30, 2020
Operating Lease - Operating Cash Flows (Fixed Payments)$335 $508 $1,129 $1,264 
Operating Lease - Operating Cash Flows (Liability Reduction)$123 $612 $1,044 $1,281 
New ROU Assets - Operating Leases$165 $60 $165 $1,680 
Weighted Average Lease Term (Years) - Operating Leases5.015.85
Weighted Average Discount Rate - Operating Leases3.13 %3.05 %
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities as of September 30, 2021, is as follows:
September 30, 2021
Operating lease payments due: 
Within one year$1,443 
After one but within two years1,426 
After two but within three years1,212 
After three but within four years1,097 
After four years but within five years766 
After five years620 
Total undiscounted cash flows6,564 
Discount on cash flows(1,107)
Total operating lease liabilities$5,457 
NOTE 16 — SUBSEQUENT EVENTS
Redemption of Subordinated Debt
On October 30 2021, the Company redeemed in full, the amount of its subordinated notes payable of $10.0 million, in accordance with its contractual terms.
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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, 2020, 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 - Basis of Presentation” to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of September 30, 2021, compared to December 31, 2020.
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;
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 duration and severity of the COVID-19 pandemic and the severity of COVID variants both in our principal area of operations and nationally, and the impact of the pandemic, including the government’s responses to the pandemic, on our and our customers’ operations, personnel, and business activity (including developments and volatility), as well as the pandemic’s impact on the credit quality of our loan portfolio and on financial market and general economic conditions;
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);
our ability to successfully manage interest rate risk, credit risk, liquidity risk, and other risks inherent to our industry;
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;
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our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;
the 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.
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.
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Executive Overview
Highlights of our performance and financial condition as of and for the three and nine months ended September 30, 2021, and other key events that have occurred during 2021 are provided below.
Results of Operations for the three months ended September 30, 2021
Net income remained steady at $6.3 million compared to prior quarter. Net interest income increased $1.9 million, which was offset by a decrease in noninterest income of $0.8 million, an increase in noninterest expense of $0.7 million, and a higher provision expense of $0.3 million.
During the quarter, interest income derived from loans, including fees, increased $1.9 million. The increase was primarily due to the recognition of $1.8 million from the acceleration of loan fees associated with the Bank’s Payroll Protection Program (“Professional Bank PPP”) and $0.2 million in deposit correspondent fees from service charges on deposit accounts associated with acting as a correspondent bank for a Payroll Protection Program lender (the “Correspondent Banking Relationship”).
Net interest income increased $1.9 million, or 11.1%, to $19.1 million compared to the prior quarter primarily due to an increase in loan yield in our commercial real estate and commercial loan portfolios. The loan yield increase resulted from the acceleration of Professional Bank PPP loan fees and acceleration of purchase accounting loan marks from the Marquis Bancorp, Inc. (“MBI”) acquisition.
Noninterest income decreased $0.8 million, or 35.9%, to $1.5 million compared to the prior quarter primarily due to decreases in service charges from the Correspondent Banking Relationship and a decrease in SWAP fee income due to a lower volume of SWAP transactions.
Noninterest expense increased $0.7 million, or 6.1%, to $11.6 million compared to the prior quarter primarily due to a $0.3 million charitable contribution expense for the AAA scholarship foundation and increased salaries and employee benefits associated with an increase in employee headcount. Employee headcount increased primarily due to our opening of loan production offices (“LPOs”) in Tampa Bay and Jacksonville.
Results of Operations for the nine months ended September 30, 2021
The variance in the nine-month Results of Operations for 2021 compared to 2020 occurred in part due to the March 26, 2020, closing date of the MBI acquisition as there were 187 days of MBI integration in the nine months of 2020 compared to 273 days in the nine months of 2021 (the “MBI Variance”).
Net income increased $14.6 million, or 529.7%, to $17.4 million compared to the prior year. The increase was primarily due to the increase of interest income resulting from the MBI Variance, the acceleration of Professional Bank PPP loan fees, deposit fees associated with the Correspondent Banking Relationship, as well as lower provision for loan losses primarily due to the macro environment stabilization following the increased reserves at the early stages of COVID-19 pandemic in 2020 and having addressed the impairment of a loan to Coex Coffee International, Inc. (“Coex”) in the third quarter of 2020.
Net interest income increased $12.4 million, or 29.6%, to $54.2 million compared to the prior year primarily due to loan growth and an increase in forgiveness of Professional Bank PPP loans resulting in a higher amount of loan fees recognized in addition to a reduction in interest expense on deposit accounts..
Noninterest income increased $2.1 million, or 75.7%, to $4.9 million, compared to the prior year primarily due to an increase of $0.9 million in service charges associated with the Correspondent Banking Relationship, $0.5 million in service charges on other deposit accounts, a $0.5 million increase in Bank Owned Life Insurance income, a $0.2 million increase in SWAP fee income, and a $0.1 million increase in Small Business Administration (“SBA”) loan origination fees, partially offset by a $0.1 million decrease in fees generated from loans held for sale.
Noninterest expense increased $1.6 million, or 4.9%, to $34.4 million compared to the prior year. The year over year increase was due to increased salaries and employee benefits resulting from our opening of LPOs in Tampa Bay and Jacksonville and investment in digital infrastructure, partially offset by prior year MBI acquisition expenses. The Bank’s number of employees increased from 172 as of September 30, 2020, to 205 as of September 30, 2021.
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Financial Condition
On September 30, 2021:
Total assets remained relatively unchanged at $2.6 billion compared to the prior quarter. Total assets increased 27.4%, or $0.6 billion, compared to September 30, 2020, primarily as a result of increases in cash and cash equivalents, net loans, and taxable securities available-for-sale.
Total loans were consistent compared to the prior quarter at $1.7 billion primarily due to new loan originations offset by loan paydowns and prepayments. New loan originations were $198.7 million, of which $172.7 million funded. The Professional Bank PPP loan balance decreased $54.1 million, or 38.9%, to $85.1 million from the prior quarter.
Total Deposits increased 3.4%, or $0.1 billion, to $2.4 billion compared to the prior quarter primarily due to increases in money market and savings accounts and interest bearing demand deposit accounts, partially offset by a decrease in noninterest bearing demand deposit accounts. During the quarter, $57.0 million of noninterest bearing deposits were recategorized into interest bearing deposits.
Nonperforming assets remained unchanged at $2.8 million compared to the prior quarter. As of September 30, 2020, the Company had nonperforming assets of $9.9 million. There were no charge-offs during the three months ended September 30, 2021, compared to one loan that was net charged-off for $0.2 million for the three months ended September 30, 2020.
Operating Results
Results of Operations for the three months ended September 30, 2021, and 2020
The following table sets forth the principal components of net income for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands)20212020Change
Interest income$20,890$19,1019.4 %
Interest expense1,7861,6418.8 %
Net Interest income19,10417,4609.4 %
Provision for loan losses1,0605,957(82.2)%
Net interest income after provision18,04411,50356.9 %
Noninterest income1,47696353.3 %
Noninterest expense11,62411,713(0.8)%
Income before income taxes7,896753948.6 %
Income tax expense (benefit)1,608(197)(916.2)%
Net income$6,288$950561.9 %
Net income for the three months ended September 30, 2021, was $6.3 million, an increase of $5.3 million, or 561.9%, compared to the three months ended September 30, 2020. Net interest income increased $1.6 million for the three months ended September 30, 2021, compared to the same period in the prior year. The increase in our net interest income year-over-year was primarily due to increased loan portfolio growth. Provision for loan losses decreased by $4.9 million for the three months ended September 30, 2021, compared to the same period in the prior year. The decrease in the provision expense was attributed primarily to having addressed the impairment of a loan to Coex in the third quarter of 2020. The increase in noninterest income during the three months ended September 30, 2021, compared to the same period in the prior year was primarily due to increases in service charges on deposit accounts associated with the Correspondent Banking Relationship, and secondarily to an increase in Bank owned life insurance income. The decrease in noninterest expense for the three months ended September 30, 2021, compared to the same period in the prior year was primarily due to the lack of MBI acquisition expenses this quarter and to a lesser extent the realization of our implementation efforts regarding operational efficiencies in occupancy, equipment, and data processing expenses, partially offset by higher salaries and employee benefits as a result of our continued growth.
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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 September 30,
20212020
(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-bearing deposits$561,082 $212 0.15 %$251,613 $65 0.10 %
Federal funds sold36,264 10 0.11 %30,164 12 0.16 %
Federal Reserve Bank stock, FHLB stock and other corporate stock7,521 96 5.06 %8,998 103 4.55 %
Investment securities - taxable105,498 186 0.70 %80,643 209 1.03 %
Investment securities - tax exempt19,402 177 3.62 %23,583 224 3.77 %
Loans(1)
1,702,137 20,209 4.71 %1,572,833 18,488 4.68 %
Total interest earning assets2,431,904 20,890 3.41 %1,967,834 19,101 3.86 %
Loans held for sale1,478 — 
Noninterest earning assets125,751 99,075 
Total assets$2,559,133 $2,066,909 
Liabilities and stockholders’ equity
Interest-bearing liabilities
Interest-bearing deposits1,463,138 1,476 0.40 %1,049,556 1,165 0.44 %
Borrowed funds45,046 310 2.73 %297,227 476 0.64 %
Total interest-bearing liabilities1,508,184 1,786 0.47 %1,346,783 1,641 0.48 %
Noninterest-bearing liabilities
Noninterest-bearing deposits810,042 494,415 
Other noninterest-bearing liabilities16,746 19,961 
Stockholders’ equity224,161 205,750 
Total liabilities and stockholders’ equity$2,559,133 $2,066,909 
Net interest spread(2)
2.94 %3.38 %
Net interest income$19,104 $17,460 
Net interest margin(3)
3.12 %3.53 %
__________________________________
(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 $2.3 million and $1.3 million for the three months ended September 30, 2021 and 2020, respectively.
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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been proportionately allocated to both volume and rate.
For the Three Months Ended September 30, 2021 Compared to 2020
Change Due To
(Dollars in thousands)VolumeRateTotal
Interest income
Interest-bearing deposits$80$67$147
Federal funds sold2(4)(2)
Federal Reserve Bank stock, Federal Home Loan Bank stock and other corporate stock(17)10 (7)
Investment securities - taxable64 (87)(23)
Investment securities - tax exempt(40)(7)(47)
Loans1,520201 1,721
Total$1,610$179$1,789
Interest expense
Interest-bearing deposits459(148)311 
Borrowed funds(404)238(166)
Total$55$90$145
Net interest income totaled $19.1 million for the three months ended September 30, 2021, up $1.9 million, or 11.1% compared to the three months ended June 30, 2021, primarily due to increased loan portfolio growth and the acceleration of Professional Bank PPP loan fees and purchase accounting marks from the MBI acquisition. Net interest margin for the third quarter of 2021 was 3.12%, an increase of 30 basis points compared to the second quarter of 2021. Our weighted average roll-off rate for loans paid off was 4.5% and the weighted average roll-on rate for loans originated was 3.9% on September 30, 2021.
Net interest income increased by $1.6 million to $19.1 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Our total net interest income was impacted by an increase in interest earning assets, which was primarily due to increased balances in large low yielding cash assets, coupled with an increase in our loan portfolio. Average total interest earning assets were $2.4 billion for the three months ended September 30, 2021, compared to $2.0 billion for the three months ended September 30, 2020. The annualized yield on interest earning assets decreased 45 basis points for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to increased cash balances and accelerated paydowns of principal in higher yielding loans and investments. The increase in the average balance of interest earning assets was driven primarily by our growth in cash of $309.5 million, or 123.0%, and growth in our loan portfolio of $129.3 million, or 8.2%, compared to three months ended September 30, 2020. The growth in our loan portfolio was due to organic loan originations.
Average interest-bearing liabilities for the three months ended September 30, 2021, increased due to organic deposit growth and grew by $161.4 million, or 12.0%, for the three months ended September 30, 2020. The increase was primarily due to a $413.6 million, or 39.4%, increase in the average balance of interest-bearing deposits. The increase in the average balance of interest-bearing deposits was primarily due to increases in negotiable orders of withdrawal (“NOW”) and money market accounts for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, and, to a lesser extent, increases in certificates of deposit. The annualized average interest rate paid on average interest-bearing liabilities decreased to 0.47%, for the three months ended September 30, 2021, compared to 0.48% for the three months ended September 30, 2020. Annualized average interest rate paid on interest-bearing deposits decreased 4 basis points to 0.40%, and the annualized average interest rate paid on borrowed funds increased by 209 basis points to 2.73%. The average interest rate on borrowings during the quarter ended September 30, 2021, increased as we paid-off the Paycheck Protection Program Liquidity Facility (“PPPLF”) balances, leaving higher priced Federal Home Loan Bank ("FHLB") advances and subordinated debt as our borrowings. For the three months ended September 30, 2021, our average other noninterest-bearing liabilities decreased $3.2 million, or 16.1%, compared to the three months ended September 30, 2020. Average noninterest-bearing deposits also
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increased $315.6 million, or 63.8%, compared to the three months ended September 30, 2020. For the three months ended September 30, 2021, our annual net interest margin was 3.12% and net interest spread was 2.94%. For the three months ended September 30, 2020, annual net interest margin was 3.53% and net interest spread was 3.38%.
pfhd-20210930_g1.jpg
Provision for Loan Losses
The provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by our management in determining the allowance for loan losses see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Loan Losses.”
Our provision for loan losses amounted to $1.1 million for the three months ended September 30, 2021, and $6.0 million for the three months ended September 30, 2020. The decrease from 2020 to 2021 was primarily due to the need for an increased reserve at the early stages of COVID-19 in 2020 and the decreasing impact of COVID-19 on the economy in 2021 and having addressed the impairment of a loan to Coex in the third quarter of 2020. We did not record any net charge-offs for the three months ended September 30, 2021, compared to one loan that was charged-off for $0.2 million for the three months ended September 30, 2020. Our allowance for loan losses as a percentage of total loans (excluding Professional Bank PPP loans) was 0.72% on September 30, 2021, compared to 1.10% on December 31, 2020. See Reconciliation of non-GAAP Financial Measures.
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.
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The following table presents the major categories of noninterest income for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands)20212020Increase (Decrease)
Noninterest income
Service charges on deposit accounts$643$319101.6%
Income from Bank owned life insurance281123128.5%
SBA origination fees21100.0%
SWAP fee income20814939.6%
Third party loan sales161252(36.1)%
Gain on sale and call of securities11—%
Other16111935.3%
Total noninterest income$1,476$96353.3%
Noninterest income for the three months ended September 30, 2021, was $1.5 million, a $0.5 million, or 53.3%, increase compared to the three months ended September 30, 2020. The increase was primarily due to an increase in service charges on deposit accounts associated with the Correspondent Banking Relationship, secondarily to an increase in income from Bank owned life insurance ("BOLI"), partially offset by a decrease in third party loan sales.
See Note 11 to the Consolidated Financial Statements (unaudited) dated September 30, 2021, titled "Customer Derivatives – Interest Rate SWAPs" for additional information regarding our derivative financial instruments.
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.
The following table presents the major categories of noninterest expense for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands)20212020Increase (Decrease)
Noninterest expense
Salaries and employee benefits$7,350$6,43314.3%
Occupancy and equipment9351,196(21.8)%
Data processing303374(19.0)%
Marketing420435(3.4)%
Professional fees68956222.6%
Acquisition expenses1,078(100.0)%
Regulatory assessments48125092.4%
Other1,4461,3854.4%
Total noninterest expense$11,624$11,713(0.8)%
Noninterest expense amounted to $11.6 million for the three months ended September 30, 2021, a decrease of $0.1 million, or 0.8%, compared to the three months ended September 30, 2020. The decrease was primarily due to the lack of MBI acquisition expenses this quarter and to a lesser extent the realization of our implementation efforts regarding operational efficiencies in occupancy, equipment, and data processing expenses, partially offset by higher salaries resulting from our opening of loan production offices in Tampa Bay and Jacksonville and investment in digital infrastructure. Additionally, the decrease in occupancy and equipment was due primarily to the Company exercising an option to early terminate a lease for one of the former operational offices of Marquis Bank and a branch located in Coral Gables (the "Option"). The Option resulted in savings of over $400 thousand in lease payments plus expenses.
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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 $1.6 million for the three months ended September 30, 2021, compared to an income tax benefit of $0.2 million for the three months ended September 30, 2020. Our effective tax rates for those periods were 20.4% and (25.7)%, respectively. The change in the effective tax rate was due to an increase in tax-exempt income, and state income tax credits in 2020.
Results of Operations for the nine months ended September 30, 2021 and 2020
The following table sets forth the principal components of net income for the periods indicated.
Nine Months Ended September 30,
(Dollars in thousands)20212020Change
Interest income$59,624$48,64322.6%
Interest expense5,4396,831(20.4)%
Net Interest income54,18541,81229.6 %
Provision for loan losses2,8608,552(66.6)%
Net interest income after provision51,32533,26054.3 %
Noninterest income4,8972,78775.7 %
Noninterest expense34,36632,7474.9 %
Income before income taxes21,8563,300562.3 %
Income tax expense4,452536730.6 %
Net income$17,404$2,764529.7 %
Net income for the nine months ended September 30, 2021, was $17.4 million, an increase of $14.6 million, or 529.7%, compared to the nine months ended September 30, 2020. Interest income increased $11.0 million while interest expense decreased $1.4 million, resulting in a net interest income increase of $12.4 million for the nine months ended September 30, 2021, compared to the same period in the prior year. The increase in our net interest income was primarily due to the MBI Variance, increased loan portfolio growth, and decreased cost of funds to the Company. Provision for loan losses decreased by $5.7 million for the nine months ended September 30, 2021, compared to the same period in the prior year. The decrease in the provision expense was due primarily due to the macro environment stabilization following the increased reserves at the early stages of COVID-19 pandemic in 2020 and having addressed the impairment of a loan to Coex in the third quarter of 2020. The increase in noninterest expense for the nine months ended September 30, 2021, compared to the same period in the prior year was primarily due to increased salaries and investment in digital infrastructure, partially offset by lower MBI acquisition expenses. The Bank’s number of employees increased from 172 as of September 30, 2020, to 205 as of September 30, 2021.
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 conditions in domestic and foreign financial markets. Periodic changes in the volume and types of
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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 Nine Months Ended September 30,
20212020
(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-bearing deposits$441,679 $436 0.13 %$201,730 $694 0.46 %
Federal funds sold49,982 50 0.13 %32,682 143 0.58 %
Federal Reserve Bank stock, FHLB stock and other corporate stock7,624 290 5.09 %7,372 313 5.67 %
Investment securities - Taxable81,941 526 0.86 %71,820 663 1.23 %
Investment securities - Non-taxable20,396 569 3.73 %15,787 430 3.64 %
Loans(1)
1,688,499 57,753 4.57 %1,296,922 46,400 4.78 %
Total interest earning assets2,290,121 59,624 3.48 %1,626,313 48,643 4.00 %
Loans held for sale1,824 — 
Noninterest earning assets122,306 91,454 
Total assets$2,414,251 $1,717,767 
Liabilities and shareholders’ equity
Interest-bearing liabilities
Interest-bearing deposits1,350,795 4,223 0.42 %936,765 5,408 0.77 %
Borrowed funds82,229 1,216 1.98 %197,327 1,423 0.96 %
Total interest-bearing liabilities1,433,024 5,439 0.51 %1,134,092 6,831 0.80 %
Noninterest-bearing liabilities
Noninterest-bearing deposits742,530 386,848 
Other noninterest-bearing liabilities17,769 17,243 
Shareholders’ equity220,928 179,584 
Total liabilities and shareholders’ equity$2,414,251 $1,717,767 
Net interest spread(2)
2.97 %3.20 %
Net interest income$54,185 $41,812 
Net interest margin(3)
3.16 %3.43 %
__________________________________
(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 $6.7 million and $2.3 million for the nine months ended September 30, 2021, and 2020, respectively.
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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been proportionately allocated to both volume and rate.
For the Nine Months Ended September 30, 2021 Compared to 2020
Change Due To
(Dollars in thousands)VolumeRateTotal
Interest income
Interest-bearing deposits$825$(1,083)$(258)
Federal funds sold76 (169)(93)
Federal Reserve Bank stock, Federal Home Loan Bank stock and other corporate stock11 (34)(23)
Investment securities - taxable93 (230)(137)
Investment securities - tax exempt12613139 
Loans14,009 (2,656)11,353
Total$15,140$(4,159)$10,981
Interest expense
Interest-bearing deposits2,390(3,575)(1,185)
Borrowed funds(830)623(207)
Total$1,560$(2,952)$(1,392)
Net interest income increased by $12.4 million to $41.8 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Our total net interest income was impacted primarily due to increases in annualized average interest rates primarily reflected an increase in interest earning assets, primarily due to increased balances in our low yielding cash assets as well as increases in our loan portfolio of lower yielding loans, offset by decreased cost of funds to the Company. Average total interest earning assets were $2.3 billion for the nine months ended September 30, 2021, compared with $1.6 billion for the nine months ended September 30, 2020. The annualized yield on those interest earning assets decreased 52 basis points to 3.48% for the nine months ended September 30, 2021, due to loans repricing downward, coupled with higher yielding loan payoffs. The increase in the average balance of interest earning assets was driven primarily by the MBI Variance and growth in our loan portfolio of $391.6 million, or 30.2%, compared to the nine months ended September 30, 2020. The growth in the loan portfolio was due to organic loan originations during the nine months ended September 30, 2021.
Average interest-bearing liabilities increased due to the MBI Variance and organic deposit growth and grew by $298.9 million, or 26.4%, for the nine months ended September 30, 2021. The increase was primarily due to a $414.0 million, or 44.2%, increase in the average balance of interest-bearing deposits. The increase in the average balance of interest-bearing deposits was primarily due to increases in NOW and money market accounts for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, and, to a lesser extent, increases in certificates of deposits. The annualized average interest rate paid on average interest-bearing liabilities decreased to 0.51% for the nine months ended September 30, 2021, compared to 0.80% for the nine months ended September 30, 2020. Annualized average interest rate paid on interest-bearing deposits decreased 35 basis points to 0.42%, and the annualized average interest rate paid on borrowed funds increased by 102 basis points to 1.98%. For the nine months ended September 30, 2021, our average other noninterest-bearing liabilities increased $0.5 million, or 3.1%, compared to the nine months ended September 30, 2020. Average noninterest-bearing deposits also increased $355.7 million, or 91.9%, compared to the nine months ended September 30, 2020. For the nine months ended September 30, 2021, our annual net interest margin was 3.16% and net interest spread was 2.97%. For the nine months ended September 30, 2020, annual net interest margin was 3.43% and net interest spread was 3.20%.
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 $2.9 million for the nine months ended September 30, 2021, and $8.6 million for the nine months ended September 30, 2020. The decrease from 2020 to 2021 was attributed primarily to the lowering of COVID related risk in the portfolio taken in the prior year offset by an increase in loan originations subject to the allowance requirements and having addressed the impairment of a loan to Coex in the third quarter of 2020. We recorded a net charge-off related to one loan of $7.6 million for the nine months ended September 30, 2021, compared to a net charge-off related to one loan of $0.3 million for the nine months ended September 30, 2020. Our allowance for loan losses as a percentage of total loans (excluding Professional Bank PPP loans) was 0.72% on September 30, 2021, compared to 1.10% on December 31, 2020. See Reconciliation of non-GAAP Financial Measures.
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.
Nine Months Ended September 30,
(Dollars in thousands)20212020Increase (Decrease)
Noninterest income
Service charges on deposit accounts$2,237$848163.8%
Income from Bank owned life insurance844378123.3%
SBA origination fees16611445.6%
SWAP fee income78162225.6%
Third party loan sales462519(11.0)%
Gain on sale and call of securities231643.8%
Other38429032.4%
Total noninterest income$4,897$2,78775.7%
Noninterest income for the nine months ended September 30, 2021, was $4.9 million, a $2.1 million, or 75.7%, increase compared to for the nine months ended September 30, 2020. The increase was primarily due to growth in deposit transaction accounts, coupled with increases in service charges on deposit accounts with the Correspondent Banking Relationship, $0.5 million increase in income from BOLI, and $0.2 million increase in SWAP fee income.
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. See Note 11 to the Consolidated Financial Statements (unaudited) dated September 30, 2021, entitled "Customer Derivatives – Interest Rate SWAPs" for additional information regarding our derivative financial instruments.
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining client relationships and providing banking services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy and equipment expenses, professional fees, data processing expenses, advertising expenses, loan processing expenses and other general and administrative expenses, including FDIC assessments, communications, travel, meals, training, supplies and postage.
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The following table presents the major categories of noninterest expense for the periods indicated.
Nine Months Ended September 30,
(Dollars in thousands)20212020Increase (Decrease)
Noninterest expense
Salaries and employee benefits$21,233$18,60814.1%
Occupancy and equipment2,9423,051(3.6)%
Data processing869971(10.5)%
Marketing7387232.1%
Professional fees2,0871,72321.1%
Acquisition expenses6843,301(79.3)%
Regulatory assessments1,24876463.4%
Other4,5653,60626.6%
Total noninterest expense$34,366$32,7474.9%
Noninterest expense amounted to $34.4 million for the nine months ended September 30, 2021, an increase of $1.6 million, or 4.9%, compared to for the nine months ended September 30, 2020. The increase was primarily due to increased salaries and investment in digital infrastructure, offset by a reduction in acquisition expenses. The Bank’s number of employees increased from 172 as of September 30, 2020, to 205 as of September 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 $4.5 million for the nine months ended September 30, 2021, compared to $0.5 million for the nine months ended September 30, 2020. Our effective tax rates for those periods were 20.4% and 16.4%, respectively. The change in the effective tax rate was due to a decrease in nondeductible expenses, an increase in tax-exempt income and state income tax credits in 2020.
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.
For the nine months ended September 30, 2021, our total assets increased 28.6%, or $0.6 billion, compared to December 31, 2020. Total loans increased 2.1%, or $34.4 million, compared to December 31, 2020, as a result of the third round of the PPP and new organic loan origination, partially offset by loan payoffs. Interest-bearing deposits at other financial institutions increased due to our desire to maintain our excess liquidity in more liquid assets due to our continued robust demand for loans and cash associated with Correspondent Banking Relationship. Stockholders’ equity increased $12.5 million, or 5.8%, compared to December 31, 2020, primarily due to net income of $17.4 million for the nine months ended September 30, 2021, offset by repurchases of the Company’s Class A voting common stock.
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. Due to our desire to maintain excess liquidity in more liquid assets to fund our loan growth and excess due to the Correspondent Banking Relationship, cash and cash equivalents increased $527.2 million, or 243.0%, compared to December 31, 2020, primarily due to an increase in interest-bearing deposits. As we continue to grow, so do our liquidity needs.
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Banks are required to maintain cash reserves in the form of vault cash or in an account with the Federal Reserve Bank or in noninterest-earning accounts with other qualified banks. This requirement is based on the Bank’s amount of transaction deposit accounts. The Bank’s cash reserve requirements was $0 on September 30, 2021, and 2020, respectively.
Investment Securities
We use our securities portfolio to provide a secondary source of liquidity, achieve additional interest income through higher yields on funds invested (compared to other options, such as interest-bearing deposits at other banks or fed funds sold), manage interest rate risk, and meet both collateral and regulatory capital requirements.
Securities may be classified as either trading, held-to-maturity, available-for-sale, or equity. Trading securities (if any) are held principally for resale and recorded at their fair value with changes in fair value included in income. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Equity securities 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 over the period to maturity.
Our investment portfolio increased $25.6 million, or 26.9%, to $120.6 million compared to December 31, 2020, primarily due to purchases of $50.9 million in securities available for sale, offset by paydowns, and maturities. 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).
The following tables summarize the contractual maturities and weighted-average yields of investment securities as of September 30, 2021, and December 31, 2020.
September 30, 2021December 31, 2020
(Dollars in thousands)Book ValueFair ValueBook ValueFair Value
Securities Available for Sale - taxable
Small Business Administration loan pools$40,131$39,703$30,678$30,556
Mortgage-backed securities51,10550,92728,51428,922
United States agency obligations2,0022,0793,0003,122
Corporate bonds1,5001,5092,5012,510
Total$94,738$94,218$64,693$65,110
Securities Available for Sale - tax exempt
Community Development District bonds$17,800$18,364$20,582$21,299
Municipals1,0541,0981,0641,099
Total$18,854$19,462$21,646$22,398
Securities Held to Maturity
Mortgage-backed securities$259$269$345$359
United States Treasury202202
Foreign Bonds1,0001,000
Total$259$269$1,547$1,561
Equity Securities
Mutual Funds$5,903$5,903$6,005$6,005
Other equity securities800800
Total$6,703$6,703$6,005$6,005
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One Year or LessMore than One Year
Through Five Years
More than Five Years
Through 10 Years
More than 10 YearsTotal
On September 30, 2021
(Dollars in thousands)
Book ValueWeighted
Average
Yield
Book ValueWeighted
Average
Yield
Book ValueWeighted
Average
Yield
Book ValueWeighted
Average
Yield
Book ValueFair ValueWeighted
Average
Yield
Securities Available for Sale - taxable
Small Business Administration loan pools$— — %$545 0.89 %$18,802 1.51 %$20,784 1.40 %$40,131 $39,703 1.45 %
Mortgage-backed securities— — %120 0.31 %6,376 0.78 %44,610 1.16 %51,106 50,927 1.11 %
United States agency obligations999 2.54 %1,003 2.66 %— — %— — %2,002 2,079 2.60 %
Corporate bonds— — %1,500 1.17 %— — %— — %1,500 1,509 1.17 %
Total$999 2.54 %$3,168 1.56 %$25,178 1.32 %$65,394 1.24 %$94,739 $94,218 1.29 %
Securities Available for Sale - tax exempt
Community Development District bonds$190 4.52 %$17,295 4.92 %$315 3.75 %$— — %$17,800 $18,364 4.90 %
Municipals— — %1,054 2.27 %— — %— — %1,054 1,098 2.27 %
Total$190 4.52 %$18,349 4.77 %$315 3.75 %$— — %$18,854 $19,462 4.75 %
Securities Held to Maturity
Mortgage-backed securities— — %— — %— — %259 2.56 %259 269 2.56 %
United States Treasury— — %— — %— — %— — %— — — %
Foreign Bonds— — %— — %— — %— — %— — — %
Total$— — %$— — %$— — %$259 2.56 %$259 $269 2.56 %
Equity Securities
Mutual Funds5,903 1.10 %— — %— — %— — %5,903 5,903 1.10 %
Other equity securities800 — %— — %— — %— — %800 800 — %
Total$6,703 1.10 %$— — %$— — %$—  %$6,703 $6,703 0.97 %
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. Our lending activities are principally directed to our market area consisting of the Miami-Dade MSA. The
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following table summarizes and provides additional information about certain segments of our loan portfolio as of September 30, 2021 and December 31, 2020.
September 30, 2021December 31, 2020
(Dollars in thousands)AmountPercentAmountPercent
Loans held for investment:
Commercial real estate$856,19450.7%$777,02546.9%
Owner Occupied315,489—%286,701—%
Non-Owner Occupied540,705—%490,324—%
Residential real estate371,46922.0%379,53422.9%
Commercial (Non-PPP)288,17717.1%206,09512.4%
Commercial (PPP)85,1335.0%185,74811.2%
Construction and land development69,5344.1%99,5906.0%
Consumer and other16,7441.0%9,6890.6%
Total loans held for investment, gross1,687,251100.0%1,657,681100.0%
Allowance for loan loss(11,478)(16,259)
Loans held for investment, net$1,675,773$1,641,422
Loans held for sale:
Loans held for sale$284100.0%$1,270100.0%
Total loans held for sale$284$1,270
Commercial Real Estate Loans. We originate both owner-occupied and non-owner-occupied commercial real estate loans. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. Commercial real estate loans that are secured by owner-occupied commercial real estate and primarily supported by operating cash flows are also included in this category of loans. As of September 30, 2021, we had $315.5 million of owner-occupied commercial real estate loans and $540.7 million of investment commercial real estate loans, representing 36.8% and 63.2%, respectively, of our commercial real estate portfolio. As of September 30, 2021, the average loan balance of loans in our commercial real estate loan portfolio was approximately $1.3 million for owner-occupied and $1.8 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 September 30, 2021, we did not have any commercial real estate loans with a loan to value over 100%. Our credit policy also usually requires a minimum debt service coverage ratio of 1.20x. As of September 30, 2021, our weighted-average loan-to-value ratios for owner-occupied and non-owner-occupied commercial real estate were both at 49.3% and debt service coverage ratios were 2.48x and 1.99x, respectively. The interest rates on our commercial real estate loans have initial fixed rate terms that adjust typically at five years, and we routinely charge an origination fee for our services. We generally require personal guarantees from the principal owners of the business, supported by a review of the principal owners’ personal financial statements and global debt service obligations. All commercial real estate loans with an outstanding balance of $1.0 million or more are reviewed at least annually. The properties securing the portfolio are located primarily throughout our market and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.
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As of September 30, 2021As of December 31, 2020
(Dollars in thousands)AmountPercentAmountPercent
Commercial Real Estate
Auto (Car Lot/Auto Repair)$27,6003.2%$22,4242.9%
Educational Facility32,6253.8%14,3131.8%
Gas Station68,8568.0%64,1428.3%
Hotel59,6797.0%54,2447.0%
Mixed Use32,4113.8%29,9413.9%
Multifamily123,87914.5%98,73812.7%
Office104,53912.2%111,73514.4%
Other / Special Use52,5306.1%41,6685.4%
Religious Facility10,8021.3%8,4341.1%
Retail212,16224.8%191,99024.7%
Vacant Land6,0800.7%7,8491.0%
Warehouse125,03114.6%131,54716.8%
Total$856,194100.0%$777,025100.0%
As of September 30, 2021As of December 31, 2020
(Dollars in thousands)AmountPercentAmountPercent
Commercial Real Estate
Broward$124,36714.5%$118,35315.2%
Miami-Dade535,10062.5%500,69064.4%
Palm Beach141,27016.5%113,24914.6%
Other FL County31,7073.7%27,1243.5%
Out of State23,7502.8%17,6092.3%
Total$856,194100.0%$777,025100.0%
As of September 30, 2021, non-owner occupied commercial real estate loans of $540.7 million represented 33.8% of total risk-weighted assets.
Construction and Development Loans. The majority of our construction loans are offered within the Miami-Dade MSA to builders primarily for the construction of single-family homes and condominium and townhouse conversions or renovations and, to a lesser extent, to individuals. Our construction loans typically have terms of 12 to 18 months with the goal of transitioning the borrowers to permanent financing or re-underwriting and selling into the secondary market. According to our credit policy, the loan to value ratio may not exceed the lesser of 80% of the appraised value, as established by an independent appraisal, or 85% of costs for residential construction and 90% of costs for SBA 504 loans. As of September 30, 2021, our weighted average loan-to-value ratio on our construction, vacant land, and land development loans were 51.3%, 49.7% and 49.8%, 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 buildout and strictly enforce our original underwriting guidelines for construction milestones and completion timelines.
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As of September 30, 2021As of December 31, 2020
(Dollars in thousands)AmountPercent AmountPercent
Construction & Development
1 – 4 Family Construction$43,046 61.9 %$44,971 45.1 %
Commercial Construction669 1.0 %34,031 34.2 %
Land Development5,343 7.7 %5,783 5.8 %
Vacant Land20,476 29.4 %14,805 14.9 %
Total$69,534 100.0 %$99,590 100.0 %
As of September 30, 2021As of December 31, 2020
(Dollars in thousands)AmountPercentAmountPercent
Construction & Development
Broward$2,5373.6%$21,72221.8%
Miami-Dade57,27482.4%57,00857.3%
Palm Beach9,72314.0%15,04815.1%
Other FL County—%5,8125.8%
Total$69,534100.0%$99,590100.0%
As of September 30, 2021, total construction and land development loans of $69.5 million represented 7.7% 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 15.7% of our residential loan portfolio. Our residential loans also include home equity lines of credit, which totaled approximately $46.0 million, or approximately 12.4% of our residential loan portfolio as of September 30, 2021. The average loan balance of closed-end residential loans in our residential portfolio was approximately $0.8 million as of September 30, 2021. As of September 30, 2021, 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 or seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years. Upon the implementation of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the origination, closing and servicing of the traditional residential loan products became much more complex, which led to increased cost of compliance and training. As a result, many banks exited the business, which created an opportunity for the banks that remained in the space. While the use of technology, and other related origination strategies have allowed non-bank originators to gain significant market share over the last several years, traditional banks that made investments in personnel and technology to comply with the new requirements have typically experienced loan growth. Unlike many of our competitors, we have been able to effectively compete in the residential loan market, while simultaneously doing the same in the commercial loan market which has enabled us to establish a broader and deeper relationship with our borrowers. Additionally, by offering a full line of residential loan products, the owners of the many small to medium sized businesses that we lend to use us, instead of a competitor, for financing a personal residence. This greater bandwidth to the same market has been a significant contributor to our growth and market share in South Florida. The following table shows our residential real estate portfolio by loan type and the weighted average loan-to-value ratio for each loan type.
As of September 30, 2021As of December 31, 2020
(Dollars in thousands)AmountPercentLTV (%)AmountPercentLTV (%)
Residential Real Estate
Owner Occupied$266,966 71.8 %57.3 %$270,934 71.2 %57.8 %
Investor Owned Residences58,475 15.7 %51.7 %48,087 12.6 %50.7 %
HELOC46,028 12.4 %50.9 %60,513 15.9 %57.1 %
Loans Held for Sale284 0.1 %— %1,270 0.3 %— %
Total$371,753 100.0 %$380,804 100.0 %
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Commercial Loans. 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 $0.6 million as of September 30, 2021. As of September 30, 2021, non-Professional Bank PPP commercial loans was $288.2 million, and Professional Bank PPP commercial loans was $85.1 million. For commercial loans over $0.5 million, a global cash flow analysis is generally required, which forms the basis for the credit approval, “Global cash flow” is defined as a cash flow calculation which includes all income sources of all principals in the transaction as well as all debt payments, including the debt service associated with the proposed transaction. In general, a minimum 1.20x debt service coverage is preferred, but in no event may the debt service coverage ratio be less than 1.00x. As of September 30, 2021, the debt service coverage ratio for our Bank commercial loan portfolio was approximately 2.43x for non-Professional Bank PPP loans, excluding approximately 3.3% of the commercial loan portfolio that is cash secured. Most commercial business loans, which exclude Professional Bank PPP loans, are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment, and we generally obtain a personal guaranty from the borrower or other principal. The following table shows our commercial loan portfolio by industry segment as of September 30, 2021.
As of September 30, 2021As of December 31, 2020
(Dollars in thousands)AmountPercentAmountPercent
Commercial Loans
Business Products$58—%$1,1630.6%
Business Services65,44122.7%29,46114.3%
Communication17,5486.1%17,6878.6%
Construction31,19810.8%19,2419.3%
Finance84,75229.5%56,50627.3%
Healthcare11,1793.9%7,3693.6%
Services36,12112.5%23,25211.3%
Technology7600.3%8500.4%
Trade32,55711.3%44,23321.5%
Transportation1,2170.4%2,9261.4%
Other7,3462.5%3,4071.7%
Total$288,177100.0%$206,095100.0%
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 following chart illustrates our gross loans and weighted average loan-to-value ratio for our collateralized loan portfolio as of the end of the periods indicated.

pfhd-20210930_g2.jpg
Third quarter loans totaled $1.7 billion, a decrease of $3.3 million, or 0.2%, from the prior quarter primarily due to Professional Bank PPP loan forgiveness and loan payoffs during the quarter. Loan growth, net of Professional Bank PPP loans, was up $50.9 million, or 3.3% quarter-over-quarter. We experienced strong originations across all loan types due to new loan originations of $198.7 million (of which $172.7 million funded), partially offset by payoffs of $157.1 million ($101.2 million of conventional loans and $55.9 million of Professional Bank PPP loans forgiven).
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The repayment of loans is a source of additional liquidity for us. The following table details maturities and sensitivity to interest rate changes for our loan portfolio on September 30, 2021.
September 30, 2021
(Dollars in thousands)Due in One
Year or Less
Due in One to
Five Years
Due After
Five Years
Total
Commercial Real Estate$80,898$224,943$550,353$856,194
Residential Real Estate12,59220,362338,515371,469
Commercial*96,387150,537126,386373,310
Construction and Development27,86814,54227,12469,534
Consumer and Other3,7707,2705,70416,744
Total loans$221,515$417,654$1,048,082$1,687,251
Amounts with fixed rates$108,887$347,399$1,012,608$1,468,894
Amounts with floating rates$112,628$70,255$35,474$218,357
*Includes Paycheck Protection Program (PPP) loans.
December 31, 2020
(Dollars in thousands)Due in One
Year or Less
Due in One to
Five Years
Due After
Five Years
Total
Commercial Real Estate$63,256$221,157$492,612$777,025
Residential Real Estate16,37723,862339,295379,534
Commercial*93,184228,11570,544391,843
Construction and Development37,16030,13132,29999,590
Consumer and Other3,6263,8502,2139,689
Total loans$213,603$507,115$936,963$1,657,681
Amounts with fixed rates$108,016$469,399$908,158$1,485,573
Amounts with floating rates$105,587$37,716$28,805$172,108
*Includes Paycheck Protection Program (PPP) loans.
Paycheck Protection Program
The Company participated in all three rounds of the PPP and funded 2,287 small business loans representing approximately $340.5 million in relief proceeds, of which 1,745 loans totaling $251.4 million were forgiven by the SBA. Most of the Professional Bank PPP loans were initially pledged to the Federal Reserve as part of the PPPLF. The PPPLF pledged loans are non-recourse to the Company. However, the Company paid off all of the PPPLF advances during the first and second quarter of 2021 and the balance of PPPLF advances made by the Company was $0 on September 30, 2021.
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pfhd-20210930_g3.jpg
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured. Any loan which the Bank deems to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. Loans that are past due for 180 days or more are charged off unless the loan is well secured and in the process of collection. We currently have no loans accruing over 90 days or greater past due as of September 30, 2021.
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 $2.8 million as of September 30, 2021, or 0.10% of total assets. We had nonperforming assets of $10.4 million as of December 31, 2020, or 0.51% of total assets. The decrease in nonperforming assets was primarily driven by the $7.6 million charge off of the Coex Coffee International, Inc. ("Coex") loan during the first quarter of 2021. Occasionally, loans that we make will be impacted due to the occurrence of unforeseen events, which was a primary factor in the recent increase in our nonperforming assets relative to our historically low, near-zero levels. However, 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. 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.
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(Dollars in thousands)September 30, 2021December 31, 2020
Nonaccrual Loans
Commercial real estate$$
Residential real estate
Commercial1,4689,127
Construction and development
Consumer and other loans1,3071,307
Accruing loans 90 or more days past due
Total nonperforming loans$2,775$10,434
Other real estate owned
Total nonperforming assets$2,775$10,434
Restructured loans-nonaccrual$$
Restructured loans-accruing$227$298
Ratio of nonperforming loans to total loans0.16%0.62%
Ratio of nonperforming assets to total assets0.10%0.51%
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 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.
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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. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
(Dollars in thousands)PassSpecial
Mention
SubstandardDoubtfulTotal
September 30, 2021
Commercial real estate$853,888$$2,306$$856,194
Residential real estate371,469371,469
Commercial (Non-PPP)286,3343751,468288,177
Commercial (PPP)85,13385,133
Construction and land development69,53469,534
Consumer15,349881,30716,744
Total$1,681,707$463$5,081$$1,687,251
December 31, 2020
Commercial real estate$774,674$$2,351$$777,025
Residential real estate379,104430379,534
Commercial (Non-PPP)196,8561129,127206,095
Commercial (PPP)185,748185,748
Construction and land development99,59099,590
Consumer8,3821,3079,689
Total$1,644,354$542$12,785$$1,657,681
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
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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. The following table analyzes the activity in the allowance over the past two years and for the nine months ended September 30, 2021, and 2020.
For the Nine Months Ended September 30,For the Year Ended December 31,
(Dollars in thousands)2021202020202019
Balance at beginning of period$16,259 $6,548 $6,548 $5,685 
Charge-offs
Commercial real estate— — — — 
Residential real estate— (179)(207)— 
Commercial(7,641)(99)(99)— 
Construction and development— — — — 
Consumer and other— — — — 
Total Charge-offs(7,641)(278)(306)— 
Recoveries
Commercial real estate— — — — 
Residential real estate— — — — 
Commercial— — — — 
Construction and development— — — — 
Consumer and other— — — 
Total recoveries— — — 
Net charge-offs(7,641)(278)(306)— 
Provision for loan losses2,860 8,765 10,017 862 
Balance at end of period$11,478 $15,035 $16,259 $6,548 
ALLL as a percentage of total loans at end of period0.68 %0.95 %0.99 %0.83 %
ALLL as a percentage of loans (excluding PPP loans) at end of period0.72 %1.09 %1.10 %0.83 %
ALLL as a multiple of net charge-offs1.554.153.1N/A
ALLL as a percentage of nonperforming loans413.6 %151.6 %155.8 %287.2 %
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Our allowance for loan losses was $11.5 million on September 30, 2021, compared to $16.3 million on December 31, 2020, a decrease of 29.4%. The decrease was primarily due to the macro environment stabilization following the increased reserves at the early stages of COVID-19 pandemic in 2020 and having addressed the impairment of Coex in the third quarter of 2020. A reasonable balance was maintained in response to economic weakening and the onset of COVID variants. On September 30, 2021, our allowance for loan losses was 0.72% of total gross loans (excluding Professional Bank PPP loans) and provided coverage of 413.6% of our nonperforming loans, compared to an allowance for loan losses to total gross loans (net of overdrafts) ratio of 1.10% as of December 31, 2020. See Reconciliation of non-GAAP Financial Measures. We believe our allowance on September 30, 2021, was adequate to absorb probable incurred losses inherent in our loan portfolio. The following table provides an allocation of the allowance for loan losses to specific loan types as of September 30, 2021, and December 31, 2020.
September 30, 2021December 31, 2020
(Dollars in thousands)AllowancePercentAllowancePercent
Commercial real estate$4,07935.5%$3,15919.5%
Residential real estate2,22219.4%2,17713.4%
Commercial4,09735.7%10,46264.3%
Construction and development3332.9%3882.4%
Consumer and other7476.5%730.4%
Total allowance for loan losses$11,478100.0%$16,259100.0%
On September 30, 2021, 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 $3.0 million, of which $2.8 million required a specific reserve of $1.3 million, compared to a recorded investment in impaired loans of $13.1 million, of which $10.4 million required a specific reserve of $8.3 million on December 31, 2020.
Impaired loans also include certain loans that were modified as troubled debt restructurings (“TDR”). On September 30, 2021, we had two loans amounting to $0.2 million that were considered to be TDRs, compared to the same two loans amounting to $0.3 million on December 31, 2020. We did not allocate any specific reserves to loans that have been modified as TDRs as of September 30, 2021, and December 31, 2020.

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 $77.8 million and $98.2 million, on September 30, 2021, and December 31, 2020, respectively. Additionally, we supplement our deposits with wholesale funding sources such as Quickrate, brokered deposits. However, we do not significantly rely on wholesale funding sources, which are generally viewed as less stable compared to core deposits due to the relatively higher price elasticity of demand for deposits from wholesale sources. As of September 30, 2021, and December 31, 2020, these wholesale deposits represented 3.8% and 4.3%, respectively, of our total deposits.
Interest-bearing deposits increased $371.4 million, or 36.50%, from December 31, 2020, to September 30, 2021, primarily due to a $194.6 million increase in money market account balances 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 35 basis points to for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The decrease in average rates paid on interest-bearing deposits was a result of a continued decrease in interest rates during the nine months ended September 30, 2021. As of September 30, 2021, we had approximately $56.4 million in brokered deposits representing 2.4% of total deposits. Brokered deposits increased approximately $26.3 million, or 87.2%, compared to December 31, 2020. 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.
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For the Nine Months Ended September 30, 2021For the Year Ended
December 31, 2020
(Dollars in thousands)Average
Balance
Average RateAverage
Balance
Average Rate
NOW accounts$273,5900.20%$167,9910.26%
Money market accounts780,8250.40%586,2400.65%
Brokered deposits36,5550.56%11,3390.90%
Savings accounts11,3580.10%7,5640.13%
Certificates of deposit248,4670.71%216,4671.13%
Total interest-bearing deposits1,350,7950.42%989,6010.97%
Noninterest-bearing deposits742,530—%410,357—%
Total deposits$2,093,3250.27%$1,399,9580.48%
The following table presents the ending balances and percentage of total deposits for the periods indicated.
For the Nine Months Ended September 30, 2021For the Year Ended
December 31, 2020
(Dollars in thousands)Ending
Balance
% of TotalEnding
Balance
% of Total
NOW accounts$328,667 14.0 %$232,367 14.0 %
Money market accounts893,441 37.9 %679,761 41.0 %
Brokered deposits56,418 2.4 %30,137 1.8 %
Savings accounts13,833 0.6 %9,727 0.6 %
Certificates of deposit262,998 11.2 %231,953 14.0 %
Total interest-bearing deposits1,555,357 66.1 %1,183,945 71.3 %
Noninterest-bearing deposits799,389 33.9 %475,598 28.7 %
Total deposits(1)
$2,354,746 100.0 %$1,659,543 100.0 %
__________________________________
(1)Balance Sheet does not illustrate brokered deposits as presented above.
For more information regarding the maturities of our time deposits including time deposits that meet or exceed the $250,000 FDIC insurance limit as of September 30, 2021, and December 31, 2020, refer to Note 6 to the Consolidated Financial Statements (unaudited) dated September 30, 2021, entitled "Deposits."
Debt
See Note 7 to the Consolidated Financial Statements (unaudited) dated September 30, 2021, entitled "Debt" for additional information regarding our Subordinated Debt and Valley National Line of Credit.
Borrowings
We primarily use short-term and long-term borrowings to supplement deposits to fund our lending and investment activities.
FHLB Advances. The FHLB allows us to borrow up to 25% of our assets on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2021, approximately $238.7 million in total loans that were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As of September 30, 2021, we had $35.0 million in outstanding advances and $129.3 million in additional
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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.
(Dollars in thousands)Nine Months Ended September 30, 2021Year Ended December 31, 2020
Amount outstanding at period-end$35,000$40,000
Weighted average interest rate at period-end2.04%1.96%
Maximum month-end balance during period$40,000$70,000
Average balance outstanding during period$38,867$58,210
Weighted average interest rate during period1.98%1.63%
Federal Reserve Bank of Atlanta. The Federal Reserve Bank of Atlanta has an available borrower in custody arrangement which allows us to borrow on a collateralized basis. No advances were outstanding under this facility as of September 30, 2021.
PPPLF Advances. The Company initially funded Professional Bank PPP loans with the PPPLF. Most of the Professional Bank PPP loans were initially pledged to the Federal Reserve as part of the PPPLF. The PPPLF pledged loans are non-recourse to the Company. In addition, we paid off all PPPLF advances for a balance of $0 on September 30, 2021.
Liquidity and Capital Resources
Capital Resources
Stockholders’ equity increased $12.5 million, or 5.8%, to $228.0 million on September 30, 2021, compared to December 31, 2020, primarily due to net income of $17.4 million for the nine months ended September 30, 2021, offset by repurchases of the Company’s Class A voting common stock.
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.
In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $1 billion, which we refer to below as “covered” banking organizations. We were required to implement the new Basel III capital standards as of January 1, 2015, and January 1, 2018, respectively.
As of September 30, 2021, 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.
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The following table presents our regulatory capital ratios as of September 30, 2021, and December 31, 2020. The amounts presented exclude the capital conservation buffer.
ActualMinimum for capital adequacyMinimum to be well
capitalized
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
September 30, 2021
Total capital ratio
Bank$206,77612.9%$127,8608.0%$159,82410.0%
Company224,53714.0%127,8608.0%N/AN/A
Tier 1 capital ratio
Bank194,37712.2%95,8956.0%127,8608.0%
Company202,12212.6%95,8956.0%N/AN/A
Tier1 leverage ratio
Bank194,3777.7%101,3534.0%126,6915.0%
Company202,1228.0%101,3534.0%N/AN/A
Common equity tier 1 capital ratio
Bank194,37712.2%71,9214.5%103,8866.5%
Company202,12212.6%71,9214.5%N/AN/A
ActualMinimum for capital adequacyMinimum to be well
capitalized
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
December 31, 2020
Total capital ratio
Bank$176,63312.0%$117,2988.0%$146,62310.0%
Company215,97714.7%117,2988.0%N/AN/A
Tier 1 capital ratio
Bank159,44810.9%87,9746.0%117,2988.0%
Company188,63912.9%87,9746.0%N/AN/A
Tier1 leverage ratio
Bank159,4488.4%75,7234.0%94,6545.0%
Company188,63910.0%75,7234.0%N/AN/A
Common equity tier 1 capital ratio
Bank159,44810.9%65,9804.5%95,3056.5%
Company188,63912.9%65,9804.5%N/AN/A
Liquidity
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to fund loan commitments, purchase securities, accommodate deposit withdrawals or repay other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our Asset Liability Management Committee, or ALCO, and senior management, including our Liquidity Contingency Policy, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our clients’ deposits, supplemented by our short-term borrowings, primarily from FHLB borrowings. We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements.
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On September 30, 2021, we had the ability to generate approximately $390.0 million in additional liquidity through all of our available resources beyond our overnight funds sold position. In addition to the primary borrowing outlets mentioned above, we also have the ability to generate liquidity by borrowing from the Federal Reserve Discount Window and through brokered deposits. We recognize the importance of maintaining liquidity and have developed a Contingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity. We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases, certain credit facilities may no longer be available. We conduct quarterly liquidity stress tests and the results are reported to our Asset-Liability Management Committee and our Board. We believe the liquidity available to us is currently sufficient to meet our ongoing needs.
We also view our investment portfolio as a liquidity source and have the option to pledge securities in our portfolio as collateral for borrowings or deposits, and/or sell selected securities. On September 30, 2021, and December 31, 2020, there were $238.7 million and $264.2 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 3.43 years and 3.02 years on September 30, 2021, and December 31, 2020, respectively, and had a net unrealized pre-tax gain of $0.1 million and $1.2 million, respectively, in our available for sale securities portfolio as of those dates.
As we deploy our capital and continue to grow our operations, we maintain cash in our holding company for added liquidity. As of September 30, 2021, cash held at the holding company was approximately $16.7 million. Our average net overnight funds sold position (defined as funds sold plus interest-bearing deposits with other banks less funds purchased) was $50.0 million during 2021 compared to an average net overnight funds sold position of $39.6 million for the year ended December 31, 2020. Our liquidity is supported by our continued organic growth and our excess liquidity is comprised of readily available assets, such as federal funds sold and cash at other depository institutions, as opposed to less liquid, but higher yielding, assets, like investment securities.
We expect our capital expenditures over the next 12 months to be approximately $0.8 million, which will consist primarily of investments in digital capabilities, technology purchases for our new banking offices, business applications and information technology security needs. We expect that these capital expenditures will be funded with existing resources without impairing our ability to meet our ongoing obligations.
Inflation
The impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant, and equipment. Assets and liabilities of financial institutions are primarily all monetary in nature, and therefore are principally impacted by interest rates rather than changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. Inflation measures have increased during the third quarter of 2021 as bottlenecked supply chains and other economic factors caused temporary increases in prices of commodities and consumer goods.
Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. While our liquidity monitoring and management consider both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as of September 30, 2021.
(Dollars in thousands)Due in One
Year or Less
Due after One
Through Three
Years
Due After
Three
Through
Five Years
Due After
Five Years
Total
FHLB advances$— $20,000 $10,000 $5,000 $35,000 
Time deposits of $250,000 or less88,844 6,444 — — 95,288 
Time deposits of more than $250,000167,505 4,831 — — 172,336 
Operating leases1,443 2,638 1,863 620 6,564 
Subordinated debt— — — 10,016 10,016 
Total$257,792 $33,913 $11,863 $15,636 $319,204 
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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 expiring by period as of the date indicated are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
(Dollars in thousands)September 30, 2021December 31, 2020
Unfunded lines of credit$368,117 $356,955 
Commitments to extend credit97,251 40,629 
Letters of credit11,308 13,036 
Total credit extension commitments$476,676 $410,620 
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.
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.
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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 nine months ended September 30, 2021, and for the year ended December 31, 2020.
Nine Months Ended September 30, 2021Year Ended December 31, 2020
Return on Average Assets0.96 %0.46 %
Return on Average Equity10.53 %4.30 %
Average Equity to Average Assets9.15 %10.64 %
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.
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.
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Analysis
The following table indicates that, for periods less than one year, rate-sensitive assets exceeded rate-sensitive liabilities, resulting in a slightly asset-sensitive position. For a bank with an asset-sensitive position, otherwise referred to as a positive gap, rising interest rates would generally be expected to have a positive effect on net interest income, and falling interest rates would generally be expected to have the opposite effect.
REPRICING GAP
September 30, 2021
(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
Assets
Interest earning assets
Loans$417,201 $70,690 $258,411 $746,302 $929,471 $1,675,773 
Loans held for sale284 — — 284 — $284 
Securities49,733 3,229 7,889 60,851 59,791 120,642 
Interest-bearing deposits at other financial institutions680,333 — — 680,333 40,074 720,407 
Federal funds sold23,736 — — 23,736 — 23,736 
FHLB & FRB stock7,757 — — 7,757 — 7,757 
Total interest earning assets$1,179,044 $73,919 $266,300 $1,519,263 $1,029,336 $2,548,599 
Liabilities
Interest-bearing liabilities
Interest-bearing deposits$727,470 $20,900 $94,052 $842,422 $445,311 $1,287,733 
Time deposits13,104 25,557 217,688 256,349 11,275 267,624 
Total interest-bearing deposits740,574 46,457 311,740 1,098,771 456,586 1,555,357 
Securities sold under agreements to repurchase— — — — — — 
FHLB advances— — — — 35,000 35,000 
Subordinated debt— — — — 10,016 10,016 
Total interest-bearing liabilities$740,574 $46,457 $311,740 $1,098,771 $501,602 $1,600,373 
Period gap$438,470 $27,462 $(45,440)$420,492 $527,734 
Cumulative gap$438,470 $465,932 $420,492 $420,492 $948,226 
Ratio of cumulative gap to total earning assets37.19 %630.33 %157.90 %27.68 %92.12 %
Ratio of cumulative gap to cumulative total earning assets17.20 %18.28 %16.50 %16.50 %37.21 %
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CASH FLOW GAP
September 30, 2021
(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
Assets
Interest earning assets
Loans$103,535 $85,298 $277,619 $466,452 $1,209,321 $1,675,773 
Loans held for sale284 — — 284 — 284 
Securities7,249 2,181 9,988 19,418 101,224 120,642 
Interest-bearing deposits at other financial institutions680,333 — — 680,333 40,074 720,407 
Federal funds sold23,736 — — 23,736 — 23,736 
FHLB & FRB stock— — — — 7,757 7,757 
Total interest earning assets$815,137 $87,479 $287,607 $1,190,223 $1,358,376 $2,548,599 
Liabilities
Interest-bearing liabilities
Interest-bearing deposits$24,931 $49,862 $224,379 $299,172 $988,561 $1,287,733 
Time deposits13,104 25,557 217,688 256,349 11,275 267,624 
Total interest-bearing deposits38,035 75,419 442,067 555,521 999,836 1,555,357 
Securities sold under agreements to repurchase— — — — — — 
FHLB advances— — — — 35,000 35,000 
Subordinated debt— — — — 10,016 10,016 
Total interest-bearing liabilities$38,035 $75,419 $442,067 $555,521 $1,044,852 $1,600,373 
Period gap$777,102 $12,060 $(154,460)$634,702 $313,524 
Cumulative gap$777,102 $789,162 $634,702 $634,702 $948,226 
Ratio of cumulative gap to total earning assets95.33 %902.12 %220.68 %53.33 %69.81 %
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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.
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The following table summarizes the results of our net interest income at risk analysis in simulating the change in net interest income and fair value of equity over a 12-month and 24-month horizon as of September 30, 2021, and December 31, 2020, and 2019.
Net Interest Income at Risk – 12 months-400bps-300bps-200bps-100bpsFlat+100bps+200bps+300bps+400bps
Policy Limit(20.0)%(15.0)%(10.0)%(5.0)%N/AN/AN/AN/AN/A
September 30, 2021(7.5)%(5.5)%(2.9)%0.4 %N/A7.8 %15.6 %23.4 %31.1 %
December 31, 2020(3.1)%(2.4)%(1.2)%(0.2)%N/A1.5 %3.5 %5.5 %7.3 %
December 31, 2019(9.9)%(6.6)%(4.7)%(1.6)%N/A0.6 %0.8 %1.0 %1.2 %
Net Interest Income at Risk – 24 months-400bps-300bps-200bps-100bpsFlat+100bps+200bps+300bps+400bps
Policy Limit(20.0)%(15.0)%(10.0)%(5.0)%N/AN/AN/AN/AN/A
September 30, 2021(14.3)%(11.7)%(8.3)%(5.0)%N/A10.0 %20.1 %30.0 %39.8 %
December 31, 2020(4.3)%(3.6)%(2.6)%(1.8)%N/A5.8 %12.0 %17.9 %23.6 %
December 31, 2019(16.1)%(12.0)%(7.7)%(2.7)%N/A1.3 %2.3 %3.1 %3.7 %
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.
The following table illustrates the results of our EVE analysis as of September 30, 2021, and December 31, 2020, and 2019.
Economic Value of Equity as of-400bps-300bps-200bps-100bpsFlat+100bps+200bps+300bps+400bps
Policy Limit(30.0)%(20.0)%(15.0)%(10.0)%N/A17.5 %22.5 %27.5 %37.5 %
September 30, 20212.2 %2.1 %2.1 %0.1 %N/A0.2 %0.3 %(0.1)%(1.2)%
December 31, 20200.8 %1.5 %2.6 %2.5 %N/A(2.5)%(5.1)%(8.1)%(11.3)%
December 31, 2019(5.3)%(0.4)%0.7 %0.6 %N/A(3.7)%(8.2)%(13.2)%(19.0)%
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
We have identified the following accounting policies and estimates that, due to the difficult, subjective, or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate.
Allowance for Loan Losses
The allowance for loan losses provides for probable incurred losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date. It is maintained at a level estimated to be adequate to absorb potential losses through periodic charges to the provision for loan losses.
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The allowance for loan losses consists of specific and general reserves. Specific reserves relate to loans classified as impaired. Loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan. Impaired loans include troubled debt restructurings, and performing and nonperforming loans. Impaired loans are reviewed individually and a specific allowance is allocated, if necessary, based on evaluation of either the fair value of the collateral underlying the loan or the present value of future cash flows calculated using the loan’s existing interest rate. General reserves relate to the remainder of the loan portfolio, including overdrawn deposit accounts, and are based on evaluation of a number of factors, such as current economic conditions, the quality and composition of the loan portfolio, loss history, and other relevant factors.
Our loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. However, the ability of borrowers to honor their contractual repayment obligations is substantially dependent on changing economic conditions. Because of the uncertainties associated with economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of loan losses in the loan portfolio and the amount of the allowance needed may change in the future. The determination of the allowance for loan losses is, in large part, based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In situations where the repayment of a loan is dependent on the value of the underlying collateral, an independent appraisal of the collateral’s current market value is customarily obtained and used in the determination of the allowance for loan loss.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in economic conditions. Also, regulatory agencies, as an integral part of their examination process, periodically review management’s assessments of the adequacy of the allowance for loan losses. Such agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy defines Level 1 valuations as those based on quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 valuations include inputs based on quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 valuations are based on at least one significant assumption not observable in the market, or significant management judgment or estimation, some of which may be internally developed.
Financial assets that are recorded at fair value on a recurring basis include investment securities available for sale and loans held for sale. Determining the fair values of assets and liabilities, especially the loan portfolio, core deposit intangibles, and goodwill, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. As of September 30, 2021, purchase accounting loan marks were $14.3 million.
Recent Accounting Pronouncements
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 our financial statements. Please also refer to the Notes to our consolidated financial statements included in this quarterly report for a full description of recent accounting pronouncements, including the respective expected dates of adoption and anticipated effects on our results of operations and financial condition.
ASU 2016-13, Financial Instruments — Credit Loses (Topic 326)
In June 2016, FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss, or 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
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off-balance sheet credit exposures not accounted for as insurance (i.e. loan commitments, standby letters of credit, financial guarantees and other similar instruments). We anticipated that this ASU would be effective for us on January 1, 2021, but the FASB announced on October 16, 2019, a delay of the effective date of ASU 2016-13 for smaller reporting companies until January 1, 2023. We are in the process of evaluating and implementing changes to credit loss estimation models and related processes. Updates to business processes and the documentation of accounting policy decisions are ongoing. We 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 our consolidated financial statements has not yet been determined.
Pro Opp Fund LLC
On April 8, 2021, the Company formed a separately capitalized subsidiary, Pro Opp Fund LLC. Subsequent to the close of the quarter ended September 30, 2021, Pro Opp Fund LLC committed to investments of approximately $0.8 million in businesses indirectly, directly, and tangentially related to the Company’s core business as permitted under the U.S. Bank Holding Company Act. Additionally, Pro Opp Fund LLC has an additional $0.9 million of unfunded investments outstanding.
COVID-19 Operational Response and Bank Preparedness

The Company continues to work within the COVID-19 pandemic response plans which were originally established in the spring of 2020. In the summer of 2021, we returned to a normalized office schedule. However, there are no comparable events that provide guidance as to the effect of the spread of COVID-19 and the situation remains volatile. Thus we are required to monitor differing levels of infection across the globe; various, and often conflicting, governmental strategies to address COVID-19 , including for the variants of COVID; and vaccination programs and requirements. We sill adjust our response plans where necessary.
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 September 30,Three Months Ended
June 30,
Nine Months Ended September 30,
(Dollar amounts in thousands, except per share data)20212020202120212020
Net interest income (GAAP)$19,104 $17,460 $17,202 $54,185 $41,812 
Total non-interest income1,476 963 2,302 4,897 2,787 
Total non-interest expense11,624 11,713 10,954 34,366 32,747 
Pre-tax pre-provision earnings (non-GAAP)$8,956 $6,710 $8,550 $24,716 $11,852 
Total adjustments to non-interest expense— (1,078)— (684)(3,301)
Adjusted pre-tax pre-provision earnings (non-GAAP)$8,956 $7,788 $8,550 $25,400 $15,153 
Return on average assets (GAAP)0.97 %0.18 %0.99 %0.96 %0.21 %
Adjusted return on average assets (non-GAAP)
Annualized pre-tax pre-provision ROAA (non-GAAP)1.39 %1.30 %1.33 %1.37 %0.92 %
Adjusted annualized pre-tax pre-provision ROAA (non-GAAP)1.39 %1.51 %1.33 %1.41 %1.18 %
September 30, 2021December 31, 2020
Total loans (GAAP)$1,675,773 $1,641,422 
Add allowance for loan loss11,478 16,259 
Add loans held for sale284 1,270 
Total gross loans$1,687,535 $1,658,951 
Less PPP loans85,133 185,748 
Total gross loans excluding Professional Bank PPP loans (non-GAAP)$1,602,402 $1,473,203 
Add purchase accounting loan marks14,317 18,835 
Total gross loans excluding PPP loans (non-GAAP)$1,616,719 $1,492,038 
Allowance for loan loss as a % of total loans (GAAP)0.68 %0.99 %
Allowance for loan loss as a % of total gross loans excluding Professional Bank PPP loans (non-GAAP)0.72 %1.10 %
Loan marks + allowance for loan loss / total gross loans excluding PPP loans (non-GAAP)1.60 %2.35 %
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 Accounting Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2021.
As disclosed in Part II, Item 9A. Controls and Procedures in our Annual Report on Form 10-K dated December 31, 2020, management observed deficiencies associated with controls that address infrequent significant transactions in the Company’s control environment, that, in the aggregate, resulted in a material weakness. Individually, each of the observations were determined to be immaterial. The observations included Accounting for Participation Loan Sales, Recording of Inter-Company
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Capital Transactions, and Business Combination Accounting. The Company has developed and is in the process of implementing controls and procedures as part of the remediation efforts in connection to the identified deficiencies described above. Therefore, the Chief Executive Officer and Chief Accounting Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective as of such date.
Despite the foregoing, our management has concluded that, the financial statements fairly present in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity GAAP.
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 2020 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 2020 Form 10-K.
Presidential Directive to the Occupational Safety and Health Administration (“OSHA”) to Mandate Vaccinations.
On September 9, 2021, the President of the United States of America announced that he has directed OSHA to develop an emergency temporary standard (“ETS”) mandating either the full vaccination or weekly testing of employees of employers with 100 or more employees. On November 4, 2021, OSHA issued the ETS requiring workers to be fully vaccinated by January 4, 2022, or undergo weekly testing. The certainty of the January 4, 2022, implementation of the ETS has been made uncertain by a subsequent stay ordered by the Fifth Circuit Court of appeals. It is currently not possible to predict the administrative costs of a compliant program or other impacts that the ETS will have on our workforce. Additional vaccine mandates (or prohibitions of mandates in States such as Florida) may be announced in areas in which we operate. Our implementation of these requirements may result in attrition, including attrition of critically skilled labor, and difficulty securing future labor needs, which could have a material adverse effect on our business, financial conditions, and result of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a)Not applicable.
(b)Use of Proceeds.
On February 7, 2020, the Company completed its initial public offering of 3,565,000 shares of its Class A Common Stock at a public offering price of $18.50 per share, or an aggregate offering price of $57,350,000. The offering, for which the managing underwriters were Stephens Inc. and Keefe, Bruyette & Woods, was registered under the Securities Act (Registration No. 333-235822) and resulted in total net proceeds to the Company of approximately $61.3 million, after deducting an underwriting discount of 7%, before expenses (approximately $1.6 million).
As of September 30, 2021, we used approximately $4.0 million for expenses associated with the MBI acquisition, and $10.0 million to paydown our line of credit with Valley National Bank, fund $800 thousand with the remaining proceeds pushed down to the Bank for general corporate purposes, including working capital and capital expenditures. None of the proceeds were used as payments to our directors or officers (or their associates), or to our affiliates or 10% stockholders. In addition, on October 30, 2021, we redeemed in full, the amount of our subordinated notes payable of $10.0 million, in accordance with its contractual terms.
(c)Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
As detailed in our 10-K Part II, Item 5 for the year ended December 31, 2020, on March 2, 2020, the Company’s Board of Directors authorized the purchase from time to time of up to $10 million of the Company’s Class A voting common stock. On May 5, 2021, the Company’s Board of Directors authorized an increase in the amount available under the stock repurchase program such that, effective May 6, 2021, $10 million was available to purchase outstanding shares of the Company’s Class A voting common stock. Under this program, shares may be repurchased in privately negotiated and/or open market transactions,
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including under plans complying with Rule 10b5-1 under the Exchange Act. The purchases made during the three months ended September 30, 2021, are shown below:
PeriodsTotal Number of
Shares Purchased
Average Price
Paid per Share
Approximate Dollar
Value of Shares that
May yet be Purchased
Under the Plan
July 1, 2021 to July 31, 2021:80,428$18.15$5,074,943
August 1, 2021 to August 31, 2021:5,074,943
September 1, 2021 to September 30, 2021:13,17120.724,832,121
Total - 3rd Quarter93,599$18.19$4,832,121
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
EXHIBIT INDEX
Exhibit No.Description of Exhibit
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1943, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 12, 2021.
PROFESSIONAL HOLDING CORP.
By:/s/ Daniel R. Sheehan
Daniel R. Sheehan
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1943, this Report has been signed by the following persons in the capacities set forth opposite their names and on the dates indicated.
SignatureTitleDate
/s/ Daniel R. SheehanChairman and Chief Executive OfficerNovember 12, 2021
Daniel R. Sheehan(Principal Executive Officer)
/s/ Mary UsateguiChief Accounting OfficerNovember 12, 2021
Mary Usategui(Principal Financial Officer and Principal Accounting Officer)
/s/ Margaret BlakeyDirectorNovember 12, 2021
Margaret Blakey
/s/ Rolando DiGasbarroDirectorNovember 12, 2021
Rolando DiGasbarro
/s/ Norman EdelcupDirectorNovember 12, 2021
Norman Edelcup
/s/ Carlos M. GarciaDirectorNovember 12, 2021
Carlos M. Garcia
/s/ Jon L. GorneyDirectorNovember 12, 2021
Jon L. Gorney
/s/ Abel L. IglesiasDirectorNovember 12, 2021
Abel L. Iglesias
/s/ Herbert Martens, JrDirectorNovember 12, 2021
Herbert Martens, Jr.
/s/ Ava L. ParkerDirectorNovember 12, 2021
Ava L. Parker
/s/ Lawrence SchimmelDirectorNovember 12, 2021
Dr. Lawrence Schimmel, M.D.
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