PROFESSIONAL HOLDING A Introduction
The following discussion and analysis is presented to aid in understanding our financial position and results of operations and should be read together with the financial information contained in the Form 10-K. See Note 1 "Summary of Significant Accounting Policies" to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three and nine months endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 , for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as ofSeptember 30, 2022 , compared toDecember 31, 2021 . As used in this discussion and analysis the term "Company" refers toProfessional Holding Corp.
Proposed Merger with Seacoast Banking Corporation of Florida
OnAugust 8, 2022 , Seacoast Banking Corporation of Florida ("Seacoast"),Seacoast National Bank ("SNB"), the Company, andProfessional Bank entered into an Agreement and Plan of Merger (the "Merger Agreement") that provides for the combination of Seacoast and Professional and their two banks. Under the Merger Agreement, the Company will merge with and into Seacoast, with Seacoast as the surviving corporation (the "Merger"). Immediately following the Merger,Professional Bank will merge with and into SNB, with SNB as the surviving bank (collectively, with the Merger, the "Mergers"). The transaction is subject to approval of the Company's shareholders, other customary conditions set forth in the Merger Agreement, and is expected to be completed in the first quarter of 2023.
Subject to the terms of the Merger Agreement, the Company's shareholders will have the right to receive 0.8909 shares of Seacoast common stock for each outstanding share of the Company's common stock.
Cautionary Note Regarding Forward Looking Information
This communication contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained in this communication that are not statements of historical fact may be deemed to be forward-looking statements, including, without limitation, statements preceded by, followed by or including words such as "anticipate," "intend," "believe," "estimate," "plan," "seek," "project" or "expect," "target," "goal," "may," "will," "would," "could" or "should" and similar expressions. Forward-looking statements represent the Company's current expectations, plans or forecasts; involve assumptions, risks and uncertainties; and are not guarantees. Several important factors could cause actual results to differ materially from those in forward-looking statements and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Those factors include, without limitation: •general business and economic conditions, either globally, nationally, in theState of Florida , or in the specific markets in which we operate, including the negative impacts and disruptions resulting from rising interest rates, political instability from acts of war, including the ongoing conflict betweenRussia andUkraine , supply chain challenges and inflation, which have had and may likely continue to have an adverse impact on our business operations and performance, and could continue to have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically; •the impact of Hurricane Ian onFlorida generally, as well as certain of the communities we serve, and which could continue to have a negative impact on our business, credit portfolio, borrowers and our stock price; •the effects of our lack of a diversified loan portfolio and concentration in theSouth Florida market including the risks of geographic, depositor, and industry concentrations, including our concentration in loans secured by real estate; • the frequency and magnitude of foreclosure of our loans; •changes in the securities, real estate markets and commodities markets (including fluctuations in the price of coffee or oil); •the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss reserve and deferred tax asset valuation allowance; •increased competition and its effect on pricing of our products and services as well as our margins; •our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate; •Professional Bank's ability to make cash distributions to us and our ability to declare and pay dividends, the payment of which is subject to our capital and other requirements; 29 -------------------------------------------------------------------------------- Table of Contents •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 theU.S. Government and theFederal Reserve ; •inflation, interest rate, unemployment rate, market, and monetary fluctuations; •the efficiency and effectiveness of our internal control environment; •the ability of our third-party service providers to continue providing services to us and clients without interruption; •geopolitical developments; •the effects of harsh weather conditions, including hurricanes, and other natural disasters (including pandemics such as COVID-19) and man-made disasters; •potential business interruptions from catastrophic events such as terrorist attacks, active shooter situations, and advanced persistent threat groups; •the willingness of clients to accept third-party products and services rather than our products and services and vice versa; •changes in consumer spending and saving habits; •growth and profitability of our noninterest income; and •anti-takeover provisions under federal and state law as well as our governing documents; •the risk that our proposed merger with Seacoast may not be completed in a timely manner or at all, which may adversely affect our business and the price of our common stock;
•the diversion of management time on issues related to the merger with Seacoast;
•the effect of the announcement or pendency of the merger on Seacoast's customer, employee and business relationships, operating results, and business generally;
•changes in laws or regulations;
•changes in interest rates, deposit flows, loan demand and real estate values;
•the ongoing impacts and disruptions resulting from COVID-19 or other variants on the economies and communities we serve, which has had and may likely continue to have an adverse impact on our business operations and performance, and could continue to have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically; and
•other factors described in our Annual Report on Form 10-K for the year ended
Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in forward-looking statements. We caution investors not to rely unduly on any forward-looking statements and urge investors to carefully consider the risks described in our filings with theSecurities and Exchange Commission , referred to above, which are available on www.proholdco.com and theSEC's website at www.sec.gov. The Company expressly disclaims any obligation to update any of the forward-looking statements included herein to reflect future events or developments or changes in expectations, except as may be required by law.
Executive Overview
Highlights of our performance and financial condition as of and for the three
and nine months ended
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Results of Operations for the Three Months Ended
•Net income increased by$2.2 million , or 34.7%, to$8.5 million compared to$6.3 million during the three months endedSeptember 30, 2021 , due to an increase in net interest income of$5.7 million , partially offset by an increase in provision expense of$0.3 million , a decrease in noninterest income of$0.3 million , an increase in noninterest expense of$2.2 million , and an increase in income tax provision of$0.7 million . •Net interest income increased by$5.7 million , or 29.8%, to$24.8 million compared to$19.1 million during the three months endedSeptember 30, 2021 , due to the impact of theFederal Reserve's target Federal Funds Rate increases during the third quarter and new loan production in a higher rate environment on the Company's asset sensitive balance sheet. •Provision for loan losses increased$0.3 million , or 26.7%, to$1.3 million compared to$1.1 million during the three months endedSeptember 30, 2021 , primarily due to loan growth. There were no net charge-offs for the three months endedSeptember 30, 2022 and 2021. •Noninterest income decreased$0.3 million , or 17.1% to$1.2 million compared to the three months endedSeptember 30, 2021 . The decrease was comprised of lower swap fee income of$0.2 million , lower loans held for sale income of$0.2 million , and lower service charges of$0.1 million on deposit accounts compared to the three months endedSeptember 30, 2021 . These decreases were partially offset by an increase of$0.1 million in income from bank owned life insurance as a result of prior quarter's additional bank owned life insurance purchase of$15.0 million . •Noninterest expense increased$2.2 million , or 19.2%, to$13.9 million compared to$11.6 million during the three months endedSeptember 30, 2021 . The increase was comprised of acquisition expenses of$1.0 million in connection with the pending merger with Seacoast, higher salaries and benefits of$0.7 million , and higher other noninterest expense of$0.5 million , partially offset by lower regulatory assessments expense of$0.2 million . The increase in salaries and benefits was due to higher sales incentives resulting from higher net income and loans as well as enhancements to our regulatory and compliance areas. The increase in noninterest expense was primarily comprised of an increase in provision for unfunded commitments and the Community Reinvestment Act ("CRA") mutual fund investment valuation.
Results of Operations for the Nine Months Ended
•Net income increased by$0.5 million , or 2.8%, to$17.9 million compared to$17.4 million in the prior year period, due to an increase in net interest income of$11.6 million , partially offset by an increase in provision expense of$1.6 million , a decrease in noninterest income of$0.6 million , an increase in noninterest expense of$8.6 million , and an increase in income tax provision of$0.3 million . •Net interest income increased by$11.6 million , or 21.3%, to$65.8 million compared to$54.2 million in the prior year period, primarily due to the impact of theFederal Reserve's target Federal Funds Rate increases in 2022 on the Company's asset sensitive balance sheet, in addition to an increase in average loans from$1.7 billion in 2021 to$1.9 billion in 2022. Interest income also benefited from increased average balances and higher yields in the investment portfolio. •Provision for loan losses increased by$1.6 million , or 55.0%, to$4.4 million compared to$2.9 million in the prior year period primarily due to loan growth. The ratio of annualized charge-offs to average loans was 0.05% during the nine months endedSeptember 30, 2022 , compared to 0.61% in the prior year period. •Noninterest income decreased by$0.6 million , or 12.7% to$4.3 million compared to the prior year period. The decrease primarily reflected lower service charges of$0.6 million on deposit accounts compared to prior year due to service charges of approximately$0.7 million , associated with acting as a correspondent bank for a Payroll Protection Program ("PPP") lender, and lower swap fee income of$0.7 million . These decreases were partially offset by an increase of$0.8 million in other noninterest income, comprised of$0.5 million of expected insurance proceeds on a previously recognized contingency and a$0.2 million loss on fixed asset disposals recorded in 2021. •Noninterest expense increased by$8.6 million , or 25.0%, to$43.0 million compared to$34.4 million in the prior year period primarily due to higher salaries and employee benefits of$5.5 million and higher other noninterest expense of$2.0 million . The increase in salaries and benefits was driven by the$2.9 million expense related to the departure of the Company's former Chief Executive Officer, and higher employee compensation costs from higher headcount and bonus and sales incentives. The increase in other noninterest expense was primarily comprised of a$0.7 million loss 31
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related to a previously recognized contingency from the first quarter, a
Financial Condition
At
•Total assets decreased$0.2 billion , or 7.1%, to$2.5 billion compared toDecember 31, 2021 , primarily as a result of decreases in cash and cash equivalents of$0.4 billion , partially offset by an increase in net loans of$0.2 billion . •Total loans increased$0.2 billion , or 12.8%, to$2.0 billion compared toDecember 31, 2021 . The increase was driven by loan originations of approximately$708.7 million , partially offset by paydowns and prepayments. The ProfessionalBank PPP loan balance decreased$56.0 million , or 95.5%, to$2.6 million fromDecember 31, 2021 . •Total deposits decreased$0.2 billion , or 7.7%, to$2.2 billion compared toDecember 31, 2021 primarily due a decrease in money market and savings and time deposits, partially offset by an increase in noninterest bearing demand deposits. •As ofSeptember 30, 2022 , the Company had nonperforming assets of$1.8 million , or 0.07% of total assets, compared to nonperforming assets of$2.1 million atDecember 31, 2021 . The decrease was due to the charge-off of a$0.7 million impaired loan in the consumer loan category, partially offset by the addition of a$0.3 million nonaccrual commercial real estate loan during the nine months endedSeptember 30, 2022 . Operating Results
Results of Operations for the three months ended
The following table sets forth the principal components of net income for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands) 2022 2021 Change
Interest income $ 27,165 $ 20,890 30.0 %
Interest expense 2,368 1,786 32.6 %
Net interest income 24,797 19,104 29.8 %
Provision for loan losses 1,343 1,060 26.7 %
Net interest income after provision 23,454 18,044 30.0 %
Noninterest income 1,223 1,476 (17.1) %
Noninterest expense 13,853 11,624 19.2 %
Income before income taxes 10,824 7,896 37.1 %
Income tax expense 2,351 1,608 46.2 %
Net income $ 8,473 $ 6,288 34.7 %
Net Interest Income and Net Interest Margin Analysis
We analyze our ability to maximize income generated from interest earning assets
and control the interest expenses associated with our liabilities, measured as
net interest income, through our net interest margin and net interest spread.
Net interest income is the difference between the interest and fees earned on
interest earning assets, such as loans and securities, and the interest expense
paid on interest bearing liabilities, such as deposits and borrowings, which are
used to fund those assets. Net interest margin is a ratio calculated as
annualized net interest income divided by average interest earning assets for
the same period. Net interest spread is the difference between average interest
rates earned on interest earning assets and average interest rates paid on
interest-bearing liabilities.
Changes in market interest rates and the interest rates we earn on interest
earning assets or pay on interest-bearing liabilities, as well as in the volume
and types of interest earning assets, interest bearing and noninterest-bearing
liabilities and stockholders' equity, are usually the largest drivers of
periodic changes in net interest income, net interest margin and net interest
spread. Fluctuations in market interest rates are driven by many factors,
including governmental monetary policies, inflation, deflation,
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macroeconomic developments, changes in unemployment rates, the money supply,
political and international conditions, and circumstances, in domestic and
foreign financial markets. Periodic changes in the volume and types of loans in
our loan portfolio are affected by, among other factors, the economic and
competitive conditions in the Miami-Dade MSA, as well as developments affecting
the real estate, technology, government services, hospitality and tourism, and
financial services sectors within the Miami-Dade MSA. Our ability to respond to
changes in these factors by using effective asset-liability management
techniques is critical to maintaining the stability of our net interest income
and net interest margin as our primary sources of earnings.
The following table shows the average outstanding balance of each principal
category of our assets, liabilities, and stockholders' equity, together with the
average yields on our assets and the average costs of our liabilities for the
periods indicated. Such yields and costs are calculated by dividing the
annualized income or expense by the average daily balances of the corresponding
assets or liabilities for the same period.
For the Three Months Ended September 30,
2022 2021
Average Interest Average Interest
Outstanding Income/ Average Outstanding Income/ Average
(Dollars in thousands) Balance Expense(4) Yield/Rate Balance Expense(4) Yield/Rate
Assets
Interest earning assets
Interest-earning deposits $ 137,355 $ 747 2.16 % $ 561,082 $ 212 0.15 %
Federal funds sold 21,895 124 2.25 % 36,264 10 0.11 %
Federal Reserve Bank stock, FHLB stock
and other corporate stock 7,384 108 5.80 % 7,521 96 5.06 %
Investment securities - taxable 168,662 736 1.73 % 105,498 186 0.70 %
Investment securities - tax-exempt 27,572 228 3.28 % 19,402 177 3.62 %
Loans (1) 1,979,132 25,222 5.06 % 1,702,137 20,209 4.71 %
Total interest earning assets 2,342,000 27,165 4.60 % 2,431,904 20,890 3.41 %
Loans held for sale 31 1,478
Noninterest earning assets 156,584 125,751
Total assets $ 2,498,615 $ 2,559,133
Liabilities and shareholders' equity
Interest-bearing liabilities
Interest-bearing deposits $ 1,453,653 2,170 0.59 % $ 1,463,138 1,476 0.40 %
Borrowed funds 24,447 198 3.21 % 45,046 310 2.73 %
Total interest-bearing liabilities 1,478,100 2,368 0.64 % 1,508,184 1,786 0.47 %
Noninterest-bearing liabilities
Noninterest-bearing deposits 758,135 810,042
Other noninterest-bearing liabilities 24,492 16,746
Shareholders' equity 237,888 224,161
Total liabilities and shareholders'
equity $ 2,498,615 $ 2,559,133
Net interest income $ 24,797 $ 19,104
Net interest spread (2) 3.96 % 2.94 %
Net interest margin (3) 4.20 % 3.12 %
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(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
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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
Compared to 2021
Change Due To
(Dollars in thousands) Volume Rate Total
Interest income
Interest earning deposits $ (160) $ 695 $ 535
Federal funds sold (4) 118 114
(2) 14 12
Investment securities - taxable 111 439 550
Investment securities - tax-exempt 75 (24) 51
Loans 3,289 1,724 5,013
Total $ 3,309 $ 2,966 $ 6,275
Interest expense
Interest-bearing deposits (10) 704 694
Borrowed funds (142) 30 (112)
Total $ (151) $ 733 $ 582
Net interest income increased by $5.7 million to $24.8 million for the three
months ended September 30, 2022 , compared to the three months ended
September 30, 2021 . Our total net interest income was impacted by increases in
the Federal Reserve's target Federal Funds Rate and increased average balances
on loans and investments. Average total interest earning assets were $2.3
billion for the three months ended September 30, 2022 , compared to $2.4 billion
for the three months ended September 30, 2021 . The annualized yield on interest
earning assets increased 119 basis points for the three months ended
September 30, 2022 , compared to the three months ended September 30, 2021 ,
primarily due to increases in the Federal Reserve's target Federal Fund Rate.
The decrease in the average balance of interest earning assets was driven
primarily by lower average balances in our interest earning deposits of $0.4
billion , or 75.5%, partially offset by growth in our average loan portfolio of
$0.3 billion , or 16.3%, compared to three months ended September 30, 2021 . The
growth in our loan portfolio was due to organic loan originations.
Average interest-bearing liabilities for the three months ended September 30,
2022 , decreased due to lower average interest bearing deposits and average
borrowings compared to the three months ended September 30, 2021 . The decrease
in the average balance of interest-bearing deposits was primarily due to a
decrease of $88.4 million , or 34.3%, in our average certificates of deposit
accounts, and a decrease of $28.1 million , or 57.9% in our average brokered
deposit accounts, partially offset by an increase in money market accounts of
$90.5 million , or 10.7% for the three months ended September 30, 2022 , compared
to the three months ended September 30, 2021 . The annualized average interest
rate paid on average interest-bearing liabilities increased to 0.64%, for the
three months ended September 30, 2022 , compared to 0.47% for the three months
ended September 30, 2021 . The annualized average interest rate paid on
interest-bearing deposits increased 19 basis points to 0.59%, and the annualized
average interest rate paid on borrowed funds increased by 48 basis points to
3.21%. The average interest rate on borrowings during the three months ended
September 30, 2022 , increased due to lower rate borrowings that were paid down
and the remaining balances make up a larger weighted average rate. For the three
months ended September 30, 2022 , our average other noninterest-bearing
liabilities increased $7.7 million , or 46.3%, compared to the three months ended
September 30, 2021 . Average noninterest-bearing deposits decreased $51.9
million , or 6.4%, compared to the three months ended September 30, 2021 . For the
three months ended September 30, 2022 , our net interest margin was 4.20% and net
interest spread was 3.96%. For the three months ended September 30, 2021 , net
interest margin was 3.12% and net interest spread was 2.94%.
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Provision for Loan Losses
The provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by our management in determining the allowance for loan losses see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Loan Losses."
Our provision for loan losses amounted to
Noninterest Income Our primary sources of recurring noninterest income are service charges on deposit accounts, mortgage banking revenue, interest rate swap fee income, origination fees for SBA loans, and other fees and charges. Noninterest income does not include loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.
The following table presents the major categories of noninterest income for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands) 2022 2021 Increase (Decrease)
Noninterest income
Service charges on deposit accounts $ 542 $ 643 (15.7)%
Income from bank owned life insurance 400 281 42.3%
SBA origination fees 90 21 100.0%
Swap fee income - 208 (100.0)%
Loans held for sale income 6 161 (96.3)%
Gain on sale and call of securities - 1 (100.0)%
Other 185 161 14.9%
Total noninterest income $ 1,223 $ 1,476 (17.1)%
Noninterest income for the three months ended September 30, 2022 , was
$1.2 million , a $0.3 million , or 17.1%, decrease compared to the three months
ended September 30, 2021 . The decrease was primarily comprised of a decrease of
$0.2 million in swap fee income, a decrease of $0.2 million in loans held for
sale income, and a decrease in service charges on deposit accounts of
$0.1 million due to lower service charges from the Correspondent Banking
Relationship. These decreases were partially offset by higher income from bank
owned life insurance as a result of as a result from of our prior quarter
purchases of approximately $15.0 million .
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining client relationships, and providing banking services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy and equipment expenses, professional fees, data processing expenses, advertising expenses, loan processing expenses, and other general and administrative expenses, includingFDIC assessments, communications, travel, meals, training, supplies, and postage. 35
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The following table presents the major categories of noninterest expense for the periods indicated.
Three Months Ended September 30,
(Dollars in thousands) 2022 2021 Increase (Decrease)
Noninterest expense
Salaries and employee benefits $ 8,003 $ 7,350 8.9%
Occupancy and equipment 1,001 935 7.1%
Data processing 257 303 (15.2)%
Marketing 565 420 34.5%
Professional fees 830 689 20.5%
Acquisition expenses 957 - -%
Regulatory assessments 254 481 (47.2)%
Other 1,986 1,446 37.3%
Total noninterest expense $ 13,853 $ 11,624 19.2%
Noninterest expense amounted to $13.9 million for the three months ended
September 30, 2022 , an increase of $2.2 million , or 19.2%, compared to the three
months ended September 30, 2021 . The increase was primarily due to acquisition
expenses of $1.0 million in connection with the pending merger with Seacoast,
higher salaries and employee benefits of $0.7 million , and higher other
noninterest expense of $0.5 million , partially offset by lower regulatory
assessments expense of $0.2 million . Salaries and employee benefits increased
due to higher sales incentives resulting from higher net income and loans as
well as enhancements to our regulatory and compliance areas. The increase in
other noninterest expense was primarily comprised of a $0.3 million increase in
provision for unfunded commitments and a $0.1 million increase in our CRA mutual
fund investment valuation.
Income Tax Expense
The amount of income tax expense we incur is influenced by the amounts of our
pre-tax income, tax-exempt income, and other nondeductible expenses. Deferred
tax assets and liabilities are reflected at current income tax rates in effect
for the period in which the deferred tax assets and liabilities are expected to
be realized or settled. As changes in tax laws or rates are enacted, such as the
Tax Act, deferred tax assets and liabilities are adjusted through the provision
for income taxes. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense was $2.4 million for the three months ended September 30,
2022 , compared to $1.6 million for the three months ended September 30, 2021 .
Our effective tax rates for those periods were 21.7% and 20.4%, respectively.
The increase in the effective tax rate from the quarter ended September 30,
2021 , to the quarter ended September 30, 2022 was primarily due to an increase
in the state tax rate and an increase in non-deductible expenses.
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Results of Operations for the nine months ended
The following table sets forth the principal components of net income for the periods indicated.
Nine Months Ended September 30,
(Dollars in thousands) 2022 2021 Change
Interest income $ 71,857 $ 59,624 20.5%
Interest expense 6,104 5,439 12.2 %
Net interest income 65,753 54,185 21.3 %
Provision for loan losses 4,434 2,860 55.0 %
Net interest income after provision 61,319 51,325 19.5 %
Noninterest income 4,277 4,897 (12.7) %
Noninterest expense 42,952 34,366 25.0 %
Income before income taxes 22,644 21,856 3.6 %
Income tax expense 4,758 4,452 6.9 %
Net income $ 17,886 $ 17,404 2.8 %
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Net Interest Income and Net Interest Margin Analysis
The following table shows the average outstanding balance of each principal
category of our assets, liabilities, and stockholders' equity, together with the
average yields on our assets and the average costs of our liabilities for the
periods indicated. Such yields and costs are calculated by dividing the
annualized income or expense by the average daily balances of the corresponding
assets or liabilities for the same period.
Nine Months Ended September 30
2022 2021
Average Interest Average Interest
Outstanding Income/ Average Outstanding Income/ Average
(Dollars in thousands) Balance Expense(4) Yield/Rate Balance Expense(4) Yield/Rate
Assets
Interest earning assets
Interest earning deposits $ 394,614 $ 1,985 0.67 % $ 441,679 $ 436 0.13 %
Federal funds sold 27,215 209 1.03 % 49,982 50 0.13 %
Federal Reserve Bank stock, FHLB stock and
other corporate stock 7,433 310 5.58 % 7,624 290 5.09 %
Investment securities - taxable 177,604 2,078 1.56 % 81,941 526 0.86 %
Investment securities - tax-exempt 27,305 673 3.30 % 20,396 569 3.73 %
Loans (1) 1,869,450 66,602 4.76 % 1,688,499 57,753 4.57 %
Total interest earning assets 2,503,621 71,857 3.84 % 2,290,121 59,624 3.48 %
Loans held for sale 452 1,824
Noninterest earning assets 148,404 122,306
Total assets $ 2,652,477 $ 2,414,251
Liabilities and shareholders' equity
Interest-bearing liabilities
Interest-bearing deposits 1,595,585 5,247 0.44 % 1,350,795 4,223 0.42 %
Borrowed funds 33,463 857 3.42 % 82,229 1,216 1.98 %
Total interest-bearing liabilities 1,629,048 6,104 0.50 % 1,433,024 5,439 0.51 %
Noninterest-bearing liabilities
Noninterest-bearing deposits 769,026 742,530
Other noninterest-bearing liabilities 20,781 17,769
Shareholders' equity 233,622 220,928
Total liabilities and shareholders' equity $ 2,652,477 $ 2,414,251
Net interest income $ 65,753 $ 54,185
Net interest spread (2) 3.34 % 2.97 %
Net interest margin (3) 3.51 % 3.16 %
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(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
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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
Compared to 2021
Change Due To
(Dollars in thousands) Volume Rate Total
Interest income
Interest-bearing deposits $ (46) $ 1,595 $ 1,549
Federal funds sold (23) 182 159
(7) 27 20
Investment securities - taxable 614 938 1,552
Investment securities - tax-exempt 193 (89) 104
Loans 6,189 2,660 8,849
Total $ 6,920 $ 5,313 $ 12,233
Interest expense
Interest-bearing deposits 765 259 1,024
Borrowed funds (721) 362 (359)
Total $ 44 $ 621 $ 665
Net interest income increased by $11.6 million to $65.8 million for the nine
months ended September 30, 2022 , compared to the nine months ended September 30,
2021 . Our total net interest income was impacted by increases in our average
interest earning assets coupled with the increases in the Federal Reserve's
target Federal Funds Rate during the nine months ended September 30, 2022 .
Average total interest earning assets were $2.5 billion for the nine months
ended September 30, 2022 , compared to $2.3 billion for the nine months ended
September 30, 2021 . The annualized yield on those interest earning assets
increased 36 basis points to 3.84% for the nine months ended September 30, 2022 ,
due to the increases in the Federal Reserve's target Funds rate. The increase in
the average balance of interest earning assets was driven primarily by growth in
our average loan portfolio of $0.2 billion , or 10.7%, and growth in our average
investment securities portfolio of $0.1 billion , or 100.2%, compared to the nine
months ended September 30, 2021 . The growth in the loan portfolio was due to
organic loan originations during the nine months ended September 30, 2022 .
Average interest-bearing liabilities increased by $0.2 billion , or 13.7%, to
$1.6 billion , for the nine months ended September 30, 2022 , compared to the nine
months ended September 30, 2021 . The increase was due to a $0.2 billion , or
18.1%, increase in the average balance of interest-bearing deposits, partially
offset by a decrease of $48.8 million , or 59.3%, in our borrowed funds due to
the paydown of our Federal Home Loan Bank advances. The increase in the average
balance of interest-bearing deposits was primarily due to increases in our
average money market balances for the nine months ended September 30, 2022 ,
compared to the nine months ended September 30, 2021 . The annualized average
interest rate paid on average interest-bearing liabilities decreased to 0.50%
for the nine months ended September 30, 2022 , compared to 0.51% for the nine
months ended September 30, 2021 . Annualized average interest rate paid on
interest-bearing deposits increased 2 basis points to 0.44%, and the annualized
average interest rate paid on borrowed funds increased by 144 basis points to
3.42%. The average interest rate on borrowings during the nine months ended
September 30, 2022 , increased as a result of paying off lower cost advances and
replacing them with a larger balance of subordinated debt. Average
noninterest-bearing deposits increased $26.5 million , or 3.6%, compared to the
nine months ended September 30, 2021 . Average other noninterest-bearing
liabilities also increased $3.0 million , or 17.0%, compared to the nine months
ended September 30, 2021 . For the nine months ended September 30, 2022 , our
annual net interest margin was 3.51% and net interest spread was 3.34%. For the
nine months ended September 30, 2021 , annual net interest margin was 3.16% and
net interest spread was 2.97%.
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Provision for Loan Losses
Our provision for loan losses amounted to$4.4 million for the nine months endedSeptember 30, 2022 , and$2.9 million for the nine months endedSeptember 30, 2021 . The increase from 2021 to 2022 was primarily related to loan growth. Our allowance for loan losses as a percentage of total loans was 0.82% onSeptember 30, 2022 , compared to 0.74% onDecember 31, 2021 .
Noninterest Income
The following table presents the major categories of noninterest income for the periods indicated.
Nine Months Ended September 30,
(Dollars in thousands) 2022 2021 Increase (Decrease)
Noninterest income
Service charges on deposit accounts $ 1,636 $ 2,237 (26.9)%
Income from bank owned life insurance 1,049 844 24.3%
SBA origination fees 138 166 (16.9)%
Swap fee income 112 781 (85.7)%
Loans held for sale income 122 462 (73.6)%
Gain on sale and call of securities 13 23 (43.5)%
Other 1,207 384 214.3%
Total noninterest income $ 4,277 $ 4,897 (12.7)%
Noninterest income for the nine months ended September 30, 2022 , was $4.3
million , a $0.6 million , or 12.7%, decrease compared to for the nine months
ended September 30, 2021 . The decrease primarily reflected lower service charges
of $0.6 million on deposit accounts compared to prior year due to service
charges of approximately $0.7 million , associated with acting as a correspondent
bank for a Payroll Protection Program lender, and lower swap fee income of $0.7
million . These decreases were partially offset by an increase of $0.8 million in
other noninterest income, comprised of $0.5 million of expected insurance
proceeds on a previously recognized contingency and a $0.2 million loss on fixed
asset disposals recorded in 2021.
Noninterest Expense
The following table presents the major categories of noninterest expense for the periods indicated.
Nine Months Ended September 30,
(Dollars in thousands) 2022 2021 Increase (Decrease)
Noninterest expense
Salaries and employee benefits $ 26,696 $ 21,233 25.7%
Occupancy and equipment 3,013 2,942 2.4%
Data processing 875 869 0.7%
Marketing 886 738 20.1%
Professional fees 2,635 2,087 26.3%
Acquisition expenses 957 684 39.9%
Regulatory assessments 1,276 1,248 2.2%
Other 6,614 4,565 44.9%
Total noninterest expense $ 42,952 $ 34,366 25.0%
Noninterest expense amounted to $43.0 million for the nine months ended
September 30, 2022 , an increase of $8.6 million , or 25.0%, compared to the nine
months ended September 30, 2021 . The increase in salaries and benefits was
driven by the $2.9 million expense related to the departure of the Company's
former Chief Executive Officer, and higher employee compensation costs from
higher headcount and bonus and sales incentives. The increase in other
noninterest expense was primarily comprised of a $0.7 million loss related to a
previously recognized contingency from the first quarter, a $0.3 million
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increase related to our CRA mutual fund investment valuation, and a
Income Tax Expense
Income tax expense was
Financial Condition
Balance Sheet Analysis
The following sections provide expanded discussion of the significant changes in certain line items in asset, liability, and stockholder's equity categories.
As ofSeptember 30, 2022 , our total assets decreased 7.1%, or$0.2 billion , compared toDecember 31, 2021 , primarily as a result of decreases in cash and cash equivalents, partially offset by an increase in net loans. Net loans increased 12.7%, or$0.2 billion , compared toDecember 31, 2021 , driven by loan originations of approximately$0.7 billion , partially offset by paydowns and prepayments. The ProfessionalBank PPP loan balance decreased$56.0 million , or 95.5%, to$2.6 million fromDecember 31, 2021 . Stockholders' equity increased$6.3 million , or 2.7%, compared toDecember 31, 2021 , primarily due to an increase in retained earnings of$17.9 million and an increase in additional paid in capital of$4.7 million for the nine months endedSeptember 30, 2022 , partially offset by a decrease of$16.0 million in accumulated other comprehensive net income.
Cash and Cash Equivalents
Cash that is not immediately needed to fund loans by the Bank is invested in liquid assets that also earn interest, including deposits with other financial institutions. Cash and cash equivalents decreased$0.4 billion , or 71.0%, to$0.2 billion , compared to$0.6 billion onDecember 31, 2021 , primarily due to a decrease in interest-bearing deposits. Banks may be required to maintain cash reserves in the form of vault cash or in an account with theFederal 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 onSeptember 30, 2022 , andDecember 31, 2021 , respectively.
We use our securities portfolio to provide a secondary source of liquidity, achieve additional interest income through higher yields on funds invested (compared to other options, such as interest-bearing deposits at other banks or fed funds sold), manage interest rate risk, and meet both collateral and regulatory capital requirements.
Securities may be classified as either trading, held to maturity, available for sale, or equity. Trading securities (if any) are held principally for resale and recorded at their fair value with changes in fair value included in income. Held to maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Equity securities with readily determinable fair values, are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. Available for sale securities consist of securities not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses on available for sale securities are excluded from income and reported in comprehensive income or loss. Gains and losses on the sale of available for sale securities are recorded on the trade date and are determined using the specific-identification method. Premiums and discounts on securities available for sale are recognized in interest income using the interest method. Our investment portfolio decreased$17.4 million , or 8.7%, to$183.8 million compared toDecember 31, 2021 , due to$25.1 million in investment calls, redemptions and paydowns, coupled with unrealized losses of$21.5 million during the year, partially offset by purchases of approximately$30.7 million in MBS CDD, and municipal bonds. To supplement interest income earned on the Company's loan portfolio, the Company invests in mortgage-backed securities, government agency bonds, corporate bonds, community development district bonds, and equity securities (including mutual funds). 41
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The following tables summarize the book value, fair value, contractual
maturities and weighted-average yields of investment securities as of
September 30, 2022 December 31, 2021
(Dollars in thousands) Book Value Fair Value Book Value Fair Value
Securities Available for Sale - taxable
Small Business Administration loan pools $ 31,902 $ 31,514 $ 40,368 $ 39,934
Mortgage-backed securities (1) 135,017 114,834 131,273
130,103
United States agency obligations 2,947 2,667 3,939 3,986 Corporate bonds 1,500 1,502 1,500 1,513 Total $ 171,366 $ 150,517 $ 177,080 $ 175,536 Securities Available for Sale - tax-exempt Community Development District bonds $ 25,343 $ 24,014 $ 17,163 $ 17,674 Municipals 3,148 2,849 1,051 1,091 Total $ 28,491 $ 26,863 $ 18,214 $ 18,765 Securities Held to Maturity Mortgage-backed securities $ 194 $ 178 $ 236 $ 242 Total $ 194 $ 178 $ 236 $ 242 Equity Securities Mutual Funds $ 5,325 $ 5,325 $ 5,838 $ 5,838 Other equity securities 857 857 800 800 Total $ 6,182 $ 6,182 $ 6,638 $ 6,638 (1) As ofSeptember 30, 2022 residential mortgage-backed is$91.1 million and commercial mortgage-backed is$23.7 million . As ofDecember 31, 2021 residential mortgage-backed is$104.0 million and commercial mortgage-backed is$26.1 million . 42
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More than One Year More than Five Years
One Year or Less Through Five Years Through 10 Years More than 10 Years Total
Weighted Weighted Weighted Weighted Weighted
As of September 30, 2022 Average Average Average Average Average
(Dollars in thousands) Book Value Yield (1) Book Value Yield (1) Book Value Yield (1) Book Value Yield (1) Book Value Fair Value Yield (1)
Available for Sale - taxable
SBA loan pools $ - - % $ 333 2.09 % $ 16,111 2.52 % $ 15,458 2.74 % $ 31,902 $ 31,514 2.62 %
Mortgage-backed securities - - % 1,064 1.23 % 3,485 1.01 % 130,468 1.84 % 135,017 114,834 1.82 %
United States agency
obligations - - % 1,002 2.66 % 1,945 1.31 % - - % 2,947 2,667 1.77 %
Corporate bonds 1,500 4.62 % - - % - - % - - % 1,500 1,502 4.62 %
Total $ 1,500 4.62 % $ 2,399 1.95 % $ 21,541 2.17 % $ 145,926 1.93 % $ 171,366 $ 150,517 1.99 %
Available for Sale -
tax-exempt
CDD bonds $ 3,789 4.12 % $ 20,914 4.07 % $ 640 3.50 % $ - - % $ 25,343 $ 24,014 4.07 %
Municipals - - % 1,041 2.27 % 2,107 4.20 % - - % 3,148 2,849 3.56 %
Total $ 3,789 4.12 % $ 21,955 3.98 % $ 2,747 4.04 % $ - - % $ 28,491 $ 26,863 4.01 %
Held to Maturity
Mortgage-backed securities - - % - - % - - % 194 2.91 % 194 178 2.91 %
Total $ - - % $ - - % $ - - % $ 194 2.91 % $ 194 $ 178 2.91 %
Equity Securities
Mutual Funds 5,325 1.41 % - - % - - % - - % 5,325 5,325 1.41 %Other equity securities 857 - % - - % - - % - - % 857 857 - % Total$ 6,182 1.21 % $ - - % $ - - % $ - - %$ 6,182 $ 6,182 1.21 % (1)Weighted average yield is calculated by assigning a weight amount to each investment by type and multiplying the weight amount times the outstanding yield to obtain the individual yield.
Loan Portfolio
Our primary source of income is derived from interest earned on loans. Our loan portfolio consists of loans secured by real estate as well as commercial business loans, construction and development and other consumer loans. Our loan clients primarily consist of small to medium sized businesses, the owners and operators of these businesses as well as other professionals, entrepreneurs, and high net worth individuals. Our owner-occupied and investment commercial real estate loans, residential construction loans and commercial business loans provide us with higher risk-adjusted returns, shorter maturities, and more sensitivity to interest rate fluctuations, and are complemented by our relatively lower risk residential real estate loans to individuals. Commercial Real Estate Loans. We originate both owner-occupied and non-owner-occupied commercial real estate loans. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. Commercial real estate loans that are secured by owner-occupied commercial real estate and primarily supported by operating cash flows are also included in this category of loans. As ofSeptember 30, 2022 , we had$371.1 million of owner-occupied commercial real estate loans and$626.4 million of investment commercial real estate loans, representing 37.2% and 62.8%, respectively, of our commercial real estate portfolio. As ofSeptember 30, 2022 , the average loan balance of loans in our commercial real estate loan portfolio was approximately$1.5 million for owner-occupied and$2.7 million for non-owner occupied. Commercial real estate loan terms are generally extended for 10 years or less and amortize generally over 25 years or less. Terms of 15 years are permitted where the loan is fully amortized over the term of the loan. The maximum loan to value is generally, 80% of the market value or purchase price, but may be as high as 90% for SBA 504 owner-occupied loans. As ofSeptember 30, 2022 , we did not have any commercial real estate loans with a loan to value over 100%. Our credit policy also usually requires a minimum debt service coverage ratio of 1.20x. As ofSeptember 30, 2022 , our weighted-average loan-to-value ratios for owner-occupied and non-owner-occupied commercial real estate were 49.0% and 51.2%, respectively and debt service coverage ratios were 3.04x and 2.03x, respectively. The interest rates on our commercial real estate loans have initial fixed rate terms that adjust typically at five years, and we routinely charge an origination fee for our services. We generally require personal guarantees from the principal owners of the business, supported by a review of the principal owners' personal financial statements and global debt service obligations. All commercial real estate loans with an outstanding balance of$1.0 million or more are reviewed at least annually. The properties securing the portfolio are located primarily throughout our market and are 43
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generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.
As of September 30, 2022 As of December 31, 2021
(Dollars in thousands) Amount Percent Amount Percent
Commercial Real Estate
Auto (Car Lot/Auto Repair) $ 26,415 2.6% $ 27,419 3.0%
Educational Facility 28,398 2.8% 32,281 3.6%
Gas Station 67,740 6.8% 60,854 6.7%
Hotel 98,168 9.8% 75,617 8.4%
Mixed Use 55,170 5.5% 28,762 3.2%
Multifamily 140,377 14.1% 140,496 15.6%
Office 138,199 13.9% 109,010 12.1%
Other / Special Use 63,191 6.3% 56,276 6.2%
Religious Facility 9,594 1.0% 10,679 1.2%
Retail 226,078 22.7% 209,283 23.2%
Vacant Land 5,800 0.6% 6,523 0.7%
Warehouse 138,348 13.9% 145,454 16.1%
Total $ 997,478 100.0% $ 902,654 100.0%
As of September 30, 2022 As of December 31, 2021
(Dollars in thousands) Amount Percent Amount Percent
Commercial Real Estate
Broward $ 151,827 15.2% $ 111,224 12.3%
Miami-Dade 536,932 53.9% 559,966 62.0%
Palm Beach 188,476 18.9% 139,517 15.5%
Other FL County 111,060 11.1% 49,892 5.5%
Out of State 9,183 0.9% 42,055 4.7%
Total $ 997,478 100% $ 902,654 100.0%
As of
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 ofSeptember 30, 2022 , our weighted average loan-to-value ratio on our construction, vacant land, and land development loans were 51.8%, 48.2%, and 49.4%, respectively. We require construction and development loans to establish an interest reserve account, which is sufficient to pay the loan through completion of the project. We conduct semi-annual stress testing of our construction loan portfolio and closely monitor underlying real estate conditions as well as our borrowers' trends of sales valuations as compared to underwriting valuations as part of our ongoing risk management efforts. We also closely monitor our borrowers' progress in construction build out and strictly enforce our original underwriting guidelines for construction milestones and completion timelines. 44
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As of September 30, 2022 As of December 31, 2021
(Dollars in thousands) Amount Percent Amount Percent
Construction & Development
1 - 4 Family Construction $ 61,946 48.1 % $ 47,164 51.5 %
Land Development 20,946 16.3 % 9,620 10.5 %
Vacant Land 45,848 35.7 % 34,736 38.0 %
Total $ 128,570 100.0 % $ 91,520 100.0 %
As of September 30, 2022 As of December 31, 2021
(Dollars in thousands) Amount Percent Amount Percent
Construction & Development
Broward $ 3,887 3.0% $ 1,194 1.3%
Miami-Dade 89,256 69.4% 67,562 73.9%
Palm Beach 25,652 20.0% 21,080 23.0%
Other FL County 4,070 3.2% 1,684 1.8%
Out of State 5,705 4.4% - -%
Total $ 128,570 100.0% $ 91,520 100.0%
As of
Residential Real Estate Loans. We offer one-to-four family mortgage loans primarily on owner-occupied primary residences and, to a lesser extent, investor-owned residences, which make up approximately 14.2% of our residential loan portfolio. Our residential loans also include home equity lines of credit, which totaled approximately$44.0 million , or approximately 9.7% of our residential loan portfolio as ofSeptember 30, 2022 . The average loan balance of closed-end residential loans in our residential portfolio was approximately$0.9 million as ofSeptember 30, 2022 . As ofSeptember 30, 2022 , we did not have any residential real estate loans with a loan to value over 100%. Our one-to-four family residential loans have a relatively small balance spread between many individual borrowers compared to our other loan categories. Our owner-occupied residential real estate loans usually have fixed rates for five, seven or ten years and adjust on an annual basis after the initial term based on a typical maturity of 30 years. Upon the implementation of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the origination, closing and servicing of the traditional residential loan products became much more complex, which led to increased cost of compliance and training. As a result, many banks exited the business, which created an opportunity for the banks that remained in the space. While the use of technology, and other related origination strategies have allowed non-bank originators to gain significant market share over the last several years, traditional banks that made investments in personnel and technology to comply with the new requirements have typically experienced loan growth. Unlike many of our competitors, we have been able to effectively compete in the residential loan market, while simultaneously doing the same in the commercial loan market which has enabled us to establish a broader and deeper relationship with our borrowers. Additionally, by offering a full line of residential loan products, the owners of the many small to medium sized businesses that we lend to use us, instead of a competitor, for financing a personal residence. This greater bandwidth to the same market has been a significant contributor to our growth and market share inSouth 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, 2022 As of December 31, 2021 (Dollars in thousands) Amount Percent LTV (%) Amount Percent LTV (%)Residential Real Estate Owner Occupied$ 344,292 76.1% 55.7 %$ 272,858 72.3% 57.8 % Investor Owned Residences 64,202 14.2% 53.4 % 54,698 14.5% 50.7 % HELOC 44,027 9.7% 56.6 % 49,955 13.2% 57.1 % Total$ 452,521 100.0%$ 377,511 100.0% Loans held for sale $ - 100.0%$ 165 100.0% 45
-------------------------------------------------------------------------------- Table of Contents Commercial Loans (non-PPP). In addition to our other loan products, we provide general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products, primarily in our market, and underwritten based on each borrower's ability to service debt from income. These loans are primarily made based on the identified cash flows of the borrower, as determined based on a review of the client's financial statements, and secondarily, on the underlying collateral provided by the borrower. The average loan balance of the loans in our commercial loan portfolio, excluding ProfessionalBank PPP loans was$0.9 million as ofSeptember 30, 2022 . As ofSeptember 30, 2022 , non-ProfessionalBank PPP commercial loans totaled$397.7 million , and ProfessionalBank PPP commercial loans totaled$2.6 million . For commercial loans over$0.5 million , a global cash flow analysis is generally required, when appropriate, which forms provides for a part of the basis for the credit approval. "Global cash flow" is defined as a cash flow calculation which includes all income sources of all principals in the transaction as well as all debt payments, including the debt service associated with the proposed transaction. In general, a minimum 1.20x debt service coverage is preferred, but in no event may the debt service coverage ratio be less than 1.00x. As ofSeptember 30, 2022 , the debt service coverage ratio for our Bank commercial loan portfolio was approximately 2.51x for non-ProfessionalBank PPP loans, excluding approximately 2.7% of the commercial loan portfolio that is cash secured. Most commercial business loans, which exclude ProfessionalBank 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 ofSeptember 30, 2022 andDecember 31, 2021 . As of September 30, 2022 As of December 31, 2021 (Dollars in thousands) Amount Percent Amount Percent Commercial Loans (non-PPP) Business Products $ 4,529 1.1% $ 13 -% Business Services 69,319 17.4% 73,868 22.7% Communication 13,495 3.4% 389 0.1% Construction 40,849 10.3% 31,285 9.6% Finance 130,271 32.8% 100,849 31.1% Healthcare 22,827 5.7% 23,564 7.2% Services 53,156 13.4% 34,112 10.5% Technology 6,990 1.8% 2,979 0.9% Trade 43,800 11.0% 47,522 14.6% Transportation 1,296 0.3% 1,593 0.5% Other 11,193 2.8% 9,241 2.8% Total $ 397,725 100.0% $ 325,415 100.0% Consumer and Other Loans. We offer consumer, or retail credit, to individuals for household, family, or other personal expenditures. Generally, these are either in the form of closed-end/installment credit loans or open-end/revolving credit loans. Occasionally, we will make unsecured consumer loans to highly qualified clients in amounts up to$250,000 with up to three-year repayment terms. 46
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The repayment of loans is a source of additional liquidity for us. The following table details maturities and sensitivity to interest rate changes for our loan portfolio onSeptember 30, 2022 andDecember 31, 2021 . September 30, 2022 Due in One Due in One to Due in Five to Due After (Dollars in thousands) Year or Less Five Years Fifteen Years Fifteen Years Total Commercial Real Estate$ 76,961 $ 235,371 $ 663,383 $ 21,763 $ 997,478 Residential Real Estate 21,439 16,755 18,814 395,513 452,521 Commercial* 116,176 114,114 142,215 27,838 400,343 Construction and Development 78,238 11,538 5,373 33,421 128,570 Consumer and Other 5,560 7,416 13,007 - 25,983 Total loans$ 298,374 $ 385,194 $ 842,792 $ 478,535$ 2,004,895 Amounts with fixed rates$ 104,668 $
302,817
$ 193,706 $ 82,377 $ 17,919 $ 23,163 $ 317,165 *Includes Paycheck Protection Program (PPP) loans. December 31, 2021 Due in One Due in One to Due in Five to Due After (Dollars in thousands) Year or Less Five Years Fifteen Years Fifteen Years Total Commercial Real Estate$ 87,405 $ 233,829 $ 567,349 $ 14,071 $ 902,654 Residential Real Estate 10,201 21,210 15,904 330,196 377,511 Commercial* 113,129 131,332 111,645 27,924 384,030 Construction and Development 40,851 17,029 3,141 30,499 91,520 Consumer and Other 4,226 7,444 9,779 - 21,449 Total loans$ 255,812 $ 410,844 $ 707,818 $ 402,690$ 1,777,164 Amounts with fixed rates$ 98,992 $
327,126
$ 156,820 $ 83,718 $ 34,437 $ 17,027 $ 292,002 *Includes Paycheck Protection Program (PPP) loans. Nonperforming Assets Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management's opinion, reasonably assured. Any loan which the Bank deems to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. Loans that are past due for 180 days or more are charged off unless the loan is well secured and in the process of collection. We currently have no loans accruing over 90 days or greater past due as ofSeptember 30, 2022 . We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio, such as annual reviews of the underlying financial performance of all commercial loans in excess of$1.0 million . We also engage in semi-annual stress testing of the loan portfolio, and proactive collection and timely disposition of past due loans. Our bankers follow established underwriting guidelines, and we also monitor our delinquency levels for any negative trends. As a result, we have, in recent years, experienced a relatively low level of nonperforming assets. We had nonperforming assets of$1.8 million as ofSeptember 30, 2022 , or 0.07% of total assets. We had nonperforming assets 47
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of$2.1 million as ofDecember 31, 2021 , or 0.08% of total assets. We believe that our low loan-to-value loan portfolio is well positioned to withstand these types of discrete events as they occur from time to time. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions. September 30, December 31, (Dollars in thousands) 2022 2021 Nonaccrual Loans Commercial real estate $ 297 $ - Residential real estate - - Commercial 1,468 1,468 Construction and development - - Consumer and other loans - 654 Accruing loans 90 or more days past due - - Total nonperforming loans $ 1,765 $ 2,122 Other real estate owned - - Total nonperforming assets $ 1,765 $ 2,122 Restructured loans-nonaccrual $ - $ - Restructured loans-accruing $ 2 $ 55 Ratio of nonperforming loans to total loans 0.09% 0.12% Ratio of nonperforming assets to total assets 0.07% 0.08% Credit Quality Indicators We strive to manage and control credit risk in our loan portfolio by adhering to well-defined underwriting criteria and account administration standards established by our management team and approved by our Board of Directors ("Board"). We employ a dedicatedChief Credit Officer and have established a Risk Committee at the Bank level which oversees, among other things, risks associated with our lending activities and enterprise risk management. Our written loan policies document underwriting standards, approval levels, exposure limits and other limits or standards that our management team and Board deem appropriate for an institution of our size and character. Loan portfolio diversification at the obligor, product and geographic levels are actively managed to mitigate concentration risk, to the extent possible. In addition, credit risk management includes an independent credit review process that assesses compliance with policies, risk rating standards and other critical credit information. In addition, we adhere to sound credit principles and evaluate our clients' borrowing needs and capacity to repay, in conjunction with their character and financial history. Our management team and Board place significant emphasis on balancing a healthy risk profile and sustainable growth. Specifically, our approach to lending seeks to balance the risks necessary to achieve our strategic goals while ensuring that our risks are appropriately managed and remain within our defined limits. We believe that our credit culture is a key factor in our relatively low levels of nonperforming loans and nonperforming assets compared to other institutions within our market. We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt including: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, all credits greater than$1.0 million , other than residential real estate loans, are reviewed no less than annually to monitor and adjust, if necessary, the credit risk profile. Loans classified as "substandard" or "special mention" are reviewed quarterly for further evaluation to determine if they are appropriately classified and whether there is any impairment. Beyond the annual review, all loans are graded at initial issuance. In addition, during the renewal process of any loan, as well as if a loan becomes past due, we will determine the appropriate loan grade. Loans excluded from the review process above are generally classified as "pass" credits until: (a) they become past due; (b) management becomes aware of deterioration in the creditworthiness of the borrower; or (c) the client contacts us for a modification. In these circumstances, the loan is specifically evaluated for potential reclassification to special mention, substandard, doubtful, or even a charged-off status. See Note 4 - Loans to the Consolidated Financial Statements (unaudited) datedSeptember 30, 2022 , for additional information regarding risk category of loans by class of loans. 48
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Allowance for Loan Losses
We believe that we maintain our allowance for loan losses at a level sufficient
to provide for probable incurred credit losses inherent in the loan portfolio as
of the balance sheet date. Credit losses arise from the borrowers' inability or
unwillingness to repay, and from other risks inherent in the lending process
including collateral risk, operations risk, concentration risk, and economic
risk. We consider all of these risks of lending when assessing the adequacy of
our allowance. The allowance for loan losses is established through a provision
charged to expense. Loans are charged-off against the allowance when losses are
probable and reasonably quantifiable. Our allowance for loan losses is based on
management's judgment of overall credit quality, which is a significant estimate
based on a detailed analysis of the loan portfolio. Our allowance can and will
change based on revisions to our assessment of our loan portfolio's overall
credit quality and other risk factors both internal and external to us.
We evaluate the adequacy of the allowance for loan losses on a quarterly basis.
The allowance consists of two components. The first component consists of those
amounts reserved for impaired loans. A loan is deemed impaired when, based on
current information and events, it is probable that the Bank will not be able to
collect all amounts due (principal and interest), according to the contractual
terms of the loan agreement. Loans are monitored for potential impairment
through our ongoing loan review procedures and portfolio analysis. Classified
loans and past due loans over a specific dollar amount, and all troubled debt
restructurings are individually evaluated for impairment.
The approach for assigning reserves for the impaired loans is determined by the
dollar amount of the loan and loan type. Impairment measurement for loans over a
specific dollar are determined on an individual loan basis with the amount
reserved dependent on whether repayment of the loan is dependent on the
liquidation of collateral or from some other source of repayment. If repayment
is dependent on the sale of collateral, the reserve is equivalent to the
recorded investment in the loan less the fair value of the collateral after
estimated sales expenses. If repayment is not dependent on the sale of
collateral, the reserve is equivalent to the recorded investment in the loan
less the estimated cash flows discounted using the loan's effective interest
rate. The discounted value of the cash flows is based on the anticipated timing
of the receipt of cash payments from the borrower. The reserve allocations for
individually measured impaired loans are sensitive to the extent market
conditions or the actual timing of cash receipts change. Impairment reserves for
smaller-balance loans under a specific dollar amount are assigned on a pooled
basis utilizing loss factors for impaired loans of a similar nature.
The second component is a general reserve on all loans other than those
identified as impaired. General reserves are assigned to various homogenous loan
pools, including commercial, commercial real estate, construction and
development, residential real estate, and consumer. General reserves are
assigned based on historical loan loss ratios determined by loan pool and
internal risk ratings that are adjusted for various internal and external risk
factors unique to each loan pool.
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The following table analyzes the activity in the allowance for the three and
nine months ended
For the Three Months Ended For the Nine Months Ended September
September 30, 30,
(Dollars in thousands) 2022 2021 2022 2021
Balance at beginning of period $ 15,142 $ 10,418 $ 12,704 $ 16,259
Charge-offs
Commercial real estate - - - -
Residential real estate - - - -
Commercial - - - (7,641)
Construction and development - - - -
Consumer and other - - (653) -
Total Charge-offs - - (653) (7,641)
Recoveries
Commercial real estate - - - -
Residential real estate - - - -
Commercial - - - -
Construction and development - - - -
Consumer and other - - - -
Total recoveries - - - -
Net charge-offs - - (653) (7,641)
Provision for loan losses 1,343 1,060 4,434 2,860
Balance at end of period $ 16,485 $ 11,478 $ 16,485 $ 11,478
Ratio of net charge-offs to average
loans - % - % 0.05 % 0.61 %
September 30, December 31,
2022 2021
ALLL as a percentage of total loans at end of period 0.82 % 0.74 %
ALLL as a percentage of loans (excluding PPP loans) at end of period
0.82 % 0.76 %
ALLL as a multiple of net charge-offs (1) 18.4 1.5
ALLL as a percentage of nonperforming loans 934.0 % 598.7 %
(1) Calculated for the
Our allowance for loan losses was$16.5 million onSeptember 30, 2022 , compared to$12.7 million onDecember 31, 2021 , an increase of 29.8%. The increase was primarily due to higher loan production volume during the nine months endedSeptember 30, 2022 . We had charge-offs of$0.7 million during the nine months endedSeptember 30, 2022 , compared to charge-offs of$7.6 million during the same period in 2021. There were minimal changes to qualitative loss factors and historical loss factors for the current period with the principal driver for the increased allowance being loan growth. OnSeptember 30, 2022 , our allowance for loan losses was 0.82% of total gross loans (excluding ProfessionalBank PPP loans) and provided coverage of 934.0% of our nonperforming loans, compared to an allowance for loan losses to total gross loans (net of overdrafts) ratio of 0.76% as ofDecember 31, 2021 . See Reconciliation of non-GAAP Financial Measures. We believe our allowance onSeptember 30, 2022 , was adequate to absorb probable incurred losses inherent in our loan portfolio. The following table provides an allocation of the allowance for loan losses to specific loan types as ofSeptember 30, 2022 , andDecember 31, 2021 . 50
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September 30, 2022 December 31, 2021
(Dollars in thousands) Allowance Percent Allowance Percent
Commercial real estate $ 5,889 35.7% $ 4,471 35.2%
Residential real estate 3,580 21.7% 2,339 18.4%
Commercial 5,970 36.3% 4,637 36.5%
Construction and development 876 5.3% 471 3.7%
Consumer and other 170 1.0% 786 6.2%
Total allowance for loan losses $ 16,485 100.0% $ 12,704 100.0%
OnSeptember 30, 2022 , the recorded investment in impaired loans (consisting of nonaccrual loans, troubled debt restructured loans, loans past due 90 days or more and still accruing interest and other loans based on management' judgment) was$1.8 million , of which$1.8 million required a specific reserve of$0.8 million , compared to a recorded investment in impaired loans of$2.1 million , with a recorded investment of$2.1 million , on nonaccrual with a required specific reserve of$1.3 million onDecember 31, 2021 . There was also a substandard accruing loan with a recorded investment of$2.3 million , with no allowance onDecember 31, 2021 . OnSeptember 30, 2022 , we had one loan amounting to$2.0 thousand that was considered to be a troubled debt restructuring ("TDR"), compared to one loan amounting to$55 thousand onDecember 31, 2021 . We did not allocate any specific reserves to loans that have been modified as TDRs as ofSeptember 30, 2022 , andDecember 31, 2021 . Deposits Deposits are our primary source of funding. We offer a variety of deposit products including checking, NOW, savings, money market, and time deposit accounts all of which we actively market at competitive pricing. We generate deposits from our consumer and commercial clients through the efforts of our private bankers. We had public deposits of$90.5 million and$84.4 million , onSeptember 30, 2022 , andDecember 31, 2021 , respectively. Additionally, we supplement our deposits with wholesale funding sources such as Qwickrate and brokered deposits. However, we do not significantly rely on wholesale funding sources, which are generally viewed as less stable compared to core deposits due to the relatively higher price elasticity of demand for deposits from wholesale sources. As ofSeptember 30, 2022 , andDecember 31, 2021 , these wholesale deposits represented 0.8% and 3.9%, respectively, of our total deposits. Average interest-bearing deposits decreased$9.5 million , or 0.6%, during the three months endedSeptember 30, 2022 , compared to the same time period in 2021, primarily due to a$88.4 million decrease in certificates of deposit account balances and a$28.1 million decrease in brokered deposits, partially offset by a$90.5 million increase in money market account balances and a$13.3 million increase in NOW accounts from organic growth. In order to fund our loan growth, our bankers are actively involved with our strategic efforts and are incentivized to grow core deposits. The average rate paid on interest-bearing deposits increased 19 basis points to for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . For the Three Months Ended September 30, 2022 For the Three Months Ended September 30, 2021 Average Average (Dollars in thousands) Balance Average Rate Balance Average Rate NOW accounts $ 309,386 0.22% $ 296,066 0.19% Money market accounts 938,898 0.71% 848,408 0.39% Brokered deposits 20,422 1.27% 48,517 0.48% Savings accounts 16,040 0.10% 12,867 0.10% Certificates of deposit 168,907 0.61% 257,280 0.68% Total interest-bearing deposits 1,453,653 0.59% 1,463,138 0.40% Noninterest-bearing deposits 758,135 -% 810,042 -% Total deposits $ 2,211,788 0.39% $ 2,273,180 0.26% 51
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Average interest-bearing deposits increased$244.8 million , or 18.1%, during the nine months endedSeptember 30, 2022 , compared to the same time period in 2021 primarily due to$217.7 million increase in money market account balances and a$48.0 million increase in NOW accounts from organic growth, partially offset by a$29.3 million decrease in certificate of deposit account balances. The average rate paid on interest-bearing deposits increased 2 basis points to for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . For the Nine Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 Average Average (Dollars in thousands) Balance Average Rate Balance Average Rate NOW accounts $ 321,587 0.18% $ 273,590 0.20% Money market accounts 998,530 0.48% 780,825 0.40% Brokered deposits 42,167 0.59% 36,555 0.56% Savings accounts 14,177 0.10% 11,358 0.10% Certificates of deposit 219,124 0.62% 248,467 0.71% Total interest-bearing deposits 1,595,585 0.44% 1,350,795
0.42%
Noninterest-bearing deposits 769,026 -% 742,530 -% Total deposits $ 2,364,611 0.30% $ 2,093,325 0.27% The following table presents the ending balances and percentage of total deposits for the periods indicated. As ofSeptember 30, 2022 , we had approximately$18.4 million in brokered deposits representing 0.8% of total deposits. Brokered deposits decreased approximately$40.0 million , or 68.5%, compared toDecember 31, 2021 . We did not obtain these brokered deposits through a deposit listing agency, but rather through an existing relationship with the Bank. However, these deposits meet the regulatory definition of brokered deposits and are reported accordingly. September 30, 2022 December 31, 2021 Ending Ending (Dollars in thousands) Balance % of Total Balance % of Total NOW accounts $ 308,167 14.1 % $ 310,362 13.1 % Money market accounts 944,728 43.2 % 1,055,033 44.5 % Brokered deposits 18,407 0.8 % 58,365 2.5 % Savings accounts 16,966 0.8 % 12,558 0.5 % Certificates of deposit 141,981 6.5 % 261,067 11.0 % Total interest-bearing deposits 1,430,249 65.4 % 1,697,385 71.6 % Noninterest-bearing deposits 758,042 34.6 % 674,003 28.4 % Total deposits(1)$ 2,188,291 100.0 %$ 2,371,388 100.0 %
__________________________________
(1)Balance Sheet does not illustrate brokered deposits as presented above.
For more information regarding the maturities of our time deposits including time deposits that meet or exceed the$250,000 FDIC insurance limit as ofSeptember 30, 2022 , andDecember 31, 2021 , refer to Note 6 - Deposits to the Consolidated Financial Statements (unaudited) datedSeptember 30, 2022 .
Debt
See Note 7 - Debt and Borrowings to the Consolidated Financial Statements
(unaudited) dated
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
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collateral for potential FHLB borrowings and FHLB letters of credit. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As ofSeptember 30, 2022 , we had no outstanding advances, compared to$35.0 million as ofDecember 31, 2021 . As ofSeptember 30, 2022 andDecember 31, 2021 , we had$163.9 million and$113.0 million , respectively, in additional available borrowing capacity from the FHLB based on the collateral that we have currently pledged. The following table sets forth certain information on our FHLB borrowings during the periods presented. September 30, 2022 December 31, 2021 (Dollars in thousands) Weighted average interest rate at period-end -% 2.04% Maximum month-end balance during period $ 35,000 $ 35,000 Average balance outstanding during period 9,121 36,918 Weighted average interest rate during period 1.98% 2.01%
Liquidity and Capital Resources
Capital Resources
Stockholders' equity increased$6.3 million , or 2.7%, to$237.9 million onSeptember 30, 2022 , compared toDecember 31, 2021 , primarily due an increase in retained earnings of$17.9 million and an increase in additional paid in capital of$4.7 million for the nine months endedSeptember 30, 2022 , partially offset by a decrease of$16.0 million in accumulated other comprehensive net income. We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum ratios of common equity Tier 1, Tier 2, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. We are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. As ofSeptember 30, 2022 , we were in compliance with all applicable regulatory capital requirements to which we were subject, and the Bank was classified as "well capitalized" for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we intend to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us. Based on changes to theFederal Reserve's definition of a "Small Bank Holding Company " that increased the threshold to$3 billion in assets inAugust 2018 , the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the$3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company's ratios are included in following discussion as well, all of which would have exceeded the "well-capitalized" level had the Company been subject to separate capital minimums. During the nine months endedSeptember 30, 2022 , the Company infused$7.5 million of capital into the Bank to support asset growth and maintain well capitalized ratios at the Bank. 53
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The following table presents our regulatory capital ratios as ofSeptember 30, 2022 , andDecember 31, 2021 . The amounts presented exclude the capital conservation buffer. Minimum to be well Actual Minimum for capital adequacy capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount RatioSeptember 30, 2022 Total capital ratio Bank$ 257,261 12.5 %$ 164,087 8.0 %$ 205,109 10.0 % Company 271,324 13.2 % 164,087 8.0 % N/A N/A Tier 1 Capital ratio Bank 239,468 11.7 % 123,066 6.0 % 164,087 8.0 % Company 229,064 11.1 % 123,066 6.0 % N/A N/A Tier 1 Leverage ratio Bank 239,468 9.6 % 99,364 4.0 % 124,205 5.0 % Company 229,064 9.2 % 99,364 4.0 % N/A N/A Common Equity Tier 1 Bank 239,468 11.7 % 92,299 4.5 % 133,321 6.5 % Company 229,064 11.1 % 92,299 4.5 % N/A N/A Minimum to be well Actual Minimum for capital adequacy capitalized (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2021 Total capital ratio Bank $ 222,696 12.9% $ 138,435 8.0% $ 173,043 10.0% Company 220,206 12.7% 138,435 8.0% N/A N/A Tier 1 capital ratio Bank 208,997 12.1% 103,826 6.0% 138,435 8.0% Company 206,507 11.9% 103,826 6.0% N/A N/A Tier1 leverage ratio Bank 208,997 7.7% 107,877 4.0% 134,846 5.0% Company 206,507 7.7% 107,877 4.0% N/A N/A Common equity tier 1 capital ratio Bank 208,997 12.1% 77,869 4.5% 112,478 6.5% Company 206,507 11.9% 77,869 4.5% N/A N/A Liquidity In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to fund loan commitments, purchase securities, accommodate deposit withdrawals or repay other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our Asset Liability Management Committee, or ALCO, and senior management, including our Liquidity Contingency Policy, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our clients' deposits, supplemented by our short-term borrowings, primarily from FHLB borrowings. We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements. 54
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OnSeptember 30, 2022 , we had the ability to generate approximately$459.3 million in additional liquidity through all of our available resources beyond our overnight funds sold position. During the nine months endedSeptember 30, 2022 , the Company issued$25.0 million in subordinated notes payable due 2032 and also increased the availability under its revolving line of credit atValley National Bank, N.A. from$10.0 million to$25.0 million . In addition to the primary borrowing outlets mentioned above, we also have the ability to generate liquidity by borrowing from the Federal Reserve Discount Window and through brokered deposits. We recognize the importance of maintaining liquidity and have developed a Contingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity. We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases, certain credit facilities may no longer be available. We conduct quarterly liquidity stress tests and the results are reported to our Asset-Liability Management Committee and our Board. We believe the liquidity available to us is currently sufficient to meet our ongoing needs. We also view our investment portfolio as a liquidity source and have the option to pledge securities in our portfolio as collateral for borrowings or deposits, and/or sell selected securities. OnSeptember 30, 2022 , andDecember 31, 2021 , there were$265.3 million and$235.3 million in total loans pledged to the FHLB for liquidity. Our investment portfolio primarily consists of debt issued by the federal government and governmental agencies. The weighted-average life of our investment portfolio was 5.90 years and 4.41 years onSeptember 30, 2022 , andDecember 31, 2021 , respectively. The duration of our investment portfolio was 4.75 years and 4.08 years onSeptember 30, 2022 , andDecember 31, 2021 , respectively. As we deploy our capital and continue to grow our operations, we maintain cash in our holding company for added liquidity. As ofSeptember 30, 2022 , cash held at the holding company was approximately$9.2 million . Our average net overnight funds sold position (defined as funds sold plus interest-bearing deposits with other banks less funds purchased) was$21.9 million during three months endedSeptember 30, 2022 , compared to an average net overnight funds sold position of$42.9 million for the year endedDecember 31, 2021 . As ofSeptember 30, 2022 , cash held at theFederal Reserve was approximately$111.9 million compared to$544.0 million as ofDecember 31, 2021 . We expect our capital expenditures over the next 12 months to be approximately$1.1 million , which will consist primarily of investments in digital capabilities, technology purchases for our new banking offices, business applications and information technology security needs. We expect that these capital expenditures will be funded with existing resources without impairing our ability to meet our ongoing obligations.
Inflation
We are experiencing and may continue to experience labor cost inflation and constraints in hiring qualified employees. We aim to offset the potential unfavorable impact of these items with automation, productivity improvements, and other initiatives. In general, the impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment. Assets and liabilities of financial institutions are primarily all monetary in nature, and therefore are principally impacted by interest rates rather than changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. AtSeptember 30, 2022 , inflation was rising at a higher and more sustained level than anticipated by theFederal Reserve . As a result, there were five rate increases for the nine months endedSeptember 30, 2022 , totaling an upward increase of 300 basis points. Another increase of 75 bps occurred onNovember 2, 2022 , and the current market expects another interest rate increase in 2022 that could lead to greater market volatility. 55
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Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. While our liquidity monitoring and management consider both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as ofSeptember 30, 2022 . Due After Due after One Three Due in One Through Three Through Due After (Dollars in thousands) Year or Less Years Five Years Five Years Total Time deposits of$250,000 or less$ 47,062 $ 4,276 $ - $ -$ 51,338 Time deposits of more than$250,000 87,647 6,331 - - 93,978 Operating leases 1,394 2,252 1,060 325 5,031 Subordinated debt - - - 24,467 24,467 Total$ 136,103 $ 12,859 $ 1,060 $ 24,792 $ 174,814 Off-Balance Sheet Items In the normal course of business, we enter into various transactions that, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our clients. These transactions include commitments to extend credit and issue letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. We are not aware of any accounting loss to be incurred by funding these commitments, however we maintain an allowance for off-balance sheet credit risk which is recorded in other liabilities on the consolidated balance sheet. Our commitments associated with outstanding letters of credit and commitments to extend credit as of the date indicated are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. September 30, (Dollars in thousands) 2022 December 31, 2021 Unfunded lines of credit 529,519 415,402 Commitments to extend credit 93,278 108,824 Standby letters of credit 10,972 12,095 Commercial letters of credit 394 2,765
Total credit extension commitments
Unfunded lines of credit represent unused portions of credit facilities to our
current borrowers that represent no change in credit risk in our portfolio.
Lines of credit generally have variable interest rates. The maximum potential
amount of future payments we could be required to make is represented by the
contractual amount of the commitment, less the amount of any advances made.
Letters of credit are conditional commitments issued by us to guarantee the
performance of a client to a third party. In the event of nonperformance by the
client in accordance with the terms of the agreement with the third party, we
would be required to fund the commitment. If the commitment is funded, we would
be entitled to seek recovery from the client from the underlying collateral,
which can include commercial real estate, physical plant and property,
inventory, receivables, cash, or marketable securities.
Our policies generally require that letter of credit arrangements contain
security and debt covenants similar to those contained in loan agreements and
our credit risk associated with issuing letters of credit is similar to the
credit risk involved in extending loan facilities to our clients. The effect on
our revenue, expenses, cash flows, and liquidity of the unused portions of these
letters of credit commitments and letters of credit cannot be precisely
predicted because there is no guarantee that the lines of credit will be used.
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Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition established in the contract, for a specific purpose. Commitments generally have variable interest rates, fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each client's creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit is based on management's credit evaluation of the client. We enter into forward commitments for the delivery of mortgage loans in our current pipeline. Interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitments to fund the loans. These commitments to fund mortgage loans, to be sold into the secondary market, (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. We attempt to minimize our exposure to loss under credit commitments by subjecting them to the same credit approval and monitoring procedures as we do for on-balance sheet instruments.
Certain Performance Metrics
The following table shows the return on average assets (computed as annualized net income divided by average total assets), return on average equity (computed as annualized net income divided by average equity) and average equity to average assets ratios for the three months endedSeptember 30, 2022 , and 2021 and nine months endedSeptember 30, 2022 , and 2021. Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended (Dollars in thousands) September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Return on average assets 1.35 % 0.97 % 0.90 % 0.96 % Return on average equity 14.13 % 11.13 % 10.24 % 10.53 % Average equity to average assets 9.52 % 8.76 % 8.81 % 9.15 %
Market Risk and Interest Rate Sensitivity
Overview
Market risk arises from changes in interest rates, exchange rates, commodity prices, and equity prices. We have risk management policies designed to monitor and limit exposure to market risk and we do not participate in activities that give rise to significant market risk involving exchange rates, commodity prices, or equity prices. In asset and liability management activities, our policies are designed to minimize structural interest rate risk.
Interest Rate Risk Management
Our net income is largely dependent on net interest income. Net interest income
is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest earning assets.
When interest-bearing liabilities mature or reprice more quickly than interest
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when interest
earning assets mature or reprice more quickly than interest-bearing liabilities,
falling market interest rates could result in a decrease in net interest income.
Net interest income is also affected by changes in the portion of interest
earning assets that are funded by interest-bearing liabilities rather than by
other sources of funds, such as noninterest-bearing deposits and stockholders'
equity.
We have established what we believe to be a comprehensive interest rate risk
management policy, which is administered by ALCO. The policy establishes limits
of risk, which are quantitative measures of the percentage change in net
interest income (a measure of net interest income at risk) and the fair value of
equity capital (a measure of economic value of equity, or EVE, at risk)
resulting from a hypothetical change in interest rates for maturities from one
day to 30 years. We measure the potential adverse impacts that changing interest
rates may have on our short-term earnings, long-term value, and liquidity by
employing simulation analysis through the use of computer modeling. The
simulation model captures optionality factors such as call features and interest
rate caps and floors imbedded in investment and loan portfolio contracts. As
with any method of gauging interest rate risk, there are certain shortcomings
inherent in the interest rate modeling methodology used by us. When interest
rates change, actual movements in different categories of interest earning
assets and interest-bearing liabilities, loan prepayments, and withdrawals of
time and other deposits, may deviate significantly from assumptions used in the
model. Finally, the methodology does not measure or reflect the impact that
higher rates may have on adjustable-rate loan clients' ability to service their
debts, or the impact of rate changes on demand for loan and deposit products.
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The balance sheet is subject to testing for interest rate shock possibilities to indicate the inherent interest rate risk. We prepare a current base case and several alternative interest rate simulations (-400, -300, -200, -100, +100, +200, +300 and +400 basis points (bps)), at least once per quarter, and report the analysis to ALCO and our Board. We augment our interest rate shock analysis with alternative interest rate scenarios on a quarterly basis that may include ramps, parallel shifts, and a flattening or steepening of the yield curve (non-parallel shift). In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when other business conditions so dictate. Our goal is to structure the balance sheet so that net interest earnings at risk over a 12-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels. We attempt to achieve this goal by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets, by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by managing the mix of our core deposits, and by adjusting our rates to market conditions on a continuing basis.
Analysis
The following table indicates that, for periods less than one year,
rate-sensitive assets exceeded rate-sensitive liabilities, resulting in a
slightly asset-sensitive position. For a bank with an asset-sensitive position,
otherwise referred to as a positive gap, rising interest rates would generally
be expected to have a positive effect on net interest income, and falling
interest rates would generally be expected to have the opposite effect.
REPRICING GAP
After One After Three
Month Months Greater than
September 30, 2022 Within One Through Three Through Within One One Year
(Dollars in thousands) Month Months 12 Months Year or Nonsensitive Total
Interest Earning Assets
Loans $ 457,601 $ 61,612 $ 262,215 $ 781,428 $ 1,206,982 $ 1,988,410
Loans held for sale - - - - - -
Securities 42,934 6,052 10,422 59,408 124,348 183,756
Interest earning deposits at
other financial institutions 112,571 - - 112,571 44,933 157,504
Federal funds sold 15,762 - - 15,762 - 15,762
FHLB & FRB stock 7,390 - - 7,390 - 7,390
Total interest earning assets
$ 272,637 $ 976,559 $ 1,376,263 $ 2,352,822 Interest-Bearing Liabilities Interest-bearing deposits$ 612,935 $ 22,740 $ 102,333 $ 738,008 $ 546,925 $ 1,284,933 Time deposits 16,548 29,235 88,926 134,709 10,607 145,316
Total interest-bearing deposits
$ 191,259 $ 872,717 $ 557,532 $ 1,430,249 FHLB advances - - - - - - Subordinated debt - - - - 24,467 24,467 Total interest-bearing liabilities$ 629,483 $ 51,975 $ 191,259 $ 872,717 $ 581,999 $ 1,454,716 Period gap$ 6,775 $ 15,689 $ 81,378 $ 103,842 $ 794,264 Cumulative gap$ 6,775 $ 22,464
1.06 % 33.20 % 38.09 % 10.63 % 65.26 %
Ratio of cumulative gap to
cumulative total earning assets 0.29 % 0.95 % 4.41 % 4.41 % 38.17 %
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CASH FLOW GAP
After One After Three
Month Months Greater than
September 30, 2022 Within One Through Three Through Within One One Year
(Dollars in thousands) Month Months 12 Months Year or Nonsensitive Total
Interest Earning Assets
Loans $ 118,656 $ 111,893 $ 288,441 $ 518,990 $ 1,469,420 $ 1,988,410
Loans held for sale - - - - - -
Securities 9,001 3,075 14,674 26,750 157,006 183,756
Interest earning deposits at
other financial institutions 112,570 - - 112,570 44,934 157,504
Federal funds sold 15,762 - - 15,762 - 15,762
FHLB & FRB stock (1) - - - - 7,390 7,390
Total interest earning assets $ 255,989 $ 114,968 $ 303,115 $ 674,072 $ 1,678,750 $ 2,352,822
Interest-Bearing Liabilities
Interest-bearing deposits $ 24,485 $ 48,976 $ 220,398 $ 293,859 $ 991,074 $ 1,284,933
Time deposits 16,548 29,235 88,926 134,709 10,607 145,316
Total interest-bearing deposits 41,033 78,211 309,324 428,568 1,001,681 1,430,249
FHLB advances - - - - - -
Subordinated debt - - - - 24,467 24,467
Total interest-bearing
liabilities $ 41,033 $ 78,211 $ 309,324 $ 428,568 $ 1,026,148 $ 1,454,716
Period gap $ 214,956 $ 36,757 $ (6,209) $ 245,504 $ 652,602
Cumulative gap $ 214,956 $ 251,713
83.97 % 218.94 % 80.99 % 36.42 % 53.50 %
Ratio of cumulative gap to
cumulative total earning assets 9.14 % 10.70 % 10.43 % 10.43 % 38.17 %
(1)Includes FRB and FHLB stock, which has been historically redeemable at par.
Measures of net interest income at risk produced by simulation analysis are indicators of an institution's short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, and do not necessarily indicate the long-term prospects or economic value of the institution. The following table summarizes the results of our net interest income at risk analysis in simulating the change in net interest income and fair value of equity over a 12-month and 24-month horizon as ofSeptember 30, 2022 , andDecember 31, 2021 . Net Interest Income at Risk - 12 months -400bps -300bps -200bps -100bps Flat +100bps +200bps +300bps +400bps Policy Limit (20.0) % (15.0) % (10.0) % (5.0) % - % (5.0) % (10.0) % (15.0) % (20.0) % September 30, 2022 (15.1) % (11.7) % (5.6) % (1.9) % - % 1.7 % 3.3 % 5.0 % 6.6 % December 31, 2021 (6.0) % (4.0) % (1.5) % 1.3 % - % 4.2 % 8.4 % 12.4 % 16.2 % Net Interest Income at Risk - 24 months -400bps -300bps -200bps -100bps Flat +100bps +200bps +300bps +400bps Policy Limit (20.0) % (15.0) % (10.0) % (5.0) % - % (5.0) % (10.0) % (15.0) % (20.0) % September 30, 2022 (24.4) % (19.6) % (11.2) % (4.8) % - % 4.3 % 8.3 % 12.4 % 16.6 % December 31, 2021 (15.6) % (12.5) % (9.1) % (4.7) % - % 6.5 % 12.7 % 18.6 % 24.4 % Using an EVE, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model. This measures the difference between the economic value of our assets and the economic value of our liabilities, which is an estimate of liquidation value. While this provides some value as a risk measurement tool, management believes net interest income at risk is more appropriate in accordance with the going concern principle. 59
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The following table illustrates the results of our EVE analysis as of
Economic Value of Equity -400bps -300bps -200bps -100bps Flat +100bps +200bps +300bps +400bps Policy Limit (30.0) % (20.0) % (15.0) % (10.0) % - % (10.0) % (15.0) % (20.0) % (30.0) %September 30, 2022 (1.9) % (0.4) % 2.3 % 2.6 % - % (3.1) % (6.3) % (9.6) % (13.3) %December 31, 2021 6.7 % 6.2 % 5.9 % 4.8 % - % (3.7) % (7.3) % (11.1) % (15.4) %
Critical Accounting Policies and Estimates
Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Our financial position and results of operations are affected by management's application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include our accounting for the allowance for loan losses and fair value measurements. Significant accounting policies are discussed in the Notes to Consolidated Financial Statements within our Annual Report. There have been no changes in such policies or the application of such policies during the nine months endedSeptember 30, 2022 . InJune 2016 , FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) to replace the incurred loss model with an expected loss model, which is referred to as the current expected CECL model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (i.e. loan commitments, standby letters of credit, financial guarantees and other similar instruments). For Public Business Entities that are non-SEC filers and forSEC filers that are considered small reporting companies, it is effective forJanuary 1, 2023 . The Company's management has selected a credit loss estimation model. Initial data integration with the model is complete, and theCredit Department has performed several test runs with no material differences. The Company established a CECL committee that reviewed a parallel run usingJune 30, 2022 data during the third quarter. The committee is refining the qualitative factors under CECL and finalizing the structural overview document. The Company may recognize an increase in the allowance for credit losses upon adoption, recorded as a one-time cumulative adjustment to retained earnings. However, the magnitude of the impact on the Company's consolidated financial statements has not yet been determined. The Company will adopt this accounting standard effectiveJanuary 1, 2023 .
Explanation of Certain unaudited non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains financial information determined by methods other thanU.S. GAAP, which we refer to "non-GAAP financial measures." The table below provides a reconciliation between these non-GAAP measures and net interest income and total loans held for investment, which are the most comparable GAAP measures. Management uses these non-GAAP financial measures in its analysis of the Company's performance and believes these measures are useful supplemental information that can enhance investors' understanding of the Company's business and performance without considering taxes or provisions for loan losses and can be useful when comparing performance with other financial institutions. However, these non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable GAAP measures. 60
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Reconciliation of non-GAAP Financial Measures
Three Months Ended Nine Months Ended
(Dollar amounts in thousands, except per September 30, September 30, September 30, September 30,
share data) 2022 2021 2022 2021
Net interest income (GAAP) $ 24,797 $ 19,104 $ 65,753 $ 54,185
Total noninterest income 1,223 1,476 4,277 4,897
Total noninterest expense 13,853 11,624 42,952 34,366
Pre-tax pre-provision earnings (non-GAAP) $ 12,167 $ 8,956 $ 27,078 $ 24,716
Total adjustments to noninterest expense (1) $ (957) $ - $ (3,872) $ (684)
Adjusted pre-tax pre-provision earnings
(non-GAAP) $ 13,124 $ 8,956 $ 30,950 $ 25,400
Return on average assets (GAAP) 1.35 % 0.97 % 0.90 % 0.96 %
Annualized pre-tax pre-provision ROAA
(non-GAAP) 1.93 % 1.39 % 1.36 % 1.37 %
Adjusted annualized pre-tax pre-provision
ROAA (non-GAAP) 2.08 % 1.39 % 1.56 % 1.41 %
(1)Adjustments to noninterest expense for the three months ended September 30,
2022 were related to acquisition expenses. Adjustments for the nine months ended
September 30, 2022 , were related to acquisition expenses and severance and
accelerated vesting expense related to the departure of the former Chief
Executive Officer. Adjustments to noninterest expense for the nine months ended
September 30, 2021 were related to change in control payments to two former
Marquis employees.
(Dollar amounts in thousands, except per share data) September 30, 2022 December 31, 2021
Total loans held for investment, net (GAAP) $ 1,988,410 $ 1,764,460
Add allowance for loan loss 16,485 12,704
Total gross loans held for investment 2,004,895 1,777,164
Less Professional Bank net PPP loans $ 2,618 $ 58,615
Total gross LHFI excluding net PPP loans (non-GAAP) 2,002,277 1,718,549
Add purchase accounting loan marks 8,480 13,003
$ 2,010,757 $ 1,731,552
Total gross LHFI excluding net PPP loans (non-GAAP) + PA
marks
ALLL as a % of LHFI (GAAP) 0.82 % 0.71 %
ALLL as a % of total LHFI excluding net PPP loans (non-GAAP) 0.82 % 0.74 %
PA marks + ALLL / LHFI excluding net PPP loans (non-GAAP) 1.24 % 1.48 %
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(Dollar amounts in thousands, except per Three Months Ended Nine Months Ended share data) September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Net interest income (GAAP) $ 24,797
$ 19,104 $ 65,753 $ 54,185 Less: PPP net interest income recognized
(200) (2,151) (2,077) (7,048)
Net interest income excluding PPP (non-GAAP) 24,597 16,953 63,676 47,137 Less: PA premium/discounts (1,504) (1,969) (4,813) (1,969) Net interest income excluding PPP and PA (non-GAAP) $ 23,093
$ 14,984 $ 58,863 $ 45,168 Average interest earning assets (GAAP)
2,342,000 2,431,904 2,503,621 2,290,121
Less: average PPP loans (4,796) (117,256) (22,890) (164,691)
Average interest earning assets, excluding
PPP (non-GAAP) 2,337,204 2,314,648 2,480,731 2,125,430
Add: average PA marks 9,178 14,317 10,631 16,823
Average interest earning assets, excluding
PPP and PA (non-GAAP) $ 2,346,382 $ 2,328,965 $ 2,491,362 $ 2,142,253
Net interest margin (GAAP) 4.20 % 3.12 % 3.51 % 3.16 %
Net interest margin excluding PPP
(non-GAAP) 4.18 % 2.91 % 3.43 % 2.97 %
Net interest margin excluding PPP and PA
(non-GAAP) 3.90 % 2.55 % 3.16 % 2.82 %
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