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PFHD Professional Holding

Filed: 16 Aug 21, 4:25pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

the Securities Exchange Act of 1934

(Mark One)

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

For the quarterly period ended June 30, 2021

OR

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

For the transition period from ___________ to ___________

For the quarterly period ended

    

Commission file

June 30, 2021

number 001-39215

Professional Holding Corp.

(Exact name of Registrant as specified in its charter)

Florida

    

    

46-5144312

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

396 Alhambra Circle, Suite 255

Coral Gables, FL 33134 (786) 483-1757

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

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Class A Common Stock

 

PFHD

 

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Number of shares of common stock outstanding as of August 13, 2021: 13,419,010

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited).

PROFESSIONAL HOLDING CORP.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollar amounts in thousands, except share data)

     

June 30, 

     

December 31, 

2021

2020

ASSETS

 

  

 

  

Cash and due from banks

$

29,803

$

62,305

Interest-bearing deposits

 

586,377

 

129,291

Federal funds sold

 

36,156

 

25,376

Cash and cash equivalents

 

652,336

 

216,972

Securities available for sale, at fair value - taxable

 

100,735

 

65,110

Securities available for sale, at fair value - tax exempt

19,761

22,398

Securities held to maturity (fair value June 30, 2021 – $1,296, December 31, 2020 – $1,561)

 

1,285

 

1,547

Equity securities

 

5,942

 

6,005

Loans, net of allowance of $10,418 and $16,259 as of June 30, 2021 and December 31, 2020, respectively

 

1,680,168

 

1,643,373

Loans held for sale

2,039

1,270

Federal Home Loan Bank stock, at cost

 

2,341

 

3,229

Federal Reserve Bank stock, at cost

 

4,954

 

4,762

Accrued interest receivable

 

5,449

 

6,666

Premises and equipment, net

 

4,000

 

4,370

Bank owned life insurance

 

37,923

 

37,360

Deferred tax asset

9,446

10,525

Goodwill

24,621

24,621

Core deposit intangibles

1,280

1,422

Other assets

 

8,738

 

7,640

Total assets

$

2,561,018

$

2,057,270

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

Deposits

 

 

Demand – non-interest bearing

$

854,673

$

475,598

Demand – interest bearing

 

286,173

 

232,367

Money market and savings

874,637

715,003

Time deposits

 

261,680

 

236,575

Total deposits

 

2,277,163

 

1,659,543

Official checks

 

3,289

 

4,447

Federal Home Loan Bank advances

 

35,000

 

40,000

Other borrowings

114,573

Subordinated debt

10,062

10,153

Accrued interest and other liabilities

 

12,476

 

12,989

Total liabilities

 

2,337,990

 

1,841,705

Stockholders’ equity

 

 

Preferred stock, 10,000,000 shares authorized, NaN issued

 

 

Class A Voting Common stock, $0.01 par value; authorized 50,000,000 shares, issued 14,289,480 and outstanding 13,475,781 shares as of June 30, 2021, and authorized 50,000,000 shares, issued 14,100,760 and outstanding 13,534,829 shares at December 31, 2020

 

143

 

141

Class B Non-Voting Common stock, $0.01 par value; 10,000,000 shares authorized, NaN issued and outstanding at June 30, 2021 and December 31, 2020

 

 

Treasury stock, at cost

 

(13,544)

 

(9,209)

Additional paid-in capital

 

210,274

 

208,995

Retained earnings

 

25,872

 

14,756

Accumulated other comprehensive income (loss)

 

283

 

882

Total stockholders’ equity

 

223,028

 

215,565

Total liabilities and stockholders' equity

$

2,561,018

$

2,057,270

3

PROFESSIONAL HOLDING CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

(Dollar amounts in thousands, except share data)

Three Months Ended June 30, 

Six Months Ended June 30, 

 

2021

    

2020

 

    

2021

    

2020

Interest income

Loans, including fees

$

18,311

$

17,897

$

37,544

$

27,912

Investment securities - taxable

 

161

 

232

 

340

 

434

Investment securities - tax exempt

189

206

392

226

Dividend income on restricted stock

 

99

 

131

 

194

 

210

Other

 

202

 

56

 

264

 

760

Total interest income

 

18,962

 

18,522

 

38,734

 

29,542

Interest expense

 

 

  

 

 

  

Deposits

 

1,430

 

1,617

 

2,747

 

4,243

Federal Home Loan Bank advances

 

190

 

287

 

386

 

565

Subordinated debt

77

59

207

189

Other borrowings

63

268

313

193

Total interest expense

 

1,760

 

2,231

 

3,653

 

5,190

Net interest income

 

17,202

 

16,291

 

35,081

 

24,352

Provision for loan losses

 

762

 

1,750

 

1,800

 

2,595

Net interest income after provision for loan losses

 

16,440

 

14,541

 

33,281

 

21,757

Non-interest income

 

 

  

 

 

  

Service charges on deposit accounts

 

1,199

 

307

 

1,594

 

529

Income from Bank owned life insurance

 

281

 

126

 

563

 

255

SBA origination fees

84

145

114

SWAP fees

364

210

573

473

Third party loan sales

226

157

301

267

Gain on sale and call of securities

21

11

22

15

Other

 

211

 

73

 

223

 

171

Total non-interest income

 

2,302

 

968

 

3,421

 

1,824

Non-interest expense

 

 

  

 

 

Salaries and employee benefits

 

7,099

 

6,912

 

13,883

 

12,175

Occupancy and equipment

 

905

 

1,081

 

2,007

 

1,855

Data processing

 

276

 

421

 

566

 

597

Marketing

 

165

 

151

 

318

 

288

Professional fees

 

770

 

806

 

1,398

 

1,161

Acquisition expenses

560

684

2,223

Regulatory assessments

 

418

 

300

 

767

 

514

Other

 

1,321

 

1,317

 

3,119

 

2,221

Total non-interest expense

 

10,954

 

11,548

 

22,742

 

21,034

Income before income taxes

 

7,788

 

3,961

 

13,960

 

2,547

Income tax provision

 

1,457

 

830

 

2,844

 

733

Net income

 

6,331

 

3,131

 

11,116

 

1,814

Earnings per share:

 

 

  

 

 

  

Basic

$

0.47

$

0.23

$

0.83

$

0.16

Diluted

$

0.45

$

0.22

$

0.80

$

0.15

Other comprehensive income:

 

 

  

 

 

  

Unrealized holding gain (loss) on securities available for sale

 

(505)

 

743

 

(794)

 

1,068

Tax effect

 

124

 

(188)

 

195

 

(271)

Other comprehensive gain (loss), net of tax

 

(381)

 

555

 

(599)

 

797

Comprehensive income

$

5,950

$

3,686

$

10,517

$

2,611

4

PROFESSIONAL HOLDING CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(Dollar amounts in thousands, except share data)

Accumulated

Additional

Other

Common Stock

Treasury

Paid-in

Retained

Comprehensive

Shares

Amount

Stock

Capital

Earnings

 

Income (Loss)

Total

Balance at April 1, 2020

13,537,565

$

138

$

(6,257)

$

201,670

$

5,134

$

169

$

200,854

Issuance of common stock, net of issuance cost

 

89,167

 

1

 

 

450

 

 

 

451

Employee stock purchase plan

 

 

 

 

27

 

 

 

27

Stock based compensation

 

 

 

 

296

 

 

 

296

Treasury stock

 

(182,097)

 

 

(2,875)

 

(5)

 

 

 

(2,880)

Net loss

 

 

 

 

 

3,131

 

 

3,131

Other comprehensive income

 

 

 

 

 

 

555

 

555

Balance at June 30, 2020

 

13,444,635

$

139

$

(9,132)

$

202,438

$

8,265

$

724

$

202,434

Balance at April 1, 2021

13,661,567

$

143

$

(10,087)

$

209,770

$

19,541

$

664

$

220,031

Issuance of common stock, net of issuance cost

 

8,359

 

 

 

107

 

 

 

107

Employee stock purchase plan

 

978

 

 

 

18

 

 

 

18

Stock based compensation

 

(1,834)

 

 

 

385

 

 

 

385

Treasury stock

 

(193,289)

 

 

(3,457)

 

(6)

 

 

 

(3,463)

Net income

 

 

 

 

 

6,331

 

 

6,331

Other comprehensive income

 

 

 

 

 

 

(381)

 

(381)

Balance at June 30, 2021

 

13,475,781

$

143

$

(13,544)

$

210,274

$

25,872

$

283

$

223,028

Balance at January 1, 2020

5,867,446

$

60

$

(4,155)

$

77,019

$

6,451

$

(73)

$

79,302

Issuance of common stock, net of issuance cost

 

3,664,667

 

37

 

 

60,221

 

 

 

60,258

Marquis Bancorp (MBI) acquisition

4,227,816

42

64,657

64,699

Employee stock purchase plan

 

 

 

 

58

 

 

 

58

Stock based compensation

 

 

 

 

492

 

 

 

492

Treasury stock

 

(315,294)

 

 

(4,977)

 

(9)

 

 

 

(4,986)

Net loss

 

 

 

 

 

1,814

 

 

1,814

Other comprehensive income

 

 

 

 

 

 

797

 

797

Balance at June 30, 2020

 

13,444,635

$

139

$

(9,132)

$

202,438

$

8,265

$

724

$

202,434

Balance at January 1, 2021

    

13,534,829

$

141

$

(9,209)

$

208,995

$

14,756

$

882

$

215,565

Issuance of common stock, net of issuance cost

 

61,204

 

1

 

 

543

 

 

 

544

Employee stock purchase plan

 

1,851

 

 

 

34

 

 

 

34

Stock based compensation

 

125,665

 

1

 

 

709

 

 

 

710

Treasury stock

 

(247,768)

 

 

(4,335)

 

(7)

 

 

 

(4,342)

Net income

 

 

 

 

 

11,116

 

 

11,116

Other comprehensive income

 

 

 

 

 

 

(599)

 

(599)

Balance at June 30, 2021

 

13,475,781

$

143

 

$

(13,544)

 

$

210,274

 

$

25,872

 

$

283

 

$

223,028

5

PROFESSIONAL HOLDING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollar amounts in thousands, except share data)

Six Months Ended June 30, 

    

2021

    

2020

Cash flows from operating activities

 

  

 

  

Net income (loss)

$

11,116

$

1,814

Adjustments to reconcile net income to net cash from operating activities

 

  

 

  

Provision for loan losses

 

1,800

 

2,595

Deferred income tax benefit (expense)

 

988

 

(499)

Depreciation and amortization

 

739

 

739

Gain on sale of securities

(4)

Gain on call of securities

(22)

(11)

Equity unrealized change in market value

63

(24)

Net amortization of securities

 

1,396

 

(906)

Net amortization of deferred loan fees

 

(4,400)

 

1,118

Loans held for sale

(769)

(1,070)

Proceeds from sale of loans

110

Income from bank owned life insurance

 

(563)

 

(255)

Loss on disposal of premises and equipment

137

Employee stock purchase plan

34

58

Stock compensation

 

710

 

492

Changes in operating assets and liabilities:

 

  

 

  

Accrued interest receivable

 

1,217

 

(1,472)

Other assets

 

(1,098)

 

1,887

Official checks, accrued interest, interest payable and other liabilities

 

(1,385)

 

(3,395)

Net cash provided by operating activities

 

9,963

 

1,177

Cash flows from investing activities

 

  

 

  

Proceeds from maturities and paydowns of securities available for sale

 

11,123

 

6,256

Proceeds from calls of securities available for sale

4,648

4,835

Proceeds from maturities and paydowns of securities held to maturity

 

257

 

44

Purchase of securities available for sale

 

(50,922)

 

(60,693)

Proceeds from sale of securities available for sale

1,739

Loans originations, net of principal repayments

 

(47,410)

 

(256,731)

Purchase of Federal Reserve Bank stock

 

(192)

 

(2,671)

Proceeds from maturities of Federal Home Loan Bank Stock

888

Purchase of Federal Home Loan Bank Stock

 

 

(1,297)

Purchases of premises and equipment

 

(455)

 

(741)

Proceeds from acquisition

26,860

Net cash used in investing activities

 

(82,063)

 

(282,399)

Cash flows from financing activities

 

  

 

  

Net increase (decrease) in deposits

 

617,620

 

126,404

Proceeds from issuance of stock, net of issuance costs

 

544

 

60,258

Purchase of treasury stock

(4,342)

(4,986)

Proceeds from Federal Home Loan Bank advances

 

 

10,000

Repayments of Federal Home Loan advances

 

(5,000)

 

(25,000)

Repayment of line of credit

(9,999)

Proceeds from PPPLF advances

218,080

Repayments of PPPLF advances

(101,358)

Net cash provided by financing activities

 

507,464

 

374,757

Increase in cash and cash equivalents

 

435,364

 

93,535

Cash and cash equivalents at beginning of period

 

216,972

 

198,950

Cash and cash equivalents at end of period

$

652,336

$

292,485

Supplemental cash flow information:

 

  

 

  

Cash paid during the period for interest

$

4,425

$

4,907

Cash paid during the period for taxes

 

3,000

 

20

Supplemental noncash disclosures:

 

  

 

  

Lease liabilities arising from obtaining right of use assets

$

$

1,620

Total assets acquired

589,374

Total liabilities assumed

539,403

6

PROFESSIONAL HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Tables in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The accompanying unaudited consolidated financial statements of Professional Holding Corp. and its subsidiary, Professional Bank (the “Bank” and collectively with Professional Holding Corp., the “Company”), have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current period presentation.

Operating results for the six months ended June 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Use of Estimates:

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

Adoption of new accounting standards:

ASU 2019-12, Income Taxes (Topic 740)

In December 2019, FASB issued guidance which simplifies the accounting for income taxes by removing multiple exceptions to the general principals in Topic 740. The standard is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The new guidance did not materially impact the Company’s Consolidated Financial Statements or disclosures.

ASU 2020-04, Reference Rate Reform (Topic 848)

In March 2020, FASB issued guidance which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the London Interbank Offered Rate ("LIBOR") likely being discontinued as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying U.S. Generally Accepted Accounting Principles (“GAAP”) to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022. The Company has established a cross-functional working group to guide the Company’s transition from LIBOR and has begun efforts to transition to alternative rates consistent with industry timelines. The Company has identified its products that utilize LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates. The Company is evaluating existing platforms and systems and preparing to offer new rates. The new guidance did not materially impact the Company’s Consolidated Financial Statements or disclosures.

7

New accounting standards that have not yet been adopted:

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

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)

Description

In June 2016, FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (i.e. loan commitments, standby letters of credit, financial guarantees and other similar instruments).

Date of Adoption

For PBEs that are non-SEC filers and for SEC filers that are considered small reporting companies, it is effective for January 1, 2023. Early adoption is still permitted.

Effect on the Consolidated Financial Statements

The Company's management is in the process of evaluating credit loss estimation models. Updates to business processes and the documentation of accounting policy decisions are ongoing. The company may recognize an increase in the allowance for credit losses upon adoption, recorded as a one-time cumulative adjustment to retained earnings. However, the magnitude of the impact on the Company's consolidated financial statements has not yet been determined. The Company will adopt this accounting standard effective January 1, 2023.

NOTE 2 — EARNINGS PER SHARE

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

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

2021

    

2020

Basic earnings per share:

 

  

 

  

  

 

  

Net income

$

6,331

$

3,131

$

11,116

$

1,814

Total weighted average common stock outstanding

 

13,397,747

 

13,415,525

 

13,419,929

 

11,516,756

Net income per share

$

0.47

$

0.23

$

0.83

$

0.16

Diluted earnings per share:

 

 

 

 

Net income

$

6,331

$

3,131

$

11,116

$

1,814

Total weighted average common stock outstanding

 

13,397,747

 

13,415,525

 

13,419,929

 

11,516,756

Add: Dilutive effect of employee stock options

564,822

518,435

521,900

526,503

Total weighted average diluted stock outstanding

13,962,569

13,933,960

13,941,829

12,043,259

Net income per share

$

0.45

$

0.22

$

0.80

$

0.15

For the three months ended June 30, 2021, there were 270,850 thousand stock options that were anti-dilutive and for the three months ended June 30, 2020, there were 29,350 thousand stock options that were anti-dilutive. For the six months ended June 30, 2021, there were 270,850 thousand stock options that were anti-dilutive and for the six months ended June 30, 2020, there were 29,350 thousand stock options that were anti-dilutive.

8

NOTE 3 — SECURITIES

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at June 30, 2021 and December 31, 2020, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss and gross unrecognized gains and losses:

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

June 30, 2021

Cost

Gains

Losses

Fair Value

Available-for-sale - taxable

Small Business Administration loan pools

$

43,091

$

78

$

(573)

$

42,596

Mortgage-backed securities

 

54,517

 

205

 

(182)

 

54,540

United States agency obligations

2,001

88

-

2,089

Corporate bonds

 

1,500

 

10

 

-

 

1,510

Total available-for-sale - taxable

$

101,109

$

381

$

(755)

$

100,735

Available-for-sale - tax exempt

Community Development District bonds

$

17,954

$

704

$

-

$

18,658

Municipals

1,057

46

-

1,103

Total available-for-sale - tax exempt

$

19,011

$

750

$

-

$

19,761

    

    

Gross

    

Gross

    

 

Amortized

Unrecognized

Unrecognized

Cost

Gains

Losses

Fair Value

Held-to-Maturity

 

  

 

  

 

  

 

  

Mortgage-backed securities

$

285

$

11

$

$

296

Foreign Bonds

1,000

1,000

Total Held-to-Maturity

$

1,285

$

11

$

$

1,296

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

December 31, 2020

Cost

Gains

Losses

Value

Available-for-sale - taxable

 

  

 

  

 

  

 

  

Small Business Administration loan pools

$

30,678

$

77

$

(199)

$

30,556

Mortgage-backed securities

 

28,514

 

438

 

(30)

 

28,922

United States agency obligations

3,000

122

-

3,122

Corporate bonds

 

2,501

 

9

 

-

 

2,510

Total available-for-sale - taxable

$

64,693

$

646

$

(229)

$

65,110

Available-for-sale - tax exempt

Community Development District bonds

$

20,582

$

717

$

-

$

21,299

Municipals

1,064

35

-

1,099

Total available-for-sale - tax exempt

$

21,646

$

752

$

-

$

22,398

    

    

Gross

    

Gross

Amortized

Unrecognized

Unrecognized

Fair

Cost

Gains

Losses

    

Value

Held-to-Maturity

 

  

 

  

 

  

 

  

Mortgage-backed securities

$

345

$

14

$

$

359

United States Treasury

202

202

Foreign Bonds

1,000

1,000

Total Held-to-Maturity

$

1,547

$

14

$

$

1,561

As of June 30, 2021 and December 31, 2020, Corporate bonds were comprised of investments in the financial services industry. During the six months ended June 30, 2021, the net investment portfolio increased by $32.6 million as a result of increases from purchases of $50.9 million in SBA and MBS securities combined with decreases of $17.4 million from paydowns, maturities and calls, as well as the unrealized holding loss on securities available for sale of $0.7 million with related tax effect of $0.2 million. Proceeds from the maturity and redemption of securities during the three and six months ended June 30, 2021, were $3.2 million and $4.7 million, with gross realized gains of $21 thousand and $22 thousand, respectively. Proceeds from the sales of securities during the year ended December 31, 2020,

9

were $1.7 million, with gross realized gains of $4 thousand. Proceeds from redemption of securities for the year ended December 31, 2020, were $9.1 million, with gross realized gains of $33 thousand. Total securities pledged as of June 30, 2021 and December 31, 2020, were $13.3 million and $12.5 million, respectively. Securities pledged for derivative SWAP transactions as of June 30, 2021, were $1.1 million which were included in the total securities pledged, such securities were generally pledged for public funds. There were no securities pledged for derivate SWAP transactions at December 31, 2020.

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. The scheduled maturities of securities as of June 30, 2021, are as follows:

June 30, 2021

    

Amortized

    

Fair

Cost

Value

Available-for-sale

Due in one year or less

$

1,038

$

1,056

Due after one year through five years

 

21,159

 

21,975

Due after five years through ten years

315

329

Due after ten years

Subtotal

$

22,512

$

23,360

Small Business Administration loan pools

$

43,091

$

42,596

Mortgage-backed securities

54,517

54,540

Total available-for-sale

$

120,120

$

120,496

Held-to-maturity

Due in one year or less

$

1,000

$

1,000

Due after one year through five years

Subtotal

$

1,000

$

1,000

Mortgage-backed securities

$

285

$

296

Total held-to-maturity

$

1,285

$

1,296

At June 30, 2021 and December 31, 2020, there were 0 holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

At June 30, 2021 and December 31, 2020, the number of investment positions that are in an unrealized loss position were 48 and 36, respectively. The tables below indicate the fair value of debt securities with unrealized losses and for the period of time of which these

10

losses were outstanding at June 30, 2021 and December 31, 2020, respectively, aggregated by major security type and length of time in a continuous unrealized loss position:

Less Than 12 Months

12 Months or Longer

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

Value

Losses

Value

Losses

Value

Losses

June 30, 2021

Available-for-sale - taxable

Small Business Administration loan pools

$

15,273

$

(427)

$

17,777

$

(146)

$

33,050

$

(573)

Mortgage-backed securities

 

14,648

 

(181)

 

1,286

 

(1)

 

15,934

 

(182)

United States agency obligations

Corporate bonds

 

 

 

 

 

 

Total available-for-sale - taxable

$

29,921

$

(608)

$

19,063

$

(147)

$

48,984

$

(755)

Available-for-sale - tax exempt

Community Development District bonds

$

$

$

$

$

$

Municipals

Total available-for-sale - tax exempt

$

$

$

$

$

$

December 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Available-for-sale - taxable

 

  

 

  

 

  

 

  

 

  

 

  

Small Business Administration loan pools

$

18,849

$

(133)

$

8,945

$

(66)

$

27,794

$

(199)

Mortgage-backed securities

 

5,839

 

 

2,510

 

(30)

 

8,349

 

(30)

United States agency obligations

227

227

Corporate bonds

 

 

 

 

 

 

Total available-for-sale - taxable

$

24,915

$

(133)

$

11,455

$

(96)

$

36,370

$

(229)

Available-for-sale - tax exempt

Community Development District bonds

$

$

$

$

$

$

Municipals

Total available-for-sale - tax exempt

$

$

$

$

$

$

The unrealized holding losses within the investment portfolio are considered to be temporary and are mainly due to changes in the interest rate cycle. The unrealized loss positions may fluctuate positively or negatively with changes in interest rates or spreads. Since SBA loan pools and mortgage-backed securities are government sponsored entities that are highly rated, the decline in fair value is attributable to changes in interest rates and not credit quality. The Company does not have any securities in an Other Than Temporary Impairment (“OTTI”) position. The Company does not intend to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2021. NaN credit losses were recognized in operations during the six months ended June 30, 2021, or during the year ended December 31, 2020.

11

NOTE 4 — LOANS

Loans at June 30, 2021 and December 31, 2020, were as follows:

    

June 30, 2021

    

December 31, 2020

Commercial real estate

$

875,453

$

777,776

Residential real estate

 

361,946

 

380,491

Commercial

 

373,333

 

396,642

Construction and land development

 

74,175

 

99,883

Consumer and other

 

14,575

 

11,688

Total loans

 

1,699,482

 

1,666,480

Unearned loan origination (fees) costs, net

 

(1,984)

 

(1,323)

Unearned PPP loan origination (fees) costs, net

(4,855)

(4,255)

Allowance for loan loss

 

(10,418)

 

(16,259)

Loans held for sale

(2,039)

(1,270)

Other

(18)

Loans, net

$

1,680,168

$

1,643,373

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

At June 30, 2021 and December 31, 2020, there were $209.9 million and $227.8 million, respectively in total loans pledged to the Federal Home Loan Bank (“FHLB”) for liquidity.

Loan premiums for loans purchased are amortized over the life of the loan with acceleration upon the increase in principal paydowns or payoffs. At June 30, 2021 and December 31, 2020, loan premiums for purchased loans were $0.5 million and $0.6 million, respectively.

There are 0 loans over 90 days past due and accruing as of June 30, 2021, or December 31, 2020. The following table presents the aging of the recorded investment in past due loans as of June 30, 2021 and December 31, 2020, by class of loans:

30 – 59

60 – 89

Greater than

Days

Days

89 Days

Total

Loans Not

    

Past Due

    

Past Due

    

Past Due

    

Nonaccrual

    

Past Due

    

Past Due

    

Total

June 30, 2021

 

  

 

  

 

  

  

  

 

  

 

  

Commercial real estate

$

$

$

$

$

$

875,453

$

875,453

Residential real estate

 

 

 

 

 

 

361,946

 

361,946

Commercial

 

 

 

 

1,468

 

1,468

 

371,865

 

373,333

Construction and land development

 

 

 

 

 

 

74,175

 

74,175

Consumer and other

 

 

94

 

1,307

1,401

 

13,174

 

14,575

Total

$

$

94

$

$

2,775

$

2,869

$

1,696,613

$

1,699,482

30 – 59

60 – 89

Greater than

Days

Days

89 Days

Total

Loans Not

    

Past Due

    

Past Due

    

Past Due

    

Nonaccrual

    

Past Due

    

Past Due

    

Total

December 31, 2020

Commercial real estate

$

$

$

$

$

$

777,776

$

777,776

Residential real estate

 

1,303

 

 

 

 

1,303

 

379,188

 

380,491

Commercial

 

278

 

 

 

9,127

 

9,405

 

387,237

 

396,642

Construction and land development

 

 

 

 

 

 

99,883

 

99,883

Consumer and other

 

 

 

1,307

1,307

 

10,381

 

11,688

Total

$

1,581

$

$

$

10,434

$

12,015

$

1,654,465

$

1,666,480

12

At June 30, 2021, there were 6 impaired loans (consisting of nonaccrual loans, troubled debt restructured loans, loans past due 90 days or more and still accruing interest and other loans based on management’s judgment) with both unpaid principal balance and recorded investments totaling $5.4 million. NaN of these loans were impaired loans with a recorded investment of $2.8 million with an allowance of $0.7 million and 1 substandard accruing loan with a recorded investment of $2.3 million with no allowance. The average net investment on the impaired residential real estate and commercial loans during the three months ended June 30, 2021, were $0.9 million. Residential real estate loans had $2.4 thousand and $5.0 thousand interest income recognized for the three and six months ended June 30, 2021 and 2020, respectively, which was equal to the cash basis interest income. At December 31, 2020, there were 6 impaired loans with recorded investments totaling $13.1 million, of which there were 3 impaired loans with a recorded investment of $10.4 million on nonaccrual with an allowance of $8.3 million and 1 substandard accruing loan with a recorded investment of $2.4 million with no allowance. The average net investment on the impaired residential real estate and commercial loans during the year ended December 31, 2020, was $2.2 million. The residential real estate loans had $12.7 thousand of interest income recognized during the year ended December 31, 2020, which was equal to the cash basis interest income.

Troubled Debt Restructurings:

The principal carrying balances of loans that met the criteria for consideration as troubled debt restructurings (“TDR”) were $252 thousand and $298 thousand as of June 30, 2021 and December 31, 2020, respectively. The Company has allocated 0 specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2021 and December 31, 2020. The Company has not committed any additional amounts to customers whose loans are classified as a troubled debt restructuring.

Credit Quality Indicators:

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

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

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

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

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

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

Moderate Risk: Loans to borrowers who are in non-compliance with periodic reporting requirements of the loan agreement, and any other credit file documentation deficiencies, which do not otherwise affect the borrower’s credit risk profile. This may include borrowers who fail to supply updated financial information that supports the adequacy of the primary source of repayment to service the Bank’s debt and prevents bank management to evaluate the borrower’s current debt service capacity. Existing loans will include those with consistent

13

track record of timely loan payments, no material adverse changes to underlying collateral, and no material adverse change to guarantor(s) financial capacity, evidenced by public record searches.

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

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

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

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

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

Special

(Dollars in thousands)

   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Total

June 30, 2021

 

 

 

 

Commercial real estate

$

873,127

$

$

2,326

$

$

875,453

Residential real estate

 

361,946

 

 

 

 

 

 

 

 

361,946

Commercial

 

371,400

 

 

465

 

 

1,468

 

 

 

 

373,333

Construction and land development

 

74,175

 

 

 

 

 

 

 

 

74,175

Consumer

 

13,174

 

 

94

 

 

1,307

 

 

 

 

14,575

Total

$

1,693,822

 

$

559

 

$

5,101

 

$

 

$

1,699,482

 

 

 

 

December 31, 2020

Commercial real estate

$

775,420

$

$

2,356

$

$

777,776

Residential real estate

 

380,062

 

 

429

 

 

 

 

 

 

380,491

Commercial

 

387,403

 

 

112

 

 

9,127

 

 

 

 

396,642

Construction and land development

 

99,883

 

 

 

 

 

 

 

 

99,883

Consumer

 

10,381

 

 

 

 

1,307

 

 

 

 

11,688

Total

$

1,653,149

 

$

541

 

$

12,790

 

$

 

$

1,666,480

Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:

(Dollars in thousands)

June 30, 2021

    

December 31, 2020

Commercial real estate(1)

$

5,892

$

Residential real estate

452

405

Commercial

 

616

 

746

Construction and development(1)

 

 

3,732

Carrying amount, net of total discounts

$

6,960

$

4,883

(1)During the three months ended June 30, 2021, construction was completed on a construction loan and recategorized as a non-owner occupied commercial real estate loan.

14

Changes in the carrying amount of the accretable yield for all purchased credit impaired loans were as follows for the six months ended June 30, 2021:

(Dollars in thousands)

    

2021

Balance at beginning of period

$

(630)

Adjustment of income

 

Accretion

 

195

Reclassifications from nonaccretable difference

 

(136)

Disposals

 

Balance at end of period

$

(571)

For those purchased credit impaired loans disclosed above, 0 allowances for loan losses were recorded or reversed during the six months ended June 30, 2021.

The credit fair value adjustment on purchased credit impairment (“PCI”) loans represents the portion of the loan balances that have been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan. PCI loans purchased on March 26, 2020, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

(Dollars in thousands)

    

March 26, 2020

Contractually required principal and interest by loan type

Commercial real estate

$

427

Residential real estate

 

604

Commercial

 

2,176

Construction and development

 

5,614

Consumer and other loans

 

-

Total

$

8,821

Contractual cash flows not expected to be collected (nonaccretable discount)

Commercial real estate

$

80

Residential real estate

 

138

Commercial

 

1,123

Construction and development

 

2,297

Consumer and other loans

 

-

Total

$

3,638

Expected cash flows

$

5,183

Interest component of expected cash flows (accretable discount)

(545)

Fair value of PCI loans accounted for under ASC 310-30

$

4,638

Non-Performing Assets

As of June 30, 2021, the Company had nonperforming assets of $2.8 million, or 0.11% of total assets, compared to nonperforming assets of $10.4 million, or 0.51% of total assets, at December 31, 2020. The Bank’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when a determination of a confirmed loss is made on a loan. In March 2021, the Company charged off $7.6 million of the Coex Coffee International, Inc. (“Coex”) loan, which amount was previously reserved during the third quarter of 2020. Based on a review of the estimated receivables collected by the assignee in the Florida case for the benefit of creditors (the “Assignee”), the remaining book balance of $0.6 million for the Coex loan appears to be collectable by the Company, subject to final accounting by the Assignee.

Paycheck Protection Program

During the three months ended June 30, 2021, the Company funded 172 loans representing $17.6 million under Round 3 of the Paycheck Protection Program (“PPP.”). As of June 30, 2021, the Company participated in all three rounds of the PPP and funded 2,287 small business loans representing approximately $340.5 million in relief proceeds, of which 1,362 loans totaling $196.9 million were forgiven by the SBA. Most of the PPP loans were initially pledged to the Federal Reserve as part of the Payroll Protection Program

15

Liquidity Facility ("PPPLF"). The PPPLF pledged loans are non-recourse to the Company. However, the Company paid off all of the PPPLF advances during the first and second quarter of 2021 and the balance was $0 as of June 30, 2021.

Debt Service Relief Requests Related to COVID-19

As a result of the COVID-19 pandemic the Company has reviewed and processed numerous debt service relief requests in accordance with Section 4013 of the CARES Act and interagency guidelines published by federal banking regulators on March 13, 2020. As currently interpreted by the agencies, the guidelines assert that short-term modifications made on good faith for reasons related to the COVID-19 pandemic to borrowers who were current prior to such relief are not considered TDRs. These modifications include deferrals of principal and interest, modification to interest only, and deferrals to escrow requirements. The modifications have varying terms up to six months. As of June 30, 2021, all these loans had returned to normal payment schedules.

NOTE 5 — ALLOWANCE FOR LOAN LOSSES

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method for the six months ended June 30, 2021, and the year ended December 31, 2020:

Construction

Commercial

Residential

and land

Consumer

    

Real Estate

    

Real Estate

    

Commercial

    

Development

    

and Other

    

Total

June 30, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Allowance for loan losses:

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

3,159

$

2,177

$

10,462

$

388

$

73

$

16,259

Provision for loan losses

 

1,126

 

92

 

602

 

(27)

 

7

 

1,800

Loans charged-off

 

-

 

-

 

(7,641)

 

-

 

-

 

(7,641)

Recoveries

 

-

 

-

 

-

 

-

 

-

 

-

Total ending allowance balance

$

4,285

$

2,269

$

3,423

$

361

$

80

$

10,418

Construction

Commercial

Residential

and land

Consumer

    

Real Estate

    

Real Estate

    

Commercial

    

Development

    

and Other

    

Total

December 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Allowance for loan losses:

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

1,845

$

3,115

$

1,235

$

272

$

81

$

6,548

Provision for loan losses

 

1,314

 

(731)

 

9,326

 

116

 

(8)

 

10,017

Loans charged-off

 

 

(207)

 

(99)

 

 

 

(306)

Recoveries

 

 

 

 

 

 

Total ending allowance balance

$

3,159

$

2,177

$

10,462

$

388

$

73

$

16,259

16

Construction

Commercial

Residential

and Land

Consumer

    

Real Estate

    

Real Estate

    

Commercial

    

Development

    

and Other

    

Total

June 30, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Allowance for loan losses:

Ending allowance balance attributable to loans

Individually evaluated for impairment

$

$

$

658

$

$

$

658

Purchased Credit Impaired (PCI) loans

Collectively evaluated for impairment

4,285

2,269

2,765

361

80

9,760

Total ending allowance balance

$

4,285

$

2,269

$

3,423

$

361

$

80

$

10,418

Loans:

Loans individually evaluated for impairment

$

2,326

$

252

$

1,468

$

$

1,307

$

5,353

Loans collectively evaluated for impairment

873,127

361,694

371,865

74,175

13,268

1,694,129

Total ending loans balance

$

875,453

$

361,946

$

373,333

$

74,175

$

14,575

$

1,699,482

December 31, 2020

Allowance for loan losses:

Ending allowance balance attributable to loans

Individually evaluated for impairment

$

$

$

8,309

$

$

$

8,309

Purchased Credit Impaired (PCI) loans

Collectively evaluated for impairment

3,159

2,177

2,153

388

73

7,950

Total ending allowance balance

$

3,159

$

2,177

$

10,462

$

388

$

73

$

16,259

Loans:

Loans individually evaluated for impairment

$

2,356

$

298

$

9,127

$

$

1,307

$

13,088

Loans collectively evaluated for impairment

775,420

380,193

387,515

99,883

10,381

1,653,392

Total ending loans balance

$

777,776

$

380,491

$

396,642

$

99,883

$

11,688

$

1,666,480

NOTE 6 — DEPOSITS

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

For the Six Months Ended

For the Year Ended 

June 30, 2021

December 31, 2020

Ending

Ending

(Dollars in thousands)

    

Balance

    

% of Total

    

Balance

    

% of Total

    

NOW accounts

$

286,173

12.6

%  

$

232,367

14.0

%  

Money market accounts

 

810,913

 

35.6

%  

 

679,761

 

41.0

%  

Brokered deposits

56,534

2.5

%  

30,137

1.8

%  

Savings accounts

 

11,814

 

0.5

%  

 

9,727

 

0.6

%  

Certificates of deposit

 

257,056

 

11.3

%  

 

231,953

 

14.0

%  

Total interest-bearing deposits

 

1,422,490

 

62.5

%  

 

1,183,945

 

71.3

%  

Noninterest-bearing deposits

 

854,673

 

37.5

%  

 

475,598

 

28.7

%  

Total deposits

$

2,277,163

100.0

%  

$

1,659,543

100.0

%  

(1)Balance Sheet does not illustrate brokered deposits as presented above .

The following table presents the maturities of our time deposits including time deposits that exceed the $250,000 FDIC insurance limit as of June 30, 2021.

    

    

Over

    

Over Six

    

    

Three

Three

Months

Months or

Through

Through

Over

(Dollars in thousands)

Less

Six Months

12 Months

12 Months

Total

Time deposits of $250,000 or less

$

15,852

$

12,749

$

43,020

$

22,047

$

93,668

Time deposits of more than $250,000

23,302

24,537

85,376

34,797

168,012

Total

$

39,154

$

37,286

$

128,396

$

56,844

$

261,680

17

The following tables present the maturities of our time deposits including time deposits that exceed the $250,000 FDIC insurance limit as of December 31, 2020.

    

    

Over

    

Over Six

    

    

Three

Three

Months

Months or

Through

Through

Over

(Dollars in thousands)

Less

Six Months

12 Months

12 Months

Total

Time deposits of $250,000 or less

$

20,767

$

13,258

$

24,805

$

19,240

$

78,070

Time deposits of more than $250,000

40,189

35,314

42,844

40,158

158,505

Total

$

60,956

$

48,572

$

67,649

$

59,398

$

236,575

As of June 30, 2021 and December 31, 2020, the Company had time deposits that meet or exceed the $250,000 FDIC insurance limit of $168.0 million and $158.5 million, respectively. Securities, mortgage loans or other financial instruments pledged as collateral for certain deposits were $52.4 million, and $54.7 million at June 30, 2021 and December 31, 2020, respectively. The aggregate amount of demand deposits that have been re-classified as loan balances at June 30, 2021 and December 31, 2020, were $0.3 million, and $0.1 million, respectively. Deposits from principal officers, directors and their affiliates at June 30, 2021 and December 31, 2020, were $17.9 million, and $12.1 million, respectively.

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

June 30, 2021

December 31, 2020

Less than 1 year

$

204,836

$

177,178

Over 1 through 2 years

55,625

57,034

Over 2 through 3 years

1,179

1,658

Over 3 through 4 years

40

705

Over 4 through 5 years

-

-

Over 5 years

-

-

Total

$

261,680

$

236,575

Banks are required to maintain cash reserves in the form of vault cash or in an account with the Federal Reserve Bank or in noninterest-earning accounts with other qualified banks. This requirement is based on the Bank’s amount of transaction deposit accounts. Due to the amount of transaction deposit accounts, the Bank was not required to have cash reserve requirements at June 30, 2021 and December 31, 2020. Additionally, the Company had $93.6 million and $98.2 million, in Qualified Public Deposits (“QPD”) that require collateral pledged as of June 30, 2021 and December 31, 2020.

NOTE 7 — DEBT

Subordinated Debt. On March 26, 2020, pursuant to terms of the acquisition, the Company assumed the subordinated notes payable of Marquis Bancorp, Inc. (“MBI”) at its fair value of $10.3 million. According to the terms of the subordinated note, the principal amount due is $10.0 million with a 7% fixed rate until October 30, 2021, and a variable rate thereafter at LIBOR plus 576 basis points. The note matures on October 30, 2026, and can be redeemed by the Company anytime on or after October 30, 2021. The subordinated debt was fair valued at a premium of $0.3 million and is being amortized over the expected life.

Valley National Line of Credit. On December 19, 2019, the Company entered into a $10.0 million secured revolving line of credit with Valley National Bank, N.A. Amounts drawn under this line of credit bears interest at the Prime Rate, as announced by The Wall Street Journal from time to time as its prime rate, and its obligations under this line of credit are secured by shares of the capital stock of the Bank, which we have pledged as security. On January 7, 2021, (the “Closing Date”) the Company and Valley National Bank entered an amendment, which among other things, extended the maturity date of the note to March 19, 2021. No other material terms of the note changed. The principal balance outstanding pursuant to the note on the Closing Date was $0. On May 10, 2021, the Company and Valley National Bank entered into an extension agreement, which among other things, extended the maturity date of the note to March 1, 2022.

18

NOTE 8 — BORROWINGS

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

FHLB Advances. The FHLB allows the Company to borrow up to 25% of its assets on a blanket floating lien status collateralized by certain securities and loans. As of June 30, 2021, approximately $209.9 million in loans were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As of June 30, 2021, we had $35.0 million in outstanding advances and $134.7 million in additional available borrowing capacity from the FHLB based on the collateral that we have currently pledged. The following table sets forth certain information on our FHLB borrowings during the periods presented.

Six Months Ended

Year Ended 

(Dollars in thousands)

    

June 30, 2021

    

December 31, 2020

Amount outstanding at period-end

$

35,000

$

40,000

Weighted average interest rate at period-end

 

2.04

%  

 

1.96

%

Maximum month-end balance during period

$

40,000

$

70,000

Average balance outstanding during period

 

38,867

 

58,210

Weighted average interest rate during period

 

1.98

%  

 

1.63

%

Federal Reserve Bank of Atlanta. The Federal Reserve Bank of Atlanta has an available borrower in custody arrangement which allows us to borrow on a collateralized basis. NaN advances were outstanding under this facility as of June 30, 2021.

PPPLF Advances. The Company initially funded PPP loans with the PPPLF. Most of the PPP loans were initially pledged to the Federal Reserve as part of the PPPLF. The PPPLF pledged loans are non-recourse to the Company. In addition, we paid off approximately $101.4 million in PPPLF advances for a balance of $0 at June 30, 2021.

NOTE 9 — COMMON STOCK AND PREFERRED STOCK

Class A Voting Common Stock

The Company has Class A voting common stock with a par value of $0.01 per share. As of June 30, 2021, there are 50,000,000 shares authorized as Class A voting common stock of which 13,475,781 are outstanding. During the six months ended June 30, 2021, the Company issued 193,764 shares of Class A voting common stock, inclusive of 127,499 shares of restricted stock grants, 64,414 shares of options exercised, and 1,851 shares pursuant to the employee stock purchase program.

During the six months ended June 30, 2021, the Company repurchased 247,768 shares of Class A common stock. Further, during the same six month period, upon the vesting of a portion of restricted stock, employees of the Company elected to have 3,210 shares of Class A common voting stock withheld for tax purposes and had 1,834 in restricted stock cancellations.

19

Class B Non-voting Common Stock

The Company has Class B non-voting common stock with a par value of $0.01 per share. As of June 30, 2021, there are 10,000,000 shares authorized as Class B non-voting common stock, NaN of which are outstanding.

Preferred Stock

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

NOTE 10 — FAIR VALUE

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

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

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

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

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

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

Securities available for sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations, corporate bonds, municipal bonds and U.S. agency notes. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 might include certain residual interests in securitizations and other less liquid securities. As of June 30, 2021 and December 31, 2020, all securities available for sale were Level 2.

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

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

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

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

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

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

20

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

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

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

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

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis, are summarized below:

There were 0 securities reclassified into or out of Level 3 during the six months ended June 30, 2021, or for the year ended December 31, 2020.

Fair Value Measurements

at June 30, 2021 Using:

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Fair

Identical Assets

Inputs

Inputs

June 30, 2021

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Available-for-sale - taxable

 

  

 

  

 

  

 

  

Small Business Administration loan pools

$

42,596

$

$

42,596

$

Mortgage-backed securities

 

54,540

 

 

54,540

 

United States agency obligations

2,089

2,089

Corporate bonds

 

1,510

 

 

1,510

 

Total

$

100,735

$

$

100,735

$

Available-for-sale - tax exempt

Community Development District bonds

$

18,658

$

$

18,658

$

Municipals

1,103

1,103

Total

$

19,761

$

$

19,761

$

Equity

 

  

 

  

 

  

 

  

Mutual funds

$

5,942

$

5,942

$

$

Total

$

5,942

$

5,942

$

$

21

Fair Value Measurements

at December 31, 2020 Using:

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Fair

Identical Assets

Inputs

Inputs

December 31, 2020

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Available-for-sale - taxable

 

  

 

  

 

  

 

  

Small Business Administration loan pools

$

30,556

$

$

30,556

$

Mortgage-backed securities

 

28,922

 

 

28,922

 

United States agency obligations

 

3,122

 

 

3,122

 

Corporate bonds

 

2,510

 

 

2,510

 

Total

$

65,110

$

$

65,110

$

Available-for-sale - tax exempt

Community Development District bonds

$

21,299

$

$

21,299

$

Municipals

1,099

1,099

Total

$

22,398

$

$

22,398

$

Equity

 

  

 

  

 

  

 

  

Mutual funds

$

6,005

$

6,005

$

$

Total

$

6,005

$

6,005

$

$

at June 30, 2021 Using:

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Fair

Identical Assets

Inputs

Inputs

June 30, 2021

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Customer Derivatives: Interest Rate SWAPs

 

  

 

  

 

  

 

  

Customer Derivatives - Interest Rate SWAPs Asset

$

863

$

$

863

$

Customer Derivatives - Interest Rate SWAPs Liability

(863)

(863)

Total

$

$

$

$

As of December 31, 2020, the Company did not hold any interest rate SWAPs.

Impaired loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

Specifically, regarding the Coex loan, the carrying amount of the loan for impairment purposes was determined based on the note outstanding balance at June 30, 2021, less the non-recourse amount sold to our participant, yielding a carrying value of $0.6 million. The fair value of the collateral was determined based on a review of information obtained from the Assignee related to the collectability of the collateral adjusted for legal and disposition costs. When netted in the same percentage as the non-recourse portion of the loan, the net fair

22

value of collateral was noted as $0.6 million. The net result of these calculations provides for 0 specific reserve within the Allowance for Loan and Lease Losses (“ALLL”) associated with the Coex loan or approximately 0% of the carrying value of the loan.

Assets measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements

at June 30, 2021 Using:

Significant

Quoted Prices in

Other

Significant

Total at

Active Markets for

Observable

Unobservable

June 30, 

Identical Assets

Inputs

Inputs

Total Gains

(Dollars in thousands)

    

2021

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

(Losses)

Impaired Loans:

 

  

 

  

 

  

 

  

  

Commercial real estate

$

$

$

$

$

Residential real estate

 

 

 

 

 

Commercial

810

810

(658)

Construction and land development

Consumer and other

 

 

 

 

 

Total

$

810

$

$

$

810

$

(658)

Fair Value Measurements

at December 31, 2020 Using:

Significant

Quoted Prices in

Other

Significant

Total at

Active Markets for

Observable

Unobservable

December 31,

Identical Assets

Inputs

Inputs

Total Gains

(Dollars in thousands)

    

2020

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

(Losses)

Impaired Loans:

 

  

 

  

 

  

 

  

  

Commercial real estate

$

$

$

$

$

Residential real estate

 

 

 

 

 

Commercial

818

818

(8,309)

Construction and land development

Consumer and other

 

 

 

 

 

Total

$

818

$

$

$

818

$

(8,309)

23

As shown above our impaired loans consist solely of commercial loans considered to be Level 3. These Level 3 loans have significant unobservable inputs such as appraisal adjustments for local market conditions and economic factors that may result in changes in value of an assets over time.

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

June 30, 2021

Carrying

Fair

Fair Value

    

Amount

    

Value

    

Hierarchy

Financial Assets:

 

  

 

  

 

  

Cash & Due from Banks, including interest bearing deposits

$

616,180

$

616,180

 

Level 1

Federal Funds Sold

 

36,156

 

36,156

 

Level 1

Securities, Available for Sale - taxable

 

101,109

 

100,735

 

Level 2

Securities, Available for Sale - tax exempt

19,011

19,761

Level 2

Securities, Held to Maturity

 

1,285

 

1,296

 

Level 2

Securities, Equity

 

5,942

 

5,942

 

Level 1

Loans, net

 

1,680,168

 

1,702,726

 

Level 3

Loans Held For Sale

 

2,039

 

2,039

 

Level 1

Bank Owned Life Insurance

37,923

37,923

Level 2

Accrued Interest Receivable

 

5,449

 

5,449

 

Level 1, 2 & 3

Customer Derivatives - Interest Rate SWAPs

863

863

Level 2

Financial Liabilities:

 

  

 

  

 

  

Deposits

 

2,277,163

 

2,246,864

 

Level 2

Federal Home Loan Bank Advances

 

35,000

 

33,671

 

Level 2

Subordinated Debt

10,062

10,062

Level 2

PPPLF Advances

Level 2

Loan Participations

Level 2

Customer Derivatives - Interest Rate SWAPs

863

863

Level 2

Accrued Interest Payable

 

267

 

267

 

Level 2

December 31, 2020

Carrying

Fair

Fair Value

    

Amount

    

Value

    

Hierarchy

Financial Assets:

 

  

 

  

 

  

Cash & Due from Banks, including interest bearing deposits

$

191,597

$

191,597

 

Level 1

Federal Funds Sold

 

25,375

 

25,375

 

Level 1

Securities, Available for Sale - taxable

 

65,110

 

65,110

 

Level 2

Securities, Available for Sale - tax exempt

22,398

22,398

Level 2

Securities, Held to Maturity

 

1,547

 

1,561

 

Level 2

Securities, Equity

 

6,005

 

6,005

 

Level 1

Loans, net

 

1,643,373

 

1,653,401

 

Level 3

Loans Held For Sale

1,270

1,270

Level 1

Bank Owned Life Insurance

 

37,360

 

37,360

 

Level 2

Accrued Interest Receivable

 

6,666

 

6,666

 

Level 1, 2 & 3

Financial Liabilities:

 

  

 

  

 

  

Deposits

 

1,659,543

 

1,693,331

 

Level 2

Federal Home Loan Bank Advances

 

40,000

 

37,927

 

Level 2

Subordinated Debt

10,153

10,153

Level 2

PPPLF Advances

101,358

101,519

Level 2

Loan Participations

13,215

13,215

Level 2

Accrued Interest Payable

 

546

 

546

 

Level 2

NOTE 11 — CUSTOMER DERIVATIVES — INTEREST RATE SWAPS

During the first quarter of 2021, the Company established a program whereby it originates a variable rate loan and enters into a variable-to-fixed interest rate SWAP with the customer. The Company also enters into an offsetting SWAP with a SWAP dealer. These back-to-back SWAP agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The SWAPs with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the SWAPs are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to

24

earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurement and Disclosure (“ASC 820”). During the six months ended June 30, 2021, the Company recorded 5 SWAP transactions with clients having a total notional amount of $22.3 million, offset by five SWAP transactions with dealers having a total notional amount of $22.3 million. Additionally, we recorded $0.5 million in SWAP fees. The fair value of these derivatives is based on a market standard discounted cash flow approach. The Company incorporates credit value adjustments on derivatives to properly reflect the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. As of June 30, 2021, the Bank’s asset fair value position in other assets was $0.9 million and liability fair value position in other liabilities was $0.9 million, which were fully collateralized with pledged securities held with counterparty in excess of the exposure amount at quarter end.

NOTE 12 — LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

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

The contractual amounts of financial instruments with off-balance-sheet risk at June 30, 2021 and December 31, 2020, were as follows:

(Dollars in thousands)

    

June 30, 2021

    

December 31, 2020

Unfunded lines of credit

$

366,015

$

356,955

Commitments to extend credit

 

83,857

 

40,629

Letters of credit

 

11,226

 

13,036

Total credit extension commitments

$

461,098

$

410,620

NOTE 13 — REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for United States banks (Basel III rules) became effective for the Bank on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for June 30, 2021, is 2.50% and for December 31, 2020, was 2.50%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of June 30, 2021, the Bank met all capital adequacy requirements to which it was subject.

Prompt corrective action regulations provide 5 classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.

25

Actual and required capital amounts and ratios are presented below at June 30, 2021 and December 31, 2020. The required amounts for capital adequacy shown below do not include the capital conservation buffer previously discussed.

Minimum to be well

Actual

Minimum for capital adequacy

capitalized

(Dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

June 30, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Total capital ratio

 

  

 

 

  

 

  

 

  

 

  

Bank

$

198,836

 

12.8

%  

$

124,003

 

8.0

%  

$

155,004

 

10.0

%

Company

 

218,325

 

14.1

%  

 

124,003

 

8.0

%  

 

N/A

 

N/A

Tier 1 capital ratio

 

  

 

 

  

 

  

 

  

 

  

Bank

 

187,416

 

12.1

%  

 

93,002

 

6.0

%  

 

124,003

 

8.0

%

Company

 

196,844

 

12.7

%  

 

93,002

 

6.0

%  

 

N/A

 

N/A

Tier1 leverage ratio

 

  

 

 

  

 

  

 

  

 

  

Bank

 

187,416

 

7.4

%  

 

101,368

 

4.0

%  

 

126,710

 

5.0

%

Company

 

196,844

 

7.8

%  

 

101,368

 

4.0

%  

 

N/A

 

N/A

Common equity tier 1 capital ratio

 

  

 

 

 

  

 

  

 

  

Bank

 

187,416

 

12.1

%  

 

69,752

 

4.5

%  

 

100,753

 

6.5

%

Company

 

196,844

 

12.7

%  

 

69,752

 

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, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Total capital ratio

 

  

 

  

 

  

 

  

 

  

 

  

Bank

$

176,633

 

12.0

%  

$

117,298

 

8.0

%  

$

146,623

 

10.0

%

Company

 

215,977

 

14.7

%  

 

117,298

 

8.0

%  

 

N/A

 

N/A

Tier 1 capital ratio

 

  

 

 

  

 

  

 

  

 

  

Bank

 

159,448

 

10.9

%  

 

87,974

 

6.0

%  

 

117,298

 

8.0

%

Company

 

188,639

 

12.9

%  

 

87,974

 

6.0

%  

 

N/A

 

N/A

Tier1 leverage ratio

 

  

 

 

  

 

  

 

  

 

  

Bank

 

159,448

 

8.4

%  

 

75,723

 

4.0

%  

 

94,654

 

5.0

%

Company

 

188,639

 

10.0

%  

 

75,723

 

4.0

%  

 

N/A

 

N/A

Common equity tier 1 capital ratio

 

  

 

 

 

  

 

  

 

  

Bank

 

159,448

 

10.9

%  

 

65,980

 

4.5

%  

 

95,305

 

6.5

%

Company

 

188,639

 

12.9

%  

 

65,980

 

4.5

%  

 

N/A

 

N/A

NOTE 14 — STOCK BASED COMPENSATION

Restricted Stock

An award of restricted stock involves the immediate transfer by the Company to the participant of a specific number of shares of our Class A voting common stock, which are subject to a risk of forfeiture and a restriction on transferability. This restriction will lapse following a stated period of time. The participant does not pay for the restricted stock and has all of the rights of a holder of a share of our Class A voting common stock (except for the restriction on transferability), including the right to vote and receive dividends unless otherwise determined by the Compensation Committee and set forth in the award agreement.

The Company has limited the aggregate number of shares of our Class A voting common stock to be awarded under the 2019 Equity Incentive Plan as restricted stock to 300,000 shares. The Company has 222,009 shares of restricted stock outstanding, at a weighted average exercise price of $16.82, to employees and directors under the 2019 Equity Incentive Plan as of June 30, 2021, for which the Company did not receive, nor will it receive, any monetary consideration. Therefore, there were 77,991 restricted shares available to be issued at June 30, 2021. As of June 30, 2021, there was approximately $2.9 million in unrecognized compensation expense in regard to restricted stock that will be recognized over a three-year period.

26

NOTE 15 — LEASES

Operating leases in which the Company is the lessee are recorded as right-of-use (“ROU”) assets and operating lease liabilities, including premises and equipment and other liabilities, respectively on the Consolidated Balance Sheets. Currently the Company does not have any lessor leases (formerly known as capital leases) to report on its financials.

The Company’s ROU assets are classified under premises and equipment on the Balance Sheet. The ROU liabilities are classified under other liabilities. The Company did 0t record new ROU during the six months ended June 30, 2021, and recorded $2.0 million during the year ended December 31, 2020. The total amount of ROU was $5.6 and $6.5 million at June 30, 2021 and December 31, 2020, respectively.

The majority of the Company’s lessee leases are operating leases and consist of leased real estate for branches and operations centers. The Company elected the short term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months. The ROU assets represent the Company’s right to use the underlying assets during the lease term and operating liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement. Options to extend and renew leases are generally exercised under normal circumstances. Advance notification is required prior to termination, and any noticing period is often limited to the months prior to renewal. Variable payments generally consist of common area maintenance and taxes. Rent escalations are generally specified by a payment schedule or are subject to a defined formula. The Company also does not separate lease and non-lease components for all leases, the majority of which consist of real estate common area maintenance expenses. Generally, leases do not include guaranteed residual values, but instead typically specify that the leased premises are to be returned in satisfactory condition with the Company liable for damages.

Lease cost for the three and six months ended June 30, 2021 and 2020 consists of:

Three Months Ended

Three Months Ended

Six Months Ended

Six Months Ended

    

June 30, 2021

June 30, 2020

June 30, 2021

    

June 30, 2020

Operating Lease and Interest Cost

$

326

$

445

$

794

$

756

Variable Lease Cost

 

82

 

142

 

199

 

249

Total Lease Cost

$

408

$

587

$

993

$

1,005

The following table provides supplemental information related to leases for the three and six months ended June 30, 2021 and 2020:

Three Months Ended

Three Months Ended

Six Months Ended

Six Months Ended

    

June 30, 2021

June 30, 2020

June 30, 2021

    

June 30, 2020

Operating Lease - Operating Cash Flows (Fixed Payments)

$

326

$

445

$

793

$

756

Operating Lease - Operating Cash Flows (Liability Reduction)

$

296

$

416

$

921

$

669

New ROU Assets - Operating Leases

$

$

$

$

1,620

Weighted Average Lease Term (Years) - Operating Leases

5.25

6.02

Weighted Average Discount Rate - Operating Leases

%

%

3.13

%

3.02

%

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities as of June 30, 2021, is as follows:

    

June 30, 2021

Operating lease payments due:

 

  

Within one year

$

1,400

After one but within two years

 

1,421

After two but within three years

1,296

After three but within four years

1,093

After four years but within five years

955

After five years

706

Total undiscounted cash flows

6,871

Discount on cash flows

(1,291)

Total operating lease liabilities

$

5,580

27

NOTE 16 — SUBSEQUENT EVENTS

Loan Production Offices

On July 12, 2021, the Company expanded its Florida footprint by opening up 2 new loan production offices in Tampa/St. Petersburg and Jacksonville.  

28

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

Introduction

The following discussion and analysis are part of Professional Holding Corp.’s (the “Company”) Quarterly Report on Form 10-Q filed with the SEC and updates the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was previously filed with the SEC. This financial information is presented to aid in understanding the Company’s financial position and results of operations and should be read together with the financial information contained in the Form 10-K. See Note 1 “Summary of Significant Accounting Policies - Basis of Presentation” to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020, for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of June 30, 2021, compared to December 31, 2020.

Cautionary Note Regarding Forward Looking Information

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

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

the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
the effects of our lack of a diversified loan portfolio and concentration in the South Florida market, including the risks of geographic, depositor, and industry concentrations, including our concentration in loans secured by real estate;
the duration and severity of the COVID-19 pandemic and the severity of COVID variants both in our principal area of operations and nationally, and the impact of the pandemic, including the government’s responses to the pandemic, on our and our customers’ operations, personnel, and business activity (including developments and volatility), as well as the pandemic’s impact on the credit quality of our loan portfolio and on financial market and general economic conditions;
the frequency and magnitude of foreclosure of our loans;
changes in the securities, real estate markets and commodities markets (including fluctuations in the price of coffee or oil);
our ability to successfully manage interest rate risk, credit risk, liquidity risk, and other risks inherent to our industry;
the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss reserve and deferred tax asset valuation allowance;
increased competition and its effect on pricing of our products and services as well as our margins;
legislative or regulatory changes;
our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;

29

the Professional Bank’s (the “Bank”) ability to make cash distributions to us and our ability to declare and pay dividends, the payment of which is subject to our capital and other requirements;
changes in accounting principles, policies, practices or guidelines, including the effects of forthcoming CECL implementation;
our ability to fund and manage our growth, both organic growth as well as growth through other means, such as future acquisitions;
negative publicity and the impact on our reputation;
our ability to attract and retain highly qualified personnel;
technological changes;
cybersecurity risks including security breaches, computer viruses, and data processing system failures and errors;
our ability to manage operational risks, including, but not limited to, client, employee, or third-party fraud;
changes in monetary and fiscal policies of the U.S. Government and the Federal Reserve;
inflation, interest rate, unemployment rate, market, and monetary fluctuations;
the efficiency and effectiveness of our internal control environment;
the ability of our third-party service providers to continue providing services to us and clients without interruption;
geopolitical developments;
the effects of harsh weather conditions, including hurricanes, and other natural disasters (including pandemics such as COVID-19) and man-made disasters;
potential business interruptions from catastrophic events such as terrorist attacks, active shooter situations, and advanced persistent threat groups;
the willingness of clients to accept third-party products and services rather than our products and services and vice versa;
changes in consumer spending and saving habits;
growth and profitability of our noninterest income; and
anti-takeover provisions under federal and state law as well as our governing documents.

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

Executive Overview

Highlights of our performance and financial condition as of and for the three and six months ended June 30, 2021, and other key events that have occurred during 2021 are provided below.

30

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

Net income increased $1.5 million, or 32.3%, to $6.3 million compared to the prior quarter. The increase was primarily due to balance sheet expansion and increases in service charges on deposit accounts associated with acting as a correspondent bank for a Payroll Protection Program lender (the “Correspondent Banking Relationship”).
During the quarter we continued to participate in the Small Business Association’s Payroll Protection Program (“PPP”). We recognized $1.4 million in revenue primarily from fees in connection with the forgiveness of PPP loans associated with the Bank’s participation in the PPP (“Professional Bank PPP”) and $0.7 million in revenue from deposit correspondent fees from the Correspondent Banking Relationship.
Net interest income decreased $0.7 million, or 3.8%, to $17.2 million compared to the prior quarter primarily due to a decrease in Professional Bank PPP loan fees coupled with payoffs of higher yielding loans.
Noninterest income increased $1.1 million, or 105.7%, to $2.3 million, compared to the prior quarter primarily due to increases in service charges from the Correspondent Banking Relationship, secondarily to an increase in SWAP fees, and to income due to repayment of a Federal Home Loan Bank (“FHLB”) advance at a favorable position during the quarter.
Noninterest expense decreased $0.8 million, or 7.1%, to $11.0 million compared to the prior quarter primarily due to the payment of change-in-control obligations paid in the prior quarter.

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

The variance in the six-month Results of Operations for 2021 compared to 2020 occurred in part due to the March 26, 2020, closing date of the Marquis Bancorp, Inc. (“MBI”) acquisition as there were 95 days of MBI integration in the first six months of 2020 compared to 181 days in the first six month of 2021 (the “MBI Variance”).
Net income increased $9.3 million, or 512.8%, to $11.1 million compared to the prior year. The increase was primarily due to the MBI Variance, Professional Bank PPP loan fees recognized, and deposit fees associated with the Correspondent Banking Relationship.
Net interest income increased $10.7 million, or 44.1%, to $35.1 million from the prior year primarily due to loan growth.
Noninterest income increased $1.6 million, or 87.6%, to $3.4 million, compared to the prior year primarily due to increases in service charges on deposit accounts associated with the Correspondent Banking Relationship, $0.5 million increase in SWAP referral fees, $0.3 million increase in Bank Owned Life Insurance (“BOLI”), and $0.2 million increase in fees generated from loans held for sale, offset by a $0.3 million decrease in SBA loan origination fees.
Noninterest expense increased $1.7 million, or 8.1%, to $22.7 million compared to the prior year. The year over year increase was due to increased salaries and investment in digital infrastructure. The Bank’s number of employees increased from 137 as of December 31, 2019, to 179 as of June 30, 2020, which increase was due to the MBI acquisition, and further increased to 194 as of June 30, 2021.

Financial Condition

At June 30, 2021:

Total assets increased 14.7%, or $0.4 billion, to $2.6 billion compared to the prior quarter primarily due to increases in customer deposit accounts associated with the Correspondent Banking Relationship and investments in taxable securities available-for-sale. Additionally, total assets increased 26.0%, or $0.5 billion, compared to June 30, 2020.
Total loans were flat at $1.7 billion compared to the prior quarter. New loan originations were $186.8 million ($169.2 million of conventional loans, of which $118.0 million funded, coupled with $17.6 million of Professional Bank PPP loans). The Professional Bank PPP loan balance decreased $66.7 million, or 31.7%, from the prior quarter.

31

Total Deposits increased 19.7%, or $0.4 billion, to $2.3 billion compared to the prior quarter primarily due to increases in noninterest bearing demand deposit accounts. Additionally, average assets for the quarter increased due to large balances associated with the Correspondent Banking Relationship.
Nonperforming assets remained unchanged at $2.8 million compared to the prior quarter. As compared to June 30, 2020, the Company had nonperforming assets of $6.2 million.

Operating Results

Results of Operations for the three months ended June 30, 2021 and 2020

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

Three Months Ended June 30, 

 

(Dollars in thousands)

    

2021

    

2020

    

Change

 

Interest income

$

18,962

$

18,522

 

2.4

%

Interest expense

 

1,760

 

2,231

 

(21.1)

%

Net Interest income

 

17,202

 

16,291

 

5.6

%

Provision for loan losses

 

762

 

1,750

 

(56.5)

%

Net interest income after provision

 

16,440

 

14,541

 

13.1

%

Noninterest income

 

2,302

 

968

 

137.8

%

Noninterest expense

 

10,954

 

11,548

 

(5.1)

%

Income before income taxes

 

7,788

 

3,961

 

96.6

%

Income tax expense

 

1,457

 

830

 

75.5

%

Net income

$

6,331

$

3,131

 

102.2

%

Net income for the three months ended June 30, 2021, was $6.3 million, an increase of $3.2 million, or 102.2%, compared to the three months ended June 30, 2020. Interest income increased $0.4 million while interest expense decreased $0.5 million, resulting in a net interest income increase of $0.9 million for the three months ended June 30, 2021, compared to the same period in the prior year. The increase in our interest income year-over-year was primarily due to increased loan portfolio growth and decreased cost of funds to the Company. Provision for loan losses decreased by $1.0 million for the three months ended June 30, 2021, compared to the same period in the prior year. The decrease in the provision expense was primarily due to loan payoffs in higher risk categories offset by an increase in loan originations. The increase in noninterest income during the three months ended June 30, 2021, compared to the same period in the prior year was primarily due to increases in service charges on deposit accounts associated with the Correspondent Banking Relationship, and secondarily to an increase in SWAP fees, as well as a one-time credit due to the unwinding fee of a FHLB advance. The decrease in noninterest expense for the three months ended June 30, 2021, compared to the same period in the prior year was primarily due to the lack of MBI acquisition expenses this quarter and to a lesser extent the realization of our implementation efforts regarding operational efficiencies in occupancy, equipment, and data processing expenses.

Net Interest Income and Net Interest Margin Analysis

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

Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest earning assets, interest bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment rates, the money supply, political and international conditions, and circumstances, in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, the economic and competitive conditions in the Miami-Dade MSA, as well as developments affecting the real estate, technology, government services, hospitality and tourism, and financial services sectors within the Miami-Dade MSA. Our ability to respond to changes in these factors by

32

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.

33

For the Three Months Ended June 30, 

2021

2020

    

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-bearing deposits

$

580,632

$

178

 

0.12

%  

$

170,658

$

44

 

0.10

%  

Federal funds sold

 

69,506

 

24

 

0.14

%  

 

32,965

 

12

 

0.15

%  

Federal Reserve Bank stock, FHLB stock and other corporate stock

 

7,391

 

99

 

5.37

%  

 

7,598

 

131

 

6.93

%  

Investment securities - taxable

 

70,137

 

161

 

0.92

%  

 

88,365

 

241

 

1.10

%  

Investment securities - tax exempt

20,172

189

3.76

%  

20,973

197

3.78

%  

Loans(1)

 

1,699,403

 

18,311

 

4.32

%  

 

1,501,590

 

17,897

 

4.79

%  

Total interest earning assets

 

2,447,241

 

18,962

 

3.11

%  

 

1,822,149

 

18,522

 

4.09

%  

Loans held for sale

2,638

Noninterest earning assets

 

115,358

 

  

 

 

102,663

 

  

 

  

Total assets

$

2,565,237

 

  

 

$

1,924,812

 

  

 

  

Liabilities and stockholders’ equity

 

  

 

  

 

 

  

 

  

 

  

Interest-bearing liabilities

 

  

 

  

 

 

  

 

  

 

  

Interest-bearing deposits

 

1,377,712

 

1,430

 

0.42

%  

 

994,972

 

1,617

 

0.65

%  

Borrowed funds

 

56,347

 

330

 

2.35

%  

 

230,516

 

614

 

1.07

%  

Total interest-bearing liabilities

 

1,434,059

 

1,760

 

0.49

%  

 

1,225,488

 

2,231

 

0.73

%  

Noninterest-bearing liabilities

 

  

 

  

 

 

  

 

  

 

  

Noninterest-bearing deposits

 

890,292

 

  

 

 

475,613

 

  

 

  

Other noninterest-bearing liabilities

 

17,690

 

  

 

 

19,540

 

  

 

  

Stockholders’ equity

 

223,196

 

  

 

 

204,171

 

  

 

  

Total liabilities and stockholders’ equity

$

2,565,237

 

  

 

$

1,924,812

 

  

 

  

Net interest spread(2)

 

  

 

  

 

2.62

%  

 

  

 

  

 

3.36

%  

Net interest income<