Q2 2022 Professional Holding Corp Earnings Call

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Good morning everyone and welcome to the Professional Holding Corporation conference call to discuss financial results for the three months ended June 30, 2022. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

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Please note, this event is being recorded.

At this time, I would like to turn the conference over to the company's general counsel, Michael Sauntag. Please go ahead.

Good morning, and thank you for joining Professional Holding Corps' second quarter 2022 earnings call.

Representing the company on today's call are President and Chief Executive Officer, Avalid Glacias, Chief Financial Officer, Mary Eusef Teggi, Chief Information Officer, Orion Gourney, and our Chairman, Herbert Attanas. Yesterday, after market closed, we announced our financial results for the second quarter 2022. A copy of our press release can be found on our website at prohocos.com. The release contains a notice regarding where we're looking statements.

As today's discussion may include such statements as defined by the SEC in connection with future events, future operating results, or financial performance. You can find more information about the risks on certainties and other factors in our reports filed with the SEC. In today's discussion, we will also include references to certain non-GAAP financial measures. These non-GAAP measures are presented for supplemental informational purposes only.

here today and investing your time to participate in Professional Holdings quarterly investor call.

I am happy and proud to report that we had our best quarter on record for both quarterly net income and loan originations.

Traditional banking continues to be a percent of professional banks offerings. With C&I and CRE representing 72% of our loan portfolio and residential loans representing 21% as of June 30th. We thank Comly and the pies for each of the rapid losses from all over Russia but in the following years, the days of April and mungkinburnetsk st St St St St St St St St St St St St St St St A St St St St St St St St st St St St St St St X St St St St St St St St St St St St St St St St St St St St St St St St you

Loan originations were over $300 million for the quarter and net income was approximately $7 million for 52 cents per share.

Additionally, Professional Holding Corp. was added back into the Russell 2000 Index.

In a compost frid, our company is extremely proud of.

For the second quarter of 2022,

Annualized loan growth was 36.2%.

with record loan production of $316 million, which was partially offset by paydowns and prepayments.

Our bankers in Jacksonville, Tampa, and New Hampshire are exceeding our expectations with new loan production. Our exceeding our expectations with new loan production.

Credit quality remains exceptional as we are committed to maintaining disciplined, underwriting standards on an individual, team, office, and company wide basis while continuing to focus on expanding our concierge banking strategy with our clients.

As Mary will touch upon later.

We did add to our allowance this quarter, but it was the result of loan growth, not because we have any concerns with credit quality.

Our team continues to deliver strong loan production across our markets and offerings.

Total loans grew to approximately 2 billion as of June 30th, increasing 9% during the second quarter, or 36.1% annualized loan growth, and has grown 15.2% over the last 12 months.

Paydowns of prepayments slowed in the quarter, which was added and added benefit to our loan production group.

Ad relationally.

$69.5 million of loans with a weighted average rate of 4.82% were booked on the last day of the quarter and are not reflected in the net income discordor. Although their associated amount balances are reflected this quarter.

A long book remains conservatively constructed through the end of the second quarter with quarterly originations having a weighted average, loans to value, a 54.7% and an average loan size of 2.2 million.

Overall, our weighted average loan to valley remains conservative at 50.1.9%.

As a reminder, while our legal lending limit is $31 million unsecured and $52 million secured

Most of our landing relationships are under 10 million.

Commercial loans, including CNI and Search Fund, grew by 10.1% during the quarter and 20.5% over the last 12 months.

excluding PPP are existing lending teams capitalized on our continued strong pipelines.

Our lenders' deep roots networks have similarly resulted in a strong pipeline of activity on the commercial real estate side, with CRE up 11% during the quarter and 14.6% over the last 12 months.

New loan originations in the second quarter were led by commercial and commercial real estate production.

With total originations of 315.8 million, more than offsetting pay off and pay down to 85.8 million.

We also saw a record quarterly net income of $7 million on an increase of 4.6 compared to 2.4 in the prior quarter. The net income of $7 million on an increase of 4.6 compared to 2.4 in the prior quarter.

Our focus on cost containment and profitability is evident in our results.

Our efficiency ratio was 53.2% for the second quarter, improving from 81.2% in the first quarter, in 56.2% in the second quarter of 2021. In 56.2% in the second quarter of 2021.

Additionally, our return on average assets exceeded 1% of the total of 1.03% for the quarter compared to 0.36% last quarter. of the total of 1.03% for the quarter compared to 0.36% last quarter.

As I've said,

We are focused on profitability and creating efficiency.

The Digital Innovation Center in Cleveland not only helps us grow, but also maintains a balanced expense structure.

This team is led by a key member of our management team, Chief Information Officer Ryan Gordon.

I'd like to invite Ryan to share some comments about our most recent digital developments. Ryan.

Thanks, Abel. As I mentioned in our last earnings call, the Cleveland Digital Innovation Team has been developing software for our bankers to continue to focus on our clients' needs.

while making it easier and more efficient to work at Professional Bank.

Learning from our wirebot automation that I mentioned last quarter, we created and are piloting a wire workflow tool set, which takes the manual processes around wire tracing, recalls an adjustment.

and puts them into a user-friendly workflow engine, thus cutting down on manual processes and human errors.

When fully deployed, we expect the tool to further defer the need for additional resources as well as overtime expenses we continue to grow. The wire workflow tool set is also the first implementation of our new workflow engine, which we will implement across our institution and drive further efficiency and scale.

Additionally, we continue to focus on information security enhancements and employee mobility through enhancing our security posture to adopting the latest in employee identity and access management as well as strengthening cloud security capabilities.

As such, since we are utilizing internally developed software,

This had a slight impact to earnings this quarter as we capitalized a portion of our salary associated with the software utilization.

We will continue to focus on ways to improve our bankers' jobs and continue to drive down the efficiency ratio.

The IT and OPS team remains more engaged than ever in finding solutions to drive efficiency to the organization. The IT and OPS team remains more engaged than ever

With that being said, I will hand it back to Abel.

Thank you, Ryan.

Our commitment to digital innovation center remains a key to our future success.

We intend to continue generating top line and balance sheet growth by offering traditional banking services to business owners and operators, professionals, and other entrepreneurs. When a consumer looking down on?, they are demanding assimilation excellent approach of the individual and operators and working on another you

We will continue to provide our unique brand with customized, consured service to our clients while we maintain underwriting a risk management discipline.

We will also continue to invest in talent and technology to provide an exceptional client experience. We will continue to invest in talent and technology to provide an exceptional client experience. We will continue to invest in talent and technology to provide an exceptional client experience. We will continue to invest in talent and technology

And now that I have mentioned talent.

I wanted to reiterate that professional bank continues to have a very low attrition rate, executive management remains intact and key bankers, remain more than ever driven to deliver bottom line results.

The experience we have combined with low turnover gives us the foundation to stay on track and move professional banking to the future.

For some additional detail on our financial performance of the second quarter and her perspective overall, it is a pleasure to introduce our CFO , Mary Usutegui.

Thank you, Abel.

I wanted to begin with the record results from the quarter that Able touched upon earlier. Quarterly net income was $7 million or $52 cents per share.

While Q1 included severance associated with the departure of our former CEO , adjusted Q1 net income was $5 million, meaning that on an adjusted basis, adjusted net income improved $2 million over prior quarter or 40% improvement.

Net interest income was up 15% from the previous quarter to $21.9 million for the second quarter of 2022 and up 27.4% from the year-ago period, a combination of rate increases on our assets and extraordinary growth in higher yielding categories.

Net interest margin of 3.42% expanded 45 basis points from 2.97% in the previous quarter as yields improved on interest earning assets and loan growth originations in the quarter.

Poor NIM, which we define as NIM backing out PPPCs and purchase accounting marks, also increase significantly to 3.04% of 46 basis points from 2.58% to previous quarter.

Non-interest income increased 39.9% primarily from the previous quarter. This quarter included the investment of $15 million in additional BOLI proceeds as well as the recognition of expected insurance proceeds from a previously disclosed wire fraud.

Turning to expenses, non-interest expenses decreased by 23.6% from the first quarter. Relative to the previous quarter, salaries and employee benefits were down due to the prior quarter severance expense associated with the departure of the former CEO and a benefit from capitalization of internally developed software.

We do anticipate a slight increase in salary and benefits as we continue to work on retainment of top talent in the marketplace.

All other expense categories remain somewhat neutral from the prior quarter, and we expect that trend to continue.

As a result of the strong loan growth we had this quarter, we booked $2.2 million in provision expense of $1.4 million from the previous quarter.

This increases the result of loan growth and not a result of any concern credits in our portfolio.

Additionally, the net charge off this quarter was on a previously disclosed impaired loan and was not a result of any new credit concerns.

As a result of the provision expense in charge of, our allowance to total loans was 76 basis points.

It includes some of the marquee loan marks plus our allowance. Loan marks plus allowance was 1.26% to the total loan portfolio. To the total loan portfolio. to the total loan portfolio.

As we mentioned in last quarter's earning call, our commitment to bottom-line profit was and will be top of mind as we move forward in 2022.

This focus included allowing some high price deposits outflow.

As a result of positioning our balance sheet for maximizing net profit, our loan-to-deposit ratio improved from 70% in Q1 2022 to 83% in Q2..

While professional banks in market, relationship driven deposit franchise slows during the quarter, non-intersparing deposits make up nearly 33% of total deposits and supported further improvement to our cost and deposits in the quarter to 24 basis ones.

We will continue to monitor our balance sheet and will adjust the rates as necessary to ensure we maintain the top clientele in our portfolio. As such, we do expect some cost of deposit upward movement in Q3, given the recent Fed announcement of 75 basis point increase on Wednesday. However, if we do still expect nymph expansion, even the expected cost of deposit increase.

We maintained a disciplined policy on deposit pricing, which may have impacted deposit growth, but has not impacted our banking relationships.

Maintaining cash balances and having both floating rate loans and loans maturing in less than one year, we continue to remain as a sensitive and our position well in a rising rate environment.

As Abel mentioned, credit quality continued to show strong performance with non-performing assets declining.

Our capital levels remain strong with total risk-based capital of 12.8% and a leveraged capital ratio of 8.1%.

Tangible book value per share increased to $15.13 compared to $14.93 in the prior quarter, boosted by strong earnings despite the $11 million loss and accumulated other comprehensive income at the end of the quarter.

Our bank is well positioned to benefit in the raising rate environment, and with our laser-focused commitments to profitability and prudent risk in capital management, the business we have will continue to deliver profitable long-term growth.

With that financial update, I'll head back over to April .

Thank you, Mary. Before beginning our Q&A, I want to reaffirm our commitment to focus on bottom line profitability, not at the sake of credit quality, but as a result of developing strong client relationships and improvement in operational efficiency.

The focus will continue to be on maximizing shareholder value, and I hope this commitment has shown with stellar results we've had as my first full quarter as CEO . On that note, I would be happy to entertain questions at this time.

We will now begin the question and answer session.

we would ask each participant to limit themselves to one question with one follow-up per person.

You may continue to re-enter the queue and submit additional questions if you wish.

To ask a question, you may press star then 1 on your telephone keypad.

If you're using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster.

Our first question is from Brady Galey with KBW. Please go ahead.

Hey thanks, good morning guys.

Morning, Brady.

So, you know, professional achieved a 1% RWA in the quarter. I was just wondering, you know, do you think the 1% RWA is achievable still going forward? Or do you think that it'll be lumpy and it could dip back below 1% before, you know, you kind of maintain 1% from a longer-term point of view? You know, you kind of maintain 1% from a longer-term point of view.

Ready, that's the goal. We believe that we are on track. As we stated in our last quarter, we said that the goal is to achieve at the minimum of 1% and higher. So the goal is to continue to stay true to that target. I believe we can. And so I think everybody is aligned and focused on achieving that.

forward.

All right, then your professional saw some really nice expense control in the quarter with expenses down to $12.6 million. How do you think about expense creep going forward? Do you think expenses can be held flat, or should we expect some modest growth in expenses going forward?

Mary Hanlon. Hey Brady how are you? I would say you know we did disclose that there were two not extraordinary but timing wise a little bit different than what we're usually seeing. We did disclose that we'd capitalized software expense this quarter to the tune of about $400,000. As Cleveland develops the software and as we implement it that will be an ongoing credit to expenses however it is going

some expense creep and salary and benefits just as we retain top clients or sorry, top employees in the organization, but I do think considering all those factors, everything else is good to continue moving forward as we focus on cost containment. I would add, the only other thing is that, as we said in the past, the focus is squarely on controlling expenses and being mindful of profits going forward. So this is in line with what we said that we would do back in Q.

mindful of the macro environment, very, very close here in Watchville, I, on what's happening in the marketplace. But for now, I would tell you that I see it stabilizing and leveling off for the bounce of the year. That said, our bankers and our folks are really beating the pavement and they're leveraging their relationships and deepening their existing client relationships and attracting market share. I like what I'm seeing, but we're very cautious.

but we're forecasting. I think it'll be at the low teams at this point going forward. And I think that's an appropriate forecast for us to... and I think that's an appropriate forecast for us to...

to put out there at this point given the uncertainties out there.

Okay, great. Thanks for the killer, guys.

The next question is from Steven Scouten with Piper Sandler. Please go ahead.

Hey, thanks. Good morning.

I guess maybe digging down a little bit further into the loan growth. I would look like it was pretty well balanced across categories. I'm curious particularly the newer markets and you mentioned Jacksonville Tampa New Hampshire exceeding expectations but I'm wondering if you could give some detail about how much they added to production this quarter or any sort of overall balances that you've seen today in those markets.

So you have to continue to produce at their level, and the anticipated levels, they continue to do well. They are, you know,

because they're tracking very nicely for the year on the CNI side for the quarter they did approximately about $15 million. I can tell you that Tampa, St. Pete and Jacksonville are nearing break even and they're just shy of $40 million, which is on pace with what we anticipated that they would be at at this point through June 30th. So we believe that they will continue to...

to, you know, their pipelines are strong. And so we believe that they will achieve an exceed break even before the end of the year.

Okay, helpful. Thanks Abel. And then...

It looked like in the slide deck the asset sensitivity and up 100 basis points from here had a pretty significant move down. I think it was plus 6% last quarter, now it's up 2.4%. So I'm wondering, were there any changes to your assumptions within that or is that just a reduction in some of the liquidity given the move down in deposits?

You know, I would have almost thought those numbers would have gone up given how well your deposit costs, you know, responded this quarter.

Hey Steve, I would say it is the latter. It's a reduction of just the deposits in our portfolio really had an effect. We were sitting on quite significant amount of liquidity that was supposed to be as sensitive as can be. That's come down our loan book's gone up. And so that's the driving factor. There were no major assumption changes in the modeling.

Okay, and just to follow up on that, what are you guys assuming from a beta perspective on your deposits within your assets and saving money?

We're not disclosing that per se, but we do expect a significant deposit, cost of deposit creep up. However, we do still expect some NIM expansion even with the cost of deposit creep. We're seeing some of our competitors put out some pretty high rates. And now that we feel a little bit more comfortable with our loan-to-deposit ratio going from 70 to 83, we're starting to monitor that and we do expect there to be a cost of deposit increase.

Yeah, I would add to that that, you know, it's become fairly apparent with what we're seeing in the marketplace that we're gonna have to place some defense and perhaps a little bit of offense on the deposit side. So I believe that we're gonna start seeing some increase in our deposit cost going forward just by what we're seeing in the marketplace. But we're gonna do it on an exception type basis now, you know, and for the foreseeable future. And.

Again, with the focus on retaining relationships and maintaining accounts here in the bank. So, but no question that we're going to start seeing an increase.

Well, not many banks were able to start this quarter with a reduction in deposit costs, so starting from a strong place. So congrats on the quarter.

Thank you.

The next question is from Joey and Choonis with Raymond James. Please go ahead.

Hi there, they were taking my questions.

So after successfully improving your loan to deposit ratio as you just discussed, do you feel like right now you are kind of in the optimal range that you would like to have that?

No, we like to see that continue to expand and grow. And so, and we believe that it will, given the where we see the pipelines of our loans. Now again, as we said in our opening comments, we're not gonna do that at the expense of credit quality. We're gonna be very disciplined in the way that we continue to grow our loan book. And very mindful of what's happening with the economy.

But to answer your question, we'd like to see it continue to grow and we believe that we will.

Okay, and then...

With your prior comments about increasing deposit costs, should we expect some deposit growth from here?

Yes, and a lot of it will have to do with obviously with where our loan book is at and our typelining balls. But, you know, our bankers are active and they're incentive on bringing deposits into the bank specifically low cost deposits that's part of their incentive. And so, I mean, listen, as your loans deposit. And so, I mean, listen, as your loans deposit.

ratio starts to creep up your your activity and bringing in you know deposits you know needs to increase along with it i should say we haven't seen accounts close with you know your deposits came down relationships have not gone away

Some of this may have been deposit, you know tax payments for the quarter.

Some of it was obviously us not paying up for deposits that we didn't believe that we needed to retain, but more importantly, perhaps the one figure that I focused on.

is, you know, relationship turn. And we're seeing, you know, our existing clients have retained their relations. We're retaining relations, we're keeping accounts here. So I think that's important. It's important data point for us to keep an eye on. And we believe that as long as that continues to be the case, I think we can certainly expand other parts that's going forward. And the other parts that's going follow.

Perfect. All right, I guess that was a change from the March quarter when I believe you said you're not incentivizing your bankers to bring in a whole lot of deposits. I'm going to be able to bring in a whole lot of deposits.

And then for my last question.

kind of given the rising rate environment should we expect swap income to be pretty diminimess at this point.

And if so, are there any issues how to plug that fee income hole?

Well, yes, I mean given the rate environment we don't expect much from the swap area, but we are very active in the SBA front.

And we've expanded our SBA lending team. We believe that that will start to generate additional fee income for us going forward. And let me just address briefly your comments on the previous statements in the last quarter with regards to deposits. At the time, our low to deposit ratio was in the high 60 low 70s. This is dynamic balance sheet, the dynamic management of the balance sheet. So again, I wanna reiterate, while we're not chasing high cost deposits, and let's be honest here.

This is a market where we want to open up the deposits, pick it, we can do so. We can put up a good rate, and we can bring in deposits immediately. We're very careful about that. Now again, to my past comments on deposits and loan to deposits, I think it's important that we keep a very close eye, and we will, with regards to where our pipeline, our loan pipeline, is at, and what our funding needs are. And we will react accordingly.

And if we have to set it to bring in new deposits, then we will do so to be able to

we have to incentive to bring in new deposits and we will do so to be able to to maintain the right levels of liquidity to fund our needs.

Understood, I appreciate it. Congrats on a great quarter.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Abel Iglesias for any closing remarks.

Well, thank you. I'd like to thank everyone. I'd like to conclude by thanking our analysts and investors for participating this morning. I want to reiterate that our management team is highly energized and motivated to execute on our plans and creating long-term shareholder value. As we said in the past, please feel free to contact Mary or our General Counsel Mike Sontag with questions or to schedule additional discussions with us. Thank you very much, everyone. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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