Professional Holding Corp. (NASDAQ:PFHD) Q2 2022 Earnings Conference Call July 29, 2022 11:00 AM ET
Company Participants
Michael Sontag – General Counsel
Abel Iglesias – President and Chief Executive Officer
Mary Usategui – Chief Financial Officer
Ryan Gorney – Chief Information Officer
Herbert Martens – Chairman
Conference Call Participants
Brady Gailey – KBW
Stephen Scouten – Piper Sandler
Joe Yanchunis – Raymond James
Operator
Good morning, everyone and welcome to the Professional Holding Corporation Conference Call to discuss Financial Results for the 3 months ended June 30, 2022. [Operator Instructions] 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 Sontag. Please go ahead.
Michael Sontag
Good morning and thank you for joining Professional Holding Corp.’s second quarter 2022 earnings call. Representing the company on today’s call are President and Chief Executive Officer, Abel Iglesias; Chief Financial Officer, Mary Usategui; Chief Information Officer, Ryan Gorney; and our Chairman, Herbert Martens.
Yesterday, after market close, we announced our financial results for the second quarter of 2022. A copy of our press release can be found on our website at proholdco.com. The release contains a notice regarding forward-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, uncertainties 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 and should not be considered as a substitute for financial information presented in accordance with GAAP. Please refer to the reconciliation of these measures to the most directly comparable GAAP measures in our press release.
At this time, I will turn the call over to our President and CEO, Abel Iglesias.
Abel Iglesias
Thank you, Mike and thank you all for being 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 at the center of Professional Bank’s offerings with C&I and CRE representing 72% of our loan portfolio and residential loans representing 21% as of June 30. Loan originations were over $300 million for the quarter and net income was approximately $7 million or $0.52 per share. Additionally, Professional Holding Corp. was added back into the Russell 2000 Index, an accomplishment 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 pay-downs and prepayments. Our bankers in Jacksonville, Tampa, and New Hampshire are 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 30, increasing 9%, during the second quarter or 36.1% annualized loan growth and has grown 15.2% over the last 12 months. Pay-downs and prepayments slowed in the quarter, which was an added benefit to our loan production growth. Additionally, $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 this quarter, although their associated allowance balances are reflected this quarter. The loan book remains conservatively constructive through the end of the second quarter with quarterly originations having a weighted average loan-to-value of 54.7% and an average loan size of $2.2 million.
Overall, our weighted average loan to value remains conservative at 51.9%. As a reminder, while our legal lending limit is $31 million unsecured and $52 million secured most of our lending relationships are under $10 million. Commercial loans, including C&I and search fund grew by 10.1% during the quarter and 20.5% over the last 12 months. Excluding PPP, our 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 payoff and pay-downs of $85.8 million.
We also saw a record quarterly net income of $7 million on an increase of $4.6 million compared to $2.4 million in the prior quarter. Our focus on cost containment and profitability is evidenced in our results. Our efficiency ratio was 53.2% for the second quarter, improving from 81.2% in the first quarter and 56.2% in the second quarter of 2021. Additionally, our return on average assets exceeded 1% lending and 1.03% for the quarter compared to 0.36% last quarter. As I have said, we are focused on profitability and creating efficiency. The Digital Innovation Center in Cleveland not only helps us grow, but also maintained a balanced expense structure. This team is led by a key member of our management team, Chief Information Officer, Ryan Gorney.
I’d like to invite Ryan to share some comments about our most recent digital developments. Ryan?
Ryan Gorney
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 in professional bank.
Learning from our wire bot 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 and adjustments 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 expense as 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 institutions 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.
With that being said, I will hand it back to Abel.
Abel Iglesias
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. We will continue to provide our unique brand of customized concierge service to our clients while we maintained underwriting and risk management discipline. We will also continue to invest in talent and technology to provide an exceptional client experience.
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 Bank into the future.
For some additional detail on our financial performance in the second quarter and her perspective overall, it is a pleasure to introduce our CFO, Mary Usategui.
Mary Usategui
Thank you, Abel. I wanted to begin with the record results from the quarter that Abel touched upon earlier. Quarterly net income was $7 million or $0.52 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.
For NIM, which we define as NIM backing out PPP fees and purchase accounting marks also increased significantly to 3.04%, up 46 basis points from 2.58% the previous quarter. Non-interest income increased 39.9% primarily from the previous quarter. This quarter included the investment of $50 million of additional BOLI proceeds as well as the recognition of expected insurance proceeds from a previously disclosed wire front.
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 repayment of top talent in the marketplace. All other expense categories remained 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 of provision expense, up $1.4 million from the previous quarter. This increase is a result of loan growth and not a result of any concerned 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 and charge-offs, our allowance to total loans was 76 basis points. If inclusive of the marquee loan marks, plus our allowance, loan marks plus allowance was 1.26% to the total loan portfolio.
As we mentioned in last quarter’s earnings 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-priced 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-interest-bearing deposits make up nearly 33% of total deposits and supported further improvements to our cost of deposits in the quarter to 24 basis points.
We will continue to monitor our balance sheet and we’ll adjust 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, we do still expect NIM expansion even when 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 1 year, we continue to remain asset sensitive and are positioned well in a rising rate environment.
As Abel mentioned, credit quality continued to show strong performance with nonperforming assets declining. Our capital levels remained strong with total risk-based capital of 12.8% and a leverage 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 in accumulated other comprehensive income at the end of the quarter.
Our bank is well positioned to benefit in the rising rate environment. And with our laser-focused commitment to profitability and prudent risk and capital management, the business we have will continue to deliver profitable long-term growth.
With that financial update, I’ll hand it back over to Abel.
Abel Iglesias
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.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Brady Gailey with KBW. Please go ahead.
Brady Gailey
Hi, thanks. Good morning, guys.
Abel Iglesias
Good morning, Brady.
Brady Gailey
So Professional achieved a 1% ROA in the quarter. I was just wondering, do you think the 1% ROA is achievable still going forward? Or do you think that it will be lumpy and it could dip back below 1% before you kind of maintain 1% from a longer-term point of view?
Abel Iglesias
Brady, 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 a 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 going forward.
Brady Gailey
Alright. And then 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?
Abel Iglesias
Mary, handle that.
Mary Usategui
Hi, Brady, how are you? I would say 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 capitalized software expense this quarter to the tune of about $400,000. As Cleveland develops a software and as we implement it, that will be an ongoing credit to expenses. However, it is going to be cyclical. It’s not going to be stagnant going forward. So that’s one item that I would back out of modeling. The other one was high FAS 91 fees this quarter, which was a direct result of loan growth and we had record originations of $316 million. And that, again, was driven solely by loan growth. But other than that, I’d say the expense structure is pretty much on point. I did mention that there might be some expense creep in salary and benefits just as we retain top clients – 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.
Ryan Gorney
I would add the only other thing is that as we’ve said in the past, the focus is squarely on controlling expenses, be mindful of profits going forward. So this is in line with what we said that we would do back in Q1. And it’s playing out as you can see now in the results and that will continue to be the focus going forward, Brady.
Brady Gailey
Okay. And then, finally for me, a nice step-up in loan growth here. How are you guys thinking about loan growth going forward?
Abel Iglesias
I see it stabilizing to more normalized levels. And we got a healthy pipe right now, strong. But we’re mindful of the macro environment, keeping a very, very close ear and not rely on what’s happening in the marketplace. But for now, I would tell you that I see it stabilizing and leveling off for the balance of the year. That said, our bankers and our folks are really beating the pace and they are leveraging their relationships and deepening their existing client relationships and attracting market share. So I like where we’re at. I like what I’m seeing. But we’re very cautious about and keeping a close eye as to how things are evolving in the macroeconomic environment.
Brady Gailey
And where do you think it stabilizes to? I mean if I look last year and kind of the pace that you all have been running, it feels like a stabilized loan growth level could be kind of low to mid-double-digit range. Is that the right way to think about it?
Abel Iglesias
That is exactly what we’re forecasting. I think it will be in the low teens at this point going forward. And I think that’s an appropriate forecast for us to put out there at this point given the uncertainties out there.
Brady Gailey
Okay, great. Thanks for the color, guys.
Operator
The next question is from Stephen Scouten with Piper Sandler. Please go ahead.
Stephen Scouten
Hi, thanks. Good morning. I guess, maybe digging down a little bit further into the loan growth. It looked like it was pretty well balanced across categories. I’m curious, particularly the newer markets, I know you mentioned Jacksonville, Tampa and 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 to date in those markets?
Abel Iglesias
So New Hampshire continues to produce at their level and anticipated levels. They continue to do well. They are – I guess they are tracking very nicely for the year. On the C&I side, for the quarter, they did approximately about $15 million. I can tell you that Tampa, St. Pete and Jacksonville are nearing breakeven. They are just shy of $40 million, which is on pace with what we anticipated that they would be at, at this point through June 30. So we believe that they will continue to – their pipelines are strong. And so we believe that they will achieve and exceed breakeven before the end of the year.
Stephen Scouten
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? Because I would have almost thought those numbers would have gone up given how well your deposit costs responded this quarter.
Abel Iglesias
Mary?
Mary Usategui
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 asset-sensitive as can be. That’s come down. Our loan book has gone up. And so that’s the driving factor. There were no major assumption changes in the modeling.
Stephen Scouten
Okay. And just to follow-up on that. What are you guys assuming from a beta perspective on your deposits within your asset sensitivity modeling?
Mary Usategui
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.
Abel Iglesias
Yes. I would add to that, that it’s become fairly apparent with what we’re seeing in the marketplace that we’re going to have to play some defense and perhaps a little bit of offense on the deposit side. So I believe that we’re going to start seeing some increase in our deposit cost going forward just by what we’re seeing in the marketplace. But we’re going to do it on an exception type basis now and for the foreseeable future and again with the focus on retaining relationships and maintaining accounts here in the bank, but no question that we’re going to start seeing an increase.
Stephen Scouten
Got it. Well, not many banks were able to start this quarter with a reduction in deposit costs. Starting from a strong place, so congrats on the quarter.
Abel Iglesias
Thank you.
Operator
The next question is from Joe Yanchunis with Raymond James. Please go ahead.
Joe Yanchunis
Hi, there. Thanks for taking my questions. So after successfully improving your loan-to-deposit ratio, as you just discussed, do you feel like right now you’re kind of in the optimal range where you’d like to have that?
Abel Iglesias
No. We’d like to see that continue to expand and grow. And so – and we believe that it will, given where we see the pipelines of our loans. Now again, as we said in our opening comments, we’re not going to do that at the expense of credit quality. We’re going to 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 to continue to grow and we believe that we will.
Joe Yanchunis
Okay. And then with your prior comments about increasing deposit costs, should we expect some deposit growth from here?
Abel Iglesias
Yes. And a lot of it will have to do with, obviously, with where our loan book is at and how our pipeline evolves. But our bankers are active. And they are incented on bringing deposits into the bank, specifically low-cost deposits. That’s part of their incentive. And so I mean, listen, as your loan-to deposit ratio starts to creep up, your activity in bringing in deposits needs to increase along with it. I should say we haven’t seen accounts closed. Our deposits came down. Our relationships have not gone away. Some of this may have been deposit – 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 and the one figure that I focused on is relationship churn. And we’re seeing our existing clients have retained their relationships. We’re retaining relationships, 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 on deposits going forward.
Joe Yanchunis
Perfect. Alright. 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. And then for my last question, kind of given the rising rate environment, should we expect swap income to be pretty de minimis at this point? And if so, are there any initiatives to kind of plug that fee income hole?
Abel Iglesias
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. Let me just address briefly your comment on the previous statements in the last quarter with regards to deposits. At the time, our loan-to-deposit ratio was in the high 60s, low 70s, this dynamic – balance sheet, the dynamic management of the balance sheet. So again, I want to 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 deposits, 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, in my past comments on deposits and loan-to-deposits, I think it’s important that we keep a very slow sign, 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 incent to bring in new deposits, then we will do so to be able to maintain the right levels of liquidity to fund our needs.
Joe Yanchunis
Understood. I appreciate. Congrats on a great quarter.
Abel Iglesias
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Abel Iglesias for any closing remarks.
Abel Iglesias
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.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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