SBCF (2022 - Q1)

Good morning everyone and welcome to the Professional Holding Corp Conference Call to Discuss Financial Results of the Three Months ended March 31, 2022. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Before turning the call over to management, please direct your attention to the statement contained at the end of the company's press release posted on proholdco.com regarding forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained in this presentation that are not statements of historical fact may be deemed to be forward-looking. Forward-looking statements represent the Company's current expectations, plans or forecasts and involve significant risks and uncertainties. Several important factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to those described in the Company's most recent form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. The Company disclaims any obligations to update any of the forward-looking statements included here and to reflect future events or developments or changes in expectation, except, as maybe required by law. To the extent of non-GAAP financial measures are discussed in this call, they will be presented with the most comparable GAAP measures, and reconciliations of the non-GAAP measures can be found on the Company's news release issued today and available on proholdco.com. Representing Professional Holding Corp on today's call, our Chairman, Herbert Martens; Chief Executive Officer, Abel Iglesias; Chief Financial Officer, Mary Usategui; Chief Information Officer; Ryan Gorney, and General Counsel Michael Sontag. At this time, I would like to turn the conference over to the Company's Chairman, Herb Martens. Herbert

Thank you and good morning, everyone. Before turning the call over to our management team for a deeper discussion of our very strong performance, which included approximately 20% annualized net interest income growth, strong net interest margin expansion and 17% annualized core loan growth. I wanted to briefly share a few comments on behalf of our Board of Directors. As announced on February 24, our former Chairman and CEO resigned by mutual agreement and beyond what has already been disclosed to-date on the separation. The company does not have additional information to share. And naming the CEO in the first quarter, we were well prepared by have a clear successor, who has been instrumental in professional banks growth during his nine years on the management team and six years on the Board. We attribute the initial success of the leadership transition to Abel's commitment to transparency and shared success is for decades as one of Florida's most respected and experienced bankers and his mandate to maintain professional banks revenue and balance sheet growth trajectory while intensifying organizational focus on profitability. Since we named Abel Iglesias to serve as CEO, Professional Bank has retained all members of the management team who are with us here on today's call, key producers and relationship managers across South Florida as well as our teams in St. Petersburg, Jacksonville in New Hampshire loan production offices, and of course, the entire group at Cleveland Digital Innovation Center. The retention we've seen over the last 65 days has reinforced the Board's confidence and Abel's ability to lead Professional Bank entire high performing workforce. With the support of an outstanding management team, the Board believes the company has the right leader at the right time to realize Professional Bank's full potential. On a personal note, as a founding shareholder, and Director of the bank, I have never been more impressed by the people we have in this organization today. And what we think they can achieve by working together. Therefore, it's with great pleasure that I'm able to introduce you to our CEO, Abel Iglesias.

Thank you very much, Herb. I appreciate the trust and confidence the Board has placed in me. We have a fantastic team that has built a strong foundation over the course of many years at Professional Bank, and it is my honor to represent them this morning. We're excited to be hosting Professional Holding's inaugural Investor Call which we intend to host on a quarterly basis going forward. I've been able to speak with a number of our shareholders and analysts in recent weeks and look forward to meeting many more of you in the months ahead. As reflected in the first quarter results, traditional banking will continue to be at the center of Professional Bank's offering with C&I and CRE representing 72% of our loan portfolio on March 31, and residential loans representing another 21%. Excluding PPP lending, Professional Bank has regularly delivered sequential quarter loan growth since the third quarter of 2011 with the exception of the second quarter of 2020 in the initial weeks of the national response to COVID-19. The first quarter of 2022 loan production was $199 million or 10.5%, annualized. Our bankers are doing an exceptional job of building and leveraging longstanding relationships with what we believe are some of the most experienced well capitalized and highest quality commercial borrowers and sponsors in Florida. Their work continues to pay off. We had solid first quarter loan production across South Florida, as well as from our St. Petersburg and Jacksonville LPOs. And we're committed to supporting our talented teams in these highly desirable banking markets. Professional Banks search fund and sponsored finance team also had solid production in the first quarter. The New Hampshire-based team which has reported to me since we entered the search fund space in 2020 serves sophisticated acquirers of small and mid-sized businesses nationwide. It's highly differentiated offering has proven to be a natural fit with our entrepreneurial culture and other commercial products. And we intend to grow professional banks search fund business for the long-term. Our approach today as it's been since the bank's founding, and my joining in 2013 is to attract and retain highly entrepreneurial bankers by empowering them with significant authority, the best possible technology and support, clear, consistent and timely decisions on loan approvals, and a compensation structure and career opportunities that truly reward results. Of course, results include asset quality, as well as production. We believe Professional Bank's, robust credit quality metrics are a product of our commitment to underwriting and risk management discipline on individual team, office and company-wide basis. We also intend to continue investing in banking technology through our Digital Innovation Center in Cleveland. This team is led by Professional Bank's Chief Information Officer, Ryan Gorney, was a key member of our management team. I'd now like to invite Ryan to share some comments about our differentiated digital capabilities.

Thank you, Abel and good morning everyone. Professional Bank's Digital Innovation Center truly sets our company apart from peers and the industry in an increasingly digital world. Our small and nimble team of in-house software developers and project managers work to automate and streamline tools and processes that save our bankers time, therefore freeing them to focus their energy on more sophisticated tasks and client needs. Our work is above all else focused on efficiency. I have just one example of the scores of projects we've successfully rolled out to-date, our team automated elements of the wire transaction process, which not only eliminated at least 400 hours of manual work annually, but also eliminated the potential for human data entry error. Projects like this have helped and will continue to help us scale significantly, without needing to dramatically increase the overall employee base. By continuing to focus on improving automating and streamlining work, our Digital Innovation Center helps our talented employees focus more on what they do best, which is focusing on our clients. With that, I'll turn it back to Abel.

Thank you, Ryan. Our commitment to Digital Innovation Center is as strong as ever and across the board we are doubling down on what's made Professional Bank a success to-date. 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'll provide our unique brand of customized concierge service to our clients. We'll maintain underwriting and risk management discipline. And we'll continue to invest in talent and technology to provide an exceptional client experience. Today, we're also pairing proven success in these areas with more deliberate focus on sustainable profitability improvements. Mary will share some specifics on our work on this front in a few moments. We believe Professional Bank already has one of the most attractive franchises in Florida, built by one of the finest teams that any financial institution could walk. Together we're banking some of the most sought after markets in one of the most economically attractive and fastest growing states in the nation. In addition, our growth potential is further enhanced by our ability to take advantage of industry consolidation. South Florida market disruptions presenting, excellent opportunities for Professional Bank to take small and mid-sized commercial clients away from larger national and multinational competitors. In short, we believe we have an incredible opportunity to accelerate sustainable top and bottom line organic growth by executing with people technology client face and franchise foundations in place of Professional Bank today. For some additional detail on our progress in the first quarter and her perspective, overall, it's a pleasure to introduce our CFO; Mary Usategui.

Thank you, Abel. Let me start off by reiterating our conviction about the tremendous opportunity we have to maximize the full potential of the business we built to-date. Over the last two months, our entire management team has collaborated intensively, and we are fully aligned on what's being shared with all of you today. I've able to augment we intend to maintain our balance sheet and top line growth posture while intensifying organizational focus on profitability. Operating expense discipline will begin at the top from ensuring that management team compensation is based on performance to greater discipline around the structure of significant investments. For example, we are working to take full advantage of opportunities to capitalize investments in software development through our in-house Digital Innovation Center. In addition, we recently caused workforce expansion as we put processes in place to ensure that any new positions are created intentionally with a clear return on investment. At the same time, our organic growth plans remain unchanged thanks to the strength of our current team and the highly scalable technology we have in place to support a larger balance sheet. Beyond operating costs, examples of other early profitability measures include reducing interest expense by more than $400,000 annualized with the mid-April payoff of our FHLB advances. In addition, executing on new BOLI purchases in mid-April will generate another 400,000 or more an annualized fee income. These are just some examples of efforts initiated over the last two months. We are now evaluating all of our expense structures throughout the organization seeking sustainable, profitability improvements over time to drive operating leverage and complement top line growth. While it would be premature for us to project the impact of these measures we bring today, you can expect us to intensify our focus on key metrics such as ROA, ROE efficiency, expenses to average assets, and the rate of earnings growth. I'm sure most of you have reviewed the news release we issued earlier this morning. So let me share a few observations about the first quarter with you now, and then we'll be happy to address questions you may have on our results during the Q&A session. Following our recent Form 10-K and proxy statement disclosures regarding the terms of our former CEO separation we recorded $2.9 million in related non-recurring expenses in the first quarter, which on an after tax basis reduced net income by $2.6 million or $0.19 per share. Including the impact of separation related expenses, net income was $2.4 million or $0.18 per share in the first quarter of 2022 compared to $4 million or $0.30 per share in the previous quarter, and $4.8 million or $0.36 per share in the first quarter of last year. As Herb mentioned net interest income of $19 million for the three months of 2022 was the second highest quarterly level in the company's history, and grew 5.1% from the previous quarter and 6.5% from the year ago period on higher average earning asset balances. Net interest margin of 2.97% expanded 19 basis points from 2.78% in the previous quarter, as yields improved on interest earning assets, and we focus on reduction of our cost of deposits. We continue to maintain an asset-sensitive balance sheet driven by large cash balances, floating rate loans and loans maturing and less than one year positioning as well in a rising rate environment. Turning to expenses, excluding the separation related items we've discussed, operating expenses increased by 5.4% from the fourth quarter and 15.3% from the first quarter of last year. Relative to the previous quarter, marketing expenses were up due to on a core reversal in the prior period. Housing, salary and benefit costs reflecting regular seasonal payroll taxes paid in the first quarter, as well as an increase in restricted share amortization and performance awards issued in Q1, 2022. We also wanted to touch on the $0.37 decline in tangible book value per common share during the first quarter to $14.93 at period end. This reduction is a result of an additional 219,000 shares issued and outstanding in connection with our compensation programs and to a greater extent unrealized losses on our available for sale securities portfolio, which reduced accumulated other comprehensive income by $6.3 million in the first three months of the year. As Abel shared with you earlier, our team continues to deliver strong loan production from across our markets and offerings. Total loans ex-PPP grew to approximately $1.8 billion on March 31, increasing 4.3% during the first quarter and 21.7% over the last 12 months. The loan book remains conservatively constructed to the end of the first quarter with a weighted average LTV of 51.3% and an average loan size of $938,000. 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 9.7% during the quarter and 53.8% over the last 12 months, excluding PPP, as our existing lending teams capitalize on continued strong pipelines. Our lenders' deep networks have similarly resulted in a strong pipeline of activity on the commercial real estate side, with CRE up by 3.2% during the quarter and 14% over the last 12 months. New loan originations in the first quarter were led by commercial and CRE production, with total originations of $199 million more than offsetting pay-offs and pay-downs of $96 million. Professional Bank in market relationship driven deposit franchise continues to grow, increasing 9.1% during the quarter and 35.8% from March 31, 2021. Non-interest bearing deposits make up nearly 34% of total deposits and supportive further improvements or cost of deposits in the quarter to 26 basis points. With amazing talent, innovative technology economically attractive and growing markets, sound credit quality, and an asset sensitive balance sheet Professional Bank is poised for continued success. Our management team remains more focused than ever on maximizing the full potential of this business for the benefit of our clients and our shareholders. Herb, Abel, Mike, Ryan and I look forward to taking some of your questions, so I'll now ask the operator to open the line for Q&A.

[Operator Instructions] Our first question comes from Brody Preston with Stephens Inc. Please go ahead.

Hey, good morning, everyone and thanks for hosting the call.

Good morning Brody.

Good morning Brody.

Okay, I just wanted to touch on the C&I growth this quarter was very strong. I wanted to just ask was it - evenly distributed throughout the footprint or were there any specific pockets of strength and related to that, I guess I wanted to touch on how production was from the Tampa and Jacksonville LPOs at this point?

Brody it was pretty evenly spread throughout the footprint, the safety and Tampa LPOs contributed and so did search fund, as well. So it's pretty evenly spread across the board. Obviously, I'm telling you preponderance as it's obviously and you know where we have the greatest degree of presence, which is here in South Florida. But I will tell you that we had some nice contributions from our LPOs in St. Pete, as well as our search fund team up in New Hampshire.

Got it. And then maybe just on credit - credit remains really strong. I just wanted to ask, you know, Mary, I think in some of the old decks, you all used to include LTVs, and debt service coverage ratios by loan bucket. I saw the average LTVs chart. But could you remind me what the debt service coverage ratios typically look like?

That we underwrite Brody to north of a 1.3 times coverage across the board, I would tell you that on average, we are well in excess of that they've held up pretty strong. In addition, we also stress and have emphasized stressing in our underwriting going forward given the rate environment that we're in, and that we expect to be going forward.

Got it. And if I could just sneak my last one in here you know, maybe for Abel and Herb, as you guys think about the next couple of years, what are some of the profitability targets that you have in mind? You know, as it relates to the ROA, if you wouldn't mind sharing them?

Well, we're focused on achieving an ROA target of 1% and north of that that is something that we have just become obsessed with growing in this organization. We expect the rate environment that, again, that we're in and that we expect to be over the coming months to really help out tremendously in helping us get there. But it's not just on the top line. We're laser focused, as we said, in our press release, and as we've indicated, on controlling expenses, and just minimizing - our operating leverage to achieve those results.

Do you think that's achievable at some point, you know, by year end 2023?

I think we're going to make tremendous headway in that direction. And I believe that we're well underway. Well, I want to be careful not to create too much of an expectation with any of you here, I can tell you that we are focused, we're doubling down on doing what we need to do to achieve that. And I believe - I believe that we will make some significant improvements between now and the end of the year. So I can tell you that the commitment is there from all of us.

Got it, thank you very much for, taking my questions. Yes, go ahead Herb?

Sorry, I just want to compliment Abel. There's just no question from top to bottom. Those are our goals and we would like to achieve them sooner rather than later. We understand the importance of it and the market importance of it. So thank you.

Got it, thank you guys I appreciate it.

Our next question comes from Graham Dick with Piper Sandler. Please go ahead.

Hey, good morning guys.

Good morning, Graham.

Good morning, Graham.

Just wanted to just touch on, NII sensitivity, you guys obviously gave a lot of good color on the loan book in particular. But just maybe on the deposit side, just kind of wondering what kind of overall deposit growth you're modeling this year, and then also, in those NII sensitivity expectations, what kind of deposit data you're assuming?

I'll answer the first half of that and then I'll hand it over to Mary, for the second part of that question. As you seen in our first quarter, we continue to grow on deposits as we attract new clients for bank new relationships. And that will continue to be part of our strategy going forward. However, we're not paying up for deposits. We don't expect to be paying up for deposits anytime soon, although we're keeping a very close eye on where the market is at. What's happening with rates, and what our competitors are doing? So that that you know we, at this point, I can tell you that we're not, we're not incentivizing our bankers to go out and obtain, high deposits or retain deposits at this point, but we feel that we've got more than ample liquidity in our run rate for the time being. As far as status on rates - Mary, you want to go ahead and take that.

Sure, you know, we did not publish our beta, but we are certainly asset sensitive and as rates rise, we do expect them to expand. But we'll tell you that even under the conservative model that we run internally, which is based on a very aggressive deposit beta professional continues to earn money. And you know, what's more, as we stress our betas in all scenarios, and are constantly asset sensitive.

Okay, that's helpful. I guess, just not on the beta thing. What was yours if you guys have what that might have been over the last rate hike cycle, just so we can get a frame of reference for - I guess, the last time around?

Unfortunately, we do not give guidance or publish that information.

Okay, thanks. And then turning to expenses, I guess. Just wanted to see if there's anything else non-recurring in there besides the severance costs or if or if that $13.6 million level is a reasonable run rate to assume going forward. So yes I think whether it would be helpful? Thanks.

Sure, I think the run rate is a good run rate going forward to use. But keeping in mind that we are focused on expense improvement, but I would say that that is a safe run rate for the time being.

Okay, awesome. I'll hop in queue thanks.

Our next question comes from Woody Lay with KBW. Please go ahead.

Hey, good morning, guys.

Good morning Woody.

Wanted to go back to the deposit growth in the first quarter I mean, it was really strong. Was there any seasonal impact or was any of the deposit growth temporary in nature? Do you sort of expect all that deposit growth to be sticky?

We believe that some of it might come down. We don't know exactly how much. But, you know, again, I think that our business development efforts and our initiatives across the board to attract new market share to this organization continue to payoff. I mean, we are attracting new accounts, new relationships to this organization on an ongoing basis. While again, as I indicated earlier, we're not incentivizing a whole lot to bring in deposits. As we lend, we create new relationships, as we expand on our new lending relationships, we continue to drill down and cross-sell into those relationships and that produces additional deposit inflow into the organization.

Right. And then, just as a follow-up, I mean, given the strong deposit growth, cash levels on an interim period basis continue to increase. Can you just talk about excess liquidity deployment? Would you ideally like to put it on the loan portfolio or could we see the securities portfolio grow from here just any thoughts there would be great?

But we got very good low demand right now and several initiatives to continue to drive you know, growth and net interest income. So as long as that demand is there, and you know, we continue to execute on new lending opportunities we'll continue to deploy liquidity into that bucket. Obviously, we're being we're monitoring the demand and how much we put into that bucket. We are not having the money sitting in idly and not making providing any returns for us. So the investment bucket is always an option for us. I mean Mary, anything you want to add on that?

No, I would agree what Abel is stating, our loan pipeline is very strong right now. So we're monitoring cash inflows and outflows, our loan to deposit ratio is 70%. And we obviously want to see that improved. So you know for now, it's just focused on loan production and fill in the gaps as necessary.

All right, that's great color. Thanks for taking my questions.

Thank you.

[Operator Instructions] Our next question comes from Joe [indiscernible] with Raymond James. Please go ahead.

Hi, there thanks for taking my questions. I wanted to go back to expense questions - you said that you're focused on improving expenses on a go forward basis? Does that mean they should trend down from the core level from 2022? And then kind of also, what type of wage pressure are you experiencing?

So we continue to pull down on expenses, I want to I can't stress that enough on this call, I mean, it’s a priority in our organization. In terms of wage, there's no question that we, you know, we're all experiencing what everybody else is experiencing in terms of wage. However, we're starting to see that kind of level off. And I think that this is more something that we - a phenomenon that it really manifested itself in a very big way in 2021, kind of drift a little bit into 2022. But we're starting to see that kind of plateau at this particular time. So we, you know, we've addressed it, we're obviously retaining our top talent and doing what we need to do to retain our top talent. And you know for our business line producers, we've gone ahead and enhanced the opportunity on the incentive. We've put other remedies in place that obviously, you know, reward for performance at the same time, you know maintain a stable you know FTE expense line item going forward for us.

Understood and then, additionally, you had previously spoken about monetizing some of your digital assets. Can you discuss - thinking around this initiative? And then, you know, if that's still the plan is, when would we expect to see some of that bear fruit?

I'll go ahead and hand down over to Ryan Gorney, who's here with me today.

Thanks, Joe. Our focus right now is on driving the efficiency ratio down, we want to improve efficiency, laser focused on that. If other banks were to come to us, we would certainly have conversations about the technology. But really, we believe that everything we're doing right now is going to make for a more efficient bank. And that's where the focus should be.

Understood, I appreciate it. And then if I could just slip in one more, one last question - have seen the question for me. Looks like you realized accretion increased in the quarter, which I assume is from the elevated pay-downs, how do you expect accretion income to trend in the near term?

So, you know, we hope to see less pay-downs going forward, and we believe that we will, as the rate environment continues to increase. So PPP is running off, we still have possibly about $31 million left in that bucket, and we expect from this event to be gone fairly soon. So we expect that our robust loan production will start to drift off, you know, just - essentially start to produce more net interest income for us on a going forward basis.

Perfect, thank you very much answer all my questions.

Our next question comes from Graham Dick with Piper Sandler. Please go ahead.

Hey, guys, just a couple more things for me real quick. Mary, I think you mentioned something about BOLI investments, and I just might have missed it. I was wondering if there'd be any impact on these or just the size of those maybe, overall what would you expect from that?

Yes, so that wasn't a Q1 event. It actually occurred in Q2, but we wanted to provide some color on some of the initiatives that the management team is doing to improve bottom line improvement. We did execute a BOLI and purchased and it should result in excess of $400,000 to fee income annually.

Okay, great. And then Abel, Herb, I'm not sure which one you guys want to take this. But I'm just wondering, now if you guys at the helm here. Maybe what your propensity is for M&A if this is something you're interested in, or what kind of the bar we need to be for you all to look at a deal? I know - organic growth is obviously a priority and really strong for you all right now, but the stock is has held out there outperformed the group by a lot. So just wondering if you guys are interested in this at all, maybe in the medium to long-term?

Well, I think you'll see that our organic growth and we've proven that we can continue to grow organically. And that's something that we're very confident, Graham that we can continue to do. We're not actively pursuing an M&A activity at this point. However, as we've always said, as an opportunity, where to present itself we would evaluate it. And if we felt that it was immediately accretive and good for our shareholders, we'll certainly consider it and decide upon that, at that particular point in time.

And I might add these would - any opportunity that would come our way would have to be an enhancement to our core businesses. I think as Abel said we have to be accretive.

Okay, and do you guys have any, asset size or geography you look at, I guess more sales than others or I guess we'd be focused in footprint?

I think the opportunities on both ends, I think that we have, as I indicated in my opening remarks, the disruption that continues to take place here in South Florida, certainly is an opportunity for us going forward. But we don't want to just say in South Florida, as you've seen, we expanded into the Tampa, St. Pete area, we're in Jacksonville. And we will continue to look at other points within the state that we believe could enhance our geographic footprint and - diversify our portfolio, and our bank in general. So I think we bring a very good value proposition into those markets as they too are experiencing market disruption through M&A. So that will continue to be part of our analysis and our strategy going forward.

All right, fantastic, thanks, guys.

Thank you.

Our next question comes from Joe [indiscernible] with Raymond James.

Hi, there. I have one more follow-up question. I was hoping you can discuss your appetite for share repurchases. At this point, I believe you still have a little bit left on your current authorization?

Sure, I'll take that one. You know, as you - as someone mentioned on this call, our stock has been performing well as of late. And so, while we do have runway still left for our approved share repurchase plan. The stock would have to be at a price level that we felt would be beneficial for our shareholders if we were to repurchase.

Understood, I appreciate it.

Okay, I want to thank everyone. I like to conclude by thanking our analysts and investors for participating this morning. Our management team is highly energized and motivated to execute on our plans for creating long-term shareholder value. And we appreciate the trust that you place in us to continue to be good stewards of your capital. We look forward to hosting our investor calls on a regular basis. And hope that you will join us when we review our second quarter results later this summer. Until then, please feel free to reach out to Mary or Mike with questions or to schedule additional discussions with us. So thank you, and have a great day, great weekend.

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