Professional Holding Corp. Reports Second Quarter 2022 Results

Record Quarter for Net Income and Loan Production Results in Earnings per Share of $0.52

Professional Holding Corp. (the "Company") (NASDAQ:PFHD), the parent company of Professional Bank (the "Bank"), today reported net income of $7.0 million, or $0.52 per share, for the second quarter of 2022 compared to net income of $2.4 million, or $0.18 per share, for the first quarter of 2022, and net income of $6.3 million, or $0.47 per share, for the second quarter of 2021.

"We are extremely proud of our record setting quarter of loan production and net income. Our team continues to deliver high quality results and we look forward to building on this momentum in the future," said Abel Iglesias, Chief Executive Officer.

Results of Operations for the Three Months Ended June 30, 2022

• Net income increased $4.6 million, or 189.1%, to $7.0 million compared to $2.4 million in the prior quarter, due to higher net interest income of $2.9 million, higher noninterest income of $0.5 million, and lower noninterest expense of $3.9 million, partially offset by higher provision expense of $1.4 million and higher income tax provision of $1.3 million.

• Net interest income increased $2.9 million, or 15.0%, to $21.9 million compared to $19.0 million in the prior quarter, primarily as a result of the Federal Reserve's target Federal Funds Rate increases during the second quarter as the Company maintains an asset sensitive balance sheet. The Company's yield on average interest earning assets increased 45 basis points while cost of funds decreased four basis points compared to the prior quarter. Net interest income also benefited from average loan growth of $79.2 million to $1.9 billion compared to $1.8 billion in the prior quarter.

• Provision for loan losses expense increased $1.4 million, or 163.2%, to $2.2 million compared to $0.9 million in the prior quarter primarily due to loan growth during the second quarter. The ratio of annualized charge-offs to average loans was 0.14% during the three months ended June 30, 2022, compared to 0% in the prior quarter.

• Noninterest income increased $0.5 million, or 39.9% to $1.8 million compared to $1.3 million in the prior quarter. The increase was comprised of higher income from bank-owned life insurance primarily due to purchases of approximately $15.0 million during the quarter and $0.5 million of expected insurance proceeds on a previously recognized contingency, partially offset by a decrease in swap fee income of $0.1 million due to a lower volume of swap transactions.

• Noninterest expense decreased $3.9 million, or 23.6%, to $12.6 million compared to $16.5 million in the prior quarter, primarily due to lower salaries and employee benefits of $3.7 million. The decrease in salaries and employee benefits reflects the first quarter expense of $2.9 million related to the departure of the Company's former Chief Executive Officer. In addition, in the second quarter the Company began capitalizing certain qualified costs in connection with the development of internal-use software, including $0.4 million related to salary expense, and increased capitalization of deferred salaries cost of  $0.4 million as a result of the current quarter record loan production.

Results of Operations for the Six Months Ended June 30, 2022

• Net income decreased $1.7 million, or 15.3%, to $9.4 million compared to $11.1 million in the prior year, due to increased noninterest expense driven by the expenses associated with the departure of the Company's former Chief Executive Officer and higher provision expense, partially offset by higher net interest income.

• Net interest income increased $5.9 million, or 16.7%, to $41.0 million compared to $35.1 million in the prior year, primarily as a result of the Federal Reserve's target Federal Funds Rate increases in 2022 as the Company maintains an asset sensitive balance sheet, in addition to an increase in average loans from $1.7 billion in 2021 to $1.8 billion in 2022. Interest income also benefited from increased average balances and higher yields in the investment portfolio.

• Provision for loan losses increased $1.3 million, or 71.7%, to $3.1 million compared to $1.8 million in the prior year primarily due to loan growth. The ratio of annualized charge-offs to average loans was 0.07% during the six months ended June 30, 2022, compared to 1.80% in the prior year.

• Noninterest income decreased $0.4 million, or 10.7% to $3.1 million compared to the prior year. The decrease primarily reflected lower service charges of $0.5 million on deposit accounts compared to prior year due to service charges of approximately $0.7 million, associated with acting as a correspondent bank for a Payroll Protection Program lender. Swap fee income and loans held for sale income also decreased $0.5 million and $0.2 million, respectively in 2022 compared to 2021 due to lower volume in both noninterest income categories. These decreases were partially offset by an increase of $0.8 million in other noninterest income, comprised of $0.5 million of expected insurance proceeds on a previously recognized contingency and a $0.2 million loss on fixed asset disposals recorded in 2021.

• Noninterest expense increased $6.4 million, or 28.0%, to $29.1 million compared to $22.7 million in the prior year primarily due to higher salaries and employee benefits of $4.8 million and higher other noninterest expense of $1.5 million, partially offset by prior year acquisition costs of $0.7 million. The increase in salaries and benefits was driven by the $2.9 million expense related to the departure of the Company's former Chief Executive Officer, and higher employee compensation costs from higher headcount and bonus and sales incentives paid out during the 2022 period. The increase in other noninterest expense was primarily comprised of a $0.7 million loss related to a previously recognized contingency from the first quarter, and a $0.3 million increase related to our Community Reinvestment Act ("CRA") mutual fund investment valuation.

Financial Condition

At June 30, 2022:

• Total assets decreased $0.2 billion, or 28.8%, annualized to $2.7 billion, compared to March 31, 2022, primarily as a result of decreases in cash and cash equivalents, partially offset by an increase in loans.

• Total loans increased $164.5 million, or 36.2%, annualized to $2.0 billion, compared to $1.8 billion at March 31, 2022. The increase was driven by loan originations of approximately $315.8 million, partially offset by paydowns and prepayments of $85.8 million. The Professional Bank PPP loan balance decreased $22.9 million, or 73.7%, to $8.2 million from March 31, 2022.

• Total deposits decreased $0.2 billion, or 31.9% annualized, compared to March 31, 2022, with decreases in interest bearing and noninterest bearing accounts. Cost of deposits decreased two basis points to 0.24% for the three months ended June 30, 2022, from 0.26% for the three months ended March 31, 2022.

• As of June 30, 2022, nonperforming assets decreased $0.7 million to $1.5 million compared to $2.1 million at March 31, 2022, due to a charge-off of a nonperforming consumer loan of $0.7 million during the three months ended June 30, 2022. There were no net charge-offs in the prior quarter.

Capital and Liquidity

The Company continues to remain well capitalized per regulatory requirements. As of June 30, 2022, the Company had a total risk-based capital ratio of 12.8% and a leverage capital ratio of 8.1%. The Company maintains a strong liquidity position. At June 30, 2022, in addition to its balance sheet liquidity, the Company had the ability to generate approximately $488.1 million in liquidity through available resources. Additionally, the Company retained $10.5 million in cash at the holding company.

Net Interest Income and Net Interest Margin Analysis

Net interest income was $21.9 million for the three months ended June 30, 2022. The following table shows the average outstanding balance of each principal category of the Company's assets, liabilities, and shareholders' equity, together with the average yields on assets and the average costs of 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 respective periods. For the three months ended June 30, 2022, the Company's cost of funds was 0.28%.

Net interest income was $41.0 million and the Company's cost of funds was 0.30% for the six months ended June 30, 2022.

Provision for Loan Losses

Provision for loan losses increased $1.4 million, or 163.2%, to $2.2 million compared to $0.9 million in the prior quarter primarily due to loan growth during the quarter.

Investment Securities

The Company's investment portfolio decreased $14.5 million, or 6.8%, to $198.4 million compared to the prior quarter. The decrease was primarily due to $10.6 million in investment calls, redemptions and paydowns coupled with an increase in unrealized losses of $5.8 million during the quarter, partially offset by purchases of approximately $2.1 million of municipal bonds. To supplement interest income earned on the Company's loan portfolio, the Company invests in high quality mortgage-backed securities, government agency bonds, corporate bonds, community development district bonds, and equity securities (including mutual funds). Equity securities include $0.9 million of investments, made through our subsidiary Pro Opp Fund LLC, in businesses directly and indirectly related to the Company's core business as permitted under the U.S. Bank Holding Company Act. Pro Opp Fund LLC has an additional $0.8 million of unfunded investments outstanding.

Loan Portfolio

The Company's primary source of income is derived from interest earned on loans. The Company's loan portfolio consists of loans secured by real estate, as well as commercial business loans, construction and development loans, and other consumer loans. The Company's loan clients primarily consist of small-to medium-sized businesses, the owners and operators of those businesses, and other professionals, entrepreneurs and high net worth individuals. The Company's owner-occupied and investment commercial real estate loans, residential construction loans, and commercial business loans provide higher risk-adjusted returns, shorter maturities, and more sensitivity to interest rate fluctuations and are complemented by the relatively lower risk residential real estate loans to individuals. The Company's lending activities are principally directed to the Miami-Dade MSA. The following table summarizes and provides additional information about certain segments of the Company's loan portfolio as of June 30, 2022, March 31, 2022, and December 31, 2021:

Nonperforming Assets

As of June 30, 2022, the Company had nonperforming assets of $1.5 million, or 0.06% of total assets, compared to nonperforming assets of $2.1 million, or 0.07% of total assets, at March 31, 2022. The decrease was due to the charge-off of a $0.7 million impaired loan in the consumer loan category.

Allowance for Loan and Lease Loss ("ALLL")

The Company's allowance for loan losses increased $1.6 million, or 11.7%, to $15.1 million at June 30, 2022, compared to March 31, 2022, primarily as a result of higher loan production volume during the second quarter as well as a $0.7 million charge-off of a previously disclosed impaired loan. The Company's allowance for loan losses as a percentage of total loans held for investment (excluding Professional Bank PPP loans - non-GAAP, see Explanation of Certain Unaudited Non-GAAP Financial Measures) was 0.77% at June 30, 2022, compared to 0.76% at March 31, 2022. There were minimal changes to qualitative loss factors to address rising inflation and threats of a recessionary environment and minimal change in the historical loss factors for the current period with the principal driver for the increased allowance being loan growth.

Explanation of Certain Unaudited Non-GAAP Financial Measures

This press release contains financial information determined by methods other than U.S. Generally Accepted Accounting Principles ("GAAP"), which we refer to as "non-GAAP financial measures." The table below provides a reconciliation between these non-GAAP measures and net income and net income per share, which are the most comparable GAAP measures.

Management uses these non-GAAP financial measures in its analysis of the Company's performance and believes these measures are useful supplemental information that can enhance investors' understanding of the Company's business and performance without considering taxes or provisions for loan losses and can be useful when comparing performance with other financial institutions. However, these non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable GAAP measures.

Certain Performance Metrics

The following table shows the return on average assets (computed as annualized net income divided by average total assets), return on average equity (computed as annualized net income divided by average equity) and average equity to average assets ratios for the periods presented below.

Additional Materials

A slide presentation with supplemental financial information relating to this release can be accessed at https://proholdco.com.

Forward Looking Statements

"This communication contains 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 statements, including, without limitation, statements preceded by, followed by or including words such as "anticipate," "intend," "believe," "estimate," "plan," "seek," "project" or "expect," "may," "will," "would," "could" or "should" and similar expressions. Forward-looking statements represent the Company's current expectations, plans or forecasts; involve assumptions, risks and uncertainties; and are not guarantees. Several important factors could cause actual results to differ materially from those in forward-looking statements. Those factors include, without limitation, current and future economic and market conditions, including those that could impact credit quality and the ability to generate loans and gather deposits; the duration, extent and impact of the COVID-19 pandemic, including government responses to the pandemic and the potential worsening of the pandemic resulting from variants of COVID-19, on our and our customers' operations, personnel, and business activity (including developments and volatility), as well as COVID-19's impact on the credit quality of our loan portfolio and financial markets and general economic conditions; the effects of our lack of a diversified loan portfolio and concentration in the South Florida market; the impact of current and future interest rates and expectations concerning the actual timing and amount of interest rate movements; competition; our ability to execute business plans; geopolitical developments; legislative and regulatory developments; inflation or deflation; market fluctuations; natural disasters (including pandemics such as COVID-19); critical accounting estimates; and other factors described in our Annual Report on Form 10-K for the year ended December 31, 2021, and other filings with the Securities and Exchange Commission. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in forward-looking statements. We caution investors not to rely unduly on any forward-looking statements and urge investors to carefully consider the risks described in our filings with the Securities and Exchange Commission, referred to above, which are available on www.proholdco.com and the SEC's website at www.sec.gov. The Company expressly disclaims any obligation to update any of the forward-looking statements included herein to reflect future events or developments or changes in expectations, except as may be required by law."

About Professional Bank and Professional Holding Corp.:

Professional Holding Corp. (NASDAQ:PFHD) is the financial holding company for Professional Bank, a Florida state-chartered bank established in 2008 and based in Coral Gables, Florida. Professional Bank focuses on providing creative, relationship-driven commercial banking products and services designed to meet the needs of small to medium-sized businesses, the owners and operators of these businesses, professionals and entrepreneurs. Professional Bank currently operates its Florida network through nine branch locations and two LPOs in the regional areas of Miami, Broward, Palm Beach, Duval (Jacksonville), Hillsborough and Pinellas (Tampa Bay) counties. It also has a Digital Innovation Center located in Cleveland, Ohio and a LPO in Bedford, New Hampshire that specializes in search fund lending. For more information, visit www.myprobank.com. Member FDIC. Equal Housing Lender.

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