USCB Financial Q1 2025 Earnings Call Transcript

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April 25, 2025

There are 7 speakers on the call.

Operator

Day, and welcome to the USCB Financial Holdings First Quarter twenty twenty five Earnings Conference Call. All participants will be in the listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press then 2.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Luis Dila Aguilera. Please go ahead.

Speaker 1

Good morning, and thank you for joining us for USCB Financial Holdings twenty twenty five First Quarter Earnings Call. With me today reviewing our Q1 highlights is CFO, Rob Anderson and Chief Credit Officer, Bill Turner, who will provide an overview of the bank's performance, the highlights of which commence on Slide three. After a record 2024, Team USCB has come off the block strong in Q1, posting our best quarter since the bank launched its IPO less than four years ago. Our team is focused on the diligent execution of a business plan that emphasizes relationship driven organic growth. Every associate knows the responsibilities and is encouraged to actively participate, execute and lead.

Speaker 1

Our collective efforts delivered a fully diluted EPS of $0.38 this past quarter, a 65% increase over the prior year. CFO Anderson will soon report on Q1's performance in detail and all the inputs that deliver the quarter's results. The industry is currently navigating a market that is experiencing heightened volatility, a large part due to the recently announced tariffs and the uncertainty their impact may have on the economy. In the past few days, we have seen the market react positively as the administration has announced progress on numerous trade deals, which may lead to a de escalation in trade pressures. Immediately after the tariff announcements, management quickly met with both our credit and production teams to discuss the situation and offer clear guidance on identifying and risk assessing all client business sectors that could potentially be impacted by tariff actions.

Speaker 1

Clearly, this is a time for heightened risk management, ensuring that credit quality is maintained and new loan production is carefully vetted in the context of the moment. Nonetheless, at USCB, we move forward with cautious optimism, taking advantage of our widely diversified business lines and commercial banking initiatives designed to deepen existing relationships and develop new one. The Florida economy continues to be amongst the strongest in the country and is forecasted to grow steadily in 2025, with a growing labor force, low unemployment, and nation leading business relocations. Bolstered by the strength of the state's economy, average loans increased 205,300,000 or 11.5% compared to the first quarter of twenty twenty four. Similarly, average deposits grew by $166,600,000 or 8.1%, again, compared to the same quarter last year.

Speaker 1

The loan pipeline continues to be robust and diversified, and we anticipate the second quarter to meet or exceed the budget with high single digit to low double digit loan and deposit growth. Further supporting production activities, three additional senior bankers joined our team this past quarter, supporting business lending, association banking and deposit production. This past week, on April 21, the company's Board of Directors declared a cash dividend of $0.10 per share of the company's Class A common stock. The dividend will be paid on 06/05/2025, to shareholders of record as of the close of business on May 15. The cash dividend program is an important driver to shareholder value, and the Board of Directors is committed to return capital to our investors while maintaining a strong balance sheet.

Speaker 1

The following slide is self explanatory, directionally showing nine select historical trends since recapitalization. Profitable performance based on sound and conservative risk management is what our team is focused on consistently delivering. So let's now draw our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

Speaker 2

Thank you, Lou, and good morning, everyone. Looking at pages five and six, I would characterize the first quarter of twenty twenty five as another fantastic quarter for USCB. Net income for the quarter was $0.38 per diluted share, up 65% over the prior year. Loans were up 13% annualized compared to the prior quarter and we surpassed the $2,000,000,000 loan mark in the quarter, a fantastic milestone achievement for the team. Deposits were up 25% annualized compared to the prior quarter and this growth provides us with ample liquidity and ability to further fund loan volume in the coming quarters.

Speaker 2

Return on average assets was 1.19%, Return on average equity was 14.15%. NIM was 3.1%, down slightly from the prior quarter. The efficiency ratio improved to 52.79%. Tangible book value per share was up $0.42 to $11.23 and last, credit metrics remained benign. With that overview, let's discuss deposits on the next page.

Speaker 2

Deposits continue to increase both on a linked quarter and year over year basis. With continued execution across our various business verticals, we have seen consistent growth in total deposits over the past few quarters. However, this quarter, while interest bearing deposits increased, we experienced a decline in average DDA balances. This decline was primarily driven by outflows early in the year from our Correspondent Banking division, which temporarily moved funds off balance sheet. For reference, the end of period DDA balance was $6.00 $5,000,000 which is $42,000,000 above the quarterly average.

Speaker 2

We successfully reduced interest bearing deposits by nine basis points from the prior quarter. However, because of the lower DDA average balances, the total cost of our deposit book increased one basis point when compared to the previous quarter. With that, let's move on to the loan book. There are a few points I would like to highlight on this slide. First, we surpassed $2,000,000,000 in loans.

Speaker 2

This significant milestone is a result of effective strategic execution by our management team as well as the strength and resilience of the South Florida economy. For reference, we surpassed the $1,000,000,000 threshold in June of twenty twenty. Second would be the loan growth. On average, loans increased 28,300,000 or 5.9% annualized compared to the previous quarter and $205,300,000 or 11.5% when compared to the same quarter of 2024. Third would be the timing of our loan production in the quarter.

Speaker 2

Most of the loan production occurred late in the quarter. This timing limited both the contribution of new yields to quarterly results and the average loan balances reported for the period. If you look at our end of period numbers for the quarter, the story is better. End of period net loan growth was $63,400,000 or 13% annualized compared to the prior quarter. And last would be the loan yield movement.

Speaker 2

Loan yields decreased eight basis points compared to the previous quarter This is largely due to the repricing behavior of our loan portfolio. Approximately 28% of our variable rate loans are tied to SOFR, which has retracted 34 basis points from the prior quarter. Moving on to slide nine. Two comments for this slide. One is that we continue to diversify our loan portfolio across products and collateral codes, as demonstrated by our loan composition trend and the other comment is that the weighted average coupon for new loans for the first quarter was 6.67%.

Speaker 2

However, if we exclude new loans from our corresponding banking group, the weighted average coupon for new loans would be 7.15 percent. While correspondent bank loans may lower the overall weighted average coupon, it is important to note that these loans are short term in nature, typically one hundred and eighty days, and provide a degree of protection in a rising rate environment. Also, all of the banks come as a full relationship. This includes low cost deposits and competitively priced wire fees. So with that, let's look at the margin.

Speaker 2

On a year over year basis, our NIM continues to improve reflecting the strength of our asset mix and disciplined balance sheet management. However, compared to the previous quarter, the NIM declined six basis points. Contributing to the decline are a few items. First is the lower SOFR rate. As mentioned earlier, the decline in SOFR has negatively impacted the yield of variable rate assets contributing to the overall reduction in earning asset yields.

Speaker 2

Second, we had higher than expected cash balances which lowered the earning power of our earning asset mix. And third, the lower average DDA balances put pressure on our overall deposit costs. The net interest income was negatively impacted by a lower day count compared to the previous quarter, but despite this short term dip, the underlying trends remain positive and intact for further expansion in the coming quarters, especially if the Fed cuts rates. Moving on to page 11. In prior quarters, our strategy focused on preparing for a potentially lower rate environment.

Speaker 2

However, given the current uncertainty in the rate outlook, we are now positioning the balance sheet to remain neutral, prepared for both upward and downward shifts in interest rates. This is reflected in our year one static net interest income simulation results, which show that the balance sheet is resilient to a 100 basis point rate increase and 100 basis point rate decrease. Now, when we look at the loan portfolio repricing profile, we see that 55% of the portfolio is variable and 42% is fixed. However, it is worth noting that the majority, if not all, of the variable rate loans have embedded floors which will protect the balance sheet in a lower rate environment. In fact, we booked nearly $500,000 this quarter, which I will highlight shortly.

Speaker 2

Also, 42% of the variable rate loans will reprice within the next twelve months, which limits immediate rate exposure. Looking ahead, one of the most favorable things that can happen this year would be the normalization of the yield curve, specifically a return to a positively sloped curve. This would naturally support margin expansion by allowing us to benefit from the spread between short term funding costs and long term asset yields. With that, let me turn it to Bill to discuss asset quality.

Speaker 3

Thank you, Rob, and good morning, everyone. Please turn to Page 12. As you can see from the first graph, the allowance for credit losses increased to $24,700,000 in the first quarter. This was due to a $681,000 provision. The allowance for credit loss remained unchanged at an adequate 1.22% of the portfolio.

Speaker 3

The $681,000 provision was driven by the $63,000,000 in net loan growth in the quarter. Net losses were zero for the first quarter. The remaining graphs on Page 12 show the non performing loans as of quarter end, which increased six basis points or $1,400,000 from the fourth quarter to 0.2% of the portfolio. The increase was related to three smaller loans secured for residential real estate and no losses expected. After the quarter end, the bank sold a yacht securing a $1,700,000 non performing loan.

Speaker 3

The loss on the sale was a little more than $500,000 and was provided for last year. Without this Yacht loan, non performing assets improved at 0.13% of total loans. Classified loans increased seven basis points or $1,700,000 to 0.44% of the portfolio to $9,000,000 and represents 3.26% of capital. The increase was related to one commercial loan and three residential loans and no losses expected. The sale of the previous mentioned Yacht will also improve the classified ratio to 2.6% of capital.

Speaker 3

The bank continues to have no other real estate. On page 13, the first graph shows the loan portfolio mix at threethirty one. The portfolio increased $63,000,000 on a net basis in the first quarter to $2,000,000,000 The composition continues to be well diversified. Commercial real estate represents 57 of the portfolio or $1,150,000,000 segmented between retail, multifamily, owner occupied, and office properties. The second graph is a breakout of the commercial real estate portfolio to the non owner occupied and owner occupied, which also demonstrates the diversification.

Speaker 3

The table to the right of the graph also shows the weighted average loan to value to the commercial real estate portfolio at less than 60% and the debt service coverage ratios are adequate for each portfolio segment. The quality and payment performances are good for all segments of the loan portfolio and the total pass through ratio remains below peer banks. Overall, the quality of the loan portfolio remains good. Rob?

Speaker 2

Thank you, Bill. Noninterest income was certainly a bright spot for the USCB team this quarter. We had approximately $500,000 in loan prepayment penalties, which falls under the other line item in service fees. Title insurance fees are also in this line item and were stronger than prior periods. Swap loans decreased this quarter due to market conditions, but we have plenty of swap loans in the pipeline and expect Q2 to have better results.

Speaker 2

SBA loan sales were back this quarter and we booked $525,000 in fees. Overall, noninterest income was 16.3% of total revenue and 0.58% to average assets. Both metrics are in line with the prior quarter and higher than the first quarter of twenty twenty four. Let's look at expenses on page 15. Our total expense base was $12,100,000 and in line with our previous guidance.

Speaker 2

Salaries and employee benefits decreased $294,000 compared to the prior quarters as we booked higher incentive accruals in the fourth quarter of twenty twenty four. Again, our incentive and bonus programs are fully aligned with the company performance, so when the company performs well, our shareholders and associates share in that success. Consulting and legal expenses decreased $359,000 due to reimbursement of some legal expenses in the quarter and looking forward, we fully expect the quarterly expense base to gradually increase throughout 2025 due to new hires and potentially adding to the bonus accruals based on company performance. So with that, let's turn to capital. Three things to note on capital.

Speaker 2

First, we doubled the dividend to $0.10 per share. Next, AOCI improved slightly to a negative $41,100,000 This nominally improved our tangible book value per share metric. And alas, end of period share count increased with the twenty twenty four performance stock awards. So with that, let me turn it

Speaker 1

back to Lou for some closing comments. Thanks, Rob. As seen by our first quarter's results, the Bank's plan for 2025 is clearly on track and supported by the strength of Florida's economy, which is forecasted to grow at 2.8% this year, outpacing the nation's average economic growth projected at 1.5. Florida's labor force has been consistently growing with the state adding 113,000 jobs in January of this year. US Century services a strong, diversified, and growing market, and we plan for loan and deposit growth in the high single digit, low double digit range, tempered by cautious optimism due to the uncertainty of the economic potential economic impacts of the new trade and tariff policies, heightened risk management to ensure that credit quality is maintained and new loan production is carefully vetted and assessed regarding tariff related uncertainties.

Speaker 1

Continued disciplined expense control to maintain and improve operating leverage. We have recently onboarded three new experienced bankers to support continued loan and deposit growth and expect to hire two more in the next quarter. As a matter of fact, one of those accepted a job offer yesterday. With that said, I would like to open the floor to q and a.

Operator

We will now begin the question and answer session. The first question comes from Woody Lay with KBW. Please go ahead.

Speaker 4

Hey, good morning guys.

Speaker 1

Good morning, Woody.

Speaker 2

Good morning. Wanted

Speaker 4

to start on deposit growth. I mean, balances were up pretty notably. Was there a specific deposit vertical that drove the growth in the quarter? And then also, were there any seasonal impacts in the quarter? If I look back at this time last year, deposits were up a lot in the first quarter as well.

Speaker 4

Just curious if there's any seasonal impacts?

Speaker 1

I think we saw the positive growth in certain key areas like our Correspondent Banking. There was movement at the end of the year, it came back in at the beginning, also where HOAs contributed to that. And I think overall, also the business banking group had a very strong quarter. They lead with loans, but they bring in new clients and the deposits come with them. So I think overall, was pretty balanced.

Speaker 4

Got it. And then maybe shifting to the NIM, some of that excess liquidity weighed on the NIM in the first quarter, and then it looks like a portion of a solid chunk of the loan production was weighted towards the end of the quarter. So just given those aspects and you expect strong growth, how should we be thinking about the NIM trajectory from here? It sounds like it should be biased upwards.

Speaker 2

Yes, I would say flat to slightly up. If you think we're going to get rate cuts in June, which I think is the implied forward curve, I think that will benefit us on the deposit cost. So I think slightly flat to up would be our bias internally.

Speaker 4

Got it. And how should we sort rationalize the ALCO models paired with some of that commentary? Because if I look at slide 11, it would seem that you all would screen as asset sensitive. But it almost thinks like your the NIM would move, know, the increase in the down rate environment. So, how should we sort of rationalize those two points?

Speaker 2

Yeah, no, it's a good point. I asked my treasurer this all the time. I said, hey, rates are going down on the front end of the curve and our margin is going up, so what's going on with the model? But the models are loaded with conservative assumptions and what I'd like to say is that we outperform the model, so if our model has a deposit beta on the money market around 39% and we are able to move it to 40 to 50, we are going to outperform the model which we did when the Fed cut rates and we would be looking to outperform those assumptions again if the Fed were to cut rates. So we are optimistic about the margin.

Speaker 2

Think this quarter we had excess liquidity, our DDA average was down, but at the end of the quarter, we brought that back up to around $6.00 $5,000,000 which was nice to see and we need to hold it there or grow it to continue to have a good deposit cost. But overall, we're encouraged about the margin in a down rate scenario. But I would cautiously just say flat to down or flat to up would be the guidance going forward.

Speaker 4

All right. That's really helpful color. That's it for me. Thanks for taking my questions.

Speaker 2

Thanks, Woody.

Operator

Our next question comes from Michael Rose with Raymond James. Please go ahead.

Speaker 5

Hey, good morning, guys. Thanks for taking my questions. Just following up on the deposit discussion. What was the impact from some of the specialty verticals? And I think you mentioned some hiring of deposit gatherers.

Speaker 5

I'm sorry if I got that wrong. But just what's kind of the outlook for deposit growth as we move forward given just such a really strong start to the year? I know last quarter last year's first quarter was really strong, but just I think it was stronger than a lot of us were looking for. Thanks.

Speaker 1

Sure. We added production personnel on the HOA side. We also added one on the business banking side, which again, they're focused on loans and deposits. And another one is on the retail side. And again another lender is going to be joining us shortly.

Speaker 1

Each one of those new hires is supporting one of the verticals that we have. They've all been responding well. We believe there's gonna be a lot of opportunity on the HOA later in the year. The state is rationalizing its decision regarding some legislation that was approved on the requirements for associations to have reserves in place. All of them had to have submitted a plan by December 31 regarding their reserves, so we have a plan in place to work with them and bringing them in to benefit from both the loans and the deposit side.

Speaker 1

So we continue to work these verticals, they've been very significant. I think they're contributing, last time I checked, it was about $650,000,000 to the overall deposit base of the bank, and we continue for them to be accretive.

Speaker 5

Very helpful, appreciate it. And then on Slide 15, just on expenses, noted the comment that the efficiency ratio is the lowest it's been since the third quarter of twenty twenty one. You'd previously talked about around $12,000,000 for expenses. Sounds like maybe there's some opportunistic hires out there. So how should we think about the expense base and the hiring outlook as we move forward?

Speaker 5

Thanks.

Speaker 2

Yes. As Lou mentioned, we did make a couple of hires in the first quarter. We just had another one accept yesterday and we do anticipate that expense base to move up, especially with company performance and strong performance. So it's around 12.1%, could it go to 12.3%, twelve point four % in the coming quarters? I think that's a good guidance for the coming quarter short term.

Speaker 5

Okay, perfect. And I assume just from the capital point of view that organic growth continues to be the focus here. I know just given the pullback in the sector, we've seen a lot of banks kind of talk and lean into buybacks, but I would assume just given pretty solid still growth prospects at this point that that's the focus.

Speaker 1

That's the focus. Always has been and continues to be.

Speaker 5

Alright. Sounds good. Thanks for taking my questions, Appreciate it.

Speaker 1

Absolutely, Michael. Thank you. Take care.

Operator

The next question comes from Fetty Strickland with Hovde Group. Please go ahead.

Speaker 6

Hey, good morning. Just wanted to dig into the margin a little bit more. Appreciate the guide flat to maybe slightly up. I was originally thinking you'd maybe see a little bit more of a benefit just given that late second quarter loan production that seemed to be at higher rates and you also had the end of period DDA increases. Is it just expected competitive pressures maybe offsetting some of that benefit?

Speaker 6

Is that really the driver there? Yeah, I mean, we are seeing

Speaker 2

a lot of competitive pressures on the deposit rates right now. So there were a number of things that go into the margin. One was the lower DDA average. Again, we brought that back by the end of the quarter, but it was really like the last week of the quarter. So it was near the end.

Speaker 2

We did have higher cash balances, like if you looked at our end of period cash balance, it was around 97,000,000 So we are really set with cash. That impacted the margin as well, but that will help fund our loan growth in the coming quarter as well. But we are seeing a lot of competition and customers asking for CDs that are very competitively priced. And then also we had an abundance of our correspondent banking loans that are typically one hundred and eighty days and they will reprice typically with SOFR, they are tied to SOFR to a certain extent and that came down in the quarter as well. But again, that relationship is a full relationship on the correspondent bank side.

Speaker 2

So while the loans may be short term in nature, they may be lower priced than a typical CRE loan, which they are, they are coming with very strong deposits and wire activity as well. But again, I would guide on the margin flat to up in the coming quarters. And if we get rate cuts, we expect to outperform the model.

Speaker 6

Got it. That's helpful. And then just within the correspondent banking side, I know there's that trade finance piece. Can you talk a little bit about how that maybe specifically could be impacted here and what the magnitude of that portion of the portfolio is?

Speaker 1

We don't see there's going to be a lot of really things that are impacting. We're in contact with our banks. Remember, the client that we have is another bank. We're not financing the individual clients. Our conversations with them are ongoing, and we haven't really perceived any concerns from them.

Speaker 1

I think when our four correspondent banks are also in the Caribbean Basin and Central America, and I think last time I checked, the overall trade impact to Central America was 10%, and they're all kind of negotiating. So it's on the lower range of what we've seen globally. So we don't believe that there's going to be much of an impact on that.

Speaker 6

Thanks, Lou. That's helpful. And then just one last one for me, just on credit. I mean, with some of the moves this quarter, credit is still relatively clean when you look at your portfolio versus peers. But I guess we have seen a little bit of an upward trend last couple of quarters on NPAs and classifieds.

Speaker 6

You seem to imply in your opening comments that you're making some progress on a couple of different pieces. I mean, is there the possibility we could maybe see that trend reverse, all else equal in the second quarter and maybe see NPAs and or classifieds down a little?

Speaker 3

Yes, I think we will see the non performance come down with the sale of the yacht with the loans that we have in the non performing portfolio right now. We have a few loans that are only non performing because of their history. Their current pain is agreed. Some of the loans have already had the assets sold by the client and we're just waiting to pay off. So I anticipate the non performance to improve during the second quarter.

Speaker 3

And also the classifieds will come down also.

Speaker 6

All right, great. Thanks for taking my questions.

Speaker 2

Thanks, Patti.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Luis de la Aguilera for closing remarks.

Speaker 1

Well, you. Thank you, everyone. So on behalf of the U. S. Entry team, I would like to thank you all for your attendance and look forward to meeting again at our next earnings call.

Operator

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

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