USCB Financial Holdings, Inc. (NASDAQ:USCB) Q1 2024 Earnings Call Transcript

USCB Financial Holdings, Inc. (NASDAQ:USCB) Q1 2024 Earnings Call Transcript April 26, 2024

USCB Financial Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. And welcome to the First Quarter 2024 USCB Financial Holdings, Incorporated Earnings Conference Call. All participants will be in listen only mode [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Luis de la Aguilera, President and CEO. Please go ahead.

Luis de la Aguilera: Good morning. And thank you for joining us for USCB Financial Holdings first quarter 2024 earnings call. With me today reviewing our Q1 highlights is CFO, Rob Anderson; and Director of Credit, Sergio Garrido, who will provide an overview of the Bank’s performance, the highlights of which commence on Slide 3. Our Chief Credit Officer, Bill Turner is not with us today as he is accompanying a family member who is undergoing surgery this morning. Bolstered by the strength of Florida’s economy, USCB came off the blocks in the New Year posting strong growth in assets, deposits, diversified quality loans and profitability. Our results reflect the diligent execution of a business plan that focuses on organic growth supported by diversified commercial banking initiatives designed to deepen existing relationship and develop new ones.

In 2023, we sourced new production hires, expanded our business lines, added deposit aggregating verticals while carefully controlling expenses. These efforts have delivered results and have well positioned the Bank in 2024. In reviewing our press release and noted Q1 highlights, I will comment on a select few as CFO, Anderson will further detail our growth, profitability, capital and liquidity positions. Net income was $4.6 million or $0.23 per diluted share, an increase of $1.9 million compared to the fourth quarter of 2023. Also, average deposits increased by $204.3 million or 11.1% compared to the first quarter of 2023. Multiple deposit focused initiatives continued to deliver results as deposits grew $165.7 million on an end of period basis this past quarter.

While growth in deposits has rebounded, we judiciously priced deposits based on relationship and profitability. This past quarter, we completed a comprehensive review of the deposit portfolio taking actions that would immediately improve net interest margin. We will discuss these actions as we go through today’s presentation. Average loans increased $234.1 million or 15.1% compared to the first quarter 2023. Our loan growth has moved in line with accretive quarter-over-quarter improvement on average loan coupon, which contributes to net interest income. To this end, the weighted average coupon on a quarterly low production over the past six quarters has increased from 5.68% to 8.16%. This will be detailed shortly. During the quarter, the company paid its first cash dividend to shareholders with an aggregate amount distributed being $1 million.

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. As mentioned in the press release last night, the Board of Directors approved a new share repurchase program up to 500,000 shares of Class A common stock or approximately 2.5% of the company’s issued and outstanding shares of common stock. The stock repurchase program will provide flexibility in the event of market volatility, keeping in mind forward earnings, risk and capital levels. Our intention and practice is to run a safe and sound institution, always maintaining well capitalized levels. As of April 22, 2024, 572,980 shares remained authorized for repurchase under the company’s share repurchase program.

Moving on to Slide 4. 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 turn our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

Rob Anderson: Okay. Thank you, Lou, and good morning, everyone. Overall, I would characterize Q1 as a solid quarter for USCB despite a tough economic backdrop. As you look at Pages 5 and 6, there are some positive trends to keep in mind when reviewing the quarter, including the following. Net income was $0.23 per share and higher than the past three consecutive quarters demonstrating an upward trend. As it relates to the balance sheet, loans, deposits and total assets were all up approximately 15% from the prior year. Deposit growth was up 34% annualized from the prior quarter. This growth allowed us to pay down high priced overnight FHLB borrowings and reprice higher cost deposits at quarter end. While we won’t see the benefits until the second quarter, we do expect our net interest income and net interest margin to improve from this point.

During Q1, we purchased an additional $34 million in securities with a yield of 5.85% and a duration of 2.08. The intention was to provide and support the NIM while maintaining sound liquidity practices. Depending on the interest rates, we expect to receive $30 million to $35 million in cash flows from the securities portfolio during 2024, which will be used to support loan growth. In Q1, net interest income increased $782,000 or 21.8% annualized compared to the fourth quarter 2023. This is due to a larger balance sheet. Noninterest income was up 19% over the prior year. Expenses were up in Q1 due to new hires, seasonal FICA taxes and some operating expenses, but remained low for our asset size, which is shown on Page 6. We initiated and paid our first dividend starting at $0.05 per share.

Intangible book value per share grew to $9.92. AOCI was up slightly from the prior quarter. NIM was 2.62% and down 3 basis points from the prior quarter, driven by excess liquidity and higher funding costs. I’ll discuss what we did and will continue to do with any excess funding in a bit. In terms of soundness, our credit metrics remained strong and our loan loss reserve coverage remained at 1.18%. So let’s discuss deposits on the next page. While we present this page on an average basis, a big part of the story for the quarter is what happened in the last month of the quarter. First, our sales team delivered strong deposit growth in Q1 evidenced by both our average deposit growth and on an end of period basis. Deposit balances at the end of the quarter were $2.103 billion, which is $54 million above the average of $2.049 billion.

More specifically, while our average noninterest bearing deposits had a slight decrease in the first quarter 2024, our end of period DDA balance increased $23.9 million or 17.4% annualized. While we expect rates to remain higher for longer, our ability to attract and retain DDA will be the focus of our sales strategies and bank officers. As Lou mentioned, we are gaining traction in our new business verticals, which we expect to attract additional operating accounts. The additional deposit growth in Q1 put $126 million of cash on our balance sheet at quarter end, which negatively impacted our NIM in the quarter but positions us well for Q2. With this additional funding, we paid down all high priced overnight FHLB borrowings and rationalized some higher priced public fund money.

Furthermore, because public funds require collateral, reducing balances in this funding bucket also helped our liquidity. So with that, let’s turn the page and look at our loan book. Average loans increased $82.9 million or 19.6% annualized compared to the prior quarter and $234.1 million or 15.1% compared to the first quarter 2023. On a spot or end of period basis, we ended the quarter at $1.821 billion, which is $39 million above our average loan balance for the quarter. Loan coupon increased 22 basis points compared to the prior quarter and 87 basis points compared to the first quarter of ’23. Our loan book will continue to grind higher but much depends on our new loan originations as the refinance volume is de minimis. As for the guidance, we expect loan growth to continue in the low double digits.

Turning to Page 9. You can see for the past three quarters, we have originated loans above 8%. We expect a similar amount of loan originations in Q2 with yields above 8%, given the current pipeline. Additionally, our loan book has transitioned over time and is more diversified. As of quarter end, non-CRE loans are 29% of the total loan portfolio. With that, let’s take a look at the margin on the next page. For the first quarter of the year, our NIM contracted compared to the previous quarters. However, our net interest income increased $782,000 or 21.8% annualized compared to the fourth quarter 2023. This is a direct result of a larger balance sheet. As discussed on the deposit slide, the cost of funds remains one of the biggest challenges this year.

Although, we grew deposits in the first quarter, the majority of the growth was in interest bearing deposits, which resulted in higher than expected interest expense. As a response, we have adjusted deposit pricing and reduced higher price public funds. We expect the changes will have a positive impact on our NIM going forward. And in short, we have several reasons to believe the NIM will improve, so let me point those out. Since the end of the quarter, we have reduced our dependency on public funds by over $100 million, which are rate sensitive deposits. We have adjusted money market rates additionally. Currently, we don’t have any money market deposits paying above 5%. Deposits also have already adjusted to a higher rate environment, so we don’t expect material jumps in our interest expense.

New loan production has been above 8% for three straight quarters and we expect this trend to continue in ’24. And with a higher for longer rate environment, we expect our interest rate swaps to generate $2 million of additional interest income for the year. And finally, with the strong liquidity position beginning in Q2, we can pass on non-relationship rate sensitive deposits. The Bank is well positioned for rates to be higher for longer. However, as we navigate some uncertain times, i.e., the inverted yield curve, geopolitical conflicts and the election year among others, the challenge we’ll be managing under uncertainty. So with that, let’s take a look at our interest rate risk models on the next page. According to our ALM model, the Bank’s balance sheet remains slightly asset sensitive.

Part of the asset sensitivity comes from a higher cash position at the end of the quarter. While some of these inflows are temporary, we believe that we are going to be able to reinvest the cash into longer duration assets, which will protect our balance sheet from expected lower rates. Additionally, as rates remain higher for longer, our asset sensitivity may result in an improvement in NIM. If rates drop 100 basis points across all tenors, the model is telling us that the NIM will contract. However, 100 basis point drop across all tenors is highly unlikely. A more likely scenario would be a drop in short term rates, which would immediately allow us to reprice our $1 billion plus money market deposit book. Additionally, we had three consecutive quarters booking loans with a weighted average coupon above 8%.

And while this may have a minimal impact in our current NIM, as rates drop, these longer duration loans with embedded prepayment penalties and floors will help to protect our margin in a down rate scenario. So with that, let me turn it over to Sergio to discuss asset quality.

Sergio Garrido: Thank you, Rob. Please turn to Page 12. As you can see from the first graph, the allowance from credit losses increased to $21.5 million. This was due to $410,000 first quarter provision and the ratio remain unchanged at an adequate of 1.18%. The provision was driven by the $40 million net increase in the loan portfolio. Net losses remain near zero for the quarter. The remaining graphs on Page 12 show the nonperforming loans as of the quarter end were unchanged at 0.03% of the portfolio and classified loans improved from the fourth quarter to 0.44% of the portfolio. No losses are anticipated from these classified loans. Also, the Bank continues to have no other real estate owned. On Page 13, the first graph shows the loan portfolio mix at 3/31.

The portfolio increased $40 million on a net basis in the first quarter to a little more than $1.8 billion. The composition continues to be well diversified. Commercial real estate represents 58%, a little over $1 billion. Commercial real estate is segmented between retail, multifamily, owner occupied and office properties. The second graph represents a breakdown of the commercial real estate portfolios for the non-owner occupied and owner occupied loans, which also demonstrate this portfolio’s diversification. The table to the right of the graph shows that the weighted average loan values at 60% or less and the debt service coverage ratios are adequate for each portfolio segment. The loan quality and payment performance are good for all segments as the past due loan percentage remain less than 1.

On Page 14, we discuss the Bank’s office portfolio. Our portfolio at quarter end consists of 128 loans totaling $187 million with almost all being B and C properties with over 75% located in South Florida. The average loan amount is $1.5 million with an average loan to value of 57%. The average debt service coverage stands at almost 2 times. The first graph shows that owner occupied office make up 34% of the office segment with 63% of those loans being occupied by professional and medical businesses. The second graph represents the non-owner occupied office loans, which comprise 66% of the office portfolio with 84% of their use being multitenant and medical. The quality of the office portfolio is satisfactory with all loans paying as agreed with no classifieds.

We’re especially vigilant of the upcoming 2024 loan repricing and assuring schedule. We monitor, we model the loan repayment, the ability to service our loans, to proactively act as needed. Overall, the quality and performance of the loan portfolio remains pristine.

Rob Anderson: Okay. Thank you, Sergio. Let’s go to Page 15. Couple of items to point out here. First, you’ll notice the nice upward quarterly trend in service fees. We have been speaking for some time that we are gaining traction differentiating ourselves from our competitors, and becoming our clients’ go to bank for their operational wire needs. We are gaining new foreign correspondent banks, doing more business with current clients and modifying our approach to wire fees with clients across the board. All these strategies have yielded new business. Other noninterest income increased due to the BOLI restructuring we did last year, increases in treasury management fees and an increase in swap fees with clients. On a go forward basis, we believe a $2.5 million or slightly higher is a good quarterly run rate for the noninterest income line item.

So with that, let’s take a look at expenses on the next page. Our total expense base was $11.2 million and up from the prior quarter. Salaries and benefits are up due to three net new FTEs, seasonal payroll taxes and stock based compensation. Other operating expenses were up $271,000 due to $67,000 increase in promotional expense to support our business verticals, $60,000 increase in force placed insurance and $40,000 increase in property insurance. I would note that the noninterest expense to average assets improved 11 basis points year-over-year and has been below 190 basis points for three quarters in a row. Going forward, we expect the quarterly expense base to grind upwards from this point. So with that, let’s take a look at capital. USCB capital levels remain comfortably above well capitalized guidelines.

Also worth noting is the company repurchased 7,100 shares of common stock at a weighted average price per share of $11.15 during the quarter. As mentioned in the press release last night, the Board of Directors approved a new share repurchase program up to 500,000 shares or approximately 2.5% of the company’s issued and outstanding shares of common stock. So as of the end of or as of April 22, 2024, 572,980 shares remain authorized for repurchase under the company’s share repurchase programs. So with that, let me turn it back to Lou for some closing comments.

Luis de la Aguilera: Thanks, Rob. U.S. Century’s performance this past quarter is clearly on track with our expectations and budget. Five new production hires brought on board in late 2023 and early 2024 are hitting their stride and contributing to both loan and deposit growth. This past January, we launched another business line branded MD Advantage, a new deposit aggregating vertical focusing on servicing medical professionals and led by two experienced bankers having over 30 years of combined experience in the field. We now have seven non-CRE business lines, including Association Banking, SBA Lending, Yacht Lending, Foreign Correspondent Banking, Private Client Group, as well as our Jurist and new MD Advantage initiatives, which were up, which respectively focused on supporting both the attorney and medical professionals market.

Collectively, these business lines have account for $554 million or 26% of total deposits. These business verticals have also contributed greatly to the diversification of the loan portfolio, of which 29% of $528 million is now non-CRE. By comparison, only 9% of the Bank’s loan portfolio was classified as non-CRE as of June 30, 2020. Furthermore, these business lines have driven noninterest income, which was 14% of total income this past quarter, up from 11.5% of total income in Q1 2023. Growth in wire activity, gain on sale of SBA 7(a) loans, swap fees, as well as greater demand for treasury services have steadily contributed to increases in noninterest income. The Bank’s performance is supported by the overall robust economy of Florida, which is forecasted to grow by a solid 3% in 2024, more than double the projected national economies growth of 1.4%.

Florida’s statewide unemployment rate has been lower than the national rate for 39 consecutive months. The national unemployment rate was 3.7% for January 2024 or 0.6% points higher than Florida’s rate. In short, Florida’s strong economy serves as a foundation from which we continue to grow our franchise. These factors, along with longstanding draws of low taxes, warm weather and housing that’s more affordable than in the Northeast, are expected to contribute to another solid year of population gains for the state and further growth opportunities for the Bank. With that said, I would like to open the floor for Q&A.

See also 10 Best Technology Dividend Aristocrats to Buy and 20 Countries that Produce the Most Pollution in the World.

Q&A Session

Operator: [Operator Instructions] The first question comes from Michael Rose with Raymond James.

Michael Rose: Just wanted to dig into the deposit growth and expectations. Obviously, very good this quarter and it was good to see DDA balances up, which is good. And Luis, you talked about one of the newer verticals, the MD Advantage coming online. And just wanted to get a sense for now that the loan to deposit ratio is kind of back in the mid-80% range after this quarter’s growth, and it sounds like there’s some hopeful remixing opportunity as we move forward. Can you just talk about expectations for the need to continue to grow deposits? It seems like you could probably dial back on some of the higher cost funding as some of the specialty verticals and their deposit growth kind of ramps. Is that the way to think about it? And then, I know given this quarter’s start, you’re going to probably blow past the 10% that you had talked about last quarter. But just wanted to kind of see the expectations for measured growth as we move forward?

Luis de la Aguilera: Well, as I reported in the last quarter, and I’m kind of reemphasizing in today’s call, we hired two teams that came in late 2023, early 2024 and then again hired one that joined us in February of this year. These teams are very much focused on deposits. They are coming in from other banks where they no longer had any kind of non-compete situations. Collectively, these teams handled about $350 million in a deposit book and they are really focused on bringing in their clients without any real issues. So all of these are part of these verticals, the MD Advantage, the Jurist Advantage, the private client group. So they are moving very established relationships that we don’t believe are going to be subject to high interest rates. They’re coming over with bankers that have served them for many, many years and we are taking advantage of that.

Michael Rose: And as it relates, Rob, to kind of how the margins should trend from here, obviously, bringing on the deposit growth this quarter, obviously, was a step down. But I think you did a really good job kind of pointing out all the factors that will help support margin expansion from here. Can you just talk about expectations with and without rate cuts and what the delta could be just as we move forward as you continue to grow deposits, but also have continued pretty healthy loan growth above 8% ongoing coupons?

Rob Anderson: And just picking up on what Lou mentioned with our deposit aggregating teams that came on. Typically, what would happen is that as they bring customers on, they’re bringing over the money market first and then the DDA comes a little bit later as they move those funds. So you did see the DDA come in towards the end of the quarter. With that additional funding, we did reprice down some high priced public funds, which is collateralized. We will see some of that move off our balance sheet in April, which we fully expected that and that was not a surprise, but we are bringing in lower cost funding. So if we can replace $100 million to $200 million of funding from, let’s say, something above $5 million with something with a 4 handle on it in the mid-4s with some DDA, that’s going to help the margin.

Plus multiple quarters with loans above 8%, those originations will start helping the NIM. I think what we’re anticipating absent any rate cuts that the deposit cost will start to plateau, the loan yields will continue to grind higher and we could be anywhere up 5, hopefully 10 basis points, we’ll know in April. But we’re very optimistic about the things we did in the early part of April end of March on the deposit side to curtail the deposit cost, and I think you’ll see the loan yield continue to pick up. I mean, if you look at the slide on Page 8, you can see the loan yields are increasing at least 20 basis points per quarter. We expect that to continue. And if you go back to Page 7, we’re going to stop the deposit cost going up 20 basis points a quarter or so.

So that will help the margin and we’ll know within the next week on how we did on April. And we got another round of deposit cuts coming because we still have the cash on the balance sheet, which is good.

Michael Rose: Just to clarify, Rob. Is that 5 to 10 basis points in the second quarter or is that through year end…

Rob Anderson: No, just in the second quarter. I’d conservatively say 5, but we could see on the upper end of it, maybe 10.

Michael Rose: And then just, I’m sorry to drop this home, but if we do have rate cuts, maybe 1 or 2, well, I think that’s where the forward curve is now. It’s changing by the minute it seems. And then if we don’t, how big is the delta? And I understand that you have some NII sensitivity, but I know it’s static, so things change.

Rob Anderson: I think with rate cuts, if you get 1 to 2 depending upon when they come, that could help us maybe another 5 to 10 basis points above what we just mentioned. It could be low teens, but it depends on when they come. If they come in like November and December, then it’s going to be higher. It’s going to be harder to get the margin back up. It should grind higher. But with cuts we believe that we have our $1 billion plus money market book and there’s some opportunities in there with rate cuts to have a more aggressive beta that I think we modeled in the model, like a 40% deposit beta, I think we can outperform it.