USCB Financial Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the U.S. Century Bank 3rd Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star, then zero, key on your touch-tone telephone. As a quick reminder, this call is being recorded. and you can find the third quarter earnings material including the presentation deck on the company's investor relation website at investors.uscenturybank.com. During the call, there may be reference to unaudited financial and non-GAAP measures, which are reconciled to GAAP results. To the extent available without unreasonable efforts in the earning materials, also, Comments on this conference call may include forward-looking statements regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectation and are subject to the safe harbor statement for forward-looking statements. As for results for future periods may differ materially from those expressed or implied by these forward-looking statements. I would now like to turn the call over to Luis de la Aguilera, President and CEO. Sir, you may now begin the conference.

Good morning, and welcome to U.S. Century Bank's first earning call. It has been a very exciting and active quarter as the team rallies to deliver on our strategic plan with clear progress and results. I am Luis de la Aguilera, President and CEO. Joining me today is Rob Anderson, our CFO. as well as our Chief Credit Officer, Ben Passos. Shortly, Rob will cover in detail the earnings presentation reviewing our third quarter financial results and progress. So let's start with some Q3 highlights. The IPO simplified our capital structure with a sale of 4.6 million shares of Class A common stock with net proceeds of 42.4 million. Simultaneously, we exchanged and repurchased all our outstanding preferred shares. Prior to the IPO, the bank had an extremely complex capital structure that included Class A voting, Class B non-voting, which we still have, along with three classes of preferred stock, namely C, D, and E. However, the E class was repurchased by the bank in the quarter preceding the IPO, and the classes C and D have either been redeemed or exchanged. Simplifying the capital stack was strategically important to the bank and our shareholders on many levels. First and foremost, after 20 years as a private company, our shareholders finally were able to monetize their investment as a liquid, readily traded public currency. Clearly, a public currency will help advance the bank's strategic priorities by providing capital for future loan growth, allow us to better compete for talent with larger banks, as we can now provide stock as part of performance-based compensation to bankers that are used to having this component as part of their compensation. And equally important is the retention of our best and brightest talent with a stock plan being developed. In both cases, the performance-based incentive plan that includes a stock component will align the interest of our team and investors along with the performance of the bank. We want our team thinking, working, and acting like owners. Along these lines, a stock component And any compensation plan will also assist us in team lift-outs. We successfully did a team lift-out of three lenders in early 2020, and the production results have been excellent. Additional capital will also support opportunistic asset purchases and, of course, support any M&A opportunities, which clearly would require a simplified capital structure. Again, acquisitions in the near term are not in play as our strategic plan is focused on maximizing organic growth, profitability, and efficiency. Still, being always prepared is important. At this point, I would also like to report that a lawsuit filed by two previous legacy directors was dismissed by the plaintiffs. Management strongly felt it was meritless. Still, we responded immediately and vigorously, as we would always do in defending the bank's interests. Now let's see some performance highlights for the third quarter of 2021. Net income was $6.6 million for the third quarter, an increase of $3.2 million or 93.8% compared with the third quarter of 2020. This included a $2.5 million recovery in default interest from a prior customer. Rob will review this in detail. ROAA was 1.5% compared to 0.93% in the third quarter of 2020. Also, ROAE was 13.4% compared to 8.1 in the third quarter of 2020. And our efficiency ratio was 50.92% compared to 65.02 also in the third quarter of 2020. Average deposits increased by $254 million or 20.8% compared to the third quarter. Average loans increased by $112 million or 10.9% also compared to the third quarter of 2020. Average loans excluding PPP increased 148 million, or 16%, compared to the third quarter of 2020. In late June of this year, a month prior to the IPO, the bank acquired a $44 million portfolio of yacht loans. This acquisition was in line with a developing strategy we have been studying for an extended period. as we like the diversified asset class, which is focused on high net worth clients. Also, 50% of these vessels are in Florida, our primary market. This is a quality loan portfolio and has the following attributes. The average loan balance was $1.8 million as we purchased 24 notes in the first tranche. The loans have a weighted average coupon of $4.11. The weighted average loan-to-value of 71%. Debt service coverage weighted average of 5.75 times. Liquidity coverage weighted average of 192 times. The guarantor's average credits for it was 752. While the loans have a 20-year term, the average duration is between 36 to 42 months, which was very important for us. The vessels in the collateral pool ranged in size from 60 to 80 feet and were an average 2017 through 2020 models. I will further expand on this lending initiative shortly. For the nine months ending with the third quarter of 2021, the loan growth, less PPP and Yacht loans purchased was 13.9%. Loan growth absent PPP and Yacht loans was 14 million or 5.15 annualized for the third quarter. So our loan growth is not always linear quarter to quarter. as the third quarter 2021 also posted the highest payoffs for the same period over the past two years. What we do expect going forward is high single to low double-digit annual loan growth, but it may not always be linear quarter to quarter. To continue to support our loan growth, we are expanding our production team and this past month hired two new experienced lenders. Post-IPO, we have received a lot of attention and we're expecting to hire more production staff in the fourth quarter. I want to share some further exciting news regarding the Yacht Loans, as on August 26, 2021, we bought a second tranche totaling $48.2 million, finalizing our decision to launch a new lending vertical focused on high net worth in the high net worth market. Our preparation for entry has been extensive as the bank has researched the market thoroughly, including drafting a comprehensive white paper on the industry to verify the market's size and potential. We carefully developed and approved loan policies and designed a comprehensive closing process with the participation and direction of the bank's credit, legal, BSA, finance, and BSA departments. The bank has now planned to launch this initiative November 1st, 2021 to coincide with the boat show season that starts with the Fort Lauderdale International Boat Show, which started yesterday, October 28th, the Miami International Boat Show, which will be February 17th of next year, The Palm Beach International Boat Show, March 24th next year, and the Tampa Bay Boat Show, March 4th of next year. We have a presence in the Fort Lauderdale International Boat Show, which opened yesterday, and fully expect to have applications very shortly. Loan generation in the yacht lending industry is largely driven by brokers or brokerage firms. In preparation for entry into this new vertical, we have created partnerships with several of the largest and most reputable national brokerage firms all of which have offices in South Florida. We're ready to launch. As we have tested and experienced, the Yacht Loan portfolio has a short duration and is fast-moving. Our plans are to grow it carefully up to 10% of the loan book, always placing a premium on asset quality. Still, there is demand for quality non-CRE loans in the market, and we believe that we can, on occasion, package and sell loan tranches, managing the size of the book while generating additional non-interest income. We are proud of our team and all that they have delivered over the past six years since the recapitalization, as well as the dedication and effort given over these past nine months. We have a committed and highly experienced board, talented management team that is full of creative ideas and years of experience and are confident that U.S. Century can deliver consistent growing earnings for our shareholders. More exciting things are coming as we continue to build a franchise that will become a high-performing institution. With that, let me allow Rob to lead us through the performance in more detail.

Okay. Thank you, Lou, and good morning, everyone. In looking at our financial statements, and by all measures, U.S. Century Bank had a great quarter. Let me highlight a few items on page five before getting into specific details. First, our loan balances grew to $1.2 billion. Total assets are now at $1.8 billion. Deposits at $1.5 billion. And we continue to put excess cash to work in our securities portfolios. As we noted on page 3, we classified 100 million of securities from AFS to HDM to protect tangible book value in a rising rate environment. Additionally, our equity grew to $202 million with the completion of the IPO and strong earnings in Q3. In terms of the income statement, net interest income grew $1 million from last quarter and $2.4 million from prior years. Non-interest income contained the $2.5 million in default interest recovery we spoke about during the IPO, and this item made up $0.11 in earnings per share. While one may think the recovery of this nature would be placed on the provision line as an increase to the allowance, because it is a judgment amount for default interest and not a recovery of principal balance, the GAAP accounting treatment requires us to book it on non-interest income. We booked no provision expense for the quarter, and expenses were up slightly from the prior quarter. Net income was $6.6 million, and our net income available to common stockholders was a negative $83.5 million, which was impacted by the $89.6 million one-time accounting impact for the exchange and redemption of preferred shares at a liquidation value that exceeded book value. This leaves our GAF earnings per share at a negative $5.11, but on an operating basis, our earnings per share was $0.37. As a reminder, we have two classes of common stock, and therefore the accounting treatment is to allocate the income amongst the two different shares on a pro rata basis. This is mainly required because the B shares were not subject to the 5-for-1 reverse stock split prior to the IPO, so the EPS for the B shares are at one-fifth or 20% of the A shares. The best and easiest way to think about this in terms of getting to an EPS figure or a tangible book value figure without doing the allocation net income between the two classes of stock is to treat the B shares on an as-converted basis at one-fifth or 20% of the common shares. You'll come to the same number. There's more detail on this topic in the tables in the press release that we filed last night, so let's take a look at our key performance indicators. In terms of soundness, our capital and credit metrics remain pristine. A slight recovery on the charge-off line and reserve coverage ratio is 1.27%, down slightly from the prior quarter. In terms of profitability, return on average assets was 1.5% for the quarter, and if you excluded the $2.5 million default recovery, we'd be at 1.08%. Return on average equity, 13.41%. Our NIM was up slightly from the prior quarter, but mainly due to the recognition of PPP fees. More on this in a bit. The efficiency ratio dipped down to 50.92%, but was more of a function of higher revenue than a drop in our expense base and was predominantly driven by the $2.5 million in default interest recovery. If you excluded the $2.5 million default interest recovery, our efficiency ratio would have been 59% for the quarter, which is in line with expectations and guidance. Last, notice our tangible book value for common share at $10.10, which is now reflective of all the gymnastics we did with the issuance of new shares via the IPO and exchanging and redeeming all remaining preferred shares. With that overview, let's look at our loan book and loan yields. We separated out our core loans from PPP loans so you can see how each component piece is working. While the PPP loans are going through the forgiveness process, our core loan book grew 16.1% from last year and 32.9% annualized from last quarter. Adding to this growth was the yacht portfolio, which we purchased mid-quarter. Loan yields were up 10 basis points from the quarter, four basis points due to fees, six basis points due to higher loan coupons. In terms of new loan origination yields, this quarter we saw yields above 4%, so we feel the loan coupon yield does not have much downside in the current rate environment, especially as the 1% yield on the PPP loans rolls off. So with that, let's talk about PPP fees and how that impacted our numbers on the next page. PPP fees were slightly up from prior quarter but fairly steady at $1 million. We have $2.4 million of unrealized fees remaining. Also at quarter end, we have $58 million of PPP loans remaining on our books. That's down from $84 million from the prior quarter, and we expect the majority of the remaining PPP loans to be forgiven over the next nine months. So with that, let's move to deposits. Deposits continue to grow despite dropping rates steadily over the past year. We grew total deposits $254 million compared to the third quarter of 2020, and DDA made up $155 million of that growth While we are gaining new customers, we are seeing companies hold more liquidity on their balance sheet. On average, we saw a 32% increase in average deposit balance per account over the prior year. So let's see how all that impacted our margin. First, net interest income increased 1 million or 31.7% annualized compared to last quarter and 2.4 million or 21.2% compared to the third quarter of 2020. Our NIM was 3.19% for the quarter, and if you negated the impact of the PPP fees, we would be at 3.08%. Clearly a low percentage and not where we would like to operate, but not unusual for the industry that is experiencing a liquidity surge for an extended period of time. As you can see by the chart at the bottom, our earning asset mix has evolved from last year with cash being deployed into securities. Over the past year, we have grown our securities portfolio by $238 million, and it now stands at $430 million at quarter end. The securities book averaged 1.86% for the quarter, and the purchase of new securities is averaging a yield of 1.50% with a duration just under five years. Let's move on to non-interest income. The headline here is the recovery of $2.5 million in default interest from a prior lending customer, the bank, While these recoveries are rare in nature, I would credit the tenacity of our credit department for chasing this one down. Again, because this recovery is a judgment for default interest and not a recovery of principal balance, the GAAP accounting treatment requires us to book it in non-interest income. For the record, we did recover all the principal balance of this loan, which was previously charged off. The SBA team had several loan sales with solid premiums in the quarter, and we were able to book $532,000 in fees. As discussed during the IPO, we're expecting more execution consistency quarter to quarter from this team going forward. I'll also reiterate our goal about having our fee businesses range around 15% of revenue or higher in our quest to becoming a high-performing bank. Knowing that we have some work cut out for us, I would specifically say that we are looking at SBA and the implementation of our new treasury management platform to help propel the numbers higher going forward. So let's take a closer look at our expenses for the quarter. While our total expense base moved up slightly to $9 million for the quarter, our ratios are all in line with expectations. Although our efficiency ratio dipped down to 50.92%, it was really driven by the $2.5 million in default interest recovery. Again, If you excluded the $2.5 million default interest recovery, our efficiency ratio would have been 59% for the quarter, which is in line with expectations and the guidance we've provided you. We detailed out line item explanations for you so you won't go through the details, but believe you can expect this $9 million quarterly run rate going forward. I would caveat this statement that we are gaining interest from talent within the marketplace about joining our team now that we are public, and we're always seeking out new bankers to help fuel our earnings growth going forward. As stated in the past, we will opportunistically hire great bankers as they become available, and this may impact our quarterly $9 million run rate in expenses, but I would not expect any material jump. With that, let's look at asset quality. Our allowance for credit losses was at 1.27% for the quarter, and that's down from the prior quarter as we see the impact of COVID dissipating, but not yet totally gone. We also noted the allowance excluding PPP loans was at 1.33%. There are no loans under deferment due to COVID-19. We have no OREOs and only 18,000 non-performing loans. With credit straightforward, let's look at our capital metrics. The bank completed its IPO in July and we're excited about having a public currency to fuel our strategic plan. In terms of capital metrics, we are above all capitalized guidelines as of quarter end. We have no preferred shares remaining. And again, we still have two classes of common stock. So the best and easiest way to think about this in terms of getting to an EPS figure or a tangible book value share per figure is to treat the B shares on an as-converted basis. In fact, we have these figures in the tables in the press release that was filed last night. So with that, I'll turn it back to Lou for some closing comments.

Thanks, Rob. As you can see, U.S. Sentry has hit the ground running post-IPO. as we now are only one of four publicly traded community banks in Miami-Dade County and the fifth largest bank by deposits in Florida's most populated county. We have an emerging profitability profile as seen in our balance sheet and income statement generated through disciplined lending, effective business strategies, careful accretive hires, expense control, and improved technology. Operating ROAA and pre-tax, pre-provision ROAA, efficiency ratio, and net interest margin show a steady, sustainable trend. Through the IPO, our capital has increased and it's structured, simplified. And while in the near term acquisitions are not our focus, smaller, potentially accretive banks may come into play. But it is important to be ready for these opportunities as we execute our strategic plan. So in conclusion, We presented eight takeaways, and I will touch on a few. U.S. Century is a leading franchise and one of the most dynamic banking markets in Florida, if not the country. Our management team is proven, experienced, committed, knows the market well, and our credit culture is disciplined. Pristine credit quality has been managed by design, not by chance. Our core funded deposit base of 38% in non-interest bearing deposits continues to grow supported by multiple business-focused deposit aggregating verticals. Overall, the market continues to consolidate, leading to scarcity value, and the attractiveness is a proven franchise with a clear potential and an emerging profitability profile. So I will stop here and open things up for questions.

Thank you. Ladies and gentlemen, if you have questions at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for our questions. Our first questions come from the line of Will Jones from KBW. Your line is open. Please ask your question.

Hey, good morning, guys. Good morning. Morning. Good morning. Hey, great. So I just wanted to start on loan growth. Loans are obviously up really nice this quarter. A lot of that was the yacht portfolio purchases. You know, it sounds like you guys are selling pretty hard into that business and, you know, loans are now, you know, roughly 92 million or by my math, about 8% portfolio. Lou, I know you've mentioned taking that up to 10% with this new vertical. So, you know, it doesn't really sound like a ton of room for growth here. Is that, am I hearing that correctly?

I'm sorry, can you say it again? We have a little audio situation here. Can you say it again?

Yeah, no worries. So you guys are selling pretty hard into the yacht business. Loans are already about 8% of the portfolio. You think that can get up to 10%. So really not a huge growth opportunity there near term. Is that the right way to think about it?

Well, I think there's – on the yacht vertical, and I gave probably a lot of information just because it is new and I wanted to share that idea. or that plan with everybody. It's something that we have been studying for a long, long time. I think that vertical could grow exponentially. The demand is clearly there. We're starting, and like every vertical that we have done, we've done it very cautiously, very carefully, but I have no doubt that the demand is there. Our focus here is going to be on the on the organic growth on all our other verticals. Keep in mind also that, as I said, that this is a very fast book of business with a duration of about 36 months. We have the opportunity to grow it even beyond that 10% and sell portions of it and capture fees. So I think it's a good vertical to be in and a great market.

Yeah, it makes sense, and it sounds like a lot of that growth will be more sort of organic production from here as opposed to some of these bulk purchases.

Absolutely. This particular purchase, again, is something that we have been studying for upwards of about two and a half years. So it came at a certain time because of a bank that was sold, and they wanted to divest themselves of that bulk right at a point in time that we were planning to enter the market. So the timing was good for both of us.

Okay, great. That's super helpful. And just thinking about capital, you know, you guys just completed the IPO process. There's no buyback in place today. But as you guys think about, you know, ways to right-size your capital, I know growth will take your first priority there. But is the buyback something that you guys and the board are considering at the moment?

Hey, Will, it's Robbie Anderson. I would say we're always talking and dialoguing about our capital, but we spent a lot of money to go out and get capital. I think the stock is doing well post-IPO, first two months. We do have a lot of capital. Part of it was to simplify the capital structure. But, you know, our story is an organic story and, you know, we're looking to deploy that capital. So I don't think near term we would put an authorization in place. But what I would say is that we're always here to support the stock. And, you know, if we had market volatility, I'm sure we'd probably put something in place. But that's really not on the horizon right now. We're looking to deploy it in a profitable manner in the manners that we set out on the IPO.

Gotcha. Makes total sense. Lastly for me, maybe more so housekeeping, I know PVP fees are fairly notable for you guys. You have about 2.4 million remaining. You've recognized about a million to a million and a half a quarter in recent quarters. Is this a fair assumption moving forward just in terms of how you guys plan to recognize fees?

Yeah, I mean, we had, what, about 58 remaining end of period. And, you know, I would say that's being steadily, you know, coming down. We had 84 million at the end of the second quarter. So, you know, I would say within the next nine months, you know, we would see the majority of that coming off the books through the forgiveness process, and we'll recognize that remaining 2.4 million. So certainly it's distorting a little bit of the numbers, but, you know, it is giving us a lot of – tailwind right now. So I would say over the next maybe three quarters, we'd get the majority of that recognized.

Okay, great. Thanks for taking my questions.

Thanks, Will.

Your next question comes from the line of Michael Rose from Raymond James. Your line is open. Please ask your question.

Hey, good morning, everyone. Thanks for taking my questions. So, Rob, you mentioned kind of the outlook for high single-digit, low double-digit growth. Just wanted to get some flavor around what that would be comprised of and maybe what, you know, yacht loan purchases would be as a percentage of that. And then maybe if you can address some of the, you know, the specialty verticals that you guys have and, you know, what the outlook is for some of those businesses because I know you know, through the IPO process, you know, those are being built out and just wanted to get an update on some of those articles. Thanks.

Yeah, so as Lou said, Michael, you know, I don't think we anticipate any more bulk purchases of the yacht portfolio. I think it, you know, it was more opportunistically as we entered the market. You know, if I looked at last quarter's production, you know, we had, it was fairly well you know, stratified, you know, the commercial and real estate made up probably, you know, a little over 40%. We had some CNI in there and certainly the yacht purchases more on the consumer that will be booked on the consumer line. So we're seeing it across the board. You know, certainly we'd see the majority of it in commercial real estate. But I would Still say our other verticals are doing well as expected. We don't have specific numbers for you, but certainly we can get some of that detail. But, you know, SBA had a good quarter. Jurist Advantage is doing well. We've got a new treasury management platform that we've implemented just here at the – started the fourth quarter. We'd expect to talk to you about that probably in 90 days and see how that's going, but we expect that to benefit us from well. And Lou, I don't know if you have any other comments to add on the loan side.

Yeah, Michael, I am intimately involved with a review of our pipeline and our production efforts with all our lenders on an ongoing basis. And, you know, all the other verticals, specifically the HOA, the SBA, the Jurist Advantage, and the global are on track. We think that it's going to continue and it's going to be a very strong market. There's pipeline activity on all of them. Again, this is a CRE denominated market down here. There is a lot of activity and demand on multifamily. We focus also on owner-operated business. So all these different lines we see steady and continued demand and And we're excited for that.

Okay, great. Maybe as a follow-up question, Rob, just on the loan yields, if you could – I haven't done the math around what the yield was ex-PPP, but if you can let us know what that is. And then, you know, kind of what are, you know, new production loan yields kind of running at, just trying to get, you know, front look, back look.

Yeah, so new loan yields for the quarter – was 431 for the quarter. And if he excluded the PPP loans and the yacht loans, it was 438. So we're well above 4%. So that's why I said in the commentary, I think the coupon of the quarter at 397 does not have downside to it. So I think we're seeing as rates have risen a little bit, a little bit higher coupon this quarter versus last quarter. So I think that shall continue. In terms of the Loan yield excluding the PPP. I don't have that right offhand, but we can get that to you. It might be pretty easy to calculate. It is on the NIM page. We went from about 319, and then if you excluded PPP, we were at 308. But we can get you the loan yield one as well.

Great, thanks. And then maybe just finally for me, I think you mentioned at the outset that expenses around the $9 million range would be a good starting point. Can you just kind of outline, you know, expectations for hiring? You know, you mentioned some team lift outs. I know it's competitive and there's clearly some wage pressure. But, you know, how should we think about expense growth as we move into next year, just balancing those forces? Thanks.

Yeah. I would say $9 million is a good run rate near term. And, you know, if we see, you know, bankers, it's more opportunistically. As Lou mentioned, we hired a couple bankers this quarter. We're interviewing others for the fourth quarter. And I would fully expect us to pick up, you know, a couple, you know, next quarter. But I don't think it's going to be anything material. But I would see that moving up into 2022. But again, our goal is to keep the efficiency ratio under 60%, and we've got to make the money first before we spend the money. So we talk about that a lot around here, and we'll do it opportunistically. But right now, I would say $9 million in the near term is a good run rate. Great. Thanks for taking my questions.

Thank you, Michael.

Again, if you have questions, I'm not showing any further questions. I would now like to turn the call back to Lou for any further remarks.

Well, I thank you all for attending. We're very excited to wrap up this year and to go into the new year. A lot of work went into the IPO. I think we are remarkably It's the same bank with a lot more firepower, so we're very excited to deploy that. If there are no other questions, I thank you all, and we'll be talking next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.