USCB Financial Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the USCB Financial Holdings, Inc. Fourth 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 on your touch-tone telephone. As a quick reminder, this call is being recorded, and you can find the fourth quarter earnings materials, including the presentation deck, on the company's investor relations website. During the call, there may be reference to the unaudited financials and non-GAAP measures, which are reconciled to GAAP results to the extent available without unreasonable efforts in the earnings 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. Actual 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 Lou D'Aguilera, President and CEO. Sir, you may begin the conference.

Good morning and welcome. We are pleased to report on our queue for 2021 results. ending an exciting year in which our team members, board, and partners achieved many notable accomplishments. The momentum of our successful IPO has continued through the fourth quarter as we have finalized the simplification of our capital structure, formed a bank holding company, and approved the share repurchase program. On December 21st, 2021, we completed the final step in our capital simplification project as we exchanged all Common B non-voting shares for Common A voting shares for a 5-for-1 reverse stock split. As of December 31, 2021, there were no issued or outstanding Class B stock. The only issued and outstanding shares at year-end were Class A common stock, now our only capital instrument. This past December 30, the bank completed a reorganization, forming a bank holding company in which USCB Financial Holdings, Inc., became the parent holding company of U.S. Century Bank. We believe that forming a holding company places the bank in the best position to respond to evolving market conditions, enabling us to take advantage of future opportunities. Another important project we initiated in the fourth quarter and was approved by our board of directors on January 24th of this year was a share repurchase program for up to 750,000 common A shares. Our conservative and disciplined approach to lending continues to be reflected in our credit metrics, which remain at historical low levels. Our allowance for credit losses as of December 31st, 2021 was 1.27% of total loans compared to 1.45% for the same period in 2020. Similarly, non-performing loans to total loans was 0.10% at year-end 2021 compared to 0.15% for the last quarter 2020. The bank has no OREO and has no loans under deferment associated with COVID-19. As we look at profitability indicators, net income was 5.7 million for the quarter, an increase of 33% compared to the fourth quarter of 2020. Annualized return on average assets for the past quarter was 1.23% compared to 1.11% for the fourth quarter of 2020. Annualized return on average shareholders' equity was 11.08% compared to 9.96% for the fourth quarter of 2020. Our efficiency ratio improved to 55.74% compared to 63.81% in Q4 2020, driven in part by a one-time gain on the sale of our East Hialeah Banking Center building. The bank had two locations in Hialeah, as well as a nearby location on Milam Dairy Road just west of the Miami International Airport. Upon the sale of the East Hialeah assets, clients were efficiently reassigned to these two closely located branches. This continues our active management of expenses. as we continuously and effectively have rationalized our banking center network. Our focus has been on upgrading people, process, and products while improving and leveraging technology to better service our clients through multiple digital delivery channels. Since our recapitalization in March 2015, overhead and personnel expenses have significantly improved as we have reduced locations from 18 to 10. Of these nine banking centers, are in Miami-Dade County and one in South Broward, specifically Hollywood. As a business-focused commercial bank headquartered in Miami-Dade, our primary market, we have developed a philosophy of following our clients as their business and investments grow and expand and beyond the county line. The Miami metropolitan area is the seventh largest metropolitan area in the United States and includes Miami-Dade, Broward, and Palm Beach Counties, which are the first, second, and third most populous counties in Florida. Focusing our presence in Broward, the Hollywood Banking Center has grown in deposits from 18 million in December 2015 to over 80 million at present. Similarly, over that time, our commercial activities in Broward and Palm Beach counties have significantly increased, as our business bankers and business development officers have followed their clients and developed new ones in these adjacent counties. Our market analytics have concern that presently the bank has 224 million in loans or 18.8% of total loans and 156 million in deposits or 9.8% of total deposits comprised of 882 client relationships between Broward and Palm Beach counties. At this point, we are far beyond testing the waters in Broward and Palm Beach. In late 2019, a strategic team lift comprised of three lenders further increased our business activities in these counties. On November 21st, an additional Broward-based lender joined the team, and this past week, a second Palm Beach-based lender accepted an offer and will join us shortly. While these recent hires will be based out of Hollywood, it is our plan to open a satellite loan production office to further support our business activities in Broward, Palm Beach, as we continue to analyze the market for opportunities. Our developing expansion of the Broward and Palm Beach markets have been part of our growth story in 2021, as average deposits increased by 270.5 million, or 20%, compared to the fourth quarter of 2020. By comparison, average loans excluding PPP increased by 179.9 million, or 19.4%, compared to the fourth quarter of 2020. With that said, let me allow Rob to lead us through our 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 another great quarter. Let me highlight a few items on the next couple of pages before getting into specific details. First, total assets are now at $1.9 billion. Loan balance is just under $1.2 billion. Deposits at $1.6 billion. and we continue to put excess cash to work in our securities portfolio. At quarter end, we had 526 million in securities, and 123 million of those securities are classified as held to maturity to protect tangible book value in a rising rate environment. Additionally, our equity grew to 204 million with the completion of the IPO in Q3 and strong earnings in the second half of the year. In terms of the income statement, net interest income increased by $605,000 or 17.8% annualized compared to last quarter and $2.6 million or 22.4% compared to the fourth quarter of 2020. Non-interest income contained a 983 gain on sale of a branch in East Hialeah that Lou mentioned. And if you recall, Q3 contained some one-time items as well. We booked no provision expense for the quarter, and expenses were up slightly from prior quarter with a few new hires and other related personnel expense. Net income was $5.7 million, or 30 cents a share, and with the exchange of B shares for A shares at year end, we are finally able to report an earnings per share figure on a single class of shares. So with that, let's take a quick 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 our reserve coverage ratio is steady at 1.27%. In terms of profitability, return on average assets was 1.23% for the quarter, and if you excluded the 983 gain on sale, we'd still be above 1% at 1.07%. Return on average equity was 11.08%. Our NIM was steady from prior quarter at 3.19%, and our efficiency ratio was 55.74%. Last, notice our tangible book value for common share at $10.20, which is reflective of the share exchange we did at year end. And please refer to the appendix for specific calculations in the back. 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 $37 million, or 13.7%, annualized compared to the last quarter, and $180 million, or 19.4%, compared to the fourth quarter of 2020. Loan yields were up four bips from the last quarter, three bips due to fees and two bips due to higher loan coupon. In terms of new loan origination yields, this quarter we saw yields above 4%, and with rates rising, we feel the loan coupon yields have more upside than downside in the current rate environments. especially as the 1% yield on the PPP loans roll off. So with that, let's look at PPP loans and how that impacted our numbers on the next page. PPP fees were down slightly from the prior quarter, but steady at approximately $1 million. We have $1.5 million of unrealized fees remaining at year end, so you can expect fees associated with PPP in the coming quarters to be less. Also, We have 42 million of PPP loans remaining on our books at year end. That's down from 58 million from the prior quarter, and we do expect most of the remaining PPP loans to be forgiven over the next six months. So with that, let's move to deposits. Deposits continue to grow despite dropping rates steadily over the past year. We grew total average deposits 85 million, or 22.8% annualized compared to the last quarter, and $271 million, or 20.9%, compared to the fourth quarter of 2020. You also notice that we are growing the right type of deposits. DDA average deposits grew $39 million, or 27.4% annualized compared to the last quarter, and $167 million, or 38.2%, compared to the fourth quarter of 2020. DDA balances now comprise 38.7% of our total deposits. Time deposits have been flat to down since the fourth quarter of 2020 and now comprise 14.6% of total deposit. So let's see how all this impacted our margin on the next page. First, net interest income increased by $605,000 or 17.8% annualized compared to the last quarter and $2.6 million or 22.4% compared to the fourth quarter of 2020. Net interest income growth was driven by lower deposit costs and interest income generated by a larger loan and investment portfolio. Our NIM was steady at 3.19% for the quarter, and if you negated the impact of the PPP fees, we would be at 3.06%. Clearly a low percentage, but driven more by our earning asset mix than anything else. 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 $189 million, and it now stands at $526 million at quarter end. The securities book averaged 1.81% for the quarter, and the purchases of new securities in the quarter were averaging around 1.50%, with a duration just under five years. With that, let's see how sensitive our balance sheet is to interest rate movements on the next page. With interest rates widely expected to increase this year, we believe that U.S. Century Bank is positioned well. First, our balance sheet is asset sensitive, which means our assets will reprice faster than our liabilities. Forty percent of the loan portfolio is fixed rate, while the remaining 60 percent is variable rate. Variable rate loans provide protection against rising interest rates. The variable rate loans are indexed to Prime, Constant Maturity Treasury, or CMT, and LIBOR. In terms of repricing, the bank will reprice 40% of the loan portfolio within the following year. Additionally, our securities portfolio will have $80 million in cash flow that will give us an opportunity to remix the funds into loans throughout 2022 or reinvest those into securities with higher interest rates if and when we get the Fed to increase rates. Both scenarios would be a positive for our NIM and net interest income in 2022. According to our ALM model static run, which contains conservative assumptions, the bank's net interest income will remain fairly neutral to a parallel rate shock for year one. However, given the vast amount of liquidity on our balance sheet, I would expect our deposit betas to outperform our modeling assumptions and therefore could benefit more from rising rates than what is shown in our model. We will closely monitor this and revisit our assumptions quarterly. Additionally, as mentioned earlier, 123 million of securities are classified as held to maturity to protect tangible book value in a rising rate environment. So with that, let's move on to non-interest income. We had $2.6 million in fees for the quarter, and that included a one-time gain of $983,000. Additionally, we purchased an additional block of BOLI for $15 million, which helped this quarter's performance. The SBA team had a couple loan sales with solid premiums in the quarter, and we were able to book $107,000 in SBA fees. As discussed previously, we're expecting more consistency quarter to quarter from this team going forward, and in review of the pipeline for Q1, it looks promising, and we believe 2022 will be another solid year from this team. Let's look closer at our expenses for the quarter. While our total expense base moved up slightly to $9.3 million for the quarter, our ratios are all in line with expectations. Our efficiency ratio was 55.74%, but was impacted by the 983,000 one-time gain on sale, which is in the denominator of the efficiency ratio equation. Absent the 983 gain on sale, our efficiency ratio would have been 59% for the quarter, which is in line with expectations and the guidance we have provided you. We detailed out line item explanations for you, so we won't go through the detail, but believe you can expect the quarterly run rate going forward to be 9.3 or slightly higher depending on our ability to hire new revenue producers. Lou already mentioned a couple that we've done in the first quarter. With that, let me turn it back to Lou to speak about our business verticals.