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.

An important part of our growth strategy is has been to seek and develop accretive business lines that consistently and safely provide growth and diversified deal flow opportunities. To this end, over the past five years, we have launched three new business verticals, namely our JurisAdvantage program, a deposit aggregating business line focused on developing law firms and their partners' owners by providing high-touch concierge service. Our Community Association Program, a business vertical aimed at building both new loan and deposit relationships in the largest condominium association market in Florida. Our SBA Lending Program, supporting our key constituents, the owner-operated business. This vertical, offering both SBA 504 and 708 loans, launched in mid-2019, has doubled its loan volume each year since its inception. Our Global Banking Group, led by a 40-year veteran banker, has a primary focus developing and servicing a select group of foreign correspondent banks, mostly in the Caribbean and Central American Basin. At present, we have 24 bank clients. This business line, which was effectively reactivated after the 2015 recapitalization, generates strong non-interest income and deposits. Our newest business line, the Yacht Lending Program, was announced last quarter. targeting high net worth clients and one of the most active yacht markets in the country. This vertical is expected to gain traction, coinciding with the upcoming Miami International Boat Show, scheduled February 16th through 20th. We've already received five applications, totaling $7.8 million, and have approved $2.6 million. The 2022 boat show season continues with Palm Beach, Vero Beach, and Tampa, running between January and March of this year. Each business vertical is led by a proven, experienced senior banker product expert whose duties include training our production team in each product's benefit. By doing so, we effectively leverage the product knowledge and sales capacity of our teams. Collectively, these five business verticals close the year with a combined $352 million in deposits and $224 million in non-CRE loans, further diversifying the loan portfolio.

Rob? Okay, on the credit page, our allowance for credit losses was 1.27%, and that's flat to the prior quarter. The allowance excluding our PPP loans was at 1.31%, so coming down slightly from prior quarters. There are no loans under deferment due to COVID. We have no OREOs and only one loan that is non-performing. While the one loan is on non-accrual and non-performing, the metrics on the property would indicate a full recovery. With credit fairly straightforward, let's look at our capital metrics. 2021 was quite an active year as it relates to our capital simplification efforts. These efforts continue into the fourth quarter as we exchange all remaining common B shares for common A shares. We formed a bank holding company which provides more efficient access to capital while allowing us flexibility for growth and acquisition strategies. Additionally, as Lou mentioned, the board approved a share repurchase program, about 750,000 shares, or approximately 4% of our total shares outstanding. I would emphasize that repurchases will be opportunistic in nature and to provide support in the event of stock market volatility. With that, I will point out the fundamentals to U.S. Century Bank as an investment thesis on the next page. We have spoken to you about these items in the past. So in the interest of time, let's open it up for questions. Operator, can you please open the line for Q&A?

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone 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 question comes from Steven Scouten with Piper Sandler.

Hey, good morning, Lou, Rob.

Good morning, Stephen.

Maybe if we could start on the expense side. I know you said, Rob, that 9.3 run rate should be a pretty good run rate, X maybe some new hires, but I guess can you speak to what you're seeing from an inflationary standpoint, salaries or other pressures and kind of how you're keeping those at bay? I feel like that's been a big issue for a lot of peers in the industry as a whole, so just wondering how you're able to keep that expense rate relatively static.

Yeah, so that's going to continue to be somewhat challenging, and we'll work through that just like everyone else in the industry. Stephen, you know, what I would say is that we crept up. We're seeing, you know, some new hires. There's a lot of excitement about U.S. Century Bank in the marketplace. We're attracting some very good, talented salespeople. and opportunistically to land those individuals. Typically, we're looking for the A and the B players. So they're at either good institutions today, and that takes a little bit of money to pry them out of those institutions. But I would say 9.3 to slightly higher, and if we find more people, we're going to hire them. And we have good aspirations on the growth side, and that takes talented workforce to do that. So we need to make sure we're paying our people appropriately and attracting and retaining our top talent. Perfect.

That makes sense. Okay. And then if we could jump back to slide 10 on the interest rate sensitivity, I guess I'm kind of surprised at the de minimis move in year one, given how much you guys have in variable rate loans. And I appreciate you said more conservative modeling, but maybe – Can you give some insight into what's behind that modeling, maybe what deposit ratings you're assuming, what's kind of driving that, you know, kind of flatline number there in year one?

Yeah, the big piece on that is the betas on the non-maturity deposits. Like our money market has a 75% beta. We think we can outperform that. So, you know, while we're conservative in our modeling assumptions, you know, I would say the upside on that to our modeling assumptions will be on our deposit betas. Right now, with all the excess liquidity we have, and I think in this cycle coming up, a lot of banks are going to be slow walking rate increases on deposits depending on their growth. We have our investment securities portfolio stacked with cash flow type products. We'll get $80 million off that. We got 40% of our loans repricing. So we're going to have on the asset side good opportunities to reprice or reinvest. And I think from a modeling standpoint, it'll be on the deposit set where we could probably outperform what's modeled. So we'll show this again in the next quarter. Everything that I'm hearing is the first rate hike could be as soon as March, and it could be either four or five rate increases. So we're certainly at the pre-cusp of a rate cycle. and I think the bank is positioned well.

Okay, great. And then maybe last thing for me, just on the loan growth side, it looked like, you know, C&I kind of reversed the trend we've seen the last three quarters here. Is that the segment where you think we could see outsized growth in 22 or, you know, maybe any color around where you were seeing the growth and where you expect to see the growth next year?

Yeah, so our PPP loans are all within – CNI, so as that kind of comes down through the forgiveness process, CNI will probably be a little bit challenged from the growth line. Certainly commercial real estate, but we do have some good diversification in our yacht portfolio and other verticals. The yachts are typically within the consumer line, and HOAs as well will be out there as well. So we've got some good opportunities on the loan side, but Just point out the PPP loans are in CNI, and that's probably driving the bulk of that decrease.

Got it. Yeah, thanks for the reminder there. Okay, great. Well, I appreciate the color.

Thanks for the time. Thank you, Stephen.

Our next question comes from Will Jones with KBW.

Hey, good morning, guys. Hey, Will. Good morning. Hey, so just wanted to start, you guys announced, you know, some several really nice organizational changes to kind of align yourself closer with a lot of your bank peers. One of those being, you know, the announcement of the buyback, which is really nice to see. You know, we really think that makes a lot of sense for you guys, especially where the stock is trading today, just on a tangible value basis. Just curious to gauge your thoughts on, you know, how you would prioritize the buyback going forward from a capital standpoint. And just, you know, where your buyback upside would be today?

Yeah, so we announced the buyback of 750,000 shares, which is approximately 4% of our shares outstanding. You know, we really view our opportunities to deploy capital and to get the return on capital as organic growth. And, you know, you hope that the stock market and the pricing of our valuation reflects the numbers that we post on a quarterly basis and the opportunities that we have in front of us. Now, from time to time, like probably the past month or so, you've probably seen a lot of volatility in the marketplace. So I think the message to our shareholders is that we're going to support the stock. There's times when our own stock is the best use of capital, the best return on capital. We'll be opportunistic about that. And, you know, I'll leave it at that. But our preference is to deploy it in organic growth of the company and in the markets that we serve.

Gotcha. No, that makes total sense. And then maybe just piggybacking off from your comments there and going back to the loan growth discussion, um, you know, period imbalances, if you look at XPP, PPP, we're up about 10% annualized, which is pretty much in line with where you guys, you know, thought that would come in. Um, but it sounds like, you know, hiring is really an active part of your, um, upcoming year. And you guys are in some of the best markets in the Southeast and in Florida. Um, Any reason to believe that, you know, loan growth couldn't come better than the high single-digit, you know, low double-digit range you guys put out there?

Well, there's a lot of migration from the northeast and from other areas of the country down here, and clearly everybody's seeing that and it's being reported on that. What we're doing is, if they become opportunities for us, we will move on it. We have spent five years building the verticals that I shared with you all, the yachts, the SBA, relaunching the global, the Juris Advantage, the HOA, all of which are non-CRE. And one of the things that I always wanted to do when the team joined, when I came on board, was to really diversify the portfolio. All those verticals are getting traction. Business is coming steadily from all of them. We are, as you've seen, expanding into Broward and Palm Beach steadily. And I think of an approach as steady as she goes. We've brought in two new lenders last year. We're scheduled to bring in two, just hired one. Probably going to have another one in place by the second quarter. And we have them with solid goals, great support. The bank is in a great position, and I just feel that it's a steady-as-she-goes kind of an approach that's going to get us there.

Yeah, no, it makes total sense. And lastly for me, Rob, I don't know if you have this handy, but just the value of the PTA at the end of the quarter.

Yeah, we do have that. That is – I believe that – $34 million, and the NOLs are at $28 million of that DTA.

Great. Thanks, guys.

Thank you, Will.

Again, if you have a question, please press star and then the one key on your touchtone telephone. Our next question comes from Michael Rose with Raymond James.

Hey, good morning, guys. How are you? Morning, Michael. Morning, Michael. Hey, so just looking at slide 13, so 92 million in yacht loan purchases between second and third quarter, yet the balances are at 80. So it seems like that has been, you know, you probably had a pay down or two. It seems like a little bit of a headwind. Can you just talk to that portfolio and maybe the appetite to further grow it as we think about kind of the context of what looks to be pretty robust loan growth, especially with the new hires. Thanks.

Absolutely. One of the things that we liked about the yacht loans were the short duration. These are loans that are 20-year term, but in our analysis, their duration is between 36 to 42 months. We bought these two tranches, the one in June and then in August. These loans were already seasoned, so some of them were probably not scheduled to be paid off. They're going to be paid off by the very nature of the owners of these yachts. Nobody keeps a large yacht for 10 or 15 years. They buy it. They enjoy it. They either sell it and they get a larger one or they're out of yachting for a period of time What is very exciting for us is that since we announced the program in late November, and December is a holiday month, there's been already a number of applications, and we believe that this is going to grow very, very well for us this year. So we've always said that we could have up to maybe 10% of the total portfolio in this particular vertical. But, you know, we believe we're going to hit our numbers. We budgeted about $40 million for this year, and we believe we're going to meet or exceed that number.

Perfect. And then maybe for Rob, just looking at the core margin down a few basis points, obviously, you know, good loan growth, a little bit of investment in the securities book, deposit costs down a Have we hit a bottom here? And, you know, as loan growth, you know, continues to be, you know, fairly robust, you know, cash is obviously come down given the investments in the portfolio. But, you know, should we think about the core margin, you know, essentially having stabilized with opportunity to grow, particularly if we get rate hikes? Thanks.

Yeah, especially with rate hikes. I would say that we're probably nearing the bottom of the cycle here if we get something as soon as, you know, March in terms of rate hikes. You know, we have cash around 5% of our portfolio securities, like I said, packed with cash flow products that will throw off chances to either reinvest in securities or put that to work on the loan portfolio. So we're anxious to see an expanding margin, and that's a key to our profitability profile. So if we're not at the bottom, I'd say we're very close. You know, we're not going to have what appears to be rate increases through the first quarter, maybe at the end of March. So probably the second quarter will be a little bit better.

Perfect. And then maybe just finally one more for me, just, just thinking, you know, broader for Lou, you guys obviously are hiring a lender in Palm beach and, you know, it seems like there's, there's a lot of opportunities, you know, for growth. We saw one of your competitors, you know, going to the Tampa and Jacksonville, you know, markets. Um, can you just talk about, uh, maybe intermediate term, uh, you know, expectations for the franchise? I mean, would it include, you know, broadening out the franchise a bit, just given the model that you guys have and, you know, just how should we think about kind of the pace of, of lending hires beyond, you know, what you, what you talked about previously? Thanks.

I think for this year, we, we will execute, uh, what we have planned for the budget, uh, As we analyze markets beyond Miami-Dade County, we have, like I said, we've always had the strategy of following our clients. And when we look at our loan books, we have followed clients up to Jacksonville, to Tampa, to Orlando. But nothing has had the volume that we have experienced here in Palm Beach and in Broward County. So I'd like to focus on those counties. before we look at anything else, but we will always be looking for opportunities. And, you know, a lot of what we've done strategically, the holding company, et cetera, has been done to prepare us for those moments.

Great. I appreciate you taking all my questions.

Thank you, Michael.

Our next question comes from Stephen Scouten with Piper Sandler.

Hey, guys, I just had one follow-up question. I wanted to confirm the deleted share count moving forward. Where will that fall out in the first quarter after the move from the BVA shares?

Yeah, so we'll have – I know there's a little, you know, looks a little unusual on that. But, you know, the ending count was $19,991. Someone's passing me some information. We can certainly get that back to you. on that, but it would be slightly under that. I'll have to get back to you on that, Stephen, but right now the ending year count would be $19,991, so we'll go from there.

Okay, great. Thanks, Ron. Appreciate it.

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

We are excited in the new year, ready to go. Our engines are revved. The team is excited. We plan to execute on our plans, and we'll keep you informed of all our developments.

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.