USCB Financial Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the USCB Financial Holdings Incorporated First Quarter 2022 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 touchstone telephone. As a quick reminder, this call is being recorded and you can find the first 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. Additionally, 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 de la Aguilera, President and CEO. Sir, you may now begin the conference.

Good morning, and thank you for joining us for our first quarter 2022 earnings call. I will review our Q1 highlights along with Ben Passos, our Cape Credit Officer, and CFO Rob Anderson, providing an overview of the bank's performance and some strategies we're executing to continue to generate consistent positive earnings power and drive long-term shareholder value. But first, I would like to expand on two important board-level approvals made this past quarter. As previously reported during the first quarter of 2022, the Board of Directors approved a new share repurchase program, which allows for the repurchase of 750,000 shares of Class A common stock. Repurchases under this program may be made in open market transactions. The timing and actual number of shares repurchased will depend on a variety of factors, including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. As of March 31st, 2022, the bank had not repurchased any shares. Independent board oversight and governance will always be a commitment made to our shareholders. To this end, U.S. Century Bank welcomed this past quarter Ramon A. Rodriguez, Robert E. Cafafian, and Maria C. Alonso to its board of directors, increasing our director count to nine. As noted in the accompanying press release, Ramon, Robert, and Maria bring to U.S. Century a wealth of business and community experience and will immediately make a positive impact. Their impressive backgrounds will provide important new strategic voices to the conversation of how we deliver U.S. Century Bank's mission to more individuals, families, businesses, and communities throughout the South Florida market. Our first quarter results demonstrate the focused execution of our business plan, reflecting solid growth in deposits and loans and an expanding NIM as we continue to deploy excess liquidity into higher yielding assets and securities to maximize returns. Compared to the first quarter of 2021, average deposits increased by 306.6 million or 23%. Well located in key commercial markets, our banking centers are well aligned with our lenders and business development officers as they support the coordinated business activities of these line partners. As a commercially focused bank, our primary target clients are owner-operated businesses, investors, retailers, distributors, and entrepreneurs, and their related personal accounts, which we consider as relationship retail business. Success in developing these relationships has been seen over time in the deposit growth of our banking centers, which over the past five years has increased by 709 million, or 119%. Presently, seven of our 10 banking centers have deposits at over 100 million, two of which have deposits of more than 200 million. Total loans were 1.3 billion as of March 31st, 2022, representing an increase of 154.4 million, or 14%, from March 31st, 2021. By comparison, average loans excluding Triple P's increased by 217.4 million, or 23%, compared to our first quarter, 2021. During the first quarter of 2022, we closed $159 million in new production with fundings of $141.3 million. On January 24, 2022, we opened a new commercial business office directly adjacent to our Coral Gables Banking Center, our second largest branch by deposits, and located in one of the most affluent submarkets in Miami-Dade County. Located in the commercial business district of Coral Gables, just east of the Miami International Airport, This loan production hub is staffed by two lenders and two business development officers with office space for three more. Three new lenders have been hired since November 2021. One of these joined the team in the first quarter of 2022, increasing our lending team by 27% as we now have 14 active lenders in production supported by nine business development officers. Very recent local merger and acquisition activity as well as changes in the executive leadership of some of our immediate competitors, is causing disruption in the market and opportunities for the acquisition of new clients, individual hires, and possible team lifts. In the past quarter alone, the announced acquisition of Apollo Bank by Seacoast Bank, as well as the planned acquisition of First Horizon by TD Bank, are opportunities to act upon. We are presently in active discussions with production personnel and anticipate to act on these opportunities. Our approach to credit is conservative and a pristine loan portfolio is indicative of our disciplined credit culture. Strong asset quality is reflective of our credit metrics and non-performing loans to total loans was 0% at March 31st, 2022 compared to 0.06% at March 31st, 2021. The allowance for credit losses represents 1.2% of total loans at March 31st, 2022, compared to 1.36% at March 31st, 2021. This decrease in coverage was mostly attributed to the reduced uncertainty around the economic impact of the COVID-19 pandemic on our loan portfolio. With that said, let me allow Rob to lead us through our first quarter performance in more detail.

Okay, thank you, Lou, and good morning, everyone. In looking at our financial statements and by many 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 just under $2 billion. Loan balances are $1.3 billion. Deposits at $1.7 billion. We continue to put excess liquidity to work by growing our loan book, and our securities portfolio remains above $500 million. Specifically, at quarter end, we had 514 million in securities, and 122 million of those securities are classified as held to maturity or HTM to protect tangible book value in a rising rate environment. While our equity walked back to 192 million, it is being driven by the mark-to-market accounting in our securities portfolio. Had we not made the move last year to move securities from AFS to HTM, we would have seen it decrease another $8.7 million. Net interest income increased by $303,000 or 8.7% annualized compared to the last quarter and $1.9 million or 15.3% compared to the first quarter of 2021. We booked no provision expense for the quarter and expenses were up slightly from the prior quarter with a few new hires and a one-time expense related to the formation of the bank holding company. More on this in a bit. Net income was $4.9 million, or $0.24 a share, and I will point out that this quarter contained three items that either happened infrequently or are considered one-time items. I'll speak to each of them as we advance in the presentation, but in summary, we collected $161,000 in default interest from a prior client of the bank. Expenses contained $181,000 in legal expense associated with formation of the bank holding company. And finally, we recorded $300,000 in additional tax expense related to a catch-up entry to our DTA. Adjusting our net income and EPS for these items, we would have reported $0.26 for the quarter. While I'm not a big fan of, quote, adjustments, I know our analyst community take these into consideration, so I wanted to point them out for you. Also, I'll remind you that EPS comparisons to prior year will be difficult and not relevant due to the multitude of items we did to clean up our capital stack throughout 2021. Let's take a quick look at our key performance indicators. In terms of soundness, our credit metrics remain pristine. A slight recovery on the charge-off line and our loan loss reserve coverage ratio has come down to pre-pandemic levels of 1.20%. In terms of profitability, return on average assets was 1.03% for the quarter, and return on average equity was 9.75% for the quarter. Our NIM expanded slightly from the prior quarter to 3.22%, and our efficiency ratio was 58.88%. Last, our tangible book value per share came down to $9.60, which is reflective of the negative mark in OCI I referenced earlier. With that overview, let's look at our loan book. We separated out our core loans from Triple P loans, so you can see how each component piece is working. While the Triple P loans are going through the forgiveness process, our core loan book grew 69 million, or 25.2% annualized compared to the last quarter, and 217 million, or 22.7% compared to the first quarter. Loan yields were up three basis points from last quarter. Fees came down five basis points, and our loan coupon was higher by eight. In terms of new loan origination yields, this quarter we saw yields above 4%, and with interest rates rising, we feel the loan coupon will continue to climb. So with that, let's look how Triple P fees impacted our numbers. Triple P fees were steady at $1 million this quarter. We have 500,000 of unrealized Triple P fees remaining at quarter end, so you can expect this government-sponsored program to slowly come to an end. Also, we have 25 million of Triple P loans remaining on our books at quarter end. That's down from 42 million from the prior quarter. We expect most of the remaining Triple P loans to be forgiven over the next three months. With that, let's move on to deposits. Deposits continue to grow despite dropping rates slightly or holding them steady. Average deposits increased 88.2 million or 22.9% annualized compared to prior quarter. and 306.6 million or 22.8% compared to the first quarter of 21. We have no wholesale deposits and DDA average deposits grew 22.4 million or 15.2% annualized compared to prior quarter and 144 million or 29.9% compared to the first quarter of 21. Also, our deposit costs came down one basis point with the first 25 basis point rate increase from the Fed. As it relates to rate increases and given our excess liquidity, I would expect us to be able to slow walk any rate increases on the interest-bearing deposits and would expect slower overall deposit growth if we have clients seeking the highest rate in town. We believe our deposit base is relationship-oriented, granular in nature, and 38% of deposits are in DDA accounts, demonstrating that U.S. Century Bank is the primary bank for many of our clients. So let's see how this impacted our margins. Net interest income increased by $303,000 or 8.7% annualized compared to last quarter and $1.9 million or 15.3% compared to the first quarter of 2021. Net interest income growth is being driven by lower deposit costs and higher interest income generated by a larger loan and investment portfolio. Cash balances and securities continue to make up a third of our earning assets. Our ending cash balance at quarter end was $94 million, which will allow us to absorb the seasonality of tax season in April, where we see some liquidity come off our clients' balance sheets, and we'll be in a position to deploy excess liquidity into loan demand, which, as Lou mentioned, remains robust. Our NIM expanded to 3.22%, but if you exclude the impact of the triple P loan fees, we were basically flat. With that, let's see how sensitive our balance sheet is to interest rate movements and what you may expect in the coming quarters. While we already had a 25 basis point rate hike, like the rest of the world, we are expecting more rate increases to come this quarter and throughout 2022. We believe U.S. Century Bank is positioned well for this new rate cycle. First, our balance sheet is asset sensitive, which means our assets will reprice faster than our liabilities. 42% of our loan portfolio is fixed rate, while the remaining 58% is variable rate. Variable rate loans provide protection against rising interest rates. Variable rate loans are indexed to Prime, Constant Maturity Treasury, or CMT, and LIBOR. In terms of repricing, the bank will reprice 46% of the variable and hybrid rate loan portfolio within the following year. In fact, in the next six months, we have $258 million of loans repricing with a weighted average coupon of 3.87%. As it relates to our securities portfolio, we expect to receive $45 million from prepayments and maturities, or approximately 9% of the total portfolio this year. Currently, our portfolio is invested at a 185 yield. Effectively, we can reinvest these cash flows at 3%, which will result in an additional $515,000 of interest income annually. were deployed into new loan production at much higher yields. All positive scenarios for NIM and net interest income. According to our ALM model static run, the bank's net interest income will increase slightly with a parallel rate shock in year one. A parallel rate shock assumes all points of the curve move in a parallel fashion. This is highly unlikely. In fact, the forward rate curve is showing a much flatter yield curve where the Fed will lift the front end or short-term rates with the belly of the curve meaning points from 3 to 10 years remaining at current levels or rising slightly. This makes forecasting our NIM and the impact to our net interest income challenging the forecast, add in the fact that the PPP loans will soon be disappearing, and we have more complexity. For the short term, I would guide you to model a modest increase in our NIM with rising rates offset by the negative impact of declining PPP loan fees. I would also model higher NIM by the end of 2022 and into 2023, from where we are today given the current economic and rate outlook. We will closely monitor this and update you on our next call. So let's move on to non-interest income. We had a solid quarter of fee generation with SBA producing 334,000 in fees related to SBA loan sales, and we collected 161,000 of default interest from a prior client of the bank. I believe this action, which is the second collection with default interest rate in the past year, speaks to our ability to properly attach collateral and covenants with penalties in the event of default. More on credit in a bit. With fees straightforward, let's take a closer look at expenses for the quarter. While our total expense base moved up to $9.6 million for the quarter, we had a lingering legal bill for the formation of the bank holding company. Despite this one item, our expenses and efficiency ratio were in line with the guidance we provided you last quarter. While we detailed line item explanations, I would say that we are starting to see some signs of wage inflation, including exception requests for merit increases above our target, new hires coming in with a higher salary than those leaving the role, specifically in technology roles, and the acquisition cost of new hires is also going up. Having said all this, I believe you can expect the near-term quarterly run rate to be around $9.6 million. slightly higher depending on our ability to hire new revenue producers. Again, I would reiterate, interest in team liftouts and the dislocation happening in our market. With that, let me turn it back to Lou to speak about our business verticals. Thanks, Rob.