USCB Financial Holdings, Inc.

Good day and welcome to the third quarter 2022 USCB Financial Holdings Incorporated Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, Please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Luis de la Aguilera, President and CEO. Please go ahead.

Good morning, and thank you for joining us for our third quarter 2022 earnings call. Today, we'll review our Q3 highlights along with our CFO, Rob Anderson, and Chief Credit Officer, Ben Passos, providing an overview of the bank's third quarter performance. To start, I will comment on selected slides detailed on page three. USDV Financial Holdings delivered another quarter of solid results with strong double-digit annualized loan and deposit growth and an expanding net interest margin. Our credit metrics remain pristine and stable, supported by strong capital and liquidity trends. Again, there are no loans classified as non-performing with our allowance for credit loss ratio at 1.16. The bank's tangible book value per share is at $8.87, down 13 cents from the prior quarter, primarily due to AOCI. We have classified 74.4 million of securities from available for sale to hold to maturity to protect tangible book value in a rising rate environment. Rob will offer additional comments shortly. Net interest income before provision for credit losses was 16.8 million for the quarter ended September 30th, 2022. An increase of 3.3 million or 24.5% compared to the third quarter of 2021. Annualized return on average assets for the quarter ended September 30th, 2022 was 1.09% compared to 1.50% for the third quarter of 2021. The bank's deficiency ratio for the quarter ended September 30th, 2022 was 54.58% compared to 50.92 for the third quarter of 2021. Net interest margin increased by 10 basis points from the past quarter to 3.47% for the quarter ended September 30th, 2022 compared to 3.19% for the third quarter ended 2021. As previously noted, both deposit and loan growth have continued to post double-digit growth. Average deposits increased by 285.7 million, or 19.3%, compared to the third quarter in 2021, validating the successful efforts of the production teams to develop fully banked relationships. To this end, 38.2% of the bank's total deposits are comprised of demand deposit accounts. Total average loans excluding Triple P loans increased 113.3 million or 35.2% annualized compared to the prior quarter and 321.1 million or 30% compared to the third quarter of 2021. Slide four graphically details the trends of nine key performance indicators showing the bank's historical trends over the past six years. I will briefly comment on three of these KPIs namely total loans, deposits, and stockholders' equity. Total loans were $1.4 billion at September 30, 2022, representing an increase of $255.1 million, or 21.7%, from September 30, 2021. Similarly, total deposits were $1.8 billion at September 30, 2022, representing an increase a 312.1 million or 21% from September 30th, 2021. Total stockholders' equity was 177.4 million at September 30th, 2022, representing a decrease of 24.5 million or 12.1% from September 30th, 2021. Total stockholders' equity includes unrealized security losses of 45.2 million at September 30th, 2022, compared to unrealized security gains of $1.2 million at September 30th, 2021. Let's move on to slide five. Prior to Hurricane Ian's September 28th landfall on the southwest coast of Florida, our credit department identified the forecasted path of the storm and tracked its progress. After the storm passed, we traced its trajectory across 27 counties throughout the state and identified 94 loans, totaling $173 million that were within the storm's path, including more yachts financed under our new yacht lending program. The three counties most impacted were Lee, Charlotte, and Collier counties, where USDB identified 11 assets financed. On October 10th, I personally visited all the properties identified and reported their condition, observing negligible or no damage to those assets financed. To date, no loan modifications have been requested. We continue to assess any potential credit risk, and most importantly, we're in direct contact with our customers. As I drove up the West Coast from Naples to Cape Coral, I identified firsthand the damage caused by the storm, which due to storm surge primarily impacted a one-half-mile strip inland from the beach all the way along the coast, an area highly concentrated with condominium buildings containing thousands of units. The rebuilding of the West Coast is critical for the state's economy, and preliminary damage report estimates costs range between $42 billion to $260 billion. Association Banking is a key business vertical at U.S. Entry Bank, and we are actively offering financing support to our partner area management companies that cover the West Coast. Rob, I'll turn things over to you now.

Okay. Thank you, Lou, and good morning, everyone. In looking at our financial statements, and by many measures, U.S. Entry 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 were $2.037 billion for the quarter. Loan balances were $1.432 billion, which is up $60 million from the prior quarter, and deposits are at $1.797 billion, and that's up $58 million from the prior quarter. At quarter end, we had 427 million in securities and we moved another 74 million of securities to HTM to protect tangible book value in a rising rate environment. In total, we have 179 million or 42% of the securities portfolio and held the maturity at quarter end. Like most banks in the industry today, these securities were put on the books during the pandemic period of very low interest rates. As interest rates have taken a fast and sharp rise, These securities now have a significant negative mark due to the mark-to-market accounting treatment. The bank has no intention of selling securities at significant losses, so we might as well move them to HTM to avoid further negative marks with anticipated rate increases later this year. The impact of all this can be seen in our total equity, which moved down to $177 million from $180 million in Q2. And although footnoted on the slide, the $177 million in equity includes $45.2 million in unrealized losses. on the securities portfolio due to AOCI, and for comparison purposes, the second quarter had $36.9 million in unrealized losses. Taking a look at the P&L, net interest income increased $1.1 million, or 28.7% annualized compared to the prior quarter, and $3.3 million, or 24.5% compared to the prior quarter. If you excluded the impact of Triple P fees, our net interest income grew 38.5% compared to the prior quarter and 34.1% compared to the prior year, which I think is an interesting data point. Non-interest income was $1.8 million up slightly from the prior quarter. And as a reminder, the prior year amount of $4.2 million contained a one-time $2.5 million loan settlement, which we flagged previously. We booked 910,000 in provision expense with loan growth for the quarter and operating expenses moved up to 10.1 million for the quarter. I'll speak more on this in a bit. Net income was 5.6 million or 28 cents a share. I'll remind you that EPS comparisons prior year would be difficult and not relevant due to the multitude of items we did to clean up our capital stack throughout 2021. So let's take a look at our key performance indicators. In terms of soundness, our credit metrics remain strong. We had one small charge off for $91,000, and our loan loss reserve coverage ratio increased slightly to 1.16%. In terms of profitability, return on average assets was 1.09%, and return on average equity was 11.9%. Our NIM expanded 10 basis points from the prior quarter to 3.47%, and our efficiency ratio improved slightly to 54.58%. Last, our tangible book value per share came down to $8.87 per share, which is reflective of the negative mark of $2.26 per share on our securities portfolio I referenced earlier. And absent this mark, our tangible book value per share would have been $11.13. With that overview, let's take a look at our loan book and loan yields. First, we separated out our core loans from our Triple P loans, so you can see how each component piece is working. While the Triple P loans are nearly done with the forgiveness process, total average loans excluding Triple P loans increased 113.3 million or 35.4% annualized compared to the prior quarter and 321.1 million or 30% compared to the third quarter of 21. Loan coupon increased 28 basis points compared to the prior quarter and 53 basis points compared to the prior year. Increases are due to the higher interest rate environment and disciplined pricing by the teams. Loan fees decreased 10 basis points from the prior quarter, primarily due to the amortization of a premium on a yacht loan that we purchased in 21 and subsequently that loan paid off in 22. Additionally, a decrease of 312,000 in Triple P loan fees should be noted as well. While the quarter's loan growth was in line with the guidance we provided you on our last call, I'll provide two comments for modeling purpose. First, our ending spot balance for the third quarter of 1.432 billion is above the quarterly average of 1.399 billion. And if you just held the 1.432 billion steady throughout the fourth quarter, we'd have average loan growth of 9.44% in the fourth quarter. Second, it's becoming more likely that loan growth will continue to slow as we enter 2023 as rates continue to rise, years of an economic downturn or a recession continue to develop and we maintain pricing discipline. For 2023, we will fall back to our previous guidance of high single-digit to low teens, given the macroeconomic conditions we find ourselves in. We could still be on the high side of that range or even higher in Q4, but believe things will gravitate back to our guidance for the full year of 23. Our goal is to book profitable business, not necessarily business for gross sake. With that, I'd like to turn it back to Lou to provide a few more details on our loan book.