USCB Financial Holdings, Inc.

Good morning, and welcome to the USCB Financial Holdings Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode today. Should you need any assistance during the call, 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 your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. Please go ahead.

Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. Please go ahead. Luis de la Aguilera, President and Chief Executive Officer. the highlights of which you can see on slide three. Completing our first full year of performance since our IPO on July 23rd, 2021, USDB Financial Holdings ended the year posting consistent solid results in the fourth quarter and robust double digit annualized growth, annualized loan and deposit growth as net interest margins expanded year over year. Total assets were 2.1 billion as of December 31st, 2022, representing an increase of $231.9 million or 12.5% increase from December 31st, 2021. Asset quality continued a sound and stable trend with no loans classified as non-performing. Capital liquidity remains strong, positioning us well for continued safe and sound future growth. The bank closed the year with total deposits at $1.8 billion as of December 31st, 2022. average deposits increased by 241.9 million, or 15.5%, compared to the fourth quarter of 2021. As a business-centered commercial bank, our focus is to develop and optimize fully banked relationships, always placing a premium on growing core deposits. To this point, demand deposit balances comprise 36.2% of total deposits at year end. In continued support of our deposit growth strategies, we have hired two new experienced senior bankers that have joined us in the new year. This new team of proven producers have deep roots in the South Dade market and a strong following. Their primary focus are professionals, owner-operated businesses, and homeowners associations. We are confident that they will be accretive to our loan and deposit growth plans. Total average loans excluding PPP loans increased 347.8 million or 31.4% annualized compared to the fourth quarter 2021. 2022 saw the strongest year of loan production since the bank's 2015 recapitalization with 569 million in originations. Increased diversification in our loan portfolio is being generated through the various business verticals we have developed, including SBA, Homeowners Association Lending, global banking, and yacht lending. Nonetheless, we maintain a prudent and disciplined approach in sourcing new loan opportunities with a focus on quality, repayment, deposits, and business potential, as well as diversity by asset class and concentration. Our South Florida market is driven by a largely real estate-denominated economy, and CRE lending will be significant for most banks. Under the supervision of our Chief Credit Officer, Ben Passos, our credit department maintains a watchful eye regarding risk management, closely monitoring loan concentrations, analyzing sub-market performance, growth trends, and proactively monitoring key credit metrics. Mr. Passos will shortly be updating us on the evolution of the bank's loan portfolio, where we will note with granularity the composition of our commercial real estate by loan type, weighted averages, covering loan-to-values, debt service coverage ratios, and average loan size. In effect, the CRE portion of the loan portfolio is high quality, low leverage, and well diversified. The bank's net income for the fourth quarter was $4.4 million, or $0.22 per diluted share. Non-GAAP operating net income was $5.9 million, or $0.29 per diluted share, compared to $5.6 million, or $0.30 per diluted share, for the same period in 2021. The bank executed a strategy in Q4 2022, which resulted in the sale of 17 million of its lower-yielding available-for-sale securities for an estimated after-tax loss of approximately 1.5 million, or 7 cents, EPS. Proceeds from the sale will be more effectively reinvested in higher-yielding assets, generating an additional 3 cents in 2023 EPS. CFO Anderson, will review this repositioning strategy update as well as overall bank performance in greater detail. As we continue an overview of our Q4 profitability highlights, we note the quarter closed with an ROA of 0.86 and an ROAE of 9.91%. Non-GAAP ROAA was 1.14 compared to 1.22% for the fourth quarter of 2021. Non-GAAP operating ROAE was 13.23% compared to 11.03% for the fourth quarter of 2021. The bank's efficiency ratio was 59.81%. By contrast, our non-GAAP operating efficiency ratio was 53.46% compared to 55.85% for the fourth quarter of 2021. NIM was 3.45%. and net interest income was $16.9 million compared to 3.19 percent at $14 million in Q4 2021. Again, to fully appreciate the directional trajectory of U.S. Century Bank, we best view its performance trends. Slide four graphically details nine key performance indicators showing the significant strides made by the bank since recapitalization. I will briefly comment on four of these KPIs, namely total assets, total loans, total deposits, and stockholders' equity. When comparing 2021 and 2022, we see double-digit year-over-year increases in total assets of $232 million, or 12.5%, total loans of $317 million, or 26.7%, and total deposits of $239 million, or 15.5%. Stockholders' equity. was 182.4 million at December 31st, 2022, representing a decrease of 21.5 million, or 10.5% from December 31st, 2021. Total stockholders' equity includes unrealized securities losses of 44.8 million at December 31st, 2022, compared to unrealized securities loss of 2.5 million at December 31st, 2021. The bank's progress over these years is indicative of the leadership of our board, the experience and capacity of the management team, the commitment of our staff, and the positive response of our local market. Our developing business lines are an important contributor to our loan and deposit objectives. On slide five are listed five diversified business lines that include the Juris Advantage Program, a deposit aggregation strategy primarily supporting small to medium-sized law firms, offering personalized concierge banking service. Association Banking, focus on the expansive and deposit-rich Florida condominium market. Global Banking, developing select foreign correspondent banking relationships in the Caribbean Basin and Central America, a strong fee business generator. SBA Lending, supporting small to medium-sized businesses. We're developing a growing niche in SBA 7A Lending having the opportunity to sell the government-guaranteed portion, offering strong fee potential. And yacht lending, our newest vertical, launched in January 2022, focused on high net worth clients and one of the premier yachting markets in the U.S. Each business vertical offers multiple sales opportunities as clients are onboarded and relationships develop. As can be seen in the graphic, collectively, these business lines have generated over $446 million in deposits, and $339 million in loans, mostly CNI and consumer. The Yacht Financing Vertical is a high-quality, short-duration portfolio, which is modeled according to plan. Presently, the Yacht portfolio totals $125 million, or 8% of the total portfolio of 60 notes, having an average loan size of $2.6 million. The portfolio also reflects the following data points, which underscores the conservative nature of this underwriting. The average FICO score is 770. Average liquidity to monthly debt is at 102 times. The average loan to cost is 66%. Average liquidity to loans of 234%. The average debt service coverage is 4.4 times. All loans are recourse, current, and on auto debit. This is a new and exciting business vertical and already new additional business has been generated as a large number of these yacht owners reside in South Florida or maintain second homes in the state. Notwithstanding, this business line represents an excellent opportunity to commence a business relationship with high net worth prospects. With that said, I will turn things over to Rob.

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 were $2.1 billion for the quarter, loan balances were $1.5 billion, which is up $76 million from the prior quarter, and deposits are at $1.8 billion, up $33 million from the prior quarter. At quarter end, we had $419 million in securities, and we executed a portfolio restructuring strategy which resulted in the sale of $17 million of lower-yielding securities for an after-tax loss of $1.5 million, or $0.07 a share. Proceeds from the sales securities will be reinvested into higher-yielding assets, generating an additional $0.03 a share in 2023. In short, we expect an earn-back on this capital slightly over two years. Also, the loss on the sales securities is expected to have a nominal impact on our tangible book value as such loss was previously reflected in capital through Accumulated Other Comprehensive Income, or AOCI. I will highlight this on our capital slide. 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 negative mark due to the mark-to-market accounting treatment. While the midpoint of the interest rate curve has moved down, our total equity is now 182 million, up from 177 million in Q3. Although footnoted on the slide, the 182 million in equity includes 44.8 million in unrealized losses on the securities portfolio in AOCI. For comparison purposes, the third quarter had 45.2 million in unrealized losses. Moving on to the P&L, net interest income increased slightly from the prior quarter with triple P income nearly exhausted and our non-interest income is negative due to the portfolio restructuring I just mentioned. We booked 880,000 of provision expense with loan growth in the quarter and operating expenses were flat at 10 million for the quarter. On a gap basis, net income was 4.4%. million or 22 cents a share, but on an operating or non-GAAP basis, we made 5.9 or 29 cents a share for the quarter. And the reconciliation from GAAP to non-GAAP are in the back of the presentation. With that, let's take a look at our performance indicators. In terms of soundness, our credit metrics remain strong. Loan loss reserve remained at 1.16%, and then we'll discuss our credit book in more detail. In terms of profitability, our operating return on average assets was 1.14% for the quarter, and operating return on average equity was 13.23%. Our NIM was down two basis points from the prior quarter to 3.45%, but if you excluded the impact of the triple fee income, we are flat quarter over quarter. The operating efficiency was 53.46%, and our tangible book value per share moved up slightly to $9.12 per share, which is reflective of the negative mark of $2.24 per share on our securities portfolio in AOSDI. Absent this mark, our tangible book value per share would have been $11.36. With that, let me turn it back to Lou to speak about our loan book and loan yields.

Thank you, Rob. Clearly, loan production in 2022 was strong. Again, total loans were $1.5 billion at December 31, 2022, representing an increase of $317.3 million, or 26.7% from December of the previous year. The five lenders that joined the production team in 2020 through 2021 hit their stride after the early challenges of the pandemic. They incorporated seamlessly with the lending team. Their production was strong, and their client base followed them. The HOA, SBA, and YAT programs grew, matured, and delivered results. The bank's successful IPO launch raised our profile in the business community and introduced new clients and opportunities. The disruption caused by recent local bank acquisition is playing in our favor as customers seek alternative banking relationships and USCB earns their business. These dynamics play well for us in 2022, and I believe they will continue to be influential factors in the new year. The benefits of increased production in a rising rate market are clearly seen. Average loans, excluding Triple P loans, increased 63.3 million, or 18% annualized, compared to the prior quarter, and 347.8 million, or 31.4%, compared to the fourth quarter of 2022. Loan coupons increased 32 basis points compared to the prior quarter, and 83 basis points compared to the fourth quarter of 2021, increased due to higher interest rate environment. Loan fees yield decreased 29 basis points compared to the fourth quarter of 2021, primarily due to amortization of premium ungotten loans purchased in 2021 and subsequently paid off in 2022. Additionally, there was a decrease of 847,000 in Triple P loan fees. Throughout the year, our lenders beat their loan goals four consecutive quarters as loan amortization and payoffs slowed. The combined effects of increased production, higher rates, and fewer payoffs translates to $569 million in new originations with an average coupon 86 basis points above the portfolio average in the fourth quarter. Our business banking division led production in 2022, delivering 67% of all loan volume. Going into the new year, we continue a prudent approach in sourcing new loan opportunities with a focus on quality, repayment, deposit potential, and diversity. Going into Q1 2023, the active pipeline remains very robust with 90 million already approved, committed, and in the process of closing with anticipated fundings of over 70 million scheduled to close between January and February 2023. In the medium term, we anticipate loan growth in the mid to high teens. As we review the funding pipeline for the first two months of the new year, We know a growing diversity away from commercial real estate. 65% of the total new loans approved are non-CRE, consisting of HOA, SBA 7A, C&I equipment, and yacht loans. Again, our new non-CRE lending verticals are delivering results as our production teams have focused on new opportunities to diversify the product line. I mentioned earlier how we balance production and manage risk with discipline. Through the ongoing analysis of our loan and deposit portfolios, our credit department maintains a methodology that closely tracks trends, monitors concentrations, and proactively analyzes our various sub-markets to identify both risks and opportunities. With that said, our Chief Credit Officer, Ben Postles, will review our loan portfolio mix and asset quality.

Thank you, Luis, and good morning to everyone. 2022 was a very good year for U.S. Century Bank. our loan group grew to $1.5 billion. South Florida is Miami-Dade, Broward, and Palm Beach is our primary business market, and this is a CRE-denominated market. Accordingly, 65% of our loan portfolio is comprised by real estate, both owner-occupied and non-owner-occupied. The table at the lower right-hand side of page 10 give you some metrics on our CRE portfolio. As you can see, loan amounts are conservatively margin, and average loan-to-values range from 53% to 62%, none of them beyond 65% on average. To add to that, debt service coverage ratios are conservative as well. None of these average below 135 times, well above our own policy. Finally, Average loan sizes are kept at a very manageable level in all segments that comprise the CRE book. Moving to page 11, you can see relevant asset quality metrics in our portfolio. The allowance for loan losses is stated at 1.16 of total loans, growing in absolute numbers due to our growth in quarter four. We close every quarter in 2022 without loans classified as non-performance. And in the same way, 2022 was another year without ORIs. And finally, our book of classified loans continues to be minimal as a percentage of total loans and as a percentage of regulatory capital. Now on page 12, Rob will talk about our deposit portfolios.

Okay. Thank you, Ben. Deposits continue to grow despite raising our rates modestly through the quarter. Average deposits increased $40.9 million or 9.2% annualized compared to prior quarter and $241.9 million or 15.5% compared to the fourth quarter of 2021. Average DDA deposits decreased slightly compared to prior quarter due to seasonal property tax payments an increase 50.1 million or 8.3% compared to the fourth quarter of 2021. DDA balances comprise 36.2% of total deposits. As we enter 2023, we are expecting a higher deposit beta depending on the actions taken by the Fed and our competitors. We are seeing more requests from clients to match competitors' promotional rates on CDs and money market accounts. As mentioned in previous calls, we believe that our total deposit beta will be close to 25% to 35% throughout this entire rate cycle. Quarterly figures may vary some, but for modeling purposes, we should look at the beta throughout the entire rate hike cycle. While we are hopeful to outperform this number, and so far we have, this range is good for modeling purposes. Another point to make while we're on this slide is the value that our deposit base brings to the overall enterprise value of the franchise. 36.2% of the total deposits are in DDA accounts, demonstrating that U.S. Century Bank is the primary bank for many of our clients. With rates moving up so much, the enterprise value of our DDA accounts have gone up tremendously. Overall, our deposit base is relationship-oriented, granular in nature, and sticky, even with rising rates. In listening to other conference calls this quarter, some competitors have seen mixed shift out of their DDA accounts and into interest-bearing products, or deposits have come off their balance sheet altogether. That is not the case here at U.S. Century Bank, and we believe that is a differentiating factor when it comes to our institution and valuation. So let's see how all this impacted our margins. Net interest income increased slightly in the quarter, and our net interest margin of 3.45% was flat to the prior quarter when you remove the impact of triple P fees. While the spread between our loan yield and deposit is beginning to compress, we are seeing an improvement in our earning asset mix demonstrated by the chart on the lower left-hand side of the page. We expect further improvement as we progress through 2023 to help improve our NIMS. With $50 million of cash flows rolling off our securities portfolio in 2023, we'll have an opportunity to reinvest these funds into higher-yielding assets. With that, let's take a look at how Triple P and loans impacted our numbers and how sensitive our balance sheet is to further interest rate movements and what you may expect in the coming quarters. The Triple P fees were $10,000 for the quarter, and we only have $13,000 of unrealized fees remaining. As this program comes to an end and the numbers become immaterial, we will drop this slide going forward. Moving on to the next page, we have already experienced an improvement in our net interest income and NIM due to the higher rates. We believe we have hit an inflection point as we enter 2023 with an inverted yield curve and expectations for the curve to remain inverted for some time. Our balance sheet is slightly liability sensitive in year one as our deposits repriced but moves into a slight asset sensitive position for year two where we have more loans repricing. Again, these models are loaded with assumptions, are done on a static balance sheet, and represent a parallel shift in rate. While we are living in a much different rate environment, our actual results have outperformed our modeling assumptions as demonstrated by a lower than expected deposit data. Over the long run, we expect our actual net interest income to be more closely aligned this model as deposits are beginning to reprice faster and the yield curve remains inverted. 38% of the loan portfolio is fixed rate, while the remaining 62% is variable rate in nature. The variable rate loans are indexed to Prime, CMT, and LIBOR. In terms of repricing, the bank will reprice 31% of variable rate and hybrid rate loans within the following year. The weighted average coupon for new loan production in Q4 was 5.68%, and nearly every loan we are putting on the books today is priced at 6% or above. Also worth noting is that we increased our loan duration during 2022, which reduced our asset sensitivity, but will protect the balance sheet when rates drop. In the next six months, we have 229 million of loans repricing with a weighted average coupon of 7.3%. And according to our modeling, these loans could reprice above 7.5% with future rate increases. While these coupons may seem higher than expected, it is important to note that 88% of the 229 million of loans are tied to prime and one-month LIBOR and hence have already experienced the benefit of higher rates. These loans will now only reprice with continued rate increases. As it relates to our securities portfolio, we expect the yield of our portfolio to remain stable near-term as we continue to deploy the investment portfolio cash flows into new loan production at much higher yields. I would expect our securities portfolio to shrink gradually over 2023. Overall, as we live with an inverted yield curve for an extended period of time, we expect our NIM to compress beginning in the first quarter, the extent of which could be 10 to 15 basis points. This will largely depend on our ability to slow walk deposit costs, maintain our DDA balances, and remain disciplined in our loan pricing. So with that, let's move on to non-interest income. The highlight here is the portfolio restructuring strategy, which resulted in a sale of $17 million of lower-yielding securities for a loss of $2 million on a pre-tax basis and $1.5 million or $0.07 a share on an after-tax basis. As mentioned before, the proceeds from the sale of the securities will be reinvested into higher yielding assets, generating an additional three cents a share in 2023. Another item which will improve our fee line in 2023 includes an initiative to increase our wire fees in our global correspondent banking business, which includes doing business with 27 banks. We expect initial results to materialize this quarter and more prominently in the second half of the year. Additionally, We believe SBA will gain traction in 2023, and we are starting to see demand for interest rate swaps from our clients again. We believe these initiatives will push up our fee line as a percentage of revenue in the new year. With that, let's take a closer look at expenses. Our total expense base was $10 million and flat to the prior quarter. Most line items were in line with prior quarters, so not much to highlight here. In terms of guidance for 23, I would model $10 million a quarter, perhaps slightly more in the second half of the year, and we may add some new hires as Lou had mentioned earlier. Let's take a quick look at capital. Capital levels remain above well-capitalized levels and bounce around a bit depending upon the ratio, but even with the portfolio restructuring strategy after tax loss of $1.5 million in the fourth quarter, Tangible common equity to tangible assets moved up four basis points with a slight improvement in our AOCI numbers. I would also mention that the stock buyback and dividends are on the table and being discussed with the board. With capital straightforward, let's open it up for some Q&A.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause just momentarily to assemble our roster. And our first question here will come from Steven Scouten with Piper Sandler. Please go ahead with your question.

Yeah, thanks. Good morning, guys. I guess maybe if I could start on slide five, kind of, I think if I'm correct, it's the new slide kind of showing the net impact of these business verticals, especially the first few on the deposit side. Pretty strong results are shown year over year. I'm kind of wondering if you could give some granularity into how those did this quarter and kind of how sensitive those various deposit verticals in particular are to to rate increases today, just given a little different maybe than what some other banks might have?

Well, if we're looking at the first two that we have here, the jurist advantage and the homeowners associations, although there's always some kind of sensitivity regarding rates, but a lot of this is being driven, in our opinion, by the service we give and the teams that we have that know a lot of the management companies on the HOA side. Recently we met one that is pretty significant in the number of deposits that they maintain, and they simply were extremely happy with our bank, very unhappy with our prior bank, and both managing partners came in and announced that they're moving all the deposits over here. Another thing that has happened on the HOA side, which I think is gonna be very beneficial to us, Unfortunately, it has to do with the hurricanes that happened recently. There's a lot of activity on the West Coast for repairs, and also there's been legislation that has been passed in the current year regarding the reserve requirements on HOAs. In the past, a lot of the smaller HOAs kind of kicked the can down the road, and now they have to have the reserves in place, and they're coming to banks in order to fund these. We saw this coming over a year ago and actually have created a strategy for that. So I believe that we're going to have a very good year on the HOA side, both in loans and deposit, and that's already very clear in the Q1 pipeline. The Jurist Advantage, this is an initiative that is less than five years old. but it's been one in which it's been all about developing the relationship with the local attorneys. We've identified that a lot of the small to medium-sized law firms are wanting service that the larger banks are failing to give them, and this is a vertical that started in absolute zero. It is not really so much of a loan vertical, but a deposit one, and it's done very very well. I think it's what you have there as a year-to-year growth on both sides. I don't know if one quarter outperformed the other, but the overall was very steady.

Okay. Thank you, Lou. That's very helpful. And then just in terms of the composition of those deposits, what categories do those tend to fall in, and are many of those HOA and Juris Advantage and Global, are those index deposits? Are they predominantly non-interest payer? What kind of categories would those be?

The Juris Advantage are not really rate sensitive. If you think about it, they are not the accounts of the individual partners. They're the IOTA accounts, escrow accounts, trust accounts, and we rarely have a law firm or a partner negotiate rate. So those are the categories that they are, but they're not driven by a high fee at all. And the HOA, We seek operating accounts more than anything. Every once in a while, you do have an HOA that is negotiating a rate, but we always do it based on the overall relationship. So we price the relationship.

Yeah, the other point I might throw in there, Stephen, is that on global markets, That's probably a good mix of both DDA and some money market accounts. The cost of those deposits are below our enterprise costs, but also we're doing a lot of wires in that business. I think we had over $700,000 of wires in global, and as I mentioned in the script, that we anticipate some good growth out of that and increase in wire business in global. The other piece on the jurist advantage is on the fee line again. We're transacting and doing wire business in the jurist advantage. So we may have the operating accounts, some money market accounts in there, but really it's the service that we provide that the attorneys can call us up immediately to be hours that the traditional banks just don't cover, and it's really the service that we're providing there. So I think there's a lot of good wire business in there too. Okay, great.

It sounds like overall, you know, growth trends are good, hiring trends are good. But in the same vein, I think what a lot of banks are seeing right now is we, you know, might be tough in 23 to deliver operating leverage. How are you guys thinking about the ability to deliver operating leverage in 23 and what sounds like maybe somewhere where we've seen kind of already peak NIM and maybe peak NII for the time being?

Yeah, it's a good question and certainly one that we've talked a lot about. But I'd say there's a couple things I would point out. One is Lou mentioned that about our pipeline and our loan volume. We've been running above our stated guidance. I think we will have good volume initially coming out of 23 to, I'd say, mid to high teens in loan growth. So our volume will be high. And it'll mitigate some of the compression that we're starting to see on our margin. The second piece that I would point out is that we're seeing a lot of traction on some fee businesses and some initiatives. I think we've traditionally run around 10% of our revenue is in the fee line. We've mentioned before that we need to move that up. So there's a number of initiatives that I think this year that we can bring out of the gate and talk about more as we progress in 2023 that will improve our fee line as a percent of revenue. And then just being disciplined on the expense side. Credit still remains clean. Mr. Passos has been perfect for a long time now, and we expect that near term to remain pristine. But at some point, we could see some credit costs, but still, I think those will be benign in 2023. So that's what I would point out.

Great. That's perfect. And, yeah, the 0% NPAs continues to be a pleasant sight every quarter. So congrats on that.

And thanks for the time. Thanks, Stephen.

Our next question will come from Carl Doyer with Raymond James.

Please go ahead. Good morning, everyone.

Thank you for taking my question. Just, I guess if I wanted to, I wanted to drill down a bit more on the loan growth, obviously, unlike one of the few banks actually increasing the loan growth guidance for 2023. And it seems like it's more than just the hiring, but there's also a higher incentive pipeline at year end. I just wanted to hear, where are you seeing sort of loan demand and which categories, and if you could just talk about just the market in general.

Well, as I mentioned, we were very pleased that going into the first quarter, 67% of our loan volume is in non-CRE. So we are seeing it across the board on the HOA side, which I think is going to be a very solid year for us. We are seeing it on the CRE side on multifamily. We're seeing it also on the warehouse side. We source as a bank that is very focused on owner-operated business. We look at owner-operated opportunities, and that's where the SBA comes into play. So I think all the non-CRE verticals that I mentioned are delivering very well, and I specifically made a detailed mention of what we're doing on the yacht side Because, again, that was a vertical that we launched in January of last year, but it's been one that the response has been tremendous. We are going into the yacht season now with the Miami Boat Show. The Fort Lauderdale was just about a month and a half ago. Then there's Palm Beach. So we've seen very strong and steady activity here, and I believe it will continue into the new year. So all the verticals that we've mentioned, again, all these verticals have been created over the past five years, are delivering. And I personally attend all pipeline meetings twice a week. I speak with all the team leaders, with the division head, and I have my finger on the pulse of what's happening. So far, the demand is steady and continuous, although I've got to tell you, we cherry pick. We want the best relationship, the best asset quality. Ben, I think, did a great job in showing how we segment CRE. We're not afraid of CRE concentrations because I think we manage them extremely well. They're extremely conservative and steady as she goes.

Perfect. Thank you. And just the thoughts on deposit growth from here. Obviously, your loan deposit ratio has increased, but it's still manageable at 82%. And additionally, the securities portfolio restructuring should reduce pressure there. Just thoughts on where the deposit growth goes from here.

Yeah, certainly, you know, we're at a stage where we did the portfolio restructuring, which gave us a little cash on the balance sheet at year end. I think we had around $53 million of cash at year end. So that put us in a good position for funding loan growth in the first quarter. But certainly, we need to grow both sides of the balance sheet in a disciplined way. Lou mentioned that we just hired two new bankers that are really specialized in deposit gathering. So we anticipate to grow our deposit book somewhat in tandem of our loan growth. I'd say two things. One, we're starting our cash off on a good position. We have $50 million of securities, cash flows rolling off. That will give us funding as well. And then certainly we need to grow our deposit book.

Perfect. Thank you. And one last one for me, and it'll be it. Just your thoughts on just the share repurchase. I know you have a program for 750,000 shares. You didn't repurchase any in 4Q. Just your thoughts on that.

No, we didn't repurchase any. I would say we're having discussions on both the repurchase and the potential dividends. Nothing yet, but certainly both are being discussed as we have very good capital levels right now.

Sounds good. All right. That'll be all for me. Thank you. Thank you.

Again, if you have a question, please press star, then 1 on your telephone keypad. And with no remaining questions, this will conclude our question and answer session. I'd like to turn the conference back over to Luis de la Aguilera for any closing remarks.

Thank you. Yes. So despite a challenging operating environment, 2022 offered us clear opportunities for growth and profitability, and the USCB team continued its focused execution on our business plan. Again, we believe on the budget and model we presented and plan to continue to improve on growth and profitability trends we've established. Management is mindful of current economic uncertainties and while a soft landing for the national economy is expected, we're taking prudent approach with our balance sheet by limiting growth in certain areas, maintaining appropriate capital and reserve levels, managing liquidity, and preparing for a range of economic scenarios. Nonetheless, Florida has developed a very strong economy and 2023 is forecasted to be another year of population growth in the state with continued strong wealth migration, strong job growth, and historically low unemployment rates, which have remained under the national rate for 25 consecutive months. I believe that these factors and many more offer the state an economic resiliency that will temper the impacts of a recession. We're very aware of our competitive positioning in this dynamic South Florida market and we plan to take advantage of every opportunity. Our strong profitability metrics, growth in our balance sheet, and the economic strength in our footprints gives us confidence in our ability to achieve our financial targets in 2023 and beyond. We look forward in delivering as planned and in updating you of our progress on our next earnings call. With that said, I thank you all.

The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect your line. Hello. Thank you. Thank you. Good morning, and welcome to the USCB Financial Holdings Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode today. Should you need any assistance during the call, 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 your telephone keypad. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Luis de la Aguilera, President and Chief Executive Officer. Please go ahead.

Luis de la Aguilera Good morning, and thank you for joining us for our fourth quarter 2022 earnings call. Today, I'll review our Q4 highlights along with our CFO, Rob Anderson, and Chief Credit Officer, Ben Pasos, providing an overview of the bank's performance the highlights of which you can see on slide three. Completing our first full year of performance since our IPO on July 23rd, 2021, USDB Financial Holdings ended the year posting consistent solid results in the fourth quarter and robust double digit annualized growth, annualized loan and deposit growth as net interest margins expanded year over year. Total assets were 2.1 billion as of December 31st, 2022, representing an increase of $231.9 million or 12.5% increase from December 31st, 2021. Asset quality continued a sound and stable trend with no loans classified as non-performing. Capital liquidity remains strong, positioning us well for continued safe and sound future growth. The bank closed the year with total deposits at $1.8 billion as of December 31st, 2022. Average deposits increased by 241.9 million, or 15.5%, compared to the fourth quarter of 2021. As a business-centered commercial banker, our focus is to develop and optimize fully banked relationships, always placing a premium on growing core deposits. To this point, demand deposit balances comprise 36.2% of total deposits at year end. In continued support over deposit growth strategies, we have hired two new experienced senior bankers that have joined us in the new year. This new team of proven producers have deep roots in the South Dade market and a strong following. Their primary focus are professionals, owner-operated businesses, and homeowners associations. We are confident that they will be accretive to our loan and deposit growth plans. Total average loans excluding PPP loans increased 347.8 million or 31.4% annualized compared to the fourth quarter 2021. 2022 saw the strongest year of loan production since the bank's 2015 recapitalization with 569 million in originations. Increased diversification in our loan portfolio is being generated through the various business verticals we have developed, including SBA, homeowners association lending, global banking, and yacht lending. Nonetheless, we maintain a prudent and disciplined approach in sourcing new loan opportunities with a focus on quality repayment, deposits, and business potential, as well as diversity by asset class and concentration. Our South Florida market is driven by a largely real estate-denominated economy, and CRE lending will be significant for most banks. Under the supervision of our Chief Credit Officer, Ben Passos, Our credit department maintains a watchful eye regarding risk management, closely monitoring loan concentrations, analyzing sub-market performance, growth trends, and proactively monitoring key credit metrics. Mr. Passos will shortly be updating us on the evolution of the bank's loan portfolio, where we will note with granularity the composition of our commercial real estate by loan type, weighted averages, covering loan-to-values, debt service coverage ratios, and average loan size. In effect, the CRE portion of the loan portfolio is high quality, low leverage, and well diversified. The bank's net income for the fourth quarter was $4.4 million, or $0.22 per diluted share. Non-GAAP operating net income was $5.9 million, or $0.29 per diluted share, compared to $5.6 million, or $0.30 per diluted share, for the same period in 2021. The bank executed a strategy in Q4 2022, which resulted in the sale of 17 million of its lower yielding available for sale securities for an estimated after tax loss of approximately 1.5 million or seven cents EPS. Proceeds from the sale will be more effectively reinvested in higher yielding assets, generating an additional three cents in 2023 EPS. CFO Anderson, will review this repositioning strategy update as well as overall bank performance in greater detail. As we continue an overview of our Q4 profitability highlights, we note the quarter closed with an ROA of 0.86 and an ROAE of 9.91 percent. Non-GAAP ROAA was 1.14 compared to 1.22 percent for the fourth quarter of 2021. Non-GAAP operating ROAE was 13.23% compared to 11.03% for the fourth quarter of 2021. The bank's efficiency ratio was 59.81%. By contrast, our non-GAAP operating efficiency ratio was 53.46% compared to 55.85% for the fourth quarter of 2021. NIM was 3.45%. and net interest income was $16.9 million compared to 3.19% and $14 million in Q4 2021. Again, to fully appreciate the directional trajectory of U.S. Century Bank, we best view its performance trends. Slide four graphically details nine key performance indicators showing the significant strides made by the bank since recapitalization. I will briefly comment on four of these KPIs, namely total assets, total loans, total deposits, and stockholders' equity. When comparing 2021 and 2022, we see double-digit year-over-year increases in total assets of $232 million, or 12.5%, total loans of $317 million, or 26.7%, and total deposits of $239 million, or 15.5%. Stockholders' equity. was 182.4 million at December 31st, 2022, representing a decrease of 21.5 million or 10.5% from December 31st, 2021. Total stockholders' equity includes unrealized securities losses of 44.8 million at December 31st, 2022, compared to unrealized securities loss of 2.5 million at December 31st, 2021. The bank's progress over these years is indicative of the leadership of our board, the experience and capacity of the management team, the commitment of our staff, and the positive response of our local market. Our developing business lines are an important contributor to our loan and deposit objectives. On slide five are listed five diversified business lines that include the Juris Advantage Program, a deposit aggregation strategy primarily supporting small to medium-sized law firms, offering personalized concierge banking service. Association Banking, focused on the expansive and deposit-rich Florida condominium market. Global Banking, developing select foreign correspondent banking relationships in the Caribbean Basin and Central America, a strong fee business generator. SBA Lending, supporting small to medium-sized businesses. We're developing a growing niche in SBA 7A Lending having the opportunity to sell the government-guaranteed portion, offering strong fee potential. And yacht lending, our newest vertical, launched in January 2022, focused on high net worth clients and one of the premier yachting markets in the U.S. Each business vertical offers multiple sales opportunities as clients are onboarded and relationships develop. As can be seen in the graphic, collectively, these business lines have generated over $446 million in deposits, and 339 million in loans, mostly CNI and consumer. The Yacht Financing Vertical is a high-quality, short-duration portfolio, which is modeled according to plan. Presently, the Yacht portfolio totals 125 million, or 8% of the total portfolio of 60 notes, having an average loan size of 2.6 million. The portfolio also reflects the following data points, which underscores the conservative nature of this underwriting. The average FICO score is 770. Average liquidity to monthly debt is at 102 times. The average loan to cost is 66%. Average liquidity to loans of 234%. The average debt service coverage is 4.4 times. All loans are recourse, current, and on auto debit. This is a new and exciting business vertical and already new additional business has been generated as a large number of these yacht owners reside in South Florida or maintain second homes in the state. Notwithstanding, this business line represents an excellent opportunity to commence a business relationship with high net worth prospects. With that said, I will turn things over to Rob.

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 were $2.1 billion for the quarter. Loan balances were $1.5 billion, which is up $76 million from the prior quarter, and deposits are at $1.8 billion, up $33 million from the prior quarter. At quarter end, we had $419 million in securities, and we executed a portfolio restructuring strategy which resulted in the sale of $17 million of lower-yielding securities for an after-tax loss of $1.5 million or $0.07 a share. Proceeds from the sale of securities will be reinvested into higher-yielding assets, generating an additional $0.03 a share in 2023. In short, we expect an earn-back on this capital slightly over two years. Also, the loss on the sale of securities is expected to have a nominal impact on our tangible book value as such loss was previously reflected in capital through Accumulated Other Comprehensive Income, or AOCI. I will highlight this on our capital slide. 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 negative mark due to the mark-to-market accounting treatment. While the midpoint of the interest rate curve has moved down, our total equity is now 182 million, up from 177 million in Q3. Although footnoted on the slide, the 182 million in equity includes 44.8 million in unrealized losses on the securities portfolio in AOCI. For comparison purposes, the third quarter had 45.2 million in unrealized losses. Moving on to the P&L, net interest income increased slightly from the prior quarter with triple P income nearly exhausted and our non-interest income is negative due to the portfolio restructuring I just mentioned. We booked 880,000 of provision expense with loan growth in the quarter and operating expenses were flat at 10 million for the quarter. On a gap basis, net income was 4.4%. million or 22 cents a share, but on an operating or non-GAAP basis, we made 5.9 or 29 cents a share for the quarter. And the reconciliation from GAAP to non-GAAP are in the back of the presentation. With that, let's take a look at our performance indicators. In terms of soundness, our credit metrics remain strong. Loan loss reserve remained at 1.16%, and then we'll discuss our credit book in more detail. In terms of profitability, our operating return on average assets was 1.14% for the quarter, and operating return on average equity was 13.23%. Our NIM was down two basis points from the prior quarter to 3.45%, but if you excluded the impact of the triple fee income, we are flat quarter over quarter. The operating efficiency was 53.46%. and our tangible book value per share moved up slightly to $9.12 per share, which is reflective of the negative mark of $2.24 per share on our securities portfolio in AOSDI. Absent this mark, our tangible book value per share would have been $11.36. With that, let me turn it back to Lou to speak about our loan book and loan yields.

Thank you, Rob. Clearly, loan production in 2022 was strong. Again, total loans were $1.5 billion at December 31, 2022, representing an increase of $317.3 million, or 26.7% from December of the previous year. The five lenders that joined the production team in 2020 through 2021 hit their stride after the early challenges of the pandemic. They incorporated seamlessly with the lending team. Their production was strong, and their client base followed them. The HOA, SBA, and Yacht programs grew, matured, and delivered results. The bank's successful IPO launch raised our profile in the business community and introduced new clients and opportunities. The disruption caused by recent local bank acquisition is playing in our favor as customers seek alternative banking relationships and USCB earns their businesses. These dynamics play well for us in 2022, and I believe they will continue to be influential factors in the new year. The benefits of increased production in a rising rate market are clearly seen. Average loans excluding triple P loans increased 63.3 million or 18% annualized compared to the prior quarter and 347.8 million or 31.4% compared to the fourth quarter of 2022. Loan coupons increased 32 basis points compared to the prior quarter and 83 basis points compared to the fourth quarter of 2021, increased due to higher interest rate environment. Loan fees yield decreased 29 basis points compared to the fourth quarter of 2021, primarily due to amortization of premium ungotten loans purchased in 2021 and subsequently paid off in 2022. Additionally, there was a decrease of $847,000 in Triple P loan fees. Throughout the year, our lenders beat their loan goals four consecutive quarters as loan amortization and payoffs slowed. The combined effects of increased production, higher rates, and fewer payoffs translates to $569 million in new originations with an average coupon 86 basis points above the portfolio average in the fourth quarter. Our business banking division led production in 2022, delivering 67% of all loan volume. Going into the new year, we continue a prudent approach in sourcing new loan opportunities with a focus on quality, repayment, deposit potential, and diversity. Going into Q1 2023, the active pipeline remains very robust with 90 million already approved, committed, and in the process of closing with anticipated fundings of over 70 million scheduled to close between January and February 2023. In the medium term, we anticipate loan growth in the mid to high teens. As we review the funding pipeline for the first two months of the new year, we know a growing diversity away from commercial real estate. 65% of the total new loans approved are non-CRE, consisting of HOA, SBA 7A, CNI equipment, and yacht loans. Again, our new non-CRE lending verticals are delivering results as our production teams have focused on new opportunities to diversify the product line. I mentioned earlier how we balance production and manage risk with discipline through the ongoing analysis of our loan and deposit portfolios. Our credit department maintains a methodology that closely tracks trends, monitors concentrations, and proactively analyzes our various sub-markets to identify both risk and opportunities. With that said, our Chief Credit Officer, Ben Postos, will review our loan portfolio mix and asset quality.

Thank you, Luis, and good morning to everyone. 2022 was a very good year for U.S. Century Bank. Our loan grew to $1.5 billion. South Florida is Miami-Dade, Broward, and Palm Beach. It's our primary business market, and this is a CRE-denominated market. Accordingly, 65% of our loan portfolio is comprised by real estate, both owner-occupied and non-owner-occupied. The table at the lower right-hand side of page 10 gives you some metrics on our CRE portfolio. As you can see, loan amounts are conservatively margin, and average loan-to-values range from 53% to 62%, none of them beyond 65% on average. To add to that, debt service coverage ratios are conservative as well. None of these average below 135 times, well above our own policy. Finally, average loan sizes are kept at a very manageable level in all segments that comprise the CRE book. Moving to page 11, you can see relevant asset quality metrics in our portfolio. The allowance for loan losses is stated at 1.16 of total loans growing in absolute numbers due to our growth in quarter four. We closed every quarter in 2022 without loans classified as non-performance. And in the same way, 2022 was another year without Oreos. And finally, our book of classified loans continues to be minimal as a percentage of total loans and as a percentage of regulatory capital. Now on page 12, Rob will talk about our deposit portfolio.

Okay, thank you, Ben. Deposits continue to grow despite raising our rates modestly through the quarter. Average deposits increased 40.9 million or 9.2% annualized compared to prior quarter and 241.9 million or 15.5% compared to the fourth quarter of 2021. Average DDA deposits decreased slightly compared to prior quarter due to seasonal property tax payments and increased 50.1 million or 8.3% compared to the fourth quarter of 2021. DDA balances comprised 36.2% of total deposits. As we enter 2023, we are expecting a higher deposit beta depending on the actions taken by the Fed and our competitors. We are seeing more requirements requests from clients to match competitors' promotional rates on CDs and money market accounts. As mentioned in previous calls, we believe that our total deposit beta will be close to 25% to 35% throughout this entire rate cycle. Quarterly figures may vary some, but for modeling purposes, we should look at the beta throughout the entire rate hike cycle. While we are hopeful to outperform this number, and so far we have, This range is good for modeling purposes. Another point to make while we're on this slide is the value that our deposit base brings to the overall enterprise value of the franchise. 36.2% of the total deposits are in DDA accounts, demonstrating that U.S. Century Bank is the primary bank for many of our clients. With rates moving up so much, the enterprise value of our DDA accounts have gone up tremendously. Overall, our deposit base is relationship-oriented, granular in nature, and sticky, even with rising rates. In listening to other conference calls this quarter, some competitors have seen mixed shift out of their DDA accounts and into interest-bearing products, or deposits have come off their balance sheet altogether. That is not the case here at U.S. Century Bank, and we believe that is a differentiating factor when it comes to our institution and valuation. So let's see how all this impacted our margins. Net interest income increased slightly in the quarter, and our net interest margin of 3.45% was flat to the prior quarter when you remove the impact of triple P fees. While the spread between our loan yield and deposit is beginning to compress, we are seeing an improvement in our earning asset mix demonstrated by the chart on the lower left-hand side of the page. We expect further improvement as we progress through 2023 to help improve our NIMS. With $50 million of cash flows rolling off our securities portfolio in 2023, we'll have an opportunity to reinvest these funds into a higher yielding asset. With that, let's take a look at how Triple P and loans impacted our numbers and how sensitive our balance sheet is to further interest rate movements and what you may expect in the coming quarters. The Triple P fees were $10,000 for the quarter, and we only have $13,000 of unrealized fees remaining. As this program comes to an end and the numbers become immaterial, we will drop this slide going forward. Moving on to the next page, we have already experienced an improvement in our net interest income and NIM due to the higher rates. We believe we have hit an inflection point as we enter 2023 with an inverted yield curve and expectations for the curve to remain inverted for some time. Our balance sheet is slightly liability sensitive in year one as our deposits repriced. but moves into a slight asset sensitive position for year two where we have more loans repricing. Again, these models are loaded with assumptions, are done on a static balance sheet, and represent a parallel shift in rate. While we are living in a much different rate environment, our actual results have outperformed our modeling assumptions as demonstrated by a lower than expected deposit beta. Over the long run, we expect our actual net interest income to be more closely aligned This model has deposits are beginning to reprice faster and the yield curve remains inverted. 38% of the loan portfolio is fixed rate while the remaining 62% is variable rate in nature. The variable rate loans are indexed to Prime, CMT, and LIBOR. In terms of repricing, the bank will reprice 31% of variable rate and hybrid rate loans within the following year. The weighted average coupon for new loan production in Q4 was 5.68%, and nearly every loan we are putting on the books today is priced at 6% or above. Also worth noting is that we increased our loan duration during 2022, which reduced our asset sensitivity, but will protect the balance sheet when rates drop. In the next six months, we have 229 million of loans repricing with a weighted average coupon of 7.3%. And according to our modeling, these loans could reprice above 7.5% with future rate increases. While these coupons may seem higher than expected, it is important to note that 88% of the 229 million of loans are tied to prime and one month LIBOR and hence have already experienced the benefit of higher rates. These loans will now only reprice with continued rate increases. As it relates to our securities portfolio, we expect the yield of our portfolio to remain stable near-term as we continue to deploy the investment portfolio cash flows into new loan production at much higher yields. I would expect our securities portfolio to shrink gradually over 2023. Overall, as we live with an inverted yield curve for an extended period of time, we expect our NIM to compress beginning in the first quarter, the extent of which could be 10 to 15 basis points. This will largely depend on our ability to slow walk deposit costs, maintain our DDA balances, and remain disciplined in our loan pricing. So with that, let's move on to non-interest income. The highlight here is the portfolio restructuring strategy, which resulted in a sale of $17 million of lower-yielding securities for a loss of $2 million on a pre-tax basis and $1.5 million or $0.07 a share on an after-tax basis. As mentioned before, the proceeds from the sale of the securities will be reinvested into higher yielding assets, generating an additional three cents a share in 2023. Another item which will improve our fee line in 2023 includes an initiative to increase our wire fees in our global correspondent banking business, which includes doing business with 27 banks. We expect initial results to materialize this quarter and more prominently in the second half of the year. Additionally, We believe SBA will gain traction in 2023, and we are starting to see demand for interest rate swaps from our clients again. We believe these initiatives will push up our fee line as a percentage of revenue in the new year. With that, let's take a closer look at expenses. Our total expense base was $10 million and flat to the prior quarter. Most line items were in line with prior quarters, so not much to highlight here. In terms of guidance for 23, I would model $10 million a quarter, perhaps slightly more in the second half of the year, and we may add some new hires as Lou had mentioned earlier. Let's take a quick look at capital. Capital levels remain above well-capitalized levels and bounce around a bit depending upon the ratio, but even with the portfolio restructuring strategy after tax loss of $1.5 million in the fourth quarter, Tangible common equity to tangible assets moved up four basis points with a slight improvement in our AOCI numbers. I would also mention that the stock buyback and dividends are on the table and being discussed with the board. With capital straightforward, let's open it up for some Q&A.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause just momentarily to assemble our roster. And our first question here will come from Steven Skelton with Piper Sandler. Please go ahead with your question.

Yeah, thanks. Good morning, guys. I guess maybe if I could start on slide five, kind of, I think if I'm correct, this is a new slide kind of showing the net impact of these business verticals, especially the first few on the deposit side. Pretty strong results are shown year over year. I'm kind of wondering if you could give some granularity into how those did this quarter and kind of how sensitive those various deposit verticals in particular are to rate increases today, just given a little different maybe than what some other banks might have?

Well, if we're looking at the first two that we have here, the jurist advantage and the homeowners associations, although there's always some kind of sensitivity regarding rates, but a lot of this is being driven, in our opinion, by the service we give and the teams that we have that know a lot of the management companies on the HOA side. Recently, we met one that is pretty significant in the number of deposits that they maintain, and they simply were extremely happy with our bank, very unhappy with our prior bank, and both managing partners came in and announced that they're moving all the deposits over here. Another thing that has happened on the HOA side, which I think is going to be very beneficial to us. Unfortunately, it has to do with the hurricanes that happened recently. There's a lot of activity on the West Coast for repairs, and also there's been legislation that has been passed in the current year regarding the reserve requirements on HOAs. In the past, a lot of the smaller HOAs kind of kicked the can down the road, and now they have to have the reserves in place, and they're coming to banks in order to fund these. We saw this coming over a year ago and actually have created a strategy for that. So I believe that we're going to have a very good year on the HOA side, both in loans and deposit, and that's already very clear in the Q1 pipeline. The Jurist Advantage, this is an initiative that is less than five years old. but it's been one in which it's been all about developing the relationship with the local attorneys. We've identified that a lot of the small to medium-sized law firms are wanting service that the larger banks are failing to give them, and this is a vertical that started in absolute zero. It is not really so much of a loan vertical, but a deposit one, and it's done very very well. I think it's what you have there as a year-to-year growth on both sides. I don't know if one quarter outperformed the other, but the overall was very steady.

Okay. Thank you, Lou. That's very helpful. And then just in terms of the composition of those deposits, what categories do those tend to fall in and are many of those HOA and Juris Advantage and Global, are those index deposits? Are they predominantly non-interest payer? What kind of categories would those be?

The Juris Advantage are not really rate sensitive. If you think about it, they are not the accounts of the individual partners. They're the IOTA accounts, escrow accounts, trust accounts, And we rarely have a law firm or a partner negotiate rate. So those are the categories that they are, but they're not driven by a high fee at all. And the HOAs, we seek operating accounts more than anything. Every once in a while, you do have an HOA that is negotiating a rate, but we always do it we always do it based on the overall relationship. So we price the relationship.

Yeah, the other point I might throw in there, Stephen, is that on global, that's probably a good mix of both DDA and some money market accounts. The cost of those deposits are below our enterprise costs, but also we're doing a lot of wires in that business. I think we had over you know, $700,000 of wires in global. And as I mentioned in the script, that we anticipate some good growth out of that and increase in wire business in global. The other piece on the jurist advantage is on the fee line. Again, we're transacting and doing wire business in the jurist advantage. So we may have the operating accounts, some money market accounts in there, but really it's the service that we provide that the attorneys can call us up immediately and to be hours that the traditional banks just don't cover, and it's really the service that we're providing there. So I think there's a lot of good wire business in there, too. Okay, great.

It sounds like overall growth trends are good, hiring trends are good, but in the same vein, I think what a lot of banks are seeing right now is it might be tough in 23 to deliver operating leverage. How are you guys thinking about the ability to deliver operating leverage in 23 and what sounds like maybe somewhere where we've seen kind of already peak NIM and maybe peak NII for the time being?

Yeah, it's a good question and certainly one that we've talked a lot about, but I'd say there's a couple things I would point out. One is Lou mentioned that about our pipeline and our loan volume. We've been running above our stated guidance. I think we will have good volume initially coming out of 23 to, I'd say, mid to high teens in loan growth, so our volume will be high, and it'll mitigate some of the compression that we're starting to see on our margin. The second piece that I would point out is that we're seeing a lot of traction on some fee businesses and some initiatives. I think we've traditionally run Around 10% of our revenue is in the fee line. We've mentioned before that we need to move that up. So there's a number of initiatives that I think this year that we can bring out of the gate and talk about more as we progress in 2023 that will improve our fee line as a percent of revenue. And then just being disciplined on the expense side. Credit still remains clean. Mr. Passos has been perfect for a long time now. And we expect that near term to... remain pristine. But at some point, you know, we could see some credit costs, but still, I think those will be benign in 2023. So that's what I would point out.

Great. That's perfect. And yeah, the 0% NPAs continues to be a pleasant sight every quarter. So congrats on that.

And thanks for the time. Thanks, Stephen.

Our next question will come from Carl Doyer with Raymond James.

Please go ahead. Hey, good morning, everyone.

Thank you for taking my question. I wanted to drill down a bit more on the loan growth. Obviously, one of the few banks actually increasing the loan growth guidance for 2023, and it seems like it's more than just the hiring, but there's also a higher incentive pipeline at year end. I just wanted to hear, where are you seeing sort of loan demand and which categories? And if you could just talk about just the markets in general.

Well, as I mentioned, we were very pleased that going into the first quarter, 67% of our loan volume is in non-CRE. So we are seeing it across the board on the HOA side, which I think is going to be a very solid year for us. We are seeing it on... On the CRE side, on multifamily, we're seeing it also on the warehouse side. We source as a bank that is very focused on owner-operated business. We look at owner-operated opportunities, and that's where the SBA comes into play. So I think all the non-CRE verticals that I mentioned are delivering very well. And I specifically made a detailed mention of what we're doing on the yacht side because, again, that was a vertical that we launched in January of last year, but it's been one that the response has been tremendous. We are going into the yacht season now with the Miami Boat Show. The Fort Lauderdale was just about a month and a half ago. Then there's Palm Beach. So we've seen very strong and steady activity here, and I believe it will continue into the new year. So all the verticals that we've mentioned, again, all these verticals have been created over the past five years, are delivering. And I personally attend all pipeline meetings twice a week. I speak with all the team leaders, with the division head, and I have my finger on the pulse of what's happening. So far, the demand is steady and continuous, although I've got to tell you, we cherry pick. We want the best relationship, the best asset quality. Ben, I think, did a great job in showing how we segment CRE. We're not afraid of CRE concentrations because I think we manage them extremely well. They're extremely conservative and steady as she goes.

Perfect. Thank you. And just the thoughts on deposit growth from here. Obviously, your loan deposit ratio is increased, but still manageable at 82%. And additionally, the decreased portfolio restructuring should reduce pressure there. Just thoughts on where deposit growth goes from here.

Yeah, certainly, you know, we're at a stage where we did the portfolio restructuring, which gave us a little cash on the balance sheet at year end. I think we had around $53 million of cash at year end. So that put us in a good position for funding loan growth in the first quarter. But certainly, we need to grow both sides of the balance sheet in a disciplined way. Lou mentioned that we just hired two new bankers that are really specialized in deposit gathering. So we anticipate to grow our deposit book somewhat in tandem of our loan growth. I'd say two things. One, we're starting our cash off on a good position. We have $50 million of securities cash flows rolling off. That will give us funding as well. And then certainly we need to grow our deposit book.

Perfect. Thank you. And one last one for me, and it'll be it. Just your thoughts on just the share repurchase. I know you have a program for 750,000 shares. You didn't repurchase any in 4Q. Just your thoughts on that.

No, we didn't repurchase any. I would say we're having discussions on both the repurchase and the potential dividends. Nothing yet, but certainly both are being discussed as we have very good capital levels right now.

Sounds good. All right. That'll be all for me. Thank you. Thank you.

Again, if you have a question, please press star, then 1 on your telephone keypad. And with no remaining questions, this will conclude our question and answer session. I'd like to turn the conference back over to Luis de la Aguilera for any closing remarks.

Thank you. Yes. So despite a challenging operating environment, 2022 offered us a clear opportunities for growth and profitability. And the USCB team continued its focused execution on our business plan. Again, we believe on the budget and model we presented and plan to continue to improve on growth and profitability trends we've established. Management is mindful of current economic uncertainties and while a soft landing for the national economy is expected, we're taking prudent approach with our balance sheet by limiting growth in certain areas, maintaining appropriate capital and reserve levels, managing liquidity and preparing for a range of economic scenarios. Nonetheless, Florida has developed a very strong economy and 2023 is forecasted to be another year of population growth in the state with continued strong wealth migration, strong job growth, and historically low unemployment rates, which have remained under the national rate for 25 consecutive months. I believe that these factors and many more offer the state an economic resiliency that will temper the impacts of a recession. We're very aware of our competitive positioning in this dynamic South Florida market and we plan to take advantage of every opportunity. Our strong profitability metrics, growth in our balance sheet, and the economic strength in our footprints gives us confidence in our ability to achieve our financial targets in 2023 and beyond. We look forward in delivering as planned and in updating you of our progress on our next earnings call. With that said, I thank you all.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your line.