USCB Financial Holdings, Inc.

Good morning and welcome to the USCB Financial Holdings 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 your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would like now to send the conference over to Mr. Luis de la Aguilera, President and CEO of the company. Please go ahead.

Good morning, and thank you for joining us today for USCB Financial Holdings 2023 First Quarter Earnings Call. With me today reviewing our Q1 highlights is CFO Rob Anderson and Chief Credit Officer Ben Passos, who will provide an overview of the bank's performance the highlights of which you can see on slide three. Well, what a difference a quarter makes. Who would have imagined that just six weeks after our last earnings call, three banks would have suddenly failed, heightening client concerns about the safety and soundness of the banking industry and intensifying discussions on inflation, liquidity, uninsured deposit ratios, any potential recession. Banking is based on confidence, and clients look for guidance and support during stressful economic times. It is critical to maintain our clients' trust, and we see the moment as an opportunity to further interact with them to strengthen and grow their relationships. More on that shortly. Despite these challenges, we are pleased to announce that the USDB team delivered strong performance in the first quarter of 2023, reflecting our ability to navigate a challenging operating environment with prudent consistency. Our financial results demonstrate robust earnings driven by solid loan production, disciplined credit underwriting, and risk management practices. Over the past six years, we have focused on diversifying our loan portfolio by developing multiple non-CRE business lines, which are delivering in a meaningful way. Actually, 64% of the bank's Q1 loan production was non-CRE, and we expect that trend to continue. Our deposits are derived primarily from local businesses, their owners, and the communities we serve. We do not have any exposure to either cryptocurrencies or investments or to crypto-related businesses. We are a commercial bank, and our strength and stability is reinforced by growing core customer relationships, enabling us to build a granular deposit-based and diversified loan portfolio in one of the fastest growing markets in Florida and the United States. As we review our Q1 2023 highlights, let's start by comparing our results to those posted in the first quarter of 2022. Average deposits increased by 194 million or 11.8% compared to the first quarter of last year. Average loans excluding PPP loans increased 137 million or 31.4% compared to the first quarter of 2022. Tangible book value per share was $9.37, including an after-tax unrealized security loss impact of $2.14. Net income was $5.8 million, or $0.29 per diluted share, an increase of $1 million, or 19.7%, compared to the first quarter of 2022. Annualized return on average assets for the quarter ended March 31st, 2023 was 1.11% compared to 1.03 for the first quarter of 2022. Annualized return on average stockholders' equity for the quarter ended March 31st, 2023 was 12.85% compared to 9.75% for the first quarter of the previous year. The efficiency ratio for the quarter ended March 31st, 2023 was 56.32% compared to 58.88% for the first quarter of last year. Credit metrics remain strong. Non-performing loans to total loans was 0.03% at March 31st, 2023 compared to zero at March 31st of last year with a single loan for $486,000 classified as non-performing. The allowance for credit losses represented a 1.20% of total loans, both at the March 31st, 2023 and March 31st of last year. Effectively, as of January 1st of this year, the company adopted the CECL methodology for estimating credit losses, which resulted in an increase to the allowance for credit losses for loans of 1.1 million and an increase to the reserve for unfunded commitments of 259,000. This one-time cumulative adjustment resulted in an after-tax decrease of $1 million in retained earnings. During the quarter, the company repurchased 500,000 shares of USTB Financial Holdings, Inc. at a weighted average price per share of $11.74. The aggregate purchase price for these transactions was approximately $5.9 million, including transaction costs. These open market repurchases were made pursuant to the company's publicly announced repurchase program. As of March 31st, 23, 250,000 shares remain to be repurchased under the program. The following page is self-explanatory, directionally showing nine select historical financial trends since our recapitalization. Profitable performance based on sound and conservative risk management is what our team is focused on consistently delivering. So now let's turn our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

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 2.2 billion for the quarter. Loan balances were 1.6 billion, which is up 73 million from the prior quarter, and deposits are at 1.8 billion. At quarter end, we had 416 million in securities. 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-mark accounting treatment. Total equity is now $184 million, up slightly from $182 million in Q4. And although footnoted on the slide, the $184 million in equity includes $42.1 million in unrealized losses on the securities portfolio running through AOCI. Moving on to the P&L, net interest income decreased from the prior quarter due to higher deposit costs and our non-interest income of $2.1 million reflects the execution of SBA loan sales. The bank implemented CECL in the quarter and booked 201,000 provision expense with loan growth. Additionally, our day one CECL implementation resulted in a 1.1 million increase to our loan loss reserve, which we ran through retained earnings. On a GAAP basis, net income was 5.8 million, or 29 cents a share. And with that, let's take a quick look at our performance indicators on the next page. In terms of soundness, our credit metrics remain strong. Our loan loss reserve coverage ratio increased with the adoption of CECL at 1.20%, and Ben will discuss our credit book in more detail in a bit. In terms of profitability, our return on average assets was 1.11 for the quarter, and return on average equity was 12.85%. Our NIM was down 23 basis points from the quarter to 3.22%, driven by a higher cost of funding. Efficiency Ratio was 56.32%, and our tangible book value per share moved up slightly to $9.37 per share, which is reflective of the negative mark of $2.14 per share on our securities portfolio and AOSDI that I referenced earlier, and the stock repurchases in the quarter. Absent the AOSDI mark, our tangible book value per share would have been $11.51. Let's hit on liquidity on the next page. During the month of March, our industry saw three notable banks fail and liquidity became a headline issue across the industry. The Federal Reserve created a new liquidity program to make additional funding available to depository institutions. We have enrolled in the Bank Term Funding Program, or BTFP, but have not accessed the program and do not intend to access the program anytime soon. Our on-balance sheet liquidity is in excess of $413 million and our off-balance sheet sources, excluding brokered CDs, is in the excess of $228 million. We continue to beef up our pledging of both loans and securities, and our liquidity sources have expanded post-quarter end. Additionally, U.S. Century Bank has access to the brokered CD market and listing CDs, which we have self-imposed policy limits on these products and are not listed on the chart. If we include all sources of wholesale funding, our self-imposed liquidity limits are in excess of $500 million of funding, which we believe is sufficient to weather the current environment. So with that, let's take a look at our deposit book on the next page. Average deposits increased $40.4 million or 9.1% annualized compared to the prior quarter and $194 million or 11.8% compared to the first quarter of 2022. Average DDA deposits increased 10.5 million or 6.5% annualized compared to the prior quarter and increased 38 million or 6.1% compared to the first quarter of 2022. Average DDA balances comprised 36% of total deposits during the quarter and is consistent with the prior quarter. You may note that USCB did not experience the mix shift that seems prevalent with other institutions today. We believe this speaks to the strength of our deposit base. Also, you will notice that quarter end spot balance of $1.831 billion is below our quarterly average of $1.844 billion. We had numerous conversations with clients in the last two weeks of March who were concerned about the events happening within the industry. While few clients decided to minimize their balances with USCB, I'm happy to report that we did not lose any clients due to these events, and we had a few clients place their deposits into the Intrify ICS and CDARS product, which provides the depositor with insurance on every dollar of their deposit. To that point, we had $35.7 million in ICS CDARS at quarter end, and some clients have continued to put more in the ICS product post-quarter end. As it relates to the cost of our deposit book, we continue to see increases relative to the Fed Funds rate increases but remain with a 24% deposit beta through the current rate cycle. So let's take a closer look at the deposit book on the next slide. Our deposit book reflects our business model, a diversified commercial bank. 54% of our deposits are commercial or business accounts, 35% personal or retail accounts, and 11% public fund accounts, which are partially collateralized. The bank has 19.2 thousand deposit accounts with the majority in personal accounts, 12.4 thousand or 64.4 percent of the total. As you can see by the chart on the lower left, the average balance in a business account is 145 thousand, 52 thousand in a personal account, and 7.1 million in a public fund account. The total amount of uninsured deposits adjusted by the collateralized portion of public funds is 56% for quarter end, a decrease of 3% compared to the fourth quarter of 2022 and below the 2022 average so far. We anticipate this number to come down or more significantly next quarter as we continue to place clients in the ICS product post-quarter end. With that, let me turn it back to Liv.

Thank you, Rob. As seen on the graph on slide 10, average loans for Q1 2023 excluding PPP loans increased 90.6 million or 25.2 annualized compared to the prior quarter and 370 million or 31.4% compared to the first quarter of 2022. As a competitive relationship-driven bank, we price based on risk and relationship. To this point, we know that loan coupons increased 32 basis points compared to the prior quarter and 107 basis points compared to the first quarter of 2022. Notwithstanding our loan growth or yields, our focus is on quality and ongoing risk assessment and management. Our chief credit officer will be reviewing our portfolio mix, detailing our CRE concentrations by loan type, weighted average loan-to-value and debt service coverage, as well as average loan size. Here you will note the low leverage, strong repayment, and diversified nature of this portfolio. Furthermore, we will take a close look at the bank's CRE office portfolio. Following the COVID pandemic, there has been a significant course correction in the office sector, as the industry evaluates how office buildings will be used, repriced, valued, and transacted. Again, conservative underwriting and risk management guide our choice of selection and all our CRE asset classes. As seen on the graph on page 11, the strong loan production posted throughout 2022 slowed over the past four quarters as the Fed increased rates 425 basis points from March to March. Over this time, higher borrowing costs have impacted loan demand, specifically CRE loan demand and refinancing. The bank delivered or exceeded budget over the past five quarters, and we're forecasted to do so throughout 2023. Excluding PPP loans, our point-to-point loan growth for 2022 ran at 31.4%, as an effect of the Fed's monetary policy, which has led to higher rates and decreased loan demand. We expect high single-digit to low double-digit growth in 2023. Still, the average coupon for new loans increased to 6.66% for Q1 2023, 152 basis points above the portfolio average. As previously noted, 64% of the first quarter's loan production, totaling $94 million, was well diversified and non-CRE. This shift was due toward development and diversification of new product lines, namely HOA, SBA, and correspondent bank lending, as well as equipment and yacht financing, all of which are in strong demand in South Florida. With that said, let me turn things over to Ben.

Thank you, Luis, and good morning to all. Our loan portfolio mix, as detailed in slide 12, has not changed appreciably from the numbers you have seen before. Out of a book of $1.580 billion, CRE loans amount to $988 million, and this includes owner-occupied loans. Our biggest concentration is in the retail segment, with 298 million. I'm happy to report that as of the end of quarter one, and even up to today, asset quality is excellent. The CRE book has conservative metrics across all segments. Weighted average loan-to-values ranging from 54% to 62%. debt service coverage ranging from 140 times to 2.62 times, and average loan sizes conservatively low, ranging from one million to 4.6 million. Moving to slide 13, we have information on our CRE office segment. The numbers you see in this slide confirm that CRE office is not among our largest CRE segments. Non-owner-occupied office loans are just 13% of the CRE loans and 8% of total loans. We do have 3% of our total loans in the owner-occupied bucket that are office related. Key metrics for office loans in both the non-owner-occupied bucket and the owner-occupied bucket are 120 notes totaling 173 million, and they have a weighted average loan balance of 1.4 million, weighted average loan-to-values of 57%, and an average debt service coverage of 2.1 times. In addition to what we said before for our retail loans, asset quality is very good. Most importantly, maturities within a year are just 4% of the office book. Moving to slide 14, asset quality continues to be very good, reflecting conservative underwriting and prudent risk management. Our HRR coverage stands at 20%. The bank implemented the CISO methodology starting January 1st of this year. The implementation of CISO led to an initial increase of $1.1 million in the ALLL, and the subsequent increase is a result of the loan growth. After several quarters with zero non-accrual loans, we placed a $486,000 loan in this category in quarter one. We do continue with no arrears and none anticipated going forward. Our classified asset book is negligible and that results in a ratio of classified loans to total loans of just a quarter of 1%. Going to slide 15, Rob will talk about our name.

Okay, thank you, Ben. Net interest income decreased by $869,000 compared to prior quarter, predominantly due to an increase in deposit costs. Our net interest margin compressed 23 basis points to 3.22%. Our earning asset mix continues to improve towards higher earning assets, even though we held higher levels of cash and increased our FHLB advances at quarter end, given the heightened attention on liquidity. With approximately $50 million of cash flows rolling off our securities portfolio this year, we will have the opportunity to reinvest those funds into higher-yielding assets, and we fully expect our team to grow our deposit book, despite challenging environments. Let's take a look at our interest rate sensitivity. According to our asset liability model, our balance sheet is liability sensitive for year one and asset sensitive for year two. This is a direct result of higher money market and saving account balances and having a higher portfolio of variable rate loan portfolio repricing in year two. Furthermore, the yield curve shape has also had an impact on the magnitude of the repricing. Under an inverted yield curve, our liabilities, particularly in money market accounts and short-term borrowings, are repricing faster and higher than our assets, which increases our liability sensitivity in the short term. While our through-the-cycle deposit beta remains near our stated range of 25% to 35%, going forward and given expectation on the yield curves, current and future shape in our current balance sheet composition We expect further NIM compression going forward. So with that, let's move on to the next page. We had a very solid quarter of non-interest income. Service fees were steady, and we are excited about some new initiatives to move this number up in the coming quarters. SBA fees were consistent from prior quarters, and we saw very little movement in our securities book this quarter. With fees straightforward, let's take a look at our expenses. Our total expense base was 10.2 million, and slightly up from the prior quarter. Salaries and benefits were up with a few new hires and seasonal increases in payroll taxes. The remaining light items were in line with prior quarters, so not much to highlight here. So let's take a look at capital. Capital levels remain above well-capitalized levels, but came down a bit as the company repurchased 500,000 shares at an average weighted price of $11.74. I would also mention that these purchases happened prior to the banking events, which further depressed bank stocks at quarter end. The company has 250,000 shares remaining under the current authorization, and you'll notice AOCI improved by 2.7 million in the quarter. With capital straightforward, I will turn it back to Lou for some closing comments.

Thank you, Rob. U.S. Century Bank closed the first quarter of 2023 directionally as forecasted. responding with consistency to both the expected challenges of rising interest rates and the unexpected liquidity pressures caused by a crisis of confidence and a perceived flight to safety that has impacted most banks. Team USDB took the situation and created an opportunity, taking immediate action by reaching out to our clients to proactively explain the situation, hear their concerns, and provide solutions. Every relationship manager contacted their top depository clients in the first week. Many hundreds of contacts were made. This effort was very much in line with a new business mining project launched in the fourth quarter of 2022. The project is led by teams of lenders and business development officers who are in effect contacting and further developing the deposit and business potential of existing customers. This high-touch business mining initiative was designed to expand our share of wallet with non-lending transaction banking products to deepen relationships, and our efforts are delivering consistent results. Even in challenging times, U.S. Century is advantageously located in one of the most attractive banking markets in Florida and the U.S. Our state is the third largest in population and the fourth largest economy in the country. With 900 net new residents arriving in Florida every day, and an estimated population of 26 million by 2023, Florida is primed for continuous growth. I mentioned earlier how 64% of our first quarter loan production was non-CRE related. Pivoting in this manner was not done by chance. It has taken time, talent, and planning to develop new non-CRE lending verticals in a state where businesses are largely real estate denominated. Higher interest rates lead to higher borrowing costs, slowing CRE demand, and the number of quality financing opportunities. Over the last five years, we have developed strong competencies in association lending, SBA lending, and most recently, yacht lending, all of which are in strong demand in Florida even in the current interest rate environment. Collectively, these three business lines have generated over $280 million in diversified non-CRE loans, and we expect this trend to continue. To underscore this point, I point to the following data. Florida has the second highest number of HOAs nationwide and the highest concentration of HOAs, accounting for 67% of all homeowners. our association banking activities have grown its deposit book to 125 million and generated $54 million in new loans in over the past year. In regards to SBA lending, there are currently 2.8 million small businesses in Florida that represent over 90% of all business in the state. With a 5.5% corporate tax rate, Florida has become one of the best states in the nation for small business startups. Recognizing this opportunity, we're in the process of developing a new initiative to further serve our owner-operated businesses with small ticket SBA financing. We plan to announce this shortly. In January 2022, we launched our newest lending vertical, Yacht Financing, focused on high net worth individuals in a state that has the highest number of registered recreational boating vessels in the country, with more than a million in total. Again, since the launching of this business in January 2022, we have generated 97 million in low leverage, short duration quality loans. Ongoing development of new client-centric products and business lines is part of our DNA. We recognize profitable business opportunities, and we develop them. And technology plays a big role in these plans. At U.S. Century Bank, we believe that tech modernization is a forever process, working in lockstep with production to consistently improve our performance. On May 1st, this coming Monday, we will be going live with Abrigo, our choice for a new loan operating system that will dynamically coordinate the entire loan process from application to underwriting to closing and booking. Our new LOS will make us more responsive to our clients by digitally coordinating the loan approval process experience across the board. The next several quarters will see the delivery of multiple tech products, including Zelle for Small Business, Pigeon Real-Time Payment Solution, and Robotics Process Automation, with more in the works. By proactively responding to our clients' needs for digital business solutions, we expand their share of wallet with non-lending transaction banking products and deepen relationships to improve our service model. I now would like to open the floor for Q&A.

Thank you. We'll 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'll pause momentarily to assemble our roster. Our first question comes with Michael Rolf with the Framing James. Please go ahead.

Hey, good morning, everyone. I hope you're well.

Michael.

Yeah, maybe just wanted to start on loan growth. And I appreciate that the slide is always on loan production. It's obviously slowing, I think, for you and everybody else. How much of that is you guys intentionally pulling back versus, you know, any sort of slowdown in the market? I obviously understand that, you know, Florida is a much stronger place. You threw out some statistics, Luis, that I think are really, really important here. I'm just trying to get a sense because it is obviously implying a pretty decent acceleration from from this quarter's growth. And I assume that some of the growth was just prior commitments funding up, but we just love some greater color. Thanks.

Well, yes, Mike, like I said, The loan demand has slowed specifically on the CRE sector, clearly with Prime at 8%. There's a lot of refinancing has pretty much gone away, and there's just a lot of projects that don't work at that level, and investors are kind of sitting on the sidelines. Notwithstanding, our pipeline going into the second quarter is very strong and we're very bullish on it. About 65% of that pipeline is non-CRE and we're very pleased. It's in all areas that I mentioned on the SBA side, on the HOA side, on the yacht financing. equipment financing. So I think our people have done a really good job of diversifying things. And again, this is something that didn't happen last quarter. We've been at it for the last seven years. So I think that the efforts that we've put into it are going to provide good results. But there's no question that the CRE market has slowed down.

That's helpful. Thank you. And then maybe for you, Rob, appreciate the color that, you know, the margin will be down. You know, on the one hand, you know, growth continues. And I think you said that you expect to, you know, grow balances, deposit balances, you know, from here. But you have the full quarter impact would be kind of the excess liquidity that's been put on you and everybody else. Can you give us a sense of magnitude for what we can kind of expect for Margin compression in the second quarter understanding that you know, we'll probably see some stabilization in the in the back half of the year.

Thanks Yeah, it's a good question. You know, it's a very tough operating environment I'm sure you've heard from from many of your banks that you know that they're experiencing margin compression I would say in if we don't get More Fed rate increases, you know, there's I think two scheduled in this upcoming quarter and May and June, you know, we'd be down probably 10 to 15 basis points on the margin, most likely closer to the 15. But if we get, you know, increases in May and in June or one or two of them, then we're certainly going to be past that and could be 15 to 20 basis points down.

That's helpful. And then maybe just, you know, finally for me, the expenses were a touch higher than what I was kind of looking for. Just as you guys are balancing cost containment efforts with ongoing investments in the franchise, and I heard you mention the SBA rollout here in the short term, how should we think about the cadence of expense growth from here, just balancing the puts and takes? Thanks.

Yeah, so I think our expense base is going to be fairly steady from our base today. If you looked at Flood 2018, You know, we are about 10.1 million in the third quarter of last year, 10 million in the fourth quarter. We're just 10.2 this quarter. You know, we had filled some open slots with some new hires, but, you know, you have the FICA type hitting it in Q1. But I think we're going to try to hold that number at the current level. Certainly expense control will be very critical as we move through 23 and probably into 24. So I would say that 10.2 is good modeling for on a quarterly basis near term.

Great. Thanks for taking my question.

Thank you, Michael.

Thank you.

The next question comes with Graham Dick with Piper Sandler. Please, you may proceed.

Hey, good morning, guys.

Morning. Good morning, Graham.

So I appreciate all the color you guys gave on the deposit front. I just kind of wanted to talk about funding in general. Looks like the end of period number was about $15 million lower than the average. So I assume there must have or probably was some movement there in the month of March around the banking crisis, which isn't unexpected and it's understandable given the unprecedented things we've seen. But I wanted to know kind of where those deposit balances have trended since the end of the quarter and then also how that relates to your guys' strategy around borrowings. And if you think that the deposit growth will be good enough in the coming quarter to pay down some of those borrowings you guys added in one queue.

Okay. Yeah, it is a great question. Certainly with the unprecedented events that happened from March 10th forward, we did see some volatility, and I would just say overall, you know, some clients getting a little nervous. So there was a lot of education from our sales team about the ICS product. We did move some clients into the ICS. Some clients, you know, who had, I would say, larger deposit balances decided to, you know, take a little bit of those deposits and move that around and spread that to other institutions. We didn't lose clients, but I would say there were some clients that minimized their deposits, not significantly. I mentioned the spot balances versus the average. It has leveled off in the time since quarter end. We are seeing more people move to ICS, so I think you'll see the ICS number grow and then our uninsured deposits drop because we'll have in the ICS product. But overall, in terms of how we think about funding the balance sheet, I think loan growth is slowing. We're still trying to control our deposit costs. So we're very careful on who we're giving preferential rates to. They typically have to be core relationships. We do have people shopping their deposits, mainly their money market and CDs. So the incremental cost of the dollars coming in are pretty pricey, and if the Fed raises rates, again, they're going to get more pricey, and that's going to lead to margin compression. We have no brokered CDs, but we would entertain a little bit of that, and I think we have some opportunities either with hedging opportunities or with brokered CDs to lower the cost of funds. But our preference is to bank our relationships and our clients and to win them over from our competitors, and I think we can do that. But I think the next couple quarters are going to be challenging from a funding standpoint, because all banks are having the same issues, and they're all fighting for clients, and some, they're doing it with rates.

Okay, that's helpful. Yeah, everyone's seeing the crazy amount of funding pressure right now. So would it be safe to assume, I guess, borrowings and probably just are at least level, uh, from here through the next couple of quarters?

Yeah, I would say we're going to have a heightened attention on liquidity. We might keep a little bit more in cash. And if that means having, uh, some, some borrowings on the books, we will. I don't think the borrowings will go up substantially from here, but I think current levels will probably carry the quarter.

Okay. Um, appreciate it. And then I guess just one last question. Um,

The $486,000 non-accrual, I know it's tiny, but you guys have had amazing credit for the last over a year. So I'm just interested to hear what the loan was or any details around it you could share because it's just outside the norm for you guys, I would say, even though it's still only three basis points of loans.

Yes. As you know, we do a fair amount of SBA 7A loans. This is the 25% unguaranteed portion. That alone, we sold the remaining 75%. And actually, we audited that file and it's in perfect condition. This is a client that was trying to get rid of some debt that he acquired. in the process of growing the company. We remain as friendly as we can be. He has another loan that is a 504 financing the building where he operates. That loan is completely current, no issues. And as I said, it has to go through a court process in order to go back to normal. At this point, we don't anticipate a charge-off there.

Okay, that's great, Collier. Thanks, guys.

Thank you. Thank you, Graham. Thank you.

The next question comes with Brady Gailey with KBW.

Please go ahead.

Thank you. Good morning.

Good morning, Brady. It was good to see US Sentry active on the buyback in the quarter. If you look at where you repurchase the stock, it's cheaper today than it was then. I know you have some authorization left, but not a ton. Maybe just thoughts on how aggressive you could get on the buyback going forward?

Yeah, so on the buyback, I mean, we bought it, you know, 1174, 500,000 shares. We got 250,000 shares remaining. We did make those purchases prior to, you know, the March 10th kind of, you know, chaos that happened in the industry. And certainly that has had an impact on the share price. You know, we just think it's a great value. And, you know, banks across the industry are are down significantly. I mean, we're way down. I mean, you know, you pick a name. You know, your most popular and well-run banks, they're all down, and there's not a lack of buyers right now. So, you know, putting capital to work, sometimes, you know, your stock is the best use of it. You know, we prefer to make loans and use the capital to – you know, make loan balances. But right now the price is very attractive. We have a board meeting Monday. That topic will come up. But, you know, the 250,000 shares remaining at this price, I think we could be buyers. And, you know, it's a little turbulent time, so there's, you know, school thought that you might want to preserve some capital. But certainly it's very attractive at this price right now.

All right. Then I wanted to ask about anticipated deposit growth. As I look at the loan or deposit ratio, it's been ticking up for the last year. It's still relatively low at 86%, but your loan growth guide, as you said, is high single-digit, low double-digit. Do you think that deposits can grow at that same pace, or will we continue to see the loan or deposit ratio increase? tick up here?

Yeah, I think you're going to continue to see it to tick up a little bit. I mean, prior to March 10th, I would have said that we're making really good progress on funding our assets with core deposits. That has changed a little bit in the market. We are seeing a lot of competition on the money market and CD side, and it's being rate-driven. So I think that we will have some borrowings and advances, maybe some brokered CDs down the road. But certainly, I think you're going to see the loan-to-deposit move up a little bit. You know, I've always said, like, I prefer operating between 90% and 95% for kind of a really strong profitability profile. So if we're at, what, 86% loan-to-deposit ratio, could it be closer to 90% next quarter? I think so.

All right. And then the size of the deferred tax asset, I think it was about a little over $42 million at the end of the year. Where did that balance finish at the end of March?

Yeah, and I'll certainly give you kind of the – there's lots of different pieces in there, Brady. The big piece that is kind of abnormal for a bank is the net operating loss piece for us. That has trended down over time. That's right at 19.9 million at the end of the quarter. And you have, you know, other timing differences between book and tax, and we can send over to you that, you know, quarterly number. But the NOL portion was 19.9. I think at the end of the fourth quarter, that NOL portion was 21.7. If I recall, I can confirm that number. But certainly as we continue to, you know, provide earnings, that number is going to come down.

Okay. And I know this is not a near term idea probably, but if you guys did eventually decide to sell this company, like having a DTA that is the size that it currently is, like, is that a limiting factor? Like would, would the buyer not be able to realize that full DTA upon the sale of a company?

You know, the DTA is pretty tricky. Tax, you know, depending upon ownership type changes. You know, if you just took roughly 20 million, we have 20 million and just under 20 million shares. It's like a dollar a share right now, the impact on a fully, you know, if you had to lose every bit of it. That doesn't always happen in ownership changes. So, you know, it's very situational, Brady. I think, you know, I'll speak for the management team. You know, we've always said we're shareholder-focused, but right now we prefer to run the company and provide the best returns we can for our shareholders.

Yep, that makes sense. All right, thanks for the call.

Thank you, Brady. Thank you.

The next question comes with Ross Haberman with RLH Investments.

Please go ahead. Good morning, gentlemen. Thanks for taking the call. I had a quick question about the uninsured deposits. You said, I guess, some of them are migrating to CDARs. Are you actively trying to get that number to a lower level? And what's your thought about moving that down significantly over the next couple quarters? Thank you.

That's a good question, Ross. Again, as we have reiterated throughout the presentation, we are a commercial bank and a lot of our deposits are larger on the HOA side, on the municipal side, and even on the commercial. We have a lot of clients that have been with us for many years that maintain very large balances. That's just the nature of the bank we are. We contacted our top depository clients. Like I said, we spent a good week and a half talking to every single one of them. And they were concerned about the industry, but not concerned about the bank. Let's put it that way. A lot of them asked for information on ICS. And we gave it to them. A lot of them, it looked like they were going to do something. And ultimately, when we contacted them and said, nah, we're fine. So it's difficult to say, is that going to move things down? We did model it that if we moved the top 25 deposit relationships by size, we dropped this number down into the low 40s very, very quickly. It's just that they haven't been interested in doing it. So will they do it? Could happen. But we've done everything that we can to let them know that the product is available, and it's really going to be up to them. But our business model is not a retail model. It's a commercial bank. We also, we've got about 180 million in correspondent banking, and those banks, it is what it is. Nobody's going to move deposits there.

And can I just ask one other question? Could you discuss the amount of participations you have in in dollars and, sorry, one thing about the SBA which you mentioned. What was the dollar amount of the unguaranteed portion which are on your books? Thank you.

Yes, the dollar amount was about 1.8 million. The amount that we sold in the market. As I said, we recently audited with the servicer, that portion, and the file is in good standing. We don't do a lot of participations. This is not a bank. Certainly, we do have a few participations with some local banks out of the need to minimize risk And in a few situations, we've been asked by bankers and banks that we've known for a while to participate with them for the same reasons. As I said, this is a bank where loan growth is not based on participation. We are not necessarily geared to do that.

We don't feel it's something that we should do.

Okay, thank you for your help. I really appreciate it.

Certainly. Thank you, Ross.

Thank you. This concludes our Q&A session.

I'd like to turn the conference back over to Mr. Luis de la Aguilera for any closing remarks.

Thank you, Caroline. You know, we're focused on delivering quarter over quarter as we've had since, not only since the IPO, but since the new management team has gotten here. So with that said, we'll get back to work and see you next quarter.

Thank you. This conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. you you Thank you. Thank you. Thank you. Good morning and welcome to the USCB Financial Holdings 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 your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would like now to send the conference over to Mr. Luis de la Aguilera, President and CEO of the company. Please go ahead.

Good morning, and thank you for joining us today for USCB Financial Holdings 2023 First Quarter Earnings Call. With me today reviewing our Q1 highlights is CFO Rob Anderson and Chief Credit Officer Ben Passos, who will provide an overview of the bank's performance the highlights of which you can see on slide three. Well, what a difference a quarter makes. Who would have imagined that just six weeks after our last earnings call, three banks would have suddenly failed, heightening client concerns about the safety and soundness of the banking industry and intensifying discussions on inflation, liquidity, uninsured deposit ratios, any potential recession. Banking is based on confidence, and clients look for guidance and support during stressful economic times. It is critical to maintain our clients' trust, and we see the moment as an opportunity to further interact with them to strengthen and grow their relationships. More on that shortly. Despite these challenges, we are pleased to announce that the USDB team delivered strong performance in the first quarter of 2023, reflecting our ability to navigate a challenging operating environment with prudent consistency. Our financial results demonstrate robust earnings driven by solid loan production, disciplined credit underwriting, and risk management practices. Over the past six years, we have focused on diversifying our loan portfolio by developing multiple non-CRE business lines, which are delivering in a meaningful way. Actually, 64% of the bank's Q1 loan production was non-CRE, and we expect that trend to continue. Our deposits are derived primarily from local businesses, their owners, and the communities we serve. We do not have any exposure to either cryptocurrencies or investments or to crypto-related businesses. We are a commercial bank, and our strength and stability is reinforced by growing core customer relationships, enabling us to build a granular deposit-based and diversified loan portfolio in one of the fastest growing markets in Florida and the United States. As we review our Q1 2023 highlights, let's start by comparing our results to those posted in the first quarter of 2022. Average deposits increased by 194 million or 11.8% compared to the first quarter of last year. Average loans excluding PPP loans increased 137 million or 31.4% compared to the first quarter of 2022. Tangible book value per share was $9.37, including an after-tax unrealized security loss impact of $2.14. Net income was $5.8 million, or $0.29 per diluted share, an increase of $1 million, or 19.7%, compared to the first quarter of 2022. Annualized return on average assets for the quarter ended March 31st, 2023 was 1.11% compared to 1.03 for the first quarter of 2022. Annualized return on average stockholders' equity for the quarter ended March 31st, 2023 was 12.85% compared to 9.75% for the first quarter of the previous year. The efficiency ratio for the quarter ended March 31st, 2023 was 56.32% compared to 58.88% for the first quarter of last year. Credit metrics remain strong. Non-performing loans to total loans was 0.03% at March 31st, 2023 compared to zero at March 31st of last year with a single loan for 486,000 classified as non-performing. The allowance for credit losses represented a 1.20% of total loans both at the March 31st, 2023 and March 31st of last year. Effectively, as of January 1st of this year, the company adopted the CECL methodology for estimating credit losses, which resulted in an increase to the allowance for credit losses for loans of $1.1 million and an increase to the reserve for unfunded commitments of $259,000. This one-time cumulative adjustment resulted in an after-tax decrease of $1 million in retained earnings. During the quarter, the company repurchased 500,000 shares of USTB Financial Holdings, Inc. at a weighted average price per share of $11.74. The aggregate purchase price for these transactions was approximately $5.9 million, including transaction costs. These open market repurchases were made pursuant to the company's publicly announced repurchase program. As of March 31st, 23, 250,000 shares remain to be repurchased under the program. The following page is self-explanatory, directionally showing nine select historical financial trends since our recapitalization. Profitable performance based on sound and conservative risk management is what our team is focused on consistently delivering. So now let's turn our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

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 $2.2 billion for the quarter. Loan balances were $1.6 billion, which is up $73 million from the prior quarter, and deposits are at $1.8 billion. At quarter end, we had $416 million in securities. 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-mark accounting treatments. Total equity is now $184 million, up slightly from $182 million in Q4. And although footnoted on the slide, the $184 million in equity includes $42.1 million in unrealized losses on the securities portfolio running through AOCI. Moving on to the P&L, net interest income decreased from the prior quarter due to higher deposit costs and our non-interest income of $2.1 million reflects the execution of SBA loan sales. The bank implemented CECL in the quarter and booked 201,000 provision expense with loan growth. Additionally, our day one CECL implementation resulted in a 1.1 million increase to our loan loss reserve, which we ran through retained earnings. On a GAAP basis, net income was 5.8 million, or 29 cents a share. And with that, let's take a quick look at our performance indicators on the next page. In terms of soundness, our credit metrics remain strong. Our loan loss reserve coverage ratio increased with the adoption of CECL at 1.20%, and Ben will discuss our credit book in more detail in a bit. In terms of profitability, our return on average assets was 1.11 for the quarter, and return on average equity was 12.85%. Our NIM was down 23 basis points from the quarter to 3.22%, driven by a higher cost of funding. Efficiency Ratio was 56.32%, and our tangible book value per share moved up slightly to $9.37 per share, which is reflective of the negative mark of $2.14 per share on our securities portfolio and AOSDI that I referenced earlier, and the stock repurchases in the quarter. Absent the AOSDI mark, our tangible book value per share would have been $11.51. Let's hit on liquidity on the next page. During the month of March, our industry saw three notable banks fail and liquidity became a headline issue across the industry. The Federal Reserve created a new liquidity program to make additional funding available to depository institutions. We have enrolled in the Bank Term Funding Program, or BTFP, but have not accessed the program and do not intend to access the program anytime soon. Our on-balance sheet liquidity is in excess of $413 million and our off-balance sheet sources, excluding brokered CDs, is in the excess of $228 million. We continue to beef up our pledging of both loans and securities, and our liquidity sources have expanded post-quarter end. Additionally, U.S. Century Bank has access to the brokered CD market and listing CDs, which we have self-imposed policy limits on these products and are not listed on the chart. If we include all sources of wholesale funding, our self-imposed liquidity limits are in excess of $500 million of funding, which we believe is sufficient to weather the current environment. So with that, let's take a look at our deposit book on the next page. Average deposits increased $40.4 million or 9.1% annualized compared to the prior quarter and $194 million or 11.8% compared to the first quarter of 2022. Average DDA deposits increased 10.5 million or 6.5% annualized compared to the prior quarter and increased 38 million or 6.1% compared to the first quarter of 2022. Average DDA balances comprised 36% of total deposits during the quarter and is consistent with the prior quarter. You may note that USCB did not experience the mix shift that seems prevalent with other institutions today. We believe this speaks to the strength of our deposit base. Also, you will notice that quarter end spot balance of $1.831 billion is below our quarterly average of $1.844 billion. We had numerous conversations with clients in the last two weeks of March who were concerned about the events happening within the industry. While few clients decided to minimize their balances with USCB, I'm happy to report that we did not lose any clients due to these events, and we had a few clients place their deposits into the Intrify ICS and CDARS product, which provides the depositor with insurance on every dollar of their deposit. To that point, we had $35.7 million in ICS CDARS at quarter end, and some clients have continued to put more in the ICS product post-quarter end. As it relates to the cost of our deposit book, we continue to see increases relative to the Fed Fund's rate increases but remain with a 24% deposit beta through the current rate cycle. So let's take a closer look at the deposit book on the next slide. Our deposit book reflects our business model, a diversified commercial bank. 54% of our deposits are commercial or business accounts, 35% personal or retail accounts, and 11% public fund accounts, which are partially collateralized. The bank has 19.2 thousand deposit accounts with the majority in personal accounts, 12.4 thousand or 64.4 percent of the total. As you can see by the chart on the lower left, the average balance in a business account is 145 thousand, 52 thousand in a personal account, and 7.1 million in a public fund account. The total amount of uninsured deposits adjusted by the collateralized portion of public funds is 56% for quarter end, a decrease of 3% compared to the fourth quarter of 2022 and below the 2022 average so far. We anticipate this number to come down or more significantly next quarter as we continue to place clients in the ICS product post-quarter end. With that, let me turn it back to Liv.

Thank you, Rob. seen on the graph on slide 10 average loans for q1 2023 excluding ppp loans increased 90.6 million or 25.2 annualized compared to the prior quarter and 370 million or 31.4 compared to the first quarter of 2022. as a competitive relationship driven bank we price based on risk and relationship to this point we note that loan coupons increased 32 basis points compared to the prior quarter and 107 basis points compared to the first quarter of 2022. Notwithstanding our loan growth or yields, our focus is on quality and ongoing risk assessment and management. Our Chief Credit Officer will be reviewing our portfolio mix, detailing our CRE concentrations by loan type, weighted average loan to value, and debt service coverage, as well as average loan size. Here you will note the low leverage, strong repayment, and diversified nature of this portfolio. Furthermore, we will take a close look at the bank's CRE office portfolio. Following the COVID pandemic, there has been a significant course correction in the office sector as the industry evaluates how office buildings will be used, repriced, valued, and transacted. Again, conservative underwriting and risk management guide our choice of selection in all our CRE asset classes. As seen on the graph on page 11, the strong loan production posted throughout 2022 slowed over the past four quarters as the Fed increased rates 425 basis points from March to March. Over this time, higher borrowing costs have impacted loan demand, specifically CRE loan demand and refinancing. The bank delivered or exceeded budget over the past five quarters and we forecasted to do so throughout 2023. Excluding PPP loans, our point-to-point loan growth for 2022 ran at 31.4%, as an effect of the Fed's monetary policy, which has led to higher rates and decreased loan demand. We expect high single-digit to low double-digit growth in 2023. Still, the average coupon for new loans increased to 6.66% for Q1 2023, 152 basis points above the portfolio average. As previously noted, 64% of the first quarter's loan production, totaling $94 million, was well diversified and non-CRE. This shift was due to our development and diversification of new product lines, namely HOA, SBA, and correspondent bank lending, as well as equipment and yacht financing, all of which are in strong demand in South Florida. With that said, let me turn things over to Ben.

Thank you, Luis, and good morning to all. Our loan portfolio mix, as detailed in slide 12, has not changed appreciably from the numbers you have seen before. Out of a book of $1.580 billion, CRE loans amount to $988 million, and this includes owner-occupied loans. Our biggest concentration is in the retail segment with $298 million. I'm happy to report that as of the end of quarter one, And even up to today, asset quality is excellent. The CRE book has conservative metrics across all segments. Weighted average loan-to-values ranging from 54% to 62%. Debt service coverage ranging from 140 times to 2.62 times. And average loan sizes conservatively low ranging from 1 million to 4.6 million. Moving to slide 13, we have information on our CRE office segment. The numbers you see in this slide confirm that CRE office is not among our largest CRE segments. Non-owner-occupied office loans are just 13% of the CRE loans and 8% of total loans. We do have 3% of our total loans in the owner-occupied bucket that are office related. Key metrics for office loans in both the non-owner-occupied bucket and the owner-occupied bucket are 120 notes totaling 173 million, and they have a weighted average loan balance of 1.4 million, weighted average loan-to-values of 57%, and an average debt service coverage of 2.1 times. In addition to what we said before for our retail loans, asset quality is very good. Most importantly, maturities within a year are just 4% of the office book. Moving to slide 14, asset quality continues to be very good, reflecting conservative underwriting, and prudent risk management. Our A-triple-L coverage stands at 20%. The bank implemented the CISO methodology starting January 1st of this year. The implementation of CISO led to an initial increase of $1.1 million in the A-triple-L, and the subsequent increase is a result of the loan growth. After several quarters with zero non-accrual loans, we placed a 486,000 loan in this category in quarter one. We do continue with no OREOs and none anticipated going forward. Our classified asset book is negligible, and that results in a ratio of classified loans to total loans of just a quarter of 1%. Going to slide 15, Rob will talk about our name.

Okay. Thank you, Ben. Net interest income decreased by $869,000 compared to prior quarter, predominantly due to an increase in deposit costs. Our net interest margin compressed 23 basis points to 3.22%. Our earning asset mix continues to improve towards higher earning assets, even though we held higher levels of cash and increased our FHLB advances at quarter end given the heightened attention on liquidity. With approximately 50 million of cash flows rolling off our securities portfolio this year, we will have the opportunity to reinvest those funds into higher yielding assets and we fully expect our team to grow our deposit book despite a challenging environment. Let's take a look at our interest rate sensitivity. According to our asset liability model, our balance sheet is liability sensitive for year one and asset sensitive for year two. This is a direct result of higher money market and saving account balances and having a higher portfolio of variable rate loan portfolio repricing in year two. Furthermore, the yield curve shape has also had an impact on the magnitude of the repricing. Under an inverted yield curve, our liabilities, particularly money market accounts and short-term borrowings, are repricing faster and higher than our assets. which increases our liability sensitivity in the short term. While our through the cycle deposit beta remains near our stated range of 25% to 35%, going forward and given expectation on the yield curves current and future shape in our current balance sheet composition, we expect further NIM compression going forward. So with that, let's move on to the next page. We had a very solid quarter of non-interest income. Service fees were steady, and we are excited about some new initiatives to move this number up in the coming quarters. SBA fees were consistent from prior quarters, and we saw very little movement in our securities book this quarter. With fees straightforward, let's take a look at our expenses. Our total expense base was $10.2 million and slightly up from the prior quarter. Salaries and benefits were up with a few new hires and seasonal increases in payroll taxes. The remaining line items were in line with prior quarters, so not much to highlight here. So let's take a look at capital. Capital levels remain above well-capitalized levels, but came down a bit as the company repurchased 500,000 shares at an average weighted price of $11.74. I would also mention that these purchases happened prior to the banking events, which further depressed bank stocks at quarter end. The company has 250,000 shares remaining under the current authorization, and you'll notice AOCI improved by 2.7 million in the quarter. With capital straightforward, I will turn it back to Lou for some closing comments.

Thank you, Rob. U.S. Century Bank closed the first quarter of 2023 directionally as forecasted. responding with consistency to both the expected challenges of rising interest rates and the unexpected liquidity pressures caused by a crisis of confidence and a perceived flight to safety that has impacted most banks. Team USDB took the situation and created an opportunity, taking immediate action by reaching out to our clients to proactively explain the situation, hear their concerns, and provide solutions. Every relationship manager contacted their top depository clients in the first week. Many hundreds of contacts were made. This effort was very much in line with a new business mining project launched in the fourth quarter of 2022. The project is led by teams of lenders and business development officers who are in effect contacting and further developing the deposit and business potential of existing customers. This high-touch business mining initiative was designed to expand our share of wallet with non-lending transaction banking products to deepen relationships, and our efforts are delivering consistent results. Even in challenging times, US Century is advantageously located in one of the most attractive banking markets in Florida and the US. Our state is the third largest in population and the fourth largest economy in the country. With 900 net new residents arriving in Florida every day, and an estimated population of 26 million by 2023, Florida is primed for continuous growth. I mentioned earlier how 64% of our first quarter loan production was non-CRE related. Pivoting in this manner was not done by chance. It has taken time, talent, and planning to develop new non-CRE lending verticals in a state where businesses are largely real estate denominated. Higher interest rates lead to higher borrowing costs, slowing CRE demand, and the number of quality financing opportunities. Over the last five years, we have developed strong competencies in association lending, SBA lending, and most recently, yacht lending. all of which are in strong demand in Florida, even in the current interest rate environment. Collectively, these three business lines have generated over $280 million in diversified non-CRE loans, and we expect this trend to continue. To underscore this point, I point to the following data. Florida has the second highest number of HOAs nationwide and the highest concentration of HOAs accounting for 67% of all homeowners. Our association banking activities have grown its deposit book to 125 million and generated $54 million in new loans in over the past year. In regards to SBA lending, there are currently 2.8 million small businesses in Florida that represent over 90% of all business in the state. With a 5.5% corporate tax rate, Florida has become one of the best states in the nation for small business startups. Recognizing this opportunity, we are in the process of developing a new initiative to further serve our owner-operated businesses with small-ticket SBA financing. We plan to announce this shortly. In January 2022, we launched our newest lending vertical, Yacht Financing, focused on high net worth individuals in a state that has the highest number of registered recreational boating vessels in the country. with more than a million in total. Again, since the launching of this business in January 2022, we have generated 97 million in low leverage, short duration quality loans. Ongoing development of new client-centric products and business lines is part of our DNA. We recognize profitable business opportunities, and we develop them. And technology plays a big role in these plans. At U.S. Century Bank, we believe that tech modernization is a forever process, working in lockstep with production to consistently improve our performance. On May 1st, this coming Monday, we will be going live with Abrego, our choice for a new loan operating system that will dynamically coordinate the entire loan process from application to underwriting to closing and booking. Our new LOS will make us more responsive to our clients by digitally coordinating the loan approval process experience across the board. The next several quarters will see the delivery of multiple tech products, including Zelle for Small Business, Pigeon Real-Time Payment Solution, and Robotics Process Automation, with more in the works. By proactively responding to our clients' needs for digital business solutions, we expand their share of wallet with non-lending transaction banking products and deepen relationships to improve our service model. I now would like to open the floor for Q&A.

Thank you. We'll 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 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes with Michael Rolf with the Framer and Jane. Please go ahead.

Hey, good morning, everyone. I hope you're well. Michael.

Yeah, maybe just wanted to start on loan growth, and I appreciate that the slide is always on loan production. It's obviously slowing, I think, for you and everybody else. How much of that is you guys intentionally pulling back versus any sort of slowdown in the market? I obviously understand that Florida is a much stronger place. You threw out some statistics, Luis, that I think are really, really important here. Just trying to get a sense, because it is obviously implying a pretty decent deceleration from from this quarter's growth. And I assume that some of the growth was just prior commitments funding up, but we just love some greater color. Thanks.

Well, yes, Mike, like I said, The loan demand has slowed specifically on the CRE sector, clearly with Prime at 8%. Refinancing has pretty much gone away, and there's just a lot of projects that don't work at that level, and investors are kind of sitting on the sideline. Notwithstanding, our pipeline going into the second quarter is very strong and we're very bullish on it. About 65% of that pipeline is non-CRE and we're very pleased. It's in all areas that I mentioned on the SBA side, on the HOA side, on the yacht financing. equipment financing. So I think our people have done a really good job of diversifying things. And again, this is something that didn't happen last quarter. We've been at it for the last seven years. So I think that the efforts that we've put into it are going to provide good results. But there's no question that the CRE market has slowed down.

That's helpful. Thank you. And then maybe for you, Rob, appreciate the color that, you know, the margin will be down. You know, on the one hand, you know, growth continues. And I think you said that you expect to, you know, grow balances, deposit balances, you know, from here. But you have the full quarter impact would be kind of the excess liquidity that's been put on you and everybody else. Can you give us a sense of magnitude for what we can kind of expect for Margin compression the second quarter understanding that you know, we'll probably see some stabilization in the in the back half of the year.

Thanks Yeah, it's a good question. You know, it's a very tough operating environment I'm sure you've heard from from many of your banks that you know that they're experiencing margin compression. I would say in if we don't get More Fed rate increases, you know, there's I think two scheduled in this upcoming quarter and May and June, you know, we'd be down probably 10 to 15 basis points on the margin, most likely closer to the 15. But if we get, you know, increases in May and in June or one or two of them, then we're certainly going to be past that and could be 15 to 20 basis points down.

That's helpful. And then maybe just, you know, finally for me, the expenses were a touch higher than what I was kind of looking for. Just as you guys are balancing cost containment efforts with ongoing investments in the franchise, and I heard you mention the SBA rollout here in the short term, how should we think about the cadence of expense growth from here, just balancing the puts and takes? Thanks.

Yeah, so I think our expense base is going to be fairly steady from our base today. If you looked at Flood 2018, You know, we are about 10.1 million in the third quarter of last year, 10 million in the fourth quarter. We're just 10.2 this quarter. You know, we had filled some open slots with some new hires, but, you know, you have the FICA type hitting it in Q1. But I think we're going to try to hold that number at the current level. Certainly expense control will be very critical as we move through 23 and probably into 24. So I would say that 10.2 is good modeling for on a quarterly basis near term.

Great. Thanks for taking my question. Thank you, Michael. Thank you.

The next question comes with Graham Dick with Piper Sandler. Please, you may proceed.

Hey, good morning, guys.

Morning. Good morning, Graham.

So I appreciate all the color you guys gave on the deposit front. I just kind of wanted to talk about funding in general. Looks like the end of period number was about $15 million lower than the average. So I assume there must have or probably was some movement there in the month of March around the banking crisis, which isn't unexpected and it's understandable given the unprecedented things we've seen. But I wanted to know kind of where those deposit balances have trended since the end of the quarter and then also how that relates to your guys' strategy around borrowings. And if you think that the deposit growth will be good enough in the coming quarter to pay down some of those borrowings you guys added in one queue.

Okay. Yeah, it is a great question. Certainly with the unprecedented events that happened from March 10th forward, we did see some volatility, and I would just say overall, you know, some clients getting a little nervous. So there was a lot of education from our sales team about the ICS product. We did move some clients into the ICS. Some clients, you know, who had, I would say, larger deposit balances decided to, you know, take a little bit of those deposits and move that around and spread that to other institutions. We didn't lose clients, but I would say there were some clients that minimized their deposits, not significantly. I mentioned the spot balances versus the average. It has leveled off in the time since quarter end. We are seeing more people move to ICS, so I think you'll see the ICS number grow and then our uninsured deposits drop because we'll have in the ICS product. But overall, in terms of how we think about funding the balance sheet, I think loan growth is slowing. We're still trying to control our deposit costs. So we're very careful on who we're giving preferential rates to. They typically have to be core relationships. We do have people shopping their deposits, mainly their money market and CDs. So the incremental cost of the dollars coming in are pretty pricey, and if the Fed raises rates, again, they're going to get more pricey, and that's going to lead to margin compression. We have no brokered CDs, but we would entertain a little bit of that, and I think we have some opportunities either with hedging opportunities or with brokered CDs to lower the cost of funds. But our preference is to bank our relationships and our clients and to win them over from our competitors, and I think we can do that. But I think the next couple quarters are going to be challenging from a funding standpoint, because all banks are having the same issues, and they're all fighting for clients, and some, they're doing it with rates.

Okay, that's helpful. Yeah, everyone's seeing the crazy amount of funding pressure right now. So would it be safe to assume, I guess, borrowings and probably just are at least level, uh, from here through the next couple of quarters?

Yeah, I would say we're going to have a heightened attention on liquidity. We might keep a little bit more in cash. And if that means having, uh, some, some borrowings on the books, we will. I don't think the borrowings will go up substantially from here, but I think current levels will probably carry the quarter.

Okay. Um, appreciate it. And then I guess just one last question. Um,

The $486,000 non-accrual, I know it's tiny, but you guys have had amazing credit for the last over a year. So I'm just interested to hear what the loan was or any details around it you could share because it's just outside the norm for you guys, I would say, even though it's still only three basis points of loans.

Yes. As you know, we do a fair amount of SBA 7A loans. This is the 25% unguaranteed portion. That alone, we sold the remaining 75%. And actually, we audited that file and it's in perfect condition. This is a client that was trying to get rid of some debt that he acquired. in the process of growing the company. We remain as friendly as we can be. He has another loan that is a 504 financing the building where he operates. That loan is completely current, no issues. And as I said, it has to go through a court process in order to go back to normal. At this point, we don't anticipate a charge-off there.

Okay, that's great, Collier. Thanks, guys.

Thank you. Thank you, Graham. Thank you.

The next question comes with Brady Gailey with KBW.

Please go ahead.

Thank you. Good morning.

Good morning, Brady. It was good to see US Sentry active on the buyback in the quarter. If you look at where you repurchase the stock, it's cheaper today than it was then. I know you have some authorization left, but not a ton. Maybe just thoughts on how aggressive you could get on the buyback going forward?

Yeah. So on the buyback, I mean, we bought it, you know, 1174, 500,000 shares. We got 250,000 shares remaining. We did make those purchases prior to, you know, the March 10th kind of, you know, chaos that happened in the industry. And certainly that has had an impact on the share price. You know, we just think it's a great value. And, you know, banks across the industry are are down significantly. I mean, we're way down. I mean, you know, you pick a name. You know, your most popular and well-run banks, they're all down, and there's not a lack of buyers right now. So, you know, putting capital to work, sometimes, you know, your stock is the best use of it. You know, we prefer to make loans and use the capital to – you know, make loan balances. But right now the price is very attractive. We have a board meeting Monday. That topic will come up. But, you know, the 250,000 shares remaining at this price, I think we could be buyers. And, you know, it's a little turbulent time, so there's, you know, school thought that you might want to preserve some capital. But certainly it's very attractive at this price right now.

All right. Then I wanted to ask about anticipated deposit growth. As I look at the loan or deposit ratio, it's been ticking up for the last year. It's still relatively low at 86%, but your loan growth guide, as you said, is high single-digit, low double-digit. Do you think that deposits can grow at that same pace, or will we continue to see the loan or deposit ratio increase? tick up here?

Yeah, I think you're going to continue to see it to tick up a little bit. I mean, prior to March 10th, I would have said that we're making really good progress on funding our assets with core deposits. That has changed a little bit in the market. We are seeing a lot of competition on the money market and CD side, and it's being rate-driven. So I think that we will have some borrowings and advances, maybe some brokered CDs down the road. But certainly, I think you're going to see the loan-to-deposit move up a little bit. I've always said I prefer operating between 90% and 95% for kind of a really strong profitability profile. So if we're at, what, 86% loan-to-deposit ratio, could it be closer to 90% next quarter? I think so.

All right. And then the size of the deferred tax asset, I think it was about a little over $42 million at the end of the year. Where did that balance finish at the end of March?

Yeah, and I'll certainly give you kind of the – there's lots of different pieces in there, Brady. The big piece that is kind of abnormal for a bank is the net operating loss piece for us. That has trended down over time. That's right at 19.9 million at the end of the quarter. And you have, you know, other timing differences between book and tax, and we can send over to you that, you know, quarterly number. But the NOL portion was 19.9. I think at the end of the fourth quarter, that NOL portion was 21.7. If I recall, I can confirm that number. But certainly as we continue to, you know, provide earnings, that number is going to come down. Okay.

And I know this is not a near term idea probably, but if you guys did eventually decide to sell this company, like having a DTA that is the size that it currently is, like, is that a limiting factor? Like would, would the buyer not be able to realize that full DTA upon the sale of a company?

You know, the DTA is pretty tricky. Tax, you know, depending upon ownership type changes. You know, if you just took roughly 20 million, we have 20 million, just under 20 million shares. It's like a dollar a share right now, the impact on a fully, you know, if you had to lose every bit of it. That doesn't always happen in ownership changes. So, you know, it's very situational, Brady. I think, you know, I'll speak for the management team. You know, we've always said we're shareholder-focused, but right now we prefer to run the company and provide the best returns we can for our shareholders.

Yep, that makes sense.

All right, thanks for the color. Thank you, Brady. Thank you.

The next question comes with Ross Haberman with RLH Investments. Please go ahead.

Good morning, gentlemen. Thanks for taking the call. I had a quick question about the uninsured deposits. You said, I guess, some of them are migrating to CDARs. Are you actively trying to get that number to a lower level? And what's your thought about moving that down significantly over the next couple quarters? Thank you.

That's a good question, Ross. Again, as we have reiterated throughout the presentation, we are a commercial bank and a lot of our deposits are larger on the HOA side, on the municipal side, and even on the commercial. We have a lot of clients that have been with us for many years that maintain very large balances. That's just the nature of the bank we are. We contacted our top depository clients. Like I said, we spent a good week and a half talking to every single one of them. And they were concerned about the industry, but not concerned about the bank. Let's put it that way. A lot of them asked for information on ICS. And we gave it to them. A lot of them, it looked like they were going to do something. And ultimately, when we contacted them and said, nah, we're fine. So it's difficult to say, is that going to move things down? We did model it that if we moved the top 25 deposit relationships by size, we dropped this number down into the low 40s very, very quickly. It's just that they haven't been interested in doing it. So will they do it? Could happen. But we've done everything that we can to let them know that the product is available, and it's really going to be up to them. But our business model is not a retail model. It's a commercial bank. We also, we've got about 180 million in correspondent banking, and those banks, it is what it is. Nobody's going to move deposits there.

And can I just ask one other question? Could you discuss the amount of participations you have in in dollars and, sorry, one thing about the SBA which you mentioned. What was the dollar amount of the unguaranteed portion which are on your books? Thank you.

Yes, the dollar amount was about 1.8 million. The amount that we sold in the market. As I said, we recently audited with the servicer, that portion, and the file is in good standing. We don't do a lot of participations. This is not a bank. Certainly, we do have a few participations with some local banks out of the need to minimize risk And in a few situations, we've been asked by bankers and banks that we've known for a while to participate with them for the same reasons. As I said, this is a bank where loan growth is not based on participation. We are not necessarily geared to do that.

We don't feel it's something that we should do.

Okay. Thank you for your help. I really appreciate it.

Certainly. Thank you, Ross.

Thank you. This concludes our Q&A session.

I'd like to turn the conference back over to Mr. Luis de la Aguilera for any closing remarks.

Thank you, Caroline. You know, we're focused on delivering quarter over quarter as we've had since not only since the IPO, but since the new management team has gotten here. So with that said, we'll get back to work and see you next quarter.

Thank you. This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.