USCB Financial Holdings, Inc.

2024 USCB Financial Holdings Incorporated Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Luis de la Aguilera, President and CEO. Please go ahead.

Good morning, and thank you for joining us for USCB Financial Holdings first quarter 2024 earnings call. With me today reviewing our Q1 highlights is CFO Rob Anderson and Director of Credit Sergio Garrido, who will provide an overview of the bank's performance, the highlights of which commence on slide three. Our Chief Credit Officer Bill Turner is not with us today as he is accompanying a family member who is undergoing surgery this morning. Bolstered by the strength of Florida's economy, USCB came off the blocks in the new year posting strong growth in assets, deposits, diversified quality loans and profitability. Our results reflect the diligent execution of a business plan that focuses on organic growth supported by diversified commercial banking initiatives designed to deep deepen existing relationships, and develop new ones. In 2023, we sourced new production hires, expanded our business lines, added deposit aggregating verticals while carefully controlling expenses. These efforts have delivered results and have well positioned the bank in 2024. In reviewing our press release and noted Q1 highlights, I will comment on a select few as CFO Anderson will further detail our growth, profitability, capital, and liquidity positions. Net income was 4.6 million or 23 cents per diluted share, an increase of 1.9 million compared to the fourth quarter of 2023. Also, average deposits increased by 204.3 million or 11.1% compared to the first quarter of 2023. Multiple deposit-focused initiatives continued to deliver results as deposits grew 165.7 million on an end of period basis this past quarter. While growth in deposits has rebounded, we judiciously priced deposits based on relationship and profitability. This past quarter, we completed a comprehensive review of the deposit portfolio, taking actions that would immediately improve net interest margin. We will discuss these actions as we go through today's presentation. Average loans increased 234.1 million or 15.1 percent compared to the first quarter 2023. Our loan growth has moved in line with a creative quarter-over-quarter improvement on average loan coupon, which contributes to net interest income. To this end, the weighted average coupon on a quarterly loan production over the past six quarters has increased from 5.68 percent to 8.16 percent. This will be detailed shortly. During the quarter, the company paid its first cash dividend to shareholders with an aggregate amount distributed being $1 million. The cash dividend program is an important driver to shareholder value, and the Board of Directors is committed to return capital to our investors while maintaining a strong balance sheet. As mentioned in the press release last night, the Board of Directors approved a new share repurchase program up to 500,000 shares of Class A common stock, or approximately 2.5% of the company's issued and outstanding shares of common stock. The stock repurchase program will provide flexibility in the event of market volatility, keeping in mind forward earnings, risk, and capital levels. Our intention and practice is to run a safe and sound institution, always maintaining well-capitalized levels. As of April 22, 2024, 572,980 shares remained authorized for repurchase under the company's share repurchase program. Moving on to slide four. The following slide is self-explanatory, directionally showing nine select historical trends since recapitalization. Profitable performance based on sound and conservative risk management is what our team is focused on consistently delivering. So let's now turn our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

Okay, thank you, Lou, and good morning, everyone. Overall, I would characterize Q1 as a solid quarter for USCB despite a tough economic backdrop. As you look at pages five and six, there are some positive trends to keep in mind when reviewing the quarter, including the following. Net income was 23 cents per share and higher than the past three consecutive quarters, demonstrating an upward trend. As it relates to the balance sheet, loans, deposits, and total assets were all up approximately 15% from the prior year. Deposit growth was up 34% annualized from the prior quarter. This growth allowed us to pay down high-priced overnight FHLB borrowings and reprice higher-cost deposits at quarter end. While we won't see the benefits until the second quarter, we do expect our net interest income and net interest margin to improve from this point. During Q1, we purchased an additional $34 million in securities with a yield of 5.85% and a duration of 2.08. The intention was to provide and support the NIM while maintaining sound liquidity practices. Depending on the interest rates, we expect to receive $30 to $35 million in cash flows from the securities portfolio during 2024, which will be used to support loan growth. In Q1, net interest income increased 782,000 or 21.8% annualized compared to the fourth quarter of 2023. This is due to a larger balance sheet. Non-interest income was up 19% over the prior year. Expenses were up in Q1 due to new hires, seasonal FICA taxes, and some operating expenses, but remained low for our asset size, which is shown on page 6. We initiated and paid our first dividends starting at $0.05 per share. Intangible book value per share grew to $9.92. AOCI was up slightly from the prior quarter. NIM was 2.62% and down three basis points from the prior quarter driven by excess liquidity and higher funding costs. I'll discuss what we did and will continue to do with any excess funding in a bit. In terms of soundness, our credit metrics remain strong. and our loan loss reserve coverage remained at 1.18%. So let's discuss deposits on the next page. While we present this page on an average basis, a big part of the story for the quarter is what happened in the last month of the quarter. First, our sales team delivered strong deposit growth in Q1, evidenced by both our average deposit growth and on an end-of-period basis. Deposit balances at the end of the quarter were $2.103 billion which is 54 million above the average of 2.049 billion. More specifically, while our average non-interest bearing deposits had a slight decrease in the first quarter 2024, our end of period DDA balance increased 23.9 million or 17.4% annualized. While we expect rates to remain higher for longer, our ability to attract and retain DDA will be the focus of our sales strategies and bank officers. As Lou mentioned, we are gaining traction in our new business verticals, which we expect to attract additional operating accounts. The additional deposit growth in Q1 put $126 million of cash on our balance sheet at the quarter end, which negatively impacted our NIM in the quarter but positions us well for Q2. With this additional funding, we paid down all high-priced overnight FHLB borrowings and rationalized some higher-priced public fund money. Furthermore, because public funds require collateral, reducing balances in this funding bucket also helped our liquidity. So with that, let's turn the page and look at our loan book. Average loans increased 82.9 million or 19.6% annualized compared to the prior quarter and 234.1 million or 15.1% compared to the first quarter 2023. On a spot or end of period basis, we ended the quarter at $1.821 billion, which is $39 million above our average loan balance for the quarter. Loan coupon increased 22 basis points compared to the prior quarter and 87 basis points compared to the first quarter of 23. Our loan book will continue to grind higher, but much depends on our new loan originations as the refinance volume is de minimis. As for the guidance, we expect loan growth to continue in the low double digits. Turning to page nine, you can see for the past three quarters, we have originated loans above 8%. We expect a similar amount of loan originations in Q2 with yields above 8% given the current pipeline. Additionally, our loan book has transitioned over time and is more diversified. As of a quarter end, non-CRE loans are 29% of the total loan portfolio. With that, let's take a look at the margin on the next page. For the first quarter of the year, our NIM contracted compared to the previous quarters. However, our net interest income increased 782,000 or 21.8% annualized compared to the fourth quarter 2023. This is a direct result of a larger balance sheet. As discussed on the deposit slide, the cost of funds remains one of the biggest challenges this year. Although we grew deposits in the first quarter, the majority of the growth was in interest-bearing deposits, which resulted in higher-than-expected interest expense. As a response, we have adjusted deposit pricing and reduced higher-priced public funds. We expect the changes will have a positive impact on our NIM going forward, and in short, we have several reasons to believe the NIM will improve, so let me point those out. Since the end of the quarter, we have reduced our dependency on public funds by over $100 million, which are rate-sensitive deposits. We have adjusted money market rates additionally. Currently, we don't have any money market deposits paying above 5%. Deposits also have already adjusted to a higher rate environment, so we don't expect material jumps in our interest expense. New loan production has been above 8% for three straight quarters, and we expect this trend to continue in 24. And with a higher for longer rate environment, we expect our interest rate swaps to generate $2 million of additional interest income for the year. And finally, with the strong liquidity position beginning in Q2, we can pass on non-relationship rate-sensitive deposits. The bank is well-positioned for rates to be higher for longer. However, as we navigate some uncertain times, i.e. the inverted yield curve, geopolitical conflicts in the election year, among others, the challenge will be managing under uncertainty. So with that, let's take a look at our interest rate risk models on the next page. According to our ALM model, the bank's balance sheet remains slightly asset sensitive. Part of the asset sensitivity comes from a higher cash position at the end of the quarter. While some of these inflows are temporary, we believe that we are going to be able to reinvest the cash into longer duration assets, which will protect our balance sheet from expected lower rates. Additionally, as rates remain higher for longer, our asset sensitivity may result in an improvement in them. If rates drop 100 basis points across all tenors, the model is telling us that the NIM will contract. However, 100 basis point drop across all tenors is highly unlikely. A more likely scenario would be a drop in short-term rates, which would immediately allow us to reprice our $1 billion plus money market deposit book. Additionally, we had three consecutive quarters booking loans with a weighted average coupon above 8%. And while this may have a minimal impact in our current NIM as rates drop. These longer-duration loans with embedded prepayment penalties and floors will help to protect our margin in a down-rate scenario. So with that, let me turn it over to Sergio to discuss asset quality. Thank you, Rob.