USCB Financial Holdings, Inc.

Good morning, and welcome to the USCB Financial Holdings, Inc. second quarter of 2024 earnings conference call. All participants will be in a listen-only mode, and should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. And to withdraw your question, please press star, then two. Please also note that this event is being recorded. I would now like to turn the conference over to Lou de la Aguilera, Chairman, President, and CEO of USCB Financial Holdings. Please go ahead, sir.

Good morning. With me today reviewing our Q2 highlights is CFO Rob Anderson and Chief Credit Officer Bill Turner, who will provide an overview of the bank's performance, the highlights of which commence on slide three. This past Tuesday, July 23rd, marked the third anniversary since USDB launched a successful IPO and went public, a clear milestone for our bank. Despite strong headwinds, including a prolonged inverted yield curve, growing inflation, and an unprecedented rise in interest rates, our team has consistently executed our strategic plan with a sense of urgency, disciplined risk management practices, benign credit metrics, and the support of an associate base committed to superior customer service. Over these three years, assets have grown 47%, or $791 million, while loans and deposits increased 63%, or $724 million, and 43%, or $617 million, respectively. Our clear, actionable strategic plan and a motivated team of bankers have combined to deliver continued sustainable results. Again, this past quarter, the bank has delivered on all our key performance indicators, Our focused efforts to rationalize and lower deposit costs while growing them has led to strong NIM expansion in Q2. Diversified quality loan production with high coupons continues. Non-interest income has surged, and record profits in the quarter has led to notable improvement in efficiency, profitability, and our earnings per share, all of which Rob will review in detail in a moment. The backdrop to our results is the strength of the Florida economy. which continues to demonstrate remarkable resilience and growth, significantly outperforming the national average in 2024. The following page is self-explanatory. They're actually 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.

Thank you, Lou, and good morning, everyone. Looking at pages 5 and 6, I would characterize Q2 as a fantastic quarter for USCB. Net income was $0.31 per diluted share and the highest since going public and simplifying our capital structure. Return on average assets was 1.01%, up from 0.76% in Q1. Return on average equity was 12.63%, up from 9.61% in Q1. NIM was 2.94% and up 32 basis points from the prior quarter. The efficiency ratio was 56.33%, down from 63.41% in the prior quarter, and tangible book value per share grew to $10.24, up 13% annualized from the prior quarter. Driving this record performance was threefold. First and most notably was the improvement in the net interest margin, As average earning assets continued to reprice upwards and our overall funding costs saw a marked decrease. Net interest income increased 2.2 million or 57.1% annualized compared to the prior quarter and 3.1 million or 22.1% compared to the second quarter of 2023. This momentum will benefit forward earnings as we enter the second half of the year. Next, non-interest income showed a marked uptick, as our strategies mentioned over the past year continue to pay off. And last, credit metrics remain benign. So with that overview, let's discuss deposits on the next page. First, we saw our average deposit balances continue to grow, and most notably was the DDA growth. Average DDA deposits increased 35.6 million, or 24.9% annualized compared to the second quarter of 23, prized 29.3% of total average deposits for the second quarter. Second, and buoyed by the DDA growth, was the decrease in our overall deposit cost. This was driven by the pricing actions we mentioned on our previous call. Specifically, we're able to price down our interest-bearing deposits by 10 basis points through the quarter, and we continue to evaluate all relationship pricing based on the breadth and tenor of that relationship. Going forward, we believe that we can hold the deposit book steady at these rates. The key for us will be to continue to grow the DDA book. With that, let's take a look at our loan portfolio. Average loans increased $47 million or $10.6 million annualized compared to the prior quarter and $259.2 million or 16.5% compared to the second quarter of 23. Loan coupons increased 15 basis points compared to the prior quarter and 85 basis points compared to the second quarter of 23. Driving this performance is really laid out on the next page. First, for the past four quarters, we have originated 571 million of loans with a weighted average yield above 8%. That's over 30% of our total loan book. This is a critical component to the improvement in our net interest margin as we look to remix our balance sheet with assets at higher yields. Also, the majority of these loans are fixed rates, with five- to seven-year terms and have embedded floors and prepayment penalties. This will provide protection in a down-rate scenario. In terms of the pipeline, we have a steady pipeline with solid credits priced in a similar fashion. Additionally, and very noteworthy, is the diversification we have achieved over the past four years. CRE loans, which is the predominant loan-type opportunity in this market, now makes up 56% of our total loan composition, and that's down from 63% just four years ago. Okay, let's turn the page and look at the margin. Q2 showed a marked improvement in both net interest income and net interest margin. This is a direct result of a larger balance sheet, improved earning asset yields, and lower funding costs. We remain optimistic about maintaining the NIM around this level near term, but we have several reasons to believe the NIM will improve over time, so let me mention them. Deposits have already been adjusted to a higher rate environment, so we don't expect material jumps in our interest-bearing deposit rate. In fact, this quarter, we lowered them. Next, if the Fed drops rates in September, as the market fully expects, we have over a billion dollars in money market accounts that can be immediately repriced. We have 175 million of CDs maturing in the second half of this year at a weighted average rate of 4.62%. And currently, all of our CD renewal rates are at or below this rate. New loan production has been above 8% for four straight quarters and has shown on the loan slide the yield on the loan book continues to grind higher. We fully expect this trend to continue. Also at the end of June, we executed the sale of $35.5 million of bonds at a net gain of $14,000. The bonds carried an average life of 2.4 years, and the funds were reinvested into new loan volume, effectively locking in an additional 275 basis points. And with this transaction, we also extended our asset duration, which will protect our balance sheet from an expected lower rate. We expect 23.6 million of cash flows coming off the securities portfolio this year at a weighted average yield of 3.32%, which can be reinvested into higher earning assets. I would also note with interest rates drifting lower, there may be additional opportunities to sell securities to reinvest into higher yielding assets. And finally, with a strong liquidity position beginning in Q3, we can pass on non-relationship rate-sensitive deposits. Let's go to the next page. According to our ALM model, the bank's balance sheet remains slightly asset-sensitive. However, when compared to the previous quarter, our asset sensitivity has decreased. The reduction in asset sensitivity is the result of management efforts to better position the balance sheet for expected lower rates. As all of you are aware, these rate scenarios are run with parallel shocks across all tenors, which is highly unlikely. For transparency purposes, we show these scenarios as it is disclosed in our filings and a regulatory requirement. For example, if rates drop 100 basis points across all tenors, which again is highly unlikely, the NIM will contract slightly according to our modeled assumptions. However, a more likely scenario would be for the Fed to reduce short-term rates and the longer-term rates, being the 5-, 7-, and 10-year rates, do not move down in an equal fashion. In these scenarios, we model more favorably. So in short, we believe we are well poised to capitalize on a rates down scenario. So with that, let me turn it over to Bill to discuss asset quality.