USCB Financial Holdings, Inc.

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 this event is being recorded. I would now like to turn the conference over to Luis De La Aguilera chairman and please go ahead.

Good morning and thank you for joining us for USCB financial holdings third quarter 2024 earnings call. With me today reviewing our Q3 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 commenced on slide 3. We're very pleased to report another consecutive record quarter a fully diluted earnings per share reaffirming the soundness of our strategic initiatives and operational performance. Supported by the strength of Florida's economy USCB continued posting strong growth in assets deposits diversified quality loans and profitability. These results reflect the steady execution of a business plan that focuses on organic growth supported by diversified commercial banking initiatives designed to deepen existing relationships and develop new ones. In reviewing our Q3 highlights I will comment on a select few data points as CFO Anderson will further detail our growth profitability capital and liquidity positions. Supported by our various deposit aggregating business verticals deposits increased 206 million to 2.1 billion or 10.7 percent compared to the third quarter of 2023. These business lines which include both association and correspondent banking as well as our focus on developing the deposit rich attorney-client market have grown to represent 31% of total deposits as of the end of the third quarter. These business verticals also contributed to the continued diversification of quality loan production generating non-CRE relationship focused loans. Average loans increased 267 million or 16.6 percent compared to the third quarter of 2023. Our loan growth has moved in line with consecutive -over-quarter improvement and average loan coupon rates contributing to profitability. To this end loan yields increased 16 basis points compared to the prior quarter and 79 basis points compared to the third quarter 2023. This will be detailed shortly. In speaking of our loan portfolio I am pleased to report that the bank experienced minimal effects from the damage caused by Hurricane Milton which on October 9th made landfall along the west coast of Florida as a category 3 hurricane. In early preparation for the storm our credit department identified all the bank's exposure along the projected path of the storm in the Tampa Orlando and Ocala markets where the bank had identified 169 million in exposure. Prior to the storm we confirmed that all insurance policies were current and active. All clients were immediately contacted after the storm. Site visits initiated and only one multifamily building having a loan exposure of 1.6 million had reported damage. Repairs are underway and the loan is current. As we look at profitability net income was 6.9 million or 35 cents per diluted share an increase of 3.1 million or 82 percent compared to the third quarter of 2023. ROA was 1.11 percent for the third quarter of 2024 compared to 0.67 percent for the third quarter of 2023 while ROA was 13.38 percent for the past quarter again as compared to 8.19 for Q3 2023. Also the company's board director declared a cash dividend of five cents per share of the company's class a common stock on October 28th 2024. The dividend will be paid on December 5th of this year. 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. The following page is self-explanatory directionally showing nine select historical trends since recapitalization. The disciplined execution of a business plan focused on developing the best people products and processes has consistently delivered efficient profitable performance guided by conservative risk management practices. 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.

Okay thank you Lou and good morning everyone. Q3 was the second quarter in a row where we posted record earnings. As you look at pages five and six you'll see results that reflect crisp execution from a well-oiled USB machine and positive trends that we believe are sustainable as we enter Q4 and into 2025. First net income was 6.9 million and fully diluted earnings per share was 35 cents per share. That's up from 31 cents per share last quarter and 19 cents per share last year. As it relates to the balance sheet loans deposits and total assets were all up double digits from the prior year. Tangible book value per share was $10.90 and if you exclude AOCI tangible book value per share would be $12.84. Profitability metrics exceeded the prior quarters with return on average assets at .11% and return on average equity of 13.38%. We also saw improvements in both the net interest margin and the efficiency ratio this quarter. Credit remains clean and all capital ratios improves. So with that overview let's discuss specifics starting with deposits on the next page. The deposit book stayed steady throughout the quarter as we used excess liquidity to fund loan volume in the quarter. Probably the most noteworthy item was the feds action to cut rates by 50 basis points in September. Accordingly we were ready for this move and while the deposit cost was flat quarter to quarter the September cost of deposits was .57% representing the efforts the team took in repricing the money market book. We feel confident that we can reduce our deposit cost with any rate cuts some specific actions that we are currently taking include the following. Reducing money market rates across the board. We anticipate the deposit beta for this deposit book specifically to be between a 40 and 50 percent beta. In Q4 we have 147 million in CDE is repricing at a weighted average rate of 4.03%. Currently we are repricing these CDE's anywhere between 20 to 100 basis points lower based on the tenor. Furthermore we are not offering any CDE's beyond one year as we are looking to keep liabilities short as the market is anticipating Fed rates to continue. With that let's discuss our next slide. The next slide is the one that we are looking at. That's our loan book. The loan book continues to grow at double digits whether you look at it from a link quarter perspective or year over year. Additionally as we book new loans at yields above the portfolio average our overall loan portfolio yields continue and will grind higher. As a reminder we book all loans with with floors and prepayment penalties which could protect us if rates begin to drop. As for guidance we expect loan growth to continue in the high single to low double digits going forward. Turning to page 9 you can see that for the past five quarters we have originated 728 million in new loans with a weighted average loan coupon at 7.98%. This past quarter is the first time we have seen loan coupons below 8% and while the loan coupon ticked down this quarter which lowers the five quarter average we are still originating loans 143 basis points above the portfolio average. This will help ensure our loan portfolio yield continues to grind higher. Also worth noting is that the loan book has transitioned over time and is more diversified. As of quarter end non real estate loans are at 28% of the total loan portfolio. Let's go to the next page and look at the margin. While the margin improved nine basis points in the net interest income increased 798,000 or .3% annualized compared to the prior quarter. The drivers include a larger balance sheet, higher loan yields, and an improvement in our earning asset mix while holding deposit costs stable. We believe the NIM can improve from here as September's NIM was .09% buoyed by loan yields that continue to go higher and stabilization in our deposit costs. According to our ALM model the bank's balance sheet is close to neutral as we have made changes in the last couple of quarters to prepare for a lower rate environment. Most notably we have favored money market retention rates over CD rates. This will allow us to reprice liabilities faster going forward. As previously mentioned we are not booking CD booking any CDs beyond one year as we prefer to stay short on the liability side. During the quarter we unwound 200 million notional pay fixed interest rate swaps. These swaps while beneficial in a period of rising rates and an inverted yield curve were at a point where they were not as appealing with the change in Fed policy and the 50 basis points of rate cuts. While these swaps will have a small negative drag in the coming quarters we have reduced our asset sensitivity with minimal impact on profitability. We expect to receive 13.5 million from the securities portfolio in Q4 at current rates and 49.2 million in 2025. These cash flows will support loan growth or debt repayment. If rates drop a hundred basis points we expect to receive 52.9 million in 2025. These rates the rates attached to these cash flows are between .22% to .39% offering us an opportunity to reinvest at much higher rates. As mentioned on earlier calls we have also pruned the balance sheet from rate-sensitive public funds and single service product clients. With these changes we believe our NIMP performance will improve from this level especially if the yield curve deepens. So with that let me turn it over to Bill to discuss asset quality.

Thank you Rob. Please turn to page 12. As you can see from the first graph the allowance for credit loss has increased $23 million in the third quarter. This was due to an $837,000 provision to the ratio and the ratio remained unchanged at an adequate 1.19%. The provision was driven by the $62 million net quarterly increase in the loan portfolio. Net losses were zero for the quarter. The remaining graphs on page 12 show the non-performing loans at quarter end increased $2 million and represents .14% of the portfolio. This increase was driven by one consumer loan relationship consisting of two loans which are in the process of collection. No loss is currently expected. Classified loans improved nine basis points from the second quarter to .36% of the portfolio as a large substandard commercial real estate loan paid off with no loss to the bank. Classified loans represent less than 3% of capital. The bank continues to have no other real estate. On page 13 the first graph shows the loan portfolio mix at 930. The portfolio increased $62 million on a net basis in the third quarter to a little more than 1.9 billion. The composition continued to be well diversified. Commercial real estate represents 57% of the portfolio for 1.1 billion segmented between retail, multi-family, owner occupied and office properties. The second graph is a breakout of the commercial real estate portfolios for the non-owner occupied and owner occupied loans which also demonstrates their diversification. The table to the right of the graph shows the weighted average loan to values of the commercial real estate portfolio at 60% or less and debt service covered ratios adequate for each portfolio segment. The loan portfolio and payment performance are good for all segments and the past due loan ratio remains at less than one half or 1% with and below pure banks. On page 14 we discussed the bank office portfolio. Our portfolio at quarter end consists of 120 loans totaling $182 million with almost all properties being Class B and C. The quality of the office portfolio is good with all loans paying as agreed with no classified loans. 95% of the properties are in Florida with adequate debt service coverage. The average loan amount is $1.5 million with an average loan to value of 56% and average debt service coverage at almost two times. The first chart shows the owner occupied offices making up 36% of that segment with 64% of those loans being occupied by professional and medical businesses. The second chart is the non-owner occupied office loans comprising 64% of the office portfolio with 85% of those being multi-tenant and medical. We are especially vigilant of the upcoming 2024 and 2025 loan repricing and maturing schedules for all portfolio segments and monitor the monitor and model the loan portfolio repayment ability during annual reviews to respond proactively if needed. Overall, the quality and performance of the loan portfolio remains good. Rob?

Thank you, Bill. As we look at our fee businesses, the standout this quarter is the team's performance with interest rate swaps. Since Q1 of this year, we have seen an uptick in clients managing their debt obligations with interest rate swaps. We anticipate Q4 will have a similar performance as the pipeline remains robust. With other line items in line or straightforward, let's look at our total expense base. Our total expense base was $11.5 million and down slightly from the prior quarter. Salaries and benefits decreased to $153,000 compared to the prior quarter due to higher incentives paid out in the second quarter of 2024. Also worth noting is that the overall headcount has been stable for some time allowing us to leverage our fixed costs over a larger earning asset base and this is evident in the efficiency ratio and non-interest expense to average assets ratio, both of which benchmark wealth peers. With other line items straightforward, let's turn to capital. USCB capital levels remain comfortably above well-capitalized guidelines. All ratios improved with strong earnings and the AOCI improved to negative $38 million. Also worth noting is the company repurchased 10,000 shares of common stock at a weighted average price of $12.03 per share during the quarter. So with that, let me turn it back to Lou for some closing comments.

Thank you, Rob. US Century Bank's performance throughout the year has consistently met or exceeded management's 2024 budget expectations and the team is keenly focused on delivering the quarter ahead. Without a doubt, the strength of the Florida economy provides the fuel that runs our engine as the state passed the mid-year point with strong job growth, historically low unemployment, and migration. Florida is creating one in every 11 jobs in the US and adding approximately 750 net new residents daily. The state leads the nation with $36 billion in net income migration, which is greater than the rest of the top 10 states combined. Florida's statewide unemployment is .3% and has been lower than the national average for 47 consecutive months. The state is also ranked number one this year as the best to start a small business due to a low corporate tax rate of .5% and the continued migration of consumers and companies. These factors are among a few that offer Florida continued economic resiliency on which we will continue to grow. The bank's strong profitability metrics, balanced growth, and operating efficiency gives us confidence in our ability to achieve financial targets in 2024 and beyond. With that said, I would like to open the floor for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you were using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

At

this time, we will pause momentarily

to assemble our roster. The first question comes from Woody Lay with

KBW. Please go ahead.

Hey, thanks for taking my questions. I wanted to start with the non-interest bearing deposit growth in the quarter. It was really impressive to see. Does it feel like the increase in that segment is sticky or were there seasonal aspects that impacted that segment?

Yeah, maybe I'll take a shot at that first, Woody. On average, the DDA was kind of flat from the quarter, but we did see an uptick towards the end of the month, so a -to-point growth was fairly strong. We do see some businesses add some deposits at quarter end from time to time, but I would tell you we have a lot of efforts with the sales team focusing on operating accounts and building relationships, so we anticipate to build our DDA going forward. That trend should continue.

Got it. Then I mean the overall deposit growth was also really strong. Could you just give some more specific color on, you know, were there certain deposit verticals that drove that growth in the quarter? Was it pretty broad-based among the deposit verticals?

Hey Woody, this is Lou. I would say it's fairly broad-based, but without a doubt there are three of our deposit aggregating verticals that really have done a great job. Our focus on the jurist advantage, which focuses on the attorney client business has been strong. Our HOA business has also been very strong, and you know, in general, I think we're going to continue seeing that, and our association banking also has been very, very strong. We have grown really, really nicely on the HOA side. If we, like I said earlier, 31% of our total deposits have been contributed by those deposit aggregating verticals. Just to put it in perspective, have grown almost a hundred million dollars in the last three quarters. So those are kind of the leaders in the overall, but like Rob said, the entire team is focused on deposits, deposits, deposits, and they're delivering.

Definitely, and then I mean just shifting over to the loan side, you know, you've printed sustainable double digit levels over the past couple quarters. How's the pipeline entering the fourth quarter, and do you think this double digit range is sustainable going forward?

Yes, I attend the pipeline meetings every single week, as does Rob and does Bill. We interact with our division head, our team leaders. They keep us very much informed of what's happening with the competition, and the Q4 pipeline is right online with budget. So we feel very comfortable that the same momentum will continue.

Great to hear. All right, I'll hop back into queue. Thanks for taking my questions. Thanks, Woody.

The next question comes from Michael Rose with Raymond James. Please go ahead.

Hey, good morning everyone. Thanks for taking my questions. Lou, I just wanted to go back to your comment at the beginning of the call that, you know, the specialized verticals now are about 31% of deposits. Can you just remind us where that was maybe a year or two ago, and is there any sort of limiter that you would look to maybe put in place to some of those those verticals, because I would expect that there could be, you know, some seasonality or lumpiness depending on business trends in some of those verticals? I'm just trying to get a better sense of, you know, what the growth potential is there, and then on just the core side, can you just remind us again some of the incentive structures that you have in place to kind of drive, you know, more traditional relationship growth? Thanks.

Right, the three main deposit aggregating verticals, if I go back to 2020, total 312 million. In 2022, there were 446 million. In the first quarter of this year, there were 554 million, and in the third quarter, we're at 644 million. So you can see the trend is non-seasonal. It is continuous, and again, we have in each area a product, let's put it this way, a product expert. Their job is really over time to work with the business development officers and with the lenders to share the knowledge and then leverage the team, so it's not just one person bringing in the specialized deposits and or loans that go with them. I think they've done a great job on that. And at the same time, we're doing it not by adding additional staff, per se. We're very tactical when we do that. As far as incentive programs, we have an incentive program that both rewards for loans and deposits. It's paid semi-annually, and it is also very much, how can I say, focused on asset quality. So all three things have to be in play. It's your asset quality, it's your loan growth, it's your deposit growth, and on top of that, it's your portfolio maintenance. So there's a big risk management component to that.

Very helpful. And then, I know you kind of mentioned at the end of the quarter, the margin, I think you said around 309, and you gave some great statistics around both the loan repricing and the deposit repricing as well. As we think about the next couple quarters with the, obviously the rate sensitivity has come down a little bit here. I mean, should we expect the margin off of that 309 to kind of grind higher based on the dynamics, or do you think that competition, at least on the loan side, ramps up and could offset a portion of that over the next couple quarters? Thanks.

Yeah, good question. So a couple of the data points on the deposit side, the end of September was, total cost of deposits was 2.57%, and we didn't get the full month of the cuts going in. The NIM on the month of September was 3.09%. And if you look at the slide on the loan slide, we're improving our loan yields about 16 basis points every quarter on the portfolio. So we anticipate the impact of all that to have a positive impact on our margin, and that will continue to grind higher. So that could be, you know, 309, 310, somewhere around there, I think, in the fourth quarter. And if we get cuts, you know, the first place we're going to look to is the billion-dollar money market book that we have, and if we can hold betas between 40 and 50%, we'll tell you how we're performing. You'll be able to see that in the coming quarters with additional rate cuts. That will be beneficial. So again, we're still originating loans, 143 basis points above the portfolio average. So I anticipate the total loan portfolio to grind higher as well.

Okay, and then you talked about some debt repayment opportunities. Could you just remind us what those are when the maturities are? And, you know, it seems like there's probably a pretty good likelihood all else equal that you'd probably look to pay some of that down. Thanks. Yeah,

so, you know, we have only FHLB, some FHLB borrowings at quarter end. There are some terms in there. We had some staged out when interest rates were really low. I think we have a couple in 25. We have some six months. I'd have to get the specifics, but we're looking at either loaning it out or keeping, you know, small cash balances or paying off the FHLB borrowings when we can. There's not a significant amount there at quarter end. I can get you the specifics on the maturity, so, and that will certainly be in the queue.

Okay, perfect. Great. And if I just squeeze one last in, you guys, to your point, have been running non-interest expenses to average assets, you know, sub 2% for a while now. Any sort of larger expenditures we should think to kind of keep the balance sheet growth momentum, you know, moving forward or is that kind of a target that we should, you know, continue to think about as we move forward, kind of in that high 180s, low 190s range?

I

think that

will hold as we move forward, Michael. You know, we have not made significant hires over the past year. We typically, I just looked at it, you know, probably the last month or two, we probably hired maybe four to five people a year and were able to leverage those individuals and are predominantly on the sales side and we continue to, you know, get some new salespeople and performance manage others, but in terms of the efficiency ratio, we're certainly targeting the low 50s and the expense to average assets below 2 and I think at the 180 to 190 is a good modeling range.

Okay, great. Thanks for taking my questions. I'll send them back.

The

next question comes from

Fetty Strickland with HVD Group. Please go ahead.

Hey, good morning, guys. Just

wanted to start on swap fees here. I think you said they'd likely remain relatively stable at this $1.2 million or so level in the fourth quarter, but I mean, should we expect that to start to step down a bit in early 2025 as you sort of work through the customer base that's just, I guess, taking on that product?

It could. I mean, right now the fourth quarter is, I would say, robust and I would say we should be at that level. I mean, we're closing in on October right now and just looking at October's numbers was very strong. So I feel comfortable about the near term on the swap fees, but certainly as, you know, rates continue to go down, maybe clients, it could moderate a bit, but for a near term, I'd say the next six months, I think that level is a good modeling number.

Gotcha.

You have the dividend now. You've been active on the buyback. With that in mind, can you just talk about priorities in terms of capital deployment and how you rank with an opportunity going forward?

Yeah, first and foremost, I mean, the capital is there to support our growth, but, you know, if we're growing our earnings faster than the assets, then we're going to build capital and we'll probably look at the dividend and we also have other tools in place such as the buyback. So when the stock is lower compared to where we feel it should be trading at, certainly we're going to repurchase. But I think we will look at the dividend level as we enter into kind of the fall, you know, planning cycle and budgeting and stuff like that for next year in more detail. But those would be the three areas that I would point to for capital. But first and foremost,

is to support our growth. Gotcha. And just one last one for me, just generally speaking, it doesn't

sound like there's really been any kind of slowdown or negative, you know, sentiment change among your customer base, right? I mean, your loan price line seems pretty strong. So that would imply to me that, you know, things are still proceeding along at a pretty quick pace down there?

I would say it's at a steady pace. We, there's a lot of deals ready that we pass on. We're very selective and ask the quality and the overall relationship is really how we make our choices. And the fact that we have a pretty diversified suite of products to pick from keeps the business growing very steadily. You know, this bank used to be very concentrated on commercial real estate and over the last few years, I think the management team has done a really good job in introducing different business lines that are non-steery and they've all contributed over time and are very steady in their delivery. So I foresee, you know, our continuity in that low double digit, you know, target.

Yeah, I would agree with that. Great. Thanks for taking my questions, Rob and Luke. Certainly.

The next question comes from Steven Scouten with Piper Sandler. Please go ahead.

Hey, good morning, everyone. Thanks for the time. So the loan growth trends obviously look phenomenal in a time when we're not seeing such strengths from the industry as a whole and from, you know, probably most of the other banks that reported this quarter. How do you think about growth in the 25? I mean, the message we're hearing in general from the industry is, hey, growth has been slower. We think it could pick up after the election or in the 25. You guys are already kind of seeing this low double digit growth. So could we see an additional uptick or do you kind of want to manage to that level of growth irrespective of the environment or just kind of help me think about that if you could?

Well, you know, we're modeling it at that low double digit and if we surprise you, we'll let you know. All right? But the Florida market as I ended my talk here really is about as strong as it gets, Texas and Florida. And I'd say over the last decade, you know, we've seen moments where there may be a dip, but it has been very steady for us. We go back eight or nine years and we see that it's that year over year delivery. And again, the fact that we have developed all these diversified business clients adds to that growth and that consistency. So into 2025, I would still say that what we're projecting is what we're going to deliver and it's going to be really based on a strong economy in the state.

Makes sense, Luke. Appreciate that. And along with that, I mean, to drive this pace of growth in the future, do you feel like you have to continue to grow your teams or do you feel like, you know, kind of the team you have on the field here can continue to grow at this pace, you know, for some good period of time?

We are always looking for talent. As a matter of fact, I just interviewed somebody this morning, okay, that we've been talking to for a while. The person is ready to go and I believe they're going to be joining us shortly. But again, we're being very selective of the individuals. I think Rob made it a point of talking about how we've grown the bank over a billion dollars in assets over the last three years and we're still under 200 in our headcount. What we've been very good at doing is upgrading the quality of the production person or the staff person that comes in. And so we've trimmed on the non-performers and we have been very focused on bringing in talent. And we will continue to do that. So it's not an exponential hiring craze that needs to be done to continue our numbers. It's bringing in the right people and supporting the ones we have.

Fantastic. And then just maybe last thing for me, you guys not only have seemingly bucked industry trends to the positive on loan growth, but also on the direction of your NIMS since, you know, let's see, second, third quarter, 23. So you screen as asset sensitive, but directionally you're seeing great improvements. So how do I think about that? Is it really just the progress you've made on the deposit side or is it more that, you know, you'll be able to see NIM expansion as the Fed is not moving, but maybe we see some volatility as they're actually cutting rates. And then, you know, again, we see the same level of stability improvement we've seen the last few quarters once they pause. How can I think about that in kind of in reality versus, you know, the modeling and the asset sensitivity?

Yeah, that's a great question, Stephen. I talk to my treasurer about this all the time because we do screen probably slightly asset sensitive to neutral. But as you know, those models are loaded with assumptions and they're based on some historical pieces. But, you know, what I would say is that we've been able to outperform the model, especially on repricing our money market book. You know, like the model could have a 39% deposit data. Well, if we perform at 40 to 50% on that book, then we're going to outperform that model and we're going to have margin So that would be one example. We are very focused on the deposit side. I think we've proven over a good period of time that the loan engine is working here, growing at, you know, a double digit pace. So the real challenge for us as we move forward is how do we continue to fund that loan growth at low cost deposits? So the hires that we have recently last year and into this year, the one that Lou interviewed this morning is all around deposit gathering and good solid bankers that have deposit books that can bring over relationships. So we'll look to outperform our model and we anticipate more margin expansion as we go further into 2025.

Perfect. Very helpful, Rob. Congrats on a great quarter, guys, and all the continued progress.

Thanks, Stephen. Thank you, Stephen.

This concludes our question and answer session. I would like to turn the conference back over to Luis de la Aguilera for any closing remarks.

Well, thank you, everybody. So on behalf of U.S. Century, the team at U.S. Century Bank, I would like to thank you all for your attendance and look forward to meet again in our next earnings call. Have a great day.

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