USCB Financial Holdings, Inc.

After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone phones. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mr. Luis de la Aguilera, CEO. Sir, please go ahead.

Thank you, and good morning. Thank you for joining us for USDB Financial Holdings 2025 Second Quarter Earnings Call. 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. I'm very pleased to report that U.S. Century Bank delivered another consecutive record quarter with continued improvement in our profitability ratios. posting a return on average equity of 14.29%, a return on average assets of 1.22%, and a fully diluted earnings per share of 40 cents compared to 31 cents per fully diluted share for the same period in 2024. This past Monday, the bank marked its fourth anniversary since launching a successful IPO on July 21st, 2021. Since then, management's overarching focus has been to safely grow the bank as a high-performing franchise, while prudently managing risk and capital allocation to deliver long-term value to our shareholders. That goal remains, our efforts continue, and as always, the team executes on a clearly defined and communicated business plan. Our strong franchise presence in key South Florida markets enables us to achieve steady, sustainable, profitable growth, reflecting the success of our strategic initiatives and diversified business lines. Also, the success of our deposit verticals has resulted in a diversified funding base, which has helped us to manage our NIM under an evolving economic environment. Part of the success has been reflected in our valuation. USCB stands out as one of the few independent banks with a meaningful scale in the Miami-Dade MSA, having $2.1 billion in local deposits across 10 branches, positioning us uniquely among area competitors, offering clients a relationship-driven experience backed by local decision-making with deep market knowledge. Our ability to combine personalized service with strong financial performance continues to differentiate UCB in our competitive landscape. To this point, average deposits increased 13.7% annualized compared to the previous quarter to 2.3 billion, reflecting the trust and confidence of our clients, as well as the efforts to prudently hire proven production personnel. As previously reported, And in support of our deposit focus, we added four new producers in the first half of the year, two in business banking, one deposit-focused business developer, and another supporting our association banking, which targets the deposit-rich South Florida condominium market. Next month, our private client group will add another experienced vice president at our Coral Gables location. As management develops our three-year strategic plan, we aim to remain agile and responsive to creative, hiring and business opportunities, and their execution. To this point, the company has done two things to prepare ourselves for the quick execution if and when market conditions present themselves. In May, we filed a $100 million universal shelf offering. The shelf allows the company to offer various securities over a period of time as needed without the requirement to file a new registration statement for each offering. Shortly thereafter, Kroll Bond Rating Agency assigned both the company and the bank investment grade debt ratings. The investment grade ratings will support the deposit gathering activity of a foreign correspondent bank team as several of their existing and potential bank clients set deposit limit on U.S. bank correspondents unless they are credit rated. This action will allow us to gather more deposits from this customer base. We view both actions as customary and prudent steps to further prepare ourselves to quickly and efficiently execute strategic initiatives as they present themselves over time. The following page 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 now, let's draw 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 five and six, I would describe the second quarter of 2025 as a highly successful quarter for USTB. In fact, it was another record for us. Net income was 8.1 million or 40 cents per diluted share, up 29% over the prior year. Total loans were up 15.1% annualized compared to the prior quarter, and the portfolio hit another milestone by closing above 2.1 billion. Deposits rose 4.5% annually from the previous quarter, giving us strong liquidity to support upcoming loan growth. Profitability ratios were equally as impressive. Return on average assets was 1.22%. Return on average equity was 14.29%. The NIM improved to 3.28%. Efficiency ratio improved to 51.77%. And our tangible book value per share was up 30 cents for the quarter to $11.53. And last, Credit metrics remain within management expectations. The net charge off of 14 basis points this quarter was in large part provided for last quarter. So the impact on earnings this quarter was negligible. Bill will touch on this in a bit. So with that overview, let's discuss deposits on the next page. Deposits have demonstrated sustained growth on both a quarterly and year-over-year basis through ongoing effective execution across our diverse business verticals, we have been able to grow our deposit book and reduce the cost of deposit, despite no movement in the Fed funds rate this year. The increase in deposit balances and improvement in the cost of funds is mostly driven by higher average DDA balances for the quarter. Average DDA balances increased 17.1 million or 12.2% annually compared to the prior quarter. And we successfully lowered the interest bearing liabilities by five basis points from the prior quarter, which helped improve our overall cost of deposits by three basis points. Let's move on to the loan book. On a linked quarter basis, average loans grew 70 million or 14.3% annualized. Compared to the second quarter of 2024, we grew 229 million or 12.5%. Regardless of the comparison point, our growth was at the top end of our previous guidance. Alongside this growth, we saw our loan yield climb six basis points from the previous quarter, and seven basis points compared to Q2 of 2024. The loan yield improvement was driven by higher yields on new loan production and a stable SOFR rate throughout Q2. Looking ahead and assuming no rate changes this quarter, loan yields are expected to remain stable or improve slightly as new loans are booked with yields higher than the portfolio average yield. Moving on to page nine. For the quarter, we closed $187 million in new loan production, with $95 million of that closing in the last couple weeks of June. Due to the late addition of these loans, the full impact of the quarterly loan production to interest income was not fully realized in Q2, but will more fully materialize in Q3. The weighted average coupon on new loans was 7.12%, and 89 basis points higher than the portfolio average yield. our loan portfolio continues to diversify, shifting away from real estate-related loans and into other various loan types. Now having reviewed both deposit and loan performance, let's see the impact on the margin. On both a quarterly basis and a yearly basis, the NIM continues to improve, reflecting the strength of our asset mix and disciplined balance sheet management. Net interest income experienced notable growth, increasing by 1.9 million or 40.3% annualized over the prior quarter, and up 3.7 million or 21.5% compared to Q2 of 24. This increase was driven by several factors, including a larger balance sheet, higher yields on both loans and securities, coupled with lower deposit costs. Additionally, and as just mentioned, the 95 million in new loan production, which happened late in the quarter, will more fully impact earnings in Q3. Let's turn to page 11 to see the impact on changing rates on our balance sheets. In the past several quarters, our strategy has been to prepare for a lower rate environment and a more normalized yield curve. This strategic positioning has begun to yield benefits as evidenced by an increasing margin and profitability. Our balance sheet currently demonstrates a liability sensitive profile for year one and transitions to an almost neutral balance sheet for year two. We view this transition very positively for two reasons. First, if rate cuts occur in the near term, this will allow us to reprice our funding sources more quickly than our assets, which should provide a boost to our net interest margin. Second, as the yield curve returns to a more traditional shape, a positive upward sloping yield curve, we will be well positioned to capture the widening spread between lower cost short-term funding and higher yielding long-term assets. This combination of agility and preparedness enhances our ability to navigate both the declining and normalizing rate environment, supporting sustained margin improvement in the quarters ahead. So with that, let me turn it over to Bill to discuss asset quality.

Thank you, Rob, and good morning, everyone. Please turn to page 12. As you can see from the first graph, the allowance for credit loss has increased to $24.9 million in the second quarter. The increase was due to the net effect of the million-dollar quarterly provision and the $700,000 loss on the sale of a yacht and a tender vessel, which collateralized the consumer loan relationship. This amount had been reserved in previous quarters. The allowance for credit loss ratio is at an adequate 1.18% of the portfolio at second quarter end. The million-dollar provision was driven by the $77 million in net loan growth during the quarter. The remaining graphs on page 12 show the non-performing loans at quarter end at $1.4 million and decreased to 0.06% of the portfolio and are well covered by the allowance. The decrease was related to the liquidation of the vessels mentioned before and the payoff of a non-accrual residential loan. No losses are expected from these remaining non-performing loans. Classified loans also decreased during the quarter to $5.6 million, or 0.27% of the portfolio, and represent less than 2% of capital. The decrease was again related to the sale of the consumer loan relationship vessels and the residential loan payoff. No losses are expected from the remaining classified loans. The bank continues to have no other real estate. On page 13, the first graph shows the diversified loan portfolio mix at second quarter end. The loan portfolio increased $77 million on a net basis in the second quarter to $2.1 billion. Commercial real estate represents 57% of the portfolio, or $1.2 billion segmented between retail, multifamily, owner-occupied, and warehouse properties. The second graph is a breakout of the commercial real estate portfolios for the non-owner-occupied and owner-occupied portfolios, 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 less than 60%, and debt service coverage ratios are adequate for each portfolio segment. The quality and payment performances are good for all segments of the portfolio, with the past due ratio at 0.19%, and non-performing loans remain below pure banks. Overall, the quality of the loan portfolio remains good. Now let me turn it back over to Rob.

Thank you, Bill. Non-interest income continues to improve with a variety of different revenue streams. Both wire and swap fees increased over the prior quarter, and as mentioned on previous calls, all loans are booked with prepayment penalties, so in the event of an early payoff, we receive compensation. These fees are booked under the other line item in service fees. Title insurance fees and banked-owned life insurance are also in this line item. SBA loan sales were down slightly from the prior quarter, but the pipeline is strong and we expect a higher number in Q3. Overall, non-interest income was 13.8% of total revenue and 0.5% to average assets. slightly lower than the prior quarter, so we'll look to improve upon this number in Q3. Let's look at expenses on page 15. Our total expense base was $12.6 million, and while up from the prior quarter, it was in line with guidance. The efficiency ratio was 51.77% and the lowest since 2021. In more detail, salaries and benefits rose by $318,000 from the previous quarter due to the additional new hires that Lou mentioned and increased incentive accruals reflecting improved company performance. As stated previously, our incentive programs are aligned with our shareholders and are highly variable. Looking forward, we expect the quarterly expense base to be at this level and perhaps gradually increase throughout the balance of 2025 with consistent improved overall company performance. So with that, let's turn to capital. The capital ratios remain strong, improved in comparison to the previous quarter, and well above regulatory minimums, providing a solid foundation for ongoing growth and strategic initiatives. The AOCI was a negative 41.8 million flat compared to the previous quarter, which resulted in a negative $2.08 impact on our tangible book value per share metric. We have 285 million in AFS securities, and the majority of this was purchased during the pandemic with historically low interest rates. The yield on these securities is low, below 3%, and hence the large negative mark. We are hopeful that in the coming quarters that this asset can somewhat self-correct with improved rates, run off, become a much smaller portion of the balance sheet with continued growth, or we have an opportunity to sell a portion of these securities with acceptable return economics to our shareholders. In short, we are monitoring each option to improve our forward earnings and profitability. As Lou mentioned, we completed 100 million universal shelf offering received investment-grade debt ratings from Kroll, and are well prepared for a variety of strategic initiatives if and when they present themselves. With that, let me turn it back to Lou for some closing comments.

Thank you, Rob. U.S. Century Bank's performance throughout the first two quarters of 2025 consistently met or exceeded management's budget expectations. Without a doubt, we benefit and are propelled by the resiliency and strength of the Florida market, which continues to attract businesses and residents across the nation, drawn by our favorable client, pro-business policies and absence of state income tax. The total state GDP reached nearly 1.5 trillion and is projected to grow at 2.5 to 3% for 2025, continuing to outpace the national average. Florida has maintained a lower than average unemployment rate for more than 50 consecutive months and has added over 113,000 jobs year over year as of January 2025, again, outpacing the national growth rates. Clearly, the strength of the market we serve provides the fuel to deliver continued strong profitability metrics, balance sheet growth, and operational efficiency. With that said, I would like to open the floor for Q&A.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on your touchtone phones. If you are using a speakerphone, we ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to ask a question. At this time, we'll pause momentarily to assemble the roster. And our first question today comes from Will Jones from KBW. Please go ahead with your question.

Yeah, hey, great. Good morning, guys. Morning. Good morning. Hey, so Lou and Rob, thanks for pointing out the investment grade rating. I think that's a very important step for you guys. And Lou, you mentioned the opportunity this could provide just on the international deposit front. I guess this first question is, is the strategy different trying to gather international deposits as opposed to domestic deposits? And could you maybe just help us frame or give us just a realistic idea of what this opportunity could be for? in terms of the deposit chance here?

Certainly. The global group manages a portfolio of 30 banks that are in the Caribbean Basin and Central America. There are two other banks that are not in that area. There's a few that are in Ecuador and one that is in Peru. We have segregated these banks into three categories let's just call them A banks, B banks, and C banks, and we're really grading them by their deposits with us. So an A bank will have deposits over 10 million on average. A B bank will have deposits maybe from 2 million to 10. And then the C banks have average balances, I think, were about 1.5 million. So what we're doing here is upgrading the B banks to A, maintaining and growing the A banks, and then growing the C banks. We started last year probably a more robust travel schedule than we've ever had. I think in the last quarter and a half of the year, we literally visited all the banks that are borrowing banks, and we saw deposits grow relatively quickly after that. This is very much a relationship-driven strategy, and our executive team who runs it has had almost 40 years in the business. He travels with his successor. He knows these banks very well. They know him and by extension us. So the plan is really to grow that area with the strategy that I just mentioned. But it just so happens that there's a number of these countries that have limits on how much they can have out to U.S. banks. And this has been the case for the longest time. So getting the debt rating and sharing it with them is going to give us the ability to, again, raise those deposits from Cs to Bs and from B to As. And we're also looking at possibly three to five new banks in the portfolio for 2026. So we're focused on that, and we will be reaching out to them probably in due time.

That's great. That's very helpful to understand.

And just in terms of, you know, what once you see the incremental cost of deposits on some of your international customers as opposed to the incremental cost on your domestic customers, what do you see as the driving difference there?

Yeah, so, Will, I'll take that one. So on our global banking front, we probably have $268 million in deposits as of quarter end. The cost of those deposits are cheaper than the overall funding costs. They're at 1.74%. So certainly, you know, these are banking institutions, and, you know, they want a relationship with a U.S.-based correspondent bank, and we price them fairly low, and they're below our overall cost of deposits.

Yeah, well... Seems like a very attractive opportunity for you guys then. Rob, while I've got you, just a quick one on the margin. I know just looking back at my notes last quarter, it feels like rate cuts are beneficial to you guys just in terms of your rate sensitivity. Though I say that every quarter, it feels like we continue to outperform margin expectations, and the margin was up fairly significantly again this quarter. Do you still see the same NIM upside if we do get cuts later in the year, or have you really kind of recognized some of the benefit to margin earlier in the front half of the year and rate cuts will just more or less help you maintain stability as we look into the second half?

Yeah, on the deposit book, we're looking at that constantly for opportunities. You know, sometimes we will bring in a new client. We will give them a good rate. We're looking for a relationship, looking for their operating account. And, you know, if that doesn't materialize, we'll look to cut that rate until that happens. But, you know, on average, we had $1.2 billion in money markets. So if rates do get cut on the front end of the curve by the Fed, you know, we'd be looking to that money market book to reduce rates, and I think we've been managing that pretty prudently in a flat rate environment, and certainly with that size of a money market book, we'll have opportunities to cut with a Fed cut, and that would help our margins. So in a rate cut environment, we're looking at a liability-sensitive balance sheet, and our margins should improve, and that's what we've modeled out.

Okay, that's great. Thanks for all the color this morning, and really nice quarter, guys. Thank you, Will.

Our next question comes from Freddie Strickland from Hovde Group. Please go ahead with your question.

Hey, good morning. Lou Robbins, Bill. Just want to talk about loom pipeline mix today. What do you have coming on in the next, let's say, six months or so? And if we get rate cuts, how does that change?

Well, we... Actually, Bill, Rob, and I attend the pipeline meeting with the lenders every week. So it's 52 times a year. We're sitting in there. We're asking questions. We're seeing what's coming in. The pipeline, we had two really solid months closing June and July. I think it was like $150 million in closings. The pipeline usually during the third quarter because of the summer months historically always dips a little. But we're projecting what we have in credit and what has already been closed in July. We feel very comfortable that we're going to hit the numbers again. So we have the dry powder going into the fourth quarter, and we have the volume in place to deliver the third. It's pretty balanced, as we have mentioned. We have business coming in from numerous business verticals, whether it be the yacht loans, the association banking on the HOA side, and then on the commercial side, I think it's pretty balanced with multifamily and, you know, warehouse and very select retail. So it continues to be more of the same. And we also believe we're going to have a A very strong year end on the SBA side, especially with the 7As. The pipeline there looks really good. We believe that we're going to double our SBA 7A volume from what it was last year.

Gotcha. Thanks for that.

You actually beat me to my next question, which was kind of on the gain on sale. You know, obviously stepped down a little bit from the first and second quarter. It sounds like given the SBA pipeline, maybe we could see that come back up in the back half of the year.

We believe so.

Perfect. And just one more from me, just great to see the VDAs rise during the quarter.

Can you talk a little bit about what some of the biggest drivers were there? It sounds like we can maybe see that continue given some of your prepared remarks.

Yeah, maybe I'll touch on that one. Certainly, our desire is to have all of our clients view us as their main bank. And so all of our team is incentivized on gathering deposits, but specifically DDA. So we have a lot of initiatives, and we made some new hires this year that are focused only on deposits. I think our loans have had a very strong trajectory in growing at double digits, and the deposit in our funding base and making sure that's low-cost core deposits is really what we need to focus on and will be helpful for us in the back half of this year and next year. But certainly, I think no matter how many banks you talk to, they're always looking for low-cost deposits and solid relationships. we're out there on the street every day fighting with everyone else in town.

So, you know, we'll see if we can get our share. Great. Thanks for that, Rob. Thanks for taking my questions, guys. I'll step back. Certainly.

Once again, if you would like to ask a question, please press star and one. Our next question comes from Michael Rose from Raymond James. Please go ahead with your question.

Hey, good morning, guys. Thanks for taking my questions. Just two quick ones for me. Just back to the international deposit gathering strategy. Just wanted to better appreciate what the size of that book is and maybe what it could grow to as a percentage of deposits. I think as analyst investors, we're always a little bit skeptical, probably wrongly so. When you see foreign deposits, there's another bank within your market that has a pretty high concentration and isn't necessarily viewed as kind of the greatest thing. I'm certainly fine with it, but is there any sort of limiters as to you know, what you would want that to grow versus the domestic deposits. Certainly understand why you're, where you're doing it, part of the strategy and everything, but just wanted to better appreciate, um, you know, what the, uh, what the limiters could be. Thanks.

Yeah. Hey, Michael, it's Rob. I'll take this first. Just some, some numbers out there. So we have about $268 million in, um, our, our global correspondent, uh, banking group. And as Lou mentioned, these are all, um, foreign banks, but they're looking for a U.S. correspondent, which we have over 30 of them here. The cost of those deposits are rather low compared to our overall cost, so we think it's a great funding source. We've been in this business for multiple years, and at $268 million, it's probably, what, a little over 10% of our total deposit book. we don't have necessarily caps on that, but I don't think it's ever been above 15% the entire time I've been here for the last five years. So we'd look to grow it in tandem with our balance sheet. I think we could get it a little bit bigger, but I don't think it'll be anything that would remain outsized of our funding base. I don't know, Lou, anything else?

I agree. The potential is there. Actually, in the last board we were talking about, you know, the potential to do it because it truly is there. We've been growing it, you know, since the recap. Ten years ago, it was one-tenth of what it is now. Obviously, the bank was in a different situation back then. But we're dealing with countries that, you know, will have the entire bank network in one of these countries may be seven to ten banks. So the banks are in very good shape. When we analyze them, it's not only the country risk, it's the bank risk. And because of the relationships that we have with the executive teams, we just believe that it has tremendous potential. We keep it at a certain level because we don't want it to have an outsized concentration, but the potential to do that and the fees that come with it, especially on the wire, is very significant. Another thing that we've been doing over time is that we've been reaching out to the executives of these banks, and dozens of them have accounts here with us. As you know, it's very common for well-heeled Central and South Americans to maintain a second home in Florida. So we tap into that opportunity, and they've responded. So we like the business. We know the business. We handle it very conservatively. And we've never had an issue on any of our subsequent safety and soundness examinations over the last 15 years.

That's a great overview. Really, really appreciate it. I assume the beta on those deposits is fairly low, as well as the stickiness being pretty high. Is that a fair kind of assumption? Very fair.

Very fair.

Okay. Perfect. All right, and then maybe just separately, we've seen a lot of M&A, you know, announced both in Florida and, you know, kind of more broadly, you know, one last night among some regional banks. How does that factor into maybe your hiring plans? I know dislocations are always opportunities for talent additions. And then just separately, you know, just given the multiple and where you're trading on tangible, probably could open up some opportunities for you to actually look to acquire you know, maybe some smaller banks in and around your markets. Is that something you guys are thinking about? Thanks.

Well, Rob and I are – we pretty much know every CEO in the Miami-Dade MSA. I think part of our job is to keep close tabs and good relationships with them, and we're always planting seeds when we have these discussions. So those possibilities are definitely there. In the past, when there have been merger – you know, situations here in the local market. We have taken advantage of that. We took advantage of that with Apollo. We took advantage of that with professional. And if anything else happens, we will, we'll move accordingly. We're always going to be opportunistic when, when those opportunities present themselves.

Yeah. Then maybe on the multiple, Michael, I mean, I don't know, we're trading right around 150, a tangible book, but probably on earnings, maybe a little bit lower than peers. I'll leave that to you guys. But certainly, you know, our job is to run the bank and put up good numbers. I think we've done that consistently. We're very positive about the outlook for the balance of this year and next year as well. So, you know, we'll leave that to you guys on the multiples.

Perfect. And maybe just one final one for me, just going back to loan growth. Obviously, really nice growth this quarter above kind of the outlook you guys had laid out. It doesn't sound to me, based on the prior questions, that there's really any slowing here. So it's kind of more of a mid-teens growth rate, more we should expect here, at least for the next couple quarters, just based on pipelines and previous commentary.

Yeah, I mean, Lou mentioned that the summer is a little slow, but we do have a solid pipeline. I'd probably say, you know, just more conservatively, Michael, maybe on the lower teens. I mean, on page nine of our presentation, past two quarters, we've originated new loans, 182 in Q1, then 187 this quarter, but we really haven't been below 150 million for the past five quarters. So I would anticipate between 150 to 180 million for the next couple quarters as well. So that could lead to low double digits but could we reach the upper end of that? Yeah, perhaps.

Perfect. I'll step back. Thanks for taking my questions. Thanks, Michael.

And ladies and gentlemen, at this time, we'll be ending today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.

Well, on behalf of the entire management team and our board of directors, I want to thank you for your interest and time. We're excited about our growth trajectory and the strength of the franchise, and we look forward to updating you on our progress in the next quarter. So thank you and have a great day.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.