Uscb Financial Holdings, Inc. Q4 FY2024 Earnings Call

Good morning and welcome to the USCB Financial Holdings Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 fourth quarter 2024 earnings call. With me today reviewing our Q4 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 3. Our results in Q4 2024 highlight a record year for the bank as team USCB outperformed our internal budget and delivered impressive results for our shareholders. A year ago, we posted $0.14 per share in diluted EPS in Q4 2023 and more than doubled these earnings this quarter to $0.34 per share. Our continued focus on reducing deposit costs has contributed to net interest margin expansion, helping us maintain solid profitability. Benefiting from Florida's strong, resilient and growing economy, USCB continues to post strong gains in assets, deposits, diversified quality loan production and profitability. Our performance underscores our disciplined execution of a business plan, focused on commercial banking initiatives designed to profitably expand existing client relationships and grow new ones. In reviewing our Q4 highlights, I will comment on a select few data points as CFO, Anderson will further detail our growth, profitability, capital and liquidity positions. Driven by our various deposit focused business lines, average deposits increased $225 million or 11.8% compared to the fourth quarter of 2023. These business verticals, which target deposit-rich private clients, attorneys, medical professionals as well as correspondent and association banking have grown to over $625 million, representing 30% of total deposits as of the end of the past quarter. Average loans increased $260 million or 15.3% compared to the fourth quarter of 2023. Our loan pricing has moved in line with the market as loan coupon rates decreased 7 basis points compared to the prior quarter while increasing 46 basis points compared to the fourth quarter of 2023. As we look at profitability, net income was $6.9 million or $0.34 per diluted share, an increase of $4.2 million or 153.7% compared to the fourth quarter of 2023. Similarly, net interest income before provision increased $5 million or 34.7% for the past quarter in comparison to the fourth quarter of 2023. ROAA was 1.08% for the fourth quarter of 2024 compared to 0.48% for the fourth quarter of 2023 while ROA was 12.73% for the past quarter, again, compared to 5.8% for Q4 2023. Given the earnings power of the company, our outlook for 2025 and the strong capital levels, the Board approved on January 21, 2025, to double the quarterly cash dividend to $0.10 per share of the company's Class A common stock. The dividend will be paid on March 5, 2025. The cash dividend program is an important driver to shareholder value, and the Board of Directors is committed to the return of capital to our investors while maintaining a strong balance sheet. The following page is self-explanatory, directionally showing historical trends since recapitalization. The disciplined execution of our 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, Luis, and good morning, everyone. Looking at Pages 5 and 6, I would characterize Q4 as another fantastic quarter for USCB. Net income was $0.34 per diluted share and absent the nonrecurring expenses would have been $0.38 per share, and another record quarter for USCB. However, as reported, return on average assets was 1.08%, return on average equity was 12.73%. The NIM was 3.16% and up 13 basis points from the prior quarter. The efficiency ratio was 55.92%, and adjusted for the nonrecurring expenses would have been 51.41%. Tangible book value per share retreated $0.09 to $10.81 driven by a higher AOCI interest rate mark and higher share count. And last, credit metrics remained benign. So with that overview, let's discuss deposits on the next page. Deposits continue to increase both on a linked quarter and year-over-year basis. We have used excess liquidity to fund loan volume, and walk away from rate-sensitive deposits and single service product clients. Deposits decreased 18 basis points this quarter and the reduction in our cost of funds has been a fundamental driver in our net interest margin improvement. So with that, let's look at the loan book. Average loans increased $80.3 million or 17% annualized compared to the prior quarter and $260 million or 15.3% compared to the fourth quarter of '23. Additionally, as we book new loans at yields above the portfolio average, our overall loan yields will remain stable or increased in the next couple of quarters as we continue to book loans with coupons above 7%. As a reminder, we book all loans with floors and prepayment penalties, which should help us in a down rate scenario. As for guidance, we expect loan growth to be in high single-digits to low double-digits going forward, particularly since we have experienced high interest rate volatility in the last couple of weeks. Turning to Page 9. You can see for the past five quarters, we have originated $754 million in new loans and for the fourth quarter, we have originated $161 million, achieving a record quarter in terms of loan production with a loan coupon of 7.14%. And in the last five quarters, our weighted average coupon was 7.79%, which helped to increase our yield on earning assets. And while the loan coupon ticked down this quarter, it is still 89 basis points above the portfolio average. Also worth noting is that we have been able to diversify our loan book over time. As of quarter end, non-real estate loans are 27% of the total loan book. Let's look at the margin. One of the most impressive accolades this year is the success story of the NIM. In 2024, our NIM went from 2.62% to 3.16%, an improvement of 54 basis points in a matter of three quarters. Equally impressive has been the improvement on net interest income. Compared to the fourth quarter of 2023, net interest income increased $5 million or 34.7%. As we enter 2025, this increase will generate significant earnings power going forward. The drivers include a lower deposit cost, larger balance sheet, higher loan yields and an improvement in our earning asset mix. Going forward, we believe the NIM will hover around current levels near term, but we can expect further expansion in 2025 given a more normalized yield curve. Moving on to Page 11. According to our ALM model, the bank's balance sheet is neutral for year one as we have made strategic changes in the last couple of quarters to prepare for a lower rate environment. Most notably, we have favored money market retention rates over long-term CD rates. We have focused on three to six-month CD terms. Moreover, we will adjust the term of our liabilities depending on the current and expected interest rate scenario. For now, we are aiming for a neutral balance sheet. One of the benefits of having a neutral balance sheet is that the bank's financial performance can be more predictable in an uncertain rate environment. As mentioned on earlier calls, we have also pruned the balance sheet from rate-sensitive deposits and single-service product clients. During the last couple of quarters, we have adjusted down our deposit rates without losing meaningful relationships. This has translated into a more resilient balance sheet. Additionally, if the Fed fund rate does drop this year, that will help our deposit cost. And with the rise in the five, seven and 10-year rates, we will help new origination loans at higher rates. In short, this will give us a more normalized yield curve, which is great for the banking industry in general, but will really benefit us as we tend to book loans at five years fixed rate with a spread over the US treasury rates. With these changes, we believe our NIM performance can hold at the current levels near term and expand into 2025, especially if the yield curve normalizes. 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 losses increased to $24 million in the fourth quarter. This was due to a $1 million provision and the ratio increased 3 basis points to an adequate 1.22% of the portfolio. $650,000 of the provision is related to a consumer loan relationship consisting of a yacht and tender vessel, which were repossessed during the fourth quarter. The remaining provision was driven by the $38 million quarterly net loan growth. Net losses were zero for the quarter and the year. The remaining graphs on Page 12 shows the nonperforming loans as of quarter end, which remained unchanged from the third quarter at $2.7 million and represents 0.14% of the portfolio. Classified loans increased slightly to 0.37% and 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 12/31. The portfolio increased $38 million on a net basis in the fourth quarter to $1.97 billion. The composition continues to be well diversified. Commercial real estate represents 58% of the portfolio or $1.1 billion segmented between retail, multifamily, owner-occupied and office properties. The second graph is a breakdown of the commercial real estate portfolios where the nonowner-occupied and owner-occupied loans, which also demonstrate their diversification. The table to the right of the graph show the weighted average loan to values of the commercial real estate portfolio at less than 60% and the debt service coverage ratios are adequate for each portfolio segment. The loan quality and payment performances are good for all segments and the past due ratio remains at less than 0.5% and below peer banks. Overall, the quality of the portfolio remains good with pass-through ratios below peer banks.

Thank you, Bill. Outside of the NIM, fee businesses were the other bright spot in the quarter and for the year. The standout this quarter is the team's repeated performance and interest rate swaps. Since Q1 of this year, we have seen an uptick in clients managing their debt obligations with interest rate swaps. Additionally, we had $169,000 of prepayment penalties booked in other service fees line item. With other line items straightforward, let's look at expenses. Our total expense base was $12.9 million and contained over $1 million in nonrecurring expenses. Salaries and benefits increased $730,000 and contained $620,000 of expenses related to an accelerated restricted stock award. These shares have a three-year ratable vesting period, but for a couple of executives, the first vesting period was recognized or vested in the last two months of the year. In 2025, we will have a more normalized vesting period on the stock grant. Additionally, legal expenses increased $173,000 for various items and other operating expenses increased $174,000 related to forced-placed insurance. We expect reimbursement for both items in the coming quarters. As noted on the slide, these nonrecurring expenses had a negative $0.04 per share impact on our fully diluted earnings per share for the quarter. On an adjusted basis, the efficiency ratio would have been 51.41%, which is more in line with our guidance and run rate improvement this year. Looking forward, we expect Q1 expense base to be around $12 million and move up from there throughout 2025. So with that, let's turn to capital. Three things to note on capital. First, we doubled the dividend to $0.10 per share. This increase is a direct result of the current performance and expected future performance of the bank. Next, AOCI increased to a negative $44.5 million with an increase in interest rates across the five, seven and 10-year tenor points. And as you know, this negatively impacts our tangible book value per share. And last, the end of period share count increased with a restricted share grant in Q4 and individuals exercising options in the quarter. So with that, let me turn it back to Luis for some closing comments.

Thanks, Rob. Our plans for 2025 are rooted on the ongoing strength of Florida's economy, which continues to attract industry entrepreneurs and consumers to a state which offers a welcoming tax climate, global accessibility and a highly skilled workforce. This past year, Florida was again ranked the second in the nation as the best state for business. As we have seen this economic fuel propels our growth and hones our strategies. Since launching our IPO in 2021, both total assets and deposits have grown by 47%, while loans increased 75%, expanding our balance sheet by $825 million. If Florida were a country, it would be the 15th largest economy in the world, which is forecasted to grow by 2.2% in 2025, slightly ahead of the national economy's growth forecast. Consistent migration of new residents and businesses continues as the state population approaches 24 million. US Century services the strong, diversified and dynamic market. We forecast growth in 2025 to be in the high single-digit to low double-digit range as we continue to optimize operational efficiency, maximize profitability and maintain pristine credit quality. With that said, I would like to open the floor to Q&A.

The first question comes from Woody Lay with KBW. Please go ahead.

Hey, good morning, guys.

Good morning.

Wanted to start on loan production and specifically Slide 9, where you sort of outlined the weighted average coupon on new production. The yields were down a little bit in the fourth quarter. I know rates were moving. But is that also a reflection of increased competition impacting pricing? Any thoughts there?

I believe it's a mix of factors. Clearly, as rates decreased, our variable portion of the book also reduced. The competition in Miami-Dade County is quite intense, but we remain focused on our desired pricing strategy. If the relationship isn't fully backed by bank deposits and the potential for the growth we are looking for, we will choose to decline it.

Yeah. The other thing, Woody, I would like to add to that would be, we did have a chunk of that new loan production in the fourth quarter in our correspondent banking group. And those are typically a 180-day lines of credit. And those are typically a little thinner than our commercial real estate loans or C&I loans as well. So that brought down that quarter's origination yield.

Got it. That's helpful. And then it does feel like expectations for loan growth across the industry are picking up, and South Florida is a very competitive market. How do you think about deposit growth in the year ahead? And does a pickup in competition? Does that impact the ability at all to lower deposit costs going forward?

Good question. I mean, we've talked for probably quarters and maybe years that we had a very good loan engine here at USCB. I think the market is very strong, and it really comes down to the funding. And our challenge and how we're gearing the sales team is that we have to have strong bankers that can produce on both sides of the balance sheet, but the deposits will be the challenge. And I think if you ask any bank, that would be the response. But right now, we're growing the deposit book in line with our loans, and we fully expect that to happen in the coming year.

Yeah. And then lastly, the time deposit portfolio, 15% of deposits is not overly large. But any color you can provide on the maturity schedule there and repricing dynamics?

Yeah, I don't have specifics on the repricing, but I think it's about 180 in the next, what, in the next year, my treasurer is giving me the answer there. So we'll have opportunity there. We're pricing that lower. I think that's actually a good opportunity. We are pricing, I would say, along with the Fed funds line or Fed funds curve. So we would expect that book to come down over time, especially if we get one or two rate drops in 2025.

All right. Thanks for taking my question. Congrats on the nice quarter.

Thank you, Woody.

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

Hey, good morning, guys. Thanks for taking my questions. Luis, in the opening comments, you mentioned that the specialty verticals are, I think, 30% or so of deposits. Just as we think about South Florida and some of the challenges from the hurricanes and insurance and things like that and specifically related to the association deposits, any sort of concern there? Is that something you plan to maybe deemphasize as we move forward, just given the challenges related to some of those associations that we've all read about? And then just broadly as it relates to deposit competition down there, is it all fairly rational just holistically? Thanks.

Sure. I'm bullish on the association banking. If you look at the data, I think it's over 30% of the population of the state lives in a condominium. So the thing is to choose them wisely. We really look at associations that are professionally managed. When we do our analysis, we really focus on the number that our owners versus renters, we don't go after every single one. We look for ones that have the credit qualifiers that we want and I think there's plenty of those. So it is in our best interest to be choosy as we've been from the very beginning. I believe that the volume is still going to be significant and we have a clear focus on this area. So I believe that both these areas and the others, the MD Advantage, which is focused on the attorney business, which is a deposit-rich market, we service it well. Those clients are responding. So I believe that both these areas and the others, the MD Advantage, which is focused on the medical business are all scalable, and we have plans to develop them well.

Okay. Rob, regarding Slide 14, can you explain what is included in the other category that led to a significant increase quarter-over-quarter in service fees?

Yeah, that was the prepayment penalties. So like we said, we booked a lot of floor prepayment penalties. And we did get paid off on some and then we get paid for it. So that was in the other line item in service fees.

Got it. Thanks. I appreciate that. Sorry if I missed it. And then maybe just finally for me. I appreciate the outlook on expenses, obviously, some nonrecurring items this quarter. Can you just discuss what the hiring plans are for this year? And what's baked into your assumptions for expense growth and maybe what the market looks like for competition for those sorts of lending hires? Just want to see if you plan to be a little bit more opportunistic this year just given the relative strength of the South Florida markets. Thanks.

As we prepare the budget, we closely look at this, and we feel that we are properly staffed for our plans for 2025. Being opportunistic is something that is what we do, and we've been good at it. So when those individuals become available, we will move on them, but it's nothing that we're really budgeting for just in case it happens. We feel very comfortable that our staffing levels are proper and our production teams are prime for action.

Okay. Great. Appreciate taking my questions.

Thank you, Michael.

The next question is from Feddie Strickland with the Hovde Group. Please go ahead.

Hey, good morning. Just wanted to start drilling down on fees a little bit here. Specifically, the swap fee income came in pretty good, as you guys indicated, it would last quarter. And Rob, I think you mentioned there's still a decent pipeline there. I mean what should we expect in the next couple of quarters from that line item?

This one will likely fluctuate a bit. This year, the market and interest rates have certainly benefitted swap activity, but I think we may see that quiet down into 2025. If that happens, we will aim to compensate for the decrease with higher wire fees, TM fees, and SBA gain on sale. So, a decline might trend into 2025. For this year, we likely booked over $3 million, but I do not expect that level of activity in 2025.

That's fair. And I was going to ask what the opportunity was on FDA, just kind of what you're seeing in terms of pipelines looking forward and kind of how much we could see that grow over the course of the year potentially?

We planned to more than double our achievements from the past year. We shared our strategy with the Board in the last meeting. Our focus will be on a specific business segment that we're preparing for. All our lenders are well-versed in the SBA 7(a) program. We have been training them for three years since launching the program, initially led by the department head. Every lender has participated, received strong marketing support, and understands their goals and strategy. Therefore, I believe we are well-positioned for this year with an expected increase in SBA fee volume.

Thank you for that. That's helpful. And just last for me. Just thinking about the specialty lending segments between the yacht financing and some of the other areas, where do you see the most green shoots for 2025?

I believe yacht financing will remain stable, similar to how it has been over the past few years. We are entering the yacht season with several upcoming boat shows like the Miami International Boat Show and the Palm Beach show, which typically boosts volume. I anticipate that other areas will also remain steady and see growth. On a global level, we have visited all of our bank clients involved in lending in the past two quarters, and we received very positive feedback from these meetings. We expect that they will continue to borrow and strengthen their relationships with us, focusing on expanding existing partnerships rather than bringing in new clients. Therefore, we are confident that this will be a productive year with them. Additionally, Homeowners Associations (HOAs) are also expected to progress. I recall that nearly 50% of HOAs in Florida are over 30 years old, which means they will need to undergo the 30- and 40-year certifications, prompting them to seek repairs on roofs and windows, presenting significant opportunities.

Got it. Thank you so much. That’s it for me.

Thanks, Feddie.

The next question is from Stephen Scouten with Piper Sandler. Please go ahead.

Hi, good morning, everyone. I apologize for joining a few minutes late. I was wondering if you could discuss the loan growth this quarter. It was still good, but perhaps a bit lighter than in recent times. Was that due to higher paydowns or are there other trends you’re noticing? Also, how do you see the trend line moving forward? What could be the best case for growth in 2025, or on the lower end if things don’t develop as we hope?

In the past quarter, we saw significant payoff activity, likely more than the usual for a quarter, particularly in our correspondent banking sector, where we have 180-day terms. We expect borrowing to continue in that area, and we are not facing any issues there. We also have prepayments on the commercial side. I participate in all pipeline meetings weekly alongside Rob and Bill, and we maintain constant communication with our lenders. We are aware of the competition's activities. Looking ahead, I believe our pipeline is as strong as it has been in the last four quarters. Therefore, we anticipate loan demand will remain steady. As previously mentioned, we are planning for high single-digit to low double-digit growth.

Okay. Great. Very helpful. And then I know, Rob, you had kind of said, hey, it's the deposit growth that really helps to fuel the potential maximization of the loan opportunities and maximizing the team's potential. Are there any new deposit verticals potentially out on the horizon or any new initiatives from a deposit front that you guys would endeavor towards to drive even higher deposit growth? Or is it just a continuation of working what you guys have built in maximizing those platforms?

Yeah. I think it's optimizing what we have. I think we have a lot of talented people on the team that are sophisticated in their area of expertise. We started MD Advantage this past year. I think there's a lot of opportunity there. Our Private Client Group is seeing a lot of activity and continued growth. And I think it's just growing what we have and giving our team the right tools and the products, and I think they're doing a fantastic job in the market. So I think we'll continue to grow our deposit book in line with our loan book and part of the key is making sure we get the operating accounts. And we can tweak maybe incentive plans a tad or two on the deposit side. But I don't think we need new verticals or new teams that add to the expense, I think it's working with what we have.

If I can, we chose and developed the association banking, the correspondent banking, the attorney business and the medical because we believe that they are incredibly scalable in this market. So it's not really about adding new lines, it's about maximizing what we have. And within the strategies, they are opportunities to bring in new teams. We have done that very successfully, and we will continue to look for those opportunities. But I believe that the ones have chosen, the ones that we've developed and market and trained our people to execute on are very scalable and with a lot of demand.

Nice. That's great commentary on the scalability. I appreciate that. And then just last thing for me would be loan loss reserve kind of levels. Obviously, you guys have a fantastic credit book, de minimis nonaccruals, but the reserve continues to build as a percentage of loans. As we move forward, if credit holds where it is, could we see those existing dollars of reserves kind of be more flat and just cover the incremental loan growth versus building as a percentage of loans? Or how do you guys think about that loan loss reserve percentage relative to your exemplary credit?

Thank you for the positive comment on credit. It is likely to grow in line with the portfolio expansion as net loans increase, and the reserve will rise by 1 or 2 basis points as we progress. Provided there are no issues with credit quality, we should expect a gradual increase of 1 or 2 basis points or even stability each quarter moving forward.

I think we were around 1.19% last quarter, and we've increased to 1.22%. Part of that is related to the yacht and vessel provision that Bill mentioned. Besides that, the general pool is likely around 1.19%, which is adequate when you consider the credit quality. I don’t expect significant changes in dollar terms. Bill mentioned loan growth, but I believe we are well reserved.

Yeah, for sure. Okay. That makes a lot of sense. Thank you guys for all the color. Congrats on a great quarter and a great year.

Thanks, 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.

Okay. Thank you very much for your attendance. On behalf of the US Century team, I would like to thank you all for your attendance and look forward to meet again at our next earnings call.

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