Uscb Financial Holdings, Inc. Q2 FY2025 Earnings Call

Good morning, everyone, and welcome to the Q2 2025 USCB Financial Holdings, Inc. Earnings Conference Call. 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 USCB 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 3. I'm very pleased to report that U.S. Century Bank delivered another 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 $0.40 compared to $0.31 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 21, 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 net interest margin under an evolving economic environment. Part of the success has been reflected in our evaluation. The 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 USCB in our competitive landscape. To this point, our 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 developed our 3-year strategic plan, we aim to remain agile and responsive to accretive 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 our foreign correspondent bank team as several of their existing and potential bank clients set the positive limit on U.S. bank correspondents unless they're 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, directly showing 9 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. In the second quarter of 2025, USCB had a highly successful quarter, setting another record. Net income was $8.1 million or $0.40 per diluted share, reflecting a 29% increase from the previous year. Total loans rose by 15.1% annualized compared to the prior quarter, exceeding $2.1 billion. Deposits increased by 4.5% annually from the previous quarter, providing strong liquidity for upcoming loan growth. Our profitability ratios were equally impressive, with a return on average assets of 1.22%, a return on average equity of 14.29%, a net interest margin improvement to 3.28%, an efficiency ratio of 51.77%, and tangible book value per share rising by $0.30 for the quarter to $11.53. Additionally, our credit metrics remain within management expectations, with a net charge-off of 14 basis points, mostly covered from the previous quarter, resulting in a negligible impact on earnings this quarter. Bill will elaborate on this shortly. Now, let's move to deposits. We've achieved sustained growth on both a quarterly and year-over-year basis. Through effective execution across our diverse business verticals, we've been able to grow our deposit book and lower deposit costs despite no movement in the Fed funds rate this year. The rise in deposit balances and improved cost of funds were largely driven by higher average DDA balances, which increased by $17.1 million or 12.2% compared to the prior quarter. We also successfully reduced interest-bearing liabilities by 5 basis points, which improved our overall cost of deposits by 3 basis points. Now, let's discuss the loan book. On a linked-quarter basis, average loans grew by $70 million or 14.3% annualized. Compared to the second quarter of 2024, we experienced a $229 million or 12.5% increase. Our growth is at the top end of our previous guidance. Alongside this growth, we observed a loan yield increase of 6 basis points from the previous quarter and 7 basis points compared to Q2 of 2024. This improvement was driven by higher yields on new loan production, coupled with a stable SOFR rate throughout Q2. Looking ahead, assuming no rate changes, loan yields are expected to remain stable or slightly improve as new loans are booked with yields higher than the average yield of the portfolio. Moving on, we closed $187 million in new loan production during the quarter, with $95 million closing in the last weeks of June. Due to the timing of these loans, the full impact on quarterly interest income wasn't fully realized in Q2 but will be more evident in Q3. The weighted average coupon on new loans stood at 7.12%, which is 89 basis points higher than the portfolio average yield. Our loan portfolio continues to diversify, shifting away from real estate-related loans into other various loan types. Now, after reviewing both deposit and loan performance, let's look at the impact on the margin. Both quarterly and yearly, our net interest margin continues to improve, reflecting the robustness of our asset mix and disciplined balance sheet management. Net interest income grew notably, 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 2024. This increase was driven by several factors, including a larger balance sheet, higher yields on loans and securities, and lower deposit costs. Additionally, the $95 million in late-quarter new loan production will more significantly impact earnings in Q3. Turning to the impact of changing rates on our balance sheet, our strategy in previous quarters has focused on preparing for a lower rate environment and a normalized yield curve. This positioning has started yielding benefits, evident by an increasing margin and profitability. Our balance sheet currently shows a liability-sensitive profile for year one, transitioning to an almost neutral balance sheet in year two. This transition is favorable for two reasons: first, if rate cuts occur soon, it will allow us to reprice our funding sources more quickly than our assets, enhancing our net interest margin. Second, as the yield curve normalizes, we will be well-equipped to benefit from the widening spread between lower-cost short-term funding and higher-yielding long-term assets. This combination of agility and preparedness strengthens our capability to navigate both declining and normalizing rate environments, supporting sustained margin improvement in the upcoming quarters. Now, let me hand it over to Bill to discuss asset quality.

Thank you, Rob, and good morning, everyone. Please turn to Page 12. As indicated in the first graph, the allowance for credit losses rose to $24.9 million in the second quarter, primarily due to a $1 million quarterly provision and a $700,000 loss on the sale of a yacht and a tender vessel that secure our consumer loan relationship, which had already been reserved in earlier quarters. The allowance for credit loss ratio stands at a satisfactory 1.18% of the portfolio by the end of the second quarter. The $1 million provision was influenced by a $77 million net growth in loans during the quarter. The remaining graphs on Page 12 show nonperforming loans at quarter end at $1.4 million, equating to a decrease to 0.6% of the portfolio, and these are well covered by the allowance. This decrease was linked to the liquidation of the previously mentioned vessels and the payoff of nonaccrual residential loans, with no anticipated losses from these remaining nonperforming loans. Classified loans also fell during the quarter to $5.6 million or 0.27% of the portfolio, representing less than 2% of capital, again related to the sale of consumer loan relationship vessels and residential loan payoffs. The banks continue to have no other real estate. On Page 13, the first graph illustrates the diversified loan portfolio mix at the end of the second quarter. The loan portfolio increased by $77 million on a net basis during the second quarter, reaching $2.1 billion. Commercial real estate constitutes 57% of the portfolio, or $1.2 billion, segmented into retail, multifamily, owner-occupied, and warehouse properties. The second graph breaks down the commercial real estate portfolios, highlighting nonowner-occupied and owner-occupied segments, demonstrating their diversification. The table adjacent to the graph shows the weighted average loan-to-values of the commercial real estate portfolio at under 60%, with adequate debt service coverage ratios for each segment. The quality and payment performance across all segments are strong, with a pass-through ratio of 0.19%, and nonperforming loans remain below those of peer banks. Overall, the loan portfolio quality is solid. Now let me hand it back to Rob.

Thank you, Bill. Noninterest 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 received compensation. These fees are booked under the other line item in service fees. Title insurance fees and bank-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, noninterest income was 13.8% of total revenue and 0.5% to average assets, slightly lower than the prior quarter. So we will 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 remained strong, improved in comparison to the previous quarter and well above regulatory minimums, providing a solid foundation for ongoing growth in its 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, runoff, 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 rating 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 in 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.

Our first question today comes from Will Jones from KBW.

So Lou and Rob, I appreciate you highlighting the investment-grade rating. This is a significant milestone for you. Lou, you spoke about the potential this opens up regarding international deposits. My first question is whether the strategy for attracting international deposits differs from that for domestic deposits. Could you also give us an idea of the realistic opportunity this could present in terms of deposits?

Certainly. The global group manages a portfolio of 30 banks that are in the Caribbean Basin and Central America. There are 2 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 million. 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 quarters 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 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 Bs to As. And we're also looking at possibly 3 to 5 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 what 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?

Yes. 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, these are banking institutions, and they want a relationship with a U.S.-based correspondent bank, and we priced them fairly low and they're below our overall cost of deposits.

Yes. Well, it 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 to 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?

Yes. On the deposit book, we're looking at that constantly for opportunities 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 if that doesn't materialize, we'll look to cut that rate until that happens. But on average, we had $1.2 billion in money market. So if rates do get cut on the front end of the curve by the Fed, 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 margin should improve and that's what we've modeled out.

Our next question comes from Feddie Strickland from Hovde Group.

Rob and Bill. Just want to talk about loan pipeline mix today. What do you have going on in the next, let's say, 6 months or so? And if we get rate cuts, how does that change?

Well, Bill, Rob, and I participate in the pipeline meeting with our lenders every week, totaling 52 meetings a year. During these meetings, we ask questions and review incoming data. We experienced two excellent months of closings in June and July, reaching about $150 million. Typically, in the third quarter, the pipeline dips a bit due to the summer months. However, based on our current credit projections and the closings from July, we're confident we will meet our goals again. We also have sufficient capital heading into the fourth quarter and the necessary volume to achieve our third-quarter targets. The situation remains balanced, as we've noted. We're receiving business from various sectors, including yacht loans, association banking for HOAs, and several commercial areas like multifamily, warehouses, and select retail. We also anticipate a strong year-end performance in the SBA segment, particularly with 7(a) loans, where the pipeline looks promising. We expect to double our SBA 7(a) volume compared to last year.

You actually beat me into my next question, which was kind of on the gain on sale. We 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 for me. Just great to see the DDAs rise during the quarter. Can you talk a little bit about what some of the biggest drivers were there? And it sounds like we can maybe see that continue given some of your prepared remarks.

Certainly, our goal is for all of our clients to consider us their primary bank. Our entire team is motivated to increase deposits, especially demand deposit accounts. We have initiated several programs and made new hires this year specifically focused on deposit growth. Our lending has been very strong, growing at double digits, and it's crucial for us to concentrate on our funding base by ensuring we have low-cost core deposits. This focus will be beneficial for us in the latter half of this year and into next year. Regardless of how many banks you engage with, they are always in search of low-cost deposits and strong relationships. We are actively working in the market, competing with other banks for our share.

Our next question comes from Michael Rose from Raymond James.

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 analysts and 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 what you would want that to grow versus the domestic deposits, certainly understand where you're doing it part of the strategy and everything. But just wanted to better appreciate what the limiters could be.

Yes. Michael, it's Rob. I'll take this first, just some numbers out there. So we have about $268 million in our global correspondent banking group. And as Lou mentioned, these are all 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% in the entire time I've been here for the last 5 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 will be anything that would remain outsized of our funding base. I don't know, Lou, anything else...

I agree. The potential is clearly there. In our recent board meeting, we discussed the opportunities available because they truly exist. We've been growing since the restructuring a decade ago, when we were at only a tenth of our current level. Back then, the bank faced different circumstances. Now, we are working with countries that may have an entire bank network composed of about 7 to 10 banks, and these banks are in strong condition. When we analyze the situation, we consider both country and bank risks, and our strong relationships with the executive teams lead us to believe in the significant potential here. We keep our exposure at a manageable level to avoid excessive concentration, but the opportunities and the fees, particularly from wire transactions, are very substantial. Additionally, we've been actively engaging with bank executives, many of whom have accounts with us. It's quite common for affluent Central and South Americans to keep a second home in Florida, and we capitalize on that opportunity, which has been well received. We are confident in this business, we understand it well, and we manage it conservatively. We have maintained a strong record with no issues during our safety and soundness examinations over the past fifteen years.

That's a great overview. 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.

Perfect. All right. And then maybe just separately, we've seen a lot of M&A announced both in Florida and kind of more broadly, one last line 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, just given the multiple on where you're trading on tangible, probably could open up some opportunities for you to actually look to acquire maybe some smaller banks in and around your markets. Is that something you guys are thinking about?

Rob and I know many CEOs in the Miami-Dade area, and part of our responsibility is to maintain close connections and strong relationships with them. We are constantly exploring new possibilities in our discussions. In the past, we have seized opportunities during local mergers, such as with Apollo and Professional. If new situations arise, we will adjust our approach accordingly. We will always remain open to opportunities as they come our way.

Yes. Then maybe on the multiple, Michael, I mean, I don't know, we're trading right around $150 million in tangible book, but probably on earnings, maybe a little bit lower than peers. I'll leave that to you guys. But certainly, our job is to run the bank and put up good numbers. And 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 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 of quarters just based on pipelines and previous commentary?

Yes. I mean Lou mentioned that the summer is a little slow, but we do have a solid pipeline. I'd probably say just more conservatively, Michael, maybe on the lower teens. I mean, on Page 9 of our presentation, the past two quarters, we've originated new loans $182 million in Q1 then $187 million this quarter, but we really haven't been below $150 million for the past 5 quarters. So I would anticipate between $150 million to $180 million for the next couple of quarters as well. So that could lead to low double digits. But could we reach the upper end of that? Yes, perhaps.

Ladies and gentlemen, at this time, we will 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.