Uscb Financial Holdings, Inc. Q4 FY2025 Earnings Call

Good morning, everyone, and welcome to the Q4 2025 USCB Financial Holdings, Inc. Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Luis de la Aguilera, Chairman and CEO. Sir, please proceed.

Thank you, Jamie, and good morning, and thank you for joining us for USCB Financial Holdings Q4 2025 Earnings Call. I am Luis de la Aguilera, Chairman, President and CEO of USCB Financial Holdings. 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. 2025 was another successful year in which team USCB closely focused on our business plan, executed efficiently and delivered strong results. In reviewing overall performance, we note that total assets reached $2.8 billion, up 8.1% year-over-year. Loans grew by $216 million or 11%, reflecting strong commercial activity and disciplined underwriting. Deposits increased $171 million or 7.9%, demonstrating continued franchise growth and deep client relationships. Net interest income expanded to 3.27%, improving from 3.16% in the prior year. Credit quality remains excellent with nonperforming loans at 0.14% of total loans. Tangible book value per share increased 10.8% year-over-year to $11.97. These metrics affirm that our business model remains sound and that the bank continues to execute consistently across all major areas: profitability, balance sheet strength, credit quality and capital. Still, as we executed our 2025 plans, management kept its eye on the future, taking strategic actions to enhance our earnings power in 2026 and beyond. In the third quarter of 2025, we completed a successful $40 million subordinated debt issuance, providing efficient capital at attractive terms. Most of the proceeds were used to repurchase approximately 2 million shares at a weighted average of $17.19 per share, underscoring our confidence in the intrinsic value of our stock and our commitment to returning capital to shareholders. In the fourth quarter of 2025, we reported GAAP diluted EPS of $0.07, which included two known non-operating impacts. First, the execution of select restructuring of our securities portfolio that resulted in the sale of $44.6 million of lower-yielding available-for-sale securities producing an after-tax loss of $5.6 million or $0.31 per diluted share. Second, a $0.06 per share income tax liability expense related to prior periods for income generated in states outside of Florida. When you exclude these strategic non-routine items, operational diluted EPS was $0.44, consistent with the last quarter and reflecting strong stable performance. The balance sheet repositioning was thoughtfully planned as we reinvested the proceeds into higher-yielding loans at year-end. As a matter of fact, Q4 2025 was our strongest loan production quarter for the year, and this past December, posted a record monthly closing high for 2025. This action is expected to lift NIM, accelerate earnings and deliver long-term value for our shareholders. On expenses, while GAAP noninterest income and expense reflect the restructuring and one-time items, our operation efficiency ratio remained 55.92%, demonstrating stable operating leverage. Our capital remains strong, and we announced this week that the Board's approval of a 25% increase quarterly cash dividend of $0.125 per share. Risk-based capital ratios continue to exceed regulatory requirements by a comfortable margin, and the bank's underlying business remains solid, disciplined and resilient across all metrics. CFO, Anderson will guide us in detail through these strategic actions and their expected positive impacts. The following Page 4 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. I'll now turn the call over to Rob for a deeper review of our performance.

Thank you, Lou, and good morning, everyone. Q4 was an interesting quarter for us, and there are several items that require some detailed explanations. Prior to addressing each item individually, I would note that the bank's core performance remains strong. The measures implemented in the fourth quarter will further strengthen USCB's position for continued improvement in 2026. First, as we previously disclosed, we executed a securities loss sale in December, which negatively impacted our earnings per share by $0.31. We also incurred tax liabilities to other states where we generate income from loans. State tax liability expenses for all 2024 and for the first three quarters of '25 were recognized during the fourth quarter of this year. This was $1.1 million and negatively impacted earnings by $0.06 per share. Going forward, our tax expense should be modeled at 26.4%. Adjusting our GAAP figures for these two items only, you will find the operating or adjusted numbers on Page 6. This includes operating return on average assets of 1.14%, operating return on average equity of 15.05%, operating efficiency of 55.92% and operating diluted earnings per share of $0.44. I would note that our expenses were not adjusted, and this line item does include costs that, although semi-routine in nature, do not occur consistently or have a full year impact recognized in Q4 and subsequently will be amortized over 12 months in future periods. I'll provide further details once we get to the expense slide. Also, the 18.3 million shares represent a complete 3-month period following the repurchase of shares in September. And last, tangible book value per share was $11.97. So with that overview, let's discuss deposits on the next page. Average deposits were essentially stable this quarter, down $3.9 million compared to the prior quarter, but up $314.6 million year-over-year, reflecting continued strength in core relationship growth. Within the mix, a positive development was a $26.4 million quarter-over-quarter increase in DDA balances, which represented 24.3% total average deposits. This shift toward lower-cost funding supports our NIM resilience, particularly in an uncertain rate environment. On pricing, interest-bearing deposit rates decreased 27 basis points to 3.02%, down from 3.29% in the third quarter. Total deposit costs improved 25 basis points from the quarter-to-quarter and 20 basis points compared to the same quarter last year. These results reflect the benefit of the September, October and December rate cuts and the disciplined repricing actions we have implemented. So with that, let's move on to the loan book. Average loans increased $31.9 million or 6.02% annualized compared to the prior quarter and $172.3 million or 8.8% compared to the fourth quarter of 2024. On an end-of-period basis, our loan book grew just under 11%. As Lou mentioned, December was a record month for the new loan production. Also, since these loans were booked at the end of December, we did not get the full benefit of interest income in the period. This will be realized in Q1 of 2026. Additionally, we must provision on day 1 for these loans, so the financial impact in the quarter was negative. Portfolio yield declined modestly to 6.16%, reflecting the Federal Reserve's Q3 and Q4 rate cuts, which impacted our variable rate loans tied to SOFR and Prime. Additionally, a higher proportion of new loan production were short-tenured 180-day correspondent banking loans tied to SOFR. Gross loan production totaled $196 million in the fourth quarter with $83.5 million or 43% coming from correspondent banking. These loans carried a 5.26% new loan yield due to their short-term 180-day SOFR-linked structure, which helps explain the sequential yield decline. Excluding correspondent banking new loan production, new loan yields remained healthy at 6.43% for the quarter. And as we look ahead to 2026, we expect loan yields to remain above 6%. On Page 10 is a snapshot of our business verticals, and all these business verticals are led by very seasoned experienced bankers and are pivotal to our branch-light model. These business verticals are highly scalable. And in the past year, we have added production personnel to support further growth. Now moving on to Page 11. Net interest income increased $933,000 on a linked quarter basis, representing 17.4% annualized growth and improved by $2.8 million compared to the same period last year. NIM expanded 13 basis points quarter-over-quarter and 11 basis points year-over-year to 3.27%. A key driver of this improvement, consistent with what we discussed on the deposit side is our ability to reprice the deposit book more quickly than the loan portfolio. Our disciplined deposit pricing strategy supported a steady NIM recovery throughout 2025. As we head into 2026, we expect further NIM improvement to be supported by continued impact of rate cuts and the ongoing execution of our deposit strategy, which emphasizes core relationship funding. Additionally, we anticipate NIM improvement from the securities restructuring performed late in Q4. Moving on to Page 12. Our balance sheet remains well positioned to benefit from an easing cycle. According to our ALM model, the balance sheet is liability sensitive, and we continue to maintain a healthy mix between fixed rate and variable rate loans. With additional rate cuts expected in the near term, we anticipate meaningful relief in funding costs and a supportive backdrop for overall margin expansion. While we believe we can continue to outperform our model deposit betas, it's important to consider the dynamics on the asset side as well. We currently have $2.18 billion in the loan portfolio and 61% or roughly $1.33 billion is variable rate or hybrid in nature. Of that, 52% or approximately $692 million is scheduled to reprice or mature over the next year. This will naturally influence the pace at which asset yields adjust in the lower rate environment. In short, our liability sensitivity will depend on our ability to reprice our deposit book faster than the loan portfolio reprices, something we have historically executed well. With that, let's turn to our securities portfolio. We ended the quarter with $461.4 million in securities, split 67% AFS and 33% HTM with a quarterly portfolio yield of 3.01%. At current rates, we expect to receive $68.2 million of cash flows in 2026 and approximately $87.7 million in a 100 basis point down rate scenario. These cash flows provide meaningful optionality, allowing us to support loan growth or retire higher cost funding as conditions evolve. At this point, we are not anticipating any additional portfolio restructuring. We do expect the yield on the investment portfolio to improve from current levels driven by natural cash flow reinvestment at higher yields when available. As noted, the loss rate executed in the fourth quarter of 2025 was deliberately aimed at increasing our NIM and the resulting cash flows were redeployed into higher-yielding loans. So with that, let me pass it over to Bill to discuss asset quality.

Thank you, Rob, and good morning, everyone. As you can see on Page 14, the first graph shows that the allowance for credit losses increased to $25.5 million at the end of the fourth quarter at an adequate 1.16% of the portfolio. We made a $480,000 provision to the allowance that was driven mostly by the $59 million in net loan growth. There were no loan losses during the quarter. The remaining graphs on Page 14 show that the nonperforming loans at quarter end grew by 8 basis points or almost $2 million. The nonperforming ratio stands at 0.14% of the portfolio, and these loans are well covered by allowance. This increase is related to two past due residential real estate loans that are in the process of collection. These loans are well collateralized by real estate and no loss is expected. Classified loans also increased during the quarter to $6.4 million or 0.29% of the portfolio and represents 2.1% of capital. The increase is related to the two nonperforming residential loans previously mentioned. No losses are expected from the classified loan pool. The bank continues to have no other real estate. On Page 15, the first graph shows the diversified loan portfolio mix at year-end. The loan portfolio increased $59 million on a net basis in the fourth quarter to just under $2.2 billion. Commercial real estate represents 57% of the loan portfolio or $1.2 billion centered in retail, multifamily and owner-occupied loans. The second graph is a breakout of the commercial real estate portfolios for the non-owner-occupied and owner-occupied loans, which also demonstrates our collateral diversification with no major changes from the third quarter. 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 the debt service coverage ratios are adequate for each portfolio segment. The quality and payment performances are good for all segments of the loan portfolio with the overall past due ratio at 0.14% and nonperforming loans also at 0.14% with both ratios below peer banks. There were no loan losses in the quarter. Overall, the quality of the loan portfolio is good. Now let me turn it back over to Rob.

Thank you, Bill. The main point regarding noninterest income was the securities loss restructuring that we executed in December. The available-for-sale securities sold made up about 12.6% of the AFS portfolio as of November 30, 2025, with a weighted average yield of 1.70%. These sales resulted in a one-time after-tax loss of $5.6 million, or $0.31 per diluted share. The proceeds from these sales were reinvested into loans with a 6.15% yield. Excluding the securities loss, noninterest income for the fourth quarter of 2025 was $3.3 million, which is consistent with previous quarters. Now, regarding expenses, our total expense base was $14.3 million, which is an increase from the prior quarter. This amount includes $759,000 allocated for a new bonus plan for non-management personnel as well as enhancements to sales incentives and retention programs. It’s crucial to highlight that this $759,000 represents an annual cost that will be accrued monthly based on future performance. The new bonus and retention programs are designed to attract and keep top talent, reinforcing USCB's position as a leading bank employer. Consulting and legal fees rose by $315,000 compared to the previous quarter, with $275,000 of this increase due to non-routine expenses related to the universal shelf offering and the share repurchase that occurred earlier in 2025. Other operating expenses increased by $137,000 mainly due to force-placed insurance for specific borrowers, which we expect to receive reimbursement for in the upcoming quarters. The operating efficiency ratio was $55.92, which includes the entire $14.3 million expense base. If we adjust for the $759,000 and the $275,000, the adjusted expense base for the fourth quarter would have been $13.2 million, leading to an adjusted efficiency ratio of 51.87%. For planning purposes in 2026, we consider $13.2 million to be an appropriate baseline for our expenses in the fourth quarter of 2025. Moving on to capital ratios, earlier this week, the Board approved a 25% increase in the dividend to $0.125 per share due to strong operating earnings. In August 2025, the company issued $40 million in subordinated notes and primarily used the proceeds to repurchase 2 million shares, representing roughly 10% of the company at an average price of $17.19 per share. The bank maintains regulatory capital levels that are well above the required thresholds for being classified as well-capitalized, and we’re looking for ways to deploy capital where the return on average equity is between 15% and 17%, which matches top quartile performance against similar-sized peers. Lastly, the total share count for the quarter was 18.1 million. Now, I’ll turn it back over to Lou for some closing remarks.

Thank you, Rob. 2025 marked another strong year for U.S. Century, and we are committed to making strategic decisions that enhance profitability and shareholder value. As we look towards 2026, expanding and strengthening our deposit base is a top priority. Our approach is focused on building relationships rather than just offering competitive rates. While all our production units are poised to deliver results, we are particularly focusing on four of our strongest business lines: Business Banking, Private Client Group, Association Banking, and Correspondent Banking. Each of these areas has a clear plan, defined targets, and experienced leadership to ensure effective execution. Business Banking ended 2025 with nearly $400 million in deposits, and we are leveraging that momentum. In 2026, we will enhance our production capacity by launching a new lending and deposit team targeting Doral, Medley, and Hialeah, which are among the densest small business markets in Miami-Dade. This team will focus on SBA and C&I lending, operating accounts, and treasury services aimed at attracting stable relationship-based deposits. This is a focused expansion, positioning Business Banking as a key contributor to organic deposit growth this year. Our Private Client Group had a fantastic year, increasing deposits by 18% to $300 million. This segment thrives due to its specialization in professional markets, including legal, medical, and affluent clients. In 2026, we will add more dedicated relationship professionals, starting with new hires anticipated between Q1 and Q2. The strategy is to increase share of wallet through more operating accounts and treasury services while strengthening our presence in the professional services industry. Association Banking presents a significant growth opportunity, with a deposit growth target of $100 million for 2026. The team is currently managing over 480 homeowner association relationships and continues to expand deposits and lending in this area. Our 2026 strategy will focus on property management companies, as about half of the HOAs in South Florida are professionally managed. With 25 firms now onboarded, we are actively working to capture their operating and reserve balances. Notably, around 40% of Florida's 23 million residents live in condominiums, homeowner associations, or planned developments, highlighting the potential of this business. This stable, low-risk deposit growth aligns with our funding goals. Correspondent Banking reached $235 million by the end of the year, with strong lending results and meaningful fee income from wire activity. In 2026, our focus will shift to expanding correspondent banking relationships by onboarding three to five new banks and maintaining an active travel schedule. We are also assessing additional talent to support our growth. Our objective is to continue acquiring low-cost deposits and to explore trade finance and fee income opportunities. Our specialty business lines—private client, correspondent, and association banking—have grown to $686 million, accounting for 29.3% of total deposits. We have a clear and achievable plan to sustain this growth trajectory. With that said, I would like to open the floor to Q&A.

And our first question today comes from Will Jones from KBW.

So I just wanted to start on deposit trends. I know the story with average balances is a little bit different than what you saw in the period, but I just wanted to dig into kind of the shrinkage you saw there at the end of the year, essentially giving back some of that growth you saw last quarter. Rob, just any notable trends to point out there? And any kind of seasonality to be aware of or strategic shrinkage you guys kind of saw there at the end of the quarter?

Well, there are two things that happened literally in the last two weeks of the last month. We have a relationship with a client that is over 10 years, a phenomenal relationship, and there was a significant move in deposits of well over $100 million. This is something that they had communicated to us as early as February; it was a business move that they were going to make. It could have happened in January, but it happened in the last two weeks of the year. The client still maintains with us over $112 million in deposits, 31% in DDA accounts, and that is something that's going to rebuild over time. There was also on the correspondent banking side, about a $50 million swing also in the last two weeks of the year, but that has pretty much been recovered already in January. Our Correspondent Bank clients are flush with cash and periodically, especially at year-end, they tend to pay down their loans, and that's exactly what happened here. So those were isolated to very identified situations, and we're not really concerned about them. We expected them.

Yes, I understand. This leads to my next question. You are currently operating at the upper limit of your loan-to-deposit ratio that we have observed over the last few years. Based on what you mentioned, it seems likely that this ratio may decrease a bit in the first half of '26. Could you share your thoughts on the preferred range for this ratio and your perspective on the current levels?

Yes. I think optimally, I mean, I like kind of the 90% to 95% on the loan-to-deposit ratio. I think you get a little bit above that. That seems a little too tight for me, and when you get a little lower than that, I think you have a little bit more liquidity. So I generally like anywhere between 90% and 95%, and I think we're operating at that level. As Lou mentioned, you do have some companies that do some window dressing at year-end. We anticipate to build back those deposits. I think Lou mentioned in his closing comments, we have a lot of resources decked up against deposit building for 2026, and we feel that is the #1 priority for the bank as we go into 2026.

Yes, that's helpful. Lou, your comments about the new SBA vertical you are launching in certain Florida markets were interesting. Could you elaborate on that opportunity for us? What do you envision it looking like over the next one to three years? Also, do you have the personnel in place to kickstart that initiative?

The initiative was launched about four years ago, and we've been growing it carefully. It generated over $1 million in fee income last year. We focus primarily on SBA 504 loans, but we've entered the 7a space for product diversification and to take advantage of gain on sale opportunities. Our average loan amount is around $1.2 million, with most secured by real estate, reflecting our conservative approach. We aren't interested in issuing small, unsecured loans. Our goal is to grow our annual volume to approximately $40 million or $50 million in the next three years, which would significantly boost our fee income. We plan to target markets in Hialeah, Medley, and Doral, which are adjacent areas in the North and Northwest part of the county. Our analysis indicates there are more than 43,000 small businesses in these locations, and we will concentrate on established businesses with revenues between $3 million to $5 million. This is the type of clientele we will be targeting as we develop this initiative.

Got it. Okay. So this is just an extension of what you guys are already doing on the SBA side then? Okay.

Correct. We're just going to be ramping it up.

Got you. Okay. That's helpful. And then the last thing for me, maybe just broad strokes over capital. You guys have been just fairly active over the past 3 months or so. Just strategically, as you think about some of the repurchase you did, the dividend increase, bond structure and of course, organic growth. Maybe it's just a good time to reset and just ask whether there's anything else you guys are thinking about strategically on the capital front and maybe just what your top priorities are in 2026.

Yes. Besides building capital and returning it to shareholders, that's the #1 priority. I mean we just increased the dividend 25%. I think that demonstrates some conviction and strength by the management team and the Board. We did a lot last year with the buyback and the sub debt, I think 2026, we're looking to earn and return capital, and we don't have any significant plans, I would say, at this time to do anything other than produce good earnings and build it.

Our next question comes from Feddie Strickland with Hovde Group.

I wanted to drill down on the margin a little bit. It sounds like in your opening comments, you talked about thinking there's going to be some expansion over the course of the year. But is it fair to expect a little bit more of a spike maybe in the first quarter from the impact of the balance sheet restructure and then kind of see a more steady growth over the rest of the year, particularly if we get some rate cuts?

You broke up a little bit on the first part. Are you referencing the NIM, Feddie?

Yes, sorry about that. I want to discuss the margin and whether we might see a bit more of a spike in the first quarter.

Yes. I think we're going to be probably, I would say, conservatively, probably a little flat. What we had is some runoff in deposits that were moderately priced. We backfilled a little bit of that with some FHLB advances, which were a little bit priced here. We ended the quarter at 3.27%. I think you should model flat to slightly up, not significant, and we look to build it. If we do get any rate cuts, certainly, that would be on the front end of the curve, and we look to our $1.2 billion money market book to reprice plus our CDs. And I think that would give us the margin expansion as well. But right now, the challenge for us is to backfill the deposits we lost with either DDA or moderately priced money market and either pay off the advances or redeploy that into higher-yielding loans. So I would say, conservatively, flat to slightly up on the NIM in the first quarter.

Appreciate that. And just on the loan growth, I mean, is kind of high single digits, low teens still on the cards? It sounds like it is, particularly given the strong growth at quarter end.

Yes, I would say that, I mean, on average, we were kind of 6% for the quarter, but we just put up our largest quarterly new loan production in a while. It was $196 million, and a lot of that was done at year-end. So we didn't get the benefit of it in the quarter in terms of interest income, but we provisioned for it, and we'll get the benefit in the second quarter. But I would still say conservatively, certainly high single digits and maybe a little bit more to the low double digits would be kind of a secondary guide for you.

Perfect. And just one last question on the tax rate guidance. I think I heard you say that's going to go up to 26.4%. Is that a consequence of some of the securities you sold? Or just curious what the driver was there?

No. The main driver is that, after consulting with our tax professionals, we identified some loans that are out of state, and we wanted to ensure compliance. Therefore, we proceeded to pay those, which were for prior periods. I would say that moving forward, a tax expense modeling number of 26.4% is appropriate for 2026.

Our next question comes from Evan Yee from Raymond James. The main driver is that we self-identified with our tax professionals that we have some loans that are out of state, and we want to ensure we're complying with everything. So we went ahead and paid those. It was for prior periods. I would say that from a modeling standpoint, going forward, 26.4% is a good modeling number regarding the tax expense you'll see in 2026.

I was just kind of curious on your expense outlook. If you have any updates there and maybe what the puts and takes would be given just the new bonus plan enhancements to sales incentives and retention programs in addition to what kind of sounds like more anticipated hires here?

In the fourth quarter, I want to emphasize our GAAP numbers. This time, we're also referencing some non-GAAP figures, which I typically don't prefer, having done so only once before with a restructuring portfolio in 2023. Since going public, we have consistently reported GAAP numbers, and that's what I favor for clarity. We excluded two known items, and on the expense side, we initiated annual programs that are reflected in the quarter, with future performance-based adjustments. If you account for those, our expense base was approximately $13.2 million for the quarter. You can expect that figure to rise gradually in the first quarter due to new hires and throughout the year. We anticipate maintaining a low 50% efficiency ratio, and $13.2 million is a solid starting point for modeling the fourth quarter as you plan for 2026, which I hope is helpful.

Okay, that's very helpful. I have another question. We've discussed SBA, but I'm wondering if you have any updates on your overall fee outlook. Could you elaborate on the various factors affecting it?

On noninterest income, this quarter would have been $3.3 million if we exclude the securities loss we experienced. The previous quarter was approximately $3.7 million. I expect us to aim for a range of about $3.5 million to $3.8 million for 2026 initially, and we anticipate continuing to build on that. We are seeing good growth in wire fees with new correspondent banks, which has increased our volumes successfully. Additionally, swap fees are still appealing to our clients, and our treasury management business is generating significant fees as well. Therefore, I believe we have opportunities for growth as a company, and I consider anywhere from $3.5 million to $3.8 million a reasonable expectation in the upcoming quarters.

And ladies and gentlemen, at this time, in showing no additional questions, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Lou for any closing remarks.

Thank you, Jamie. Before I conclude, I want to express my appreciation to our shareholders, clients and the entire USCB team for their continued confidence and partnership. As you've heard today, 2025 was a year marked by strong execution, disciplined decision-making and strategic actions designed to evaluate our earnings power for years to come. As we move into 2026, our focus remains unchanged, deliver consistent performance, grow high-quality loans, strengthen core funding, manage risk with discipline, invest in our people and create long-term value for our shareholders. I thank you all for your interest and support, and I look forward to meeting again at our next earnings call.

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