Uscb Financial Holdings, Inc. Q1 FY2026 Earnings Call

Good morning, everyone, and welcome to the Q1 2026 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 conference call over to Luis de la Aguilera, Chairman, President and CEO. Sir, please go ahead.

Good morning, and thank you for joining us for the USCB Financial Holdings First Quarter 2026 Earnings Call. I'm Luis de la Aguilera, Chairman, President and CEO of USCB Financial Holdings. Joining me today are Rob Anderson, our Chief Financial Officer; and Bill Turner, our Chief Credit Officer. Rob will walk you through our financial results in detail, and Bill will review credit quality and portfolio trends. We are very pleased to report on another record quarter, highlighted by strong core earnings, disciplined balance sheet execution and our continued focus on maintaining strong credit quality. For the quarter ending March 31, 2026, the company generated net income of $9.4 million or $0.51 per diluted share on a GAAP basis. On an operating or adjusted basis, diluted EPS was $0.47, operating ROAA was 1.25%, ROAE was 15.92% and an efficiency ratio of 52.36%. These results reflect consistent execution of our long-term business model focused on disciplined growth, prudent risk management and sustainable profitability. At a high level, total assets reached $2.8 billion, up 6.3% year-over-year. Loans increased 10.1% year-over-year from $2.2 billion driven by continued strong diversified production. Deposits grew 8% year-over-year to $2.5 billion, supported by specialized business verticals as well as a well-diversified deposit base. Our deposit-focused business verticals, namely Association Banking, our Private Client Group and correspondent banking have steadily grown to 30% of deposits or $747 million as of March 31, 2026, a $62 million quarter-over-quarter increase. Net interest margin expanded to 3.27%, up from 3.1% the prior year, reflecting effective asset deployment and improving funding costs. Importantly, this growth has not come at the expense of credit quality. Nonperforming loans remain exceptionally low at 0.16% of total loans, and net charge-offs were effectively zero for the quarter. Our first quarter's performance demonstrates the benefits of actions we have taken over the past several quarters to enhance earning power and balance sheet resilience. Loan production was strong during the quarter with $188 million in gross loan production, over half of which occurred in March, positioning us for continued momentum into the second quarter. While the timing of production limited full quarter earnings contribution, the pipeline supports future net interest income expansion. On the funding side, we continue to see the benefits of our specialized deposit franchises. Average deposits increased by nearly $212 million year-over-year while deposit costs declined to 2.2%, improving by 29 basis points from the first quarter of last year. Capital remains a key strength for the company. During April, our Board declared a quarterly cash dividend of $0.125 per share, reflecting confidence in our earnings durability and capital generation. Tangible book value per share increased to $12.23, an 8.9% year-over-year increase even after absorbing the market-related AOCI impacts. Overall, this was a balanced quarter with strong earnings, solid growth, stable margins and strong credit quality, all while maintaining conservative capital levels. The following page is self-explanatory, directionally highlighting nine select historical trends since recapitalization. Consistent, efficient, profitable performance based on conservative risk management is what a team focuses on consistently delivering. Noting this overview, I'll now turn over the call to Rob to review our financial results in greater detail.

Okay. Thank you, Luis, and good morning, everyone. Looking at Pages 5 and 6, I would describe the first quarter of 2026 as a highly successful quarter for USCB. The team posted very solid results, which I'm proud to share with you today. The balance sheet, specifically the loan book, continues to grow within our stated range of high single- to low double-digit growth. Deposits increased this quarter, outpacing loan growth and ensuring sufficient liquidity for future lending. Credit remains solid, and our profitability ratios came in line with internal projections. While we made $0.51 on a GAAP basis, the company recognized a $619,000 income tax benefit in the quarter due to an adjustment of the deferred tax asset relating to 2025. Adjusting our GAAP figures for this one item, you'll find the operating or adjusted numbers on Page 6. This includes operating return on average assets of 1.25%, operating return on average equity of 15.92%, efficiency ratio of 52.36%, operating diluted earnings per share of $0.47, NPA to assets of 0.13%, allowance for credit losses stable at 1.16%, total risk-based capital at 14.09% and last tangible book value per share at $12.23. So with that overview, let's discuss deposits on the next page. Average deposits for the quarter totaled approximately $2.4 billion, representing an increase of $212 million year-over-year. On a linked-quarter basis, average deposits declined by $26 million, and that sequential movement requires some context. Late in the fourth quarter, a large commercial client drew approximately $130 million, which reduced our average deposit balance entering the first quarter. Importantly, this was an anticipated and managed outflow. And as the end-of-period chart demonstrates, we have since recovered from that decline. On an end-of-period basis, total deposits increased by $149 million during the quarter, highlighting both the resilience of our franchise and our ability to respond quickly to large discrete movements. Equally important is the total deposit cost declined eight basis points quarter-over-quarter to 2.2%, which played a meaningful role in allowing us to keep the net interest margin stable. With ongoing rate volatility, we anticipate deposit costs will stay near current levels; although some competitors are offering higher rates, a relationship-driven deposit base should ensure stable pricing and funding. So with that, let's move on to the loan book. On an average basis, loans increased $46.8 million quarter-over-quarter, which equates to an 8.9% annualized growth rate. Year-over-year, average loans grew 9.6% and are well within management's expectations. Net loan growth at the end of the period was $52 million, showing strong production momentum, and two key dynamics stood out on this. First, a significant portion of our loan production occurred late in the quarter and second, loan payoffs occurred early in the quarter. This timing is visible on the chart and translates to a lower earnings impact in the quarter. More specifically on Page 9, gross loan production totaled $188 million during the quarter with $114 million or 60% closing in March. Additionally, SOFR rates were lower for most of the quarter, further influencing loan yield metrics. Correspondent banking loans represented 30% of quarterly production and carried a new loan yield of 5.13%. Excluding this segment, the weighted average yield on the new loan production was 6.2% for the quarter. It's important to remember that these correspondent loans are short term in nature, typically 180 days tied to SOFR and serve a strategic purpose by adding asset sensitivity and optionality to the balance sheet. Additionally, these banks have over $250 million in low-cost deposits with significant wire volume, a very profitable business vertical for USCB. Looking ahead, we expect new loan production yields to remain around these levels. Turning to Page 10. Net interest margin was flat at 3.27% for the quarter. Despite successfully lowering deposit costs, overall margin was impacted by lower-than-expected loan interest income, largely driven by timing and volatility rather than structural pressure. Specifically, interest income was constrained as mentioned before by a combination of factors: loan closings that occurred late in the quarter, elevated payoffs early in the period and lower SOFR rates throughout much of the quarter. These pressures were partially offset by improvements in deposit pricing and higher yields in the securities portfolio, which helped stabilize our margin. Importantly, we have now expanded the NIM quarter after quarter and the underlying trajectory remains intact. As recently originated loans season into earnings, we expect incremental improvement in interest income, which should support a very modest margin expansion later this year. That said, ongoing rate volatility may limit the degree to which deposit costs can move materially lower from here, and our focus remains on disciplined pricing, balance sheet mix and execution, all aimed at protecting the margin while positioning the franchise for improved profitability. 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 from Page 11, the allowance for credit losses increased to $26.1 million at the end of the first quarter and at an adequate 1.16% of the loan portfolio. We made a $602,000 loan provision to the allowance that was driven mostly by the $52 million in net loan growth. There were no loan losses during the quarter. The remaining graphs on Page 11 show the nonperforming loans in the quarter and they grew by six basis points or almost $500,000. The nonperforming ratio stands at 0.16% of the portfolio, and these loans are well covered by the allowance and compare favorably to peer banks at year-end 2025. The increase was related to two pass-through residential real estate loans that are in the process of collection. All nonperforming loans are well collateralized and no loss is expected. Classified loans also increased during the quarter to $6.8 million or 0.3% of the portfolio and represent 2.2% 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. Overall, the quality of the loan portfolio is good. Now let me turn it back over to Rob.

Thank you, Bill. Total noninterest income for Q1 was $4.2 million, up from the previous quarter and accounting for 15.8% of total revenue. Service fee income reached $3.1 million, mainly driven by record swap fees of $1.6 million amidst strong loan activity and strong sales execution with rate volatility in the quarter. While fee performance was exceptional this quarter, we expect swap-related fees to normalize in Q2 as market conditions stabilize. Overall, noninterest income performance in the quarter highlights the diversification of our revenue streams and the value of our fee-based capabilities. Let's take a look at our expenses. Our total expenses amounted to $13.7 million, which is $564,000 less than the previous quarter, predominantly due to various one-time items in Q4 of last year. The efficiency ratio stood at 52.4% for the quarter, which is consistent with prior periods. Additionally, head count increased this quarter and more hires are planned for Q2. You should expect expenses to increase, but at a measured pace, and the efficiency ratio should remain in the low 50% range. In a minute, Luis will speak about some specific strategies that will tie this together. So with that, let's move on to capital. Capital ratios remain robust and continue to strengthen. Total risk-based capital currently stands at 14.09%. The dividend remains at $0.125 and given our projected earnings and capital generation profile, we anticipate further improvement in capital ratios over the coming quarters. So with that, let me turn it back to Luis for some closing comments.

Thank you, Rob. Before we conclude, I would like to briefly expand on how our operating model is translating into tangible growth opportunities across South Florida, particularly in Miami-Dade, Broward and Palm Beach counties. In March of this year, we launched a new lending team located in our recently remodeled Doral headquarters banking center. This new production unit will focus on developing one of Miami-Dade's densest small business high-growth areas, the Airport West market, encompassing the adjacent cities of Doral, Hialeah and Medley. U.S. Century Bank has banking centers in each of these markets, and this new lending team will partner with each respective branch to leverage business development opportunities, led by a proven senior lender as team leader, along with two business development officers and supported by a portfolio manager and lending assistant; existing staff have been reassigned to largely field this team. To round off this new production unit, a new senior C&I lender has been hired. In fact, this new team will have a total of two new production hires as the rest is composed of current team members. Another production unit which is expanding is our association banking team, which was launched as a business vertical focused on the condominium market. This unit has grown to serve over 470 condominium associations in the Tri-County market, of which 136 are in the Broward and Palm Beach markets. At quarter end 2026, this business unit totaled $160 million in deposits, posting a 29% year-over-year deposit growth rate. The association banking team also closed Q1 2026 with $126 million in loans, reflecting an 11.5% annual growth rate. Led by an experienced Senior Vice President of the Association Banking unit, we have hired a new production officer who will focus on developing Palm Beach and the Treasure Coast from Port St. Lucie North to Vero Beach. The Tri-County Miami-Dade MSA reports approximately 13,000 condominium associations housing over 600,000 condo units, noting a clear opportunity for growth. Since 2015, U.S. Century Bank has tactically adopted a branch-light, technology-enabled model, consolidating our physical footprint from 18 locations to 10, while more than tripling the size of our balance sheet. This approach has allowed us to scale efficiently, deploy capital productively and service clients through a relationship-driven high-touch model without the overhead associated with an additional large branch network. Our investments in digital capabilities and centralized operations enable our bankers to focus on what matters most: local market knowledge, speed of execution and client service. The results in Broward and Palm Beach County provide compelling proof of concept. As of March 31, 2026, the bank serves over 2,100 clients across these two counties, with approximately $445 million in loans and $415 million in deposits despite operating only one physical branch location between them. In Broward County alone, we have built a base of 1,850 customers supported by $234 million in loans and $259 million in deposits, while Palm Beach County has grown to 253 customers, $122 million in loans and $156 million in deposits. Importantly, this growth has been driven primarily through referral activity, direct calling efforts and our specialized verticals rather than reliance on legacy branch traffic. These metrics reinforce our belief that there is substantial unmet demand for commercially focused, relationship-driven banking led by local decision makers who understand the market. As a result, we believe the time is right to thoughtfully extend our physical presence by opening two to four strategically located branches in Broward and Palm Beach counties over the next three years. These locations will be designed to complement, not duplicate, our existing branch-light strategy and will be staffed by proven local talent with deep market relationships, allowing us to further capture market share, deepen client penetration and accelerate organic growth while maintaining strict discipline around returns and expense efficiency. We view this next phase of expansion not as a departure from our model, but as a natural evolution, deploying physical offices where the data already demonstrates scale, profitability and long-term opportunity. The three strategies I have just outlined align well with USCB's relationship-driven business model: growth in professional firms, closely held businesses and income-producing real estate continues to generate high-quality loans and deposit opportunities. Our specialized verticals and conservative underwriting allow us to participate in this growth while maintaining excellent credit quality. Simply put, Florida's strength maintains a powerful tailwind for USCB and we believe the state's long-term fundamentals continue to support sustainable growth opportunity for our franchise. With that said, Operator, we are now ready to open the line for Q&A.

Our first question today comes from Will Jones from KBW.

Rob, I wanted to start firstly on the margin this quarter. It felt like with some of the loan dynamics with the payoffs early and the growth late that we didn't really get to see or realize fully optimized margins just from the bond structure that you guys did and some of the liquidity deployment that you guys had planned. Is there a way to look at what a March NIM would have looked like just as we think about a good starting point for the margin going forward?

On the margin, our net interest income was down slightly. You had the day count in there, of course, but we also had elevated payoffs early in the quarter. Some clients sold properties and left, and around 60% of our loan production occurred in March. The March margin was right around 3.28%. So it's been pretty steady for the three months. I would anticipate all the additional earning assets that came in mainly in the last two weeks of March to help fuel net interest income for the second quarter. We have a very strong pipeline right now, probably one of the strongest we've seen. April activity was strong on the loan side as well. So I would anticipate flat to slightly higher margin given what we're doing on the deposits, and we don't have to pay up for deposits. So I would model flat to slightly up near term.

Do you have that—the new incremental deposits this quarter, what that's costing and kind of what the competitive dynamics are looking like today?

We grew about $149 million in the quarter, and it was very broad-based. Luis mentioned about $62 million of that came from our specialty verticals, meaning the Private Client Group, correspondent banking and our homeowners association vertical, which we've been emphasizing and will continue to put resources behind. The balance of it came across the board. In the meantime, we decreased the cost of the entire deposit book by eight basis points in the quarter. So it's not like we are paying up for that funding. Our DDA has been strong in the early parts of April. So we feel pretty confident about maintaining our deposit costs around current levels. The specialty verticals have a much lower deposit cost than overall. For instance, our Private Client Group deposit cost in that book is a little over 2%, correspondent banking is probably around 1.65% and our HOA deposits are around a similar amount.

All right. That's great. This is very helpful color. Then just a little on some of your final thoughts there. It feels like the next couple of years is going to be a pretty transformational period for you in terms of growth of the franchise. Within that comes a little bit of upfront investment, as you guys talked about, but it still feels like you're going to carry some pretty solid revenue momentum just from that group. What is the right way to think about operating leverage as we look out maybe over this year and next, and then maybe some near-term profitability goals you might have?

It's a good question. We've been modeling that out. We do have a really strong three-year strategic plan. It does involve some investments, mainly moving up to Broward and Palm Beach in addition to investing heavily in Miami-Dade. The word I would use is measured. We're clocking a 1.25% ROA and 16% on equity. I do not see those materially moving down. Of course, asset quality has been our cornerstone, but we will be making investments. You can expect expenses to tick up, but we're still growing the balance sheet at a double-digit pace and compounding our equity around 16%. So that should translate into good earnings and returns for our shareholders that are well within what I'd say is our current performance.

To add to that, the fact that we've built out in Broward and Palm Beach, the portfolios we have in loans and deposits—over $445 million in loans, over $415 million in deposits—that is as large as some smaller banks that have multiple branches. So we already have the demand. It's clear proof of concept with over 2,100 customers. We feel that strategically opening banking centers can not only service those customers more readily but also attract new ones. Over the last decade there has been a lot of M&A activity in Broward and Palm Beach, and there's a wide open opportunity for us.

Yes. Well, it's certainly a fun growth story to cover. I look forward to seeing what you guys do over the next few years.

Our next question comes from Michael Rose from Raymond James.

Just wanted to follow up on some of the deposit commentary. I know that was kind of your number one priority coming into the year. You guys really executed both on the interest-bearing front, but especially on the noninterest-bearing front, and mix remained relatively stable. As we think about efforts to ramp up and continue loan growth at higher levels, should we anticipate any change in that mix? And from a shorter-term perspective, Rob, what are you assuming in terms of rate cuts, if any? It seems like the forward curve doesn't have any in there, just the ability to cap deposit costs for some of the growth in some of the specialty verticals. A lot in that, but just trying to frame up the deposit conversation.

Early in the quarter, around February, it seemed like rates were starting to move down and then in March they started moving back up. We're not anticipating rate cuts near term, though there is one implied in the forward curve further out. As a reminder, we are slightly liability-sensitive, which would benefit us, and we've been able to outperform our modeling. If we do get rate cuts that will be beneficial to the margin. We have put a lot of emphasis on our deposit book because we feel that's where we add franchise value—having small, granular low-cost deposits across the board. So we've made investments in our Private Client Group, HOA space, correspondent banking, and of course in our business banking. We regularly engage the sales team on deposit strategy—pipeline meetings, monthly leadership meetings—this is a heavy focus. You can continue to see both loans and deposits growing at double digits; we've given that guidance before. This quarter was a little outsized on the deposit side, but we needed that given what we had at year-end. I don't think deposit cost is going to move materially next quarter unless we have a rate cut, which isn't anticipated at this time.

Perfect. I appreciate it. I think I heard Rob earlier that you expect swap fees to normalize. Service charges were up this quarter, which was nice to see. Previously you talked about a $4 million to $4.5 million a quarter kind of run rate for fee income. Any updated thoughts there as you move forward and grow the deposit side?

On the fee side, swaps were the outstanding item in the quarter. The sales team knows how to work with customers, position swaps as a product where customers can choose either a fixed rate or a swap, and that was elevated in February. We had a fair amount that locked in at a little bit tighter spreads. March came in a little tighter, but February was a good month. I think you'll see the swap number come back down to maybe $700,000 a quarter, and that would put total fees, all else being equal, around 3.7% for the quarter. But certainly, 4.1% was a nice quarter for us and a standout, and the team did a great job.

Great. One final one: you continue to have really strong capital levels. They bumped up higher this quarter despite strong balance sheet growth. Any thoughts around normalized capital levels as you execute on these growth plans, and what that could translate to from either an ROCE or ROA perspective over the intermediate to longer term as the growth initiatives play out?

This year, we increased our dividend to $0.125 a quarter. I think that will remain at that level for the current time. Our capital was really supporting our growth. When we're compounding our capital at 16% to 17%, which I think is a great return for a bank our size, we're going to build capital. We're growing our earnings faster than our balance sheet, which should continue to grow our capital levels. Our capital levels are good from where they are, but we'll continue to deploy them at a profitable pace as well. We may rethink the dividend in the future, but I would say that's pretty safe at current levels for the balance of the year.

Our next question comes from Feddie Strickland from Hovde.

It sounds like there's maybe still a little bit of room for the margin to grow from here, maybe on the yield side. It looks like the weighted average yield on new production was around 6.20% as in the deck. What's the pickup you're seeing there versus what is coming off, particularly maybe fixed-rate CRE coming up for repricing?

The pipeline is really strong right now, probably one of the strongest we've had in a long time, and it's more balanced earlier in the quarter. Outside of the correspondent piece, which was a little lower this past quarter, yields were around 6.20%. Today, they're hovering around that for high-quality CRE-type properties. I would anticipate we would be right around the same level. I don't see that moving significantly higher or lower on loan yields. We haven't changed our pricing significantly and our pipeline is strong at those levels. We tend to want to keep the sales team focused on volume and pricing that is in the market today where we don't have to chase lower yields. Given where we are in terms of growth and what we're putting on, we don't have to go chase a lot of lower-yielding assets. So at or near current levels would be good for modeling.

And do you have anything that's coming off at lower rates that's being replaced with that roughly 6.20% production? That's what I'm curious about.

We do have some loans that were at lower rates that will be moving off. For example, we had a payoff recently that was at about 4.85%—probably a $7 million to $10 million loan that came off. I don't have the exact number that's rolling off, but we had over $50 million of net loan growth. I think that's a reasonable number to model for the coming quarter as well, given our pipeline is similar or a little more elevated.

Appreciate that. On the correspondent banking side, super strong growth this quarter. Was that expected or seasonal? Was any of that driven by recent geopolitical turmoil, maybe customers moving here, or was it not directly related?

No, that was planned. We want to grow that book responsibly. Our focus is the Caribbean Basin and Central America. To that effect, we onboarded three new banks this quarter, and we are looking at an additional five. Our team makes quarterly visits with our lead director in Central America. Like domestic customers, these banks are eager for customer service execution, and I think we're well poised to do that. Keep in mind that the term of these loans is 180 days and the business is relationship-driven because not all the banks borrow but all of them have deposits, and those are low-cost deposits with a tremendous amount of wire activity. For us, it's a very good business: it provides loan diversity, cheap funding, and these are very established banks. We look carefully at country risk. By and large, the banks are very well capitalized and established.

Great color. One last quick one: I know you had a one-time tax item this quarter. What should we expect as a normalized tax rate going forward?

For modeling, I'd use about 26.4%. I think that's a good rate to use going forward.

Our next question comes from Howard Angles from Prem Capital. It is showing no additional questions at this time. I'd like to turn the floor back over to the management group for any closing comments.

Thank you. In closing, the first quarter was an excellent start to 2026 and effectively a strong kickoff to our three-year strategic plan. We delivered record earnings, continued to grow balances prudently, maintained strong margins and preserved outstanding credit quality while returning capital to shareholders. Our franchise remains well positioned in one of the most attractive banking markets in the country, supported by a differentiated business model, specialized verticals and a proven management team. We appreciate the continued confidence and support of our shareholders, clients and employees and look forward to speaking with you next quarter. I wish you all a great day, and thank you for your continued confidence in U.S. Century Bank.

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