USCB - NASDAQ

Good day, and welcome to the USCB Financial Holdings, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Luis de la Aguilera, Chairman, CEO and President. Please go ahead.

Good morning, and thank you for joining us for USCB Financial Holdings Q3 2025 Earnings Call. With me today reviewing our Q3 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. The third quarter of 2025 continued to reflect disciplined financial performance across all key metrics, marking our third consecutive quarter of record fully diluted earnings per share. For the quarter ended September 30, 2025, the bank posted net income of $8.9 million or $0.45 per diluted share, up from $6.9 million or $0.35 per share in the third quarter of 2024. During the third quarter, our profitability metrics remain among the best in our peer group. Return on average assets increased to 1.27% compared to 1.11% a year ago. Return on average equity improved from 15.74%, up from 13.38% last year. Our efficiency ratio strengthened to 52.28%, reflecting disciplined expense management and operating leverage. Net interest margin expanded to 3.14% compared to 3.03% in the same quarter last year. Net interest income before provision for credit losses was $21.3 million, up $3.2 million or 17.5% from the prior year, supported by solid balance sheet growth and prudent pricing discipline. Total assets reached $2.8 billion as of September 30, 2025, representing a 10.5% year-over-year growth. Total deposits ended the quarter at $2.5 billion, marking a robust 15.5% year-over-year increase. Growth was broad-based across business and consumer segments. Our diversified deposit-focused business verticals, namely Association Banking, Private Client Group and Correspondent Banking now account for $672 million or 27% of total deposits. These deposit-focused verticals are highly scalable. And in the past year, we have added new production personnel to further support our growth plans. Liquidity remains strong and well above policy limits, providing ample flexibility to support loan growth and capital initiatives. Loans held for investment grew to $2.1 billion, an increase of more than $199 million or 10.3% from $1.9 billion on September 30, 2024, reflecting steady customer demand and solid credit quality. Again, as consistently focused -- again, we consistently focus on credit quality and diversity, and our loan book has significantly diversified in composition as 42% of our loans are now non-CRE. Credit performance continues to be exceptionally strong. Nonperforming loans declined to just 0.06% of total loans, down from 0.14% last year. The allowance for credit losses totaled $25 million at year-end, representing 1.17% of total loans. During the quarter, 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 price of $17.19 per share, underscoring our confidence in the intrinsic value of our stock and our commitment to returning capital to shareholders. Following these transactions, tangible book value per share grew to $11.55, 6% higher than the prior year. Our capital position remains a key strength. As of September 30, total risk-based capital ratios were 14.2% for the company and 13.93% for the bank, well above regulatory minimums. Overall, the third quarter's record performance reflects the strength of our business model, our focus on relationship-based growth and our commitment to deliver long-term value to our shareholders, customers and employees. On the following page is self-explanatory, directionally 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 let's now draw our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

Thank you, Lou, and good morning, everyone. Looking at Pages 5 and 6, I would describe the third quarter of 2025 as a highly successful quarter for USCB. In fact, it was another record for us. Net income was $8.9 million or $0.45 per diluted share, and that's up 29% over the prior year. Return on average assets was 1.27%. Return on average equity was 15.74%, and these metrics benchmark incredibly well when compared to peers. The most notable activity in the quarter was the $40 million sub debt raise and repurchasing 2 million shares or 10% of the company. The weighted average price per share of the buyback was $17.19. While the 2 million share repurchase happened on September 4, the weighted average diluted share count for the quarter was marginally impacted to 19.755 million shares versus the ending share count of 18.1 million. On a pro forma basis, assuming the repurchase happened on day 1 of the quarter with the same $8.9 million of earnings would have equated to an EPS amount of $0.49. This number should help you when updating your estimates for 2026. While the summer months cooled off our loan growth for the quarter, we put excess cash to work in our securities portfolio. As a reminder, our securities portfolio is still reflective of the COVID era, yielding 3.03%. As discussed in previous calls, this represents a tremendous opportunity for us to improve go-forward earnings. I will elaborate more on this in a bit. With the sub debt raise and the excess cash on the balance sheet and in anticipation of loan demand, the NIM retreated slightly to 3.14%. The efficiency ratio was steady at 52.28%. Tangible book value per share was $11.55 and reflects the impact of the share repurchase. And last, credit metrics remain benign. So with that overview, let's discuss deposits on the next page. Average deposits increased $166 million or nearly 29% compared to the prior quarter and are up $380 million or 18% year-over-year. During the quarter, we issued $100 million of brokered CDs, which were used as hedging instruments as we put on an interest rate collar to mitigate interest rate risk. These are 3-month CDs, which will be renewed every quarter at market rates over the next 2 years. The cap rate on the collar is 4.5% with a floor rate of 1.88%. The swaps have a duration of 2 years at inception. While average DDA balances declined $10.6 million from the prior quarter, DDA still comprised 23% of total deposits. Interest-bearing deposit costs remained stable at 3.29%, down 47 basis points from the same period last year. Total deposit costs increased slightly by 7 basis points, primarily due to the decrease in DDA balances and the higher proportion of interest-bearing deposits. While this mix shift puts some pressure on the cost of funds, we anticipate improvement in our funding base in the fourth quarter as more liabilities reprice with rate cuts. Despite the temporary shift, we remain optimistic about deposit growth and continue to execute our business plan in niche verticals to support sustainable growth in core operating accounts and low-cost deposits. So with that, let's move on to the loan book. On a linked quarter basis, average loans grew by $41.6 million or 8% annualized. Compared to the third quarter of 2024, we grew $220.8 million or 11.8%. Both growth metrics are within our stated guidance. Alongside this growth, loan yield decreased 2 basis points to 6.21% and was negatively impacted by the payoff of consumer yacht loans during the quarter. Excluding the effect of the consumer yacht loan payoffs, the yield would have been 6.25%. On a point-to-point basis, the loan book increased $19 million. As you can see from Page 9, our new loan production was lower than our last 4 quarters, but with a strong pipeline and the summer sluggishness behind us, we look to get on our normal run rate in Q4. New loan production had a weighted average coupon of 6.43%, 22 basis points higher than the portfolio's average yield. On Page 10 is a snapshot of our business verticals. 2 are loan-oriented and 3 are deposit-oriented, namely Association Banking, Private Client Group and Correspondent Banking. All business verticals are led by very seasoned experienced bankers and are pivotal to our branch-light model. As Lou mentioned, they are highly scalable. And in the past year, we have added new production personnel to further support growth. Moving on to Page 11. Net interest income increased by $240,000 or 4.5% annualized compared to the prior quarter and was up $3.2 million or 17.5% year-over-year. Our net interest margin for the quarter was 3.14% and was affected by the higher cash balances, the issuance of $40 million of sub debt at 7.625%, delayed loan production and increased funding costs driven by lower DDA balances. Additionally, we received prepayments on yacht loans, which negatively impacted loan yields and the NIM for the quarter. However, looking ahead, we expect improvement in the NIM as we put excess cash to work in loan volume late in the quarter, added to our securities portfolio and cut deposit rates in September. In fact, the NIM for the month of September was 3.27%. All these items are good tailwinds heading into Q4. With that, let's move on to the ALM model on the next page. In the past several quarters, the strategy has been to prepare for a lower rate environment. And according to our ALM model, the balance sheet is liability sensitive and well positioned for the current rate environment. With rate cuts expected in the short term, we anticipate this will benefit our funding costs and overall margin and the effect of these rate cuts will be seen more predominantly in the fourth quarter. For instance, the ALM model contains a deposit beta assumption of 60%, but we have outperformed this beta over time. With the September rate cut, we achieved a 70% beta on our $1.2 billion money market book, which translates into an $840 million repricing fully at 100% or 25 basis points. On the flip side, we have $2.131 billion in our loan book and 62% or $1.3 billion is variable rate or hybrid in nature. 40% of that book or $620 million will reprice in the next year. In short, our liability sensitivity will be dependent on our ability to reprice our money market book faster than our loan book reprices. With that, let's take a look at our securities portfolio. Total holdings stood at $480 million at quarter end with 67% classified as available for sale and 33% as held to maturity. The portfolio yield has improved compared to the previous year, reaching 3.03%. This represents an increase of 42 basis points compared to the same period last year. A significant portion of this yield enhancement is due to our net purchase of $76 million in bonds during the first 9 months of the year, which carry a yield of 6% and an average duration of 4 years. The modified duration is 5.1 and the average life is 6.4 years, reflecting our strategy to purchase longer duration bonds in anticipation of lower interest rates. 79% of the portfolio is invested in agency, mortgage-backed securities, boosting liquidity. Looking ahead, we expect to receive $14.4 million in cash flows from the portfolio for the remainder of 2025 at current rates and approximately $76.4 million in 2026 with a runoff rate of about 3%. These cash flows provide us with significant optionality. They can be reinvested at higher yields, whether in loans or other investments or used to let go of more expensive funding sources. In this way, our investment portfolio should be viewed as a strategic tool for the upcoming quarters, supporting both margin improvement and balance sheet flexibility as we navigate the evolving rate environment. So with that, let me turn it over to Bill to discuss asset quality.

Thank you, Rob, and good morning, everyone. As you can see from Page 14, the first graph shows the allowance for credit losses is at $25 million at the third quarter end and at an adequate 1.17% of the portfolio. We made a $31,000 provision to the ACL that was driven mostly by the $18 million in net loan growth with no new classified loans and no loan losses in the third quarter. No significant losses are expected in the fourth quarter. The remaining graphs on Page 14 show the nonperforming loans as of quarter end steady at $1.3 million and remained at 0.06% of the portfolio and are well covered by the allowance. No losses are expected from these nonperforming loans. Classified loans also decreased during the quarter to $4.7 million or 0.22% of the portfolio and represent less than 2% of capital. No losses are expected from the classified loans. The bank continues to have no other real estate. On Page 15, the first graph shows the diversified loan portfolio mix at third quarter end. The loan portfolio increased $18 million on a net basis in the second quarter to $2.1 billion. Commercial real estate represents 57% of the portfolio or $1.2 billion segmented between retail, multifamily and owner-occupied. The second graph is a breakout of the commercial real estate portfolios for nonowner-occupied and owner-occupied loans, which also demonstrates their collateral diversification. The table to the right of the graph shows the weighted average loan to values for the commercial real estate portfolio at less than 60% and debt service coverage ratios are adequate for each portfolio segment. The quality and payment performances are good for all segments of the loan portfolio with the past due ratio at 0.38% and nonperforming loans at 0.06% remain below peer banks. Overall, the quality of the loan portfolio is good. Now let me turn it back over 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 in previous calls, all loans are booked with prepayment penalties. So in the event of an early payoff, we receive compensation. These fees are booked under the other line item and service fees. Noninterest income was 14.8% of total revenue and 0.52% to average assets. Let's take a look at expenses. Our total expense base was $13 million, and while up from the prior quarter, contained $188,000 in onetime expenses. This includes legal fees for the S-3 filing and the administration expense related to the interest rate collar. Since the end of the first quarter, we have added 5 new sales associates with 3 of the 5 in deposit aggregating business verticals. The efficiency ratio was 52.28% and noninterest expense to average assets was stable at 1.85% and consistent with recent quarters. Looking forward, we expect the quarterly expense base to be at this level and gradually increasing due to additional new hires and potentially adding to the incentive accrual with improved company performance. Let's go to capital. In August, the company issued the $40 million in subordinated notes and used most of the proceeds to buy back 2 million shares or approximately 10% of the company. The impact of these 2 transactions can be seen on all capital levels. In fact, all capital levels remain comfortably above well-capitalized regulatory guidelines. And last, I'll note the ending share count for the quarter was 18.1 million. So with that, let me turn it back to Lou for some closing comments.

Thanks, Rob. Before we open the call for questions, I want to take a moment to put our results in the context of the broader environment here in Florida because the strength of the state's economy continues to be a key driver of our success. Florida remains one of the most vibrant and resilient economies in the nation. In 2025, real GDP growth is tracking around 2.4%, outpacing national averages and underscoring the state's enduring fundamentals. Population growth remains strong with over 23 million residents and continued positive net migration that fuels housing, business formation and consumer spending. Business confidence across Florida also remains high. From Miami to Tampa to Orlando, the economic landscape is driven by diversification in financial services, trade, health care and technology, which continues to create opportunities across our client base. The moderate normalization we have seen in interest rates and inflation trends has also contributed to a more stable, predictable operating environment. For USCB, this economic background aligns perfectly with our strategy. South Florida's growth in middle market business, real estate development and professional services continues to generate high-quality loan and deposit opportunities. Our ability to serve these sectors with a personal relationship-driven approach positions us exceptionally well within this expanding marketplace. In short, Florida's strength is USCB strength. The combination of a resilient economy, disciplined execution and a focus on long-term relationships allow us to continue growing at a steady, sustainable pace while delivering strong results to our shareholders. Thank you again for your time and your confidence in USCB Financial Holdings. So operator, we are now ready to open the line for questions.

[Operator Instructions] The first question comes from Woody Lay with KBW.

Just a question on the yacht payoffs you saw in the quarter. Could you just -- and sorry if I missed it in the opening comments, but could you just quantify the amount of payoffs you saw in that division in the quarter, and when in the quarter they occurred?

Yes, I'll take that one, Woody. It was a little over $10 million, and that happened in August, and that impacted our loan yields in August and our margin in August.

Got it. Okay. And then it looks like a majority of the loan production came in September. That will obviously be a strength for the NIM next quarter. But just looking into that production, is it a sign of sustained loan momentum entering the fourth quarter? Or was it September just a strong month?

No, I believe it is. Historically, we always see a seasonal dip in Q3 as vacation time, school stop, school starts. We had the same situation last year and the previous year. And you're right, September was a record-setting month for the year. As we look forward, the go-forward pipeline is absolutely in line with what we've seen over the last 5 quarters. And I just attended with Rob and Bill a pipeline meeting a couple of days ago. We have enough dry powder, I think, to have a very good fourth quarter.

Yes. And then what are you seeing on the loan competition side, especially on pricing? It looks like the yields on new production came down a little bit, but that was to be expected with the rate cut and that can be driven by mix shift. So any thoughts on how competition is impacting pricing?

Well, without a doubt, this is a very competitive market. There's no question about it. We price to relationship. We price deposits and an overall relationship. We are not a transactional lender. So every deal is priced based on opportunity and based on existing loan balances and deposit balances and overall relationship. We've been very active on the swap side as rates have gone down, there's been a lot of opportunity for that, and we continue seeing the same for the coming quarter.

Yes. And even while it was down from the previous quarter at 6.43%, that's still 22 basis points above the portfolio average. I would say, I think our yacht loans are priced right around 6.25% right now. We're probably seeing the majority of our new loan production at 6% to 6.50%.

00:25:51 The next question comes from Feddie Strickland with Hovde.

Just wanted to start on the margin, digging a little deeper here. I appreciate the detail on that 3.27% and the discussion on yields and where yields are going. But given that we have a little bit of additional cost, I guess, coming in from the sub debt in the fourth quarter, does the quarter still, I guess, end at that 3.27% -- I'm just trying to figure out if maybe more of that is coming from the cost side for you to kind of land at recovery in the margin there?

Yes. On the margin, I mean, it came back to 3.14%. August was a month where we had a lot of cash sitting on the balance sheet because we were anticipating a strong pipeline, but all of the loan demand came in, in September. So -- and then we had payoffs on the yacht portfolio that exasperated that issue in August. But 3.27%, I think, is a good go-forward number for the fourth quarter. We had a rate cut in September. There's like a 97% probability in October. We've already done a round of rate cuts on our money market book. We've lowered CD rates. So I think 3.27% or slightly better for the fourth quarter is still a realistic number.

Appreciate that. And just wanted to dig in a little bit on the swap fees as well. Obviously, great to see those come up. Is that still a good new run rate going forward? I'm just trying to get a sense for kind of where we could have noninterest income. And within that same vein, what are you seeing on the SBA side, keeping in mind the government shutdown fees?

Yes. In fact, I'll start with the SBA. We probably had $200,000 that got slow walked at the end of the quarter that will fall into the first quarter. But that's definitely impacting on the SBA side. But we're seeing a lot of activity on the wire fees, predominantly in our correspondent banking group and our Private Client Group. The swap fees specifically with rates being lower, there's a lot of activity on swaps, and I would anticipate a somewhat similar number, maybe between Q2 and Q3 could repeat again in the fourth quarter. So a lot of the loan volume right now, as Lou mentioned, we saw the pipeline. We see what's in there at either fixed rate, variable rate, what's on swaps, et cetera. So there's a fair amount of swap volume in there, too.

Perfect. If I could just squeeze one more in. I just wanted to ask about the opportunity set on the condo association banking business line? And just how much do you think you can grow that segment in terms of loans and deposits over the next couple of quarters?

We're very bullish about the association banking vertical. I think it's one of our greatest opportunities for scale. Just to put things in perspective, there's a 27,500 condominium associations in the state of Florida, 48% of that is in between Miami-Dade and Broward County. And of the overall condominium inventory, 60% of that falls between 30 to 40 years, and they're all subject to 30- and 40-year recertifications. So we, right now, in the current pipeline have more HOA business than we probably have seen in any one quarter. So we are very bullish on this area. It gives us great opportunities for low-cost deposits, shorter-term C&I lending. We hired about 2 quarters ago, a new production officer, which joined us from one of the largest management companies here. She's doing quite well, and we believe that this is an area that we could probably double the book of business in the next 18 months.

The next question comes from Michael Rose with Raymond James.

Rob, maybe I just want to go back to the margin. I think you said that the September margin was 3.27%. I know you guys are liability sensitive and it looks like loan growth is going to reaccelerate. So is 3.27% kind of a good starting point to think about the fourth quarter? And then I would expect as we move through what appears to be, if I use the forward curve, a few more cuts from here, further expansion as we go ahead? Or at some point, do the forces of deposit competition and lower loan rates went over at some point?

Yes. No, the September was -- on the margin, it was 3.27% and that -- and we had a full month of the sub debt costs embedded in that month. As Lou mentioned, we really had a record month in terms of loan volume. So we put on some securities. We put on loan volume in the month of September. And I would say that's a good starting point. We profile as liability sensitive. We have been aggressive on the rate cuts on our money market book. We've already cut some rates in anticipation of the October rate cut on what is it the 29th and next week, we'll get another update from the Fed, I believe. So I think we're well positioned for the next -- this rate environment and any further cuts. So we would expect expansion on the NIM. The other thing that we mentioned, too, is our securities portfolio. I mean that's still reflective of a COVID era yield. And I think there's a lot of opportunity on the securities portfolio to either rebalance that. There could be a securities trades in there as well. But we have $480 million yielding 3%, and we're earning just under 16% on our equity. If that securities portfolio moved up 100 bps, I mean, that would give us tremendous earnings power and expansion in our margin. So I think we have a lot of opportunity as we go into 2026 with the rate environment going down, a steeper yield curve and our ability to fix our securities portfolio over time.

That's very helpful, Rob. And then maybe just going back to expenses. I think you mentioned relative stability near term, but obviously balancing that with some investments as we move through next year. I know maybe a little bit early, but is rate of inflation, let's call it, 2%, 3% plus GDP plus or something like that a good way to think about expenses for you guys? Or is there going to be some more concentrated efforts to hire folks and maybe we could be thinking or contemplating something a little bit higher for next year?

Yes. I mean, right now, our efficiency ratio is 52% in our expense to average assets. I always kind of use a benchmark around peers is if we're under 2, I think we're performing well. I think both metrics benchmark well. In terms of the pure number, we've added some sales-facing FTE. I think we've added 5 since the end of the first quarter, all in sales type roles. Lou mentioned the one in HOA. We've got one on the Private Client group. We have other business development and some business banking personnel as well. Sometimes those get a little costly with some upfront money to get that personnel. But I would anticipate the run rate of $13 million a quarter to be at that level to increase slightly throughout next year. But I would say low 50s in terms of efficiency ratio. And it could dip into the below 50. But I would say right now, I'd say low 50s in the near term, but the pure $13 million could inch up in the fourth quarter and then into next year as well.

Very helpful. And maybe if I could just sneak one last one in. Just going back to the comments that you made on the securities portfolio and where capital is at this point. Have you guys given any updated thoughts on any sort of potential restructuring would that make sense for you guys at this point, maybe not right now, just given the use of capital and cash for the repurchases. But would just be curious as to any thoughts you have.

I mean that strategy is always on the table. We're looking at it every month in terms of the viability, in terms of payback and what that would be. Certainly, with rates coming down a bit, we'd like to see if we could get out of this without doing a restructure. But certainly, I think $480 million at 3%. If we could move that up significantly to even 100 basis points, that would give us tremendous earning power going forward. So I think that strategy is always on the table and should be. I think well-run companies look at it and can act on it from time to time. Right now, we used a lot of our excess capital or dry powder on the repurchase, which I thought was a unique opportunity to repurchase 10% of the company. We bought that back probably at 1.5 tangible book value, but on a forward earnings basis on 2026, it was probably relatively cheap compared to peers in terms of where we trade and how we perform on a performance basis. So I'd say it's clearly on the table. And whether or not we act upon it will depend upon interest rates, earn back, a lot of different factors.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aguilera for any closing remarks.

Thank you again to everyone joining us today. As we conclude the third quarter, I want to emphasize how proud we are of the consistency and strength demonstrated across all aspects of our business, our record earnings, loan and deposit growth, strong credit quality, our direct results of disciplined execution and a commitment to long-term strategic priorities. Looking ahead, we remain confident of our ability to sustain this momentum into 2026. The fundamentals of our business are solid. Our markets are vibrant. Our balance sheet is strong, and our team remains focused on building lasting relationships with our customers and communities. We continue to invest and capabilities that will enhance our growth and efficiency while maintaining prudent risk management and delivering value for our shareholders. As always, thanks to our employees for their hard work, to our customers for their trust and to our shareholders for their continued support. Thank you, and we will be talking at our next earnings call.