USCB - NASDAQ

Good morning, everyone, and welcome to the Q4 2025 USCB Financial Holdings, Inc. Earnings Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I would like to turn the conference over to Luis de la Aguilera, Chairman and CEO. Sir, please go ahead.

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% (sic) [ $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% (sic) [ $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 2 known nonoperating 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 nonroutine items, operational diluted EPS was $0.44, consistent with 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 onetime 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 9 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 3 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 2 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 deposit. 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 increase 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 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 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 2 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 2 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 nonowner-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.

Okay. Thank you, Bill. The headline for noninterest income was the securities loss restructuring we executed in December. The AFS securities sold represented approximately 12.6% of the AFS portfolio as of November 30, 2025, and had a weighted average yield of 1.70% and the sales resulted in a onetime after-tax loss of $5.6 million or $0.31 per diluted share. The proceeds were reinvested into loans with a 6.15% yield. Excluding the security loss, noninterest income was $3.3 million for the fourth quarter of 2025, consistent with prior quarters. So let's move on to expenses. Our total expense base was $14.3 million, while up from the prior quarter contained $759,000 for a new bonus plan for nonmanagement personnel and enhancements of sales incentives and retention programs. It's important to note that the $759,000 represents an annual expense and will be accrued monthly based on performance in the future periods. The new bonus and retention programs aim to attract and retain top talent and position USCB as a leading bank employer. Consulting and legal fees rose by $315,000 compared to the previous quarter with $275,000 of this increase attributed to the nonroutine expenses related to the universal shelf offering and the share repurchase transaction that took place earlier in 2025. Other operating expenses increased $137,000 primarily due to force-placed insurance for specific borrowers, which the company fully expects to receive reimbursement for in the coming quarters. The operating efficiency ratio was $55.92, which encompasses the full $14.3 million expense base. Adjusting for the $759,000 and the $275,000, the fourth quarter expense base would have been $13.2 million, resulting in an adjusted efficiency ratio of 51.87%. When planning for 2026, we consider the $13.2 million to be an appropriate baseline for our expenses in Q4 of '25. So with that, let's turn it to -- turn over to capital ratios. Earlier this week, the Board approved a 25% increase to the dividend or $0.125 per share based on strong operating earnings. As a reminder, in August of 2025, the company issued $40 million in subordinated notes and used most of the proceeds to buy back 2 million shares or approximately 10% of the company at a weighted average price of $17.19 per share. The bank maintains regulatory capital levels that significantly exceed the thresholds necessary for classification as well capitalized, and we look for ways to deploy capital where the return on average equity is between 15% to 17%, which equates to top quartile performance relative to peers of similar size. Last, I will note the ending share count for the quarter was 18.1 million. And with that, let me turn it back to Lou for some closing comments.

Thank you, Rob. 2025 ended another strong year for U.S. Century, and we continue to proactively make ongoing strategic decisions that support profitability and shareholder value. As we look ahead into 2026, expanding and strengthening our deposit base remains one of our highest priorities. Our approach is multi-vertical and intentionally relationship-driven, not rate-driven. While all our production units are ready to deliver results, we are leaning on 4 of our strongest business lines: Business Banking, Private Client Group, Association Banking and Correspondent Banking. Each vertical has a clear plan, clear targets and experienced leadership accountable for execution. Business banking delivered strong results in 2025, closing the year-end at nearly $400 million in deposits, and we are building on that momentum. In 2026, we're expanding production capacity by launching a new lending and deposit gathering team focused on Doral, Medley and Hialeah, 3 of the densest small business markets in Miami-Dade. This team will emphasize SBA and C&I lending, operating accounts and treasury services, all designed to bring in sticky relationship anchored deposits. It's a very targeted expansion, and this positions business banking to be one of our biggest contributors to organic deposit growth this year. Our Private Client Group had an excellent year-round growing deposits, 18% to $300 million. This franchise continues to win because of its deep specialization in professional markets, legal, medical and affluent professional clients. For 2026, we're adding more dedicated relationship talent, beginning with additional production hires expected between Q1 and Q2. The strategy here is share of wallet, more operating accounts, more treasury services and deepening our footprint in the professional services sector. Association Banking remains one of the most scalable opportunities, and it carries our largest deposit growth target for 2026 of $100 million. The team now manages over 480 homeowner associations relationships today and continues to grow both deposits and lending in this vertical. Our 2026 strategy focus on property management company. Roughly half of the HOAs in South Florida are professionally managed. And now with 25 firms onboarded, we are working hard to capture these operating and reserve balances. Keep in mind that approximately 40% of the state's population of 23 million live in either a condominium, homeowner association or a planned urban development, underscoring the importance potential of this business vertical. This granular, stable, low beta deposit growth is exactly the kind of funding we want more of. Correspondent Banking grew to $235 million by year-end. The team also delivered a strong lending year and meaningful fee income through wire activity. In 2026, the focus is on expanding the corresponding banking relationships onboarding 3 to 5 new correspondent banks and maintaining an active travel schedule. We're also evaluating additional production talent to support growth. Our goal is to continue growing low-cost deposits as well as expand on trade finance and income -- and fee income opportunities. Our specialty business lines, namely private client, correspondent and association banking have grown to $686 million or 29.3% of total deposits. We have a clear and attainable plan to continue this important growth trajectory. With that said, I would like to open the floor to Q&A.

[Operator Instructions] 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 given 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's 2 things that happened literally on the last 2 weeks of the last month. We have a relationship with a client that is over 10 years, 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 2 weeks of the year. The client still maintains with us over $112 million in deposits, 31% is DDA [indiscernible] 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 2 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. Okay. Got it. I guess that kind of bares my next question. You guys are kind of operating at the higher bound of your loan-to-deposit ratio that we've seen over the past handful of years. So I guess just based on your commentary that that's probably going to trend maybe back down a little bit in the first half of '26. But maybe just any thoughts about where you could -- what range you would like to see that ratio operate in and how you think about 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, 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. Okay. That's helpful. And Lou, I thought your comments were interesting about this new kind of SBA vertical that you guys are launching there in some of your specific Florida markets. Maybe if you could just unpack that a little bit deeper for us. Just frame what you see the -- that opportunity looking like over the next, call it, 1 to 3 years? And maybe whether or not you already have the personnel in place to kind of kickstart that initiative?

Sure. Well, the initiative actually launched about 4 years ago, and we have been growing it prudently. It delivered over $1 million in fee income last year. We tend -- we do a lot of SBA 504, always have, always will. But we got into the 7a space just to diversify our product offering on the SBA side. And also, we like the gain on sale opportunity there. We're -- our average ticket is about $1.2 million. I think most of them are real estate secured. So we tend to be conservative in nature. We're not a shop that is trying to do millions of dollars in $50,000 loans that are unsecured. That's not what we're going to be doing. We'd like to grow this probably in the next 3 years to about $40 million or $50 million in annual volume, and that would deliver very handsomely on the fee income side. So we believe that the markets that we're going to be targeting down here, Hialeah, Medley and Doral, they're contiguous markets on the North and Northwest side of the county. Our analysis show that there's over 43,000 small businesses in these markets, and that's the type of business we're going to go after pretty much with the same focus that we started. It's not the tiny little, small SBA loan. These are established businesses. They have revenues probably between $3 million to $5 million. And again, this is the type of business that we're going to be selling treasury to and developing.

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 -- we're 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 talk about the margin and just whether we might see a little bit more of a spike in the first quarter versus [indiscernible].

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 we self-identified with our tax professionals kind of -- we do have some loans that are out of state, and we want to make sure we're complying with everything. So we went ahead and paid those. It was for prior periods. But I would say, from a modeling standpoint, going forward is 26.4% is a good modeling number in terms of the tax expense you'll see in 2026.

[Operator Instructions] Our next question comes from Evan Yee from Raymond James.

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?

Yes. So the fourth quarter, I would characterize as first is we have our GAAP numbers. And this quarter, we're referencing some non-GAAP numbers, which I historically really don't prefer, and I think we've done it one other time with a portfolio of restructuring maybe in 2023. But since we've been public, we have been reporting GAAP numbers, and that's what I prefer. I think it's just a cleaner quarter for you guys. But we backed out the 2 known items. And then on the expense side, we did some new programs that were annual type expenses that booked in the quarter, and those will be based on performance on a run rate going forward. But I think if you were to back those things out, our expense base was around $13.2 million for the quarter. And I think you'll see that gradually increase in the first quarter with new hires and through the year. But we anticipate to have low 50% on an efficiency ratio. And -- but I think $13.2 million would be a good jump-off point for the fourth quarter as you model out 2026, if that's helpful.

Okay. Great. No, that is super helpful. And then I guess another one for me. I know we've had -- we touched on SBA, but just curious if you have any updates on your fee outlook as a whole? And could you maybe go into the puts and takes there?

Yes. So on noninterest income, we've been running this quarter would have been $3.3 million if you backed out the securities loss that we executed. The quarter before was around $3.7 million, $3.3 million, $3.7 million. So I would anticipate us to continue to build that around, I think, the $3.5 million to $3.8 million range for 2026 initially and as we move forward -- but that's kind of what we're targeting. I think that's a good number, and it should gradually build from there. We have a lot of -- on the wire fees, new correspondent banks, we're increasing volume there. We've done that successfully. Swap fees remain attractive to our clients in the marketplace. And then certainly, our treasury management business as well is bringing in a lot of fees as well. So I think there's opportunity there for us as a company. And I would say anywhere from $3.5 million to $3.8 million in the coming quarters is a good number.

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 in meeting again at our next earnings call.