USCB Financial Holdings, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Quarterly Performance: The second quarter was a record, with net income up 29% year-over-year, loans exceeding $2.1 billion, and deposits rising 4.5% annually.
• Deposit Growth: Diverse business verticals drove deposit growth, with average DDA balances increasing by 12.2%. The cost of deposits improved by 3 basis points.
• Loan Growth: Linked-quarter average loans increased by $70 million (14.3% annualized). New loan production had a weighted average coupon of 7.12%, 89 basis points higher than the portfolio average yield.
• Margin Improvement: NIM improved due to a larger balance sheet, higher yields on loans and securities, and lower deposit costs.
• Asset Quality: The allowance for credit losses increased to $24.9 million. Nonperforming loans and classified loans decreased.
• Noninterest Income: Improved but slightly lower than the prior quarter; wire and swap fees increased, while SBA loan sales were down but the pipeline was strong.
• Expenses: Total expense was $12.6 million, with the efficiency ratio at 51.77%. Salaries and benefits rose due to new hires.
• Capital: Strong capital ratios, with AOCI (Accumulated Other Comprehensive Income) at negative $41.8 million. A $100 million universal shelf offering was completed, and an investment-grade debt rating was received.

Segment Performance

• Deposits: Increased 13.7% annualized to $2.3 billion, with average DDA balances up $17.1 million (12.2%) from the prior quarter. Deposits contribute to a diversified funding base.
• Loans: Total loans rose 15.1% annualized from the prior quarter, closing above $2.1 billion. Loan yield climbed 6 basis points from the previous quarter. New loan production was $187 million, with $95 million in the last couple of weeks of June.
• Profitability: Net income was $8.1 million ($0.40 per diluted share), up 29% year-over-year. Return on average assets was 1.22%, return on average equity was 14.29%, net interest margin (NIM) was 3.28%, and the efficiency ratio was 51.77%.
• Credit Metrics: Net charge-off was 14 basis points. Nonperforming loans were $1.4 million (0.06% of the portfolio), and classified loans were $5.6 million (0.27% of the portfolio), all well covered by the allowance for credit losses.

Guidance

• Loan Pipeline: Expect to meet third-quarter numbers despite a summer dip, with dry powder for the fourth quarter. Projected to double SBA 7(a) volume from the previous year.
• Rate Impact: A liability-sensitive balance sheet positions the company to benefit from rate cuts, potentially boosting the margin.
• Deposit Growth: The international deposit strategy aims to upgrade B banks to A, grow A and C banks, with $268 million in global correspondent banking deposits.

Risks

• Concentration Risk: Potential concentration of international deposits, but managed conservatively with no outsized concentration in recent years.
• Market Fluctuations: Impact of rate changes on the balance sheet and margin, though the strategy is positioned for rate cuts.

Question and Answer

Q: Strategy for gathering international deposits vs domestic?

A: The global group manages 30 banks in the Caribbean Basin and Central America, grading them by deposit levels. Aims to upgrade B banks to A, grow A and C banks, with $268 million in deposits, and lower costs than overall funding.

Q: Incremental cost of international vs domestic deposits?

A: International deposits cost 1.74%, lower than overall funding costs.

Q: Loan pipeline mix in next 6 months?

A: Pipeline is strong with $150 million closings in June and July, projecting to hit numbers, balanced across verticals.

Q: Gain on sale of SBA loans?

A: Expected to rise in the back half due to a strong SBA 7(a) pipeline.

Q: DDA drivers and growth potential?

A: Incentivized team, new hires focused on deposits, DDA up due to a relationship-driven strategy.

Q: International deposit growth limits?

A: Currently ~10% of total deposits, no caps, but managed to avoid outsized concentration.

Q: M&A and talent acquisition?

A: Keep close tabs on CEOs in the Miami-Dade MSA, opportunistic with M&A, hiring plans aligned with growth.

Q: Loan growth outlook?

A: Mid-teens growth expected, with a pipeline of $150-180 million in the next couple of quarters.