Q2 2023 USCB Financial Holdings Inc Earnings Call
[music].
Good morning, and thank you for joining us today for Uscb Financial Holdings second quarter 2023 earnings call with me today, reviewing our second quarter highlights as CFO , Rob Anderson, Chief Credit Officer, Ben <unk>.
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We will provide an overview of the bank's performance the highlights of which you can see on slide three.
The past quarter saw the market react process and respond to the collapse of three high profile regional banks.
News on some financial markets triggered a crisis in confidence amongst consumers and a deposit like to the perceived safety, our too big to fail Brethren.
At U S century bank, we build business relationships.
Based on the best in class service products and people as our clients look to us for support and guidance. The USB team responded immediately to the March events contacting our clients.
Directly to a sale or concerns answer their questions and most importantly, educate them on their options for obtaining additional FDIC insurance coverage to this point the bank has reduced its funding for deposit ratio by 10% over the past two quarters as interested clients opt for available Ics and Cedars deposit products our U S. Thanks.
<unk> Bank R.
Our efforts have been very well received deposit outflows were quickly curb and the slowdown in loan demand experienced from mid March through early May has dissipated the loan closings in June or amongst the highest we've had in the past 18 months and a growing quality loan pipeline is again strong well diversified.
And reflecting consistent quarter over quarter increases and our weighted average coupon. We will review this progress in greater detail shortly.
On a management level.
Our previous board of Directors Chair Doctor, either let me.
Passed on the Chairman's Baton to me this past month for the full support of our board of Directors. The Board also confirmed Mr. FERC Whitehall managing partner Patriot financial partners as lead director I am grateful for the privilege to closely working with Doctor Loving Tan. These past years look forward to continuing collaborating.
Mr Why crop and thank our board for their continued trust and support.
On page three in terms of growth both loans and deposits have been growing at or above our stated guidance over the prior year liquidity improved over the past quarter and as I stated, we assisted many clients into insurance and deposit products net income was $4 2 million or <unk> 21 per diluted share.
And are all AA was 77% compared to one <unk> percent for the second quarter of 2022.
Profitability was impacted by continued inverted yield curve and exacerbated by the bank failures of this past March the banks the banking sectors challenge of NIM compression continued in Q2 as deposits reprice faster than new loan yields. We believe that we are at or near an inflection point on our NIM.
As loan demand is back on track and pricing increases in terms of capital and credit both remained strong during the quarter. The company repurchased 77603 shares of Uscb Financial Holdings, Inc. At a weighted average price per share of $9 58.
As of June 32023, 172397 shares remain authorized under the program.
The following page is self explanatory.
Directionally showing nine select historical trends since recapitalization.
<unk> performance based on sound and Conservative risk management is what our team is focused on consistently delivering.
So, let's now turn our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO Rob Anderson.
Okay. Thank you Lou and good morning, everyone as Lou mentioned U S century bank is dealing with a very challenging operating environment and our second quarter results reflect this environment, while I review, our second quarter results it'll be pointing out why our management team feels more confident about the future, but first let's cover the quarter total assets were $2.
2 billion for the quarter loan balances were one six.
<unk> 6 billion and deposits are at one 9 billion.
At quarter end, we had $439 million in securities and like most banks in the industry. Today. These securities were put on the books during it.
Pandemic period of very low interest rates as.
As interest rates have taken it fast and sharp rise. These securities have now have a negative mark due to the mark to market accounting treatments roughly 50% of these securities are treated as held to maturity and the other half as available for sale total equity is now 184 million flat to the prior quarter, although footnoted on the slide the $184 million in equity.
It includes $47 1 million in unrealized losses on the securities portfolio and a OCI.
Moving onto the P&L net interest income decreased from prior quarter and prior year as we deal with an inverted yield curve for an extended period of time noninterest income was relatively flat to the prior quarter and as mentioned on our last call. The bank implemented seasonal on January one.
Of this year and our provision expense was nominal for the quarter as improved economic forecast drove a small reduction expected loss rates and this was partially offset by net portfolio loan growth during the quarter.
Expenses were up from the prior quarter and there are some moving pieces. There. So I'll cover that slide in more detail in a few minutes on a GAAP basis net income was $4 2 million or 21, a share down from the prior quarter and prior year overall I'd characterize this quarter is reflective of a difficult operating environment, we are dealing with an inverted yield curve.
That hub that has hung around for a long time and it was just worsened by the recent bank failures in March.
Moving on to our key performance.
But metrics remained strong our loan loss reserve coverage was down slightly to $1 one 8% in terms of profitability return on average assets was <unk>, 77%.
And return on average equity was 913%, our NIM was 273% and down 49 basis points from the prior quarter driven by several factors, which I'll cover in more detail.
Efficiency ratio was $65, two 5% and our tangible book value per share moved up slightly to $9 40.
Which is reflective of the negative mark of $2 41.
Per share on our securities portfolio in.
Ci that I referenced earlier absence, the OCI Mark our tangible book value per share would have been $11 81.
So let's cover deposits on the next page.
A big part of our NIM story hinges on our deposits first an abundance of caution given the recent bank failures, we brought in $50 million of brokerage Cds at a weighted average rate of 449, 8% to boost liquidity.
We finally experienced the mixed shift that most of our competitors experienced earlier in this rate cycle on average DDA balances dropped $62 million this quarter as clients sought out higher returns in money market and CD products. This movement had a more profound impact on our deposit costs, which moved up 70 basis points to 199.
<unk> percent relative to the fed funds rate increases this puts the through the rate cycle deposit beta at 36% average DDA balances comprised 32, 1% of total deposits at quarter end, which demonstrates the strength of our deposit book.
If you take a closer look at our posit book on the next slide our deposit base reflects our business model a diversified commercial bank, 50% of our deposits are commercial accounts 36 personal accounts, 11% public funds, which are partially collateralized and 3% broker deposits the toe.
It'll amount of uninsured.
<unk> adjusted by the collateralized portion of public funds was 49%.
Excluding the collateralized portion of public funds, the uninsured or 53%.
I'd also point out that our ending spot balance of $1 92 1 billion.
Our average balance for the quarter demonstrating sustained growth at quarter end, so let's move on to liquidity.
During the quarter, we strengthened our liquidity to $853 million and this excludes our ability to tap the brokered or listing CD markets as stated on our last call. The Federal reserve created a new liquidity program to make additional funding available to depository institutions. We have enrolled in the bank term funding program, but not but have.
Not access the program and do not intend to access program.
Our on balance sheet liquidity is $309 million and our off balance sheet sources, excluding brokered and lifting Cds is more than $544 million. We feel confident that these liquidity sources are adequate for us to navigate the current environment. So with that let me turn it back to Luke to discuss our loan book.
Thank you Rob.
On page 10 on slide 10, we see the average loans, excluding PPP loans increased $22 5 million or five 8% annualized compared to our prior quarter and $290 1 million or 22, 7% compared to the second quarter 2022.
Directionally portfolio loan yields have increased 109 basis points compared to the second quarter of 2022, a trend that will continue through 2023, let's see that in greater detail on slide 11.
A slowdown in loan demand was noted from mid March through early May 2023 immediately after the SBB triggered bank crisis.
Market, uncertainties made business clients and prospects understandably nature, but as the market has settled and fears of contagion have abated production is back on track.
As we see on the graphic on the left hand side quarter to quarter. The weighted average coupon on new production continued to increase from 444 basis points in Q2, 2022 to 720 basis points in Q2, 2023, or 189 basis points above the portfolio average.
June 2023, gross closings top $50 million and the active pipeline has been reconstructed and a well diversified composition that is at a pre SBB run rate, reflecting an estimated go forward coupon of over 750 basis points for Q3.
Portfolio diversification has been a focus of the management team and over the past seven years, we have developed and added several non CRE business vertical store product lines, including Association lending.
Lending with a focus on variable 70 loans <unk> loans and correspondent banking as you can see on the loan composition graphic provided 26% of the portfolio is non CRE as of Q2 2023 up from 9% at Q2 2020.
The trend for greater loan diversification has picked up the pace in 2023 as a total new loan volume in Q1, and Q2 was respectively, 66% and 81% non CRE.
Okay. Thank you Lou.
Moving on to our NIM page net interest income decreased by $1 8 million compared to the prior quarter predominantly due to an increase in deposit costs and our liability sensitive balance sheet. We.
We held more cash in the wake of recent bank failures increase and increase liquidity with higher priced brokered Cds, both at a detriment to our net interest margin in the quarter. We also experienced a mix shift with balances moving out of DDA and then into interest bearing deposits.
As noted earlier many of our competitors experienced this in prior quarters. So we finally caught up with the pack as Lou mentioned the majority of our Q2 loan production was done at higher yields were booked at the end of the quarter. So the full impact on the NIM as yet to be realized all of these events had a negative impact on our NIM, but we feel we are at.
At or near an inflection point for the following reasons.
First liquidity and movement in our deposit book is settled down or abated second we put on 50 million notional pay fixed interest rate swap to take advantage of the inverted yield curve in the second quarter. Today. This swap has 172 basis point carry on the notional amount, which will improve our NIM by 860000 on an app.
Annualized basis with no movement in rates.
Next we did a 100 million notional pay fixed rate swap in early Q3, and today as a 65 basis point carry or $650000 on an annualized basis with no further movement in rates.
Combined these two swaps to potentially improve our NIM by $1 5 million on an annualized basis if rates stay steady.
If the fed continues to raise rates later this year, each 25 basis point rate hike will improve this number by another 375000 and Conversely, when rates drop we could see the opposite.
Our loan pipeline is strong and has a weighted average rate above 750, we believe net loan growth for the balance of the year will be in the low double digits, perhaps a tad higher.
Fifth we have nearly $100 million in cash sitting on the balance sheet that just reprice 25 basis points with the last rate increase and we can deploy this cash into loans at 750 or above.
The excess cash will also allow us to be opportunistic on deposit pricing Street clients walk in the door with request to match competitors pricing.
Let's move to the next page, which will highlight how our balance sheet is expected to behave given the latest rate movement.
According to our model our balance sheet is neutral in year, one and asset sensitive in year. Two this is a direct result of having a higher portfolio of variable rate loans repricing in year two.
As discussed before our practice is to book 10 year fixed rate CRE loans that have a repricing mechanism. After year five we price these loans with an index tied to the five year CMT, while we expect 33 of the variable and hybrid loans to reprice within a year, we have $227 million of loans repricing.
Within the next six months.
So with that let me turn it to Ben to discuss asset quality.
Thank you, Rob and good morning to all our eighth proposal is to slightly lower in absolute numbers and in percentage of total loans. This is strictly due to improvement in the economic outlook.
Nonperforming loans convenient to be minimal at 486000.
And our classified loans have decreased also in absolute numbers and as a percentage of total loans at <unk> 363000 in classified credits. We should note that we do not have any CRE loans philosophy pie.
Moving to slide 15, we have information on our loan portfolio mix.
This portfolio has not changed appreciably from the numbers you have seen before.
Out of our book of one 595 billion CRE loans amounted to $989 million inclusive of owner occupied loans.
Our CRE concentration has decreased and is now lower than at fiscal year ended 2022.
Our biggest concentration is in the retail segment with $297 million, which translates into 30% of the CRE portfolio.
The Beijing, Inc.
Favorable in page 15 gives you metrics of the CRE book.
Got you.
Weighted average loan to values, ranging from 54% to 62% debt service coverage ranging from 141 times to 20 times and average loans conservatively low ranging from $1 2 million to $4 80.
Okay.
Moving to slide 16, we have information on our CRE office segment.
Again, not much change from what you have seen before the metrics show our clean this portfolio now.
<unk>, 91% of outstanding loan balances are within the banks primary mark.
Finally, I should note that Miami office sector outperformed national averages will lower vacancy of nine 4% and an availability rate of one of 12%.
Going to slide 17, Rob will talk about our non interesting. Okay. Thank you Ben we had a steady quarter for noninterest income service fees were flat to the prior quarter, but up from the prior year SBA fees were slightly down from the prior quarter as we saw fewer loan sales this quarter with these straightforward let's.
Take a closer look at expenses, our total expense base was $10 5 million and slightly up from the prior quarter salaries and benefits were down as we decreased the incentive accrual based on company performance through Q2 like others. Our FDIC assessment was up this quarter and largely attributed to the increase.
Other operating expense, which increased 468000 due to audit and tax services Internet banking fees and special assets insurance expense. While some of these expenses are due to timing of when the invoices are paid we are seeing a general increase in other operating expense, which we project at the current or near current pace.
The remainder of the year in.
In terms of a forward run rate, we feel our quarterly expense should be at or slightly lower than our $10 $5 million. So with that let me take a quick.
Look at capital.
Capital levels remain above well capitalized levels, and we were able to pick up 77600, <unk> three shares at a weighted average price of $9 58 in the quarter. We have 170 to 397 shares remaining under our current authorization, which will allow us to be opportunistic if the share price retreats, so with capital.
Straightforward I'll turn it back to Lou for some closing comments. Thank.
Thank you Rob as we navigate this challenging operating environment. Our management team is mindful of the current economic conditions, taking prudent approach in managing our balance sheet liquidity expenses and capital.
While we conservatively manage asset quality and risk our focus is on enhancing our margin and profitability, while limiting growth in certain asset classes and.
In terms of closing comments I'll say the following day.
Delivering a 77 basis point ROA is not sitting well with this management team while a quarter does not define our performance. We ask you to review our longer term trend performance on page, four which demonstrates consistency and delivering sound profitable growth. Since 2016, we have laid out several goals.
Which we feel are reasonable and achievable for the teams to deliver in the near term they include.
And <unk> of 1% or better and Aro AE of 10% or better NIM to steadily rise to 3% by year end and improve further into 2020 for loan and deposit growth above 10% quarterly expenses below $10 5 million and to continue our operations in <unk>.
Safe and sound manner to ensure our credit book remains clean or.
Our primary near term focus is to improve our NIM Rob discussed many specific actions that we have already taken to do so and we have other variable viable opportunities to explore as we get into the second half of the year with that said, let's open the floor to Q&A.
The floor is now open for questions to ask a question at this time. Please press star one on your telephone keypad.
At any point you would like to withdraw from the queue. Please press star one again.
Our first question comes from the line of Bruce.
<unk> Gailey with <unk>.
Yes.
Thank you good morning, guys.
Good morning.
The buyback.
It was you were active in the buyback in the second quarter, but it did slow from <unk> levels.
The stock is still relatively cheap on tangible book values. How do you think about utilizing the rest of your authorization and the buyback.
Yeah, I would say in the second quarter price slowed because we were.
A little hesitant with the bank failures and making sure no other activity would really fall during that quarter, I think we feel a little bit better.
We really are using the buyback to support our stock we feel is a great opportunity to buy if it ever goes back down to tangible book value.
And.
Yes, we bought it at $9 58, our tangible book value was $940. It's up appreciably. Since then and we think that was a smart move. So again, we view the buyback is more opportunistic or capital is here too.
Deploy and make loans and take take bigger risks than just buying it back but it sometimes our capital is best used on the buyback in this quarter, we got it at $9 58.
Alright.
And then the two swaps that were added of.
$150 million I think you said the NIM impact would be a benefit of one $5 million annually. What is the life of those swaps.
Yes, so we have them.
Kind of layered in there probably men between two and three years.
As the.
As the terms on those Brady.
Okay and finally for me your U S century does screen a little high when it comes to office. So I just wanted to.
A little more of an update on how you think office is performing in your markets.
Do you anticipate I mean credit quality is so clean for you guys right now.
I was just wondering if you anticipate seeing any noise and office over time.
Well.
<unk>.
We are really watching.
Every segment, mainly in our CRE book Office.
No there is a big concern nationwide in Miami.
<unk> office is doing probably.
Is the priority the best marketing the U S. And this is not my opinion. This this comes from a third.
Third party studies that we have.
Commission and paid for.
Hey.
We do not have a big office sample concentration.
Concentration compared to do our segments and we are carefully addressing every from non menthol.
Either in new requests or annual reviews.
I cannot say that <unk> make any major issues in in office.
Frankly, but I understand your your concern.
Okay, great. Thanks for the color guys.
Brady.
Our next question comes from Michael Rose from Raymond James.
Your line is now open.
Hey, good morning, everyone. Thanks for taking my questions.
Good morning, Rob wanted to start the morning wanted to start.
On the margin appreciate kind of all the color and the kind of the puts and.
It takes can you just remind us what.
Youre beta assumptions are and where you think an IV mix.
Could trough and then.
On the DDA side I know you have several <unk>.
Different.
Lending verticals are any of those.
A source of deposits that you guys.
Can maybe push a little bit harder on thanks.
Okay, yes so.
Probably a year ago when rates started to increase we said.
No quarter should make.
The rate cycles. So we always said kind of through the rate cycle.
We could be up to around 35% on a total deposit deposit beta so were at that peak right now.
We're anticipating betas on our money markets around 40% and then Cds repricing around 75%. So we're hoping to hold the line, we do have $100 million in cash, but I can tell you we had clients come in the door past few days and asking for rates at $5 40.
We had a lot of competitors post March.
Run specials, some of those have abated, but others have not.
First horizon was bigger in the marketplace with a 538 money market account.
We were only matching on select basis.
But I would like to see our core DDA has come back.
And hold it at 36%, but that's certainly a challenge for us.
Okay.
I appreciate that.
It's obviously.
Very challenging.
And then just on the on the loan growth front.
Are you guys.
You need to have.
Some momentum, but little bit slower than in prior quarters, just wanted to get a sense for kind of the competitive dynamics in the market.
What we could expect for growth over the next couple of quarters and.
What the.
<unk>.
Don't know if you mentioned this Rob Im sorry, if I missed it but kind of the new <unk>.
Production loan yields are where loans are repricing too. Thanks.
Sure.
Good morning, Mike This is Lew.
We are as I mentioned, we have been doing very very well the last actually the last year in a in a ship on senior more C&I lending than we've ever had historically here doing very good business on the HOA side on the SBA side.
The yacht loans, which are consumer coming in very steadily and very strongly and we're being very selective on all our CRE again as Ben pointed down they've actually trended down.
The C&I.
Component gives us more opportunity on deposits.
Again, the HOA and our jurist advantage initiatives, which were which is focus on the attorney market have have consistently delivered and we don't think that thats going to stop our foreign correspondent banking has also been doing very very well on bringing in additional core deposits. So we believe that thats going to <unk>.
<unk>.
Very steadily.
We believe that the FERC on our production is going to be on a low single digit going forward, it's going to be more in line with what we saw last year, which I believe we were doing.
Quarterly fundings of about $125 million per quarter Thats, what I anticipate for the next two quarters again, we're looking at our go forward.
Pipeline and projecting that we're going to be seeing.
A coupon.
Well over seven five.
Got it and Louis just to appreciate slide 11 with C&I at 26% is there a target level you'd like to strive to get to in terms of the mix percentage.
I would I would probably like to shoot for that to be at about 35 to.
40% of the overall book.
I think a lot of community banks.
A really desirous of that having been in this market for 41 years I can tell you it's not easy.
And we've had the greatest success here, because we've developed a real verticals with real subject matter experts that we brought in from larger banks, they've been able to not only assist in developing the strategies writing the policies training the team in order to leverage.
To leverage the overall production.
Production team. So I do believe that these are all going to continue and youre going to be seeing are our C&I component of our non C. R E.
<unk> increase in again.
A move.
From 9% in 2020% to 26% in the second quarter I think it's been pretty significant we're very pleased with that and we believe that that's going to continue but.
But notwithstanding.
We are in South, Florida, and this is a real estate denominated economy.
We do CRE lending well, we're not shy about doing it but.
But we're not transactional and we're always trying to bringing the best quality business.
Fully banked.
Great. Thanks, Lew and maybe just finally for me just on the expense side I appreciate the color around relatively stable expenses from here you guys and sorry, if I missed this but you guys did have a step down in the salaries line.
Employee Count has continued to show a little bit higher I think you were at 178, or so I think that was up 2% sequentially, but just wanted to get some color. There and then are there any.
Other levers you can pull on the expense side.
To bring that cost a little bit thanks.
Yes, so on the expenses.
Salaries and benefits decreased we did lower our incentive accrual and Thats based on company performance. So our.
I guess, our mantra here is that.
If the team wins, we all win and if the team doesn't do our stated goals then we bring that down so.
We'll adjust that on a quarterly type basis, but there are some.
Opportunities and we'll be looking at everything is on the table I would tell you that.
So.
But I would say right now we expect the 10 five.
At or slightly below as a run rate.
Great. Thanks for all the color guys I appreciate it.
Thank you my welcome here.
Our next question comes from steady strictly from Janney Montgomery Scott.
Hey, good morning, gentlemen.
My on Friday.
I heard you correctly I think you mentioned the margins should get back to around 3% by the fourth quarter just thinking through how we get there is that the result of deposit costs stabilizing since you had more kind of a front loaded data.
Earning assets horizon from Remax, New production you have the swap is it the combination of those factors primarily or are there. Some other levers you're able to pull in there too there that are driving that outlook.
Yes, so on the margin.
Certainly.
270 margin is not going to cut it for us. So we've got to put out a number of things that will get us back to the 3%. We feel like we can grind higher I think 3% is a good goal for us the main item that I would say and there is multiple factors that would contribute to that.
But the main one is putting on higher earning asset yields.
Above 750, so Lou mentioned the 125, our goal as loan production as a quarter at 750 or above we have to hit those marks for us to hit.
Our margin goals, certainly controlling our deposit costs, the swaps will help a little bit on the margin on the edges, but the main thing is controlling our deposit costs and putting on higher yields and if we get some loans re pricing that's going to be great. We do have some of that opportunity, but the main pieces putting on higher <unk>.
Earning asset yields.
Understood that makes sense.
And kind of along that same line of questioning what.
What was the term of that brokered CD brought on.
And could we see more of that or was that really just a one time move to shore up liquidity not necessarily as much Doug.
A way to grow deposits necessarily.
Yes, so the brokered CD was around a two year where we.
We're rolling those and I think that is probably a more of a one off than anything else right now I mean, we're getting at or near the end of the rate cycle.
But we're still living in an inverted yield curve, we anticipate that to go on for for some time, whether the fed pauses or not I mean, we're still we're still inverted so going out on the curve two to three years.
Is the reason for the swaps.
Got it and just one last one for me.
Total liquidity coverage of uninsured deposits grew thanks to around 90% this quarter.
Is that something you're focused on whether you want to get that to 100% or whether youre happy where it is or is it just not as much of a concern given that in the past it seems like your depositors haven't been too worried about it.
Well I think the uninsured deposit figures are very reflective of our of our business model, we're simply not a retail bank.
We have corresponded banks.
Here that don't discuss that we've talked to all our clients when the March events happen, probably within 48 hours, we spoke to all of our top clients broken down by the different portfolio managers. Each one spoke to the top 25.
Everybody was concerned and kind of insurable, what's happening what we did very quickly is that we have.
White labeled the Ics and the Cedars products that we traditionally have had which in the past the only ones that really were interested worthy HR ways. So as we educated the clients more and more wanted to.
To be.
I guess b on the safer side and so you started seeing the that that shift mix as Rob refers to it.
I think that slowly that will continue to gain popularity I don't think its going to make a big move.
At this point in time.
But one of the things we are doing we are doing on an ongoing basis is to continually educate the customer should there ever be any kind of.
Sure.
Significant event people just know that they don't have to go anywhere they can they can do it here and so I think we've done a good job in educating them and creating the product.
Steady as she goes.
Makes sense. Thanks for that I appreciate the color guys and congrats on the terminal.
Thank you very much thanks Fredrik.
At this time there are no more questions.
Okay for thank you all for attending this earnings call and for the dialogue. We've had we always welcome the opportunity to take your calls field any questions and share our plans while the industry is traversing a very challenging operating environment, we look for opportunities to improve and capitalize on these challenges.
I have full confidence on this team on board. They are the very ones that work, so hard and turning this franchise around taking it in under six years from a regulatory oversight to a successful IPO.
Our plan is clear the Florida economy is among the best in the nation. The team is motivated and delivering results and as I said earlier, a single quarter does not define our performance. So we look forward and delivering as planned and in updating you all on our progress on our next earnings call with that said.
You all very much and have a great weekend.
This concludes the meeting you may now disconnect.
Okay.
Sure.