USCB Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 7 speakers on the call.

Operator

Good morning, and thank you for joining us today for USDB Financial Holdings' 2nd quarter 2023 earnings call. With me today reviewing our 2nd quarter highlights is CFO, Rob Anderson and Chief Credit Officer, Ben Passos, who will provide an overview of the bank's performance, the highlights of which you can see on Slide 3. The past quarter saw the market react, process and respond to the collapse of 3 high profile regional banks. The news on some financial markets triggered a crisis in confidence amongst consumers and a deposit light to the perceived safety of our too big to fail brethren. At U.

Operator

S. Century Bank, we build business relationships best based on the best in class service, products and people as our clients look to us for support and guidance. The USCB team responded immediately to the March events, contacting our clients directly to assail their 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 uninsured deposit ratio by 10% over the past 2 quarters as interested clients opt for available ICS and Cedars deposit products at U. S.

Operator

Entry Bank. Our efforts have been very well received. Deposit outflows were quickly curbed and the slowdown in loan demand experienced from mid March through early May has dissipated. The loan closings in June were 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 in our weighted average coupon. We will review this progress in greater detail shortly.

Operator

On a management level, our previous Board of Directors Chair, Doctor. Aida Levitan 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. Kirk Wyckoff, Managing Partner of Patriot Financial Partners as Lead Director. I am grateful for the privilege of closely working with Doctor.

Operator

Levitan these past years, look forward to continuing collaborating with Mr. Wyckoff and thank our Board for their continued trust and support. On Page 3, in terms of growth, both loans and deposits have been growing atorabove our stated guidance over the prior year. Liquidity improved over the past quarter and as I stated, we assisted many clients into insurance deposit products. Net income was $4,200,000 or $0.21 per diluted share and our ROAA was 0.77% compared to 1.08% for the Q2 of 2022.

Operator

Profitability was impacted by continued inverted yield curve and exacerbated by the bank failures of this past March. The banking sector's 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 remain strong. During the quarter, the company repurchased 77,603 shares of USCB Financial Holdings Inc.

Operator

At a weighted average price per share of $9.58 As of June 30, 2023, 172,397 shares remain authorized under the program. 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 turn our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

Speaker 1

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 2nd quarter results reflect this environment.

Speaker 1

While I review our 2nd quarter results, I will be pointing out why our management team feels more confident about the future, but first let's cover the quarter. Total assets were $2,200,000,000 for the quarter, loan balances were 1 point $6,000,000,000 and deposits are at $1,900,000,000 At quarter end, we had $439,000,000 in securities and like most banks in the industry today, these securities were put on the books during the pandemic period of very low interest rates. As interest rates have taken a fast and sharp rise, these securities have now have a negative mark due to the mark to mark accounting treatment. Roughly 50% of these securities are treated as held to maturity and the other half as available for sale. Total equity is now 184,000,000 flat to the prior quarter, although footnoted on the slide, the 184,000,000 in equity includes 47,100,000 the securities portfolio in AOCI.

Speaker 1

Moving on to the P and L, net interest income decreased from prior quarter and prior year as we deal with an inverted yield curve extended period of time. Non interest income was relatively flat to the prior quarter and as mentioned on our last call, the bank implemented CECL on January 1 of this year and our provision expense was nominal for the quarter as improved economic forecast drove a small reduction in 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 $4,200,000 or $0.21 a share, down from the prior quarter and prior year. Overall, I would characterize this quarter as reflective of a difficult operating environment.

Speaker 1

We are dealing with an inverted yield curve 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 indicators in terms of soundness, our credit metrics remain strong. Our loan loss reserve coverage was down slightly to 1.18 percent. In terms of profitability, return on average equity was 9.13%. Our NIM was 2.73% and down 49 basis points from the prior quarter driven by several factors which I'll cover in more detail.

Speaker 1

This efficiency ratio was 65.25 percent 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 and AOCI that I referenced earlier. Absent the AOCI 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, in abundance of caution, given the recent bank failures, we brought in 50,000,000 of brokered CDs at a weighted average rate of 4.98 percent to boost liquidity. 2nd, we finally experienced the mix shift that most of our competitors experienced earlier in this rate cycle.

Speaker 1

On average, DDA balances dropped $62,000,000 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 1.99%. Relative to the Fed funds rate increases, this puts the through the rate cycle deposit paid at 36%. Average DDA balances comprised 32 0.1% of total deposits at quarter end, which demonstrates the strength of our deposit book. If you take a closer look at our deposit book on the next slide, our deposit base reflects our business model, a diversified commercial bank.

Speaker 1

50% of our deposits are commercial accounts, 36 personal accounts, 11% public funds, which are partially collateralized and 3% brokered deposits. The total amount of uninsured deposits adjusted by the collateralized portion of public funds is 49%. Excluding the collateralized portion of public funds, the uninsured are 53%. I'd also point out that our ending spot balance of $1,921,000,000 is above our average balance for the quarter demonstrating sustained growth at quarter end. So let's move on to liquidity.

Speaker 1

During the quarter, we strengthened our liquidity to $853,000,000 and this excludes our ability to tap the brokered or listing CDE markets. As stated on our last call, the Federal Reserve created a new liquidity program to make additional funding available program and do not intend to access the program. Our on balance sheet liquidity is $309,000,000 and our off balance sheet sources excluding brokered and listing CDs is more than $544,000,000 We feel confident that these liquidity sources for us to navigate the current environment. So with that, let me turn back to Lou to discuss our loan book.

Operator

Thank you, Rob. On Page 10, on Slide 10, we see the average loans excluding PPP loans increased $22,500,000 or 5.8 percent annualized compared to a prior quarter and $290,100,000 or 22.7% compared to the Q2 2022. Directionally, portfolio loan yields have increased 109 basis points compared to the Q2 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 SVB triggered bank crisis.

Operator

Market uncertainties made business clients and prospects understandably knee jerk, but as the market has settled and fears of contagion have abated, production is back on track. As we see in 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 7 20 basis points in Q2 2023, 189 basis points above the portfolio average. In June 2023, gross closings topped 50,000,000 and the active pipeline has been reconstructed in a well diversified composition that is at a pre SVB run rate, SVB Q3. Portfolio diversification has been a focus of the management team and over the past 7 years we have developed and added several non CRE business verticals to our product lines, including association lending, SBA lending with a focus on variable 7 loans, YAT loans and correspondent banking. As you can see on the loan composition graphic provided, 26% of the current portfolio is non CRE as of Q2 2023, up from 9% at Q2 2020.

Operator

The trend for greater loan diversification has picked up the pace in 2023 as the total new loan volume in Q1 and Q2 was respectively 66% and 81% non CRE.

Speaker 1

Okay. Thank you, Lou. Moving on to our NIM page, net interest income decreased by $1,800,000 compared to the prior quarter, predominantly due to an increase in deposit cost and a liability sensitive balance sheet. We held more cash in the wake of recent bank failures and increased liquidity with higher priced brokered CDs both at a detriment to our net interest margin in the quarter. We also experienced the mix shift with balances moving out of DDA and into interest bearing deposits.

Speaker 1

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 has yet to be realized. All these events had a negative impact on our NIM, but we feel we are at or near an inflection point for the following reasons. First, liquidity and movement in our deposit book has settled down or abated. 2nd, we put on $50,000,000 notional pay fixed interest rate swap to take advantage of the inverted yield curve in the 2nd quarter.

Speaker 1

Today, this swap has 172 basis point carry on the notional amount, which will improve our NIM by $860,000 on an annualized basis with no movement in rates. Next, we did a $100,000,000 notional pay fixed rate swap in early Q3 and today has a 65 basis point carry or $650,000 on an annualized basis with no further movement in rates. Combined these two swaps could potentially improve our NIM by $1,500,000 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 375,000 and conversely, when rates drop, we could see the opposite. 4th, our loan pipeline is strong and has a weighted average rate above 7.50.

Speaker 1

We believe net loan growth for the balance of the year will be in the low double digits perhaps a tad higher. 5th, we have nearly 100,000,000 in cash sitting on the balance sheet that just repriced 25 basis points with the last rate increase and we can deploy this cash into loans at $7.50 or above. The excess cash will also allow us to be opportunistic on deposit pricing should 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 ALM model, our balance sheet is neutral in year 1 and asset sensitive in year 2.

Speaker 1

This is a direct result of having a higher portfolio of variable rate loans repricing in year 2. As discussed before, our practice is to book 10 year fixed rate CRE loans that have a repricing mechanism after year 5. We price these loans with an index tied to the 5 year CMT, while we expect 33 of the variable and hybrid loans to reprice within a year, we have $227,000,000 of loans repricing within the next 6 months. So with that, let me turn it to Ben to discuss asset quality.

Speaker 2

Thank you, Rob, and good morning to all. Our ALLL is slightly lower in absolute numbers and in percentage of total loans. This is strictly due to improvement in the economic outlook. Non performing loans continue to be minimal at 486,000 dollars And our classified loans have decreased also in absolute numbers and as a percentage of total loans at $3,363,000 in classified credits. We should note that we do not have any CRE loans classified.

Speaker 2

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 a book of $1,595,000,000 CRE loans amount to $989,000,000 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 $297,000,000 which translates into 30% of the CRE portfolio.

Speaker 2

The table in Page 15 gives you metrics of the CRE book. Weighted average loan to values ranging from 54% to 62%, debt service coverage ranging from 141 times to 220 times and average loans conservatively low ranging from $1,200,000 to $4,800,000 Moving to Slide 16, we have information on our CRE office segment. Again, not much changed from what you have seen before. The metrics show how clean this portfolio is. 91% of outstanding loan balances are within the bank's primary market.

Speaker 2

Finally, I should note that Miami's office sector outperforms the national averages with lower vacancy of 9 point 4% and availability rate of 12%. Going into Slide 17, Rob will talk about our non interest income.

Speaker 1

Okay. Thank you, Ben. We had a steady quarter for non interest 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.

Speaker 1

With these straightforward, let's take a closer look at expenses. Our total expense base was $10,500,000 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 $468,000 due to audit and tax services, Internet banking fees and special assets insurance expense.

Speaker 1

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 for the remainder of the year. In terms of a forward run rate, we feel our quarterly expense should be at or slightly lower than our $10,500,000 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 77,603 shares at a weighted average price of $9.58 in the quarter. We have 172,397 shares remaining under our So with capital straightforward, I'll turn it back to Lou for some closing comments.

Operator

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. In terms of closing comments, I'll say the following. Delivering a 77 basis point ROA is not sitting well with this management team.

Operator

While the quarter does not define our performance, we ask you to review our longer term trend performance on Page 4, which demonstrates consistency in delivering sound profitable growth since 2016. We have laid out several goals, which we feel are reasonable and achievable for the team to deliver in the near term. They include an ROAA of 1% or better, and ROAE of 10% or better NIM to steadily rise to 3% by year end and improve further into 2024 loan and deposit growth above 10%, quarterly expenses below $10,500,000 and to continue our operations in a safe and sound manner to ensure our credit book remains clean. 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.

Operator

With that said, let's open the floor to Q and A.

Speaker 3

Our first question comes from the line of Brady Gailey with KBW. Your line is now open.

Speaker 4

Thank you. Good morning, guys. Good morning. Good morning. So the buyback was you were active in the buyback in the Q2, but it did slow from 1Q levels.

Speaker 4

I mean, the stock is still relatively cheap on tangible book value. So how do you think about utilizing the rest of your authorization and the buyback?

Speaker 1

Yes, 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 it's a great opportunity to buy if it ever goes back down to tangible book value. And we bought it at 9.58, our tangible book value is 9.40.

Speaker 1

It's up appreciably since then and we think that was a smart move. So again, we view the buyback as more opportunistic. Our capital is here to deploy and make loans and take bigger rest than just buying it back. But sometimes our capital is best used on the buyback. In this quarter, we got it at $9.58

Speaker 4

All right. And then the 2 swaps that were added of $150,000,000 I think you said the NIM impact would be a benefit of $1,500,000 annually. What is the life of those swaps?

Speaker 1

Yes. So we have them kind of layered in. They're probably men between 2 3 years is the terms on those, Brady.

Speaker 4

Okay. And finally for me, U. S. Sentry does screen a little high when it comes to office. So I just wanted a little more of an update on how you think office is performing in your markets?

Speaker 4

And do you anticipate I mean credit quality is so clean for you guys right now. But I was just wondering if you anticipate seeing any noise in office over time?

Speaker 2

Well, we are really watching every segment in our CRE book. Office, we know there is a big concern nationwide. In Miami, office is doing probably is probably the best market in the U. S. And this is not my opinion.

Speaker 2

This comes from 3rd party studies that we have commissioned and paid for. We do not have a big office concentration compared to other segments and we are carefully addressing every fundamental either in new requests or annual reviews. I cannot say that I anticipate any major issues in office, frankly, but I understand your concern.

Speaker 4

Okay, great. Thanks for the color guys.

Speaker 5

Thank you, Brady.

Speaker 3

Our next question comes from Michael Rose from Raymond James. Your line is now open.

Speaker 6

Hey, good morning, everyone. Thanks for taking my questions. Good morning, Mark. Rob, wanted to start good morning. I wanted to start just on the margin.

Speaker 6

Appreciate kind of all the color and kind of the puts and takes. Can you just remind us what your beta assumptions are and where you think NIB mix could trough? And then just on the DDA side, I know you have several different lending verticals. Are any of those a source of deposits that you guys can maybe push a little bit harder on? Thanks.

Speaker 1

Okay. Yes. So probably a year ago when rates started to increase, we said no quarter should make the rate cycle. So we always said kind of through the rate cycle, we could be up to around 35 percent on a total deposit beta. So we're at that peak right now.

Speaker 1

We're anticipating betas 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 $100,000,000 in cash. But I can tell you, we had clients come in the door past few days and asking for rates at 5.40.

Speaker 1

We had a lot of competitors post March run specials, some of those have abated, but others have not. First Horizon was big in the marketplace with a 538 money market account. We were only matching on select basis, but I'd like to see our core DDAs come back a bit and hold it at 36%, but that's certainly a challenge for us.

Speaker 6

Okay. Appreciate that color. It's obviously very challenging. And then just on the loan growth front, you guys continue to have some momentum, but a 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

Speaker 2

the I don't know

Speaker 6

if you mentioned this, Rob, I'm sorry if I missed it, but kind of the new production loan yields are where loans are repricing to? Thanks.

Operator

Sure. Good morning, Mike. This is Lou. We are as I mentioned, we have been doing very, very well actually the last year in a shift on seeing more C and 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.

Operator

The C and I component gives us more opportunity on deposits. Again, the AQA and our Juris Advantage initiatives, which were which is focused on the attorney market, have consistently delivered and we don't think that that's going to stop. Our foreign correspondent banking has also been doing very, very well on bringing in additional core deposits. So we believe that that's going to continue very steadily. We believe that the on our production is going to be on a low single digit going forward.

Operator

It's going to be more in line with what we saw last year, which I believe we were doing quarterly fundings of about $125,000,000 per quarter. That's 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

Speaker 6

7.5%. Got it. And Lou, just to appreciate Slide 11 with C and I at 26%, is there a target level you'd like to strive to get to in terms of a mix percentage?

Operator

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 are 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 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 the overall production team.

Operator

So I do believe that these are all going to continue, and you're going to be seeing our C and I component or non CRE portion increase. And again, a move from 9% in 2020 to 26% in the Q2, I think, has been pretty significant. We're very pleased with that, and we believe that that's going to continue. But notwithstanding, we're in South Florida, and this is a real estate denominated economy. We do CRE lending well.

Operator

We're not shy about doing it, but we're not transactional, and we're always trying to bring in the best quality business fully banked.

Speaker 6

Great. Thanks, Lou. And maybe just finally for me, just on the expense side, appreciate the color around relatively stable expenses from here. You guys sorry if I missed this, but you guys did have a step down in the salaries and the employee count has continued to march a little bit higher. I think you were at 178 or so.

Speaker 6

I think that was up 2 sequentially, but I'm just wondering to get some color there. And then are there any other levers that you can pull on the expense side to bring that cost a little bit? Thanks.

Speaker 1

Yes. So on the expenses, salaries and benefits decreased. We did lower our incentive accrual and that's 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's on the table, I would tell you that.

Speaker 1

So but I would say right now, we expect the 10.5 at or slightly below as a run rate.

Speaker 6

Great. Thanks for all the color guys. Appreciate it.

Speaker 1

Thank you, Mike.

Speaker 3

Thank you. All right. Our next question comes from Freddie Strickland from Janney Montgomery Scott.

Speaker 5

Hey, good morning, gentlemen.

Speaker 3

Good morning.

Speaker 1

Good morning, Freddie.

Speaker 5

If I heard you correctly, I think you mentioned the margin should get back to around 3% by the Q4. Just thinking through how we get there, is that the result of deposit costs stabilizing since you had more kind of a front loaded beta, earning assets rising from remix, new production, you have the swap. Is it the combination of those factors primarily? Are there some other levers you're able to pull in there too that are driving that outlook?

Speaker 1

Yes. So on the margin, certainly, 2.70 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.

Speaker 1

The main item that I would say and there's multiple factors that would contribute to that, But the main one is putting on higher earning asset yields above 7.50. So Lou mentioned the 125 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 repricing, that's going to be great.

Speaker 1

We do have some of that opportunity, but the main piece is putting on higher earning asset yields.

Speaker 5

Understood. That makes sense. And kind of along that same line of questioning, what was the term of that brokered CD you 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 to a way to grow deposits necessarily?

Speaker 1

Yes. So the brokered CD was around a 2 year. We're rolling those and I think that is probably more of a one off than anything else right now. I mean we're getting at or near the end of the rate cycle. So but we're still living in an inverted yield curve.

Speaker 1

We anticipate that to go on for some time whether the Fed pauses or not. I mean, we're still inverted. So going out on the curve 2 to 3 years is the reason for the swaps.

Speaker 5

Got it. And just one last one for me. I saw liquidity coverage of uninsured deposits grew, think, around 90% this quarter. Is that something you're focused on, whether you want to get that to 100% or whether you're 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?

Operator

Well, I think the uninsured deposit figure is very reflective of our business model. We're simply not a retail bank. We have correspondent banks here that don't discuss that. We've talked to all our clients when the March events happened, probably within 48 hours, we spoke to all our top clients broken down by the different portfolio managers. Each one spoke to their top 25.

Operator

Everybody was concerned and kind of unsure of what was happening. What we did very quickly is that we white labeled the ICS and the Cedars products that we traditionally have had, which in the past, the only ones that really were interested were the HOAs. So as we educated the clients, more and more wanted to be, I guess, be on the safer side. And so you started seeing that shift mix, as Rob refers to it. I think that slowly that will continue to gain popularity.

Operator

I don't think it's going to make a big move at this point in time. But one of the things we are doing on an ongoing basis is to continually educate the customer should there ever be any kind of significant event. People just know that they don't have to go anywhere. They can do it here. And so I think we've done a good job in educating them and creating the product and steady as she goes.

Speaker 5

Makes sense. Thanks for that. Appreciate the color guys and congrats, Lou, on the Chairman role.

Speaker 3

At this time, there are no more questions.

Operator

Okay. So 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 and Board.

Operator

They are the very ones that work so hard in turning this franchise around, taking it in under 6 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.

Operator

So we look forward in delivering as planned and in updating you all on our progress on our next earnings call. With that said, thank you all very much, and have a great weekend.

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Key Takeaways

  • Client outreach and FDIC-insured products: Management contacted clients after the March bank failures to educate them on FDIC coverage and white-label ICS/Cedars solutions, reducing the uninsured deposit ratio by 10% over two quarters and stemming outflows even as deposit costs rose to 1.99%.
  • Resilient loan growth and diversification: After a mid-March slowdown, June loan closings reached an 18-month high, the pipeline is strong and diversified, and non-CRE verticals now comprise 26% of the portfolio with new production yields averaging 7.20%.
  • NIM compression and recovery plans: Net interest margin compressed to 2.73% due to the inverted yield curve and faster deposit repricing, but management targets a 3% margin by year-end through ~$150 million in pay-fixed swaps, $100 million in cash redeployment, and stabilized deposit betas.
  • Strong capital and liquidity: The bank finished Q2 with $2.2 billion in assets, $853 million of on/off-balance-sheet liquidity, repurchased 77,603 shares at $9.58 (172,397 shares remaining), and reported a tangible book value of $9.40 per share ($11.81 ex-AOCI).
  • Prudent asset quality: Credit metrics remain healthy with an ALLL coverage ratio of 1.18%, minimal non-performing loans ($0.5 million), $3.36 million in classified credits, no classified CRE loans, and conservative exposure focused on Miami’s outperforming office and retail markets.
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Earnings Conference Call
USCB Financial Q2 2023
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