USCB Financial Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 26, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone, and welcome to the Q4 2023 USCB Financial Holdings, Inc. Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. And at this time, I'd like to turn the floor over to Luis de la Aguilera, CEO.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us today for USCB Financial Holdings 4th quarter 2023 earnings call. With me today reviewing our Q4 highlights is CFO, Rob Anderson and our new Chief Credit Officer, Bill Turner, who will provide an overview of the bank's performance, the highlights of which you can see on Slide 3. Bill joined us this past November as Ben Fasos, our previous Chief Credit Officer, formally retired at age 70. Ben was the first member of the executive team that joined me here at US Sentry after the bank's recapitalization in 2015. He played a transformative role in engineering the bank's conservative credit culture, while always maintaining strong and diversified asset quality.

Speaker 1

I had the distinct pleasure of working with Ben for 38 years. He will be missed and we wish him well. Like Ben, I have known Bill Turner since 1984, initially when he was a bank examiner with the OCC. Subsequently, we worked together in the late 1980s at Republic National Bank, where he rose to the position of SVP and Credit Policy Officer. From there, Bill went on to serve in key senior and executive positions in both Union Planners and BankUnited.

Speaker 1

From 2008 to 2015, Bill joined me and Ben at Total Bank where for 7 years he was Credit Policy Officer. Afterwards, he moved up to serve as Chief Credit Officer for both Apollo Bank and Inter American Bank in Miami. I have full confidence in Bill as having worked with him in the past, I have firsthand experience of his capacity, integrity and leadership. 2023 was a challenging year for the banking industry. The 2nd quarter was tumultuous as certain bank failures triggered a short lived crisis of confidence which affected many regional and community banks.

Speaker 1

Consumer sentiment was shaken, loan demand stalled and deposits fled to money center banks in a perceived flight to safety. The Fed continued raising rates further, prompting the mix shift in deposits from non interest bearing to interest bearing categories, further compressing NIM. Still, despite these and other headwinds, the USCB team pushed on through 2023 to deliver solid results, with total assets growing $253,000,000 or 12.1 percent to close the year at $2,300,000,000 dollars Loan growth was robust and diversified ending the year at 1,800,000,000 with total loans growing $273,000,000 or 18% over the previous year. Deposits closed the year at $1,900,000,000 an increase of $107,900,000 or 6% from December 31, 2022. After the slowdown in Q2, loan production came back on track over the last two quarters as the economy in South Florida continues to perform well with gains across most sectors.

Speaker 1

In Q4, our loan production was 186,000,000,000 dollars of which $150,000,000 funded mostly in December. This will continue to be accretive to net interest margin going forward. To this end, the weighted average coupon on quarterly loan production over the past 5 quarters has increased from 5.68 percent to 8%. This will be detailed shortly. Equally important to loan production and yields is asset quality and diversity.

Speaker 1

And this past year, 57% of gross loan production was non CRE, consisting of diversified HOA, SBA, equipment, consumer and yacht loans. Since loan growth is optimally funded by low cost deposits, our efforts to further leverage our deposit gathering business lines has taken a priority. New deposit focused hires sourced in Q3 and Q4 are coming online and new business verticals have been developed and recently introduced. In December 2017, the bank launched or reintroduced 3 deposit aggregating business lines, namely HOA Banking, Juris Advantage Initiative focused on developing the deposit rich legal market and Global Banking primarily focused on correspondent banking. Over these 5 years, these verticals have grown over $400,000,000 in deposits, of which 35% are non interest bearing.

Speaker 1

Each business line is headed by a senior banker having expertise in their field. New production personnel has been identified, allocated and hired to further support the deposit gathering activities of these verticals. Furthermore, on January 18 this year, we announced a new business vertical branded as MD Advantage, focused on the local medical and healthcare market. In early 2020 3, an experienced team with a $200,000,000 book of business was hired and organized to develop this market. The team has set operations at our Dadeland Banking Center, which is within 1.5 miles of 3 of the largest hospitals in South Miami.

Speaker 1

Another veteran senior producer managing $110,000,000 portfolio was also hired this month to further grow our deposit rich legal banking niche, sourcing lower funding costs. Also during this quarter, the company repurchased 92,317 shares of common stock at a weighted average price per share of $10.45 As of December 31, 2023, 80,080 shares remain authorized for repurchase under the company's stock program. Before we move on, I am pleased to confirm that this past December, a Florida state court judge dismissed with prejudice a federal class action suit led by 3 US Sentry Bank shareholders against current and former corporate directors. The judge held that the class action had no merit. The next page is self explanatory, directionally showing 9 select historical trends since recapitalization.

Speaker 1

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 specific financial results and key performance indicators which will be reviewed by our CFO, Rob Anderson.

Speaker 2

Okay. Thank you, Lou, and good morning, everyone. It appears we are coming to the close of the Federal Reserve's most aggressive tightening cycle in decades. As you all know, this has put a squeeze on the industry's profitability and USCB is no exception. As we discussed on our last call, our goal is to aggressively reprice current assets, originate new loans at higher yields and cost increases to improve the profitability of the bank.

Speaker 2

While I'm pleased to say that we have accomplished these goals in Q4, it will take a few more quarters with more pronounced results to materially improve our profitability profile. We also need some help from the Fed which most believe will come in the second half of twenty twenty four. First I'd point to the loan growth in our our growth in our loan book up $104,000,000 from the prior quarter or nearly 25%. While our deposits were up slightly, the pace of increases in our deposit focus slowed and I'll touch more on this in a bit. Net interest income finally saw an inflection point after declining all year and during the Q4 we sold $10,000,000 of lower yielding securities for an $883,000 loss, which impacted our non interest income line.

Speaker 2

The cash flows from this sale were reinvested in higher earning assets with an earn back under 1 year. With $104,000,000 of loan growth in the quarter, we booked a rather large provision expense. I'd also note that this growth came on late in the quarter predominantly in December, so we have the provision expense but not the benefit of the interest income for the quarter and that impacted our profitability. Regardless, the interest income generated by these loans will help the bank's profitability going forward. Earnings per share on a GAAP basis was $0.14 for the quarter and if you back out the securities loss sale, we made $0.17 for the quarter.

Speaker 2

As Lou mentioned, we were able to repurchase some shares this quarter and that did lower our share count both on a spot and weighted average basis. So let's move on to our key performance indicators. First, our tangible book value per share increased to $9.81 and includes AOC impact of a negative or negative $2.26 We saw an improvement in our AFS AOCI portfolio of $10,200,000 this quarter which translated into higher tangible book value per share. In terms of profitability, return on average assets was 0.48% for the quarter and return on average equity was 5.88%. Our NIM was 2.65 percent and up 5 basis points from the prior quarter driven by several factors which I'll cover later.

Speaker 2

In terms of soundness, our credit metrics remain strong and our loan loss reserve coverage was up slightly to 1.18%. Going on to the next page on deposits, a big part of our NIM story centers around our deposit costs and composition. Our deposit book was down slightly on an average basis, but up slightly when compared to the previous quarter on an ending spot basis. Deposit costs continue to increase, however, the pace of change is slowing down, particularly when compared with the 1st 2 quarters of 2023. As you know, the narrative around interest rates has bounced around some in the quarter.

Speaker 2

First, we are higher for longer, then the Fed came out in December and announced the expectation for rate cuts in 2024 and the market quickly started pricing in rate cuts. Now in January it appears we may be at current rates a bit longer than the market is pricing in and rates have moved back up a bit. Having said all this, in December as the rate narrative was moving down, we saw clients asking for 1 year CDs at 5 $25 to $5.50 and bringing us advertisements or emails with our competitors with those rates. While we did lose some of our clients excess liquidity at those rates, I can tell you we're not losing clients. Typically clients that move funds had CDs renewing or would be taking excess liquidity from their money market accounts and trying to lock in rates before they drop.

Speaker 2

As a note, alternative wholesale funding was nearly 70 to 90 basis points lower than competition for these CDs, so we decided only to match rates for our very best clients. And so far this year, we haven't opened a CD above 5% and the weighted average coupon for new CDs is close to 4.5%. Another positive aspect regarding our deposit portfolio is that the beta of total deposit costs remain within the 40% guidance and even when we have seen deposit mix shifting towards interest bearing accounts, our DDA balances comprised 30.1% of total deposits. At the end of 2023, we have $262,000,000 of deposits that are indexed to rates both prime and Fed funds. So when rates eventually drop these deposits will have 100% beta which will benefit our NIM and overall cost of funds.

Speaker 2

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. While our uninsured deposits ticked up to 55%, the conversations we are having with clients today are more about the rate being paid and not centered around the safety and insured deposits which dominated the headlines in Q2. Page 9 is the new slide to give everyone a better picture of our business verticals and how they contribute to our growth story. As mentioned before, each of these verticals are led by 1 senior leader with deep expertise, strong industry and client contacts and very little support staff, so the operating leverage in these verticals can be impressive, especially without all the brick and mortar branch cost. As Lou mentioned, we are adding personnel to all these verticals and fully expect this growth trend to continue as we progress through 2024.

Speaker 2

Let's move on to liquidity. First, you'll notice our loan to deposit ratio increased again this quarter to 91 0.9% as a result of the loan growth in the last few weeks of the quarter. We still have ample sources of liquidity both on and off balance sheet and the most noteworthy item on this slide is an action we took in early January. The Fed's bank term funding program has seen increased activity due to market sentiment of multiple rate cuts over the next 12 months. The rate banks pay to use the BTFP is tied to future interest rate expectations.

Speaker 2

Now that investors have priced in a series of rate cuts later this year, USCB and other banks are able to utilize this program at a lower cost than FHLB borrowings. USCB drew down $80,000,000 and paid off a similar amount in overnight FHLB borrowings saving the company 70 basis points or $560,000 annually. We'll see the impact of this action in 2024. So with that, let me turn it back to Lou to discuss our loan book.

Speaker 1

Thank you, Rob. Average loans increased $87,700,000 or 21.6 percent annualized compared to the prior quarter and $241,800,000 or 16.6% compared to the Q4 of 2022. Directionally, portfolio loan yields have increased 97 basis points to compared to the Q4 of 2022, a trend that will continue into the New Year. The previously noted Q2 slowdown in loan demand initiated by the sudden bank failures has abated. Our loan production teams responded and so did our clients.

Speaker 1

Loan production for 2023 totaled $446,000,000 and well diversified over various asset classes. As we see on the graphic, quarter to quarter the weighted average coupon on new production continued to increase from 568 basis points in Q4 2022 to 800 basis points in both Q3 and Q4 2023 or 2 21 basis points above the portfolio average. In the Q4, gross closings were $150,000,000 and the active pipeline is strong as we forecast similar activity, diversification and pricing into the New Year. Asset quality and continued portfolio diversification is an ongoing priority. Our Chief Credit Officer, Bill Turner, will be reviewing on Slide 17 our loan portfolio mix as well as the growing volume contributed by our non CRE business verticals to our product lines including association lending, SBA lending, Yacht loans and correspondent banking.

Speaker 2

Okay. Thank you, Lou. On Page 13, both net interest income and the NIM increased this quarter. While nominal, it does represent an inflection point and we feel both will continue to improve over 2024 for the following reasons slower increases in deposit costs, new loans coming on at higher rates, lower cost of borrowings with the FHLB and BTFP transaction, loan to deposit ratio is increasing, the mix of our interest earning assets continues to improve, dollars 40,000,000 of cash flows coming off our securities portfolio that can be reinvested and rate cuts coming in the second half of the year. According to our ALM model, we are slightly asset sensitive on a static model run and this reflects the balance sheet changes and strategies we executed during 2023.

Speaker 2

While the model is loaded with conservative assumptions that results in low volatility to interest rate movements, we believe that we could beat these assumptions and see a margin improvement during 2024. This however is dependent on the yield curve state normalization from inverted to a more positive slope curve. Furthermore, when we look at our deposit portfolio, we have reasons to believe that during 2024 we will see NIM expansion. As mentioned before, we have $262,000,000 of deposits that are indexed with a beta of 100 percent. Taking into consideration the index deposits, we have a remaining $750,000,000 money market accounts that will reprice with a 44% beta.

Speaker 2

So if the Fed cuts rates 25 basis points, the annual savings on the money market accounts will be 825,000. On the loan side in 2024, we expect to reprice $330,000,000 of variable rate loans and receive $118,000,000 in cash flows from loan maturities. The current weighted average coupons for both these buckets is 7.02%. If we reprice these buckets at 7.50 or above, this will result in additional interest income of 2,200,000 dollars Moving on to the next slide, a key component of our balance sheet and liquidity management is our securities portfolio. For the Q4, the securities portfolio was $404,000,000 of which $56,700,000 is classified as AFS while the remaining 43 0.3% is classified as HTM.

Speaker 2

By classifying 43.3% of our portfolio as HDM, we have saved approximately $28,000,000 of unrealized losses and this has helped preserve our tangible book value per share. Our portfolio has a modified duration of 5.5 and the average life is 6.9. Our duration has increased as a result of extended higher rates which has resulted in lower prepayments. For the year, we expect to receive $40,500,000 from the securities portfolio and depending on our liquidity position and loan demand we could reinvest these cash flows at considerable higher yields as most of the securities portfolio was purchased when rates were at historical lows. We also saw an improvement in our AFS AOCI portfolio of $10,200,000 from quarter to quarter which translated into higher tangible book value per share.

Speaker 2

So with that, let me turn it over to Bill to discuss asset quality.

Speaker 3

Thank you, Rob. I look forward to working with you and the rest of the team here at US Century. As you can see from the first graph on Page 16, the allowance for credit losses increased 2 basis points to 1.18 percent of the loan portfolio at quarter end. This increase was a result of a $1,600,000 provision to the allowance driven mainly by the increase of over $100,000,000 in new loans booked during the Q4. The remaining graphs on Page 16 show the non performing loans as of quarter end were unchanged at 0.03% of portfolio and classified loans increased 5 basis points from the 3rd quarter to 0.32 percent of the portfolio and 2.49 percent of capital.

Speaker 3

No losses are expected from these classified loans. The bank continues to have no other real estate. On Page 17, the first graph shows the loan portfolio mix at year end. The portfolio increased over $100,000,000 on a net basis in the Q4 to almost $1,800,000,000 The composition continues to be well diversified. Commercial Real Estate represents 59% or a little over $1,000,000,000 and is segmented between retail, multifamily, owner occupied properties and offices.

Speaker 3

The second graph is a breakout of the commercial real estate portfolios for the non owner occupied and owner occupied loans, which demonstrates the diversified makeup of this segment. The table to the right of the graph shows the weighted average loan to values are less than 60% and the debt service coverage ratios are adequate for each segment of the portfolio. The loan quality and payment performance is good for all segments as the past due loan percentage remains below peer group banks. We're especially vigilant of the upcoming 2024 repricing and ensuring schedules for all portfolios and monitor and model the repayment ability in order to respond proactively. Overall, the quality and performance of the portfolio remains good.

Speaker 2

Okay. Thank you, Bill. Couple of items to point out on Page 18. First, service fees increased year over year due to new foreign correspondent banks being added to the portfolio, doing more business with current clients and modifying our approach to wire fees. 2nd, which has already been discussed as a securities loss sale.

Speaker 2

While we did 2 of these in 2023, we will be opportunistic about doing further loss sales going forward. Moving on to Page 19, our total expense base was $10,700,000 and up slightly from the prior quarter. Salaries and benefits were relatively flat as we made a few hires in the quarter and made final adjustments to our incentive accrual. On this front, our incentive program is aligned with shareholders so when the performance of the company is good, the incentive accrual is larger and when the company performance is lower, the incentive accrual is lower. In short, we win together and we lose together.

Speaker 2

Our associate base is aligned with our shareholders. Looking forward to 2024, we'll be resetting the incentive accrual and anticipate new hires in Q1, so you should expect our expense base to move up from this point. With that, let's turn to capital. While capital levels retreated some with strong loan growth in the quarter, USCB remains comfortably above well capitalized guidelines. Also worth noting is that the company repurchased 92,317 shares of common stock at a weighted average price of $10.45 during the quarter and for the full year of 2023, the company repurchased 669,920 shares of the company's common stock at a weighted average price of $11.28 per share.

Speaker 2

As of year end, 80,000 shares remain authorized for repurchase under the current program. So with that, let me turn it back to Lou for some closing comments.

Speaker 1

Thanks, Rob. Our plans for 2024 are supported by the vibrant strength of Florida's economy, which is forecasted to grow by a solid 3.3% in 2024, more than doubling the national's economy growth of 1.5%. The strong migration in new residents and businesses continued as the state's population approached 23,000,000 adding over 300,000 new residents last year. We serviced a strong diversified and growing market and project annualized loan growth of approximately 12%, 10% deposit growth to support our lending activities with a focus on non interest bearing deposits. In the past 4 quarters, we have on boarded 5 new veteran bankers who collectively managed over $350,000,000 in deposits at their prior institutions and expect to hire 2 more in the Q1 of 2024.

Speaker 1

We have launched a new business vertical supporting the medical healthcare market. This will be our 4th specialized deposit aggregating business line. With that said, I would like to open the floor to Q and

Operator

and Our first question today comes from Will Jones from KBW. Please go ahead with your question.

Speaker 4

Hey, great. Good morning, guys.

Speaker 5

Good morning, Will.

Speaker 1

Good morning.

Speaker 4

Hey, so, Raul, I wanted to start with the margin. I know there is a ton of moving pieces there. And right now on paper, you might screen a little asset sensitive. But it feels like just with deposit betas that you're expecting on the way down and just the growth you guys are experiencing directionally, you will see expansion again next year. Is there any way to kind of ring fence a range and where you feel like the NIM could ultimately end the year as we move to 2024?

Speaker 2

Yes, it's going to be a little challenging. I mean I think this quarter we did hit an inflection point on the margin. I think I pointed out a number of reasons why we think it will even will increase even without rate cuts and if we do get rate cuts in the second half of the year, I think our margin will expand even a little further. Our profile is neutral to slightly asset sensitive right now, but I would point out that the deposit costs are slowing and if rates stay where they are today on the deposit side, we shouldn't see too many more increases going forward. And plus on the way down, we would anticipate 40% of betas on the deposit book and then also we have $262,000,000 that's indexed to like prime and Fed funds and that could have 100% beta.

Speaker 2

So I would say margin specifically for modeling purposes, I think it's going to grind up slowly until we get rate cuts and then it can move a little faster.

Speaker 4

Okay, perfect. That's very helpful there. And then, I mean, 18% loan growth in a year like this is really pretty impressive. And I look back just really since the IPO, you guys have been growing loans at this kind of mid to upper teens pace. I guess first question is the expectation that you will continue to see that demand and then we can see that same pace of loan growth moving into next year?

Speaker 4

And then conversely, deposits have grown, but not quite at that pace and we are now sitting at a little over 90% loan to deposit ratio. Is that a constraint to you guys moving forward?

Speaker 1

Well, I think I answered I shared with the group what we're doing strategically. We were setting the bank up next year to really focus or last year to really focus on the deposit growth side by continuing to support the deposit aggregating verticals that we have. We've hired 5 new team members throughout the course of 2023. We were looking for teams that had deposit books and that we've had no issues regarding non competes. The members that we brought in have $350,000,000 under their management, which now they're going to be targeting.

Speaker 1

Of the 350,000,000 from the analysis that we've done, about 35% of that is DDA, which is very much in line with the deposit composition of the verticals that we do have. So we feel comfortable that we are going to be moving up on the deposit side. My projection is 10% deposit growth to support our lending activities with a focus on interest bearing deposits. And as I stated, I believe the annual loan growth that we are going to be having is about 12% annualized.

Speaker 4

Okay. That makes sense. And the MD Advantage program, I mean, that's an exciting vertical for you guys. You call out the 315 $1,000,000 or so book that all the lenders currently have. Is the initial expectation that those deposits you will ultimately be able to attain at some point in time?

Speaker 1

We're definitely going to be working on it. The good thing is that when you have veteran bankers and in this case one particular banker has been handling that book of business for 30 years. So the relationship with those clients is very, very deep. I've already met with a few of them of these doctor groups. The first one I met with at a very significant high 7 figure depository balance and they were just waiting to come on board.

Speaker 1

So they're being on boarded as we speak. And the newest hire that we have which actually starts in a week again has a deposit book of 110,000,000 dollars which she has handled for the last almost 15 years. So again, we believe that when you've got that kind of a banker that has a very loyal following, they will follow them.

Speaker 4

Okay, great. Well, exciting things ahead, guys. And congrats to Ben on a great career.

Speaker 1

Thank you.

Operator

Our next question comes from Michael Rose from Raymond James. Please go ahead with your question.

Speaker 5

Hey, good morning guys. Thanks for taking my questions. Just following up on the deposit discussion on Slide 9, these specialty verticals have kind of ranged in the low to mid-twenty percent range in terms of total deposits just with the medical group coming on. How comfortable are you letting that percentage drift higher? And just are there any other verticals that you guys are exploring that are out there, maybe other licensed professionals or things like that?

Speaker 5

Thanks.

Speaker 1

Well, we feel I feel very strongly that we're going to see faster growth on the Juris Advantage side, the one that's focused on attorneys because we have hired 2 new individuals to work on that. The medical one has just started. Again, we announced the launch January 18th this year. I think that one is going to get traction quickly. The correspondent banking, we onboarded in the Q4 4 new banks and we plan to probably do another 4 by the end of the second.

Speaker 1

So all of these are going to be accretive into moving these numbers higher. We are for the first time in the last 5 years really adding much more personnel focused on these areas. And I think because they are very experienced, they have proven books, there is no restraints on non solicitation or non compete, we should be seeing these areas move forward. We have a total of 6 business verticals, 4 are now focused on deposit. The others are non CRE lending.

Speaker 1

We identify the opportunities and create them when especially when we find the senior person to lead them. So I don't have any other in mind right now. We just want to focus on expanding and maximizing the growth of the ones we have.

Speaker 5

Okay, helpful. And then it was good to see the loan production, the new loan production yield kind of hold steady at 8%. As you guys are thinking about your modeling and as it relates to the margin, what are you guys assuming for new production loan yields as we move through the year? Assuming we do get a couple cuts this year, do you guys think you can hold it? Or do you think rates come down, there will be more kind of competition and will put more pressure kind of on those yields?

Speaker 5

Thanks.

Speaker 1

Until rates are lowered, I think we're going to be able to hold it. Again, our focus on the non CRE business lines give us the ability to hold it. They're not as competitive as the CRE market here is in Miami. This is a real estate denominated economy and every bank in town is competing on CRE. But when you get into all these other business lines, you've got more flexibility on the higher pricing.

Speaker 2

And Michael, the other thing I would say is, I think we've proven year after year we've had very strong loan demand and I think we can probably be a little bit more selective on the ones that are priced a little higher with good relationship deposits and still have a good growth number on the loan side. And as Lou mentioned, we're putting a lot of resources right now on the deposit aggregating verticals and growing our loan book or our deposit book to support the loan growth.

Speaker 5

That's helpful. And Rob, I'm sorry if I missed this, but what is your base case for rates as it relates to the previous margin commentary?

Speaker 2

Yes, when we went through our strategic plan this fall, I think anywhere from 2 to 3 rate cuts could happen in the second half of the year. As mentioned on Will's question around the margin, I think we can grind the margin a little higher until rate cuts do materialize and then I think the margin expands a little further from there.

Speaker 5

Okay, great. And then maybe finally for me, you mentioned some new hires, expenses moving a little higher in the Q1. You guys had a deceleration in expense growth though in 'twenty three. Any other initiatives on the horizon that would cause a reacceleration of expense growth as we move through the year? Or is kind of mid single digit range something we should be contemplating for the year?

Speaker 5

Thanks.

Speaker 2

Yes, on the expenses, I mentioned it's going to move up some with the new hires and then resetting the incentive accrual a little bit. If you want to start off closer to 11,000,000. We ran 10.7 this past quarter. We had a one time item in there but we could move that up starting off in 2024. But again, we're going to be watching our expenses in the major hires right now around deposit aggregating people and we got a couple of them in the funnel, but nothing materially above that for the near term.

Speaker 5

Okay, great. Thanks for taking my questions.

Operator

Our next question comes from Teddy Strickland from Janney Montgomery Scott. Please go ahead with your question.

Speaker 6

Hey, good morning. Just wondering if you could provide a little more detail on the yield of the securities that were sold versus what came on or just generally what the pickup in yield was there on that securities trade?

Speaker 2

Yes, I'm looking at my treasurer right now. I think the 10,000,000 was roughly around 2% and I think we had about a 700 basis point pickup in some of those securities. It was 10,000,000 I mean we originated loans at 8. We did pick up a couple of pieces of sub debt, I think that were above 10, but nothing material, but I would say 700 basis points.

Speaker 6

Got it. So with that, the loan growth, the bank term funding program, paying off FHLB funding, I mean it seems like maybe we see a little bit more of a pickup maybe in the Q1 in margin that slows down. I know we've already discussed this some, but that slows down a bit and then we get rate cuts in the back half of the year it starts to accelerate again. Is that a fair way to look at it?

Speaker 2

Yes, Freddie, that's very fair.

Speaker 6

Okay, perfect. And then just one more question. Just generally speaking, I know you talked a little bit about non interest income earlier, but can you talk about how much opportunity you see to grow that line and then more specifically, SBA longer term?

Speaker 2

Okay, I'll start and one on the service fees, which is predominantly wire fees. This past year we worked on that a little bit. We have our foreign correspondent business that really has the predominant share of the wire fees. And the leader there, 1, we did more business with our current clients, we just asked for more business. We also were working on how we price wire fees which with each of those clients and those were somewhat dynamic but got some pickup there.

Speaker 2

And then also we're adding a couple of banks this year. I think we added at least 3, 4 new banks to the portfolios that picked up as well. I think on the service fee line itself, you could probably estimate or model a double digit increase on the wire fees alone. And then the gain on sale has been a little bit opportunistic. I think we've closed 1 in January, but our goal is to have more dollars on that line every quarter.

Speaker 2

So I don't know, Lou, if you want to make any other comments, but I think it's going to be not materially higher, but we are anticipating that to grow faster than our net interest income. So you could probably model 15% in total for that line item for the year and I think that would be a good placeholder and we'll see how we do against that. Understood. That's helpful. Thanks for taking my question.

Operator

And our next question comes from Ross Haberman from RLH Investments. Please go ahead with your question.

Speaker 7

Good morning, gentlemen. I have a quick question. Could you describe your uninsured deposits a little more? How chunky is it 30 names or 200 names that make up the uninsured portion and are you actively trying to get that percentage down more in 2024? Thank

Speaker 2

you. I would say it did the uninsured bounced back up a little bit. The conversations lately with the majority of our clients has been around the rate. So they're more a little bit more sensitive to rate than the insurance. I think the conversations have quickly changed.

Speaker 2

Frankly in my career talking with regulators, this is the 1st year we've talked about insured deposits versus uninsured deposits. I think we will follow what our clients are looking for. We have the ability and the products to have them insured if they wish to do that. I wouldn't be surprised if it hovers around this level or the insured improves slightly, but it is somewhat granular. I can't give you a specific amount, but again about 45 is insured and 55 is uninsured.

Speaker 2

And we do have big commercial clients and some of those are not insured.

Speaker 7

Are the regulators just one follow-up, are the regulators pushing you and everybody else to sort of reduce that number or when they come in, they're happy with or satisfied, I should say, with your amount of uninsured?

Speaker 1

I'll answer that. We had a safety and soundness exam that wrapped up in August, and we had that discussion. And they acknowledged that this is a topic really never discussed. In my 42 year career and every examination I've had, it's never been discussed. So we showed them the granularity.

Speaker 1

We actually have hundreds of accounts. It's not like a big chunky blocks. They understood that our business model is what it is. We showed them how we had moved it down, how we had quickly educated our clients as to ICS and Cedars, how that number had moved up and they were fine with it. There was no issue.

Speaker 1

As an example on our foreign correspondent side, all those banks, it's not even a discussion. They are here with low cost deposits because they want to have a U. S. Bank providing them service and it's not a matter of are they insured. And that was one of the things that we shared with the regulators and they fully understood.

Speaker 7

And just one follow-up question about the loans. Could you give us a rough sense or rough breakdown of what percentage of the loans you would describe as B and C office or would you describe most of them as A?

Speaker 3

Our office portfolio is about 190,000,000 dollars It's spread out over 129 loans. 32% of that is owner occupied and 68% is non owner occupied. We don't and 93% of that is located in Florida. I'm not I don't have a breakdown of class, but

Speaker 1

If I could, I would say that the great majority, if not all of it is solid B and C. These are I think rarely would you have an office building here that's over 5 stories and none of them are really in the major metropolitan area. They're out in the commercial section of the suburbs.

Speaker 3

And none of them are past due or non accrual or classified. The same as their vein in the group.

Speaker 7

Thank you very much guys. Have a nice weekend.

Speaker 3

Thank you, Ross.

Operator

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like

Speaker 4

to turn the floor back over

Operator

to Louis for closing remarks.

Speaker 1

Thank you. So on behalf of the USCB team, I would like to thank you all for your attendance and look forward to meet again in our next earnings call. Thank you.

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Key Takeaways

  • Q4 2023 results showed total assets rising 12.1% YoY to $2.3 B, loans up 18% to $1.8 B, deposits up 6% to $1.9 B, and loan production of $186 M mostly funded in December.
  • Net interest margin reached 2.65% (up 5 bps QoQ) and GAAP EPS was $0.14 ($0.17 ex–security loss), with management expecting further margin expansion from higher-yield loan repricing and Fed rate cuts in H2 2024.
  • USCB is enhancing its deposit gathering strategy via four specialized verticals—including the newly launched MD Advantage medical banking group—and aims for 10% deposit growth, aided by $262 M of rate-indexed deposits.
  • The bank’s liquidity and funding profile was strengthened by drawing $80 M from the Fed’s term funding program to replace costlier FHLB borrowings, saving 70 bps and supporting a 90.9% loan-to-deposit ratio.
  • Asset quality remains conservative, with nonperforming loans at 0.03%, allowance coverage at 1.18%, and classified loans at 0.32%, and management projects no credit losses from current classified loans.
AI Generated. May Contain Errors.
Earnings Conference Call
USCB Financial Q4 2023
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