Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- USCB Financial Holdings Inc (USCB, Financial) reported a significant increase in net income, reaching $0.31 per diluted share, the highest since going public.
- The company achieved a notable expansion in net interest margin (NIM), which increased by 32 basis points to 2.94% from the previous quarter.
- USCB's average deposit balances grew, particularly in demand deposit accounts (DDA), which increased by $35.6 million or 24.9% annualized.
- Noninterest income surged, contributing to record profits and improved efficiency, profitability, and earnings per share.
- The Florida economy, where USCB operates, continues to demonstrate remarkable resilience and growth, significantly outperforming the national average in 2024.
Negative Points
- USCB faces challenges from a prolonged inverted yield curve, growing inflation, and an unprecedented rise in interest rates.
- The company's asset sensitivity has decreased, which could impact its ability to capitalize on future rate changes.
- There is a potential risk of NIM contraction if rates drop 100 basis points across all centers, although this scenario is considered unlikely.
- USCB's loan portfolio saw an increase in non-performing loans and classified loans, albeit by a small margin.
- The company's expenses increased, primarily due to higher salaries and benefits, which could impact future profitability if not managed carefully.
Q & A Highlights
Q: Wanted to start on noninterest-bearing trends. On an average basis is really encouraging. It looks like average levels were a little bit ahead of the end of period. Just any comment on the trends you saw during the quarter?
A: Yes. So we did a lot of the pricing action on our deposits at the end of the first quarter and into the first month of the second quarter. We did see some movement at the end of the quarter. But you typically can see some movement on the last two weeks of the quarter, whether it's companies doing window dressing. We feel strong about growing our deposit book. So there's a little bit up and down, but the average really drives the net interest income and the net interest margin. So I think we're going to be fine, we expect to fully continue to grow in the second quarter as well.
Q: And the margin expansion in the second quarter, I mean, it was really great to see. Is there to more pull-through that we'll see in the third quarter or was the margin like relatively stable throughout the second quarter?
A: It was relatively stable throughout the second quarter. Like I said, we did a lot of deposit pricing actions at the end of the first quarter and the first month of the second quarter, so March and April. So we saw kind of a 2.94-ish margin for all three months basically. We expect that to be stable maybe near term to start grinding forward but certainly, it was nice to see and it was mainly on the deposit side that we were able to gain the traction.
Q: What stuck out to me was the growth in swap fees, I think that's kind of contrary to what we've seen. And I think you mentioned, Luis, that the pipeline was solid as we think about it going forward. Can you just explain maybe why swap fees are strong, I mean maybe your customers are just a little bit later to actually kind of locking in, but it seems like the activity at other banks kind of slowed.
A: Our clients and our sales force on the lending side are very adept and trained to offer the top to client to explain it to them. And there's a lot of people that when you take the time to explain the benefits of it, they see the value and they want to move in that direction. So when we have a loan of this type of a special pipe and term and size, that conversation happens. So we take the time to educate our clients in it, and they were a good decision. So the decisions have been favorable, and we have capitalized on. We not only look at our future growth in our loan portfolio by what we have in it as far as size, we also identified the swap deals that the clients have requested and the levers of intent that have been issued and the commitment orders that have been accepted. So when we track that, we feel very comfortable that the swap activity is going to continue into Q3 and Q4.
Q: Maybe just switching over to the balance sheet. Obviously, loan growth has been really strong and I know you have kind of a prior outlook of around 10%. You're tracking over that. It seems like maybe there's some maybe nearer-term medicines, but just macro-wise, but you guys are in really good economies, you have momentum. Any reason that, that number wouldn't end the year higher than that? And then just separately on deposits, certainly appreciate the reduction rates. You've kind of talked previously about also growing, I think deposits around 10%. Just wanted to get a sense for an update on both loans and deposits.
A: Yes, both loans and deposits, I think you're going to see a similar growth rate, I think, in the future quarters as you saw this quarter. Right now, we'd like to fund kind of the loan growth with existing deposit growth, relationship, cost deposits. So as I mentioned, we're going to have some cash flows off the securities portfolio. We'll have some opportunistic maybe to look at selling a few more securities here and there to run some stuff but overall, I would say it's going to be in the low double digits for both.
Q: I wanted to ask a little more about the cost of funds and the fact that you had a little bit of rollover this quarter. Do you see that continuing? And do you see any sort of new funding bases that can lower costs going forward?
A: Yes. Let me start. I would say from a cost standpoint, even looking at the month of June and the three months in the quarter, we're probably going to be a little steady on our deposit costs. We did lose a little bit of funding at the end of the quarter, and that was kind of rate sensitive. When we did drop the rates, they stuck around for a little bit, but some of it moved we anticipated that movement. I think for us, growing our DDA growth and keeping the DDAs in there will be key. But the expectation is that we hold at kind of the current level on our deposit cost because we did do a pretty sizable push on the end of the first quarter in April to really reprice some deposits and looking through that. Now, we're doing more of that, we do that every day. But I would expect the future quarters to be right around the current level, not up or down materially without any rate movement from the fed.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
