USCB FINANCIAL HOLDINGS, INC. quarterly report, Q2 FY2022

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USCB Financial Holdings, Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. Unaudited. USCB is a bank holding company whose subsidiary, U.S. Century Bank, serves South Florida.

Financial performance and position

Unless noted otherwise, dollar amounts below are in millions.

  • Q2 earnings: Net income was $5.3 million, up from $4.1 million a year earlier. Net income available to common stockholders was also $5.3 million, versus $3.3 million, as the company had no preferred dividends in 2022. Class A diluted EPS was $0.26; the prior-year filing reported $0.64 for Class A and $0.13 for Class B.
  • First-half earnings: Net income was $10.1 million versus $8.8 million; income available to common stockholders was $10.1 million versus $7.3 million. Six-month Class A diluted EPS was $0.50, compared with $1.41 for Class A and $0.29 for Class B in 2021. The different share structure following the 2021 IPO and preferred-share exchanges affects per-share comparability.
  • Revenue and margins: Q2 net interest income before credit-loss provision increased 25.4% to $15.6 million; net interest margin rose to 3.37% from 3.14%. First-half net interest income was $30.0 million, up 20.3%, and net interest margin was 3.30% versus 3.24%. Q2 non-interest income was $1.6 million, up 6.7%; first-half non-interest income was $3.6 million, down 7.2%, mainly reflecting fewer loan-sale gains.
  • Costs and profitability: Q2 non-interest expense rose 10.1% to $9.6 million, primarily from salaries and benefits. First-half expense increased 10.4% to $19.2 million. Q2 efficiency ratio improved to 55.34% from 62.00%; first-half ratio was 57.06% versus 60.28%. Q2 net income annualized return on average assets was 1.08%, and return on average equity was 11.38%.
  • Credit provision: Q2 and first-half provision for credit losses was $0.7 million, compared with none in Q2 2021 and a $0.2 million net recovery in first-half 2021. The company attributed the provision to loan growth. Allowance for credit losses was $15.8 million, or 1.15% of gross loans, versus 1.30% at June 30, 2021.
  • Cash flow: First-half operating cash flow was $20.1 million, investing cash use was $161.5 million, and financing cash flow was $178.4 million. Cash and cash equivalents increased $37.0 million to $83.3 million.
  • Balance sheet and funding: Total assets were $2.02 billion, up about $162 million from year-end. Gross loans were $1.37 billion, up 15.2%; deposits were $1.74 billion, up 9.3%. FHLB advances were $66.0 million, up from $36.0 million. Stockholders’ equity was $180.1 million, down from $203.9 million.
  • Capital: The company and bank reported total risk-based capital ratios of 13.74% and 13.67%, respectively, and management said both exceeded regulatory requirements and well-capitalized guidelines.

Material changes and notable items

  • Loan growth was concentrated in commercial real estate: $843.4 million, or 61.5% of gross loans, versus $705.0 million and 59.2% at year-end. Management said it expects no significant near-term change in portfolio composition or its CRE emphasis.
  • Commercial and industrial loans declined partly because of PPP loan forgiveness. PPP loans outstanding fell to $13.5 million from $42.4 million at year-end; related fees and interest contributed $1.5 million to first-half 2022 loan income, versus $2.4 million in 2021.
  • Investment securities totaled $456.1 million at carrying value, down from $524.2 million at year-end. Available-for-sale securities had $50.3 million of gross unrealized losses; total accumulated other comprehensive loss was $36.9 million, compared with $2.5 million at year-end. Management attributed the securities’ unrealized losses to market interest-rate changes rather than credit deterioration and said it did not intend, and was not likely required, to sell before recovery.
  • The company’s 2022 share repurchase authorization covers up to 750,000 Class A shares; none had been repurchased through June 30. The company reported 20,000,753 Class A shares outstanding as of August 1, 2022.
  • First-half 2022 results are compared with U.S. Century Bank alone for 2021, while 2022 includes the holding company and bank; the filing notes this change in consolidation scope.

Outlook, risks, and contingencies

  • The filing provides no specific earnings or growth guidance. Management said liquidity resources were adequate and not expected to be compromised at the time of filing.
  • Interest-rate risk is material: management characterized the company as asset-sensitive over years one and two, suggesting rising rates may benefit near-term net interest income. Its models also indicate that higher rates could negatively affect economic value of equity; modeled outcomes rely on assumptions and may differ from actual results.
  • Funding and concentration risks include approximately $1.0 billion of estimated uninsured deposits and a South Florida-focused business, with substantial CRE exposure. A $30 million FHLB advance was scheduled to mature July 14, 2022; most remaining advances were due in 2025.
  • At June 30, $146.3 million of commitments to grant loans, unfunded credit lines, and letters of credit were outstanding. Such commitments may not be fully drawn, but carry credit and liquidity risk.
  • Asset quality indicators were favorable at period-end: no non-performing loans or assets were reported, and all loans were current or no more than 89 days past due. However, $8.2 million of TDR loans remained on accrual status, and $1.1 million of loans were graded special mention or substandard.
  • Management planned to adopt CECL on January 1, 2023; the financial impact was not yet determined, though management expected meaningful changes to credit-loss estimation and disclosures. The company was also evaluating reference-rate reform and new troubled-debt-restructuring guidance.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.

Important facts for investors to verify

  • Whether loan growth, especially CRE growth, is matched by underwriting quality and an adequate allowance as CECL adoption approaches.
  • How rapidly deposit costs rise as interest rates change, and whether deposit growth and liquidity remain sufficient given the estimated $1.0 billion of uninsured deposits.
  • The duration and recoverability of securities’ unrealized losses, their effect on equity, and the company’s ability to avoid selling securities at a loss.
  • The timing and funding plan for the $30 million FHLB maturity due July 14, 2022, and the company’s broader dependence on wholesale borrowing.
  • How share issuance and the 2021 IPO/preferred-share restructuring affect EPS and tangible book value comparisons; tangible book value per share was $9.00 at June 30, 2022.