USCB Financial Holdings, Inc. — Q1 2024 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2024, compared with Q1 2023; balance-sheet comparisons are primarily with December 31, 2023. USCB is a Florida bank holding company whose subsidiary, U.S. Century Bank, serves South Florida. Amounts below are in millions unless otherwise noted.
Financial performance and condition
- Earnings: Net income was $4.6 million, down 20.6% from $5.8 million; diluted EPS was $0.23 versus $0.29. Income before tax was $6.0 million versus $7.7 million.
- Interest income and margin: Interest income rose to $30.9 million from $22.4 million, but interest expense increased to $15.7 million from $6.4 million. Net interest income fell 5.2% to $15.2 million; net interest margin declined to 2.62% from 3.22%. Average cost of deposits rose to 2.76% from 1.29%.
- Other income and costs: Non-interest income increased 19.0% to $2.5 million, led by service fees. Non-interest expense rose 9.8% to $11.2 million, including higher audit, legal, regulatory assessment, and other operating expenses. The efficiency ratio was 63.41% versus 56.32%.
- Profitability: Annualized return on average assets was 0.76% versus 1.11%; return on average equity was 9.61% versus 12.85%.
- Balance sheet and lending: Total assets were $2.49 billion, up $150.0 million from year-end. Loans, including deferred costs, were $1.82 billion, up $40.4 million; commercial real estate (CRE) was 58.2% of gross loans. Deposits were $2.10 billion, up $165.7 million.
- Credit quality: Allowance for credit losses was $21.5 million, or 1.18% of loans. Non-performing loans were $456,000, or 0.03% of loans; quarterly charge-offs were $5,000. Substandard loans totaled $8.0 million, mainly CRE. One $468,000 commercial-and-industrial loan modification was reported.
- Cash flow and liquidity: Operating cash flow was $8.0 million; investing used $66.4 million, primarily reflecting securities purchases and loan growth; financing provided $143.9 million, mainly from deposit growth and borrowing activity. Cash and cash equivalents increased to $126.5 million from $41.1 million. The filing reports $162.0 million of borrowings: $82.0 million in FHLB advances and $80.0 million under the Federal Reserve’s Bank Term Funding Program (BTFP).
- Capital and securities: The Bank’s total risk-based capital ratio was 12.89% and leverage ratio 8.84%; the Company’s total risk-based capital ratio was 12.98%. Available-for-sale securities had $260.0 million fair value; held-to-maturity securities had $173.0 million carrying value and $152.2 million fair value. Accumulated other comprehensive loss was $45.4 million.
Material changes, outlook, risks and unusual items
- Management attributed weaker net interest income to faster growth in funding costs than asset yields, despite higher loan and investment income. Loan growth drove the higher credit-loss provision.
- Management described the balance sheet as asset-sensitive in its year-one and year-two static interest-rate models: higher rates are expected to benefit net interest income, while lower rates are expected to reduce it. The filing cautions that model assumptions and actual customer behavior may cause different results.
- Deposit risks include estimated uninsured deposits of 55% at March 31, 2024 and $90.1 million of brokered deposits. Management said liquidity resources were adequate; $244.4 million of securities were pledged to secure public deposits and the BTFP. The BTFP stopped making new loans in March 2024.
- Material risk exposures include CRE concentration, South Florida and other geographic/depositor concentrations, interest-rate and liquidity risk, competition, economic conditions, and potential deposit attrition. CRE sensitivity testing showed a hypothetical $6.1 million allowance increase under a specified high-risk scenario; this was not management’s reserve estimate.
- Investment securities had $83.2 million of gross unrealized losses at quarter-end, which management attributed primarily to interest-rate and spread movements rather than credit deterioration. Management stated it did not intend, and was not more likely than not required, to sell securities before recovery.
- No earnings or balance-sheet guidance was provided. The Board declared a second-quarter $0.05-per-share dividend after quarter-end and approved a new repurchase program for up to 500,000 shares, to begin after the existing program is completed.
- A shareholder lawsuit concerning the 2021 reorganization was dismissed with prejudice in December 2023; plaintiffs appealed on May 1, 2024. Management considered a material adverse impact remote but noted the appeal could be reversed and defense costs or outcomes remain uncertain. Management reported no other material legal proceedings.
Most important facts for investors to verify
- Whether deposit-cost increases continue to outpace asset-yield growth, and the resulting effects on net interest margin and earnings.
- Deposit mix and stability, particularly uninsured and brokered balances, and liquidity after the BTFP ceased new lending.
- CRE portfolio performance, substandard loan trends, and the adequacy of the allowance under changing economic and property-market conditions.
- Capital and tangible book value sensitivity to securities valuation changes; tangible book value was $9.92 per share, with accumulated other comprehensive loss of $45.4 million.
- Progress and funding implications of the new repurchase program and dividend, alongside the appeal of the reorganization litigation.