USCB FINANCIAL HOLDINGS, INC. quarterly report, Q3 FY2022

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USCB Financial Holdings, Inc. — Q3 2022 Form 10-Q

Business context and reporting period. The company is a bank holding company whose wholly owned subsidiary, U.S. Century Bank, serves South Florida. This unaudited report covers the quarter and nine months ended September 30, 2022. Income statement comparisons are to the same 2021 periods; balance sheet comparisons are generally to December 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.

Financial performance and position

  • Q3 earnings: Net income was $5.6 million, down from $6.6 million in Q3 2021. Class A diluted EPS was $0.28, versus a reported loss of $5.11 a year earlier. The prior-year per-share loss reflected an $89.6 million preferred-share exchange and redemption charge and preferred dividends; it was not a comparable operating loss.
  • Nine-month earnings: Net income was $15.7 million versus $15.4 million in 2021. Net income available to common stockholders was $15.7 million, versus a reported loss of $76.2 million in 2021, primarily due to the prior-year preferred-share charge and dividends.
  • Interest income and margin: Q3 net interest income before provision rose 24.5% to $16.8 million; net interest margin increased to 3.47% from 3.19%. For the nine months, net interest income rose 21.8% to $46.8 million and margin increased to 3.36% from 3.22%. Management attributed the growth mainly to larger loan and investment portfolios and higher loan yields.
  • Credit provision and asset quality: Q3 provision for credit losses was $910,000, compared with none in Q3 2021; nine-month provision was $1.6 million versus a $160,000 net recovery. The allowance was $16.6 million, or 1.16% of gross loans, at September 30. Non-performing loans were zero; $942,000 of loans were graded substandard. The company attributed provision expense principally to loan growth.
  • Other income and expenses: Q3 non-interest income fell 57.7% to $1.8 million; nine-month non-interest income fell 33.6% to $5.4 million. The principal comparison was a non-recurring $2.5 million default-interest recovery recorded in 2021. Q3 non-interest expense increased 12.5% to $10.1 million, mainly from salaries and benefits; nine-month expense rose 11.1% to $29.3 million.
  • Profitability ratios: Q3 efficiency ratio was 54.58% versus 50.92%; annualized return on average assets was 1.09% versus 1.50%, and return on average equity was 11.90% versus 13.41%. The filing reports nine-month efficiency ratio of 56.18% versus 56.72%.
  • Balance sheet growth: Total assets were $2.04 billion, up 9.9% from year-end 2021. Gross loans were $1.43 billion, up 20.3%; commercial real estate represented 64.9% of gross loans. Deposits were $1.80 billion, up 13.0%.
  • Liquidity, funding and debt: Cash and cash equivalents totaled $73.3 million, up from $46.2 million at year-end. Deposits were the primary funding source; estimated uninsured deposits were $1.1 billion. Federal Home Loan Bank advances were $26.0 million, down from $36.0 million, with a weighted-average rate of 1.39%. The company reported no outstanding Fed Funds line borrowings and stated liquidity resources were adequate.
  • Cash flow: For the first nine months, operating activities provided $31.6 million; investing activities used $200.8 million, including $177.9 million of net loan growth; financing activities provided $196.4 million, principally from a $206.3 million deposit increase, partly offset by net FHLB repayments. Cash increased $27.1 million to $73.3 million.
  • Equity and securities: Stockholders’ equity was $177.4 million, down from $203.9 million at year-end. Accumulated other comprehensive loss widened to $45.2 million from $2.5 million, largely reflecting unrealized investment-security losses. Available-for-sale securities had $50.7 million of gross unrealized losses; held-to-maturity securities’ fair value was $159.7 million against $178.9 million amortized cost. Management attributed the declines to market interest rates, stated it did not intend or expect to be required to sell before recovery, and classified no securities as other-than-temporarily impaired.
  • Capital: Company and Bank total risk-based capital ratios were 13.65% and 13.58%, respectively; management said the Bank was well capitalized and both entities exceeded applicable capital requirements. Tangible book value per common share was $8.87, down from $10.10 at September 30, 2021, primarily due to unrealized security losses.

Material changes and notable items

  • Loan growth was concentrated in commercial real estate, which increased to $928.5 million from $705.0 million at year-end 2021. Management said it did not expect significant near-term changes in portfolio composition or its commercial-real-estate emphasis.
  • During Q3, the company transferred $63.8 million of securities from available-for-sale to held-to-maturity. Related unrealized losses remain in accumulated other comprehensive income and are amortized over the securities’ remaining lives; no transfer-date gain or loss was recognized in earnings.
  • Unrealized losses on investment securities contributed to the substantial decline in accumulated other comprehensive income and stockholders’ equity, despite positive net income.
  • The Board authorized repurchases of up to 750,000 Class A shares; none had been repurchased through September 30, 2022.

Outlook, risks and contingencies

  • The filing provides no quantified earnings or growth guidance. Management’s rate-risk modeling indicated net interest income was approximately neutral to rate changes in year one and asset-sensitive in year two; modeled net interest margin was expected to remain mostly flat in year one and increase in year two. Management cautioned that actual results may differ because the models rely on assumptions.
  • Key disclosed risks include economic and South Florida market conditions; concentration in commercial real estate and the local market; credit, liquidity and interest-rate risk; deposit competition and uninsured deposits; inflation and rising rates; cybersecurity and other operational risks; regulatory compliance; and estimates for credit losses and deferred tax assets.
  • The company expected to adopt CECL on January 1, 2023. Management anticipated significant changes to credit-loss accounting and disclosures but said the financial impact had not yet been determined. It was also evaluating reference-rate reform and the impact of related accounting guidance.
  • Off-balance-sheet commitments totaled $125.2 million, including $119.8 million of loan commitments and unfunded lines and $5.4 million of letters of credit; actual funding needs may be lower because commitments may expire unused.
  • Management reported no material legal proceedings and did not expect ordinary-course claims to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting.

Important facts for investors to verify

  1. Whether loan growth and the 64.9% commercial-real-estate concentration remain consistent with underwriting standards and risk appetite.
  2. How credit quality, the allowance, and criticized or substandard loans develop as the portfolio grows and economic conditions change.
  3. Whether deposit costs rise, particularly for money market and savings accounts, and how uninsured deposits affect funding stability and liquidity.
  4. How higher interest rates affect net interest margin, deposit pricing, securities values, tangible book value, and capital.
  5. The eventual CECL adoption impact and whether management’s modeled interest-rate and liquidity assumptions match subsequent results.