USCB Financial Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. USCB is a Florida bank holding company whose principal subsidiary, U.S. Century Bank, operates in South Florida. Figures below are in U.S. dollars; financial statement amounts are generally converted from thousands to millions.
Financial results and position
| Metric | Q3 2023 / Sept. 30, 2023 | Comparable period / prior date |
|---|---|---|
| Net interest income | $14.0 million; Q3 net interest margin 2.60% | $16.8 million; Q3 2022 margin 3.47% |
| Net income / diluted EPS | $3.8 million / $0.19 | $5.6 million / $0.28 in Q3 2022 |
| Nine-month net income / diluted EPS | $13.8 million / $0.70 | $15.7 million / $0.78 in 2022 |
| Total assets | $2.245 billion | $2.086 billion at Dec. 31, 2022 |
| Gross loans / net loans | $1.675 billion / $1.657 billion | $1.507 billion / $1.490 billion at Dec. 31, 2022 |
| Deposits | $1.921 billion | $1.829 billion at Dec. 31, 2022 |
| Cash and cash equivalents | $33.4 million | $54.2 million at Dec. 31, 2022 |
| FHLB advances | $102.0 million outstanding; weighted-average rate 3.66% | $46.0 million at Dec. 31, 2022 |
| Stockholders’ equity | $182.9 million; tangible book value $9.36 per share | $182.4 million at Dec. 31, 2022 |
- For the first nine months, net cash from operating activities was $28.5 million; investing activities used $190.3 million; financing activities provided $141.0 million. Cash and cash equivalents fell $20.7 million over the period.
- Q3 efficiency ratio was 64.64%, versus 54.58% in Q3 2022. Return on average assets was 0.67%, versus 1.09%; return on average equity was 8.19%, versus 11.90%.
- The allowance for credit losses was $19.5 million, or 1.16% of loans. Nonperforming loans were $479,000, or 0.03% of loans; the filing reports no loans 90 days past due and still accruing.
- Company and Bank total risk-based capital ratios were 13.10% and 13.06%, respectively. The Bank reported capital ratios above “well-capitalized” thresholds.
Material changes versus prior periods
- Q3 net interest income fell 16.4% year over year; nine-month net interest income fell 5.6%. Higher asset yields and loan growth did not offset sharply higher funding costs. Q3 interest expense rose to $12.4 million from $1.7 million a year earlier.
- Loans grew 15.0% on an annualized basis from year-end, while deposits grew 6.7% annualized. Commercial real estate remained the largest loan category at 60.0% of gross loans; commercial and industrial loans also expanded substantially.
- Nine-month noninterest income increased 13.6% to $6.1 million, supported by higher service fees and a $981,000 BOLI enhancement. This included net securities-sale losses of $976,000. Noninterest expense rose 6.1% to $31.1 million.
- Accumulated other comprehensive loss widened to $51.2 million from $44.8 million at year-end, reflecting unrealized investment-security losses. Management attributed the losses principally to interest-rate and spread movements, stated it did not intend to sell the securities, and concluded no AFS credit-loss allowance was required.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $1.1 million and the unfunded-commitment reserve by $259,000, with a $1.0 million after-tax cumulative adjustment to accumulated deficit. Comparisons of 2023 and 2022 credit-loss measures use different methodologies.
Outlook, liquidity, risks and unusual items
- The filing provides no specific earnings, margin, growth or other numerical guidance. Management describes the balance sheet as asset-sensitive in its static interest-rate simulations: rising rates are modeled to benefit net interest income, while falling rates are modeled to reduce it. Management cautions that actual results may differ because of model assumptions and customer behavior; rising rates are expected to negatively affect economic value of equity.
- Management says liquidity resources are adequate and cites core deposits, loan and securities cash flows, FHLB borrowing capacity, brokered deposits, the Federal Reserve discount window and BTFP as potential sources. The company had $33.4 million of cash and equivalents; it had no BTFP borrowing, but had pledged $134.4 million of securities at par to the program. FHLB advances were $102 million.
- Estimated uninsured deposits were 53% of deposits at September 30. The company acquired $50 million of brokered deposits during the first nine months to support liquidity. These funding levels and deposit costs merit attention.
- Key exposures include South Florida and commercial real estate concentration, credit and liquidity risk, deposit attrition and uninsured deposits, interest-rate sensitivity, banking-industry stress, and economic, regulatory and operational risks. Approximately 59% of loans had adjustable or floating rates.
- A July 2023 shareholder lawsuit alleges directors lacked authority and breached fiduciary duties in a 2021 preferred-stock exchange. Plaintiffs seek class treatment and damages exceeding $750,000 plus fees and costs. The company disputes the claims and intends to defend them; it warns an adverse outcome could result in substantial damages and insurance coverage is not assured.
- In Q3, the company restructured BOLI: it surrendered a $7.1 million policy, transferred $2.9 million to a new policy, and funded the new policy with an additional $11.1 million. The new carrier provided a $981,000 cash-surrender-value enhancement.
- The company repurchased 577,603 shares year to date at a weighted-average $9.77 per share, for approximately $6.6 million including costs; it made no repurchases in Q3. No common dividends were declared for the quarter.
Important facts for investors to verify
- Whether deposit pricing and funding mix stabilize, and how they affect net interest margin and earnings.
- Deposit retention, uninsured-deposit concentration, use of brokered funding, and available borrowing capacity and collateral.
- Credit performance and reserve adequacy as the loan book grows, particularly in commercial real estate and South Florida; review the small increase in nonperforming loans.
- The extent and duration of unrealized securities losses, the ability to avoid forced sales, and the impact of rate changes on tangible equity and economic value.
- Developments and potential financial exposure in the preferred-stock exchange litigation, including insurance coverage.
- Management’s CECL assumptions and the comparability of reported credit-loss measures after adoption.