Executive Summary / Key Takeaways

• USCB Financial Holdings ($USCB) is a South Florida-focused bank executing a relationship-driven organic growth strategy, leveraging specialized business verticals to drive diversified loan and deposit growth.
• The company delivered record earnings in Q1 2025, with significant increases in net income, EPS ($0.38 diluted), and NIM (3.10%), fueled by strong loan and deposit growth and effective deposit cost management.
• Loan and deposit growth are projected to continue in the high single-digit to low double-digit range, supported by the robust Florida economy and a strong pipeline, despite market volatility and competitive pressures.
• Asset quality remains strong with low non-performing assets and charge-offs, though management maintains vigilance and reserves are increasing in line with loan growth and economic forecasts.
• The company is actively managing its balance sheet for interest rate risk, positioning for potential rate decreases while maintaining capital strength and returning value to shareholders through a recently doubled dividend and share repurchases.

South Florida's Strategic Foundation and Competitive Arena

USCB Financial Holdings, Inc., through its wholly-owned subsidiary U.S. Century Bank, operates as a commercially focused financial institution deeply rooted in the dynamic South Florida market. Established in 2002, the bank has evolved, culminating in its 2021 IPO and subsequent reorganization into a holding company structure. This history has shaped its core strategy: a relentless focus on relationship-driven organic growth, particularly targeting small-to-medium sized businesses (SMBs) and deposit-rich client segments.

The South Florida banking landscape is characterized by intense competition, described by management as "sporty." USCB competes directly with a range of institutions, from larger national players like U.S. Bancorp (USB) to regional banks such as Origin Bancorp (OBNK) and Regions Financial (RF). While larger competitors benefit from scale, broader geographic reach, and often more advanced technological infrastructure, USCB carves out its niche through a specialized approach and deep local relationships.

Compared to larger peers like U.S. Bancorp, USCB's scale is significantly smaller, which can translate to higher operating costs per unit and potentially slower technological adoption in certain areas. U.S. Bancorp, for instance, likely boasts faster digital processing speeds due to its substantial investments in technology. Similarly, Regions Financial's broader regional network offers greater efficiency in services like cash management. However, USCB leverages its focused strategy to potentially achieve lower operating costs per unit in its specific target segments and fosters stronger customer loyalty through personalized service – a key differentiator in a relationship-based market.

USCB's strategic response to this competitive environment involves developing specialized business verticals designed to attract specific, deposit-rich client bases. These include Association Banking, Correspondent Banking, and dedicated services for attorneys (Jurisadvantage) and medical professionals (MD Advantage), alongside a Private Client Group. This targeted approach aims to secure low-cost, stable deposits and generate diversified loan opportunities, moving the bank away from a historical concentration in commercial real estate (CRE).

While USCB may not possess a single, unique "core differentiated technology" in the sense of a proprietary material science or software platform, its operational effectiveness is increasingly supported by leveraging technology to enhance efficiency and client service. This includes utilizing platforms for treasury management services, operational wire needs, and internal processes like ALM and CECL modeling. Management's focus is on optimizing these tools and training staff to maximize their utility in serving clients and managing risk, rather than highlighting a specific technological moat over competitors. The ability to effectively implement and utilize standard banking technologies for specific client needs, such as streamlined wire services for businesses or tailored digital tools for specialized verticals, contributes to its competitive positioning within its chosen market segments.

Performance Momentum and Operational Strength

USCB's strategic execution has translated into compelling financial performance, particularly evident in the first quarter of 2025. Net income surged to $7.7 million, or $0.38 per diluted share, a 65% increase over Q1 2024. This robust profitability was underpinned by strong growth across the balance sheet. Total assets reached $2.68 billion at March 31, 2025, representing a 15.1% annualized increase from December 31, 2024. Total loans, net of deferred fees/costs, grew 13.0% annualized to $2.04 billion over the same period, surpassing the significant $2 billion milestone. Deposits also saw substantial growth, increasing 25.3% annualized to $2.31 billion.

The primary driver of this performance was net interest income before the provision for credit losses, which rose 26.1% year-over-year in Q1 2025 to $19.1 million. The net interest margin (NIM) expanded to 3.10% in Q1 2025, up from 2.62% in Q1 2024. This expansion resulted from a combination of higher yields on a larger loan portfolio and a decrease in the rates paid on interest-bearing liabilities. While the weighted average coupon for new loans in Q1 2025 was 6.67% (7.15% excluding correspondent banking loans), consistently originating loans at yields above the portfolio average continues to support overall loan yield improvement. On the funding side, management's efforts to rationalize deposit costs have been effective, contributing to the NIM improvement seen over the past year.

Non-interest income also played a significant role, increasing 50.8% year-over-year in Q1 2025 to $3.7 million. This growth was primarily fueled by higher activity in fee-generating transactions, including a notable increase in prepayment penalties and title insurance income, as well as higher gains on the sale of SBA 7(a) loans. Interest rate swaps related to customer loans also contribute to fee income, with a notional amount of $211 million at March 31, 2025.

Disciplined expense management, while seeing a Q1 2025 increase primarily due to higher salaries and employee benefits (merit increases, bonuses, stock-based compensation), has contributed to an improved efficiency ratio of 52.79% in Q1 2025. This metric benchmarks favorably against many peers and reflects the bank's ability to leverage its operational base over a growing asset size.

The loan portfolio continues its trend towards diversification. While commercial real estate remains the largest segment at 56.7% of total gross loans at March 31, 2025, non-real estate loans comprise a significant portion, reflecting the success of verticals like Correspondent Banking (5.1%), Commercial and Industrial (12.6%), and Consumer and Other (10.8%). Approximately 57.6% of the loan portfolio has adjustable or variable rates, with most including interest rate floors, providing some protection in a declining rate environment. Asset quality remains strong, with the allowance for credit losses (ACL) at 1.22% of total loans at March 31, 2025. Non-performing loans were 0.20% of total loans, a slight increase from Q4 2024, but management anticipates no losses on the related loans and expects non-performing assets to improve in Q2 2025 following the sale of a nonperforming yacht loan. Classified loans also saw a slight increase but are expected to decrease. Net charge-offs remain minimal.

Deposit growth has been robust, particularly in Q1 2025. The specialized verticals are key contributors, with management noting significant growth in deposits from these areas. While average DDA balances saw a temporary dip in Q1 2025 due to specific client movements, end-of-period balances rebounded. The deposit base is granular and includes a mix of commercial (55%), personal (32%), public funds (5%), and brokered deposits (8%). Uninsured deposits were estimated at 54% at March 31, 2025, a slight decrease from Q4 2024, with the company offering ICS and CDARS products to fully insure client funds.

Liquidity is supported by this strong deposit base, along with access to FHLB advances ($108 million outstanding at March 31, 2025) and Federal Funds/Discount Window lines. The investment portfolio also provides liquidity through cash flows. Capital levels remain solid, with the Bank exceeding all regulatory requirements and remaining well-capitalized, positioning the company to support continued growth.

Outlook, Risks, and Shareholder Value

Management remains cautiously optimistic about the outlook for 2025, projecting high single-digit to low double-digit growth in both loans and deposits. This forecast is underpinned by the continued strength of the Florida economy, which is expected to outpace the national average, attracting businesses and residents. The robust loan pipeline and the contributions from recently hired senior bankers are expected to support this growth trajectory.

The NIM is expected to be flat to slightly up in the coming quarters, with potential for further expansion if the Federal Reserve cuts rates. Management believes they are well-positioned for a declining rate environment, anticipating the ability to reprice their money market book and maturing CDs at lower rates, which should benefit funding costs. The continued origination of new loans at yields above the portfolio average is also expected to support NIM.

Expenses are projected to increase gradually throughout 2025, primarily due to new hires and potential increases in performance-based bonus accruals. Management is focused on maintaining operating leverage and efficiency as the balance sheet grows.

While the outlook is positive, several risks warrant attention. Market volatility, particularly related to recently announced tariffs, introduces uncertainty regarding potential economic impacts on client sectors. Management is actively addressing this through heightened risk assessment and careful vetting of new loan production. Concentration risk in the South Florida market and in commercial real estate remains inherent, although the bank's diversification efforts are mitigating it over time. Interest rate risk is actively managed through ALCO strategies, though unexpected rate movements could impact NIM and the economic value of equity. Credit risk is monitored through internal grading and proactive management of problem loans, but economic downturns could lead to increased non-performing assets and provisions.

Despite these risks, the company is committed to enhancing shareholder value. The Board recently doubled the quarterly cash dividend to $0.10 per share, reflecting confidence in the bank's earnings power and outlook.

Share repurchases are also ongoing under existing programs.

While the bank requires FDIC approval for dividends due to negative retained earnings, the consistent dividend declarations signal a commitment to returning capital while maintaining strong capital ratios to support future growth.

Conclusion

USCB Financial Holdings is executing a clear, relationship-driven strategy in the attractive South Florida market. The company's recent performance, particularly the strong Q1 2025 results, demonstrates the effectiveness of its focus on organic growth, deposit cost management, and loan portfolio diversification through specialized verticals. While operating in a competitive landscape and facing macroeconomic uncertainties, USCB's disciplined approach to risk management and operational efficiency positions it to capitalize on the favorable regional economic backdrop. The outlook for continued growth, coupled with a commitment to shareholder returns, presents a compelling narrative for investors, provided the company can successfully navigate potential credit cycles and maintain its competitive edge through strategic execution and leveraging technology for client service and efficiency.