USCB FINANCIAL HOLDINGS, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is designed to provide a better understanding of the consolidated financial condition and results of operations of the Company and the Bank, its wholly owned subsidiary, as of and for the three and nine months ended September 30, 2024. This discussion and analysis is best read in conjunction with the unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”) and the audited consolidated financial statements and related notes included in the Annual Report on Form 10-K (“2023 Form 10- K”) filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2023. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-Looking Statements" and Item 1A “Risk Factors" below in Part II hereof and in the 2023 Form 10-K filed with the SEC which is available at the SEC’s website www.sec.gov. Throughout this document, references to “we,” “us,” “our,” and “the Company” generally refer to USCB Financial Holdings, Inc. Forward-Looking Statements This Form 10 -Q contains statements that are not historical in nature are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. The words “may,” “will,” “anticipate,” “could,” “should,” “would,” “believe,” “contemplate,” “expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. These forward-looking statements include statements related to our projected growth, anticipated future financial performance, and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from expected developments or events, or business and growth strategies, including anticipated internal growth. These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Potential risks and uncertainties include, but are not limited to: • the strength of the United States economy in general and the strength of the local economies in which we conduct operations; • our ability to successfully manage interest rate risk, credit risk, liquidity risk, and other risks inherent to our industry; • the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss reserve and deferred tax asset valuation allowance; • the efficiency and effectiveness of our internal control procedures and processes; • our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate; • adverse changes or conditions in capital and financial markets, including actual or potential stresses in the banking industry; • deposit attrition and the level of our uninsured deposits; • legislative or regulatory changes and changes in accounting principles, policies, practices or guidelines, including the on-going effects of the implementation of the Current Expected Credit Losses (“CECL”) standard; • the lack of a significantly diversified loan portfolio and the concentration in the South Florida market, including the risks of geographic, depositor, and industry concentrations, including our concentration in loans secured by real estate, in particular, commercial real estate; • the effects of climate change; • the concentration of ownership of our common stock; • fluctuations in the price of our common stock; • our ability to fund or access the capital markets at attractive rates and terms and manage our growth, both organic growth as well as growth through other means, such as future acquisitions; • inflation, interest rate, unemployment rate, market and monetary fluctuations; • impacts of international hostilities and geopolitical events; • increased competition and its effect on the pricing of our products and services as well as our interest rate spread and net interest margin; • the loss of key employees; • the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client, employee, or third-party fraud and security breaches; and • other risks described in this Form 10-Q, the 2023 Form 10-K and other filings we make with the SEC. Table of Contents 32 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations. Therefore, you are cautioned not to place undue reliance on any forward-looking statements. Further, forward-looking statements included in this Form 10-Q are made only as of the date hereof, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, unless required to do so under the federal securities laws. You should also review the risk factors described in the 2023 Form 10-K and in the reports the Company filed or will file with the SEC. Overview The Company reported net income of $6.9 million or $0.35 per diluted share of common stock for the three months ended September 30, 2024 compared to $3.8 million or $0.19 per diluted share of common stock for the three months ended September 30, 2023. On October 28, 2024, the Company’s Board of Directors declared its fourth quarterly cash dividend of $0.05 per share of the Company’s Class A common stock. The cash dividend will be paid on December 5, 2024 to shareholders of record at the close of business on November 15, 2024. The aggregate amount distributed in connection with the three prior quarterly cash dividends paid in 2024 was $3.0 million. 10,000 shares of Class A common stock were repurchased at a weighted average price per share of $11.99 during the third quarter 2024. These repurchases were made pursuant to the Company’s publicly announced repurchase programs. As of September 30, 2024, 537,980 shares remained authorized for repurchase under the Company’s program s. In evaluating our financial performance, the Company considers the level of and trends in net interest income, the net interest margin, the cost of deposits and borrowings, levels and composition of non-interest income and non-interest expense, performance ratios, asset quality ratios, regulatory capital ratios, and any significant event or transaction. Unless otherwise stated, all period comparisons in the bullet points below are calculated at or for the quarter ended September 30, 2024 compared to at or for the quarter ended September 30, 2023 and as of September 30, 2024 compared to December 31, 2023, and annualized where appropriate: • Net interest income for the three months ended September 30, 2024 increased $4.1 million or 29.1% to $18.1 million from $14.0 million for the quarter ended September 30, 2023. • Net interest margin (“NIM”) was 3.03% for the three months ended September 30, 2024 compared to 2.60% for the three months ended September 30, 2023. • Total assets were $2.5 billion at September 30, 2024, representing an increase of $259.4 million or 11.6% from September 30, 2023 and an increase of $164.9 million or 9.4% annualized from December 31, 2023. • Total loans were $1.9 billion at September 30, 2024, representing an increase of $254.8 million or 15.2% from September 30, 2023 and an increase of $150.5 million or 11.3% annualized from December 31, 2023. • Total deposits were $2.1 billion at September 30, 2024, representing an increase of $205.7 million or 10.7% from September 30, 2023 and an increase of $189.5 million or 13.1% annualized from December 31, 2023. • Annualized return on average assets for the quarter ended September 30, 2024 was 1.11% compared to 0.67% for the quarter ended September 30, 2023. • Annualized return on average stockholders’ equity for the quarter ended September 30, 2024 was 13.38% compared to 8.19% for quarter ended September 30, 2023. • The ACL to total loans was 1.19% at September 30, 2024 and 1.18% at December 31, 2023. • Non-performing loans to total loans was 0.14% at September 30, 2024 and 0.03% at December 31, 2023. • At September 30, 2024, the total risk-based capital ratios for the Company and the Bank were 13.22% and 13.14%, respectively. • Tangible book value per common share (a non-GAAP measure) was $10.90 at September 30, 2024, representing an increase of $0.66 or 25.6% annualized from $10.24 at June 30, 2024. At September 30, 2024, tangible book value per common share was negatively affected by $1.94 due to an accumulated comprehensive loss of $38.0 Table of Contents 33 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q million. At June 30, 2024, tangible book value per common share was negatively affected by $2.28 due to an accumulated comprehensive loss of $44.7 million. See “Reconciliation and Management Explanation for Non-GAAP Financial Measures” included in this Form 10-Q for a reconciliation of this non-GAAP financial measure. Critical Accounting Policies and Estimates The consolidated financial statements are prepared based on the application of U.S. GAAP, the most significant of which are described in Note 1 “Summary of Significant Accounting Policies” in the Company’s 2023 Form 10-K and “Summary of Significant Accounting Policies” in Part I in this Form 10-Q . To prepare financial statements in conformity with US GAAP, management makes estimates, assumptions, and judgments based on available information. These estimates, assumptions, and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical to an understanding of our financial statements. Management has presented the application of these policies to the Audit and Risk Committee of our Board of Directors. Non-GAAP Financial Measures This Form 10-Q includes financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). This financial information includes certain operating performance measures. Management has included these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating the Company’s underlying performance trends. Further, management uses these measures in managing and evaluating the Company’s business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the section “Reconciliation and Management Explanation of Non-GAAP Financial Measures” included in this Form 10-Q. Segment Reporting Management monitors the revenue streams for all its various products and services. The identifiable segments are not material and operations are managed and financial performance is evaluated on an overall Company-wide basis. Accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment. Results of Operations General The following tables present selected balance sheet, income statement, and profitability ratios for the dates indicated (in thousands, except ratios): September 30, 2024 December 31, 2023 Consolidated Balance Sheets: Total assets $ 2,503,954 $ 2,339,093 Total loans (1) $ 1,931,362 $ 1,780,827 Total deposits $ 2,126,617 $ 1,937,139 Total stockholders' equity $ 213,916 $ 191,968 (1) Loan amounts include deferred fees/costs. Table of Contents 34 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Consolidated Statements of Operations: Net interest income before provision for credit losses $ 18,109 $ 14,022 $ 50,578 $ 44,192 Total non-interest income $ 3,438 $ 2,161 $ 9,113 $ 6,077 Total non-interest expense $ 11,454 $ 10,461 $ 34,188 $ 31,089 Net income $ 6,949 $ 3,819 $ 17,770 $ 13,824 Profitability: Efficiency ratio 53.16% 64.64% 57.27% 61.85% Net interest margin 3.03% 2.60% 2.87% 2.84% The Company’s results of operations depend substantially on the levels of our net interest income and non-interest income. Other factors contributing to the results of operations include our provision for credit losses, the level of non-interest expense, and the provision for income taxes. Three months ended September 30, 2024 compared to the three months ended September 30, 2023 Net income increased to $6.9 million for the three months ended September 30, 2024 from $3.8 million for the same period in 2023. The $3.1 million or 82% increase in net income was attributable to higher interest income from a larger loan portfolio, net interest margin expansion, and increased activity in fee generating transactions (wire fees, gain on sale of loans, SWAP fees, and treasury management fees) between periods. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 Net income increased to $1 7.8 million for the nine months ended September 30, 2024 from $13.8 million for the same period in 2023. The $3.9 million or 28.5% increase in net income was attributable to higher interest income from a larger loan portfolio and increased activity in fee generating transactions (wire fees, SWAP fees, and treasury management fees) between periods. Net Interest Income Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest- bearing liabilities and is the primary driver of core earnings. Interest income is generated from interest and dividends on interest-earning assets, including loans, investment securities and other short-term investments. Interest expense is incurred from interest paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances and other borrowings. To evaluate net interest income, we measure and monitor (i) yields on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources, (iii) net interest spread, and (iv) net interest margin. Net interest spread is equal to the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is equal to the annualized net interest income divided by average interest -earning assets. Because non-interest- bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the indirect benefit of these non-interest-bearing funding sources. Changes in market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets and interest-bearing and non-interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Our asset liability committee (“ALCO”) has in place asset-liability management techniques to manage major factors that affect net interest income and net interest margin. Table of Contents 35 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q The following table contains information related to average balances, average yields earned on assets, and average costs of liabilities for the periods indicated (dollars in thousands): Three Months Ended September 30, 2024 2023 Average (1) Balance Interest Yield/Rate (2) Average (1) Balance Interest Yield/Rate (2) Assets Interest-earning assets: Loans (3) $ 1,878,230 $ 29,819 6.32% $ 1,610,864 $ 22,523 5.55% Investment securities (4) 419,315 2,754 2.61% 445,828 2,833 2.52% Other interest-earnings assets 80,378 989 4.89% 83,479 1,026 4.88% Total interest-earning assets 2,377,923 33,562 5.61% 2,140,171 26,382 4.89% Non-interest-earning assets 107,511 110,087 Total assets $ 2,485,434 $ 2,250,258 Liabilities and stockholders' equity Interest-bearing liabilities: Interest-bearing checking $ 57,925 411 2.82% $ 52,080 331 2.52% Saving and money market deposits 1,084,562 10,064 3.69% 1,011,164 8,779 3.44% Time deposits 325,580 3,391 4.14% 290,272 2,565 3.51% Total interest-bearing deposits 1,468,067 13,866 3.76% 1,353,516 11,675 3.42% FHLB advances and other borrowings 156,043 1,587 4.05% 85,326 685 3.19% Total interest-bearing liabilities 1,624,110 15,453 3.79% 1,438,842 12,360 3.41% Non-interest-bearing demand deposits 609,456 587,917 Other non-interest-bearing liabilities 45,227 38,598 Total liabilities 2,278,793 2,065,357 Stockholders' equity 206,641 184,901 Total liabilities and stockholders' equity $ 2,485,434 $ 2,250,258 Net interest income $ 18,109 $ 14,022 Net interest spread (5) 1.82% 1.48% Net interest margin (6) 3.03% 2.60% (1) Average balances - Daily average balances are used to calculate yields/rates. (2) Annualized. (3) Average loan balances include non-accrual loans. Interest income on loans includes accretion of deferred loan fees, net of deferred loan costs. (4) At fair value except for securities held to maturity. This amount includes FHLB stock. (5) Net interest spread is the weighted average yield on total interest-earning assets minus the weighted average rate on total interest-bearing liabilities. (6) Net interest margin is the ratio of net interest income to average total interest-earning assets. Table of Contents 36 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Nine Months Ended September 30, 2024 2023 Average Balance (1) Interest Yield/Rate (2) Average Balance (1) Interest Yield/Rate (2) Assets Interest-earning assets: Loans (3) $ 1,829,593 $ 84,479 6.17 % $ 1,576,074 $ 63,081 5.35 % Investment securities (4) 426,594 8,634 2.70 % 430,118 7,501 2.33 % Other interest-earnings assets 101,919 3,953 5.18 % 71,514 2,459 4.60 % Total interest-earning assets 2,358,106 97,066 5.50 % 2,077,706 73,041 4.70 % Non-interest earning assets 108,902 107,443 Total assets $ 2,467,008 $ 2,185,149 $ Liabilities and stockholders' equity Interest-bearing liabilities: Interest-bearing checking $ 55,887 1,171 2.80 % $ 54,554 $ 574 1.41 % Money market and savings accounts 1,094,433 30,529 3.73 % 949,858 20,532 2.89 % Time deposits 321,470 9,907 4.12 % 264,241 5,767 2.92 % Total interest-bearing deposits 1,471,790 41,607 3.78 % 1,268,653 26,873 2.83 % Borrowings and repurchase agreements 160,726 4,881 4.06 % 80,087 1,976 3.30 % Total interest-bearing liabilities 1,632,516 46,488 3.80 % 1,348,740 28,849 2.87 % Non-interest bearing demand deposits 598,294 617,741 Other non-interest-bearing liabilities 37,045 34,492 Total liabilities 2,267,855 2,000,973 Stockholders' equity 199,153 184,176 Total liabilities and stockholders' equity $ 2,467,008 $ 2,185,149 Net interest income $ 50,578 $ 44,192 Net interest spread (5) 1.70 % 1.83 % Net interest margin (6) 2.87 % 2.84 % (1) Average balances - Daily average balances are used to calculate yields/rates. (2) Annualized. (3) Average loan balances include non-accrual loans. Interest income on loans includes accretion of deferred loan fees, net of deferred loan costs. (4) At fair value except for securities held to maturity. This amount includes FHLB stock. (5) Net interest spread is the weighted average yield on total interest-earning assets minus the weighted average rate on total interest-bearing liabilities. (6) Net interest margin is the ratio of net interest income to average total interest-earning assets. Three months ended September 30, 2024 compared to the three months ended September 30, 2023 Net interest income before the provision for credit losses was $18.1 million for the three months ended September 30, 2024, an increase of $4.1 million or 29.1%, from $14.0 million for the same period in 2023. This increase was primarily attributable to higher income from a larger loan portfolio combined with an increase in the weighted average loan yield . Net interest margin was 3.03% for the quarter ended September 30, 2024 and 2.60% for the same period in 2023. The volume of and rates on loans and interest-bearing liabilities both increased; however, the volume of and yields on loans grew at a higher rate, offsetting the increase in deposits and borrowing costs. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 Net interest income before the provision for credit losses was $50.6 million for the nine months ended September 30, 2024, an increase of $6.4 million or 14.5%, from $44.2 million for the same period in 2023. This increase was primarily attributable to higher income from a larger loan portfolio combined with an increase in the weighted average loan yield. Net interest margin was 2.87% for the nine months ended September 30, 2024 and 2.84% for the same period in 2023. Loan yields and the rate paid on interest -bearing liabilities both increased; however , the interest -earning assets balance was greater than that of interest-bearing liabilities. Therefore the effect of the increase in yields resulted in a NIM expansion of 3 bps between periods. Table of Contents 37 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Provision for Credit Losses The provision for credit losses represents a charge to earnings necessary to maintain an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for all expected credit losses. The provision for credit losses is impacted by variations in the size and composition of our loan and debt securities portfolio, recent historical and projected future economic conditions, our internal assessment of the credit quality of the loan and debt securities portfolios and net charge-offs. Three months ended September 30, 2024 compared to the three months ended September 30, 2023 The provision for credit loss was $931 thousand for the three months ended September 30, 2024 compared to $653 thousand for the same period in 2023. Growth in the loan portfolio was the primary driver of the increase in the provision expense during the three months ended September 30, 2024. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 The provision for credit loss was $2.1 million for the nine months ended September 30, 2024 compared to $892 thousand for the same period in 2023. Growth in the loan portfolio was the primary driver of the increase in the provision expense during the nine months ended September 30, 2024. Non-Interest Income Our services and products generate service charges and fees, mainly from our depository accounts. We also generate income from gain on sale of loans though our swap and SBA programs. In addition, we own and are beneficiaries of the life insurance policies on some of our employees and generate income from the increase in the cash surrender value of these policies. The following table presents the components of non-interest income for the dates indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Service fees $ 2,544 $ 1,329 $ 6,172 $ 3,707 Gain (loss) on sale of securities available for sale, net - (955) 14 (976) Gain on sale of loans held for sale, net 109 255 593 696 Other non-interest income 785 1,532 2,334 2,650 Total non-interest income $ 3,438 $ 2,161 $ 9,113 $ 6,077 Three months ended September 30, 2024 compared to the three months ended September 30, 2023 Non-interest income for the three months ended September 30, 2024 increased $1.3 million or 59.1% to $3.4 million, compared to the same period in 2023. This increase was primarily driven by growth in SWAP loan fees reported under service fees category, partially offset by declines in gains on sale of loans and other non-interest income. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 Non-interest income for the nine months ended September 30, 2024 increased $3.0 million or 50.0%, compared to the same period in 2023. This increase was primarily driven by growth in SWAP loan fees reported under service fees category and gain on sale of loans, , partially offset by declines in gains on sale of loans and other non-interest income. Table of Contents 38 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Non-Interest Expense The following table presents the components of non-interest expense for the dates indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Salaries and employee benefits $ 7,200 $ 6,066 $ 20,863 $ 18,325 Occupancy 1,341 1,350 3,921 3,968 Regulatory assessment and fees 452 365 1,361 1,041 Consulting and legal fees 161 513 1,016 1,257 Network and information technology services 513 481 1,499 1,464 Other operating 1,787 1,686 5,528 5,034 Total non-interest expense $ 11,454 $ 10,461 $ 34,188 $ 31,089 Three months ended September 30, 2024 compared to the three months ended September 30, 2023 Non-interest expense for the three months ended September 30, 2024 increased $1.0 million or 9.5%, compared to the same period in 2023. The increase was primarily driven by an increase of $1.1 million in salaries and employee benefits due to management bonus accrual based on the Company’s performance, and stock-based compensation expense. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 Non-interest expense for the nine months ended September 30, 2024 increased $3.1 million or 10.0%, compared to the same period in 2023. The increase was primarily driven by an increase of $2.5 million in salaries and employee benefits due to sales incentives, management bonus accrual based on the Company’s performance, merit increases, and stock- based compensation expense. Regulatory assessment and fees increased by $306 thousand due to FDIC deposit insurance. Other operating expenses increased due to an increase of $153 thousand in audit and tax services. Provision for Income Tax Fluctuations in the effective tax rate reflect the effect of the differences in the inclusion or deductibility of certain income and expenses for income tax purposes. Therefore, future decisions on the investments we choose will affect our effective tax rate. The cash surrender value of bank-owned life insurance policies covering key employees, purchasing municipal bonds, and overall levels of taxable income will be important elements in determining our effective tax rate. Three months ended September 30, 2024 compared to the three months ended September 30, 2023 Income tax expense for the quarter ended September 30, 2024 was $2.2 million as compared to $1.3 million for the same period in 2023. The effective tax rate for the three months ended September 30, 2024 was 24.2% compared to 24.7% for 2023. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 Income tax expense for the nine months ended September 30, 2024 was $5.6 million as compared to $4.5 million for the same period in 2023. The effective tax rate for the nine months ended September 30, 2024 was 24.0% compared to 24.4% for the same period in 2023. For a further discussion of income taxes, see Note 4 “Income Taxes” to the unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q. Analysis of Financial Condition Total assets at September 30, 2024 were $2.50 billion, an increase of $164.9 million, or 9.4% annualized, over total assets of $2.34 billion at December 31, 2023. Total loans, net of deferred fees/costs, increased $150.5 million, or 11.3% annualized, to $1.93 billion at September 30, 2024 compared to $1.78 billion at December 31, 2023. Total deposits increased by $189.5 million, or 13.1% annualized, to $2.13 billion at September 30, 2024 compared to $1.94 billion December 31, 2023. Table of Contents 39 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Investment Securities The investment portfolio is used and managed to provide liquidity through cash flows, marketability and, if necessary, collateral for borrowings. The investment portfolio is also used as a tool to manage interest rate risk and the Company’s capital market risk exposure. The philosophy of the portfolio is to maximize the Company’s profitability taking into consideration the Company’s risk appetite and tolerance, manage the asset composition and diversification, and maintain adequate risk-based capital ratios. The investment portfolio is managed in accordance with the Board approved Asset and Liability Management (“ALM”) policy, which includes investment guidelines. Such policy is reviewed at least annually or more frequently if deemed necessary, depending on market conditions and/or unexpected events. The investment portfolio composition is subject to change depending on the funding and liquidity needs of the Company, and the interest risk management objective directed by the Asset-Liability Committee (“ALCO”). The portfolio of investments also can be used to modify the duration of the balance sheet. The allocation of cash into securities takes into consideration anticipated future cash flows (uses and sources) and all available sources of credit. Our investment portfolio consists primarily of securities issued by U.S. government-sponsored agencies, U.S. agency mortgage-backed securities, collateralized mortgage obligation securities, corporate securities, other debt securities, and municipal securities all with varying contractual maturities and coupons. Due to the optionality embedded in these securities, the final maturities do not necessarily represent the expected life of the portfolio. Some of these securities will be called or paid down prior to maturity depending on capital market conditions and expectations. The investment portfolio is regularly reviewed by the Chief Financial Officer, Treasurer, and the ALCO of the Company to ensure an appropriate risk and return profile as well as for adherence to the investment policy. When evaluating AFS debt securities under ASC Topic 326, the Company evaluates whether the decline in fair value is attributable to credit losses or other factors like interest rate risk, using both quantitative and qualitative analyses, including company performance analysis, review of credit ratings, vintage bonds, remaining payment terms, prepayment speeds and analysis of macro-economic conditions. Each investment is expected to recover its unrealized loss position over its holding period as it approaches to maturity and the Company has the intent and ability to hold these securities maturity. As a result of this evaluation, the Company concluded that no allowance was required on AFS securities as of September 30, 2024. At quarter end, HTM securities included $157.7 million of U.S. Government and U.S. Agency issued bonds and mortgage-backed securities. Because of the explicit and/or implicit guarantee on these bonds, the Company holds no reserves on these holdings. The remaining portion of the HTM portfolio is made up of $9.3 million in investment grade corporate bonds. The required reserve for these holdings is determined each quarter using the model described above. For the portion of the HTM exposed to non-government credit risk, the Company utilized the PD/LGD methodology to estimate a $8 thousand allowance for credit losses (“ACL”) as of September 30, 2024. The book value for debt securities classified as HTM represents amortized cost less ACL. AFS and HTM investment securities increased $22.2 million, or 7.3% annualized, to $426.5 million at September 30, 2024 from $404.3 million at December 31, 2023. Investment securities increased due to reinvestment of payments received and investment of excess in cash balances into high credit quality investments to increase the Company’s profitability and modify the Company’s balance sheet duration according to the ALM policy. As of September 30, 2024, investment securities with a market value of $69.7 million were pledged to secure public deposits. The investment portfolio does not have any tax-exempt securities. Table of Contents 40 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q The following table presents the amortized cost and fair value of investment securities for the dates indicated (in thousands): September 30, 2024 December 31, 2023 Available-for-sale: Amortized Cost Fair Value Amortized Cost Fair Value U.S. Government Agency $ 11,916 $ 10,733 $ 9,664 $ 8,173 Collateralized mortgage obligations 104,228 84,194 103,645 80,606 Mortgage-backed securities - residential 60,390 50,762 63,795 52,187 Mortgage-backed securities - commercial 75,263 70,333 49,212 42,764 Municipal securities 24,945 20,425 25,005 19,338 Bank subordinated debt securities 24,272 23,080 28,106 26,261 $ 301,014 $ 259,527 $ 279,427 $ 229,329 Held-to-maturity: U.S. Government Agency $ 42,909 $ 38,965 $ 43,626 $ 38,306 Collateralized mortgage obligations 58,345 52,403 62,735 54,752 Mortgage-backed securities - residential 41,173 38,313 43,784 39,599 Mortgage-backed securities - commercial 15,316 14,563 15,439 14,182 Corporate bonds 9,266 8,881 9,398 8,671 $ 167,009 $ 153,125 $ 174,982 $ 155,510 Allowance for credit losses - securities held-to-maturity (8) (8) Securities held-to maturity, net of allowance for credit losses $ 167,001 $ 174,974 The following table shows the weighted average yields, categorized by contractual maturity, for investment securities as of September 30, 2024 (in thousands, except yields): Within 1 year After 1 year through 5 years After 5 years through 10 years After 10 years Total Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Available-for-sale: U.S. Government Agency $ - 0.00% $ - 0.00% $ 2,375 3.15% $ 9,541 1.96% $ 11,916 2.19% Collateralized mortgage obligations - 0.00% - 0.00% - 0.00% 104,228 1.64% 104,228 1.64% MBS - residential - 0.00% - 0.00% - 0.00% 60,390 1.84% 60,390 1.84% MBS - commercial - 0.00% - 0.00% 4,099 4.70% 71,164 3.40% 75,263 3.47% Municipal securities - 0.00% - 0.00% 19,704 1.72% 5,241 1.85% 24,945 1.75% Bank subordinated debt securities - 0.00% 1,000 7.99% 23,272 5.07% - 0.00% 24,272 5.19% $ - $ 1,000 $ 49,450 $ 250,564 $ 301,014 2.45% Held-to-maturity: U.S. Government Agency $ - 0.00% $ 7,945 1.02% $ 20,067 1.42% $ 14,897 2.06% $ 42,909 1.57% Collateralized mortgage obligations - 0.00% - 0.00% - 0.00% 58,345 1.66% 58,345 1.66% MBS - residential - 0.00% 4,352 1.86% 5,891 1.75% 30,930 2.22% 41,173 2.12% MBS - commercial - 0.00% 3,061 1.62% - 0.00% 12,255 2.85% 15,316 2.60% Corporate bonds - 0.00% 9,266 2.81% - 0.00% - 0.00% 9,266 2.81% $ - $ 24,624 $ 25,958 $ 116,427 $ 167,009 1.90% Loans Loans are the largest category of interest-earning assets on the unaudited Consolidated Balance Sheets, and usually provide higher yields than the remainder of the interest -earning assets. Higher yields typically carry greater inherent credit and liquidity risks in comparison to lower yield assets. The Company manages and mitigates such risks in accordance with the credit and ALM policies, risk tolerance and balance sheet composition. Table of Contents 41 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q The following table shows the loan portfolio composition as of the dates indicated (in thousands): September 30, 2024 December 31, 2023 Total Percent of Total Total Percent of Total Residential Real Estate $ 283,477 14.7 % $ 204,419 11.5 % Commercial Real Estate 1,095,112 56.8 % 1,047,593 58.8 % Commercial and Industrial 246,539 12.8 % 219,757 12.4 % Correspondent Banks 103,815 5.4 % 114,945 6.5 % Consumer and Other 198,604 10.3 % 191,930 10.8 % Total gross loans 1,927,547 100.0 % 1,778,644 100.0 % Plus: Deferred fees/costs 3,815 2,183 Total loans net of deferred fees/costs 1,931,362 1,780,827 Less: Allowance for credit losses 23,067 21,084 Total net loans $ 1,908,295 $ 1,759,743 Total loans, net of deferred fees/costs, increased by $150.5 million, or 11.3% annualized to $1.93 billion, at September 30, 2024 compared to December 31, 2023. The residential real estate loan segment had the most significant growth. Our loan portfolio continues to grow, with commercial real estate lending as the primary focus which represented approximately 56.8% of the total gross loan portfolio as of September 30, 2024. Our loan growth strategy since inception has been reflective of the market in which we operate and of our strategic plan as approved by the Board. Most of the commercial real estate exposure represents loans to commercial businesses secured by owner-occupied real estate. The growth experienced in recent years is primarily due to implementation of our relationship-based banking model and the success of our relationship managers in competing for new business in a highly competitive metropolitan area. Many of our larger loan clients have long-term relationships with members of our senior management team or our relationship managers that date back to former institutions. From a liquidity perspective, our loan portfolio provides us with additional liquidity due to repayments or unexpected prepayments. The following table shows maturities and sensitivity to interest rate changes of the loan portfolio at September 30, 2024 (in thousands): Due in 1 year or less Due in 1 to 5 years Due after 5 to 15 years Due after 15 years Total Residential Real Estate $ 6,136 $ 69,921 $ 67,027 $ 140,393 $ 283,477 Commercial Real Estate 88,789 304,663 696,167 5,493 1,095,112 Commercial and Industrial 10,396 64,579 125,719 45,845 246,539 Correspondent Banks 103,815 - - - 103,815 Consumer and Other 3,186 2,976 14,144 178,298 198,604 Total gross loans $ 212,322 $ 442,139 $ 903,057 $ 370,029 $ 1,927,547 Interest rate sensitivity: Fixed interest rates $ 177,851 $ 208,887 $ 184,199 $ 279,696 $ 850,633 Floating or adjustable rates 34,471 233,252 718,858 90,333 1,076,914 Total gross loans $ 212,322 $ 442,139 $ 903,057 $ 370,029 $ 1,927,547 The information presented in the table above is based upon the contractual maturities of the individual loans, which may be subject to renewal at their contractual maturity. Renewals will depend on approval by our credit department and balance sheet composition at the time of the analysis, as well as any modification of terms at the loan’s maturity. Additionally, maturity concentrations, loan duration, prepayment speeds and other interest rate sensitivity measures are discussed, reviewed, and analyzed by the ALCO. Decisions on term /rate modifications are discussed as well. As of September 30, 2024, approximately 56% of the loans have adjustable/variable rates and 44% of the loans have fixed rates. The adjustable/variable rate loans re-price to different benchmarks and tenors and in different periods of time. By contractual characteristics, there are no material concentrations on anniversary repricing. Additionally, it is important to note that most of our loans have interest rate floors. This embedded option protects the Company from a decrease in interest rates below the floor and positions us to gain in the scenario of higher interest rates. Table of Contents 42 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Asset Quality Our asset quality grading analysis estimates the capability of the borrower to repay the contractual obligation of the loan agreement as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans. Internal credit risk grades are reviewed at least once a year, and more frequently as needed. Internal credit risk ratings may change based on management’s assessment of the results from the annual review, portfolio monitoring, and other developments observed with borrowers. The internal credit risk grades used by the Company to assess the credit worthiness of a loan are shown below: Pass – Loans indicate different levels of satisfactory financial condition and performance. Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligator or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified at substandard, with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss – Loans classified as loss are considered uncollectible. Loan credit exposures by internally assigned grades are as follows for the dates indicated (in thousands): September 30, 2024 Pass Special Mention Substandard Doubtful Total Residential Real Estate $ 282,909 $ - $ 568 $ - $ 283,477 Commercial Real Estate 1,092,648 - 2,464 - 1,095,112 Commercial and Industrial 244,620 - 1,919 - 246,539 Correspondent Banks 103,815 - - - 103,815 Consumer and Other 196,613 - 1,991 - 198,604 $ 1,920,605 $ - $ 6,942 $ - $ 1,927,547 December 31, 2023 Pass Special Mention Substandard Doubtful Total Residential Real Estate $ 204,127 $ - $ 292 $ - $ 204,419 Commercial Real Estate 1,040,032 - 7,561 - 1,047,593 Commercial and Industrial 218,129 - 1,628 - 219,757 Correspondent Banks 114,945 - - - 114,945 Consumer and Other 191,930 - - - 191,930 $ 1,769,163 $ - $ 9,481 $ - $ 1,778,644 Table of Contents 43 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Non-Performing Assets The following table presents non-performing assets as of the dates shown (in thousands, except ratios): September 30, 2024 December 31, 2023 Non-accrual loans $ 2,725 $ 468 Loans past due over 90 days and still accruing - - Total non-performing loans $ 2,725 $ 468 Other real estate owned - - Total non-performing assets $ 2,725 $ 468 Asset quality ratios: Allowance for credit losses to total loans 1.19% 1.18% Allowance for credit losses to non-performing loans 846% 4,505% Non-performing loans to total loans 0.14% 0.03% Non-performing assets include all loans categorized as non-accrual, other real estate owned (“OREO”) and other repossessed assets. Problem loans for which the collection or liquidation in full is reasonably uncertain are placed on a non- accrual status. This determination is based on current existing facts concerning collateral values and the paying capacity of the borrower. When the collection of the full contractual balance is unlikely, the loan is placed on non-accrual to avoid overstating the Company’s income for a loan with increased credit risk. If the principal or interest on a commercial loan becomes due and unpaid for 90 days or more, the loan is placed on non-accrual status as of the date it becomes 90 days past due and remains in non-accrual status until it meets the criteria for restoration to accrual status. Residential loans, on the other hand, are placed on non-accrual status when the principal or interest becomes due and unpaid for 120 days or more and remains in non-accrual status until it meets the criteria for restoration to accrual status. Restoring a loan to accrual status is possible when the borrower resumes payment of all principal and interest payments for a period of six consecutive months and the Company has a documented expectation of repayment of the remaining contractual principal and interest or the loan becomes secured and in the process of collection. The Company may grant a loan concession to a borrower experiencing financial difficulties. This determination is performed during the annual review process or whenever problems surface regarding the borrower’s ability to repay in accordance with the original terms of the loan or line of credit. The concessions are given to the debtor in various forms, including interest rate reductions, principal forgiveness, extension of maturity date, waiver, or deferral of payments and other concessions intended to minimize potential losses. For further discussion of non-performing loans and borrowers experiencing financial difficulties, see Note 3 “Loans” to the unaudited Consolidated Financial Statements in Item 1 of Part 1 this Form 10-Q. Allowance for Credit Losses The ACL represents an amount that, in management's evaluation, is adequate to provide coverage for all expected future credit losses on outstanding loans. Additionally, qualitative adjustments are made to the ACL when, based on management’s judgment, there are factors impacting the allowance estimate not considered by the quantitative calculations. See Note 3 “Loans” in Item 1 of Part 1 of this Form 10-Q for more information on the ACL. Table of Contents 44 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q The following table presents ACL and net charge-offs to average loans by type for the periods indicated (in thousands): Residential Real Estate Commercial Real Estate Commercial and Industrial Correspondent Banks Consumer and Other Total Three Months Ended September 30, 2024 Beginning balance $ 3,193 $ 10,272 $ 4,747 $ 892 $ 3,126 $ 22,230 Provision for credit losses (1) 760 (86) (96) (69) 322 831 Recoveries 2 - 10 - 1 13 Charge-offs - - - - (7) (7) Ending Balance $ 3,955 $ 10,186 $ 4,661 $ 823 $ 3,442 $ 23,067 Average loans $ 238,113 $ 1,093,599 $ 238,331 $ 105,388 $ 202,799 $ 1,878,230 Net charge-offs to average loans (3) (0.00)% - (0.02)% - 0.01% 0.00% Nine Months Ended September 30, 2024 Beginning balance $ 2,695 $ 10,366 $ 3,974 $ 911 $ 3,138 $ 21,084 Provision for credit losses (2) 1,252 (180) 666 (88) 318 1,968 Recoveries 8 - 21 - 3 32 Charge-offs - - - - (17) (17) Ending Balance $ 3,955 $ 10,186 $ 4,661 $ 823 $ 3,442 $ 23,067 Average loans $ 231,947 $ 1,065,280 $ 232,160 $ 102,659 $ 197,547 $ 1,829,593 Net charge-offs to average loans (3) (0.01)% - (0.02)% - 0.01% 0.00% (1) Provision for credit losses excludes a $101 thousand expense due to unfunded commitments included in other liabilities and a $1 thousand release related to investment securities held to maturity. (2) Provision for credit losses excludes $159 thousand expense due to unfunded commitments included in other liabilities. (3) Annualized. Residential Real Estate Commercial Real Estate Commercial and Industrial Correspondent Banks Consumer and Other Total Three Months Ended September 30, 2023 Beginning balance $ 2,673 $ 10,183 $ 2,500 $ 677 $ 2,782 $ 18,815 Provision for credit losses (1) (162) (84) 738 73 108 673 Recoveries - - 8 - - 8 Charge-offs - - - - (3) (3) Ending Balance $ 2,511 $ 10,099 $ 3,246 $ 750 $ 2,887 $ 19,493 Average loans $ 183,643 $ 992,171 $ 179,127 $ 87,847 $ 168,076 $ 1,610,864 Net charge-offs to average loans (4) - - (0.02)% - 0.01% 0.00% Nine Months Ended September 30, 2023 Beginning balance $ 1,352 $ 10,143 $ 4,163 $ 720 $ 1,109 $ 17,487 Cumulative effect of adoption of accounting principle (2) 1,238 1,105 (2,158) 23 858 1,066 Provision for credit losses (3) (89) (1,149) 1,181 7 965 915 Recoveries 10 - 60 - 3 73 Charge-offs - - - - (48) (48) Ending Balance $ 2,511 $ 10,099 $ 3,246 $ 750 $ 2,887 $ 19,493 Average loans $ 186,918 $ 980,244 $ 164,466 $ 90,597 $ 153,849 $ 1,576,074 Net charge-offs to average loans (4) (0.01)% - (0.05)% - 0.04% 0.00% (1) Provision for credit losses excludes a $17 thousand expense due to unfunded commitments included in other liabilities and a $3 thousand release related to investment securities held to maturity. (2) Impact of CECL adoption on January 1, 2023. (3) Provision for credit losses excludes $39 thousand release due to unfunded commitments included in other liabilities and $16 thousand expense due to investment securities held to maturity. (4) Annualized. Table of Contents 45 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Bank-Owned Life Insurance As of September 30, 2024, the combined cash surrender value of all bank-owned life insurance (“BOLI”) policies was $53.0 million. Changes in cash surrender value are recorded to non-interest income in the unaudited Consolidated Statements of Operations. The Company had BOLI policies with five insurance carriers. The Company is the beneficiary of these policies. Deposits Customer deposits are the primary funding source for the Bank’s growth. Through our network of banking centers, we offer a competitive array of deposit accounts and treasury management services designed to meet our customers’ business needs. Our primary deposit customers are small-to-medium sized businesses (“SMBs”), and the personal business of owners and operators of these SMBs, as well as the retail/consumer relationships of the employees of these businesses. The following table presents the daily average balance and average rate paid on deposits by category for the periods presented (in thousands, except ratios): Three Months Ended September 30, 2024 2023 Average Balance Average Rate Paid Average Balance Average Rate Paid Non-interest-bearing checking $ 609,456 0.00% $ 587,917 0.00% Interest-bearing checking 57,925 2.82% 52,080 2.52% Money market and savings deposits 1,084,562 3.69% 1,011,164 3.44% Time deposits 325,580 4.14% 290,272 3.51% Total $ 2,077,523 2.66% $ 1,941,433 2.39% The Company has a granular deposit portfolio with outstanding balances comprised of 59% in commercial deposits, 31% personal deposits, 5% public funds (which are partially collateralized) and 5% brokered deposits. The brokered deposits balance at September 30, 2024 was $100.0 million and $50.0 million at December 31, 2024. The Company has approximately 20 thousand deposit accounts with the majority in personal accounts, approximately 13 thousand or 62.3%. The estimated average account size of our deposit portfolio was approximately $104 thousand as of September 30, 2024. The uninsured deposits are estimated based on the FDIC deposit insurance limit of $250 thousand for all deposit accounts at the Company per account holder. The total estimated amount of uninsured deposits was 56% at September 30, 2024 and 53% at September 30, 2023. The Company offers Insured Cash Sweep (“ICS”) and Certificate of Deposit Account Registry Service (“CDARS”) deposit products to fully insure our clients. The deposit balance in ICS/CDARS at quarter end was $106.0 million at September 30, 2024 and $107.3 million at December 31, 2023. The following table shows scheduled maturities of uninsured time deposits as of September 30, 2024 (in thousands): September 30, 2024 Three months or less $ 33,952 Over three through six months 50,797 Over six though twelve months 10,780 Over twelve months 776 $ 96,305 Other Liabilities The Company collects from commercial and residential loan customers funds which are held in escrow for future payment of real estate taxes and insurance. These escrow funds are disbursed by the Company directly to the insurance companies and taxing authority of the borrower. Escrow funds are recorded as other liabilities. As of September 30, 2024 escrow balances totaled $22.5 million compared to $2.3 million at December 31, 2023. Table of Contents 46 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Borrowings As a member of the FHLB of Atlanta, we are eligible to obtain advances with various terms and conditions. This accessibility of additional funding allows us to efficiently and timely meet both expected and unexpected outgoing cash flows and collateral needs without adversely affecting either daily operations or the financial condition of the Company. As of September 30, 2024, we had $118.0 million of fixed-rate advances outstanding from the FHLB with a weighted average rate of 3.47%. Maturity dates for the advances range between 2024 to 2028 as detailed in the table below. The following table presents the FHLB advances as of September 30, 2024 (in thousands): Interest Rate Type of Rate Maturity Date Amount 2.05% Fixed March 27, 2025 10,000 1.07% Fixed July 18, 2025 6,000 3.76% Fixed January 24, 2028 11,000 3.77% Fixed April 25, 2028 50,000 3.68% Fixed September 13, 2027 21,000 3.79% Fixed March 23, 2026 20,000 $ 118,000 During the third quarter 2024, the Company paid off the $80.0 million fixed-rate loan outstanding from the Bank Term Funding Program with an original maturity date of January 10, 2025. The Company has also established Federal Funds lines of credit with our upstream correspondent banks and the Federal Reserve Bank of Atlanta Discount Window to manage temporary fluctuations in our daily cash balances. As of September 30, 2024, there were no outstanding balances with any of these liquidity sources. Off-Balance Sheet Arrangements We engage in various financial transactions in our operations that, under GAAP, may not be included on the balance sheet. To meet the financing needs of our customers, we may include commitments to extend credit and standby letters of credit. To a varying degree, such commitments involve elements of credit, market, and interest rate risk in excess of the amount recognized in the balance sheet. We use more conservative credit and collateral policies in making these credit commitments than we do for on-balance sheet items. We are not aware of any accounting loss to be incurred by funding these commitments; however, we maintain an allowance for off-balance sheet credit risk which is recorded under other liabilities on the unaudited Consolidated Balance Sheets. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect actual future cash funding requirements. The following table presents lending related commitments outstanding as of the dates indicated (in thousands ): September 30, 2024 December 31, 2023 Commitments to grant loans and unfunded lines of credit $ 104,851 $ 85,117 Standby and commercial letters of credit 4,507 3,987 Total $ 109,358 $ 89,104 Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition established in the contract, for a specific purpose. Commitments generally have variable interest rates, fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn, the total commitment amounts disclosed above do not necessarily represent future cash requirements. Unfunded lines of credit represent unused portions of credit facilities to our current borrowers that represent no change in credit risk in our portfolio. Lines of credit generally have variable interest rates. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment, less the amount of any advances made. Letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. In the event of nonperformance by the client in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. If the commitment is funded, we would be entitled to seek recovery from the client from Table of Contents 47 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash or marketable securities. Asset and Liability Management Committee Members of senior management and our Board make up the asset and liability management committee, or ALCO. Senior management is responsible for ensuring that Board approved strategies and policies for managing and mitigating risks are appropriately executed within the designated lines of authority and responsibility in a timely manner. ALCO oversees the establishment, approval, implementation, and review of interest rate risk, management, and mitigation strategies, ALM related policies, ALCO procedures and risk tolerances and appetite. While some degree of Interest Rate Risk (“IRR”) is inherent to the banking business, we believe our ALCO implements sound risk management practices to identify, quantify, monitor, and limit IRR exposures. When assessing the scope of IRR exposure and impact on the consolidated balance sheet, cash flows and income statement, management considers both earnings and economic impacts. Asset price variations, deposit volatility and reduced earnings or outright losses could adversely affect the Company’s liquidity, performance, and capital adequacy. Income simulations are used to assess the impact of changing rates on earnings under different rates scenarios and time horizons. These simulations utilize both instantaneous and parallel changes in the level of interest rates, as well as non-parallel changes such as changing slopes (flat and steepening) and twists of the yield curve. Static simulation models are based on current exposures and assume a constant balance sheet with no new growth. Dynamic simulation is also utilized to have a more comprehensive assessment on IRR. This simulation relies on detailed assumptions outlined in our budget and strategic plan, and in assumptions regarding changes in existing lines of business, new business, management strategies and client expected behavior. To have a more complete picture of IRR, the Company also evaluates the economic value of equity (“EVE”). This assessment allows us to measure the degree to which the economic values will change under different interest rate scenarios (parallel and non-parallel). The economic value approach focuses on a longer-term time horizon and captures all future cash flows expected from existing assets and liabilities. The economic value model utilizes a static approach in that the analysis does not incorporate new business; rather, the analysis shows a snapshot in time of the risk inherent in the balance sheet. Market and Interest Rate Risk Management According to our ALCO model, as of September 30, 2024, we had a neutral to slightly asset sensitive balance sheet both for year one and year two modeling, using the static modeling. Asset sensitivity indicates that our assets generally reprice faster than our liabilities, which results in a favorable impact to net interest income when market interest rates increase. Liability sensitivity indicates that our liabilities generally reprice faster than our assets, which results in a favorable impact to net interest income when market interest rates decrease. Many assumptions are used to calculate the impact of interest rate variations on our net interest income, such as asset prepayment speeds, non-maturity deposit price sensitivity (betas), pricing correlations, deposit truncations and decay rates, and key interest rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most likely will, differ from static measures results. In addition, static measures like EVE do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates or customer deposit behavior. As part of our ALM strategy and policy, management has the ability to modify the balance sheet to either increase asset duration and decrease liability duration to reduce asset sensitivity, or to decrease asset duration and increase liability duration in order to increase asset sensitivity. According to our model, as of September 30, 2024, our balance sheet is neutral to slightly asset sensitive for both year one and year two under interest static rate scenarios (an increase or decrease of 400 basis points). This means that the impact of rates variations will be minimal to our NIM. Additionally, utilizing an EVE approach, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model. This measures the difference between the economic value of our assets and the economic value of our liabilities, which is a proxy for our liquidation value. According to our balance sheet composition, and as expected, our model stipulates that an increase in interest rates will have a negative impact on the EVE and lower rates, a positive impact. Results and analysis are presented quarterly to the ALCO, and strategies are reviewed and defined. Table of Contents 48 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Liquidity Liquidity is defined as a Company’s capacity to meet its cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the Company’s ability to efficiently meet both expected and unexpected cash flow and collateral needs without adversely affecting either daily operations or the financial condition of the Company. Liquidity risk is the risk that we will be unable to meet our short-term and long-term obligations as they become due because of an inability to liquidate assets or obtain relatively adequate funding. The Company’s obligations, and the funding sources used to meet them, depend significantly on our business mix, balance sheet structure and composition, credit quality of our assets and the cash flow profiles of our on - and off-balance sheet obligations. In managing inflows and outflows, management regularly monitors situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints on the ability to convert assets (particularly investments) into cash or in accessing sources of funds (i.e., market liquidity), pledging of assets and contingent liquidity events. Changes in macroeconomic conditions, as well as exposure to credit, market, operational, legal and reputational risks, such as cybersecurity risk, could have an unexpected impact on the Company’s liquidity risk profile and are factored into the assessment of liquidity and the ALM framework. Management has established a comprehensive and holistic management process for identifying, measuring, monitoring and mitigating liquidity risk. Due to its critical importance to the viability of the Company, liquidity risk management is integrated into our risk management processes, Contingency Funding Plan and ALM policy. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the Board and active involvement of senior management; appropriate strategies, policies, procedures, and limits used to identify and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the Company; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the institution’s liquidity risk management process. We expect funds to be available from several basic banking activity sources, including the core deposit base, the repayment and maturity of loans and investment security cash flows. Other potential funding sources include Federal Funds purchased, brokered certificates of deposit, listing services certificates of deposit, and draws from the Federal Reserve Bank of Atlanta discount window, and borrowings from the FHLB. Accordingly, we believe our liquidity resources are adequate to fund loans and meet other cash needs as necessary. Table of Contents 49 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Capital Adequacy As of September 30, 2024, the Bank was well capitalized under the FDIC’s prompt corrective action framework. We also follow the capital conservation buffer framework, and as of September 30, 2024, we exceeded the capital conversation buffer in all capital ratios, according to our actual ratios. The following table presents the capital ratios for the Bank at the dates indicated (in thousands, except ratios). Actual Minimum Capital Requirements To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio September 30, 2024 Total risk-based capital $ 257,212 13.14 % $ 156,587 8.00 % $ 195,733 10.00 % Tier 1 risk-based capital $ 233,606 11.93 % $ 117,440 6.00 % $ 156,587 8.00 % Common equity tier 1 capital $ 233,606 11.93 % $ 88,080 4.50 % $ 127,227 6.50 % Leverage ratio $ 233,606 9.28 % $ 100,700 4.00 % $ 125,874 5.00 % December 31, 2023: Total risk-based capital $ 233,109 12.65 % $ 147,432 8.00 % $ 184,290 10.00 % Tier 1 risk-based capital $ 211,645 11.48 % $ 110,574 6.00 % $ 147,432 8.00 % Common equity tier 1 capital $ 211,645 11.48 % $ 82,931 4.50 % $ 119,789 6.50 % Leverage ratio $ 211,645 9.17 % $ 92,328 4.00 % $ 115,410 5.00 % The Company is not subject to regulatory capital ratios imposed by Basel III on bank holding companies because the Company is deemed to be a small bank holding company. Impact of Inflation Our Consolidated Financial Statements and related notes have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. Recently Issued Accounting Pronouncements Recently issued accounting pronouncements are discussed in Note 1 “Summary of Significant Accounting Policies” to the unaudited Consolidated Financial Statements in Part 1 of this Form 10-Q. Table of Contents 50 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Reconciliation and Management Explanation of Non -GAAP Financial Measures Management has included these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating the Company’s underlying performance trends. Further, management uses these measures in managing and evaluating the Company’s business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies. The following table reconciles the non-GAAP financial measurement of operating net income available to common shareholders for the periods presented (in thousands, except per share data): USCB FINANCIAL HOLDINGS, INC. NON-GAAP FINANCIAL MEASURES (UNAUDITED) (Dollars in thousands) As of or For the Three Months Ended 9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023 Pre-tax pre-provision ("PTPP") income: (1) Net income $ 6,949 $ 6,209 $ 4,612 $ 2,721 $ 3,819 Plus: Provision for income taxes 2,213 1,967 1,426 787 1,250 Plus: Provision for credit losses 931 786 410 1,475 653 PTPP income $ 10,093 $ 8,962 $ 6,448 $ 4,983 $ 5,722 PTPP return on average assets: (1) PTPP income $ 10,093 $ 8,962 $ 6,448 $ 4,983 $ 5,722 Average assets $ 2,485,434 $ 2,479,222 $ 2,436,103 $ 2,268,811 $ 2,250,258 PTPP return on average assets (2) 1.62% 1.45% 1.06% 0.87% 1.01% Operating net income: (1) Net income $ 6,949 $ 6,209 $ 4,612 $ 2,721 $ 3,819 Less: Net gains (losses) on sale of securities - 14 - (883) (955) Less: Tax effect on sale of securities - (4) - 224 242 Operating net income $ 6,949 $ 6,199 $ 4,612 $ 3,380 $ 4,532 Operating PTPP income: (1) PTPP income $ 10,093 $ 8,962 $ 6,448 $ 4,983 $ 5,722 Less: Net gains (losses) on sale of securities - 14 - (883) (955) Operating PTPP income $ 10,093 $ 8,948 $ 6,448 $ 5,866 $ 6,677 Operating PTPP return on average assets: (1) Operating PTPP income $ 10,093 $ 8,948 $ 6,448 $ 5,866 $ 6,677 Average assets $ 2,485,434 $ 2,479,222 $ 2,436,103 $ 2,268,811 $ 2,250,258 Operating PTPP return on average assets (2) 1.62% 1.45% 1.06% 1.03% 1.18% Operating return on average assets: (1) Operating net income $ 6,949 $ 6,199 $ 4,612 $ 3,380 $ 4,532 Average assets $ 2,485,434 $ 2,479,222 $ 2,436,103 $ 2,268,811 $ 2,250,258 Operating return on average assets (2) 1.11% 1.01% 0.76% 0.59% 0.80% Operating return on average equity: (1) Operating net income $ 6,949 $ 6,199 $ 4,612 $ 3,380 $ 4,532 Average equity $ 206,641 $ 197,755 $ 193,092 $ 183,629 $ 184,901 Operating return on average equity (2) 13.38% 12.61% 9.61% 7.30% 9.72% Operating Revenue: (1) Net interest income $ 18,109 $ 17,311 $ 15,158 $ 14,376 $ 14,022 Plus: Non-interest income 3,438 3,211 2,464 1,326 2,161 Less: Net gains (losses) on sale of securities - 14 - (883) (955) Operating revenue $ 21,547 $ 20,508 $ 17,622 $ 16,585 $ 17,138 Operating Efficiency Ratio: (1) Total non-interest expense $ 11,454 $ 11,560 $ 11,174 $ 10,719 $ 10,461 Operating revenue $ 21,547 $ 20,508 $ 17,622 $ 16,585 $ 17,138 Operating efficiency ratio 53.16% 56.37% 63.41% 64.63% 61.04% (1) The Company believes these non-GAAP measurements are key indicators of the ongoing earnings power of the Company. (2) Annualized. Table of Contents 51 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q USCB FINANCIAL HOLDINGS, INC. NON-GAAP FINANCIAL MEASURES (UNAUDITED) (Dollars in thousands, except per share data) As of or For the Three Months Ended 9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023 Tangible book value per common share (at period-end): (1) Total stockholders' equity $ 213,916 $ 201,020 $ 195,011 $ 191,968 $ 182,884 Less: Intangible assets - - - - - Tangible stockholders' equity $ 213,916 $ 201,020 $ 195,011 $ 191,968 $ 182,884 Total shares issued and outstanding (at period-end): Total common shares issued and outstanding 19,620,632 19,630,632 19,650,463 19,575,435 19,542,290 Tangible book value per common share (2) $ 10.90 $ 10.24 $ 9.92 $ 9.81 $ 9.36 Operating diluted net income per common share: (1) Operating net income $ 6,949 $ 6,199 $ 4,612 $ 3,380 $ 4,532 Total weighted average diluted shares of common stock 19,825,211 19,717,167 19,698,258 19,573,350 19,611,897 Operating diluted net income per common share: $ 0.35 $ 0.31 $ 0.23 $ 0.17 $ 0.23 Tangible Common Equity/Tangible Assets (1) Tangible stockholders' equity $ 213,916 $ 201,020 $ 195,011 $ 191,968 $ 182,884 Tangible total assets (3) $ 2,503,954 $ 2,458,270 $ 2,489,142 $ 2,339,093 $ 2,244,602 Tangible Common Equity/Tangible Assets 8.54% 8.18% 7.83% 8.21% 8.15% (1) The Company believes these non-GAAP measurements are key indicators of the ongoing earnings power of the Company. (2) Excludes the dilutive effect, if any, of shares of common stock issuable upon exercise of outstanding stock options. (3) Since the Company has no intangible assets, tangible total assets is the same amount as total assets calculated under GAA P. Table of Contents 52 USCB Financial Holdings, Inc. Q3 2024 Form 10-Q Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, we are not required to provide the information required by this item.