EDGAR 10-K Filing

Company CIK: 1901637
Filing Year: 2023
Filename: 1901637_10-K_2023_0001562762-23-000130.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
USCB Financial Holdings, Inc.,
a Florida corporation (the “Company”), was formed on December 17, 2021, to serve as
the holding company for U.S. Century Bank, a Florida state-chartered bank (the “Bank”), and is a bank holding company (a
“BHC”)
registered
with
the
Board
of
Governors
of
the
Federal
Reserve
System
(the “Federal
Reserve”)
under
the
Bank
Holding Company Act
of 1956, as
amended (the “BHC Act”).
The Company is
headquartered in Miami, Florida,
and, through
the Bank, its sole
subsidiary, operates 10 banking centers in South Florida providing a wide
range of personal and business
banking products and services. As of December 31, 2022,
the Company had total consolidated assets of $2.1 billion.
The Bank commenced operations
on October 28, 2002 and
is a Florida state-chartered, non-Federal
Reserve System
member bank. Over the course
of 2021, the Bank
simplified its capitalization structure
by exchanging and/or repurchasing
all of
its issued
and outstanding
preferred shares,
including Class
C, Class
D, and
Class E
preferred stock.
In December
2021, the
Bank reached agreements
with holders
of its
Class B
common stock, to
exchange all
outstanding Class B
common
stock for Class A common stock in a 1-for-5 stock
exchange.
On July 27,
2021, the Bank
completed an initial
public offering of 4,600,000
shares of its
Class A common stock.
Shares
of the Bank’s Class A
common stock were sold
at a price to
the public of $10.00
per share and began
trading on the Nasdaq
Stock Market under ticker symbol “USCB”.
On December
30, 2021
(the
“Effective
Date”),
the Company
acquired
all of
the
issued
and
outstanding
stock
of
the
Bank in a
share exchange
(the “Reorganization”)
effected under
the Florida
Business Corporation
Act and
in accordance
with the
terms of an
Agreement and Plan
of Share Exchange
dated December 27,
2021 between the
Bank and
the Company
(the “Share Exchange Agreement”). The Reorganization and
the Share Exchange Agreement were approved
by the Bank’s
stockholders at a special meeting of the Bank’s stockholders held on December 20,
2021. Pursuant to the Share Exchange
Agreement, on the Effective
Date each issued and
outstanding share of the
Bank’s Class A common
stock was converted
into and exchanged
for one share
of the Company’s Class
A common stock.
As a result,
the Bank became the
wholly owned
subsidiary
of
the
Company,
the
Company
became
the
holding
company
for
the
Bank
and
the
stockholders
of
the
Bank
became stockholders of the Company.
Prior
the
Effective
Date,
the
Bank’s
Class
A
common
stock
was
registered
under
Section
12(b)
of
the
Securities
Exchange Act of 1934 (the “Exchange
Act”), and the Bank was subject to
the information requirements of the Exchange
Act
and, in
accordance with Section
12(i) thereof, filed
quarterly reports, proxy
statements and other
information with the
Federal
Deposit Insurance Corporation
(“FDIC”).
As a result of the Reorg
anization, pursuant to Rule
12g-3(a) under the Exchange
Act, the Company became the successor registrant to the Bank, the Company’s Class A common stock was deemed to be
registered under Section 12(b)
of the Exchange Act,
and the Company became
subject to the information
requirements of
the Exchange Act and
is now required to
file reports, proxy statements
and other information with
the U. S. Securities
and
Exchange Commission
(“SEC”). The
trading symbol
for the
Company’s
Class A
Common Stock
is “USCB”,
which is
the
same as the Bank’s former trading symbol.
Prior to
the Reorganization,
the Company
had no material
assets and
had not conducted
any business
or operations
except for activities related to its incorporation and the
Reorganization.
Our strategy
in becoming
a publicly
traded company
and forming
a BHC
was to continue
pursuing organic
growth as
well as strategic acquisitions if the opportunity arises,
which efforts will be further facilitated by access
to public capital and
the added flexibility provided by a holding company structure.
In this Annual Report on Form 10-K, unless the context indicated otherwise, references to “we,” “us,”, and “our” refer to
the Company and the Bank,
as the contest dictates. However, if the discussion
relates to a period before
the Effective Date,
the terms refer only to the Bank.
Products and Services
Lending Services
Our mission
is to
provide high
value, relationship-based
banking products,
services and
solutions to
a diverse
set of
clients in the
markets we serve. We focus on
serving small-to-medium sized businesses (“SMBs”) and
catering to the needs
of
local
business
owners,
entrepreneurs
and
professionals
in
South
Florida.
We
have
further
leveraged
our
success
in
USCB Financial Holdings, Inc.
2022 10-K
providing comprehensive banking solutions
to SMBs to also secure the personal
retail deposit relationships of the
owners,
operators, and employees of our commercial lending clients, which has
been a cornerstone of our deposit growth strategy.
In addition
to our
traditional commercial
banking services,
we are
among a
select number
of banks
of our
size within
our market
area that
can offer
certain specialty
banking products,
services and
solutions designed
for small
businesses,
homeowner associations,
law firms, medical
practices and other
professional services
firms, and global
banking services.
Our major specialty banking offerings include
the following:
•
Small
Business
Administration
(“SBA”)
lending:
Our
SBA
platform
originates
loans
under
Sections
7(a)
and 504
of the
SBA program.
The 7(a)
loan program,
SBA's most
common
loan program,
includes financial
help for small businesses
with special requirements
while the 504 loan program
provides long-term, fixed
rate
financing of
up to $5.0
million for
major fixed
assets that
promote business
growth and
job creation.
Since its
formation in
2018, the
platform
serves as
an opportunity
to generate
commercial and
industrial loans,
or C&I
loans, and to diversify our revenue stream through originating and
selling SBA 7(a) loans. As of December 31,
2022, the Bank is a Preferred Lending Partner with the SBA
which allows us to offer the full range of SBA loan
products and
to exercise
lending authority
at the
local bank
level, allowing
us to
make timely
credit decisions
for prospective clients.
•
Yacht lending:
Our yacht lending vertical
provides yacht financing for
larger vessels, transactions range
from
$750 thousand to $7.5 million.
We target high
net-worth clients, in one
of the most active
yacht markets in the
country.
In 2021,
two portfolios
of yacht
loans were
purchased as
part of
our strategic
initiative to
launch this
new business vertical and diversify our portfolio.
•
Homeowner Association (“HOA”)
services:
We provide banking
services to HOAs and
property managers,
including deposit collection,
lockbox services, payment
services, and lending
products. Launched in
2016, we
offer our HOA customers a unique combination of market knowledge of
a local bank, and a highly personalized
“white glove” approach to customer service.
•
Jurist Advantage and Private Client
Group services:
Our Jurist Advantage and Private
Client Group vertical
provides customized
banking solutions
for law
firms
as well
as their
partners, assoc
iates, staff,
and high
net
worth clients.
We also leverage
our relationships with
our law
firm clients to
generate personal deposit
accounts.
•
Global
Banking
services:
Our
Global
Banking
vertical
provides
correspondent
banking
services
for
banks
headquartered
in
certain
Latin
America
and
the
Caribbean
countries.
We
also
cross-sell
our
correspondent
banking relationships to
generate international personal
banking clients for
our Bank. Our
compliance team is
experienced in issues
related to foreign
banking, and we
have frequent and regular
open communication with
our foreign bank clients to ensure proper compliance
controls are maintained at such institutions.
Credit Practices
Our underwriting process is informed by a conservative credit culture
that encourages prudent lending. We
believe our
strong asset quality
is due
to our understanding
of and experience
with businesses within
Florida,
in particular South
Florida,
our
long-standing
relationships
with
clients
and
our
disciplined
underwriting
processes.
Our
thorough
underwriting
processes
collaboratively
engage
our
seasoned
business
bankers,
credit
underwriters
and
portfolio
managers
in
the
analysis of each loan request.
We manage our credit risk by analyzing metrics related
to our different lines of business, which allows us to
maintain a
conservative
and
well-diversified
loan portfolio
reflective
of
our assessment
of
various industry
sectors.
Based
upon our
aggregate exposure to any given borrower relationship, we undertake
a scaled review of loan originations that may involve
senior credit officers, our Chief Credit Officer,
our Credit Committee or, ultimately,
our Board of Directors (“Board”).
Deposit Products
We
offer
traditional deposit
products including
commercial
and consumer
checking accounts,
money market
deposit
accounts, savings accounts and certificates of deposit with a
variety of terms and rates as well
as a robust suite of treasury,
commercial payments and cash
management services. Additionally,
we offer deposit products
for municipalities and other
public entities. Our deposit products are mainly offered
across our primary geographic footprint.
Title Services
Florida
Peninsula
Title
LLC
is
a
subsidiary
of
the
Bank
that
offers
our
clients
title
insurance
policies
for
real
estate
transactions closed at the Bank. Licensed in the State of Florida and approved by the Department of Insurance Regulation,
Florida Peninsula
Title LLC
began operations
in 2021.
Our title
service business
not only provides
diversification for
non-
interest income but also provides our clients with access
to tile insurance services.
USCB Financial Holdings, Inc.
2022 10-K
Seasonality
We do not believe our business to be seasonal
in nature.
Markets
Our primary banking market is South
Florida. Due to the recent
acceptance and expected ongoing emphasis on remote
work, coupled
with a
low tax
environment, warm
weather and
a strong
real estate
market has
encouraged companies
to
relocate some or all of their
operations to South Florida. We
believe this trend is further demonstrated
by recent relocation
initiatives undertaken by large financial institutions such as Blackstone Group Inc., Goldman Sachs Group Inc., and Citadel
Advisors
LLC,
all
of
which
have
established
operations
in
South
Florida.
We
believe
Florida
offers
long-term
attractive
banking opportunities.
Our largest concentration is in the Miami metropolitan statistical area; however, we are also focused
on growth in other urban Florida markets in which we
have a presence, such as Broward and Palm Beach counties
.
According to the 2020
United States Census Bureau,
Florida was the third most
populous state in the country
and the
three
largest
population
centers
were
in
Miami-Dade,
Broward,
and
Palm
Beach
counties,
all
located
in
South
Florida.
According to estimates
from the
United States Census
Bureau, from
2010 to 2021,
Florida’s population
increased to 21.8
million residents
,
an increase
of 3.0
million new
residents.
The percentage
change
in Florida’s
population between
April
2020 and July 2021 alone was 1.1% according to the
United States Census Bureau.
Competition
Our markets are highly competitive,
and we compete with a wide range of lenders and other financial institutions within
our markets,
including local,
regional,
national,
and international
commercial
banks
and credit
unions. We
also compete
with mortgage companies, brokerage
firms, trust service providers, consumer
finance companies, mutual funds,
securities
firms,
insurance
companies,
third-party
payment
processors,
financial
technology
companies,
or
Fintechs,
and
other
financial intermediaries on various
of our products and
services. Some of our competitors
are not subject to the
regulatory
restrictions
and
the
level
of
regulatory
supervision
applicable
to
us.
Many
of
our
competitors
are
much
larger
financial
institutions that have greater financial
resources than we do
and compete aggressively for market
share. These competitors
attempt to gain market share through their financial product
mix, pricing strategies and larger banking center networks.
Interest rates
on both
loans and
deposits and
prices of
fee-based services
are significant
competitive factors
among
financial
institutions
generally.
Other
important
competitive
factors
include
convenience,
quality
of
customer
service,
availability and quality of digital offerings, community
reputation, and continuity of personnel and services.
Emerging Growth Company
We are an “emerging growth
company,” or
“EGC”, as defined in the Jumpstart
Our Business Startups Act of 2012 (the
“JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are
applicable
to
other
public
companies
that
are
not
“emerging
growth
companies,”
including,
but
not
limited
to,
not
being
required to comply with the auditor
attestation requirements of Section
404 of the Sarbanes-Oxley Act,
reduced disclosure
obligations
regarding
executive
compensation
in
our
periodic
reports
and
proxy
statements,
and
exemptions
from
the
requirements of
holding a
non-binding advisory
vote on
executive compensation
and shareholder
approval of
any golden
parachute payments not previously approved.
In addition,
Section
of
the
JOBS
Act
also
provides
that
an
EGC can
take
advantage
of
the
extended
transition
period provided
in Section
7(a)(2)(B) of
the Securities
Act of
1933, as
amended (the
“Securities Act”),
for complying
with
new or revised accounting standards. In other
words, an EGC can delay the adoption of
certain accounting standards until
those standards would otherwise apply to private
companies. We intend to take
advantage of the benefits of this extended
transition period, for as long as it is available.
Human Capital Resources
We respect the values
and diversity throughout our organization
and the community. Diversity and inclusion are integral
parts of
our organization’s
culture. We
seek the active
engagement and
participation of
people with
diverse backgrounds
and
ethnicities.
We
are
taking
steps
to
create
programs
to
ensure
that
we
are
organized
in
a
way
where
the
unique
contributions of each individual in our Company is
recognized and supported. Each team member is to be
treated fairly with
equal access to opportunities and resources for success. Additionally,
we run homebuyer educational and financial literacy
workshops in an effort
to reach the financing
needs of the
sectors of our
communities in which
these workshops are
most
needed.
USCB Financial Holdings, Inc.
2022 10-K
At December 31, 2022,
we had 191 full
-time equivalent employees.
None of our
employees are parties
to a collective
bargaining agreement. We believe that our employees are our greatest asset and vital to our success. As such, we seek to
hire and retain the best
candidate for each position, without regard to
age, gender, ethnicity, or other protected class status,
but
with
an
appreciation
for
a
diversity
of
perspectives
and
experiences.
We
have
designed
a
compensation
structure
including an array of benefit plans and programs
that we believe is attractive to our current and prospective employees.
Regulation and Supervision
Bank
holding
companies,
banks,
and
their
affiliates
are
extensively
regulated
under
federal
and
state
law.
These
regulations have a material
effect on the operations
of USCB Financial Holdings,
Inc. and its
direct and indirect subsidiaries,
including U.S. Century Bank.
Statutes, regulations and
regulatory policies limit
the activities in
which we
may engage and
the conduct of
our permitted
activities and establish capital requirements with which we must comply. The regulatory framework
is intended primarily for
the
protection
of
depositors,
borrowers,
customers
and
clients,
the
Federal
Deposit
Insurance
Corporation
(“FDIC”)
insurance funds
and the
banking system
as a
whole, and
not for
the protection
of our
shareholders or
creditors. In
many
cases, the applicable regulatory
authorities have broad enforcement
power over bank holding
companies, banks and their
subsidiaries, including the power to impose substantial fines
and other penalties for violations of laws and regulations.
Further,
the
regulatory
system
imposes
reporting
and
information
collection
obligations.
Banking
statutes
and
regulations are subject
to change,
and additional statutes,
regulations, and corresponding
guidance may
be adopted. We
are unable to predict these future changes or the effects, if any, that these changes could have on the business, prospects,
revenues, and results of operations of our Bank and Company.
The material
statutory and
regulatory requirements
that are
applicable to
us are
summarized below.
The description
below is not
intended to summarize
all laws and
regulations applicable to us.
These summary descriptions are
not complete,
and you should refer to the full text of the statutes, regulations,
and corresponding guidance for more information.
Bank and Bank Holding Company Regulation
As
a
Florida
state
bank,
U.S.
Century
Bank
is
subject
to
ongoing
and
comprehensive
supervision,
regulation,
examination, and enforcement by the FDIC and the Florida Office
of Financial Regulation (“FOFR”). The FOFR supervises
and regulates
all areas
of our
operations including,
without limitation,
the making
of loans,
the issuance
of securities,
the
conduct
of
our
corporate
affairs,
the
satisfaction
of
capital
adequacy
requirements,
the
payment
of
dividends,
and
the
establishment or closing
of banking centers.
In addition, our
deposit accounts
are insured
by the Deposit
Insurance Fund
administered by the FDIC to the maximum extent permitted by law, and the FDIC has certain supervisory
and enforcement
powers over us.
Any entity
that directly
or indirectly
controls a
bank must
be approved
by the
Federal Reserve
Board under
the Bank
Holding
Company
Act
of
(the
“BHC
Act”)
to
become
a
bank
holding
company.
BHCs
are
subject
to
regulation,
inspection,
examination,
supervision
and
enforcement
by
the
Federal
Reserve
Board
under
the
BHC
Act.
The
Federal
Reserve Board's jurisdiction also extends to any company
that is directly or indirectly controlled by a BHC.
USCB Financial
Holdings,
Inc, which
controls
U.S. Century
Bank,
is a
BHC and,
as such,
is subject
to ongoing
and
comprehensive supervision, regulation, examination and
enforcement by the Federal Reserve Board.
Notice and Approval Requirements Related to Control
Banking
laws
impose
notice,
approval,
and
ongoing
regulatory
requirements
on
any shareholder
or
other
party
that
seeks to acquire direct
or indirect "control"
of an FDIC-insured
depository institution. These
laws include the
BHC Act and
the Change in Bank Control Act. Among other things,
these laws require regulatory filings by individuals
or companies that
seek to
acquire direct or
indirect "control" of
an FDIC-insured depository
institution. The determination
of whether an
investor
"controls" a depository
institution is based
on all of
the facts and
circumstances surrounding
the investment.
As a general
matter, a party
is deemed to control
a depository institution or
other company if the
party owns or controls
25% or more of
any class of voting stock. Subject to rebuttal, a party may be presumed
to control a depository institution or other company
if the investor owns or controls 10%
or more of any class of voting
stock (and the entity’s securities are registered under the
Exchange
Act
or,
if
not,
the
investor
would
be
the
largest
shareholder).
Except
under
limited
circumstances,
BHCs
are
prohibited from acquiring, without prior approval,
control of any other bank
or BHC or substantially all the assets
thereof or
more than 5% of the voting shares of a bank or BHC
which is not already a subsidiary.
USCB Financial Holdings, Inc.
2022 10-K
Source of Strength
All companies, including BHCs, that directly
or indirectly control an insured depository
institution, are required to serve
as a
source
of
strength
for
the
institution.
Under
this
requirement,
USCB
Financial
Holdings,
Inc.
in
the
future
could
be
required to provide financial assistance
to U.S. Century Bank should
it experience financial distress.
Such support may be
required at times when,
absent this statutory and
Federal Reserve Policy
requirement, a BHC
may not be
inclined to provide
it.
Safety and Soundness Regulation
As an insured depository
institution, we are subject to
prudential regulation and supervision
and must undergo regular
on-site examinations by our state and federal banking agencies. The cost of examinations of insured depository institutions
and any affiliates are assessed
by the appropriate agency against
each institution or affiliate that
is subject to examination
as it deems
necessary or appropriate.
We file
quarterly consolidated
reports of
condition and income,
or call reports,
with
the FDIC and FOFR.
The federal banking
agencies have also
adopted guidelines establishing safety
and soundness standards for
all insured
depository institutions including
the Bank. The safety
and soundness guidelines
relate to, among other
things, our internal
controls, information systems, internal audit systems, loan underwriting and documentation, anti-money laundering policies
and
procedures,
transactions
with
insiders,
risk
management,
compensation,
asset
growth,
and
interest
rate
exposure.
These
standards
assist
the
federal
banking
agencies
with
early
identification
and
resolution
of
problems
at
insured
depository institutions.
If we
were to fail
to meet or
otherwise comply
with any of
these standards, the
FDIC could require
us
to
submit
a
plan
for
achieving
and
maintaining
compliance.
If
a
financial
institution
fails
to
submit
an
acceptable
compliance plan, or fails
in any material respect
to implement a compliance
plan that has been
accepted by the FDIC,
the
FDIC is
required to
issue an
order directing
the institution
to cure
the deficiency.
Until the
deficiency cited
in the
order is
cured, the FDIC
may restrict the
financial institution’s
rate of growth,
require the financial
institution to increase
its capital,
restrict the rates the institution pays on
deposits or require the institution to take any
action the regulator deems appropriate
under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also
constitute grounds
for other
enforcement action,
including cease
and desist
orders and civil
money penalty
assessments.
In
addition,
the
FDIC
could
terminate
our
deposit
insurance
if
it
determines
that
our
financial
condition
was
unsafe
or
unsound or that we engaged in unsafe or unsound practices that violated applicable rules, regulations, orders or conditions
enacted or imposed on us by our regulators.
During
the
past
decade,
the
bank
regulatory
agencies
have
increasingly
emphasized
the
importance
of
sound
risk
management processes and
strong internal
controls when
evaluating the
activities of
the financial
institutions they
supervise.
Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become
even more
important as
new technologies, product
innovation and
the size
and speed
of financial
transactions have
changed
the nature of
banking markets. The
agencies have identified
a spectrum
of risks facing
a banking institution
including, but
not limited
to, credit,
market, liquidity, interest rate,
cybersecurity, operational, legal and
reputational risk. In
particular, recent
regulatory pronouncements
have focused
on operational
risk, which
arises from
the potential that
inadequate information
systems,
operational problems,
breaches in
internal
controls, fraud
or unforeseen
catastrophes
will result
in unexpected
losses. New
products and
services, use
of outside
vendors and
cybersecurity are
critical sources
of operational
risk that
financial institutions
are expected
to address
in the
current environment.
We
have active
Board and
senior management
oversight
policies,
procedures
and
risk
limits;
adequate
risk
measurement
and
monitoring
and
adequate
management
information systems; and comprehensive internal controls
to address these various risks.
Permissible Activities and Investments
Banking
laws
generally
restrict
the
ability
of
USCB
Financial
Holdings,
Inc.
to
engage
in
activities
other
than
those
determined by the
Federal Reserve Board
to be
so closely
related to banking
as to be
a proper incident
thereto. The Gramm-
Leach-Bliley Act (the “GLB Act”) expanded the scope of permissible activities for a BHC that qualifies as a financial holding
company. Under the regulations implementing the GLB Act, a financial
holding company may engage in additional
activities
that are
financial
in nature
or incidental
or complementary
to a
financial
activity.
USCB Financial
Holdings,
Inc., is
not a
financial holding company.
In addition, as
a general matter, the establishment or
acquisition by USCB Financial
Holdings, Inc., of a
non-bank entity,
or
the
initiation
of
a
non-banking
activity,
requires
prior
regulatory
approval.
In
approving
acquisitions
or
the
addition
of
activities, the Federal Reserve Board considers, among other things, whether the acquisition or the additional activities can
reasonably be expected
to produce benefits
to the public, such
as greater convenience,
increased competition or
gains in
efficiency,
that
outweigh
such
possible
adverse
effects
as
undue
concentration
of
resources,
decreased
or
unfair
competition, conflicts of interest or unsound banking practices.
USCB Financial Holdings, Inc.
2022 10-K
Regulatory Capital Requirements
The federal banking
regulators have adopted
risk-based capital
adequacy guidelines for
bank holding companies
and
their subsidiary banks and
banks without bank holding
companies based on the
Basel III standards.
Under these guidelines,
assets and off-balance sheet items are assigned to specific risk categories, each with designated risk weightings. The risk-
based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences
in risk profiles
among banks and bank holding
companies, to account for off-balance sheet
exposure, to minimize disincentives for holding
liquid assets, and
to achieve greater
consistency in
evaluating the
capital adequacy
of major
banks throughout the
world.
The resulting
capital ratio requirements
represent capital as
a percentage of
total risk-weighted assets
and off-balance sheet
items. Final
rules implementing the
capital adequacy guidelines
became effective, with
various phase-in periods,
on January
1, 2015
for
community
banks
such
as us.
All
of
the
rules
were
fully
phased
in
as of
January
1,
2019.
These
final
rules
represent a significant change to the prior general risk-based capital rules and are
designed to substantially conform to the
Basel III international standards.
In computing
total risk-weighted
assets, bank
and bank
holding company
assets are
given risk-weights
of 0%,
20%,
50%, 100%
and 150%.
In addition,
certain
off-balance
sheet items
are given
similar
credit conversion
factors
to convert
them to asset
equivalent amounts
to which an
appropriate risk-weight
will apply.
Most loans will
be assigned to
the 100%
risk
category,
except
for
performing
first
mortgage
loans
fully
secured
by 1-to
family or
certain
multi-family
residential
properties, which carry
a 50%
risk rating. Most
investment securities (including,
primarily, general obligation claims on
states
or
other
political
subdivisions
of
the
United
States)
will
be
assigned
to
the
20%
category,
except
for
municipal
or
state
revenue bonds, which have a 50% risk-weight,
and direct obligations of the U.S.
Treasury or obligations backed
by the full
faith
and
credit
of
the
U.S.
government,
which
have
a
0%
risk-weight.
In
covering
off-balance
sheet
items,
direct
credit
substitutes,
including
general
guarantees
and
standby
letters
of
credit
backing
financial
obligations,
are
given
a
100%
conversion
factor.
Transaction-related
contingencies
such
as
bid
bonds,
standby
letters
of
credit
backing
nonfinancial
obligations,
and undrawn
commitments
(including commercial
credit lines
with
an initial
maturity
of more
than one
year)
have
a
50%
conversion
factor.
Short-term
commercial
letters
of
credit
are
converted
at
20%
and
certain
short-term
unconditionally cancelable commitments have a 0% factor.
Under
the
final
rules,
minimum
requirements
increased
for
both
the
quality
and
quantity
of
capital
held
by
banking
organizations. In this respect, the final rules
implement strict eligibility criteria for regulatory capital instruments and improve
the methodology for
calculating risk-weighted
assets to enhance
risk sensitivity.
Consistent with the
international Basel III
framework, the rules include a new
minimum ratio of Common
Equity Tier 1 Capital to Risk
-Weighted Assets of 4.5%. The
rules also create a Common Equity Tier 1 Capital conservation
buffer of 2.5% of risk-weighted assets. This
buffer is added
to each of the three risk-based capital
ratios to determine whether an institution
has established the buffer.
The rules raise
the minimum ratio of Tier 1 Capital to Risk-Weighted Assets from 4% to 6% and
include a minimum leverage ratio of 4% for
all banking
organizations. If
a financial
institution’s
capital conservation
buffer
falls below
2.5% -
e.g., if
the institution’s
Common
Equity Tier
1 Capital
to Risk
-Weighted
Assets is
less than
7.0% -
then capital
distributions
and
discretionary
payments
will
be
limited
or
prohibited
based
on
the
size
of
the
institution’s
conservation
buffer.
The
types
of
payments
subject to this limitation include
dividends, share buybacks, discretionary payments on
Tier 1 instruments, and discretionary
bonus payments.
The
capital
regulations
may
also
impact
the
treatment
of
accumulated
other
comprehensive
income,
or,
AOCI,
for
regulatory capital purposes. Under
the rules, AOCI generally
flows through to regulatory
capital, however, community banks
and their holding companies (if any) were allowed to make a
one-time irrevocable opt-out election to continue to treat AOCI
the same
as under
the old
regulations for
regulatory capital
purposes. This
election was
required to
be made
on the
first
call report
filed after
January 1,
2015. We
made the
opt-out election.
Additionally,
the rules
also permit
community banks
with less than
$15 billion in
total assets to
continue to count
certain non-qualifying
capital instruments
issued prior to
May
19, 2010 as Tier 1 capital, including trust preferred securities
and cumulative perpetual preferred stock (subject to a limit of
25% of Tier 1 capital). However, non-qualifying
capital instruments issued on or after May 19, 2010 do not qualify for Tier 1
capital treatment.
On September 17, 2019, the
federal banking agencies jointly finalized
a rule intended to simplify
the regulatory capital
requirements described above for qualifying community banking organizations
that opt into the Community Bank Leverage
Ratio, or
CBLR,
framework,
as required
by Section
201 of
the Regulatory
Relief
Act. The
final rule
became
effective
on
January 1,
2020,
and the
CBLR framework
became
available for
banks
to use
beginning
with their
March
31, 2020
call
reports. Under
the final
rule, if
a qualifying
community banking
organization opts
into the
CBLR framework
and meets
all
requirements under the
framework, it will
be considered to
have met the
well-capitalized ratio requirements
under the
prompt
corrective action regulations described elsewhere
in this Form 10-K
and will not be
required to report or
calculate risk-based
capital. In order to
qualify for the CBLR
framework, a community
banking organization must
have a tier 1 leverage
ratio of
greater
than
9%,
less
than
$10
billion
in
total
consolidated
assets,
off-balance
sheet
exposures
of
25%
or
less
of
total
USCB Financial Holdings, Inc.
2022 10-K
consolidated assets, and trading assets and
liabilities of 5% or less of total consolidated
assets. However, Section
4012 of
the Coronavirus Aid,
Relief and Economic
Security Act (the
“CARES Act”) required
that the CBLR
be temporarily lowered
to 8%. The federal regulators issued a
rule implementing the lower CBLR effective April 23, 2020. The
rule also established
a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% CBLR requirement so long as
the
bank
maintains
a
leverage
ratio
of
7%
or
greater.
Another
rule
was
issued
to
transition
back
to
the
9%
CBLR
by
increasing the ratio to 8.5%
for calendar year 2021 and
9% thereafter. Although the Bank is a
qualifying community banking
organization, the Bank has elected
not to opt in to the CBLR framework
at this time and will continue to follow
the Basel III
capital requirements as described above.
As of
December 31,
and
2021, the
Bank
qualified
as a
“well capitalized”
institution.
See Note
“Regulatory
Matters” of the Consolidated Financial Statements
included in this Annual Report Form 10-K for further details.
Prompt Corrective Action
Under the Federal
Deposit Insurance Act
(“FDIA”), the
federal bank regulatory
agencies must
take "prompt corrective
action"
against
undercapitalized
U.S.
depository
institutions.
The
capital-based
regulatory
framework
contains
five
categories
of
compliance
with
regulatory
capital
requirements,
including
"well
capitalized,"
"adequately
capitalized,"
"undercapitalized,"
"significantly
undercapitalized,"
and
"critically
undercapitalized,"
and
are
subjected
to
differential
regulation corresponding to the capital category within which the
institution falls.
As of December
31, 2021, a
depository institution
was deemed to
be "well capitalized"
if the banking
institution had
a
total risk-based
capital
ratio
of
10.0%
or greater,
a tier
1 risk-based
capital
ratio
of
8.0%
or
greater,
a
CET1
risk-based
capital
ratio
of
6.5%
and
a
leverage
ratio
of
5.0%
or
greater,
and
the
institution
was
not
subject
to
an
order,
written
agreement,
capital
directive,
or
prompt
corrective
action
directive
to
meet
and
maintain
a
specific
level
for
any
capital
measure.
Under
certain
circumstances,
a
well-capitalized,
adequately
capitalized
or
undercapitalized
institution
may
be
treated as
if the
institution were
in the
next lower
capital category
if it’s
determined
that the
institution is
in an
unsafe or
unsound condition or
is engaging in
an unsafe or
unsound practice. The
degree of regulatory
scrutiny of a
financial institution
will
increase,
and
the
permissible
activities
of
the
institution
will
decrease,
as
it
moves
downward
through
the
capital
categories.
A
banking
institution
that
is
undercapitalized
is required
to
submit
a
capital restoration
plan.
Failure
to
meet
capital guidelines
could subject
the institution
to a
variety of
enforcement
remedies by
federal bank
regulatory agencies,
including: termination
of deposit insurance
by the FDIC,
restrictions on certain
business activities, and
appointment of
the
FDIC as conservator or receiver.
Commercial Real Estate Concentration Guidelines
The federal
banking regulators
have implemented
guidelines to
address increased
concentrations in
commercial real
estate
loans.
These
guidelines
describe
the
criteria
regulatory
agencies
will
use
as
indicators
to
identify
institutions
potentially
exposed
to
commercial
real
estate
concentration
risk.
An
institution
that
has
(i)
experienced
rapid
growth
in
commercial real
estate lending,
(ii) notable
exposure to
a specific
type of
commercial real
estate, (iii)
total reported
loans
for construction, land development,
and other land representing
100% or more of
total capital, or (iv) total
commercial real
estate
(including
construction)
loans
representing
300%
or
more
of
total
capital
and
the
outstanding
balance
of
the
institution’s
commercial
real estate
portfolio has
increased
by 50%
or more
in the
prior 36
months,
may be
identified for
further supervisory analysis of a potential concentration
risk.
As of December
31, 2022, our
ratio of construction
loans to total
risk-based capital
was 27%, and
therefore, we
were
under
the
100%
threshold
set
forth
in
clause
(iii)
in
the
paragraph
above.
However,
with
respect
to
clause
(iv)
in
the
paragraph above, as
of December
31, 2022, our
ratio of total
commercial real
estate loans
to total
risk-based capital
was
390% and the outstanding balance of
the institution’s commercial real estate portfolio increased by 50%
or more in the prior
36 months.
As a
result, we
are deemed
to have
a concentration
in commercial
real estate
lending under
applicable regulatory
guidelines.
If a
concentration is
present, under
the federal
banking regulator’
guidance, management
should employ
heightened
risk management practices that address key elements,
including board and management oversight and strategic
planning,
portfolio management,
development
of underwriting
standards,
risk
assessment and
monitoring
through
market analysis
and stress
testing, and
maintenance of
increased capital
levels as
needed to
support the
level of
commercial real
estate
lending.
To address the commercial real estate lending concentration,
USCB Financial Holdings has
previously established
a commercial
real estate
lending framework
to monitor
specific exposures
and limits
by types
within the
commercial real
estate
portfolio,
including,
among
other
things,
annual
stress
testing
of
the
commercial
real
estate
portfolio,
and
takes
appropriate actions, as necessary.
USCB Financial Holdings, Inc.
2022 10-K
Payment of Dividends
The ability of
the board of
directors of an
insured depository
institution to declare
a cash dividend
or other distribution
with respect to capital
is subject to statutory
and regulatory restrictions
that limit the
amount available for
such distribution
depending
upon
earnings,
financial
condition
and
cash
needs
of
the
institution,
as
well
as
general
business
conditions.
Insured depository institutions are also prohibited from
paying management fees to any controlling persons
or, with certain
limited exceptions,
making
capital distributions,
including dividends,
if after
such transaction
the institution
would be
less
than
adequately
capitalized.
We
may
generally
declare
a
dividend
from
retained
net
profits
which
accrued
prior
to
the
preceding two years, but we must, before the declaration of a dividend on our common stock, under applicable Florida law,
carry 20% of our net profits for such preceding period as is
covered by the dividend to our surplus fund, until the same shall
at least equal the amount of our common stock and preferred stock, if
any, then issued and outstanding. Under Florida law,
we are prohibited
from declaring
a dividend
at any time
at which
our net
income from
the current
year combined
with the
retained net
income
from
the preceding
two
years is
a loss
or which
would cause
our capital
accounts
to fall
below the
minimum amount required by law,
regulation, order, or
any written agreement with a state or federal regulatory agency.
In addition,
because
we are
a BHC,
we are
dependent
upon the
payment
of dividends
by the
Bank
as our
principal
source of funds
to pay dividends
in the future,
if any,
and to make
other payments. It
is the policy
of the Federal
Reserve
Board that BHCs
should pay cash
dividends on common
stock only out
of income available
over the past
year and only
if
prospective earnings retention
is consistent with
the organization’s expected future
needs and
financial condition. The
policy
provides that BHCs should not maintain a level of cash dividends that undermines the BHC’s ability to serve as a source of
strength to its banking subsidiaries.
Incentive Compensation
Guidelines adopted by
the federal banking
agencies pursuant to
the FDIA
prohibit excessive compensation
as an
unsafe
and
unsound
practice
and
describe
compensation
as
excessive
when
the
amounts
paid
are
unreasonable
or
disproportionate to the services performed by an executive
officer, employee, director
or principal shareholder.
In June 2010,
the federal banking
agencies jointly
adopted the
Guidance on Sound
Incentive Compensation
Policies,
or GSICP.
The GSICP intended to
ensure that banking organizations
do not undermine the
safety and soundness of
such
organizations
by
encouraging
excessive
risk-taking.
This
guidance,
which
covers
all
employees
that
have
the
ability
to
expose the
organization
to material
amounts of
risk, either
individually or
as part
of a
group, is
based upon
a set
of key
principles relating to
a banking organization’s
incentive compensation arrangements.
Specifically,
incentive compensation
arrangements should (i)
provide employee incentives
that appropriately balance risk
in a manner that does
not encourage
employees to expose their
organizations to imprudent risk,
(ii) be compatible with effective
controls and risk management,
and (iii) be supported by
strong corporate governance,
including active and effective
oversight by the organization’s
board
of directors. Any deficiencies in our compensation practices
could lead to supervisory or enforcement actions
by the FDIC.
The
Dodd-Frank
Act
requires
the
federal
banking
agencies
and
the
SEC
to
establish
joint
regulations
or
guidelines
prohibiting incentive-based
payment arrangements
at specified regulated
entities, such
as us,
having at least
$1 billion in
total
assets
that
encourage
inappropriate
risk-taking
by
providing
an
executive
officer,
employee,
director
or
principal
shareholder
with
excessive
compensation,
fees,
or
benefits
or
that
could
lead
to
material
financial
loss
to
the
entity.
In
addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-
based compensation
arrangements. The
federal banking
agencies proposed
such regulations
in April
and issued
a
second proposed
rule in
April 2016.
The second
proposed rule
would apply to
all banks,
among other
institutions, with
at
least $1 billion in average total
consolidated assets. Final regulations have not been adopted as
of the date of this Form 10-
K.
If
adopted,
these
or
other
similar
regulations
would
impose
limitations
on
the
manner
in
which
we
may
structure
compensation for our executives and other
employees that go beyond the requirements
of GSICP.
The scope and content
of the
federal banking
agencies’ policies
on incentive
compensation are
continuing
to develop
and are
likely to
continue
evolving, but the timeframe for finalization of such policies
is not known at this time.
Limits on Transactions with Affiliates and
Insiders
Insured depository institutions are subject to restrictions
on their ability to conduct transactions
with affiliates and other
related parties. Section 23A of the Federal Reserve Act imposes quantitative limits, qualitative requirements,
and collateral
requirements on certain transactions by
an insured depository institution with,
or for the benefit
of, its affiliates. Transactions
covered by Section 23A include loans,
extensions of credit, investment
in securities issued by an affiliate,
and acquisitions
of assets from
an affiliate. Section
23B of the
Federal Reserve
Act requires that
most types of
transactions by
an insured
depository
institution
with,
or
for
the
benefit
of,
an
affiliate
be
on
terms
at
least
as
favorable
to
the
insured
depository
institution as if the transaction were conducted with an
unaffiliated third party.
USCB Financial Holdings, Inc.
2022 10-K
An affiliate of a bank
is any company or entity
that controls, is controlled by
or is under common
control with the bank.
In
a
holding
company
context,
the
parent
bank
holding
company,
such
as
USCB
Financial
Holdings,
Inc.,
and
any
companies that are
controlled by such
parent holding company
(excluding subsidiaries of the
bank) are affiliates of
the bank.
Loans to executive officers and directors of an insured depository institution or any of its affiliates or to any person who
directly or indirectly, or acting through or in concert with one or more persons,
owns, controls or has the power to vote
more
than 10% of any class of voting securities of a bank, which we
refer to as 10% shareholders, or to any political or campaign
committee the
funds or
services of
which will
benefit those
executive officers,
directors, or
10% shareholders
or which
is
controlled by those executive officers, directors
or 10% shareholders, are subject to
Sections 22(g) and 22(h) of
the Federal
Reserve
Act
and
the
corresponding
regulations
(Regulation
O)
and
Section
13(k)
of
the
Exchange
Act
relating
to
the
prohibition
on
personal
loans
to
executives
(which
exempts
financial
institutions
in
compliance
with
the
insider
lending
restrictions of Section 22(h) of the Federal Reserve Act).
FDIC Deposit Insurance
The FDIC is
an independent
federal agency
that insures the
deposits of federally
insured depository
institutions up
to
applicable limits. The FDIC also has certain regulatory,
examination and enforcement powers with respect to FDIC-insured
institutions.
The
deposits
are
insured
by
the
FDIC
up
to
applicable
limits.
As
a
general
matter,
the
maximum
deposit
insurance amount is $250 thousand per depositor.
Additionally, FDIC
-insured depository institutions are required
to pay deposit insurance assessments
to the FDIC. The
amount of
a particular
institution's deposit
insurance assessment
is based
on that
institution's risk
classification under
an
FDIC risk-based assessment system. An institution's
risk classification is assigned based on
its capital levels and the level
of supervisory concern the institution poses to the regulators.
Under the current
system, deposit
insurance assessments
are based
on a bank’s
assessment base,
which is defined
as average total assets minus
average tangible equity.
For established small institutions,
such as the Bank, the
FDIC sets
deposit
assessment
rates
based
on
the
Financial
Ratios
Method,
which
takes
into
account
several
ratios
that
reflect
leverage, asset quality,
and earnings at
each individual institution
and then applies
a pricing multiplier that
is the same
for
all institutions. An
institution’s rate must
be within a
certain minimum and
a certain maximum,
and the range varies
based
on the
institution’s
composite CAMELS
rating. The
deposit insurance
assessment
is calculated
by multiplying
the bank’s
assessment base by the total base assessment
rate.
In October
2022, the
FDIC finalized
a rule
that will
increase the
initial base
deposit insurance
assessment rates
by 2
basis points, beginning
with the first quarterly
assessment period of
2023 (January 1,
2023 through March
31, 2023). The
FDIC, as required
under the Federal
Deposit Insurance
Act, established
a plan in
September 2020 to
restore the Deposit
Insurance Fund (“DIF”) reserve ratio to meet or exceed
the statutory minimum of 1.35 percent within eight
years. This plan
did not
include an
increase in
the deposit
insurance assessment
rate. Based
on the
FDIC’s recent
projections, however,
the FDIC determined that the DIF reserve
ratio is at risk of not reaching
the statutory minimum by the statutory
deadline of
September 30, 2028 without increasing
the deposit insurance assessment rates. The
increased assessment would improve
the likelihood
that the
DIF reserve
ratio would
reach the
required minimum
by the
statutory deadline,
consistent
with the
FDIC’s Amended Restoration
Plan. The FDIC also
concurrently maintained the
Designated Reserve Ratio
(“DDR”) for the
DIF at 2 percent for 2023. The new assessment rate
schedules will remain in effect unless and until the reserve ratio meets
or exceeds 2 percent
in order to support
growth in the DIF
in progressing toward
the FDIC’s long-term
goal of a 2 percent
DRR. Progressively lower assessment
rate schedules will take effect
when the reserve ratio reaches
2 percent, and again
when it reaches
2.5 percent. The
revised assessment
rate schedule will remain
in effect unless
and until the
reserve ratio
meets or exceeds 2 percent, absent further action by the FDIC.
Under the
FDIA, the
FDIC may
terminate deposit
insurance upon
a finding
that the
institution has
engaged in
unsafe
and unsound
practices,
is in
an unsafe
or unsound
condition
to continue
operations,
or has
violated any
applicable
law,
regulation, rule, order, or condition
imposed by the FDIC.
Depositor Preference
The FDIA provides
that, in the
event of the
"liquidation or other
resolution" of an
insured depository institution, the
claims
of depositors
of the institution
(including the
claims of
the FDIC as
subrogee of
insured depositors)
and certain
claims for
administrative
expenses
of
the
FDIC
as
a
receiver
will
have
priority
over
other
general
unsecured
claims
against
the
institution. Insured and
uninsured depositors,
along with the
FDIC, will have
priority in payment
ahead of unsecured,
non-
deposit creditors,
including U.S.
Century Bank,
with respect
to any
extensions of
credit they
have made
to such
insured
depository institution.
USCB Financial Holdings, Inc.
2022 10-K
Overdraft Fee Regulation
The Electronic Fund Transfer Act prohibits
financial institutions from charging consumers
fees for paying overdrafts on
automated teller machines, or
ATMs,
and one-time debit card transactions,
unless a consumer consents,
or opts in, to the
overdraft service for those types
of transactions. If a consumer does
not opt in, any
ATM transaction or debit that overdraws
the consumer’s
account will
be denied. Overdrafts
on the payment
of checks
and regular electronic
bill payments
are not
covered
by
this
new
rule.
Before
opting
in,
the
consumer
must
be
provided
with
a
notice
that
explains
the
financial
institution’s
overdraft
services,
including
the
fees
associated
with
the
service,
and
the
consumer’s
choices.
Financial
institutions
must
provide consumers
who do
not
opt
in
with
the
same
account
terms,
conditions
and
features
(including
pricing) that they provide to consumers who do opt in.
Federal Reserve System and Federal Home Loan
Bank System
We are
a member
of the FHLB
of Atlanta,
which is
one of
regional FHLBs.
Each FHLB
serves as
a quasi-reserve
bank
for
its members
within
its
assigned
region.
It
is
funded
primarily
from
funds
deposited
by member
institutions
and
proceeds from the sale of consolidated obligations
of the FHLB system. A FHLB makes
loans to members (i.e., advances)
in accordance with policies and procedures established by
the Board of Trustees of the FHLB.
As a member
of the FHLB
of Atlanta, we are
required to own
capital stock in
the FHLB in
an amount at
least equal to
0.05% (or
5 basis
points), which
is subject
to annual
adjustments, of
the Bank’s
total assets
at the
end of
each calendar
year (up
to
a maximum
of $15
million),
plus
4.25%
of
our outstanding
advances
(borrowings)
from
the FHLB
of
Atlanta
under the activity-based stock ownership requirement.
Anti-Money Laundering Regulation
As a financial
institution, we
must maintain
anti-money laundering
programs that
include established
internal policies,
procedures
and
controls,
a
designated
compliance
officer,
an
ongoing
employee
training
program,
and
testing
of
the
program by an independent audit function in accordance
with the Bank Secrecy Act of 1970, as amended (“BSA”), and the
regulations issued
by the
Department of
the Treasury
in 31
CFR Chapter
X, FDIC
Rule 326.8
and the
Florida Control
of
Money Laundering
and Terrorist
Financing in
Financial Institutions
Act. Financial
institutions are
prohibited from
entering
into specified
financial
transactions
and account
relationships
and must
meet enhanced
standards for
due
diligence and
“knowing your customer” in
their dealings with
foreign financial institutions, foreign
customers and other
high risk customers.
Financial
institutions
must
also
take
reasonable
steps
to
conduct
enhanced
scrutiny
of
account
relationships
to
guard
against money laundering
and to report transactions
that meet certain
dollar amount thresholds
as well as
any suspicious
transactions. Recent laws,
such as
the USA PATRIOT Act, enacted in
2001 and renewed
through 2019, as
described below,
provide law enforcement authorities with increased access
to financial information maintained by banks.
Anti-money laundering
obligations have
been substantially
strengthened
as a
result of
the USA
PATRIOT
Act. Bank
regulators routinely examine institutions for compliance with these obligations, and this area has become a particular focus
of
the
regulators
in
recent
years.
In
addition,
the
regulators
are
required
to
consider
compliance
in
connection
with
the
regulatory
review
of
certain
applications.
In
recent
years,
regulators
have
expressed
concern
over
banking
institutions’
compliance
with
anti-money
laundering
requirements
and,
in
some
cases,
have
delayed
approval
of
their
expansionary
proposals. The regulators and other
governmental authorities have
been active in imposing
“cease and desist” orders
and
significant money penalty sanctions against institutions
found to be in violation of the anti-money laundering regulations.
USA PATRIOT
Act
The USA PATRIOT Act became effective on October 26, 2001 and amended
the BSA. The USA PATRIOT Act requires
banks to establish anti-money laundering programs
that include, at a minimum:
•
a bank
compliance
program
that contains
internal
policies,
procedures
and
controls
designed
to
implement
and
maintain the
bank’s compliance
with all
of the
requirements
of the
USA PATRIOT
Act, the
BSA and
related laws
and regulations;
bank wide
systems
and procedures
for monitoring
and reporting
of suspicious
transactions
and
activities;
•
a designated compliance officer;
•
employee training for bank employees;
•
an independent audit function to test the efficacy
of the bank’s anti-money laundering program;
•
procedures to verify the identity of each bank customer upon
the opening of accounts;
•
heightened due diligence policies,
procedures and controls applicable to
certain foreign accounts and
relationships;
and
USCB Financial Holdings, Inc.
2022 10-K
•
required reports to law enforcement and/or financial regulators to assist in the deterrence and prevention of money
laundering activities.
Additionally,
the USA PATRIOT
Act requires each financial
institution to develop a
customer identification program,
or
CIP, as part of its anti-money
laundering program. The key
components of the
CIP are identification
verification, government
list comparison,
notice and
record retention.
The purpose
of the
CIP is
to enable
the financial
institution to
determine the
true identity
and anticipated
account activity
of each
customer.
To
make this
determination, the
financial institution
must,
among other things, collect certain information from customers at the time they enter
into the customer relationship with the
financial institution.
This information must
be verified
within a
reasonable time. Furthermore,
all customers
must be
screened
against any CIP-related government lists of known or suspected terrorists or other “sanctioned” persons. On May 11, 2018,
the U.S. Treasury’s
Financial Crimes Enforcement
Network, or FinCEN, issued
a final rule under
the BSA requiring
banks
to identify and verify the
identity of the natural persons behind
their customers that are legal entities-the beneficial owners.
We
and
our
affiliates
have
adopted
policies,
procedures
and
controls
designed
to
comply
with
the
BSA
and
the
USA
PATRIOT
Act.
The Office of Foreign Assets Control
The Office of Foreign Assets Control (the “OFAC”)
is responsible for helping to ensure that U.S. entities do not engage
in transactions with
“enemies” of
the United States,
as defined by
various Executive Orders
and Acts of
Congress. OFAC
publishes lists of
names of
persons and organizations
suspected of aiding,
harboring or
engaging in terrorist
acts; owned
or
controlled
by,
or
acting
on
behalf
of
target
countries;
and
narcotics
traffickers.
Such
persons
are
referred
to
as
“sanctioned” persons.
If a bank
finds a name on
any transaction, account
or wire transfer
that is on an
OFAC list,
it must freeze
the account
and/or block the transaction or wire transfer. We utilize an outside vendor to oversee
the inspection of our accounts and the
filing of any notifications.
We also monitor
high-risk OFAC
areas such as new
accounts, wire transfers
and customer files.
These checks are performed using software that is updated each time
a modification is made to the lists provided by
OFAC
and other agencies of Specially Designated Nationals
and Blocked Persons.
Consumer Laws and Regulations
Our activities
are subject
to a
variety of
federal and
state statutes
and regulations
designed to
protect consumers
in
transactions with
banks. Interest
and other
charges collected
or contracted
for by
us are
subject to
state usury
laws and
federal laws concerning interest rates. Our loan
operations are also subject to federal laws
applicable to credit transactions,
such as:
•
the
Truth-In-Lending
Act,
or
TILA,
and
Regulation
Z,
governing
disclosures
of
credit
and
servicing
terms
to
consumer borrowers and including substantial new requirements for mortgage lending and servicing, as mandated
by the Dodd-Frank Act
•
the Home Mortgage Disclosure Act of 1975 and Regulation C, requiring
financial institutions to provide information
to enable the
public and public
officials to
determine whether
a financial institution
is fulfilling its
obligation to help
meet the housing needs of the communities they serve;
•
the Equal Credit
Opportunity Act and
Regulation B, prohibiting
discrimination on the
basis of race,
color, religion,
or other prohibited factors in extending credit;
•
the Fair
Credit Reporting Act
of 1978,
as amended by
the Fair
and Accurate Credit
Transactions Act, and Regulation
V, as well as the rules and
regulations of the FDIC governing the
use and provision of information
to credit reporting
agencies, certain identity theft protections and certain
credit and other disclosures;
•
the Fair
Debt Collection
Practices Act
and Regulation
F,
governing the
manner in
which consumer
debts may
be
collected by collection agencies; and
•
the Real Estate Settlement Procedures Act, or RESPA, and Regulation X, which governs aspects of the settlement
process for residential mortgage loans.
Our deposit operations are also subject to federal laws,
such as:
•
the FDIA, which, among other things, limits the amount of
deposit insurance available per account to $250,000 and
imposes other limits on deposit-taking;
•
the Right to
Financial Privacy Act,
which imposes a
duty to
maintain the confidentiality
of consumer financial
records
and prescribes procedures for complying with administrative subpoenas
of financial records;
•
the Electronic
Funds Transfer
Act and
Regulation E,
which governs
automatic
deposits to
and withdrawals
from
deposit accounts
and customers’
rights and
liabilities arising
from
the use
of ATMs
and other
electronic
banking
services; and
USCB Financial Holdings, Inc.
2022 10-K
•
the Truth
in Savings
Act and
Regulation DD,
which requires
depository institutions
to provide
disclosures so
that
consumers can make meaningful comparisons about depository
institutions and accounts.
These
laws
and
regulations
mandate
certain
disclosure
requirements
and
regulate
the
manner
in
which
financial
institutions must deal with clients when
taking deposits or making loans to
such clients. We must comply with the applicable
provisions of these consumer protection laws and regulations as part of both
our ongoing client relations and our regulatory
compliance obligations.
Financial Privacy and Cybersecurity
Banking organizations
are
subject to
many federal
and state
laws and
regulations
governing the
collection,
use and
protection
of
customer
information. Under
the
privacy
protection
provisions
of
the
Gramm-Leach-Bliley
Act
of
1999 and
related regulations,
we are
limited in
our ability
to disclose
non-public
information
about consumers
to nonaffiliated
third
parties. These limitations require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers
to prevent disclosure
of certain personal
information to a
nonaffiliated third
party.
Federal banking agencies,
including the
FDIC, have adopted
guidelines for establishing information
security standards and cybersecurity
programs for implementing
safeguards.
These
guidelines,
along
with
related
regulatory
materials,
increasingly
focus
on
risk
management
and
processes related to information technology and the use
of third parties in the provision of financial services.
In addition to federal laws and regulations, we are subject
to state laws governing customer privacy and cybersecurity.
The Florida Information Protection Act of 2014 (“Florida Act”) requires notification of the
Florida Department of Legal Affairs
of any breach involving
personal information that
affects more than
500 people as
well as requiring notification
of affected
individuals of
a breach.
The Florida
Act also
requires us to
take reasonable measures
to protect
and secure
data in
electronic
form containing personal information and take all reasonable measures to dispose, or arrange for the disposal, of
customer
records containing
personal information
within our
custody or
control when
the records
are no
longer to
be retained.
We
incur
significant
costs
and
expenses
in
order
to
address
compliance
with
the
federal
and
state
customer
privacy
and
cybersecurity laws and regulations, and we expect such
costs and expenses will continue into the future.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (“CFPB”) is
an independent regulatory authority housed within the Federal
Reserve Board. The CFPB has broad authority to regulate the offering and provision of consumer
financial products and to
prevent institutions subject to its authority from engaging in “unfair
and deceptive or abusive acts or practices” with respect
to their
offering of consumer
financial products or
services. The CFPB
has the
authority to
supervise and examine
depository
institutions with more than
$10 billion in assets for
compliance with federal consumer
laws. The authority to supervise
and
examine depository
institutions with
$10 billion or
less in assets,
such as the
Bank, for
compliance with federal
consumer
laws remains largely with those institutions’ primary
federal regulators. However, the CFPB may participate in examinations
of these smaller institutions
on a “sampling basis”
and may refer potential
enforcement actions against
such institutions to
their primary regulators.
As such, the
CFPB may participate
in examinations of
the Bank. In
addition, states are
permitted
to adopt consumer
protection laws and
regulations that are stricter
than the regulations promulgated
by the CFPB,
and state
attorneys general are permitted to enforce consumer
protection rules adopted by the CFPB against certain institutions.
The Volcker Rule
The Dodd-Frank Act
prohibits (subject to
certain exceptions) us
and our
affiliates from engaging
in short term
proprietary
trading in securities and derivatives and from
investing in and sponsoring certain investment companies defined
in the rule
as “covered
funds” (including
not only
hedge funds,
commodity pools
and private
equity funds,
but also
a range
of asset
securitization structures
that do not
meet exemptive
criteria in the
final rules). This
statutory provision
is commonly
called
the “Volcker Rule.” At December 31, 2022, we are not
subject to the Volcker Rule because of our asset
size, which is below
the $10.0 billion Volcker
Rule threshold.
Community Reinvestment Act and Fair Lending Requirements
As
previously
noted,
we
are
subject
to
certain
fair
lending
requirements
and
reporting
obligations
involving
home
mortgage
lending
operations.
We
are
also
subject
to
certain
requirements
and
reporting
obligations
under
the
federal
Community Reinvestment Act (“CRA”).
The CRA and
its corresponding regulations are
intended to encourage banks
to help
meet the credit needs of
the communities they serve,
including low-
and moderate-income neighborhoods,
consistent with
safe and sound banking practices.
Accordingly,
the
CRA
generally
requires
federal
banking
agencies
to
evaluate
the
record
of
a
financial
institution
in
meeting applicable
CRA requirements.
The CRA
further requires
the agencies
to take
into account our
record of
meeting
USCB Financial Holdings, Inc.
2022 10-K
community
credit
needs
when
evaluating
applications
for,
among
other
things,
new
branches
or
mergers.
We
are
also
subject to analogous state CRA requirements
in Florida and certain other states
in which we may establish branch
offices.
In
connection
with
their
assessments
of
CRA
performance,
the
FDIC
and
FOFR
assign
a
rating
of
“outstanding,”
“satisfactory,”
“needs to
improve,” or
“substantial
noncompliance.” We
received a
“satisfactory” CRA
Assessment
Rating
from
both regulatory
agencies
in our
most
recent CRA
examinations.
In addition
to substantive
penalties
and corrective
measures that may
be required for
a violation of
certain fair lending
laws, the federal
banking agencies may
take compliance
with such
laws and
CRA into
account when
regulating and
supervising other
activities of
the bank,
including in
acting on
expansionary proposals such as when a bank submits
an application to establish bank branches, merge with
another bank,
or acquire
the assets
and assume
the liabilities
of another
bank. An
unsatisfactory
CRA and/or
fair lending
record could
substantially delay
or block
any such
transaction. The
regulatory agency's
assessment of
the institution's
record is
made
available to the
public at
www.ffiec.gov/craratings.
Following its most
recent CRA performance
evaluation in March
2020,
U.S. Century Bank received an overall rating of "Satisfactory."
Call Reports and Examination Cycle
All institutions, regardless of size, submit
a quarterly call report that includes
data used by federal banking agencies
to
monitor the condition, performance, and
risk profile of individual institutions
and the industry as a
whole. In June 2019, the
federal banking agencies issued a
final rule to permit insured depository
institutions with total assets of
less than $5 billion
that
do
not
engage
in
certain
complex
or international
activities
to
file
the
most
streamlined
version
of
the
quarterly
call
report, and to reduce data reportable on certain streamlined
call report submissions.
Effect of Governmental Monetary Policies
The commercial banking
business is affected
not only by
general economic conditions,
but also by
the monetary policies
of the
Federal Reserve
Board. Changes
in the
discount
rate on
member
bank borrowing,
availability of
borrowing at
the
“discount
window,”
open market
operations, changes
in the
Fed Funds
target
interest rate,
the
imposition of
changes in
reserve requirements
against
member
banks’
deposits
and
assets
of
foreign
banking
centers
and
the
imposition
of
and
changes in
reserve requirements
against certain
borrowings by
banks
and their
affiliates
are some
of the
instruments
of
monetary
policy
available
to
the
Federal
Reserve
Board.
These
monetary
policies
are
used
in
varying
combinations
to
influence overall growth and distributions of bank loans, investments and deposits,
which may affect interest rates charged
on
loans
or
paid
on
deposits.
The
monetary
policies
of
the
Federal
Reserve
Board
have
had
a
significant
effect
on the
operating results
of commercial
banks and
are expected
to continue
to do
so in
the future.
The Federal
Reserve Board’s
policies are primarily influenced by the dual mandate of price stability and
full employment, and to a lesser degree by short-
term
and
long-term
changes
in
the
international
trade
balance
and
in
the
fiscal
policies
of
the
U.S.
government.
Future
changes in monetary policy and the effect of such changes on our business and earnings in the future cannot be
predicted.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects
the regulation of the financial services industry,
and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating
in those states.
Federal and state
regulatory agencies
also periodically propose
and adopt changes
to their regulations
or
change the manner
in which existing
regulations are
applied or
interpreted. The
substance or
impact of pending
or future
legislation or regulation, or
the application thereof, cannot
be predicted, although enactment
of proposed legislation has
in
the past
and may
in the
future affect
the regulatory
structure under
which we
operate and
may significantly
increase our
costs, impede the efficiency
of our internal business
processes, require us to
increase our regulatory capital
or modify our
business
strategy,
or
limit
our
ability
to
pursue
business
opportunities
in
an
efficient
manner.
Our
business,
financial
condition, results
of operations
or prospects
may be
adversely affected,
perhaps materially,
as a
result of
any such
new
legislation or regulations.
The CARES Act and Initiatives Related to COVID-19
On March 27, 2020, the CARES Act was signed into law and provided for approximately $2.2 trillion in direct economic
relief in
response to
the public
health and
economic impacts
of COVID-19.
Many of
the CARES
Act’s programs
are, and
remain, dependent
upon the
direct involvement
of financial
institutions like
us. These
programs
have been
implemented
through rules and guidance adopted by federal
departments and agencies, including the U.S.
Department of Treasury,
the
Federal Reserve and
other federal bank
regulatory authorities, including
those with direct
supervisory jurisdiction
over us.
Furthermore, as the COVID-19 pandemic
evolves, federal regulatory authorities continue
to issue additional guidance with
respect
to
the
implementation,
life
cycle,
and
eligibility
requirements
for
the
various
CARES
Act
programs,
as
well
as
industry-specific
recovery
procedures
for
COVID-19.
In
addition,
it
is
possible
that
Congress
will
enact
supplementary
COVID-19 response legislation, including
amendments to the CARES
Act or new bills comparable
in scope to the CARES
Act. We
continue to
assess
the
impact
of
the
CARES
Act,
the
Consolidated
Appropriations
Act,
and
the
potential
USCB Financial Holdings, Inc.
2022 10-K
impact
of
new
COVID-19
legislation
and
other
statutes,
regulations
and
supervisory
guidance
related
to
the
COVID-19
pandemic.
A
principal
provision
of
the
CARES
Act
amended
the
SBA’s
loan
program
to
create
a
guaranteed,
unsecured
loan
program, the Paycheck Protection
Program, or PPP, to fund operational costs
of eligible businesses, organizations
and self-
employed persons impacted by COVID-19. These loans are eligible to be forgiven if
certain conditions are satisfied and are
fully guaranteed by the SBA. Additionally,
loan payments will also be deferred
for the first six months of the
loan term. The
PPP commenced on
April 3,
2020 and was
available to qualified
borrowers through August
8, 2020.
No collateral
or personal
guarantees were required. On December 27, 2020,
President Trump signed the Consolidated Appropriations Act, 2021 into
law which included the Economic Aid to Hard-Hit Small Businesses,
Nonprofits, and Venues Act, or
the HHSB Act. Among
other things, the HHSB Act renewed the
PPP,
allocating $284.45 billion for both new first time PPP
loans under the existing
PPP and
the expansion
of existing
PPP loans
for certain
qualified, existing
PPP borrowers.
In addition
to extending
and
amending the PPP,
the HHSB Act also creates
a new grant program
for “shuttered venue operators.”
As of December 31,
2022, we had 6 active PPP loans remaining totaling $1.3
million.
The
CARES
Act,
as
extended
by certain
provisions
of
the
Consolidated
Appropriations
Act,
2021,
permits
banks
to
suspend
requirements
under
GAAP
for
loan
modifications
to
borrowers
affected
by
COVID-19
that
may
otherwise
be
characterized as troubled
debt restructurings and
suspend any determination
related thereto if (i)
the borrower was
not more
than 30
days past
due as
of December
31, 2019,
(ii) the
modifications are
related to
COVID-19, and
(iii) the
modification
occurs between March 1, 2020 and
the earlier of 60 days after the
date of termination of the national emergency or
January
1,
2022.
Federal
bank
regulatory
authorities
also
issued
guidance
to
encourage
banks
to
make
loan
modifications
for
borrowers affected by
COVID-19. As of
December 31, 2022, there
were no
loans in
our portfolio
in deferral
status associated
with the COVID-19 pandemic.
See
Note
“Loans”
of
the
Consolidated
Financial
Statements
included
in
this
Annual
Report
Form
10-K
for
further
details.
Available Information
Our
website
address
is
www.uscentury.com.
Our
electronic
filings
with
the
FDIC
and
the
SEC
(including
all
Annual
Reports on Form
10-K, Quarterly Reports
on Form 10-Q,
Current Reports on Form
8-K, and if applicable,
amendments to
those reports)
are available
free of
charge on
the website
as soon
as reasonably
practicable after
they are
electronically
filed
with, or
furnished
to,
the
FDIC
or
SEC. The
information
posted
on
our
website
is
not
incorporated
into
this
Annual
Report
on
Form
10-K.
In
addition,
the
FDIC
and
the
SEC
each
maintains
a
website
that
contains
reports
and
other
information that is filed.
USCB Financial Holdings, Inc.
2022 10-K

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
This
section
contains
a
description
of
the
material
risk
and
uncertainties
identified
by
management
that
could,
individually or in combination, harm our business, results of
operations, liquidity and financial condition. The risks described
below are not all inclusive. We may face other
risks that are not presently known, or that we presently
deem immaterial.
Summary of Risk Factors
Our business is subject to
a number of risks
that could cause actual results
to differ materially from
those indicated by
forward-looking statements
made in
this Form
10-K or presented
elsewhere from
time to
time. These
risks are
discussed
more fully in this Item 1A and include, without limitation, the
following:
Risks Related to our Business and Operations
•
Our
business
operations
and
lending
activities
are concentrated
in
South
Florida,
and
we
are more
sensitive
to
adverse changes in the local economy than our more geographically
diversified competitors.
•
The small- to medium-sized businesses
to which we lend may have
fewer resources to weather adverse
business
developments, which may impair a borrower's ability to
repay a loan.
•
The continuing
COVID-19 pandemic
has, and may
continue to,
adversely affect
our business,
financial condition,
liquidity, capital and
results of operations.
•
Inflationary pressures and rising prices may affect
our results of operations and financial condition.
•
Financial challenges
at other
banking institutions
could lead
to depositor
concerns that
spread within
the banking
industry causing disruptive deposit outflows and other destabilizing
results.
•
Changes in U.S. trade policies and other global political
factors beyond our control may adversely impact us.
•
Our lending business is subject to credit risk, which could
lead to unexpected losses.
•
The potential for the replacement or discontinuation of London Inter-bank Offered Rate, or LIBOR, as a benchmark
interest rate could present operational problems
and result in market disruption.
•
Natural disasters and severe weather events in Florida
could have a material adverse impact on us.
•
Our business is subject to interest rate risk.
•
A failure or the perceived risk
of a failure to raise the statutory
debt limit of the U.S.
could have a material adverse
effect on our business, financial condition and results
of operations.
•
Our allowance for credit losses may not be sufficient
to absorb potential losses in our loan portfolio.
•
Our commercial loan portfolio may expose us to increased
credit risk.
•
The imposition of limits by the bank regulators
on commercial real estate lending
activities could curtail our growth
and adversely affect our earnings.
•
Our SBA lending program depends on our status as a participant in the SBA's Preferred Lenders Program, and we
face specific risks associated with originating SBA loans
and selling the guaranteed portion thereof.
•
The SBA may not honor its guarantees if we do not originate
loans in compliance with SBA guidelines.
•
Global banking is an important part of our business, which creates
increased BSA/AML risk.
•
We may not recover all amounts that are contractually
owed to us by our borrowers.
•
Non-performing assets take significant time to resolve and
adversely affect us.
USCB Financial Holdings, Inc.
2022 10-K
•
We engage in
lending secured by
real estate and
may foreclose on
the collateral and
own the underlying
real estate,
subjecting us to the costs and potential risks associated
with the ownership of real property and other risks.
•
We are subject to certain operational risks,
such as fraud and data processing system failures and errors.
•
We are subject to liquidity risk, which could adversely
affect our financial condition and results of
operations.
•
We have several large depositor relationships, the
loss of which could adversely affect
us.
•
The value of our securities in our investment portfolio
may decline in the future.
•
We may not effectively execute on our expansion
strategy.
•
New lines of business, products, product enhancements
or services may subject us to additional risk.
•
Additional capital we need may not be available on terms
acceptable to us or may dilute our shareholders.
•
Our strategy to grow through mergers or acquisitions may not be
successful or, if successful,
may produce risks in
successfully integrating and managing the merged companies
or acquisitions and may dilute our shareholders.
•
We may lose one or more of our key personnel
or fail to attract and retain other highly qualified personnel.
•
Damage to our reputation could significantly harm our
businesses.
•
We face strong competition and must respond
to rapid technological changes to remain competitive.
•
A
failure, interruption, or breach in the security of our or our contracted vendors’ systems could adversely affect us.
•
We rely on other companies to provide key components
of our business infrastructure.
•
Litigation and regulatory actions could subject us to significant
liabilities or restrictions.
•
Certain of our directors may have conflicts of interest
in presenting business opportunities to us.
Risks Related to Our Tax, Accounting
and Regulatory Compliance
•
We may be unable to recognize the benefits of deferred
tax assets.
•
The accuracy of our financial statements could be affected
by our judgments, assumptions or estimates.
•
As a new public company,
we may not create an effective internal control
environment.
•
We operate in a highly regulated environme
nt.
•
Our participation in the SBA PPP loan program exposes
us to noncompliance risk and litigation risk.
•
We face a risk of noncompliance with the Bank
Secrecy Act and other anti-money laundering laws.
•
We are subject to capital adequacy requirements
that may become more stringent.
•
We are periodically subject to examination and scrutiny
by a number of banking agencies.
•
We are subject to numerous laws and regulations
of certain regulatory agencies designed to protect consumers.
•
Climate change
and related
legislative and
regulatory initiatives
may materially
affect our
business and
results of
operations.
Risks Related to Our Class A Common Stock
•
Ability to pay dividends on our common stock
is subject to restrictions.
USCB Financial Holdings, Inc.
2022 10-K
•
The market price and trading volume of our Class A common
stock may be volatile.
•
There are significant restrictions in our Articles of Incorporation
that restrict the ability to sell our capital stock.
•
We
are
an
emerging
growth
company
and
have
decided
to
take
advantage
of
certain
exemptions
from
various
reporting and other requirements applicable to emerging growth
companies.
•
We have existing investors that
own a significant amount of
our common stock whose individual
interests may differ
from yours.
•
Provisions in our governing documents and Florida
law may have an anti-takeover effect
and there are substantial
regulatory limitations on changes of control of the Company.
Risks Related to our Business and Operations
Our business
operations and
lending activities
are concentrated
in South
Florida, and
we are
more sensitive
to adverse changes in the local economy than our
more geographically diversified competitors.
Unlike many of
our larger competitors
that maintain significant
operations located
outside of our
market area, most
of
our customers are concentrated in South Florida. In addition, we have
a high concentration of loans secured by real estate
located in
South Florida.
Therefore, our
success depends
upon the
general economic
conditions in
South Florida,
which
may differ from the economic conditions in other areas
of the U.S. or the U.S. generally.
Our real estate
collateral provides
an alternate source
of repayment in
the event
of default by
the borrower;
however,
the value of the collateral may decline during the time the credit is outstanding. The concentration of our loans in the South
Florida area subjects us to
risk that a downturn in the
local economy or recession in
this area could result in
a decrease in
loan originations and increases in delinquencies and foreclosures, which would have a greater negative effect on us than if
our lending
were more
geographically diversified.
If we
are required
to liquidate
our real
estate collateral
securing a
loan
during
a
period
of
reduced
real
estate
values
to
satisfy
the
debt,
our
earnings
and
capital
could
be
adversely
affected.
Moreover, since
a large portion
of our loan
portfolio is secured
by properties located
in South Florida,
the occurrence of
a
natural disaster, such
as a hurricane, or a man-made disaster
could result in a decline in loan originations,
a decline in the
value or
destruction
of mortgaged
properties
and an
increase
in the
risk
of delinquencies,
foreclosures
or loss
on loans
originated by
us. We
may suffer
further losses
due to
the decline
in the
value of
the properties
underlying our
mortgage
loans, which would have an adverse impact on our results
of operations and financial condition.
A downturn in the local economy generally may lead to loan losses that are not offset by operations in other markets; it
may also reduce the ability
of our customers to grow
or maintain their deposits with
us. For these reasons, any
regional or
local economic
downturn
that
affects
South Florida,
or existing
or prospective
borrowers
or
depositors
in
South Florida,
could have a material adverse effect on our business,
financial condition and results of operations.
In addition, there are
continuing concerns related
to, among other things,
the level of
U.S. government debt
and fiscal
actions that may
be taken to
address that debt,
price fluctuations of key
natural resources, inflation, the
potential resurgence
of economic and political tensions with China, the Russian invasion of Ukraine and
continuing high oil prices due to, among
other things, Russian supply disruptions, each of
which may have a destabilizing effect
on financial markets and economic
activity.
Economic
pressure
on
consumers
and
overall
economic
uncertainty
may
result
in
changes
in
consumer
and
business spending,
borrowing
and saving
habits. These
economic
conditions and/or
other negative
developments
in the
domestic
or international
credit markets
or economies
may significantly
affect
the markets
in which
we do
business, the
value of our loans and investments, and our ongoing
operations, costs and profitability.
The
small-
to
medium-sized
businesses
to
which
we
lend
may
have
fewer
resources
to
weather
adverse
business developments, which may impair a borrower's
ability to repay a loan.
We
target our
business
development
and
marketing
strategies
primarily
to
serve
the
banking
and
financial
services
needs of small- to
medium-sized businesses, or SMBs, and
the owners and operators of
those businesses. SMBs generally
have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market
shares than their competition, may be
more vulnerable to economic
downturns, often need substantial additional
capital to
expand
or
compete,
and
may
experience
substantial
volatility
in
operating
results,
any
of
which,
individually
or
in
the
aggregate, may impair
their ability as
a borrower to
repay a loan.
These factors may
impact SMBs significantly
more as a
result of the effects of the COVID-19 pandemic. In addition, the success of SMBs often depends on the management skills,
talents and efforts of a small group of
key people, and the death, disability or
resignation of one or more of these individuals
could have
an adverse
impact on
the business
and its
ability to
repay its
loan. If
general economic
conditions negatively
USCB Financial Holdings, Inc.
2022 10-K
impact the markets in which we operate
or any of our borrowers otherwise are
affected by adverse business developments,
our
SMB
borrowers
may
be
disproportionately
affected
and
their
ability
to
repay
outstanding
loans
may
be
negatively
affected, which could have a material adverse effect
on our business, financial condition and results of operations.
The
continuing
COVID-19
pandemic
has,
and
may
continue
to,
adversely
affect
our
business,
financial
condition, liquidity, capital and results
of operations.
The extent and duration
to which the
continuing COVID-19 pandemic
will affect our
business in the
future is unknown
and will depend
on future developments,
which are highly
uncertain and outside
our control. These
developments include
the
duration
and
severity
of
the
pandemic
(including
the
possibility
of
further
surges
of
COVID-19
variants
of
concern),
supply chain disruptions, decreased demand for our products and services or those of our borrowers, which could increase
our credit
risk,
rising inflation,
our ability
to maintain
sufficient
qualified personnel
due to
labor shortages,
talent attrition,
employee illness, quarantine,
willingness to return
to work, face-coverings
and other safety
requirements, or travel
and other
restrictions, and the actions taken
by governments, businesses and individuals
to contain the impact of
COVID-19, as well
as
further
actions
taken
by
governmental
authorities
to
limit
the
resulting
economic
impact.
It
is
also
possible
that
the
pandemic
and
its
aftermath
will
lead
to
a
prolonged
economic
slowdown
in
sectors
disproportionately
affected
by
the
pandemic or recession in the U.S. economy or the world
economy in general.
Inflationary pressures and rising prices may affect
our results of operations and financial condition.
Inflation
has
risen
sharply
since
the
end
of
to
levels
not
seen
in
more
than
years.
Small
to
medium-sized
businesses may be
impacted more during
periods of high
inflation, as they are
not able to leverage
economics of scale
to
mitigate cost pressures compared
to larger businesses. Consequently,
the ability of our business
customers to repay their
loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of
operations and financial
condition. Furthermore,
a prolonged period
of inflation could
cause wages
and other of
our costs
to increase, which could adversely affect our results
of operations and financial condition.
Financial
challenges
at
other
banking
institutions
could
lead
to
depositor
concerns
that
spread
within
the
banking industry causing disruptive deposit outflows
and other destabilizing results.
In March 2023, certain specialized banking institutions with elevated concentrations of uninsured deposits experienced
large deposit outflows,
resulting in the
institutions being placed
into FDIC receiverships.
In the aftermath,
there has been
substantial
market
disruption
and
indications
that
deposit
concerns
could
spread
within
the
banking
industry,
leading
to
deposit outflows
and other
destabilizing results.
U.S. Century
Bank maintains
a well-diversified
deposit base.
Our top 15
depositors only
hold 12%
of our
total portfolio.
As of
December 31,
2022, 39% of
our deposits
are estimated
to be FDIC-
insured. Our public funds
are 11%
of total deposits and
are partially collateralized.
The estimated average account
size of
our deposit
portfolio is
$95 thousand. In
addition, the Bank
was qualified
as a
“well capitalized” institution
as of
December 31,
2022 and 2021.
Changes in
U.S. trade
policies and
other global
political factors
beyond our
control, including
the imposition
of tariffs, retaliatory tariffs, or other sanctions, may adversely impact our business, financial condition and results
of operations.
There have
been, and
may be
in the
future, changes
with respect
to U.S.
and international
trade policies,
legislation,
treaties and tariffs, embargoes, sanctions and other trade restrictions. Tariffs,
retaliatory tariffs or other trade restrictions on
products
and
materials
that
customers
import
or export,
or a
trade
war or
other
related governmental
actions
related
to
tariffs,
international
trade
agreements
or
policies
or
other
trade
restrictions
have
the
potential
to
negatively
impact
our
customers' costs, demand
for our products,
or the U.S.
economy or
certain sectors thereof
and, thus, could
adversely impact
our business,
financial condition
and results
of operations.
As a
result of
Russia's invasion
of Ukraine,
the U.S.
imposed,
and is likely to continue to impose material additional, financial and economic sanctions and export controls against certain
Russian organizations and/or individuals, with similar actions either implemented or planned by the European Union ("EU")
and
the
United
Kingdom
(“UK”) and
other
jurisdictions.
The
U.S.,
the
UK,
and
the
EU
have
each
imposed
packages
of
financial
and
economic
sanctions
that,
in
various
ways,
constrain
transactions
with
numerous
Russian
entities
and
individuals; transactions
in Russian
sovereign debt;
and investment,
trade, and
financing to,
from, or
in certain regions
of
Ukraine. Moreover, actions by Russia, and any
further measures taken by the
U.S. or its allies,
could have negative impacts
on regional and global
financial markets and economic conditions.
To the extent changes in the global
political environment,
including Russia's
invasion of
Ukraine and
the escalating
tensions between
Russia and
the U.S.,
NATO,
the EU
and the
UK, have a negative impact on
us or on the markets
in which we operate, our business,
results of operations and financial
condition could be materially and adversely impacted.
USCB Financial Holdings, Inc.
2022 10-K
Our lending business is subject to credit risk, which
could lead to unexpected losses.
Our
primary
business
involves
making
loans
to
customers.
The
business
of
lending
is
inherently
risky
because
the
principal or
interest on
the loan
may not
be repaid
timely or
at all
or the
value of
any collateral
securing the
loan may
be
insufficient to
cover our
outstanding exposure.
These risks
may be affected
by the
strength or
weakness of
the particular
borrower's business sector
and local, regional and
national market and
economic conditions. Many
of our loans are
made
to SMBs that may be
less able to withstand
competitive, economic and financial
pressures than larger borrowers.
Our risk
management practices,
such as
monitoring the
concentration of
our loans
within specific
industries in
which we
lend and
concentrations with individual borrowers
or related borrowers, and
our credit approval
practices, may not adequately
reduce
credit risk. In addition, there are risks inherent in making any loan, including
risks relating to proper loan underwriting, risks
resulting from
changes in
economic and
industry conditions,
risks
inherent in
dealing with
individual borrowers,
including
the risk that a borrower may not provide
information to us about their business
in a timely manner,
may present inaccurate
or incomplete information to us, may lack a U.S. credit history,
or may leave the U.S. without fulfilling their loan obligations,
leaving us
with little recourse
to them
personally,
and/or risks
relating to the
value of
collateral. In
order to
manage credit
risk successfully,
we must,
among other
things, maintain
disciplined and
prudent underwriting
standards and
ensure that
our lenders follow those standards. The weakening of
these standards for any reason, such as an
attempt to attract higher
yielding loans,
a lack
of discipline
or diligence
by our
employees in
underwriting and
monitoring loans,
the inability
of our
employees to adequately adapt
policies and procedures to
changes in economic or
any other conditions affecting borrowers
and the quality
of our loan portfolio,
may result in loan
defaults, foreclosures and additional
charge-offs and may necessitate
that we significantly increase our allowance for credit losses, each of which could adversely affect our net income. A failure
to effectively
manage
credit risk
associated
with our
loan portfolio
could
lead to
unexpected
losses and
have a
material
adverse effect on our business, financial condition
and results of operations.
The
potential
for
the
replacement
or
discontinuation
of
London
Inter-bank
Offered
Rate,
or
LIBOR,
as
a
benchmark
interest
rate
and
a
transition
to
an
alternative
reference
interest
rate
could
present
operational
problems and result in market disruption.
In 2017, the
Financial Conduct
Authority announced
that after 2021
it will no
longer compel banks
to submit the
rates
required to
calculate
LIBOR.
In November
2020, the
administrator
of LIBOR
announced
it will
consult
on its
intention to
extend the retirement
date of certain offered
rates whereby the publication
of the one week
and two month LIBOR
offered
rates will cease after December 31, 2021; but, the publication of
the remaining LIBOR offered rates will continue until June
30,
2023.
Given
consumer
protection,
litigation,
and
reputation
risks,
the
bank
regulatory
agencies
have
indicated
that
entering into new
contracts that use
LIBOR as a
reference rate after
December 31, 2021
would create safety
and soundness
risks and that
they will examine
bank practices accordingly.
Therefore, the
agencies encouraged banks
to cease entering
into new contracts that use LIBOR as a reference rate
as soon as practicable and in any event by December
31, 2021.
Regulators, industry groups
and certain communities
(e.g., the Alternative
Reference Rates Committee)
have, among
other
things,
published
recommended
fallback
language
LIBOR-linked
financial
instruments,
identified
recommended
alternatives for certain LIBOR rates (e.g.,
the Secured Overnight Financing Rate (“SOFR”) as the
recommended alternative
to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments.
At this
time, while it appears that
these recommendations and proposals
have been broadly accepted, it
is not possible to predict
whether they
will continue
to evolve,
and what
the effect
of their
implementation
may be
on the
markets
for floating
rate
financial instruments.
The uncertainty
surrounding potential
reforms,
including the
use of
alternative reference
rates and
changes
to
the
methods
and
processes
used
to
calculate
rates,
may
have
an
adverse
effect
on
the
trading
market
for
LIBOR-based
securities,
loan
yields,
and
the
amount
received
and
paid
on
derivative
contracts
and
other
financial
instruments.
In addition,
the implementation of
LIBOR reform proposals
may result in
increased compliance and
operational
costs.
Certain of our financial products are
tied to LIBOR. Inconsistent approaches to
a transition from LIBOR to
an alternative
rate among
different market
participants and
for different
financial products
may cause
market disruption
and operational
problems, which
could adversely
affect
us, including
by exposing
us to
increased interest
rate risk
and associated
costs,
including, but not limited to, creating the possibility of
disagreements with counterparties.
Natural disasters and severe weather events in Florida
could have a material adverse impact on our
business,
financial condition and operations.
Our
operations
and
our
customer
base
are
primarily
located
in
South
Florida.
This
region
is
vulnerable
to
natural
disasters
and
severe
weather
events
or
acts
of
God,
such
as
hurricanes
or
tropical
storms,
which
can
have
a
material
adverse impact
on our
loan portfolio,
our overall
business, financial
condition and
operations, cause
widespread property
damage and have
the potential to
significantly depress
the local economies
in which we
operate. Future adverse
weather
events in
Florida could
potentially result
in extensive
and costly
property damage
to businesses
and residences,
depress
USCB Financial Holdings, Inc.
2022 10-K
the value of property serving as collateral for our loans, force the relocation of residents, and
significantly disrupt economic
activity in the region.
We
cannot predict
the extent
of damage
that may
result from
such adverse
weather events,
which will
depend on
a
variety of factors that are beyond our control,
including, but not limited to, the
severity and duration of the event,
the timing
and level
of government
responsiveness, the
pace of
economic recovery
and availability
of insurance
to cover
losses. In
addition,
the
nature,
frequency
and
severity
of
these
adverse
weather
events
and
other
natural
disasters
may
be
exacerbated by climate change. If a significant adverse weather event or other natural disaster were to occur, it could have
a materially adverse impact
on our financial
condition, results of operations
and our business, as
well as potentially
increase
our exposure to credit and liquidity risks.
Our business is subject to
interest rate risk, and variations in
interest rates may materially and adversely
affect
our financial performance.
Changes in the interest
rate environment may reduce
our profits. It is
expected that we
will continue to realize
income
from the differential or "spread" between the interest earned on loans, securities
and other interest-earning assets, and the
interest paid on deposits, borrowings
and other interest-bearing
liabilities. Net interest spreads
are affected, in part,
by the
difference
between
the
maturities
and
repricing
characteristics
of
interest-earning
assets
and
interest-bearing
liabilities.
Changes
in
market
interest
rates
generally
affect
loan
volume,
loan
yields,
funding
sources
and
funding
costs.
Our
net
interest
spread
depends
on
many
factors
that
are
partly
or completely
out
of
our
control,
including
competition,
general
economic
conditions,
and
federal
economic
monetary
and fiscal
policies,
and
in
particular,
the
Federal
Reserve's
policy
determinations with respect to interest rates.
It is currently expected that during 2023,
the Federal Open Market Committee of the Federal
Reserve (the “FOMC”) will
increase interest rates
to reduce the
rate of
inflation to the
extent necessary
to reduce
inflation to the
rate that the
FOMC
believes is appropriate. Since March 2022, the FOMC has increased the federal funds rate by
450 basis points. All of these
increases were expressly
made in response
to inflationary pressures,
which are currently
expected to continue.
However,
there can be no assurances as to any future FOMC action.
While an increase
in interest rates
may increase our
loan yield, it
may adversely
affect the ability
of certain borrowers
with variable rate
loans to pay
the contractual
interest and principal
due to us.
Following an increase
in interest rates,
our
ability to maintain a positive net interest spread is
dependent on our ability to increase our loan offering rates, replace loans
that mature and
repay or
that prepay before
maturity with new
originations at higher
rates, minimize increases
on our
deposit
rates, and maintain an acceptable
level and composition of
funding. We cannot provide
assurances that we will
be able to
increase
our
loan
offering
rates
and
continue
to
originate
loans
due
to
the
competitive
landscape
in
which
we
operate.
Additionally,
we cannot
provide assurances
that we
can minimize
the increases
in our
deposit rates
while maintaining
an
acceptable
level
of
deposits.
Finally,
we
cannot
provide
any
assurances
that
we
can
maintain
our
current
levels
of
noninterest-bearing deposits as customers may seek
higher-yielding products when interest rates increase.
Accordingly,
changes
in
levels
of
interest
rates
could
materially
and
adversely
affect
our
net
interest
margin,
asset
quality, loan origination
volume, average loan portfolio balance, liquidity,
and overall profitability.
A
failure
or
the
perceived
risk of
a
failure
to
raise
the
statutory
debt
limit
of
the
U.S.
could
have
a
material
adverse effect on our business, financial condition
and results of operations
.
U.S. debt ceiling and budget deficit
concerns have increased the
possibility of additional credit-rating
downgrades and
economic slowdowns, or a recession in
the United States. Although U.S.
lawmakers passed legislation to
raise the federal
debt ceiling on multiple occasions, including the most recent increase in December 2021, ratings agencies have lowered or
threatened to lower the long-term sovereign
credit rating on the United
States. The impact of this
or any further downgrades
to the U.S. government’s sovereign credit rating or its
perceived creditworthiness could adversely affect the U.S. and global
financial markets and economic conditions. Absent further
quantitative easing by the Federal Reserve,
these developments
could cause interest rates
and borrowing costs to rise,
which may negatively impact
our ability to access
the debt markets
on favorable terms. In
addition, disagreement over
the federal budget has
caused the U.S.
federal government to shut
down
for
periods
of
time.
Continued
adverse
political
and
economic
conditions
could
have
a
material
adverse
effect
on
our
business, financial condition and results of operations.
Our allowance for credit losses may not be sufficient
to absorb potential losses in our loan portfolio.
We
maintain
an
allowance
for
credit
losses
that
represents
management's
judgment
of
probable
losses
and
risks
inherent in our loan portfolio.
The level of the allowance
reflects management's continuing
evaluation of general economic
conditions,
present
political
and
regulatory
conditions,
diversification
and
seasoning
of
the
loan
portfolio,
historic
loss
USCB Financial Holdings, Inc.
2022 10-K
experience, identified credit
problems, delinquency levels
and adequacy of
collateral. Determining the
appropriate level of
our
allowance
for
credit
losses
involves
a
degree
of
subjective
judgment
and
requires
management
to
make
significant
estimates of and assumptions regarding current credit risks
and future trends, all of which may undergo material changes.
Inaccurate
management
assumptions,
deterioration
of
economic
conditions
affecting
borrowers,
new
negative
information
regarding
existing
loans,
identification
of
additional
problem
loans or
deterioration
of existing
problem
loans,
and
other
factors
(including
third-party
review
and
analysis),
both
within
and
outside
of
our
control,
may
require
us
to
increase our allowance for
credit losses. In addition,
our regulators, as an
integral part of their
periodic examinations, review
our methodology for calculating, and
the adequacy of, our allowance
for credit losses and may
direct us to make additions
to the allowance
based on their
judgments about
information available to
them at the
time of their
examination. Further,
if
actual charge-offs in future
periods exceed the
amounts allocated to
our allowance for
credit losses, we
may need additional
provisions for credit losses to restore
the adequacy of our allowance for credit
losses. Finally, the measure of our allowance
for credit losses depends on the
adoption and interpretation of accounting
standards. The Financial Accounting
Standards
Board, or FASB, issued a new credit
impairment model, the Current Expected Credit Loss, or
CECL model, which became
applicable
to
us
on
January
1,
2023.
CECL
requires
financial
institutions
to
estimate
and
develop
a
provision
for
credit
losses over the lifetime of the loan at origination, as opposed to reserving for incurred or probable
losses up to the balance
sheet date. Under the CECL
model, expected credit deterioration
would be reflected in the income
statement in the period
of
origination
or
acquisition
of
a
loan,
with
changes
in
expected
credit
losses
due
to
further
credit
deterioration
or
improvement reflected
in the
periods in
which the
expectation changes.
Accordingly,
implementation of
the CECL
model
could
require
financial
institutions,
like
us,
to
increase
our
allowances
for
credit
losses
from
levels
in
place
prior
to
the
implementation of CECL.
Moreover, the
CECL model may create
more volatility in our
level of allowance for
credit losses.
If we
are required
to materially
increase our
level of
allowance for
credit losses
for any
reason, such increase
could adversely
affect our business, prospects, cash flow,
liquidity, financial
condition and results of operations.
Our commercial loan portfolio may expose us to increased
credit risk.
Commercial business
and real
estate loans
generally have
a higher
risk
of loss
because loan
balances
are typically
larger
than
residential
real
estate
and
consumer
loans
and
repayment
is
usually
dependent
on
cash
flows
from
the
borrower’s business or the
property securing the loan. Our
commercial business loans are primarily
made to small business
and middle market customers. These loans typically
involve repayment that depends upon income
generated, or expected
to be generated, by the property securing the loan
and/or by the cash flow generated by the business borrower and
may be
adversely affected by changes in the economy or
local market conditions. These loans expose a
lender to the risk of having
to liquidate the collateral securing
these loans at times when there
may be significant fluctuation of
commercial real estate
values or to the
risk of inadequate cash flows to
service the commercial loans. Unexpected deterioration in
the credit quality
of our
commercial business
and/or real
estate loan
portfolio could
require us
to increase
our allowance
for credit
losses,
which would
reduce our
profitability and
could have
an adverse
effect
on our
business, financial
condition, and
results of
operations.
Commercial construction loans generally
have a higher risk
of loss due to the assumptions
used to estimate the
value
of property
at completion
and the
cost of
the project,
including interest.
It can
be difficult
to accurately
evaluate the
total
funds required
to complete
a project,
and construction
lending often
involves the
disbursement
of substantial
funds
with
repayment dependent, in large part, on the success of the ultimate project rather than the ability of a borrower or guarantor
to repay the loan from sources other than the subject project. If the assumptions and estimates are inaccurate, the value of
completed property
may fall
below the
related loan
amount. If
we are forced
to foreclose
on a
project prior
to completion,
we may
be
unable
to
recover
the
entire
unpaid
portion
of
the
loan,
which
would
lead
to
losses.
In
addition,
we may
be
required to fund additional amounts to complete a project,
incur taxes, maintenance and compliance costs for
a foreclosed
property and
may have
to hold
the property
for an
indeterminate
period of
time, any
of which
could adversely
affect
our
business, prospects, cash flow,
liquidity, financial
condition and results of operations.
The imposition
of limits
by the
bank regulators
on commercial
real estate
lending activities
could curtail
our
growth and adversely affect our earnings.
The
FDIC,
the
Federal
Reserve
Board
and
the
Office
of
the
Comptroller
of
the
Currency
have
promulgated
joint
guidance
on
sound
risk
management
practices
for
financial
institutions
with
concentrations
in
commercial
real
estate
lending. Under this guidance, a financial
institution that, like us, is actively
involved in commercial real estate lending should
perform
a
risk
assessment
to
identify
concentrations.
Regulatory
guidance
on
concentrations
in
commercial
real
estate
lending provides that a bank’s commercial real estate lending exposure
could receive increased supervisory scrutiny where
total
commercial
real
estate
loans,
including
loans
secured
by
multi-family
residential
properties,
owner-occupied
and
nonowner-occupied investor
real estate, and
construction and
land loans,
represent 300%
or more of
an institution’s
total
risk-based capital, and the outstanding
balance of the commercial real estate
loan portfolio has increased by 50%
or more
during the
preceding
36 months.
At December
31, 2022,
our total
commercial investor
real estate
loans, including
loans
USCB Financial Holdings, Inc.
2022 10-K
secured by apartment buildings,
commercial real estate,
and construction and land
loans represented 390% of
the Bank’s
total risk-based capital and the growth in the
commercial real estate portfolio exceeded 50% over the preceding 36
months.
The particular
focus of
the guidance
is on
exposure to
commercial real
estate loans
that are
dependent on
the cash
flow
from the
real estate
held as
collateral and
that are
likely to
be at
greater risk
to conditions
in the
commercial
real estate
market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The
purpose of the guidance is
to guide institutions in developing
risk management practices and
capital levels commensurate
with the
level and
nature of
real estate
concentrations.
Management has
established an
commercial real
estate lending
framework to
monitor specific exposures
and limits by
types within the
commercial real estate
portfolio and
takes appropriate
actions, as necessary. While we believe we have implemented policies and procedures with respect to our commercial real
estate loan portfolio
consistent with
this guidance,
the FDIC, U.S.
Century Bank’s
primary federal
regulator,
could require
us
to
implement
additional
policies
and
procedures
pursuant
to
their
interpretation
of
the
guidance
that
may
result
in
additional costs to us. In addition, If the FDIC were
to impose restrictions on the amount of commercial real estate loans we
can hold in our portfolio, our earnings would be adversely
affected.
Our
SBA
lending
program
is dependent
upon
the
federal
government
and
our status
as
a participant
in the
SBA's Preferred
Lenders Program,
and we
face specific
risks associated
with originating
SBA loans
and selling
the guaranteed portion thereof.
We
have been
approved
by
the
SBA
to
participate
in
the
SBA's
Preferred
Lenders
Program.
As
an
SBA
Preferred
Lender,
we enable
our clients
to obtain
SBA loans
without being
subject to
the potentially
lengthy SBA
approval process
necessary
for
lenders
that
are
not
SBA
Preferred
Lenders.
The
SBA
periodically
reviews
the
lending
operations
of
participating
lenders
to
assess,
among
other
things,
whether
the
lender
exhibits
prudent
risk
management.
When
weaknesses are identified, the SBA may request corrective actions
or impose enforcement actions, including revocation of
the lender's
Preferred Lender
status. If
we lose
our status
as an
SBA Preferred
Lender,
we may
lose some
or all
of our
customers to
lenders who
are SBA
Preferred Lenders,
which could
adversely affect
our business,
financial condition
and
results of operations.
We generally sell the guaranteed
portion of our SBA 7(a) loans
in the secondary market. These
sales have resulted in
both premium income for us
at the time of sale
and created a stream of
future servicing income. There can be
no assurance
that we will be able to continue originating these loans, that a secondary market for these loans will continue to exist or that
we will continue to realize
premiums upon the sale
of the guaranteed portion of
these loans. When we sell
the guaranteed
portion of our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on
the non-guaranteed portion of a loan, we share any loss
and recovery related to the loan pro-rata with the SBA.
The laws, regulations and
standard operating procedures
that are applicable to
SBA loan products may
change in the
future. We
cannot predict
the effects
of these
changes on
our business
and profitability.
Because government
regulation
greatly
affects
the
business
and
financial
results
of
all
commercial
banks
and
bank
holding
companies,
especially
our
organization, changes in the laws, regulations
and procedures applicable to SBA loans
could adversely affect our
ability to
operate profitably.
In addition, the
aggregate amount of
SBA 7(a) and 504
loan guarantees by the
SBA must be approved
each fiscal year by the federal
government. We cannot predict
the amount of SBA 7(a)
loan guarantees in any given
fiscal
year. If the federal government were to reduce the amount of SBA loan guarantees, such reduction could
adversely impact
our SBA lending
program, including making and
selling the guaranteed portion
of fewer SBA
7(a) and 504
loans. In addition,
any default by
the U.S. government
on its obligations
or any prolonged
government shutdown
could, among
other things,
impede our ability to originate
SBA loans or sell such loans
in the secondary market, which
could materially and adversely
affect our business, financial condition and results
of operations.
The SBA may not honor its guarantees if we do not originate
loans in compliance with SBA guidelines
.
SBA lending programs
typically guarantee
75.0% of the
principal on
an underlying
loan. If the
SBA establishes
that a
loss on
an
SBA guaranteed
loan
is attributable
to significant
technical
deficiencies
in the
manner
in
which
the loan
was
originated,
funded
or serviced
by us,
the
SBA may
seek
recovery
of
the
principal
loss
related
to
the
deficiency
from
us
notwithstanding that a portion of the loan
was guaranteed by the SBA, which could adversely
affect our business, financial
condition and results of
operations. While we follow
the SBA's underwriting
guidelines, our ability to
do so depends on the
knowledge and diligence of our employees
and the effectiveness of
controls we have established. If our
employees do not
follow
the
SBA
guidelines
in
originating
loans
and
if
our
loan
review
and
audit
programs
fail
to
identify
and
rectify
such
failures, the
SBA may
reduce or,
in some
cases, refuse
to honor
its guarantee
obligations and
we may
incur losses
as a
result.
USCB Financial Holdings, Inc.
2022 10-K
Global banking is an important part of our business, which
creates increased BSA/AML risk.
As our
business
model
includes
correspondent
services
to banks
in Latin
America
and the
Caribbean,
these
cross-
border
correspondent
banking
relationships
pose
unique
risks
because
they
create
situations
in
which
a
U.S.
financial
institution will be
handling funds from
a financial institution
in Latin America
and the Caribbean
whose customers may
not
be transparent to us. Moreover, many foreign financial institutions, including
in Latin America and the Caribbean where our
correspondent banking
services
are located,
are not
subject to
the same
or similar
regulatory
guidelines
as U.S.
banks.
Accordingly,
these
foreign
institutions
may
pose
higher
money
laundering
risk
to
their
respective
U.S.
bank
correspondent(s). Because
of the
large amount
of funds,
multiple transactions,
and our
potential lack
of familiarity
with a
foreign correspondent financial institution's customers, these customers may
be able to more
easily conceal the source and
use of
illicit funds.
Consequently,
we may
have a
higher
risk
of non-compliance
with the
BSA
and
other
AML rules
and
regulations
due
to
our
correspondent
banking
relationships
with
foreign
financial
institutions.
Additionally,
international
private banking
places additional
pressure on
our policies,
procedures and
systems for
complying with
the Bank
Secrecy
Act of 1970, as amended, or BSA, and other anti-money laundering, or AML, statutes and regulations. Our failure to strictly
adhere to the terms and
requirements of our OFAC
license or our failure
to adequately manage our
BSA/AML compliance
risk
in light
of
our correspondent
banking
relationship
with
foreign
financial
institutions
and
international
private
banking
could result
in regulatory or
other actions
being taken
against us,
which could significantly
increase our compliance
costs
and materially and adversely affect our results of
operations.
We may not recover all amounts that are contractually
owed to us by our borrowers.
We are
dependent on
the collection
of loan
principal, interest,
and fees
to partially
fund our
operations. A
shortfall in
collections and proceeds may impair our ability to fund
our operations or to repay our existing debt.
When
we
lend
funds,
commit
to
fund
a
loan
or
enter
into
a
letter
of
credit
or
other
credit-related
contract
with
a
counterparty, we incur credit risk. The
credit quality of our
portfolio can have a
significant impact on our
earnings. We expect
to experience charge-offs and delinquencies on our loans
in the future. Many borrowers have been negatively impacted by
the COVID-19 pandemic and related
economic consequences, and may continue
to be similarly or more severely
affected
in the future. Our
customers' actual operating results may be
worse than our underwriting contemplated when
we originated
the loans, and in these
circumstances, we could incur
substantial impairment or
loss of the value on
these loans. We
may
fail to identify problems because our customer did not report them in
a timely manner or, even if the customer did report the
problem, we may fail to address it quickly enough or at all, or some loans, due
to market circumstances, may not be able to
be fully rehabilitated.
Even if customers
provide us with
full and accurate
disclosure of
all material information
concerning
their businesses, we may misinterpret or incorrectly analyze
this information. Mistakes may cause us to
make loans that we
otherwise would not have made or to fund
advances that we otherwise would not
have funded, either of which could result
in losses
on loans,
or necessitate
that we
significantly
increase our
allowance for
loan and
lease losses.
As a
result, we
could suffer
loan losses
and have
non-performing loans,
which could
have a
material adverse
effect
on our
net earnings
and results of operations and financial condition, to the extent
the losses exceed our allowance for loan and lease losses.
Some of our
loans are
secured by a
lien on specified
collateral of the
borrower and we
may not obtain
or properly perfect
our liens or the value of the collateral securing any particular loan may not be sufficient to protect us from suffering a partial
or complete
loss
if the
loan becomes
non-performing
and
we proceed
to foreclose
on or
repossess
the collateral.
With
respect
to
loans
that
we
originate
for
condominium
or
homeowners'
associations,
or
the
Associations,
these
loans
are
primarily secured by and rely
upon the cash flow received
by the Associations from
payments received from their property
owners, as well
as cash on
hand. These Associations
rely upon payments
received from
their property owners
in order to
perform
on
these
loans
and
for
the
loan collateral.
Accordingly,
our
ability
to
recover
amounts
on
non-performing
loans
made to Associations
is dependent
upon the Association
having sufficient
cash on hand
for repayment
of the loan
and/or
having
the
ability
to
impose
assessments
on
its
property
owners,
some
of
whom
may
not
have
the
ability
to
pay
such
assessments. In such events, we could suffer
loan losses, which could have a material adverse effect
on our net earnings,
allowance for loan and lease losses, financial condition,
and results of operations.
Non-performing
assets
take
significant
time
to
resolve
and
adversely
affect
our
results
of
operations
and
financial condition, and could result in further losses in
the future.
Non-performing assets adversely
affect our net
income in various
ways. We do
not record
interest income on
nonaccrual
loans or other
real estate
owned (“OREO”),
thereby adversely
affecting our
net income
and returns on
assets and
equity,
increasing our loan administration costs and adversely
affecting our efficiency ratio. When
we take collateral in foreclosure
and similar proceedings, we are
required to mark the collateral to
its then-fair market value, which may
result in a loss. Non-
performing loans
and OREO
also increase our
risk profile
and the level
of capital
our regulators
believe is
appropriate for
us to
maintain in
light of
such risks.
The resolution
of non-performing
assets requires
significant time
commitments from
management and can
be detrimental to
the performance
of their other
responsibilities. If
we experience increases
in non-
USCB Financial Holdings, Inc.
2022 10-K
performing
loans
and
non-performing
assets,
our
net
interest
income
may
be
negatively
impacted
and
our
loan
administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such
as return on assets and equity.
We engage in
lending secured by
real estate and
may foreclose on
the collateral and
own the underlying
real
estate, subjecting us to the costs
and potential risks associated with the
ownership of real property,
or consumer
protection initiatives
or changes in
state or federal
law may substantially
raise the cost
of foreclosure
or prevent
us from foreclosing at all.
Since we
originate
loans secured
by real
estate,
we may
have to
foreclose
on the
collateral
property
to recover
our
investment and may thereafter own and operate such property,
in which case we would be exposed to the risks inherent in
the
ownership
of
real
estate.
The
amount
that
we,
as
a
mortgagee,
may
realize
after
a
foreclosure
depends
on
factors
outside of our
control, including,
but not limited
to, general or
local economic
conditions, environmental
cleanup liabilities,
various assessments
relating to the
ownership of
the property,
interest rates, real
estate tax rates,
operating expenses
of
the
mortgaged
properties,
our
ability
to
obtain
and
maintain
adequate
occupancy
of
the
properties,
zoning
laws,
governmental and
regulatory rules,
and natural
disasters. Our
inability to manage
the amount
of costs
or size of
the risks
associated with
the ownership
of real
estate, or
write-downs in
the value
of OREO,
could have
an adverse
effect
on our
business, financial condition, and results of operations.
Additionally,
consumer protection initiatives
or changes in state
or federal law may
substantially increase the
time and
expenses associated
with the
residential foreclosure
process or
prevent us
from foreclosing
at all.
A number
of states
in
recent
years
have
either
considered
or
adopted
foreclosure
reform
laws
that
make
it
substantially
more
difficult
and
expensive for
lenders to
foreclose on
residential properties
in default.
Furthermore, federal
regulators have
prosecuted a
number of
mortgage servicing
companies for
alleged consumer
law violations.
If new
state or
federal laws
or regulations
are ultimately enacted
that significantly raise
the cost of
residential foreclosures
or raise outright barriers,
they could have
an adverse effect on our business, financial condition,
and results of operations.
We are exposed to risk of environmental liability
when we take title to property.
A
significant
portion
of
our
loan
portfolio
is
secured
by
real
estate,
and
we
could
become
subject
to
environmental
liabilities with respect
to one or
more of these
properties, or with
respect to properties that
we own in
operating our business.
During the ordinary course of
business, we may foreclose on and take
title to properties securing defaulted loans.
In doing
so, there is
a risk that
hazardous or toxic
substances could
be found on
these properties. If
hazardous conditions
or toxic
substances are found
on these properties,
we may be
liable for remediation
costs, as well
as for personal
injury and property
damage, civil
fines and
criminal penalties
regardless
of when
the hazardous
conditions or
toxic substances
first affected
any particular property.
The costs associated with investigation or
remediation activities could be substantial.
In addition, if
we are the owner or former owner
of a contaminated site, we may be
subject to common law claims
by third parties based
on damages and
costs resulting
from environmental
contamination emanating
from the
property.
If we become
subject to
significant environmental liabilities, our business, financial condition
and results of operations could be adversely affecte
d.
We
are
subject
to
certain
operational
risks,
including,
but
not
limited
to,
customer,
employee
or
third-party
fraud and data processing system failures and errors.
Employee errors and employee or
customer misconduct could subject us
to financial losses or
regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding unauthorized
activities from us, improper
or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to
prevent employee
errors and
misconduct, and
the precautions we
take to
prevent and
detect this
activity may
not be
effective
in all cases. Employee errors could also subject us to financial
claims for negligence.
We have
implemented a
system of
internal controls
designed to
mitigate operational
risks, including
data processing
system failures
and errors
and customer
or employee
fraud, as
well as
insurance
coverage
designed to
protect us
from
material
losses
associated
with
these
risks,
including
losses
resulting
from
any
associated
business
interruption.
If
our
internal controls fail
to prevent or
detect an
occurrence, or if
any resulting loss
is not
insured or exceeds
applicable insurance
limits, it could adversely affect our business,
prospects, cash flow, liquidity,
financial condition and results of operations.
When we originate loans, we rely
heavily upon information supplied by third parties,
including the information contained
in credit
applications, property
appraisals, title
information, equipment
pricing and
valuation and
employment and
income
documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon
which
we
rely
is
misrepresented,
either
fraudulently
or
inadvertently,
and
the
misrepresentation
is
not
detected
prior
to
funding,
the
value of
the
loan may
be significantly
lower
than expected,
or we
may fund
a
loan that
we
would not
have
funded or
on terms
that do not
comply with
our general
underwriting standards.
Whether a
misrepresentation is
made by
USCB Financial Holdings, Inc.
2022 10-K
the applicant, the borrower,
one of our employees or another
third party,
we generally bear the risk of
loss associated with
the misrepresentation. A loan
subject to a material
misrepresentation is typically
unsellable or subject
to repurchase if
it is
sold prior to detection of the
misrepresentation. The sources of
the misrepresentations are often difficult
to locate, and it is
often difficult
to recover
any of
the
resulting monetary
losses
we may
suffer,
which could
adversely
affect
our business,
financial condition and results of operations.
We are subject to liquidity risk, which could adversely
affect our financial condition and results
of operations.
Effective liquidity management is essential for the operation of our business. Although we
have implemented strategies
to maintain
sufficient
and
diverse
sources of
funding
to accommodate
planned,
as well
as unanticipated,
liquidity
needs
(including changes in assets,
liabilities, and off-balance sheet
commitments under various economic conditions),
an inability
to
raise
funds
through
deposits,
borrowings,
the
sale
of
investment
securities
and
other
sources
could
have
a
material
adverse effect on
our liquidity. Our
access to
funding sources in
amounts adequate to
finance our
activities could
be impaired
by factors that affect us specifically or the financial services
industry in general. Factors that could detrimentally impact
our
access to liquidity sources include a decrease in the level of our business activity due to a market disruption, a decrease in
the borrowing capacity assigned to
our pledged assets by
our secured creditors, competition from other
financial institutions
which could drive up the
costs of deposits or adverse
regulatory action against us. Deterioration in
economic conditions and
the loss of
confidence in financial
institutions may increase
our cost of
funding and limit
our access to
some of our
customary
sources of liquidity,
including, but not
limited to, inter-bank
borrowings and borrowings
from the Federal
Home Loan Bank
of Atlanta, or
the FHLB, and
the Federal Reserve
Bank of
Atlanta. Our ability
to acquire
deposits or borrow
could also be
impaired by factors
that are
not specific
to us, such
as a
severe disruption
of the
financial markets
or negative views
and
expectations
about the
prospects
for
the financial
services
industry
generally
as
a result
of
conditions
faced
by banking
organizations
in
the
domestic
and
international
credit
markets.
Any decline
in
available
funding
or cost
of
liquidity could
adversely impact our ability to originate loans, invest in securities, meet our expenses
or fulfill obligations such as repaying
our borrowings or
meeting deposit withdrawal demands,
any of which
could, in turn,
have an adverse
effect on our
business,
financial condition, and results of operations.
We have several
large depositor relationships,
the loss of which
could force us to
fund our business
through
more expensive and less stable sources.
Withdrawals of deposits by any
one of our largest depositors
could force us to
rely more heavily on more
expensive and
less stable funding sources.
Consequently,
the occurrence of any
of these events could
have a material adverse
effect on
our business, financial condition and results of operations.
The value of our securities in our investment portfolio
may decline in the future.
The
fair
market
value
of
our
investment
securities
may
be
adversely
affected
by
general
economic
and
market
conditions, including
changes
in interest
rates,
credit
spreads, and
the
occurrence
of any
events
adversely
affecting
the
issuer of particular securities in our investments portfolio
or any given market segment or industry in
which we are invested.
Any of these factors, among others, could cause OTTI and realized and/or unrealized losses in future periods and declines
in
other
comprehensive
income,
which could
have
an
adverse
effect
on
our
business,
financial
condition
and
results
of
operations.
The
process
for
determining
whether
impairment
of
a
security
is
OTTI
usually
requires
complex,
subjective
judgments about the
future financial performance
and liquidity of
the issuer,
any collateral underlying
the security and
our
intent and ability to hold the security for a sufficient period of time to allow for any anticipated recovery in fair value, in order
to assess the probability of receiving
all contractual principal and interest
payments on the security.
Our failure to correctly
and timely assess
any impairments or
losses with respect
to our securities
could have an
adverse effect
on our business,
financial condition and results of operations.
We may not
effectively execute
on our expansion
strategy, which
may adversely affect
our ability to
maintain
our historical growth and earnings trends.
Our
primary
expansion
strategy
focuses
on
organic
growth,
supplemented
by
potential
acquisitions
of
financial
institutions and
banking teams;
however,
we may
not be
able to
successfully execute
on these
aspects of
our expansion
strategy,
which
may
cause
our
future
growth
rate
to
decline
below
our
recent
historical
levels,
or
may
prevent
us
from
growing at
all. More
specifically,
we may not
be able
to generate
sufficient new
loans and
deposits within
acceptable risk
and
expense
tolerances
or
obtain
the
personnel
or
funding
necessary
for
additional
growth.
Various
factors,
such
as
economic conditions
and competition
with other financial
institutions, may impede
or restrict the
growth of
our operations.
Further, we may be unable to attract
and retain experienced bankers, which could
adversely affect our growth. The success
of our strategy also depends on our ability to manage our growth effectively,
which in turn depends on a number of factors,
including
our
ability
to
adapt
our
credit,
operational,
technology,
risk
management,
internal
controls
and
governance
infrastructure to accommodate expanded operations.
Even if we are successful in continuing our growth,
such growth may
USCB Financial Holdings, Inc.
2022 10-K
not offer the
same levels of
potential profitability,
and we may not
be successful in
controlling costs and maintaining
asset
quality in the
face of
that growth. Accordingly,
our inability to
maintain growth
or to
effectively manage
growth could
have
an adverse effect on our business, financial condition
and results of operations.
New lines of business, products, product enhancements
or services may subject us to additional risk.
From time to time,
we may implement new
lines of business or
offer new products
and product enhancements
as well
as new
services within
our existing
lines of
business. There
are substantial
risks and
uncertainties associated
with these
efforts. In
developing, implementing
or marketing new
lines of business,
products, product
enhancements or
services, we
may invest significant time and
resources. We may underestimate the appropriate level
of resources or expertise necessary
to
make
new
lines
of
business
or
products
successful
or
to
realize
their
expected
benefits.
We
may
not
achieve
the
milestones
set
in
initial
timetables
for
the
development
and
introduction
of
new
lines
of
business,
products,
product
enhancements or services, and price
and profitability targets may not
prove feasible. External factors, such
as compliance
with regulations, competitive
alternatives and shifting
market preferences, may
also impact the
ultimate implementation of
a new line of business or offerings of new products, product
enhancements or services. Any new line of business,
product,
product enhancement or service could have a significant impact on the effectiveness of our system of internal controls. We
may also
decide to
discontinue
businesses
or products,
due to
lack
of customer
acceptance
or unprofitability.
Failure to
successfully develop and implement new lines of business or offerings of new products, product enhancements or services
could have an adverse effect on our business, financial condition and results
of operations and could subject us to new and
unanticipated operational, credit, regulatory and reputational risks,
among other risks.
Our business
needs and
future growth
may require
us to
raise additional
capital and
that capital
may not
be
available on terms acceptable to us or may be dilutive to
existing shareholders.
We believe that
we have sufficient capital
to meet our capital
needs for our current
growth plans. However,
we expect
that we
will need
to raise
additional capital,
in the
form of
debt or
equity securities,
in the
future to
have sufficient
capital
resources
to
meet
our
longer-term
growth
plans,
and/or
if
the
quality
of
our
assets
or
earnings
were
to
deteriorate
significantly.
In addition, we
are required by federal
regulatory authorities to
maintain adequate levels
of capital to support
our operations.
Our ability
to raise
capital will
depend on,
among other
things, conditions
in the
capital markets,
which are
outside of
our control, and our financial performance. Accordingly,
we cannot provide assurance that such capital
will be available on
terms acceptable to us or at all. Any occurrence
that limits our access to capital may adversely
affect our capital costs and
our ability to raise capital. Further, if we need to raise capital in the future, we may have to do so when many other financial
institutions are also
seeking to
raise capital and
would then
have to
compete with those
institutions for investors.
Any inability
to raise capital on acceptable terms when needed may cause us to
either issue additional shares of common stock or other
securities on less than
desirable terms or
reduce our rate of
growth until market conditions
become more favorable. If
any
of such
events occur, they could
have a material
adverse effect on
our business, financial
condition and results
of operations
and could be dilutive to both tangible book value and our
share price.
In
addition,
an
inability
to
raise
capital
when
needed
may
subject
us
to
increased
regulatory
supervision
and
the
imposition of
restrictions
on
our growth
and
business.
These
restrictions
could
negatively
affect
our ability
to operate
or
further
expand
our
operations
through
loan
growth,
acquisitions
or
the
establishment
of
additional
branches.
These
restrictions
may
also
result
in
increases
in
operating
expenses
and
reductions
in
revenues
that
could
have
a
material
adverse effect on our financial condition, results
of operations and our share price.
We may
grow through
mergers or
acquisitions,
a strategy
that may
not be
successful or,
if successful,
may
produce risks in successfully integrating and managing the merged companies or acquisitions and may dilute our
shareholders.
As
part
of
our
growth
strategy,
we
may
pursue
mergers
and
acquisitions
of
banks
and
non-bank
financial
services
companies within or outside our principal market areas that fit within the mission-driven values of our franchise and that we
believe support our business and make financial and strategic
sense. We may have difficulty identifying suitable acquisition
candidates or executing on acquisitions that we pursue, and we may
not realize the anticipated benefits of any transactions
we complete. Additionally,
for any opportunistic
acquisition we
were to consider,
we expect to
face significant
competition
from
numerous
other
financial
services
institutions,
many
of
which
will
have
greater
financial
resources
than
we
do.
Accordingly,
attractive opportunistic
acquisitions
may
not be
available to
us. There
can be
no assurance
that
we will
be
successful in identifying or completing any future acquisitions.
USCB Financial Holdings, Inc.
2022 10-K
Mergers and acquisitions involve numerous risks,
any of which could harm our business, including:
•
the possibility that expected benefits
may not materialize in the
time frame expected or at
all, or may be more
costly
to achieve, or that the acquired business will not perform
to our expectations;
•
time,
expense
and
difficulties
in
integrating
the
operations,
management,
products
and
services,
technologies,
existing contracts, accounting processes
and personnel of the target
and realizing the anticipated synergies
of the
combined businesses;
•
incurring the
time and
expense associated with
identifying and
evaluating potential acquisitions
and merger partners
and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our
existing business;
•
difficulties in supporting and transitioning customers
of the target and disruption of our ongoing banking business;
•
the price we
pay or other
resources that
we devote may
exceed the value
we realize, or
the value we
could have
realized if we had allocated the purchase consideration
or other resources to another opportunity;
•
entering new markets or areas in which we have limited
or no experience;
•
the possibility that our culture is disrupted as a result of
an acquisition;
•
potential loss of key personnel and customers from
either our business or the target’s business;
•
assumption of unanticipated problems, claims or other liabilities
of the acquired business;
•
an inability to realize expected synergies or returns on
investment;
•
the possibility of regulatory approval for the acquisition being delayed,
impeded, restrictively conditioned, including
the requirement to divest
various activities, or denied
due to existing or
new regulatory issues surrounding
us, the
target institution or the proposed combined entity and
the possibility that any such issues associated with
the target
institution, of which we
may or may
not be aware
at the time
of the acquisition,
could adversely impact the
combined
entity after completion of the acquisition;
•
the possibility that the acquisition may not be timely completed,
if at all;
•
the need to raise capital; and
•
inability to generate sufficient revenue to offset
acquisition costs.
Our acquisition
activities could
require us
to use
a substantial
amount of
cash, other
liquid assets,
and/or incur
debt.
Also,
if
we finance
acquisitions
by issuing
equity
securities,
our
existing
shareholders’
ownership
may
be
diluted,
which
could negatively
affect the
market price of
our Class A
common stock.
Additionally,
if the goodwill
recorded in
connection
with our
potential future
acquisitions
were determined
to be
impaired,
then
we would
be required
to recognize
a charge
against our
earnings, which
could materially
and adversely
affect
our results
of operations
during the
period in
which the
impairment was
recognized. Acquisitions
may also
involve the
payment of
a premium
over book
and market
values and,
therefore, some
dilution of
our tangible
book value
and net
income per
common share
may occur
in connection
with any
future transaction.
As a result, we
may not achieve the
anticipated benefits of
any such merger or
acquisition, and we may
incur costs in
excess
of
what
we
anticipate.
Our
failure
to
successfully
evaluate
and
execute
mergers,
acquisitions
or
investments
or
otherwise adequately address and
manage the risks associated with
such transactions could have
a material adverse effect
on our business, results of operations and financial condition,
including short-term and long-term liquidity.
The loss of
one or more
of our key
personnel, or our
failure to attract
and retain other
highly qualified personnel
in the future, could harm our business.
Our future success will, to some extent, depend on the continued service of our directors, executive officers and senior
management
team.
The
loss
of
the
services
of
any
of
these
individuals
could
have
a
significant
adverse
effect
on
our
business.
In
particular,
we
believe
that
retaining
Luis
de
la
Aguilera,
our
President
and
Chief
Executive
Officer,
Robert
Anderson, our Chief Financial Officer,
and Benigno Pazos, our Chief Credit Officer,
is important to our continuing success.
Although
we
have
entered
into
employment
and
other
agreements
with
certain
members
of
our
executive
and
senior
management team,
including Mr.
de la
Aguilera and
Mr.
Anderson, no
assurance can
be given
that these
individuals will
continue to be employed by us. The loss of any of these individuals could negatively affect our ability to achieve our growth
strategy and could have a material adverse effect
on our business and results of operations.
We also need to continue
to attract and retain other senior
management and to recruit qualified
individuals to succeed
existing
key
personnel
to
ensure
the continued
growth
and successful
operation
of
our business.
We
may be
unable
to
attract or
retain qualified
management
and other
key
personnel
in the
future
due
to the
intense competition
for
qualified
personnel
among
companies
in
the
financial
services
business
and
related
businesses.
The
loss
of
the
services
of
any
senior management personnel, or the inability to recruit
and retain qualified personnel in the future, could
have an adverse
effect on our business, results of
operations, financial condition and prospects.
Additionally,
to attract and retain personnel
with appropriate skills and
knowledge to support our
business, we may offer
a variety of benefits, including
equity awards,
which may reduce our earnings or adversely affect
our business, results of operations, financial condition or
prospects.
USCB Financial Holdings, Inc.
2022 10-K
Damage to our reputation could significantly harm
our businesses.
Our ability to attract
and retain customers and
highly-skilled management and employees is impacted
by our reputation.
A negative public
opinion of us
and our business
can result from
any number of
activities, including our
lending practices,
corporate
governance
and
regulatory
compliance,
acquisitions,
customer
complaints
and
actions
taken
by
community
organizations in
response to
these activities.
Furthermore, negative
publicity regarding
us as
an employer
could have
an
adverse
impact
on our
reputation,
especially
with respect
to matters
of diversity,
pay equity
and
workplace
harassment.
Significant
harm
to
our
reputation
could
also
arise
as
a
result
of
regulatory
or
governmental
actions,
litigation
and
the
activities of our customers, other
participants in the financial services
industry or our contractual counterparties, such
as our
service providers
and
vendors.
The potential
harm
is heightened
given
increased attention
to how
corporations
address
environmental, social
and governance
issues. In
addition, a cybersecurity
event affecting
us or our
customers' data
could
have a negative
impact on our
reputation and
customer confidence
in us and
our cybersecurity
practices. Damage
to our
reputation could also
adversely affect
our credit ratings
and access to
the capital markets.
Additionally,
whereas negative
public opinion once was
primarily driven by adverse
news coverage in traditional
media, the widespread use
of social media
platforms
by virtually
every segment
of society
facilitates
the rapid
dissemination
of information
or misinformation,
which
magnifies the potential harm to our reputation.
We
face
strong
competition
from
financial
services
companies
and
other
companies
that
offer
banking
services, which could materially and adversely affect
our business.
The financial
services industry has
become even
more competitive as
a result
of legislative,
regulatory and technological
changes and
continued
banking consolidation,
which may
increase as
a result
of
current economic,
market and
political
conditions. We
face substantial
competition
in all
phases
of our
operations
from
a variety
of competitors,
including local
banks,
regional
banks,
community
banks
and,
more
recently,
financial
technology,
or
"fintech"
companies.
Many
of
our
competitors offer the same banking services
that we offer and our
success depends on our ability to
adapt our products and
services
to
evolving
industry
standards
and
customer
requirements.
Increased
competition
in
our
market
may
result
in
reduced new
loan and
lease production
and/or decreased
deposit balances
or less
favorable terms
on loans
and leases
and/or deposit
accounts. We also
face competition
from many
other types
of financial
institutions, including without
limitation,
non-bank
specialty
lenders,
insurance
companies,
private
investment
funds,
investment
banks,
and
other
financial
intermediaries. Should competition in
the financial services industry
intensify, our ability to market our
products and services
may be adversely affected. If we are unable to attract and retain banking customers, we may
be unable to grow or maintain
the levels
of our
loans and
deposits and
our results
of operations
and financial
condition may
be adversely
affected as
a
result. Ultimately,
we may not be able to compete successfully against current
and future competitors.
We must respond to rapid technological changes
to remain competitive.
We will
have to respond
to future
technological changes,
which are occurring
at a rapid
pace in the
financial services
industry.
We
expect
that
new
technologies
and
business
processes
applicable
to
the
banking
industry
will
continue
to
emerge, and these
new technologies and business
processes may be
better than those we
currently use. Because the
pace
of technological change
is high and our
industry is intensely
competitive, our future
success will depend,
in part, upon our
ability to address
the needs of our
customers by using technology
to provide products and
services that will satisfy
customer
demands for convenience,
as well as to
create additional efficiencies
in our operations. We
may not be able
to implement
new technology-driven
products and services
effectively or
be successful in
marketing these
products and services
to our
customers. Failure to keep pace successfully with technological change affecting the financial services industry could harm
our
ability
to
compete
effectively
and
could
have
an
adverse
effect
on
our
business,
financial
condition
and
results
of
operations. As
these
technologies
improve
in the
future,
we may
be required
to make
significant capital
expenditures
in
order to remain
competitive, which may increase
our overall expenses
and have an
adverse effect on our
business, financial
condition and results of operations.
A
failure,
interruption,
or
breach
in
the
security
of
our
systems,
or
those
of
our
contracted
vendors,
could
disrupt
our
business,
result
in
the
disclosure
of
confidential
information,
damage
our
reputation,
and
create
significant financial and legal exposure.
Although we
devote significant
resources to
maintain and regularly
update our
systems and processes
that are designed
to
protect
the
security
of
our
computer
systems,
software,
networks
and
other
technology
assets,
as
well
as
the
confidentiality,
integrity and availability
of information belonging
to us and
our customers,
there is no
assurance that
all of
our
security
measures
will
provide
absolute
security.
Many
financial
institutions,
including
us,
have
been
subjected
to
attempts
to
infiltrate
the
security
of
their
websites
or
other
systems,
some
involving
sophisticated
and
targeted
attacks
intended
to
obtain
unauthorized
access
to
confidential
information,
destroy
data,
disrupt
or
degrade
service,
sabotage
systems or cause
other damage, including
through the introduction of
computer viruses or
malware, cyber-attacks and other
USCB Financial Holdings, Inc.
2022 10-K
means. We
have been
targeted by
individuals and
groups using
phishing campaigns,
pretext calling,
malicious code
and
viruses and expect to
be subject to such
attacks in the future.
While we have
not experienced a material
cyber-incident or
security breach that has
been successful in compromising
our data or systems
to date, we can
never be certain that
all of
our systems are entirely free from vulnerability to breaches
of security or other technological difficulties or
failures.
Despite efforts to
ensure the integrity
and security of
our systems, it
is possible that
we may not be
able to anticipate,
detect or recognize
threats to our
systems or
to implement effective
preventive measures
against all efforts
to breach our
security inside or outside our business, especially because the techniques used to attack our
systems change frequently or
are
not
recognized
until
launched,
and
because
cyber-attacks
can
originate
from
a
wide
variety
of
sources,
including
individuals or groups who are associated
with external service providers or who are or
may be involved in organized crime
or linked
to terrorist
organizations or
hostile foreign
governments. Those
parties may
also attempt
to fraudulently
induce
employees, customers, third-party service providers or other users of our systems to disclose sensitive information in order
to gain access
to our data or
that of our customers
or clients. Similar to
other companies, our
risks and exposures
related
to cybersecurity
attacks have
increased as
a result
of the COVID
-19 pandemic,
the related
increased reliance
on remote
working and increase in digital operations. Such
risks and exposures are expected to remain high
for the foreseeable future
due to
the rapidly
evolving nature
and sophistication
of these
threats and
the expanding
use of
technology,
as our
web-
based product offerings grow and we expand internal
usage of web-based applications.
A successful
penetration or
circumvention
of
the security
of
our systems,
including those
of
our third-party
vendors,
could
cause
serious
negative
consequences,
including
significant
disruption
of
our
operations,
misappropriation
of
confidential information,
or damage
to computers
or systems,
and may result
in violations
of applicable
privacy and
other
laws, financial loss,
loss of confidence
in our security measures,
customer dissatisfaction, increased
insurance premiums,
significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on our business,
financial condition, results of operations, and future prospects.
We
rely
on
other
companies
to
provide
key
components
of
our
business
infrastructure
and
our
operations
could
be
interrupted
if
our
third-party
service
providers
experience
difficulty,
terminate
their
services
or
fail
to
comply with banking regulations.
Third parties
provide key
components of
our business
operations such
as data
processing, recording
and monitoring
transactions,
online
banking
interfaces
and services,
Internet
connections
and
network
access. While
we have
selected
these third-party
vendors carefully,
performing upfront
due diligence
and ongoing
monitoring activities,
we do
not control
their actions. Any problems caused by these third parties, including those resulting from disruptions in services provided by
a
vendor
(including
as
a
result
of
a
cyber-attack,
other
information
security
event
or
a
natural
disaster),
financial
or
operational difficulties
for the vendor,
issues at third-party
vendors to our
vendors, failure of
a vendor to
handle current or
higher volumes, failure of a vendor to provide services for any reason,
poor performance of services, failure to comply with
applicable laws
and regulations,
or fraud
or misconduct
on the
part of
employees of
any of
our vendors,
could adversely
affect our
ability to deliver
products and services
to our customers,
our reputation and
our ability to
conduct our business,
which could
adversely affect
our business,
prospects, cash
flow,
liquidity,
financial condition
and results
of operations.
In
certain
situations,
replacing
these
third-party
vendors
could
also
create
significant
delay,
expense,
and
operational
difficulties, which
could also
adversely affect
our business.
Accordingly,
use of
such third
parties creates
an unavoidable
and
inherent
risk
to
our
business
operations.
Such
risk
is
generally
expected
to
remain
elevated
until
the
COVID-19
pandemic
subsides
and
may
remain
elevated
thereafter,
as
many
of
our
vendors
have
also
been,
and
may
further
be,
affected by increased
reliance on remote
work environments, market
volatility and other factors
that increase their risks
of
business disruption or
that may otherwise
affect their ability
to perform under
the terms of
any agreements with
us or provide
essential services.
Our operations could be interrupted or
materially impacted if any of our
third-party service providers fail to comply
with
banking regulations
and other
applicable laws.
The Federal
Reserve, FDIC,
the Florida
Office of
Financial Regulation,
or
the FOFR, and other regulators expect financial institutions to be responsible for all aspects of their performance, including
aspects that they delegate
to third parties. Accordingly,
we will be responsible
for deficiencies in
our oversight and control
of our third party relationships
and in the performance
of the parties with
which we have these
relationships. As a result,
if
our regulators
conclude that
we have
not exercised
adequate oversight
and control
over our
third party
vendors or
other
ongoing third party business
relationships or that such
third parties have not performed
appropriately,
we could be subject
to remedial and/or enforcement
actions, including civil money penalties
or other administrative or judicial
penalties or fines
as well as requirements for customer remediation, any
of which could have a material
adverse effect our business, financial
condition or results of operations.
USCB Financial Holdings, Inc.
2022 10-K
Litigation and regulatory actions,
including possible enforcement actions, could subject
us to significant fines,
penalties,
judgments
or
other
requirements
resulting
in
increased
expenses
or
restrictions
on
our
business
activities.
In the normal course of business,
from time to time, we
have in the past and
may in the future be
named as a defendant
in various
legal actions
arising in
connection
with our
current and/or
prior business
activities. Legal
actions could
include
claims for substantial compensatory
or punitive damages
or claims for
indeterminate amounts of
damages. Further,
in the
future
our
regulators
may
impose
consent
orders,
civil
money
penalties,
matters
requiring
attention,
or
similar
types
of
supervisory penalties
or criticism.
We may
also, from
time to time,
be the subject
of subpoenas,
requests for
information,
reviews, investigations and proceedings (both formal and informal) by governmental agencies
regarding our current and/or
prior
business
activities.
Any
such
legal
or
regulatory
actions
may
subject
us
to
substantial
compensatory
or
punitive
damages,
significant
fines,
penalties,
obligations
to
change
our
business
practices
or
other
requirements
resulting
in
increased
expenses,
diminished
income
and
damage
to
our
reputation.
Our
involvement
in
any
such
matters,
whether
tangential or otherwise and
even if the matters are
ultimately determined in our
favor, could
also cause significant harm
to
our reputation and divert management attention away from
the operation of our business. Further, any
settlement, consent
order or adverse
judgment in
connection with
any formal
or informal
proceeding or
investigation by
government agencies
may result in
litigation, investigations or proceedings
as other litigants
and government agencies begin
independent reviews
of the same
activities. As a
result, the outcome of
legal and regulatory
actions could have
an adverse effect on
our business,
results of operations and results of operations.
Certain of
our directors may
have conflicts
of interest in
determining whether to
present business
opportunities
to us or another entity with which they are, or may
become, affiliated.
Certain of our directors
are or may
become subject to fiduciary
obligations in connection with
their service on the
boards
of
directors
of
other
corporations,
including
financial
institutions.
A
director's
association
with
other
financial
institutions,
which give rise to
fiduciary or contractual obligations to such other
institutions, may create conflicts of interest. To the extent
that any of our directors
become aware of acquisition
opportunities that may be
suitable for entities other
than us to which
they have fiduciary or contractual obligations, or they are
presented with such opportunities in their capacities as fiduciaries
to such
entities, they
may honor
such obligations
to such
other entities.
You
should assume
that to
the extent
any of
our
directors become
aware of an
opportunity that may
be suitable both
for us and
another entity to
which such person
has a
fiduciary obligation
or contractual
obligation
to present
such
opportunity as
set forth
above,
he or
she may
first give
the
opportunity to such other entity
or entities and may give
such opportunity to us only
to the extent such other
entity or entities
reject
or
are
unable
to
pursue
such
opportunity.
In
addition,
you
should
assume
that
to
the
extent
any
of
our
directors
become
aware
of
an
acquisition
opportunity
that
does
not
fall
within
the
above
parameters,
but
that
may
otherwise
be
suitable for us, he or she may not present such opportunity to
us.
Pursuant to an agreement between us and each of our Significant Investors
(as defined below), each of the Significant
Investors has the right
to nominate one
director to serve
on our Board, including
Board committees, and
to designate one
non-voting Board
observer.
The directors
and Board
observers designated
by the
Significant Investors
have the
right to,
and have
no duty
not to,
engage in
the same
or similar
business activities
or lines
of business
as us.
In the
event that
a
director or Board observer designated by a Significant Investor acquires knowledge of a potential transaction or matter that
may be
a corporate opportunity
for us,
such person
shall have
no duty
to communicate or
present such corporate
opportunity
to us
and shall
not be
liable to
us or
our shareholders
for breach
of any
duty by
reason of
the fact
that such
person or
a
related investment fund
thereof, directly or
indirectly, pursues or acquires such opportunity
for itself, directs such
opportunity
to another person, or does not present such opportunity to
us.
Risks Related to Our Tax,
Accounting and Regulatory Compliance
Our
ability
to
recognize
the
benefits
of
deferred
tax
assets
is
dependent
on
future
cash
flows
and
taxable
income and may be materially impaired upon significant
changes in ownership of our common stock.
We recognize the expected future tax benefit
from deferred tax assets when it
is more likely than not
that the tax benefit
will be realized. Otherwise, a valuation allowance is applied against deferred tax assets, reducing the value of such assets.
Assessing
the
recoverability
of
deferred
tax
assets
requires
management
to
make
significant
estimates
related
to
expectations
of
future
taxable
income
from
all
sources,
including
reversal
of
taxable
temporary
differences,
forecasted
operating
earnings
and
available
tax
planning
strategies.
Estimates
of
future
taxable
income
are
based
on
forecasted
income from operations and the application of existing tax laws in each jurisdiction. The improved risk profile of the Bank is
a key component
used in the
determination of
our ability
to realize the
expected future
benefit of
our deferred
tax assets.
To
the extent that future taxable income differs
significantly from estimates as a result of
the interest rate environment and
loan growth capabilities or other factors, our ability to realize
the net deferred tax assets could be negatively
affected.
USCB Financial Holdings, Inc.
2022 10-K
Subject to certain exceptions, our Class A common stock is subject
to transfer restrictions as set forth in our Articles of
Incorporation that are
designed to preserve
our deferred tax
assets. Notwithstanding these
protective provisions, the
Articles
of Incorporation include
an exception that
allows our Significant
Investors the right
to effect any
transfer that would
otherwise
be prohibited, which transfer could result in the loss of the deferred
tax assets.
Additionally,
significant future
issuances of
common
stock or
common stock
equivalents, or
changes in
the
direct or
indirect ownership
of our
common stock
or common
stock equivalents,
could cause
an ownership
change and
could limit
our ability to
utilize our net
operating loss carryforwards
and other tax
attributes pursuant
to Section 382
and Section 383
of the Internal Revenue Code.
Future changes in tax law
or changes in ownership structure
could limit our ability to utilize
our recorded net deferred tax assets.
The
accuracy
of
our
financial
statements
and
related
disclosures
could
be
affected
if
the
judgments,
assumptions or estimates used in our critical accounting
policies are inaccurate.
The
preparation
of
our
financial
statements
and
related
disclosures
in
conformity
with
GAAP
requires
us
to
make
judgments,
assumptions
and
estimates
that
affect
the
amounts
reported
in
our
consolidated
financial
statements
and
accompanying notes. In some cases, management
must select the accounting policy or method
to apply from two or more
alternatives,
any of
which
may be
reasonable
under
the circumstances,
yet which
may result
in
our
reporting
materially
different
results
than
would
have
been
reported
under
a
different
alternative.
Certain
accounting
policies
are
critical
or
significant to presenting our financial
condition and results of operations.
Our critical accounting policies, which
are included
in the section captioned
"Management's Discussion and
Analysis of Financial Condition
and Results of
Operations" in this
Annual Report
on Form
10-K, describe
those significant
accounting
policies and
methods used
in the
preparation of
our
consolidated financial statements that we
consider critical because they
require judgments, assumptions and estimates that
materially affect
our consolidated
financial
statements
and related
disclosures.
As a
result,
if future
events
or regulatory
views concerning such
analyses differ significantly from
the judgments, assumptions and
estimates in our
critical accounting
policies, those
events or
assumptions could
have a
material impact
on our
consolidated financial
statements and
related
disclosures, in each
case resulting in
our need to
revise or restate
prior period financial
statements, cause
damage to our
reputation and
the price
of our
Class A
common
stock and
adversely affect
our business,
prospects, cash
flow,
liquidity,
financial condition and results of operations.
As a new public
company, we may not efficiently or effectively create an
effective internal control environment,
and any
future failure
to maintain
effective internal
control over
financial reporting
could impair
the reliability
of
our financial
statements, which
in turn could
harm our business,
impair investor
confidence in the
accuracy and
completeness of
our financial
reports and
our access
to the
capital markets,
cause the
price of
our Class
A common
stock to decline and subject us to regulatory penalt
ies.
Our management is responsible for establishing
and maintaining adequate internal control over financial
reporting and
for
evaluating
and
reporting
on
that
system
of
internal
control.
Our
internal
control
over
financial
reporting
consists
of
a
process
designed
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial statements for external purposes in accordance with GAAP.
As a public company,
we are required to comply with
SEC regulations, including
the Sarbanes-Oxley Act
and other rules
that govern public
companies that we
previously were
not required to comply with
as a private company.
In particular,
we are required to certify
our compliance with Section
of the Sarbanes-Oxley Act
beginning with this Annual
Report on Form 10-K,
which requires us to annually
furnish a report
by management on
the effectiveness
of our internal
control over financial
reporting. When
evaluating our internal
controls
over financial
reporting, we
may identify
material
weaknesses
that we
may not
be able
to remediate
in time
to meet
the
applicable deadline imposed upon
us for compliance with
the requirements of Section
404 of the Sarbanes-Oxley
Act. We
are
in
the
process
of
reviewing
our
formal
policies,
processes
and
practices
related
to
financial
reporting
and
to
the
identification of key financial reporting
risks, assessment of their potential impact
and linkage of those
risks to specific areas
and controls within our organization.
If we fail to achieve and maintain the adequacy of
our internal controls, as such standards are modified, supplemented,
or amended from time
to time, we may not
be able to ensure
that we will be able
to conclude on an ongoing
basis that we
have
effective
internal
controls
over
financial
reporting
in
accordance
with
Section
of
the
Sarbanes-Oxley
Act.
We
cannot be certain as to the timing of completion of our evaluation, testing,
and any remediation actions or the impact of the
same on
our operations.
If we fail
to adequately
comply with
the requirements
of Section 404
of the Sarbanes
-Oxley Act,
we may be subject to adverse regulatory consequences and
there could be a negative reaction in the
financial markets due
to a loss of investor confidence in us and the
reliability of our financial statements.
In addition, we may be required to incur
costs in improving
our internal control
system and
hiring additional
personnel. Any such
action could negatively
affect our
business, financial condition, results of operations, and the price
of our Class A common stock may decline.
USCB Financial Holdings, Inc.
2022 10-K
While we remain an
emerging growth company or a
non-accelerated smaller reporting company, we will not be
required
to
include
an
attestation
report
on
internal
control
over
financial
reporting
issued
by
our
independent
registered
public
accounting firm.
To
prepare for
eventual compliance
with the auditor
attestation requirement
of Section
404 of
Sarbanes-
Oxley once we no longer qualify as an emerging growth company, we are currently engaged in a process to document
and
evaluate our
internal control
over financial
reporting, which
is both
costly and
challenging. In
this regard,
we will
need to
dedicate internal resources, potentially engage outside consultants
and adopt a detailed work
plan to assess and
document
the adequacy
of internal
control over
financial reporting, continue
steps to
improve control
processes as
appropriate, validate
through testing that controls are functioning
as documented and continue to refine
our reporting and improvement process
for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the
prescribed time
frame or
at all,
that our
internal control
over financial
reporting is
effective as
required by
Section 404
of
Sarbanes-Oxley.
If
we
identify
one
or
more
material
weaknesses,
it
could
result
in
an
adverse
reaction
in
the
financial
markets due to a loss of confidence in the reliability of
our financial statements.
We
operate
in
a
highly
regulated
environment,
and
the
laws
and
regulations
that
govern
our
operations,
corporate governance,
executive compensation
and accounting
principles, or
changes in
them, or
our failure
to
comply with them, could adversely affect us.
We operate in a
highly regulated industry and
we are subject
to examination, supervision and
comprehensive regulation
by various federal and state agencies,
including the Federal Reserve, the
FDIC and the FOFR. As
such, we are subject to
extensive regulation, supervision and
legal requirements that govern almost
all aspects of our operations.
These laws and
regulations
are
not
intended
to
protect
our
shareholders.
Rather,
these
laws
and
regulations
are
intended
to
protect
customers, depositors, the Deposit Insurance
Fund, or DIF, and the overall financial health and
stability of the United States
banking
system.
These
laws
and
regulations,
among
other
matters,
prescribe
minimum
capital
requirements,
impose
limitations on the
business activities
and investments
in which we
can engage, regulate
and restrict our
lending activities,
require us to provide certain banking services broadly within the communities in which
we operate, determine the locations
of our branch
offices and impose certain
specific accounting requirements on us
that may be more
restrictive and may
result
in
greater
or
earlier
charges
to
earnings
or
reductions
in
our
capital
than
GAAP
would
require.
We
are
also
subject
to
capitalization
guidelines
established
by
our
regulators,
which
require
us
to
maintain
adequate
capital
to
support
our
business.
Compliance
with
laws
and
regulations
can
be
difficult
and
costly,
and
changes
to
laws
and
regulations
often
impose additional operating costs. Further, we must obtain approval from our regulators
before engaging in many activities,
and
our
regulators
have
the
ability
to
compel
us
to,
or
restrict
us
from,
taking
certain
actions
entirely.
There
can
be
no
assurance that any regulatory approvals we may require
or otherwise seek will be obtained.
Regulations affecting
banks and
other financial
institutions are
undergoing continuous
review and
frequently change,
and the ultimate effect of such changes cannot be predicted. Changes to the legal and regulatory framework governing our
operations, including
the Dodd-Frank
Wall
Street Reform
and Consumer
Protection Act,
or the
Dodd-Frank
Act, and
the
Economic Growth, Regulatory Relief and Consumer
Protection Act, or the Regulatory Relief Act,
have significantly revised
the laws and regulations under which we operate. Such regulations and laws may be modified or repealed at any time, and
new legislation may be enacted that will affect
us and our subsidiaries.
Our failure to comply with these laws and regulations, even if the failure follows good faith effort
or reflects a difference
in
interpretation,
could
subject
us
to
restrictions
on
our
business
activities,
enforcement
actions
and
fines
and
other
penalties,
any
of
which
could
adversely
affect
our
results
of
operations,
regulatory
capital
levels
and
the
price
of
our
securities. Further, any new laws, rules and
regulations, such as were imposed
under the Dodd-Frank Act or
the Regulatory
Relief Act, could make
compliance more difficult
or expensive or otherwise
adversely affect
our business, prospects, cash
flow, liquidity,
financial condition and results of operations.
Our participation in the SBA PPP loan program exposes us to risks related to noncompliance
with the PPP,
as
well as litigation
risk related to
our administration of
the PPP loan
program, which
could have a
material adverse
impact on our business, financial condition, and results
of operations.
We are a
participating lender in
the PPP, a loan program administered
through the SBA,
that was created
to help eligible
businesses, organizations
and self-employed persons
fund their operational
costs during the
COVID-19 pandemic.
Under
this program, the SBA guarantees 100% of the amounts
loaned under the PPP.
The PPP opened on April 3, 2020; however,
because of the short window between
the passing of the CARES Act and
the opening
of the
PPP,
there was
some
ambiguity in
the laws,
rules and
guidance
regarding the
operation
of the
PPP.
Subsequent rounds of
legislation and associated
agency guidance have
not provided needed
clarity and in
certain instances
have
potentially
created
additional
inconsistencies
and
ambiguities.
Accordingly,
we
are
exposed
to
risks
relating
to
noncompliance with the PPP.
USCB Financial Holdings, Inc.
2022 10-K
Additionally, since the launch of the PPP, several larger banks have been
subject to litigation regarding
the process and
procedures
that
such
banks
used
in
processing
applications
for
the
PPP,
as
well
as
litigation
regarding
the
alleged
nonpayment of
fees that
may be
due to
certain agents
who facilitated
PPP loan
applications. We
may be
exposed to
the
risk of PPP-related litigation, from
both customers
and non-customers that approached us
regarding PPP loans, regarding
our process and procedures used in processing
applications for the PPP.
If any such litigation is filed against
us and is not
resolved
in
a
manner
favorable
to
us,
it
may
result
in
significant
financial
liability
or
adversely
affect
our
reputation.
Regardless of outcome, litigation can be costly and distracting. Any financial liability, litigation costs or reputational damage
caused by
PPP-related litigation
could have
a material
adverse impact
on our
business, financial
condition and
results of
operations.
PPP loans are fixed,
low interest rate loans
that are guaranteed by
the SBA and subject
to numerous other regulatory
requirements, and a borrower may apply to have all
or a portion of the loan forgiven. If PPP
borrowers fail to qualify for loan
forgiveness, we face
a heightened risk
of holding these loans
at unfavorable interest
rates for an extended
period of time.
While the PPP loans are guaranteed
by the SBA, various regulatory
requirements will apply to
our ability to seek
recourse
under the guarantees, and related procedures are currently subject
to uncertainty.
In
addition,
we
may
be
exposed
to
credit
risk
on
PPP
loans
if
a
determination
is
made
by
the
SBA
that
there
is
a
deficiency
in
the
manner
in
which
the
loan
was
originated,
funded,
or
serviced,
such
as
an
issue
with
the
eligibility
of
borrower to receive a PPP
loan, which may or may
not be related to the
ambiguity in the laws, rules
and guidance regarding
the operations of the PPP. If
a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount
of the guaranty,
or, if it has already paid
under the guaranty,
seek recovery of any loss related to the deficiency from
us.
We
face
a
risk
of
noncompliance
with
the
Bank
Secrecy
Act
and
other
anti-money
laundering
statutes
and
regulations and corresponding enforcement proceedings.
The
federal
Bank
Secrecy
Act,
the
Uniting
and
Strengthening
America
by
Providing
Appropriate
Tools
Required
to
Intercept and
Obstruct Terrorism
Act of
2001, or
the USA
PATRIOT
Act, and
other laws
and regulations
require financial
institutions, among
other duties,
to institute
and maintain
effective anti-money
laundering programs
and to file
suspicious
activity and
currency transaction
reports, as
appropriate. The
federal Financial
Crimes Enforcement
Network, or
FinCEN,
established by the
U.S. Treasury
Department to
administer the
Bank Secrecy
Act, is authorized
to impose
significant civil
money penalties for
violations of those
requirements and has engaged
in coordinated enforcement efforts with
the individual
federal
banking
regulators,
as
well
as
the
U.S.
Department
of
Justice,
Drug
Enforcement
Administration
and
Internal
Revenue Service.
Additionally,
South Florida
has been
designated as
a “High
Intensity Financial
Crime Area,”
or HIFCA,
by FinCEN and a
“High Intensity Drug Trafficking Area,” or HIDTA, by the Office of
National Drug Control Policy. The HIFCA
program is intended to concentrate law enforcement efforts
to combat money laundering efforts in higher-risk
areas. There
is also increased scrutiny of
compliance with the rules enforced by the
Office of Foreign Assets Control,
or OFAC. Federal
and state bank
regulators have for
many years focused
on compliance with
Bank Secrecy
Act and anti-money
laundering
regulations. In
order to
comply
with regulations,
guidelines and
examination
procedures
in this
area,
we have
dedicated
significant resources
to our
anti-money laundering
program,
especially due
to the
regulatory focus
on financial
and other
institutions located in South
Florida. Our business includes
supporting our customers, including foreign
financial institutions,
with respect to their international banking needs and our policies, procedures and systems have been designed to address
federal and
state anti-money
laundering compliance.
If our
policies, procedures
and systems
are deemed
deficient or the
policies,
procedures
and
systems
of
the
financial
institutions
that
we may
acquire
are
deficient,
we
would
be
subject
to
liability,
including
fines,
and
regulatory
actions
that
are
deemed
necessary
in
order
to
remediate
such
deficiencies
and
prevent the recurrence
thereof. In recent
years, sanctions that
the regulators have
imposed on banks
that have not
complied
with
all
anti-money
laundering
requirements
have
been
especially
severe.
Failure
to
maintain
and
implement
adequate
programs to
combat money
laundering and
terrorist financing
could also
have serious
reputational consequences
for us,
which could have a material adverse effect
on our business, financial condition and results of operations.
We
are
subject
to
capital
adequacy
requirements
and
may
become
subject
to
more
stringent
capital
requirements, which could adversely affect our
financial condition and operations.
In July 2013, the federal banking agencies published new regulatory capital rules based on
the international standards,
known as
Basel III,
that were
developed by
the Basel
Committee on
Banking Supervision.
The new
rules raised
the risk-
based capital
requirements
and revised
the methods
for calculating
risk-weighted
assets, usually
resulting
in higher
risk
weights. The new rules now apply to us.
The Basel III rules increased
capital requirements and included
two new capital measurements,
a risk-based common
equity Tier 1 ratio
and a capital conservation buffer.
Common Equity Tier
1 (CET1) capital is a subset
of Tier 1 capital
and
is limited to common
equity (plus related surplus), retained
earnings, accumulated other comprehensive income and
certain
other
items.
Other
instruments
that
have
historically
qualified
for
Tier
treatment,
including
noncumulative
perpetual
USCB Financial Holdings, Inc.
2022 10-K
preferred stock,
are consigned
to a
category known
as Additional
Tier
1 capital
and must
be phased
out of
CETI over
a
period of
nine years
beginning in
2014. In
order to
be a
“well-capitalized” depository
institution under
the new
regime, an
institution must maintain a
CET1 capital ratio of 7.0%
or more; a Tier
1 capital ratio of 8.5% or
more; a total capital ratio
of
10.5% or more; and a leverage ratio of 4% or more.
Institutions must also maintain a capital conservation
buffer consisting
of common equity Tier
1 capital. In
addition to the
higher required capital
ratios and the
new deductions and
adjustments,
the final
rules increased
the risk
weights for
certain assets,
meaning that
we will
have to
hold more
capital against
these
assets. We will also be required to hold capital
against short-term commitments that are not unconditionally
cancellable.
While we currently meet these new
requirements of the Basel III-based capital requirements, we may
fail to do so in
the
future. The failure
to meet applicable
regulatory capital
requirements could result
in one or
more of
our regulators placing
limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities,
and could affect customer and investor confidence, our costs of funds and level of required deposit insurance
assessments
to the FDIC,
our ability to
pay dividends on
our capital
stock, our ability
to make acquisitions,
and our business,
results of
operations and financial condition, generally.
In addition,
in the
current economic
and regulatory
environment, including
the COVID-19
pandemic, bank
regulators
may
impose
capital
requirements
that
are
more
stringent
than
those
required
by
applicable
existing
regulations.
The
application of more stringent capital requirements for us
could, among other things, result in
lower returns on equity, require
the raising of additional
capital, and result
in regulatory actions if
we were to be unable
to comply with such
requirements.
Implementation
of
changes
to
asset
risk
weightings
for
risk-based
capital
calculations,
items
included
or
deducted
in
calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business
strategy and could limit our ability to make distributions,
including paying dividends.
We are periodically subject
to examination and
scrutiny by a
number of banking agencies
and, depending upon
the findings and determinations
of these agencies, we may
be required to make adjustments
to our business that
could adversely affect us.
As part of
the bank regulatory
process, the Federal Reserve,
the FDIC and
the FOFR periodically conduct
examinations
of our business,
including compliance
with applicable laws
and regulations. If,
as a result
of an examination,
one of these
banking
agencies
were
to
determine
that
the
financial
condition,
capital
resources,
asset
quality,
asset
concentration,
earnings prospects, management, liquidity sensitivity
to market risk, risk
management and internal controls
or other aspects
of any of our operations has become unsatisfactory, or that we or our management are in violation of any law or regulation,
the banking
agency could
take a
number of
different remedial
or punitive
actions as
it deems
appropriate. These
actions
include the power to prohibit the continuation of
"unsafe or unsound" practices, to require affirmative
actions to correct any
conditions
resulting
from
any violation
or practice,
to
issue an
administrative
order
or enforcement
that can
be judicially
enforced, to direct an increase
in our capital, to restrict our
growth, to change the asset composition
of our loan or securities
portfolios
or
balance
sheet,
to
assess
civil
monetary
penalties
against
our
officers
or
directors,
to
remove
officers
and
directors and, if
it is concluded
that such conditions
cannot be corrected
or there is
an imminent risk
of loss to depositors,
to
terminate
our
deposit
insurance
and
force
us
to
terminate
our
business
operations.
If
we
become
subject
to
such
regulatory actions, our business, financial condition, results
of operations and reputation may be negatively impacted.
We
are
subject
to
numerous
laws
and
regulations
of
certain
regulatory
agencies
designed
to
protect
consumers, including the Community Reinvestment
Act, or CRA, and fair lending laws, and failure
to comply with
these laws could lead to a wide variety of sanctions.
The CRA directs all insured depository institutions to help meet the credit needs of
the local communities in which they
operate
branches,
including
low-
and
moderate-income
neighborhoods.
Each
institution
is
examined
periodically
by
its
primary federal
regulator,
which assesses
the institution’s
CRA performance.
The Equal
Credit Opportunity
Act, the
Fair
Housing
Act
and
other
fair
lending
laws
and
regulations
impose
nondiscriminatory
lending
requirements
on
financial
institutions. The U.S. Department of Justice, the Federal Reserve, and other federal agencies are responsible for enforcing
these laws and regulations. A successful regulatory challenge to our performance under the CRA, fair lending or consumer
lending
laws
and
regulations
could
result
in
a
wide
variety
of
sanctions,
including
damages
and
civil
money
penalties,
injunctive
relief,
customer
restitution,
restrictions
on
mergers
and
acquisitions
activity,
restrictions
on
expansion,
and
restrictions
on
entering
new
business
lines.
Private
parties
may
also
have
the
ability
to
challenge
an
institution’s
performance
under
fair
lending
laws
in
private
class
action
litigation.
Such
actions
could
have
an
adverse
effect
on
our
business, financial condition and results of operations.
USCB Financial Holdings, Inc.
2022 10-K
Climate change and related legislative and regulatory initiatives may materially affect the Company’s business
and results of operations.
The effects
of climate change
continue to
create an
alarming level
of concern for
the state of
the global
environment.
As a result, the global business community has
increased its political and social awareness surrounding
the issue, and the
United States
has entered
into international
agreements in
an attempt
to reduce
global temperatures,
such as
reentering
the Paris Agreement.
Further,
the U.S. Congress,
state legislatures
and federal and
state regulatory agencies
continue to
propose numerous
initiatives to supplement
the global effort
to combat climate
change. Similar and
even more expansive
initiatives
are
expected
under
the
current
administration,
including
potentially
increasing
supervisory
expectations
with
respect to banks’
risk management
practices, accounting
for the effects
of climate change
in stress testing
scenarios and
systemic
risk assessments,
revising expectations
for credit
portfolio concentrations
based on
climate-related
factors
and
encouraging investment
by banks
in climate-related initiatives
and lending
to communities
disproportionately impacted
by
the effects
of climate change.
The lack
of empirical data
surrounding the
credit and
other financial
risks posed
by climate
change render it difficult, or
even impossible, to predict how climate
change may impact our financial
condition and results
of operations; however,
the physical effects
of climate change may
also directly impact
us. Specifically,
unpredictable and
more frequent weather disasters may adversely impact the real property, and/or the value of the real property,
securing the
loans in our
portfolios. Additionally,
if insurance
obtained by
our borrowers
is insufficient
to cover any
losses sustained
to
the collateral, or if
insurance coverage is
otherwise unavailable to
our borrowers, the
collateral securing our
loans may be
negatively impacted by climate change, natural disasters and
related events, which could impact our
financial condition and
results
of
operations. Further,
the effects
of climate
change may
negatively
impact
regional
and
local economic
activity,
which could adversely
affect our customers
and the communities
in which we
operate. Overall, climate
change, its effects
and the resulting, unknown impact could have a material adverse effect on our
financial condition and results of operations.
Risks Related to Our Class A Common Stock
Our ability to pay dividends is subject to restrictions.
Holders of our Class A common stock are only
entitled to receive cash dividends when, as and
if declared by our Board
out of funds
legally available
for dividends.
The Company
is a bank
holding company
that conducts
substantially all
of its
operations through the Bank,
which is a legal entity separate
and distinct from the
Company.
As a result, our ability
to pay
dividends
on
our
common
stock
will substantially
depend
upon
the
receipt
of
dividends
and
other
distributions
from
the
Bank,
the
profitability
of
which
is
subject
to
the
fluctuating
cost
and
availability
of
money,
changes
in
interest
rates
and
economic conditions in general. There
are numerous laws and banking
regulations and guidance that limit the
Bank's ability
to pay dividends to us and our ability to pay dividends on our
common stock.
The market price and trading volume of our Class A
common stock may be volatile, which could result in rapid
and substantial losses for our shareholders.
The market
price of
our
Class
A common
stock may
be highly
volatile
and
could
be
subject
to
wide fluctuations.
In
addition, the trading volume on
our Class A common stock may
fluctuate and cause significant price variations to
occur. We
cannot assure you that the market price of our Class A common stock will not fluctuate or decline significantly in the future.
Some, but
certainly not
all, of
the factors
that could
negatively affect
the price
of our
Class A
common stock,
or result
in
fluctuations in the price or trading volume of our Class
A common stock, include:
•
general market conditions;
•
domestic and international economic factors unrelated
to our performance;
•
variations in our quarterly operating results or failure to
meet the market’s earnings expectations;
•
publication of research reports about us or the financial services
industry in general;
•
the failure of securities analysts to cover our Class
A common stock after this offering;
•
additions or departures of our key personnel;
•
future sales of our Class A common stock;
•
adverse market reactions to any indebtedness we may incur
or securities we may issue in the future;
•
actions by our shareholders;
•
the expiration of contractual lock-up agreements;
•
the operating and securities price performance of
companies that investors consider to be comparable to us;
•
changes or proposed changes in laws or regulations affecting
our business; and
•
actual or potential litigation and governmental investigations.
In
addition,
if
the
market
for
stocks
in
our
industry,
or
the
stock
market
in
general,
experiences
a
loss
of
investor
confidence, the
trading price
of the
Class A
common stock
could decline
for reasons
unrelated to
our business,
financial
USCB Financial Holdings, Inc.
2022 10-K
condition or results of operations. If
any of the foregoing occurs, it could
cause our Class A common
stock price to fall and
may expose us to lawsuits that, even if unsuccessful,
could be costly to defend and a distraction to management.
There are significant restrictions in our Articles of Incorporation that restrict the
ability to sell our capital stock
to shareholders that would own 4.95% or more of
our stock, excluding our Significant Investors.
Because the
continued availability
of our
"deferred tax
assets" depends,
in part,
on the
value of
our stock
owned by
shareholders owning
5% or more
of our stock,
our Articles of
Incorporation, except
as otherwise
may be approved
by the
Board
or
except
for
transfers
by
our
Significant
Investors,
prohibits
any
direct
or
indirect
transfer
of
stock
or
options
to
acquire stock to any
person who, as a
result of the transfer, would own 4.95%
or more of our
stock, as long as the
Company
continues to have "deferred tax assets." Such restrictions may
limit the ability to transfer our stock.
Because
we
are
an
emerging
growth
company
and
because
we
have
decided
to
take
advantage
of
certain
exemptions from
various reporting
and other
requirements applicable
to emerging
growth companies,
our Class
A common stock could be less attractive to investors.
We
are an
“emerging growth
company,”
as defined
in the
JOBS Act.
For as
long as
we remain
an emerging
growth
company,
we will have
the option
to take advantage
of certain
exemptions from
various reporting and
other requirements
that are applicable to other public companies that are not emerging
growth companies, including:
•
we
may
present
only
two
years
of
audited
financial
statements
and
only
two
years
of
related
management’s
discussion and analysis of financial condition and results
of operations
•
we
are
exempt
from
the
requirements
to
obtain
an
attestation
and
report
from
our
auditors
on
management’s
assessment of our internal control over financial reporting
under the Sarbanes-Oxley Act;
•
we are permitted to have less extensive disclosure about our
executive compensation arrangements; and
•
we
are
not
required
to
give
our
shareholders
non-binding
advisory
votes
on
executive
compensation
or
golden
parachute arrangements.
We may
continue to
take advantage
of some
or all
of the
reduced regulatory
and reporting
requirements
that will
be
available to
us as
long as
we continue
to
qualify
as an
emerging
growth
company.
We
will remain
an emerging
growth
company until the earliest of
(i) the last day of the first fiscal year
in which our annual gross revenues
exceed $1.07 billion,
(ii) the date that the market value of our Class A common stock
that is held by non-affiliates exceeds $700 million as of
the
last business day of
June 30 of that
year, (iii) the date on
which we have, during
the previous three-year period, issued
more
than $1 billion
in non-convertible
debt, or
(iv) the end
of fiscal
year following the
fifth anniversary
of the
completion of
our
IPO.
It is
possible that
some
investors could
find our
Class
A common
stock less
attractive if
we choose
to rely
on these
exemptions. If some investors find our Class A common
stock less attractive, there may be a less
active trading market for
our Class A common stock and our stock price may be
more volatile.
Because we have elected
to use the extended
transition period for complying
with new or revised
accounting
standards for an “emerging growth company,” our financial statements may not be comparable to companies that
comply with these accounting standards as of the public
company effective dates.
We have elected
to use the
extended transition
period for complying
with new or
revised accounting standards
under
Section 7(a)(2)(B) of
the Securities Act.
This election allows
us to delay
the adoption of
new or revised
accounting standards
that have different
effective dates for
public and private companies
until those standards apply
to private companies.
As a
result of
this election,
our financial
statements
may not
be comparable
to companies
that
comply
with these
accounting
standards as of the
public company effective dates. Because
our financial statements may
not be comparable to
companies
that
comply
with
public
company
effective
dates,
investors
may
have
difficulty
evaluating
or
comparing
our
business,
performance or
prospects in
comparison to
other public
companies, which
may have
a negative
impact on
the value
and
liquidity of
our Class
A common
stock. We
cannot predict
if investors
will find
our Class
A common
stock less
attractive
because we
plan to
rely on
this exemption.
If some
investors find
our Class
A common
stock less
attractive as
a result,
there may be a less active trading market for our Class A common
stock and our stock price may be more volatile.
We have existing investors that own
a significant amount of our
common stock whose individual interests may
differ from yours.
A significant percentage of our Class A common stock is currently held by a few institutional investors, including Patriot
Financial Partners II,
L.P.
and Patriot Financial
Partners Parallel II, L.P.
(collectively,
"Patriot"), and Priam
Capital Fund II,
LP
("Priam,"
and
together
with
Patriot,
the
"Significant
Investors").
As
of
February
28,
Patriot
and
Priam
own
USCB Financial Holdings, Inc.
2022 10-K
approximately 22.71
%
and 22.71
%
, respectively, of our outstanding Class A common stock. In addition, Patriot and Priam
are each entitled to nominate a director to our Board and have certain subscription rights to purchase new equity securities
that we issued in the future,
in each case as long as certain equity
ownership criteria are met. Patriot and
Priam also have
certain
registration
rights,
including
demand
registration
rights,
and
information
rights.
Although
Patriot
and
Priam
are
independent of each other, these institutional investors will continue to have a significant level of influence over us
because
of their level of
Class A common
stock ownership and their
right to representation
on our Board. For
example, Patriot and
Priam will have a greater ability than our other shareholders to influence the election of directors and the potential outcome
of other matters submitted
to a vote of
our shareholders, including mergers and
other acquisition transactions, amendments
to our Articles
of Incorporation and
Amended and Restated
Bylaws, and other
extraordinary corporate matters. The
interests
of these
investors could
conflict with
the interests
of our
other shareholders,
and any future
transfer by
these investors
of
their shares of Class A common
stock to other investors who have
different business objectives
could adversely affect
our
business, results of operations, financial condition, prospects
or the market value of our Class A common
stock.
Provisions
in
our
governing
documents
and
Florida
law
may
have
an
anti-takeover
effect
and
there
are
substantial regulatory limitations on changes of control
of the Company.
Our corporate organizational documents and provisions of federal
and state law to which we
are subject contain certain
provisions that could
have an anti-takeover
effect and
may delay,
make more
difficult or prevent
an attempted
acquisition
that you may favor or an attempted replacement of our Board
or management.
Our governing documents include provisions that:
•
empower our Board, without shareholder
approval, to issue our preferred
stock, the terms of which,
including voting
power, are to be set by our
Board;
•
provide that directors may be removed from office only for cause and only upon a majority vote
of the shares of our
Bank with voting power;
•
prohibit holders of our Class A common stock
to take action by written consent in lieu of a shareholder meeting;
•
require holders of at least 10% of our Class A common
stock to call a special meeting;
•
do not provide for cumulative voting in elections of our
directors;
•
provide that our Board has the authority to amend our Amended
and Restated Bylaws;
•
require shareholders that wish to bring business before annual or special meetings of shareholders, or to nominate
candidates for election as directors at our annual meeting of shareholders, to provide
timely notice of their intent in
writing and satisfy disclosure requirements; and
•
enable our Board to increase, between
annual meetings, the number of
persons serving as directors and to
fill the
vacancies created
as a
result of
the increase
until the
next meeting of
shareholders by
a majority
vote of
the directors
present at a meeting of directors.
In addition,
certain provisions
of Florida
law may
delay,
discourage, or
prevent an
attempted acquisition
or change
in
control. Furthermore,
banking laws
impose notice,
approval, and
ongoing regulatory
requirements
on any
shareholder or
other party that seeks to acquire direct or indirect "control" of
a bank holding company,
which includes the Change in Bank
Control
Act.
These
laws
could
delay
or
prevent
an
acquisition.
Also,
for
preservation
and
continued
availability
of
our
"deferred tax assets," our Articles
of Incorporation prohibits any direct
or indirect transfer of stock
or options to acquire
stock
to any
person
who, as
a result
of
the
transfer,
would own
4.95%
or more
of
our stock,
as long
as
we continue
to
have
"deferred tax assets," subject to
limited exceptions as provided in
our Articles of Incorporation. Because
of the requirements
to overcome this restriction, this provision of the Articles of Incorporation could have an anti-takeover effect and may delay,
make more difficult or prevent an attempted acquisition
that you may favor.
Adjust as necessary due to Class A common stock
repurchases.
USCB Financial Holdings, Inc.
2022 10-K

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

---

ITEM 2. PROPERTIES
Item 2.
Properties
The Company’s corporate office
s
are headquartered at 2301 N.W.
87th Avenue, Miami, Florida 33172. The Company,
through the
Bank,
operates
10 banking
centers
in South
Florida
within Miami
-Dade and
Broward counties.
From
the 10
banking centers, nine of these locations are leased and one is owned. The
banking center that is owned is located at 3999
Sheridan St, Hollywood, FL 33021. Management
believes that each of these locations
are in good condition and adequate
to meet our present and foreseeable needs, subject to
possible future expansion.
See Note 4 “Leases”
and Note 5 “Premises
and Equipment”
to the Consolidated Financial
Statements included in this
Annual Report on Form 10-K for additional information.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings
We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation
arising
in
the
ordinary
course
of
business.
These
claims
and
litigation
may
include,
among
other
things,
allegations
of
violation of banking and other applicable regulations, competition
law, labor laws and consumer
protection laws, as well as
claims
or litigation
relating
to intellectual
property,
securities, breach
of contract
and tort.
We
intend to
defend ourselves
vigorously against any pending or future claims and litigation.
There can be no
assurance that any
future legal proceedings
to which we are
a party will not
be decided adversely
to
our interests and have a material adverse effect
on our financial condition and operations.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures
Not applicable.
USCB Financial Holdings, Inc.
2022 10-K
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market
for
Registrant’s
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities
Market Information
In July
2021, the Bank’s
Class A
common stock began
trading on the
Nasdaq Stock Market
under ticker symbol
“USCB”.
The listing of our Class
A common stock
on the Nasdaq Stock
Market has resulted in
a more active trading
market for our
Class
A
common
stock.
However,
we
cannot
assure
that
a
liquid
trading
market
for
our
Class
A
common
stock
will
be
sustained.
Effective December 30, 2021, the bank holding company,
or the Company, acquired all issued and
outstanding shares
of Class
A common
stock of
the Bank.
Each of
the outstanding
shares of
the Bank’s
common stock
formerly held
by its
shareholders was converted
into and exchanged
for one newly
issued share
of the Company’s
common stock. The
ticker
symbol “USCB” remained the same.
Prior
to
our
listing
on
the
Nasdaq
Stock
Market
there
was
not
an
established
public
trading
market
for
the
Class
A
common shares. The
following table shows the
quarterly high and low
closing prices of
our Class A common
stock traded
on the Nasdaq Stock Market since going public on July
23, 2021:
Stock Price
High
Low
Quarter Ended:
September 30, 2021
$
13.91
$
10.57
December 31, 2021
$
15.89
$
12.30
March 31, 2022
$
15.49
$
13.30
June 30, 2022
$
14.84
$
11.21
September 30, 2022
$
14.74
$
11.08
December 31, 2022
$
14.30
$
12.16
As of
December 31, 2022,
our Class
B common
stock is not
listed or
traded on
any stock
exchange and
no shares
were
issued and outstanding at such date.
Holders
As
of
January
31,
2023,
the
Company’s
Class
A
common
shares
were
held
by
approximately
shareholders
of
record, not
including the
number
of persons
or entities
whose stock
is held
in nominee
or “street”
name through
various
brokerage firms and banks.
Dividends
As a bank holding company, the Company’s ability to declare and pay dividends depends on various federal regulatory
considerations, including the guidelines of the Federal Reserve regarding
capital adequacy and dividends.
Because we are
a bank holding
company and currently do
not engage directly in
business activities of a
material nature,
our ability to pay dividends
to our shareholders depends,
in large part, upon
our receipt of dividends
from the Bank, which
is also subject to
numerous limitations on
the payment of
dividends under federal and
state banking laws, regulations
and
policies.
The principal
source of
revenue with
which to
pay dividends
on common
shares are
dividends the
Bank may
declare
and
pay
out
of
funds
legally
available
for
payment
of
dividends.
As
a
Florida
corporation,
we
are
only
permitted
to
pay
dividends to shareholders if, after giving effect to the dividend, (i) the Company is able to pay its debts as they become due
in the ordinary course
of business and
(ii) the Company’s
assets exceeds the
sum of Company’s
(a) liabilities plus
(b) the
amount that
would be
needed for
the Company
to satisfy
the
preferential rights
upon dissolution
of shareholders
whose
preferential rights are superior to those receiving the dividend,
if any.
Securities Authorized for Issuance Under Equity Compensation
Plans
See Note
9 ”Equity
Based and
Other Compensation
Plans” to
the Consolidated
Financial Statements
included in this
Annual Report Form on 10-K for additional information
required.
USCB Financial Holdings, Inc.
2022 10-K
$-
$20
$40
$60
$80
$100
$120
$140
$160
7/22/2021
8/8/2021
8/25/20219/11/20219/28/2021
10/15/2021
11/1/2021
11/18/2021
12/5/2021
12/22/2021
1/8/2022
1/25/20222/11/20222/28/20223/17/2022
4/3/2022
4/20/2022
5/7/2022
5/24/20226/10/20226/27/20227/14/20227/31/20228/17/2022
9/3/2022
9/20/202210/7/2022
10/24/202211/10/2022
11/27/2022
12/14/202212/31/2022
COMPARISON OF CUMULATIVE
TOTAL RETURN
Among USCB Financial Holdings, Inc., the NASDAQ Bank Index, the NASDAQ ABA
Community Bank Index, and the NASDAQ Composite
USCB
NASDAQ Bank NASDAQ
ABA Community Bank
NASDAQ Composite
Stock Price Performance
The graph below compares the
cumulative total return
to stockholders of our Class
A common stock between July
23,
2021 (the
date the
Bank’s
Class A
common
stock commenced
trading on
the Nasdaq
Stock
Market) and
December 31,
2022, with the cumulative total return
of (a) the Nasdaq Bank Index
(b) the NASDAQ ABA Community Bank
Index, and (c)
the Nasdaq
Composite Index
over the same
period. This
graph assumes
the investment
of $100 in
our Class
A common
stock at the closing sale price of $10.82 per
share on July 23, 2021, and assumes the reinvestment
of dividends, if any.
The comparisons shown
in the graph
below are based
upon historical data.
We caution that the
stock price performance
shown in the graph below is not indicative of, nor is it intended to forecast, the potential future performance
of our common
stock.
07/23/2021
12/31/2021
12/31/2022
USCB Financial Holdings, Inc. (USCB)
$
$
$
NASDAQ Bank (BANK)
$
$
$
NASDAQ ABA Community Bank (QABA)
$
$
$
NASDAQ Composite (IXIC)
$
$
$
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Other
Affiliates
On January
24, 2022,
the Board
approved a
share repurchase
program of
up to 750,000
shares of
Class A
common
stock.
Under the
repurchase
program,
the Company
may purchase
shares of
Class
A common
stock on
a discretionary
basis from time
to time through
open market repurchases, privately
negotiated transactions, or otherwise
in compliance with
Rule
10b-18
under
the
Exchange
Act.
As
of
December 31,
2022,
neither
the
Company
nor
any
of
its
affiliates
had
repurchased any Class A common shares of the Company.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Reserved
USCB Financial Holdings, Inc.
2022 10-K

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management’s
discussion
and
analysis
of
financial
condition
and
results
of
operations
analyzes
the
consolidated
financial condition and results of operations of the Company and the
Bank, its wholly owned subsidiary, for the years ended
December 31, 2022
and 2021.
This discussion
and analysis
are best
read in
conjunction with
the Consolidated
Financial
Statements and related footnotes
of our Company presented
in Item 8 “Financial
Statements and Supplementary
Data” of
this Annual Report on Form
10-K. In addition to
historical information, 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" of this Annual Report.
In this Annual Report on Form 10-K, unless the context indicated otherwise, references to “we,”
“us,”, and “our” refer to
the Company and the Bank, as
the contest dictates. However, if
the discussion relates to a period
before the Effective Date,
the terms refer only to the Bank.
Forward-Looking Statements
This
Annual
Report
on
Form
10-K
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,”
“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;
•
the COVID-19
pandemic
and its
impact
on us,
our employees,
customers
and third-party
service
providers,
and the
ultimate extent of the impact of the pandemic and related
government stimulus programs;
•
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 environment;
•
our
ability
to
comply
with
the
extensive
laws
and
regulations
to
which
we
are
subject,
including
the
laws
for
each
jurisdiction where we operate;
•
legislative or
regulatory changes
and changes
in accounting
principles, policies,
practices or
guidelines, including
the
effects of the implementation of the Current Expected
Credit Losses (“CECL”) standard on January 1, 2023;
•
the effects of our lack of a diversified loan portfolio and concentration in the South Florida market, including the risks of
geographic, depositor, and
industry concentrations, including our concentration in loans
secured by real estate;
•
effects of climate change;
•
the concentration of ownership of our common stock;
•
fluctuations in the price of our Class A 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 potential 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 margin;
•
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 Annual Report and other
filings we make with the SEC.
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
Annual Report
on Form
10-K 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 herein and in
USCB Financial Holdings, Inc.
2022 10-K
the reports the Company filed or will file with the SEC and, for periods
prior to the completion of the bank holding company
reorganization in December 2021, the Bank filed with the FDIC
Non-GAAP Financial Measures
This Annual Report on Form 10-K 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 ‘Non-GAAP Reconciliation Tables’ included
in this annual report.
Overview
For the year ended December 31, 2022, the Company reported net income of
$20.1 million compared with net income
of
$21.1 million for the year ended December 31, 2021.
In
evaluating
our
financial
performance,
we consider
the
level
of
and
trends
in
net
interest
income,
the
net
interest
margin, the cost of deposits,
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
.
The following significant highlights are of note for the
year ended December 31, 2022:
•
Net interest
income before
provision for
credit losses
totaled $63.7 million,
an increase
of $11.2
million or
21.3%,
compared to $52.5 million for the year ended December
31, 2021.
•
Net interest margin (“NIM”) was 3.38% for the year ended
December 31, 2022 and 3.26% for the year ended 2021.
The yield on earning assets increased to 3.78% for 2022, compared
to 3.52% for 2021.
•
Total
assets
grew
to
$2.1
billion
at
December
31,
2022,
an
increase
of
$231.9
million
or
12.5%,
compared
to
December 31, 2021.
•
Total
loans
grew
to
$1.5
billion
at
December
31,
2022,
an
increase
of
$317.3
million
or
26.7%,
compared
to
December 31, 2021.
•
The cost
of interest-bearing
liabilities
increased to
0.66% for
the
year ended
December
31, 2022
from
0.45%
in
December 31, 2021 as a result of the increase in market
interest rates.
•
Return on average assets for the year ended December
31, 2022 was 1.01% compared to 1.24% in 2021.
•
Return on average
stockholders’
equity for the
year ended December 31,
2022 was
10.73% compared to
11.45%
in 2021.
•
Nonperforming assets was $0.0 for the year ended December
31, 2022 compared to $1.2 million at December
31,
2021.
•
The Company maintained its strong capital position. As of December 31, 2022, the Bank was well-capitalized, with
a total risk-based capital ratio of 13.65%,
a tier 1 risk-based capital ratio of
12.53%, a common equity tier 1 capital
ratio of
12.53%, and
a leverage
ratio of
9.61%. As
of December
31, 2022
and 2021,
all of
our regulatory
capital
ratios exceeded the thresholds to be well-capitalized under the
applicable bank regulatory requirements.
•
The Company became the parent bank
holding company of the Bank effective
December 30, 2021. Each share of
the
Bank
was
exchanged
for
one
share
of
the
Company,
making
the
Bank
a
wholly
owned
subsidiary
of
the
Company. Shares
of the Company trade under ticker symbol “USCB” on the Nasdaq
Stock Market.
USCB Financial Holdings, Inc.
2022 10-K
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” to our
Consolidated Financial Statements
.
To
prepare financial statements in conformity with 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 in understanding
our
financial statements.
Management
has presented
the application
of these
policies to
the audit
and risk
committee of
our
Board.
Allowance for Credit Losses
The allowance for credit
losses (“ACL”) is
a valuation allowance that
is established through charges
to earnings in the
form of a
provision for credit
losses. The amount
of the ACL
is affected by
the following: (i)
charge-offs of loans
that decrease
the allowance;
(ii) subsequent
recoveries on
loans previously
charged off
that increase
the allowance;
and (iii)
provisions
for credit losses charged to income that increase or decrease the allowance. Management considers the policies related to
the ACL
as the
most critical
to the
financial statement
presentation. The
total ACL
includes activity
related to
allowances
calculated in accordance with Accounting Standards Codification (“ASC”)
310, Receivables, and ASC 450, Contingencies.
Throughout the year,
management estimates the probable
incurred losses in the loan portfolio
to determine if the ACL
is adequate to absorb such losses. The ACL
consists of specific and general components.
The specific component relates
to loans that are
individually classified as
impaired. We follow
a loan review program
to evaluate the credit
risk in the loan
portfolio. Loans
that have
been identified
as impaired
are reviewed
on a
quarterly basis
in order
to determine
whether a
specific reserve is
required. The
general component covers
non-impaired loans
and is based
on industry and
our specific
historical loan
loss experience,
volume, growth
and composition
of the
loan portfolio,
the evaluation
of our
loan portfolio
through our
internal
loan review
process, general
current
economic
conditions both
internal and
external
to
us that
may
affect the borrower’s ability to pay,
value of collateral and other qualitative relevant risk factors. Based on a review
of these
estimates, we
adjust the ACL
to a
level determined by
management to be
adequate. Estimates of
credit losses
are inherently
subjective as they involve an exercise of judgment.
The
CARES
Act,
as
amended
by
the
Consolidated
Appropriations
Act,
2021,
specified
that
COVID-19
related
loan
modifications executed
between March 1,
2020 and
the earlier
of (i)
60 days
after the
date of
termination of
the national
emergency declared by President Trump and (ii) January 1, 2022, on loans
that were current as of December 31, 2019,
are
not TDRs. Additionally,
under guidance from the federal banking agencies,
other short-term modifications made on a good
faith basis
in response
to COVID-19
to borrowers
that were
current prior
to any
relief are
not TDRs
under ASC
Subtopic
310-40,
“Troubled
Debt
Restructurings
by
Creditors.”
These
modifications
include
short-term
(i.e.,
up
to
six
months)
modifications
such
as
payment
deferrals,
fee
waivers,
extensions
of
repayment
terms,
or
delays
in
payment
that
are
insignificant. The Company’s charge-off
policy is to continuously review all impaired loans to monitor the Company’s ability
to collect them in full at the applicable maturity date and/or in
accordance with terms of any restructurings. For loans
which
are collateral dependent,
or deemed to
be uncollectible, any
shortfall in the
fair value of
the collateral relative
to the recorded
investment
in the loan is charged off. The amount charged-off
conforms to the amount necessary to comply with GAAP.
Income Taxes
Deferred tax
assets and
liabilities are
recognized for
the future
tax consequences
attributable to
differences
between
the financial statement carrying amounts of
existing assets and liabilities and their
respective tax bases and operating loss
and tax credit carryforwards. Deferred
tax assets and liabilities are measured
using enacted tax rates expected to
apply to
taxable income
in the
years in
which those
temporary differences
are expected
to be
recovered or
settled. The
effect
on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
Management is required to assess whether a valuation allowance should be established on the net deferred tax assets
based on the
consideration of
all available evidence
using a more
likely than not
standard. In its
evaluation, management
considers taxable loss
carry-back availability, expectation of sufficient taxable
income, trends in
earnings, the future
reversal
of temporary differences, and available tax planning
strategies.
USCB Financial Holdings, Inc.
2022 10-K
The Company recognizes positions taken
or expected to be
taken in a tax
return in accordance with existing accounting
guidance on
income taxes
which prescribes
a recognition threshold
and measurement
process. Interest
and penalties on
tax liabilities, if any,
would be recorded in interest expense and other operating
non-interest expense, respectively.
Other than temporary impairment
The
Company
reviews
investments
quarterly
for
other
than
temporary
impairment
(“OTTI”).
The
following
primary
factors
are
considered
for
securities
identified
for
OTTI
testing:
percent
decline
in
fair
value,
rating
downgrades,
subordination, duration, the Company's ability to hold the debt security, and the ability of the issuers to pay all amounts
due
in
accordance
with
the
contractual
terms.
Prices
obtained
from
pricing
services
are
usually
not
adjusted.
Based
on
our
internal review procedures
and the fair values
provided by the pricing
services, we believe that
the fair values provided
by
the pricing
services are
consistent with
the principles
of ASC
Topic
820, Fair
Value
Measurement. The
Company may
at
times validate the
observed prices using
the observed prices
for similar securities
to determine the
fair value of
its securities.
Changes in the fair values, as
a result of deteriorating economic conditions
and credit spread changes, should only
be
temporary.
Further,
management
believes
that
the
Company’s
other
sources
of
liquidity,
as
well
as
the
cash
flow
from
principal and interest
payments from
its securities portfolio,
reduces the
risk that losses
would be realized
as a result
of a
need to sell securities to obtain liquidity.
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):
As of December 31,
Consolidated Balance Sheets:
Total
assets
$
2,085,834
$
1,853,939
Total
loans
(1)
$
1,507,338
$
1,190,081
Total
deposits
$
1,829,281
$
1,590,379
Total
stockholders' equity
$
182,428
$
203,897
(1)
Loan amounts include deferred fees/costs.
Years Ended December 31,
Consolidated Statements of Operations:
Net interest income before provision for credit losses
$
63,661
$
52,496
Total
non-interest income
$
5,228
$
10,698
Total
non-interest expense
$
39,309
$
35,677
Net income
$
20,141
$
21,077
Net income (loss) available to common stockholders
$
20,141
$
(70,585)
Profitability:
Efficiency ratio
57.06%
56.31%
Net interest margin
3.38%
3.26%
The Company’s results
of operations depend
substantially on net
interest income and
non-interest income. Other
factors
contributing to the
results of operations
include our provision
for credit losses,
non-interest expense, and
the provision for
income taxes.
USCB Financial Holdings, Inc.
2022 10-K
Net income
for the
year ended
December 31, 2022
was $20.1 million,
compared with
net income
of $21.1 million
for
the same
period in
2021. The Company
reported net
income per
diluted share
for the
year ended
December 31, 2022
of
$1.00 compared
to net
loss per diluted
share for
the same
period in 2021
of $6.72. The
net loss per
diluted share
for the
year ended 2021 was
attributable to the one-time
reduction in net income
available to common stockholders
reflecting the
exchange and
redemption
of the
Class
C and
Class
D preferred
shares. During
the third
quarter of
2021,
the Company
completed
an
exchange
of
the
outstanding
preferred
shares
for
Class A
common
shares
and
thereafter
redeemed
the
remaining outstanding
preferred shares,
at a
liquidation value
that exceeded
book value,
causing a
one-time reduction
in
net income available
to common stockholders
of $89.6 million.
At December 31, 2022,
there were no
issued and outstanding
preferred shares.
Adjusted
diluted
net
income
per
common
share
(non-GAAP)
for
the
year
ended
December 31,
was
$1.00
compared to adjusted net income per diluted share (non-GAAP) for the same period in 2021 of $1.81. Adjusted net income
per
diluted
share
(non-GAAP)
for
the
year
ended
excludes
the
$89.6 million
one-time
accounting
impact
of
the
exchange and redemption of the
preferred shares. To see
a reconciliation of non-GAAP
measures,
to GAAP measures refer
to section below “Reconciliation and Management Explanatio
n
of Non-GAAP Financial Measures”.
Net Interest Income
Net interest
income is
the difference
between interest
earned on
interest earning
assets and
interest incurred
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 benefit of these non-interest-bearing
sources.
Changes in
the 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. The
ALCO has in place
asset-liability management techniques
to manage major
factors that affect
net interest income
and net
interest margin.
USCB Financial Holdings, Inc.
2022 10-K
The following table contains information related
to average balance sheet, average yields
on assets, and average costs
of liabilities for the periods indicated (in thousands):
Years Ended December 31,
Average
Balance
Interest
Yield/Rate
Average
Balance
Interest
Yield/Rate
Assets
Interest-earning assets:
Loans
(1)
$
1,341,693
$
60,825
4.53
%
$
1,116,142
$
48,730
4.37
%
Investment securities
(2)
470,508
9,346
1.99
%
403,677
7,886
1.95
%
Other interest earnings assets
70,873
1.31
%
92,430
0.11
%
Total
interest-earning assets
1,883,074
71,100
3.78
%
1,612,249
56,722
3.52
%
Non-interest earning assets
107,536
89,409
Total
assets
$
1,990,610
$
1,701,658
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits
$
64,835
0.13
%
$
52,379
0.11
%
Saving and money market deposits
803,426
5,173
0.64
%
619,810
2,082
0.34
%
Time deposits
220,319
1,509
0.68
%
235,127
1,531
0.65
%
Total
interest-bearing deposits
1,088,580
6,768
0.62
%
907,316
3,672
0.40
%
Borrowings and repurchase agreements
38,463
1.74
%
36,000
1.54
%
Total
interest-bearing liabilities
1,127,043
7,439
0.66
%
943,316
4,226
0.45
%
Non-interest bearing demand deposits
645,366
547,116
Other non-interest-bearing liabilities
30,449
27,142
Total
liabilities
1,802,858
1,517,574
Stockholders' equity
187,752
184,084
Total
liabilities and stockholders' equity
$
1,990,610
$
1,701,658
Net interest income
$
63,661
$
52,496
Net interest spread
(3)
3.12
%
3.07
%
Net interest margin
(4)
3.38
%
3.26
%
(1)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred
loan fees, net of deferred loan costs.
(2)
At fair value except for securities held to maturity. This amount includes
FHLB stock.
(3)
Net interest spread is the average yield on
total interest-earning assets minus the average
rate on total interest-bearing liabilities.
(4)
Net interest margin is the ratio of net interest
income to total interest-earning assets.
Net interest income before the provision
for credit losses was $63.7
million for the year ended December
31, 2022, an
increase of $11.2 million
or 21.3%, from
$52.5 million for the
year ended December 31,
2021. This increase
was primarily
attributable to higher income from a larger loan portfolio and
higher yield on earning assets.
Included with loan interest income are PPP fees totaling $1.6 million and $4.5 million for the
year ended December 31,
2022 and 2021, respectively.
PPP loan fees are fully recognized upon forgiveness. As of December 31, 2022, we had
$1.3
million of PPP loans remaining in our portfolio.
The net
interest margin
was 3.38%
for the
year ended
December 31, 2022
and 3.26%
for the
year ended
2021. The
overall and individual
yields for interest-bearing
assets and interest
-bearing liabilities
both increased in
2022 compared to
2021 due primarily to increases
in market rates of interest.
Provision for Credit Losses
ACL represents
probable
incurred
losses
in
our
portfolio. We
maintain
an
adequate ACL
that
can
mitigate
probable
losses incurred
in the
loan portfolio.
The ACL is increased
by the
provision for
credit losses
and is
decreased by
charge-
offs,
net
of
recoveries
on
prior
loan
charge-offs.
There
are
multiple
credit
quality
metrics
that
we
use
to
base
our
determination of
the amount
of the ACL
and corresponding
provision for
credit losses.
These credit
metrics
evaluate the
credit
quality
and
level
of
credit
risk
inherent
in
our
loan
portfolio,
assess
non-performing
loans
and
charge-offs
levels,
considers statistical trends and economic conditions and other
applicable factors.
USCB Financial Holdings, Inc.
2022 10-K
Provision for credit loss
for the year ended
December 31, 2022, was
$2.5 million compared to
a net reduction of
$160
thousand in provision
expense for
the same period
in 2021. The
primary driver of
the increase was
loan growth. The ACL
as a percentage of total loans was 1.16%
at December 31, 2022 compared to 1.27% at December
31, 2021.
See “Allowance
for Credit
Losses”
below for
further discussion on
how the
ACL was
calculated for
the periods
presented.
Non-Interest Income
Net interest income
and other types of
recurring non-interest
income are generated
from our operations.
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 insurance
on several employees
and generate
income reflecting 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):
Years Ended December 31,
Service fees
$
4,010
$
3,609
Gain (loss) on sale of securities available for sale, net
(2,529)
Gain on sale of loans held for sale, net
1,626
Gain on sale of premises and equipment, net
-
Loan settlement
2,500
Other non-interest income
2,695
1,766
Total
non-interest income
$
5,228
$
10,698
Non-interest income
for the
year ended
December 31, 2022
was $5.2
million compared
to $10.7
million for
the same
period in 2021. This decrease was primarily driven by $2.5
million loss on sale of securities in 2022 and one-time items that
generated income in 2021 but not in 2022. One-time items in 2021 include a $2.5 million interest recovery related to a prior
lending customer
and a gain
on the
sale of
a previously
owned building
for $983
thousand. In
the fourth
quarter of
2022,
the
Company
executed
a
portfolio
restructuring
strategy
which
resulted
in
a
sale
of
$17.0
million
of
its
lower-yielding
available-for-sale
securities
for
a
loss
of
$2.0
million.
Proceeds
from
the
sale
will
be
reinvested
in
securities
and
loans
currently yielding higher than the securities that were sold.
Non-Interest Expense
The following table presents the components of non-interest
expense for the dates indicated (in thousands):
Years Ended December 31,
Salaries and employee benefits
$
23,943
$
21,438
Occupancy
5,058
5,257
Regulatory assessment and fees
Consulting and legal fees
1,890
1,454
Network and information technology services
1,806
1,466
Other operating
5,682
5,279
Total
non-interest expense
$
39,309
$
35,677
Non-interest expense for
the year ended
December 31, 2022
increased $3.6 million
or 10.2%, compared
to the same
period in
2021. The
increase is
primarily due
to an
increase in
salaries and
employee benefit
costs of
$2.5 million for
the
year ended
December 31, 2022,
compared to
the same
period in 2021.
The headcount
of full-time
equivalent employees
increased
from
at
December 31,
to
at
December 31,
2022.
Further,
consulting
and
legal
fees
and
other
operating expenses
increased $436
thousand or
30.0% and
$403 thousand
or 7.6%,
respectively, during
the year
ended
December 31,
2022 compared
to the
same
period in
due to
our first
full
year of
operations
as a
publicly
reporting
company.
The increase in salaries and employee
benefits, consulting and legal fees,
and other operating costs has
enabled
us to support recent growth
and has provided us
with the necessary technology and
required professionals to execute
our
growth strategy.
USCB Financial Holdings, Inc.
2022 10-K
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 expense for income tax purposes.
Therefore, future decisions on the investments we
choose will affect our effective tax
rate. Changes in the
cash surrender
value of bank-owned
life insurance policies
for key employees,
purchasing municipal
bonds, and overall taxable income will be important elements
in determining our effective tax rate.
Income
tax expense
for the
year ended
December 31,
2022 was
$6.9 million,
compared
to $6.6 million
for
the
year
ended December 31, 2021. The effective
tax rate for the year
ended December 31, 2022 was 25.6%
and for the year
ended
December 31, 2021 was 23.8%.
For a further discussion
on income taxes, see
Note 6 “Income Taxes”
to the Consolidated Financial
Statements in this
Annual Report on Form 10-K.
Rate/Volume Analysis
The
table
below
sets
forth
information
regarding
changes
in
interest
income
and
interest
expense
for
the
periods
indicated (in thousands).
For each category of
interest-earning assets and interest-bearing liabilities,
information is provided
on changes attributable to (i) changes in rate (changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); and (iii) changes in rate-volume (change in
rate multiplied by change in volume). Changes in
rate-volume are proportionately allocated between rate and volume
variance.
Years Ended 2022 vs. 2021
Years Ended 2021 vs. 2020
Increase (decrease) due to change in
Increase (decrease) due to change in
Volume
Rate
Net
Change
Volume
Rate
Net
Change
Interest-earning assets:
Loans
(1)
$
9,847
$
2,248
$
12,095
$
4,091
$
(2,439)
$
1,652
Investment securities
(2)
1,306
1,460
5,288
(2,650)
2,638
Other interest earnings assets
(25)
(51)
(150)
(201)
Total increase (decrease) in interest income
$
11,128
$
3,250
$
14,378
$
9,328
$
(5,239)
$
4,089
Interest-bearing liabilities:
Interest-bearing demand deposits
$
$
$
$
$19
$
(118)
$
(99)
Saving and money market deposits
2,474
3,091
(1,973)
(1,013)
Time deposits
(96)
(22)
(704)
(2,474)
(3,178)
Borrowings and repurchase agreements
(321)
(199)
(520)
Total increase (decrease) in interest expense
2,641
3,213
(46)
(4,764)
(4,810)
Increase (decrease) in net interest income
$
10,556
$
$
11,165
$
9,374
$
(475)
$
8,899
(1)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred
loan fees, net of deferred loan costs.
(2)
At fair value except for securities held to maturity. This amount includes FHLB
stock.
Both average yields on
interest earning assets
and average rates
paid on interest
bearing liabilities increased
in 2022
as a compared to 2021, reflecting the changes in the
macro interest rate environment.
Analysis of Financial Condition
Total
assets at December 31, 2022, were $2.1 billion, an increase of $231.9 million, or 12.5%, over total assets of $1.9
billion at
December 31, 2021. Total loans increased
$317.3 million,
or 26.7%,
to $1.5
billion at
December 31, 2022 compared
to
$1.2
billion
at
December 31,
2021.
The
increase
in
loans
includes
purchased
loans
totaling
$70.2
million
including
deferred fees. Total deposits
increased by $238.9 million, or 15.0%, to $1.8 billion at December 31, 2022 compared to $1.6
billion at December 31, 2021.
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
operating philosophy of the portfolio is
to maximize the Company’s profitability,
taking into
consideration the Company’s risk appetite and tolerance, manage the assets composition
and diversification, and maintain
adequate risk-based capital ratios.
USCB Financial Holdings, Inc.
2022 10-K
The
investment
portfolio
is
managed
in
accordance
with
the
Asset
and
Liability
Management
(“ALM”)
policy,
which
includes an
investment guideline,
approved by
the Board.
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 ALCO. The portfolio of investments 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,
agency
mortgage-backed securities,
collateralized mortgage
obligation securities,
municipal securities,
and other
debt 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 depending
on capital market conditions and expectations. The investment portfolio is regularly reviewed by the Chief Financial Officer,
Treasurer,
or the
ALCO of
the Company
to ensure
an appropriate
risk and
return profile
as well
as for
adherence to
the
investment policy.
As of December
31, 2022, the investment portfolio consisted of available-for-sale (“AFS”) and held-to-maturity
(“HTM”)
debt securities.
During the third quarter of 2022, there were 26 investment securities that was
transferred from AFS to HTM
with an amortized cost basis and fair value amount
of $74.4 million and $63.8 million, respectively.
On the date of transfer,
these securities
had a
total net
unrealized loss
of $10.6
million. The
transfer of
the debt
securities from
the AFS
to HTM
category was
made at
fair value
at the
date of
transfer.
The unrealized
gain or
loss
at the
date of
transfer is
retained in
accumulated other
comprehensive income
and in
the carrying
value of
the HTM
securities. Such
amounts are
amortized
over the remaining life of the security.
There was no impact to net income on the date of transfer.
The book value of the AFS securities is adjusted monthly
for unrealized gain or loss as a valuation allowance,
and any
gain
or
loss
is
reported
on
an
after-tax
basis
as
a
component
of
other
comprehensive
income
in
stockholders’
equity.
Periodically,
we
may
need
to
assess
whether
there
have
been
any
events
or
unexpected
economic
circumstances
to
indicate that
a security
on which
there is
an unrealized
loss is
impaired on
an other-than-temporary
basis (“OTTI”).
If the
impairment is
deemed to
be permanent,
an analysis
would be made
considering many
factors, including
the severity
and
duration of the impairment, the severity
of the event, our intent and
ability to hold the security for
a period of time sufficient
for a
recovery in
value, recent
events specific
to the
issuer or
industry,
any related
credit events,
and for
debt securities,
external
credit
ratings
and
recent
downgrades
related
to
deterioration
of
credit
quality.
Securities
on
which
there
is
an
unrealized loss
that is
deemed to
be OTTI
are written
down to fair
value, with
the write-down
recorded as
a realized
loss
under line item
“Gain (loss) on
sale of securities
available-for-sale, net” of
the Consolidated Statements
of Operations. As
of
December 31,
2022, there
are no
securities
which
management
has classified
as
OTTI.
For further
discussion
of
our
analysis
on
impaired
investment
securities
for
OTTI,
see
Note 2
“Investment
Securities”
to
the
Consolidated
Financial
Statements in this Annual Report on Form 10-K.
AFS and HTM investment securities
in aggregate decreased $105.4 million or 20.1%
to $418.8 million at December 31,
2022 from $524.2
million at
December 31, 2021.
Investment securities
decreased over the
past year as
repayments from
securities were
allocated to
fund loan
growth.
Management reinvested
the repayments
of securities
and income
from the
sale of securities into higher
yielding loans. As of December
31, 2022, securities with a
market value of $49.0 million
were
pledged to secure
public deposits.
As of December
31, 2022, the
Company did
not have any
tax-exempt securities
in the
portfolio.
USCB Financial Holdings, Inc.
2022 10-K
The
following
table
presents
the
amortized
cost
and
fair
value
of
investment
securities
for
the
dates
indicated
(in
thousands):
December 31, 2022
December 31, 2021
Available-for-sale:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
U.S. Government Agency
$
10,177
$
8,655
$
10,564
$
10,520
Collateralized mortgage obligations
118,951
95,541
160,506
156,829
Mortgage-backed securities - Residential
73,838
60,879
120,643
118,842
Mortgage-backed securities - Commercial
32,244
27,954
49,905
50,117
Municipal securities
25,084
18,483
25,164
24,276
Bank subordinated debt securities
15,964
14,919
27,003
28,408
Corporate bonds
4,037
3,709
12,068
12,550
$
280,295
$
230,140
$
405,853
$
401,542
Held-to-maturity:
U.S. Government Agency
$
44,914
$
39,062
$
34,505
$
33,904
U.S. Treasury
9,841
9,828
-
-
Collateralized mortgage obligations
68,727
60,925
44,820
43,799
Mortgage-backed securities - Residential
42,685
38,483
26,920
26,352
Mortgage-backed securities - Commercial
11,442
10,777
3,103
3,013
Corporate bonds
11,090
10,013
13,310
13,089
$
188,699
$
169,088
$
122,658
$
120,157
The following
table shows
the weighted
average yields,
categorized by
contractual maturity,
for investment
securities
as of December 31, 2022 (in thousands, except ratios):
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
$
-
-
$
-
-
$
-
-
$
10,177
2.31%
$
10,177
2.31%
Collateralized mortgage obligations
-
-
-
-
-
-
118,951
1.57%
118,951
1.57%
MBS - Residential
-
-
-
-
-
-
73,838
1.65%
73,838
1.65%
MBS - Commercial
-
-
-
-
-
-
32,244
2.01%
32,244
2.01%
Municipal securities
-
-
-
-
1,000
2.05%
24,084
1.72%
25,084
1.74%
Bank subordinated debt securities
-
-
-
-
15,964
4.76%
-
-
15,964
4.76%
Corporate bonds
-
-
4,037
2.50%
-
-
-
-
4,037
2.50%
$
-
-
$
4,037
2.50%
$
16,964
4.60%
$
259,294
1.69%
$
280,295
1.88%
Held-to-maturity:
U.S. Government Agency
$
-
-
7,902
1.03%
20,354
1.46%
16,658
1.85%
44,914
1.53%
U.S. Treasury
9,841
4.49%
-
-
-
-
-
-
9,841
4.49%
Collateralized mortgage obligations
-
-
-
-
-
-
68,727
1.66%
68,727
1.66%
MBS - Residential
-
-
4,554
1.84%
5,950
1.74%
32,181
2.12%
42,685
2.04%
MBS - Commercial
-
-
-
-
3,088
1.62%
8,354
1.69%
11,442
1.67%
Corporate bonds
1,515
2.25%
9,575
2.79%
-
-
-
-
11,090
2.71%
$
11,356
4.19%
$
22,031
1.96%
$
29,392
1.53%
$
125,920
1.81%
$
188,699
1.92%
Loans
Loans are
the largest
category of
interest-earning assets
on the
Consolidated
Balance Sheets,
and usually
provides
higher yields than the remainder of the Company’s
interest-earning assets. Higher yields typically carry
inherent credit and
liquidity risks in
comparison to lower
yielding assets. The
Company manages and
mitigates such risks
in accordance with
the credit and ALM policies, risk tolerance and balance
sheet composition.
USCB Financial Holdings, Inc.
2022 10-K
The following table shows the loan portfolio composition
as of the dates indicated (in thousands):
December 31, 2022
December 31, 2021
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
185,636
12.3
%
$
201,359
16.9
%
Commercial Real Estate
970,410
64.4
%
704,988
59.2
%
Commercial and Industrial
126,984
8.4
%
146,592
12.3
%
Foreign Banks
93,769
6.2
%
59,491
5.0
%
Consumer and Other
130,429
8.7
%
79,229
6.6
%
Total
gross loans
1,507,228
100.0
%
1,191,659
100.0
%
Less: Unearned income
(110)
1,578
Total
loans net of unearned income
1,507,338
1,190,081
Less: Allowance for credit losses
17,487
15,057
Total
net loans
$
1,489,851
$
1,175,024
Tot
al gross loans increased by $315.6 million or 26.5% at December
31, 2022 compared to December 31, 20211.
The
most significant
growth was
in the
commercial real
estate and
consumer
and other
loan pools,
offset
by a
decline in
the
residential real estate and commercial and industrial loan pools. Consumer
and other loans increased primarily as result of
organic
growth
from
our
yacht
lending
business
vertical
created
in
January
2022.
Commercial
and
industrial
loans
decreased primarily because of continuing PPP loan forgiveness
as expected.
Other
than
the
shifts
note
above,
we
do
not
expect
any
significant
changes
over
the
foreseeable
future
in
the
composition
of
our
loan
portfolio
or
in
our
emphasis
on
commercial
real
estate
lending.
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.
The
growth
experienced
over
the
last
couple
of
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 lengthy
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
for
the
loan
portfolio
at
December 31, 2022 (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
$
16,199
$
9,411
$
81,858
$
78,168
$
185,636
Commercial Real Estate
69,565
166,885
724,288
9,672
970,410
Commercial and Industrial
9,000
29,688
47,480
40,816
126,984
Foreign Banks
93,769
-
-
-
93,769
Consumer and Other
2,553
2,527
9,060
116,289
130,429
Total
gross loans
$
191,086
$
208,511
$
862,686
$
244,945
$
1,507,228
Interest rate sensitivity:
Fixed interest rates
$
160,781
$
127,603
$
144,441
$
142,813
$
575,638
Floating or adjustable rates
30,305
80,908
718,245
102,132
931,590
Total
gross loans
$
191,086
$
208,511
$
862,686
$
244,945
$
1,507,228
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
December 31,
2022, approximately
61.8%
of
the loans
have adjustable/variable
rates
and
38.2%
of
the loans
have fixed rates.
The adjustable/variable
loans re-price to
different benchmarks
and tenors in different
periods of time.
By
contractual characteristics, there are no
material concentrations on anniversary repricing. Additionally, it is
important to note
USCB Financial Holdings, Inc.
2022 10-K
that most
of our
loans have
interest rate
floors. This
embedded option
protects the
Company from
a decrease
in interest
rates and positions us to gain in the scenario of higher interest
rates.
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 evaluated
at least annually,
or more frequently
if deemed necessary.
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):
December 31, 2022
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
185,636
$
-
$
-
$
-
$
185,636
Commercial Real Estate
967,465
-
2,945
-
970,410
Commercial and Industrial
126,177
-
-
126,984
Foreign Banks
93,769
-
-
-
93,769
Consumer and Other
130,233
-
-
130,429
$
1,503,280
$
-
$
3,948
$
-
$
1,507,228
December 31, 2021
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
196,778
$
-
$
4,581
$
-
$
201,359
Commercial Real Estate
703,349
1,222
-
704,988
Commercial and Industrial
146,039
-
-
146,592
Foreign Banks
59,491
-
-
-
59,491
Consumer and Other
79,005
-
-
79,229
$
1,184,662
$
1,222
$
5,775
$
-
$
1,191,659
USCB Financial Holdings, Inc.
2022 10-K
Non-Performing Assets
The following table presents non-performing assets as
of December 31, 2022 and 2021 (in thousands, except
ratios):
Non-accrual loans, less non-accrual TDR loans
$
-
$
1,190
Non-accrual TDRs
-
-
Loans past due over 90 days and still accruing
-
-
Total
non-performing loans
-
1,190
Other real estate owned
-
-
Total
non-performing assets
$
-
$
1,190
Asset quality ratios:
-
-
Allowance for credit losses to total loans
1.16%
1.27%
Allowance for credit losses to non-performing loans
0.00%
1,265.00%
Non-performing loans to total loans
0.00%
0.10%
Non-performing
assets include
all loans
categorized as
non-accrual or
restructured,
impaired securities,
non-accrual
troubled
debt
restructurings
(‘TDRs”),
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 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.
A TDR is
a debtor that
is experiencing financial
difficulties and
the Company grants
a concession. This
determination
is performed during the annual review process or whenever problems
are surfacing regarding the client’s ability to repay in
accordance with
the original
terms of
the loan
or line
of credit.
In general,
a borrower
that can
obtain funds
from sources
other than
the Company
at market
interest rates
at or
near those
for non-troubled
debt is
not involved
in a
troubled debt
restructuring.
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.
The following tables present performing and non-performing
TDRs for the dates indicated (in thousands):
December 31, 2022
Accruing
Non-Accruing
Total
Residential Real Estate
$
7,206
$
-
$
7,206
Commercial Real Estate
-
Commercial and Industrial
-
Consumer and Other
-
$
7,877
$
-
$
7,877
December 31, 2021
Accruing
Non-Accruing
Total
Residential Real Estate
$
7,815
$
-
$
7,815
Commercial Real Estate
-
Commercial and Industrial
-
Consumer and Other
-
$
8,876
$
-
$
8,876
The Company had allocated $294 thousand and $360 thousand of specific allowances
for TDR loans at December 31,
2022 and 2021, respectively.
There was no commitment to lend additional funds to
these TDR customers.
USCB Financial Holdings, Inc.
2022 10-K
Charge-offs on TDR loans for the years ended December 31,
2022 and 2021 were $0 and $18 thousand, respectively.
There were
no defaults
on TDR
loans at December
31, 2022
and 2021
within the
prior 12 months
.
The Company
did not
have any new TDR loans for the year ended December
31, 2022.
There were no TDRs or modifications due to COVID-19
as of December 31, 2022.
For further
discussion on
non-performing loans,
see Note
3 “Loans”
to the
Consolidated Financial
Statements in
this
Annual Report on Form 10-K.
Allowance for Credit Losses
In
determining
the
balance
of
the
allowance
account,
loans
are
pooled
by
product
segments
with
similar
risk
characteristics and management
evaluates the ACL on
each segment and on
a regular basis to maintain
the allowance at
an
adequate
level
based
on
factors
which,
in
management’s
judgment,
deserve
current
recognition
in
estimating
credit
losses.
Such
factors
include
changes
in
prevailing
economic
conditions,
historical
loss
experience,
delinquency
trends,
changes in the composition and size of the loan portfolio and
the overall credit worthiness of the borrowers.
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.
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
Foreign
Banks
Consumer
and Other
Total
December 31, 2022:
Beginning balance
$
2,498
$
8,758
$
2,775
$
$
$
15,057
Provision for credit losses
(1,179)
1,385
1,474
2,495
Recoveries
-
-
Charge-offs
-
-
(104)
-
(16)
(120)
Ending Balance
$
1,352
$
10,143
$
4,163
$
$
1,109
$
17,487
Average loans
$
193,368
$
842,914
$
127,473
$
81,421
$
96,517
$
1,341,693
Net charge-offs to average loans
(0.02)%
-
0.07%
-
0.01%
0.00%
December 31, 2021:
Beginning balance
$
3,408
$
9,453
$
1,689
$
$
$
15,086
Provision for credit losses
(919)
(695)
(160)
Recoveries
-
-
Charge-offs
(229)
-
(18)
-
(14)
(261)
Ending Balance
$
2,498
$
8,758
$
2,775
$
$
$
15,057
Average loans
$
212,867
$
654,723
$
153,763
$
52,187
$
42,602
$
1,116,142
Net charge-offs to average loans
-
-
(0.08)%
-
0.02%
(0.01)%
USCB Financial Holdings, Inc.
2022 10-K
The
following
table
presents
ACL
by
type
and
its
individual
percentage
to
total
loans
for
the
periods
indicated
(in
thousands):
December 31,
Loan Category
Allowance
% of Loans in
Each Category to
Total Loans
Allowance
% of Loans in
Each Category to
Total Loans
Residential Real Estate
$
1,352
12.3
%
$
2,498
16.9
%
Commercial Real Estate
10,143
64.4
%
8,758
59.2
%
Commercial and Industrial
4,163
8.4
%
2,775
12.3
%
Foreign Banks
6.2
%
5.0
%
Consumer and Other
1,109
8.7
%
6.6
%
Total
$
17,487
100.0
%
$
15,057
100.0
%
Bank-Owned Life Insurance
At
December 31,
2022,
the
combined
cash
surrender
value
of
all
bank-owned
life
insurance
(“BOLI”)
policies
was
$42.8 million.
Changes
in
cash
surrender
value
are
recorded
in
non-interest
income
on the
Consolidated
Statements
of
Operations. In
2022, the Company
maintained 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 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. Our focus on quality and customer
service
has created a strong brand recognition within
our depositors, which reflects in the composition
of our deposits; most of our
funding sources are core deposits. In addition to our banking centers network,
we developed business verticals to diversify
our portfolio in different specialty industries and
we offer public fund deposit products
to municipalities and public agencies
in our geographical footprint.
Furthermore, our
personal and
private banking
management
line of
business is
focused on
the needs
of the
owners
and operators of
our business customers,
offering a suite
of checking, savings,
money market and
time deposit accounts,
and utilizing superior
client service
to build and
expand client relationships.
A unique aspect
of our business
model is our
ability to offer correspondent services to banks
in Central America and the Caribbean.
The
following
table
presents
the
daily
average
balance
and
average
rate
paid
on
deposits
by
category
as
of
December 31, 2022 and 2021 (in thousands, except ratios):
Twelve Months Ended December 31,
Average Balance
Average Rate
Paid
Average Balance
Average Rate
Paid
Non-interest bearing demand deposits
$
645,366
0.00%
$
547,116
0.00%
Interest-bearing demand deposits
64,835
0.13%
52,379
0.11%
Saving and money market deposits
803,426
0.64%
619,810
0.34%
Time deposits
220,319
0.68%
235,127
0.65%
$
1,733,946
0.39%
$
1,454,431
0.25%
To
tal average deposits for the year ended December 31, 2022 was $1.7 billion,
an increase of $279.5 million,
or 19.2%
over total average
deposits of $1.5 billion
for the
same period in
2021. Our focus
on demand deposits
resulted in an
increase
in average balances of $98.3 million,
or 18.0%, in non-interest bearing demand deposits and an increase of $183.6 million,
or 29.6%, in saving and money market deposits
when comparing the average balances for the
years ended December 31,
2022 and 2021.
The
uninsured
deposits
are
estimated
based
on
the
FDIC
deposit
insurance
limit
of
$250 thousand
for
all
deposit
accounts
at
the
Bank
per
account
holder.
Total
estimated
uninsured
deposits
were
$1.1
billion
and
$897.8 million
at
USCB Financial Holdings, Inc.
2022 10-K
December 31,
and
2021,
respectively.
U.S.
Century
Bank
maintains
a
well-diversified
deposit
base.
Our
top
depositors only
hold 12%
of our
total portfolio.
As of
December 31,
2022, 39%
of our
deposits are
estimated to
be FDIC-
insured. Our public funds
are 11%
of total deposits and
are partially collateralized.
The estimated average account
size of
our deposit
portfolio is
$95 thousand.
Time
deposits with
balances of
$250 thousand
or more
totaled $122.9
million and
$119.4 million at December
31, 2022 and 2021, respectively.
Critical elements of our liquidity
risk management include: effective corporate governance consisting of
oversight by the
Board and
ALCO and
active involvement
by 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
certificates of
deposit, Fed
funds lines
and borrowings
from
the FHLB
Atlanta. Accordingly, our liquidity resources were at sufficient levels to
fund loans and meet other
cash needs as necessary.
The following table shows scheduled maturities of uninsured
time deposits as of December 31, 2022 (in thousands):
Three months or less
$
10,669
Over three through six months
17,573
Over six though twelve months
29,891
Over twelve months
23,840
$
81,973
Borrowings
As
a
member
of
the
FHLB
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.
Outstanding fixed-rate advances from the FHLB were at $46.0 million and $36.0 million, as of December 31, 2022, and
December 31, 2021,
respectively.
The weighted average
rate for outstanding
FHLB advances at
December 31, 2022
was
2.60%. Most of the advances are due in 2023.
USCB Financial Holdings, Inc.
2022 10-K
The following table presents the FHLB fixed rate advances
as of December 31, 2022 (in thousands):
At December 31, 2022
Interest Rate
Type of Rate
Maturity Date
Amount
2.05%
Fixed
March 27, 2025
$
10,000
1.07%
Fixed
July 18, 2025
6,000
1.04%
Fixed
July 30, 2024
5,000
0.81%
Fixed
August 17, 2023
5,000
4.17%
Fixed
January 13, 2023
20,000
$
46,000
At December 31, 2021
Interest Rate
Type of Rate
Maturity Date
Amount
0.81%
Fixed
August 17, 2023
$
5,000
1.04%
Fixed
July 30, 2024
5,000
2.05%
Fixed
March 27, 2025
10,000
1.91%
Fixed
March 28, 2025
5,000
1.81%
Fixed
April 17, 2025
5,000
1.07%
Fixed
July 18, 2025
6,000
$
36,000
We
have
also
established
Fed
Funds
lines
of
credit
with
our
upstream
correspondent
banks
to
manage
temporary
fluctuations in our daily
cash balances. As of December 31,
2022, there were no
outstanding balances under the Fed
Funds
line of credit.
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 as 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 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 the actual
future cash funding
requirements.
The following table
presents lending related
commitments outstanding as of December 31, 2022 and
2021 (in thousands):
Commitments to grant loans and unfunded lines of credit
$
95,461
$
134,877
Standby and commercial letters of credit
4,320
6,420
Total
$
99,781
$
141,297
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
the underlying collateral,
which can include
commercial real estate,
physical plant and
property, inventory, receivables, cash
or marketable securities.
USCB Financial Holdings, Inc.
2022 10-K
Asset and Liability Management Committee
The asset and liability management committee of our Company,
or ALCO, consists of members of senior management
and our Board. Senior management is responsible for
ensuring in a timely manner that Board
approved strategies, policies,
and procedures
for managing
and mitigating
risks are
appropriately executed
within the
designated lines
of authority
and
responsibility.
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”) exposure is inherent
to the banking business, our ALCO
has established
sound risk management practices in place to identify,
measure, monitor and mitigate 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,
deposits
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 steeping) 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 analysis 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,
or
EVE.
This
assessment
allows
us
to
measure
the
degree
to
which
the
economic
values
will
change
under
different
interest
rate
scenarios. The economic value of equity 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 December 31, 2022, we were a
liability sensitive bank for year one modeling and
asset sensitive for year two 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,
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
EVEs do not include actions that management may
undertake to manage the risks in response to anticipated changes in interest rates or client 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 December 31, 2022, the NIM will remain fairly stable for static rate scenarios (-400
basis
points:
+400
basis
points).
For
the
static
forecast
for
year
one,
the
estimated
NIM
will decrease
from
3.38%
base
case
scenario to 3.20%
under a +400-basis
points scenario. Additionally, utilizing an economic
value of equity, or 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
of interest
rates will have
a negative impact
on the EVE.
Results and analysis
are presented quarterly
to
the ALCO, and strategies are reviewed and refined.
Additionally, in the last couple of quarters we
have been reducing our asset
sensitivity by extending asset duration.
This
has reduced our
NII volatility
for the first
and second year
in the analysis
and has
helped us to
maintain the NII
in accordance
with ALCO expectations.
USCB Financial Holdings, Inc.
2022 10-K
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 adequate funding on
acceptable terms. 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),
and contingent
liquidity events. Management
presents to the
ALCO, on a quarterly basis, liquidity stress tests foll
owing the scenarios described in the Bank’s
contingency funding plan.
Changes in macroeconomic conditions or exposure
to credit, market, operational, legal
and reputational risks, including
cybersecurity risk could also affect the Company
’s liquidity risk profile unexpectedly
and are considered in the assessment
of liquidity and 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 and ALM
policy.
Critical elements of our liquidity
risk management include: effective corporate governance consisting of
oversight by the
Board and
ALCO and
active involvement
by 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
certificates of
deposit, Fed
funds lines
and borrowings
from
the FHLB
Atlanta. Accordingly, our liquidity resources were at sufficient levels to
fund loans and meet other
cash needs as necessary.
USCB Financial Holdings, Inc.
2022 10-K
Capital Adequacy
As
of
December 31,
2022,
the
Bank
was
well
capitalized
under
the
FDIC’s
prompt
corrective
action
framework.
Additionally,
we follow the capital
conservation buffer
framework, and according
to our actual ratios
the Bank exceeds
the
capital conversation buffer
in all capital ratios
as of December
31, 2022. The
following table presents
the capital ratios
for
both the Bank and the Company at December 31, 2022
and 2021 (in thousands,
except ratios):
Actual
Minimum Capital
Requirements
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2022:
Total
risk-based capital:
$
216,693
13.58
%
$
127,616
8.00
%
$
159,520
10.00
%
Tier 1 risk-based capital:
$
198,909
12.47
%
$
95,712
6.00
%
$
127,616
8.00
%
Common equity tier 1 capital:
$
198,909
12.47
%
$
71,784
4.50
%
$
103,688
6.50
%
Leverage ratio:
198,909
9.56
%
$
83,210
4.00
%
$
104,012
5.00
%
December 31, 2021:
(1)
Total
risk-based capital
$
186,735
14.92
%
$
100,125
8.00
%
$
125,157
10.00
%
Tier 1 risk-based capital
$
171,484
13.70
%
$
75,094
6.00
%
$
100,125
8.00
%
Common equity tier 1 capital
$
171,484
13.70
%
$
56,321
4.50
%
$
81,352
6.50
%
Leverage ratio
$
171,484
9.55
%
$
71,825
4.00
%
$
89,781
5.00
%
Impact of Inflation
Our Consolidated
Financial Statements
and related
notes have been
prepared in
accordance with
U.S. GAAP,
which
requires 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.
As market interest rates
rise or fall in relation
to the rates earned
on loans and investments,
the
value
of
these
assets
decreases
or
increases
respectively.
Inflation
can
also
impact
core
non-interest
expenses
associated with delivering the Company’s
services.
Recently Issued Accounting Pronouncements
Recently issued accounting
pronouncements are discussed
in Note 1 “Summary
of Significant Accounting
Policies” in
the Consolidated Financial Statements of this Annual Report
on Form 10-K.
USCB Financial Holdings, Inc.
2022 10-K
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 GA
AP,
and
are
not
necessarily
comparable
to non-GAAP
measures
that may
be presented
by other
companies.
The
Company believes
these
non-GAAP
measurements
are key
indicators of
the earnings power
of the Company.
The following
table reconciles
the non-GAAP
financial measurement
of
operating net income available to common stockholders
for the periods presented (in thousands,
except per share data):
As of and for the years ended December 31,
Pre-Tax Pre-Provision ("PTPP") Income:
Net income
$
20,141
$
21,077
Plus: Provision for income taxes
6,944
6,600
Plus: Provision for (recovery of) credit losses
2,495
(160)
PTPP income
$
29,580
$
27,517
PTPP Return on Average Assets:
PTPP income
$
29,580
$
27,517
Average assets
$
1,990,610
$
1,701,658
PTPP return on average assets
1.49%
1.62%
Operating Net Income:
Net income
$
20,141
$
21,077
Less: Net gain (loss) on sale of securities
(2,529)
Less: Tax effect
on sale of securities
(52)
Operating net income
$
22,029
$
20,915
Operating PTPP Income:
PTPP income
$
29,580
$
27,517
Less: Net gain (loss) on sale of securities
(2,529)
Operating PTPP Income
$
32,109
$
27,303
Operating PTPP Return on Average Assets:
Operating PTPP income
$
32,109
$
27,303
Average assets
$
1,990,610
$
1,701,658
Operating PTPP Return on average assets
1.61%
1.60%
Operating Return on Average Assets:
Operating net income
$
22,029
$
20,915
Average assets
$
1,990,610
$
1,701,658
Operating return on average assets
1.11%
1.23%
USCB Financial Holdings, Inc.
2022 10-K
Years Ended December 31,
Adjusted Net Income Available to Common Stockholders:
Net income (GAAP)
$
20,141
$
21,077
Less: Preferred dividends
-
2,077
Less: Exchange and redemption of preferred shares
-
89,585
Net income (loss) available to common stockholders (GAAP)
20,141
(70,585)
Add back: Exchange and redemption of preferred shares
-
89,585
Adjusted net income available to common stock (non-GAAP)
$
20,141
$
19,000
Weighted average shares outstanding:
Class A common stock
Basic
19,999,323
10,507,530
Diluted
20,176,838
10,507,530
Diluted EPS:
Class A common stock
Net income (loss) per diluted share (GAAP)
$
1.00
$
(6.72)
Add back: Exchange and redemption of preferred shares
-
8.53
Adjusted net income available to common stockholders per diluted share (non-GAAP)
$
1.00
$
1.81

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company,
we are not required to provide the information required by
this item.
USCB Financial Holdings, Inc.
2022 10-K

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
(
Crowe LLP
, PCAOB ID:
)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Crowe LLP
Independent Member Crowe Global
USCB Financial Holdings, Inc.
2022 10-K
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of
USCB Financial Holdings, Inc.
Doral, Florida
Opinion on the Financial Statements
We
have audited
the
accompanying
consolidated
balance sheets
of
USCB Financial
Holdings,
Inc.
(the
"Company")
as
of
December
31,
and
2021,
the
related
consolidated
statements
of
operations,
comprehensive income
(loss), changes
in stockholders’
equity,
and cash
flows for
the years
then ended,
and the
related
notes
(collectively
referred
to as
the
"financial statements").
In
our opinion,
the
financial
statements present fairly, in all material respects, the
financial position of the Company as
of December 31,
2022 and 2021,
and the results of its operations
and its cash flows for the
years then ended, in conformity
with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These financial
statements are
the responsibility
of the
Company's management.
Our responsibility
is to
express an opinion
on the Company's financial
statements based on our
audits. We are a
public accounting
firm registered
with the
Public Company
Accounting Oversight
Board (United
States) ("PCAOB")
and are
required to be
independent with respect to
the Company in accordance with
the U.S. federal
securities laws
and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted
our audits
in accordance
with the
standards of
the PCAOB.
Those standards
require that
we plan and perform the
audit to obtain reasonable
assurance about whether the
financial statements are
free
of material misstatement, whether due to error or fraud.
Our
audits
included
performing
procedures
to
assess
the
risks
of
material
misstatement
of
the
financial
statements,
whether due
to error
or fraud,
and performing
procedures that
respond
to those
risks.
Such
procedures
included examining,
on a
test basis,
evidence
regarding the
amounts
and disclosures
in the
financial
statements.
Our
audits
also
included
evaluating
the
accounting
principles
used
and
significant
estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that our audits provide a reasonable
basis for our opinion.
/s/ Crowe LLP
Crowe LLP
We have served as the Company's auditor since
2017.
Fort Lauderdale, Florida
March 24, 2023
Crowe LLP
Independent Member Crowe Global
USCB Financial Holdings, Inc.
2022 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands,
except share and per share data)
December 31,
ASSETS:
Cash and due from banks
$
6,605
$
6,477
Interest-bearing deposits in banks
47,563
39,751
Total cash and cash equivalents
54,168
46,228
Investment securities held to maturity (fair value $
169,088
and $
120,157
, respectively)
188,699
122,658
Investment securities available for sale, at fair value
230,140
401,542
Federal Home Loan Bank stock, at cost
2,882
2,100
Loans held for investment, net of allowance
of $
17,487
and $
15,057
, respectively
1,489,851
1,175,024
Accrued interest receivable
7,546
5,975
Premises and equipment, net
5,263
5,278
Bank owned life insurance
42,781
41,720
Deferred tax asset, net
42,360
34,929
Lease right-of-use asset
14,395
14,185
Other assets
7,749
4,300
Total assets
$
2,085,834
$
1,853,939
LIABILITIES:
Deposits:
Demand
$
629,776
$
$605,425
Money market and savings accounts
915,853
703,856
Interest-bearing checking accounts
66,675
55,878
Time deposits
216,977
225,220
Total deposits
1,829,281
1,590,379
Federal Home Loan Bank advances
46,000
36,000
Lease liability
14,395
14,185
Accrued interest and other liabilities
13,730
9,478
Total liabilities
1,903,406
1,650,042
Commitments and contingencies (See Note 10
and 18)
(nil)
(nil)
STOCKHOLDERS' EQUITY:
Preferred stock - Class C; $
1.00
par value; $
1,000
per share liquidation preference;
52,748
shares
authorized;
issued and outstanding as of December 31,
2022 and 2021
-
-
Preferred stock - Class D; $
1.00
par value; $
5.00
per share liquidation preference;
12,309,480
shares
authorized;
issued and outstanding as of December 31,
2022 and 2021
-
-
Preferred stock - Class E; $
1.00
par value; $
1,000
per share liquidation preference;
3,185,024
shares
authorized;
issued and outstanding as of December 31,
2022 and 2021
-
-
Common stock - Class A Voting; $
1.00
par value;
45,000,000
shares authorized;
20,000,753
and
19,991,753
issued and outstanding as of December 31,
2022 and 2021
20,001
19,992
Common stock - Class B Non-voting; $
1.00
par value;
8,000,000
shares authorized;
issued and
outstanding as of December 31, 2022 and 2021
-
-
Additional paid-in capital on common stock
311,282
310,666
Accumulated deficit
(104,104)
(124,245)
Accumulated other comprehensive income (loss)
(44,751)
(2,516)
Total stockholders' equity
182,428
203,897
Total liabilities and stockholders' equity
$
2,085,834
$
1,853,939
The accompanying notes are an integral part of
these consolidated financial statements.
Crowe LLP
Independent Member Crowe Global
USCB Financial Holdings, Inc.
2022 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Dollars in thousands,
except per share data)
Years Ended December 31,
Interest income:
Loans, including fees
$
60,825
$
48,730
Investment securities
9,346
7,886
Interest-bearing deposits in financial institutions
Total interest income
71,100
56,722
Interest expense:
Interest-bearing deposits
Savings and money markets accounts
5,173
2,082
Time deposits
1,509
1,531
Federal Home Loan Bank advances
Total interest expense
7,439
4,226
Net interest income before provision for
credit losses
63,661
52,496
Provision for credit losses
2,495
(160)
Net interest income after provision for
credit losses
61,166
52,656
Non-interest income:
Service fees
4,010
3,609
Bank owned life insurance income
1,061
Gain (loss) on sale of securities available for
sale, net
(2,529)
Gain on sale of loans held for sale, net
1,626
Gain on sale of premises and equipment,
net
-
Loan settlement
2,500
Other non-interest income
1,634
1,007
Total non-interest income
5,228
10,698
Non-interest expense:
Salaries and employee benefits
23,943
21,438
Occupancy
5,058
5,257
Regulatory assessment and fees
Consulting and legal fees
1,890
1,454
Network and information technology services
1,806
1,466
Audit and tax services fees
Other operating
4,764
4,304
Total non-interest expense
39,309
35,677
Net income before income tax
expense
27,085
27,677
Income tax expense
6,944
6,600
Net income
20,141
21,077
Less: Preferred stock dividend
-
2,077
Less: Exchange and redemption of preferred shares
-
89,585
Net income (loss) available to common stockholders
$
20,141
$
(70,585)
Per share information:
Class A common stock
Net income (loss) per share, basic
$
1.01
$
(6.72)
Net income (loss) per share, diluted
$
1.00
$
(6.72)
(1)
See Note 14 "Earnings per Share" for information
on the allocation of income available to common
stockholders.
The accompanying notes are an integral part of
these consolidated financial statements.
Crowe LLP
Independent Member Crowe Global
USCB Financial Holdings, Inc.
2022 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Income
(Loss)
(Dollars in thousands)
Years Ended December 31,
Net income
$
20,141
$
21,077
Other comprehensive income (loss):
Unrealized loss on investment securities
(59,260)
(9,561)
Amortization of net unrealized gains on securities
transferred from available-for-sale to held-to-maturity
Reclassification adjustment for (gain) loss included
in net income
2,529
(214)
Tax effect
14,376
2,370
Total other comprehensive loss, net of tax
(42,235)
(7,297)
Total comprehensive income (loss)
$
(22,094)
$
13,780
The accompanying notes are an integral part of
these consolidated financial statements.
USCB Financial Holdings, Inc.
2022 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders’
Equity
(Dollars in thousands,
except per share data)
Preferred Stock
Common Stock
Additional Paid-
in Capital on
Common Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Shares
Par Value
Shares
Par Value
Total
Stockholders'
Equity
Balance at January 1, 2022
-
$
-
19,991,753
$
19,992
$
310,666
$
(124,245)
$
(2,516)
$
203,897
Net income
-
-
-
-
-
20,141
-
20,141
Other comprehensive loss
-
-
-
-
-
-
(42,235)
(42,235)
Issuance of common stock - exercised options
-
-
9,000
-
-
Stock based compensation
-
-
-
-
-
-
Balance at December 31, 2022
-
-
20,000,753
20,001
311,282
(104,104)
(44,751)
182,428
Balance at January 1, 2021
12,350,879
$
32,077
10,010,521
$
10,010
$
177,755
$
(53,622)
$
4,781
$
171,001
Net income
-
-
-
-
-
21,077
-
21,077
Other comprehensive loss
-
-
-
-
-
-
(7,297)
(7,297)
Dividends - preferred stock
-
-
-
-
-
(2,077)
-
(2,077)
Issuance of Class A common stock, net of
offering costs of $
6,048
-
-
4,600,000
4,600
35,226
-
-
39,826
Exchange of preferred stock
(11,109,025)
(22,154)
10,278,072
10,279
92,501
(80,626)
-
-
Redemption of preferred stock
(1,241,854)
(9,923)
-
-
-
(8,997)
-
(18,920)
Exchange of Class B to Class A common stock
-
-
(4,896,840)
(4,897)
4,897
-
-
-
Stock based compensation
-
-
-
-
-
-
Balance at December 31, 2021
-
$
-
19,991,753
$
19,992
$
310,666
$
(124,245)
$
(2,516)
$
203,897
The accompanying notes are an integral part of
these consolidated financial statements.
USCB Financial Holdings, Inc.
2022 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
Cash flows from operating activities:
Net income
$
20,141
$
21,077
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses
2,495
(160)
Depreciation and amortization
1,033
Amortization of premiums on securities, net
Accretion of deferred loan fees, net
(1,497)
(3,754)
Stock based compensation
Loss (Gain) on sale of available for sale securities,
net
2,529
(214)
Gain on sale of loans held for sale
(891)
(1,626)
Gain on sale of premises and equipment, net
-
(983)
Increase in cash surrender value of bank owned
life insurance
(1,061)
(759)
Decrease in deferred tax asset
6,945
6,600
Net change in operating assets and liabilities:
Accrued interest receivable
(1,571)
(428)
Other assets
(3,449)
(2,270)
Accrued interest and other liabilities
4,252
2,652
Net cash provided by operating activities
29,537
22,051
Cash flows from investing activities:
Purchase of investment securities held to maturity
(14,739)
(57,917)
Proceeds from maturities and pay-downs of investment
securities held to maturity
12,237
3,736
Purchase of investment securities available for
sale
(53,113)
(258,767)
Proceeds from maturities and pay-downs of investment
securities available for sale
40,754
61,047
Proceeds from sales of investment securities available
for sale
60,649
48,940
Proceeds from call of investment securities available
for sale
-
3,034
Net increase in loans held for investment
(257,580)
(33,515)
Purchase of loans held for investment
(70,175)
(129,531)
Additions to premises and equipment
(673)
(633)
Proceeds from the sale of loans held for
sale
12,821
16,980
Proceeds from the sale of property
-
1,652
Proceeds from the redemption of Federal Home
Loan Bank stock
3,440
Purchase of Federal Home Loan Bank stock
(4,222)
-
Purchase of bank owned life insurance
-
(15,000)
Net cash used in investment activities
(270,601)
(359,363)
(Continued)
The accompanying notes are an integral part of
these consolidated financial statements.
USCB Financial Holdings, Inc.
2022 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years Ended December 31,
Cash flows from financing activities:
Proceeds from issuance of Class A common stock,
net
39,826
Cash dividends paid
-
(2,077)
Redemption of Preferred stock Class C
-
(5,275)
Redemption of Preferred stock Class D
-
(6,145)
Redemption of Preferred stock Class E
-
(7,500)
Net increase in deposits
238,902
316,977
Proceeds from Federal Home Loan Bank advances
126,000
-
Repayments on Federal Home Loan Bank advances
(116,000)
-
Net cash provided by financing activities
249,004
335,806
Net increase (decrease) in cash and cash equivalents
7,940
(1,506)
Cash and cash equivalents at beginning of year
46,228
47,734
Cash and cash equivalents at end of year
$
54,168
$
46,228
Supplemental disclosure of cash flow information:
Interest paid
$
7,306
$
4,286
Supplemental schedule of non-cash investing and
financing activities:
Transfer of loans held for investment to loans held for
sale
$
11,930
$
15,354
Transfer of investment securities from available-for-sale to held-to-maturity
$
63,798
$
68,667
Transfer of premises and equipment to assets held for sale
$
-
$
Lease liability arising from obtaining right-of-use assets
$
3,203
$
Exchange of Preferred C for Class A common
stock
$
-
$
47,473
Exchange of Preferred D for Class A common
stock
$
-
$
55,308
Exchange of Class B common stock for Class A
common stock
$
-
$
4,897
The accompanying notes are an integral part of
these consolidated financial statements.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Overview
USCB Financial Holdings, Inc., a
Florida corporation incorporated
in 2021, is a bank
holding company with one wholly
owned subsidiary,
U.S. Century Bank (the
“Bank”), together referred to
as “the Company”. The
Bank, established in 2002,
is a Florida
state-chartered, non-member financial institution providing financial
services through its banking
centers located
in South Florida.
In December 2021, USCB Financial
Holdings, Inc. acquired all issued
and outstanding shares of the Class
A common
stock of the Bank. Each of the outstanding shares of
the Bank’s common stock, par value $
1.00
per share, formerly held by
its shareholders were
converted into and exchanged
for one newly
issued share of
the Company’s common stock, par
value
$
1.00
per share.
The Bank
owns a subsidiary,
Florida Peninsula
Title LLC,
that offers
our clients title
insurance policies
for real
estate
transactions closed at the Bank. Licensed in the State of Florida and approved by the Department of Insurance Regulation,
Florida Peninsula tittle LLC began operations in 2021.
Principles of Consolidation
Intercompany transactions
and balances
are eliminated
in consolidation.
The Consolidated
financial statements
have
been prepared in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP").
Initial Public Offering and Exchange and Redemption
of Shares
On July 27, 2021,
the Company completed
an initial public
offering (the “IPO”)
and its Class
A voting common
shares
began trading
on the
Nasdaq Stock
Market under
ticker symbol
“USCB”. Following
the IPO,
the Company
completed an
exchange
of
then
outstanding
preferred
shares
for
Class
A
common
shares
and
thereafter
redeemed
the
remaining
outstanding preferred shares.
In December 2021,
the Company reached
agreements with the
Class B common
shareholders to receive
Class A voting
common
stock
in
exchange
for
all
outstanding
Class
B
non-voting
common
stock
in
a
1 for 5
stock
exchange.
As
of
December 31,
2022,
there
were
no
issued
and
outstanding
preferred
shares
or
Class
B
common
shares.
See
Note
“Stockholders’ Equity” for further information about the IPO
and the exchange and redemption of shares.
Risk and Uncertainties
Current Banking Environment
Industry
events
transpiring
prior
to
the
Company’s
filing
date,
including
bank
failures,
have
led
to
uncertainty
and
concerns regarding
the liquidity
positions of
the banking
sector.
These failures
underscore the
importance of
maintaining
access to diverse sources of
funding. The Company’s deposit
base includes a combination
of consumer,
commercial, and
public
funds
deposits.
The
Company’s
largest
depositors
include
a
mixture
of
government-related
organizations
and
commercial clients without a high level of industry concentration.
In response to
these events,
the Treasury
Department, Federal
Reserve, and FDIC
jointly announced the
Bank Term
Funding
Program
(BTFP)
on
March
12,
2023.
This
program
aims
to
enhance
liquidity
by
allowing
institutions
to
pledge
certain securities at the
par value of the securities,
and at a borrowing
rate of ten basis
points over the one-year
overnight
index swap
rate. The
BTFP is
available to
eligible
U.S. federally
insured
depository
institutions,
with advances
having a
term of
up to
one year
and no
prepayment penalties.
As of
the date
of the
release of
the Audited
Consolidated Financial
Statements, the Company has not accessed the BTFP.
Market conditions and external factors may unpredictably impact the competitive landscape for deposits
in the banking
industry.
Additionally,
the rising interest rate environment
has increased competition for
liquidity and the premium
at which
liquidity is available
to meet
funding needs.
The Company
believes its
sources of
liquidity are sufficient
to meet
its needs
on the balance sheet date.
An unexpected influx
of withdrawals of
deposits could adversely
impact the Company's
ability to
rely on organic
deposits
to primarily
fund its
operations, potentially
requiring greater
reliance on
secondary sources
of liquidity
to meet
withdrawal
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
demands or to fund continuing operations. These sources may include proceeds from FHLB advances, sales of
investment
securities and loans, federal funds lines of credit from
correspondent banks, and out-of-market time deposits.
Such reliance on secondary funding sources could increase the Company's
overall cost of funding and thereby reduce
net
income.
While
the
Company
believes
its
current
sources
of
liquidity
are
adequate
to
fund
operations,
there
is
no
guarantee they
will suffice
to meet
future
liquidity demands.
This may
necessitate
slowing
or discontinuing
loan growth,
capital expenditures, or other investments, or liquidating assets.
For further discussion of the Company's liquidity practices,
see page 59 and 62 of this Annual Report on Form
10-K.
Use of Estimates
In preparing the consolidated financial statements, management is required
to make estimates and assumptions based
on available information that affect the amounts
reported in the financial statements and the disclosures provided.
The coronavirus (“COVID-19”)
pandemic has negatively
affected many of
the Company’s
clients and could
still impair
their ability to fulfill
their financial obligations.
The Company’s business
is dependent upon the
willingness and ability of
its
associates and customers to conduct banking and other financial transactions. While
we believe conditions have improved
as of December 31, 2022, if there is a resurgence in the virus, the Company could experience further adverse effects on its
business,
financial
condition,
results
of
operations
and
cash
flows. While
it
is not
possible
to know
the
full
extent
of
the
impact
the COVID-19
pandemic
will have
on the
Company's
future operations,
the Company
continues
to
communicate
with its associates and customers
to understand their challenges, which allows
us to respond to their needs
and issues as
they arise.
While there was
not a
material impact to
the Company’s Consolidated Financial
Statements as of
and for
the year ended
December 31, 2022,
future increases
in the
allowance for
credit losses
(“ACL”) may
be required
because of
the potential
economic
downturn
that
a
resurgence
in
the
virus
may cause
and
those
ACL
increases
can be
material.
It
is difficult
to
quantify the
impact that
COVID-19 will
have on
the estimates
and assumptions
used to
prepare the
financial statements.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The
Company
considers
investments
with
a
maturity
of
days
or
less
from
its
original
purchase
date
to
be
cash
equivalents. For
the Consolidated
Statements of
Cash Flows, cash
and cash equivalents
include cash
on hand,
amounts
due from banks, and interest-bearing deposits in banks.
Restricted Cash
The Company may
be required to
maintain funds at
other banks to
satisfy a loan
participation agreement. The Company
reports restricted cash within cash and cash equivalents.
Interest-Bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions consist
of Federal Reserve Bank, Federal Home Loan
Bank and
other accounts.
Investment Securities
Debt securities
are recorded
at fair
value except
for those
securities
which the
Company has
the positive
intent and
ability to hold to
maturity. Management determines the appropriate classification of its securities at
the time of purchase
and
accounts for them on a trade date basis.
Debt securities that
management has the
positive intent and
ability to hold
to maturity are
classified as "held-to-maturity"
and recorded at amortized cost. Trading securities are
recorded at fair value with
changes in fair value included
in earnings.
Securities not classified
as held-to-maturity or
trading are classified
as "available-for-sale"
and recorded at
fair value, with
unrealized gains and
losses excluded from
earnings and reported
in other comprehensive
income (loss). Equity
investments
must be recorded at fair value with changes in fair value
included in earnings.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Purchase premiums and discounts are amortized or accreted over
the estimated life of the related available-for-sale or
held-to-maturity
security
as
an
adjustment
to
yield
using
the
effective
interest
method.
Prepayments
of
principal
are
considered in determining the estimated life of the
security. Such amortization and accretion are included in interest income
in the Consolidated
Statements of Operations.
Dividend and interest
income are recognized when
earned. Gains and
losses
on the sale of securities are recorded on trade date and are determined
on a specific identification basis.
Declines
in
the
fair
value
of
available-for-sale
debt
securities
below
their
cost
that
are
deemed
to
be
other-than-
temporary
are
reflected
in
earnings
as
realized
losses.
In
determining
whether
other-than-temporary
impairment
exists,
management considers several factors in their analysis including
(i) severity and duration of the
impairment, (ii) credit rating
of security including any downgrade, (iii) intent to sell the security, or if it is more likely than not that it will be required to sell
the
security
before
recovery,
(iv)
whether
there
have
been
any
payment
defaults
and
(v)
underlying
guarantor
of
the
securities.
Federal Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to
own a certain amount of stock based on the level
of borrowings and
other factors and
may invest in
additional amounts. FHLB
stock is carried
at cost, classified
as a restricted
asset, and
periodically evaluated
for impairment
based on
ultimate recovery
of par
value. As
of December
31, 2022
and
2021,
FHLB
stock
amounted
to
$
2.9
million
and
$
2.1
million,
respectively,
with
no
impairment
deemed
necessary.
Both
cash and stock dividends are reported as interest income.
Loans Held for Investment and Allowance for Credit
Losses
Loans held for investment (“loans”) are reported at their outstanding principal
balance net of charge-offs, deferred loan
fees,
unearned
income
and
the
ACL.
Interest
income
is generally
recognized
when
income
is earned
using
the
interest
method.
Loan
origination
and
commitment
fees
and
the
costs
associated
with
the
origination
of
loans
are
deferred
and
amortized, using the interest method or the straight-line
method, over the life of the related loan.
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 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. All interest
accrued but not
collected for
loans that are
placed on
nonaccrual status
is reversed
against interest
income. The
interest
on these
loans is
accounted for
on the
cash-basis
or cost-recovery
method,
under which
cash collections
are applied
to
unpaid principal, which may change as conditions dictate.
The Company has determined that the entire balance of a
loan is contractually delinquent for all classes if the
minimum
payment is not received by
the specified due date on
the borrower's statement. Interest and fees
continue to accrue on past
due loans until the date the loan goes into nonaccrual
status.
The Company provides for loan losses through a provision for credit losses charged to operations. When management
believes that a
loan or a portion
of the loan balance
is uncollectible, that
amount is charged
against the ACL.
Subsequent
recoveries, if any,
are credited to the ACL.
The ACL
reflects management's
judgment of
probable loan losses
inherent in
the portfolio
at the balance
sheet date.
Management uses a disciplined
process and methodology
to establish the
ACL each quarter.
To
determine the total ACL,
the Company
estimates the
reserves needed
for each
segment of
the portfolio,
including loans
analyzed individually
and
loans analyzed on a pooled basis. The ACL consists
of the amount applicable to the following segments:
•
Residential real estate
•
Commercial real estate
•
Commercial and industrial
•
Foreign banks
•
Other loans (secured and unsecured consumer loans)
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Residential
real
estate
loans
are
underwritten
following
the
policies
of
the
Company
which
includes
a
review
of
the
borrower’s credit, capacity
and the collateral
securing the loan.
The borrower’s ability
to repay involves
an analysis of
factors
including: current
income, employment
status, monthly
payment of
loan, current
debt obligations,
monthly debt
to income
ratio and credit history. The Company relies on appraisals in determining the
value of the property. Risk is mitigated by this
analysis and the diversity of the residential portfolio.
Commercial real estate
loans are
secured by liens
on commercial properties,
land, construction and
multifamily housing.
Underwriting
of
commercial
loans
will analyze
the
key
market
and
business
factors
to
arrive
at
a
decision
on
the
credit
worthiness of the borrower.
The analysis may include
the capacity of the
borrower, income
generated by property for
debt
service, other
sources of
repayment, sensitivity
analysis to
fluctuations in
market conditions
including vacancy
and rental
rates in geographic location and loan to value. Land and construction analysis will include the time to develop, sell or lease
the property.
Appraisals
are used
to determine
the
value of
the underlying
collateral.
Risk
is mitigated
as the
properties
securing the commercial real estate loans are diverse in
type, location, and loan structure.
Commercial
and
industrial
loans
are
secured
by
the
business
assets
of
the
company
and
may
include
equipment,
inventory, and receivables.
The loans are underwritten based on the
income capacity of the business, the ability
to service
the debt based
on operating cash
flows, the credit
worthiness of the
borrower,
other sources
of repayment and
collateral.
The Company mitigates the risk in the commercial portfolio
through industry diversification.
Foreign Banks
loans are
short term
loans with
international correspondent
banking institutions
primarily
domiciled in
Latin America. Most of these loans are for trade capital and have a
life of less than one year. The
Company’s credit review
includes a credit analysis, peer comparison and current
country risk overview.
Annual re-evaluation of the risk rating of the
borrower and country and a review of authorized
signer within the Company.
The risk is mitigated as these loans are short
term, have limited exposure, and are geographically dispersed.
Other
loans
are
secured
and
unsecured
consumer
loans
including
personal
loans,
overdrafts
and
deposit
account
collateralized
loans.
Repayment
of
these
loans
are
primarily
from
the
personal
income
of
the
borrowers.
Loans
are
underwritten based on the credit worthiness of the borrower.
The risk on these loans is mitigated by small loan balances.
In
determining
the
balance
of
the
ACL,
loans
are
pooled
by
product
segments
with
similar
risk
characteristics
and
management evaluates
the ACL
on each
segment and
as a
whole to
maintain the
allowance at
an adequate
level based
on factors which, in
management's judgment,
deserve current recognition in
estimating credit losses.
Such factors include
changes in prevailing economic conditions, historical loss experience,
delinquency trends, changes in the composition and
size of the loan portfolio and the overall credit worthiness
of the borrowers.
The ACL
consists of
general and
specific components.
The following
is how
management determines
the balance
of
the general component for the ACL account for each segment
of the loans as described above.
The loan segments
are primarily grouped by
collateral type with similar
risk characteristics and
a historical loss
rate is
determined based on a ten year look back period. The Company applies time weights to
consider various stages of a credit
cycle.
The
ACL
calculation
is
based
on
the
Company’s
own
net
loss
experience
adjusted
for
certain
qualitative
and
environmental factors. To
estimate the impact of
non-recurrent losses, management
has developed a statistical
study that
tracks historical non-recurring
losses at a
loan level. This
analysis is
used to estimate
an adjusted loss
rate for
each loan
pool. Management believes the
effect of these losses
results in a loss
rate that is more
consistent with the behavior
of the
loan portfolio in the normal course of business.
Qualitative
factors
are
applied
to
historical
loss
rates
based
on
management's
experience
and
assessment.
The
following are the factors used to adjust the historical
loss rates:
•
Loan quality review
•
Lending and credit management /staff expertise
and practices
•
Economic and business conditions
•
Lending and credit underwriting policies and procedures
•
Problem loan levels and trends
•
Collateral concentrations
•
Large obligor concentration
•
New loan volumes
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
•
Combined loan to value (“CLTV”)
qualitative adjustment for substandard accrual loan segment
Changes in these factors could
result in material adjustments to the
ACL. The losses the Company may
ultimately incur
could differ materially from the amounts estimated
in arriving at the ACL.
In addition
to the
ACL, the
Company also
estimates probable
losses related
to financial
instruments with
off-balance
sheet risk, such as letters
of credit and unfunded loan
commitments, and records these estimates
in other liabilities on the
Consolidated
Balance
Sheets
with
the
offset
recorded
in
non-interest
expense
on
the
Consolidated
Statements
of
Operations.
Financial
instruments
with
off-balance
sheet
risk
are
subject
to
review
on
an
aggregate
basis.
Past
loss
experience and
any other
pertinent information is
reviewed, resulting in
the estimation
of the
reserve for financial
instruments
with off-balance sheet risk.
A loan is considered
impaired when, based
on current information
and events, it
is probable that
the Company will
be
unable to
collect the
scheduled payments
of principal
or interest
when due
according to
the contractual
terms of
the loan
agreement or when the loan
is designated as a Troubled
Debt Restructuring (“TDR”). Factors
considered by management
in determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and
interest payments when due.
Loans that experience insignificant
payment delays and payment
shortfalls generally are not
classified as impaired. Impairment is measured on a loan by loan basis by either the present value
of expected future cash
flows discounted at the loan's effective
interest rate, the loan's obtainable
fair value, or the fair value of
the collateral, if the
loan
is
collateral
dependent.
If
management
determines
that
the
value
of
the
impaired
loan
is
less
than
the
recorded
investment in the loan (outstanding principal balance plus accrued interest, net of previous charge-offs, and net of deferred
loan fees or cost), impairment is recognized through an allowance
estimate or a charge-off to the ACL.
In
situations
where,
due
to
a
borrower's
financial
difficulties,
management
grants
a
concession
for
other
than
an
insignificant period of time to the borrower that would not
otherwise be granted, the loan is classified as a TDR.
On March 27,
2020, the Coronavirus Aid,
Relief, and Economic
Security Act (“CARES
Act”) was signed
by the President
of the United
States. The
CARES Act
has certain
provisions which
encourage financial
institutions to
prudently work
with
borrowers impacted
by COVID
-19. Under
these provisions,
modifications
deemed to
be COVID
-19 related
would not
be
considered a TDR if the loan was not more than 30 days past
due as of December 31, 2019. The deferral would need to be
executed March
1, 2020
and the
earlier of
60 days
after the
date of
termination of
the COVID-19
national emergency
or
December
31, 2020.
Additional
legislation
was passed
in December
of 2020
that
extended
the TDR
relief
to January
1,
2022. Banking regulators issued similar guidance clarifying that a COVID-19
related modification should not be considered
a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and
considered short-term. See Note 3 “Loans” for additional disclosures
of loans that were modified and not considered TDR.
In addition to the
allowance for the
pooled portfolios, management
has developed a separate
allowance for loans
that
are identified as
impaired through a
TDR. These loans
are excluded from
the general
component of the
ACL, and a
separate
reserve is provided under the accounting guidance for loan
impairment. Residential loans whose terms have been modified
in a TDR are also individually analyzed for estimated impairment.
The Company's charge-off policy
is to review all impaired loans on a quarterly basis in order to monitor
the Company's
ability to
collect
them
in full
at maturity
date
and/or
in
accordance
with terms
of any
restructurings.
For
loans
which are
collateral dependent,
or deemed
to be uncollectible,
any shortfall
in the fair
value of
the collateral relative
to the recorded
investment in the loan is charged off.
Concentration of Credit Risks
Credit
risk
represents
the
accounting
loss
that
would
be
recognized
at
the
reporting
date
if
counterparties
failed
to
perform as contracted and any collateral or security proved to be insufficient
to cover the loss. Concentrations of credit risk
(whether on or off-balance sheet) arising from financial instruments exist in relation to
certain groups of customers. A group
concentration arises when
a number of
counterparties have similar
economic characteristics
that would cause
their ability
to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not
have a significant exposure to any individual customer
or counterparty.
Most of the Company's business activity is with
customers located within its primary market area, which is
generally the
State of Florida. The Company's loan portfolio is concentrated largely in real estate and commercial loans in South Florida.
Many of the Company's
loan customers are
engaged in real estate
development. Circumstances,
which negatively impact
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
the South Florida real estate industry
or the South Florida economy, in general, could adversely impact the
Company's loan
portfolio.
At December 31,
2022 and
2021, the
Company had
a concentration
of risk
with loans
outstanding to
the Company’s
top ten lending relationships
totaling $
197.9
million and $
156.4
million, respectively.
At December 31, 2022 and
2021, this
concentration represented
13.1
%, of
the net
loans outstanding.
For the
period ended
December 31,
2022 there
was
one
commercial real estate loan note with an outstanding balance of $
million collateralized by a 1
st
lien commercial property
located in New York
State.
At December 31,
2022, the
Company also
had a
concentration of
risk with
loans outstanding
totaling $
88.8
million to
foreign banks located
in Ecuador,
Dominican Republic, Honduras,
and El Salvador.
At December 31, 2021,
the Company
also had a concentration of risk
with loans outstanding totaling $
47.9
million to foreign banks located in
Ecuador, Honduras,
and
El
Salvador.
These
banks
maintained
deposits
with
right
of
offset
totaling
$
31.4
million
and
$
28.9
million
at
December 31, 2022 and 2021, respectively.
At various times
during the year,
the Company has
maintained deposits with
other financial institutions.
The exposure
to the Company
from these transactions is
solely dependent upon
daily balances and the
financial strength of the
respective
institution.
Premises and Equipment, net
Land is
carried at
cost. Premises
and equipment
are stated
at cost
less accumulated
depreciation
and amortization.
Depreciation is computed
on the straight-line
method over the
estimated useful life
of the asset. Leasehold
improvements
are amortized over the
remaining term of
the applicable leases or their
useful lives, whichever
is shorter.
Estimated useful
lives of these assets were as follows:
Building
years
Furniture, fixtures and equipment
to
years
Computer hardware and software
to
years
Leasehold improvements
Shorter of life or term of lease
Maintenance
and
repairs
are
charged
to
expense
as
incurred
while
improvements
and
betterments
are
capitalized.
When items are retired or are
otherwise disposed of, the related costs
and accumulated depreciation and
amortization are
removed from the accounts and any resulting gains or losses
are credited or charged to income.
Other Real Estate Owned
Other real estate
owned (“OREO”)
consists of real
estate property
acquired through,
or in lieu
of, foreclosure
that are
held for sale and are initially recorded at
the fair value of the property less estimated selling
costs at the date of foreclosure,
establishing a
new cost
basis. Subsequent
to foreclosure,
valuations are
periodically performed
by management
and the
assets are carried at the lower of carrying amount or fair value less cost to sell. Subsequent write-downs are recognized as
a valuation allowance with the offset recorded in the Consolidated Statements of Operations. Carrying
costs are charged to
other real estate owned expenses
in the accompanying Consolidated
Statements of Operation. Gains
or losses on sale of
OREO
are
recognized
when
consideration
has
been
exchanged,
all
closing
conditions
have
been
met
and
permanent
financing has been arranged.
Bank Owned Life Insurance
Bank owned
life insurance
(“BOLI”) is
carried at
the amount
that could
be realized
under the
contract at
the balance
sheet date, which is typically cash
surrender value. Changes in cash
surrender value are recorded
in non-interest income.
At December 31, 2022, the Company maintained BOLI policies with
five insurance carriers with a combined cash surrender
value
of
$
42.8
million.
These
policies
cover
certain
present
and
former
executives
and
officers,
the
Company
is
the
beneficiary of these policies.
Employee 401(k) Plan
The
Company
has
an
employee
401(k)
plan
covering
substantially
all
eligible
employees.
Employee
401(k)
plan
expense is the amount of matching contributions.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Income Taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax
assets and liabilities are recognized
for
the future
tax consequences
attributable
to differences
between the
financial
statement
carrying
amounts
of
existing
assets and
liabilities and
their respective
tax bases
and operating
loss and
tax credit
carryforwards. Deferred
tax assets
and
liabilities
are
measured
using
enacted
tax
rates
expected
to
apply
to
taxable
income
in
the
years
in
which
those
temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and
liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date.
Management is required to
assess whether a valuation
allowance should be established
on the net deferred tax
asset
based on the
consideration of
all available evidence
using a more
likely than not
standard. In its
evaluation, Management
considers taxable loss
carry-back availability, expectation of sufficient taxable
income, trends in
earnings, the future
reversal
of temporary differences, and available tax planning
strategies.
The Company recognizes positions taken
or expected to be
taken in a tax
return in accordance with existing accounting
guidance on
income taxes
which prescribes
a recognition threshold
and measurement
process. Interest
and penalties on
tax liabilities, if any,
would be recorded in interest expense and other operating
noninterest expense, respectively.
Impairment of Long-Lived Assets
The Company's long-lived
assets, such as premises
and equipment, are reviewed
for impairment whenever
events or
changes in circumstances
indicate that
the carrying
amount of
an asset may
not be recoverable.
Recoverability of
assets
to be held and
used is measured by a
comparison of the carrying amount of
an asset to estimated undiscounted future
cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge
is recognized
by the
amount by
which the
carrying amount
of the
asset exceeds
the fair
value of
the
asset. Assets
to be
disposed of
would be
separately
presented in
the Consolidated
Balance Sheets
and reported
at the
lower of
the carrying
amount or
fair value
less costs
to sell
and are
no longer
depreciated. The
assets and
liabilities of
a
disposal group classified as held for
sale would be presented separately in
the appropriate asset and liability sections of
the
Consolidated Balance Sheets.
Transfer of Financial
Assets
Transfers
of financial assets
are accounted for
as sales,
when control over
the assets
has been surrendered.
Control
over
transferred
assets
is
deemed
to
be
surrendered
when
(i)
the
assets
have
been
isolated
from
the
Company
-
put
presumptively
beyond
the
reach
of
the
transferor
and
its
creditors,
even
in
bankruptcy
or
other
receivership,
(ii)
the
transferee obtains
the right
(free of
conditions that
constrain it
from taking
advantage of
that right)
to pledge
or exchange
the transferred
assets,
and
(iii) the
Company
does not
maintain
effective
control
over the
transferred
assets
through
an
agreement to repurchase them before their maturity or
the ability to unilaterally cause the holder to return specific
assets.
Comprehensive Income (Loss)
Under
GAAP,
certain
changes
in
assets
and
liabilities,
such
as
unrealized
holding
gains
and
losses
on
securities
available-for-sale, are
excluded from
current period
earnings and
reported as
a separate
component of
the stockholders’
equity
section
of
the
Consolidated
Balance
Sheets,
such
items,
along
with
net
income
(loss),
are
components
of
comprehensive
income
(loss).
Additionally,
any
unrealized
gains
or
losses
on
transfers
of
investment
securities
from
available-for-sale to held-to-maturity are recorded to accumulated other comprehensive
income on the date of transfer and
amortized over the remaining life
of each security.
The amortization of the unrealized
gain or loss on transferred securities
is reported as a component of comprehensive income
(loss). See Note 2 “Investment Securities” for further
discussion.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings per Common Share
Basic earnings
per common
share is
net income
available to
common stockholders
divided by
the weighted
average
number
of
common
shares
outstanding
during
the
period.
Diluted
earnings
per
common
share
included
the
effect
of
additional potential common shares issuable under vested stock options. Basic and diluted earnings per share are updated
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
to reflect the effect of stock splits as occurred. See Note 14 “Earnings Per Share” for additional information on earnings per
common share. See Note 13 “Stockholders’ Equity” for further
discussion on stock splits.
Interest Income
Interest income is recognized as earned, based upon the
principal amount outstanding, on an accrual basis.
Operating Segments
While the Company monitors
the revenue streams
of the various products
and services, operations
are managed and
financial performance
is evaluated on
a Company wide
basis. Operating results
of the individual
products are
not used to
make resource allocations or performance decisions by Company
management.
Stock-Based Compensation
Stock based compensation accounting guidance requires
that the compensation cost relating to share-based payment
transactions be recognized in the accompanying Consolidated
Financial Statements. That cost will be measured
based on
the grant
date fair
value of
the equity
or liability
instruments issued.
The stock-based
compensation accounting
guidance
covers
a
wide
range
of
share-based
compensation
arrangements
including
stock
options,
restricted
share
plans,
performance-based awards, share appreciation rights, and
employee share purchase plans.
The stock-based compensation accounting guidance
requires that compensation cost
for all stock awards
be calculated
and recognized
over the
employees' service period,
generally defined as
the vesting
period. For
awards with graded-vesting,
compensation cost
is recognized
on
a straight-line
basis over
the
requisite service
period for
the
entire award.
A Black-
Scholes model is used to estimate the fair value of stock
options.
Loss Contingencies
Loss
contingencies,
including
claims
and
legal
actions
arising
in
the
normal
course
of
business,
are
recorded
as
liabilities when the
likelihood of loss is
probable, and an
amount or range of
loss can be
reasonably estimated. In the
opinion
of management, none of these actions, either individually or in the aggregate, is expected to have a material adverse effect
on the Company’s Consolidated Financial Statements.
See Note 18 “Loss Contingencies” for further details.
Dividend Restrictions
Banking
regulations
require
maintaining
certain
capital
levels
and
may
limit
the
dividends
paid
by
the
Bank
to
the
Company or by the Company to the shareholders.
Fair Value Measurements
Fair values
of financial
instruments are
estimated using
relevant market
information and
other assumptions,
as more
fully disclosed in Note
12 “Fair Value
Measurements”. Fair value estimates
involve uncertainties and matters
of significant
judgment. Changes in assumptions or in market conditions
could significantly affect the estimates.
Derivative Instruments
Derivative financial instruments
are carried at
fair value and
reflect the estimated
amount that would
have been received
to
terminate
these
contracts
at
the
reporting
date
based
upon
pricing
or
valuation
models
applied
to
current
market
information.
The
Company
enters
into
interest
rate
swaps
to
provide
commercial
loan
clients
the
ability
to
swap
from
a variable
interest rate
to a
fixed rate.
The Company
enter
into a
floating-rate
loan
with a
customer
with a
separately
issued swap
agreement allowing
the customer
to convert
floating
payments
of the
loan into
a fixed
interest rate.
To
mitigate risk,
the
Company will enter into a matching agreement with a
third party to offset the exposure on the
customer agreement. These
swaps are
not considered
to be
qualified hedging
transactions and
the unmatched
unrealized gain
or loss
is recorded
in
other non-interest income.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Revenue from Contracts with Customers
Revenue from contracts
with customers is
recognized in an
amount that
reflects the consideration
the Company expects
to receive for the
services the Company
provides to its
customers. The main
revenue earned by
the Company from
loans
and investment
securities are
excluded from
the accounting
standard update
“Revenue from
Contracts with
Customers”.
Deposit and
service charge
fees, consisting
of primarily monthly
maintenance fees,
wire fees,
ATM
interchange fees
and
other transaction-based fees, are the
most significant types of revenue
within the accounting standard update.
Revenue is
recognized when the service provided by the
Company is complete. The aggregate amount
of revenue within the scope of
this standard that is received from sources other than deposit
service charges and fees is not material.
Cash Flow Statement
The Company reports the net activity rather than gross activity in
the Consolidated Statements
of Cash Flows. The net
cash flows
are reported for
loans held
for investment, accrued
interest receivable, deferred
tax asset, other
assets, customer
deposits, accrued interest payable, other liabilities, and proceeds
from issuance of Class A common shares.
Reclassifications
Certain
amounts
in
the
Consolidated
Financial
Statements
have
been
reclassified
to
conform
to
the
current
presentation. Reclassifications had no impact on the net income
or stockholders’ equity of the Company.
Recently Issued Accounting Standards - Not Yet
Adopted
Measurement of Credit Losses on Financial Instruments
In June
2016, the FASB issued
ASU 2016-13, Financial
Instruments - Credit
Losses (Topic 326); Measurement of
Credit
Losses on Financial Instruments. This accounting standard update (“ASU” or “Update”)
on accounting for current expected
credit
losses
on
financial
instruments
(“CECL”)
will
replace
the
current
probable
incurred
loss
impairment
methodology
under U.S. GAAP
with a methodology that
reflects the expected
credit losses. The
Update is intended
to provide financial
statement
users
with
more
decision-useful
information
about
expected
credit
losses.
This
Update
is
applicable
to
the
Company
on
a modified
retrospective
basis
for
interim
and annual
periods
in
fiscal
years beginning
after
December 15,
2022. The Company adopted this
ASU on January 1, 2023. To date, the Company executed a
detailed implementation plan
through the adoption date, implemented a
software solution to assist with the
CECL estimation process, and has completed
parallel run models, and finished a data gap analysis.
The company expects its allowance for credit losses to
increase in 2023 approximately $
1.0
million to $
2.0
million upon
adoption
of
ASU
2016-13
compared
to
its
allowance
for
loan
losses
at
December
31,
2022.
Reserve
on
unfunded
commitments will
also increase
approximately $
thousand to
$
thousand and
it will
be recognized
as a
liability on
the
Consolidated
Balance
Sheet.
The
Company
reviewed
it’s
held-to-maturity
debt
securities
and
the
allowance
was
deemed immaterial. The Company will
initially apply the impact of
the new guidance through
a cumulative-effect adjustment
to retained
earnings
as
of
January
1,
2023. Future
adjustments
to credit
loss
expectations
will be
recorded
through
the
income statement as charges or credits to earnings.
The disclosed estimates are subject to further refinement upon finalization of the Company’s review of the calculations,
assumptions, methodologies and judgments. Internal controls over financial reporting relating
to these new processes have
been designed
and
implemented
and are
being evaluated.
The
Company
is
in
the final
stages
of
completing
the formal
governance
and
approval
process.
The
ongoing
impact
to
the
Company’s
results
of
operations
in
future
periods
will
be
influenced
by
the
loan
portfolio
composition
and
by
macroeconomic
conditions
and
forecasts
at
each
reporting
date.
Adoption of
the standard
on the
first quarter
of 2023
is expected
to result
in higher
volatility in
the quarterly
provision for
credit losses when compared to the Company’s
historical results under the incurred loss model.
Troubled Debt Restructurings and
Vintage Disclosures
In
March
2022,
the
FASB
issued
ASU
2022-02,
Financial
Instruments
-
Credit
Losses
(Topic
326):
Troubled
Debt
Restructurings
and
Vintage
Disclosures.
This
accounting
standard
eliminates
the
accounting
guidance
for
troubled
debt
restructurings
by
creditors
in
ASC
310-40,
and
it
enhances
disclosure
requirements
for
some
loan
refinancings
and
restructurings
involving
borrowers
experiencing
financial
difficulty.
Specifically,
rather
than
applying
the
troubled
debt
restructuring recognition and measurement guidance,
creditors will evaluate all
loan modifications to determine if
they result
in
a
new
loan
or
a
continuation
of
the
existing
loan.
Losses
associated
with
troubled
debt
restructurings
should
be
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
incorporated in a
creditor’s estimate of
its allowance for
credit losses. Additionally,
public business entities
are required to
disclose current-period gross write-offs
by year of origination for loan financing receivables and net investment
in leases.
Reference Rate Reform
In
March
2020,
the
FASB
issued
ASU
2020-04,
Reference
Rate
Reform
(Topic
848),
Facilitation
of
the
Effects
of
Reference Rate Reform
on Financial Reporting.
In January 2021,
the FASB
clarified the scope
of this guidance
with ASU
2021-01 which provides
optional guidance for
a limited period of
time to ease the
burden in accounting for
(or recognizing
the effects
of) reference
rate reform
on financial
reporting.
This
ASU is
effective
March 12,
2020 through
December 31,
2024. The
Company is
evaluating the
impact of
this ASU
and has
not yet
determined
whether LIBOR
transition and
this
ASU will have material effects on our business
operations and consolidated financial statements.
2.
INVESTMENT SECURITIES
The following
tables present
a summary
of the
amortized cost,
unrealized or
unrecognized gains
and losses,
and fair
value of investment securities at the dates indicated (in thousands):
December 31, 2022
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
10,177
$
-
$
(1,522)
$
8,655
Collateralized mortgage obligations
118,951
-
(23,410)
95,541
Mortgage-backed securities - Residential
73,838
-
(12,959)
60,879
Mortgage-backed securities - Commercial
32,244
(4,305)
27,954
Municipal securities
25,084
-
(6,601)
18,483
Bank subordinated debt securities
15,964
(1,050)
14,919
Corporate bonds
4,037
-
(328)
3,709
$
280,295
$
$
(50,175)
$
230,140
Held-to-maturity:
U.S. Government Agency
$
44,914
$
$
(5,877)
$
39,062
U.S. Treasury
9,841
-
(13)
9,828
Collateralized mortgage obligations
68,727
(7,830)
60,925
Mortgage-backed securities - Residential
42,685
(4,574)
38,483
Mortgage-backed securities - Commercial
11,442
-
(665)
10,777
Corporate bonds
11,090
-
(1,077)
10,013
$
188,699
$
$
(20,036)
$
169,088
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
December 31, 2021
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
10,564
$
$
(50)
$
10,520
Collateralized mortgage obligations
160,506
(3,699)
156,829
Mortgage-backed securities - Residential
120,643
(2,029)
118,842
Mortgage-backed securities - Commercial
49,905
(608)
50,117
Municipal securities
25,164
(894)
24,276
Bank subordinated debt securities
27,003
1,418
(13)
28,408
Corporate bonds
12,068
-
12,550
$
405,853
$
2,982
$
(7,293)
$
401,542
Held-to-maturity:
U.S. Government Agency
$
34,505
$
$
(615)
$
33,904
Collateralized mortgage obligations
44,820
-
(1,021)
43,799
Mortgage-backed securities - Residential
26,920
-
(568)
26,352
Mortgage-backed securities - Commercial
3,103
-
(90)
3,013
Corporate bonds
13,310
-
(221)
13,089
$
122,658
$
$
(2,515)
$
120,157
For the year
ended December 31,
2022, there
were
investment securities
that were transferred
from available-for-
sale
(“AFS”)
to
held-to-maturity
(“HTM”)
with
an
amortized
cost
basis
and
fair
value
amount
of
$
74.4
million
and
$
63.8
million, respectively.
On the
date of
transfer,
these securities
had a
total net
unrealized loss
of $
10.6
million which
was included in accumulated other comprehensive income
(loss).
Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer.
The unrealized gain or loss at the
date of transfer is retained in
accumulated other comprehensive income
(“AOCI”) and in
the carrying value of the held-to-maturity securities. Such amounts are
amortized over the remaining life of the security. For
the year
ended December 31,
2022, total
amortization out
of AOCI
for the
net unrealized
losses on
securities transferred
from AFS to HTM was $
thousand and $
thousand for year ended December 31, 2021.
The following
table presents
the proceeds,
realized gross
gains and
realized gross
losses on
sales and
calls of
AFS
debt securities for the years ended December 31, 2022 and
2021 (in thousands):
Available-for-sale:
Proceeds from sales and call of securities
$
60,649
$
51,974
Gross Gains
$
$
Gross Losses
(2,746)
(331)
Net realized gains (losses)
$
(2,529)
$
The
amortized
cost
and
fair
value
of
investment
securities,
by
contractual
maturity,
are
shown
below
for
the
date
indicated (in thousands).
Actual maturities may differ
from contractual maturities
because borrowers may have
the right to
call or prepay
obligations with or without
call or prepayment penalties.
Securities not due
at a single
maturity date are
shown
separately.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Available-for-sale
Held-to-maturity
December 31, 2022:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Due within one year
$
-
$
-
$
1,515
$
1,475
Due after one year through five years
4,037
3,709
9,575
8,539
Due after five years through ten years
16,964
15,722
-
-
Due after ten years
24,084
17,680
-
-
U.S. Government Agency
10,177
8,655
44,914
39,061
U.S. Treasury
-
-
9,841
9,828
Collateralized mortgage obligations
118,951
95,541
68,727
60,925
Mortgage-backed securities - Residential
73,838
60,879
42,685
38,483
Mortgage-backed securities - Commercial
32,244
27,954
11,442
10,777
$
280,295
$
230,140
$
188,699
$
169,088
At December 31,
2022 and
2021, there
were no
securities to
any one
issuer,
in an
amount greater
than 10%
of total
stockholders’
equity other
than the
United States
Government and
Government Agencies.
All the collateralized
mortgage
obligations
and
mortgage-backed
securities
are
issued
by
United
States
sponsored
entities
at
December 31,
and
2021.
Information pertaining
to investment
securities with
gross unrealized
losses, aggregated
by investment
category and
length of
time that
those
individual securities
have been
in a
continuous
loss position,
are presented
as of
the following
dates (in thousands):
December 31, 2022
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency
$
11,407
(1,093)
36,310
(7,616)
$
47,717
$
(8,709)
U.S. Treasury
9,828
(13)
-
-
9,828
$
(13)
Collateralized mortgage obligations
16,500
(963)
139,965
(34,962)
156,465
$
(35,925)
Mortgage-backed securities -
Residential
5,059
(564)
91,742
(19,348)
96,801
$
(19,912)
Mortgage-backed securities -
Commercial
10,052
(1,173)
26,823
(5,300)
36,875
$
(6,473)
Municipal securities
-
-
18,483
(6,601)
18,483
$
(6,601)
Bank subordinated debt securities
11,295
(670)
2,619
(381)
13,914
$
(1,051)
Corporate bonds
13,723
(926)
-
-
13,723
$
(926)
$
77,864
$
(5,402)
$
315,942
$
(74,208)
$
393,806
$
(79,610)
December 31, 2021
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency
$
25,951
$
(254)
$
15,477
$
(516)
$
41,428
$
(770)
Collateralized mortgage obligations
155,668
(3,223)
38,459
(1,497)
194,127
$
(4,720)
Mortgage-backed securities -
Residential
88,772
(1,178)
37,373
(1,274)
126,145
$
(2,452)
Mortgage-backed securities -
Commercial
25,289
(318)
7,507
(309)
32,796
$
(627)
Municipal securities
11,292
(395)
11,978
(499)
23,270
$
(894)
Bank subordinated debt securities
4,487
(13)
-
-
4,487
$
(13)
$
311,459
$
(5,381)
$
110,794
$
(4,095)
$
422,253
$
(9,476)
The unrealized losses
associated with $
134.7
million of investment
securities transferred from
the AFS portfolio to the
HTM portfolio represent unrealized
losses since the date of
purchase, independent of the
impact associated with changes
in the cost basis upon transfer between portfolios.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
The Company performs a review
of the investments that have
an unrealized loss to determine whether
there have been
any changes in the
economic circumstance of the security
issuer to indicate that
the unrealized loss is
impaired on an other-
than-temporary (“OTTI”) basis. Management considers several factors in their analysis including (i) severity and duration of
the impairment, (ii) credit
rating of the security
including any downgrade,
(iii) intent to sell
the security,
or if it is more
likely
than not that it will be required to
sell the security before recovery
,
(iv) whether there have been any
payment defaults and
(v) underlying guarantor of the securities.
At
December
31,
2022,
the
Company
had
$
53.7
million
of
unrealized
losses
on
mortgage
backed
securities
and
collateralized
mortgage
obligations
of
government
sponsored
entities
having
a
fair
value
of
$
294.6
million
that
were
attributable
to
a
combination
of
factors,
including
relative
changes
in
interest
rates
since
the
time
of
purchase.
The
contractual cash flows
for these securities
are guaranteed by
U.S. government agencies
and U.S. government
sponsored
entities. The municipal bonds are of high credit
quality and the declines in fair value are not
due to credit quality.
Based on
the assessment of
these mitigating factors, management
believes that the
unrealized losses on these
debt security holdings
are a
function of
changes in
investment spreads
and interest
rate movements and
not changes
in credit
quality. Management
expects to recover the entire amortized cost basis of these securities.
At December 31, 2022, the
Company does not intend to
sell debt securities that are
in an unrealized loss position
and
it is not more than likely than not that the Company will be required to sell
these securities before recovery of the amortized
cost basis. Therefore,
management does
not consider any
investment to be
other than temporarily
impaired at December
31, 2022.
As of December 31, 2022, the Company maintains a master repurchase agreement with a public banking institution for
up
to
$
20.0
million
fully
guaranteed
with
investment
securities
upon
withdrawal.
Any
amounts
borrowed
would
be
at
a
variable interest rate
based on prevailing
rates at the
time funding is
requested. At
December 31, 2022, the
Company did
no
t have any securities pledged under this agreement.
In 2018, the Company became a Qualified Public Depositor (“QPD”) with the State of Florida. As a QPD, the Company
has the
authority to
legally maintain public
deposits from cities,
municipalities, and the
State of Florida.
These public deposits
are secured by securities
pledged to the
State of Florida
at a ratio of
% of the
average outstanding uninsured
deposits.
The Company must also maintain a minimum
amount of pledged securities to be in the program.
At December 31, 2022,
the Company had
eighteen
securities with a
fair value of
$
49.0
million pledged to
the State of
Florida under the public funds program. The Company
held a total of $
204.2
million in public funds at December 31, 2022.
At December
31, 2021,
the Company
had
eleven
securities
with a
fair value
of $
20.4
million pledged
to the
State of
Florida under the public funds program. The Company
held a total of $
37.3
million in public funds at December 31, 2021.
3.
LOANS
The following table is a summary of the distribution of
loans held for investment by type (in thousands):
December 31, 2022
December 31, 2021
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
185,636
12.3
%
$
201,359
16.9
%
Commercial Real Estate
970,410
64.4
%
704,988
59.2
%
Commercial and Industrial
126,984
8.4
%
146,592
12.3
%
Foreign Banks
93,769
6.2
%
59,491
5.0
%
Consumer and Other
130,429
8.7
%
79,229
6.6
%
Total
gross loans
1,507,228
100.0
%
1,191,659
100.0
%
Less: Unearned income
(110)
1,578
Total
loans net of unearned income
1,507,338
1,190,081
Less: Allowance for credit losses
17,487
15,057
Total
net loans
$
1,489,851
$
1,175,024
At December 31, 2022 and 2021, the Company had $
338.1
million and $
185.1
million, respectively,
of commercial real
estate and residential mortgage loans pledged as collateral on lines of credit with the FHLB and the
Federal Reserve Bank
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
of Atlanta.
At December 31,
2022 and 2021
the Company
had
no
loans and one
loan for
$
1.2
million, respectively,
in the
process of foreclosure.
The Company was a participant
of the Small Business Administration’s
(“SBA”) Paycheck Protection Program
(“PPP”)
loans. These
loans were
designed to
provide a
direct incentive
for small
businesses to
keep their
workers on
payroll and
had to be used towards payroll cost, mortgage interest, rent, utilities and other costs
related to COVID-19. These loans are
forgivable under specific criteria
as determined by the SBA. The
Company had PPP loans of
$
1.3
million at December 31,
2022 and $
42.4
million at December 31, 2021, which are categorized as commercial
and industrial loans. These PPP loans
had deferred loan fees of $
thousand at December 31, 2022 and $
1.5
million at December 31, 2021.
The
Company
recognized
$
1.6
million
and
$
4.5
million
in
PPP
loan
fees
and
interest
income
for
the
years
ended
December 31,
and
2021,
respectively,
which
is
reported
under
loans,
including
fees
within
the
Consolidated
Statements of Operations.
The
Company
segments
the
portfolio
by
pools
grouping
loans
that
share
similar
risk
characteristics
and
employing
collateral type
and lien
position to
group loans
according to
risk. The
Company determines
historical loss
rates for
each
loan
pool
based
on
its
own
loss
experience.
In
estimating
credit
losses,
the
Company
also
considers
qualitative
and
environmental factors that may cause estimated credit losses
for the loan portfolio to differ from historical
losses.
Changes
in
the
allowance
for
credit
losses
for
the
years
ended
December 31,
and
are
as
follows
(in
thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2022:
Beginning balance
$
2,498
$
8,758
$
2,775
$
$
$
15,057
Provision for credit losses
(1,179)
1,385
1,474
2,495
Recoveries
-
-
Charge-offs
-
-
(104)
-
(16)
(120)
Ending Balance
$
1,352
$
10,143
$
4,163
$
$
1,109
$
17,487
December 31, 2021:
Beginning balance
$
3,408
$
9,453
$
1,689
$
$
$
15,086
Provision for credit losses
(919)
(695)
(160)
Recoveries
-
-
Charge-offs
(229)
-
(18)
-
(14)
(261)
Ending Balance
$
2,498
$
8,758
$
2,775
$
$
$
15,057
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Allowance for credit losses and the outstanding balances in
loans as of December 31, 2022 and 2021 are as
follows (in
thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2022:
Allowance for credit losses:
Individually evaluated for impairment
$
$
-
$
$
-
$
$
Collectively evaluated for impairment
1,197
10,143
4,122
1,011
17,193
Balances, end of period
$
1,352
$
10,143
$
4,163
$
$
1,109
$
17,487
Loans:
Individually evaluated for impairment
$
7,206
$
$
$
-
$
$
7,877
Collectively evaluated for impairment
178,430
970,017
126,902
93,769
130,233
1,499,351
Balances, end of period
$
185,636
$
970,410
$
126,984
$
93,769
$
130,429
$
1,507,228
December 31, 2021:
Allowance for credit losses:
Individually evaluated for impairment
$
$
-
$
$
-
$
$
Collectively evaluated for impairment
2,320
8,758
2,704
14,697
Balances, end of period
$
2,498
$
8,758
$
2,775
$
$
$
15,057
Loans:
Individually evaluated for impairment
$
9,006
$
$
$
-
$
$
10,067
Collectively evaluated for impairment
192,353
704,292
146,451
59,491
79,005
1,181,592
Balances, end of period
$
201,359
$
704,988
$
146,592
$
59,491
$
79,229
$
1,191,659
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Credit Quality Indicators
The Company grades loans based on the estimated capability of the borrower to repay the contractual obligation of the
loan agreement based
on relevant information
which may include:
current financial information
on the borrower,
historical
payment
experience,
credit
documentation
and
other
current
economic
trends.
Internal
credit
risk
grades
are
evaluated
periodically.
The Company's internally assigned credit risk
grades are as follows:
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
presented below for the periods indicated (in thousands):
As of December 31, 2022
Pass
Special
Mention
Substandard
Doubtful
Total Loans
Residential real estate:
Home equity line of credit ("HELOC") and other
$
$
-
$
-
$
-
$
1-4 family residential
132,178
-
-
-
132,178
Condo residential
52,835
-
-
-
52,835
185,636
-
-
-
185,636
Commercial real estate:
Land and construction
38,687
-
-
-
38,687
Multi family residential
176,820
-
-
-
176,820
Condo commercial
49,601
-
-
49,994
Commercial property
702,357
-
2,552
-
704,909
Leasehold improvements
-
-
-
-
-
967,465
-
2,945
-
970,410
Commercial and industrial:
(1)
Secured
120,873
-
-
121,680
Unsecured
5,304
-
-
-
5,304
126,177
-
-
126,984
Foreign banks
93,769
-
-
-
93,769
Consumer and other loans
130,233
-
-
130,429
Total
$
1,503,280
$
-
$
3,948
$
-
$
1,507,228
(1)
All outstanding PPP loans were internally graded
pass.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
As of December 31, 2021
Pass
Special
Mention
Substandard
Doubtful
Total Loans
Residential real estate:
Home equity line of credit ("HELOC") and other
$
$
-
$
-
$
-
$
1-4 family residential
130,840
-
4,581
-
135,421
Condo residential
65,237
-
-
-
65,237
196,778
-
4,581
-
201,359
Commercial real estate:
Land and construction
24,581
-
-
-
24,581
Multi family residential
127,489
-
-
-
127,489
Condo commercial
41,983
-
-
42,400
Commercial property
509,189
1,222
-
-
510,411
Leasehold improvements
-
-
-
703,349
1,222
-
704,988
Commercial and industrial:
(1)
Secured
97,605
-
-
98,141
Unsecured
48,434
-
-
48,451
146,039
-
-
146,592
Foreign banks
59,491
-
-
-
59,491
Consumer and other loans
79,005
-
-
79,229
Total
$
1,184,662
$
1,222
$
5,775
$
-
$
1,191,659
(1)
All outstanding PPP loans were internally graded
pass.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Loan Aging
The Company
also considers the
performance of loans
in grading
and in
evaluating the
credit quality
of the
loan portfolio.
The Company
analyzes credit
quality and
loan grades
based on
payment performance
and the
aging status
of the
loan.
The following table include an aging analysis
of accruing loans and total non-accruing
loans as of December 31, 2022 and
2021 (in thousands):
Accruing
As of December 31, 2022:
Current
Past Due 30-
89 Days
Past Due >
90 Days and
Still
Accruing
Total
Accruing
Non-Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
$
-
$
-
$
$
-
$
1-4 family residential
131,120
1,058
-
132,178
-
132,178
Condo residential
50,310
2,525
-
52,835
-
52,835
182,053
3,583
-
185,636
-
185,636
Commercial real estate:
Land and construction
38,687
-
-
38,687
-
38,687
Multi family residential
176,820
-
-
176,820
-
176,820
Condo commercial
49,994
-
-
49,994
-
49,994
Commercial property
704,884
-
704,909
-
704,909
Leasehold improvements
-
-
-
-
-
-
970,385
-
970,410
-
970,410
Commercial and industrial:
Secured
121,649
-
121,680
-
121,680
Unsecured
4,332
-
5,304
-
5,304
125,981
1,003
-
126,984
-
126,984
Foreign banks
93,769
-
-
93,769
-
93,769
Consumer and other
130,169
-
130,429
-
130,429
Total
$
1,502,357
$
4,871
$
-
$
1,507,228
$
-
$
1,507,228
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Accruing
As of December 31, 2021:
Current
Past Due
30-89 Days
Past Due >
90 Days and
Still
Accruing
Total
Accruing
Non-Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
$
-
$
-
$
$
-
$
1-4 family residential
133,942
-
134,231
1,190
135,421
Condo residential
64,243
-
65,237
-
65,237
198,886
1,283
-
200,169
1,190
201,359
Commercial real estate:
Land and construction
24,581
-
-
24,581
-
24,581
Multi family residential
127,053
-
127,489
-
127,489
Condo commercial
42,400
-
-
42,400
-
42,400
Commercial property
510,411
-
-
510,411
-
510,411
Leasehold improvements
-
-
-
704,552
-
704,988
-
704,988
Commercial and industrial:
Secured
98,141
-
-
98,141
-
98,141
Unsecured
48,041
-
48,451
-
48,451
146,182
-
146,592
-
146,592
Foreign banks
59,491
-
-
59,491
-
59,491
Consumer and other
78,969
-
79,229
-
79,229
Total
$
1,188,080
$
2,389
$
-
$
1,190,469
$
1,190
$
1,191,659
There was
no
interest income recognized attributable to
nonaccrual loans outstanding at
December 31, 2022 and 2021.
Interest
income
on
these
loans
for
the
years
ended
December 31,
and
2021,
would
have
been
approximately
$
thousand and $
thousand, respectively,
had these loans performed in accordance with their
original terms.
There were no loans over 90 days past due and accruing
as of December 31, 2022 and 2021.
Impaired Loans
The following table includes
the unpaid principal balances
for impaired loans with
the associated allowance amount,
if
applicable, on the basis of impairment methodology for the dates
indicated (in thousands):
December 31, 2022
December 31, 2021
Unpaid
Principal
Balance
Net
Investment
Balance
Valuation
Allowance
Unpaid
Principal
Balance
Net
Investment
Balance
Valuation
Allowance
Impaired Loans with No Specific Allowance:
Residential real estate
$
3,551
$
3,544
$
-
$
5,021
$
5,035
$
-
Commercial real estate
-
-
3,944
3,937
-
5,717
5,730
-
Impaired Loans with Specific Allowance:
Residential real estate
3,655
3,626
3,985
3,950
Commercial and industrial
Consumer and other
3,933
3,904
4,350
4,315
Total
$
7,877
$
7,841
$
$
10,067
$
10,045
$
Net investment balance is the unpaid principal balance
of the loan adjusted for the remaining net deferred loan
fees.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
The following table presents the
average recorded investment balance on impaired
loans as of December 31, 2022
and
2021 (in thousands):
Residential real estate
$
7,626
$
8,791
Commercial real estate
Commercial and industrial
Consumer and other
Total
$
8,520
$
9,937
Interest income
recognized on
impaired loans
for the
years ended
December 31, 2022
and 2021
was $
thousand
and $
thousand, respectively.
Troubled Debt Restructuring
A troubled
debt
restructuring
(“TDR”)
occurs
when the
Company
has agreed
to
a loan
modification
in
the
form
of a
concession for a borrower who is experiencing financial difficulty.
The following table presents performing and non-performing
TDRs for the dates indicated (in thousands):
December 31, 2022
December 31, 2021
Accrual Status
Non-Accrual
Status
Total TDRs
Accrual Status
Non-Accrual
Status
Total TDRs
Residential real estate
$
7,206
$
-
$
7,206
$
7,815
$
-
$
7,815
Commercial real estate
-
-
Commercial and industrial
-
-
Consumer and other
-
-
Total
$
7,877
$
-
$
7,877
$
8,876
$
-
$
8,876
The Company had
allocated $
thousand and $
thousand of specific
allowance for TDR
loans at December
31,
2022 and 2021,
respectively. Charge-offs on TDR loans for
the years
ended December 31, 2022
and 2021 was
$
thousand
and $
thousand, respectively.
There was
no
commitment to lend additional funds to these TDR
customers.
The Company
did
no
t have
any new
TDR
loans, loan
modifications,
no
r defaults
for the
years ended
December 31,
2022 and December 31, 2021.
During the year
ended December 31, 2022
and 2021, the
Company did
no
t modify
any new loans
to borrowers impacted
by COVID-19. At December 31, 2022, there was
no
loan past due that was modified in 2021.
4.
LEASES
The
Company
enters
into
leases
in
the
normal
course
of
business
primarily
for
banking
centers
and
back-office
operations. As of
December 31, 2022, the
Company leased nine
of the ten
banking centers and
the headquarter building.
The Company
is obligated
under non-cancelable
operating leases
for these
premises
with expiration
dates ranging
from
2026 to 2036, many of these leases have extension
clauses which the Company could exercise which
would extend these
dates.
The Company
has classified
all leases as
operating leases.
Lease expense
for operating
leases are
recognized on
a
straight-line basis over
the lease term.
Right-of-use (“ROU”)
assets represent the
right to use
the underlying
asset for the
lease
term
and
lease
liabilities
represent
the
obligation
to
make
lease
payments
arising
from
the
lease.
The
Company
elected the short-term
lease recognition exemption
for all leases
that qualify,
meaning those
with terms under
12 months.
ROU assets or lease liabilities are not to be recognized
for short-term leases.
ROU assets and
lease liabilities are
recognized at the lease
commencement date based on
the estimated present value
of lease payments
over the
lease term.
In the Comp
any’s Consolidated
Balance Sheets,
ROU assets
are reported
under
other assets while lease liabilities are classified under
accrued interest and other liabilities.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
As
most
of
the
Company’s
leases
do
not
provide
an
implicit
rate,
the
incremental
borrowing
rate
based
on
the
information available
at commencement
date is
used. The
Company’s incremental
borrowing rate
is based
on the
FHLB
advance rate matching or nearing the lease term.
The following table presents the ROU assets and lease liabilities
as of December 31, 2022 and 2021 (in thousands):
ROU assets:
Operating leases
$
14,395
$
14,185
Lease liabilities:
Operating leases
$
14,395
$
14,185
The weighted average remaining lease term and weighted average
discount rate as of December 31, 2022 and 2021:
Weighted average remaining lease term (in years):
Operating leases
6.98
8.28
Weighted average discount rate:
Operating leases
2.94
%
2.32
%
Future lease payment obligations and a reconciliation to lease
liability as of December 31, 2022 (in thousands):
$
3,158
3,236
3,312
2,383
Thereafter
3,478
Total
future minimum lease payments
16,518
Less: interest component
(2,123)
Total
lease liability
$
14,395
5.
PREMISES AND EQUIPMENT
A summary of premises and equipment are presented
below as of December 31, 2022 and 2021 (in thousands):
Land
$
$
Building
1,952
1,947
Furniture, fixtures and equipment
8,841
8,726
Computer hardware and software
4,575
4,552
Leasehold improvements
10,451
9,921
Premises and equipment, gross
26,791
26,118
Accumulated depreciation and amortization
(21,528)
(20,840)
Premises and equipment, net
$
5,263
$
5,278
Depreciation and
amortization expense
was $
thousand and
$
1.0
million for
the years
ended December 31,
and 2021, respectively.
During 2021, the Company
eliminated $
0.6
million in assets
due to the sale of
one banking center
and relocation
of another
banking center.
The depreciation
on these
assets
was $
0.6
million
with the
remaining
amount
recognized as an immaterial loss.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
6.
INCOME TAXES
The Company’s provision
for income taxes is
presented in the following
table for the years
ended December 31, 2022
and 2021 (in thousands):
Current:
Federal
$
-
$
-
State
-
$
-
Total
current
-
$
-
Deferred:
Federal
5,462
$
5,314
State
1,482
$
1,286
Total
deferred
6,944
$
6,600
Total
tax expense
$
6,944
$
6,600
The actual income tax
expense for the years
ended December 31, 2022 and
2021 differs from the
statutory tax expense
for the year (computed by applying the
U.S. federal corporate tax rate of
% for 2022 and 2021 to
income before provision
for income taxes) as follows (in thousands):
Federal taxes at statutory rate
$
5,688
$
5,812
State income taxes, net of federal tax benefit
1,177
$
Bank owned life insurance
(269)
$
(186)
Other, net
$
Total
tax expense
$
6,944
$
6,600
The
following table presents
the deferred tax assets
and deferred tax liabilities
as of December 31, 2022
and 2021 (in
thousands):
Deferred tax assets:
Net operating loss
$
21,720
$
28,819
Allowance for credit losses
4,432
3,816
Lease liability
3,648
3,595
Unrealized loss on available for sale securities
15,193
Deferred loan fees
-
Depreciable property
Stock option compensation
Accruals
Other, net
-
Deferred tax asset
$
46,247
$
38,651
Deferred tax liability:
Deferred loan cost
(28)
-
Lease right of use asset
(3,648)
(3,595)
Deferred expenses
(175)
(127)
Other, net
(36)
-
Deferred tax liability
$
(3,887)
$
(3,722)
Net deferred tax asset
$
42,360
$
34,929
At
December
31,
the
Company
had
approximately
$
81.8
million
of
Federal
and
$
104.5
million
of
State
net
operating
loss
carryforwards
expiring
in
various
amounts
from
2031 to
2036.
Their
utilization
is limited
to
future
taxable
earnings of the Company.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
In assessing the
realizability of deferred
tax assets, management
considered whether it
is more likely
than not that
some
portion or
all of
the deferred
tax assets
will not
be realized.
The ultimate
realization of
deferred tax
assets is
dependent
upon the generation of
future taxable income
during the periods in
which those temporary differences
become deductible.
Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable
income, and tax planning
strategies in making this assessment.
The U.S.
Federal jurisdiction
and Florida
are the
major tax
jurisdictions where
the Company
files income
tax returns.
The Company is generally no longer subject to U.S. Federal or State
examinations by tax authorities for years before 2019.
For
the
years ended
December 31,
2022 and
2021,
the
Company
did
no
t have
any unrecognized
tax benefits
as a
result of
tax positions
taken during
a prior
period or
during the
current period.
Additionally,
no
interest or
penalties
were
recorded as a result of tax uncertainties.
7.
DEPOSITS
The following table presents deposits by type at December
31, 2022 and 2021 (in thousands):
Non-interest bearing deposits
$
629,776
$
605,425
Interest-bearing transaction accounts
66,675
55,878
Saving and money market deposits
915,853
703,856
Time deposits
216,977
225,220
Total
deposits
$
1,829,281
$
1,590,379
Time
deposits
exceeding
the
FDIC
deposit
insurance
limit
of
$250
thousand
at
December 31,
and
were
$
82.0
million and $
119.4
million, respectively.
At December 31, 2022, the scheduled maturities of time deposits
were (in thousands):
$
182,647
11,135
1,998
20,402
Thereafter
$
216,977
At December
31, 2022
and 2021,
the aggregate
amount of
demand deposits
reclassified to
loans as
overdrafts
was
$
thousand and $
thousand, respectively.
8.
BORROWINGS
Borrowed
funds
consist
of
fixed
rate
advances
from
the
FHLB.
At
December 31,
FHLB
advances
were
$
46.0
million and at December 31, 2021 were $
million.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
The following
table presents
the fixed
interest rates
and expected
maturities of
the FHLB
advances at
December 31,
2022 and 2021 (in thousands):
At December 31, 2022
Interest Rate
Type of Rate
Maturity Date
Amount
2.05
%
Fixed
March 27, 2025
$
10,000
1.07
%
Fixed
July 18, 2025
6,000
1.04
%
Fixed
July 30, 2024
5,000
0.81
%
Fixed
August 17, 2023
5,000
4.17
%
Fixed
January 13, 2023
20,000
$
46,000
At December 31, 2021
Interest Rate
Type of Rate
Maturity Date
Amount
0.81
%
Fixed
August 17, 2023
$
5,000
1.04
%
Fixed
July 30, 2024
5,000
2.05
%
Fixed
March 27, 2025
10,000
1.91
%
Fixed
March 28, 2025
5,000
1.81
%
Fixed
April 17, 2025
5,000
1.07
%
Fixed
July 18, 2025
6,000
$
36,000
The
FHLB
holds
a
blanket
lien
on
the
Company's
loan
portfolio
that
may
be
pledged
as
collateral
for
outstanding
advances, subject
to eligibility
under the
borrowing agreement.
The Company
may also
choose to
assign cash
balances
held at the FHLB as additional collateral. See Note 3 “Loans”
for further discussion on pledged loans.
9.
EQUITY BASED AND OTHER COMPENSATION
PLANS
Employee 401(k) Plan
The Company has an
employee 401(k) plan (the
“Plan”) covering substantially all
eligible employees. The Plan includes
a provision
that
the employer
may contribute
to the
accounts
of
eligible employees
for
whom
a salary
deferral
is made.
There was $
thousand and $
thousand of Company contributions to the Plan during the years ended December 31,
2022 and
2021,
respectively,
and
are included
under
salaries and
employee
benefits in
the Consolidated
Statements
of
Operations.
Stock-Based Compensation
Stock
option balances,
weighted average
exercise
price,
and
weighted average
fair value
of options
granted
for the
year ended
December 31,
2021 were
adjusted to
reflect the
1 for 5
reverse stock
split on
Class A
common stock.
Stock
options are only exercisable
to Class A common
stock. See Note 13
“Stockholders’ Equity” for
further discussion on stock
split.
In
2015,
the
Company's
shareholders
approved
the
Equity
Incentive
Plan
(the
“2015
Option
Plan”),
which
authorized grants
of options
to purchase
up to
2,000,000
shares of
common
stock. The
Option
Plan
provided that
vesting
schedules
will
be
determined
upon
issuance
of
options
by
the
Board
of
Directors
or
compensation
committee.
Options
granted
under
the
Option
Plan
have
a
-year
life,
in
no
event
shall
an
option
be
exercisable
after
the
expiration of
years from the grant date. The 2015 Option Plan has a
-year life and will terminate in 2025. In July 2020,
the
shareholders
of
the
Company
approved
to
amend
the
Option
plan
authorizing
the
issuance
of
an
additional
3,000,000
shares of common stock and extending the life of the plan
additional years, terminating in 2030. The approved
shares
after
being
adjusted
to
reflect
the
1 for 5
reverse
stock
split
totaled
1,000,000
shares.
In
December
2021,
the
shareholders of the Company approved to amend the
2015 Option plan authorizing the issuance of an
additional
1,400,000
shares of common stock.
At December 31, 2022, there were
1,386,667
shares available for grant under the
2015 Option Plan. At December
31,
2021, there were
1,401,667
shares available for grant under the 2015 Option Plan.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
The Company recognizes compensation expense based
on the estimated grant date
fair value method using the
Black-
Scholes
option
pricing
model and
accounts
for
this expense
using
a prorated
straight-line
amortization
method over
the
vesting
period
of
the
option.
Stock
based
compensation
expense
is
based
on
awards
that
the
Company
expects
will
ultimately vest,
reduced by estimated forfeitures.
Estimated forfeitures consider the voluntary
termination trends as well as
actual option forfeitures.
The
compensation
expense
is
reported
under
salaries
and
employee
benefits
in
the
accompanying
Consolidated
Statements
of
Operations.
Compensation
expense
totaling
$
thousand
was
recognized
for
the
year
ended
December 31, 2022
and $
thousand for
the year
ended December
31, 2021.
There was
no
related tax
benefit for
the
years ended December 31, 2022 and 2021.
Unrecognized compensation cost
remaining on stock-based
compensation totaled $
thousand and $
1.3
million for
the years ended December 31, 2022 and 2021, respectively
.
Cash
flows
resulting
from
excess
tax
benefits
are
required
to
be
classified
as
a
part
of
cash
flows
from
operating
activities. Excess tax benefits
are realized tax benefits
from tax deductions for
exercised options in excess
of the deferred
tax asset attributable to the compensation cost for such
options.
The fair value of options
granted was determined using
the following weighted-average
assumptions at December
31,
2022:
Assumption
Risk-free interest rate
2.34
%
Expected term
years
Expected stock price volatility
%
Dividend yield
%
The following table presents a summary of stock
options for the years ended December 31, 2022 and 2021:
Stock Options
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Years
Aggregate Intrinsic
Value (in
thousands)
Balance at January 1, 2022
959,667
$
10.87
8.4
Granted
15,000
$
14.03
Exercised
(9,000)
$
11.35
Balance at December 31, 2022
965,667
$
10.91
7.4
Exercisable at December 31, 2022
560,000
$
10.18
6.4
$
1,131
Balance at January 1, 2021
339,667
$
9.37
7.1
Granted
620,000
$
11.69
Balance at December 31, 2021
959,667
$
10.87
8.4
Exercisable at December 31, 2021
319,667
$
9.07
6.0
$
The aggregate intrinsic value in
the table above represents
the total pre-tax intrinsic
value (the difference between
the
valuation of the Company’s stock and the exercise price, multiplied by the number of
options considered in-the-money) that
would have been received by the option holders had all option
holders exercised their options.
The weighted average
fair value of
options granted for
the years ended
December 31, 2022 and
2021 was $
3.45
and
$
2.32
, respectively.
There were
no
restricted stock awards outstanding as of December
31, 2021 or 2022.
There are
no
equity compensation plans of the Company that have
not been approved by the shareholders.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
10.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to
meet the
financial needs
of its
customers and
to reduce its
own exposure
to fluctuations
in interest
rates. These
financial
instruments include
unfunded commitments
under lines
of credit,
commitments to
extend credit,
standby and
commercial
letters of
credit. Those
instruments
involve, to
varying degrees,
elements of
credit and
interest rate
risk in
excess
of the
amount recognized in the Company’s Consolidated Balance Sheets. The Company uses
the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments.
The Company's
exposure to credit
loss in the
event of nonperformance
by the other
party to the
financial instruments
for unused lines of credit, and standby letters of credit
is represented by the contractual amount of these commitments.
A
summary
of
the
amounts
of
the
Company's
financial
instruments
with
off-balance
sheet
risk
are
shown
below
at
December 31, 2022 and 2021 (in thousands):
Commitments to grant loans and unfunded lines of credit
$
95,461
$
134,877
Standby and commercial letters of credit
4,320
6,420
Total
$
99,781
$
141,297
Commitments to
extend credit
are agreements
to lend
to a
customer as
long as
there is
no violation
of any
condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses.
Unfunded lines of
credit and revolving
credit lines are
commitments for
possible future extensions
of credit to
existing
customers. These lines of
credit are uncollateralized and
usually do not contain
a specified maturity date
and ultimately may
not be drawn upon to the total extent to which the Company
is committed.
Standby
and
commercial
letters
of
credit
are
conditional
commitments
issued
by
the
Company
to
guarantee
the
performance of a
customer to
a third
party. Those letters of
credit are
primarily issued to
support public and
private borrowing
arrangements. Essentially all letters of credit have fixed maturity dates and many of them expire without being drawn upon,
they do not generally present a significant liquidity risk
to the Company.
11.
DERIVATIVES
The Company utilizes interest rate swap agreements
as part of its asset liability management
strategy to help manage
its interest
rate risk
position. The
notional amount
of the
interest rate
swaps do
not represent
amounts exchanged
by the
parties. The amounts exchanged are
determined by reference to
the notional amount and the
other terms of the individual
interest rate swap agreements.
The Company enters into interest rate swaps with its loan customers. The Company had
and
interest rate swaps
with loan customers with
a notional amount of
$
33.9
million and $
39.2
million at December 31, 2022
and 2021, respectively.
These interest
rate swaps
have a
maturity date
between 2025
and 2051.
The Company
entered into
corresponding
and
offsetting derivatives
with third parties.
The fair
value of liability
on these derivatives
requires the
Company to
provide the
counterparty with funds to
be held as collateral which
the Company reports as
other assets under the Consolidated
Balance
Sheets. While these derivatives represent economic
hedges, it does not qualify as hedges for accounting purposes.
The following table reflects the Company’s customer
related interest rate swaps for the dates indicated (in
thousands):
Fair Value
Notional
Amount
Collateral
Amount
Balance Sheet Location
Asset
Liability
December 31, 2022:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
33,893
$
1,278
Other assets/Other liabilities
$
5,011
$
5,011
December 31, 2021:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
39,156
$
1,260
Other assets/Other liabilities
$
1,434
$
1,434
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
12.
FAIR VALUE
MEASUREMENTS
Determination of Fair Value
The Company
uses
fair value
measurements
to record
fair-value
adjustments
to certain
assets
and liabilities
and to
determine fair value
disclosures. In accordance
with the fair
value measurements accounting
guidance, the fair
value of a
financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market
participants
at the
measurement
date. Fair
value is
best determined
based upon
quoted market
prices.
However, in
many instances, there
are no quoted market
prices for the Company's
various financial instruments.
In cases
where quoted
market prices
are not
available, fair
values are
based on
estimates using
present value
or other
valuation
techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.
The fair
value guidance provides
a consistent definition
of fair value,
which focuses on
exit price in
an orderly transaction
(that is,
not a
forced
liquidation
or distressed
sale) between
market
participants
at the
measurement
date
under current
market
conditions. If
there
has been
a significant
decrease
in the
volume
and level
of activity
for the
asset
or liability,
a
change in
valuation technique or
the use
of multiple
valuation techniques
may be
appropriate. In
such instances, determining
the
price
at
which
willing
market
participants
would
transact
at
the
measurement
date
under
current
market
conditions
depends on the facts
and circumstances and requires
the use of significant judgment.
The fair value is
a reasonable point
within the range that is most representative of fair value under
current market conditions.
Fair Value Hierarchy
In accordance with
this guidance, the
Company groups its
financial assets
and financial liabilities
generally measured
at fair
value in
three
levels, based
on the
markets
in which
the assets
and liabilities
are traded,
and the
reliability
of the
assumptions used to determine fair value.
Level 1
- Valuation
is based
on quoted
prices in
active markets
for identical
assets or
liabilities that
the reporting
entity has
the ability to
access at
the measurement
date. Level
1 assets
and liabilities
generally include
debt and
equity securities that
are traded in
an active exchange
market. Valuations are obtained from
readily available pricing
sources for market transactions involving identical assets
or liabilities.
Level 2
- Valuation
is based on inputs other
than quoted prices included
within Level 1 that are
observable for the
asset
or
liability,
either
directly
or
indirectly.
The
valuation
may
be
based
on
quoted
prices
for
similar
assets
or
liabilities; quoted
prices in
markets that
are not active;
or other inputs
that are observable
or can be
corroborated
by observable market data for substantially the full term
of the asset or liability.
Level 3
- Valuation
is based on
unobservable inputs that
are supported
by little or
no market activity
and that are
significant
to
the
fair
value
of
the
assets
or
liabilities.
Level
assets
and
liabilities
include
financial
instruments
whose value
is determined
using pricing
models, discounted
cash
flow methodologies,
or similar
techniques,
as
well as instruments for which determination of fair value
requires significant management judgment or estimation.
A
financial
instrument's
categorization
within
the
valuation
hierarchy
is
based
upon
the
lowest
level
of
input
that
is
significant to the fair value measurement.
Items Measured at Fair Value
on a Recurring Basis
Investment securities:
When instruments are
traded in secondary markets
and quoted market prices
do not exist for
such securities,
management generally
relies on
prices obtained
from independent
vendors or
third-party broker
-dealers.
Management reviews pricing methodologies provided by the vendors and third-party broker-dealers in order to determine if
observable market information is being utilized. Securities measured with pricing provided by independent vendors or
third-
party broker-dealers
are classified
within Level 2
of the hierarchy
and often
involve using quoted
market prices
for similar
securities, pricing models or discounted cash flow analyses
utilizing inputs observable in the market where available.
Derivatives:
The
fair
value
of
derivatives
are
measured
with
pricing
provided
by
third-party
participants
and
are
classified within Level 2 of the hierarchy.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
The following table represents
the Company's assets measured at
fair value on a
recurring basis at December 31, 2022
and 2021 for each of the fair value hierarchy levels (in thousands):
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Investment securities available for sale:
U.S. Government Agency
$
-
$
8,655
$
-
$
8,655
$
-
$
10,520
$
-
$
10,520
Collateralized mortgage obligations
-
95,541
-
95,541
-
156,829
-
156,829
Mortgage-backed securities - Residential
-
60,879
-
60,879
-
118,842
-
118,842
Mortgage-backed securities - Commercial
-
27,954
-
27,954
-
50,117
-
50,117
Municipal securities
-
18,483
-
18,483
-
24,276
-
24,276
Bank subordinated debt securities
-
14,919
-
14,919
-
28,408
-
28,408
Corporate bonds
-
3,709
-
3,709
-
12,550
-
12,550
Total
-
230,140
-
230,140
-
401,542
-
401,542
Derivative assets
-
5,011
-
5,011
-
1,434
-
1,434
Total assets at fair value
$
-
$
235,151
$
-
$
235,151
$
-
$
402,976
$
-
$
402,976
Derivative liabilities
$
-
$
5,011
$
-
$
5,011
$
-
$
1,434
$
-
$
1,434
Total liabilities at fair value
$
-
$
5,011
$
-
$
5,011
$
-
$
1,434
$
-
$
1,434
Items Measured at Fair Value
on a Non-recurring Basis
Impaired Loans:
At December
31, 2022
and 2021,
in accordance
with
provisions of
the
loan impairment
guidance,
individual loans
with a
carrying amount
of approximately
$
3.9
million and
$
4.4
million, respectively,
were written
down to
their
fair
value
of
approximately
$
3.6
million
and
$
4.0
million,
respectively,
resulting
in
an
impairment
charge
of
$
thousand
and $
thousand,
respectively,
which was
included in
the allowance
for credit
losses
at December
31,
2022 and 2021, respectively.
Loans applicable to write-downs, or
impaired loans, are estimated using
the present value of
expected
cash
flows
or
the
appraised
value
of
the
underlying
collateral
discounted
as
necessary
due
to
management's
estimates of changes in economic conditions are considered
a Level 3 valuation.
Other Real Estate:
Other real
estate owned are
valued at the
lesser of the
third-party appraisals
less management's
estimate of the
costs to
sell or the
carrying cost of
the other
real estate
owned. Appraisals generally
use the
market approach
valuation technique
and use
market observable
data to
formulate an
opinion of
the fair
value of
the properties.
However,
the appraiser
uses professional
judgment in
determining the
fair value
of the
property and
the Company
may also
adjust
the value for changes in
market conditions subsequent to
the valuation date when
current appraisals are not
available. As
a consequence of the carrying cost or the
third-party appraisal and adjustments therein, the fair values of the properties are
considered a Level 3 valuation.
The following table represents the Company’s assets measured at fair value on a non-recurring basis at December
31,
2022 and 2021 for each of the fair value hierarchy levels
(in thousands):
Level 1
Level 2
Level 3
Total
December 31, 2022:
Impaired loans
$
-
$
-
$
3,639
$
3,639
December 31, 2021:
Impaired loans
$
-
$
-
$
3,990
$
3,990
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
The following table presents
quantified information about
Level 3 fair value
measurements for assets measured
at fair
value on a non-recurring basis at December 31, 2022 and
2021 (in thousands):
Fair Value
Valuation Technique(s)
Unobservable Input(s)
December 31, 2022:
Residential real estate
$
3,500
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
Discounted cash flow
Adj. for differences in net operating income expectations
Other
Discounted cash flow
Adj. for differences in net operating income expectations
Total
impaired loans
$
3,639
December 31, 2021:
Residential real estate
$
3,807
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
Discounted cash flow
Adj. for differences in net operating income expectations
Other
Discounted cash flow
Adj. for differences in net operating income expectations
Total
impaired loans
$
3,990
There were
no
financial liabilities measured at fair value on a non-recurring
basis at December 31, 2022 and 2021.
Items Not Measured at Fair Value
The carrying amounts and estimated fair values of financial instruments not carried at fair value, at December 31, 2022
and 2021 are as follows (in thousands):
Fair Value Hierarchy
Carrying
Amount
Level 1
Level 2
Level 3
Fair Value
Amount
December 31, 2022:
Financial Assets:
Cash and due from banks
$
$6,605
$
$6,605
$
-
$
-
$
6,605
Interest-bearing deposits in banks
$
47,563
$
47,563
$
-
$
-
$
47,563
Investment securities held to maturity
$
188,699
$
-
$
169,088
$
-
$
169,088
Loans held for investment, net
$
1,489,851
$
-
$
-
$
1,436,877
$
1,436,877
Accrued interest receivable
$
7,546
$
-
$
1,183
$
6,363
$
7,546
Financial Liabilities:
Demand Deposits
$
$629,776
$
$629,776
$
-
$
-
$
629,776
Money market and savings accounts
$
915,853
$
915,853
$
-
$
-
$
915,853
Interest-bearing checking accounts
$
66,675
$
66,675
$
-
$
-
$
66,675
Time deposits
$
216,977
$
-
$
-
$
211,406
$
211,406
FHLB advances
$
46,000
$
-
$
44,547
$
-
$
44,547
Accrued interest payable
$
$
-
$
$
$
December 31, 2021:
Financial Assets:
Cash and due from banks
$
6,477
$
6,477
$
-
$
-
$
6,477
Interest-bearing deposits in banks
$
39,751
$
39,751
$
-
$
-
$
39,751
Investment securities held to maturity
122,658
$
-
$
120,157
$
-
$
120,157
Loans held for investment, net
$
1,175,024
$
-
$
-
$
1,189,191
$
1,189,191
Accrued interest receivable
$
5,975
$
-
$
1,222
$
4,753
$
5,975
Financial Liabilities:
Demand Deposits
$
605,425
$
605,425
$
-
$
-
$
605,425
Money market and savings accounts
$
703,856
$
703,856
$
-
$
-
$
703,856
Interest-bearing checking accounts
$
55,878
$
55,878
$
-
$
-
$
55,878
Time deposits
$
225,220
$
-
$
-
$
224,688
$
224,688
FHLB advances
$
36,000
$
-
$
36,479
$
-
$
36,479
Accrued interest payable
$
$
-
$
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
13.
STOCKHOLDERS’ EQUITY
Common Stock
On June 16, 2021, the Bank
effected a
1 for 5
reverse stock split of all
the Class A common stock
$
1.00
par value per
share. As of the effective date of June 16, 2021,
each five shares of the Company’s
Class A common stock was combined
into
one
fully paid share of
Class A common
stock. Any fractional
shares resulting from this
reverse stock split were
rounded
up to one whole share. The
Bank has adjusted the Class
A common stock, earnings per
share and stock options adjusted
for this
1 for 5
reverse stock
split for all
periods presented
here. The
Class B non-voting
common stock
was not adjusted
but if
sold or
exchanged
would be
converted at
the
1 for 5
reverse stock
split of
5 Class
B common
stock for
share of
Class A common stock.
On July 27, 2021, the Bank completed the Initial Public Offering (“IPO”) of its Class A common stock, in which it issued
and
sold
4,600,000
shares
of
Class
A
common
stock
at
a
price
of
$
10.00
per
share.
The
Company
received
total
net
proceeds of $
40.0
million after deducting underwriting discounts and
expenses.
On
December
21,
2021,
the
Company
entered
into
agreements
with
the
Class
B
shareholders
to
exchange
all
outstanding Class
B non-voting
common stock
for Class
A voting
common stock
at a
ratio of
5 to
1. On
the same
day,
a
total of
6,121,052
shares of Class B common stock was exchanged for
1,224,212
shares of Class A common stock.
In December 2021, the
Company acquired all
the issued and outstanding
shares of the Class
A voting common
stock
of
the
Bank,
which
were
the
only
issued
and
outstanding
shares
of
the
Bank’s
capital
stock,
in
a
share
exchange
(the
“Reorganization”)
effected
under
the
Florida
Business
Corporation
Act.
Each
of
the
outstanding
shares
of
the
Bank’s
common
stock, par
value $
1.00
per share,
formerly held
by its
shareholders
was
converted into
and exchanged
for one
newly issued
share of
the
Company’s
common
stock, par
value $
1.00
per share,
and the
Bank
became
the Company’s
wholly-owned
subsidiary.
Prior to
completing the
bank holding
company formation,
the Company
had no
material assets
and had not conducted any business or operations except
for activities related to our organization and the
Reorganization.
In the
Reorganization,
each
shareholder
of
the Bank
received securities
of
the same
class,
having substantially
the
same designations,
rights,
powers, preferences,
qualifications,
limitations
and restrictions,
as those
that the
shareholder
held
in
the
Bank,
and
the
Company’s
current
shareholders
own
the
same
percentages
of
its
common
stock
as
they
previously owned of the Bank’s common
stock.
Preferred Stock
On April 5, 2021,
the Board authorized and
approved the offer to
repurchase all outstanding shares of
Class E preferred
stock at
the liquidation
value of
$
7.5
million along
with declared
dividends of
$
thousand.
All Class
E preferred
stock
shareholders approved the repurchase which the Company
completed on April 26, 2021.
The Company offered the
Class C and Class D preferred
stockholders the ability to exchange
their shares for Class
A
common stock. The offer
to exchange was voluntary and
the preferred stockholders
were given the option to
convert
%
of
their
preferred
shares
for
Class
A
common
stock
with
the
remaining
%
to
be
redeemed
in
the
form
of
cash.
The
exchange ratio for the shares of
Class A common stock issued in the
exchange transaction was based upon
the IPO price
for shares of Class A common stock.
During the
year ended
2021,
47,473
shares of
Class C
preferred stock
and
11,061,552
shares of
Class D
preferred
stock converted
into
10,278,072
shares of
Class
A common
stock. The
exchange of
the Class
C and
Class D
preferred
shares had
a total
liquidation value
of $
102.8
million.
The remaining
unconverted shares
of Class
C preferred
stock and
Class D preferred stock totaling
1,234,354
shares were subsequently redeemed at liquidation
value for $
11.4
million.
The fair value of
consideration on the exchange and redemption
of the Class C and
Class D preferred shares exceeded
the
book
value
causing
a
one-time
reduction
in
net
income
available
to
common
stockholders
of
$
89.6
million.
As
of
December 31, 2022, there were
no
preferred shares and
no
outstanding dividends to be paid.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
Dividends
The Board approved
the following dividend
amounts on the
preferred shares for
the years ended
December 31, 2022
and 2021 (in thousands):
Preferred stock - Class C: Non-voting, Non-cumulative, Perpetual: $
1.00
par value; $
1,000
per share liquidation preference; annual dividend rate of
% of liquidation preference paid
quarterly. Quarterly dividend of $
10.00
per share.
$
-
$
1,494
Preferred stock - Class D: Non-voting, Non-cumulative, Perpetual: $
1.00
par value; $
5.00
per share liquidation preference; annual dividend rate of
% of par value paid quarterly.
Quarterly dividend of $
0.01
per share.
-
Preferred stock - Class E: Non-voting, partially cumulative, Perpetual: $
1.00
par value;
$
1,000
per share liquidation preference; annual dividend rate of
% of liquidation
preferences paid quarterly. Quarterly dividend of $
17.50
per share.
-
Total
dividends paid
$
-
$
2,077
Declaration of dividends by the Board is required before dividend payments are made. The dividend payment dates for
Class C and
Class D preferred shares
were set by
the Board while the
Class E preferred shares
had a set
dividend payment
date on the fifteenth of February,
May, August, and November.
No
dividends were approved by
the Board for the common
stock classes for the years ended
December 31, 2022 and
2021. Additionally, there
were
no
dividends declared and unpaid at December 31, 2022
and 2021.
14.
EARNINGS PER SHARE
Earnings
per
share
(“EPS”)
for
common
stock
is
calculated
using
the
two-class
method
required
for
participating
securities. Basic EPS
is calculated by
dividing net income (loss)
available to common
stockholders by the weighted-average
number of common shares outstanding for
the period, without consideration for common
stock equivalents. Diluted EPS is
computed by
dividing net
income
(loss)
available to
common
stockholders by
the
weighted-average number
of common
shares outstanding for
the period and
the weighted-average number
of dilutive common
stock equivalents outstanding
for
the period determined using the treasury-stock method. For purposes
of this calculation, common stock equivalents include
common stock options and are only included in the calculation
of diluted EPS when their effect is dilutive.
In calculating EPS for
the year ended
December 31, 2022 and 2021, net
income available to common stockholders
was
not allocated
between Class
A and
Class B
common stock
since there
was
no
issued and
outstanding Class
B common
stock at year-end.
The following table
reflects the calculation
of net income
(loss) available to
common stockholders
for the years
ended
December 31, 2022 and 2021 (in thousands):
Net Income
$
20,141
$
21,077
Less: Preferred stock dividends
-
2,077
Less: Exchange and redemption of preferred shares
-
89,585
Net income (loss) available to common stockholders
$
20,141
$
(70,585)
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
The following
table reflects
the calculation
of basic
and diluted
earnings (loss)
per common
share class
for the
years
ended December 31, 2022 and 2021 (in thousands, except per
share amounts):
Class A
Class A
Basic EPS
Numerator:
Net income (loss) available to common shares before allocation
$
20,141
$
(70,585)
Multiply: % allocated on weighted avg. shares outstanding
100.0%
100.0%
Net income (loss) available to common shares after allocation
$
20,141
$
(70,585)
Denominator:
Weighted average shares outstanding
19,999,323
10,507,530
Earnings (loss) per share, basic
$
1.01
$
(6.72)
Diluted EPS
Numerator:
Net income (loss) available to common shares before allocation
$
20,141
$
(70,585)
Multiply: % allocated on weighted avg. shares outstanding
100.0%
100.0%
Net income (loss) available to common shares after allocation
$
20,141
$
(70,585)
Denominator:
Weighted average shares outstanding for basic EPS
19,999,323
10,507,530
Add: Dilutive effects of assumed exercises of stock options
177,515
-
Weighted avg. shares including dilutive potential common shares
20,176,838
10,507,530
Earnings (loss) per share, diluted
$
1.00
$
(6.72)
Anti-dilutive stock options excluded from diluted EPS
15,000
183,303
For the year
ended 2021, the
Company was
in a net
loss position after
adjusting for
the exchange and
redemption of
the Class C
and Class D
preferred shares, making
basic net loss
per share the
same as diluted
net loss per
share as the
inclusion of all potential common shares outstanding would
have been antidilutive.
See Note 13 “Stockholders’ Equity” for further discussion
on the stock splits.
15.
REGULATORY
MATTERS
Banks and
bank holding
companies
are subject
to regulatory
capital requirements
administered by
federal and
state
banking
agencies.
Failure
to
meet
minimum
capital
requirements
can
initiate
certain
mandatory
and
possibly
additional
discretionary actions
by regulators
that, if
undertaken, could
have a
direct material
effect on
the Company's
consolidated
financial
statements.
Under
capital
adequacy
guidelines
and
the
regulatory
framework
for
prompt
corrective
action,
the
Company and the
Bank must meet
specific capital guidelines
that involve quantitative
measures of
their assets, liabilities,
and
certain
off-balance-sheet
items
as
calculated
under
regulatory
accounting
practices.
The
Company
and
the
Bank’s
capital
amounts
and
classification
are
also
subject
to
qualitative
judgments
by
the
regulators
about
components,
risk
weightings, and other factors.
Based on changes to the Federal Reserve’s definition of a “Small Bank Holding
Company” that increased the threshold
to $3.0 billion in assets
in August 2018, the Company
is not currently subject to
separate minimum capital measurements.
At such time when the Company reaches the
$3.0 billion asset level, it will
be subject to capital measurements independent
of the Bank.
The Bank has
elected to permanently opt-out
of the inclusion
of accumulated other comprehensive
income in the
capital
calculations, as permitted by the regulations. This
opt-out will reduce the impact of
market volatility on the Bank’s regulatory
capital levels.
The Bank is
subject to the
rules of the
Basel III regulatory capital
framework and related Dodd-Frank
Wall Street Reform
and Consumer Protection
Act. The rules include
the implementation of
a
2.5
% capital conservation
buffer that is
added to
the minimum
requirements for capital
adequacy purposes.
Failure to maintain
the required capital
conservation buffer
will
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
limit the ability of
the Bank to pay
dividends, repurchase shares
or pay discretionary
bonuses. At December
31, 2022 and
2021, the capital ratios for the Bank were sufficient
to meet the conservation buffer.
Prompt
corrective
action
regulations
provide
five
classifications:
well
capitalized,
adequately
capitalized,
undercapitalized,
significantly
undercapitalized,
and
critically
undercapitalized,
although
these
terms
are
not
used
to
represent overall financial condition. If
adequately capitalized, regulatory approval
is required to accept brokered
deposits.
If
undercapitalized,
capital
distributions
are
limited,
as
is
asset
growth
and
expansion,
and
capital
restoration
plans
are
required.
At December 31,
2022 and
2021, the most
recent notification
from the
regulatory authorities
categorized the
Bank as
well capitalized
under the
regulatory framework
for prompt
corrective action.
Failure to
meet statutorily
mandated
capital
guidelines
could
subject
the
Bank
to
a
variety
of
enforcement
remedies,
including
issuance
of
a
capital
directive,
the
termination of deposit
insurance by the
FDIC, a prohibition
on accepting or
renewing brokered deposits,
limitations on the
rates of
interest that
the Bank
may pay
on
its deposits
and other
restrictions
on
its business.
To
be categorized
as well
capitalized, an institution must
maintain minimum
total risk-based, Tier
1 risk-based and Tier
1 leverage ratios as
set forth
in the
table below.
There are
no conditions
or events
since the
notification that
management
believes have
changed the
Bank’s category.
Actual and required
capital amounts
and ratios are
presented below for
the Bank at
December 31, 2022 and
2021 (in
thousands, except ratios). The required amounts for capital adequacy
shown do not include the capital conservation buffer
previously discussed.
Actual
Minimum Capital
Requirements
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2022:
Total
risk-based capital:
$
216,693
13.58
%
$
127,616
8.00
%
$
159,520
10.00
%
Tier 1 risk-based capital:
$
198,909
12.47
%
$
95,712
6.00
%
$
127,616
8.00
%
Common equity tier 1 capital:
$
198,909
12.47
%
$
71,784
4.50
%
$
103,688
6.50
%
Leverage ratio:
198,909
9.56
%
$
83,210
4.00
%
$
104,012
5.00
%
December 31, 2021:
(1)
Total
risk-based capital
$
186,735
14.92
%
$
100,125
8.00
%
$
125,157
10.00
%
Tier 1 risk-based capital
$
171,484
13.70
%
$
75,094
6.00
%
$
100,125
8.00
%
Common equity tier 1 capital
$
171,484
13.70
%
$
56,321
4.50
%
$
81,352
6.50
%
Leverage ratio
$
171,484
9.55
%
$
71,825
4.00
%
$
89,781
5.00
%
Effective December 30, 2021, the Company acquired the Bank in a merger and
reorganization through the formation of
a bank holding company.
Pursuant to this transaction, all of the
outstanding shares of the Bank’s
$
1.00
par value common
stock formerly
held by
its shareholders
was converted
into and
exchanged for
one newly
issued share
of the
Company’s
par value common stock,
and the Bank
became a subsidiary of
the Company. See Note 13 “Stockholders’ Equity”
for further
details.
The Company
is limited in
the amount
of cash
dividends that
it may
pay.
Payment of
dividends is generally
limited to
the Company’s
net income
of the
current year
combined with
the Bank’s
retained income
of the
preceding two
years, as
defined by state banking regulations. However, for any dividend declaration, the Company
must consider additional factors
such as the amount
of current period net
income, liquidity,
asset quality,
capital adequacy and
economic conditions at
the
Bank. It is likely that
these factors would further limit the
amount of dividends which the Company
could declare. In addition,
bank regulators have
the authority to
prohibit banks
from paying dividends
if they deem
such payment to
be an unsafe
or
unsound practice.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
16.
RELATED PARTY
TRANSACTIONS
In
the
ordinary
course
of
business,
principal
officers,
directors,
and
affiliates
may
engage
in
transactions
with
the
Company.
The
following
table
presents
loans
to
and
deposits
from
related
parties
included
within
the
accompanying
Consolidated Financial Statements at December
31, 2022 and 2021 (in thousands):
Consolidated Balance Sheets:
Loans held for investment, net
$
-
$
-
Deposits
$
6,825
$
1,905
Consolidated Statements of Operations:
Interest income
$
-
$
-
Interest expense
$
$
Loan Purchases
During 2022, the Bank purchased $
42.8
million of loans from entities that are deemed to
be related parties.
The Bank
paid those entities fees of $
thousand.
17.
PARENT COMPANY
CONDENSED FINANCIAL INFORMATION
In December
2021, USCB
Financial Holdings,
Inc. was
formed as
the parent
bank holding
company of
U.S. Century
Bank.
The
condensed
balance
sheet
is
presented
below
for
USCB
Financial
Holdings,
Inc.
at
the
dates
indicated
(in
thousands):
December 31, 2022
December 31, 2021
ASSETS:
Cash and Cash Equivalents
$
1,102
$
-
Investment in bank subsidiary
181,326
203,897
Other assets
-
-
Total
assets
$
182,428
$
203,897
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities
$
-
$
-
Stockholders' equity
182,428
203,897
Total
liabilities and stockholders' equity
$
182,428
$
203,897
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
The
condensed
income
statement
is
presented
below
for
USCB
Financial
Holdings,
Inc.
at
the
dates
indicated
(in
thousands):
December 31, 2022
December 31, 2021
INCOME:
Dividends from subsidiaries
$
1,000
$
-
Service fees from subsidiaries
-
-
Total
$
1,000
$
-
EXPENSE:
Employee compensation and benefits
-
-
Total
-
-
Income before income taxes and undistributed subsidiary income
1,000
Provision (benefit) for income taxes
-
-
Equity in undisbursed subsidiary income
19,141
Net Income
$
20,141
$
-
The condensed cash flow is presented below for USCB
Financial Holdings, Inc. at the dates indicated (in thousands):
December 31, 2022
December 31, 2021
Cash flows from operating activities:
Net income
$
20,141
$
-
Adjustments to reconcile net income to net cash provided
by operating
activities:
-
Equity in undistributed earnings of subsidiaries
(19,141)
-
Other
-
Net cash provided by operating activities
$
1,000
$
-
Cash flows from investing activities:
Capital contributions to subsidiary
-
-
Other
-
-
Net cash used in investing activities
-
-
Cash flows from financing activities:
Dividends paid
-
-
Proceeds from exercise of stock options
-
Repurchase of common stock
-
-
Net cash (used in) provided by financing activities
-
Net increase (decrease) in cash and cash equivalents
1,102
-
Cash and cash equivalents, beginning of period
-
-
Cash and cash equivalents, end of period
$
1,102
$
-
18.
LOSS CONTINGENCIES
Loss contingencies,
including claims
and legal actions
may arise
in the ordinary
course of
business. In
the opinion
of
management, none
of these
actions, either
individually or
in the aggregate,
is expected
to have
a material
adverse effect
on the Company’s Consolidated Financial Statements.
19.
SUBSEQUENT EVENTS
Management has
evaluated subsequent
events from
January 1,
2023 through
March 24,
2023, which
is the
date this
Annual Report Form 10-K was available to be issued.
Share Repurchase Program
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
USCB Financial Holdings, Inc.
2022 10-K
In February 2023 the
Company repurchased
250,000
shares of USCB Financial
Holdings Inc. Class
A common stock
at
a
price
of
$
12.04
.
Additionally,
the
Company
repurchased
250,000
shares
of
USCB
Financial
Holdings
Inc
Class
A
Common stock
at a
price of
$
11.39
in March
2023. These
repurchases were
made thru
the open
market pursuant
to the
Company’s publicly announced repurchase program.
USCB Financial Holdings, Inc.
2022 10-K

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and its
Chief
Financial
Officer,
we evaluated
the
effectiveness
of
the
design
and
operation
of
the
Company’s
disclosure
controls
and
procedures
as
of
December 31,
2022.
Based
on
that
evaluation,
management
believes
that
the
Company’s
disclosure
controls
and
procedures
were
effective
to
collect,
process,
and
disclose
the
information
required
to
be
disclosed
in
the
reports filed or
submitted under
the Exchange
Act within the
required time
periods as of
the end of
the period covered
by
this Report.
Management’s Report on Internal Control
over Financial Reporting
Management is responsible for designing, implementing, documenting, and
maintaining an adequate system of internal
control over financial
reporting, as
such term
is defined in
the Exchange
Act. An
adequate system
of internal control
over
financial reporting encompasses the processes and procedures
that have been established by management to:
•
maintain records that accurately reflect the Company’s
transactions;
•
prepare
financial
statement
and
footnote
disclosures
in
accordance
with
U.S.
GAAP
that
can
be
relied
upon
by
external users; and
•
prevent and detect unauthorized acquisition, use or disposition of the Company's assets that could have a material
effect on the financial statements.
Management conducted
an evaluation
of the
effectiveness
of the
Company's
internal control
over financial
reporting
based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the
Treadway
Commission
(COSO).
Based
on
this
evaluation
under
the
criteria
in
Internal
Control-Integrated
Framework,
management concluded that
internal control over financial
reporting was effective
as of December 31,
2022. Furthermore,
during the conduct of its assessment, management identified no material weakness in
its financial reporting control system.
The Board of USCB
Financial Holdings, Inc., through its
Audit Committee, provides oversight to
management’s conduct
of
the
financial
reporting
process.
The
Audit
Committee,
which
is
composed
entirely
of
independent
directors,
is
also
responsible for the appointment of the independent registered public accounting firm. The
Audit Committee also meets with
management, the internal audit staff,
and the independent registered public accounting
firm throughout the year to provide
assurance as to the adequacy of the financial
reporting process and to monitor the overall
scope of the work performed by
the internal audit staff and the independent public accountants.
Because of its inherent limitations, the disclosure controls and
procedures may not prevent or detect misstatements.
A
control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the
objectives of the control system are met. Because
of the inherent limitations in all control systems, no evaluation
of controls
can provide absolute assurance that all control issues and instances of
fraud, if any, have
been detected. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There has been
no change in
our internal control
over financial reporting
(as defined in
Rules 13a-15(f) and
15d-15(f)
under the
Exchange Act)
during our
most recent
fiscal quarter
that has
materially affected, or
is reasonably
likely to
materially
affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not applicable.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required
herein is incorporated
by reference from
the sections captioned “Information
with Respect to
Nominees for
Director and Information
About Executive Officers”
and “Beneficial Ownership
of Common Stock
by Certain
Beneficial Owners and Management -
Delinquent Section 16(a) Reports”
in the Company’s Definitive
Proxy Statement for
the Annual Meeting
of Shareholders
currently expected
to be held
on May 22,
2023, is expected
to be
filed with the
SEC
within 120 days of December 31, 2021 (“2023 Definitive
Proxy Statement”).
The Company has
adopted a code
of ethics and
business conduct policy,
which applies to
all of its
directors, officers,
including its principal executive officer, principal financial officer, principal accounting officer,
and employees generally. The
Company
will provide
a copy
of its
code
of ethics
to any
person, free
of charge,
upon request.
Any requests
for a
copy
should
be
made
to
the
Corporate
Secretary,
USCB
Financial
Holdings,
Inc.,
N.W.
87th
Avenue,
Doral,
Florida.
In
addition, a
copy
of the
Code of
Ethics is
available at
the Company’s
website at
www.uscentury.com
under the
“Investor
Relations” tab.
There
have
been
no
material
changes
to
the
procedures
by
which
shareholders
may
recommend
nominees
to
the
Company’s Board.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information
required herein
is incorporated
by reference
from
the sections
captioned "Executive
Compensation"
and “Information with Respect to
Nominees for Director and Information About
Executive Officers - Director Compensation”
in the Company’s 2023 Definitive Proxy Statement.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
. Information regarding security ownership
of certain beneficial owners and management is incorporated
by reference to “Beneficial Ownership of Common Stock
by
Certain Beneficial Owners and Management” in the 2023 Definitive
Proxy Statement.
Equity Compensation Plan Information
. Information regarding the Company’s equity
plans is incorporated from
Note 9 “Equity Based and Other Compensation Plans”
to the Consolidated Financial Statements included in
this Annual
Report on Form 10-K.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions,
and Director Independence
The information
required herein
is incorporated
by reference
from
the sections
captioned “Certain
Relationships and
Related
Party
Transactions”
and
“Information
with
Respect
to
Nominees
for
Director
and
Information
About
Executive
Officers” in the 2023 Definitive Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required herein is incorporated by reference
from the section captioned “Ratification of
Appointment of Independent Registered Public Accounting
Firm (Proposal Two)
- Audit Fees” in the 2023 Definitive Proxy
Statement.
USCB Financial Holdings, Inc.
2022 10-K
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)
List of documents filed as part of this Annual Report:
1)
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the years ended
December 31, 2022 and 2021
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2022 and 2021
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2022 and
Consolidated Statements of Cash Flows for the
years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
2)
Financial Statement Schedules:
Financial statement schedules are omitted as not required
or not applicable or because the information is
included in the Consolidated Financial Statements or
notes thereto.
(b)
List of Exhibits:
The exhibit list in the Exhibit Index is incorporated herein
by reference as the list of exhibits required as part of
this Annual Report on Form 10-K.
USCB Financial Holdings, Inc.
2022 10-K
EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
2.1
Agreement and Plan of Share Exchange, dated December 27, 2021, by and between U.S. Century Bank and USCB Financial
Holdings, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-41196)
filed with the Securities and Exchange Commission on December 30, 2021).
3.1
Articles of Incorporation of USCB Financial Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K (File No. 001-41196) filed with the Securities and Exchange Commission on December 30, 2021).
3.2
Amended and Restated Bylaws of USCB Financial Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-41196) filed with the Securities and Exchange Commission on December 30, 2021).
4.1
Side Letter Agreement, dated December 30, 2021, between USCB Financial Holdings, Inc., U.S. Century Bank, Priam Capital
Fund II, LP, Patriot Financial Partners II, L.P. and Patriot Financial Partners Parallel II, L.P. (incorporated by reference to Exhibit
4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-41196) filed with the Securities and Exchange Commission
on December 30, 2021).
4.2
Registration Rights Agreement, dated March 17, 2015, between U.S. Century Bank, Priam Capital Fund II, LP, Patriot Financial
Partners II, L.P., Patriot Financial Partners Parallel II, L.P., and certain other shareholders of U.S. Century Bank (incorporated
by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-41196) filed with the Securities and
Exchange Commission on December 30, 2021).
4.3
Assignment and Assumption of Agreement, dated December 30, 2021, between U.S. Century Bank and USCB Financial
Holdings, Inc. (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 001-41196)
filed with the Securities and Exchange Commission on December 30, 2021).
4.4
Description of USCB Financial Holdings, Inc.’s securities (incorporated by reference to Exhibit 4.4 to the
Registrant’s Annual Report on Form 10-K for the year ended December 1, 2021 (File No. 001-41196) filed with
the Securities and Exchange Commission on March 24, 2022).
10.1
U.S. Century Bank Amended and Restated 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 001-41196) filed with the Securities and Exchange Commission on
December 30, 2021).
10.2
Amended and Restated Employment Agreement by and among USCB Financial Holdings, Inc., U.S. Century Bank
and Luis de la Aguilera dated as of January 29, 2023 (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K dated as of January 29, 2023 (File No. 001-41196) filed with the Securities and
Exchange Commission on February 1, 2023).*
10.3
Amended and Restated Employment Agreement by and among USCB Financial Holdings, Inc., U.S. Century Bank
and Robert Anderson dated as of January 29, 2023 (incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K dated as of January 29, 2023 (File No. 001-41196) filed with the Securities and
Exchange Commission on February 1, 2023).*
10.4
Change in Control Agreement between U.S. Century Bank and Benigno Pazos dated August 2, 2019 (incorporated
by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 1, 2021
(File No. 001-41196) filed with the Securities and Exchange Commission on March 24, 2022).*
10.5
Employment Agreement between U.S. Century Bank and Jalal “Jay” Shehadeh dated as of September 28,
2020.
***
21.1
Subsidiaries of USCB Financial Holdings, Inc.
**
23.1
Consent of Crowe LLP, Independent Registered Public Accounting Firm.
**
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
**
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
**
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
***
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
***
The following financial statements from
the Company’s Annual Report on
Form 10-K for the year ended
December 31, 2021,
formatted
in
Inline
XBRL:
(i)
Consolidated
Balance
Sheets,
(ii)
Consolidated
Statements
of
Operations,
(iii)
Consolidated
Statements
of
Comprehensive Income,
(iv) Consolidated
Statements of
Changes
in
Stockholders’ Equity,
(v) Consolidated
Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Management contract or compensatory plan or arrangement.
**
Filed herwith.
***
Furnished hereby.
USCB Financial Holdings, Inc.
2022 10-K