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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-K

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR

 

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended

December 31, 2023

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____

Commission File Number:

001-41196

USCB Financial Holdings, Inc.

(Exact name of registrant as specified in its

 

charter)

 

Florida

87-4070846

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2301 NW 87th Avenue

,

Doral

,

FL

33172

(Address of principal executive offices) (zip

 

code)

Registrant’s telephone number, including area code:

 

(

305

)

715-5200

Securities registered pursuant to Section 12(b)

 

of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $1.00 par value per

share

USCB

The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g)

 

of the Act:

 

None

Indicate by check mark if the registrant is a well-known

 

seasoned issuer, as defined in Rule 405 of the Securities Act.

☐

 

Yes

 

No

☒

Indicate by check mark if the registrant is not required

 

to file reports pursuant to Section 13 or Section

 

15(d) of the Act.

 

Yes

☐

 

No

☒

Indicate by check mark

 

whether the registrant (1) has

 

filed all reports

 

required to be filed

 

by Section 13 or

 

15(d) of the Securities

 

Exchange Act of

1934 during the

 

preceding 12 months (or

 

for such shorter

 

period that the

 

registrant was required to

 

file such reports),

 

and (2) has

 

been subject to

such filing requirements for the past 90 days.

 

Yes

☒

 

No

☐

Indicate by check mark whether the registrant has

 

submitted electronically every Interactive Data File required

 

to be submitted pursuant to Rule 405

of Regulation S-T

 

(§232.405 of this chapter)

 

during the preceding

 

12 months (or for

 

such shorter period

 

that the registrant

 

was required to submit

such files).

 

Yes

☒

 

No

☐

Indicate by check mark whether

 

the registrant is a large

 

accelerated filer, an accelerated filer, a non-accelerated

 

filer, a smaller reporting company or

an emerging growth company. See the definitions of “large

 

accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,”

and “emerging growth company” in Rule 12b-2 of

 

the Exchange Act.

Large accelerated filer

☐

 

Accelerated filer

☐

 

Non-accelerated filer

☒

 

Smaller reporting company

☒

 

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant

 

has elected not to use the extended

 

transition period for complying with any

new or revised financial accounting standards provided

 

pursuant to Section 13(a) of the Exchange

 

Act.

☐

Indicate by check mark

 

whether the registrant has

 

filed a report on

 

and attestation to its

 

management’s assessment of the

 

effectiveness of its internal

control over

 

financial reporting

 

under Section

 

404(b) of

 

the Sarbanes-Oxley

 

Act (15

 

U.S.C.7262(b)) by

 

the registered

 

public accounting

 

firm that

prepared or issued its audit report.

 

☐

 

If securities are registered pursuant to Section 12(b) of the Act, indicate

 

by check mark whether the financial statements of the registrant included in

the filing reflect the correction of an error to previously

 

issued financial statements.

 

☐

 

Indicate by check mark whether any of those

 

error corrections are restatements that required a recovery analysis of incentive-based compensation

received by any of the registrant’s executive officers during

 

the relevant recovery period pursuant to §240.10D-1(b).

☐

Indicate by check mark whether the registrant is a

 

shell company (as defined in Rule 12b-2 of the

 

Securities Exchange Act of 1934). Yes

☐

 

No

☒

The aggregate market value of the voting stock held

 

by non-affiliates of the registrant based on the

 

closing price of $10.20 per share on June

 

30,

2023, the last business day of the registrant’s second quarter, was approximately $

104.8

 

million (19,544,777 shares issued and outstanding

 

at

such date less shares held by affiliates). Although directors

 

and executive officers and their affiliates of the Registrant were assumed

 

to be

“affiliates” of the Registrant for purposes of the calculation,

 

the classification is not to be interpreted as an admission

 

of such status.

As of March 15, 2024, the registrant had had

19,650,463

 

shares of Class A Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s Proxy Statement for the 2024 Annual Meeting of Shareholders (the “2024

 

Proxy Statement”) are incorporated by

reference into Part III of this report.

 

FORM 10-K

DECEMBER 31, 2023

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements

PART I

4

Item 1.

Business

4

Item 1A.

Risk Factors

20

Item 1B.

Unresolved Staff Comments

44

Item 1C.

Cybersecurity

44

Item 2.

Properties

46

Item 3.

Legal Proceedings

46

Item 4.

Mine Safety Disclosures

46

PART II

47

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

47

Item 6.

Reserved

49

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

50

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

71

Item 8.

Financial Statements and Supplementary Data

72

Consolidated Balance Sheets

74

Consolidated Statements of Operations

75

Consolidated Statements of Comprehensive Income

 

(Loss)

76

Consolidated Statements of Changes in Stockholders’ Equity

77

Consolidated Statements of Cash Flows

78

Notes to the Consolidated Financial Statements

80

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

118

Item 9A.

Controls and Procedures

118

Item 9B.

Other Information

118

Item 9C.

 

Disclosure Regarding Foreign Jurisdictions That Prevent Inspections

119

PART III

120

Item 10.

Directors, Executive Officers and Corporate Governance

120

Item 11.

Executive Compensation

120

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

120

Item 13.

Certain Relationships and Related Transactions, and Director Independence

120

Item 14.

Principal Accountant Fees and Services

120

PART IV

121

Item 15.

Exhibit and Financial Statement Schedules

121

Item 16.

Form 10-K Summary

122

Exhibit Index

122

Signatures

 

3

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

CAUTIONARY NOTE REGARDING 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,” “could,”

 

“should,” “would,” “believe,”

 

“contemplate,”

“expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are

intended

 

to

 

identify

 

forward-looking

 

statements.

 

These

 

forward-looking

 

statements

 

include

 

statements

 

related

 

to

 

our

projected

 

growth,

 

anticipated

 

future

 

financial

 

performance,

 

and

 

management’s

 

long-term

 

performance

 

goals,

 

as

 

well

 

as

statements relating to

 

the anticipated effects

 

on results of

 

operations and financial

 

condition from expected

 

developments

or events, or business and growth strategies, including

 

anticipated internal growth.

These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ

materially from those anticipated in such statements.

 

Potential risks and uncertainties include, but are not

 

limited to:

•

 

the strength of the United States economy

 

in general and the strength of the local

 

economies in which we conduct

operations;

•

 

our ability to successfully manage interest rate risk, credit

 

risk, liquidity risk, and other risks inherent to our industry;

•

 

the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss

reserve and deferred tax asset valuation allowance;

•

 

the efficiency and effectiveness of our

 

internal control 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;

•

 

adverse

 

changes

 

or

 

conditions

 

in

 

the

 

capital

 

and

 

financial

 

markets,

 

including

 

actual

 

or

 

potential

 

stresses

 

in

 

the

banking industry;

•

 

deposit attrition and the level of our uninsured deposits;

•

 

legislative or regulatory

 

changes and changes

 

in accounting

 

principles, policies,

 

practices or guidelines,

 

including

the on-going effects of the implementation of the

 

Current Expected Credit Losses (“CECL”);

•

 

the lack of a significantly 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,

in particular, commercial real estate;

•

 

the effects of climate change;

•

 

the concentration of ownership of our common stock;

•

 

fluctuations in the price of our common stock;

•

 

our ability to fund or access the capital markets at attractive

 

rates and terms and manage our growth, both organic

growth as well as growth through other means, such as

 

future acquisitions;

•

 

inflation, interest rate, unemployment rate, market, and monetary

 

fluctuations;

•

 

impacts of international hostilities and geopolitical events;

•

 

increased

 

competition

 

and

 

its

 

effect

 

on

 

the

 

pricing

 

of

 

our

 

products

 

and

 

services

 

as

 

well

 

as

 

our

 

net

 

interest

 

rate

spread and net interest margin;

•

 

the loss of key employees;

 

•

 

the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,

employee, or third-party fraud and cybersecurity breaches;

 

and

 

•

 

other

 

risks

 

described

 

in

 

this

 

Annual

 

Report

 

on

 

Form

 

10-K

 

and

 

other

 

filings

 

we

 

make

 

with

 

the

 

Securities

 

and

Exchange Commission (“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 in this Annual

Report on Form 10-K

 

and in the reports the

 

Company filed or will file

 

with the SEC and, for

 

periods prior to the completion

of

 

the

 

bank

 

holding

 

company

 

reorganization,

 

U.S.

 

Century

 

Bank

 

(the

 

“Bank”)

 

filed

 

with

 

the

 

Federal

 

Deposit

 

Insurance

Corporation (“FDIC”).

 

Table of Contents

 

 

4

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

PART I

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,

 

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

 

direct

 

subsidiary,

 

operates

 

10

 

banking

 

centers

 

in

 

South

 

Florida

 

providing

 

a

 

wide

 

range

 

of

 

personal

 

and

business

 

banking products

 

and services

 

.

 

As of

 

December 31,

 

2023, the

 

Company

 

had total

 

consolidated

 

assets

 

of $2.3

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

 

to

 

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 FDIC.

As a result of the Reorganization, 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 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

 

Table of Contents

 

 

5

 

USCB Financial Holdings, Inc.

 

2023 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,

2023, 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.

 

•

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,

 

associates, 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

 

ICS and

 

CDARS deposit

 

products that

 

are

FDIC-insured for our clients. Furthermore, 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.

 

 

Table of Contents

 

 

6

 

USCB Financial Holdings, Inc.

 

2023 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

 

United States

 

Census Bureau’s

 

estimate,

 

Florida was

 

the third most

 

populous state in

 

the country in

2023 and the three largest population

 

centers were in Miami-Dade, Broward, and Palm

 

Beach counties (all located in South

Florida) in

 

2022. According

 

to estimates

 

from the

 

United States

 

Census Bureau,

 

from 2020

 

to 2023,

 

Florida’s

 

population

increased to 22.6 million residents, an increase of 1.0 million new residents. The percentage change in

 

Florida’s population

between April 2020 and July 2023 alone was 5.0% 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

 

107

 

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.

 

We will

 

remain an

 

EGC until

 

the earliest

 

to occur

 

of (i)

 

the end

 

of the

 

fiscal year

 

following the

 

fifth anniversary

 

of the

completion of the Bank’s initial public offering in 2021,

 

(ii) the last day of the first fiscal year in

 

which the Company's annual

gross revenues exceed $1.24 billion, (iii)

 

the date that the Company becomes

 

a “large accelerated filer” as defined

 

in Rule

12b-2 under the Exchange Act which would

 

occur if the market value of the

 

Company's common stock that is held

 

by non-

affiliates exceeds $700 million as of the last business day

 

of the Company’s most recently completed second

 

fiscal quarter

(June 30th for the

 

Company), or (iv) the date on

 

which the Company has issued more

 

than $1 billion in non-convertible debt

during the preceding three-year period.

 

Table of Contents

 

 

7

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

Our human capital

 

objectives include attracting,

 

developing and retaining

 

the best available

 

talent from a

 

diverse pool

of

 

candidates

 

for

 

the

 

Company.

 

To

 

do

 

so,

 

we

 

strive

 

to

 

maintain

 

competitive

 

pay

 

and

 

benefits,

 

regularly

 

updating

 

our

compensation

 

structure

 

and

 

periodically

 

reviewing

 

our

 

compensation

 

and

 

benefits

 

programs.

 

Additionally,

 

the

 

Company

identifies

 

opportunities

 

and

 

paths

 

for

 

the

 

development

 

of

 

our

 

staff,

 

and

 

we

 

seek

 

to,

 

whenever

 

possible,

 

fill

 

positions

 

by

promotion within. The Company recognizes that the skills and knowledge of its employees

 

are critical to the success of the

organization, and promotes training and continuing education

 

as an ongoing function for employees.

We recognize

 

the importance

 

of our

 

employee's

 

financial

 

health and

 

well-being,

 

and offer

 

benefits such

 

as a

 

401(k)

retirement savings plan and make both matching and profit-sharing contributions to that plan. Benefit programs available to

eligible

 

employees

 

include,

 

in

 

addition

 

to

 

the

 

401(k)

 

retirement

 

savings

 

plan,

 

health

 

and

 

life

 

insurance,

 

employee

 

paid

holidays and other benefits.

We value and

 

promote diversity and

 

inclusion in every

 

aspect of our

 

business and at

 

every level within

 

the Company.

We recruit, hire, and promote

 

employees based on their individual

 

ability and experience and in

 

accordance with Affirmative

Action and Equal

 

Employment Opportunity

 

laws and regulations.

 

Our policy is

 

that we

 

do not discriminate

 

on the basis

 

of

race, color,

 

religion, sex,

 

gender,

 

sexual orientation,

 

ancestry,

 

pregnancy,

 

medical condition,

 

age, marital

 

status, national

origin, citizenship status, disability veteran status, gender identity, genetic information, or any other status protected by law.

At December 31, 2023,

 

we had 196

 

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

 

and regulation.

These laws

 

and 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

 

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 the 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

 

intended

to be

 

a complete

 

explanation

 

of such

 

laws

 

and regulations

 

and

 

their

 

effects

 

on

 

USCB Financial

 

Holdings,

 

Inc. and

 

U.S.

Century Bank and are qualified

 

in their entirety by reference

 

to the actual laws and

 

regulations. You

 

should refer to the full

text of the statutes, regulations, and corresponding guidance

 

for more information.

 

Table of Contents

 

 

8

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

2018 Regulatory Reform

In May 2018

 

the Economic

 

Growth, Regulatory

 

Relief and

 

Consumer Protection

 

Act (the “2018

 

Act”), was

 

enacted to

modify or remove

 

certain financial reform

 

rules and regulations, including

 

some of those

 

implemented under the

 

Dodd-Frank

Wall Street Reform

 

and Consumer Protection

 

Act (“Dodd-Frank Act”) enacted

 

in 2010. While the 2018

 

Act maintains most

of the

 

regulatory

 

structure established

 

by the

 

Dodd-Frank Act,

 

it amends

 

certain aspects

 

of the

 

regulatory framework

 

for

small depository

 

institutions

 

with assets

 

of less

 

than $10

 

billion and

 

for large

 

banks

 

with assets

 

of more

 

than $50

 

billion.

Many of these changes resulted in meaningful regulatory

 

relief for community banks such as U.S. Century Bank.

 

The 2018 Act, among other matters, expanded

 

the definition of “qualified mortgages”

 

which may be held by a financial

institution

 

and

 

simplified

 

the

 

regulatory

 

capital

 

rules

 

for

 

financial

 

institutions

 

and

 

their

 

holding

 

companies

 

with

 

total

consolidated assets of less

 

than $10 billion by instructing

 

(as described below) the

 

federal banking regulators to

 

establish

a single “Community Bank Leverage Ratio” of between 8 and 10 percent to

 

replace the leverage and risk-based regulatory

capital ratios.

 

The 2018

 

Act also

 

expanded the

 

category of

 

holding companies

 

that may

 

rely on

 

the “Small

 

Bank Holding

Company and Savings and Loan Holding Company Policy Statement” (the “SBHC Policy”) by raising the maximum amount

of assets a

 

qualifying holding company may

 

have from $1.0

 

billion to $3.0

 

billion. This expansion also

 

excluded such holding

companies

 

from

 

the minimum

 

capital

 

requirements

 

of

 

the Dodd-Frank

 

Act. In

 

addition,

 

the

 

2018

 

Act included

 

regulatory

relief

 

for

 

community

 

banks

 

regarding

 

regulatory

 

examination

 

cycles,

 

call

 

reports,

 

the

 

Volcker

 

Rule

 

(proprietary

 

trading

prohibitions), mortgage disclosures and risk weights for certain

 

high-risk commercial real estate loans.

 

Bank and Bank Holding Company Regulation

As a Florida-chartered 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

(the “DIF”)

 

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 under the

 

Bank Holding

Company

 

Act

 

of

 

1956

 

(the

 

“BHC

 

Act”)

 

to

 

become

 

a

 

bank

 

holding

 

company.

 

Bank

 

holding

 

companies

 

are

 

subject

 

to

regulation, inspection, examination, supervision and enforcement

 

by the Federal Reserve under the BHC Act. The Federal

Reserve's jurisdiction also extends to any company that is directly

 

or indirectly controlled by a bank holding company.

USCB Financial Holdings, Inc.,

 

which controls U.S. Century

 

Bank, is a bank holding

 

company and, as such,

 

is subject

to ongoing and comprehensive supervision, regulation,

 

examination and enforcement by the Federal Reserve.

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 entities 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 conclusively 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, bank

holding companies are prohibited from acquiring, without prior

 

approval, control of any other bank or

 

bank holding company

or substantially all the assets thereof or more than 5% of the voting shares of a bank or bank holding company which is not

already a subsidiary.

Source of Strength

All companies, including bank holding companies, that directly or indirectly control an insured depository institution, are

required to serve as a source

 

of strength for the institution. Furthermore,

 

the Federal Reserve policy

 

is that a bank holding

company should stand ready

 

to use available resources

 

to provide adequate capital

 

to its subsidiary banks

 

during periods

of financial

 

stress or

 

adversity and

 

should maintain

 

the financial

 

flexibility and

 

capital-raising capacity

 

to obtain

 

additional

resources for

 

assisting its subsidiary

 

banks. 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

 

Table of Contents

 

 

9

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

required at times when, absent this statutory and Federal Reserve policy requirement, a bank holding company may not be

inclined to

 

provide it.

 

A bank

 

holding company’s failure

 

to meet

 

its obligations

 

to serve

 

as a

 

source of

 

strength to

 

its subsidiary

banks will generally be considered

 

by the Federal Reserve to

 

be an unsafe and unsound

 

banking practice or a violation

 

of

the Federal Reserve’s regulations, or both.

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 U.S. Century Bank. The

 

safety and soundness guidelines relate to,

 

among other things, our

internal

 

controls,

 

information

 

systems,

 

cybersecurity,

 

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

 

to

 

be

 

so

 

closely

 

related

 

to

 

banking

 

as

 

to

 

be

 

a

 

proper

 

incident

 

thereto.

 

The

 

Federal

Reserve has determined

 

by regulation that

 

certain activities are

 

closely related to

 

banking including operating

 

a mortgage

company,

 

finance company,

 

credit card

 

company,

 

factoring

 

company,

 

trust

 

company

 

or savings

 

association;

 

performing

certain

 

data

 

processing

 

operations;

 

providing

 

limited

 

securities

 

brokerage

 

services;

 

acting

 

as

 

an

 

investment

 

or

 

financial

advisor; acting as

 

an insurance agent

 

for certain types

 

of credit-related insurance;

 

leasing personal property

 

on a

 

full-payout,

non-operating basis; providing

 

tax planning and

 

preparation services; operating

 

a collection agency;

 

and providing certain

courier services. In

 

addition, the Gramm

 

-Leach-Bliley Act (the

 

“GLB Act”) expanded

 

the scope of

 

permissible activities for

a bank holding company 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

 

such as securities

 

underwriting, insurance underwriting and

 

merchant banking. 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

 

considers,

 

among

 

other

 

things,

 

whether

 

the

 

acquisition

 

or

 

the

 

additional

 

activities

 

can

 

Table of Contents

 

 

10

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

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-4

 

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

bonus 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

 

(“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.

In May 2016,

 

amendments to the

 

Federal Reserve’s SBHC Policy

 

became effective which increased

 

the asset threshold

to qualify

 

to utilize

 

the provisions

 

of the

 

SBHC Policy

 

from $500

 

million to

 

$1.0 billion.

 

Subsequently,

 

as part

 

of the

 

2018

Act, the

 

threshold

 

was

 

increased

 

to

 

$3.0

 

billion.

 

Bank

 

holding companies

 

which

 

are subject

 

to the

 

SBHC

 

Policy

 

are not

subject to compliance with

 

the regulatory capital requirements

 

described above until they

 

exceed $3.0 billion in

 

assets. As

a consequence, as of December

 

31, 2023, USCB Financial Holdings, Inc.

 

was not required to

 

comply with the requirements

set forth above

 

and will not

 

be subject to

 

such requirements

 

until such time

 

that its

 

consolidated total

 

assets exceed

 

$3.0

 

Table of Contents

 

 

11

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

billion or

 

the Federal Reserve

 

determines that USCB

 

Financial Holdings, Inc.

 

is no

 

longer deemed to

 

be a

 

small bank

 

holding

company.

 

However,

 

if

 

USCB

 

Financial

 

Holdings,

 

Inc.

 

had

 

been

 

subject

 

to

 

the

 

requirements,

 

it

 

would

 

have

 

been

 

in

compliance with such requirements.

In

 

September

 

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 below

 

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

consolidated

 

assets,

 

and

 

trading

 

assets

 

and

 

liabilities

 

of 5%

 

or less

 

of total

 

consolidated

 

assets.

 

Although

 

U.S. Century

Bank is a qualifying

 

community banking organization,

 

U.S. Century 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,

 

2023 and

 

2022, the

 

U.S. Century

 

Bank qualified

 

as a

 

“well capitalized”

 

institution. See

 

Note 15

“Regulatory Matters” of the Consolidated Financial Statements

 

included in Item 8 of this 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.

 

An insured depository

 

institution is deemed

 

to be "well

 

capitalized" if

 

it has a

 

total risk-based

 

capital ratio

 

of 10.0% or

greater, a

 

tier 1 risk-based

 

capital ratio of 8.0%

 

or greater,

 

a Common Equity

 

Tier 1

 

risk-based capital ratio

 

of 6.5% and a

leverage ratio of 5.0%

 

or greater, and the institution is

 

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 is 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.

 

Under

 

specified

 

circumstances,

 

a

federal

 

banking

 

agency

 

may

 

reclassify

 

a

 

“well-capitalized”

 

institution

 

as

 

adequately

 

capitalized

 

and

 

may

 

require

 

an

adequately capitalized institution or an

 

undercapitalized institution to comply with

 

supervisory actions as if

 

it were in

 

the next

lower

 

category

 

(except

 

that

 

the

 

FDIC

 

may

 

not

 

reclassify

 

a

 

significantly

 

undercapitalized

 

institution

 

as

 

critically

undercapitalized).

 

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.

At December 31, 2023, U.S. Century Bank was deemed to be a “well-capitalized” institution for purposes of the prompt

corrective action regulations and as such is not subject

 

to the above mentioned restrictions.

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, 2023, our

 

ratio of construction

 

loans to total

 

risk-based capital

 

was 21%,

 

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, 2023, our

 

ratio of total

 

commercial real

 

estate loans

 

to total risk-based

 

capital was

 

Table of Contents

 

 

12

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

384% 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,

 

U.S.

 

Century

 

Bank 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.

Payment of Dividends and Share Repurchases

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 federal and state statutory

 

and regulatory restrictions that

 

limit the amount available for

such

 

distribution

 

depending

 

upon

 

earnings,

 

financial

 

condition,

 

including

 

whether

 

the

 

institution

 

has

 

negative

 

retained

earnings, 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.

Furthermore, under applicable

 

FDIC

regulations and policy,

 

because U.S. Century Bank has

 

negative retained earnings, it must obtain the

 

prior approval of the

FDIC before effecting a cash dividend or other capital

 

distribution.

A Federal Reserve policy statement on the payment

 

of cash dividends states that a bank holding

 

company should pay

cash dividends only to the

 

extent that the holding company’s net

 

income for the past year

 

is sufficient to cover both the

 

cash

dividends and

 

a rate

 

of earnings

 

retention that

 

is consistent

 

with the

 

holding company’s

 

capital needs,

 

asset quality

 

and

overall

 

financial

 

condition.

 

The

 

Federal

 

Reserve’s

 

policy

 

statement

 

also

 

provides

 

that

 

it

 

would

 

be

 

inappropriate

 

for

 

a

company experiencing serious financial problems to borrow funds to pay dividends.

 

Furthermore, under the federal prompt

corrective action

 

regulations, the

 

Federal Reserve

 

may prohibit

 

a bank

 

holding company

 

from paying

 

any dividends

 

if the

holding company’s bank subsidiary is classified

 

as “undercapitalized.” See “ - Prompt Corrective Action”

 

above.

Section 225.4(b)(1) of Regulation Y promulgated

 

by the Federal Reserve requires that

 

a bank holding company that is

not “well-capitalized” or “well-managed”,

 

or that is subject to any

 

unresolved supervisory issues, provide

 

prior notice to the

Federal Reserve for

 

any repurchase or

 

redemption of

 

its equity securities

 

for cash or

 

other value that

 

would reduce by

 

10

percent or more the bank

 

holding company’s consolidated

 

net worth aggregated over

 

the preceding 12-month period.

 

The

Federal

 

Reserve

 

may

 

disapprove

 

such

 

a

 

purchase

 

or

 

redemption

 

if

 

it

 

determines

 

that

 

the

 

proposal

 

would

 

constitute

 

an

unsafe or

 

unsound practice

 

or would

 

violate any

 

law,

 

regulation, Federal

 

Reserve order

 

or any

 

condition imposed

 

by,

 

or

written agreement

with, the Federal Reserve. As

 

of December 31, 2023, USCB

 

Financial Holdings, Inc. was

 

not subject to

any

 

formal

 

supervisory

 

restrictions

 

on

 

its

 

ability

 

to

 

pay

 

dividends

 

but

 

will

 

notify

 

the

 

Federal

 

Reserve

 

in

 

advance

 

of

 

any

proposed

 

dividend

 

to

 

the

 

Company's

 

shareholders

 

in

 

light

 

of

 

the

 

Bank's

 

negative

 

retained

 

earnings.

 

In

 

addition,

 

we

 

will

provide prior notification to the Federal Reserve prior to

 

effecting proposed share repurchases.

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 was

 

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

 

Table of Contents

 

 

13

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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

 

GSICP

 

Guidance

 

provides

 

that

 

enforcement

 

actions

 

may

 

be

 

taken

 

against

 

a

 

banking

 

organization

 

if

 

its

 

incentive

compensation arrangements or related risk-management control or governance processes pose a risk to the

 

organization’s

safety and soundness and the organization is not taking prompt and

 

effective measures to correct the deficiencies.

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

 

2011

 

and issued

 

a

second proposed

 

rule in

 

April 2016.

 

The second

 

proposed rule

 

would apply

 

to all

 

banks, among

 

other institutions,

 

with at

least $1.0 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

Transactions

 

between

 

insured

 

financial

 

institutions

 

and

 

any

 

affiliate

 

are

 

governed

 

by

 

Sections

 

23A

 

and

 

23B

 

of

 

the

Federal Reserve Act. An affiliate

 

of an insured financial institution

 

is any company or entity which

 

controls, is controlled by

or

 

is

 

under

 

common

 

control

 

with

 

the

 

insured

 

financial

 

institution.

 

In

 

a

 

bank

 

holding

 

company

 

context,

 

the

 

bank

 

holding

company

 

of

 

an

 

insured

 

financial

 

institution

 

(such

 

as

 

the

 

Corporation)

 

and

 

any

 

companies

 

which

 

are

 

controlled

 

by

 

such

holding company

 

are affiliates of

 

the insured

 

financial institution.

 

Generally, Section 23A limits

 

the extent

 

to which

 

the insured

financial institution or its

 

subsidiaries may engage in

 

“covered transactions” with any one

 

affiliate to an amount equal

 

to 10%

of such institution’s

 

capital stock

 

and surplus, and

 

contains an

 

aggregate limit

 

on all such

 

transactions with

 

all affiliates

 

to

an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain

other

 

transactions

 

and

 

requires

 

that

 

all

 

transactions

 

be

 

on

 

terms

 

substantially

 

the

 

same,

 

or

 

at

 

least

 

as

 

favorable

 

to

 

the

insured financial institution, as

 

those provided to

 

a non-affiliate. The term “covered

 

transaction” includes the making

 

of loans

to, purchase of

 

assets from

 

and issuance of

 

a guarantee to

 

an affiliate

 

and similar

 

transactions. Section

 

23B transactions

also include the provision of services and the sale of assets

 

by an insured financial institution to an affiliate.

Sections 22(g)

 

and (h)

 

of the

 

Federal Reserve

 

Act place

 

restrictions on

 

loans to

 

executive officers, directors

 

and principal

stockholders. Under

 

Section 22(h),

 

loans to

 

a director,

 

an executive

 

officer

 

and to

 

a greater

 

than 10%

 

stockholder

 

of an

insured

 

financial

 

institution,

 

and

 

certain

 

affiliated

 

interests

 

of

 

either,

 

may

 

not

 

exceed,

 

together

 

with

 

all

 

other

 

outstanding

loans to such

 

person and

 

affiliated interests,

 

the insured financial

 

institution’s loans

 

to one borrower

 

limit (generally

 

equal

to 15%

 

of

 

the

 

institution’s

 

unimpaired capital

 

and

 

surplus).

 

Section

 

22(h) also

 

requires

 

that

 

loans

 

to directors,

 

executive

officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other

persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees

of the

 

institution and

 

(ii) does

 

not give

 

preference to

 

any director, executive

 

officer or

 

principal stockholder, or

 

certain affiliated

interests thereof, over other employees

 

of the insured financial institution.

 

Section 22(h) also requires prior board

 

approval

for the issuance of certain loans. In addition, the aggregate amount of

 

extensions of credit by an insured financial institution

to all insiders cannot

 

exceed the institution’s

 

unimpaired capital and

 

surplus. Furthermore, Section

 

22(g) places additional

restrictions on

 

loans to

 

executive officers.

 

At December

 

31, 2023,

 

U.S. Century

 

Bank was

 

in compliance

 

with the

 

above

restrictions.

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.

 

Table of Contents

 

 

14

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 increased 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 FDIA, established a plan in

 

September 2020 (the “Restoration Plan”) to restore the DIF

 

reserve ratio

to meet or exceed

 

the statutory minimum

 

of 1.35% within eight

 

years. The Restoration

 

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% for 2023. The

 

new

assessment rate schedules will remain

 

in effect unless and until the reserve

 

ratio meets or exceeds 2% in order to support

growth

 

in

 

the

 

DIF

 

in

 

progressing

 

toward

 

the

 

FDIC’s

 

long-term

 

goal

 

of

 

a

 

2%

 

DRR.

 

Progressively

 

lower

 

assessment

 

rate

schedules will

 

take effect

 

when the

 

reserve ratio

 

reaches 2%,

 

and again

 

when it

 

reaches 2.5%.

 

The revised

 

assessment

rate schedule will

 

remain in effect unless

 

and until the

 

reserve ratio meets

 

or exceeds 2%,

 

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.

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 Federal Home Loan Bank (“FHLB”) of Atlanta, which is one of 11 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

0.07% (or

 

7 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

 

4.75%

 

of

 

our outstanding

 

advances

 

(borrowings)

 

from the

 

FHLB

 

of

 

Atlanta

under the activity-based stock ownership requirement.

 

Table of Contents

 

 

15

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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, 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

 

in October

 

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

•

 

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. In May 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.

The

 

Anti-Money

 

Laundering

 

Act

 

of

 

2020

 

(the

 

“AML

 

Act’)

 

and

 

within

 

the

 

AML

 

Act,

 

the

 

Corporate

 

Transparency

 

Act

 

(the

“CTA”),

 

was enacted in

 

January 2021. The

 

AML Act is

 

intended to be

 

a comprehensive

 

reform and modernization

 

to U.S.

bank

 

secrecy

 

and

 

anti-money

 

laundering

 

laws.

 

Among

 

other

 

things,

 

it

 

codifies

 

a

 

risk-based

 

approach

 

to

 

anti-money

laundering compliance

 

for financial

 

institutions; requires the

 

development of

 

standards for evaluating

 

technology and

 

internal

processes

 

for BSA

 

compliance;

 

expands

 

enforcement-

 

and investigation

 

-related

 

authority,

 

including

 

increasing

 

available

sanctions

 

for

 

certain

 

BSA

 

violations

 

and

 

instituting

 

BSA

 

whistleblower

 

incentives

 

and

 

protections.

 

The

 

CTA

 

establishes

uniform beneficial

 

ownership reporting

 

requirements for

 

corporations, limited

 

liability companies,

 

and other similar

 

entities

formed or

 

registered to

 

do business in

 

the United

 

States. The

 

CTA authorizes U.S. Treasury’s Financial Crimes

 

Enforcement

Network (“FinCEN”) to collect that information and share it with authorized government authorities and

 

financial institutions,

subject

 

to

 

effective

 

safeguards

 

and

 

controls.

 

In

 

December

 

2023,

 

FinCEN

 

issued

 

regulations

 

regarding

 

access

 

to

 

the

beneficial

 

ownership

 

information

 

collected

 

under

 

the

 

CTA.

 

We

 

and

 

our

 

affiliates

 

have

 

adopted

 

policies,

 

procedures

 

and

controls designed to comply with the BSA, the AML Act, the

 

CTA and the USA

 

PATRIOT

 

Act.

 

Table of Contents

 

 

16

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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

 

(“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,

 

(“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;

•

 

Check Clearing for

 

the 21st Century

 

Act (also known

 

as “Check 21”),

 

which gives “substitute

 

checks,” such as

 

digital

check images and copies made from that image, the

 

same legal standing as the original paper check;

•

 

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

•

 

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 GLB

 

Act and related regulations,

 

we are

 

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17

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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,

 

the

 

federal

 

banking

 

agencies

 

have

 

adopted

 

a

 

rule

 

to

 

establish

 

computer-security

 

incident

 

notification

requirements

 

for

 

bank

 

holding

 

companies,

 

banks

 

and

 

their

 

service

 

providers.

 

Under

 

the

 

rule,

 

banking

 

organizations

 

are

required to notify their primary

 

federal regulators within 36 hours

 

of any incident that has materially

 

disrupted or degraded,

or is

 

reasonably

 

likely to

 

materially disrupt

 

or degrade,

 

the banking

 

organization’s

 

ability to

 

deliver banking

 

services to

 

a

material portion of

 

its client base,

 

jeopardize the

 

viability of key

 

operations, or

 

impact the financial

 

stability of

 

the financial

sector. The rule also imposes

 

certain notification requirements on third-party bank

 

service providers when they experience

a computer-security

 

incident that

 

has caused,

 

or is

 

likely to

 

cause a

 

material service

 

disruption or

 

degradation for

 

four or

more hours. In such case, the service provider is required to notify its bank-designated point of contact as soon as possible

upon discovery of the incident.

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

 

$10.0 billion or less in assets,

 

such as U.S. Century 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

 

U.S. Century 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, 2023, 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

community

 

credit

 

needs

 

when

 

evaluating

 

applications

 

for,

 

among

 

other

 

things,

 

new

 

branches

 

or

 

mergers.

 

We

 

are

 

also

 

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18

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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

 

2023.

 

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

October 2022, U.S. Century Bank received an overall

 

rating of "Satisfactory."

In October 2023, the

 

federal banking agencies jointly issued

 

a final rule to

 

revise the regulations implementing the

 

CRA.

The final rule takes effect

 

on April 1, 2024, with

 

staggered compliance dates; the applicability date

 

for most of the provisions

is January

 

1, 2026.

 

The changes

 

are designed

 

to encourage

 

banks to

 

expand access

 

to credit,

 

investment

 

and banking

services in low and moderate income

 

communities, adapt to changes in

 

the banking industry including mobile

 

and internet

banking, provide

 

greater clarity and

 

consistency in

 

the application

 

of the CRA

 

regulations and

 

tailor CRA evaluations

 

and

data

 

collection

 

to

 

bank

 

size

 

and

 

type.

 

The

 

final

 

rule

 

implements

 

a

 

revised

 

regulatory

 

framework

 

that,

 

like

 

the

 

current

framework, is based on

 

bank asset size and

 

business model. Under the

 

final rule, a new

 

“Retail Lending Test” is established

except with

 

banks with

 

total assets

 

of less

 

than $600

 

million as

 

of December

 

31 in

 

either of

 

the prior

 

two calendar

 

years

have the option to maintain

 

the current CRA evaluation

 

framework, referred to in

 

the final rule as the

 

“Small Bank Lending

Test,”

 

or opt into

 

the Retail Lending

 

Test.

 

The Retail Lending

 

Test

 

evaluates a bank’s

 

record of helping

 

to meet the

 

credit

needs of

 

its community

 

through the

 

origination and

 

purchase of

 

residential

 

mortgage, multi

 

-family,

 

small business,

 

small

farm and,

 

in certain

 

cases, automobile

 

loans. Banks

 

of all

 

sizes will

 

maintain the

 

option to

 

elect to

 

be evaluated

 

under a

strategic plan

 

with the

 

final rule

 

updating the

 

standards

 

for obtaining

 

approval for

 

such plan.

 

The final

 

rule continues

 

the

current

 

approach

 

of

 

requiring

 

banks

 

to

 

delineate

 

specific

 

“facility-based

 

assessment

 

areas,”

 

which

 

comprise

 

the

 

areas

around a bank’s main office, branches, and deposit-taking remote service facilities (e.g., ATMs). The final rule allows

 

banks

to receive CRA credit for any qualified community development

 

activity, regardless

 

of location.

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. 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. 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 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’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

 

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19

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

Federal Securities Laws and the Sarbanes-Oxley Act

USCB

 

Financial

 

Holdings,

 

Inc.’s

 

common

 

stock

 

is

 

registered

 

with

 

the

 

SEC

 

under

 

Section

 

12(b)

 

of

 

the

 

Securities

Exchange Act of 1934. USCB Financial

 

Holdings, Inc. is subject to the

 

proxy and tender offer rules, insider trading reporting

requirements and restrictions, and certain other requirements

 

under the Securities Exchange Act of 1934.

As a public company,

 

USCB Financial Holdings, Inc. is also subject to

 

the Sarbanes-Oxley Act of 2002 (“SOA”), which

is applicable to all companies, both U.S. and non-U.S., that file periodic reports

 

under the Securities Exchange Act of 1934.

The stated goals of

 

the SOA were to increase

 

corporate responsibility, to provide for enhanced penalties for accounting and

auditing

 

improprieties

 

at

 

publicly

 

traded

 

companies

 

and

 

to

 

protect

 

investors

 

by

 

improving

 

the

 

accuracy

 

and

 

reliability

 

of

corporate disclosures

 

pursuant to

 

the securities

 

laws. The

 

SEC is

 

responsible for

 

establishing rules

 

to implement

 

various

provisions of

 

the SOA.

 

The SOA

 

includes specific

 

disclosure requirements

 

and corporate

 

governance rules,

 

requires the

SEC and securities exchanges to adopt

 

extensive additional disclosure, corporate

 

governance and other related rules

 

and

mandates

 

further

 

studies

 

of

 

certain

 

issues

 

by

 

the

 

SEC.

 

The

 

SOA

 

represents

 

significant

 

regulation

 

of

 

the

 

accounting

profession and

 

corporate governance

 

practices, such

 

as the

 

relationship

 

between a

 

board of

 

directors and

 

management

and between a board of directors and its committees.

As directed

 

by the

 

SOA, USCB

 

Financial Holdings,

 

Inc.’s principal

 

executive officer

 

and principal

 

financial officer

 

are

required to certify that the Corporation’s quarterly and

 

annual reports do not contain any untrue

 

statement of a material fact.

The rules adopted by

 

the SEC under the

 

SOA have several requirements,

 

including having these

 

officers certify that:

 

they

are responsible for establishing, maintaining and regularly evaluating the effectiveness

 

of our internal control over financial

reporting; they

 

have made

 

certain disclosures

 

to USCB

 

Financial Holdings,

 

Inc.’s auditors

 

and the audit

 

committee of

 

the

Board of Directors

 

about USCB

 

Financial Holdings,

 

Inc.’s internal

 

control over

 

financial reporting;

 

and they

 

have included

information in USCB Financial Holdings,

 

Inc.’s quarterly and annual

 

reports about their evaluation

 

and whether there have

been

 

changes

 

in

 

USCB

 

Financial

 

Holdings,

 

Inc.’s

 

internal

 

control

 

over

 

financial

 

reporting

 

or

 

in

 

other

 

factors

 

that

 

could

materially affect USCB Financial Holdings, Inc.’s

 

internal control over financial reporting.

In March 2020, the SEC issued

 

a final rule, effective

 

April 27, 2020, under the

 

SOA – Amendments to the Accelerated

Filer and

 

Large Accelerated

 

Filer Definitions.

 

As a

 

result of

 

the amendments,

 

certain low

 

revenue and/or

 

low public

 

float

filers, while they remained obligated to provide a

 

report by management assessing the effectiveness of their internal control

over financial reporting (“ICFR”), were

 

not required to provide

 

an attestation report from

 

their independent auditor assessing

the effectiveness of their ICFR. USCB Financial Holdings,

 

Inc. meets the amended definition and is not required to provide

an attestation report from its independent

 

auditor assessing the effectiveness of its ICFR. In

 

addition, as long it is

 

an eligible

emerging growth company,

 

such auditor attestation

 

requirement will not

 

apply to USCB

 

Financial Holdings, Inc.

 

However,

U.S. Century Bank

 

remains subject to

 

independent auditor attestation required

 

under FDIC regulations

 

set forth at

 

12 C.F.R.

§363.3(b).

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.

 

Table of Contents

 

 

20

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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,

which may also adversely

 

affect our business, results

 

of operations, liquidity and

 

financial condition. If any

 

of these known

or unknown risks

 

or uncertainties actually

 

occur,

 

our business, results

 

of operations, liquidity

 

and financial condition

 

could

be materially and adversely affected.

 

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.

•

 

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.

•

 

Insufficient

 

liquidity

 

could

 

impair

 

our

 

ability

 

to

 

fund

 

operations

 

and

 

jeopardize

 

our

 

financial

 

condition,

 

results

 

of

operations, growth and prospects.

•

 

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.

 

•

 

Our lending business is subject to credit risk, which could

 

lead to unexpected losses.

 

•

 

The transition from the use of LIBOR may adversely impact the interest rates paid

 

on certain financial instruments.

•

 

Natural

 

disasters

 

and

 

severe

 

weather

 

events

 

in

 

Florida

 

could

 

have

 

a

 

material

 

adverse

 

impact

 

on

 

our

 

business,

financial condition and operations.

•

 

Our business is subject to

 

interest rate risk and variations

 

in interest rates may

 

materially and adversely affect

 

our

financial performance.

•

 

A

 

failure

 

or

 

the

 

perceived

 

risk

 

of

 

a

 

failure

 

to

 

raise

 

the

 

statutory

 

debt

 

limit

 

of

 

the

 

U.S.

 

in

 

the

 

future

 

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 further 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.

 

 

Table of Contents

 

 

21

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

•

 

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

 

our results of

 

operations and financial

condition, and could result in further losses in the future.

•

 

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, including

exposure

 

to

 

environmental

 

liability,

 

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.

•

 

We are exposed to risk of environmental liability when

 

we take title to property.

•

 

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.

•

 

We face significant

 

operational risks because

 

the nature of the

 

financial services business

 

involves a high volume

of transactions.

•

 

We have several large depositor

 

relationships, the loss of

 

which could force us to

 

fund our business through more

expensive and less stable sources.

•

 

Our

 

securities

 

portfolio

 

performance

 

in

 

difficult

 

market

 

conditions

 

could

 

have

 

adverse

 

effects

 

on

 

our

 

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.

•

 

New lines of business, products, product enhancements

 

or services may subject us to additional risk.

 

•

 

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 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.

 

•

 

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.

•

 

Damage to our reputation could significantly harm our

 

businesses.

 

•

 

We face

 

strong competition

 

from financial

 

services

 

companies

 

and other

 

companies

 

that offer

 

banking services,

which could materially and adversely affect our

 

business.

•

 

We must respond to rapid technological changes

 

to remain competitive.

•

 

We continually

 

encounter technological change,

 

and we may

 

have fewer resources

 

than many of

 

our competitors

to invest in technological improvements.

•

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.

•

 

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.

•

 

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.

 

Table of Contents

 

 

22

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

•

 

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.

Risks Related to Our Tax, Accounting

 

and Regulatory Compliance

 

•

 

Our ability to

 

recognize the benefits

 

of our 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.

•

 

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.

•

 

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 penalties.

•

 

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

 

face

 

a

 

risk

 

of

 

noncompliance

 

with

 

the

 

Bank

 

Secrecy

 

Act

 

and

 

other

 

anti-money

 

laundering

 

statutes

 

and

regulations and corresponding enforcement proceedings.

•

 

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.

•

 

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.

•

 

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.

•

 

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

•

 

Our ability to pay dividends is subject to restrictions.

•

 

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.

•

 

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

 

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.

•

 

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 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.

 

Table of Contents

 

 

23

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

 

Furthermore, the economic disruption spurred

 

by the continuing COVID-

19

 

pandemic

 

has

 

particularly

 

affected

 

commercial

 

real

 

estate

 

markets.

 

Additionally,

 

the

 

pandemic

 

has

 

accelerated

 

the

adoption of

 

remote work options,

 

potentially influencing the

 

long-term performance of

 

office properties within

 

our commercial

real estate portfolio. 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 the 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 increasing

 

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 continuing war in Ukraine, the

 

conflict in Gaza and continuing

higher oil prices due to, among other things, Russian supply disruptions resulting from

 

the ongoing Ukrainian conflict, 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 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.

 

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 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 adversely 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

 

COVID-19

 

pandemic

 

has

 

adversely

 

impacted

 

the

 

global

 

and

 

national

 

economy

 

and

 

certain

 

industries

 

and

geographies in which

 

our customers operate.

 

Given its

 

ongoing and dynamic

 

nature, it is

 

difficult to

 

predict the full

 

impact

 

Table of Contents

 

 

24

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

of the continuing

 

COVID-19 pandemic

 

on the business

 

of the Company,

 

its customers, employees

 

and third-party

 

service

providers.

 

The

 

extent

 

of

 

such

 

impact

 

will

 

depend

 

on

 

future

 

developments,

 

which

 

are

 

highly

 

uncertain.

 

Additionally,

 

the

responses of various governmental and non-governmental authorities

 

and consumers to the on-going pandemic may have

material long-term effects on

 

USCB Financial Holdings and our subsidiary

 

U.S. Century Bank and its customers

 

which are

difficult to quantify in the near-term or long-term.

Inflationary pressures and rising prices may affect

 

our results of operations and financial condition.

Since 2021, there have been market indicators of a pronounced rise in inflation and the Federal Reserve raised certain

benchmark interest rates 11 times in

 

2022 and 2023 in

 

an effort to combat

 

inflation.

 

Although the rate of

 

inflation moderated

in the fourth

 

quarter of 2023,

 

it is still

 

at levels not seen

 

for more than

 

40 years. As

 

inflation increases and

 

market interest

rates rise

 

the value

 

of our

 

investment securities,

 

particularly those

 

with longer

 

maturities, decreases,

 

although this

 

effect

can be less

 

pronounced for floating-rate

 

instruments. In addition,

 

inflation generally increases

 

the cost of

 

goods and services

we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Also, 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.

 

Furthermore, our customers are also

 

affected by inflation and the

 

rising costs of goods

and services

 

used in

 

their households

 

and businesses,

 

which could

 

have a

 

negative impact

 

on their

 

ability to

 

repay their

loans with

 

us. In

 

addition, SMBs

 

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.

 

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

 

was

substantial

 

market

 

disruption

 

and

 

indications

 

that

 

deposit

 

concerns

 

could

 

spread

 

within

 

the

 

banking

 

industry,

 

leading to

deposit outflows and other destabilizing results. While the Company does not believe that the

 

circumstances of these bank

failures, including, in

 

several cases, the

 

elevated concentrations of uninsured

 

deposits, are necessarily indicators

 

of broader

issues for concern

 

with all other

 

banks or with

 

the banking system itself,

 

the failures are

 

likely to continue

 

to have an

 

adverse

effect on customer

 

confidence and the

 

availability of funding

 

and liquidity,

 

as well as possibly

 

lead to increased regulatory

requirements and costs

 

and negative reputational

 

ramifications for

 

institutions in the

 

banking industry,

 

including, possibly,

the Company and its depository subsidiary, U.S. Century Bank.

 

We will continue to closely monitor the ongoing events

 

and

volatility

 

in

 

the

 

financial

 

services

 

industry,

 

together

 

with

 

responsive

 

measures

 

by

 

the

 

banking

 

regulators

 

to

 

mitigate

 

or

manage

 

the

 

concerns

 

of

 

bank

 

customers

 

regarding

 

FDIC

 

deposit

 

insurance

 

coverage

 

and

 

the

 

safety

 

and

 

soundness

 

of

community

 

banks.

 

U.S.

 

Century

 

Bank

 

maintains

 

a

 

well-diversified

 

deposit

 

base.

 

At

 

December

 

31,

 

2023,

 

our

 

top

 

15

depositors only

 

hold 20% of

 

our total portfolio.

 

As of December

 

31, 2023,

 

45% of

 

our deposits

 

are estimated

 

to be FDIC-

insured. Our public funds

 

are 14% of total

 

deposits and are partially

 

collateralized. The estimated

 

average account size

 

of

our

 

deposit

 

portfolio

 

is

 

$97.0

 

thousand.

 

In

 

addition,

 

the

 

Bank

 

was

 

considered

 

a

 

“well

 

capitalized”

 

institution

 

as

 

of

December 31, 2023 and 2022.

 

Insufficient liquidity could

 

impair our ability to

 

fund operations and jeopardize

 

our financial condition,

 

results

of operations, growth and prospects.

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

 

Table of Contents

 

 

25

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

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 the

 

continuing war

 

in Ukraine

 

and the

 

continued heightened

 

tensions between

 

Russia and

 

the U.S.,

 

NATO,

 

the

EU and the

 

UK, as well

 

as the conflict

 

in Gaza, 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.

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

 

transition

 

from

 

the

 

use

 

of

 

LIBOR

 

may

 

adversely

 

impact

 

the

 

interest

 

rates

 

paid

 

on

 

certain

 

financial

instruments.

LIBOR was used as a reference rate for certain of the Corporation’s adjustable-rate loans and bonds. In 2017, the U.K.

Financial Conduct

 

Authority,

 

which regulates

 

LIBOR,

 

announced that

 

the publication

 

of LIBOR

 

would not

 

be guaranteed

beyond 2021. In December 2020, the

 

administrator of LIBOR announced its intention to

 

(i) cease the publication of the

 

one-

week and two-month

 

U.S. dollar LIBOR

 

after December 31,

 

2021, and (ii)

 

cease the publication

 

of all other

 

tenors of U.S.

dollar LIBOR (one, three, six and 12 month LIBOR) after

 

June 30, 2023.

There are ongoing efforts to establish an alternative

 

reference rate. The Federal Reserve Board, in conjunction with

 

the

Alternative

 

Reference

 

Rates

 

Committee,

 

a

 

steering

 

committee

 

comprised

 

of

 

large

 

U.S.

 

financial

 

institutions,

 

supports

replacing LIBOR with SOFR, a new index calculated

 

by short-term repurchase agreements backed by

 

Treasury securities.

The Bank adopted SOFR as its preferred benchmark as

 

an alternative to LIBOR for use in new contracts in 2023.

 

Table of Contents

 

 

26

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

While

 

the

 

Adjustable

 

Interest

 

Rate

 

(LIBOR)

 

Act

 

and

 

implementing

 

regulations

 

will

 

help

 

to

 

transition

 

legacy

 

LIBOR

contracts to a new benchmark rate, the

 

substitution of SOFR for LIBOR may

 

have potentially significant economic impacts

on parties to affected

 

contracts. SOFR is

 

different from LIBOR

 

in that it is

 

a retrospective-looking secured

 

rate rather than

a forward-looking

 

unsecured rate.

 

Additionally,

 

while SOFR

 

appears to

 

be the

 

preferred replacement

 

rate for

 

LIBOR, it

 

is

not

 

possible

 

to

 

predict

 

whether

 

SOFR

 

will

 

ultimately

 

prevail

 

in

 

the

 

market

 

as

 

the

 

definitive

 

replacement

 

for

 

LIBOR.

Uncertainty

 

as

 

to

 

the

 

nature

 

of

 

alternative

 

reference

 

rates,

 

and

 

as

 

to

 

potential

 

changes

 

or

 

other

 

reforms

 

related

 

to

 

the

transition from LIBOR, may adversely affect the val

 

ue of LIBOR-based financial arrangements of the Company.

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

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 our

 

primary source of

 

income will

continue to be 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.

During 2022

 

and 2023,

 

the Federal

 

Open Market

 

Committee of

 

the Federal

 

Reserve (the

 

“FOMC”) increased

 

certain

benchmark 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

 

500 basis points. All of these

increases were expressly made in response to inflationary pressures.

 

Recently the FOMC has paused increases in certain

benchmark interest rates and may consider decreases in such

 

benchmark rates at some point during 2024. However, there

can be no

 

assurances as to

 

any future FOMC

 

action, including whether

 

it decreases

 

the federal funds

 

rate or implements

further increases.

 

While an increase in

 

interest rates may increase

 

our weighted average

 

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.

 

Due

 

to

 

competitive

 

pressures

 

in

 

2023,

 

we

 

increased

 

the

 

rates

 

paid

 

on

 

our

interest-bearing deposits such that

 

our weighted average cost

 

of deposits increased from

 

0.62% for 2022

 

to 3.04% for

 

2023.

Finally,

 

we

 

cannot

 

provide

 

any

 

assurances

 

that

 

we

 

can

 

maintain

 

our

 

current

 

levels

 

of

 

noninterest-bearing

 

deposits

 

as

customers may seek higher-yielding products due to the

 

increased interest rates being paid on deposits currently.

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.

 

Table of Contents

 

 

27

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

A failure or the perceived

 

risk of a failure to raise

 

the statutory debt limit

 

of the U.S. in the future

 

could have a

material adverse effect on our business, financial

 

condition and results of operations

.

Ongoing

 

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

 

have

 

passed

legislation

 

in the

 

past to

 

raise the

 

federal debt

 

ceiling

 

on multiple

 

occasions,

 

including

 

the most

 

recent

 

increase

 

in June

2023, 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

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

 

will 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. As a result of the initial implementation of CECL,

 

we incurred as of January 1, 2023 a $1.1

 

million cumulative effect

of the adoption

 

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

 

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USCB Financial Holdings, Inc.

 

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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

 

further 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

 

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,

 

2023,

 

our

 

total

 

commercial

 

investor

 

real

 

estate

 

loans,

 

including

 

loans

 

secured

 

by

 

apartment

buildings, commercial real estate, and construction

 

and land loans represented 384% 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 a

 

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, the

 

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

 

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29

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

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 as

 

well as the

 

recently

enacted Corporate

 

Transparency

 

Act. 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 ongoing 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

 

Table of Contents

 

 

30

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

respect to loans that we originate for condominium or homeowners'

 

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-

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,

 

including

exposure

 

to

 

environmental

 

liability,

 

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.

 

Table of Contents

 

 

31

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

We

 

also

 

rely

 

on

 

the

 

integrity

 

and

 

security

 

of

 

a

 

variety

 

of

 

third

 

party

 

processors,

 

payment,

 

clearing

 

and

 

settlement

systems, as well

 

as the various

 

participants involved

 

in these systems,

 

many of which

 

have no direct

 

relationship with us.

Failure

 

by

 

these

 

participants

 

or

 

their

 

systems

 

to

 

protect

 

our

 

customers'

 

transaction

 

data

 

may

 

put

 

us

 

at

 

risk

 

for

 

possible

losses due

 

to fraud

 

or operational

 

disruption. At

 

the date

 

of this

 

Annual Report

 

Form 10-K,

 

there is

 

no knowledge or

 

indication

that customer

 

sensitive information

 

was compromised

 

as a

 

result of

 

third parties

 

system vulnerabilities,

 

but management

continues to monitor developments and vendor communications.

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

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

 

face

 

significant

 

operational

 

risks

 

because

 

the

 

nature

 

of

 

the

 

financial

 

services

 

business

 

involves

 

a

 

high

volume of transactions

.

We

 

operate

 

in

 

diverse

 

markets

 

and

 

rely

 

on

 

the

 

ability

 

of

 

our

 

employees

 

and

 

systems

 

to

 

process

 

a

 

high

 

number

 

of

transactions. Operational

 

risk is

 

the risk of

 

loss resulting from

 

our operations,

 

including but not

 

limited to, the

 

risk of fraud

by employees or

 

persons outside

 

the Company,

 

the execution

 

of unauthorized

 

transactions by

 

employees, errors

 

relating

to transaction

 

processing and technology, breaches of

 

our internal

 

control systems and

 

compliance requirements. Insurance

coverage may

 

not be available

 

for such

 

losses, or

 

where available, such

 

losses may

 

exceed insurance

 

limits. This

 

risk of

loss

 

also

 

includes

 

potential

 

legal

 

actions

 

that

 

could

 

arise

 

as

 

a

 

result

 

of

 

operational

 

deficiencies

 

or

 

as

 

a

 

result

 

of

 

non-

compliance with applicable regulatory standards,

 

adverse business decisions or their

 

implementation, or customer attrition

due to

 

potential adverse publicity. In the

 

event of a

 

breakdown in our

 

internal control systems,

 

improper operation of

 

systems

or improper employee actions, we could suffer financial

 

loss, face regulatory action, and/or suffer damage to

 

our reputation.

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.

Our securities portfolio performance in difficult market conditions could have adverse effects on

 

our results of

operations

.

Unrealized losses on

 

investment securities result from

 

changes in credit

 

spreads and liquidity

 

issues in the

 

marketplace,

along

 

with

 

changes

 

in

 

the

 

credit

 

profile

 

of

 

individual

 

securities

 

issuers.

 

Under

 

GAAP,

 

we

 

are

 

required

 

to

 

review

 

our

investment

 

portfolio

 

periodically

 

for

 

the

 

presence

 

of credit

 

losses

 

of

 

our securities,

 

taking

 

into consideration

 

current

 

and

future

 

market

 

conditions,

 

the

 

extent

 

and

 

nature

 

of

 

changes

 

in

 

fair

 

value,

 

issuer

 

rating

 

changes

 

and

 

trends,

 

volatility

 

of

 

Table of Contents

 

 

32

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

earnings, current

 

analysts’ evaluations,

 

our ability

 

and intent

 

to hold

 

investments until

 

a recovery

 

of fair

 

value, as

 

well as

other factors. Adverse developments with respect to one or more of

 

the foregoing factors may require us to deem particular

securities to be impaired, with the credit-related portion of

 

the reduction in the value recognized as a

 

charge to our earnings

through an allowance. Subsequent valuations,

 

in light of factors prevailing at that

 

time, may result in significant changes

 

in

the values of these securities in future periods.

 

Any of these factors could require us to

 

recognize further impairments in the

value of our securities portfolio, which may have an adverse

 

effect on our results of operations in future periods.

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

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.

 

Table of Contents

 

 

33

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank

and to

 

commit

 

resources

 

to support

 

such subsidiary

 

bank. Under

 

the “source

 

of strength”

 

doctrine, the

 

Federal Reserve

may

 

require

 

a

 

holding

 

company

 

to

 

make

 

capital

 

injections

 

into

 

a

 

troubled

 

subsidiary

 

bank

 

and

 

may

 

charge

 

the

 

holding

company with

 

engaging

 

in unsafe

 

and unsound

 

practices

 

for failure

 

to commit

 

resources

 

to a

 

subsidiary

 

bank. A

 

capital

injection may be required

 

at times when the

 

holding company may

 

not have the resources

 

to provide it and

 

therefore may

be required to attempt to

 

borrow the funds or raise

 

capital. Thus, any borrowing that must

 

be done by the Company

 

to make

a required

 

capital injection becomes

 

more difficult and

 

expensive and

 

could have

 

an adverse

 

effect on our

 

business, financial

condition and results of operations.

 

Moreover, it is possible that we will be

 

unable to borrow funds or

 

otherwise raise capital

at a

 

time when

 

it is

 

needed. 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.

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.

Any acquisition activities we engage in 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,

 

Table of Contents

 

 

34

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 William Turner,

 

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.

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

 

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35

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

We

 

continually

 

encounter

 

technological

 

change,

 

and

 

we

 

may

 

have

 

fewer

 

resources

 

than

 

many

 

of

 

our

competitors to invest in technological improvements.

The financial

 

services industry is

 

undergoing rapid technological

 

changes with frequent

 

introductions of new

 

technology-

driven products and

 

services. The effective use

 

of technology increases efficiency

 

and enables financial institutions

 

to better

serve customers and to reduce

 

costs. Our future success

 

will depend, in part, upon

 

our ability to address the

 

needs of our

clients by using technology to

 

provide products and services

 

that will satisfy client demands

 

for convenience, as well

 

as to

create additional

 

efficiencies in our operations. Many national vendors provide turn-key services to community banks, such

as internet banking and remote deposit capture that allow smaller banks to compete

 

with institutions that have substantially

greater resources

 

to invest

 

in technological

 

improvements.

 

We

 

may

 

not

 

be

 

able,

 

however,

 

to effectively

 

implement

 

new

technology-driven products and services or be successful

 

in marketing these products and services to our customers.

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 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 means. At

this point,

 

although there

 

is no

 

knowledge or

 

indication that we

 

have 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 related increased

 

reliance on remote working (largely

 

as a result

of the COVID-19 pandemic)

 

and the 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

 

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36

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 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,

 

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.

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 and/or

 

punitive damages or claims for indeterminate

 

amounts of damages. Further,

 

in

the future

 

our

 

federal

 

and/or

 

state

 

bank

 

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

 

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37

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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

 

our 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 our

 

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.

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 Item

7 of 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

 

Table of Contents

 

 

38

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 penalti

 

es.

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

 

404

of the

 

Sarbanes-Oxley Act, 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 periodically review our formal policies, processes and

practices related to financial reporting

 

and to the identification of

 

key financial reporting risks, assess

 

their potential impact

and the 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

 

404

 

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.

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

 

or as a non-accelerated

 

smaller reporting company,

 

we

are 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

 

Table of Contents

 

 

39

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

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” (“HIFCA”)

 

by

FinCEN and

 

a “High

 

Intensity Drug

 

Trafficking

 

Area” (“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 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

 

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

 

1

 

treatment,

 

including

 

noncumulative

 

perpetual

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

 

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40

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 are 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, result

 

s

 

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.

Climate change and related legislative and regulatory initiatives may materially affect our business and results

of operations.

The effects

 

of climate change

 

continue to create

 

a significant 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

 

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41

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

propose numerous

 

initiatives to

 

supplement the

 

global effort

 

to combat

 

climate change,

 

including provisions

 

contained in

the

 

Inflation

 

Reduction

 

Act

 

of

 

2022.

 

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 but not limited to:

•

 

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 determination of securities analysts to not cover our

 

Class A common stock;

•

 

the opinion of securities analysts about our stock as an investment;

•

 

additions to 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 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

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.

 

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42

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 to occur

 

of (i) the

 

last day of

 

the first fiscal

 

year in which

 

our annual gross

 

revenues exceed $1.235

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

 

in June 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 (which will be December 31, 2026).

It is possible

 

that some

 

investors may

 

find our Class

 

A common stock

 

less attractive

 

since we chose

 

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.

As an emerging

 

growth company,

 

we 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

 

have

 

relied

 

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

 

29,

 

2024

 

Patriot

 

and

 

Priam

 

own

approximately 22.82% and 22.83%,

 

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

 

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43

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

that we issue

 

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

 

amended 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 shares of preferred stock, the terms of

 

which, including

voting power, are 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

Company 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

 

without shareholder approval;

•

 

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

 

and the

 

Bank Holding

 

Company 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 amended Articles

 

of

Incorporation.

 

Because

 

of

 

the

 

requirements

 

to

 

overcome

 

this

 

restriction,

 

this

 

provision

 

of

 

the

 

amended

 

Articles

 

of

Incorporation could

 

have an

 

anti-takeover effect

 

and

 

may delay,

 

make more

 

difficult

 

or prevent

 

an attempted

 

acquisition

that you may favor.

 

 

Table of Contents

 

 

44

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

Item 1B. Unresolved Staff Comments

None.

Item 1C. Cybersecurity

Risk Management and Strategy Overview

Customers

 

depend

 

on

 

the

 

Company

 

to

 

properly

 

protect

 

nonpublic

 

personal

 

information

 

gathered

 

and

 

stored

 

in

connection with the services we provide. The Company realizes that cyber incidents can have financial, reputational,

 

legal,

and operational impacts that can

 

significantly adversely affect our customers, capital, and

 

earnings. Therefore, we integrate

cybersecurity processes throughout the Company as part of our enterprise-wide governance process. Regulatory agencies

are

 

charged

 

with

 

ensuring

 

the

 

Company’s

 

cybersecurity

 

controls

 

and

 

procedures

 

are

 

compliant

 

with

 

the

 

intent

 

of

 

the

cybersecurity

 

expectations

 

set

 

forth

 

by

 

the

 

Federal

 

Financial

 

Institutions

 

Examination

 

Council

 

(“FFIEC”).

 

The

 

FFIEC

framework offers a set of guidelines

 

and best practices to help

 

financial institutions manage and mitigate cybersecurity risks

effectively.

 

It focuses on ensuring the confidentiality,

 

integrity, and availability

 

of sensitive information and systems.

The Information

 

Security Officer

 

(“ISO”) is

 

an integral

 

member of

 

the Risk

 

Management and

 

Compliance Department

(“RMCD”) of

 

the Bank

 

and who

 

provides expert

 

counsel on

 

matters of

 

cybersecurity and

 

presents periodic

 

reports to

 

the

Risk Committee of our Board of Directors.

 

As part

 

of the

 

program, periodic

 

risk assessments

 

are performed

 

to determine

 

the Company’s

 

inherent and

 

residual

cybersecurity risk, the

 

maturity level of the program,

 

the risk of cyber

 

threats, and the effectiveness

 

of controls currently

 

in

practice. The

 

Company utilizes

 

the National

 

Institute of

 

Standards and

 

Technology

 

(“NIST”) Framework

 

and the

 

FFIEC’s

Cybersecurity Assessment Tool

 

to help management identify its risks and determine the Company’s cybersecurity posture.

 

Through

 

the

 

implementation

 

of

 

rigorous

 

procedures

 

and

 

controls,

 

augmented

 

by

 

ongoing

 

training

 

initiatives

 

for

 

both

management

 

and

 

staff,

 

the

 

institution

 

cultivates

 

a

 

safe

 

cybersecurity

 

environment.

 

This

 

approach

 

encompasses

 

diverse

methodologies

 

including

 

defense-in-depth

 

and

 

proactive

 

security

 

awareness

 

training

 

aimed

 

at

 

fortifying

 

the

 

institutions

cybersecurity controls and fostering a resilient operational

 

framework.

Assessment and Response to Cybersecurity Threats

It is the policy of

 

the Company and its

 

technology service providers

 

(“TSPs”) to ensure

 

they can identify,

 

mitigate, and

respond to

 

cyber-attacks involving destructive

 

malware and invasive

 

attacks such

 

as phishing,

 

ransomware, malware, DDoS

attacks, etc. This commitment aligns

 

with the Company’s risk

 

appetite, Incident Response Policy,

 

and Business Continuity

Plan, which incorporates business continuity planning and testing activities to enhance response and recovery capabilities.

The Company

 

realizes that it

 

faces a

 

variety of

 

risks from cyber-attacks

 

involving destructive malware,

 

including liquidity,

capital, operational,

 

and reputation

 

risks, due

 

to events

 

such as

 

fraud, data

 

loss, and

 

disruption of

 

customer

 

service. As

such, it

 

is the

 

policy of

 

the Company

 

to ensure

 

that its

 

risk management

 

processes, and

 

business continuity

 

planning address

these risks by:

●

 

Establishing

 

a

 

comprehensive

 

governance

 

program

 

encompassing

 

policies

 

and

 

procedures

 

to

 

administer

 

and

oversee

 

the

 

information/cybersecurity

 

programs

 

to

 

ensure

 

adherence

 

to

 

regulatory

 

guidance

 

and

 

industry

 

best

practices.

●

 

Securely configuring systems and services to mitigate the impact of cyberattacks.

 

This includes measures such as

logical

 

network

 

segmentation,

 

hard

 

backups,

 

maintaining

 

an

 

inventory

 

of

 

authorized

 

devices

 

and

 

software,

 

and

physical

 

segmentation

 

of

 

critical

 

systems.

 

Consistency

 

in

 

system

 

configuration

 

fosters

 

a

 

secure

 

network

environment by removing or disabling unused applications, functions,

 

or components.

●

 

Implementing and testing

 

controls around critical

 

systems on a regular

 

basis to ensure appropriate

 

access control

and segregation of duties. Limits on sign-on attempts

 

for critical systems are enforced, with accounts

 

being locked

upon

 

threshold

 

exceedance.

 

Alert

 

systems

 

notify

 

of

 

baseline

 

control

 

changes

 

on

 

critical

 

systems,

 

with

 

the

effectiveness and

 

adequacy of controls

 

periodically tested

 

and the results

 

reported to

 

Senior Management

 

and, if

applicable,

 

the

 

Risk

 

Committee,

 

along

 

with

 

recommended

 

risk

 

mitigation

 

strategies

 

and

 

progress

 

to

 

remediate

findings.

●

 

Performing security

 

monitoring, prevention,

 

and risk

 

mitigation activities

 

to ensure

 

the effectiveness

 

of protection

and detection systems.

 

This includes maintaining

 

up-to-date intrusion detection

 

systems, antivirus protection,

 

and

properly configured firewall

 

rules. Systems are

 

monitored to identify,

 

prevent, and contain

 

attack attempts from

 

all

sources.

 

Table of Contents

 

 

45

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

●

 

Maintaining robust business

 

continuity planning processes

 

to swiftly

 

recover, resume, and maintain

 

operations post-

cyber-attack incidents

 

involving destructive

 

malware. These

 

processes encompass

 

data and business

 

operations

recovery,

 

network

 

capability

 

rebuilding,

 

and

 

data

 

protection

 

for

 

offline

 

backups

 

in

 

the

 

event

 

of

 

cyber-attacks

impacting the Company or its critical service providers.

●

 

Conducting ongoing

 

information security

 

risk assessments

 

to address

 

new and

 

evolving threats

 

to online

 

deposit

and loan accounts. This involves identifying, prioritizing, and assessing risks to

 

critical systems, including threats to

applications controlling

 

various system parameters and implementing

 

necessary security prevention measures.

●

 

Reviewing, updating, and testing incident response and business

 

continuity plans annually to ensure effectiveness.

Testing

 

encompasses

 

both

 

in-house

 

and

 

third-party

 

processor

 

scenarios

 

to

 

validate

 

employee

 

understanding

 

of

responsibilities and adherence to Company protocols.

Executive Oversight and Roles

The

 

responsibility

 

for

 

adopting

 

and

 

maintaining

 

an

 

effective

 

cybersecurity

 

program

 

is

 

assigned

 

to

 

the

 

RMCD,

 

who

collaborates

 

with

 

functional

 

area

 

management,

 

departmental

 

level

 

managers,

 

and

 

other

 

relevant

 

staff.

 

Management

Committees

 

and

 

the

 

Board

 

of

 

Directors

 

review

 

reports

 

submitted

 

by

 

the

 

RMCD

 

detailing

 

the

 

Company’s

 

inherent

 

and

residual cybersecurity

 

risk, program

 

sophistication level,

 

and high-risk

 

threats identified

 

in the

 

cybersecurity risk assessment.

The

 

Board

 

oversees

 

the

 

development

 

and

 

maintenance

 

of

 

the

 

information

 

security

 

program,

 

holding

 

management

accountable.

 

Management

 

committees

 

ensure

 

program

 

integration

 

and

 

effectiveness,

 

with

 

the

 

RMCD

 

responsible

 

for

cybersecurity controls and procedures.

 

The Board receives regular reports

 

on cybersecurity risk assessment

 

and program

updates,

 

providing

 

expectations

 

and

 

requirements

 

to

 

management

 

and

 

holding

 

them

 

accountable

 

for

 

oversight

 

and

coordination, assignment of responsibility,

 

and the effectiveness of the information and cybersecurity

 

security program.

Annually, or as required, the RMCD

 

provides a comprehensive report

 

to the Board or

 

a designated committee regarding

the

 

status

 

of

 

the

 

cybersecurity

 

program.

 

This

 

report

 

encompasses

 

internal

 

assessments,

 

utilization

 

of

 

the

 

FFIEC

Cybersecurity

 

Assessment

 

Tool,

 

discussion

 

of

 

significant

 

program

 

matters

 

such

 

as

 

the

 

annual

 

risk

 

assessment,

 

risk

management

 

decisions,

 

monitoring

 

of

 

service

 

provider

 

compliance,

 

results

 

of

 

key

 

controls

 

testing,

 

security

 

breaches

 

or

violations, management's responses, and recommendat

 

ions for program enhancements.

Engagement with Third Party Vendors

"Private

 

information,"

 

which

 

is

 

part

 

of

 

the

 

"Internet

 

Security

 

and

 

Privacy

 

Act"

 

and

 

considered

 

"Highly

 

Sensitive

Information" under

 

the Company’s definition,

 

must not

 

be released

 

as storable

 

data to

 

third-party consultants without

 

security

procedures that

 

demonstrate compliance

 

with the

 

Company's third-party

 

diligence in

 

protecting the

 

data and

 

ensuring its

proper

 

distribution

 

when

 

no

 

longer

 

needed.

 

"Private

 

or

 

highly

 

sensitive

 

information"

 

refers

 

to

 

personal

 

information

 

(e.g.,

information concerning

 

an individual

 

which, because

 

of name,

 

number,

 

symbol,

 

mark, or

 

other identifier,

 

can be

 

used to

identify an

 

individual) in

 

combination with

 

any one

 

or more

 

of the

 

following data

 

elements: (1)

 

social security

 

number; (2)

driver’s

 

license

 

number

 

or

 

non-driver

 

identification

 

card

 

number;

 

(3)

 

account

 

number,

 

credit

 

or

 

debit

 

card

 

number,

 

in

combination

 

with

 

any

 

required

 

security

 

code,

 

access

 

code,

 

or

 

password

 

which

 

would

 

permit

 

access

 

to

 

an

 

individual’s

financial account(s) at

 

the Company including

 

but not limited

 

to an individual’s deposit

 

and loan accounts.

 

It does not

 

include

publicly available

 

information that

 

is lawfully

 

made available

 

to the public

 

from federal, state,

 

or local

 

government records

unless attached in any way to the previously mentioned

 

documentation.

Compliance with Regulatory Standards

Annual testing or

 

more frequently if

 

deemed necessary

 

of cybersecurity controls

 

and procedures will

 

be conducted

 

to

ensure compliance.

 

In instances

 

of identified

 

deficiencies or

 

vulnerabilities,

 

remedial action

 

plans will

 

be implemented

 

to

rectify issues or establish mitigating

 

controls. Any exceptions deemed significant will

 

be promptly reported, with remediation

efforts prioritized.

Annually,

 

or

 

as

 

required,

 

the

 

RMCD

 

will

 

provide

 

a

 

comprehensive

 

report

 

to

 

the

 

Board

 

or

 

a

 

designated

 

committee

regarding the status of

 

the cybersecurity Program. This report

 

will encompass internal assessments, utilization

 

of the FFIEC

cybersecurity Assessment Tool,

 

and discussion of other significant program matters.

 

As of the reporting period, there is

 

no knowledge or indication that customer sensitive information was compromised as

a

 

result

 

of

 

third-parties’

 

system

 

vulnerabilities.

 

Management

 

continues

 

to

 

monitor

 

developments

 

and

 

vendor

communications.

 

Table of Contents

 

 

46

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

Item 2.

 

Properties

The Company’s corporate offices

 

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

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.

The

 

Company

 

previously

 

disclosed

 

that

 

litigation

 

(the

 

“Litigation”)

 

had

 

been

 

commenced

 

on

 

July

 

13,

 

2023

 

by

 

three

individuals

 

who

 

were

 

shareholders

 

of

 

the

 

Bank

 

prior

 

to

 

the

 

Bank’s

 

reorganization

 

into

 

the

 

holding

 

company

 

form

 

of

organization in 2021

 

(the “Plaintiffs”)

 

against six

 

persons, all

 

of whom were

 

directors of

 

the Bank at

 

the relevant

 

time (the

“Defendants”), in the Circuit Court, Eleventh Judicial Circuit for Miami-Dade County, Florida (the “Court”) (Benes et al. v. de

la

 

Aguilera

 

et

 

al.)

 

alleging

 

the

 

Defendants

 

(i) caused

 

the

 

Bank,

 

as

 

directors

 

thereof,

 

to

 

engage

 

in ultra

 

vires

 

conduct by

devising

 

and

 

approving

 

the

 

exchange

 

transaction

 

effected

 

in

 

July

 

2021

 

pursuant

 

to

 

which

 

the

 

Bank’s

 

then

 

outstanding

shares of Class C and Class D preferred stock was exchanged for shares of Class A voting common stock in the

 

Bank (the

“Exchange Transaction”),

 

which action

 

the Plaintiffs

 

allege was

 

not permitted

 

by the

 

Bank’s Articles

 

of Incorporation,

 

and

(ii) breached

 

their

 

fiduciary

 

duty as

 

directors

 

of the

 

Bank

 

by

 

approving

 

and

 

engaging

 

in

 

the

 

Exchange

 

Transaction.

 

The

Plaintiffs sought the

 

Court to certify the

 

action as a class

 

action and to award

 

damages in an

 

amount to be

 

proven at trial.

Plaintiffs

 

sought

 

damages

 

exceeding

 

$750,000

 

plus

 

attorney’s

 

fees

 

and

 

costs

 

as

 

well

 

as

 

such

 

other

 

relief

 

as

 

the

 

Court

determined to award.

 

The Defendants filed a motion to dismiss the Litigation with

 

prejudice (the “Motion”). On December 27, 2023, the Court,

after reviewing

 

the Motion,

 

the Plaintiff’s response

 

thereto and

 

the Defendant’s reply

 

as well

 

as the

 

oral arguments presented

by

 

the

 

parties

 

on

 

December

 

14,

 

2023,

 

granted

 

the

 

Motion,

 

dismissing

 

the

 

Litigation

 

with

 

prejudice

 

and

 

rendering

 

final

judgment in favor of the Defendants. The Court reserved jurisdiction

 

to award costs or grant any post-judgment relief.

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 Disclosures

Not applicable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

47

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

PART II

Item 5.

 

Market

 

for

 

Registrant’s

 

Common

 

Equity,

 

Related

 

Stockholder

 

Matters

 

and

 

Issuer

 

Purchases

 

of

 

Equity

Securities

(a)

 

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

March 31, 2023

$

12.71

$

9.89

June 30, 2023

$

10.94

$

8.86

September 30, 2023

$

12.09

$

10.31

December 31, 2023

$

12.65

$

10.11

As of

 

December 31, 2023,

 

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,

 

2024,

 

the

 

Company’s

 

Class

 

A

 

common

 

shares

 

were

 

held

 

by

 

approximately

 

402

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

48

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

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,

2023, 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

12/31/2023

USCB Financial Holdings, Inc. (USCB)

$

100

$

140

$

122

$

123

NASDAQ Bank (BANK)

$

100

$

115

$

94

$

88

NASDAQ ABA Community Bank (QABA)

$

100

$

114

$

101

$

96

NASDAQ Composite (IXIC)

$

100

$

107

$

71

$

102

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

49

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

Recent Sales of Unregistered Securities

(a) The Company did not sell any of its equity securities

 

during 2023 that were not registered under the Securities

 

Act.

(b) Not applicable.

(c) The Company’s repurchases of equity securities

 

for the quarter ended December 31, 2023 were as

 

follows:

Total

Number of

Shares

Purchased

Average

Price Paid

Per Share

Total Number of Shares Purchased

as Part of Publicly Announced Plans

or Programs (1)

Maximum Number

of Shares that May

Yet Be Purchased

Under Plans or

Programs (1)

Period

 

October 1 - 31, 2023

-

$

-

-

172,397

November 1 - 30, 2023

 

92,317

 

10.45

92,317

 

 

80,080

December 1 - 31, 2023

-

 

-

-

 

80,080

92,317

$

10.45

92,317

(1) On January 24, 2022 the Company announced

 

its initial stock repurchase program to repurchase

 

up to 750,000 shares of Class A common

 

stock,

approximately 3.75% of the Company’s then outstanding

 

shares of common stock.

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, 2023, the

 

Company had repurchased

 

669,920 shares of

 

Class

A common stock.

Item 6.

 

Reserved

Table of Contents

 

 

50

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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, 2023

 

and

 

2022. This

 

discussion

 

and

 

analysis

 

is best

 

read

 

in

 

conjunction

 

with

 

the

 

Consolidated

 

Financial

Statements and related

 

footnotes of the 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.

Table of Contents

 

 

51

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

CAUTIONARY NOTE REGARDING 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,” “could,”

 

“should,” “would,” “believe,”

 

“contemplate,”

“expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are

intended

 

to

 

identify

 

forward-looking

 

statements.

 

These

 

forward-looking

 

statements

 

include

 

statements

 

related

 

to

 

our

projected

 

growth,

 

anticipated

 

future

 

financial

 

performance,

 

and

 

management’s

 

long-term

 

performance

 

goals,

 

as

 

well

 

as

statements relating to

 

the anticipated effects

 

on results of

 

operations and financial

 

condition from expected

 

developments

or events, or business and growth strategies, including

 

anticipated internal growth.

These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ

materially from those anticipated in such statements.

 

Potential risks and uncertainties include, but are not

 

limited to:

•

 

the strength of the United States economy

 

in general and the strength of the local

 

economies in which we conduct

operations;

•

 

our ability to successfully manage interest rate risk, credit

 

risk, liquidity risk, and other risks inherent to our industry;

•

 

the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss

reserve and deferred tax asset valuation allowance;

•

 

the efficiency and effectiveness of our

 

internal control 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;

•

 

adverse

 

changes

 

or

 

conditions

 

in

 

the

 

capital

 

and

 

financial

 

markets,

 

including

 

actual

 

or

 

potential

 

stresses

 

in

 

the

banking industry;

•

 

deposit attrition and the level of our uninsured deposits;

•

 

legislative or regulatory

 

changes and changes

 

in accounting

 

principles, policies,

 

practices or guidelines,

 

including

the on-going effects of the implementation of CECL;

•

 

the lack of a significantly 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,

in particular, commercial real estate;

•

 

the effects of climate change;

•

 

the concentration of ownership of our common stock;

•

 

fluctuations in the price of our common stock;

•

 

our ability to fund or access the capital markets at attractive

 

rates and terms and manage our growth, both organic

growth as well as growth through other means, such as

 

future acquisitions;

•

 

inflation, interest rate, unemployment rate, market, and monetary

 

fluctuations;

•

 

impacts of international hostilities and geopolitical events;

•

 

increased

 

competition

 

and

 

its

 

effect

 

on

 

the

 

pricing

 

of

 

our

 

products

 

and

 

services

 

as

 

well

 

as

 

our

 

net

 

interest

 

rate

spread and net interest margin;

•

 

the loss of key employees;

 

•

 

the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,

employee, or third-party fraud and cybersecurity breaches;

 

and

 

•

 

other risks described in this Annual Report on Form 10-K

 

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 in this Annual

Report on Form 10-K

 

and in the reports the

 

Company filed or will file

 

with the SEC and, for

 

periods prior to the completion

of the bank holding company reorganization, 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

Table of Contents

 

 

52

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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, 2023, the Company reported net income of

 

$16.5 million compared with net income

of

 

$20.1 million for the year ended December 31,

 

2022.

 

In

 

evaluating

 

our

 

financial

 

performance,

 

we

 

consider

 

the

 

level

 

of

 

and

 

trends

 

in

 

net

 

interest

 

income,

 

the

 

net

 

interest

margin, the

 

cost of

 

deposits, growth

 

and composition

 

of our

 

loan portfolio,

 

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, 2023:

•

 

Net

 

interest

 

income

 

before

 

provision

 

for

 

credit

 

losses

 

totaled

 

$58.6

 

million,

 

a

 

decrease

 

of

 

$5.1

 

million

 

or

 

8.0%,

compared to $63.7 million for the year ended December

 

31, 2022.

 

•

 

Net

 

interest

 

margin

 

(“NIM”)

 

was

 

2.79%

 

for

 

the

 

year

 

ended

 

December 31,

 

2023

 

and

 

3.38%

 

for

 

the

 

year

 

ended

December 31, 2022.

 

•

 

Total

 

assets

 

grew

 

to

 

$2.3

 

billion

 

at

 

December

 

31,

 

2023,

 

an

 

increase

 

of

 

$253.3

 

million

 

or

 

12.1%,

 

compared

 

to

December 31, 2022.

•

 

Total

 

loans

 

grew

 

to

 

$1.8

 

billion

 

at

 

December

 

31,

 

2023,

 

an

 

increase

 

of

 

$273.5

 

million

 

or

 

18.1%,

 

compared

 

to

December 31, 2022.

•

 

The weighted average cost of interest-bearing liabilities increased to 3.07% for the year ended December 31, 2023

from 0.66% in December 31, 2022 as a result of the increase

 

in market interest rates.

 

•

 

Return on average assets for the year ended December

 

31, 2023 was 0.75% compared to 1.01% in 2022.

•

 

Return on average stockholders’ equity for the year ended December 31, 2023 was 8.99% compared to 10.73% in

2022.

•

 

Nonperforming assets was $468 thousand at December

 

31, 2023 compared to $0 at December 31, 2022.

 

•

 

The Company maintained its strong capital position. As of December 31, 2023, the Bank was well-capitalized, with

a total risk-based capital ratio of

 

12.65%, a tier 1 risk-based

 

capital ratio of 11.48%, a common

 

equity tier 1 capital

ratio of

 

11.48%, and

 

a leverage

 

ratio of

 

9.17%. As

 

of December

 

31, 2023

 

and 2022,

 

all of

 

the Bank’s

 

regulatory

capital ratios exceeded the thresholds to be well-capitalized

 

under the applicable bank regulatory requirements.

•

 

During the year

 

ended December 31,

 

2023, the Company

 

repurchased 669,920 shares

 

of Class A common stock

at

 

a

 

weighted

 

average

 

price

 

per

 

share

 

of

 

$11.28.

 

The

 

aggregate

 

purchase

 

price

 

for

 

these

 

transactions

 

was

approximately

 

$7.6

 

million,

 

including

 

transaction

 

costs.

 

These

 

repurchases

 

were

 

made

 

through

 

open

 

market

purchases pursuant to the Company’s publicly announced

 

repurchase program. As of December 31, 2023, 80,080

shares remained authorized for repurchase under this

 

program.

•

 

On

 

January

 

1,

 

2023,

 

the

 

Company

 

implemented

 

Accounting

 

Standard

 

Update

 

(“ASU”)

 

2016-13

 

Financial

Instruments - Credit Losses (Topic 326) to calculate the ACL.

 

•

 

The Company brought in $50 million of brokered CDs at a weighted average rate of 4.98%

 

to boost liquidity during

the second quarter of 2023. The CDs renewed in Q1 2024 at weighted

 

average rate

 

of 5.13%.

•

 

The Company

 

executed two

 

cash flows

 

interest swap

 

with a notional

 

value of

 

$50 million

 

to manage

 

exposure to

fix interest rate funding.

•

 

The Company executed four fair

 

value interest swaps with a

 

notional value of $200 million

 

to manage exposure to

interest rate risk by reducing the loan portfolio duration.

 

Table of Contents

 

 

53

 

USCB Financial Holdings, Inc.

 

2023 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 - Loans

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.

 

On

 

January

 

1,

 

2023,

 

the

 

Company

 

implemented

 

ASU

 

2016-13

 

Financial

 

Instruments

 

-

 

Credit

 

Losses

 

(Topic

 

326):

Measurement of Credit Losses on Financial Instruments, as amended. This update replaces the incurred

 

loss methodology

with

 

the

 

CECL

 

methodology.

 

The

 

CECL

 

methodology

 

measures

 

expected

 

credit

 

losses

 

and

 

applies

 

to

 

financial

 

assets

measured at

 

amortized cost,

 

including loan

 

receivables and

 

held-to-maturity debt

 

securities. It

 

also applies

 

to off-balance

sheet

 

credit

 

exposures

 

not

 

accounted

 

for

 

as

 

insurance

 

(e.g.,

 

loan

 

commitments,

 

standby

 

letters

 

of

 

credit,

 

financial

guarantees, and similar instruments), as

 

well as net investments in leases

 

recognized by lessors in accordance

 

with Topic

842 on leases.

Under CECL, the Company estimates the allowance for credit losses by utilizing pertinent available data, sourced both

internally and

 

externally,

 

relating to

 

past events,

 

current conditions,

 

and reasonable

 

and supportable

 

forecasts. Historical

credit

 

losses

 

provide

 

the

 

foundation

 

for

 

estimation

 

of

 

expected

 

credit

 

losses.

 

Qualitative

 

adjustments

 

are

 

applied

 

to

 

the

estimated

 

expected

 

credit

 

losses

 

for

 

the

 

loan

 

portfolio

 

to

 

account

 

for

 

potential

 

constraints

 

of

 

the

 

quantitative

 

model.

Management

 

employs

 

a

 

scorecard

 

to

 

facilitate

 

the

 

evaluation

 

of

 

qualitative

 

factor

 

adjustments

 

made

 

to

 

expected

 

credit

losses.

The estimation's

 

quantitative aspect

 

relies on

 

the statistical

 

correlation between

 

the anticipated

 

value of

 

an economic

indicator and the

 

historical loss

 

experience implied

 

within a

 

selected group

 

of peers.

 

The Company conducted

 

regression

analyses using

 

peer data,

 

inclusive of

 

the Company

 

itself, where

 

observed credit

 

losses and chosen

 

economic indicators

were utilized to identify

 

appropriate drivers for

 

modeling the lifetime

 

probability of default (“PD”)

 

rates. A loss given

 

default

rate (“LGD”) is assigned to each pool

 

of loans for each period based on

 

these PD outcomes. The model

 

primarily employs

an expected

 

discounted cash

 

flow (“DCF”)

 

analysis for

 

segments within

 

the loan

 

portfolio. This

 

DCF analysis

 

operates at

the

 

individual

 

instrument

 

level

 

and

 

incorporates

 

various

 

loan-specific

 

data

 

points

 

and

 

segment-specific

 

assumptions

 

to

ascertain the lifetime expected

 

loss associated with each

 

instrument. An implicit "hypothetical

 

loss" is determined for

 

each

period of the DCF,

 

aiding in establishing the

 

present value of future

 

cash flows for each

 

period. The reserve allocated

 

to a

particular loan represents the disparity

 

between the sum of the

 

present value of future cash

 

flows and the book balance

 

of

the loan at the measurement date.

Management opted for the Remaining Life (“WARM”) methodology for five segments within the loan portfolio. For each

segment,

 

a

 

long-term

 

average

 

loss

 

rate

 

is

 

computed

 

and

 

applied

 

quarterly

 

throughout

 

the

 

remaining

 

life

 

of

 

the

 

pool.

Qualitative assessments

 

are conducted

 

to adjust for

 

economic expectations.

 

To

 

estimate the remaining

 

life, management

employed a software solution utilizing an attrition-based calculation. This software conducts quarterly cohort-based attrition

measurements based on the loan portfolio.

Portfolio

 

segments

 

represent

 

the

 

level

 

at

 

which

 

loss

 

assumptions

 

are

 

applied

 

to

 

a

 

pool of

 

loans,

 

determined

 

by

 

the

similarity of

 

risk characteristics inherent

 

in the

 

included instruments, based

 

on collateral

 

codes and

 

FFIEC Call Report

 

codes.

Currently,

 

the Company segments

 

the portfolio based on

 

collateral codes to establish

 

reserves. Each segment

 

is linked to

regression

 

models

 

(Loss

 

Driver

 

Analyses)

 

using

 

peer

 

data

 

for

 

loans

 

with

 

similar

 

risk

 

characteristics.

 

The

 

Company

 

has

established connections between

 

internal segmentation and

 

FFIEC Call Report

 

codes for this purpose.

 

The loss driver

 

for

Table of Contents

 

 

54

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

each

 

loan

 

portfolio

 

segment

 

is

 

derived

 

from

 

a

 

readily

 

available

 

and

 

reasonable

 

economic

 

forecast,

 

including

 

Federal

Reserve Bank projections

 

of the U.S.

 

civilian unemployment

 

rate and year-over-year

 

real GDP growth.

 

For the residential

loan segment, House Price

 

Index (“HPI”) projections published

 

by Fannie Mae’s

 

Economic and Strategic Research

 

Group

are utilized for

 

the forecast. Forecasts are

 

applied for the

 

first four quarters

 

of the credit

 

loss estimate and

 

then linearly revert

to the historical mean of the economic indicator over the expected

 

life of the loans.

The model integrates qualitative

 

factor adjustments to

 

fine-tune risk calibration

 

for each portfolio

 

segment, addressing

aspects that quantitative analysis may

 

not fully capture. Decisions concerning

 

qualitative adjustments reflect management's

anticipation of loss conditions deviating from those already accounted

 

for in the quantitative aspect of the model.

Our ACL

 

included residential

 

loans. To

 

assess the

 

potential impact

 

of changes

 

in qualitative

 

factors related

 

to these

loans,

 

management

 

performed

 

a sensitivity

 

analysis.

 

The Company

 

evaluated

 

the

 

impact

 

of the

 

HPI

 

used

 

in calculating

expected losses on the residential loan segment.

 

As of December 31, 2023, for every

 

100 basis points increase in the HPI

index, the forecast reduces

 

reserves by approximately $150

 

thousand and about 1

 

basis point to

 

the reserve coverage ratio,

everything else being

 

constant. This

 

sensitivity analysis provides

 

a hypothetical result

 

to assess the

 

sensitivity of the

 

ACL

and does not represent a change in management’s

 

judgement.

As of December

 

31, 2023,

 

we stress

 

tested two

 

qualitative factors

 

in our commercial

 

real estate

 

loan pool,

 

as it’s

 

the

largest segment

 

in our

 

portfolio. We

 

evaluated the

 

impact of

 

a change

 

in the

 

qualitative factors

 

from no

 

risk to

 

maximum

loss

 

to measure

 

the

 

sensitivity

 

of the

 

qualitative

 

factors.

 

The change

 

resulted

 

in

 

a $6.1

 

million

 

or

 

32.6%

 

increase

 

in the

allowance for credit losses.

 

This sensitivity analysis

 

provides a hypothetical result

 

to assess the sensitivity

 

of the ACL and

does not represent a change in management’s judgement.

The Company calculates a reserve for unfunded commitments, distinct from

 

the allowance for credit losses reported in

other liabilities.

 

This reserve

 

is determined

 

using both

 

quantitative and

 

qualitative factors

 

identical to

 

those applied

 

to the

collectively evaluated loan portfolio.

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.

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.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

55

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

Results of Operations

General

The following tables

 

present selected balance sheet, income statement, and profitability ratios for the dates and for the

periods indicated (in thousands, except ratios):

As of December 31,

2023

2022

Consolidated Balance Sheets:

Total

 

assets

$

2,339,093

$

2,085,834

Total

 

loans

(1)

$

1,780,827

$

1,507,338

Total

 

deposits

$

1,937,139

$

1,829,281

Total

 

stockholders' equity

$

191,968

$

182,428

(1)

 

Loan amounts include deferred fees/costs.

Years Ended December 31,

2023

2022

Consolidated Statements of Operations:

Net interest income before provision for credit losses

$

58,568

$

63,661

Total

 

non-interest income

$

7,403

$

5,228

Total

 

non-interest expense

$

41,808

$

39,309

Net income

 

$

16,545

$

20,141

Net income available to common stockholders

$

16,545

$

20,141

Profitability:

Efficiency ratio

63.37%

57.06%

Net interest margin

 

2.79%

3.38%

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.

Net income

 

for the

 

year ended

 

December 31, 2023

 

was $16.5 million

 

,

 

compared with

 

net income

 

of $20.1 million

 

for

the same

 

period in

 

2022. The Company

 

reported net

 

income per

 

diluted share

 

for the

 

year ended

 

December 31, 2023

 

of

$0.84 compared to net income per diluted share for the

 

same period in 2022 of $1.00.

 

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 the weighted

 

average yields

 

earned on interest

 

-earning assets

 

and the weighted

 

average 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

Asset-Liability Committee (“ALCO”) has in place asset-liability management techniques to manage major factors that affect

net interest income and net interest margin.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

56

 

USCB Financial Holdings, Inc.

 

2023 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,

2023

2022

Average

Balance

 

(1)

Interest

Yield/Rate

Average

Balance

 

(1)

Interest

Yield/Rate

Assets

Interest-earning assets:

Loans

(2)

$

1,606,960

$

87,884

5.47

%

$

1,341,693

$

60,825

4.53

%

Investment securities

(3)

423,749

10,012

2.36

%

470,508

9,346

1.99

%

Other interest earnings assets

65,986

3,121

4.73

%

70,873

929

1.31

%

Total

 

interest-earning assets

2,096,695

101,017

4.82

%

1,883,074

71,100

3.78

%

Non-interest earning assets

109,541

 

 

107,536

 

Total

 

assets

$

2,206,236

 

 

$

1,990,610

 

Liabilities and stockholders' equity

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

Interest-bearing demand deposits

$

53,324

901

1.69

%

$

64,835

86

0.13

%

Saving and money market deposits

963,708

29,658

3.08

%

803,426

5,173

0.64

%

Time deposits

268,715

8,500

3.16

%

220,319

1,509

0.68

%

Total

 

interest-bearing deposits

1,285,747

39,059

3.04

%

1,088,580

6,768

0.62

%

Borrowings and repurchase agreements

94,936

3,390

3.57

%

38,463

671

1.74

%

Total

 

interest-bearing liabilities

1,380,683

42,449

3.07

%

1,127,043

7,439

0.66

%

Non-interest bearing demand deposits

607,506

 

 

645,366

 

 

Other non-interest-bearing liabilities

34,010

 

 

30,449

 

 

Total

 

liabilities

2,022,199

 

 

1,802,858

 

 

Stockholders' equity

184,038

 

 

187,752

 

 

Total

 

liabilities and stockholders' equity

$

2,206,236

 

 

$

1,990,610

 

 

Net interest income

$

58,568

 

$

63,661

 

Net interest spread

(4)

 

1.74

%

3.12

%

Net interest margin

(5)

 

 

2.79

%

3.38

%

(1)

 

Average balances - Daily average balances are used

 

to calculate yields/rates.

(2)

 

Average loan balances include non-accrual loans. Interest income

 

on loans includes accretion of deferred

 

loan fees, net of deferred loan costs.

(3)

 

At fair value except for securities held to maturity. This amount includes

 

FHLB stock.

(4)

 

Net interest spread is the weighted average

 

yield on total interest-earning assets minus the weighted

 

average rate on total interest-bearing liabilities.

(5)

 

Net interest margin is the ratio of net interest

 

income to average total interest-earning assets.

Net interest

 

income before

 

the provision

 

for credit

 

losses was

 

$58.6 million for

 

the year

 

ended December 31,

 

2023, a

decrease of

 

$5.1 million or

 

8.0%, from

 

$63.7 million for

 

the year

 

ended December 31,

 

2022. This

 

decrease was

 

primarily

attributable to higher

 

cost of funds

 

due to the interest

 

rate market.

 

The increase in

 

weighted average rates

 

paid on cost of

funds was greater than the increase in weighted average yields

 

earned on interest-earning assets.

 

The net

 

interest margin was

 

2.79% for

 

the year ended

 

December 31, 2023 and

 

3.38%

 

for the

 

year ended 2022.

 

Although

the overall

 

and individual

 

yields for

 

interest-earning assets

 

and interest-bearing

 

liabilities both

 

increased in

 

2023, cost

 

of

funds had a

 

greater increase

 

when compared

 

to 2022. The

 

increase in

 

our cost of

 

funds was primarily

 

due to the

 

interest

rate market.

Provision for Credit Losses

ACL represents expected

 

credit losses

 

in our

 

portfolio as

 

the measurement

 

date. We

 

maintain an

 

adequate ACL that

can

 

mitigate

 

expected

 

credit

 

losses

 

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.

 

Provision for credit loss for

 

the year ended December 31, 2023,

 

was $2.4 million compared to

 

$2.5 million in provision

expense for the same period in 2022. The ACL as a percentage of total loans was 1.18% at December 31, 2023 compared

to 1.16% at December 31, 2022.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

57

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 life insurance policies 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 periods indicated (in thousands):

Years Ended December 31,

2023

2022

Service fees

$

5,055

$

4,010

Gain (loss) on sale of securities available for sale, net

(1,859)

(2,529)

Gain on sale of loans held for sale, net

801

891

Loan settlement

-

161

Other non-interest income

3,406

2,695

Total

 

non-interest income

$

7,403

$

5,228

Non-interest income

 

for the

 

year ended

 

December 31,

 

2023 was

 

$7.4

 

million compared

 

to $5.2

 

million for

 

the same

period in

 

2022. This

 

increase was

 

primarily driven by

 

a $1.0

 

million increase in

 

service fees, consisting

 

mainly of wire

 

transfer

fees. Additionally, in

 

both 2023 and 2022, the

 

Company executed a portfolio restructuring strategy

 

which resulted in the sale

of lower-yielding available-for-sale securities at a loss in

 

order to better position our securities portfolio.

 

The loss on the sale

of

 

securities

 

for

 

2023

 

was

 

$1.9

 

million

 

and

 

$2.5

 

million

 

for

 

2022.

 

Proceeds

 

from

 

the

 

sale

 

transactions

 

were

 

primarily

reinvested in securities and loans yielding higher than the

 

securities that were sold.

Non-Interest Expense

The following table presents the components of non-interest

 

expense for the periods indicated (in thousands):

Years Ended December 31,

2023

2022

Salaries and employee benefits

$

24,429

$

23,943

Occupancy

5,230

5,058

Regulatory assessment and fees

1,453

930

Consulting and legal fees

1,899

1,890

Network and information technology services

2,016

1,806

Other operating

6,781

5,682

Total

 

non-interest expense

$

41,808

$

39,309

Non-interest expense

 

for the

 

year ended

 

December 31, 2023

 

increased $2.5 million

 

or 6.4%,

 

compared to

 

the same

period in 2022. The increase is

 

primarily due to other operating expense specially in

 

the categories of internet banking fees,

promotional expense, audit

 

and tax

 

service fees, and

 

insurance expense due

 

to increased

 

activity and fees,

 

which increased

$1.1 million or 19.7%. Regulatory assessment and fees increased by $523 thousand

 

or 56.2% compared to the year ended

2022. Salaries and benefits increased by $486 thousand or 2.0%

 

due to increase in full time employees to 196 from 191

 

in

2022. The increase

 

in salaries and

 

employee benefits

 

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.

 

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,

 

2023 was

 

$5.3 million,

 

compared

 

to $6.9

 

million

 

for the

 

year

ended December 31, 2022. The

 

effective tax rate for

 

the year ended December 31, 2023

 

was 24.1% and for the

 

year ended

December 31, 2022 was 25.6%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

58

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 (in thousands).

Years Ended 2023 vs. 2022

Years Ended 2022 vs. 2021

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)

$

12,026

$

15,033

$

27,059

$

9,847

$

2,248

$

12,095

Investment securities

(2)

(929)

1,595

666

1,306

154

1,460

Other interest earnings assets

(64)

2,256

2,192

(25)

848

823

Total increase (decrease) in interest income

$

11,033

$

18,884

$

29,917

$

11,128

$

3,250

$

14,378

Interest-bearing liabilities:

Interest-bearing demand deposits

$

(15)

$

830

$

815

$

14

$

13

$

27

Saving and money market deposits

1,032

23,453

24,485

617

2,474

3,091

Time deposits

331

6,660

6,991

(96)

74

(22)

Borrowings and repurchase agreements

985

1,734

2,719

38

79

117

Total increase (decrease) in interest expense

2,333

32,677

35,010

572

2,641

3,213

Increase (decrease) in net interest income

$

8,700

$

(13,793)

$

(5,093)

$

10,556

$

609

$

11,165

(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 2023

as a compared to 2022, reflecting the changes in the macro

 

interest rate environment. However, the average rates paid on

interest-bearing liabilities increased to a greater degree than

 

yields on interest-earning assets.

Analysis of Financial Condition

Total

 

assets at December 31, 2023, were $2.3 billion, an increase of $253.3 million, or 12.1%, over total assets of $2.1

billion at

 

December 31, 2022.

 

Total loans increased $273.5

 

million, or

 

18.1%, to

 

$1.8 billion

 

at December 31,

 

2023 compared

to $1.5 billion

 

at December 31,

 

2022.

 

Total

 

deposits increased

 

by $107.9 million,

 

or 5.9%, to

 

$1.9 billion at

 

December 31,

2023 compared to $1.8 billion at December 31, 2022.

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

 

it’s asset

 

composition and

 

diversification, and

 

maintain

adequate risk-based capital ratios.

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

objectives 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,

Table of Contents

 

 

59

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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, and/or the ALCO of the Company to ensure an appropriate risk and return profile as

 

well as for adherence to the

Company’s investment policy.

As of December 31, 2023, the investment portfolio consisted of available-for-sale

 

(“AFS”) and held-to-maturity (“HTM”)

debt

 

securities.

 

During

 

the

 

third

 

quarter

 

of

 

2022,

 

26

 

investment

 

securities

 

were

 

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 (loss)

 

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. There were no

 

securities transferred

from AFS to HTM in 2023.

The book value of the AFS securities is adjusted quarterly 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 (loss) in stockholders’ equity.

 

CECL requires

 

a loss reserve

 

for securities

 

classified as

 

Held-to-Maturity (HTM).

 

The reserve should

 

reflect historical

credit performance

 

as well

 

as the

 

impact of

 

projected

 

economic forecast.

 

For U.S.

 

Government bonds

 

and

 

U.S. Agency

issued bonds in HTM the explicit guarantee

 

of the US Government is sufficient

 

to conclude that a credit loss reserve

 

is not

required. The reserve

 

requirement is for

 

three primary assets

 

groups: municipal bonds,

 

corporate bonds, and

 

non-agency

securitizations.

 

The

 

Company

 

calculates

 

quarterly

 

the

 

loss

 

reserve

 

utilizing

 

Moody’s

 

ImpairmentStudio.

 

The

 

CECL

measurement

 

for

 

investment

 

securities

 

incorporates

 

historical

 

data,

 

containing

 

defaults

 

and

 

recoveries

 

information,

 

and

Moody’s baseline

 

economic forecast.

 

The solution

 

uses probability

 

of default/loss

 

given default (“PD/LGD”)

 

approach. PD

represents the likelihood a borrower will

 

default. Within the Moody’s model,

 

this is determined using historical

 

default data,

adjusted for the current economic environment. LGD projects

 

the expected loss if a borrower were to default.

The Company

 

monitors the credit

 

quality of HTM

 

securities through the

 

use of

 

credit ratings. Credit

 

ratings are monitored

by the Company

 

on at least

 

a quarterly basis.

 

As of December

 

31, 2023 and

 

December 31, 2022,

 

all HTM securities

 

held

by the Company were rated investment grade.

At year ended

 

December 31, 2023,

 

HTM securities included $165.6

 

million of U.S.

 

Government and U.S.

 

Agency issued

bonds and

 

mortgage-backed

 

securities.

 

Because

 

of the

 

explicit and/or

 

implicit

 

guarantee

 

on these

 

bonds,

 

the

 

Company

holds no reserves

 

on these

 

holdings. The

 

remaining portion

 

of the HTM

 

portfolio is

 

made up of

 

$9.4 million

 

in investment

grade

 

corporate

 

bonds.

 

The

 

required

 

reserve

 

for

 

these

 

holdings

 

is

 

determined

 

each

 

quarter

 

using

 

the

 

model

 

described

above. For the portion of the HTM

 

exposed to non-government credit risk,

 

the Company utilized the PD/LGD

 

methodology

to estimate a $8 thousand ACL as of December 31,

 

2023. The book value for debt securities classified

 

as HTM represents

amortized cost less ACL.

AFS and HTM

 

investment securities

 

in aggregate

 

decreased $14.5 million

 

or 3.5%

 

to $404.3 million

 

at December 31,

2023 from $418.8

 

million at

 

December 31, 2022.

 

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, 2023, securities with

 

a market value of $86.9

 

million were

pledged to secure public deposits and $132.1 million pledged in securities measured at par to the Federal Reserve Bank of

Atlanta

 

for

 

the

 

BTFP

 

program.

 

As

 

of

 

December 31,

 

2023,

 

the

 

Company

 

did

 

not

 

have

 

any

 

tax-exempt

 

securities

 

in

 

the

portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

60

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

The

 

following

 

table

 

presents

 

the

 

amortized

 

cost

 

and

 

fair

 

value

 

of

 

investment

 

securities

 

for

 

the

 

dates

 

indicated

 

(in

thousands):

December 31, 2023

December 31, 2022

Available-for-sale:

Amortized

Cost

Fair Value

Amortized

Cost

Fair Value

U.S. Government Agency

$

9,664

$

8,173

$

10,177

$

8,655

Collateralized mortgage obligations

103,645

80,606

118,951

95,541

Mortgage-backed securities - residential

63,795

52,187

73,838

60,879

Mortgage-backed securities - commercial

49,212

42,764

32,244

27,954

Municipal securities

25,005

19,338

25,084

18,483

Bank subordinated debt securities

28,106

26,261

15,964

14,919

Corporate bonds

 

-

 

 

-

 

4,037

3,709

$

279,427

$

229,329

$

280,295

$

230,140

Held-to-maturity:

U.S. Government Agency

$

43,626

$

38,306

$

44,914

$

39,062

U.S. Treasury

 

-

 

 

-

 

9,841

9,828

Collateralized mortgage obligations

62,735

54,752

68,727

60,925

Mortgage-backed securities - Residential

43,784

39,599

42,685

38,483

Mortgage-backed securities - Commercial

15,439

14,182

11,442

10,777

Corporate bonds

9,398

8,671

11,090

10,013

$

174,982

$

155,510

$

188,699

$

169,088

Allowance for credit losses - securities held-to-maturity

(8)

Securities held-to maturity, net of allowance for credit losses

$

174,974

The following

 

table shows

 

the weighted

 

average yields,

 

categorized by

 

contractual maturity,

 

for investment

 

securities

as of December 31, 2023 (in thousands, except ratios):

 

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

Available-for-sale:

U.S. Government Agency

$

-

-

$

2,364

 

3.16%

$

7,300

 

2.13%

$

9,664

2.39%

Collateralized mortgage obligations

-

-

-

-

103,645

1.41%

103,645

1.41%

MBS - residential

-

-

-

-

63,795

1.87%

63,795

1.87%

MBS - commercial

-

-

-

-

49,212

2.67%

49,212

2.67%

Municipal securities

 

-

-

6,720

1.66%

18,285

1.77%

25,005

1.74%

Bank subordinated debt securities

2,710

8.75%

25,396

5.15%

-

-

28,106

5.50%

$

2,710

8.75%

$

34,480

4.33%

$

242,237

1.83%

$

279,427

2.21%

Held-to-maturity:

U.S. Government Agency

 

$

7,927

1.02%

$

20,153

1.46%

$

15,546

1.84%

$

43,626

1.52%

Collateralized mortgage obligations

-

-

-

-

62,735

1.66%

62,735

1.66%

MBS - residential

4,439

1.85%

5,916

1.74%

33,429

2.40%

43,784

2.26%

MBS - commercial

3,072

1.62%

-

-

12,367

2.61%

15,439

2.42%

Corporate bonds

9,398

2.80%

-

-

-

-

9,398

2.80%

$

24,836

1.92%

$

26,069

1.52%

$

124,077

1.98%

$

174,982

1.90%

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

61

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

The following table shows the loan portfolio composition

 

as of the dates indicated (in thousands):

December 31, 2023

December 31, 2022

Total

Percent of

Total

Total

Percent of

Total

Residential Real Estate

$

204,419

11.5

%

$

185,636

12.3

%

Commercial Real Estate

1,047,593

58.8

%

970,410

64.4

%

Commercial and Industrial

219,757

12.4

%

126,984

8.4

%

Foreign Banks

114,945

6.5

%

93,769

6.2

%

Consumer and Other

191,930

10.8

%

130,429

8.7

%

Total

 

gross loans

1,778,644

100.0

%

1,507,228

100.0

%

Plus: Deferred cost

2,183

110

Total

 

loans net of deferred cost

1,780,827

1,507,338

Less: Allowance for credit losses

21,084

17,487

Total

 

net loans

$

1,759,743

$

1,489,851

Total

 

gross loans increased

 

by $271.4 million

 

or 18.0% at

 

December 31, 2023

 

compared to December

 

31, 2022. The

most significant growth

 

was in the

 

commercial and

 

industrial and

 

commercial real

 

estate loan pools.

 

Consumer and

 

other

loans increased primarily as result of organic growth from our yacht lending business vertical created in January 2022. Our

loan

 

portfolio

 

continues

 

to

 

diversify

 

as

 

commercial

 

and

 

industrial

 

and

 

consumer

 

loans,

 

mostly

 

yacht

 

loans,

 

continue

 

to

increase as a percentage to

 

total loans. However,

 

we do not expect any

 

significant changes over the

 

foreseeable future in

the composition of our loan portfolio. Commercial real estate continues to be the main category of our portfolio, reflective of

the market in which we operate.

The

 

growth

 

experienced

 

over

 

the

 

last

 

couple

 

of

 

years

 

is

 

primarily

 

due

 

to

 

implementation

 

of

 

our

 

relationship-based

banking

 

model,

 

our

 

diversified

 

business

 

verticals,

 

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, 2023 (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

$

4,985

$

29,108

$

77,209

$

93,117

$

204,419

Commercial Real Estate

97,100

186,345

757,106

7,042

1,047,593

Commercial and Industrial

12,254

50,280

117,119

40,104

219,757

Foreign Banks

114,945

-

-

-

114,945

Consumer and Other

2,159

3,232

10,846

175,693

191,930

Total

 

gross loans

$

231,443

$

268,965

$

962,280

$

315,956

$

1,778,644

Interest rate sensitivity:

Fixed interest rates

$

195,381

$

156,815

$

188,148

$

208,681

$

749,025

Floating or adjustable rates

36,062

112,150

774,132

107,275

1,029,619

Total

 

gross loans

$

231,443

$

268,965

$

962,280

$

315,956

$

1,778,644

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,

 

2023, approximately

 

57.9%

 

of the

 

loans

 

have adjustable/variable

 

rates

 

and

 

42.1%

 

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

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

62

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

As of

 

December 31, 2023, the

 

commercial real estate

 

portfolio was $1.0

 

billion or 58.8%

 

of the

 

total gross loans

 

portfolio,

17% of outstanding balances are

 

characterized as owner occupied and

 

83% are characterized as non-owner

 

occupied. The

retail sector was $285.7 million or 33% of the $868.1 million

 

non-owner occupied CRE portfolio.

The

 

following

 

table

 

is

 

a

 

summary

 

of

 

the

 

distribution

 

of

 

non-owner

 

occupied

 

commercial

 

real

 

estate

 

loans

 

held

 

for

investment by loan type (in thousands):

December 31, 2023

Balance

# of Notes

% of Total

Gross Loans

Average Loan Size

Non-Accruals

Weighted Avg

LTV

(1)

Retail

$

285,728

98

16%

$

2,916

$

-

55%

Multifamily

179,976

125

10%

1,440

-

59%

Warehouse

127,824

51

7%

2,506

-

55%

Office

123,938

57

7%

2,174

-

53%

Hotels/Motels

86,490

17

5%

5,088

-

55%

Construction/Land

36,668

16

2%

2,292

-

52%

Other

27,395

18

2%

1,522

-

52%

$

868,019

382

49%

$

2,272

$

-

$

55%

(1) Loan-to-value is calculated based on the real estate value at the time of origination, renewal, or update, whichever is more recent.

The following table is a summary of non-owner occupied commercial real estate loans held for investment by collateral

geographical location (in thousands):

December 31, 2023

South Florida

(1)

Rest of Florida

(2)

Outside Florida

(3)

Balance

% of Non-

Owner

Occupied

CRE Loans

Balance

% of Non-

Owner

Occupied

CRE Loans

Balance

% of Non-

Owner

Occupied

CRE Loans

Retail

$

169,834

20%

$

48,204

6%

$

67,690

8%

Multifamily

138,497

16%

41,480

5%

 

-

 

 

-

 

Warehouse

75,543

9%

49,705

6%

2,576

0%

Office

83,694

10%

31,157

4%

9,087

1%

Hotels/Motels

63,562

7%

22,927

3%

 

-

 

 

-

 

Construction/Land

36,093

4%

575

0%

 

-

 

 

-

 

Other

20,295

2%

7,100

1%

 

-

 

 

-

 

$

587,518

68%

$

201,148

23%

$

79,353

9%

(1) Miami-Dade, Broward, and West Palm Beach counties

(2) All other Florida counties

(3) Within the U.S.

As of December

 

31, 2023,

 

68% of the

 

non-owner occupied

 

CRE portfolio

 

were located

 

within South Florida,

 

and only

10 loan

 

notes with

 

an outstanding

 

balance of

 

$79.4 million

 

are located

 

outside Florida.

 

Balances of

 

non-owner

 

occupied

CRE loans outside Florida were: $69.7 million in New York,

 

$7.1 million in Georgia,

 

and $2.6 million in New Jersey.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

63

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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, 2023

Pass

Special Mention

Substandard

Doubtful

Total

Residential Real Estate

$

204,127

$

-

$

292

$

-

$

204,419

Commercial Real Estate

1,040,032

-

7,561

-

1,047,593

Commercial and Industrial

218,129

-

1,628

-

219,757

Foreign Banks

114,945

-

-

-

114,945

Consumer and Other

191,930

-

-

-

191,930

$

1,769,163

$

-

$

9,481

$

-

$

1,778,644

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

-

807

-

126,984

Foreign Banks

93,769

-

-

-

93,769

Consumer and Other

130,233

-

196

-

130,429

$

1,503,280

$

-

$

3,948

$

-

$

1,507,228

Non-Performing Assets

The following table presents non-performing assets as

 

of December 31, 2023 and 2022 (in thousands, except

 

ratios):

2023

2022

Total

 

non-performing loans

$

468

$

-

Other real estate owned

-

-

Total

 

non-performing assets

468

-

Asset quality ratios:

(1)

-

-

Allowance for credit losses to total loans

1.18%

1.16%

Allowance for credit losses to non-performing loans

4505%

- %

Non-performing loans to total loans

0.03%

- %

(1) ACL was calculated under CECL methodology for 2023, and incurred loss methodology for 2022

Non-performing

 

assets

 

include

 

all

 

loans

 

categorized

 

as non-accrual

 

or restructured,

 

impaired

 

securities,

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

64

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

The

 

Company

 

may

 

grant

 

a

 

loan

 

concession

 

to

 

a

 

borrower

 

experiencing

 

financial

 

difficulties.

 

This

 

determination

 

is

performed during

 

the annual

 

review process

 

or whenever

 

problems are

 

surfacing regarding

 

the client’s

 

ability to

 

repay in

accordance with

 

the original

 

terms of

 

the loan

 

or line

 

of credit.

 

The concessions

 

are given

 

to the

 

debtor in

 

various forms,

including interest rate

 

reductions, principal forgiveness, extension

 

of maturity date,

 

waiver, or deferral of

 

payments and other

concessions intended to minimize potential losses.

For further

 

discussion 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

On January 1,

 

2023, the Company

 

adopted FASB ASU 2016-13, which

 

introduced the CECL methodology

 

and required

us to

 

estimate all

 

expected credit

 

losses over

 

the remaining

 

life of

 

our loan

 

portfolio. Accordingly,

 

the ACL

 

represents an

amount

 

that,

 

in

 

management's

 

evaluation,

 

is

 

adequate

 

to

 

provide

 

coverage

 

for

 

all

 

expected

 

future

 

credit

 

losses

 

on

outstanding loans as of the

 

measurement date. Additionally,

 

qualitative adjustments are made to

 

the ACL when, based on

management’s judgment, there

 

are factors impacting

 

the allowance estimate

 

not considered by

 

the quantitative calculations.

See

 

Note

 

3

 

“Loans”

 

to

 

the

 

Consolidated

 

Financial

 

Statements

 

set

 

forth

 

in

 

Item

 

8

 

of

 

Part

 

1

 

of

 

this

 

Form

 

10-K

 

for

 

more

information on the allowance for credit losses.

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, 2023:

 

 

 

 

 

 

Beginning balance

$

1,352

$

10,143

$

4,163

$

720

$

1,109

$

17,487

Cumulative effect of adoption of

accounting principle

(1)

1,238

1,105

(2,158)

23

858

1,066

Provision for credit losses

(2)

95

(882)

1,897

168

1,225

2,503

Recoveries

10

-

72

-

3

85

Charge-offs

-

-

-

-

(57)

(57)

Ending Balance

$

2,695

$

10,366

$

3,974

$

911

$

3,138

$

21,084

Average loans

$

186,854

$

986,234

$

179,574

$

93,364

$

160,934

$

1,606,960

Net charge-offs (recoveries) to

average loans

(0.01)%

-

(0.04)%

-

0.03%

(0.00)%

December 31, 2022:

Beginning balance

$

2,498

$

8,758

$

2,775

$

457

$

569

$

15,057

Provision for credit losses

(1,179)

1,385

1,474

263

552

2,495

Recoveries

33

-

18

-

4

55

Charge-offs

-

-

(104)

-

(16)

(120)

Ending Balance

$

1,352

$

10,143

$

4,163

$

720

$

1,109

$

17,487

Average loans

$

193,368

$

842,914

$

127,473

$

81,421

$

96,517

$

1,341,693

Net charge-offs (recoveries) to

average loans

(0.02)%

-

0.07%

-

0.01%

0.00%

(1) Impact of CECL adoption on January 1, 2023.

(2) Provision for credit losses excludes $144 thousand release for unfunded commitments included in other liabilities and $8 thousand

provision for investment securities held to maturity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

65

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

The

 

following

 

table

 

presents

 

ACL

 

by

 

type

 

and

 

its

 

individual

 

percentage

 

to

 

total

 

loans

 

for

 

the

 

periods

 

indicated

 

(in

thousands):

December 31,

2023

2022

Loan Category

Allowance

% of Loans in

Each Category to

Total Loans

Allowance

% of Loans in

Each Category to

Total Loans

Residential Real Estate

$

2,695

11.5

%

$

1,352

12.3

%

Commercial Real Estate

10,366

58.8

%

10,143

64.4

%

Commercial and Industrial

3,974

12.4

%

4,163

8.4

%

Foreign Banks

911

6.5

%

720

6.2

%

Consumer and Other

3,138

10.8

%

1,109

8.7

%

Total

$

21,084

100.0

%

$

17,487

100.0

%

 

Bank-Owned Life Insurance

At

 

December 31,

 

2023,

 

the

 

combined

 

cash

 

surrender

 

value

 

of

 

all

 

bank-owned

 

life

 

insurance

 

(“BOLI”)

 

policies

 

was

$51.8 million.

 

Changes

 

in

 

cash

 

surrender

 

value

 

are

 

recorded

 

in

 

non-interest

 

income

 

on

 

the

 

Consolidated

 

Statements

 

of

Operations. In

 

2023, 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

 

have 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, 2023 and 2022 (in thousands, except ratios):

Twelve Months Ended December 31,

2023

2022

Average Balance

Average Rate

Paid

Average Balance

Average Rate

Paid

Non-interest bearing demand deposits

$

607,506

0.00%

$

645,366

0.00%

Interest-bearing demand deposits

53,324

1.69%

64,835

0.13%

Saving and money market deposits

963,708

3.08%

803,426

0.64%

Time deposits

268,715

3.16%

220,319

0.68%

$

1,893,253

2.06%

$

1,733,946

0.39%

Total

 

average deposits for the

 

year ended December 31, 2023

 

was $1.9 billion,

 

an increase of $159.3 million

 

,

 

or 9.2%

over total

 

average deposits

 

of $1.7 billion

 

for the

 

same period

 

in 2022.

 

The greatest

 

increase was

 

in money

 

market and

savings deposits which increased

 

by $160.3 million,

 

or 19.9%. Non-interest-bearing demand

 

deposits decreased by $37.9

million or

 

5.9% due

 

to customers

 

moving deposits

 

to interest

 

bearing accounts

 

due to

 

increases in

 

rate paid

 

on deposits

due to increases in the interest rate market.

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

66

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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 was

 

$1.1 billion

 

at December 31,

 

2023 and

2022. As of December 31, 2023, 45%

 

of our deposits are estimated to be

 

FDIC-insured.

 

Our public funds are 13.9% of total

deposits and are partially collateralized. Brokered deposits are 2.6% of total deposits and are FDIC-insured. The estimated

average account size

 

of our deposit

 

portfolio is $97

 

thousand. Time deposits with

 

balances of $250

 

thousand or more

 

totaled

$58.1

 

million

 

and

 

$122.9

 

million

 

at

 

December 31,

 

2023

 

and

 

2022,

 

respectively.

 

U.S.

 

Century

 

Bank

 

maintains

 

a

 

well-

diversified deposit base. Our top 15 depositors only hold 20%

 

of our total portfolio.

Critical elements of our liquidity

 

risk management include: effective corporate governance consisting of

 

oversight by the

Board and ALCO and

 

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; 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, 2023 (in thousands):

Three months or less

$

16,641

Over three through six months

16,451

Over six though twelve months

24,002

Over twelve months

1,016

$

58,110

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

 

$183.0 million

 

and $46.0

 

million, as

 

of December

 

31, 2023,

and December 31,

 

2022, respectively.

 

The weighted average

 

rate for outstanding

 

FHLB advances at

 

December 31,

 

2023

was 4.4%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

67

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

The following table presents the FHLB fixed rate advances

 

as of December 31, 2023 (in thousands):

At December 31, 2023

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

3.76%

Fixed

January 24, 2028

11,000

3.77%

Fixed

April 25, 2028

50,000

5.57%

Fixed

December 26, 2024

101,000

$

183,000

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

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, 2023, there were no

 

outstanding balances under the Fed

 

Funds

line of credit and the BTFP.

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, 2023 and

 

2022 (in thousands):

2023

2022

Commitments to grant loans and unfunded lines of credit

$

85,117

$

95,461

Standby and commercial letters of credit

3,987

4,320

Total

$

89,104

$

99,781

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 number 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.

Table of Contents

 

 

68

 

USCB Financial Holdings, Inc.

 

2023 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 statement

of operations,

 

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, 2023, we were

 

a slightly asset sensitive/neutral 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 the economic value

 

of equity (“EVE“) 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 or

 

decrease asset

 

duration and

 

increase or

 

decrease liability

 

duration to

 

modify the

 

balance sheet

 

sensitivity to

interest rates.

 

According to our model, as of

 

end of 2023, 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 increase

 

from 2.81% base case scenario

 

to

2.86% under a +400-basis

 

points scenario. Additionally,

 

utilizing an EVE approach,

 

we analyze the risk

 

to capital from the

effects

 

of various

 

interest rate

 

scenarios

 

through a

 

long-term discounted

 

cash flow

 

model. This

 

measures

 

the difference

between the economic

 

value of our

 

assets and the

 

economic value of

 

our liabilities, which is

 

a proxy for

 

our liquidation value.

According to

 

our balance

 

sheet composition,

 

and as

 

expected, our

 

model stipulates

 

that an

 

increase 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 year 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.

 

Table of Contents

 

 

69

 

USCB Financial Holdings, Inc.

 

2023 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 in

 

a timely matter. 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, interest rate

 

environment and the cash flow

 

profiles of our on- and

 

off-balance

sheet obligations.

In

 

managing

 

cash

 

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 following

 

the scenarios

 

described in

 

the Company’s contingency

 

funding

plan.

 

Changes

 

in

 

macroeconomic

 

conditions,

 

exposure

 

to

 

credit

 

deterioration,

 

market,

 

operational,

 

legal

 

and

 

reputational

risks, including cybersecurity risk and

 

social media events 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, Contingency

 

Funding Plan and ALM policy.

Critical elements of our liquidity

 

risk management include: effective corporate governance consisting of

 

oversight by the

Board and ALCO and

 

involvement by senior management;

 

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;

 

management

 

of intraday

 

liquidity and

 

collateral;

 

a 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.

At December 31, 2023,

 

the Company had $224.8

 

million in available liquidity

 

on balance sheet, including

 

$187.7 million in

unpledged securities available to

 

use as collateral and

 

$37.1 million in

 

excess cash. The Company

 

had an additional $395.0

million in off balance sheet liquidity,

 

excluding access to brokered deposits and other off balance

 

sheet sources of funding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

70

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

Capital Adequacy

As

 

of

 

December 31,

 

2023,

 

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,

 

2023. The Company

 

is not subject

 

to regulatory

 

capital

requirements because it is deemed by the Federal Reserve

 

to be a small bank holding company.

The

 

following

 

table

 

presents

 

the

 

capital

 

ratios

 

for

 

the

 

Bank

 

at

 

December 31,

 

2023

 

and

 

2022

 

(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, 2023

Total

 

risk-based capital:

$

233,109

12.65%

$

147,432

8.00%

184,290

10.00%

Tier 1 risk-based capital:

$

211,645

11.48%

$

110,574

6.00%

147,432

8.00%

Common equity tier 1 capital:

$

211,645

11.48%

$

82,931

4.50%

119,789

6.50%

Leverage ratio:

$

211,645

9.17%

$

92,328

4.00%

115,410

5.00%

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%

 

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.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

71

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

Reconciliation and Management Explanation of Non

 

-GAAP Financial Measures

Management has included

 

non-GAAP measures set

 

forth below because

 

it believes these

 

measures may provide

 

useful

supplemental information

 

for evaluating

 

the Company’s

 

underlying performance

 

trends. Further,

 

management uses

 

these

measures

 

in

 

managing

 

and

 

evaluating

 

the

 

Company’s

 

business

 

and

 

intends

 

to

 

refer

 

to

 

them

 

in

 

discussions

 

about

 

our

operations and performance.

 

Operating performance

 

measures should be

 

viewed in addition

 

to, and not

 

as an alternative

to or

 

substitute

 

for,

 

measures

 

determined

 

in

 

accordance

 

with

 

GAAP,

 

and

 

are

 

not

 

necessarily

 

comparable

 

to non-GAAP

measures

 

that

 

may be

 

presented

 

by other

 

companies.

 

The 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,

2023

2022

Pre-Tax Pre-Provision ("PTPP") income: (1)

Net income (GAAP)

$

16,545

$

20,141

Plus: Provision for income taxes

5,251

6,944

Plus: Provision for (recovery of) credit losses

2,367

2,495

PTPP income

$

24,163

$

29,580

Operating net income: (1)

Net income (GAAP)

$

16,545

$

20,141

Less: Net gain (loss) on sale of securities

(1,859)

(2,529)

Less: Tax

 

effect on sale of securities

471

641

Operating net income

$

17,933

$

22,029

Operating PTPP income: (1)

PTPP income

$

24,163

$

29,580

Less: Net gain (loss) on sale of securities

(1,859)

(2,529)

Operating PTPP Income

$

26,022

$

32,109

(1) The Company believes these non-GAAP measurements are key indicators of the ongoing earnings power of the Company.

 

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.

Table of Contents

 

 

72

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

Item 8.

 

Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED

 

FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

 

(

Crowe LLP

, PCAOB ID:

173

)

73

Consolidated Balance Sheets

74

Consolidated Statements of Operations

75

Consolidated Statements of Comprehensive Income (Loss)

76

Consolidated Statements of Changes in Stockholders’ Equity

77

Consolidated Statements of Cash Flows

78

Notes to the Consolidated Financial Statements

80

 

Crowe LLP

Independent Member Crowe Global

 

73

 

USCB Financial Holdings, Inc.

 

2023 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,

 

2023

 

and

 

2022,

 

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,

2023 and 2022, 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.

Explanatory Paragraph - Change in Accounting Principle

As discussed in Note 1 to the financial

 

statements, the Company has changed its method of accounting for

credit losses effective January 1, 2023 due to the adoption

 

of ASU 2016-13 Financial Instruments – Credit

Losses

 

(ASC

 

Topic

 

326).

 

The

 

Company

 

adopted

 

the

 

new

 

credit

 

loss

 

standard

 

using

 

the

 

modified

retrospective

 

method

 

such

 

that

 

prior

 

period

 

amounts

 

are

 

not

 

adjusted

 

and

 

continue

 

to

 

be

 

reported

 

in

accordance with previously applicable generally accepted accounting

 

principles.

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 22, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

74

 

USCB Financial Holdings, Inc.

 

2023 10-K

USCB FINANCIAL HOLDINGS, INC.

Consolidated Balance Sheets

(Dollars in thousands,

 

except share and per share data)

 

December 31,

2023

2022

ASSETS:

Cash and due from banks

$

8,019

$

6,605

Interest-bearing deposits in banks

33,043

47,563

Total cash and cash equivalents

41,062

54,168

Investment securities held to maturity net allowance of

 

$

8

 

and $0, respectively (fair value $

155,510

 

and

$

169,088

, respectively)

174,974

188,699

Investment securities available for sale, at fair value

229,329

230,140

Federal Home Loan Bank stock, at cost

10,153

2,882

Loans held for investment, net of allowance of

 

$

21,084

 

and $

17,487

, respectively

1,759,743

1,489,851

Accrued interest receivable

10,688

7,546

Premises and equipment, net

4,836

5,263

Bank owned life insurance

51,781

42,781

Deferred tax asset, net

37,282

42,360

Lease right-of-use asset

11,423

14,395

Other assets

7,822

7,749

Total assets

$

2,339,093

$

2,085,834

LIABILITIES:

Deposits:

Demand

$

552,762

$

629,776

Money market and savings accounts

1,048,272

915,853

Interest-bearing checking accounts

47,702

66,675

Time deposits

288,403

216,977

Total deposits

1,937,139

1,829,281

Federal Home Loan Bank advances

183,000

46,000

Lease liability

11,423

14,395

Accrued interest and other liabilities

15,563

13,730

Total liabilities

2,147,125

1,903,406

Commitments and contingencies (See Notes 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; 0 issued and 0 outstanding as of

 

December 31, 2023 and 2022

-

-

Preferred stock - Class D; $

1.00

 

par value; $

5.00

 

per share liquidation preference;

12,309,480

 

shares

authorized; 0 issued and 0 outstanding as of

 

December 31, 2023 and 2022

-

-

Preferred stock - Class E; $

1.00

 

par value; $

1,000

 

per share liquidation preference;

3,185,024

 

shares

authorized; 0 issued and 0 outstanding as of

 

December 31, 2023 and 2022

-

-

Common stock - Class A Voting; $

1.00

 

par value;

45,000,000

 

shares authorized;

19,575,435

 

and

20,000,753

 

issued and outstanding as of December 31,

 

2023 and 2022

19,575

20,001

Common stock - Class B Non-voting; $

1.00

 

par value;

8,000,000

 

shares authorized; 0 issued and 0

outstanding as of December 31, 2023 and 2022

-

-

Additional paid-in capital on common stock

305,212

311,282

Accumulated deficit

(88,548)

(104,104)

Accumulated other comprehensive income (loss)

(44,271)

(44,751)

Total stockholders' equity

191,968

182,428

Total liabilities and stockholders' equity

$

2,339,093

$

2,085,834

The accompanying notes are an integral part of

 

these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

75

 

USCB Financial Holdings, Inc.

 

2023 10-K

USCB FINANCIAL HOLDINGS, INC.

Consolidated Statements of Operations

(Dollars in thousands,

 

except per share data)

 

Years Ended December 31,

2023

2022

Interest income:

 

Loans, including fees

$

87,884

$

60,825

 

Investment securities

10,012

9,346

 

Interest-bearing deposits in financial institutions

3,121

929

 

Total interest income

101,017

71,100

Interest expense:

 

Interest-bearing deposits

901

86

 

Savings and money markets accounts

29,658

5,173

 

Time deposits

8,500

1,509

 

Federal Home Loan Bank advances

3,390

671

 

Total interest expense

42,449

7,439

 

Net interest income before provision for

 

credit losses

58,568

63,661

Provision for credit losses

2,367

2,495

 

Net interest income after provision for

 

credit losses

56,201

61,166

Non-interest income:

 

Service fees

5,055

4,010

 

Bank owned life insurance income

2,160

1,061

 

Gain (loss) on sale of securities available for sale,

 

net

(1,859)

(2,529)

 

Gain on sale of loans held for sale, net

801

891

 

Loan settlement

-

161

 

Other non-interest income

1,246

1,634

 

Total non-interest income

7,403

5,228

Non-interest expense:

 

Salaries and employee benefits

24,429

23,943

 

Occupancy

5,230

5,058

 

Regulatory assessment and fees

1,453

930

 

Consulting and legal fees

1,899

1,890

 

Network and information technology services

2,016

1,806

 

Audit and tax services fees

1,287

918

 

Other operating

5,494

4,764

 

Total non-interest expense

41,808

39,309

 

Net income before income tax expense

21,796

27,085

Income tax expense

5,251

6,944

 

Net income

16,545

20,141

Net income available to common stockholders

$

16,545

$

20,141

Per share information:

Class A common stock

Net income per share, basic

$

0.84

$

1.01

Net income per share, diluted

$

0.84

$

1.00

The accompanying notes are an integral part of

 

these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

76

 

USCB Financial Holdings, Inc.

 

2023 10-K

USCB FINANCIAL HOLDINGS, INC.

Consolidated Statements of Comprehensive Income

 

(Loss)

(Dollars in thousands)

Years Ended December 31,

2023

2022

Net income

$

16,545

$

20,141

Other comprehensive income (loss):

Unrealized gain (loss) on investment securities

(1,801)

(59,260)

Amortization of net unrealized gains on securities

 

transferred from available-for-sale to held-to-maturity

251

120

Reclassification adjustment on sale of available

 

for sale securities for loss included in net income

1,859

2,529

Unrealized gain on cash flow hedge

334

-

Tax effect

(163)

14,376

Total other comprehensive income (loss), net of tax

480

(42,235)

Total comprehensive income (loss)

$

17,025

$

(22,094)

The accompanying notes are an integral part of

 

these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

77

 

USCB Financial Holdings, Inc.

 

2023 10-K

USCB FINANCIAL HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders’

 

Equity

(Dollars in thousands,

 

except per share data)

 

Common Stock

Additional Paid-in

Capital on

Common Stock

Accumulated

Deficit

Accumulated

Other

Comprehensive

Income (Loss)

Shares

Par Value

Total

Stockholders'

Equity

Balance at January 1, 2023

20,000,753

$

20,001

$

311,282

$

(104,104)

$

(44,751)

$

182,428

After tax cumulative effect of adoption of accounting principle

 

related to

ASC 326

-

-

-

(989)

-

(989)

Adjusted beginning balance after cumulative effect adjustment

20,000,753

20,001

311,282

(105,093)

(44,751)

181,439

Net income

-

-

-

16,545

-

16,545

Other comprehensive income

-

-

-

-

480

480

Repurchase of Class A common stock

(669,920)

(670)

(6,913)

-

-

(7,583)

Restricted stock issued

242,713

242

(242)

-

-

-

Restricted stock forfeiture

(8,111)

(8)

8

-

-

-

Exercise of stock options

10,000

10

65

-

-

75

Stock-based compensation

-

-

1,012

-

-

1,012

Balance at December 31, 2023

19,575,435

19,575

305,212

(88,548)

(44,271)

191,968

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

9

93

-

-

102

Stock-based compensation

-

-

523

-

-

523

Balance at December 31, 2022

20,000,753

$

20,001

$

311,282

$

(104,104)

$

(44,751)

$

182,428

The accompanying notes are an integral part of

 

these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

78

 

USCB Financial Holdings, Inc.

 

2023 10-K

USCB FINANCIAL HOLDINGS, INC.

Consolidated Statements of Cash Flows

(Dollars in thousands)

Years Ended December 31,

2023

2022

Cash flows from operating activities:

Net income

$

16,545

$

20,141

Adjustments to reconcile net income to net

 

cash provided by operating activities:

 

Provision for credit losses

2,367

2,495

Depreciation and amortization

590

688

(Accretion) amortization of premiums on securities,

 

net

(770)

433

Accretion of deferred loan fees, net

(184)

(1,497)

Stock-based compensation

1,012

523

Loss on sale of available for sale securities

1,859

2,529

Gain on sale of loans held for sale

(801)

(891)

Increase in cash surrender value of bank owned

 

life insurance

(2,160)

(1,061)

Decrease in deferred tax asset

5,251

6,945

Net change in operating assets and liabilities:

 

Accrued interest receivable

(3,142)

(1,571)

Other assets

261

(3,449)

Accrued interest and other liabilities

1,718

4,252

Net cash provided by operating activities

22,546

29,537

Cash flows from investing activities:

Purchase of investment securities held to maturity

(86,788)

(14,739)

Proceeds from maturities and pay-downs of investment

 

securities held to maturity

101,541

12,237

Purchase of investment securities available for

 

sale

(40,379)

(53,113)

Proceeds from maturities and pay-downs of investment

 

securities available for sale

15,189

40,754

Proceeds from sales of investment securities available

 

for sale

24,185

60,649

Net increase in loans held for investment

(239,361)

(257,580)

Purchase of loans held for investment

(45,645)

(70,175)

Additions to premises and equipment

(163)

(673)

Proceeds from the sale of loans held for sale

12,530

12,821

Purchase of Bank owned life insurance, net

(6,840)

-

Proceeds from the redemption of Federal Home

 

Loan Bank stock

15,495

3,440

Purchase of Federal Home Loan Bank stock

(22,766)

(4,222)

Net cash used in investment activities

(273,002)

(270,601)

(Continued)

The accompanying notes are an integral part of

 

these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

79

 

USCB Financial Holdings, Inc.

 

2023 10-K

USCB FINANCIAL HOLDINGS, INC.

Consolidated Statements of Cash Flows (Continued)

(Dollars in thousands)

Years Ended December 31,

2023

2022

Cash flows from financing activities:

Proceeds from exercise of Class A common stock

 

options, net

75

102

Repurchase of Class A common stock

(7,583)

-

Net increase in deposits

107,858

238,902

Proceeds from Federal Home Loan Bank advances

529,350

126,000

Repayments on Federal Home Loan Bank advances

(392,350)

(116,000)

Net cash provided by financing activities

237,350

249,004

Net increase (decrease) in cash and cash equivalents

(13,106)

7,940

Cash and cash equivalents at beginning of period

54,168

46,228

Cash and cash equivalents at end of period

$

41,062

$

54,168

Supplemental disclosure of cash flow information:

Interest paid

$

41,306

$

7,306

Supplemental schedule of non-cash investing and

 

financing activities:

Transfer of loans held for investment to loans held for

 

sale

$

11,729

$

11,930

Transfer of investment securities from available-for-sale to held-to-maturity

$

-

$

63,798

Lease liability arising from obtaining right-of-use asset

$

-

$

3,203

The accompanying notes are an integral part of

 

these consolidated financial statements.

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

80

 

USCB Financial Holdings, Inc.

 

2023 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

 

in connection

 

with the

 

reorganization of the

 

Bank into

 

a holding

 

company structure. Each

 

of the

 

outstanding

share of

 

the Bank’s

 

common stock,

 

par value

 

$

1.00

 

per share,

 

formerly held

 

by its

 

stockholders were

 

converted into

 

and

exchanged for one newly issued share of the Company’s

 

Class A 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 GAAP.

Risk and Uncertainties

Banking Environment

Industry events

 

transpiring early

 

in 2023,

 

including bank

 

failures, have

 

led to

 

uncertainty and

 

concerns regarding

 

the

liquidity positions

 

of the

 

banking sector.

 

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, the

 

Board of

 

Governors

 

of the

 

Federal Reserve

 

System, and

the 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

 

was

 

available

 

to

 

eligible

 

U.S.

 

federally

 

insured

depository institutions, with

 

advances having a

 

term of up to

 

one year and

 

no prepayment penalties.

 

In January 2024,

 

the

Company drew

 

$

80.0

 

million in the

 

BTFP; there

 

were

no

 

draws in 2023.

 

No further draws

 

were permitted

 

after March 11,

2024. All advances must be paid by January 2025.

Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking

industry.

 

Additionally,

 

the

 

rising

 

interest

 

rate

 

environment

 

experienced

 

in

 

2022

 

and

 

2023

 

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 as of 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

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.

Use of Estimates

The

 

Company

 

has

 

established

 

policies

 

and

 

control

 

procedures

 

that

 

are

 

intended

 

to

 

ensure

 

valuation

 

methods

 

are

controlled and

 

applied consistently

 

from period

 

to period.

 

These estimates

 

and assumptions,

 

which may

 

materially affect

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

81

 

USCB Financial Holdings, Inc.

 

2023 10-K

the reported amounts of

 

certain assets, liabilities, revenues

 

and expenses, are based

 

on information available as

 

of the date

of the

 

financial statements,

 

and changes

 

in this

 

information over

 

time and

 

the use

 

of revised

 

estimates and

 

assumptions

could materially affect amounts reported in subsequent

 

financial statements.

Cash and Cash Equivalents

The

 

Company

 

considers

 

investments

 

with

 

a

 

maturity

 

of

 

90

 

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

 

the terms of a loan participation agreement.

The Company reports restricted cash

 

within cash and cash equivalents.

 

At the years ended December

 

31, 2023 and 2022

the company had $

0

 

in restricted cash.

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.

 

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.

On

 

January

 

1,

 

2023,

 

the

 

Company

 

adopted

 

ASU

 

2016-13

 

Financial

 

Instruments

 

-

 

Credit

 

Losses

 

(Topic

 

326):

Measurement of Credit Losses

 

on Financial Instruments,

 

as amended, which replaces

 

the incurred loss methodology

 

with

an expected

 

loss methodology

 

that is

 

referred to as

 

the CECL

 

methodology.

 

The measurement

 

of expected

 

credit losses

under the CECL methodology

 

is applicable to financial

 

assets measured at amortized

 

cost, including loan receivables

 

and

held-to-maturity debt

 

securities. In

 

addition, ASC

 

326 amended

 

the accounting

 

for available-for-sale

 

debt securities.

 

One

such change is

 

to require credit

 

losses to be

 

presented as an

 

allowance rather than

 

as a write-down

 

on available-for-sale

debt securities management does not intend to sell or

 

believes that it is more likely than not they will be required

 

to sell.

CECL requires a loss reserve for securities

 

classified as HTM. The reserve should reflect

 

historical credit performance

as well as the impact

 

of projected economic forecast.

 

For U.S. Government bonds

 

and U.S. Agency issued bonds

 

in HTM

the explicit and/or

 

implicit guarantee of the

 

US Government is sufficient to

 

conclude that a

 

credit loss reserve is

 

not required.

The

 

reserve

 

requirement

 

is

 

for

 

three

 

primary

 

assets

 

groups:

 

municipal

 

bonds,

 

corporate

 

bonds,

 

and

 

non-agency

securitizations.

 

The

 

Company

 

calculates

 

quarterly

 

the

 

loss

 

reserve

 

utilizing

 

Moody’s

 

ImpairmentStudio.

 

The

 

CECL

measurement

 

for

 

investment

 

securities

 

incorporates

 

historical

 

data,

 

containing

 

defaults

 

and

 

recoveries

 

information,

 

and

Moody’s baseline

 

economic forecast.

 

The solution

 

uses probability

 

of default/loss

 

given default (“PD/LGD”)

 

approach. PD

represents the likelihood a borrower will

 

default. Within the Moody’s model,

 

this is determined using historical

 

default data,

adjusted for the current economic environment. LGD projects

 

the expected loss if a borrower were to default.

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

82

 

USCB Financial Holdings, Inc.

 

2023 10-K

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, 2023

 

and

2022, FHLB

 

stock amounted

 

to $

10.2

 

million and

 

$

2.9

 

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

cost,

 

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

 

expected

 

loan

 

losses

 

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)

Residential

 

real

 

estate

 

loans

 

are

 

underwritten

 

following

 

the

 

policies

 

of

 

the

 

Company

 

which

 

include

 

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

 

the 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 real estate 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 loan

 

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.

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

83

 

USCB Financial Holdings, Inc.

 

2023 10-K

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 where the borrower is

 

located and a review by the 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

 

yacht loans, 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.

 

Under

 

CECL,

 

the

 

Company

 

estimates

 

the

 

ACL

 

using

 

relevant

 

available

 

information,

 

from

 

both

 

internal

 

and

 

external

sources,

 

relating

 

to

 

past

 

events,

 

current

 

conditions,

 

and

 

reasonable

 

and

 

supportable

 

forecasts.

 

Historical

 

credit

 

losses

provide the basis for estimation of expected credit losses. Qualitative adjustments are applied to the expected credit losses

estimated

 

for

 

the

 

loan

 

portfolio

 

in

 

relation

 

to

 

potential

 

limitations

 

of

 

the

 

quantitative

 

model.

 

A

 

scorecard

 

is

 

used

 

to

 

aid

management in the assessment of qualitative factor adjustments

 

applied to expected credit losses.

The

 

quantitative

 

component

 

of

 

the

 

estimate

 

relies

 

on

 

the

 

statistical

 

relationship

 

between

 

the

 

projected

 

value

 

of

 

an

economic

 

indicator

 

and

 

the

 

implied

 

historical

 

loss

 

experience

 

among

 

a

 

curated

 

group

 

of

 

peers.

 

The

 

Company

 

utilized

regression

 

analyses

 

of peer

 

data,

 

in

 

which

 

the

 

Company

 

was

 

included,

 

and

 

where

 

observed

 

credit

 

losses

 

and selected

economic factors were used

 

to determine suitable

 

loss drivers for modeling

 

the lifetime rates of

 

probability of default (PD).

A

 

loss

 

given

 

default

 

rate

 

(LGD)

 

is

 

assigned

 

to

 

each

 

pool

 

for

 

each

 

period

 

based

 

on

 

these

 

PD

 

outcomes.

 

The

 

model

fundamentally utilizes

 

an expected

 

discounted cash

 

flow (DCF)

 

analysis for loan

 

portfolio segments.

 

The DCF

 

analysis is

run

 

at

 

the

 

instrument-level

 

and

 

incorporates

 

an

 

array

 

of

 

loan-specific

 

data

 

points

 

and

 

segment-implied

 

assumptions

 

to

determine the lifetime expected

 

loss attributable to each

 

instrument. An implicit "hypothetical

 

loss" is derived

 

for each period

of the

 

DCF and

 

helps establish

 

the present

 

value of

 

future cash

 

flows for

 

each period.

 

The reserve

 

applied to

 

a specific

instrument is the difference

 

between the sum of the present

 

value of future cash flows

 

and the book balance of

 

the loan at

the measurement date.

Management

 

elected

 

the

 

Remaining

 

Life

 

(WARM)

 

methodology

 

for

 

five

 

loan

 

portfolio

 

segments.

 

For

 

each

 

of

 

these

segments, a

 

long-term average

 

loss rate

 

is calculated

 

and applied

 

on a

 

quarterly basis

 

for the

 

remaining life

 

of the

 

pool.

Adjustments

 

for

 

economic

 

expectations

 

are

 

made

 

through

 

qualitative

 

assessments.

 

For

 

the

 

remaining

 

life

 

estimated,

management implemented a software

 

solution that uses an

 

attrition-based calculation that performs quarterly, cohort-based

attrition measurements based on the loan portfolio.

Portfolio segments are the level at which loss assumptions

 

are applied to a pool of loans based on the similarity

 

of risk

characteristics inherent in the

 

included instruments, relying on

 

collateral codes and FFIEC

 

Call Report codes. The

 

Company

currently segments the

 

portfolio based on

 

collateral codes for

 

the

 

purpose of establishing

 

reserves. Each of

 

these segments

is

 

paired

 

to

 

regression

 

models

 

(Loss

 

Driver

 

Analyses)

 

based

 

on

 

peer

 

data

 

for

 

loans

 

of

 

similar

 

risk

 

characteristics.

 

The

Company has established relationships between internal segmentation and FFIEC

 

Call Report codes for this purpose. The

loss driver for each loan

 

portfolio segment is derived

 

from a readily available and

 

reasonable economic forecast, including

the Federal Reserve Bank

 

projections of U.S. civilian

 

unemployment rate and the

 

year-over-year real GDP

 

growth; for the

residential

 

loan

 

segment

 

the

 

HPI

 

projections

 

published

 

by

 

Fannie

 

Mae’s

 

Economic

 

and

 

Strategic

 

Research

 

Group

 

are

utilized for the

 

forecast. Forecasts

 

are applied to

 

the first four

 

quarters of the

 

credit loss estimate

 

and revert on

 

a straight-

line basis to the lookback period's historical mean for the

 

economic indicator over the expected life of loans.

The model incorporates qualitative

 

factor adjustments in order to

 

calibrate the model for risk

 

in each portfolio segment

that may

 

not be captured

 

through quantitative

 

analysis. Determinations

 

regarding qualitative

 

adjustments are

 

reflective of

management's

 

expectation

 

of loss

 

conditions

 

differing

 

from those

 

already

 

captured

 

in

 

the

 

quantitative

 

component

 

of

 

the

model.

Qualitative factors (“Q-Factors”) used in the ACL methodology

 

include:

• Changes in lending policies, procedures, and strategies

• Changes in international, national, regional, and local conditions

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

84

 

USCB Financial Holdings, Inc.

 

2023 10-K

• Changes in nature and volume of portfolio

• Changes in the volume and severity of past due loans

 

and other similar conditions

• Concentration risk

• Changes in the value of underlying collateral

• The effect of other external factors: e.g., competition,

 

legal, and regulatory requirements

• Changes in lending management, among others

The

 

Company

 

estimates

 

a

 

reserve

 

for

 

unfunded

 

commitments,

 

which

 

is

 

reported

 

separately

 

from

 

the

 

allowance

 

for

credit losses within

 

other liabilities. The

 

reserve is based

 

upon the same

 

quantitative and qualitative

 

factors applied to

 

the

collectively evaluated loan portfolio.

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

the South Florida real estate industry

 

or the South Florida economy, in general, could adversely impact

 

the Company's loan

portfolio.

At December 31,

 

2023 and

 

2022, the

 

Company had

 

a concentration

 

of risk

 

with loans

 

outstanding to

 

the Company’s

top ten lending relationships

 

totaling $

163.1

 

million and $

197.9

 

million, respectively.

 

At December 31, 2023 and

 

2022, this

concentration represented

9.2

% and

13.1

% of

 

net loans

 

outstanding, respectively.

 

For the

 

periods ended

 

December 31,

2023 and December 31, 2022, the largest commercial real estate loan note

 

outside Florida was

one

 

commercial real estate

loan with an outstanding balance of $

20

 

million collateralized by a 1

st

 

lien commercial property located in New York

 

State.

 

At December 31, 2023,

 

the Company had

 

a concentration of

 

risk with loans

 

outstanding totaling $

105.4

 

million to foreign

banks located in Ecuador, Dominican Republic, Honduras, and El Salvador. 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,

 

Honduras, and El

Salvador.

 

These

 

banks

 

maintained

 

deposits

 

with

 

right

 

of

 

offset

 

totaling

 

$

43.9

 

million

 

and

 

$

31.4

 

million

 

at

 

December 31,

2023 and 2022, 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

 

s

 

40

 

years

Furniture, fixtures and equipment

 

3

 

to

25

 

years

Computer hardware and software

 

3

 

to

5

 

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.

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

85

 

USCB Financial Holdings, Inc.

 

2023 10-K

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

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,

 

2023,

 

the

Company

 

maintained

 

BOLI

 

policies

 

with

 

five

 

insurance

 

carriers

 

with

 

a

 

combined

 

cash

 

surrender

 

value

 

of

 

$

51.8

 

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.

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

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

86

 

USCB Financial Holdings, Inc.

 

2023 10-K

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, 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 (loss)

 

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 and

 

unvested restricted

 

stock. Basic

 

and diluted

earnings

 

per

 

share

 

are

 

updated

 

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

 

awards,

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.

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

87

 

USCB Financial Holdings, Inc.

 

2023 10-K

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 stockholders.

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.

Rate Swaps Designated as Cash Flow Hedges

The

 

changes

 

in

 

fair

 

value

 

on

 

these

 

interest

 

rate

 

swaps

 

are

 

recorded

 

in

 

other

 

assets

 

or

 

other

 

liabilities

 

with

 

a

corresponding recognition

 

in other comprehensive

 

income (loss)

 

and subsequently reclassified

 

to earnings when

 

gains or

losses are realized. As of December 31, 2023 the cash

 

flow hedge was effective.

 

Interest Rate Swaps Designated as Fair Value

 

Hedges

The

 

changes

 

in

 

fair

 

value

 

on

 

these

 

interest

 

rate

 

swaps

 

are

 

recorded

 

in

 

other

 

assets

 

or

 

other

 

liabilities

 

with

 

a

corresponding recognition in the assets being hedged.

 

Interest Rate Swaps

The Company enters into interest rate swaps

 

agreements to provide commercial loan clients

 

the ability to swap from a

variable interest rate to a fixed rate. The Company

 

enters into a floating-rate loan with a customer with

 

a separately issued

swap agreement allowing

 

the customer to convert

 

floating payments on

 

the loan into a

 

fixed interest rate. To

 

mitigate risk,

the Company enters 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.

 

Interest

 

rate

 

swap

 

agreements

 

are

 

used

 

by

 

the

 

Company

 

as

 

part

 

of

 

its

 

asset-liability

 

management

 

strategy

 

to

 

help

manage its interest

 

rate risk exposure.

 

The notional amount

 

of the interest

 

rate swaps does

 

not represent actual

 

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.

 

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

 

assets,

 

other

 

assets,

customer deposits, accrued interest payable, other liabilities, and

 

proceeds from the issuance of Class A common shares.

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

88

 

USCB Financial Holdings, Inc.

 

2023 10-K

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

 

Issued and Adopted

Guidance on Accounting for Credit Losses on Financial Instruments

On January 1, 2023, the Company implemented Accounting Standard Update (“ASU”)

2016-13

 

Financial Instruments -

Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended. This update replaces the

incurred

 

loss

 

methodology

 

with

 

the

 

CECL

 

methodology.

 

The

 

CECL

 

methodology

 

measures

 

expected

 

credit

 

losses

 

and

applies to

 

financial assets

 

measured at

 

amortized cost,

 

including loan

 

receivables and

 

held-to-maturity debt

 

securities. It

also applies to off-balance sheet credit

 

exposures not accounted for as insurance

 

(e.g., loan commitments, standby letters

of

 

credit,

 

financial

 

guarantees,

 

and

 

similar

 

instruments),

 

as

 

well

 

as

 

net

 

investments

 

in

 

leases

 

recognized

 

by

 

lessors

 

in

accordance with Topic 842 on leases. Furthermore, ASC 326 amended the accounting treatment for available-for-sale debt

securities. One notable

 

change is

 

the requirement for

 

credit losses to

 

be reported

 

as an allowance

 

rather than as

 

a write-

down on available-for-sale debt securities that management does not intend to

 

sell or believes it is more likely than

 

not they

will not need

 

to sell. CECL

 

requires a

 

loss reserve

 

for securities

 

classified as

 

held-to-maturity (HTM).

 

The reserve

 

should

reflect historical credit performance as well as the impact

 

of projected economic

 

forecast.

At adoption

 

of CECL,

84

% or

 

$

1.3

 

billion of

 

loan receivables

 

were collectively

 

evaluated under

 

the Discounted

 

Cash

Flow (“DCF)” method

 

and

16

% or $

251.0

 

million of loan

 

receivables were collectively

 

evaluated under the

 

Remaining Life

method. The remaining $

7.9

 

million of loan receivables of the total loan portfolio

 

were individually evaluated.

The impact of

 

adoption of the

 

ASU 2016-13 in

 

January 1, 2023,

 

was an increase

 

to ACL on

 

loans receivables of

 

$

1.1

million and

 

an increase

 

to the

 

reserve for

 

unfunded commitments

 

of $

259

 

thousand. This

 

one-time net

 

of tax

 

cumulative

adjustment resulted in

 

a increase of

 

$

1.0

 

million in accumulated

 

deficit. The following

 

table reflects the

 

impact of adopting

CECL on the Company’s consolidated balance sheet

 

(in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2023

As Reported Under ASC

326

Pre - ASC 326 Adoption

Impact of ASC 326

Adoption

Assets

Allowance for credit losses

$

18,553

$

17,487

$

1,066

Deferred tax asset, net

42,696

42,360

336

Liabilities

Reserve for unfunded credit commitments

516

257

259

Stockholder's Equity

Retained earnings

$

(105,093)

$

(104,104)

$

(989)

See “Allowance for Credit Losses” section in Note 3 for

 

more information on the ACL.

Guidance on Accounting for Trouble

 

Debt Restructuring and Vintage Disclosures

In March 2022, the

 

FASB issued ASU 2022-02, which eliminates creditor accounting guidance for

 

TDRs for entities that

have adopted ASU 2016-13, Financial Instruments

 

-Credit Losses (Topic

 

326) and enhances Vintage Disclosures

 

of Gross

Write-offs.

 

This ASU

 

eliminates Subtopic

 

310-40 guidance

 

for TDRs

 

and requires

 

creditors to

 

apply the

 

loan refinancing

and restructuring

 

guidance in

 

Subtopic 310-20

 

when evaluating

 

modifications granted

 

to borrowers

 

experiencing financial

difficulty to determine

 

whether the modification is

 

considered a continuation

 

of an existing loan

 

or a new loan.

 

The vintage

disclosure component of

 

the ASU requires

 

entities to disclose

 

current-period gross write-offs by

 

origination year for

 

financing

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

89

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

receivables and investment leases within the scope of Subtopic 326-20. The Company adopted ASU 2022-02 concurrently

with the adoption of ASU 2016-13.

Issued and Not Yet

 

Adopted

Guidance on 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, 2023

Available-for-sale:

Amortized

Cost

Unrealized

Gains

Unrealized

Losses

Fair Value

U.S. Government Agency

$

9,664

$

-

$

(1,491)

$

8,173

Collateralized mortgage obligations

103,645

-

(23,039)

80,606

Mortgage-backed securities - residential

63,795

-

(11,608)

52,187

Mortgage-backed securities - commercial

49,212

56

(6,504)

42,764

Municipal securities

25,005

-

(5,667)

19,338

Bank subordinated debt securities

28,106

188

(2,033)

26,261

$

279,427

$

244

$

(50,342)

$

229,329

Held-to-maturity:

U.S. Government Agency

$

43,626

$

2

$

(5,322)

$

38,306

Collateralized mortgage obligations

62,735

-

(7,983)

54,752

Mortgage-backed securities - residential

43,784

348

(4,533)

39,599

Mortgage-backed securities - commercial

15,439

-

(1,257)

14,182

Corporate bonds

9,398

-

(727)

8,671

$

174,982

$

350

$

(19,822)

$

155,510

Allowance for credit losses - securities held-to-maturity

(8)

Securities held-to maturity, net of allowance for credit losses

$

174,974

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

90

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

15

(4,305)

27,954

Municipal securities

25,084

-

(6,601)

18,483

Bank subordinated debt securities

15,964

5

(1,050)

14,919

Corporate bonds

4,037

-

(328)

3,709

$

280,295

$

20

$

(50,175)

$

230,140

Held-to-maturity:

U.S. Government Agency

$

44,914

$

25

$

(5,877)

$

39,062

U.S. Treasury

9,841

-

(13)

9,828

Collateralized mortgage obligations

68,727

28

(7,830)

60,925

Mortgage-backed securities - Residential

42,685

372

(4,574)

38,483

Mortgage-backed securities - Commercial

11,442

-

(665)

10,777

Corporate bonds

11,090

-

(1,077)

10,013

$

188,699

$

425

$

(20,036)

$

169,088

For the year ended December 31, 2023, there were

no

 

investment securities that were transferred from

 

AFS to HTM.

For the year

 

ended December 31,

 

2022, there

 

were

26

 

investment securities

 

that were

 

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 which was included in AOCI.

 

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

 

AOCI

 

and

 

in

 

the

 

carrying

 

value

 

of

 

the

 

held-to-maturity

securities. There was no impact to net income. Such amounts

 

are amortized over the remaining life of the security.

 

For the

years

 

ended

 

December 31,

 

2023

 

and

 

2022,

 

total

 

amortization

 

out

 

of

 

AOCI

 

for

 

the

 

net

 

unrealized

 

losses

 

on

 

securities

transferred from

 

AFS to

 

HTM was

 

$

251

 

thousand and

 

$

120

 

thousand. In

 

addition for

 

these securities,

 

the balance

 

of the

net unrealized losses retained in AOCI was $

9.5

 

million at December 31, 2023 and $

9.8

 

million at December 31, 2022.

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, 2023 and

 

2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

2023

2022

Proceeds from sales and call of securities

$

24,185

$

60,649

Gross Gains

$

3

$

217

Gross Losses

(1,862)

(2,746)

Net realized gains (losses)

$

(1,859)

$

(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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

91

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

Held-to-maturity

December 31, 2023:

Amortized

Cost

Fair Value

Amortized

Cost

Fair Value

Due within one year

$

-

$

-

$

-

$

-

Due after one year through five years

2,710

2,853

9,398

8,671

Due after five years through ten years

32,116

28,673

-

-

Due after ten years

18,285

14,073

-

-

U.S. Government Agency

9,664

8,173

43,626

38,306

Collateralized mortgage obligations

103,645

80,606

62,735

54,752

Mortgage-backed securities - residential

63,795

52,187

43,784

39,599

Mortgage-backed securities - commercial

49,212

42,764

15,439

14,182

$

279,427

$

229,329

$

174,982

$

155,510

At December 31,

 

2023 and

 

2022, there

 

were no

 

securities to

 

any one

 

issuer,

 

in an

 

amount greater

 

than 10%

 

of total

stockholders’

 

equity

 

other

 

than

 

the

 

U.S.

 

Government

 

and

 

U.S.

 

Government

 

Agencies.

 

All

 

the

 

collateralized

 

mortgage

obligations and mortgage-backed securities are issued

 

by U.S. sponsored entities at December 31, 2023 and

 

2022.

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, 2023

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

$

-

$

-

$

46,479

$

(8,043)

$

46,479

$

(8,043)

Collateralized mortgage obligations

-

-

135,358

(35,566)

135,358

(35,566)

Mortgage-backed securities -

residential

5,290

(47)

83,484

(18,365)

88,774

(18,412)

Mortgage-backed securities -

commercial

20,292

(611)

33,083

(8,623)

53,375

(9,234)

Municipal securities

-

-

19,338

(5,667)

19,338

(5,667)

Bank subordinated debt securities

8,600

(331)

12,287

(1,703)

20,887

(2,034)

Corporate bonds

-

-

8,671

(406)

8,671

(406)

$

34,182

$

(989)

$

338,700

$

(78,373)

$

372,882

$

(79,362)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

The

 

unrealized

 

losses

 

associated

 

with

 

$

126.8

 

million

 

outstanding

 

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.

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

92

 

USCB Financial Holdings, Inc.

 

2023 10-K

On

 

January

 

1,

 

2023,

 

the

 

Company

 

adopted

 

ASU

 

2016-13

 

Financial

 

Instruments

 

-

 

Credit

 

Losses

 

(Topic

 

326):

Measurement of Credit Losses

 

on Financial Instruments,

 

as amended, which replaces

 

the incurred loss methodology

 

with

an expected

 

loss methodology

 

that is

 

referred to

 

as CECL.

 

The measurement

 

of expected

 

credit losses

 

under the

 

CECL

methodology is applicable

 

to financial assets

 

measured at amortized

 

cost, including loan

 

receivables and

 

held-to-maturity

debt securities. In addition, ASC 326 amended the accou

 

nting for available-for-sale debt securities. One such

 

change is to

require

 

credit

 

losses

 

to

 

be

 

presented

 

as

 

an

 

allowance

 

rather

 

than

 

as

 

a

 

write-down

 

on

 

available-for-sale

 

debt

 

securities

management does not intend to sell or believes that

 

it is more likely than not they will be required to sell.

CECL requires a loss reserve for securities

 

classified as HTM. The reserve should reflect

 

historical credit performance

as well as the impact

 

of projected economic forecast.

 

For U.S. Government bonds

 

and U.S. Agency issued bonds

 

in HTM

the explicit guarantee of the US Government is sufficient

 

to conclude that a credit loss reserve is not required.

 

The reserve

requirement

 

is

 

for three

 

primary

 

assets

 

groups:

 

municipal

 

bonds,

 

corporate

 

bonds,

 

and

 

non-agency

 

securitizations.

 

The

Company calculates quarterly the loss reserve

 

utilizing Moody’s ImpairmentStudio. The CECL measurement for investment

securities

 

incorporates

 

historical

 

data,

 

containing

 

defaults

 

and

 

recoveries

 

information,

 

and

 

Moody’s

 

baseline

 

economic

forecast. The

 

solution uses

 

probability of

 

default/loss

 

given default

 

(“PD/LGD”)

 

approach. PD

 

represents the

 

likelihood a

borrower will

 

default.

 

Within the

 

Moody’s

 

model, this

 

is determined

 

using historical

 

default data,

 

adjusted for

 

the current

economic environment. LGD projects the expected loss

 

if a borrower were to default.

The Company monitors

 

the credit

 

quality of held

 

to maturity

 

securities through

 

the use of

 

credit ratings.

 

Credit ratings

are monitored by the Company on at least a quarterly basis. As of

 

December 31, 2023 and December 31, 2022, all held-to-

maturity securities held by the Company were rated investment

 

grade.

At December 31, 2023, HTM securities

 

included $

165.6

 

million of U.S. Government and

 

U.S. Agency issued bonds and

mortgage-backed

 

securities.

 

Because

 

of

 

the

 

explicit

 

and/or

 

implicit

 

guarantee

 

on

 

these

 

bonds,

 

the

 

Company

 

holds

no

reserves

 

on

 

these

 

holdings.

 

The

 

remaining

 

portion

 

of

 

the

 

HTM

 

portfolio

 

is

 

made

 

up

 

of

 

$

9.4

 

million

 

in

 

investment

 

grade

corporate bonds. The required reserve for these

 

holdings is determined each quarter using the model described above.

 

For

the portion of the HTM exposed to non-government

 

credit risk, the Company utilized the PD/LGD

 

methodology to estimate

a $

8

 

thousand ACL as

 

of December 31,

 

2023. The book

 

value for debt

 

securities classified as

 

HTM represents amortized

cost less ACL.

 

The

 

Company

 

determined

 

that

 

an

 

ACL

 

on

 

its

 

debt

 

securities

 

available

 

for

 

sale

 

as

 

of

 

December

 

31,

 

2023

 

was

 

not

required.

At

 

December

 

31,

 

2023,

 

the

 

Company

 

had

 

$

54.9

 

million

 

of

 

unrealized

 

losses

 

on

 

mortgage-backed

 

securities

 

and

collateralized mortgage

 

obligations of

 

U.S. Government

 

sponsored entities

 

having a

 

fair value

 

of $

284.1

 

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, 2023, 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.

 

As of December 31, 2023, 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, 2023, 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

25

% 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, 2023, the Company had

twenty-eight

 

securities with a fair value of $

86.9

 

million pledged to the State

of Florida

 

under

 

the

 

public

 

funds

 

program.

 

The

 

Company

 

held

 

a total

 

of

 

$

268.4

 

million

 

in

 

public

 

funds

 

at

 

December 31,

2023.

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

93

 

USCB Financial Holdings, Inc.

 

2023 10-K

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.

The Board

 

of Governors

 

of the Federal

 

Reserve System,

 

on March

 

12, 2023,

 

announced the

 

creation of

 

a new

 

Bank

Term

 

Funding Program (“BTFP”).

 

The BTFP offers

 

loans of up to one year

 

in length to banks, savings

 

associations, credit

unions,

 

and

 

other

 

eligible

 

depository

 

institutions

 

pledging

 

U.S.

 

Treasuries,

 

U.S.

 

agency

 

debt

 

and

 

mortgage-backed

securities, and other qualifying assets as collateral. These

 

assets will be valued at par.

The Company had

no

 

borrowing under the

 

BTFP program as

 

of December 31,

 

2023, and had

 

pledged $

132.1

 

million

in securities

 

measured at

 

par to

 

the Federal

 

Reserve Bank

 

of Atlanta

 

for the

 

BTFP program.

 

The BTFP

 

program ceased

making new loans as of March 2024.

On January 12, 2024, the Company borrowed $

80

 

million at a rate of

4.81

%, maturing on January 10, 2025, under the

BTFP program.

 

 

3.

 

LOANS

The following table is a summary of the distribution of

 

loans held for investment by type (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2023

December 31, 2022

Total

Percent of

Total

Total

Percent of

Total

Residential Real Estate

$

204,419

11.5

%

$

185,636

12.3

%

Commercial Real Estate

1,047,593

58.8

%

970,410

64.4

%

Commercial and Industrial

219,757

12.4

%

126,984

8.4

%

Foreign Banks

114,945

6.5

%

93,769

6.2

%

Consumer and Other

 

191,930

10.8

%

130,429

8.7

%

Total

 

gross loans

1,778,644

100.0

%

1,507,228

100.0

%

Plus: Deferred cost

2,183

110

Total

 

loans net of deferred cost

1,780,827

1,507,338

Less: Allowance for credit losses

21,084

17,487

Total

 

net loans

$

1,759,743

 

$

1,489,851

At December 31, 2023 and 2022, the Company had $

534.2

 

million and $

338.1

 

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

of Atlanta. At December 31, 2023 and 2022, the Company

 

had

no

 

loans in the process of foreclosure.

The Company was a participant of the SBAs 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 totaling

 

$

271

 

thousand at

 

December 31, 2023

 

and $

1.3

 

million at

December 31, 2022, which are categorized as commercial and industrial loans. These PPP

 

loans had deferred loan fees of

$

6

 

thousand at December 31, 2023 and $

13

 

thousand at December 31, 2022.

The

 

Company

 

recognized

 

$

8

 

thousand

 

and

 

$

1.6

 

million

 

in

 

PPP

 

loan

 

fees

 

and

 

interest

 

income

 

for

 

the

 

years

 

ended

December 31,

 

2023

 

and

 

2022,

 

respectively,

 

which

 

is

 

reported

 

under

 

loans,

 

including

 

fees

 

within

 

the

 

Consolidated

Statements of Operations.

 

Allowance for Credit Losses

In general, the Company utilizes

 

the Discounted Cash Flow (DCF)

 

method or the Remaining Life

 

(WARM) methodology

to estimate

 

the quantitative

 

portion of the

 

ACL for

 

loan pools.

 

The DCF

 

uses a

 

loss driver

 

analysis (LDA)

 

and discounted

cash flow analyses.

 

The Company engaged

 

advisors and consultants

 

with experience in

 

CECL model development

 

to assist

in development of

 

a loss driver

 

analysis based on

 

regression models

 

and supportable

 

forecast. Peer group

 

data obtained

from FFIEC Call Report

 

filings is used to

 

inform regression analyses

 

to quantify the impact

 

of reasonable and

 

supportable

forecasts in projective

 

models. Economic forecasts

 

applied to regression

 

models to estimate

 

probability of default

 

for loan

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

94

 

USCB Financial Holdings, Inc.

 

2023 10-K

receivables use at least

 

one of the following economic

 

indicators: civilian unemployment rate (national), real

 

gross domestic

product growth

 

(national

 

GDP) and/or

 

the HPI.

 

For each

 

of the

 

segments in

 

which the

 

WARM

 

methodology

 

is used,

 

the

long-term average loss rate is calculated and applied on a quarterly basis for the remaining life of the pool. Adjustments for

economic expectations are made through qualitative factors.

Qualitative factors (“Q-Factors”) used in the ACL methodology

 

include:

• Changes in lending policies, procedures, and strategies

• Changes in international, national, regional, and local conditions

• Changes in nature and volume of portfolio

• Changes in the volume and severity of past due loans

 

and other similar conditions

• Concentration risk

• Changes in the value of underlying collateral

• The effect of other external factors: e.g., competition,

 

legal, and regulatory requirements

• Changes in lending management, among others

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 evaluates

 

five segments using the loss rate

methodology 'Remaining

 

Life Method'

 

or WARM.

 

The remaining

 

is calculated

 

based on

 

the annual

 

attrition rate

 

observed

for the Company’s own

 

portfolio experience. The

 

peer group includes historical

 

losses for U.S. The

 

Company also applies

a scorecard methodology

 

to determine

 

qualitative factors

 

for WARM

 

segments. The

 

scorecard is

 

built using

 

a peer group

loss. The maximum losses for

 

these peers are derived selecting

 

periods were higher than normal

 

loss rates are observed.

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.

ACL

 

for the

 

year

 

ended

 

December

 

31,

 

2023,

 

was

 

estimated

 

under

 

the

 

CECL

 

methodology,

 

and

 

for

 

the

 

year

 

ended

December 31, 2022, it was estimated under the incurred

 

loss model.

Prior to

 

the adoption

 

of ASC

 

326 on

 

January

 

1, 2023,

 

the allowance

 

for credit

 

losses

 

was a

 

valuation allowance

 

for

probable incurred credit

 

losses.

 

Management estimated the

 

allowance balance required

 

using past loan

 

loss experience,

the

 

nature

 

and

 

volume

 

of

 

the

 

portfolio,

 

information

 

about

 

specific

 

borrower

 

situations

 

and

 

estimated

 

collateral

 

values,

economic

 

conditions,

 

and

 

other

 

factors.

 

The

 

allowance

 

consisted

 

of

 

specific

 

and

 

general

 

components.

 

The

 

specific

component

 

related

 

to

 

loans

 

that

 

were

 

individually

 

classified

 

as

 

impaired.

 

A

 

loan

 

was

 

impaired

 

when,

 

based

 

on

 

current

information and events,

 

it was probable

 

that the Bank

 

would be

 

unable to

 

collect all

 

amounts due

 

according to

 

the contractual

terms of

 

the loan

 

agreement. Loans

 

for which

 

the terms

 

had been

 

modified resulting

 

in a

 

concession,

 

and

 

for which

 

the

borrower is experiencing financial difficulties, were

 

considered troubled debt restructurings and classified as

 

impaired.

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

95

 

USCB Financial Holdings, Inc.

 

2023 10-K

Changes in the ACL for the years ended December 31, 2023

 

and 2022 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Real Estate

Commercial

Real Estate

Commercial

and Industrial

Foreign

Banks

Consumer

and Other

Total

December 31, 2023:

Beginning balance

$

1,352

$

10,143

$

4,163

$

720

$

1,109

$

17,487

Cumulative effect of adoption of

accounting principle

 

(1)

1,238

1,105

(2,158)

23

858

1,066

Provision for credit losses

(2)

 

95

(882)

1,897

168

1,225

2,503

Recoveries

10

 

-

 

72

 

-

 

3

85

Charge-offs

 

-

 

 

-

 

 

-

 

 

-

 

(57)

(57)

Ending Balance

 

$

2,695

$

10,366

$

3,974

$

911

$

3,138

$

21,084

December 31, 2022:

Beginning balance

$

2,498

$

8,758

$

2,775

$

457

$

569

$

15,057

Provision for credit losses

(1,179)

1,385

1,474

263

552

2,495

Recoveries

33

-

18

-

4

55

Charge-offs

-

-

(104)

-

(16)

(120)

Ending Balance

 

$

1,352

$

10,143

$

4,163

$

720

$

1,109

$

17,487

(1) Impact of CECL adoption on January 1, 2023

(2) Provision for credit losses excludes $

144

 

thousand release for unfunded commitments

 

included in other liabilities and $

8

 

thousand provision for

investment securities held to maturity.

Allowance for credit losses and the outstanding balances in

 

loans as of December 31, 2023 and 2022 are as

 

follows (in

thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Real Estate

Commercial

Real Estate

Commercial

and Industrial

Foreign

Banks

Consumer

and Other

Total

December 31, 2023:

Allowance for credit losses:

Individually evaluated

$

145

$

-

$

128

$

-

$

-

$

273

Collectively evaluated

2,550

10,366

3,846

911

3,138

20,811

Balances, end of period

$

2,695

$

10,366

$

3,974

$

911

$

3,138

$

21,084

Loans:

Individually evaluated

$

6,994

$

-

$

1,668

$

-

$

-

$

8,662

Collectively evaluated

197,425

1,047,593

218,089

114,945

191,930

1,769,982

Balances, end of period

$

204,419

$

1,047,593

$

219,757

$

114,945

$

191,930

$

1,778,644

December 31, 2022:

Allowance for credit losses:

Individually evaluated for impairment

$

155

$

-

$

41

$

-

$

98

$

294

Collectively evaluated for impairment

1,197

10,143

4,122

720

1,011

17,193

Balances, end of period

$

1,352

$

10,143

$

4,163

$

720

$

1,109

$

17,487

 

Loans:

Individually evaluated for impairment

$

7,206

$

393

$

82

$

-

$

196

$

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

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.

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

96

 

USCB Financial Holdings, Inc.

 

2023 10-K

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

97

 

USCB Financial Holdings, Inc.

 

2023 10-K

Loan credit exposures by internally assigned grades are

 

presented below for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2023

Term Loans by Origination Year

Revolving

Loans

Total

2023

2022

2021

2020

2019

Prior

Residential real estate

Pass

$

44,365

$

36,325

$

26,180

$

6,080

$

9,325

$

75,654

$

6,198

$

204,127

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

292

-

-

292

Doubtful

-

-

-

-

-

-

-

-

Total

44,365

36,325

26,180

6,080

9,617

75,654

6,198

204,419

Commercial real estate

Pass

148,311

337,938

184,024

104,182

78,153

182,714

4,710

1,040,032

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

6,867

694

-

-

-

7,561

Doubtful

-

-

-

-

-

-

-

-

Total

148,311

337,938

190,891

104,876

78,153

182,714

4,710

1,047,593

Commercial and

industrial

Pass

97,753

37,414

34,090

6,499

13,706

3,113

25,554

218,129

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

330

-

1,298

-

-

1,628

Doubtful

-

-

-

-

-

-

-

-

Total

97,753

37,414

34,420

6,499

15,004

3,113

25,554

219,757

Foreign banks

Pass

114,945

-

-

-

-

-

-

114,945

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

-

-

-

Doubtful

-

-

-

-

-

-

-

-

Total

114,945

-

-

-

-

-

-

114,945

Consumer and other

loans

 

Pass

71,593

74,387

41,966

615

560

1,337

1,472

191,930

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

-

-

-

Doubtful

-

Total

71,593

74,387

41,966

615

560

1,337

1,472

191,930

Total

 

Loans

Pass

476,967

486,064

286,260

117,376

101,744

262,818

 

37,934

1,769,163

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

7,197

694

1,590

-

-

9,481

Doubtful

-

-

-

-

-

-

-

-

Total

$

476,967

486,064

293,457

118,070

103,334

262,818

37,934

1,778,644

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

98

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2022

Pass

Special

Mention

Substandard

Doubtful

Total Loans

Residential real estate:

Home equity line of credit ("HELOC") and other

$

623

$

-

$

-

$

-

$

623

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

-

393

-

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

-

807

-

121,680

Unsecured

5,304

-

-

-

5,304

126,177

-

807

-

126,984

Foreign banks

93,769

-

-

-

93,769

Consumer and other loans

130,233

-

196

-

130,429

Total

$

1,503,280

$

-

$

3,948

$

-

$

1,507,228

(1)

 

All outstanding PPP loans were internally graded

 

pass.

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

99

 

USCB Financial Holdings, Inc.

 

2023 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, 2023 and

2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

As of December 31, 2023:

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

$

559

$

-

$

-

$

559

$

-

$

559

1-4 family residential

155,842

711

-

156,553

-

156,553

Condo residential

43,572

3,735

-

47,307

-

47,307

199,973

4,446

-

204,419

-

204,419

Commercial real estate:

Land and construction

33,710

-

-

33,710

-

33,710

Multi-family residential

181,287

-

-

181,287

-

181,287

Condo commercial

58,106

-

-

58,106

-

58,106

Commercial property

772,569

1,890

-

774,459

-

774,459

Leasehold improvements

31

-

-

31

-

31

1,045,703

1,890

-

1,047,593

-

1,047,593

Commercial and industrial:

Secured

200,235

29

-

200,264

468

200,732

Unsecured

19,025

-

-

19,025

-

19,025

219,260

29

-

219,289

468

219,757

Foreign banks

114,945

-

-

114,945

-

114,945

Consumer and other

191,930

-

-

191,930

-

191,930

Total

$

1,771,811

$

6,365

$

-

$

1,778,176

$

468

$

1,778,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

100

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

623

$

-

$

-

$

623

$

-

$

623

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

25

-

704,909

-

704,909

Leasehold improvements

-

-

-

-

-

-

970,385

25

-

970,410

-

970,410

Commercial and industrial:

Secured

121,649

31

-

121,680

-

121,680

Unsecured

4,332

972

-

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

260

-

130,429

-

130,429

Total

$

1,502,357

$

4,871

$

-

$

1,507,228

$

-

$

1,507,228

There were

no

 

loans over 90 days past due and accruing as of December

 

31, 2023 and 2022.

Non-accrual Status

The following table

 

includes the amortized

 

cost basis of

 

loans on non-accrual

 

status and loans

 

past due over

 

90 days

and still accruing as of December 31, 2023 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2023

Nonaccrual

Loans With

No Related

Allowance

Nonaccrual

Loans With

Related

Allowance

Total Non-

accruals

Loans Past

Due Over

90 Days

and Still

Accruing

Residential real estate

$

$

$

$

Commercial real estate

 

-

 

-

 

-

 

-

Commercial and industrial

-

468

468

-

Consumer and other

-

-

-

-

Total

$

-

$

468

$

468

$

-

The Company did not have loans in non-accrual status

 

as of December 31, 2022.

Accrued interest

 

receivable is

 

excluded from

 

the estimate

 

of credit

 

losses. There

 

was

no

 

interest income

 

recognized

attributable

 

to non-accrual

 

loans

 

outstanding

 

during the

 

years

 

ended

 

December

 

31, 2023

 

and

 

2022. Interest

 

income

 

on

these

 

loans

 

for

 

the

 

year

 

ended

 

December

 

31,

 

2023

 

and

 

2022,

 

would

 

have

 

been

 

approximately

 

$

40

 

thousand

 

and

 

$

0

thousand, respectively,

 

had these loans performed in accordance with their

 

original terms.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

101

 

USCB Financial Holdings, Inc.

 

2023 10-K

Collateral-Dependent Loans

A

 

loan

 

is

 

collateral

 

dependent

 

when

 

the

 

borrower

 

is

 

experiencing

 

financial

 

difficulty

 

and

 

repayment

 

of

 

the

 

loan

 

is

expected to

 

be provided

 

substantially through

 

the sale

 

or operation

 

of the

 

collateral. There

 

were

no

 

collateral dependent

loans as of December 31,

 

2023 or as of December 31, 2022.

 

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 as of December

 

31, 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

Unpaid

Principal

Balance

Net Investment

Balance

Valuation

Allowance

Impaired Loans with No Specific Allowance:

Residential real estate

 

$

3,551

$

3,544

$

-

Commercial real estate

393

393

-

3,944

3,937

-

Impaired Loans with Specific Allowance:

Residential real estate

 

3,655

3,626

155

Commercial and industrial

82

82

41

Consumer and other

 

196

196

98

3,933

3,904

294

Total

$

7,877

$

7,841

$

294

Interest

 

income

 

recognized

 

on

 

impaired

 

loans

 

for

 

the

 

year

 

ended

 

December

 

31,

 

2022

 

was

 

$

351

 

thousand.

 

Net

investment balance is the unpaid principal balance of the loans

 

adjusted for the remaining net deferred loan fees.

The following table

 

presents the average

 

recorded investment

 

balance on impaired

 

loans for the

 

periods indicated (in

thousands):

 

 

 

 

 

 

 

 

 

 

 

2022

Residential real estate

$

7,626

Commercial real estate

575

Commercial and industrial

109

Consumer and other

210

Total

$

8,520

Loan Modifications to Borrowers Experiencing Financial

 

Difficulties

The following

 

table present

 

newly restructured

 

loans,

 

by type

 

of modification,

 

which occurred

 

during the

 

year

 

ended

December 31, 2023 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment Prior to Modification

Recorded Investment After Modification

Number of

Loans

Combination

Modifications

Total

Modifications

Number of

Loans

Combination

Modifications

Total

Modifications

Residential real estate

-

$

-

$

-

-

$

-

$

-

Commercial real estate

-

-

-

-

-

-

Commercial and industrial

2

650

650

2

650

650

Consumer and other

-

-

-

-

-

-

2

$

650

$

650

2

$

650

$

650

The Company had two new

 

modifications to borrowers experiencing

 

financial difficulties for

 

the year ended December

31, 2023. There were

no

 

existing loan modifications that subsequently

 

defaulted during the year

 

ended December 31, 2023.

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

102

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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, 2023, 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 Company’s

 

Consolidated Balance

 

Sheets, ROU

 

assets are

 

reported under

other assets while lease liabilities are classified under

 

accrued interest and other liabilities.

 

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, 2023 and 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

2023

2022

ROU assets:

Operating leases

$

11,423

$

14,395

Lease liabilities:

Operating leases

$

11,423

$

14,395

The weighted average remaining lease term and weighted average

 

discount rate as of December 31, 2023 and 2022:

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Weighted average remaining lease term (in years):

Operating leases

6.35

6.98

Weighted average discount rate:

Operating leases

2.94

%

2.94

%

Future lease payment obligations and a reconciliation to lease

 

liability as of December 31, 2023 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2024

$

3,236

2025

3,312

2026

2,383

2027

951

2028

492

Thereafter

2,987

Total

 

future minimum lease payments

13,361

Less: interest component

(1,938)

Total

 

lease liability

$

11,423

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

103

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

5.

 

PREMISES AND EQUIPMENT

 

A summary of premises and equipment are presented

 

below as of December 31, 2023 and 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Land

$

972

$

972

Building

1,952

1,952

Furniture, fixtures and equipment

8,981

8,841

Computer hardware and software

4,592

4,575

Leasehold improvements

10,457

10,451

Premises and equipment, gross

26,954

26,791

Accumulated depreciation and amortization

(22,118)

(21,528)

Premises and equipment, net

$

4,836

$

5,263

Depreciation

 

and

 

amortization

 

expense

 

was

 

$

590

 

thousand

 

and

 

$

688

 

thousand

 

for

 

the

 

years

 

ended

 

December 31,

2023 and 2022, respectively.

 

 

6.

 

INCOME TAXES

 

The Company’s provision

 

for income taxes is

 

presented in the following

 

table for the years

 

ended December 31, 2023

and 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Current:

Federal

$

-

$

-

State

-

-

Total

 

current

-

-

Deferred:

Federal

4,121

5,462

State

1,130

1,482

Total

 

deferred

5,251

6,944

Total

 

tax expense

$

5,251

$

6,944

The actual income

 

tax expense for the

 

years ended December 31, 2023

 

and 2022 differs from

 

the statutory tax expense

for the year (computed by applying the

 

U.S. federal corporate tax rate of

21

% for 2023 and 2022 to

 

income before provision

for income taxes) as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Federal taxes at statutory rate

$

4,577

$

5,688

State income taxes, net of federal tax benefit

947

1,177

Bank owned life insurance

(273)

(269)

Other, net

-

348

Total

 

tax expense

$

5,251

$

6,944

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

104

 

USCB Financial Holdings, Inc.

 

2023 10-K

The following table presents

 

the deferred tax assets

 

and deferred tax liabilities

 

as of December 31, 2023

 

and 2022 (in

thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Deferred tax assets:

Net operating loss

$

16,430

$

21,720

Allowance for credit losses

5,410

4,432

Lease liability

2,895

3,648

Unrealized loss on available for sale securities

15,114

15,193

Depreciable property

203

158

Equity compensation

630

373

Accruals

382

723

Other, net

10

-

Deferred tax asset

$

41,074

$

46,247

Deferred tax liability:

Deferred loan cost

(553)

(28)

Lease right of use asset

(2,895)

(3,648)

Deferred expenses

(180)

(175)

Cash flow hedge

(85)

Other, net

(79)

(36)

Deferred tax liability

$

(3,792)

$

(3,887)

Net deferred tax asset

$

37,282

$

42,360

At December 31,

 

2023 the Company

 

had approximately $

61.5

 

million of Federal

 

and $

84.1

 

million of State

 

net operating

loss carryforwards

 

expiring in

 

various amounts

 

from 2032

 

to 2036

 

if unused

 

after 2036,

 

their utilization

 

is limited to

 

future

taxable earnings of the Company.

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 2020.

For

 

the

 

years

 

ended

 

December 31,

 

2023 and

 

2022,

 

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,

 

2023 and 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Non-interest bearing deposits

$

552,762

$

629,776

Interest-bearing transaction accounts

47,702

66,675

Saving and money market deposits

1,048,272

915,853

Time deposits

288,403

216,977

Total

 

deposits

$

1,937,139

$

1,829,281

Time

 

deposits exceeding

 

the FDIC

 

deposit insurance

 

limit of

 

$250 thousand

 

per account

 

at December 31,

 

2023 and

2022 were $

117.2

 

million and $

82.0

 

million, respectively.

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

105

 

USCB Financial Holdings, Inc.

 

2023 10-K

The Company brought in $

50

 

million of brokered CDs at a weighted average rate

 

of

4.98

% to boost liquidity during the

second quarter of 2023.

 

The CDs renewed in

 

Q1 2024 at weighted

 

average rate

 

of

5.13

%.There were

no

 

brokered deposits

as of December 31, 2022.

At December 31, 2023, the scheduled maturities of time deposits

 

were (in thousands):

 

 

 

 

 

 

2024

$

280,529

2025

6,074

2026

831

2027

874

2028

95

$

288,403

At December 31,

 

2023 and

 

2022, the

 

aggregate amount

 

of demand

 

deposits reclassified

 

to loans

 

as overdrafts

 

was

$

213

 

thousand and $

230

 

thousand, respectively.

 

8.

 

BORROWINGS

 

Borrowed funds

 

consist of

 

fixed-rate advances

 

from the

 

FHLB. At

 

December 31, 2023,

 

FHLB advances

 

were $183.0

 

million and at December 31, 2022 were $46.0 million.

The following table presents outstanding FHLB advances

 

at December 31, 2023 and 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2023

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

3.76

%

Fixed

January 24, 2028

11,000

3.77

%

Fixed

April 25, 2028

50,000

5.57

%

Fixed

December 26, 2024

101,000

$

183,000

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

4.14

%

Fixed

January 13, 2023

20,000

$

46,000

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. The

Company contributed $

306

 

thousand and $

313

 

thousand to the Plan during

 

the years ended December 31, 2023 and

 

2022,

respectively;

 

the

 

contributions

 

are

 

included

 

under

 

salaries

 

and

 

employee

 

benefits

 

in

 

the

 

Consolidated

 

Statements

 

of

Operations.

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

106

 

USCB Financial Holdings, Inc.

 

2023 10-K

Stock-Based Compensation

In

 

2015,

 

the

 

Company's

 

stockholders

 

approved

 

the

 

2015

 

Equity

 

Incentive

 

Plan

 

(the

 

“2015

 

Option

 

Plan”),

 

which

authorized grants

 

of options

 

to purchase

 

up to

2,000,000

 

shares of

 

common stock.

 

The

2015

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

 

2015 Option

 

Plan have

 

a

10

-year life

 

and, in

 

no event

 

shall an

 

option be

 

exercisable after

 

the

expiration of

10

 

years from

 

the grant date.

 

The 2015

 

Option Plan has

 

a

10

-year life and

 

initially would

 

have terminated

 

in

2025. In

 

July 2020,

 

the stockholders

 

of the

 

Company approved

 

the amendment

 

of the

 

2015 Option

 

plan to

 

authorize the

issuance of

 

an additional

3,000,000

 

shares of common

 

stock and

 

extending the

 

life of

 

the plan

5

 

additional years, terminating

in 2030. The

 

authorized 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

 

the

 

amendment

 

of

 

the

 

2015

 

Option

 

Plan

 

to

 

authorize

 

the

issuance of

 

an additional

1,400,000

 

shares of

 

common stock

 

as well

 

as the

 

ability to

 

issue restricted

 

stock grants

 

(up to

600,000

 

shares) for a total of

2,400,000

 

shares.

At December 31, 2023, there were

1,160,564

 

shares available for grant under the

 

2015 Option Plan. At December 31,

2022, there were

1,386,667

shares available for grant under the 2015 Option Plan.

 

Stock Options

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

 

$

459

 

thousand

 

was

 

recognized

 

for

 

the

 

year

 

ended

December 31, 2023

 

and $

523

 

thousand for

 

the year

 

ended December

 

31, 2022.

 

There was

no

 

related tax

 

benefit for

 

the

years ended December 31, 2023 and 2022.

Unrecognized compensation cost remaining

 

on stock-based compensation

 

totaled $

342

 

thousand and $

787

 

thousand

for the years ended December 31, 2023 and 2022, 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.

For the fair value of options granted in 2023 and 2022,

 

the following were the assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumption

2023

2022

Risk-free interest rate

3.53

%

2.34

%

Expected term

10

years

10

years

Expected stock price volatility

10

%

10

%

Dividend yield

0

%

0

%

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

107

 

USCB Financial Holdings, Inc.

 

2023 10-K

The following table presents a summary of stock options

 

for the years ended December 31, 2023 and 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options

Weighted Average

Exercise Price

Weighted Average

Remaining

Contractual Years

Aggregate Intrinsic

Value (in

thousands)

Balance at January 1, 2023

965,667

$

10.91

7.4

Granted

7,500

$

12.41

Exercised

(10,000)

$

7.50

Forfeitures

(16,000)

$

10.34

Balance at December 31, 2023

947,167

$

10.97

6.5

Exercisable at December 31, 2023

758,000

$

10.71

6.1

$

1,195

 

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

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value of exercisable options at the

dates presented

 

(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 per

 

share fair value

 

of options

 

granted for the

 

years ended

 

December 31, 2023

 

and 2022 was

$

3.91

 

and $

3.45

, respectively.

Restricted Stock

In 2023 , the Company issued

242,713

 

shares of Class A common stock to employees and

 

directors as restricted stock

awards pursuant

 

to the

 

Company's 2015

 

Option Plan.

 

Awards under

 

the 2015

 

Option Plan

 

may not

 

be sold

 

or otherwise

transferred until certain restrictions have lapsed.

There were

no

 

restricted stock awards outstanding as of December

 

31, 2022.

The

 

total

 

share-based

 

compensation

 

expense

 

for

 

these

 

awards

 

is

 

determined

 

based

 

on

 

the

 

market

 

price

 

of

 

the

Company's common

 

stock as

 

of the date

 

of grant

 

applied to

 

the total

 

number of

 

shares granted

 

and is

 

amortized straight

line over the

 

vesting period

 

which is

 

one to

 

three years.

 

As of December

 

31, 2023,

 

unearned share-based

 

compensation

expense associated with these awards totaled $

2.3

 

million.

Compensation expense

 

totaling $

553

 

thousand was

 

recognized for

 

the year

 

ended December

 

31, 2023

 

and reported

under salaries and benefits in the accompanying Consolidated

 

Statement of Operations.

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

108

 

USCB Financial Holdings, Inc.

 

2023 10-K

The following table presents a summary of restricted stock

 

awards for the year ended December 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock

Weighted Average Grant Date

Fair Value

Balance at January 1, 2023

-

$

-

Granted

242,713

$

12.24

Forfeited

(8,111)

$

12.67

Vested

(16,180)

$

12.67

Balance at December 31, 2023

218,422

$

12.19

 

 

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.

On

 

January

 

1,

 

2023,

 

the

 

Company

 

adopted

 

ASU

 

2016-13

 

Financial

 

Instruments

 

-

 

Credit

 

Losses

 

(Topic

 

326):

Measurement of Credit Losses

 

on Financial Instruments,

 

as amended, which replaces

 

the incurred loss methodology

 

with

an expected

 

loss methodology

 

that is

 

referred to as

 

the CECL

 

methodology.

 

The measurement

 

of expected

 

credit losses

under the CECL methodology

 

is applicable to financial

 

assets measured at amortized

 

cost, including loan receivables

 

and

held-to-maturity debt

 

securities. Prior

 

to the adoption

 

of ASC 326

 

on January

 

2023, the allowance

 

for credit

 

losses was

 

a

valuation allowance for probable incurred credit losses.

The Company

 

records

 

a

 

liability

 

for

 

expected

 

credit

 

losses

 

on

 

off-balance-sheet

 

credit

 

exposure

 

in

 

accordance

 

with

ASC

 

326.

 

The

 

Company

 

uses

 

the

 

loss

 

rate

 

and

 

exposure

 

of

 

default

 

framework

 

to

 

estimate

 

a

 

reserve

 

for

 

unfunded

commitments. Loss rates

 

for the expected funded

 

balances are determined

 

based on the

 

associated pooled loan

 

analysis

loss rate and the exposure at default is

 

based on an estimated utilization given

 

default. The off-balance sheet commitment

allowance were $

372

 

thousand and $

166

 

thousand as of December 31, 2023 and December 31,

 

2022, respectively.

 

A

 

summary

 

of

 

the

 

amounts

 

of

 

the

 

Company's

 

financial

 

instruments

 

with

 

off-balance

 

sheet

 

risk

 

are

 

shown

 

below

 

at

December 31, 2023 and 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Commitments to grant loans and unfunded lines of credit

$

85,117

$

95,461

Standby and commercial letters of credit

3,987

4,320

Total

$

89,104

$

99,781

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.

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

109

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

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.

 

Rate Swaps Designated as Cash Flow Hedges

As of December

 

31, 2023,

 

the Company had

two

 

interest rate swap

 

agreements with

 

a notional aggregate

 

amount of

$

50

 

million that were designated as cash flow hedges of certificates of deposit. The interest rate swap agreements have an

average

 

maturity

 

of

2.38

 

years,

 

the

 

weighted

 

average

 

fixed-rate

 

paid

 

is

3.59

%,

 

with

 

the

 

weighted

 

average

 

3-month

compound SOFR (Secured Overnight Financing Rate) being received.

 

The Company had

no

 

cash flow hedges outstanding

on December 31, 2022.

The

 

changes

 

in

 

fair

 

value

 

on

 

these

 

interest

 

rate

 

swaps

 

are

 

recorded

 

in

 

other

 

assets

 

or

 

other

 

liabilities

 

with

 

a

corresponding recognition

 

in other comprehensive

 

income (loss)

 

and subsequently reclassified

 

to earnings when

 

gains or

losses are realized.

Interest Rate Swaps Designated as Fair Value

 

Hedges

As of December

 

31, 2023, the

 

Company had

four

 

interest rate swap

 

agreements with a

 

notional aggregate amount

 

of

$

200

 

million

 

that

 

were

 

designated

 

as

 

fair

 

value

 

hedges

 

on

 

loans.

 

The

 

interest

 

rate

 

swap

 

agreements

 

have

 

an

 

average

maturity of

2.23

 

years, the weighted average fixed-rate paid

 

is

4.74

%, with the weighted average

 

3-month compound SOFR

being received.

The

 

changes

 

in

 

fair

 

value

 

on

 

these

 

interest

 

rate

 

swaps

 

are

 

recorded

 

in

 

other

 

assets

 

or

 

other

 

liabilities

 

with

 

a

corresponding recognition in the assets being hedged.

 

Interest Rate Swaps

The Company also

 

enters into

 

interest rate swaps

 

with its

 

loan customers. The

 

Company had

20

 

and

15

 

interest rate

swaps with loan customers with a notional aggregate

 

amount of $

46.5

 

million and $

33.9

 

million at December 31, 2023 and

2022, respectively.

 

These interest rate

 

swaps have maturity

 

dates of 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,

 

they do

 

not qualify

 

as hedges

 

for

accounting purposes.

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

110

 

USCB Financial Holdings, Inc.

 

2023 10-K

The following table reflects the Company’s customer

 

related interest rate swaps at the dates indicated (in

 

thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

Notional

Amount

Collateral

Amount

Balance Sheet Location

Asset

Liability

December 31, 2023:

Derivatives Designated as Cash Flow Hedges

Interest rate swaps

$

50,000

$

-

Other assets

$

334

$

-

Derivatives Designated as Fair Value Hedges

Interest rate swaps

$

200,000

$

-

Other liabilities

$

-

$

3,430

Derivatives not designated as hedging instruments:

Interest rate swaps related to customer loans

$

46,463

$

1,326

Other assets/Other liabilities

$

4,558

$

4,558

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

 

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

 

3

 

assets

 

and

 

liabilities

 

include

 

financial

 

instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

111

 

USCB Financial Holdings, Inc.

 

2023 10-K

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.

The following table represents

 

the Company's assets measured at

 

fair value on a

 

recurring basis at December 31, 2023

and 2022 for each of the fair value hierarchy levels (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Investment securities available for sale:

U.S. Government Agency

$

-

$

8,173

$

-

$

8,173

$

-

$

8,655

$

-

$

8,655

Collateralized mortgage obligations

-

80,606

-

80,606

-

95,541

-

95,541

Mortgage-backed securities - residential

-

52,187

-

52,187

-

60,879

-

60,879

Mortgage-backed securities - commercial

-

42,764

-

42,764

-

27,954

-

27,954

Municipal securities

-

19,338

-

19,338

-

18,483

-

18,483

Bank subordinated debt securities

-

26,261

-

26,261

-

14,919

-

14,919

Corporate bonds

-

-

-

-

-

3,709

-

3,709

Total

-

229,329

-

229,329

-

230,140

-

230,140

Derivative assets

-

4,892

-

4,892

-

5,011

-

5,011

Total assets at fair value

$

-

$

234,221

$

-

$

234,221

$

-

$

235,151

$

-

$

235,151

Derivative liabilities

$

-

$

7,988

$

-

$

7,988

$

-

$

5,011

$

-

$

5,011

Total liabilities at fair value

$

-

$

7,988

$

-

$

7,988

$

-

$

5,011

$

-

$

5,011

Items Measured at Fair Value

 

on a Non-recurring Basis

 

Individually Evaluated

 

Loans and

 

Impaired Loans:

ASC 326

 

eliminates the

 

current accounting

 

model for

 

impaired

loans effective as

 

of January 1,

 

2023. At

 

December 31, 2022,

 

in accordance

 

with provisions

 

of the

 

loan impairment

 

guidance,

individual loans

 

with a

 

carrying amount

 

of $

3.9

 

million were

 

written down

 

to their

 

fair value

 

of $

3.6

 

million, resulting

 

in an

impairment charge of $

294

 

thousand, which was included

 

in the allowance for

 

credit losses at December

 

31, 2022. Loans

subject 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 and 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.

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

112

 

USCB Financial Holdings, Inc.

 

2023 10-K

The following table represents the Company’s assets measured at fair value on a non-recurring basis at December 31,

2023 and 2022 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

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 (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

41

Discounted cash flow

Adj. for differences in net operating income expectations

Other

98

Discounted cash flow

Adj. for differences in net operating income expectations

Total

 

impaired loans

$

3,639

There were

no

 

financial liabilities measured at fair value on a non-recurring

 

basis at December 31, 2023 and 2022.

Items Not Measured at Fair Value

The carrying amounts and estimated fair values of financial instruments not carried at fair value, at December 31, 2023

and 2022 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Hierarchy

Carrying

Amount

Level 1

Level 2

Level 3

Fair Value

Amount

December 31, 2023:

Financial Assets:

Cash and due from banks

$

8,019

$

8,019

$

-

$

-

$

8,019

Interest-bearing deposits in banks

$

33,043

$

33,043

$

-

$

-

$

33,043

Investment securities held to maturity, net

$

174,974

$

-

$

155,510

$

-

$

155,510

Loans held for investment, net

$

1,759,743

$

-

$

-

$

1,723,210

$

1,723,210

Accrued interest receivable

$

10,688

$

-

$

1,448

$

9,240

$

10,688

Financial Liabilities:

 

Demand Deposits

$

552,762

$

552,762

$

-

$

-

$

552,762

Money market and savings accounts

$

1,048,272

$

1,048,272

$

-

$

-

$

1,048,272

Interest-bearing checking accounts

$

47,702

$

47,702

$

-

$

-

$

47,702

Time deposits

$

288,403

$

-

$

-

$

287,104

$

287,104

FHLB advances

$

183,000

$

-

$

182,282

$

-

$

182,282

Accrued interest payable

$

1,372

$

-

$

551

$

821

$

1,372

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

$

229

$

-

$

92

$

137

$

229

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

113

 

USCB Financial Holdings, Inc.

 

2023 10-K

 

13.

 

STOCKHOLDERS’ EQUITY

Common Stock

In 2023 , the Company issued

242,713

 

shares of Class A common stock to employees and

 

directors as restricted stock

awards

 

pursuant

 

to

 

the

 

Company's

 

2015

 

Option

 

Plan.

 

There

 

were

no

 

restricted

 

stock

 

awards

 

issued

 

in

 

the

 

year

 

ended

December 31, 2022.

During the year ended December

 

31, 2023, the Company repurchased

669,920

 

shares of Class A common

 

stock at a

weighted average price per share

 

of $

11.28

. The aggregate purchase

 

price for these transactions was

 

approximately $

7.6

million, including

 

transaction

 

costs.

 

As of

 

December 31,

 

2023,

80,080

 

shares remained

 

authorized

 

for repurchase

 

under

this program.

Shares of the Company’s Class A common stock issued and

 

outstanding as of December 31, 2023 and December 31,

2022 were

19,575,435

 

and

20,000,753

, respectively.

Dividends

Declaration of dividends by the Board is required before dividend payments are made.

No

 

dividends were approved by

the Board

 

for the

 

common

 

stock classes

 

for the

 

years ended

 

December 31,

 

2023 and

 

December 31,

 

2022. Additionally,

there were

no

 

dividends declared and unpaid as of December 31, 2023

 

and 2022.

See Note 19, Subsequent Events, for information regarding

 

dividends declared in January 2024.

The

 

Company

 

and

 

the

 

Bank

 

exceeded

 

all

 

regulatory

 

capital

 

requirements

 

and

 

remained

 

above

 

“well-capitalized”

guidelines as of December 31, 2023 and December

 

31, 2022. At December 31,

 

2023, the total risk-based capital ratios

 

for

the Company and the Bank were

12.78

% and

12.65

%, respectively.

 

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.

 

The

 

following

 

table

 

reflects

 

the

 

calculation

 

of

 

net

 

income

 

available

 

to

 

common

 

stockholders

 

for

 

the

 

years

 

ended

December 31, 2023 and 2022 (in thousands):

 

 

 

 

 

 

 

 

 

2023

2022

Net Income

$

16,545

$

20,141

Net income available to common stockholders

$

16,545

$

20,141

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

114

 

USCB Financial Holdings, Inc.

 

2023 10-K

The following table

 

reflects the calculation

 

of basic and

 

diluted earnings per

 

common share

 

class for the

 

years ended

December 31, 2023 and 2022 (in thousands, except

 

per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

2022

Class A

Class A

Basic EPS

Numerator:

Net income available to common shares

$

16,545

$

20,141

Denominator:

Weighted average shares outstanding

19,621,698

19,999,323

Earnings per share, basic

$

0.84

$

1.01

Diluted EPS

Numerator:

Net income available to common shares

$

16,545

$

20,141

Denominator:

Weighted average shares outstanding for basic EPS

19,621,698

19,999,323

Add: Dilutive effects of assumed exercises of stock options

65,936

177,515

Weighted avg. shares including dilutive potential common shares

19,687,634

20,176,838

Earnings per share, diluted

$

0.84

$

1.00

Anti-dilutive stock options excluded from diluted EPS

720,500

15,000

Net income has not been allocated to unvested

 

restricted stock awards that are participating securities

 

because the amounts that would be allocated are

not material to net income per share of common

 

stock. Unvested restricted stock awards that are participating

 

securities represent less than one percent

of all of the outstanding shares of common stock

 

for each of the periods presented.

 

 

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’s 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

 

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 reduces

 

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

limit the ability of

 

the Bank to pay

 

dividends, repurchase shares

 

or pay discretionary

 

bonuses. At December

 

31, 2023 and

2022, 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.

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

115

 

USCB Financial Holdings, Inc.

 

2023 10-K

If

 

undercapitalized,

 

capital

 

distributions

 

are

 

limited,

 

as

 

is

 

asset

 

growth

 

and

 

expansion,

 

and

 

capital

 

restoration

 

plans

 

are

required.

 

At December 31,

 

2023 and

 

2022, 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, 2023 and

 

2022 (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, 2023:

Total

 

risk-based capital:

$

233,109

12.65

%

$

147,432

8.00

%

$

184,290

10.00

%

Tier 1 risk-based capital:

$

211,645

11.48

%

$

110,574

6.00

%

$

147,432

8.00

%

Common equity tier 1 capital:

$

211,645

11.48

%

$

82,931

4.50

%

$

119,789

6.50

%

Leverage ratio:

$

211,645

9.17

%

$

92,328

4.00

%

$

115,410

5.00

%

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

%

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

 

including

 

dividends

 

to

 

their

 

parent

 

holding

company, if they deem

 

such payment to be an unsafe or unsound practice.

 

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, 2023

 

and 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

2023

2022

Consolidated Balance Sheets:

Loans held for investment, net

$

-

$

-

Deposits

$

2,792

$

6,825

Consolidated Statements of Operations:

Interest income

$

-

$

-

Interest expense

$

154

$

54

 

 

 

 

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

116

 

USCB Financial Holdings, Inc.

 

2023 10-K

Loan Purchases

During 2023, the Bank purchased $

85.1

 

million of loans from entities that are

 

deemed to be related parties.

 

The Bank

paid those entities fees of $

1.9

 

million.

 

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 $

881

 

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, 2023

December 31, 2022

ASSETS:

Cash and Cash Equivalents

$

2,426

$

1,102

Investment in bank subsidiary

188,827

181,326

Other assets

715

-

Total

 

assets

$

191,968

$

182,428

LIABILITIES AND STOCKHOLDERS' EQUITY:

Other liabilities

$

-

$

-

Stockholders' equity

191,968

182,428

Total

 

liabilities and stockholders' equity

$

191,968

$

182,428

The condensed

 

income statement

 

is presented

 

below for

 

USCB Financial

 

Holdings, Inc.

 

for the

 

periods indicated

 

(in

thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

December 31, 2023

December 31, 2022

INCOME:

Dividends from subsidiaries

$

11,100

$

1,000

Total

11,100

1,000

EXPENSE:

Employee compensation and benefits

553

-

Other operating

2,268

Total

2,821

-

Income before income taxes and undistributed subsidiary income

8,279

1,000

Provision (benefit) for income taxes

(715)

-

Equity in undisbursed subsidiary income

7,551

19,141

Net Income

$

16,545

$

20,141

 

 

 

 

Table of Contents

USCB FINANCIAL HOLDINGS, INC.

Notes to the Consolidated Financial Statements

 

117

 

USCB Financial Holdings, Inc.

 

2023 10-K

The condensed cash

 

flow is presented below

 

for USCB Financial Holdings,

 

Inc. for the periods

 

indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

December 31, 2023

December 31, 2022

Cash flows from operating activities:

Net income

$

16,545

$

20,141

Adjustments to reconcile net income to net cash provided

 

by operating

 

activities:

Equity in undistributed earnings of subsidiaries

(7,551)

(19,141)

Stock-based compensation

553

Increase in deferred tax asset

(715)

Net cash provided by operating activities

8,832

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

75

102

Repurchase of common stock

(7,583)

-

Net cash (used in) provided by financing activities

(7,508)

102

Net increase in cash and cash equivalents

 

1,324

1,102

Cash and cash equivalents, beginning of period

 

1,102

-

Cash and cash equivalents, end of period

 

$

2,426

$

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

 

Dividends

On January

 

29,

 

2024,

 

the

 

Company

 

announced

 

that

 

its

 

Board

 

of Directors

 

approved

 

a cash

 

dividend

 

program.

 

The

quarterly dividend

 

for the

 

first quarter

 

of 2024

 

was $

0.05

 

per share

 

of Class

 

A common

 

stock, paid

 

on March

 

5, 2024,

 

to

stockholders of record as of the close of business

 

on February 15, 2024. Total amount paid to shareholders in dividends on

February 15, 2024 was $

1.0

 

million.

 

Table of Contents

 

 

118

 

USCB Financial Holdings, Inc.

 

2023 10-K

Item 9.

 

Changes in and Disagreements with Accountants on

 

Accounting and Financial Disclosure

None.

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,

 

2023.

 

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.

This

 

annual

 

report

 

does

 

not

 

include

 

an

 

integrated

 

audit

 

report

 

of

 

the

 

Company's

 

registered

 

public

 

accounting

 

firm

regarding

 

internal

 

control

 

over

 

financial

 

reporting.

 

Management's

 

report

 

was

 

not

 

subject

 

to

 

audit

 

by

 

the

 

Company's

registered public accounting

 

firm pursuant to

 

temporary rules

 

of the Securities

 

and Exchange Commission

 

that permit the

Company (non-accelerated filer) to provide only management's

 

report in this annual 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,

 

2023. 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

(a)

 

None

Table of Contents

 

 

119

 

USCB Financial Holdings, Inc.

 

2023 10-K

(b)

 

During

 

the

 

three

 

months

 

ended

 

December

 

31,

 

2023,

 

none

 

of

 

the

 

Company’s

 

directors

 

or

 

Section

 

16

 

reporting

officers

adopted

 

or

terminated

 

any Rule 10b5-1

 

trading arrangement or

non-Rule

10b5-1

 

trading arrangement (as

such terms are defined in Item 408 of the SEC’s

 

Regulation S-K).

Item 9C. Disclosure Regarding Foreign Jurisdictions

 

That Prevent Inspections

Not applicable.

Table of Contents

 

 

120

 

USCB Financial Holdings, Inc.

 

2023 10-K

PART III

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

 

28, 2024,

 

is expected

 

to be

 

filed with the

 

SEC

within 120 days of December 31, 2023 (“2024 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.,

 

2301

 

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

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 2024 Definitive Proxy Statement.

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 2024 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,

 

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 2024 Definitive Proxy Statement.

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 2024 Definitive Proxy

Statement.

Table of Contents

 

 

121

 

USCB Financial Holdings, Inc.

 

2023 10-K

PART IV

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, 2023 and 2022

Consolidated Statements of Operations for the years ended

 

December 31, 2023 and 2022

Consolidated Statements of Comprehensive Income for

 

the years ended December 31, 2023 and 2022

Consolidated Statements of Changes in Stockholders'

 

Equity for the years ended December 31, 2023 and

 

2022

Consolidated Statements of Cash Flows for the years

 

ended December 31, 2023 and 2022

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.

 

 

Table of Contents

 

 

122

 

USCB Financial Holdings, Inc.

 

2023 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 Quarterly

Report on Form 10-Q (File No. 001-41196) filed with the Securities and Exchange Commission on August 11, 2023).

3.2

Amended and Restated Bylaws 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 July 26, 2023).

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. **

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).*

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.

***

97.1

Compensation Recovery Policy.**

101

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.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

Management contract or compensatory plan or arrangement.

**

Filed herewith.

***

Furnished hereby.

Item 16. Form 10-K Summary

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

123

 

USCB Financial Holdings, Inc.

 

2023 10-K

SIGNATURES

Pursuant to the requirements of the Exchange

 

Act, the registrant has duly caused this report

 

to be signed on its behalf

by the undersigned thereunto duly authorized.

USCB FINANCIAL HOLDINGS, INC.

Date: March 22, 2024

By:

/s/ Luis de la Aguilera

Luis de la Aguilera

President and Chief Executive Officer

Pursuant to the requirements

 

of the Exchange Ac,

 

this report has been

 

signed by the following

 

persons in the capacities

and on the dates indicated.

Signature

Title

Date

/s/ Luis de la Aguilera

Chairman, President, and Chief Executive

Officer (Principal Executive Officer)

March 22, 2024

Luis de la Aguilera

/s/ Robert Anderson

Chief Financial Officer (Principal Financial

Officer and Principal Accounting Officer)

March 22, 2024

Robert Anderson

/s/ Aida Levitan

Director

March 22, 2024

Aida Levitan

/s/ Howard Feinglass

Director

March 22, 2024

Howard Feinglass

/s/ Kirk Wycoff

Director

March 22, 2024

Kirk Wycoff

/s/ Ramon A. Abadin

Director

March 22, 2024

Ramon A. Abadin

/s/ Bernardo B. Fernandez

Director

March 22, 2024

Bernardo B. Fernandez

/s/ Ramon A. Rodriguez

Director

March 22, 2024

Ramon A. Rodriguez

/s/ Maria C. Alonso

Director

March 22, 2024

Maria C. Alonso

/s/ Robert E. Kafafian

Director

March 22, 2024

Robert E. Kafafian