UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
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:
(Exact name of registrant as specified in its
charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
,
,
(Address of principal executive offices) (zip
code)
Registrant’s telephone number, including area code:
)
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Securities registered pursuant to Section 12(g)
of the Act:
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
☐
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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
☐
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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.
☒
☐
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).
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☐
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
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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.
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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.
☐
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
☐
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The aggregate market
value of the
voting and non-voting
common stock
held by non-affiliates
of the registrant
on March 1,
2022, based on
the closing
price of $13.41 for shares of
the Registrant’s Class A common
stock as reported by the Nasdaq
Stock Market was approximately $
registrant has elected to
use March 1, 2022
as the calculation date
because on June 30,
2021 (the last
business day of the
Registrant’s second fiscal
quarter),
the
Registrant
was
a
privately
held
company. As
of
March
1,
2022,
the
registrant
had
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Proxy Statement for the 2022 Annual Meeting of Shareholders (the “2022 Proxy Statement”) are incorporated by
reference into Part III of this report.
FORM 10-K
DECEMBER 31, 2021
TABLE OF CONTENTS
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,”
“should,”
“would,”
“believe,”
“contemplate,”
“expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are
intended
to
identify
forward-looking
statements.
These
forward-looking
statements
include
statements
related
to
our
projected
growth,
anticipated
future
financial
performance,
and
management’s
long-term
performance
goals,
as
well
as
statements relating to
the anticipated effects
on results of
operations and financial
condition from expected
developments
or events, or business and growth strategies, including
anticipated internal growth.
These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ
materially from those anticipated in such statements.
Potential risks and uncertainties include, but are not
limited to:
•
the strength of the United States economy
in general and the strength of the local
economies in which we conduct
operations;
•
the COVID-19 pandemic and its impact on
us, our employees, customers and third-party service providers, and the
ultimate extent of the impacts of the pandemic and related government
stimulus programs;
•
our ability to successfully manage interest rate risk, credit
risk, liquidity risk, and other risks inherent to our industry;
•
the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss
reserve and deferred tax asset valuation allowance;
•
the efficiency and effectiveness of our
internal control environment;
•
our ability
to comply
with the
extensive laws
and regulations
to which
we are
subject, including
the laws
for each
jurisdiction where we operate;
•
legislative or regulatory
changes and changes
in accounting
principles, policies,
practices or
guidelines, including
the effects of the forthcoming implementation
of the Current Expected Credit Losses (“CECL”) standard
;
•
the effects
of our
lack of
a diversified
loan portfolio
and concentration
in the
South Florida
market, including
the
risks
of geographic,
depositor,
and
industry concentrations,
including our
concentration
in
loans secured
by real
estate;
•
the concentration of ownership of our Class A common
stock;
•
fluctuations in the price of our Class A common stock;
•
our ability to fund or access the capital markets at attractive
rates and terms and manage our growth, both organic
growth as well as growth through other means, such as
future acquisitions;
•
inflation, interest rate, unemployment rate, market, and monetary
fluctuations;
•
increased competition and its effect on pricing
of our products and services as well as our margins;
•
the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,
employee, or third-party fraud and security breaches; and
•
other
risks
described
this
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 presentation
are made only as of the date
hereof, and we undertake
no obligation to update
or revise any forward-looking
statement to reflect events
or circumstances
after the date on which the statement is made or to reflect the occurrence of unanticipated events, unless required to do so
under the federal securities laws. You
should also review the risk factors
described in the 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 Federal Deposit Insurance Corporation (“FDIC”).
4
USCB Financial Holdings, Inc.
2021 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 (the “Bank”), and is a bank holding company (a
“BHC”)
registered
with
the
Board
of Governors
of the
Federal
Reserve
System (the
“Federal
Reserve”)
under
the
Bank
Holding Company Act
of 1956, as
amended (the “BHC Act”).
The Company is
headquartered in Miami, Florida,
and, through
the Bank, its sole
subsidiary, operates 10 banking centers in South Florida providing a wide
range of personal and business
banking products and services. As of December 31, 2021,
the Company had total consolidated assets of $1.9 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.
Most recently,
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 reverse stock split.
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
sole
subsidiary
of
the
Company,
the
Company
became
the
holding
company
for
the
Bank
and
the
stockholders
of the
Bank
became stockholders of the Company.
Prior
the
Effective
Date,
the
Bank’s
Class
A
common
stock
was
registered
under
Section
12(b)
of
the
Securities
Exchange Act of 1934 (the “Exchange
Act”), and the Bank was subject to
the information requirements of the Exchange
Act
and, in accordance with Section 12(i) thereof, filed quarterly reports, proxy statements and other information with the 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 is 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 BHC structure.
In this Annual Report, unless the context indicated otherwise, references
to “we,” “us,”, and “our” refer to the Company
and the Bank. 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
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.
5
USCB Financial Holdings, Inc.
2021 10-K
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:
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, 2021,
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:
a new business vertical and diversify our portfolio.
•
Homeowner
Association
(HOA)
services:
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:
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:
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 consistent 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,
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.
We offer
commercial and
consumer deposit
products
across our
primary geographic footprint.
Seasonality
We do not believe our business to be seasonal
in nature.
6
USCB Financial Holdings, Inc.
2021 10-K
Markets
Our primary banking market is South
Florida. Due to the recent
acceptance and expected ongoing emphasis on remote
work, coupled
with a
low tax
environment, warm
weather and
a strong
real estate
market has
encouraged companies
to
relocate some or all of their
operations to South Florida. We
believe this trend is further
demonstrated by recent relocation
initiatives undertaken by large financial institutions such as Blackstone Group Inc., Goldman Sachs Group Inc., and Citadel
Advisors
LLC,
all
of
which
have
established
operations
in
South
Florida.
We
believe
Florida
offers
long-term
attractive
banking opportunities.
Our largest concentration is in the Miami metropolitan statistical area; however, we are also focused
on growth in other urban Florida markets in which we
have a presence, such as Broward and Palm Beach counties
.
According to the 2020
United States Census Bureau,
Florida was the third
most populous state
in the country and the
three largest populations
were in Miami-Dade,
Broward, and Palm
Beach counties, all
located in South Florida.
According
to
estimates
from
the
United
States
Census
Bureau,
from
2010
to
2021,
Florida’s
population
increased
to
21.8
million
residents, an increase of 3.0 million new residents. The percentage change
in Florida’s population between April 2020 and
July 2021 alone was 1.1% according to the United States
Census Bureau.
Competition
Our markets are highly competitive,
and we compete with a wide range of lenders and other financial institutions within
our markets,
including local,
regional,
national,
and international
commercial
banks
and credit
unions.
We
also compete
with mortgage companies, brokerage
firms, trust service providers, consumer
finance companies, mutual funds,
securities
firms,
insurance
companies,
third-party
payment
processors,
financial
technology
companies,
or
Fintechs,
and
other
financial intermediaries on various
of our products and
services. Some of our competitors
are not subject to the
regulatory
restrictions
and
the
level
of
regulatory
supervision
applicable
to
us.
Many
of
our
competitors
are
much
larger
financial
institutions that have greater financial
resources than we do
and compete aggressively for market
share. These competitors
attempt to gain market share through their financial product
mix, pricing strategies and larger banking center networks.
Interest rates
on both
loans and
deposits and
prices of
fee-based services
are significant
competitive factors
among
financial
institutions
generally.
Other
important
competitive
factors
include
convenience,
quality
of
customer
service,
availability and quality of digital offerings, community
reputation, and continuity of personnel and services.
Emerging Growth Company
We are an “emerging growth
company,”
or “EGC”, as defined in the Jumpstart
Our Business Startups Act of 2012 (the
“JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are
applicable
to
other
public
companies
that
are
not
“emerging
growth
companies,”
including,
but
not
limited
to,
not
being
required to comply with the auditor
attestation requirements of Section
404 of the Sarbanes-Oxley Act,
reduced disclosure
obligations
regarding
executive
compensation
in
our
periodic
reports
and
proxy
statements,
and
exemptions
from
the
requirements of
holding a
non-binding advisory
vote on
executive compensation
and shareholder
approval of
any golden
parachute payments not previously approved.
In addition,
Section
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.
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.
At December 31, 2021,
we had 187
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,
7
USCB Financial Holdings, Inc.
2021 10-K
but
with
an
appreciation
for
a
diversity
of
perspectives
and
experiences.
We
have
designed
a
compensation
structure
including an array of benefit plans and programs that
we believe is attractive to our current and prospective
employees.
Regulation and Supervision
Bank
holding
companies,
banks,
and
their
affiliates
are
extensively
regulated
under
federal
and
state
law.
These
regulations have
a material
effect on
the operations
of the
Company and
its direct
and indirect
subsidiaries, including
the
Bank, which is currently the Company’s only subsidiary
.
Statutes, regulations and 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 stockholders 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,
remove
officers
and
directors
from
their
positions,
force
the
termination
of
certain
activities
and
the
divestures
of
certain investments and other penalties for violations of
laws and regulations.
Further,
the
regulatory
system
imposes
reporting
and
information
collection
obligations.
Banking
statutes
and
regulations are subject
to change,
and additional
statutes, regulations,
and corresponding
guidance may
be adopted. We
are unable to predict these future changes or the effects, if any, that these changes could have on the business, prospects,
revenues, and results of operations of our Bank and Company.
The material
statutory and
regulatory requirements
that are
applicable to
us are
summarized below.
The description
below is not
intended to summarize
all laws and
regulations applicable to us.
These summary descriptions are
not complete,
and you should refer to the full text of the statutes, regulations,
and corresponding guidance for more information.
Bank and Bank Holding Company Regulation
As
a
Florida
state-chartered
bank,
the
Bank
is
subject
to
ongoing
and
comprehensive
supervision,
regulation,
examination, and enforcement by the FDIC and Florida Office of Financial Regulation (“FOFR”). The FOFR supervises and
regulates all areas
of our operations
including, without limitation,
the making of
loans, the issuance
of securities, the
conduct
of our corporate affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and
the establishment
or closing of banking centers. In addition, our deposit accounts are insured by the Deposit Insurance Fund administered by
the FDIC to the maximum extent permitted by law, and the FDIC has certain supervisory
and enforcement powers over us.
Any entity
that directly
or indirectly
controls a
bank must
be approved
by the
Federal Reserve
Board under
the Bank
Holding
Company
Act
of
1956
(the
“BHC
Act”)
to
become
a
BHC,
BHCs
and
their
bank
affiliates.
BHCs
are
subject
to
regulation, inspection,
examination, supervision
and enforcement
by the Federal
Reserve Board
under the
BHC Act.
The
Federal Reserve
Board's jurisdiction
also extends
to any
company
(except, in
most instances,
a bank)
that
is directly
or
indirectly controlled by a BHC.
The Company,
which controls the Bank, is a BHC and,
as such, is subject to ongoing and comprehensive
supervision,
regulation, examination and enforcement by the Federal
Reserve Board.
Prior Notice and Approval Requirements Related to
Control
Banking laws impose prior notice,
approval, and ongoing regulatory requirements on
any stockholder or other party
that
seeks to
acquire,
and subsequently
acquires,
direct or
indirect "control"
of an
FDIC-insured
depository institution.
These
laws include the BHC Act and the Change in Bank Control Act. Among other things, these laws require regulatory filings by
individuals
or
companies
that
seek
to
acquire
direct
or
indirect
"control"
of
an
FDIC-insured
depository
institution.
The
determination
of
whether
an
investor
"controls"
a
depository
institution
is
based
on
all
of
the
facts
and
circumstances
surrounding the investment.
As a general
matter, a
party is deemed
to control a
depository institution
or other company
if
the party
owns or
controls 25%
or more
of any
class of
voting stock
of the
depository institution,
control the
election of
a
majority of the board of directors of the depositary institution and/or exercises a controlling influence over
the management
and policies of such institution. Subject to
rebuttal, a party generally 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.
Except
under
very
limited
circumstances, bank holding
companies are prohibited
from acquiring, without
prior approval, control
of any other
bank or
BHC or substantially
all the assets
thereof or more
than 5%
of the voting
shares of
a bank or
BHC which is
not already a
subsidiary.
8
USCB Financial Holdings, Inc.
2021 10-K
Source of Strength
All companies, including BHCs, that directly
or indirectly control an insured depository
institution, are required to serve
as a source
of strength for
the institution. Under
this requirement,
the Company in
the future could
be required to
provide
financial assistance to
the Bank should it
experience financial distress. Such
support may be
required at times when,
absent
this statutory and Federal Reserve Policy requirement, a
BHC may not be inclined to provide it.
Safety and Soundness Regulation
As
an
insured
depository
institution,
the
Bank
is
subject
to
prudential
regulation
and
supervision
and
must
undergo
regular
on-site
examinations
by
our
state
and
federal
bank
regulatory
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 our
Bank. The safety and soundness
guidelines relate to, among
other things, our internal
controls, information systems, internal
audit systems, liquidity, capital adequacy, 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. 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 deficiencies
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
expect to have
active Board
and senior
management
oversight;
adequate
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
Bank regulatory
laws generally
restrict the
ability of
the Company,
as a
BHC, to
engage in
activities other
than those
determined by the
Federal Reserve Board
to be
so closely
related to banking
as to be
a proper incident
thereto. The Gramm-
Leach-Bliley Act (the “GLB Act”) expanded the scope of permissible activities for a BHC that qualifies as a financial holding
company. Under the regulations implementing the GLB Act, a financial
holding company may engage in additional
activities
that are
financial
in nature
or incidental
or complementary
to a
financial activity.
The Company
is not
a financial
holding
company.
In addition, as a general matter, the establishment or
acquisition by the Company,
of a non-bank entity, or the initiation
of a non-banking
activity,
requires prior
regulatory approval
from the Federal
Reserve Board.
In approving
acquisitions or
the addition of
activities, the Federal Reserve
Board considers, among
other things, whether the
acquisition or the
additional
activities can reasonably be
expected to produce benefits
to the public,
such as greater convenience,
increased competition
or gains in efficiency, that outweigh such possible adverse
effects as undue concentration of resources,
decreased or unfair
competition, conflicts of interest or unsound banking practices
.
9
USCB Financial Holdings, Inc.
2021 10-K
Regulatory Capital Requirements
The federal banking
regulators have adopted
risk-based capital adequacy
guidelines for bank
holding companies and
their subsidiary banks
and banks without bank
holding companies based on
the Basel III
standards. Under these guidelines,
assets and off-balance sheet items are assigned to specific risk categories, each with designated risk weightings. The risk-
based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences
in risk profiles
among banks and bank holding
companies, to account for off-balance sheet exposure,
to minimize disincentives for holding
liquid assets, and
to achieve greater
consistency in
evaluating the capital
adequacy of
major banks throughout
the world.
The resulting
capital ratio requirements
represent capital as
a percentage of
total risk-weighted assets
and off-balance sheet
items. Final rules
implementing the capital
adequacy guidelines became
effective, with various
phase-in periods, on
January
1, 2015
for
community
banks
such
as us.
All
of
the
rules
were
fully
phased
in
as of
January
1,
2019.
These
final
rules
represent a significant change to the prior general risk-based capital rules and are
designed to substantially conform to the
Basel III international standards.
In computing
total risk-weighted
assets, bank
and bank
holding company
assets are
given risk-weights
of 0%,
20%,
50%, 100%
and 150%.
In addition,
certain
off-balance
sheet items
are given
similar credit
conversion
factors
to convert
them to asset
equivalent amounts
to which an
appropriate risk-weight
will apply.
Most loans will
be assigned to
the 100%
risk category,
except for
performing first
mortgage loans
fully secured
by 1-to-4
family and
certain multi-family
residential
property, which carry a 50% risk rating. Most investment securities
(including, primarily, general
obligation claims on states
or
other
political
subdivisions
of
the
United
States)
will
be
assigned
to
the
20%
category,
except
for
municipal
or
state
revenue bonds, which have a 50% risk-weight,
and direct obligations of the U.S.
Treasury or obligations backed
by the full
faith
and
credit
of
the
U.S.
government,
which
have
a
0%
risk-weight.
In
covering
off-balance
sheet
items,
direct
credit
substitutes,
including
general
guarantees
and
standby
letters
of
credit
backing
financial
obligations,
are
given
a
100%
conversion
factor.
Transaction-related
contingencies
such
as
bid
bonds,
standby
letters
of
credit
backing
nonfinancial
obligations,
and undrawn
commitments
(including
commercial
credit lines
with
an initial
maturity
of more
than
one year)
have
a
50%
conversion
factor.
Short-term
commercial
letters
of
credit
are
converted
at
20%
and
certain
short-term
unconditionally cancelable commitments have a 0% factor.
Under
the
final
rules,
minimum
requirements
increased
for
both
the
quality
and
quantity
of
capital
held
by
banking
organizations. In this respect, the final rules
implement strict eligibility criteria for regulatory capital instruments and improve
the methodology for
calculating risk-weighted
assets to enhance
risk sensitivity.
Consistent with the
international Basel III
framework, the rules include a new
minimum ratio of Common Equity
Tier 1 Capital to Risk-Weighted
Assets of 4.5%. The
rules also create a Common Equity Tier 1 Capital
conservation buffer of 2.5% of risk
-weighted assets. This buffer is added
to each of the three risk-based capital
ratios to determine whether an institution
has established the buffer.
The rules raise
the minimum ratio of Tier 1 Capital to Risk-Weighted Assets from 4% to 6% and
include a minimum leverage ratio of 4% for
all banking
organizations. If
a financial
institution’s
capital conservation
buffer
falls below
2.5% —
e.g., if
the institution’s
Common Equity
Tier
1 Capital
to Risk
-Weighted
Assets is
less than
7.0% —
then capital
distributions
and
discretionary
payments will
be limited
or prohibited
based on
the size
of the
institution’s
buffer.
The types
of payments
subject to
this
limitation
include
dividends,
share
buybacks,
discretionary
payments
on
Tier
1
instruments,
and
discretionary
bonus
payments.
The new capital regulations
may also impact the
treatment of accumulated
other comprehensive income,
or AOCI, for
regulatory capital purposes. Under
the new rules, AOCI generally
flows through to regulatory
capital, however,
community
banks and their holding companies (if any)
may 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 new rules
also permit community
banks
with less than $15.0 billion in total assets to continue to count certain non-qualifying capital instruments issued prior to May
19, 2010 as Tier 1 capital, including trust preferred securities
and cumulative perpetual preferred stock (subject to a limit of
25% of Tier 1 capital). However, non-qualifying
capital instruments issued on or after May 19, 2010 do not qualify for Tier 1
capital treatment.
On
September
17,
2019,
the
federal
banking
agencies
jointly
finalized
a
rule
to
be
effective
January
1,
2020
and
intended to
simplify
the regulatory
capital requirements
described above
for qualifying
community
banking
organizations
that opt into the
Community Bank Leverage Ratio, or
CBLR, framework, as required by Section
201 of the Regulatory Relief
Act.
The
final
rule
became
effective
on
January
1,
2020,
and
the
CBLR
framework
became
available
for
banks
to
use
beginning with
their March
31, 2020 call
reports. Under
the final rule,
if a qualifying
community banking
organization opts
into
the
CBLR
framework
and
meets
all
requirements
under
the
framework,
it
will
be
considered
to
have
met
the
well-
capitalized ratio
requirements
under the
prompt corrective
action regulations
described elsewhere
in this
offering circular
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
$10.0 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
10
USCB Financial Holdings, Inc.
2021 10-K
total consolidated assets. However, Section
4012 of the CARES Act required that the CBLR be temporarily lowered to 8%.
The federal regulators issued a rule implementing the lower CBLR effective April 23, 2020. The
rule also established a two-
quarter grace period
for a qualifying
institution whose
leverage ratio falls
below the
8% CBLR
requirement so
long as the
bank maintains a leverage ratio of 7% or greater.
Another rule was issued to transition back to the 9% CBLR
by increasing
the
ratio
to
8.5%
for
calendar
year
2021
and
9%
thereafter.
Although
the
Bank
is
a
qualifying
community
banking
organization, the Bank has elected
not to opt in to the CBLR framework
at this time and will continue to
follow the Basel III
capital requirements as described above.
As
of
December 31,
2021
and
2020,
the
Bank
qualified
as
a
“well
capitalized”
institution.
See
Note
15
“Regulatory
Matters” of the Consolidated Financial Statements filed herewith
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
depository
institutions
are
subjected to differential regulation corresponding
to the capital category within which the institution falls.
As of December 31,
2021, a depository
institution was
deemed to be
"well capitalized"
if the banking
institution had
a
total risk-based
capital
ratio
of
10.0%
or greater,
a tier
1 risk-based
capital
ratio
of
8.0%
or
greater,
a
CET1
risk-based
capital
ratio
of
6.5%
and
a
leverage
ratio
of
5.0%
or
greater,
and
the
institution
was
not
subject
to
an
order,
written
agreement,
capital
directive,
or
prompt
corrective
action
directive
to
meet
and
maintain
a
specific
level
for
any
capital
measure.
Under
certain
circumstances,
a
well-capitalized,
adequately
capitalized
or
undercapitalized
institution
may
be
treated as
if the
institution were
in the
next lower
capital category
if it’s
determined
that the
institution is
in an
unsafe or
unsound condition or
is engaging in
an unsafe or
unsound practice. The
degree of
regulatory scrutiny of
a financial institution
will
increase,
and
the
permissible
activities
of
the
institution
will
decrease,
as
it
moves
downward
through
the
capital
categories.
A
banking
institution
that
is
undercapitalized
is required
to
submit
a
capital restoration
plan.
Failure
to
meet
capital guidelines
could subject
the institution
to a
variety of
enforcement remedies
by federal
bank regulatory
agencies,
including: termination
of deposit insurance
by the FDIC,
restrictions on certain
business activities, and
appointment of the
FDIC as conservator or receiver,
depending upon the severity of the capital deficiency
.
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
unacceptably
high
levels
of
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 institutions 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, 2021,
our ratio
of construction
loans to
total capital
was 30%,
and therefore,
we were
under the
100% threshold
set forth
in clause
(iii) in
the paragraph
above. With
respect to
clause (iv)
in the
paragraph above,
as of
December 31, 2021, our
ratio of total
commercial real estate
loans to total
capital was 298%,
but the outstanding
balance
of our
commercial real
estate portfolio
has not
increased by
50% or
more in
the prior
36 months.
As a
result, we
are not
deemed to have a concentration in commercial real estate
lending under applicable regulatory guidelines.
11
USCB Financial Holdings, Inc.
2021 10-K
Payment of Dividends
The ability of
the board of
directors of an
insured depository
institution to declare
a cash dividend
or other distribution
with
respect
to
capital
stock
is
subject
to
statutory
and
regulatory
restrictions
that
limit
the
amount
available
for
such
distribution
depending
upon
earnings,
financial
condition
and
cash
needs
of
the
institution,
as
well
as
general
business
conditions. Insured
depository
institutions are also
prohibited from
paying management
fees to any
controlling persons
or
other affiliates or,
with certain limited exceptions,
making capital distributions,
including dividends, if
after such transaction
the
institution
would
be
less
than
adequately
capitalized.
Under
Florida
law,
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, 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
then issued
and outstanding.
Under
Florida law, we are prohibited from declaring
a dividend at any time
at which our net
income from the current year
combined
with the retained net income from the preceding two years is a loss or which would cause our capital accounts to fall below
the minimum amount required by law, regulation, order,
or any written agreement with a state or federal regulatory agency.
In addition,
because we
are a
BHC, we
are dependent
upon the
payment
of dividends
by the
Bank as
our principal
source of funds
to pay dividends
in the future,
if any,
and to make
other payments.
It is the
policy of the
Federal Reserve
Board that BHCs
should pay cash
dividends on common
stock only out
of income available
over the past
year and only
if
prospective earnings retention
is consistent with
the organization’s expected future
needs and financial
condition. The policy
provides that
a BHC
should not
pay cash
dividends at
a level
that undermines
the BHC’s
ability to
serve as
a source
of
strength to its banking subsidiaries.
Incentive Compensation
Guidelines adopted by
the federal
banking agencies pursuant
to the
FDIA prohibit
excessive compensation as
an unsafe
and
unsound
practice
and
describe
compensation
as
excessive
when
the
amounts
paid
are
unreasonable
or
disproportionate to the services performed by an executive
officer, employee,
director or principal shareholder.
In June 2010,
the federal banking
agencies jointly
adopted the
Guidance on Sound
Incentive Compensation
Policies,
or GSICP.
The GSICP intended to
ensure that banking organizations
do not undermine the
safety and soundness of
such
organizations
by
encouraging
excessive
risk-taking.
This
guidance,
which
covers
all
employees
that
have
the
ability
to
expose the
organization
to material
amounts of
risk, either
individually or
as part
of a
group, is
based upon
a set
of key
principles relating to
a banking organization’s
incentive compensation arrangements.
Specifically,
incentive compensation
arrangements should (i)
provide employee incentives
that appropriately balance risk
in a manner that does
not encourage
employees to expose their
organizations to imprudent risk,
(ii) be compatible with
effective controls and risk
management,
and (iii) be supported by
strong corporate governance,
including active and effective
oversight by the organization’s
board
of directors. Any deficiencies in our compensation practices
could lead to supervisory or enforcement actions
by the FDIC.
The
Dodd-Frank
Act
requires
the
federal
banking
agencies
and
the
SEC
to
establish
joint
regulations
or
guidelines
prohibiting incentive-based payment arrangements at specified regulated entities, such as us, having at least $1.0 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
with at least $1.0 billion in average
total consolidated assets. Final
regulations have not been
adopted as of the date
hereof. 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
could
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.
12
USCB Financial Holdings, Inc.
2021 10-K
Limits on Transactions with Affiliates and
Insiders
Insured depository institutions are subject to restrictions
on their ability to conduct transactions with
affiliates and other
related parties. Section 23A of the Federal Reserve Act imposes quantitative limits, qualitative requirements,
and collateral
requirements
on
certain
loan
transactions
by
an
insured
depository
institution
with,
or
for
the
benefit
of,
its
affiliates.
Transactions covered by Section 23A include loans, extensions of credit, investment in securities issued by an
affiliate, and
acquisitions of assets from an
affiliate. Section 23B of
the Federal Reserve Act requires
that most types of transactions by
an
insured
depository
institution
with,
or
for
the
benefit
of,
an
affiliate
be
on
terms
at
least
as
favorable
to
the
insured
depository institution as
if the transaction
were conducted between
the insured depository institution
and an unaffiliated third
party.
An affiliate of a
bank is any entity that controls,
is controlled by or
is under common control with
the bank. In a holding
company context, the
parent bank holding
company,
such as USCB
Financial Holdings, Inc.,
and any companies
that are
controlled by such parent holding company (excluding
subsidiaries of the bank) are affiliates of the bank.
Loans to executive officers and directors of an insured depository institution or any of its affiliates or to any person who
directly or indirectly, or acting through or in concert with one or more persons,
owns, controls or has the power to vote more
than 10% of any class of voting securities of a bank, which we
refer to as 10% shareholders, or to any political or campaign
committee the
funds or
services of
which will
benefit those
executive officers,
directors, or
10% shareholders
or which
is
controlled by those executive officers, directors
or 10% shareholders, are subject to
Sections 22(g) and 22(h) of
the Federal
Reserve Act
and the
corresponding
regulations
(Regulation
O) and
Section 13(k)
of the
Exchange Act
(as applied
to us
through FDIC regulations) relating to the prohibition on personal loans to executives (which exempts financial institutions in
compliance with the insider lending restrictions of Section
22(h) of the Federal Reserve Act).
FDIC Deposit Insurance
The FDIC is
an independent
federal agency
that insures the
deposits of federally
insured depository
institutions up
to
applicable limits. The FDIC also has certain regulatory,
examination and enforcement powers with respect to FDIC-insured
institutions.
The
deposits
are
insured
by
the
FDIC
up
to
applicable
limits.
As
a
general
matter,
the
maximum
deposit
insurance amount which an insured bank may offer
is $250 thousand per depositor.
Additionally,
FDIC-insured depository institutions are
required to pay deposit insurance
assessments to the FDIC. The
amount of
a particular
institution's deposit
insurance assessment
is based
on that
institution's risk
classification under
an
FDIC risk-based assessment system. An institution's
risk classification is assigned based on
its capital levels and the level
of supervisory concern the institution poses to the regulators.
Under the current
system, deposit
insurance assessments
are based
on a bank’s
assessment base,
which is
defined
as average total assets minus
average tangible equity.
For established small institutions,
such as the Bank, the
FDIC sets
deposit
assessment
rates
based
on
the
Financial
Ratios
Method,
which
takes
into
account
several
ratios
that
reflect
leverage, asset quality,
and earnings at
each individual institution
and then applies
a pricing multiplier
that is the same
for
all institutions. An
institution’s rate
must be within
a certain minimum
and a certain
maximum range, 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.
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
will
have
priority
in
payment
ahead
of
unsecured,
non-deposit
creditors,
including the Company,
with respect to any extensions of credit they may 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
13
USCB Financial Holdings, Inc.
2021 10-K
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 with
respect to
participating in the overdraft service offering. 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 Home Loan Bank System
We are
a member
of the 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
0.09% (or
9 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
$15.0 million),
plus 4.25%
of its
outstanding advances
(borrowings) from
the FHLB
of Atlanta
under the activity-based stock ownership requirement.
Anti-Money Laundering Regulation
As
a
financial
institution,
the
Bank
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,
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 certain 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
or
sanctioned
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.
Certain laws, such
as the USA
PATRIOT
Act, enacted
in 2001 and
renewed through
2019, as
described below,
provide law
enforcement authorities
with increased
access to
financial information
maintained
by banks.
Anti-money laundering
obligations have
been substantially
strengthened
as a
result of
the USA
PATRIOT
Act. Bank
regulators routinely examine institutions for compliance with these obligations, and this area has become a particular focus
of the regulators in recent years. In
addition, the regulators are required to consider compliance with the
USA PATRIOT
Act
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 because
of deficiencies in such
institutions’ anti-money laundering
programs. The regulators
and
other
governmental
authorities
have
been
active
in
imposing
“cease
and
desist”
orders
and
significant
civil
money
penalty sanctions against institutions found to be in
violation of the anti-money laundering regulations.
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
daily monitoring and surveillance
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.
14
USCB Financial Holdings, Inc.
2021 10-K
Consumer Laws and Regulations
Our activities
are subject
to a
variety
of federal
and state
statutes and
regulations
designed to
protect consumers
in
transactions with
banks. Interest
and other
charges collected
or contracted
for by
us are
subject to
state usury
laws and
federal laws concerning interest rates. Our loan
operations are also subject to federal laws
applicable to credit transactions,
such as:
•
the
Truth-In-Lending
Act,
or
TILA,
and
Regulation
Z,
governing
disclosures
of
credit
and
servicing
terms
to
consumer borrowers
and including
substantial requirements
for mortgage
lending and
servicing, as
mandated by
the Dodd-Frank Act
•
the Home Mortgage Disclosure Act of 1975 and Regulation C, requiring
financial institutions to provide information
to enable the
public and public
officials to
determine whether
a financial institution
is fulfilling its
obligation to help
meet the housing needs of the communities they serve;
•
the Equal Credit
Opportunity Act and
Regulation B, prohibiting
discrimination on the
basis of race,
color,
religion,
or other prohibited factors in extending credit;
•
the Fair
Credit Reporting Act
of 1978,
as amended by
the Fair
and Accurate Credit
Transactions Act, and Regulation
V, as well as the rules and
regulations of the FDIC governing the
use and provision of information
to credit reporting
agencies, certain identity theft protections and certain
credit and other disclosures;
•
the Fair
Debt Collection
Practices Act
and Regulation
F,
governing the
manner in
which consumer
debts may
be
collected by collection agencies; and
•
the Real Estate Settlement Procedures Act, or RESPA, and Regulation X, which governs aspects of the settlement
process for residential mortgage loans.
Our deposit operations are also subject to federal laws,
such as:
•
the
FDIA,
which,
among
other
things,
limits
the
amount
of
deposit
insurance
available
per
depositor
to
$250
thousand and imposes other limits on deposit-taking;
•
the Right to
Financial Privacy Act,
which imposes a
duty to maintain
the confidentiality of
consumer financial records
and prescribes procedures for complying with administrative subpoenas
of financial records;
•
the Electronic
Funds Transfer
Act and
Regulation E,
which governs
automatic
deposits to
and withdrawals
from
deposit accounts
and customers’
rights and
liabilities arising
from the
use of
ATMs
and other
electronic banking
services; and
•
the Truth
in Savings
Act and
Regulation DD,
which requires
depository institutions
to provide
disclosures so
that
consumers can make meaningful comparisons about depository
institutions and accounts.
These
laws
and
regulations
mandate
certain
disclosure
requirements
and
regulate
the
manner
in
which
financial
institutions must deal with clients when taking
deposits or making loans to such
clients. We must comply with the applicable
provisions of these consumer protection laws and regulations as part of both
our ongoing client relations and our regulatory
compliance obligations.
Financial Privacy and Cybersecurity
Banking organizations
are
subject to
many federal
and state
laws and
regulations
governing the
collection,
use and
protection
of
customer
information.
Under
the
privacy
protection
provisions
of
the
Gramm-Leach-Bliley
Act
of
1999
and
related regulations,
we are
limited in
our ability
to disclose
non-public
information
about consumers
to nonaffiliated
third
parties. These limitations require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers
to
prevent
disclosure
of
certain
personal
customer
information
to
nonaffiliated
third
parties.
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 guidance, increasingly focus
on risk management
and processes related to information technology and the use
of third parties in the provision of financial services.
In addition to federal laws and regulations, we are subject
to state laws governing customer privacy and cybersecurity.
The Florida Information Protection Act of 2014 requires notification to 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
any
such
breach.
The
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.
15
USCB Financial Holdings, Inc.
2021 10-K
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (“CFPB”) is
an independent regulatory authority housed within the
Federal
Reserve. 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 $10.0 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 our Bank, for compliance with federal consumer
laws remains
largely with those
institutions’ primary 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 our
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/or
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, 2021, we are not
subject to the Volcker Rule because of our asset
size, which is below
the $10.0 billion in assets Volcker
Rule threshold.
Community Reinvestment Act and Fair Lending Requirements
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
banking centers
or mergers.
We are
also subject
to analogous
state CRA
requirements in
Florida and
certain other
states in
which we
may establish
banking
centers. In connection
with their assessments
of CRA
performance, the FDIC
and FOFR assign
a rating of
“outstanding,”
“satisfactory,”
“needs
to
improve,”
or
“substantial
noncompliance.”
The
Bank
received
a
“satisfactory”
CRA
Assessment
Rating
from
both
regulatory
agencies
in
our
most
recent
CRA
examinations.
In
addition
to
substantive
penalties
and
corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA
into account when regulating and supervising
other activities of the bank, including
in
acting on
expansionary proposals such
as when
a bank
submits an
application to
establish bank
centers, 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
.
Call Reports and Examination Cycle
All
banking
institutions,
regardless
of
size,
submit
a
quarterly
call
report
to
their
primary
federal
bank
regulator
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
$5.0
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
16
USCB Financial Holdings, Inc.
2021 10-K
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 in the
U.S., and to
a lesser degree
by short-term and
long-term changes in
the international trade balance and in the fiscal policies of the U.S. government. Future changes in monetary policy and
the
effect of such changes on our business and earnings
in the future cannot be predicted.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects
the regulation of the financial services industry,
and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating
in those states.
Federal and state
regulatory agencies
also periodically propose
and adopt changes
to their regulations
or
change the manner
in which existing
regulations are
applied or
interpreted. The
substance or
impact of pending
or future
legislation or regulation, or
the application thereof, cannot
be predicted, although enactment
of proposed legislation has
in
the past
and may
in the
future affect
the regulatory
structure under
which we
operate and
may significantly
increase our
costs, impede the efficiency
of our internal business
processes, require us to
increase our regulatory
capital or modify our
business
strategy,
or
limit
our
ability
to
pursue
business
opportunities
in
an
efficient
manner.
Our
business,
financial
condition, results
of operations
or prospects
may be
adversely affected,
perhaps materially,
as a
result of
any such
new
legislation or regulations.
The CARES Act and Initiatives Related to COVID-19
On March 27, 2020, the CARES Act was signed into law and provided for approximately $2.2 trillion in direct economic
relief in
response to
the public
health and
economic impacts
of COVID-19.
Many of
the CARES
Act’s programs
are, and
remain, dependent
upon the
direct involvement
of financial
institutions like
us. These
programs have
been implemented
through rules and guidance adopted by federal
departments and agencies, including the
U.S. Department of Treasury,
the
Federal Reserve and
other federal bank
regulatory authorities,
including those with
direct supervisory
jurisdiction over us.
Furthermore, as the COVID-19 pandemic evolves,
federal regulatory authorities continue
to issue additional guidance with
respect
to
the
implementation,
life
cycle,
and
eligibility
requirements
for
the
various
CARES
Act
programs,
as
well
as
industry-specific
recovery
procedures
for
COVID-19.
In
addition,
it
is
possible
that
Congress
will
enact
supplementary
COVID-19 response legislation, including
amendments to the CARES
Act or new bills comparable
in scope to the CARES
Act.
We
continue
to
assess
the
impact
of
the
CARES
Act,
the
Consolidated
Appropriations
Act,
2021
and
the
potential
impact
of
new
COVID-19
legislation
and
other
statutes,
regulations
and
supervisory
guidance
related
to
the
COVID-19
pandemic.
A
principal
provision
of
the
CARES
Act
amended
the
SBA’s
loan
program
to
create
a
guaranteed,
unsecured
loan
program, the Paycheck
Protection Program, or PPP, to fund operational
costs of eligible
businesses, organizations and self-
employed persons
impacted by COVID
-19. These loans
are fully guaranteed
by the SBA
and are eligible
to be forgiven
if
certain conditions
are satisfied.
Additionally,
loan payments
will also
be deferred
for the
first six
months of
the loan
term.
The PPP
commenced on
April 3,
2020 and
was available
to qualified
borrowers through
August 8,
2020. No
collateral or
personal guarantees were required. On December 27, 2020, President Trump signed the Consolidated Appropriations
Act,
2021 into
law which
included the
Economic Aid
to Hard-Hit
Small Businesses,
Nonprofits, and
Venues
Act, or
the HHSB
Act. Among other things, the HHSB Act renewed the PPP,
allocating $284.5 billion for both new first time PPP loans under
the
existing
PPP
and
the
expansion
of
existing
PPP
loans
for
certain
qualified,
existing
PPP
borrowers.
In
addition
to
extending and amending the
PPP,
the HHSB Act also
creates a new grant program
for “shuttered venue operators.”
As of
December 31, 2021, we had 414 active PPP loans remaining
totaling $42.4 million in outstanding principal balances.
The CARES
Act,
as
extended
by certain
provisions
of the
Consolidated
Appropriations
Act,
2021,
permits
banks
to
suspend requirements under
generally accepted accounting
principles (“GAAP”) for
loan modifications
to borrowers affected
by COVID-19 that may
otherwise be characterized
as troubled debt restructurings
and suspend any determination
related
thereto if (i) the
borrower was not
more than 30
days past due
as of December
31, 2019, (ii)
the modifications are
related
to COVID-19, and (iii)
the modification occurs between
March 1, 2020
and the earlier of
60 days after
the date of termination
of the national
emergency or January 1,
2022. Federal bank
regulatory authorities also issued
guidance to encourage banks
to
make
loan
modifications
for
borrowers
affected
by
COVID-19.
As
of
December 31,
2021,
there
were
no
loans
in
our
portfolio in deferral status associated with the COVID-19 pandemic.
See Note 3 “Loans” of the Consolidated Financial Statements
filed herewith for further details.
17
USCB Financial Holdings, Inc.
2021 10-K
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. In addition, the FDIC and the SEC maintains a
website that contains reports and other information that
is filed.
18
USCB Financial Holdings, Inc.
2021 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.
Summary of Risk Factors
Our business is subject to
a number of risks that could
cause actual results to differ
materially from those indicated
by
forward-looking statements
made in this
Form 10-K
or presented
elsewhere from
time to time.
These risks
are discussed
more fully in this Item 1A and include, without limitation,
the following:
Risks Related to our Business and Operations
•
Our
business
operations
and
lending
activities
are concentrated
in
South
Florida,
and
we
are
more
sensitive
to
adverse changes in the local economy than our more geographically
diversified competitors.
•
The small- to medium-sized businesses
to which we lend may have
fewer resources to weather adverse
business
developments, which may impair a borrower's ability to
repay a loan.
•
The ongoing COVID-19 pandemic has adversely impacted
and could continue to adversely impact us.
•
Changes in U.S. trade policies and other global political
factors beyond our control may adversely impact
us.
•
Our lending business is subject to credit risk, which could
lead to unexpected losses.
•
The potential for the replacement or discontinuation of London Inter-bank Offered Rate, or LIBOR, as a benchmark
interest rate could present operational problems and result
in market disruption.
•
Natural disasters and severe weather events in Florida
could have a material adverse impact on us.
•
Our business is subject to interest rate risk.
•
Our allowance for credit losses may not be sufficie
nt to absorb potential losses in our loan portfolio.
•
Our commercial loan portfolio may expose us to increased
credit risk.
•
Our SBA lending program depends on our status as a participant in the SBA's Preferred Lenders Program, and we
face specific risks associated with originating SBA loans
and selling the guaranteed portion thereof.
•
The SBA may not honor its guarantees if we do not originate
loans in compliance with SBA guidelines.
•
Global banking is an important part of our business, which creates
increased BSA/AML risk.
•
We may not recover all amounts that are contractually
owed to us by our borrowers.
•
Non-performing assets take significant time to resolve and
adversely affect us.
•
We engage in
lending secured by
real estate and
may foreclose on
the collateral and
own the underlying
real estate,
subjecting us to the costs and potential risks associated
with the ownership
of real property and other risks.
•
We are subject to certain operational risks, such as fraud
and data processing system failures and errors.
•
We are subject to liquidity risk, which could adversely
affect our financial condition and results of
operations.
•
We have several large depositor relationships, the
loss of which could adversely affect us.
•
The value of our securities in our investment portfolio
may decline in the future.
•
We may not effectively execute on our expansion
strategy.
19
USCB Financial Holdings, Inc.
2021 10-K
•
New lines of business, products, product enhancements
or services may subject us to additional risk.
•
Additional capital we need may not be available on terms
acceptable to us or may dilute our shareholders.
•
Our strategy to grow through mergers or acquisitions may not be
successful or, if successful,
may produce risks in
successfully integrating and managing the merged companies
or acquisitions and may dilute our shareholders.
•
We may lose one or more of our key personnel
or fail to attract and retain other highly qualified personnel.
•
Damage to our reputation could significantly harm our
businesses.
•
We face strong competition and must respond
to rapid technological changes to remain competitive.
•
A failure, interruption, or breach in the security of our or our contracted vendors’ systems could adversely affect us.
•
We rely on other companies to provide key components
of our business infrastructure.
•
Litigation and regulatory actions could subject us to significant
liabilities or restrictions.
•
Certain of our directors may have conflicts of interest
in presenting business opportunities to us.
Risks Related to Our Tax, Accounting
and Regulatory Compliance
•
We may be unable to recognize the benefits of deferred
tax assets.
•
The accuracy of our financial statements could be affected
by our judgments, assumptions or estimates.
•
As a new public company,
we may not create an effective internal control
environment.
•
We operate in a highly regulated environment.
•
Our participation in the SBA PPP loan program exposes
us to noncompliance risk and litigation risk.
•
We face a risk of noncompliance with the Bank
Secrecy Act and other anti-money laundering laws.
•
We are subject to capital adequacy requirements
that may become more stringent.
•
We are periodically subject to examination and scrutiny
by a number of banking agencies.
•
We are subject to numerous laws and regulations
of certain regulatory agencies designed to protect consumers.
Risks Related to Our Class A Common Stock
•
We do not anticipate paying dividends on our common
stock.
•
The market price and trading volume of our Class A common
stock may be volatile.
•
There are significant restrictions in our Articles of Incorporation
that restrict the ability to sell our capital stock.
•
We
are
an
emerging
growth
company
and
have
decided
to
take
advantage
of
certain
exemptions
from
various
reporting and other requirements applicable to emerging growth
companies.
•
We have existing investors that
own a significant amount of
our common stock whose individual
interests may differ
from yours.
•
Provisions in our governing documents and Florida
law may have an anti-takeover effect
and there are substantial
regulatory limitations on changes of control of the Company.
20
USCB Financial Holdings, Inc.
2021 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.
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 portfolio is
secured by properties located in South
Florida, the occurrence of a natural
disaster, such as a hurricane, or a man-made disaster could result in a decline in loan originations, a decline in the value or
destruction of
mortgaged properties
and an
increase in
the risk
of delinquencies,
foreclosures or
loss on
loans originated
by us. We may
suffer further losses
due to the decline
in the value of the
properties underlying our mortgage
loans, which
would have an adverse impact on our results of operations
and financial condition.
A downturn in the local economy generally may lead to loan losses that are not offset by operations in other markets; it
may also reduce the ability
of our customers to grow
or maintain their deposits with
us. For these reasons, any
regional or
local economic
downturn
that
affects
South Florida,
or existing
or prospective
borrowers
or
depositors
in
South Florida,
could have a material adverse effect on our business,
financial condition and results of operations.
In addition, there are
continuing concerns related
to, among other things,
the level of U.S.
government debt and
fiscal
actions that may
be taken to
address that debt,
price fluctuations of key
natural resources, inflation, the
potential resurgence
of economic
and political
tensions
with China,
the Russian
invasion
of Ukraine
and increasing
oil prices
due to
Russian
supply disruptions,
each of
which
may have
a destabilizing
effect
on financial
markets
and economic
activity.
Economic
pressure
on
consumers
and
overall
economic
uncertainty
may
result
in
changes
in
consumer
and
business
spending,
borrowing
and
saving
habits.
These
economic
conditions
and/or
other
negative
developments
in
the
domestic
or
international credit
markets or
economies
may significantly
affect
the markets
in which
we do
business, the
value of
our
loans and investments, and our ongoing operations, costs
and profitability.
The
small-
to
medium-sized
businesses
to
which
we
lend
may
have
fewer
resources
to
weather
adverse
business developments, which may impair a borrower's
ability to repay a loan.
We
target
our
business
development
and
marketing
strategies
primarily
to
serve
the
banking
and
financial
services
needs of small-
to medium-sized businesses, or SMBs, and
the owners and operators of
those businesses. SMBs generally
have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market
shares than their competition, may be
more vulnerable to economic downturns,
often need substantial additional
capital to
expand
or
compete,
and
may
experience
substantial
volatility
in
operating
results,
any
of
which,
individually
or
in
the
aggregate, may impair
their ability as
a borrower to
repay a loan.
These factors may
impact SMBs significantly
more as a
result of the effects of the COVID-19 pandemic. In addition, the success of SMBs often depends on the management skills,
talents and efforts of a small group of
key people, and the death, disability or
resignation of one or more of these individuals
could have
an adverse
impact on
the business
and its
ability to
repay its
loan. If
general economic
conditions negatively
impact the markets in which we operate
or any of our borrowers otherwise are
affected by adverse business developments,
our
SMB
borrowers
may
be
disproportionately
affected
and
their
ability
to
repay
outstanding
loans
may
be
negatively
affected, which could have a material adverse effect
on our business, financial condition and results of operations.
21
USCB Financial Holdings, Inc.
2021 10-K
The ongoing COVID-19
pandemic and resulting
substantial disruption
to global and
domestic economies has
adversely
impacted,
and
could
continue
to
adversely
impact,
our
business
operations,
asset
valuations,
and
financial results.
The
ongoing
COVID-19
pandemic
has
created
global
and
domestic
economic
and
financial
disruptions
that
have
adversely affected, and could
continue to adversely
affect, our business
operations, asset valuations
and financial results.
The pandemic has negatively
impacted the global and
domestic economies, disrupted supply chains,
lowered certain equity
market
valuations
in
certain
sectors,
and
created
significant
volatility
and
disruption
in
financial
markets.
Certain
large,
medium and small
businesses within certain
industries have been
particularly hard hit
both in the U.S.
and internationally,
including
the
aviation
industry,
the
travel,
hotel
and
hospitality
industry,
the
restaurant
industry,
property
management
industry and the retail
industry.
In addition, the pandemic
has resulted in remote
working environments, travel
restrictions,
business
entry
requirements,
and
proposed
return-to-office
vaccination
and
testing
requirements.
Should
the
negative
economic impacts
of COVID-19
persist or
worsen, this
could have
a continued
adverse impact
on our
business, financial
condition and
results of
operations, as
these circumstances
continue to
impact our
core SMB
customers. Additionally,
an
expected recovery
from the
impacts of
COVID-19 may
not occur
as fast
as anticipated,
and any
such recovery
may not
yield the same benefits to us as other financial institutions
or other companies in other industries.
Because there have been no comparable recent global pandemics
or similar disruptions that resulted in a
similar global
impact, the full extent to which the COVID-19 pandemic
will impact our business operations, asset valuations
and financial
results will depend on future developments which remain uncertain and cannot be
predicted at this time. These include the
scope and duration
of the pandemic,
including the
introduction of
new strains
of the virus,
the efficacy
and distribution
of,
and participation in,
vaccination programs, the
continued effectiveness of
our business continuity
plan, the
direct and indirect
impact of the
pandemic on our
employees, customers and third-party
service providers, as
well as other
market participants,
and the effectiveness
of actions
taken by governmental
authorities and
other third parties
in response
to the pandemic.
If
the pandemic continues to
spread, morph or otherwise
results in a continuation
or worsening of
the current economic
and
commercial environments, our business,
financial condition, results of
operations, cash flows, and
ability to pay dividends,
as well as our regulatory capital and liquidity ratios could be
materially adversely affected.
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.
has imposed,
and is
likely 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
U.K. and other
jurisdictions. The
U.S., the U.K.,
and the EU
each imposed
packages of
financial and economic
sanctions
that,
in
various
ways,
constrain
transactions
with
numerous
Russian
entities
and
individuals;
transactions
in
Russian
sovereign debt; and investment, trade, and
financing to, from, or in
certain regions of Ukraine. Moreover, actions by Russia,
and
any
further
measures
taken
by
the
U.S.
or
its
allies,
could
have
negative
impacts
on
regional
and
global
financial
markets and economic conditions. To
the extent changes in the global
political environment, including Russia's invasion
of
Ukraine and the escalating
tensions between Russia
and the U.S., NATO,
the EU and the
UK, have a negative
impact on
us or
on the
markets in
which we
operate, our
business, results
of operations
and financial
condition could
be materially
and adversely impacted.
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
22
USCB Financial Holdings, Inc.
2021 10-K
or incomplete information to us, may lack a U.S. credit history,
or may leave the U.S. without fulfilling their loan obligations,
leaving us with
little recourse
to them personally,
and/or risks
relating to the
value of
collateral. In
order to
manage credit
risk successfully,
we must,
among other
things, maintain
disciplined and
prudent underwriting
standards and
ensure that
our lenders follow those standards. The weakening of
these standards for any reason, such as an
attempt to attract higher
yielding loans,
a lack
of discipline
or diligence
by our
employees in
underwriting and
monitoring loans,
the inability
of our
employees to adequately adapt
policies and procedures to
changes in economic or
any other conditions affecting borrowers
and the quality
of our loan portfolio,
may result in loan
defaults, foreclosures and additional
charge-offs and may necessitate
that we significantly increase our allowance for credit losses, each of which could adversely affect our net income. A failure
to effectively
manage
credit risk
associated
with
our loan
portfolio could
lead to
unexpected
losses and
have a
material
adverse effect on our business, financial condition
and results of operations.
The
potential
for
the
replacement
or
discontinuation
of
London
Inter-bank
Offered
Rate,
or
LIBOR,
as
a
benchmark
interest
rate
and
a
transition
to
an
alternative
reference
interest
rate
could
present
operational
problems and result in market disruption.
In 2017, the
Financial Conduct
Authority announced
that after 2021
it will no
longer compel banks
to submit the
rates
required to
calculate
LIBOR.
In November
2020, the
administrator
of LIBOR
announced
it will
consult
on its
intention to
extend the retirement date
of certain offered
rates whereby the publication
of the one week
and two month LIBOR
offered
rates will cease after December 31, 2021; but, the publication of the remaining
LIBOR offered rates will continue until June
30,
2023.
Given
consumer
protection,
litigation,
and
reputation
risks,
the
bank
regulatory
agencies
have
indicated
that
entering into new
contracts that use
LIBOR as a
reference rate after
December 31, 2021
would create safety
and soundness
risks and that
they will examine
bank practices accordingly.
Therefore, the agencies
encouraged banks to
cease entering
into new contracts that use LIBOR as a reference rate
as soon as practicable and in any event by December
31, 2021.
There is
uncertainty as
to what
rate or
rates may
become accepted
alternatives
to LIBOR,
or what
the effect
of any
such changes
in views
or alternatives
may be
on the
markets for
LIBOR-indexed
financial
instruments. In
response,
the
Board of Governors
of the
Federal Reserve
System, or
the Federal Reserve,
based on
the recommendations
of the New
York
Federal Reserve's Alternative Reference
Rate Committee, has begun
publishing SOFR, which is
intended to replace
LIBOR, and has
encouraged banks to
transition away
from LIBOR as
soon as practicable.
Although SOFR
appears to be
the preferred replacement
rate for LIBOR,
there are conceptual
and technical differences
between LIBOR and
SOFR that
remain unresolved at this time.
Accordingly,
it is unclear if other benchmarks
may emerge or if other rates
will be adopted
outside
of
the
United
States.
The
replacement
of
LIBOR
also
may
result
in
economic
mismatches
between
different
categories of instruments
that now consistently
rely on the
LIBOR benchmark. Markets
are slowly developing
in response
to these
new rates,
and questions
around liquidity
in these
rates and
how to
appropriately adjust
these rates
to eliminate
any economic value transfer at the time of transition remain
a significant concern.
Certain of our financial products are
tied to LIBOR. Inconsistent approaches to
a transition from LIBOR to
an alternative
rate among
different market
participants and
for different
financial products
may cause
market disruption
and operational
problems, which
could adversely
affect us,
including by
exposing us
to increased
interest rate
risk and
associated costs,
including, but not limited to, creating the possibility of disagreements
with counterparties.
Natural disasters and severe weather events in Florida
could have a material adverse impact on our
business,
financial condition and operations.
Our
operations
and
our
customer
base
are
primarily
located
in
South
Florida.
This
region
is
vulnerable
to
natural
disasters
and
severe
weather
events
or
acts
of
God,
such
as
hurricanes
or
tropical
storms,
which
can
have
a
material
adverse impact
on our
loan portfolio,
our overall
business, financial
condition and
operations, cause
widespread property
damage and have
the potential to
significantly depress
the local economies
in which we
operate. Future adverse
weather
events in
Florida could
potentially result
in extensive
and costly
property damage
to businesses
and residences,
depress
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.
23
USCB Financial Holdings, Inc.
2021 10-K
Our business is subject to
interest rate risk, and variations in
interest rates may materially and adversely
affect
our financial performance.
Changes in the interest
rate environment may
reduce our profits. It
is expected that we
will continue to
realize income
from the differential or "spread" between the interest earned on loans, securities
and other interest-earning assets, and the
interest paid on deposits, borrowings
and other interest-bearing
liabilities. Net interest spreads
are affected, in part,
by the
difference
between
the
maturities
and
repricing
characteristics
of
interest-earning
assets
and
interest-bearing
liabilities.
Changes
in
market
interest
rates
generally
affect
loan
volume,
loan
yields,
funding
sources
and
funding
costs.
Our
net
interest
spread
depends
on
many
factors
that
are
partly
or completely
out
of
our
control,
including
competition,
general
economic
conditions,
and
federal
economic
monetary
and
fiscal
policies,
and
in
particular,
the
Federal
Reserve's
policy
determinations with
respect to
interest rates.
After steadily
increasing the
target federal
funds rate
in 2017
and 2018,
the
Federal
Reserve
in
2019
decreased
the
target
federal
funds
rate
by
75
basis
points,
and
in
response
to
the
COVID-19
pandemic in
March 2020,
effected an
additional 150
basis point
decrease to
a range
of 0.00%
to 0.25%
as of
March 31,
2020 where it had remained until the Federal Reserve increased the target federal
funds rate by 25 basis points to a range
of 0.25% to
0.50% in March 2022.
A prolonged low interest
rate environment could negatively
impact our net interest
margin
as assets reprice that are not subject to interest rate floors. The Federal Reserve Board has signaled that further increases
in rates are coming but the exact timing and extent remain
unknown and are largely subject to economic conditions.
While an increase
in interest rates
may increase our
loan yield, it
may adversely affect
the ability of
certain borrowers
with variable rate
loans to pay
the contractual
interest and principal
due to us.
Following an increase
in interest rates,
our
ability to maintain a positive net interest spread is
dependent on our ability to increase our loan offering rates, replace loans
that mature and
repay or
that prepay before
maturity with new
originations at higher
rates, minimize increases
on our
deposit
rates, and maintain an acceptable
level and composition of
funding. We cannot
provide assurances that we
will be able to
increase
our
loan
offering
rates
and
continue
to
originate
loans
due
to
the
competitive
landscape
in
which
we
operate.
Additionally,
we cannot
provide assurances
that we
can minimize
the increases
in our
deposit rates
while maintaining
an
acceptable
level
of
deposits.
Finally,
we
cannot
provide
any
assurances
that
we
can
maintain
our
current
levels
of
noninterest-bearing deposits as customers may seek higher
-yielding products when interest rates increase.
Accordingly,
changes
in
levels
of
interest
rates
could
materially
and
adversely
affect
our
net
interest
margin,
asset
quality, loan origination
volume, average loan portfolio balance, liquidity,
and overall profitability.
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
is
expected
to
become
applicable
to
us
on
January
1,
2023
after
the
FASB
elected
to
delay
implementation
for
smaller
reporting companies. CECL
will require financial
institutions to estimate
and develop a
provision for credit
losses over the
lifetime of
the loan
at origination,
as opposed
to reserving
for incurred
or probable
losses up
to the
balance sheet
date.
Under the CECL model, expected
credit deterioration would be reflected in
the income statement in the
period of origination
or acquisition of a loan,
with changes in expected
credit losses due to further
credit deterioration or improvement
reflected
in the
periods in
which the
expectation changes.
Accordingly,
implementation of
the CECL
model could
require financial
institutions, like
us, to
increase our
allowances for
credit losses
from levels
in place
prior to
the implementation
of CECL.
Moreover,
the
CECL
model
may
create
more
volatility
in
our
level
of
allowance
for
credit
losses.
If
we
are
required
to
materially increase our
level of
allowance for credit
losses for any
reason, such increase
could adversely affect
our business,
prospects, cash flow, liquidity,
financial condition and results of operations.
24
USCB Financial Holdings, Inc.
2021 10-K
Our commercial loan portfolio may expose us to increased
credit risk.
Commercial business
and real
estate loans
generally have
a higher
risk of
loss because
loan balances
are typically
larger
than
residential
real
estate
and
consumer
loans
and
repayment
is
usually
dependent
on
cash
flows
from
the
borrower’s business or the
property securing the loan. Our
commercial business loans are primarily made
to small business
and middle market customers. These loans typically
involve repayment that depends upon income
generated, or expected
to be generated, by the property securing the loan
and/or by the cash flow generated by the business borrower and
may be
adversely affected by changes in the economy or
local market conditions. These loans expose a
lender to the risk of having
to liquidate the collateral securing
these loans at times when there
may be significant fluctuation of
commercial real estate
values or to the
risk of inadequate cash flows to
service the commercial loans. Unexpected deterioration in
the credit quality
of our
commercial business
and/or real
estate loan
portfolio could
require us
to increase
our allowance
for credit
losses,
which would
reduce our
profitability and
could have
an adverse
effect on
our business,
financial condition,
and results
of
operations.
Commercial construction loans generally
have a higher risk of
loss due to the assumptions
used to estimate the value
of property
at completion
and the
cost of
the project,
including interest.
It can
be difficult
to accurately
evaluate the
total
funds required
to complete
a project,
and construction
lending often
involves the
disbursement
of substantial
funds with
repayment dependent, in large part, on the success of the ultimate project rather than the ability of a borrower or guarantor
to repay the loan from sources other than the subject project. If the assumptions and estimates are inaccurate, the value of
completed property
may fall
below the
related loan
amount. If we
are forced to
foreclose on
a project
prior to
completion,
we may
be
unable
to
recover
the
entire
unpaid
portion
of the
loan,
which
would
lead
to
losses.
In
addition,
we
may
be
required to fund additional amounts to complete a project,
incur taxes, maintenance and compliance costs for
a foreclosed
property and
may have
to hold
the property
for an
indeterminate
period of
time, any
of which
could adversely
affect
our
business, prospects, cash flow,
liquidity, financial
condition and results of operations.
Our
SBA
lending
program
is dependent
upon
the
federal
government
and
our status
as
a participant
in the
SBA's Preferred
Lenders Program,
and we
face specific
risks associated
with
originating SBA
loans and
selling
the guaranteed portion thereof.
We
have
been
approved
by
the
SBA
to
participate
in
the
SBA's
Preferred
Lenders
Program.
As
an
SBA
Preferred
Lender,
we enable
our clients
to obtain
SBA loans
without being
subject to
the potentially
lengthy SBA
approval process
necessary
for
lenders
that
are
not
SBA
Preferred
Lenders.
The
SBA
periodically
reviews
the
lending
operations
of
participating
lenders
to
assess,
among
other
things,
whether
the
lender
exhibits
prudent
risk
management.
When
weaknesses are identified, the SBA may request corrective actions
or impose enforcement actions, including revocation of
the lender's
Preferred Lender
status. If
we lose
our status
as an
SBA Preferred
Lender,
we may
lose some
or all
of our
customers to
lenders who
are SBA
Preferred Lenders,
which could
adversely affect
our business,
financial condition
and
results of operations.
We generally sell the guaranteed
portion of our SBA 7(a) loans
in the secondary market. These sales
have resulted in
both premium income for us
at the time of
sale and created a stream
of future servicing income. There
can be no assurance
that we will be able to continue originating these loans, that a secondary market for these loans will continue to exist or that
we will continue to realize
premiums upon the sale of
the guaranteed portion of
these loans. When we sell
the guaranteed
portion of our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on
the non-guaranteed
portion of a loan, we share any loss and recovery related
to the loan pro-rata with the SBA.
The laws, regulations and
standard operating procedures
that are applicable to
SBA loan products may
change in the
future. We
cannot predict
the effects
of these
changes on
our business
and profitability.
Because government
regulation
greatly
affects
the
business
and
financial
results
of
all
commercial
banks
and
bank
holding
companies,
especially
our
organization, changes in the laws, regulations
and procedures applicable to SBA
loans could adversely affect our
ability to
operate profitably.
In addition, the
aggregate amount of
SBA 7(a) and 504
loan guarantees by the
SBA must be approved
each fiscal year by the federal
government. We cannot predict
the amount of SBA 7(a)
loan guarantees in any given fiscal
year. If the federal government were to reduce the amount of SBA loan guarantees, such reduction
could adversely impact
our SBA lending
program, including making and
selling the guaranteed portion
of fewer SBA
7(a) and 504 loans.
In addition,
any default by
the U.S. government
on its obligations
or any prolonged
government shutdown
could, among
other things,
impede our ability to originate
SBA loans or sell such loans
in the secondary market, which
could materially and adversely
affect our business, financial condition and results
of operations.
The SBA may not honor its guarantees if we do not originate
loans in compliance with SBA guidelines
.
SBA lending programs
typically guarantee
75.0% of the
principal on
an underlying
loan. If the
SBA establishes
that a
loss on
an
SBA guaranteed
loan
is attributable
to significant
technical
deficiencies
in the
manner
in which
the loan
was
25
USCB Financial Holdings, Inc.
2021 10-K
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. Our failure to strictly
adhere to the terms and
requirements of our OFAC
license or our failure
to adequately manage our
BSA/AML compliance
risk
in
light
of
our correspondent
banking
relationship
with
foreign
financial
institutions
and
international
private
banking
could result
in regulatory or
other actions
being taken
against us, which
could significantly
increase our compliance
costs
and materially and adversely affect our results of
operations.
We may not recover all amounts that are contractually
owed to us by our borrowers.
We are
dependent on
the collection
of loan
principal, interest,
and fees
to partially
fund our
operations. A
shortfall in
collections and proceeds may impair our ability to fund
our operations or to repay our existing debt.
When
we
lend
funds,
commit
to
fund
a
loan
or
enter
into
a
letter
of
credit
or
other
credit-related
contract
with
a
counterparty, we incur credit risk. The
credit quality of our
portfolio can have a
significant impact on our
earnings. We expect
to experience charge-offs and delinquencies on our loans
in the future. Many borrowers have been negatively impacted by
the COVID-19 pandemic and related
economic consequences, and may continue
to be similarly or more severely
affected
in the future. Our
customers' actual operating results may be
worse than our underwriting contemplated when we
originated
the loans, and in these
circumstances, we could incur
substantial impairment or loss
of the value on these
loans. We may
fail to identify problems because our customer did not report them in
a timely manner or, even if the customer did report the
problem, we may fail to address it quickly enough or at all, or some loans, due
to market circumstances, may not be able to
be fully rehabilitated.
Even if customers
provide us with
full and accurate
disclosure of
all material information
concerning
their businesses, we may misinterpret or incorrectly analyze this
information. Mistakes may cause us to make loans
that we
otherwise would not have made or to fund
advances that we otherwise would not
have funded, either of which could result
in losses
on loans,
or necessitate
that we
significantly
increase our
allowance
for loan
and lease
losses. As
a result,
we
could suffer
loan losses
and have
non-performing loans,
which could
have a
material adverse
effect on
our net
earnings
and results of operations and financial condition, to the extent
the losses exceed our allowance for loan and lease
losses.
Some of our
loans are secured
by a lien
on specified collateral
of the borrower
and we may
not obtain or
properly perfect
our liens or the value of the collateral securing any particular loan may not be sufficient to protect us from suffering a partial
or complete
loss
if the
loan becomes
non-performing
and we
proceed to
foreclose
on or
repossess
the collateral.
With
respect
to
loans
that
we
originate
for
condominium
or
homeowners'
associations,
or
the
Associations,
these
loans
are
primarily secured by and rely
upon the cash flow received
by the Associations from
payments received from their
property
owners, as well
as cash on
hand. These Associations
rely upon payments
received from their
property owners in
order to
perform
on
these
loans
and
for
the
loan
collateral.
Accordingly,
our
ability
to
recover
amounts
on
non-performing
loans
made to Associations
is dependent
upon the Association
having sufficient
cash on hand
for repayment of
the loan and/or
having
the
ability
to
impose
assessments
on
its
property
owners,
some
of
whom
may
not
have
the
ability
to
pay
such
assessments. In such events, we could suffer loan losses,
which could have a material adverse effect on our
net earnings,
allowance for loan and lease losses, financial condition,
and results of operations.
26
USCB Financial Holdings, Inc.
2021 10-K
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.
Our
non-performing
assets
adversely
affect
our
net
income
in
various
ways.
We
do
not
record
interest
income
on
nonaccrual loans
or 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.
These 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,
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.
In the
course
of our
business,
we may
foreclose on
and take
title to
real
estate.
As a
result, we
could
be subject
to
environmental liabilities with
respect to these properties.
We may be held
liable to a governmental
entity or to third
parties
for
property
damage,
personal
injury,
investigation
and
clean-up
costs
incurred
by
these
parties
in
connection
with
environmental
contamination
or
may
be
required
to
investigate
or
clean
up
hazardous
or
toxic
substances
or
chemical
releases at a property.
The costs associated with
investigation or remediation
activities could be substantial.
In addition, if
we are the owner or former owner
of a contaminated site, we may be
subject to common law claims by
third parties based
on damages and
costs resulting
from environmental
contamination emanating
from the
property.
If we become
subject to
significant environmental liabilities, our business, financial condition
and results of operations could be adversely affecte
d.
We
are
subject
to
certain
operational
risks,
including,
but
not
limited
to,
customer,
employee
or
third-party
fraud and data processing system failures and errors.
Employee errors and employee or
customer misconduct could subject us
to financial losses or
regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding unauthorized
activities from us, improper
or unauthorized activities on behalf of our customers or improper use of confidential information. It is not
always possible to
prevent employee
errors and
misconduct, and
the precautions we
take to
prevent and
detect this
activity may
not be
effective
in all cases. Employee errors could also subject us to financial
claims for negligence.
We have
implemented a
system of
internal controls
designed to
mitigate operational
risks, including
data processing
system failures
and errors
and customer
or employee
fraud, as
well as
insurance
coverage
designed to
protect us
from
material
losses
associated
with
these
risks,
including
losses
resulting
from
any
associated
business
interruption.
If
our
27
USCB Financial Holdings, Inc.
2021 10-K
internal controls fail
to prevent or
detect an
occurrence, or if
any resulting loss
is not
insured or exceeds
applicable insurance
limits, it could adversely affect our business,
prospects, cash flow, liquidity,
financial condition and results of operations.
When we originate loans, we rely
heavily upon information supplied by third parties,
including the information contained
in credit
applications, property
appraisals, title
information, equipment
pricing and
valuation and
employment and
income
documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon
which
we
rely
is
misrepresented,
either
fraudulently
or
inadvertently,
and
the
misrepresentation
is
not
detected
prior
to
funding,
the value
of
the
loan may
be significantly
lower
than expected,
or we
may
fund a
loan that
we
would not
have
funded or
on terms
that do
not comply
with our
general underwriting
standards. Whether
a misrepresentation
is made
by
the applicant, the borrower,
one of our employees or another
third party,
we generally bear the risk of
loss associated with
the misrepresentation. A loan
subject to a material
misrepresentation is typically
unsellable or subject
to repurchase if it
is
sold prior to detection of the
misrepresentation. The sources of the
misrepresentations are often difficult
to locate, and it is
often difficult
to recover
any
of the
resulting monetary
losses we
may suffer,
which
could
adversely
affect
our business,
financial condition and results of operations.
We are subject to liquidity risk, which could adversely
affect our financial condition and results
of operations.
Effective liquidity management is essential for the operation of our business. Although we
have implemented strategies
to maintain
sufficient
and
diverse
sources of
funding
to accommodate
planned,
as well
as unanticipated,
liquidity
needs
(including changes in assets,
liabilities, and off-balance sheet
commitments under various economic
conditions), an inability
to
raise
funds
through
deposits,
borrowings,
the
sale
of
investment
securities
and
other
sources
could
have
a
material
adverse effect
on our
liquidity. Our access
to funding
sources in
amounts adequate to
finance our
activities could
be impaired
by factors that affect us specifically or the financial services
industry in general. Factors that could detrimentally impact
our
access to liquidity sources include a decrease in the level of our business activity due to a market disruption, a decrease in
the borrowing capacity assigned to
our pledged assets by our
secured creditors, competition from other
financial institutions
which could drive up the
costs of deposits or adverse
regulatory action against us. Deterioration in
economic conditions and
the loss of
confidence in financial
institutions may increase
our cost of
funding and limit
our access to
some of our
customary
sources of liquidity,
including, but not
limited to, inter-bank
borrowings and borrowings
from the Federal
Home Loan Bank
of Atlanta, or
the FHLB, and
the Federal Reserve
Bank of Atlanta.
Our ability to
acquire deposits
or borrow
could also be
impaired by
factors that
are not
specific to
us, such
as a
severe disruption
of the
financial markets
or negative
views and
expectations
about the
prospects
for the
financial
services
industry generally
as
a result
of conditions
faced
by banking
organizations
in
the
domestic
and
international
credit
markets.
Any decline
in
available
funding
or cost
of liquidity
could
adversely impact our ability to originate loans, invest in securities, meet our expenses
or fulfill obligations such as repaying
our borrowings or
meeting deposit withdrawal demands,
any of which
could, in turn,
have an adverse
effect on our
business,
financial condition, and results of operations.
We have several
large depositor relationships,
the loss of which
could force us to
fund our business
through
more expensive and less stable sources.
Withdrawals of deposits by any
one of our largest depositors
could force us to
rely more heavily on more
expensive and
less stable funding sources.
Consequently,
the occurrence of any
of these events could
have a material adverse
effect on
our business, financial condition and results of operations.
The value of our securities in our investment portfolio
may decline in the future.
The
fair
market
value
of
our
investment
securities
may
be
adversely
affected
by
general
economic
and
market
conditions, including
changes
in interest
rates,
credit
spreads, and
the
occurrence
of any
events
adversely
affecting
the
issuer of particular securities in our investments
portfolio or any given market segment or industry in
which we are invested.
Any of these factors, among others, could cause OTTI and realized and/or unrealized losses in future periods and declines
in
other
comprehensive
income,
which
could
have
an
adverse
effect
on
our
business,
financial
condition
and
results
of
operations.
The
process
for
determining
whether
impairment
of
a
security
is
OTTI
usually
requires
complex,
subjective
judgments about the
future financial performance
and liquidity of
the issuer,
any collateral underlying
the security and
our
intent and ability to hold the security for a sufficient period of time to allow for any anticipated recovery in fair value, in order
to assess the probability of receiving
all contractual principal and interest
payments on the security.
Our failure to correctly
and timely assess
any impairments or
losses with respect
to our securities
could have an
adverse effect
on our business,
financial condition and results of operations.
28
USCB Financial Holdings, Inc.
2021 10-K
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
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.
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 diluti
ve 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.
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.
29
USCB Financial Holdings, Inc.
2021 10-K
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
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 offs
et acquisition costs.
Our acquisition
activities could
require us
to use
a substantial
amount of
cash, other
liquid assets,
and/or incur
debt.
Also,
if
we
finance
acquisitions
by issuing
equity
securities,
our
existing
shareholders’
ownership
may be
diluted,
which
could negatively
affect the
market price of
our Class
A common stock.
Additionally,
if the goodwill
recorded in
connection
with our
potential future
acquisitions
were determined
to be
impaired,
then
we would
be required
to recognize
a charge
against our
earnings, which
could materially
and adversely
affect our
results of
operations during
the period
in which
the
impairment was
recognized. Acquisitions
may also
involve the
payment of
a premium
over book
and market
values and,
therefore, some
dilution of
our tangible
book value
and net
income per
common share
may occur
in connection
with any
future transaction.
As a result, we
may not achieve the
anticipated benefits of
any such merger or
acquisition, and we
may incur costs
in
excess
of
what
we
anticipate.
Our
failure
to
successfully
evaluate
and
execute
mergers,
acquisitions
or
investments
or
otherwise adequately address and
manage the risks associated
with such transactions could have
a material adverse effect
on our business, results of operations
and financial condition, including short-term and long-term liquidity.
30
USCB Financial Holdings, Inc.
2021 10-K
The loss of
one or more
of our key
personnel, or our
failure to attract
and retain other
highly qualified personnel
in the future, could harm our business.
Our future success will, to some extent, depend on the continued service of our directors, executive officers and senior
management
team.
The
loss
of
the
services
of
any
of
these
individuals
could
have
a
significant
adverse
effect
on
our
business.
In
particular,
we
believe
that
retaining
Luis
de
la
Aguilera,
our
President
and
Chief
Executive
Officer,
Robert
Anderson, our Chief Financial Officer,
and Benigno Pazos, our Chief Credit Officer,
is important to our continuing success.
Although
we
have
entered
into
employment
and
other
agreements
with
certain
members
of
our
executive
and
senior
management team,
including Mr.
de la
Aguilera and
Mr.
Anderson, no
assurance can
be given
that these
individuals will
continue to be employed by us. The loss of any of these individuals could negatively affect our ability to achieve our growth
strategy and could have a material adverse effect
on our business and results of operations.
We also need to continue
to attract and retain other senior
management and to recruit qualified
individuals to succeed
existing
key
personnel
to
ensure
the continued
growth
and successful
operation
of our
business.
We
may
be unable
to
attract or
retain qualified
management
and other
key
personnel
in the
future due
to the
intense competition
for qualified
personnel
among
companies
in
the
financial
services
business
and
related
businesses.
The
loss
of
the
services
of any
senior management personnel, or the inability to recruit
and retain qualified personnel in the future, could
have an adverse
effect on our business, results of
operations, financial condition and prospects.
Additionally,
to attract and retain personnel
with appropriate
skills and
knowledge to
support our
business, we
may offer
a variety
of benefits,
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
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
31
USCB Financial Holdings, Inc.
2021 10-K
ability to address
the needs of
our customers by using
technology to provide products
and services that
will satisfy customer
demands for convenience,
as well as to
create additional efficiencies
in our operations.
We may not
be able to implement
new technology-driven products
and services effectively
or be successful
in marketing these
products and services
to our
customers. Failure to keep pace successfully with technological change affecting the financial services industry could harm
our
ability
to
compete
effectively
and
could
have
an
adverse
effect
on
our
business,
financial
condition
and
results
of
operations. As
these
technologies
improve
in the
future,
we may
be required
to make
significant
capital
expenditures
in
order to remain
competitive, which may increase
our overall expenses
and have an
adverse effect on our
business, financial
condition and results of operations.
A
failure,
interruption,
or
breach
in
the
security
of
our
systems,
or
those
of
our
contracted
vendors,
could
disrupt
our
business,
result
in
the
disclosure
of
confidential
information,
damage
our
reputation,
and
create
significant financial and legal exposure.
Although we
devote significant
resources to maintain
and regularly update
our systems and
processes that are
designed
to
protect
the
security
of
our
computer
systems,
software,
networks
and
other
technology
assets,
as
well
as
the
confidentiality,
integrity and availability
of information belonging
to us and
our customers,
there is no
assurance that
all of
our
security
measures
will
provide
absolute
security.
Many
financial
institutions,
including
us,
have
been
subjected
to
attempts
to
infiltrate
the
security
of
their
websites
or
other
systems,
some
involving
sophisticated
and
targeted
attacks
intended
to
obtain
unauthorized
access
to
confidential
information,
destroy
data,
disrupt
or
degrade
service,
sabotage
systems or cause
other damage, including through
the introduction of
computer viruses or malware,
cyber-attacks and other
means. We
have been
targeted by
individuals and
groups using
phishing campaigns,
pretext calling,
malicious code
and
viruses and expect to
be subject to such
attacks in the future.
While we have not
experienced a material cyber
-incident or
security breach that has
been successful in compromising
our data or systems
to date, we can
never be certain that
all of
our systems are entirely free from vulnerability to breaches
of security or other technological difficulties or
failures.
Despite efforts to
ensure the integrity
and security of
our systems, it
is possible that
we may not
be able to
anticipate,
detect or recognize
threats to our
systems or to
implement effective
preventive measures
against all efforts
to breach our
security inside or outside our business, especially because the techniques used to attack our systems
change frequently or
are
not
recognized
until
launched,
and
because
cyber-attacks
can
originate
from
a
wide
variety
of
sources,
including
individuals or groups who are associated with
external service providers or who are or
may be involved in organized crime
or linked
to terrorist
organizations or
hostile foreign
governments. Those
parties may
also attempt
to fraudulently
induce
employees, customers, third-party service providers or other users of our systems to disclose sensitive information in order
to gain access
to our data or
that of our customers
or clients. Similar
to other companies,
our risks and exposures
related
to cybersecurity
attacks have
increased as
a result
of the COVID
-19 pandemic,
the related
increased reliance
on remote
working and increase in digital operations. Such
risks and exposures are expected to remain high
for the foreseeable future
due to
the rapidly
evolving nature
and sophistication
of these
threats and
the expanding
use of
technology,
as our
web-
based product offerings grow and we expand internal
usage of web-based applications.
A successful
penetration
or
circumvention
of the
security
of our
systems,
including those
of our
third-party
vendors,
could
cause
serious
negative
consequences,
including
significant
disruption
of
our
operations,
misappropriation
of
confidential information,
or damage
to computers
or systems,
and may
result in violations
of applicable
privacy and
other
laws, financial loss,
loss of confidence
in our security measures,
customer dissatisfaction, increased
insurance premiums,
significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on our business,
financial condition, results of operations, and future prospects.
We
rely
on
other
companies
to
provide
key
components
of
our
business
infrastructure
and
our
operations
could
be
interrupted
if
our
third-party
service
providers
experience
difficulty,
terminate
their
services
or
fail
to
comply with banking regulations.
Third parties
provide key
components of
our business
operations such
as data
processing, recording
and monitoring
transactions,
online
banking
interfaces
and services,
Internet
connections
and
network
access.
While
we
have
selected
these third-party
vendors carefully,
performing upfront
due diligence
and ongoing
monitoring activities,
we do
not control
their actions. Any problems caused by these third parties, including those resulting from disruptions in services provided by
a
vendor
(including
as
a
result
of
a
cyber-attack,
other
information
security
event
or
a
natural
disaster),
financial
or
operational difficulties
for the vendor,
issues at third-party
vendors to our
vendors, failure of
a vendor to
handle current or
higher volumes, failure of a vendor to provide services for any reason,
poor performance of services, failure to comply with
applicable laws
and regulations,
or fraud
or misconduct
on the
part of
employees of
any of
our vendors,
could adversely
affect our ability
to deliver products
and services to
our customers, our
reputation and our
ability to conduct
our business,
which could
adversely affect
our business,
prospects, cash
flow,
liquidity,
financial condition
and results
of operations.
In
certain
situations,
replacing
these
third-party
vendors
could
also
create
significant
delay,
expense,
and
operational
difficulties, which
could also
adversely affect
our business.
Accordingly,
use of
such third
parties creates
an unavoidable
32
USCB Financial Holdings, Inc.
2021 10-K
and
inherent
risk
to
our
business
operations.
Such
risk
is
generally
expected
to
remain
elevated
until
the
COVID-19
pandemic
subsides
and
may
remain
elevated
thereafter,
as
many
of
our
vendors
have
also
been,
and
may
further
be,
affected by increased
reliance on remote work
environments, market volatility
and other factors that
increase their risks
of
business disruption or
that may otherwise
affect their ability
to perform under
the terms of
any agreements with
us or provide
essential services.
Our operations could be interrupted or
materially impacted if any of our
third-party service providers fail to comply
with
banking regulations
and other
applicable laws.
The Federal
Reserve, FDIC,
the Florida
Office of
Financial Regulation,
or
the FOFR, and other regulators expect financial institutions to be responsible for all aspects of their performance, including
aspects that they delegate
to third parties. Accordingly,
we will be responsible
for deficiencies in
our oversight and control
of our third party relationships
and in the performance
of the parties with which
we have these relationships.
As a result, if
our regulators
conclude that
we have
not exercised
adequate oversight
and control
over our
third party
vendors or
other
ongoing third party business
relationships or that such
third parties have not performed
appropriately,
we could be subject
to remedial and/or enforcement actions,
including civil money penalties or
other administrative or judicial penalties
or fines
as well as requirements for customer remediation, any
of which could have a material
adverse effect our business, financial
condition or results of operations.
Litigation and regulatory actions,
including possible enforcement actions, could subject
us to significant fines,
penalties,
judgments
or
other
requirements
resulting
in
increased
expenses
or
restrictions
on
our
business
activities.
In the normal course of
business, from time to time, we
have in the past and
may in the future be
named as a defendant
in various
legal actions
arising in
connection with
our current
and/or prior
business
activities. Legal
actions could
include
claims for substantial compensatory
or punitive damages
or claims for indeterminate
amounts of damages.
Further, in
the
future
our
regulators
may
impose
consent
orders,
civil
money
penalties,
matters
requiring
attention,
or
similar
types
of
supervisory penalties
or criticism.
We may
also, from
time to
time, be
the subject
of subpoenas,
requests for
information,
reviews, investigations and proceedings (both formal and informal) by governmental agencies
regarding our current and/or
prior
business
activities.
Any
such
legal
or
regulatory
actions
may
subject
us
to
substantial
compensatory
or
punitive
damages,
significant
fines,
penalties,
obligations
to
change
our
business
practices
or
other
requirements
resulting
in
increased
expenses,
diminished
income
and
damage
to
our
reputation.
Our
involvement
in
any
such
matters,
whether
tangential or otherwise and
even if the matters are
ultimately determined in our
favor, could
also cause significant harm
to
our reputation and divert management attention away from the operation of
our business. Further, any
settlement, consent
order or adverse
judgment in
connection with
any formal
or informal
proceeding or
investigation by
government agencies
may result in
litigation, investigations or proceedings
as other litigants
and government agencies begin
independent reviews
of the same
activities. As a
result, the outcome of
legal and regulatory
actions could have
an adverse effect on
our business,
results of operations and results of operations.
Certain of
our directors may
have conflicts
of interest in
determining whether to
present business
opportunities
to us or another entity with which they are, or may
become, affiliated.
Certain of our
directors are or may
become subject to fiduciary
obligations in connection with
their service on the
boards
of
directors
of
other
corporations,
including
financial
institutions.
A
director's
association
with
other
financial
institutions,
which give rise to fiduciary or contractual obligations to
such institutions, may create conflicts of interest.
To
the extent that
any of our directors become aware of
acquisition opportunities that may be
suitable for entities other than us
to which they
have fiduciary
or contractual
obligations, or they
are presented
with such
opportunities in
their capacities
as fiduciaries
to
such
entities,
they
may
honor
such
obligations
to
such
other
entities.
You
should
assume
that
to
the
extent
any
of
our
directors become aware
of an opportunity
that may be
suitable both for
us and another
entity to which
such person has
a
fiduciary obligation
or contractual
obligation
to present
such
opportunity as
set forth
above,
he or
she may
first give
the
opportunity to such other entity
or entities and may give
such opportunity to us only
to the extent such other
entity or entities
reject
or
are
unable
to
pursue
such
opportunity.
In
addition,
you
should
assume
that
to
the
extent
any
of
our
directors
become
aware
of
an
acquisition
opportunity
that
does
not
fall
within
the
above
parameters,
but
that
may
otherwise
be
suitable for us, he or she may not present such opportunity
to us.
Investors have 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
33
USCB Financial Holdings, Inc.
2021 10-K
related investment fund
thereof, directly or
indirectly, pursues or acquires such opportunity
for itself, directs
such opportunity
to another person, or does not present such opportunity
to us.
Risks Related to Our Tax,
Accounting and Regulatory Compliance
Our
ability
to
recognize
the
benefits
of
deferred
tax
assets
is
dependent
on
future
cash
flows
and
taxable
income and may be materially impaired upon significant
changes in ownership of our common stock.
We recognize the expected future tax
benefit from deferred tax assets when
it is more likely than
not that the tax benefit
will be realized. Otherwise, a valuation allowance is applied against deferred tax assets, reducing the value of such assets.
Assessing
the
recoverability
of
deferred
tax
assets
requires
management
to
make
significant
estimates
related
to
expectations
of
future
taxable
income
from
all
sources,
including
reversal
of
taxable
temporary
differences,
forecasted
operating
earnings
and
available
tax
planning
strategies.
Estimates
of
future
taxable
income
are
based
on
forecasted
income from operations and the application of existing tax laws in each jurisdiction. The improved risk profile of the Bank is
a key
component used
in the determination
of our
ability to
realize the
expected future
benefit of
our deferred
tax assets.
To
the extent that future taxable income differs
significantly from estimates as a result
of the interest rate environment
and
loan growth capabilities or other factors, our ability to realize
the net deferred tax assets could be negatively
affected.
Subject to certain exceptions, our Class A common stock is subject
to transfer restrictions as set forth in our Articles of
Incorporation that are
designed to preserve
our deferred tax
assets. Notwithstanding these
protective provisions, the
Articles
of Incorporation include
an exception that
allows our Significant
Investors the right
to effect any
transfer that would
otherwise
be prohibited, which transfer could result in the loss of the deferred
tax assets.
Additionally,
significant future
issuances of
common stock
or common
stock equivalents,
or changes
in the
direct or
indirect ownership
of our
common stock
or common
stock equivalents,
could cause
an ownership
change and
could limit
our ability to
utilize our net
operating loss carryforwards
and other tax
attributes pursuant
to Section 382
and Section 383
of the Internal Revenue Code.
Future changes in tax law
or changes in ownership structure
could limit our ability to utilize
our recorded net deferred tax assets.
The
accuracy
of
our
financial
statements
and
related
disclosures
could
be
affected
if
the
judgments,
assumptions or estimates used in our critical accounting
policies are inaccurate.
The
preparation
of
our
financial
statements
and
related
disclosures
in
conformity
with
GAAP
requires
us
to
make
judgments,
assumptions
and
estimates
that
affect
the
amounts
reported
in
our
consolidated
financial
statements
and
accompanying notes. In some cases, management
must select the accounting policy or method
to apply from two or more
alternatives,
any of
which
may be
reasonable
under
the circumstances,
yet
which
may result
in
our
reporting
materially
different
results
than
would
have
been
reported
under
a
different
alternative.
Certain
accounting
policies
are
critical
or
significant to presenting our financial
condition and results of
operations. Our critical accounting policies, which
are included
in the section captioned
"Management's Discussion and
Analysis of Financial Condition
and Results of Operations"
in this
Annual Report
on Form
10-K, describe
those significant
accounting
policies and
methods used
in the
preparation of
our
consolidated financial statements that we
consider critical because they
require judgments, assumptions and estimates that
materially affect
our consolidated
financial
statements
and related
disclosures.
As a
result,
if future
events
or regulatory
views concerning such
analyses differ significantly from
the judgments, assumptions and
estimates in our
critical accounting
policies, those
events or
assumptions could
have a
material impact
on our
consolidated financial
statements and
related
disclosures, in each
case resulting in
our need to
revise or restate
prior period financial
statements, cause
damage to our
reputation and
the price
of our
Class A
common stock
and adversely
affect
our business,
prospects, cash
flow,
liquidity,
financial condition and results of operations.
As a new public
company, we may not efficiently or effectively create an
effective internal control environment,
and any
future failure
to maintain
effective internal
control over
financial reporting
could impair
the reliability
of
our financial
statements, which
in turn could
harm our business,
impair investor
confidence in the
accuracy and
completeness of
our financial
reports and
our access
to the
capital markets,
cause the
price of
our Class
A common
stock to decline and subject us to regulatory penalties.
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 will be
required to
certify our
compliance with
Section
404 of
the Sarbanes-Oxley
Act beginning
with our
second annual
report on
Form 10-K,
which will
require us
to annually
34
USCB Financial Holdings, Inc.
2021 10-K
furnish a
report by
management on
the effectiveness
of our
internal control
over financial
reporting. When
evaluating our
internal controls over financial reporting, we may identify material
weaknesses that we may not be able to
remediate in time
to meet
the applicable
deadline imposed
upon us
for compliance
with the
requirements
of Section
404 of
the Sarbanes-
Oxley Act. We are in the process of
reviewing our formal policies, processes and practices related to financial reporting
and
to the identification of key
financial reporting risks, assessment of their potential
impact and linkage of those
risks to specific
areas and controls within our organization.
If we fail to achieve and maintain the adequacy of
our internal controls, as such standards are modified, supplemented,
or amended from time to
time, we may not
be able to ensure
that we will be able
to conclude on an ongoing
basis that we
have
effective
internal
controls
over
financial
reporting
in
accordance
with
Section
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, we will
not be
required to include
an attestation report
on internal
control
over financial
reporting issued
by our
independent registered
public accounting
firm. To
prepare for
eventual compliance
with the auditor attestation requirement of
Section 404 of Sarbanes-Oxley once
we no longer qualify as
an emerging growth
company,
we are
currently
engaged in
a process
to document
and
evaluate our
internal control
over financial
reporting,
which is both costly and challenging. In
this regard, we will need to dedicate
internal resources, potentially engage
outside
consultants and adopt
a detailed work
plan to assess
and document the
adequacy of internal
control over financial
reporting,
continue
steps
to
improve
control
processes
as
appropriate,
validate
through
testing
that
controls
are
functioning
as
documented
and
continue
to
refine
our
reporting
and
improvement
process
for
internal
control
over
financial
reporting.
Despite our
efforts, there
is a
risk that
we will
not be
able to
conclude, within
the prescribed
time frame
or at
all, that
our
internal control over financial reporting is effective as required by
Section 404 of Sarbanes-Oxley. If we identify one or more
material
weaknesses,
it
could
result
in
an
adverse
reaction
in
the
financial
markets
due
to
a
loss
of
confidence
in
the
reliability of our financial statements.
We
operate
in
a
highly
regulated
environment,
and
the
laws
and
regulations
that
govern
our
operations,
corporate governance,
executive compensation
and accounting
principles, or
changes in
them, or
our failure
to
comply with them, could adversely affect us.
We operate in a
highly regulated industry and
we are subject to
examination, supervision and comprehensive
regulation
by various federal and state agencies,
including the Federal Reserve, the
FDIC and the FOFR. As
such, we are subject to
extensive regulation, supervision and
legal requirements that govern almost
all aspects of our operations.
These laws and
regulations
are
not
intended
to
protect
our
shareholders.
Rather,
these
laws
and
regulations
are
intended
to
protect
customers, depositors, the Deposit Insurance
Fund, or DIF, and the overall financial health and
stability of the United
States
banking
system.
These
laws
and
regulations,
among
other
matters,
prescribe
minimum
capital
requirements,
impose
limitations on the
business activities
and investments
in which we
can engage, regulate
and restrict our
lending activities,
require us to provide certain banking services broadly within the communities in which we operate,
determine the locations
of our branch
offices and impose certain
specific accounting requirements on us
that may be more
restrictive and may result
in
greater
or
earlier
charges
to
earnings
or
reductions
in
our
capital
than
GAAP
would
require.
We
are
also
subject
to
capitalization
guidelines
established
by
our
regulators,
which
require
us
to
maintain
adequate
capital
to
support
our
business.
Compliance
with
laws
and
regulations
can
be
difficult
and
costly,
and
changes
to
laws
and
regulations
often
impose additional operating costs. Further, we must obtain approval from our
regulators before engaging in many activities,
and
our
regulators
have
the
ability
to
compel
us
to,
or
restrict
us
from,
taking
certain
actions
entirely.
There
can
be
no
assurance that any regulatory approvals we may require
or otherwise seek will be obtained.
Regulations affecting
banks and
other financial
institutions are
undergoing continuous
review and
frequently change,
and the ultimate effect of such changes cannot be predicted. Changes to the legal and regulatory framework governing our
operations, including
the Dodd-Frank
Wall
Street Reform
and Consumer
Protection Act,
or the
Dodd-Frank
Act, and
the
Economic Growth, Regulatory Relief and Consumer
Protection Act, or the Regulatory Relief
Act, have significantly revised
the laws and regulations under which we operate. Such regulations and laws may be modified or repealed at any time, and
new legislation may be enacted that will affect us and
our subsidiaries.
Our failure to comply with these laws and regulations, even if the failure follows good faith effort
or reflects a difference
in
interpretation,
could
subject
us
to
restrictions
on
our
business
activities,
enforcement
actions
and
fines
and
other
penalties,
any
of
which
could
adversely
affect
our
results
of
operations,
regulatory
capital
levels
and
the
price
of
our
securities. Further, any new laws, rules and
regulations, such as were imposed
under the Dodd-Frank Act or
the Regulatory
35
USCB Financial Holdings, Inc.
2021 10-K
Relief Act, could make
compliance more difficult
or expensive or otherwise
adversely affect our
business, prospects, cash
flow, liquidity,
financial condition and results of operations.
Our participation in the SBA PPP loan program exposes us to risks related to
noncompliance with the PPP,
as
well as litigation
risk related to
our administration of
the PPP loan
program, which
could have a
material adverse
impact on our business, financial condition, and results
of operations.
We are a
participating lender in
the PPP, a loan program administered
through the SBA,
that was created
to help eligible
businesses, organizations
and self-employed persons
fund their operational
costs during the
COVID-19 pandemic.
Under
this program, the SBA guarantees 100% of the amounts
loaned under the PPP.
The PPP opened on April 3, 2020; however,
because of the short window between
the passing of the CARES Act and
the opening
of the
PPP,
there was
some ambiguity
in the
laws, rules
and guidance
regarding the
operation
of the
PPP.
Subsequent rounds of
legislation and associated
agency guidance have
not provided needed
clarity and in
certain instances
have
potentially
created
additional
inconsistencies
and
ambiguities.
Accordingly,
we
are
exposed
to
risks
relating
to
noncompliance with the PPP.
Additionally, since the launch of the PPP, several larger banks have been
subject to litigation regarding
the process and
procedures
that
such
banks
used
in
processing
applications
for
the
PPP,
as
well
as
litigation
regarding
the
alleged
nonpayment of
fees that
may be
due to
certain agents
who facilitated
PPP loan
applications. We
may be
exposed to
the
risk of PPP-related litigation, from
both customers and non-customers
that approached us regarding PPP
loans, regarding
our process and procedures used in processing
applications for the PPP.
If any such litigation is filed against
us and is not
resolved
in
a
manner
favorable
to
us,
it
may
result
in
significant
financial
liability
or
adversely
affect
our
reputation.
Regardless of outcome, litigation can be costly and distracting. Any financial liability, litigation costs or reputational damage
caused by
PPP-related litigation
could have
a material
adverse impact
on our
business, financial
condition and
results of
operations.
PPP loans are fixed,
low interest rate loans
that are guaranteed by
the SBA and subject
to numerous other regulatory
requirements, and a borrower may apply to have all
or a portion of the loan forgiven. If PPP
borrowers fail to qualify for loan
forgiveness, we face
a heightened risk
of holding these
loans at unfavorable
interest rates for
an extended period
of time.
While the PPP loans are guaranteed
by the SBA, various regulatory
requirements will apply to our
ability to seek recourse
under the guarantees, and related procedures are currently subject
to uncertainty.
In
addition,
we
may
be
exposed
to
credit
risk
on
PPP
loans
if
a
determination
is
made
by
the
SBA
that
there
is
a
deficiency
in
the
manner
in
which
the
loan
was
originated,
funded,
or
serviced,
such
as
an
issue
with
the
eligibility
of
borrower to receive a PPP
loan, which may or may
not be related to the
ambiguity in the laws, rules
and guidance regarding
the operations of the PPP. If a deficiency is identified, the SBA may deny its liability under the guaranty,
reduce the amount
of the guaranty,
or, if it has already paid
under the guaranty,
seek recovery of any loss related to the deficiency from us.
We
face
a
risk
of
noncompliance
with
the
Bank
Secrecy
Act
and
other
anti-money
laundering
statutes
and
regulations and corresponding enforcement proceedings.
The
federal
Bank
Secrecy
Act,
the
Uniting
and
Strengthening
America
by
Providing
Appropriate
Tools
Required
to
Intercept and
Obstruct Terrorism
Act of
2001, or
the USA
PATRIOT
Act, and
other laws
and regulations
require financial
institutions, among
other duties,
to institute
and maintain
effective anti-money
laundering programs
and to
file suspicious
activity and
currency transaction
reports, as
appropriate. The
federal Financial
Crimes Enforcement
Network, or
FinCEN,
established by the
U.S. Treasury
Department to administer
the Bank Secrecy
Act, is authorized
to impose significant
civil
money penalties for
violations of those
requirements and has engaged
in coordinated enforcement efforts
with the individual
federal
banking
regulators,
as
well
as
the
U.S.
Department
of
Justice,
Drug
Enforcement
Administration
and
Internal
Revenue Service.
Additionally,
South Florida
has been
designated as
a “High
Intensity Financial
Crime Area,”
or HIFCA,
by FinCEN and a
“High Intensity Drug Trafficking Area,” or HIDTA, by the Office of
National Drug Control Policy. The HIFCA
program is intended to concentrate law enforcement efforts
to combat money laundering efforts in higher-risk
areas. There
is also increased scrutiny of compliance
with the rules enforced by the
Office of Foreign Assets Control,
or OFAC. Federal
and state bank
regulators have for
many years focused
on compliance with
Bank Secrecy
Act and anti-money
laundering
regulations. In
order to
comply with
regulations,
guidelines and
examination
procedures
in this
area, we
have dedicated
significant resources
to our
anti-money laundering
program, especially
due to
the regulatory
focus on
financial and
other
institutions located in South
Florida. Our business includes supporting
our customers, including foreign financial
institutions,
with respect to their international banking needs and our policies, procedures and systems have been designed to address
federal and
state anti-money
laundering compliance.
If our policies,
procedures and
systems are
deemed deficient
or the
policies,
procedures
and
systems
of
the
financial
institutions
that
we
may
acquire
are
deficient,
we
would
be
subject
to
liability,
including
fines,
and
regulatory
actions
that
are
deemed
necessary
in
order
to
remediate
such
deficiencies
and
36
USCB Financial Holdings, Inc.
2021 10-K
prevent the recurrence
thereof. In recent
years, sanctions that
the regulators have
imposed on banks
that have not
complied
with
all
anti-money
laundering
requirements
have
been
especially
severe.
Failure
to
maintain
and
implement
adequate
programs to
combat money
laundering and
terrorist financing
could also
have serious
reputational consequences
for us,
which could have a material adverse effect on
our business, financial condition and results of operations.
We
are
subject
to
capital
adequacy
requirements
and
may
become
subject
to
more
stringent
capital
requirements, which could adversely affect our
financial condition and operations.
In July 2013, the federal banking agencies published new regulatory capital rules based on the
international standards,
known as
Basel III,
that were
developed by
the Basel
Committee on
Banking Supervision.
The new
rules raised
the risk-
based capital
requirements
and revised
the
methods for
calculating
risk-weighted
assets, usually
resulting
in higher
risk
weights. The new rules now apply to us.
The Basel III rules increased
capital requirements and included
two new capital measurements,
a risk-based common
equity Tier 1 ratio
and a capital conservation buffer.
Common Equity Tier
1 (CET1) capital is a subset
of Tier 1 capital
and
is limited to common
equity (plus related surplus), retained earnings,
accumulated other comprehensive income and certain
other
items.
Other
instruments
that
have
historically
qualified
for
Tier
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
10.5% or more; and a leverage ratio of 4% or more.
Institutions must also maintain a capital conservation
buffer consisting
of common equity
Tier 1
capital. In addition
to the higher
required capital ratios
and the new
deductions and adjustments,
the final
rules increased
the risk
weights for
certain assets,
meaning that
we will
have to
hold more
capital against
these
assets. We will also be required to hold capital
against short-term commitments that are not unconditionally
cancellable.
While we currently meet these new
requirements of the Basel III-based capital requirements, we
may fail to do so in
the
future. The failure
to meet applicable
regulatory capital
requirements could result
in one or
more of our
regulators placing
limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities,
and could affect customer and investor confidence, our costs of funds and level of required deposit insurance
assessments
to the FDIC,
our ability to
pay dividends on
our capital stock,
our ability to
make acquisitions, and
our business,
results of
operations and financial condition, generally.
In addition,
in the
current economic
and regulatory
environment, including
the COVID-19
pandemic, bank
regulators
may
impose
capital
requirements
that
are
more
stringent
than
those
required
by
applicable
existing
regulations.
The
application of more stringent capital requirements for
us could, among other things, result
in lower returns on equity, require
the raising of additional
capital, and result
in regulatory actions if
we were to be
unable to comply with
such requirements.
Implementation
of
changes
to
asset
risk
weightings
for
risk-based
capital
calculations,
items
included
or
deducted
in
calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business
strategy and could limit our ability to make distributions,
including paying dividends.
We are periodically subject
to examination and
scrutiny by a
number of banking agencies
and, depending upon
the findings and determinations
of these agencies, we may
be required to make adjustments
to our business that
could adversely affect us.
As part of
the bank regulatory process,
the Federal Reserve, the
FDIC and the FOFR
periodically conduct examinations
of our business,
including compliance
with applicable
laws and regulations.
If, as a
result of an
examination, one
of these
banking
agencies
were
to
determine
that
the
financial
condition,
capital
resources,
asset
quality,
asset
concentration,
earnings prospects, management, liquidity sensitivity to
market risk, risk management
and internal controls or
other aspects
of any of our operations has become unsatisfactory, or that we or our management are in violation of any law or regulation,
the banking
agency could
take a
number of
different remedial
or punitive
actions as
it deems
appropriate. These
actions
include the power to prohibit the continuation of "unsafe
or unsound" practices, to require affirmative
actions to correct any
conditions
resulting
from
any
violation
or practice,
to
issue an
administrative
order
or enforcement
that
can
be judicially
enforced, to direct an increase
in our capital, to restrict our
growth, to change the asset composition
of our loan or securities
portfolios
or
balance
sheet,
to
assess
civil
monetary
penalties
against
our
officers
or
directors,
to
remove
officers
and
directors and, if
it is concluded
that such conditions
cannot be corrected
or there is
an imminent risk
of loss to
depositors,
to
terminate
our
deposit
insurance
and
force
us
to
terminate
our
business
operations.
If
we
become
subject
to
such
regulatory actions, our business, financial condition, results
of operations and reputation may be negatively impacted.
37
USCB Financial Holdings, Inc.
2021 10-K
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.
Risks Related to Our Class A Common Stock
We do not anticipate paying dividends on our common stock, and our future ability to pay dividends is subject
to restrictions.
We currently
do not
intend to
pay any
cash dividends
on our
common stock
in the
foreseeable future.
Holders of
our
Class A common stock are
only entitled to receive
cash dividends when, as and
if declared by our
Board out of funds
legally
available for
dividends. The
Company is
a bank
holding company
that conducts
substantially all
of its
operations through
the Bank,
which is
a legal
entity separate
and distinct
from the
Company.
As a
result, our
ability to
pay dividends
on our
common stock will substantially depend upon the receipt of dividends and other distributions from the Bank, the profitability
of which
is subject
to the
fluctuating cost
and availability
of money,
changes in
interest rates
and economic
conditions in
general. There are numerous laws and banking regulations and guidance that limit the Bank's
ability to pay dividends to us
and our ability to pay dividends on our common stock.
The market price and trading volume of our Class A
common stock may be volatile, which could result in rapid
and substantial losses for our shareholders.
The market
price
of
our
Class
A common
stock
may
be highly
volatile
and
could
be
subject
to
wide
fluctuations.
In
addition, the trading volume on
our Class A common stock may
fluctuate and cause significant price variations to
occur. We
cannot assure you that the market price of our Class A common stock will not fluctuate or decline significantly in the future.
Some, but
certainly not
all, of
the factors
that could
negatively affect
the price
of our
Class A
common stock,
or result
in
fluctuations in the price or trading volume of our Class
A common stock, include:
•
general market conditions;
•
domestic and international economic factors unrelated
to our performance;
•
variations in our quarterly operating results or failure to
meet the market’s earnings expectations;
•
publication of research reports about us or the financial services
industry in general;
•
the failure of securities analysts to cover our Class
A common stock after this offering;
•
additions or departures of our key personnel;
•
future sales of our Class A common stock;
•
adverse market reactions to any indebtedness we may
incur or securities we may issue in the future;
•
actions by our shareholders;
•
the expiration of contractual lock-up agreements;
•
the operating and securities price performance of companies
that investors consider to be comparable to
us;
•
changes or proposed changes in laws or regulations affecting
our business; and
•
actual or potential litigation and governmental investigations.
In
addition,
if
the
market
for
stocks
in
our
industry,
or
the
stock
market
in
general,
experiences
a
loss
of
investor
confidence, the
trading price
of the
Class A
common stock
could decline
for reasons
unrelated to
our business,
financial
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.
38
USCB Financial Holdings, Inc.
2021 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 may provide less than five years of selected historical
financial information;
•
we
are
exempt
from
the
requirements
to
obtain
an
attestation
and
report
from
our
auditors
on
management’s
assessment of our internal control over financial reporting
under the Sarbanes-Oxley Act;
•
we are permitted to have less extensive disclosure about our
executive compensation arrangements; and
•
we
are
not
required
to
give
our
shareholders
non-binding
advisory
votes
on
executive
compensation
or
golden
parachute arrangements.
We may
continue to
take advantage
of some
or all
of the
reduced regulatory
and reporting
requirements that
will be
available to
us as
long as
we continue
to
qualify
as an
emerging
growth
company.
We
will remain
an emerging
growth
company until the earliest of (i)
the last day of the first fiscal year in
which our annual gross revenues
exceed $1.07 billion,
(ii) the date that the market value of our Class A common stock that
is held by non-affiliates exceeds $700 million as of the
last business day of
June 30 of that
year, (iii) the date on which
we have, during the
previous three-year period, issued
more
than $1 billion
in non-convertible
debt, or
(iv) the end
of fiscal year
following the
fifth anniversary
of the completion
of our
IPO.
It is
possible that
some investors
could find
our Class
A common
stock less
attractive if
we choose
to rely
on these
exemptions. If some investors find our Class A common
stock less attractive, there may be a less
active trading market for
our Class A common stock and our stock price may be
more volatile.
Because we have elected
to use the extended
transition period for complying
with new or revised
accounting
standards for an “emerging growth company,” our financial statements may not be comparable to companies that
comply with these accounting standards as of the public
company effective dates.
We have elected
to use the
extended transition
period for complying
with new or
revised accounting standards
under
Section 7(a)(2)(B) of
the Securities Act.
This election allows
us to delay
the adoption of
new or revised
accounting standards
that have different
effective dates for
public and private
companies until those standards
apply to private companies.
As a
result of
this election,
our financial
statements
may not
be comparable
to companies
that
comply with
these
accounting
standards as of
the public company effective dates.
Because our financial statements
may not be
comparable to companies
that
comply
with
public
company
effective
dates,
investors
may
have
difficulty
evaluating
or
comparing
our
business,
performance or
prospects in
comparison to
other public
companies, which
may have
a negative
impact on
the value
and
liquidity of
our Class
A common
stock. We
cannot predict
if investors
will find
our Class
A common
stock less
attractive
because we
plan to
rely on
this exemption.
If some
investors
find our
Class
A common
stock less
attractive as
a result,
there may be a less active trading market for our Class A common
stock and our stock price may be more volatile.
We have existing investors that own
a significant amount of our
common stock whose individual interests may
differ from yours.
A significant percentage of our Class A common stock is currently held by a few institutional investors, including Patriot
Financial Partners II,
L.P.
and Patriot Financial
Partners Parallel II, L.P.
(collectively,
"Patriot"), and Priam
Capital Fund II,
LP
("Priam,"
and
together
with
Patriot,
the
"Significant
Investors").
Patriot
and
Priam
own
approximately
22.44%
and
22.44%, respectively, of our outstanding
Class A common
stock. In addition,
Patriot and Priam
are each entitled
to nominate
a director to our
Board and have certain
subscription rights to
purchase new equity
securities that we issued
in the future,
39
USCB Financial Holdings, Inc.
2021 10-K
in each
case as
long as
certain equity
ownership criteria
are met.
Patriot and
Priam also
have certain
registration rights,
including
demand
registration
rights,
and
information
rights.
Although
Patriot
and
Priam
are
independent
of
each
other,
these institutional
investors will
continue to
have a
significant level
of influence
over us
because of
their level
of Class
A
common stock ownership and their right to representation on our Board. For example, Patriot and Priam will have a greater
ability than our
other shareholders to influence
the election of
directors and the potential
outcome of other
matters submitted
to
a
vote
of
our
shareholders,
including
mergers
and
other
acquisition
transactions,
amendments
to
our
Articles
of
Incorporation
and
Amended
and
Restated
Bylaws,
and
other
extraordinary
corporate
matters.
The
interests
of
these
investors could conflict
with the interests of
our other shareholders, and
any future transfer
by these investors of
their shares
of Class
A common
stock to
other investors
who have
different
business objectives
could adversely
affect
our business,
results of operations, financial condition, prospects or the market
value of our Class A common stock.
Provisions
in
our
governing
documents
and
Florida
law
may
have
an
anti-takeover
effect
and
there
are
substantial
regulatory limitations on changes of control of the
Company.
Our corporate organizational documents and provisions of federal
and state law to which we
are subject contain certain
provisions that could
have an anti-takeover
effect and
may delay,
make more difficult
or prevent an
attempted acquisition
that you may favor or an attempted replacement of our Board
or management.
Our governing documents include provisions that:
•
empower our Board, without shareholder
approval, to issue our preferred
stock, the terms of
which, including voting
power, are to be set by our
Board;
•
provide that directors may be removed from office only for cause and only upon a majority vote
of the shares of our
Bank with voting power;
•
prohibit holders of our Class A common stock to take
action by written consent in lieu of a shareholder meeting;
•
require holders of at least 10% of our Class A common
stock to call a special meeting;
•
do not provide for cumulative voting in elections of our
directors;
•
provide that our Board has the authority to amend our Amended
and Restated Bylaws;
•
require shareholders that wish to bring business before annual or special meetings of shareholders, or to nominate
candidates for election as directors at our annual meeting of shareholders, to provide
timely notice of their intent in
writing and satisfy disclosure requirements; and
•
enable our Board to increase, between
annual meetings, the number of
persons serving as directors and
to fill the
vacancies created
as a
result of
the increase until
the next
meeting of
shareholders by a
majority vote
of the
directors
present at a meeting of directors.
In addition,
certain provisions
of Florida
law may
delay,
discourage, or
prevent an
attempted acquisition
or change
in
control. Furthermore,
banking laws
impose notice,
approval, and
ongoing regulatory
requirements on
any shareholder
or
other party that seeks to acquire direct or indirect "control" of a
bank holding company,
which includes the Change in Bank
Control
Act.
These
laws
could
delay
or
prevent
an
acquisition.
Also,
for
preservation
and
continued
availability
of
our
"deferred tax assets," our Articles
of Incorporation prohibits any direct
or indirect transfer of
stock or options to acquire
stock
to any
person
who,
as
a result
of the
transfer,
would
own
4.95%
or more
of
our
stock,
as long
as we
continue
to
have
"deferred tax assets," subject to
limited exceptions as provided in
our Articles of Incorporation. Because
of the requirements
to overcome this restriction, this provision of the Articles of Incorporation could have an anti-takeover effect and may delay,
make more difficult or prevent an attempted acquisition
that you may favor.
40
USCB Financial Holdings, Inc.
2021 10-K
Item 1B. Unresolved Staff Comments
None.
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
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.
Item 4.
Mine Safety Disclosures
Not applicable.
41
USCB Financial Holdings, Inc.
2021 10-K
PART II
Item 5.
Market
for
Registrant’s
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities
Market Information
In July
2021, the Bank’s
Class A common
stock began trading
on the
Nasdaq Stock Market
under ticker
symbol “USCB”.
The listing of our Class
A common stock on
the Nasdaq Stock Market
has resulted in a
more active trading market
for our
Class
A
common
stock.
However,
we
cannot
assure
that
a
liquid
trading
market
for
our
Class
A
common
stock
will
be
sustained.
Effective December 30, 2021, the bank holding company,
or the Company, acquired all issued and
outstanding shares
of Class
A common
stock of
the Bank.
Each of
the outstanding
shares of
the Bank’s
common stock
formerly held
by its
shareholders was converted
into and exchanged
for one newly
issued share
of the Company’s
common stock.
The ticker
symbol “USCB” remained the same.
Prior
to
our
listing
on
the
Nasdaq
Stock
Market
there
was
not
an
established
public
trading
market
for
the
Class
A
common shares. The
following table shows
the quarterly high and
low closing prices
of our Class A
common stock traded
on the Nasdaq Stock Market since going public on July
23, 2021:
Stock Price
High
Low
Quarter Ended:
September 30, 2021
$
13.91
$
10.57
December 31, 2021
$
15.89
$
12.30
As of December 31, 2021, our Class B common stock is not
listed or traded on any stock exchange.
Holders
As of January 31, 2022, the Company’s Class A common
shares were held by approximately 529 shareholders
.
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 banking laws, regulations and policies.
The principal
source of
revenue with
which to
pay dividends
on common
shares are
dividends the
Bank may
declare
and
pay
out
of
funds
legally
available
for
payment
of
dividends.
As
a
Florida
corporation,
we
are
only
permitted
to
pay
dividends to shareholders if, after giving effect to the dividend, (i) the Company is able to pay its debts as they become due
in the ordinary course
of business and
(ii) the Company’s
assets exceeds the
sum of Company’s
(a) liabilities plus
(b) the
amount that
would be
needed for
the Company
to satisfy
the preferential
rights
upon dissolution
of shareholders
whose
preferential rights are superior to those receiving the dividend,
if any.
Securities Authorized for Issuance Under Equity Compensation
Plans
See
Note
9
”Equity
Based
and
Other
Compensation
Plans”
to
the
Consolidated
Financial
Statements
herein
for
additional information required.
42
USCB Financial Holdings, Inc.
2021 10-K
COMPARISON OF CUMULATIVE RETURN SINCE COMPANY IPO
Among USCB Financial Holdings, Inc., the NASDAQ Bank
Index, the NASDAQ ABA
Community Bank Index, and the NASDAQ Composite
USCB
NASDAQ Bank
NASDAQ ABA Community Bank
NASDAQ Composite
Stock Price Performance
The graph below compares the
cumulative total return
to stockholders of our Class
A common stock between July
23,
2021 (the
date the
Bank’s
Class A
common stock
commenced
trading on
the Nasdaq
Stock Market)
and December
31,
2021, 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
09/30/2021
12/31/2021
USCB Financial Holdings, Inc. (USCB)
$
100
$
122
$
140
NASDAQ Bank (BANK)
$
100
$
110
$
115
NASDAQ ABA Community Bank (QABA)
$
100
$
108
$
114
NASDAQ Composite (IXIC)
$
100
$
98
$
107
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Other
Affiliates
As of
December 31, 2021, the
Company nor any
of its
affiliates purchased any
Class A common
shares of
the Company.
Item 6.
Reserved
43
USCB Financial Holdings, Inc.
2021 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, 2021
and
2020. This
discussion and
analysis are
best read
in conjunction
with the
Consolidated Financial
Statements and related footnotes
of our Company presented
in Item 8 “Financial
Statements and Supplementary
Data” of
this Annual
Report.
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.
Throughout this document, references to “we,” “us,” “our,” and “the
Company” refer to USCB Financial Holdings, Inc.
Forward-Looking Statements
This
Annual
Report
on
Form
10-K
contains
statements
that
are
not
historical
in
nature
are
intended
to
be,
and
are
hereby identified as, forward-looking
statements for purposes of
the safe harbor provided by
Section 21E of the Securities
Exchange
Act
of
1934,
as
amended.
The
words
“may,”
“will,”
“anticipate,”
“should,”
“would,”
“believe,”
“contemplate,”
“expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are
intended
to
identify
forward-looking
statements.
These
forward-looking
statements
include
statements
related
to
our
projected
growth,
anticipated
future
financial
performance,
and
management’s
long-term
performance
goals,
as
well
as
statements relating to
the anticipated effects
on results of
operations and financial
condition from expected
developments
or events, or business and growth strategies, including
anticipated internal growth.
These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ
materially from those anticipated in such statements.
Potential risks and uncertainties include, but are not
limited to:
•
the strength of the United States economy
in general and the strength of the local
economies in which we conduct
operations;
•
the COVID-19 pandemic and its impact on
us, our employees, customers and third-party service providers, and the
ultimate extent of the impacts of the pandemic and related government
stimulus programs;
•
our ability to successfully manage interest rate risk, credit
risk, liquidity risk, and other risks inherent to our industry;
•
the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss
reserve and deferred tax asset valuation allowance;
•
the efficiency and effectiveness of our
internal control environment;
•
our ability
to comply
with the
extensive laws
and regulations
to which
we are
subject, including
the laws
for each
jurisdiction where we operate;
•
legislative or regulatory
changes and changes
in accounting
principles, policies,
practices or guidelines,
including
the effects of the forthcoming implementation
of the Current Expected Credit Losses (“CECL”) standard;
•
the effects
of our
lack of
a diversified
loan portfolio
and concentration
in the
South Florida
market, including
the
risks
of geographic,
depositor,
and
industry concentrations,
including our
concentration
in
loans secured
by real
estate;
•
the concentration of ownership of our Class A common
stock;
•
fluctuations in the price of our Class A common stock;
•
our ability to fund or access the capital markets at attractive
rates and terms and manage our growth, both organic
growth as well as growth through other means, such as
future acquisitions;
•
inflation, interest rate, unemployment rate, market, and monetary
fluctuations;
•
increased competition and its effect on pricing
of our products and services as well as our margins;
•
the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,
employee, or third-party fraud and security breaches; and
•
other
risks
described
this
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 presentation
are made only as of the date
hereof, and we undertake
no obligation to update
or revise any forward-looking
statement to reflect events
or circumstances
after the date on which the statement is made or to reflect the occurrence of unanticipated events, unless required to do so
under the federal securities laws. You
should also review the risk factors
described in the 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.
44
USCB Financial Holdings, Inc.
2021 10-K
Non-GAAP Financial Measures
This Annual Report on Form 10-K includes
financial information determined by methods
other than in accordance with
generally
accepted
accounting
principles
(“GAAP”).
This
financial
information
includes
certain
operating
performance
measures. Management has included these non-GAAP
measures because it believes these measures may
provide useful
supplemental information
for evaluating
the Company’s
underlying performance
trends. Further,
management uses
these
measures
in
managing
and
evaluating
the
Company’s
business
and
intends
to
refer
to
them
in
discussions
about
our
operations and performance.
Operating performance
measures should be
viewed in addition
to, and not
as an alternative
to or
substitute
for,
measures
determined
in
accordance
with
GAAP,
and
are
not
necessarily
comparable
to non-GAAP
measures
that
may
be
presented
by
other
companies.
To
the
extent
applicable,
reconciliations
of
these
non-GAAP
measures to the most directly
comparable GAAP measures can be found
in the ‘Non-GAAP Reconciliation Tables’ included
in this annual report.
Overview
For the year ended December 31, 2021, the
Company reported net income of $21.1
million compared with net income
of
$10.8 million
for the
year ended
December 31, 2020,
representing
a 94.8%
increase. The
results from
2021 included
closing our initial public offering of the Class A common stock and the simplification of the Bank’s capital structure.
In
evaluating
our
financial
performance,
we
consider
the
level
of
and
trends
in
net
interest
income,
the
net
interest
margin, the cost of deposits,
levels and composition of
non-interest income and non-interest
expense, performance ratios,
asset quality ratios, regulatory capital ratios, and any significant
event or transaction.
The following significant highlights are of note for the year
ended December 31, 2021:
•
Net interest
income
after
provision
for credit
losses totaled
$52.7
million, an
increase of
$12.3
million or
30.5%,
compared to $40.3 million at December 31, 2020.
•
Net interest
margin (“NIM”)
remained the
same at
3.26%
for the
years ended
December 31, 2021
and 2020.
The
yield on earning assets decreased to 3.52% in 2021, compared to 3.93% in 2020. The yield on earning assets was
negatively impacted by certain floating rate investment securities,
loans with variable rate pricing features, and
new
loans originated in the lower interest rate environment,
including PPP loans which carry a rate of 1.0%.
•
NIM, excluding PPP loans, was 3.16% and 3.30% for the years ended December 31, 2021 and 2020, respectively.
•
Total assets grew to $1.9 billion, an increase of $352.2
million or 23.5%, compared to December 31, 2020.
•
Loans grew to $1.2 billion, an increase of $151.6 million
or 14.6%, compared to December 31, 2020.
•
The cost of interest-bearing liabilities
decreased
to 0.45%
in 2021 from 1.07% in
2020 as a result of the continued
downward repricing of deposits and continued improvement in
deposit mix.
•
Return on average assets for the year ended December
31, 2021 was 1.24% compared to 0.76% in 2020.
•
Return on average stockholders’ equity for the year ended December 31, 2021 was
11.45% compared to 6.54% in
2020.
•
Nonperforming
assets
totaled
$1.2
million,
a
decrease
of
$0.4
million
or
24.6%,
compared
to
$1.6
million
at
December 31, 2020.
•
The Company maintained its strong capital position. As of December 31, 2021, the Bank was well-capitalized, with
a total risk-based capital ratio of 14.92%,
a tier 1 risk-based capital ratio of
13.70%, a common equity tier 1 capital
ratio of
13.70%,
and a
leverage ratio
of 9.55%.
As of
December 31, 2021
and 2020,
all of
our regulatory
capital
ratios exceeded the thresholds to be well-capitalized under
the applicable bank regulatory requirements.
•
In April 2021,
the Bank
repurchased
all of
its issued
and outstanding
Class E
preferred
shares at
the liquidation
value of $7.5
million along with
declared dividends approved
by the Board
of Directors (the
“Board”) with the
goal
to simplify its capital structure.
45
USCB Financial Holdings, Inc.
2021 10-K
•
In July
2021, the
Bank completed
the initial
public offering
of 4,600,000
shares of
Class A common
stock, which
included an additional 600,000 shares in connection with the exercise in full of the underwriters’
option to purchase
additional shares. In a continuation effort to simplify the Company’s capital structure, an exchange and redemption
of then outstanding Class C and Class D preferred shares
was also completed.
•
In December 2021,
the Bank
entered into agreements
with the Class
B shareholders
to exchange all
outstanding
Class B non-voting common stock for Class A voting common
stock.
•
The Company became the parent bank
holding company of the Bank effective
December 28, 2021. Each share of
the
Bank
was
exchanged
for
one
share
of
the
Company,
making
the
Bank
a
wholly
owned
subsidiary
of
the
Company. Shares
of the Company continue to trade under ticker symbol “USCB”
on the Nasdaq Stock Market.
Critical Accounting Policies and Estimates
The
consolidated
financial
statements
are
prepared
based
on
the
application
of
U.S.
GAAP,
the
most
significant
of
which are described
in Note 1 “Summary
of Significant Accounting
Policies” to our
Consolidated Financial Statements.
To
prepare financial statements in conformity with GAAP,
management makes estimates, assumptions,
and judgments based
on
available
information.
These
estimates,
assumptions,
and
judgments
affect
the
amounts
reported
in
the
financial
statements and accompanying notes. These estimates, assumptions, and judgments are based on
information available as
of
the
date
of
the
financial
statements
and,
as
this
information
changes,
actual
results
could
differ
from
the
estimates,
assumptions
and
judgments
reflected
in
the
financial
statements.
In
particular,
management
has
identified
accounting
policies that, due to
the estimates, assumptions
and judgments inherent
in those policies, are
critical in understanding
our
financial statements.
Management
has presented
the application
of these
policies
to the
audit and
risk committee
of our
Board.
Allowance for Credit Losses
The allowance for credit
losses (“ACL”) is
a valuation allowance that
is established through charges
to earnings in the
form of
a provision for
credit losses. The
amount of the
ACL is
affected by the
following: (i) charge-offs of
loans that decrease
the allowance;
(ii) subsequent
recoveries on
loans previously
charged off
that increase
the allowance;
and (iii)
provisions
for credit losses charged to
income that increase the allowance.
Management considers the policies
related to the ACL as
the most critical to
the financial statement
presentation. The total
ACL includes activity
related to allowances
calculated in
accordance with Accounting Standards Codification (“ASC”) 310,
Receivables, and ASC 450, Contingencies.
Throughout the year,
management estimates the probable
incurred losses in the loan portfolio
to determine if the ACL
is adequate to absorb such losses. The ACL
consists of specific and general components.
The specific component relates
to loans that are
individually classified as
impaired. We follow
a loan review program
to evaluate the credit
risk in the loan
portfolio. Loans
that have
been identified
as impaired
are reviewed
on a
quarterly basis
in order
to determine
whether a
specific reserve is
required. The general
component covers
non-impaired loans
and is based
on industry and
our specific
historical loan
loss experience,
volume, growth
and composition
of the
loan portfolio,
the evaluation
of our
loan portfolio
through our
internal
loan review
process, general
current
economic
conditions
both
internal and
external to
us that
may
affect the borrower’s ability to pay,
value of collateral and other qualitative relevant risk factors. Based on a review
of these
estimates, we
adjust the ACL
to a
level determined by
management to be
adequate. Estimates of
credit losses are
inherently
subjective as they involve an exercise of judgment.
The
CARES
Act,
as
amended
by
the
Consolidated
Appropriations
Act,
2021,
specified
that
COVID-19
related
loan
modifications executed
between March 1,
2020 and
the earlier
of (i)
60 days
after the
date of
termination
of the
national
emergency declared by President Trump and (ii) January 1, 2022, on loans
that were current as of December 31, 2019,
are
not TDRs. Additionally,
under guidance from the federal banking agencies,
other short-term modifications made on a good
faith basis
in response
to COVID-19
to borrowers
that were
current prior
to any
relief are
not TDRs
under ASC
Subtopic
310-40,
“Troubled
Debt
Restructurings
by
Creditors.”
These
modifications
include
short-term
(i.e.,
up
to
six
months)
modifications
such
as
payment
deferrals,
fee
waivers,
extensions
of
repayment
terms,
or
delays
in
payment
that
are
insignificant. The Company’s charge-off policy is to continuously
review all impaired loans to monitor the Company’s ability
to collect them in full at the applicable maturity date and/or in accordance
with terms of any restructurings. For loans which
are collateral dependent,
or deemed to
be uncollectible, any
shortfall in the
fair value of
the collateral relative to
the recorded
investment in the loan is charged off. The amount charged
-off conforms to the amount necessary
to comply with GAAP.
Income Taxes
Deferred tax
assets and
liabilities are
recognized for
the future
tax consequences
attributable to
differences
between
the financial statement carrying amounts of
existing assets and liabilities and their
respective tax bases and operating loss
46
USCB Financial Holdings, Inc.
2021 10-K
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.
Results of Operations
General
The following
tables present
selected balance
sheet, income
statement, and
profitability ratios
for the
dates indicated
(in thousands, except ratios):
As of December 31,
2021
2020
Consolidated Balance Sheets:
Total
assets
$
1,853,939
$
1,501,742
Total
loans
(1)
$
1,190,081
$
1,038,504
Total
deposits
$
1,590,379
$
1,273,402
Total
stockholders' equity
$
203,897
$
171,001
(1)
Loan amounts include deferred fees/costs.
Years Ended December 31,
2021
2020
Consolidated Statements of Operations:
Net interest income before provision for credit losses
$
52,496
$
43,597
Total
non-interest income
$
10,698
$
6,097
Total
non-interest expense
$
35,677
$
33,036
Net income
$
21,077
$
10,820
Net income (loss) available to common stockholders
$
(70,585)
$
7,693
Profitability:
Efficiency ratio
56.31%
71.13%
Net interest margin
3.26%
3.26%
The Company’s results
of operations
depend substantially on
net interest income
and non-interest income.
Other factors
contributing
to
the
results
of
operations
include
our
provision
for
credit
losses,
non-interest
expenses,
and
provision
for
income taxes.
Net income
for the
year ended
December 31, 2021
was $21.1 million
,
compared with
net income
of $10.8 million
for
the same period in 2020. The Company reported net loss per diluted
share for the year ended December 31, 2021 of $6.72
compared to net income per diluted share for the same period in 2020 of $1.50 and $0.30 for
Class A
and Class B common
stock, respectively, after adjusted to reflect the 1
for 5 reverse stock split on
Class A
common stock. The net loss per diluted
share for the year ended December 31, 2021 was attributable to the one-time reduction in net income available to common
stockholders for the
exchange and redemption
of the Class
C and Class D
preferred shares. During
third quarter of
2021,
47
USCB Financial Holdings, Inc.
2021 10-K
the
Company
completed
an
exchange
of
then
outstanding
preferred
shares
for
Class A
common
shares
and
thereafter
redeemed the remaining outstanding preferred shares, at a liquidation value that exceeded book value, causing a one-time
reduction in
net income
available to
common stockholders
of $89.6
million. At December 31,
2021, there
were no
issued
and outstanding preferred shares.
Operating net
income per
diluted share
(non-GAAP) for
the year
ended December 31,
2021 was
$1.81 compared
to
operating net income per
diluted share (non-GAAP)
for the same period
in 2020 of $1.50
and $0.30 for Class A and Class
B, respectively.
Operating net
income per
diluted share
(non-GAAP) for
the year
ended December 31,
2021 excludes
the
$89.6 million one-time accounting
impact of
the exchange
and redemption of
the preferred
shares. The
operating net
income
per diluted share
for the year
ended December 31,
2020 was adjusted
to reflect the
1 for 5
reverse stock
split on Class A
common stock.
To see
a reconciliation
of non-GAAP
measures to
GAAP measures
refer to
section below
“Reconciliation
and Management Explanation of Non-GAAP Financial
Measures”.
Net Interest Income
Net interest
income is
the difference
between interest
earned on interest
earning assets
and interest
incurred on
interest-
bearing liabilities
and is
the primary
driver of
core earnings.
Interest income
is generated
from interest
and dividends
on
interest-earning
assets,
including
loans,
investment
securities
and
other
short-term
investments.
Interest
expense
is
incurred
from
interest
paid
on
interest-bearing
liabilities,
including
interest-bearing
deposits,
FHLB
advances
and
other
borrowings.
To evaluate net
interest income, we
measure and monitor
(i) yields on
loans and other
interest-earning assets, (ii)
the
costs of deposits
and other funding
sources, (iii) net
interest spread, and
(iv) net interest margin.
Net interest spread is
equal
to the difference between rates
earned on interest-earning assets
and rates paid on interest-bearing
liabilities. Net interest
margin is
equal to
the annualized
net interest
income
divided by
average interest
-earning assets.
Because
non-interest-
bearing sources of funds, such as non-interest-bearing deposits
and stockholders’ equity, also fund interest-earning assets,
net interest margin includes the benefit of these non-interest-bearing
sources.
Changes in
the market
interest rates
and interest
rates we
earn on
interest-earning assets
or pay on
interest-bearing
liabilities, as well
as the volume
and types of
interest-earning assets and interest-bearing
and non-interest-bearing liabilities,
are usually the
largest drivers
of periodic changes
in net interest
spread, net interest
margin and net
interest income.
Our
asset liability committee
(“ALCO”) has
in place asset-liability
management techniques
to manage major
factors that
affect
net interest income and net interest margin.
48
USCB Financial Holdings, Inc.
2021 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,
2021
2020
Average
Balance
Interest
Yield/Rate
Average
Balance
Interest
Yield/Rate
Assets
Interest-earning assets:
Loans
(1)
$
1,116,142
$
48,730
4.37
%
$
1,026,905
$
47,078
4.58
%
Investment securities
(2)
403,677
7,886
1.95
%
201,073
5,248
2.61
%
Other interest earnings assets
92,430
106
0.11
%
110,898
307
0.28
%
Total
interest-earning assets
1,612,249
56,722
3.52
%
1,338,876
52,633
3.93
%
Non-interest earning assets
89,409
90,059
Total
assets
$
1,701,658
$
1,428,935
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits
$
52,379
59
0.11
%
$
46,819
158
0.34
%
Saving and money market deposits
619,810
2,082
0.34
%
473,028
3,095
0.65
%
Time deposits
235,127
1,531
0.65
%
276,462
4,709
1.70
%
Total
interest-bearing deposits
907,316
3,672
0.40
%
796,309
7,962
1.00
%
Borrowings and repurchase agreements
36,000
554
1.54
%
51,362
1,074
2.09
%
Total
interest-bearing liabilities
943,316
4,226
0.45
%
847,671
9,036
1.07
%
Non-interest bearing demand deposits
547,116
390,467
Other non-interest-bearing liabilities
27,142
25,281
Total
liabilities
1,517,574
1,263,419
Stockholders' equity
184,084
165,516
Total
liabilities and stockholders' equity
$
1,701,658
$
1,428,935
Net interest income
$
52,496
$
43,597
Net interest spread
(3)
3.07
%
2.86
%
Net interest margin
(4)
3.26
%
3.26
%
(1)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred
loan fees, net of deferred loan costs.
(2)
At fair value except for securities held to maturity.
(3)
Net interest spread is the average yield on
total interest-earning assets minus the average
rate on total interest-bearing liabilities.
(4)
Net interest margin is the ratio of net interest
income to total interest-earning assets.
Net interest income before the provision
for credit losses was $52.5 million
for the year ended December
31, 2021, an
increase of
$8.9 million or
20.4%, from
$43.6 million for
the year
ended December
31, 2020.
This increase
was primarily
attributable to higher
income from investment
securities and loan
fees as well
as lower costs
for interest-bearing liabilities
because of lower interest rate benchmarks.
Included with loan interest income are PPP fees totaling $3.6 million and $2.3 million for the year ended December
31,
2021 and 2020, respectively.
PPP loan fees are recognized upon forgiveness.
The net
interest margin
remained the
same at
3.26% for
the years
ended December 31,
2021 and
2020. The
overall
and individual yields for interest-bearing assets and interest-bearing
liabilities both decreased in 2021 compared to 2020.
Provision for Credit Losses
The allowance for credit losses
(“ACL”) represents probable incurred
losses in our portfolio. We
maintain an adequate
ACL that can mitigate probable losses incurred in the loan portfolio. The ACL is increased by the provision for credit losses
and is decreased
by charge-offs,
net of recoveries
on prior
loan charge-offs.
There are multiple
credit quality
metrics that
we use
to
base our
determination
of
the
amount of
the ACL and
corresponding
provision
for credit
losses. These
credit
metrics evaluate
the credit
quality and
level of
credit risk
inherent in
our loan
portfolio, assess
non-performing
loans and
charge-offs levels, considers statistical trends and economic
conditions and other applicable factors.
Provision for
credit loss
for the
year ended
December 31,
2021, was
a net
reduction of
$160 thousand
compared to
$3.3 million in provision
expense for the same
period in 2020. The primary
driver of the decrease
was the improvement of
49
USCB Financial Holdings, Inc.
2021 10-K
the credit risk
associated with the
COVID-19 pandemic. The
ACL as
a percentage of
total loans was
1.27%
at December 31,
2021 compared to 1.45% at December 31, 2020.
See “Allowance for Credit Losses” below for further discussion
on how the ACL is calculated.
Non-Interest Income
Net interest income
and other types of
recurring non-interest
income are generated
from our operations.
Our services
and products generate service charges and fees, mainly from our depository accounts. We also
generate income from gain
on sale of
loans though
our swap and
SBA programs. In addition,
we own insurance
on several employees
and generate
income on the increase in the cash surrender value of
these policies.
The following table presents the components of non-interest
income for the dates indicated (in thousands):
Years Ended December 31,
2021
2020
Service fees
$
3,609
$
3,266
Gain on sale of securities available for sale, net
214
434
Gain on sale of loans held for sale, net
1,626
839
Gain on sale of premises and equipment, net
983
-
Loan settlement
2,500
-
Other non-interest income
1,766
1,558
Total
non-interest income
$
10,698
$
6,097
Non-interest income
for the
year ended
December 31,
2021 increased
$4.6 million or
75.5%, compared
to the
same
period in 2020.
This increase was primarily
driven by the default
interest recovery of a
prior lending customer for $2.5
million
and a gain on the sale of a previously owned building for $983 thousand as well as higher deposit service fees and gain on
sales of loans due
to increased activity
in our SBA program. Further,
the default interest recovery
of $2.5 million was
for a
loan that was originated
in 2008 and subsequently
went through many iterations
of credit collection. This payment
reflects
the final payment and settlement of lien judgments against
the customer.
Non-Interest Expense
The following table presents the components of non-interest
expense for the dates indicated (in thousands):
Years Ended December 31,
2021
2020
Salaries and employee benefits
$
21,438
$
19,204
Occupancy
5,257
5,656
Regulatory assessment and fees
783
691
Consulting and legal fees
1,454
1,045
Network and information technology services
1,466
1,536
Other operating
5,279
4,904
Total
non-interest expense
$
35,677
$
33,036
Non-interest expense
for the
year ended
December 31, 2021
increased $2.6 million
or 8.0%,
compared to
the same
period in
2020.
The increase
is primarily
due to
an increase
in salaries
and employee
benefit costs
of $2.2 million
for the
year ended
December 31, 2021,
compared to
the same
period in
2020. The
headcount of
full-time equivalent
employees
increased
from
179
at
December 31,
2020
to
187
at
December 31,
2021.
Further,
consulting
and
legal
fees
and
other
operating
expenses
increased
$0.4
million
or
39.1%
and
$0.4 million
or
7.6%,
respectively,
during
the
year
ended
December 31,
2021 compared
to the
same
period
in
2020
due
to our
operations
as a
publicly traded
company
and
the
formation of a bank holding company.
The increase in salaries and employee benefits, consulting and legal fees, and other
operating costs has enabled
us to support recent growth
and has provided us with
the necessary technology and required
professionals to execute our growth strategy.
Provision for Income Tax
Fluctuations in the effective tax rate reflect the effect of the differences in the inclusion or deductibility of certain income
and expenses for
income tax purposes.
Therefore, future
decisions on the
investments we choose
will affect our
effective
50
USCB Financial Holdings, Inc.
2021 10-K
tax rate. 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,
2021 was
$6.6 million,
compared
to $2.
6
million
for the
year
ended December 31, 2020. The
effective tax rate for
the year ended December 31, 2021
was 23.8% and for the
year ended
December 31, 2020 was 19.3%.
For a further discussion
on income taxes, see
Note 6 “Income Taxes” to
the Consolidated Financial
Statements in this
Form 10-K.
Rate/Volume Analysis
The
table
below
sets
forth
information
regarding
changes
in
interest
income
and
interest
expense
for
the
periods
indicated (in thousands).
For each category of
interest-earning assets and interest-bearing liabilities,
information is provided
on changes attributable to (i) changes in rate (changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); and (iii) changes in rate-volume (change in
rate multiplied by change in volume). Changes in
rate-volume are proportionately allocated between rate and volume
variance.
Years Ended 2021 vs. 2020
Years Ended 2020 vs. 2019
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)
$
4,091
$
(2,439)
$
1,652
$
4,573
$
(2,229)
$
2,344
Investment securities
(2)
5,288
(2,650)
2,638
397
(596)
(199)
Other interest earnings assets
(51)
(150)
(201)
1,412
(1,866)
(454)
Total increase (decrease) in interest income
9,328
(5,239)
4,089
6,382
(4,691)
1,691
Interest-bearing liabilities:
Interest-bearing demand deposits
19
(118)
(99)
$3
(6.00)
(3)
Saving and money market deposits
960
(1,973)
(1,013)
692
(2,738)
(2,046)
Time deposits
(704)
(2,474)
(3,178)
1,106
(1,242)
(136)
Borrowings and repurchase agreements
(321)
(199)
(520)
(952)
(81)
(1,033)
Total increase (decrease) in interest expense
(46)
(4,764)
(4,810)
849
(4,067)
(3,218)
Increase (decrease) in net interest income
$
9,374
$
(475)
$
8,899
$
5,533
$
(624)
$
4,909
(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.
Both average yields on
interest earning assets and
average rates paid on interest
bearing liabilities have been declining
over the
periods presented,
reflecting the
macro interest
rate environment
and ongoing
initiatives to
reduce the
cost and
improve the mix of deposits.
Analysis of Financial Condition
Total
assets at December 31, 2021, were $1.9 billion, an increase of $352.2 million, or 23.5%, over total assets of $1.5
billion at
December 31, 2020. Total loans increased
$151.6 million,
or 14.6%,
to $1.2
billion at
December 31, 2021 compared
to
$1.0
billion
at
December 31,
2020.
The
increase
in
loans
includes
purchased
loans
totaling
$129.5
million
including
deferred
fees.
Total
deposits
increased
by
$317.0
million,
or
24.9%,
to
$1.6
billion
at
December 31,
2021
compared
to
December 31, 2020.
Investment Securities
The investment portfolio
is used and
managed to provide
liquidity through cash
flows, marketability
and, if necessary,
collateral for
borrowings. The
investment portfolio
is also
used as
a tool
to manage
interest rate
risk and
the Company’s
capital
market
risk
exposure.
The
philosophy
of
the
portfolio
is
to
maximize
the
Company’s
profitability
taking
into
consideration the Company’s risk appetite and tolerance, manage the assets 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
51
USCB Financial Holdings, Inc.
2021 10-K
subject to change
depending on the
funding and liquidity
needs of
the Company, and the interest
risk management objective
directed by the ALCO. The portfolio of investments can be used to modify the duration of the balance
sheet. The allocation
of cash into
securities takes
into consideration
anticipated future cash
flows (uses
and sources) and
all available sources
of credit.
Our
investment
portfolio
consists
primarily
of
securities
issued
by
U.S.
government-sponsored
agencies,
agency
mortgage-backed securities,
collateralized mortgage
obligation securities,
municipal securities,
and other
debt securities,
all with varying contractual maturities and coupons. Due to the optionality embedded in these securities, the final maturities
do not
necessarily represent the
expected life of
the portfolio. Some
of these
securities will be
called or paid
down depending
on capital market conditions and expectations. The investment portfolio is regularly reviewed by the Chief Financial Officer,
Treasurer,
or
ALCO
of
the
Company
to
ensure
an
appropriate
risk
and
return
profile
as
well
as
for
adherence
to
the
investment policy.
As of December 31, 2021, the investment portfolio consisted of available-for-sale
(“AFS”) and held-to-maturity (“HTM”)
debt securities.
During the third quarter
of 2021, there were
28 investment securities that
were transferred from AFS
to HTM
with an amortized cost basis and fair value amount
of $67.6 million and $68.7 million, respectively.
On the date of transfer,
these securities had a
total net unrealized gain of
$1.1 million. The transfer of debt
securities from the AFS
to HTM category
were made at fair value at the date of
transfer. The unrealized gain or loss at the date of transfer is retained in accumulated
other
comprehensive
income
and
in
the
carrying
value
of
the
HTM
securities.
Such
amounts
are
amortized
over
the
remaining life of the security.
There was no impact to net income on the date of transfer.
The book value of the AFS securities is adjusted monthly
for unrealized gain or loss as a valuation allowance,
and any
gain
or
loss
is
reported
on
an
after-tax
basis
as
a
component
of
other
comprehensive
income
in
stockholders’
equity.
Periodically,
we
may
need
to
assess
whether
there
have
been
any
events
or
unexpected
economic
circumstances
to
indicate that
a security
on which
there is
an unrealized
loss is
impaired on
an other-than-temporary
basis (“OTTI”).
If the
impairment is
deemed to
be permanent,
an analysis
would be
made considering
many factors,
including the
severity and
duration of the impairment, the severity
of the event, our intent and
ability to hold the security for a
period of time sufficient
for a
recovery in
value, recent
events specific
to the
issuer or
industry,
any related
credit events,
and for
debt securities,
external
credit
ratings
and
recent
downgrades
related
to
deterioration
of
credit
quality.
Securities
on
which
there
is
an
unrealized loss
that is
deemed to
be OTTI
are written
down to
fair value,
with the
write-down recorded
as a
realized loss
under line item
“Gain (loss) on
sale of securities
available-for-sale,
net” of the Consolidated
Statements of Operations.
As
of December
31,
2021, there
are no
securities
which
management
has
classified
as
OTTI.
For
further discussion
of our
analysis
on
impaired
investment
securities
for
OTTI,
see
Note 2
“Investment
Securities”
to
the
Consolidated
Financial
Statements in this Form 10-K.
AFS and
HTM investment
securities increased
$189.9 million or
56.8% to
$524.2 million at
December 31,
2021 from
$334.3 million at December 31, 2020. Investment securities increased over the past year due to higher than expected cash
balances.
Management
reinvested
idle
cash
balances
into
high
credit
quality
investments
to
increase
the
Company’s
profitability
and
modify
the
Company’s
balance
sheet
duration
according
to
the
ALM
policy.
As
of
December 31,
2021,
corporate bond securities with a market value of $20.4 million were pledged to secure
public deposits. As of December 31,
2021, the Company did not have any tax-exempt securities
in the portfolio.
52
USCB Financial Holdings, Inc.
2021 10-K
The
following
table
presents
the
amortized
cost
and
fair
value
of
investment
securities
for
the
dates
indicated
(in
thousands):
December 31, 2021
December 31, 2020
Available-for-sale:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
U.S. Government Agency - SBA
$
-
$
-
$
1,488
$
1,552
U.S. Government Agency
10,564
10,520
20,196
20,032
Collateralized mortgage obligations
160,506
156,829
104,426
104,650
Mortgage-backed securities - Residential
120,643
118,842
80,110
81,301
Mortgage-backed securities - Commercial
49,905
50,117
45,802
48,331
Municipal securities
25,164
24,276
24,230
24,211
Bank subordinated debt securities
27,003
28,408
24,004
24,630
Corporate bonds
12,068
12,550
27,733
29,615
$
405,853
$
401,542
$
327,989
$
334,322
Held-to-maturity:
U.S. Government Agency - SBA
$
12,004
$
11,641
$
-
$
-
U.S. Government Agency
22,501
22,263
-
-
Collateralized mortgage obligations
44,820
43,799
-
-
Mortgage-backed securities - Residential
26,920
26,352
-
-
Mortgage-backed securities - Commercial
3,103
3,013
-
-
Corporate bonds
13,310
13,089
-
-
$
122,658
$
120,157
$
-
$
-
The following
table shows
the weighted
average yields,
categorized by
contractual maturity,
for investment
securities
as of December 31, 2021 (in thousands, except ratios):
Within 1 year
After 1 year through
5 years
After 5 years through
10 years
After 10 years
Total
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Available-for-sale:
U.S. Government Agency
$
-
0.00 %
$
-
0.00 %
$
-
0.00 %
$
10,564
1.74%
$
10,564
0.00 %
Collateralized mortgage obligations
-
0.00 %
-
0.00 %
-
0.00 %
160,506
1.32%
160,506
1.32%
MBS - Residential
-
0.00 %
-
0.00 %
1,002
0.00 %
119,641
2.26%
120,643
1.38%
MBS - Commercial
-
0.00 %
-
0.00 %
-
0.00 %
49,905
2.82%
49,905
2.82%
Municipal securities
-
0.00 %
-
0.00 %
1,000
2.05%
24,164
1.38%
25,164
1.73%
Bank subordinated debt securities
-
0.00 %
-
0.00 %
26,003
4.98%
1,000
6.13%
27,003
5.02%
Corporate bonds
1,992
3.39%
5,983
4.24%
4,093
2.54%
-
0.00 %
12,068
3.52%
$
1,992
$
5,983
$
32,098
$
365,780
$
405,853
1.87%
Held-to-maturity:
U.S. Government Agency - SBA
$
-
0.00 %
$
-
0.00 %
$
3,953
1.58%
$
8,051
1.58%
$
12,004
1.58%
U.S. Government Agency
-
0.00 %
2,982
0.64%
19,519
1.26%
-
0.00 %
22,501
1.18%
Collateralized mortgage obligations
-
0.00 %
-
0.00 %
-
0.00 %
44,820
1.46%
44,820
1.46%
MBS - Residential
-
0.00 %
2,836
2.98%
9,264
1.61%
14,820
1.62%
26,920
1.76%
MBS - Commercial
-
0.00 %
-
0.00 %
3,103
1.61%
-
0.00 %
3,103
1.61%
Corporate bonds
2,017
3.07%
11,293
2.71%
-
0.00 %
-
0.00 %
13,310
2.76%
$
2,017
$
17,111
$
35,839
$
67,691
$
122,658
1.62%
Loans
Loans are
the largest
category of
interest-earning assets
on the
Consolidated
Balance Sheets,
and usually
provides
higher yields
than the
rest of
the interest-earning
assets. Higher
yields typically
carry inherent
credit and
liquidity risks
in
comparison to lower yield assets.
The Company manages and mitigates
such risks in accordance with the
credit and ALM
policies, risk tolerance and balance sheet composition.
53
USCB Financial Holdings, Inc.
2021 10-K
The following table shows the loan portfolio composition
as of the dates indicated (in thousands):
December 31, 2021
December 31, 2020
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
201,359
16.9
%
$
232,754
22.3
%
Commercial Real Estate
704,988
59.2
%
606,425
58.2
%
Commercial and Industrial
146,592
12.3
%
157,330
15.1
%
Foreign Banks
59,491
5.0
%
38,999
3.7
%
Consumer and Other
79,229
6.6
%
5,507
0.5
%
Total
gross loans
1,191,659
100.0
%
1,041,015
99.8
%
Less: Unearned income
1,578
2,511
Total
loans net of unearned income
1,190,081
1,038,504
Less: Allowance for credit losses
15,057
15,086
Total
net loans
$
1,175,024
$
1,023,418
Total
gross loans increased
by $150.6 million
or 14.5%
at December 31,
2021 compared to
the same period
in 2020.
The most
significant growth
was in
the commercial
real estate
and consumer
and other
loan pools,
offset by
a decline
in
the residential real
estate and commercial
and industrial loan
pools. Consumer and
other loans increased
because of two
yacht loan portfolios that were purchased for $93.7 million,
including deferred fees, for the year ended December 31, 2021.
Commercial and industrial loans decreased because of
continuing PPP loan forgiveness
as expected.
The loan portfolio has continued to experience growth in the past two years. Since our inception, the primary focus has
been
on
commercial
real
estate
lending,
representing
approximately
59.2%
of
the
total
gross
loan
portfolio
as
of
December 31, 2021. In the past, we supplemented our core commercial growth with the origination of 1-4 family residential
loans and
the acquisition
of 1-4
family residential
loan portfolios
to further
diversify our
loan portfolio.
However,
we have
determined not to further pursue this line of business and
are focused on growing our commercial portfolio.
Other than the previous
mentioned shifts, we
do not expect any
significant changes
over the foreseeable future
in the
composition
of
our
loan
portfolio
or
in
our
emphasis
on
commercial
real
estate
lending.
Our
loan
growth
strategy
since
inception has been reflective of the market in which we
operate and of our strategic plan as approved by the
Board.
Most of the
commercial real estate
exposure represents
loans to commercial
businesses secured
by owner-occupied
real estate.
The growth
experienced
over the
last couple
of years
is primarily
due to
implementation
of our
relationship-
based banking model and the success
of our relationship managers in
competing for new business in
a highly competitive
metropolitan area. Many of our
larger loan clients have lengthy
relationships with members of our senior management
team
or our relationship managers that date back to former institutions.
From a
liquidity perspective,
our loan
portfolio provides
us with
additional
liquidity due
to repayments
or unexpected
prepayments.
The
following
table
shows
maturities
and
sensitivity
to
interest
rate
changes
for
the
loan
portfolio
at
December 31, 2021 (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
$
7,745
$
18,350
$
83,595
$
91,669
$
201,359
Commercial Real Estate
24,279
163,931
513,333
3,445
704,988
Commercial and Industrial
15,263
67,833
31,336
32,160
146,592
Foreign Banks
59,491
-
-
-
59,491
Consumer and Other
2,005
3,465
2,505
71,254
79,229
Total
gross loans
$
108,783
$
253,579
$
630,769
$
198,528
$
1,191,659
Interest rate sensitivity:
Fixed interest rates
$
82,940
$
170,406
$
136,429
$
78,859
$
468,634
Floating or adjustable rates
25,843
83,173
494,340
119,669
723,025
Total
gross loans
$
108,783
$
253,579
$
630,769
$
198,528
$
1,191,659
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,
54
USCB Financial Holdings, Inc.
2021 10-K
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,
2021, approximately
60.7%
of the
loans
have adjustable/variable
rates
and
39.3%
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.
Asset Quality
Our asset quality grading
analysis estimates the capability of
the borrower to repay
the contractual obligation of
the loan
agreement as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly
graded loans. Internal
credit risk
grades are evaluated
at least annually,
or more frequently
if deemed necessary.
Internal
credit
risk
ratings
may
change
based
on
management’s
assessment
of
the
results
from
the
annual
review,
portfolio
monitoring and other developments observed with borrowers.
The internal credit risk grades used by the Company to
assess the credit worthiness of a loan are shown below:
Pass
– Loans indicate different levels of satisfactory
financial condition and performance.
Special Mention
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
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, 2021
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
196,778
$
-
$
4,581
$
-
$
201,359
Commercial Real Estate
703,349
1,222
417
-
704,988
Commercial and Industrial
146,039
-
553
-
146,592
Foreign Banks
59,491
-
-
-
59,491
Consumer and Other
79,005
-
224
-
79,229
$
1,184,662
$
1,222
$
5,775
$
-
$
1,191,659
December 31, 2020
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
225,861
$
-
$
6,893
$
-
$
232,754
Commercial Real Estate
605,180
-
1,245
-
606,425
Commercial and Industrial
157,097
-
233
-
157,330
Foreign Banks
38,999
-
-
-
38,999
Consumer and Other
5,229
-
278
-
5,507
$
1,032,366
$
-
$
8,649
$
-
$
1,041,015
55
USCB Financial Holdings, Inc.
2021 10-K
Non-Performing Assets
The following table presents non-performing assets as
of December 31, 2021 and 2020 (in thousands, except
ratios):
2021
2020
Non-accrual loans, less non-accrual TDR loans
$
1,190
$
303
Non-accrual TDRs
-
1,275
Loans past due over 90 days and still accruing
-
-
Total
non-performing loans
1,190
1,578
Other real estate owned
-
-
Total
non-performing assets
$
1,190
$
1,578
Asset quality ratios:
Allowance for credit losses to total loans
1.27%
1.45%
Allowance for credit losses to non-performing loans
1265%
956%
Non-performing loans to total loans
0.10%
0.15%
Non-performing
assets include
all loans
categorized as
non-accrual or
restructured,
impaired securities,
non-accrual
TDRs, other
real estate owned
(“OREO”) and other
repossessed assets. Problem
loans for
which the
collection or liquidation
in
full
is
reasonably
uncertain
are
placed
on
a
non-accrual
status.
This
determination
is
based
on
current
existing
facts
concerning collateral values
and the paying capacity
of the borrower.
When the collection of
the full contractual balance
is
unlikely, the loan is
placed on non-accrual to avoid overstating the Company’s
income for a loan with increased credit risk.
If the
principal or
interest on
a commercial
loan becomes
due and
unpaid for
90 days
or more,
the loan
is placed
on
non-accrual status as of
the date it becomes
90 days past due
and remains in non-accrual
status until it meets
the criteria
for restoration to accrual status.
Residential loans, on
the other hand, are placed
on non-accrual status when
the principal
or interest
becomes due
and unpaid
for 120
days or
more and remains
in non-accrual
status until
it meets
the criteria
for
restoration
to
accrual
status.
Restoring
a
loan
to
accrual
status
is
possible
when
the
borrower
resumes
payment
of
all
principal and interest
payments for a period
of six months
and the Company
has a documented
expectation of repayment
of the remaining contractual principal and interest or the
loan becomes secured and in the process of collection.
A TDR is
a debtor that
is experiencing
financial difficulties
and the Company
grants a concession.
This determination
is performed during the annual review process or whenever problems
are surfacing regarding the client’s ability to repay
in
accordance with
the original
terms of
the loan
or line
of credit.
In general,
a borrower
that can
obtain funds
from sources
other than
the Company
at market
interest rates
at or
near those
for non-troubled
debt is
not involved
in a
troubled debt
restructuring.
The
concessions
are
given
to
the
debtor
in
various
forms,
including
interest
rate
reductions,
principal
forgiveness,
extension
of
maturity
date,
waiver,
or
deferral
of
payments
and
other
concessions
intended
to
minimize
potential losses.
The following tables present performing and non-performing
TDRs for the dates indicated (in thousands):
December 31, 2021
Accruing
Non-Accruing
Total
Residential Real Estate
$
7,815
$
-
$
7,815
Commercial Real Estate
696
-
696
Commercial and Industrial
141
-
141
Consumer and Other
224
-
224
$
8,876
$
-
$
8,876
December 31, 2020
Accruing
Non-Accruing
Total
Residential Real Estate
$
8,884
$
777
$
9,661
Commercial Real Estate
733
-
733
Commercial and Industrial
179
23
202
Consumer and Other
278
-
278
$
10,074
$
800
$
10,874
The Company had
allocated $360 thousand
and $453 thousand of
specific allowance for
TDR loans at
December 31,
2021 and 2020, respectively.
There was no commitment to lend additional funds to these
TDR customers.
56
USCB Financial Holdings, Inc.
2021 10-K
Charge-offs on
TDR loans
for the years
ended December 31,
2021 and
2020 was $18
thousand and
$153 thousand,
respectively.
There
were
no
defaults
on
TDR
loans
at
December 31,
2021
and
2020
within
the
prior
12
months.
The
Company did not have any new TDR loans for the year
ended December 31, 2021.
The
Company
provided
financial
relief
to
borrowers
impacted
by
COVID-19
and
provided
modifications
to
include
interest
only
deferral
or
principal
and
interest
deferral.
These
modifications
are
excluded
from
TDR,
classification
under
Section 4013 of the CARES Act or under applicable interagency
guidance of the federal banking regulators.
For further
discussion on
non-performing loans,
see Note
3 “Loans”
to the
Consolidated Financial
Statements of
this
Form 10-K.
Allowance for Credit Losses
In
determining
the
balance
of
the
allowance
account,
loans
are
pooled
by
product
segments
with
similar
risk
characteristics and management
evaluates the ACL on
each segment and on
a regular basis to maintain
the allowance at
an
adequate
level
based
on
factors
which,
in
management’s
judgment,
deserve
current
recognition
in
estimating
credit
losses.
Such
factors
include
changes
in
prevailing
economic
conditions,
historical
loss
experience,
delinquency
trends,
changes in the composition and size of the loan portfolio
and the overall credit worthiness of the borrowers.
Additionally,
qualitative adjustments
are made to
the ACL when,
based on management’s
judgment, there are
factors
impacting the allowance estimate not considered by the
quantitative calculations.
The following table presents ACL and net charge-offs to average loans by
type for the periods indicated (in thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2021:
Beginning balance
$
3,408
$
9,453
$
1,689
$
348
$
188
$
15,086
Provision for credit losses
(919)
(695)
955
109
390
(160)
Recoveries
238
-
149
-
5
392
Charge-offs
(229)
-
(18)
-
(14)
(261)
Ending Balance
$
2,498
$
8,758
$
2,775
$
457
$
569
$
15,057
Average loans
$
212,867
$
654,723
$
153,763
$
52,187
$
42,602
$
1,116,142
Net charge-offs to average loans
- %
- %
(0.08)%
- %
0.02%
(0.01)%
December 31, 2020:
Beginning balance
$
3,749
$
6,591
$
1,214
$
332
$
112
$
11,998
Provision for credit losses
(36)
2,861
321
16
88
3,250
Recoveries
168
1
307
-
18
494
Charge-offs
(473)
-
(153)
-
(30)
(656)
Ending Balance
$
3,408
$
9,453
$
1,689
$
348
$
188
$
15,086
Average loans
$
258,728
$
596,022
$
122,177
$
43,433
$
6,545
$
1,026,905
Net charge-offs to average loans
0.12%
- %
(0.13)%
- %
0.18%
0.02%
Bank-Owned Life Insurance
At
December 31,
2021,
the
combined
cash
surrender
value
of
all
bank-owned
life
insurance
(“BOLI”)
policies
was
$41.7 million.
Changes
in
cash
surrender
value
are
recorded
in
non-interest
income
on
the
Consolidated
Statements
of
Operations. In
2021, 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
57
USCB Financial Holdings, Inc.
2021 10-K
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.
Additionally, 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, 2021 and 2020 (in thousands, except ratios):
2021
2020
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Non-interest-bearing deposits
$
547,116
0.00
%
$
390,467
0.00
%
Interest-bearing transaction accounts
52,379
0.11
%
46,819
0.34
%
Saving and money market deposits
619,810
0.34
%
473,028
0.65
%
Time deposits
235,127
0.65
%
276,462
1.70
%
$
1,454,432
0.25
%
$
1,186,777
0.67
%
To
tal
average
deposits
at
December 31,
2021
was
$1.5 billion,
an
increase
of
$267.7 million,
or
22.6%
over
total
average deposits of $1.2 billion
for the same period
in 2020. Our focus on
demand deposits has resulted
in an increase in
average balances of
$156.6 million,
or 40.1%, in non-interest
bearing demand deposits
and an increase of
$146.8 million,
or 31.0%, in saving and money market deposits when
comparing the average balances for the
years ended December 31,
2021 and 2020.
The
uninsured
deposits
are
estimated
based
on
the
FDIC
deposit
insurance
limit
of
$250 thousand
for
all
deposit
accounts
at
the
Bank
per
account
holder.
Total
estimated
uninsured
deposits
were
$897.8 million
and
$606.1 million
at
December 31, 2021 and
2020, respectively.
Time deposits
with balances of $250
thousand or more totaled
$119.4 million
and $104.1 million at December 31, 2021 and 2020,
respectively.
The following table shows scheduled maturities of uninsured
time deposits as of December 31, 2021 (in thousands):
Three months or less
$
28,707
Over three through six months
7,948
Over six though twelve months
42,106
Over twelve months
24,094
$
102,855
Borrowings
As a
member of
the FHLB, we
are eligible for
advances with various
terms and conditions.
This accessibility of
additional
funding allows
us to
efficiently
and timely
meet both
expected and
unexpected outgoing
cash flows
and collateral
needs
without adversely affecting either daily operations
or the financial condition of the Company.
As of December 31,
2021 and 2020,
there was $36.0 million
of fixed rate advances
from the FHLB outstanding
with a
weighted average rate of 1.52%. Most of the advances
are due in the first two quarters of 2025.
The following table presents the FHLB fixed rate advances
as of December 31, 2021 (in thousands):
Interest Rate
Type of Rate
Maturity Date
Amount
0.81%
Fixed
August 17, 2023
$
5,000
1.04%
Fixed
July 30, 2024
5,000
2.05%
Fixed
March 27, 2025
10,000
1.91%
Fixed
March 28, 2025
5,000
1.81%
Fixed
April 17, 2025
5,000
1.07%
Fixed
July 18, 2025
6,000
$
36,000
58
USCB Financial Holdings, Inc.
2021 10-K
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, 2021, there were no
outstanding balances with the Fed Funds
line of credit.
Off-Balance Sheet Arrangements
We engage
in various financial
transactions in
our operations
that, under GAAP,
may not be
included on
the balance
sheet. To
meet the financing needs
of our customers we may
include commitments to extend
credit and standby letters
of
credit. To
a varying
degree, such
commitments involve
elements of
credit, market,
and interest
rate risk
in excess
of the
amount recognized
in the
balance sheet.
We use
more conservative
credit and
collateral policies
in making
these credit
commitments as we
do for on-balance sheet
items. We are not
aware of any accounting
loss to be
incurred by funding
these
commitments; however,
we maintain an allowance
for off-balance sheet
credit risk which is
recorded under other liabilities
on the Consolidated Balance Sheets.
Since commitments associated with letters of
credit and commitments to extend
credit may expire unused, the
amounts
shown do not necessarily
reflect the actual
future cash funding requirements
.
The following table
presents lending related
commitments outstanding as of December 31, 2021 and
2020 (in thousands):
2021
2020
Commitments to grant loans and unfunded lines of credit
$
134,877
$
107,553
Standby and commercial letters of credit
6,420
1,813
Total
$
141,297
$
109,366
Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition
established
in
the
contract,
for
a
specific
purpose.
Commitments
generally
have
variable
interest
rates,
fixed
expiration
dates or
other
termination
clauses
and
may require
payment
of
a fee.
Since many
of the
commitments
are
expected to
expire without being
fully drawn, the
total commitment
amounts disclosed
above do not
necessarily represent
future cash
requirements.
Unfunded lines of credit represent unused portions of credit facilities to our current borrowers that represent no change
in credit risk in our portfolio. Lines
of credit generally have variable interest
rates. The maximum potential amount
of future
payments we could
be required to
make is represented
by the contractual
amount of the
commitment, less
the amount of
any advances made.
Letters of credit are
conditional commitments issued
by us to guarantee
the performance of a
client to a third
party.
In
the event of nonperformance by
the client in accordance with the
terms of the agreement with the
third party,
we would be
required to fund
the commitment.
If the commitment
is funded, we
would be entitled
to seek recovery
from the client
from
the underlying collateral,
which can include
commercial real estate,
physical plant and
property, inventory, receivables, cash
or marketable securities.
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
IRR (“Internal
Rate of
Return”) is
inherent to
the banking
business, our
ALCO has
established
sound risk management practices in place to identify,
measure, monitor and mitigate IRR exposures.
When assessing
the scope
of IRR
exposure
and
impact on
the consolidated
balance sheet,
cash
flows and
income
statement,
management
considers
both
earnings
and
economic
impacts.
Asset
price
variations,
deposits
volatility
and
reduced earnings or outright losses could adversely affect
the Company’s
liquidity, performance,
and capital adequacy.
Income simulations
are used
to assess
the impact
of changing
rates on
earnings under
different rates
scenarios and
time horizons.
These simulations
utilize both
instantaneous
and parallel
changes in
the level
of interest
rates, as
well as
non-parallel changes such as changing slopes (flat and steeping) and
twists of the yield curve, Static simulation models are
based on current exposures and
assume a constant balance sheet with
no new growth. Dynamic simulation analysis
is also
59
USCB Financial Holdings, Inc.
2021 10-K
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
will
allow
us
to
measure
the
degree
to
which
the
economic
values
will
change
under
different
interest
rate
scenarios (parallel and non-parallel). The economic-value approach focuses on a longer-term time horizon and
captures all
future cash flows expected
from existing assets and
liabilities. The economic
value model utilizes a
static approach in that
the analysis
does not
incorporate new
business; rather,
the analysis
shows a
snapshot in
time of
the risk
inherent in
the
balance sheet.
Market and Interest Rate Risk Management
assets generally
reprice faster
than our
liabilities, which
results in
a favorable
impact to
net interest
income when
market
interest rates
increase. 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 rate drivers.
Because of the inherent use
of these estimates and
assumptions in the model,
our actual results may,
and most likely
will, differ from static measures results. In addition, static measures like
EVEs do not include actions that management may
undertake to manage the risks in response to anticipated changes in interest rates or client deposit behavior. As part of our
ALM strategy
and
policy,
management
has the
ability
to modify
the
balance sheet
to
either increase
asset
duration
and
decrease liability
duration to reduce
asset sensitivity,
or to decrease
asset duration and
increase liability duration
in order
to increase asset sensitivity.
According to our model, as of December 31, 2021, the NIM will remain fairly stable for static rate scenarios (-400
basis
points:
+400
basis
points).
For
the
static
forecast
for
year
one,
the
estimated
NIM
will
decrease
from
3.09%
base
case
scenario to 3.08%
under a +400-basis
points scenario. Additionally, utilizing an economic
value of equity, or EVE,
approach,
we analyze the
risk to capital
from the
effects of
various interest
rate scenarios
through a long-term
discounted cash
flow
model. This
measures the
difference between
the economic
value of
our assets
and the
economic value
of our
liabilities,
which is
a proxy for
our liquidation value.
According to
our balance sheet
composition, and as
expected, our model
stipulates
that an increase of rates
will have a negative impact
on the EVE. Results and
analysis are presented quarterly to the
Board,
and strategies are defined.
Additionally, in the last couple of quarters we
have been reducing our asset
sensitivity by extending asset duration.
This
has reduced our NII volatility
for the first and second
year and has helped us
to maintain the NII in
accordance with ALCO
expectations.
Liquidity
an adequate level of liquidity depends on the Company’s ability to
efficiently meet both expected and unexpected cash flow
and collateral needs without adversely affecting
either daily operations or the financial condition of the
Company.
Liquidity risk
is the
risk that
we will
be unable
to meet
our short-term
and long-term
obligations as
they become
due
because of an inability
to liquidate assets or
obtain relatively adequate funding. The
Company’s obligations, and the funding
sources
used
to
meet
them,
depend
significantly
on
our
business
mix,
balance
sheet
structure
and
composition,
credit
quality of our assets and the cash flow profiles of our on-
and off-balance sheet obligations.
In managing
inflows and
outflows,
management
regularly
monitors situations
that can
give rise
to increased
liquidity
risk. These
include funding
mismatches, market
constraints on
the ability
to convert
assets (particularly
investments) into
cash or in accessing sources of funds (i.e., market liquidity),
and contingent liquidity events.
Changes in macroeconomic conditions or exposure
to credit, market, operational, legal
and reputational risks, including
cybersecurity risk could also affect the Company’s
liquidity risk profile unexpectedly and are considered
in the assessment
of liquidity and ALM framework.
Management has established
a comprehensive and
holistic management process for
identifying, measuring, monitoring
and
mitigating
liquidity
risk.
Due
to
its
critical
importance
to
the
viability
of
the
Company,
liquidity
risk
management
is
integrated into our risk management processes and ALM
policy.
60
USCB Financial Holdings, Inc.
2021 10-K
Critical elements of our liquidity
risk management include: effective corporate governance consisting of
oversight by the
Board and
active involvement
by senior
management; appropriate strategies,
policies, procedures, and
limits used
to identify
and mitigate liquidity risk; comprehensive liquidity risk measurement and
monitoring systems (including assessments of the
current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and
business
activities of
the Company;
active management
of intraday
liquidity and
collateral; an
appropriately diverse
mix of
existing
and
potential
future
funding
sources;
adequate
levels
of
highly
liquid
marketable
securities
free
of
legal,
regulatory,
or
operational
impediments,
that
can
be
used
to
meet
liquidity
needs
in
stressful
situations;
comprehensive
contingency
funding plans
that sufficiently address
potential adverse liquidity
events and emergency
cash flow
requirements; and internal
controls
and
internal
audit
processes
sufficient
to
determine
the
adequacy
of
the
institution’s
liquidity
risk
management
process.
We
expect
funds
to
be
available
from
several
basic
banking
activity
sources,
including
the
core
deposit
base,
the
repayment and maturity of loans and investment security
cash flows. Other potential funding sources include
federal funds
purchased, brokered
certificates of
deposit, listing
certificates of
deposit, Fed
funds lines
and borrowings
from the
FHLB.
Accordingly, our liquidity resources
were at sufficient levels to fund loans and meet other cash needs as necessary.
We do
not expect liquidity resources to be compromised at this
time.
Capital Adequacy
As
of
December 31,
2021,
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, 2021.
The following table
presents the capital
ratios for
both the Bank and the Company at December 31, 2021
and 2020 (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, 2021:
Total
risk-based capital
$
186,735
14.92
%
$
100,125
8.00
%
$
125,157
10.00
%
Tier 1 risk-based capital
$
171,484
13.70
%
$
75,094
6.00
%
$
100,125
8.00
%
Common equity tier 1 capital
$
171,484
13.70
%
$
56,321
4.50
%
$
81,352
6.50
%
Leverage ratio
$
171,484
9.55
%
$
71,825
4.00
%
$
89,781
5.00
%
December 31, 2020:
Total
risk-based capital
$
139,326
14.24
%
$
78,260
8.00
%
$
97,825
10.00
%
Tier 1 risk-based capital
$
127,061
12.99
%
$
58,695
6.00
%
$
78,260
8.00
%
Common equity tier 1 capital
$
94,984
9.71
%
$
44,021
4.50
%
$
63,587
6.50
%
Leverage ratio
$
127,061
8.61
%
$
59,053
4.00
%
$
73,817
5.00
%
Impact of Inflation
Our Consolidated
Financial Statements
and related
notes have been
prepared in
accordance with
U.S. GAAP,
which
require the
measurement
of financial
position and
operating results
in terms
of historical
dollars,
without considering
the
changes
in
the
relative
purchasing
power
of
money
over
time due
to
inflation.
The
impact
of
inflation
is
reflected
in
the
increased cost of operations.
Unlike most industrial companies,
nearly all our assets and
liabilities are monetary in
nature.
As a result,
interest rates have a
greater impact on our
performance than do the
effects of general levels
of inflation. Periods
of high inflation
are often accompanied
by relatively higher
interest rates, and
periods of low
inflation are accompanied
by
relatively lower interest rates.
As market interest rates
rise or fall in relation
to the rates earned
on loans and investments,
the
value
of
these
assets
decreases
or
increases
respectively.
Inflation
can
also
impact
core
non-interest
expenses
associated with delivering the Company’s services.
Recently Issued Accounting Pronouncements
Recently issued accounting
pronouncements are discussed
in Note 1 “Summary
of Significant Accounting Policies”
to
the Consolidated Financial Statements of this Form 10-K.
61
USCB Financial Holdings, Inc.
2021 10-K
Reconciliation and Management Explanation of Non
-GAAP Financial Measures
Management
has
included
these
non-GAAP
measures
because
it
believes
these
measures
may
provide
useful
supplemental information
for evaluating
the Company’s
underlying performance
trends. Further,
management uses
these
measures
in
managing
and
evaluating
the
Company’s
business
and
intends
to
refer
to
them
in
discussions
about
our
operations and performance.
Operating performance
measures should be
viewed in addition
to, and not
as an alternative
to or
substitute
for,
measures
determined
in
accordance
with
GAAP,
and
are
not
necessarily
comparable
to non-GAAP
measures that may be presented by other
companies. The following table reconciles the non-GAAP financial measurement
of operating net income available to common stockholders for the periods presented (in thousands,
except per share data):
As of and for the years ended December 31,
2021
2020
Pre-Tax Pre-Provision ("PTPP") Income:
Net income
$
21,077
$
10,820
Plus: Provision for income taxes
6,600
2,588
Plus: Provision for (recovery of) credit losses
(160)
3,250
PTPP income
$
27,517
$
16,658
PTPP Return on Average Assets:
PTPP income
$
27,517
$
16,658
Average assets
$
1,701,658
$
1,428,935
PTPP return on average assets
1.62%
1.17%
Operating Net Income:
Net income
$
21,077
$
10,820
Less: Net gains on sale of securities
214
434
Less: Tax
effect on sale of securities
(52)
(106)
Operating net income
$
20,915
$
10,492
Operating PTPP Income:
PTPP income
$
27,517
$
16,658
Less: Net gains on sale of securities
214
434
Operating PTPP Income
$
27,303
$
16,224
Operating PTPP Return on Average Assets:
Operating PTPP income
$
27,303
$
16,224
Average assets
$
1,701,658
$
1,428,935
Operating PTPP Return on average assets
1.60%
1.14%
Operating Return on Average Asset:
Operating net income
$
20,915
$
10,492
Average assets
$
1,701,658
$
1,428,935
Operating return on average assets
1.23%
0.73%
62
USCB Financial Holdings, Inc.
2021 10-K
Years Ended December 31,
2021
2020
Operating Net Income Available to Common Stockholders:
Net income (GAAP)
$
21,077
$
10,820
Less: Preferred dividends
2,077
3,127
Less: Exchange and redemption of preferred shares
89,585
-
Net income (loss) available to common stockholders (GAAP)
(70,585)
7,693
Add back: Exchange and redemption of preferred shares
89,585
-
Operating net income avail. to common stock (non-GAAP)
(1)
$
19,000
$
7,693
Allocation of operating net income per common stock class:
Class A common stock
$
19,000
$
5,851
Class B common stock
$
-
$
1,842
Weighted average shares outstanding:
Class A common stock
10,507,530
3,887,480
10,507,530
3,911,290
Class B common stock
-
6,121,052
-
6,121,052
Diluted EPS:
(1)(2)
Class A common stock
Net income (loss) per diluted share (GAAP)
$
(6.72)
$
1.50
Add back: Exchange and redemption of preferred shares
8.53
-
$
1.81
$
1.50
Class B common stock
Net income per diluted share (GAAP)
$
-
$
0.30
Add back: Exchange and redemption of preferred shares
-
-
$
-
$
0.30
(1)
The Company believes these non-GAAP measurements
are a key indicator of the ongoing earnings
power of the Company.
(2)
During the year ended December 31, 2021,
the Company entered into agreements with the Class
B shareholders to exchange all outstanding
Class B non-voting stock for Class A voting common
stock on a 1 for 5 reverse stock split As such,
there are no issued and outstanding shares
of Class
B common stock at December 31, 2021.
63
USCB Financial Holdings, Inc.
2021 10-K
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.
64
USCB Financial Holdings, Inc.
2021 10-K
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
, PCAOB ID:
)
65
Crowe LLP
Independent Member Crowe Global
65
USCB Financial Holdings, Inc.
2021 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Shareholders 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,
2021
and
2020,
the
related
consolidated
statements
of
operations,
comprehensive income, 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, 2021 and
2020,
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 – Financial Statement Consistency
As discussed
in
Note 1
to
the consolidated
financial
statements,
the stockholders
of U.S.
Century
Bank
exchanged their Class A
common shares of U.S.
Century Bank for shares of
USCB Financial Holdings, Inc.
on a 1
share for
1 share basis
during the year
ended December
31, 2021.
Stockholders of U.S.
Century
Bank became stockholders
of USCB Financial Holdings,
Inc., and USCB Financial
Holdings, Inc. became
the sole
stockholder
of U.S.
Century Bank.
The consolidated
financial statements
as of
and for
the year
ended December
31, 2020, do
not include
USCB Financial
Holdings, Inc.
The 2020 financial
statements
of U.S.
Century
Bank
are
presented
with
the 2021
consolidated
financial
statements
of USCB
Financial
Holdings, Inc. since U.S. Century Bank’s assets,
liabilities, and operations comprise substantially all
of the
consolidated assets, liabilities, and operations.
Our opinion is not modified with respect to this matter.
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.
March 24, 2022
66
USCB Financial Holdings, Inc.
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands,
except share and per share data)
December 31,
2021
2020
ASSETS:
Cash and due from banks
$
$
Interest-bearing deposits in banks
Total cash and cash equivalents
Investment securities held to maturity (fair value $
)
-
Investment securities available for sale, at fair value
Federal Home Loan Bank stock, at cost
Loans held for investment, net of allowance of $
, respectively
Accrued interest receivable
Premises and equipment, net
Bank owned life insurance
Deferred tax asset, net
Lease right-of-use asset
Other assets
Total assets
$
$
LIABILITIES:
Deposits:
Demand
$
$
$
442,467
Money market and savings accounts
Interest-bearing checking accounts
Time deposits over $250,000
Time deposits $250,000 or less
Total deposits
Federal Home Loan Bank advances
Lease liability
Accrued interest and other liabilities
Total liabilities
Commitments and contingencies (See Note 10
and 18)
nil
nil
STOCKHOLDERS' EQUITY:
Preferred stock - Class C; $
authorized;
-
Preferred stock - Class D; $
authorized;
-
Preferred stock - Class E; $
authorized;
-
Common stock - Class A Voting; $
(1)
Common stock - Class B Non-voting; $
issued and outstanding as of December 31, 2021
and 2020
-
Additional paid-in capital on common stock
(1)
Accumulated deficit
(
124,245
)
(
53,622
)
Accumulated other comprehensive income (loss)
(
2,516
)
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
(1)
Class A common stock outstanding and additional
paid-in-capital for December 31, 2020 were adjusted
to reflect the 1 for 5 reverse stock split. See
Note 13 "Stockholders' Equity" for further discussion
on the stock split.
The accompanying notes are an integral part of
these consolidated financial statements.
67
USCB Financial Holdings, Inc.
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Dollars in thousands,
except per share data)
Years Ended December 31,
2021
2020
Interest income:
$
$
Interest expense:
Provision for credit losses
(
160
)
Non-interest income:
-
-
Non-interest expense:
Income tax expense
Less: Preferred stock dividend
Less: Exchange and redemption of preferred shares
-
Net income (loss) available to common stockholders
$
(
70,585
)
$
Per share information:
(1)
Class A common stock
(2)
Net income (loss) per share, basic
$
(
6.72
)
$
Net income (loss) per share, diluted
$
(
6.72
)
$
Class B common stock
Net income per share, basic
$
$
Net income per share, diluted
$
$
(1)
See Note 14 "Earnings per Share" for information
on the allocation of income available to common stockholders.
(2)
For the year ended December 31, 2020, the
common stock outstanding, weighted average
shares and net income per share for the Class A
common stock were adjusted to reflect the 1
for 5 reverse stock split that occurred in June of 2021.
The accompanying notes are an integral part of
these consolidated financial statements.
68
USCB Financial Holdings, Inc.
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Years Ended December 31,
2021
2020
Net income
$
$
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities
(
9,561
)
Amortization of net unrealized gains on securities
transferred from available-for-sale to held-to-maturity
-
Reclassification adjustment for gain included in net
income
(
214
)
(
434
)
Tax effect
(
917
)
Total other comprehensive income (loss), net of tax
(
7,297
)
Total comprehensive income
$
$
The accompanying notes are an integral part of
these consolidated financial statements.
69
USCB Financial Holdings, Inc.
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders’
Equity
(Dollars in thousands,
except per share data)
Preferred Stock
Common Stock
Additional Paid-
in Capital on
Common Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Shares
Par Value
Shares
Par Value
Total
Stockholders'
Equity
Balance at January 1, 2021
$
$
$
$
(
53,622
)
$
$
Reverse stock split 1 for 5 Common A
-
-
(
15,557,626
)
(
15,558
)
-
-
-
Adjusted balance at January 1, 2021
(
53,622
)
Net income
-
-
-
-
-
-
Other comprehensive loss
-
-
-
-
-
-
(
7,297
)
(
7,297
)
Dividends - preferred stock
-
-
-
-
-
(
2,077
)
-
(
2,077
)
Issuance of Class A common stock, net of
offering costs of $
-
-
-
-
Exchange of preferred stock
(
11,109,025
)
(
22,154
)
(
80,626
)
-
-
Redemption of preferred stock
(
1,241,854
)
(
9,923
)
-
-
-
(
8,997
)
-
(
18,920
)
Exchange of Class B to Class A common stock
-
-
(
4,896,840
)
(
4,897
)
-
-
-
Stock based compensation
-
-
-
-
-
-
Balance at December 31, 2021
$
-
$
$
$
(
124,245
)
$
(
2,516
)
$
Balance at January 1, 2020
(1)
$
$
$
$
(
61,315
)
$
$
Net income
-
-
-
-
-
-
Other comprehensive income
-
-
-
-
-
-
Dividends - preferred stock
-
-
-
-
-
(
3,127
)
-
(
3,127
)
Stock based compensation
-
-
-
-
-
-
Exercise of stock options
-
-
-
-
Balance at December 31, 2020
$
$
$
$
(
53,622
)
$
$
(1)
Common stock shares, par value, and additional paid-in
capital for common stock for 2020 was adjusted
to reflect the 1 for 5 reverse stock split. See Note
13 "Stockholders' Equity" for further details.
The accompanying notes are an integral part of
these consolidated financial statements.
70
USCB Financial Holdings, Inc.
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
2021
2020
Cash flows from operating activities:
Net income
$
$
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses
(
160
)
Depreciation and amortization
Amortization of premiums on securities, net
Accretion of deferred loan fees, net
(
3,754
)
(
2,661
)
Stock based compensation
Gain on sale of available for sale securities
(
214
)
(
434
)
Gain on sale of loans held for sale
(
1,626
)
(
839
)
Gain on sale of premises and equipment, net
(
983
)
-
Increase in cash surrender value of bank owned
life insurance
(
759
)
(
712
)
Decrease in deferred tax asset
Net change in operating assets and liabilities:
Accrued interest receivable
(
428
)
(
1,998
)
Other assets
(
2,270
)
Accrued interest and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investment securities held to maturity
(
57,917
)
-
Proceeds from maturities and pay-downs of investment
securities held to maturity
-
Purchase of investment securities available for
sale
(
258,767
)
(
253,993
)
Proceeds from maturities and pay-downs of investment
securities available for sale
Proceeds from sales of investment securities available
for sale
Proceeds from call of investment securities available
for sale
Net increase in loans held for investment
(
33,515
)
(
42,527
)
Purchase of loans held for investment
(
129,531
)
-
Additions to premises and equipment
(
633
)
(
347
)
Proceeds from the sale of loans held for
sale
Proceeds from the sale of property
-
Proceeds from the redemption of Federal Home
Loan Bank stock
Purchase of Federal Home Loan Bank stock
-
(
1,926
)
Purchase of bank owned life insurance
(
15,000
)
-
Net cash used in investment activities
(
359,363
)
(
178,776
)
(Continued)
The accompanying notes are an integral part of
these consolidated financial statements.
71
USCB Financial Holdings, Inc.
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years Ended December 31,
2021
2020
Cash flows from financing activities:
Proceeds from issuance of Class A common stock, net
Cash dividends paid
(
2,077
)
(
3,127
)
Redemption of Preferred stock Class C
(
5,275
)
-
Redemption of Preferred stock Class D
(
6,145
)
-
Redemption of Preferred stock Class E
(
7,500
)
-
Net increase in deposits
Proceeds from Federal Home Loan Bank advances
-
Repayments on Federal Home Loan Bank advances
-
(
154,000
)
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
(
1,506
)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
$
Supplemental disclosure of cash flow information:
Interest paid
$
$
Supplemental schedule of non-cash investing and
financing activities:
Transfer of loans held for investment to loans held for
sale
$
$
Transfer of investment securities from available-for-sale to held-to-maturity
$
$
-
Transfer of premises and equipment to assets held for
sale
$
$
-
Lease liability arising from obtaining right-of-use assets
$
$
-
Exchange of Preferred C for Class A common
stock
$
$
-
Exchange of Preferred D for Class A common
stock
$
$
-
Exchange of Class B common stock for Class
A common stock
$
$
-
The accompanying notes are an integral part of
these consolidated financial statements.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
72
USCB Financial Holdings, Inc.
2021 10-K
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Overview
USCB Financial Holdings, Inc., a
Florida corporation incorporated
in 2021, is a bank holding
company with one wholly
owned subsidiary,
U.S. Century Bank (the
“Bank”), together referred to
as “the Company”. The
Bank, established in 2002,
is a Florida
state-chartered, non-member financial institution providing financial
services through its banking
centers located
in South Florida.
In December 2021, USCB Financial
Holdings, Inc. acquired all issued
and outstanding shares of the Class
A common
stock of the Bank. Each of the outstanding shares of
the Bank’s common stock, par value $
its shareholders were
converted into and exchanged
for one newly
issued share of
the Company’s common stock, par
value
$
The Company’s
2015 Option
Plan has
a
-year life
that will terminate
in 2025.
In July
2020, the
shareholders of
the
Company approved to amend the 2015 Option plan authorizing the issuance of an additional
stock and extending
the life of
the plan
to reflect
the
1 for 5
holding company
formation,
the shareholders
of the
Company
approved
to amend
the 2015
Option
plan
authorizing
the
issuance of an additional
The Company’s
Consolidated Financial
Statements consist
of USCB
Financial Holdings,
Inc. and
U.S. Century
Bank
as
of
and
for
the
year
ended
December
31,
2021
compared
to
only
U.S.
Century
Bank
as
of
and
for
the
year
ended
December 31, 2020.
Principles of Consolidation
Intercompany transactions
and balances
are eliminated
in consolidation.
The Consolidated
financial statements
have
been prepared in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP").
Initial Public Offering and Exchange and Redemption
of Shares
On July 27, 2021,
the Company completed
an initial public
offering (the “IPO”)
and its Class
A voting common
shares
began trading
on the
Nasdaq Stock
Market under
ticker symbol
“USCB”. Following
the IPO,
the Company
completed an
exchange
of
then
outstanding
preferred
shares
for
Class
A
common
shares
and
thereafter
redeemed
the
remaining
outstanding preferred shares.
In December 2021,
the Company reached
agreements with the
Class B common
shareholders to receive
Class A voting
common
stock
in
exchange
for
all
outstanding
Class
B
non-voting
common
stock
in
a
1
for
5
reverse
stock
split. As
of
December 31,
2021,
there
were
no
issued
and
outstanding
preferred
shares
or
Class
B
common
shares.
See
Note
13
“Stockholders’ Equity” for further information about the IPO and
the exchange and redemption of shares.
Use of Estimates
In preparing the consolidated financial statements, management is required
to make estimates and assumptions based
on available information that affect the amounts reported
in the financial statements and the disclosures provided.
The coronavirus (“COVID-19”)
pandemic has negatively
affected many of
the Company’s
clients and could
still impair
their ability to fulfill
their financial obligations.
The Company’s business
is dependent upon the
willingness and ability
of its
associates and customers to conduct banking and other financial transactions.
While we believe conditions have improved
as of December 31, 2021, if there is a resurgence in the virus, the Company could experience further adverse effects on its
business,
financial
condition,
results
of operations
and
cash
flows.
While
it
is not
possible
to know
the
full
extent
of
the
impact the
COVID-19
pandemic will
have on
the
Company's
future operations,
the Company
continues
to
communicate
with its associates and customers
to understand their challenges, which
allows us to respond to
their needs and issues as
they arise.
While there was
not a
material impact to
the Company’s Consolidated Financial
Statements as of
and for
the year ended
December 31, 2021,
future increases
in the
allowance for
credit losses
(“ACL”) may
be required
because of
the potential
economic
downturn
that
a
resurgence
in
the virus
may
cause
and those
ACL
increases
can be
material.
It
is difficult
to
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
73
USCB Financial Holdings, Inc.
2021 10-K
quantify the
impact that
COVID-19 will
have on
the estimates
and assumptions
used to
prepare the
financial statements.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The
Company
considers
investments
with
a
maturity
of
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 a loan
participation agreement. The Company
reports restricted cash within cash and cash equivalents.
Interest-Bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions consist
of Federal Reserve Bank, Federal Home Loan
Bank and
other accounts.
Investment Securities
Debt securities
are recorded
at fair
value except
for those
securities which
the Company
has the
positive intent
and
ability to hold to
maturity. Management determines the appropriate classification of its securities at
the time of purchase
and
accounts for them on a trade date basis.
Debt securities that
management has the
positive intent and
ability to hold
to maturity are
classified as "held-to-maturity"
and recorded at amortized cost. Trading securities are
recorded at fair value with
changes in fair value included
in earnings.
Securities not classified
as held-to-maturity or
trading are classified
as "available-for-sale"
and recorded at
fair value, with
unrealized gains and
losses excluded from
earnings and reported
in other comprehensive
income (loss). Equity
investments
must be classified as trading and 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.
Declines
in
the
fair
value
of
available-for-sale
debt
securities
below
their
cost
that
are
deemed
to
be
other-than-
temporary
are
reflected
in
earnings
as
realized
losses.
In
determining
whether
other-than-temporary
impairment
exists,
management considers several factors in their analysis including
(i) severity and duration of the
impairment, (ii) credit rating
of security including any downgrade, (iii) intent to sell the security, or if it is more likely than not that it will be required to sell
the
security
before
recovery,
(iv)
whether
there
have
been
any
payment
defaults
and
(v)
underlying
guarantor
of
the
securities.
Federal Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to
own a certain amount of stock based on the level
of borrowings and
other factors and
may invest in
additional amounts. FHLB
stock is carried
at cost, classified
as a restricted
asset, and
periodically evaluated
for impairment
based on
ultimate recovery
of par
value. As
of December
31, 2021
and
2020,
FHLB
stock
amounted
to
$
cash and stock dividends are reported as interest income.
Loans Held for Investment and Allowance for Credit
Losses
Loans held for investment (“loans”) are reported at their outstanding principal
balance net of charge-offs, deferred loan
fees, unearned
income
and
the
ACL.
Interest
income
is generally
recognized
when
income
is earned
using
the
interest
method.
Loan
origination
and
commitment
fees
and
the
costs
associated
with
the
origination
of
loans
are
deferred
and
amortized, using the interest method or the straight-line
method, over the life of the related loan.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
74
USCB Financial Holdings, Inc.
2021 10-K
If the
principal or
interest on
a commercial
loan becomes
due and
unpaid for
90 days
or more,
the loan
is placed
on
non-accrual status as of
the date it becomes
90 days past due
and remains in non-accrual
status until it meets
the criteria
for restoration to accrual status.
Residential loans, on
the other hand, are placed
on non-accrual status when
the principal
or interest
becomes due
and unpaid
for 120
days or
more and remains
in non-accrual
status until
it meets
the criteria
for
restoration
to
accrual
status.
Restoring
a
loan
to
accrual
status
is
possible
when
the
borrower
resumes
payment
of
all
principal and interest
payments for a period
of six months
and the Company
has a documented
expectation of repayment
of the remaining contractual principal and interest or the loan becomes secured and in the process of collection. All interest
accrued but not
collected for
loans that are
placed on
nonaccrual status
is reversed
against interest
income. The interest
on these
loans is
accounted for
on the
cash-basis
or cost-recovery
method, under
which cash
collections are
applied to
unpaid principal, which may change as conditions dictate.
The Company has determined that the entire balance of
a loan is contractually delinquent for all
classes if the minimum
payment is not received by
the specified due date on
the borrower's statement. Interest and fees
continue to accrue on past
due loans until the date the loan goes into nonaccrual
status.
The Company provides for loan losses through a provision for credit losses charged to operations. When management
believes that a
loan or a portion
of the loan balance
is uncollectible, that
amount is charged
against the ACL.
Subsequent
recoveries, if any,
are credited to the ACL.
The ACL
reflects management's
judgment of
probable loan
losses inherent
in the
portfolio at
the balance
sheet date.
Management uses a disciplined
process and methodology
to establish the ACL
each quarter.
To
determine the total
ACL,
the Company
estimates the
reserves needed
for each
segment of
the portfolio,
including loans
analyzed individually
and
loans analyzed on a pooled basis. The ACL consists
of the amount applicable to the following segments:
•
Residential real estate
•
Commercial real estate
•
Commercial and industrial
•
Foreign banks
•
Other loans (secured and unsecured consumer loans)
Residential
real
estate
loans
are
underwritten
following
the
policies
of
the
Company
which
includes
a
review
of
the
borrower’s credit, capacity
and the collateral
securing the loan.
The borrower’s ability
to repay involves
an analysis of
factors
including: current
income, employment
status, monthly
payment of loan,
current debt obligations,
monthly debt
to income
ratio and credit history. The Company relies on appraisals in determining the value of the property.
Risk is mitigated by this
analysis and the diversity of the residential portfolio.
Commercial real estate
loans are
secured by liens
on commercial properties,
land, construction and
multifamily housing.
Underwriting
of
commercial
loans
will
analyze
the
key
market
and
business
factors
to
arrive
at
a
decision
on
the
credit
worthiness of the borrower.
The analysis may include
the capacity of the borrower,
income generated by property
for debt
service, other
sources of
repayment, sensitivity
analysis to
fluctuations in
market conditions
including vacancy
and rental
rates in geographic location and loan to value. Land and construction analysis will include the time to develop, sell or lease
the property.
Appraisals
are used
to determine
the value
of the
underlying
collateral.
Risk
is mitigated
as the
properties
securing the commercial real estate loans are diverse in
type, location, and loan structure.
Commercial
and
industrial
loans
are
secured
by
the
business
assets
of
the
company
and
may
include
equipment,
inventory, and receivables.
The loans are underwritten based on the
income capacity of the business, the ability
to service
the debt based
on operating cash
flows, the credit
worthiness of the
borrower,
other sources
of repayment and
collateral.
The Company mitigates the risk in the commercial portfo
lio through industry diversification.
Foreign Banks
loans are
short term
loans with
international correspondent
banking institutions
primarily
domiciled in
Latin America. Most of these loans are for trade capital and have a
life of less than one year.
The Company’s credit review
includes a credit analysis, peer comparison and current
country risk overview.
Annual re-evaluation of the risk rating of the
borrower and country and a review of authorized
signer within the Company.
The risk is mitigated as these loans are short
term, have limited exposure, and are geographically dispersed.
Other
loans
are
secured
and
unsecured
consumer
loans
including
personal
loans,
overdrafts
and
deposit
account
collateralized
loans.
Repayment
of
these
loans
are
primarily
from
the
personal
income
of
the
borrowers.
Loans
are
underwritten based on the credit worthiness of the borrower.
The risk on these loans is mitigated by small loan balances.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
75
USCB Financial Holdings, Inc.
2021 10-K
In
determining
the
balance
of
the
ACL,
loans
are
pooled
by
product
segments
with
similar
risk
characteristics
and
management evaluates
the ACL
on each
segment and
as a whole
to maintain
the allowance
at an
adequate level
based
on factors which, in
management's judgment, deserve
current recognition in estimating
credit losses. Such
factors include
changes in prevailing economic conditions, historical loss experience,
delinquency trends, changes in the composition and
size of the loan portfolio and the overall credit worthiness
of the borrowers.
The ACL
consists of
general and
specific components.
The following
is how
management determines
the balance
of
the general component for the ACL account for each segment
of the loans as described above.
The loan segments are
primarily grouped by
collateral type with similar
risk characteristics and
a historical loss
rate is
determined based on a ten year look back period. The Company applies time
weights to consider various stages of a credit
cycle.
The
ACL
calculation
is
based
on
the
Company’s
own
net
loss
experience
adjusted
for
certain
qualitative
and
environmental factors. To
estimate the impact of
non-recurrent losses, management
has developed a statistical
study that
tracks historical non-recurring
losses at a
loan level. This
analysis is
used to estimate
an adjusted
loss rate for
each loan
pool. Management believes the
effect of these losses
results in a loss
rate that is more consistent
with the behavior of
the
loan portfolio in the normal course of business.
Qualitative
factors
are
applied
to
historical
loss
rates
based
on
management's
experience
and
assessment.
The
following are the factors used to adjust the historical loss
rates:
•
Loan quality review
•
Lending and credit management /staff expertise
and practices
•
Economic and business conditions
•
Lending and credit underwriting policies and procedures
•
Problem loan levels and trends
•
Collateral concentrations
•
Large obligor concentration
•
New loan volumes
•
Combined loan to value (“CLTV”)
qualitative adjustment for substandard accrual loan segment
Changes in these factors could
result in material adjustments to the
ACL. The losses the Company may
ultimately incur
could differ materially from the amounts estimated
in arriving at the ACL.
In addition
to the
ACL, the
Company also
estimates probable
losses related
to financial
instruments with
off-balance
sheet risk, such as letters
of credit and unfunded loan
commitments, and records these estimates
in other liabilities on the
Consolidated
Balance
Sheets
with
the
offset
recorded
in
non-interest
expense
on
the
Consolidated
Statements
of
Operations.
Financial
instruments
with
off-balance
sheet
risk
are
subject
to
review
on
an
aggregate
basis.
Past
loss
experience and
any other
pertinent information is
reviewed, resulting in
the estimation
of the
reserve for
financial instruments
with off-balance sheet risk.
A loan is considered
impaired when, based
on current information
and events, it
is probable that
the Company will
be
unable to
collect the
scheduled payments
of principal
or interest
when due
according to
the contractual
terms of
the loan
agreement or when the loan
is designated as a Troubled
Debt Restructuring (“TDR”). Factors
considered by management
in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and
interest payments when due.
Loans that experience insignificant
payment delays and payment
shortfalls generally are not
classified as impaired. Impairment is measured on a loan by loan basis by either the present value
of expected future cash
flows discounted at the loan's effective
interest rate, the loan's obtainable
fair value, or the fair value of
the collateral, if the
loan
is
collateral
dependent.
If
management
determines
that
the
value
of
the
impaired
loan
is
less
than
the
recorded
investment in the loan (outstanding principal balance plus accrued interest, net of previous charge-offs, and net of deferred
loan fees or cost), impairment is recognized through an allowance
estimate or a charge-off to the ACL.
In
situations
where,
due
to
a
borrower's
financial
difficulties,
management
grants
a
concession
for
other
than
an
insignificant period of time to the borrower that would not
otherwise be granted, the loan is classified as a TDR.
On March 27,
2020, the Coronavirus Aid,
Relief, and Economic
Security Act (“CARES Act”)
was signed by
the President
of the United
States. The
CARES Act
has certain
provisions which
encourage financial
institutions to
prudently work
with
borrowers impacted
by COVID
-19. Under
these provisions,
modifications
deemed
to be
COVID-19 related
would not
be
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
76
USCB Financial Holdings, Inc.
2021 10-K
considered a TDR if the loan was not more than 30 days past
due as of December 31, 2019. The deferral would need to be
executed March
1, 2020
and the
earlier of
60 days
after the
date of
termination
of the
COVID-19 national
emergency
or
December 31,
2020. Additional
legislation was
passed in
December
of 2020
that
extended
the TDR
relief to
January
1,
2022. Banking regulators issued similar guidance clarifying that a COVID-19
related modification should not be considered
a TDR if the borrower was current on payments at the time the
underlying loan modification program was implemented and
considered short-term. See Note 3 “Loans” for additional disclosures
of loans that were modified and not considered TDR.
In addition to the
allowance for the
pooled portfolios, management
has developed a
separate allowance for
loans that
are identified as
impaired through a
TDR. These loans
are excluded from
the general component
of the ACL,
and a separate
reserve is provided under the accounting guidance for loan
impairment. Residential loans whose terms have been modified
in a TDR are also individually analyzed for estimated impairment.
The Company's charge-off policy is to review all impaired loans
on a quarterly basis in order to monitor the Company's
ability to
collect
them
in
full
at maturity
date
and/or
in
accordance
with
terms
of
any restructurings.
For
loans
which are
collateral dependent,
or deemed to
be uncollectible,
any shortfall
in the fair
value of
the collateral
relative to
the recorded
investment in the loan is charged off.
Concentration of Credit Risks
Credit
risk
represents
the
accounting
loss
that
would
be
recognized
at
the
reporting
date
if
counterparties
failed
to
perform as contracted and any collateral or security proved to be insufficient
to cover the loss. Concentrations of credit risk
(whether on or off-balance sheet) arising from financial instruments exist in relation to certain
groups of customers. A group
concentration arises when
a number of
counterparties have
similar economic characteristics
that would cause
their ability
to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not
have a significant exposure to any individual customer
or counterparty.
Most of the Company's business activity is
with customers located within its primary market area, which
is generally the
State of Florida. The Company's loan portfolio is concentrated largely in real estate and commercial loans in South Florida.
Many of the Company's
loan customers are engaged
in real estate development.
Circumstances, which negatively
impact
the South Florida real estate industry
or the South Florida economy, in general, could adversely impact
the Company's loan
portfolio.
At December 31,
2021 and
2020, the
Company had
a concentration
of risk
with loans
outstanding to
the Company’s
top ten lending relationships
totaling $
concentration represented
% and
%, respectively,
of the net loans outstanding.
At December 31,
2021, the
Company also
had a
concentration of
risk with
loans outstanding
totaling $
foreign
banks
located
in
Ecuador,
Honduras,
and
El
Salvador.
At
December 31,
2020,
the
Company
also
had
a
concentration of
risk with
loans outstanding
totaling
$
Salvador.
These
banks
maintained
deposits
with
right
of
offset
totaling
$
2021 and 2020, 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
Furniture, fixtures and equipment
Computer hardware and software
Leasehold improvements
Shorter of life or term of lease
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
77
USCB Financial Holdings, Inc.
2021 10-K
Maintenance
and
repairs
are
charged
to
expense
as
incurred
while
improvements
and
betterments
are
capitalized.
When items are retired or are
otherwise disposed of, the related costs
and accumulated depreciation and amortization
are
removed from the accounts and any resulting gains or losses
are credited or charged to income.
Other Real Estate Owned
Other real estate
owned (“OREO”)
consists of real
estate property
acquired through,
or in lieu
of, foreclosure
that are
held for sale and are initially recorded at
the fair value of the property less estimated selling
costs at the date of foreclosure,
establishing a
new cost
basis. Subsequent
to foreclosure,
valuations are
periodically performed
by management
and the
assets are carried at the lower of carrying amount or fair value less cost to sell. Subsequent write-downs are recognized as
a valuation allowance with the offset recorded in the Consolidated Statements of
Operations. Carrying costs are charged to
other real estate owned expenses
in the accompanying Consolidated
Statements of Operation. Gains
or losses on sale of
OREO
are
recognized
when
consideration
has
been
exchanged,
all
closing
conditions
have
been
met
and
permanent
financing has been arranged.
Bank Owned Life Insurance
Bank owned
life insurance
(“BOLI”) is
carried at
the amount
that could
be realized
under the
contract at
the balance
sheet date, which is typically
cash surrender value. Changes
in cash surrender value are recorded
in non-interest income.
At December 31, 2021, the Company maintained BOLI policies with
five insurance carriers with a combined cash surrender
value
of
$
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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
78
USCB Financial Holdings, Inc.
2021 10-K
Transfer of Financial Assets
Transfers of
financial assets
are accounted for
as sales,
when control over
the assets
has been surrendered.
Control
over
transferred
assets
is
deemed
to
be
surrendered
when
(i)
the
assets
have
been
isolated
from
the
Company
-
put
presumptively
beyond
the
reach
of
the
transferor
and
its
creditors,
even
in
bankruptcy
or
other
receivership,
(ii)
the
transferee obtains
the right
(free of conditions
that constrain
it from taking
advantage of
that right)
to pledge
or exchange
the transferred
assets,
and
(iii) the
Company
does not
maintain effective
control
over
the transferred
assets
through
an
agreement to repurchase them before their maturity or
the ability to unilaterally cause the holder to return specific assets.
Comprehensive Income (Loss)
Under
GAAP,
certain
changes
in
assets
and
liabilities,
such
as
unrealized
holding
gains
and
losses
on
securities
available-for-sale, are
excluded from
current period
earnings and
reported as
a separate
component of
the stockholders’
equity
section
of
the
Consolidated
Balance
Sheets,
such
items,
along
with
net
income
(loss),
are
components
of
comprehensive
income
(loss).
Additionally,
any
unrealized
gains
or
losses
on
transfers
of
investment
securities
from
available-for-sale to held-to-maturity are recorded to accumulated other comprehensive
income on the date of transfer and
amortized over the remaining life of
each security.
The amortization of the unrealized
gain or loss on transferred securities
is reported as a component of comprehensive income
(loss). See Note 2 “Investment Securities” for further discussion.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings per Common Share
Basic earnings
per common
share is
net income
available to
common stockholders
divided by
the weighted
average
number
of
common
shares
outstanding
during
the
period.
Diluted
earnings
per
common
share
included
the
effect
of
additional potential common shares issuable under vested stock options. Basic and diluted earnings per share are updated
to reflect the effect of stock splits as occurred. See Note 14 “Earnings Per Share” for additional information on earnings per
common share. See Note 13 “Stockholders’ Equity” for further
discussion on stock splits.
Interest Income
Interest income is recognized as earned, based upon the principal
amount outstanding, on an accrual basis.
Operating Segments
While the Company monitors
the revenue streams of
the various products
and services, operations
are managed and
financial performance
is evaluated on
a Company wide
basis. Operating results
of the individual
products are
not used to
make resource allocations or performance decisions by Company
management.
Stock-Based Compensation
Stock based compensation accounting guidance requires
that the compensation cost relating to share-based payment
transactions be recognized in the accompanying Consolidated
Financial Statements. That cost will be measured
based on
the grant
date fair
value of
the equity
or liability
instruments issued.
The stock-based
compensation accounting
guidance
covers
a
wide
range
of
share-based
compensation
arrangements
including
stock
options,
restricted
share
plans,
performance-based awards, share appreciation rights, and
employee share purchase plans.
The stock-based compensation accounting guidance
requires that compensation cost
for all stock
awards be calculated
and recognized
over the
employees' service period,
generally defined as
the vesting
period. For
awards with graded-vesting,
compensation cost
is recog
nized 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
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
79
USCB Financial Holdings, Inc.
2021 10-K
of management, none of these actions, either individually or in the aggregate, is expected to have a material adverse effect
on the Company’s Consolidated Financial Statements.
See Note 18 “Loss Contingencies” for further details.
Dividend Restrictions
Banking
regulations
require
maintaining
certain
capital
levels
and
may
limit
the
dividends
paid
by
the
Bank
to
the
Company or by the Company to the shareholders.
Fair Value Measurements
Fair values
of financial
instruments are
estimated using
relevant market
information and
other assumptions,
as more
fully disclosed in Note
12 “Fair Value
Measurements”. Fair value estimates
involve uncertainties and
matters of significant
judgment. Changes in assumptions or in market conditions
could significantly affect the estimates.
Derivative Instruments
Derivative financial instruments are
carried at fair
value and reflect
the estimated amount that
would have been
received
to
terminate
these
contracts
at
the
reporting
date
based
upon
pricing
or
valuation
models
applied
to
current
market
information.
The
Company
enters
into
interest
rate
swaps
to
provide
commercial
loan
clients
the
ability
to
swap
from
a
variable
interest rate
to a
fixed rate.
The Company
enter
into a
floating-rate
loan with
a
customer with
a separately
issued swap
agreement allowing
the customer
to convert
floating
payments of
the loan
into a
fixed interest
rate. To
mitigate risk,
the
Company will enter into a matching agreement with a
third party to offset the exposure on the
customer agreement. These
swaps are
not considered
to be
qualified hedging
transactions and
the unmatched
unrealized gain
or loss
is recorded
in
other noninterest income.
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 in not material.
Cash Flow Statement
The Company reports the net activity rather than gross activity in the Consolidated
Statements of Cash Flows. The net
cash flows
are reported for
loans held
for investment, accrued
interest receivable, deferred
tax asset, other
assets, customer
deposits, accrued interest payable, other liabilities, and proceeds
from issuance of Class A common shares.
Reclassifications
Certain
amounts
in
the
Consolidated
Financial
Statements
have
been
reclassified
to
conform
to
the
current
presentation. Reclassifications had no impact on the net income
or stockholders’ equity of the Company.
Recently Issued Accounting Standards – Not Yet
Adopted
Measurement of Credit Losses on Financial Instruments
In June
2016, the FASB issued
ASU 2016-13, Financial
Instruments - Credit
Losses (Topic 326); Measurement of
Credit
Losses on Financial Instruments. This accounting standard update (“ASU” or “Update”)
on accounting for current expected
credit
losses
on
financial
instruments
(“CECL”)
will
replace
the
current
probable
incurred
loss
impairment
methodology
under U.S. GAAP
with a methodology
that reflects the
expected credit losses.
The Update is
intended to provide
financial
statement
users
with
more
decision-useful
information
about
expected
credit
losses.
This
Update
is
applicable
to
the
Company
on
a modified
retrospective
basis
for
interim
and
annual
periods
in
fiscal
years
beginning
after
December 15,
2022. Early adoption is permitted for fiscal years beginning after December 15, 2019, including interim periods within those
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
80
USCB Financial Holdings, Inc.
2021 10-K
fiscal
years.
The
Company
expects
to
adopt
this
ASU
on
January 1,
2023.
The
impact
of
adoption
on
the
Company’s
financial statements
will depend on
the composition
of the loan
and investment
securities portfolio
as of January
1, 2023,
general economic conditions,
and other factors that
are not known at
this time. Although
management is in the
process of
evaluating the impact of
adoption of this ASU on
its consolidated financial statements,
management does believe that
this
ASU will lead to significant changes
in accounting policies and disclosures
related to, and the methods used
in estimating,
the ACL.
To
date, the
Company has
executed a
detailed implementation
plan through
the adoption
date, implemented
a
software solution to assist with the CECL estimation process,
and has completed a data gap analysis.
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,
2022. 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, 2021
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency - SBA
$
$
$
(
50
)
$
Collateralized mortgage obligations
(
3,699
)
Mortgage-backed securities - Residential
(
2,029
)
Mortgage-backed securities - Commercial
(
608
)
Municipal securities
(
894
)
Bank subordinated debt securities
(
13
)
Corporate bonds
-
$
405,853
$
$
(
7,293
)
$
Held-to-maturity:
U.S. Government Agency - SBA
$
$
-
$
(
363
)
$
U.S. Government Agency
(
252
)
Collateralized mortgage obligations
-
(
1,021
)
Mortgage-backed securities - Residential
-
(
568
)
Mortgage-backed securities - Commercial
-
(
90
)
Corporate bonds
-
(
221
)
$
$
$
(
2,515
)
$
December 31, 2020
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency -SBA
$
$
$
-
$
U.S. Government Agency
(
168
)
Collateralized mortgage obligations
(
162
)
Mortgage-backed securities - Residential
(
177
)
Mortgage-backed securities - Commercial
(
20
)
Municipal securities
(
58
)
Bank subordinated debt securities
(
5
)
Corporate bonds
-
$
$
$
(
590
)
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
81
USCB Financial Holdings, Inc.
2021 10-K
For the year
ended December 31,
2021, there were
sale
(“AFS”)
to
held-to-maturity
(“HTM”)
with
an
amortized
cost
basis
and
fair
value
amount
of
$
$
impact to net income.
Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer.
The unrealized gain or loss at the
date of transfer is retained in
accumulated other comprehensive income
(“AOCI”) and in
the carrying value of the held-to-maturity securities. Such amounts are amortized
over the remaining life of the security.
As
of December 31,
2021, total
amortization
out of
AOCI for
the net
unrealized
gains
on securities
transferred
from AFS
to
HTM was $
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, 2021 and
2020 (in thousands):
Available-for-sale:
2021
2020
Proceeds from sales and call of securities
$
$
Gross Gains
$
$
Gross Losses
(
331
)
(
428
)
Net realized gains
$
$
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.
Available-for-sale
Held-to-maturity
December 31, 2021:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Due within one year
$
$
$
$
Due after one year through five years
Due after five years through ten years
-
-
Due after ten years
-
-
U.S. Government Agency - SBA
U.S. Government Agency
Collateralized mortgage obligations
Mortgage-backed securities - Residential
Mortgage-backed securities - Commercial
$
$
$
$
At December 31,
2021 and
2020, there
were no
securities to
any one
issuer,
in an
amount greater
than 10%
of total
stockholders’ equity
other than
the United
States Government
and Government
Agencies. All
the collateralized
mortgage
obligations
and
mortgage-backed
securities
are
issued
by
United
States
sponsored
entities
at
December 31,
2021
and
2020.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
82
USCB Financial Holdings, Inc.
2021 10-K
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, 2021
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency - SBA
$
$
(
146
)
$
-
$
-
$
$
(
146
)
U.S. Government Agency
(
108
)
(
516
)
(
624
)
Collateralized mortgage obligations
(
3,223
)
(
1,497
)
(
4,720
)
Mortgage-backed securities -
Residential
(
1,178
)
(
1,274
)
(
2,452
)
Mortgage-backed securities -
Commercial
(
318
)
(
309
)
(
627
)
Municipal securities
(
395
)
(
499
)
(
894
)
Bank subordinated debt securities
(
13
)
-
-
(
13
)
$
$
(
5,381
)
$
$
(
4,095
)
$
$
(
9,476
)
December 31, 2020
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 - SBA
$
-
$
-
$
-
$
-
$
-
$
-
U.S. Government Agency
(
168
)
-
-
(
168
)
Collateralized mortgage obligations
(
162
)
-
-
(
162
)
Mortgage-backed securities -
(
177
)
-
-
(
177
)
Mortgage-backed securities -
(
20
)
-
-
(
20
)
Municipal securities
(
58
)
-
-
(
58
)
Bank subordinated debt securities
(
5
)
-
-
(
5
)
$
$
(
590
)
$
-
$
-
$
$
(
590
)
The unrealized
losses associated
with $
HTM portfolio during
the third quarter
of 2021 represent
unrealized losses
since the date
of purchase, independent
of the
impact associated with changes in the cost basis upon
transfer between portfolios.
The Company performs a review
of the investments that have
an unrealized loss to determine
whether there have been
any changes in the
economic circumstance of the security
issuer to indicate that
the unrealized loss is
impaired on an other-
than-temporary (“OTTI”) basis. Management considers several factors in their analysis including (i) severity and duration of
the impairment, (ii) credit
rating of the security
including any downgrade,
(iii) intent to sell
the security,
or if it is
more likely
than not that it will be required to
sell the security before recovery,
(iv) whether there have been any payment
defaults and
(v) underlying guarantor of the securities.
The Company does not consider these
investments to be OTTI as the
decline in market value is attributable
to changes
in market
interest rates
and not
credit quality,
and because
the Company
does not
intend to
sell the
investments before
recovery of
their amortized
cost basis,
which may
be maturity,
and it
is more
likely than
not that
the Company
will not
be
required to sell the securities before maturity.
As of December 31, 2021, the Company maintains a master repurchase agreement with a public banking institution for
up
to
$
variable interest rate
based on prevailing
rates at the
time funding is
requested. At
December 31, 2021, the
Company did
not 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
outstanding
uninsured
deposits.
The
Company must also maintain a minimum amount of
pledged securities to be in the program.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
83
USCB Financial Holdings, Inc.
2021 10-K
At December 31, 2021, the
Company had
of Florida under the public funds program. The Company held
a total of $
At December 31, 2020, the Company had
Florida under the public funds program. The Company held
a total of $
3.
LOANS
The following table is a summary of the distribution of
loans held for investment by type (in thousands):
December 31, 2021
December 31, 2020
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
%
$
%
Commercial Real Estate
%
%
Commercial and Industrial
%
%
Foreign Banks
%
%
Consumer and Other
%
%
Total
gross loans
%
%
Less: Unearned income
Total
loans net of unearned income
Less: Allowance for credit losses
Total
net loans
$
$
At December 31, 2021 and 2020, the Company had $
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, 2021 and
2020, the Company had one loan
for $
process of foreclosure.
The Company was a participant
of the Small Business Administration’s
(“SBA”) Paycheck Protection Program
(“PPP”)
loans. These
loans were
designed to
provide a
direct incentive
for small
businesses to
keep their
workers on
payroll and
had to be used towards payroll cost, mortgage interest, rent, utilities and other costs
related to COVID-19. These loans are
forgivable under specific criteria as determined by the SBA.
The Company had PPP loans of $
2021
and
$
loans had deferred loan fees of $
The
Company
recognized
$
December 31,
2021
and
2020,
respectively,
which
is
reported
under
loans,
including
fees
within
the
Consolidated
Statements of Operations.
The
Company
segments
the
portfolio
by
pools
grouping
loans
that
share
similar
risk
characteristics
and
employing
collateral type
and lien
position to
group loans
according to
risk. The
Company determines
historical
loss rates
for each
loan
pool
based
on
its
own
loss
experience.
In
estimating
credit
losses,
the
Company
also
considers
qualitative
and
environmental factors that may cause estimated credit losses
for the loan portfolio to differ from historical
losses.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
84
USCB Financial Holdings, Inc.
2021 10-K
Changes
in
the
allowance
for
credit
losses
for
the
years
ended
December 31,
2021
and
2020
are
as
follows
(in
thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2021:
Beginning balance
$
$
$
$
$
$
Provision for credit losses
(
919
)
(
695
)
(
160
)
Recoveries
Charge-offs
(
229
)
(
18
)
(
14
)
(
261
)
Ending Balance
$
$
$
$
$
$
December 31, 2020:
Beginning balance
$
$
$
$
$
$
Provision for credit losses
(
36
)
Recoveries
Charge-offs
(
473
)
-
(
153
)
(
30
)
(
656
)
Ending Balance
$
$
$
$
$
$
Allowance for credit losses and the outstanding balances in
loans as of December 31, 2021 and 2020 are as
follows (in
thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2021:
Allowance for credit losses:
Individually evaluated for impairment
$
$
-
$
$
-
$
$
Collectively evaluated for impairment
Balances, end of period
$
$
$
$
$
$
Loans:
Individually evaluated for impairment
$
$
$
$
-
$
$
Collectively evaluated for impairment
Balances, end of period
$
$
$
$
$
$
December 31, 2020:
Allowance for credit losses:
Individually evaluated for impairment
$
$
-
$
$
-
$
$
Collectively evaluated for impairment
Balances, end of period
$
$
$
$
$
$
Loans:
Individually evaluated for impairment
$
$
$
$
-
$
$
Collectively evaluated for impairment
Balances, end of period
$
$
$
$
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
85
USCB Financial Holdings, Inc.
2021 10-K
Credit Quality Indicators
The Company grades loans based on the estimated capability of the borrower to repay the contractual obligation of the
loan agreement based
on relevant information
which may include:
current financial information
on the borrower,
historical
payment
experience,
credit
documentation
and
other
current
economic
trends.
Internal
credit
risk
grades
are
evaluated
periodically.
The Company's internally assigned credit risk grades are as follows:
Pass
– Loans indicate different levels of satisfactory
financial condition and performance.
Special Mention
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 classi
fied 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
the added characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Loss
– Loans classified as loss are considered uncollectible.
Loan credit exposures by internally assigned grades are
presented below for the periods indicated (in thousands):
As of December 31, 2021
Pass
Special
Mention
Substandard
Doubtful
Total Loans
Residential real estate:
Home equity line of credit ("HELOC") and other
$
$
-
$
-
$
-
$
1-4 family residential
-
-
Condo residential
-
-
-
-
-
Commercial real estate:
Land and construction
-
-
-
Multi family residential
-
-
-
Condo commercial
-
-
Commercial property
-
-
Leasehold improvements
-
-
-
-
Commercial and industrial:
(1)
Secured
-
-
Unsecured
-
-
-
-
Foreign banks
-
-
-
Consumer and other loans
-
-
Total
$
$
$
$
-
$
(1)
All outstanding PPP loans were internally graded
pass.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
86
USCB Financial Holdings, Inc.
2021 10-K
As of December 31, 2020
Pass
Special
Mention
Substandard
Doubtful
Total Loans
Residential real estate:
Home equity line of credit ("HELOC") and other
$
$
-
$
-
$
-
$
1-4 family residential
-
-
Condo residential
-
-
-
-
Commercial real estate:
Land and construction
-
-
-
Multi family residential
-
-
-
Condo commercial
-
-
Commercial property
-
-
Leasehold improvements
-
-
-
-
-
Commercial and industrial:
(1)
Secured
-
-
Unsecured
-
-
-
-
Foreign banks
-
-
-
Consumer and other loans
-
-
Total
$
$
-
$
$
-
$
(1)
All outstanding PPP loans were internally graded
pass.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
87
USCB Financial Holdings, Inc.
2021 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, 2021 and
2020 (in thousands):
Accruing
As of December 31, 2021:
Current
Past Due 30-
89 Days
Past Due >
90 Days and
Still
Accruing
Total
Accruing
Non-Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
$
$
-
$
$
-
$
1-4 family residential
-
Condo residential
-
-
-
Commercial real estate:
Land and construction
-
-
Multi family residential
-
-
Condo commercial
-
-
Commercial property
-
-
Leasehold improvements
-
-
-
-
Commercial and industrial:
Secured
-
-
-
Unsecured
-
-
-
-
Foreign banks
-
-
-
Consumer and other
-
-
Total
$
$
$
-
$
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
88
USCB Financial Holdings, Inc.
2021 10-K
Accruing
As of December 31, 2020:
Current
Past Due
30-89 Days
Past Due >
90 Days and
Still
Accruing
Total
Accruing
Non-Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
$
-
$
-
$
$
-
$
1-4 family residential
-
Condo residential
-
-
Commercial real estate:
Land and construction
-
-
-
Multi family residential
-
-
-
Condo commercial
-
-
Commercial property
-
-
-
Leasehold improvements
-
-
-
-
-
Commercial and industrial:
Secured
-
Unsecured
-
-
-
-
Foreign banks
-
-
-
Consumer and other
-
-
Total
$
$
$
-
$
$
$
There was
Interest
income
on
these
loans
for
the
years
ended
December 31,
2021
and
2020,
would
have
been
approximately
$
There were no loans over 90 days past due and accruing
as of December 31, 2021 and 2020.
Impaired Loans
The following table includes
the unpaid principal balances
for impaired loans with
the associated allowance amount,
if
applicable, on the basis of impairment methodology for the dates
indicated (in thousands):
December 31, 2021
December 31, 2020
Unpaid
Principal
Balance
Net
Investment
Balance
Valuation
Allowance
Unpaid
Principal
Balance
Net
Investment
Balance
Valuation
Allowance
Impaired Loans with No Specific Allowance:
Residential real estate
$
$
$
-
$
$
$
-
Commercial real estate
-
-
-
-
Impaired Loans with Specific Allowance:
Residential real estate
Commercial and industrial
Consumer and other
Total
$
$
$
$
$
$
Net investment balance is the unpaid principal balance
of the loan adjusted for the remaining net deferred loan
fees.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
89
USCB Financial Holdings, Inc.
2021 10-K
The following table presents the
average recorded investment balance on impaired
loans as of December 31, 2021
and
2020 (in thousands):
2021
2020
Residential real estate
$
$
Commercial real estate
Commercial and industrial
Consumer and other
Total
$
$
Interest income
recognized on
impaired loans
for the
years ended December
31, 2021
and 2020
was $
and $
Troubled Debt Restructuring
A troubled
debt
restructuring
(“TDR”)
occurs
when
the
Company
has agreed
to
a loan
modification
in
the
form
of
a
concession for a borrower who is experiencing financial difficulty.
The following table presents performing and non-performing
TDRs for the dates indicated (in thousands):
December 31, 2021
December 31, 2020
Accrual Status
Non-Accrual
Status
Total TDRs
Accrual Status
Non-Accrual
Status
Total TDRs
Residential real estate
$
$
-
$
$
$
$
Commercial real estate
-
-
Commercial and industrial
-
Consumer and other
-
-
Total
$
$
-
$
$
$
$
The Company had
allocated $
2021
and
2020,
respectively.
Charge-offs
on
TDR
loans
for
the
years
ended
December 31,
2021
and
2020
was
$
thousand and $
The Company did not have any new TDR loans for the year ended December 31, 2021. For the year ended December
31, 2020, the Company had the following new TDR loans
(in thousands, except number of loans):
Recorded Investment Prior to Modification
Recorded Investment After Modification
Number of Loans
Total Modifications
Number of Loans
Total Modifications
Residential real estate
$
$
Commercial real estate
Commercial and industrial
Consumer and other
$
$
Modifications to
loans can
be made
for rate,
term, payment,
conversion of
loan to
interest only
for a
limited time
or a
combination to include more than one type of modification.
As of December 31, 2021 and 2020, there were no defaults on loans which were modified as a TDR within
the prior 12
months.
CARES Act Modifications
The
Company
provided
financial
relief
to
borrowers
impacted
by
COVID-19
and
provided
modifications
to
include
interest
only
deferral
or
principal
and
interest
deferral.
These
modifications
are
excluded
from
TDR
classification
under
Section 4013 of the CARES Act or under applicable interagency
guidance of the federal banking regulators.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
90
USCB Financial Holdings, Inc.
2021 10-K
During the year ended December 31, 2020, the Company had modified
million. At December 31, 2020,
loans totaling $
During
the
year
ended
December 31,
2021,
the
Company
did
not
modify
any
new
loans
to
borrowers
impacted
by
COVID-19. At December 31, 2021, there was
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, 2021, 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
2022 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, 2021 and 2020 (in thousands):
2021
2020
ROU assets:
Operating leases
$
$
Lease liabilities:
Operating leases
$
$
The weighted average remaining lease term and weighted average
discount rate as of December 31, 2021 and 2020:
2021
2020
Weighted average remaining lease term (in years):
Operating leases
Weighted average discount rate:
Operating leases
%
%
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
91
USCB Financial Holdings, Inc.
2021 10-K
Future lease payment obligations and a reconciliation to lease
liability as of December 31, 2021 (in thousands):
2022
$
2023
2024
2025
2026
Thereafter
Total
future minimum lease payments
Less: interest component
(
1,912
)
Total
lease liability
$
5.
PREMISES AND EQUIPMENT
A summary of premises and equipment are presented
below as of December 31, 2021 and 2020 (in thousands):
2021
2020
Land
$
$
Building
Furniture, fixtures and equipment
Computer hardware and software
Leasehold improvements
Premises and equipment, gross
Accumulated depreciation and amortization
(
20,840
)
(
20,851
)
Premises and equipment, net
$
$
Depreciation and amortization
expense was $
2020, respectively.
During 2021, the Company
eliminated $
relocation
of
another
banking
center.
The
depreciation
on
these
assets
was
$
recognized as an immaterial loss. The Company eliminated $
6.
INCOME TAXES
The Company’s provision
for income taxes is
presented in the following
table for the years
ended December 31, 2021
and 2020 (in thousands):
2021
2020
Current:
Federal
$
-
$
-
State
-
-
Total
current
-
-
Deferred:
Federal
State
Total
deferred
Total
tax expense
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
92
USCB Financial Holdings, Inc.
2021 10-K
The actual income
tax expense for the
years ended December 31, 2021
and 2020 differs from
the statutory tax expense
for the year (computed by applying the
U.S. federal corporate tax rate of
% for 2021 and 2020 to
income before provision
for income taxes) as follows (in thousands):
2021
2020
Federal taxes at statutory rate
$
$
State income taxes, net of federal tax benefit
Bank owned life insurance
(
186
)
(
174
)
Other, net
(
522
)
Total
tax expense
$
$
The following table presents
the deferred tax assets
and deferred tax liabilities
as of December 31, 2021
and 2020 (in
thousands):
2021
2020
Deferred tax assets:
Net operating loss
$
$
Allowance for credit losses
Lease liability
Unrealized loss on available for sale securities
-
Deferred loan fees
Depreciable property
Stock option compensation
Accruals
Other, net
Deferred tax asset
Deferred tax liability:
Unrealized gain on available for sale securities
-
(
1,553
)
Lease right of use asset
(
3,595
)
(
3,617
)
Deferred expenses
(
127
)
(
64
)
Deferred tax liability
(
3,722
)
(
5,234
)
Net deferred tax asset
$
$
The Company has approximately $
expiring in various amounts from 2031 to 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 2018.
For
the
years
ended
December 31,
2021 and
2020,
the
Company
did
t have
any unrecognized
tax benefits
as a
result of
tax positions
taken during
a prior
period or
during the
current period.
Additionally,
recorded as a result of tax uncertainties.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
93
USCB Financial Holdings, Inc.
2021 10-K
7.
DEPOSITS
The following table presents deposits by type at December 31,
2021 and 2020 (in thousands):
2021
2020
Non-interest bearing deposits
$
$
Interest-bearing transaction accounts
Saving and money market deposits
Time deposits
Total
deposits
$
$
Time
deposits
exceeding
the
FDIC
insurance
limit
of
$250
thousand
at
December 31,
2021
and
2020
were
approximately $
At December 31, 2021, the scheduled maturities of time deposits
were (in thousands):
2022
$
2023
2024
2025
2026
Thereafter
$
At December 31,
2021 and
2020, the
aggregate amount
of demand
deposits reclassified
to loans
as overdrafts
was
$
8.
BORROWINGS
Borrowed funds consist of fixed rate advances from the FHLB. At December 31, 2021 and 2020, FHLB advances were
$
The following table presents
the fixed interest rates
and expected maturities
of the FHLB advances
at both December
31, 2021 and 2020 (in thousands):
Interest Rate
Type of Rate
Maturity Date
Amount
Fixed
August 17, 2023
$
Fixed
July 30, 2024
Fixed
March 27, 2025
Fixed
March 28, 2025
Fixed
April 17, 2025
Fixed
July 18, 2025
$
The
FHLB
holds
a
blanket
lien
on
the
Company's
loan
portfolio
that
may
be
pledged
as
collateral
for
outstanding
advances, subject
to eligibility
under the
borrowing agreement.
The Company
may also
choose to
assign cash
balances
held at the FHLB as additional collateral. See Note 3 “Loans”
for further discussion on pledged loans.
9.
EQUITY BASED AND OTHER COMPENSATION
PLANS
Employee 401(k) Plan
The Company has an
employee 401(k) plan (the
“Plan”) covering substantially all
eligible employees. The Plan includes
a provision
that
the employer
may contribute
to the
accounts
of eligible
employees
for whom
a salary
deferral
is made.
There was $
2021 and
2020, respectively
,
and are
included
under
salaries and
employee
benefits in
the Consolidated
Statements
of
Operations.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
94
USCB Financial Holdings, Inc.
2021 10-K
Stock-Based Compensation
Stock option
balances,
weighted average
exercise
price,
and weighted
average
fair value
of options
granted
for the
years ended December 31, 2021 and
2020 were adjusted to
reflect the
1 for 5
Stock options are only exercisable
to Class A common stock.
See Note 13 “Stockholders’ Equity”
for further discussion on
stock split.
In
2015,
the
Company's
shareholders
approved
the
2015
Equity
Incentive
Plan
(the
“2015
Option
Plan”),
which
authorized grants
of options
to purchase
up to
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
-year
life,
in
no
event
shall
an
option
be
exercisable
after
the
expiration of
-year life and will terminate in 2025. In July 2020,
the
shareholders
of
the
Company
approved
to
amend
the
2015
Option
plan
authorizing
the
issuance
of
an
additional
shares
after
being
adjusted
to
reflect
the
1 for 5
shareholders of the Company approved to amend the
2015 Option plan authorizing the issuance of
an additional
shares of common stock.
At December 31, 2021, there were
2020, there were
shares available for grant under the 2015 Option Plan
after the
1 for 5
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
$
December 31, 2021
and $
years ended December 31, 2021 and 2020.
Unrecognized compensation cost remaining
on stock-based compensation totaled
$
years ended December 31, 2021 and 2020.
Cash
flows
resulting
from
excess
tax
benefits
are
required
to
be
classified
as
a
part
of
cash
flows
from
operating
activities. Excess tax benefits
are realized tax benefits
from tax deductions for
exercised options in
excess of the deferred
tax asset attributable to the compensation cost for such
options.
The fair value of options
granted was determined using
the following weighted-average
assumptions at December 31,
2021:
Assumption
2021
Risk-free interest rate
Expected term
Expected stock price volatility
%
Dividend yield
%
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
95
USCB Financial Holdings, Inc.
2021 10-K
The following table presents a summary of stock options
for the years ended December 31, 2021 and 2020:
Stock Options
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Years
Aggregate Intrinsic
Value
Balance at January 1, 2021
$
Granted
$
Balance at December 31, 2021
$
Exercisable at December 31, 2021
$
$
Balance at January 1, 2020
(1)
$
Exercised
(
2,000
)
$
Forfeited
(
24,000
)
$
Balance at December 31, 2020
$
Exercisable at December 31, 2020
$
$
(1)
Class A common stock outstanding and additional
paid-in-capital for December 31, 2020 were adjusted
to reflect the 1 for 5 reverse stock split. See
Note 13 "Stockholders' Equity" for further discussion
on the stock split.
The aggregate intrinsic value in
the table above represents
the total pre-tax intrinsic
value (the difference between
the
valuation of the Company’s stock and the exercise price, multiplied by
the number of options considered in-the-money) that
would have been received by the option holders had all option
holders exercised their options.
The weighted average
fair value of
options granted for
the years ended
December 31, 2021 and
2020 was $
$
, respectively.
10.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to
meet the financial
needs of
its customers
and to reduce
its own
exposure to
fluctuations in
interest rates.
These financial
instruments include
unfunded commitments
under lines
of credit,
commitments to
extend credit,
standby and
commercial
letters of
credit. Those
instruments involve,
to varying
degrees, elements
of credit
and interest
rate risk
in excess
of the
amount recognized in the Company’s Consolidated Balance Sheets. The Company uses the
same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The Company's exposure
to credit loss
in the event
of nonperformance by
the other party
to the financial
instruments
for unused lines of credit, and standby letters of credit
is represented by the contractual amount of these commitments.
A
summary
of
the
amounts
of
the
Company's
financial
instruments
with
off-balance
sheet
risk
are
shown
below
at
December 31, 2021 and 2020 (in thousands):
2021
2020
Commitments to grant loans and unfunded lines of credit
$
$
Standby and commercial letters of credit
Total
$
$
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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
96
USCB Financial Holdings, Inc.
2021 10-K
Standby
and
commercial
letters
of
credit
are
conditional
commitments
issued
by
the
Company
to
guarantee
the
performance of a
customer to
a third
party. Those letters of
credit are
primarily issued to
support public and
private borrowing
arrangements. Essentially all letters of credit have fixed maturity dates and many of them expire without being drawn upon,
they do not generally present a significant liquidity risk
to the Company.
11.
DERIVATIVES
The Company utilizes interest rate swap agreements
as part of its asset liability management strategy
to help manage
its interest
rate risk
position. The
notional amount
of the
interest rate
swaps do
not represent
amounts exchanged
by the
parties. The amounts exchanged are
determined by reference to
the notional amount and the
other terms of the individual
interest rate swap agreements.
The Company enters into interest rate swaps with its loan customers. The Company had
with loan customers with
a notional amount of
$
These interest
rate swaps
have a
maturity date
between 2025
and 2051.
The Company
entered into
corresponding
and
offsetting derivatives
with third
parties. The fair
value of liability
on these derivatives
requires the Company
to provide the
counterparty with funds to
be held as collateral
which the Company reports as
other assets under the Consolidated
Balance
Sheets. While these derivatives represent economic hedges,
it does not qualify as hedges for accounting purposes.
The following table reflects the Company’s customer
related interest rate swaps for the dates indicated
(in thousands):
Fair Value
Notional
Amount
Collateral
Amount
Balance Sheet Location
Asset
Liability
December 31, 2021:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
$
Other assets/Other liabilities
$
$
December 31, 2020:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
$
Other assets/Other liabilities
$
$
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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
97
USCB Financial Holdings, Inc.
2021 10-K
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
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
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
significant
to
the
fair
value
of
the
assets
or
liabilities.
Level
3
assets
and
liabilities
include
financial
instruments
whose value
is determined
using pricing
models, discounted
cash
flow
methodologies,
or similar
techniques,
as
well as instruments for which determination of fair value
requires significant management judgment or estimation.
A
financial
instrument's
categorization
within
the
valuation
hierarchy
is
based
upon
the
lowest
level
of
input
that
is
significant to the fair value measurement.
Items Measured at Fair Value
on a Recurring Basis
Investment securities:
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:
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, 2021
and 2020 for each of the fair value hierarchy levels (in thousands):
2021
2020
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Investment securities available for sale:
U.S. Government Agency - SBA
$
-
$
$
-
$
$
-
$
$
-
$
U.S. Government Agency
-
-
-
-
-
-
Collateralized mortgage obligations
-
-
-
-
Mortgage-backed securities - Residential
-
-
-
-
Mortgage-backed securities - Commercial
-
-
-
-
Municipal Securities
-
-
-
-
Bank subordinated debt securities
-
-
-
-
Corporate Bond
-
-
-
-
Total
-
-
-
-
Derivative assets
-
-
-
-
Total assets at fair value
$
-
$
$
-
$
$
-
$
$
-
$
Derivative liabilities
$
-
$
$
-
$
$
-
$
$
-
$
Total liabilities at fair value
$
-
$
$
-
$
$
-
$
$
-
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
98
USCB Financial Holdings, Inc.
2021 10-K
Items Measured at Fair Value
on a Non-recurring Basis
Impaired Loans:
At December
31,
2021 and
2020,
in accordance
with
provisions of
the
loan impairment
guidance,
individual loans
with a
carrying amount
of approximately
$
their
fair
value
of
approximately
$
$
2021 and 2020, respectively.
Loans applicable to write-downs, or impaired
loans, are estimated using the present
value of
expected
cash
flows
or
the
appraised
value
of
the
underlying
collateral
discounted
as
necessary
due
to
management's
estimates of changes in economic conditions are considered
a Level 3 valuation.
Other Real
Estate:
estimate of
the costs to
sell or the
carrying cost of
the other
real estate
owned. Appraisals generally
use the market
approach
valuation technique
and use
market observable
data to
formulate an
opinion of
the fair
value of
the properties.
However,
the appraiser
uses professional
judgment in
determining the
fair value
of the
property and
the Company
may also
adjust
the value for changes in
market conditions subsequent
to the valuation date
when current appraisals
are not available. As
a consequence of the carrying cost or the
third-party appraisal and adjustments therein, the fair values of the properties are
considered a Level 3 valuation.
The following table represents the Company’s assets measured at fair value on a non-recurring basis at December 31,
2021 and 2020 for each of the fair value hierarchy levels
(in thousands):
Level 1
Level 2
Level 3
Total
December 31, 2021:
Impaired loans
$
-
$
-
$
$
December 31, 2020:
Impaired loans
$
-
$
-
$
$
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, 2021 and 2020
(in thousands):
Fair Value
Valuation Techniqu
e(s)
Unobservable Input(s)
December 31, 2021:
Residential real estate
$
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
Discounted cash flow
Adj. for differences in net operating income expectations
Other
Discounted cash flow
Adj. for differences in net operating income expectations
Total
impaired loans
$
December 31, 2020:
Residential real estate
$
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
Discounted cash flow
Adj. for differences in net operating income expectations
Other
Discounted cash flow
Adj. for differences in net operating income expectations
Total
impaired loans
$
There were
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
99
USCB Financial Holdings, Inc.
2021 10-K
Items Not Measured at Fair Value
The carrying amounts and estimated fair values of financial instruments not carried at fair value, at December 31, 2021
and 2020 are as follows (in thousands):
Fair Value Hierarchy
Carrying
Amount
Level 1
Level 2
Level 3
Fair Value
Amount
December 31, 2021:
Financial Assets:
Cash and due from banks
$
$
$
-
$
-
$
Interest-bearing deposits in banks
$
$
$
-
$
-
$
Investment securities held to maturity
$
$
-
$
$
-
$
Loans held for investment, net
$
$
-
$
-
$
$
Accrued interest receivable
$
$
-
$
$
$
Financial Liabilities:
Demand Deposits
$
$
$
-
$
-
$
Money market and savings accounts
$
$
$
-
$
-
$
Interest-bearing checking accounts
$
$
$
-
$
-
$
Time deposits
$
$
-
$
-
$
$
FHLB advances
$
$
-
$
$
-
$
Accrued interest payable
$
$
-
$
$
$
December 31, 2020:
Financial Assets:
Cash and due from banks
$
$
$
-
$
-
$
Interest-bearing deposits in banks
$
$
$
-
$
-
$
Loans held for investment, net
$
$
-
$
-
$
$
Accrued interest receivable
$
$
-
$
$
$
Financial Liabilities:
Demand Deposits
$
$
$
-
$
-
$
Money market and savings accounts
$
$
$
-
$
-
$
Interest-bearing checking accounts
$
$
$
-
$
-
$
Time deposits
$
$
-
$
-
$
$
FHLB advances
$
$
-
$
$
-
$
Accrued interest payable
$
$
-
$
$
$
13.
STOCKHOLDERS’ EQUITY
Common Stock
The rights
of the
holders of
Class A
common stock
and Class
B common
stock are
the same,
except for
voting and
conversion rights.
Holders of
Class A
common stock
are entitled
to voting
rights, while
holders of
Class B
common stock
have no
voting rights.
Shares of
Class
B common
stock
are convertible
into shares
of Class
A common
stock
if sold
or
transferred.
On June 16, 2021, the Company effected a
1 for 5
As of
the effective
date of
June 16,
2021, each
five shares
of the
Company’s Class
A common
stock was
combined into
to one whole share. The Company has adjusted the Class A
common stock, earnings per share and stock options adjusted
for this
1 for 5
would be converted at the
1 for 5
dividends declared by
the Board of
Directors (the “Board”)
to include Class
B common stock
will also be
paid as if
converted.
The
1 for 5
Operations, and Consolidated Statements of Changes
in Stockholders’ Equity.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
100
USCB Financial Holdings, Inc.
2021 10-K
On July
27, 2021,
the Company
completed the
Initial Public
Offering (“IPO”)
of its
Class A
common stock,
in which
it
issued and
sold
net proceeds of $
On
December
21,
2021,
the
Company
entered
into
agreements
with
the
Class
B
shareholders
to
exchange
all
outstanding Class
B non-voting
common stock
for Class
A voting
common stock
at a
ratio of
total of
In December 2021,
USCB Financial Holdings,
Inc. (the “Company”)
acquired all the
issued and outstanding
shares of
the Class A voting
common stock of
U.S. Century Bank
(the “Bank”), which are
the only issued and
outstanding shares of
the Bank’s capital
stock, in a share
exchange (the “Reorganization”)
effected under the
Florida Business Corporation
Act.
Each of the outstanding
shares of the
Bank’s common stock,
par value $
was converted into and
exchanged for one newly issued
share of the Company’s common
stock, par value $
and
the
Bank
became
the
Company’s
wholly-owned
subsidiary.
Prior
to
filing
the
bank
holding
company
formation,
the
Company
had
no
material
assets
and
had
not
conducted
any
business
or operations
except
for activities
related to
our
organization and the Reorganization.
In the
Reorganization,
each
shareholder
of the
Bank
received securities
of
the same
class,
having
substantially
the
same designations,
rights,
powers, preferences,
qualifications,
limitations
and restrictions,
as those
that the
shareholder
held
in
the
Bank,
and
the
Company’s
current
shareholders
own
the
same
percentages
of
its
common
stock
as
they
previously owned of the Bank’s common stock.
Preferred Stock
On April 5, 2021,
the Board authorized and
approved the offer to
repurchase all outstanding shares of
Class E preferred
stock at
the liquidation
value of
$
shareholders approved the repurchase which the Company
completed on April 26, 2021.
The Company offered the
Class C and Class D preferred
stockholders the ability to exchange
their shares for Class A
common stock. The offer
to exchange was voluntary
and the preferred stockholders
were given the option to
convert
%
of
their
preferred
shares
for
Class
A
common
stock
with
the
remaining
%
to
be
redeemed
in
the
form
of
cash.
The
exchange ratio for the shares of
Class A common stock issued in the
exchange transaction was based upon
the IPO price
for shares of Class A common stock.
During the year ended December 31, 2021,
D preferred stock
converted into
preferred
shares
had
a total
liquidation
value
of
$
stock
and
Class
D
preferred
stock
totaling
$
The fair value of
consideration on the exchange and redemption
of the Class C and
Class D preferred shares exceeded
the
book
value
causing
a
one-time
reduction
in
net
income
available
to
common
stockholders
of
$
December 31, 2021, there were
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
101
USCB Financial Holdings, Inc.
2021 10-K
Dividends
The Board approved
the following dividend
amounts on the
preferred shares for
the years ended
December 31, 2021
and 2020 (in thousands):
2021
2020
Preferred stock - Class C: Non-voting, Non-cumulative, Perpetual: $
per share liquidation preference; annual dividend rate of
% of liquidation preference paid
quarterly. Quarterly dividend of $
$
$
Preferred stock - Class D: Non-voting, Non-cumulative, Perpetual: $
per share liquidation preference; annual dividend rate of
% of par value paid quarterly.
Quarterly dividend of $
Preferred stock - Class E: Non-voting, partially cumulative, Perpetual: $
$
% of liquidation
preferences paid quarterly. Quarterly dividend of $
Total
dividends paid
$
$
Declaration of dividends by the Board is required before dividend payments are made. The dividend payment dates for
Class C and
Class D preferred shares
were set by
the Board while
the Class E preferred
shares had a
set dividend payment
date on the fifteenth of February,
May, August, and November.
2020. Additionally, there
were
14.
EARNINGS PER SHARE
Earnings
per
share
(“EPS”)
for
common
stock
is
calculated
using
the
two-class
method
required
for
participating
securities. Basic EPS
is calculated by
dividing net income
(loss) available to
common stockholders by the
weighted-average
number of common shares outstanding for
the period, without consideration for common
stock equivalents. Diluted EPS is
computed by
dividing net
income (loss)
available to
common stockholders
by the
weighted-average
number
of common
shares outstanding for
the period and
the weighted-average number
of dilutive common
stock equivalents outstanding
for
the period determined using the treasury-stock method. For
purposes of this calculation, common stock equivalents include
common stock options and are only included in the calculation
of diluted EPS when their effect is dilutive.
In
calculating
EPS
for
the
year
ended
December 31,
2021,
net
income
available
to
common
stockholders
was
not
allocated between Class A and
Class B common stock since
there was no issued and outstanding
Class B common stock
at year-end.
In calculating EPS for the
year ended December 31, 2020, net
income available to common stockholders was allocated
as if all
the income for
the period were
distributed to common
stockholders. The
allocation was
based on the
outstanding
shares per
common share
class to
the total
common
shares outstanding
during
each period
giving effect
for the
1 for 5
reverse
stock
split.
The
Company’s
Articles
of
Incorporation
require
that
the
distribution
of
net
income
to
Common
B
stockholders be adjusted to give effect for Class A stock splits. Therefore, the income allocated to Class B common shares
was calculated based on their
% per share equivalent to Class A common shares.
The following table
reflects the calculation
of net income
(loss) available to
common stockholders
for the years
ended
December 31, 2021 and 2020 (in thousands):
2021
2020
Net Income
$
$
Less: Preferred stock dividends
Less: Exchange and redemption of preferred shares
-
Net income (loss) available to common stockholders
$
(
70,585
)
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
102
USCB Financial Holdings, Inc.
2021 10-K
The following
table reflects
the calculation
of basic
and diluted
earnings (loss)
per common
share class
for the
years
ended December 31, 2021 and 2020 (in thousands, except
per share amounts):
2021
2020
Class A
Class B
Class A
Class B
(1)
Basic EPS
Numerator:
Net income (loss) available to common shares before allocation
$
(
70,585
)
$
-
$
$
Multiply: % allocated on weighted avg. shares outstanding
- %
Net income (loss) available to common shares after allocation
$
(
70,585
)
$
-
$
$
Denominator:
Weighted average shares outstanding
Earnings (loss) per share, basic
$
(
6.72
)
$
$
$
Diluted EPS
Numerator:
Net income (loss) available to common shares before allocation
$
(
70,585
)
$
-
$
$
Multiply: % allocated on weighted avg. shares outstanding
- %
Net income (loss) available to common shares after allocation
$
(
70,585
)
$
-
$
$
Denominator:
Weighted average shares outstanding for basic EPS
Add: Dilutive effects of assumed exercises of stock options
Weighted avg. shares including dilutive potential common shares
Earnings (loss) per share, diluted
$
(
6.72
)
$
$
$
Anti-dilutive stock options excluded from diluted EPS
(1)
Net income (loss) available to common shares
between Class A and Class B common stock was
allocated based on the weighted average
number
of shares outstanding. The allocation also assumes
that Class B shares are converted to Class A which
is equivalent to
For the year
ended December 31, 2021,
the Company was
in a net
loss position after
adjusting for the
exchange and
redemption of the Class C and Class D preferred
shares, making basic net loss per share
the same as diluted net loss per
share as the inclusion of all potential common shares outstanding
would have been antidilutive.
See Note 13 “Stockholders’ Equity” for further discussion
on the stock splits.
15.
REGULATORY
MATTERS
Banks and
bank holding
companies
are subject
to regulatory
capital requirements
administered by
federal and
state
banking
agencies.
Failure
to
meet
minimum
capital
requirements
can
initiate
certain
mandatory
and
possibly
additional
discretionary actions
by regulators
that, if
undertaken, could
have a
direct material
effect on
the Company's
consolidated
financial
statements.
Under
capital
adequacy
guidelines
and
the
regulatory
framework
for
prompt
corrective
action,
the
Company and the
Bank must meet
specific capital guidelines
that involve quantitative
measures of their
assets, liabilities,
and
certain
off-balance-sheet
items
as
calculated
under
regulatory
accounting
practices.
The
Company
and
the
Bank’s
capital
amounts
and
classification
are
also
subject
to
qualitative
judgments
by
the
regulators
about
components,
risk
weightings, and other factors.
Based on changes to the Federal Reserve’s definition of a “Small Bank
Holding Company” that increased the threshold
to $3.0 billion in assets
in August 2018, the Company
is not currently subject to
separate minimum capital measurements.
At such time when the Company reaches the
$3.0 billion asset level, it will
be subject to capital measurements independent
of the Bank.
The Bank has
elected to permanently opt-out
of the inclusion
of accumulated other comprehensive
income in the
capital
calculations, as permitted by the regulations. This
opt-out will reduce the impact of
market volatility on the Bank’s regulatory
capital levels.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
103
USCB Financial Holdings, Inc.
2021 10-K
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
% 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, 2021 and
2020, the capital ratios for the Bank were sufficient
to meet the conservation buffer.
Prompt
corrective
action
regulations
provide
five
classifications:
well
capitalized,
adequately
capitalized,
undercapitalized,
significantly
undercapitalized,
and
critically
undercapitalized,
although
these
terms
are
not
used
to
represent overall financial condition. If
adequately capitalized, regulatory approval
is required to accept brokered
deposits.
If
undercapitalized,
capital
distributions
are
limited,
as
is
asset
growth
and
expansion,
and
capital
restoration
plans
are
required.
At December 31,
2021 and
2020, 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
both
the
Bank
and
the
Company
at
December 31,
2021
and
2020
(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, 2021:
Total
risk-based capital
$
%
$
%
$
%
Tier 1 risk-based capital
$
%
$
%
$
%
Common equity tier 1 capital
$
%
$
%
$
%
Leverage ratio
$
%
$
%
$
%
December 31, 2020:
Total
risk-based capital
$
%
$
%
$
%
Tier 1 risk-based capital
$
%
$
%
$
%
Common equity tier 1 capital
$
%
$
%
$
%
Leverage ratio
$
%
$
%
$
%
As
of
December 31,
2021,
there
was
no
activity
between
the
parent
bank
holding
company
and
its
subsidiaries
to
disclose on the statements of operations or statements
of cash flows.
Effective December 28, 2021, the Company acquired the Bank in a merger and
reorganization through the formation of
a bank holding company.
Pursuant to this transaction, all of the
outstanding shares of the Bank’s
$
stock formerly
held by
its shareholders
was converted
into and
exchanged for
one newly
issued share
of the
Company’s
par value common
stock, and the Bank
became a subsidiary of
the Company. See Note 13 “Stockholders’ Equity”
for further
details.
The Company
is limited in
the amount
of cash
dividends that
it may
pay.
Payment of dividends
is generally
limited to
the Company’s
net income
of the
current year
combined with
the Bank’s
retained income
of the
preceding two
years, as
defined by state banking regulations. However, for any dividend declaration, the Company must consider
additional factors
such as the amount
of current period net
income, liquidity,
asset quality,
capital adequacy and
economic conditions at
the
Bank. It is likely that
these factors would further limit the
amount of dividends which the Company could
declare. In addition,
bank regulators have
the authority to
prohibit banks from
paying dividends
if they deem
such payment to
be an unsafe
or
unsound practice.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
104
USCB Financial Holdings, Inc.
2021 10-K
16.
RELATED PARTY
TRANSACTIONS
In
the
ordinary
course
of
business,
principal
officers,
directors,
and
affiliates
may
engage
in
transactions
with
the
Company.
The
following
table
presents
loans
to
and
deposits
from
related
parties
included
within
the
accompanying
Consolidated Financial Statements at December 31, 2021
and 2020 (in thousands):
2021
2020
Consolidated Balance Sheets:
Loans held for investment, net
$
-
$
-
Deposits
$
$
Consolidated Statements of Operations:
Interest income
$
-
$
-
Interest expense
$
$
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
sheets
are presented
below for
USCB
Financial
Holdings,
Inc. at
the
dates
indicated
(in
thousands):
December 31, 2021
December 31, 2020
ASSETS:
Investment in bank subsidiary
$
$
-
Other assets
-
-
Total
assets
$
$
-
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities
$
-
$
-
Stockholders' equity
-
Total
liabilities and stockholders' equity
$
$
-
At December 31, 2021, there was no activity between the parent bank holding company and
its subsidiaries to disclose
on the statements of operations or statements of cash flows.
18.
LOSS CONTINGENCIES
Loss contingencies,
including claims
and legal actions
may arise in
the ordinary
course of
business. In
the opinion
of
management, none
of these
actions, either
individually or
in the aggregate,
is expected
to have
a material
adverse effect
on the Company’s
Consolidated Financial Statements.
19.
SUBSEQUENT EVENTS
Management has
evaluated subsequent
events from
January 1,
2022 through
March 24,
2022, which
is the
date this
Form 10-K was available to be issued.
Share Repurchase Program
On January
24, 2022,
the Board
approved a
share repurchase
program of
up to
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
other means.
The repurchase
program
has
no
expiration
date
and
may
be
modified,
suspended,
or
terminated
at
any
time.
Repurchases
under
this
program will be funded from the Company’s
existing cash and cash equivalents or future cash flow.
105
USCB Financial Holdings, Inc.
2021 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,
2021.
Based
on
that
evaluation,
management
believes
that
the
Company’s
disclosure
controls
and
procedures
were
effective
to
collect,
process,
and
disclose
the
information
required
to
be
disclosed
in
the
reports filed or
submitted under
the Exchange
Act within the
required time
periods as of
the end of
the period covered
by
this Report.
Management’s Report on Internal Control
over Financial Reporting
This Annual
Report does
not include
a report
of management’s
assessment
regarding internal
control
over
financial
reporting or an attestation
report of the Company’s
registered public accounting
firm due to a
transition period established
by rules of the SEC for newly public companies.
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
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions
That Prevent Inspections
Not applicable.
106
USCB Financial Holdings, Inc.
2021 10-K
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information
required by
Item 10
is incorporated
by reference
to the
information that
appears under
the headings
Board Meetings and Committees in our Proxy Statement
for the 2022 Annual Meeting of Shareholders.
Item 11. Executive Compensation
The information
required by
Item 11
is incorporated
by reference
to the
information that
appears under
the headings
Executive Compensation in our Proxy Statement for the
2022 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters
The information
required by
Item 12
is incorporated
by reference
to the
information that
appears under
the headings
Beneficial Owners in our Proxy Statement for the 2022
Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions,
and Director Independence
The information
required by
Item 13
is incorporated
by reference
to the
information that
appears under
the headings
Certain Relationships
and Related
Transactions,
and Director
Independence in
our Proxy
Statement for
the 2022
Annual
Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services
The information
required by
Item 14
is incorporated
by reference
to the
information that
appears under
the headings
Ratification of Auditors in our Proxy Statement for the 2022
Annual Meeting of Shareholders.
107
USCB Financial Holdings, Inc.
2021 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, 2021 and 2020
Consolidated Statements of Operations for the years ended
December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years
ended December 31, 2021 and 2020
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2021 and 2020
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.
108
USCB Financial Holdings, Inc.
2021 10-K
EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
**
**
**
**
***
***
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 herwith.
***
Furnished hereby.
109
USCB Financial Holdings, Inc.
2021 10-K
SIGNATURES
Pursuant to the
requirements of
the Securities Exchange
Act of 1934,
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 24, 2022
By:
/s/ Luis de la Aguilera
Luis de la Aguilera
President and Chief Executive Officer
Pursuant
to
the
requirements
of
the
Securities
Exchange
Act
of
1934,
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
President, Chief Executive Officer,
and Director
(Principal Executive Officer)
March 24, 2022
Luis de la Aguilera
/s/ Robert Anderson
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 24, 2022
Robert Anderson
/s/ Aida Levitan
Director
March 24, 2022
Aida Levitan
/s/ Howard Feinglass
Director
March 24, 2022
Howard Feinglass
/s/ Kirk Wycoff
Director
March 24, 2022
Kirk Wycoff
/s/ Ramon A. Abadin
Director
March 24, 2022
Ramon A. Abadin
/s/ Bernardo B. Fernandez
Director
March 24, 2022
Bernardo B. Fernandez
/s/ Ramon A. Rodriguez
Director
March 24, 2022
Ramon A. Rodriguez
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of EquityItem 6. ReservedItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 13 "stockholders' Equity" For Further Discussion on The Stock SplitItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem 9C. Disclosure Regarding Foreign Jurisdictions That Prevent InspectionsPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules