USCB 10-K Annual Report Dec. 31, 2023 | Alphaminr
USCB FINANCIAL HOLDINGS, INC.
ALPHAMINR

USCB 10-K Fiscal year ended Dec. 31, 2023

Balance Sheet
Cash Flow
Income Statement
Debt
uscb-20231231
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uscb-20231231p1i0
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission File Number:
001-41196
USCB Financial Holdings, Inc.
(Exact name of registrant as specified in its
charter)
Florida
87-4070846
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2301 NW 87th Avenue
,
Doral
,
FL
33172
(Address of principal executive offices) (zip
code)
Registrant’s telephone number, including area code:
(
305
)
715-5200
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $1.00 par value per
share
USCB
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g)
of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
☐
Yes
No
☒
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes
☐
No
☒
Indicate by check mark
whether the registrant (1) has
filed all reports
required to be filed
by Section 13 or
15(d) of the Securities
Exchange Act of
1934 during the
preceding 12 months (or
for such shorter
period that the
registrant was required to
file such reports),
and (2) has
been subject to
such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required
to be submitted pursuant to Rule 405
of Regulation S-T
(§232.405 of this chapter)
during the preceding
12 months (or for
such shorter period
that the registrant
was required to submit
such files).
Yes
☒
No
☐
Indicate by check mark whether
the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company or
an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☒
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended
transition period for complying with any
new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark
whether the registrant has
filed a report on
and attestation to its
management’s assessment of the
effectiveness of its internal
control over
financial reporting
under Section
404(b) of
the Sarbanes-Oxley
Act (15
U.S.C.7262(b)) by
the registered
public accounting
firm that
prepared or issued its audit report.
☐
If securities are registered pursuant to Section 12(b) of the Act, indicate
by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously
issued financial statements.
☐
Indicate by check mark whether any of those
error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during
the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934). Yes
☐
No
☒
The aggregate market value of the voting stock held
by non-affiliates of the registrant based on the
closing price of $10.20 per share on June
30,
2023, the last business day of the registrant’s second quarter, was approximately $
104.8
million (19,544,777 shares issued and outstanding
at
such date less shares held by affiliates). Although directors
and executive officers and their affiliates of the Registrant were assumed
to be
“affiliates” of the Registrant for purposes of the calculation,
the classification is not to be interpreted as an admission
of such status.
As of March 15, 2024, the registrant had had
19,650,463
shares of Class A Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Proxy Statement for the 2024 Annual Meeting of Shareholders (the “2024
Proxy Statement”) are incorporated by
reference into Part III of this report.
uscb-20231231p1i0
FORM 10-K
DECEMBER 31, 2023
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
(Loss)
3
USCB Financial Holdings, Inc.
2023 10-K
CAUTIONARY NOTE REGARDING FORWARD
-LOOKING STATEMENTS
This
Annual
Report
on
Form
10-K
contains
statements
that
are
not
historical
in
nature
are
intended
to
be,
and
are
hereby identified as, forward-looking
statements for purposes of
the safe harbor provided by
Section 21E of the Securities
Exchange Act
of 1934,
as amended.
The words
“may,” “will,” “anticipate,” “could,”
“should,” “would,” “believe,”
“contemplate,”
“expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are
intended
to
identify
forward-looking
statements.
These
forward-looking
statements
include
statements
related
to
our
projected
growth,
anticipated
future
financial
performance,
and
management’s
long-term
performance
goals,
as
well
as
statements relating to
the anticipated effects
on results of
operations and financial
condition from expected
developments
or events, or business and growth strategies, including
anticipated internal growth.
These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ
materially from those anticipated in such statements.
Potential risks and uncertainties include, but are not
limited to:
•
the strength of the United States economy
in general and the strength of the local
economies in which we conduct
operations;
•
our ability to successfully manage interest rate risk, credit
risk, liquidity risk, and other risks inherent to our industry;
•
the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss
reserve and deferred tax asset valuation allowance;
•
the efficiency and effectiveness of our
internal control environment;
•
our ability
to comply
with the
extensive laws
and regulations
to which
we are
subject, including
the laws
for each
jurisdiction where we operate;
•
adverse
changes
or
conditions
in
the
capital
and
financial
markets,
including
actual
or
potential
stresses
in
the
banking industry;
•
deposit attrition and the level of our uninsured deposits;
•
legislative or regulatory
changes and changes
in accounting
principles, policies,
practices or guidelines,
including
the on-going effects of the implementation of the
Current Expected Credit Losses (“CECL”);
•
the lack of a significantly diversified loan portfolio and concentration in the South Florida market, including the risks
of geographic, depositor,
and industry concentrations,
including our concentration
in loans secured by
real estate,
in particular, commercial real estate;
•
the effects of climate change;
•
the concentration of ownership of our common stock;
•
fluctuations in the price of our common stock;
•
our ability to fund or access the capital markets at attractive
rates and terms and manage our growth, both organic
growth as well as growth through other means, such as
future acquisitions;
•
inflation, interest rate, unemployment rate, market, and monetary
fluctuations;
•
impacts of international hostilities and geopolitical events;
•
increased
competition
and
its
effect
on
the
pricing
of
our
products
and
services
as
well
as
our
net
interest
rate
spread and net interest margin;
•
the loss of key employees;
•
the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,
employee, or third-party fraud and cybersecurity breaches;
and
•
other
risks
described
in
this
Annual
Report
on
Form
10-K
and
other
filings
we
make
with
the
Securities
and
Exchange Commission (“SEC”).
All
forward-looking
statements
are
necessarily
only
estimates
of
future
results,
and
there
can
be
no
assurance
that
actual results will
not differ
materially from expectations.
Therefore, you are
cautioned not to
place undue reliance
on any
forward-looking
statements.
Further,
forward-looking
statements
included in
this
Annual Report
on Form
10-K are
made
only
as of
the
date
hereof,
and
we
undertake
no
obligation
to
update
or
revise
any forward
-looking
statement
to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events,
unless required to do so under
the federal securities laws. You
should also review the risk
factors described in this Annual
Report on Form 10-K
and in the reports the
Company filed or will file
with the SEC and, for
periods prior to the completion
of
the
bank
holding
company
reorganization,
U.S.
Century
Bank
(the
“Bank”)
filed
with
the
Federal
Deposit
Insurance
Corporation (“FDIC”).
4
USCB Financial Holdings, Inc.
2023 10-K
PART I
Item 1. Business
Overview
USCB Financial Holdings, Inc.,
a Florida corporation (the “Company”), was formed on December 17, 2021, to serve as
the
holding
company
for
U.S.
Century
Bank,
a
Florida
state-chartered
bank,
and
is
a
bank
holding
company
(a
“BHC”)
registered with
the Board
of Governors
of the
Federal
Reserve System
(the “Federal
Reserve”)
under the
Bank Holding
Company Act
of 1956,
as amended
(the “BHC
Act”). The
Company is
headquartered
in Miami,
Florida, and,
through the
Bank,
its
sole
direct
subsidiary,
operates
10
banking
centers
in
South
Florida
providing
a
wide
range
of
personal
and
business
banking products
and services
.
As of
December 31,
2023, the
Company
had total
consolidated
assets
of $2.3
billion.
The Bank commenced operations
on October 28, 2002 and
is a Florida state-chartered, non-Federal
Reserve System
member bank. Over the course
of 2021, the Bank simplified
its capitalization structure by
exchanging and/or repurchasing
all of
its issued
and outstanding
preferred shares,
including Class
C, Class
D, and
Class E
preferred stock.
In December
2021, the
Bank reached agreements
with holders of
its Class
B common
stock, to exchange
all outstanding
Class B common
stock for Class A common stock in a 1-for-5 stock exchange
.
On July 27,
2021, the Bank
completed an initial
public offering of 4,600,000
shares of its
Class A common
stock. Shares
of the Bank’s Class
A common stock were
sold at a price
to the public
of $10.00 per share
and began trading on
the Nasdaq
Stock Market under ticker symbol “USCB”.
On December
30, 2021
(the
“Effective
Date”),
the Company
acquired
all of
the
issued
and
outstanding
stock
of the
Bank in a
share exchange
(the “Reorganization”)
effected under
the Florida
Business Corporation
Act and
in accordance
with the
terms of
an Agreement and
Plan of
Share Exchange dated
December 27, 2021
between the Bank
and the
Company
(the “Share Exchange Agreement”). The Reorganization and
the Share Exchange Agreement were approved
by the Bank’s
stockholders at a special meeting of the Bank’s stockholders held on December 20,
2021. Pursuant to the Share Exchange
Agreement, on the Effective
Date each issued and outstanding
share of the Bank’s
Class A common stock was
converted
into and exchanged
for one share
of the Company’s Class
A common stock.
As a result,
the Bank became
the wholly owned
subsidiary
of
the
Company,
the
Company
became
the
holding
company
for
the
Bank
and
the
stockholders
of the
Bank
became stockholders of the Company.
Prior
to
the
Effective
Date,
the
Bank’s
Class
A
common
stock
was
registered
under
Section
12(b)
of
the
Securities
Exchange Act of 1934 (the “Exchange
Act”), and the Bank was subject to
the information requirements of the Exchange
Act
and, in accordance with Section 12(i) thereof, filed quarterly reports, proxy statements and other information with the FDIC.
As a result of the Reorganization, pursuant to Rule 12g-3(a) under the Exchange Act, the Company became the successor
registrant
to the
Bank, the
Company’s
Class
A common
stock
was
deemed
to
be
registered
under
Section
12(b) of
the
Exchange Act, and the Company became subject to the information requirements of the Exchange Act and is now required
to file
reports, proxy
statements and
other information with
the SEC.
The trading
symbol for
the Company’s Class
A Common
Stock is “USCB”, which is the same as the Bank’s former
trading symbol.
Prior to
the Reorganization,
the Company
had no
material assets
and had
not conducted
any business
or operations
except for activities related to its incorporation and the
Reorganization.
Our strategy
in becoming
a publicly
traded company
and forming
a BHC
was to
continue pursuing
organic growth
as
well as strategic acquisitions if the opportunity arises,
which efforts will be further facilitated by access
to public capital and
the added flexibility provided by a holding company structure.
In this Annual Report on Form 10-K, unless the context indicated otherwise, references to “we,” “us,”, and “our” refer to
the Company and the Bank,
as the contest dictates. However, if the discussion
relates to a period before
the Effective Date,
the terms refer only to the Bank.
Products and Services
Lending Services
Our mission
is to
provide high
value, relationship
-based banking
products, services
and solutions
to a
diverse
set of
clients in the
markets we serve. We focus
on serving small-to-medium sized businesses (“SMBs”) and
catering to the needs
of
local
business
owners,
entrepreneurs
and
professionals
in
South
Florida.
We
have
further
leveraged
our
success
in
5
USCB Financial Holdings, Inc.
2023 10-K
providing comprehensive banking solutions
to SMBs to also secure the personal
retail deposit relationships of the owners,
operators, and employees of our commercial lending clients, which has
been a cornerstone of our deposit growth strategy.
In addition
to our
traditional commercial
banking services,
we are
among a
select number
of banks
of our
size within
our market
area that
can offer
certain specialty
banking products,
services and
solutions designed
for small
businesses,
homeowner associations,
law firms, medical
practices and other
professional services
firms, and global
banking services.
Our major specialty banking offerings include
the following:
•
Small
Business
Administration
(“SBA”)
lending:
Our
SBA
platform
originates
loans
under
Sections
7(a)
and 504
of the
SBA program.
The 7(a)
loan program,
SBA's most
common loan
program, includes
financial
help for small businesses
with special requirements
while the 504 loan program
provides long-term, fixed rate
financing of
up to $5.0
million for
major fixed assets
that promote
business growth
and job creation.
Since its
formation in
2018, the
platform serves
as an
opportunity to
generate commercial
and industrial
loans, or
C&I
loans, and to diversify our revenue stream through originating and
selling SBA 7(a) loans. As of December 31,
2023, the Bank is a Preferred Lending Partner with the SBA which
allows us to offer the full range of SBA loan
products and
to exercise
lending authority
at the
local bank
level, allowing
us to
make timely
credit decisions
for prospective clients.
•
Yacht lending:
Our yacht lending vertical
provides yacht financing for
larger vessels; transactions range
from
$750 thousand to $7.5 million.
We target high net-worth
clients, in one of the
most active yacht markets
in the
country.
•
Homeowner Association (“HOA”)
services:
We provide banking services
to HOAs and property
managers,
including deposit collection,
lockbox services, payment
services, and lending
products. Launched in
2016, we
offer our HOA customers a unique combination of market knowledge of
a local bank, and a highly personalized
“white glove” approach to customer service.
•
Jurist Advantage and Private Client
Group services:
Our Jurist Advantage and Private
Client Group vertical
provides customized
banking solutions
for law
firms as
well as
their partners,
associates, staff,
and high
net
worth clients.
We also leverage
our relationships with
our law
firm clients to
generate personal deposit
accounts.
•
Global
Banking
services:
Our
Global
Banking
vertical
provides
correspondent
banking
services
for
banks
headquartered
in
certain
Latin
America
and
the
Caribbean
countries.
We
also
cross-sell
our
correspondent
banking relationships to
generate international personal
banking clients for
our Bank. Our compliance
team is
experienced in issues
related to foreign
banking, and we
have frequent and regular
open communication with
our foreign bank clients to ensure proper compliance
controls are maintained at such institutions.
Credit Practices
Our underwriting process is informed by a conservative credit culture
that encourages prudent lending. We believe our
strong asset quality
is due
to our
understanding of and
experience with businesses
within Florida,
in particular South
Florida,
our
long-standing
relationships
with
clients
and
our
disciplined
underwriting
processes.
Our
thorough
underwriting
processes
collaboratively
engage
our
seasoned
business
bankers,
credit
underwriters
and
portfolio
managers
in
the
analysis of each loan request.
We manage our credit risk by analyzing metrics related
to our different lines of business, which allows us to
maintain a
conservative
and
well-diversified
loan portfolio
reflective
of our
assessment
of various
industry
sectors.
Based
upon our
aggregate exposure to any given borrower relationship, we undertake a scaled review
of loan originations that may involve
senior credit officers, our Chief Credit Officer,
our Credit Committee or,
ultimately,
our Board of Directors (“Board”).
Deposit Products
We offer
traditional deposit
products, including
commercial and
consumer checking
accounts, money
market deposit
accounts, savings accounts, and
certificates of deposit
with a
variety of terms
and rates, as
well as a
robust suite of
treasury,
commercial payments,
and cash
management services.
Additionally,
we offer
ICS and
CDARS deposit
products that
are
FDIC-insured for our clients. Furthermore, we offer deposit products for municipalities and other public entities. Our deposit
products are mainly offered across our primary
geographic footprint.
Title Services
Florida
Peninsula
Title
LLC
is
a
subsidiary
of
the
Bank
that
offers
our
clients
title
insurance
policies
for
real
estate
transactions closed at the Bank. Licensed in the State of Florida and approved by the Department of Insurance Regulation,
Florida Peninsula
Title LLC
began operations
in 2021.
Our title
service business
not only provides
diversification for
non-
interest income but also provides our clients with access
to tile insurance services.
6
USCB Financial Holdings, Inc.
2023 10-K
Seasonality
We do not believe our business to be seasonal
in nature.
Markets
Our primary banking market is South
Florida. Due to the recent
acceptance and expected ongoing emphasis on remote
work, coupled
with a
low tax
environment, warm
weather and
a strong
real estate
market has
encouraged companies
to
relocate some or all of their
operations to South Florida. We
believe this trend is further
demonstrated by recent relocation
initiatives undertaken by large financial institutions such as Blackstone Group Inc., Goldman Sachs Group Inc., and Citadel
Advisors
LLC,
all
of
which
have
established
operations
in
South
Florida.
We
believe
Florida
offers
long-term
attractive
banking opportunities.
Our largest concentration is in the Miami metropolitan statistical area; however, we are also focused
on growth in other urban Florida markets in which we
have a presence, such as Broward and Palm Beach counties
.
According to the
United States
Census Bureau’s
estimate,
Florida was
the third most
populous state in
the country in
2023 and the three largest population
centers were in Miami-Dade, Broward, and Palm
Beach counties (all located in South
Florida) in
2022. According
to estimates
from the
United States
Census Bureau,
from 2020
to 2023,
Florida’s
population
increased to 22.6 million residents, an increase of 1.0 million new residents. The percentage change in
Florida’s population
between April 2020 and July 2023 alone was 5.0% according
to the United States Census Bureau.
Competition
Our markets are highly competitive,
and we compete with a wide range of lenders and other financial institutions within
our markets,
including local,
regional,
national,
and international
commercial
banks
and credit
unions.
We
also compete
with mortgage companies, brokerage
firms, trust service providers, consumer
finance companies, mutual funds,
securities
firms,
insurance
companies,
third-party
payment
processors,
financial
technology
companies,
or
Fintechs,
and
other
financial intermediaries on various
of our products and
services. Some of our competitors
are not subject to the
regulatory
restrictions
and
the
level
of
regulatory
supervision
applicable
to
us.
Many
of
our
competitors
are
much
larger
financial
institutions that have greater financial
resources than we do
and compete aggressively for market
share. These competitors
attempt to gain market share through their financial product
mix, pricing strategies and larger banking center networks.
Interest rates
on both
loans and
deposits and
prices of
fee-based services
are significant
competitive factors
among
financial
institutions
generally.
Other
important
competitive
factors
include
convenience,
quality
of
customer
service,
availability and quality of digital offerings, community
reputation, and continuity of personnel and services.
Emerging Growth Company
We are an “emerging growth
company,”
or “EGC”, as defined in the Jumpstart
Our Business Startups Act of 2012 (the
“JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are
applicable
to
other
public
companies
that
are
not
“emerging
growth
companies,”
including,
but
not
limited
to,
not
being
required to comply with the auditor
attestation requirements of Section
404 of the Sarbanes-Oxley Act,
reduced disclosure
obligations
regarding
executive
compensation
in
our
periodic
reports
and
proxy
statements,
and
exemptions
from
the
requirements of
holding a
non-binding advisory
vote on
executive compensation
and shareholder
approval of
any golden
parachute payments not previously approved.
In addition,
Section
107
of
the
JOBS
Act
also
provides
that
an
EGC can
take
advantage
of
the
extended
transition
period provided
in Section
7(a)(2)(B) of
the Securities
Act of
1933, as
amended (the
“Securities Act”),
for complying
with
new or revised accounting standards. In other
words, an EGC can delay the adoption
of certain accounting standards until
those standards would otherwise apply to private
companies. We intend to take advantage
of the benefits of this extended
transition period, for as long as it is available.
We will
remain an
EGC until
the earliest
to occur
of (i)
the end
of the
fiscal year
following the
fifth anniversary
of the
completion of the Bank’s initial public offering in 2021,
(ii) the last day of the first fiscal year in
which the Company's annual
gross revenues exceed $1.24 billion, (iii)
the date that the Company becomes
a “large accelerated filer” as defined
in Rule
12b-2 under the Exchange Act which would
occur if the market value of the
Company's common stock that is held
by non-
affiliates exceeds $700 million as of the last business day
of the Company’s most recently completed second
fiscal quarter
(June 30th for the
Company), or (iv) the date on
which the Company has issued more
than $1 billion in non-convertible debt
during the preceding three-year period.
7
USCB Financial Holdings, Inc.
2023 10-K
Human Capital Resources
We respect the values
and diversity throughout our organization
and the community. Diversity and inclusion are integral
parts of
our organization’s
culture. We
seek the
active engagement
and participation
of people
with diverse
backgrounds
and
ethnicities.
We
are
taking
steps
to
create
programs
to
ensure
that
we
are
organized
in
a
way
where
the
unique
contributions of each individual in our Company is
recognized and supported. Each team member is to
be treated fairly with
equal access to opportunities and resources for success. Additionally,
we run homebuyer educational and financial literacy
workshops in an effort
to reach the
financing needs of
the sectors of our
communities in which
these workshops are
most
needed.
Our human capital
objectives include attracting,
developing and retaining
the best available
talent from a
diverse pool
of
candidates
for
the
Company.
To
do
so,
we
strive
to
maintain
competitive
pay
and
benefits,
regularly
updating
our
compensation
structure
and
periodically
reviewing
our
compensation
and
benefits
programs.
Additionally,
the
Company
identifies
opportunities
and
paths
for
the
development
of
our
staff,
and
we
seek
to,
whenever
possible,
fill
positions
by
promotion within. The Company recognizes that the skills and knowledge of its employees
are critical to the success of the
organization, and promotes training and continuing education
as an ongoing function for employees.
We recognize
the importance
of our
employee's
financial
health and
well-being,
and offer
benefits such
as a
401(k)
retirement savings plan and make both matching and profit-sharing contributions to that plan. Benefit programs available to
eligible
employees
include,
in
addition
to
the
401(k)
retirement
savings
plan,
health
and
life
insurance,
employee
paid
holidays and other benefits.
We value and
promote diversity and
inclusion in every
aspect of our
business and at
every level within
the Company.
We recruit, hire, and promote
employees based on their individual
ability and experience and in
accordance with Affirmative
Action and Equal
Employment Opportunity
laws and regulations.
Our policy is
that we
do not discriminate
on the basis
of
race, color,
religion, sex,
gender,
sexual orientation,
ancestry,
pregnancy,
medical condition,
age, marital
status, national
origin, citizenship status, disability veteran status, gender identity, genetic information, or any other status protected by law.
At December 31, 2023,
we had 196
full-time equivalent employees.
None of our
employees are parties
to a collective
bargaining agreement. We believe that our employees are our greatest asset and vital to our success. As such, we seek to
hire and retain the best
candidate for each position, without regard to
age, gender, ethnicity,
or other protected class status,
but
with
an
appreciation
for
a
diversity
of
perspectives
and
experiences.
We
have
designed
a
compensation
structure
including an array of benefit plans and programs that
we believe is attractive to our current and prospective
employees.
Regulation and Supervision
Bank holding
companies, banks, and
their affiliates are
extensively regulated under
federal and
state law
and regulation.
These laws
and regulations
have a
material effect
on the
operations of
USCB Financial
Holdings, Inc.
and its
direct and
indirect subsidiaries, including U.S. Century Bank.
Statutes, regulations and
regulatory policies limit
the activities in
which we may
engage and the
conduct of our
permitted
activities and establish capital requirements with which we must comply. The regulatory framework is intended primarily for
the
protection
of
depositors,
borrowers,
customers
and
clients,
the
FDIC
insurance
funds
and
the
banking
system
as
a
whole, and not for the protection of our shareholders or creditors. In many cases, the applicable regulatory authorities have
broad
enforcement
power
over
bank
holding
companies,
banks
and
their
subsidiaries,
including
the
power
to
impose
substantial fines and other penalties for violations of laws
and regulations.
Further,
the
regulatory
system
imposes
reporting
and
information
collection
obligations.
Banking
statutes
and
regulations are subject
to change,
and additional statutes,
regulations, and corresponding
guidance may
be adopted. We
are unable to predict these future changes or the effects, if any, that these changes could have on the business, prospects,
revenues, and results of operations of the Bank and Company.
The material
statutory and
regulatory requirements
that are
applicable to
us are
summarized below.
The description
below is not intended to summarize all laws
and regulations applicable to us. These summary descriptions are not
intended
to be
a complete
explanation
of such
laws
and regulations
and
their
effects
on
USCB Financial
Holdings,
Inc. and
U.S.
Century Bank and are qualified
in their entirety by reference
to the actual laws and
regulations. You
should refer to the full
text of the statutes, regulations, and corresponding guidance
for more information.
8
USCB Financial Holdings, Inc.
2023 10-K
2018 Regulatory Reform
In May 2018
the Economic
Growth, Regulatory
Relief and
Consumer Protection
Act (the “2018
Act”), was
enacted to
modify or remove
certain financial reform
rules and regulations, including
some of those
implemented under the
Dodd-Frank
Wall Street Reform
and Consumer Protection
Act (“Dodd-Frank Act”) enacted
in 2010. While the 2018
Act maintains most
of the
regulatory
structure established
by the
Dodd-Frank Act,
it amends
certain aspects
of the
regulatory framework
for
small depository
institutions
with assets
of less
than $10
billion and
for large
banks
with assets
of more
than $50
billion.
Many of these changes resulted in meaningful regulatory
relief for community banks such as U.S. Century Bank.
The 2018 Act, among other matters, expanded
the definition of “qualified mortgages”
which may be held by a financial
institution
and
simplified
the
regulatory
capital
rules
for
financial
institutions
and
their
holding
companies
with
total
consolidated assets of less
than $10 billion by instructing
(as described below) the
federal banking regulators to
establish
a single “Community Bank Leverage Ratio” of between 8 and 10 percent to
replace the leverage and risk-based regulatory
capital ratios.
The 2018
Act also
expanded the
category of
holding companies
that may
rely on
the “Small
Bank Holding
Company and Savings and Loan Holding Company Policy Statement” (the “SBHC Policy”) by raising the maximum amount
of assets a
qualifying holding company may
have from $1.0
billion to $3.0
billion. This expansion also
excluded such holding
companies
from
the minimum
capital
requirements
of
the Dodd-Frank
Act. In
addition,
the
2018
Act included
regulatory
relief
for
community
banks
regarding
regulatory
examination
cycles,
call
reports,
the
Volcker
Rule
(proprietary
trading
prohibitions), mortgage disclosures and risk weights for certain
high-risk commercial real estate loans.
Bank and Bank Holding Company Regulation
As a Florida-chartered state bank, U.S. Century Bank
is subject to ongoing and comprehensive supervision, regulation,
examination, and enforcement by the FDIC and the Florida Office
of Financial Regulation (“FOFR”). The FOFR supervises
and regulates
all areas
of our
operations including,
without limitation,
the making
of loans,
the issuance
of securities,
the
conduct
of
our
corporate
affairs,
the
satisfaction
of
capital
adequacy
requirements,
the
payment
of
dividends,
and
the
establishment or closing
of banking centers.
In addition, our
deposit accounts
are insured
by the Deposit
Insurance Fund
(the “DIF”)
administered by
the FDIC to
the maximum
extent permitted
by law,
and the FDIC
has certain
supervisory and
enforcement powers over us.
Any entity that directly or
indirectly controls a bank
must be approved by the
Federal Reserve under the
Bank Holding
Company
Act
of
1956
(the
“BHC
Act”)
to
become
a
bank
holding
company.
Bank
holding
companies
are
subject
to
regulation, inspection, examination, supervision and enforcement
by the Federal Reserve under the BHC Act. The Federal
Reserve's jurisdiction also extends to any company that is directly
or indirectly controlled by a bank holding company.
USCB Financial Holdings, Inc.,
which controls U.S. Century
Bank, is a bank holding
company and, as such,
is subject
to ongoing and comprehensive supervision, regulation,
examination and enforcement by the Federal Reserve.
Notice and Approval Requirements Related to Control
Banking
laws
impose
notice,
approval,
and
ongoing
regulatory
requirements
on
any
shareholder
or
other
party
that
seeks to acquire
direct or indirect
“control” of an
FDIC-insured depository
institution. These laws
include the BHC
Act and
the Change in Bank
Control Act. Among other things,
these laws require regulatory filings
by individuals or entities that
seek
to acquire
direct or
indirect
"control" of
an FDIC-insured
depository
institution. The
determination
of whether
an investor
"controls" a depository
institution is based
on all of
the facts and
circumstances surrounding
the investment. As
a general
matter, a party is deemed to conclusively control a depository institution or other
company if the party owns or controls 25%
or more of any class of
voting stock. Subject to rebuttal, a party may
be presumed to control a depository institution or
other
company if the investor owns or controls 10% or more of any class
of voting stock (and the entity’s securities are registered
under the Exchange Act or, if not, the investor would be
the largest shareholder). Except under limited circumstances, bank
holding companies are prohibited from acquiring, without prior
approval, control of any other bank or
bank holding company
or substantially all the assets thereof or more than 5% of the voting shares of a bank or bank holding company which is not
already a subsidiary.
Source of Strength
All companies, including bank holding companies, that directly or indirectly control an insured depository institution, are
required to serve as a source
of strength for the institution. Furthermore,
the Federal Reserve policy
is that a bank holding
company should stand ready
to use available resources
to provide adequate capital
to its subsidiary banks
during periods
of financial
stress or
adversity and
should maintain
the financial
flexibility and
capital-raising capacity
to obtain
additional
resources for
assisting its subsidiary
banks. Under
this requirement,
USCB Financial
Holdings, Inc.
in the future
could be
required to provide financial assistance
to U.S. Century Bank should
it experience financial distress.
Such support may be
9
USCB Financial Holdings, Inc.
2023 10-K
required at times when, absent this statutory and Federal Reserve policy requirement, a bank holding company may not be
inclined to
provide it.
A bank
holding company’s failure
to meet
its obligations
to serve
as a
source of
strength to
its subsidiary
banks will generally be considered
by the Federal Reserve to
be an unsafe and unsound
banking practice or a violation
of
the Federal Reserve’s regulations, or both.
Safety and Soundness Regulation
As an insured depository
institution, we are subject to
prudential regulation and supervision
and must undergo regular
on-site examinations by our state and federal banking agencies. The cost of examinations of insured depository institutions
and any affiliates are assessed
by the appropriate agency against
each institution or affiliate that
is subject to examination
as it deems
necessary or
appropriate. We
file quarterly
consolidated reports
of condition
and income, or
call reports,
with
the FDIC and FOFR.
The federal banking
agencies have also
adopted guidelines establishing safety
and soundness standards for
all insured
depository institutions including U.S. Century Bank. The
safety and soundness guidelines relate to,
among other things, our
internal
controls,
information
systems,
cybersecurity,
internal
audit
systems,
loan
underwriting
and
documentation,
anti-
money laundering policies and procedures, transactions
with insiders, risk management, compensation, asset
growth, and
interest
rate
exposure.
These
standards
assist
the
federal
banking
agencies
with
early
identification
and
resolution
of
problems at insured depository
institutions. If we were
to fail to meet or
otherwise comply with any
of these standards, the
FDIC could require us to submit a
plan for achieving and maintaining compliance.
If a financial institution fails to
submit an
acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by the
FDIC, the FDIC is
required to issue an
order directing the
institution to cure the
deficiency.
Until the deficiency cited
in the
order is cured, the
FDIC may restrict
the financial institution’s
rate of growth, require
the financial institution to
increase its
capital, restrict
the rates
the institution
pays on
deposits or
require the
institution to
take any
action the
regulator deems
appropriate
under
the
circumstances.
Noncompliance
with
the
standards
established
by
the
safety
and
soundness
guidelines may
also constitute
grounds for
other
enforcement
action,
including cease
and desist
orders
and
civil
money
penalty assessments. In addition,
the FDIC could terminate
our deposit insurance if
it determines that
our financial condition
was unsafe or
unsound or that
we engaged in unsafe
or unsound practices that
violated applicable rules, regulations,
orders
or conditions enacted or imposed on us by our regulators.
During
the
past
decade,
the
bank
regulatory
agencies
have
increasingly
emphasized
the
importance
of
sound
risk
management processes
and strong
internal controls
when evaluating
the activities
of the
financial institutions they
supervise.
Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become
even more
important as
new technologies, product
innovation and
the size
and speed
of financial
transactions have
changed
the nature of
banking markets. The
agencies have identified
a spectrum of
risks facing a
banking institution including,
but
not limited
to, credit,
market, liquidity, interest rate,
cybersecurity, operational, legal and
reputational risk. In
particular, recent
regulatory pronouncements
have focused
on operational
risk, which
arises from
the potential
that inadequate
information
systems,
operational problems,
breaches
in
internal
controls, fraud
or unforeseen
catastrophes
will result
in unexpected
losses. New
products and
services, use
of outside
vendors and
cybersecurity are
critical sources
of operational
risk that
financial institutions
are expected
to address
in the
current environment.
We have
active Board
and senior
management
oversight
policies,
procedures
and
risk
limits;
adequate
risk
measurement
and
monitoring
and
adequate
management
information systems; and comprehensive internal controls
to address these various risks.
Permissible Activities and Investments
Banking
laws
generally
restrict
the
ability
of
USCB
Financial
Holdings,
Inc.
to
engage
in
activities
other
than
those
determined
by the
Federal
Reserve
to
be
so
closely
related
to
banking
as
to
be
a
proper
incident
thereto.
The
Federal
Reserve has determined
by regulation that
certain activities are
closely related to
banking including operating
a mortgage
company,
finance company,
credit card
company,
factoring
company,
trust
company
or savings
association;
performing
certain
data
processing
operations;
providing
limited
securities
brokerage
services;
acting
as
an
investment
or
financial
advisor; acting as
an insurance agent
for certain types
of credit-related insurance;
leasing personal property
on a
full-payout,
non-operating basis; providing
tax planning and
preparation services; operating
a collection agency;
and providing certain
courier services. In
addition, the Gramm
-Leach-Bliley Act (the
“GLB Act”) expanded
the scope of
permissible activities for
a bank holding company that
qualifies as a financial holding company.
Under the regulations implementing
the GLB Act, a
financial holding company may engage
in additional activities that are financial
in nature or incidental or complementary
to
a financial activity
such as securities
underwriting, insurance underwriting and
merchant banking. USCB Financial
Holdings,
Inc. is not a financial holding company.
In addition, as a general matter, the establishment or acquisition
by USCB Financial Holdings, Inc. of
a non-bank entity,
or
the
initiation
of
a
non-banking
activity,
requires
prior
regulatory
approval.
In
approving
acquisitions
or
the
addition
of
activities,
the
Federal
Reserve
considers,
among
other
things,
whether
the
acquisition
or
the
additional
activities
can
10
USCB Financial Holdings, Inc.
2023 10-K
reasonably be expected
to produce benefits
to the public, such
as greater convenience,
increased competition or
gains in
efficiency,
that
outweigh
such
possible
adverse
effects
as
undue
concentration
of
resources,
decreased
or
unfair
competition, conflicts of interest or unsound banking practices.
Regulatory Capital Requirements
The federal banking
regulators have adopted
risk-based capital
adequacy guidelines for
bank holding companies
and
their subsidiary banks
and banks without bank
holding companies based on
the Basel III
standards. Under these guidelines,
assets and off-balance sheet items are assigned to specific risk categories, each with designated risk weightings. The risk-
based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences
in risk profiles
among banks and bank holding
companies, to account for off-balance sheet
exposure, to minimize disincentives for
holding
liquid assets, and
to achieve greater
consistency in
evaluating the capital
adequacy of
major banks throughout
the world.
The resulting
capital ratio requirements
represent capital as
a percentage of
total risk-weighted assets
and off-balance sheet
items. Final
rules implementing the
capital adequacy guidelines
became effective, with
various phase-in periods,
on January
1, 2015
for
community
banks
such
as us.
All
of
the
rules
were
fully
phased
in
as of
January
1,
2019.
These
final
rules
represent a significant change to the prior general risk-based capital rules and are
designed to substantially conform to the
Basel III international standards.
In computing
total risk-weighted
assets, bank
and bank
holding company
assets are
given risk-weights
of 0%,
20%,
50%, 100%
and 150%.
In addition,
certain
off-balance
sheet items
are given
similar credit
conversion
factors
to convert
them to asset
equivalent
amounts to which
an appropriate risk-weight
will apply.
Most loans will
be assigned to
the 100%
risk
category,
except
for
performing
first
mortgage
loans
fully
secured
by
1-to-4
family
or
certain
multi-family
residential
properties, which carry
a 50%
risk rating. Most
investment securities (including,
primarily, general obligation claims on
states
or
other
political
subdivisions
of
the
United
States)
will
be
assigned
to
the
20%
category,
except
for
municipal
or
state
revenue bonds, which have a 50% risk-weight,
and direct obligations of the U.S.
Treasury or obligations backed
by the full
faith
and
credit
of
the
U.S.
government,
which
have
a
0%
risk-weight.
In
covering
off-balance
sheet
items,
direct
credit
substitutes,
including
general
guarantees
and
standby
letters
of
credit
backing
financial
obligations,
are
given
a
100%
conversion
factor.
Transaction-related
contingencies
such
as
bid
bonds,
standby
letters
of
credit
backing
nonfinancial
obligations,
and undrawn
commitments
(including
commercial
credit lines
with
an initial
maturity
of more
than
one year)
have
a
50%
conversion
factor.
Short-term
commercial
letters
of
credit
are
converted
at
20%
and
certain
short-term
unconditionally cancelable commitments have a 0% factor.
Under
the
final
rules,
minimum
requirements
increased
for
both
the
quality
and
quantity
of
capital
held
by
banking
organizations. In this respect, the final rules
implement strict eligibility criteria for regulatory capital instruments and improve
the methodology for
calculating risk-weighted
assets to enhance
risk sensitivity.
Consistent with the
international Basel III
framework, the rules include a new
minimum ratio of Common Equity
Tier 1 Capital to Risk-Weighted
Assets of 4.5%. The
rules also create a Common Equity Tier 1 Capital conservation
buffer of 2.5% of risk-weighted assets. This buffer
is added
to each of the three risk-based capital
ratios to determine whether an institution
has established the buffer.
The rules raise
the minimum ratio of Tier 1 Capital to Risk-Weighted Assets from 4% to 6% and
include a minimum leverage ratio of 4% for
all banking
organizations. If
a financial
institution’s
capital conservation
buffer
falls below
2.5% —
e.g., if
the institution’s
Common Equity
Tier
1 Capital
to Risk
-Weighted
Assets is
less than
7.0% —
then capital
distributions
and
discretionary
bonus payments will
be limited or
prohibited based on
the size of
the institution’s conservation buffer. The types
of payments
subject to this limitation include
dividends, share buybacks, discretionary payments on
Tier 1 instruments, and discretionary
bonus payments.
The
capital
regulations
may
also
impact
the
treatment
of
accumulated
other
comprehensive
income
(“AOCI”)
for
regulatory capital purposes. Under
the rules, AOCI generally
flows through to regulatory
capital, however, community banks
and their holding companies (if any) were allowed to make
a one-time irrevocable opt-out election to continue to treat AOCI
the same
as under
the old
regulations for
regulatory capital
purposes. This
election was
required to
be made
on the
first
call report
filed after
January 1,
2015. We
made the
opt-out election.
Additionally,
the rules
also permit
community banks
with less than
$15 billion in
total assets to
continue to count
certain non-qualifying
capital instruments issued
prior to May
19, 2010 as Tier 1 capital, including trust preferred securities
and cumulative perpetual preferred stock (subject to a limit of
25% of Tier 1 capital). However, non-qualifying
capital instruments issued on or after May 19, 2010 do not qualify for Tier 1
capital treatment.
In May 2016,
amendments to the
Federal Reserve’s SBHC Policy
became effective which increased
the asset threshold
to qualify
to utilize
the provisions
of the
SBHC Policy
from $500
million to
$1.0 billion.
Subsequently,
as part
of the
2018
Act, the
threshold
was
increased
to
$3.0
billion.
Bank
holding companies
which
are subject
to the
SBHC
Policy
are not
subject to compliance with
the regulatory capital requirements
described above until they
exceed $3.0 billion in
assets. As
a consequence, as of December
31, 2023, USCB Financial Holdings, Inc.
was not required to
comply with the requirements
set forth above
and will not
be subject to
such requirements
until such time
that its
consolidated total
assets exceed
$3.0
11
USCB Financial Holdings, Inc.
2023 10-K
billion or
the Federal Reserve
determines that USCB
Financial Holdings, Inc.
is no
longer deemed to
be a
small bank
holding
company.
However,
if
USCB
Financial
Holdings,
Inc.
had
been
subject
to
the
requirements,
it
would
have
been
in
compliance with such requirements.
In
September
2019,
the
federal
banking
agencies
jointly
finalized
a
rule
intended
to
simplify
the
regulatory
capital
requirements described above for qualifying community banking organizations
that opt into the Community Bank Leverage
Ratio, or
CBLR,
framework,
as required
by Section
201 of
the Regulatory
Relief
Act. The
final rule
became
effective
on
January 1,
2020,
and the
CBLR framework
became
available for
banks to
use beginning
with
their
March
31, 2020
call
reports. Under
the final
rule, if
a qualifying
community
banking organization
opts into
the CBLR
framework and
meets all
requirements under the
framework, it will
be considered to
have met
the well-capitalized ratio
requirements under the
prompt
corrective action
regulations
described below
in this
Form 10-K
and will
not be
required to
report or
calculate
risk-based
capital. In order to
qualify for the CBLR
framework, a community
banking organization must
have a tier 1
leverage ratio of
greater
than
9%,
less
than
$10
billion
in
total
consolidated
assets,
off-balance
sheet
exposures
of
25%
or
less
of
total
consolidated
assets,
and
trading
assets
and
liabilities
of 5%
or less
of total
consolidated
assets.
Although
U.S. Century
Bank is a qualifying
community banking organization,
U.S. Century Bank has
elected not to opt
in to the CBLR
framework
at this time and will continue to follow the Basel III capital
requirements as described above.
As of
December 31,
2023 and
2022, the
U.S. Century
Bank qualified
as a
“well capitalized”
institution. See
Note 15
“Regulatory Matters” of the Consolidated Financial Statements
included in Item 8 of this Form 10-K for further details.
Prompt Corrective Action
Under the Federal
Deposit Insurance Act
(“FDIA”), the
federal bank regulatory
agencies must take
"prompt corrective
action"
against
undercapitalized
U.S.
depository
institutions.
The
capital-based
regulatory
framework
contains
five
categories
of
compliance
with
regulatory
capital
requirements,
including
"well
capitalized,"
"adequately
capitalized,"
"undercapitalized,"
"significantly
undercapitalized,"
and
"critically
undercapitalized,"
and
are
subjected
to
differential
regulation corresponding to the capital category within
which the institution falls.
An insured depository
institution is deemed
to be "well
capitalized" if
it has a
total risk-based
capital ratio
of 10.0% or
greater, a
tier 1 risk-based
capital ratio of 8.0%
or greater,
a Common Equity
Tier 1
risk-based capital ratio
of 6.5% and a
leverage ratio of 5.0%
or greater, and the institution is
not subject to
an order, written agreement, capital directive, or
prompt
corrective action
directive to
meet and
maintain a
specific level
for any
capital measure.
Under certain
circumstances,
a
well-capitalized, adequately
capitalized or
undercapitalized institution
may be
treated as
if the
institution were
in the
next
lower capital category if it is determined that the institution is in an unsafe or unsound condition or is engaging in an unsafe
or unsound practice.
The degree of
regulatory scrutiny
of a financial
institution will increase,
and the permissible
activities
of
the
institution
will
decrease,
as
it
moves
downward
through
the
capital
categories.
Under
specified
circumstances,
a
federal
banking
agency
may
reclassify
a
“well-capitalized”
institution
as
adequately
capitalized
and
may
require
an
adequately capitalized institution or an
undercapitalized institution to comply with
supervisory actions as if
it were in
the next
lower
category
(except
that
the
FDIC
may
not
reclassify
a
significantly
undercapitalized
institution
as
critically
undercapitalized).
A banking
institution that
is undercapitalized
is required
to submit
a capital
restoration
plan. Failure
to
meet
capital
guidelines
could
subject
the
institution
to
a
variety
of
enforcement
remedies
by
federal
bank
regulatory
agencies,
including:
termination
of
deposit
insurance
by
the
FDIC,
restrictions
on
certain
business
activities,
and
appointment of the FDIC as conservator or receiver.
At December 31, 2023, U.S. Century Bank was deemed to be a “well-capitalized” institution for purposes of the prompt
corrective action regulations and as such is not subject
to the above mentioned restrictions.
Commercial Real Estate Concentration Guidelines
The federal
banking regulators
have implemented
guidelines to
address increased
concentrations in
commercial real
estate
loans.
These
guidelines
describe
the
criteria
regulatory
agencies
will
use
as
indicators
to
identify
institutions
potentially
exposed
to
commercial
real
estate
concentration
risk.
An
institution
that
has
(i)
experienced
rapid
growth
in
commercial real
estate lending,
(ii) notable
exposure to
a specific
type of
commercial real
estate, (iii)
total reported
loans
for construction, land development,
and other land representing
100% or more of
total capital, or (iv) total
commercial real
estate
(including
construction)
loans
representing
300%
or
more
of
total
capital
and
the
outstanding
balance
of
the
institution’s
commercial real
estate portfolio
has increased
by 50%
or more
in the
prior 36
months,
may be
identified for
further supervisory analysis of a potential concentration risk.
As of December
31, 2023, our
ratio of construction
loans to total
risk-based capital
was 21%,
and therefore,
we were
under
the
100%
threshold
set
forth
in
clause
(iii)
in
the
paragraph
above.
However,
with
respect
to
clause
(iv)
in
the
paragraph above, as
of December
31, 2023, our
ratio of total
commercial real
estate loans
to total risk-based
capital was
12
USCB Financial Holdings, Inc.
2023 10-K
384% and the outstanding balance of
the institution’s commercial real estate portfolio increased by 50% or
more in the prior
36 months.
As a
result, we
are deemed
to have
a concentration
in commercial
real estate
lending under
applicable regulatory
guidelines.
If a
concentration is
present, under
the federal
banking regulator’
guidance, management
should employ
heightened
risk management practices that address key elements,
including board and management oversight and strategic
planning,
portfolio management,
development
of underwriting
standards,
risk assessment
and monitoring
through
market analysis
and stress
testing, and
maintenance of
increased capital
levels as
needed to
support the
level of
commercial real
estate
lending.
To
address
the commercial
real
estate
lending
concentration,
U.S.
Century
Bank has
previously
established
a
commercial
real
estate
lending
framework
to
monitor
specific
exposures
and
limits
by
types
within
the
commercial
real
estate
portfolio,
including,
among
other
things,
annual
stress
testing
of
the
commercial
real
estate
portfolio,
and
takes
appropriate actions, as necessary.
Payment of Dividends and Share Repurchases
The ability of
the board of
directors of an
insured depository
institution to declare
a cash dividend
or other distribution
with respect to capital is subject
to federal and state statutory
and regulatory restrictions that
limit the amount available for
such
distribution
depending
upon
earnings,
financial
condition,
including
whether
the
institution
has
negative
retained
earnings, and cash needs of the institution,
as well as general business conditions.
Insured depository institutions are also
prohibited
from
paying
management
fees
to
any
controlling
persons
or,
with
certain
limited
exceptions,
making
capital
distributions, including dividends, if after such transaction the institution would be
less than adequately capitalized. We may
generally declare a dividend
from retained net profits
which accrued prior to
the preceding two
years, but we must,
before
the
declaration
of
a
dividend
on
our
common
stock,
under
applicable
Florida
law,
carry
20%
of
our
net
profits
for
such
preceding period
as is
covered by
the dividend
to our
surplus fund,
until the
same shall
at least
equal the
amount of
our
common stock and preferred stock,
if any, then issued and outstanding. Under Florida law, we are
prohibited from declaring
a
dividend
at
any
time
at
which
our
net
income
from
the
current
year
combined
with
the
retained
net
income
from
the
preceding two years is a loss or which would cause our capital accounts to
fall below the minimum amount required by law,
regulation, order,
or any written agreement
with a state or
federal regulatory agency.
Furthermore, under applicable
FDIC
regulations and policy,
because U.S. Century Bank has
negative retained earnings, it must obtain the
prior approval of the
FDIC before effecting a cash dividend or other capital
distribution.
A Federal Reserve policy statement on the payment
of cash dividends states that a bank holding
company should pay
cash dividends only to the
extent that the holding company’s net
income for the past year
is sufficient to cover both the
cash
dividends and
a rate
of earnings
retention that
is consistent
with the
holding company’s
capital needs,
asset quality
and
overall
financial
condition.
The
Federal
Reserve’s
policy
statement
also
provides
that
it
would
be
inappropriate
for
a
company experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the federal prompt
corrective action
regulations, the
Federal Reserve
may prohibit
a bank
holding company
from paying
any dividends
if the
holding company’s bank subsidiary is classified
as “undercapitalized.” See “ - Prompt Corrective Action”
above.
Section 225.4(b)(1) of Regulation Y promulgated
by the Federal Reserve requires that
a bank holding company that is
not “well-capitalized” or “well-managed”,
or that is subject to any
unresolved supervisory issues, provide
prior notice to the
Federal Reserve for
any repurchase or
redemption of
its equity securities
for cash or
other value that
would reduce by
10
percent or more the bank
holding company’s consolidated
net worth aggregated over
the preceding 12-month period.
The
Federal
Reserve
may
disapprove
such
a
purchase
or
redemption
if
it
determines
that
the
proposal
would
constitute
an
unsafe or
unsound practice
or would
violate any
law,
regulation, Federal
Reserve order
or any
condition imposed
by,
or
written agreement
with, the Federal Reserve. As
of December 31, 2023, USCB
Financial Holdings, Inc. was
not subject to
any
formal
supervisory
restrictions
on
its
ability
to
pay
dividends
but
will
notify
the
Federal
Reserve
in
advance
of
any
proposed
dividend
to
the
Company's
shareholders
in
light
of
the
Bank's
negative
retained
earnings.
In
addition,
we
will
provide prior notification to the Federal Reserve prior to
effecting proposed share repurchases.
Incentive Compensation
Guidelines adopted by
the federal
banking agencies pursuant
to the
FDIA prohibit
excessive compensation as
an unsafe
and
unsound
practice
and
describe
compensation
as
excessive
when
the
amounts
paid
are
unreasonable
or
disproportionate to the services performed by an executive
officer, employee, director
or principal shareholder.
In June 2010,
the federal banking
agencies jointly
adopted the
Guidance on Sound
Incentive Compensation
Policies,
or GSICP.
The GSICP was
intended to ensure
that banking organizations
do not undermine
the safety and
soundness of
such organizations
by encouraging
excessive risk-taking.
This guidance,
which covers
all employees
that have
the ability
to expose the organization
to material amounts
of risk, either
individually or as
part of a group,
is based upon a
set of key
principles relating to
a banking organization’s
incentive compensation arrangements.
Specifically,
incentive compensation
13
USCB Financial Holdings, Inc.
2023 10-K
arrangements should (i)
provide employee incentives
that appropriately balance risk
in a manner that does
not encourage
employees to expose their
organizations to imprudent risk,
(ii) be compatible with
effective controls and risk
management,
and (iii) be supported
by strong corporate governance,
including active and effective
oversight by the organization’s
board
of directors. Any deficiencies in our compensation
practices could lead to supervisory or enforcement
actions by the FDIC.
The
GSICP
Guidance
provides
that
enforcement
actions
may
be
taken
against
a
banking
organization
if
its
incentive
compensation arrangements or related risk-management control or governance processes pose a risk to the
organization’s
safety and soundness and the organization is not taking prompt and
effective measures to correct the deficiencies.
The
Dodd-Frank
Act
requires
the
federal
banking
agencies
and
the
SEC
to
establish
joint
regulations
or
guidelines
prohibiting incentive-based
payment arrangements
at specified
regulated entities,
such as
us, having at
least $1
billion in
total
assets
that
encourage
inappropriate
risk-taking
by
providing
an
executive
officer,
employee,
director
or
principal
shareholder
with
excessive
compensation,
fees,
or
benefits
or
that
could
lead
to
material
financial
loss
to
the
entity.
In
addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-
based compensation
arrangements. The
federal banking
agencies proposed
such regulations
in April
2011
and issued
a
second proposed
rule in
April 2016.
The second
proposed rule
would apply
to all
banks, among
other institutions,
with at
least $1.0 billion in average
total consolidated assets.
Final regulations have not
been adopted as of the
date of this Form
10-K.
If
adopted,
these
or
other
similar
regulations
would
impose
limitations
on
the
manner
in
which
we
may
structure
compensation for our executives and other employees
that go beyond the requirements of GSICP.
The scope and content
of the
federal banking
agencies’ policies
on incentive
compensation are
continuing
to develop
and are
likely
to continue
evolving, but the timeframe for finalization of such policies
is not known at this time.
Limits on Transactions with Affiliates and
Insiders
Transactions
between
insured
financial
institutions
and
any
affiliate
are
governed
by
Sections
23A
and
23B
of
the
Federal Reserve Act. An affiliate
of an insured financial institution
is any company or entity which
controls, is controlled by
or
is
under
common
control
with
the
insured
financial
institution.
In
a
bank
holding
company
context,
the
bank
holding
company
of
an
insured
financial
institution
(such
as
the
Corporation)
and
any
companies
which
are
controlled
by
such
holding company
are affiliates of
the insured
financial institution.
Generally, Section 23A limits
the extent
to which
the insured
financial institution or its
subsidiaries may engage in
“covered transactions” with any one
affiliate to an amount equal
to 10%
of such institution’s
capital stock
and surplus, and
contains an
aggregate limit
on all such
transactions with
all affiliates
to
an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain
other
transactions
and
requires
that
all
transactions
be
on
terms
substantially
the
same,
or
at
least
as
favorable
to
the
insured financial institution, as
those provided to
a non-affiliate. The term “covered
transaction” includes the making
of loans
to, purchase of
assets from
and issuance of
a guarantee to
an affiliate
and similar
transactions. Section
23B transactions
also include the provision of services and the sale of assets
by an insured financial institution to an affiliate.
Sections 22(g)
and (h)
of the
Federal Reserve
Act place
restrictions on
loans to
executive officers, directors
and principal
stockholders. Under
Section 22(h),
loans to
a director,
an executive
officer
and to
a greater
than 10%
stockholder
of an
insured
financial
institution,
and
certain
affiliated
interests
of
either,
may
not
exceed,
together
with
all
other
outstanding
loans to such
person and
affiliated interests,
the insured financial
institution’s loans
to one borrower
limit (generally
equal
to 15%
of
the
institution’s
unimpaired capital
and
surplus).
Section
22(h) also
requires
that
loans
to directors,
executive
officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees
of the
institution and
(ii) does
not give
preference to
any director, executive
officer or
principal stockholder, or
certain affiliated
interests thereof, over other employees
of the insured financial institution.
Section 22(h) also requires prior board
approval
for the issuance of certain loans. In addition, the aggregate amount of
extensions of credit by an insured financial institution
to all insiders cannot
exceed the institution’s
unimpaired capital and
surplus. Furthermore, Section
22(g) places additional
restrictions on
loans to
executive officers.
At December
31, 2023,
U.S. Century
Bank was
in compliance
with the
above
restrictions.
FDIC Deposit Insurance
The FDIC is
an independent
federal agency
that insures the
deposits of federally
insured depository
institutions up
to
applicable limits. The FDIC also has certain regulatory,
examination and enforcement powers with respect to FDIC-insured
institutions.
The
deposits
are
insured
by
the
FDIC
up
to
applicable
limits.
As
a
general
matter,
the
maximum
deposit
insurance amount is $250 thousand per depositor.
Additionally,
FDIC-insured depository institutions are
required to pay deposit insurance
assessments to the FDIC. The
amount of
a particular
institution's deposit
insurance assessment
is based
on that
institution's risk
classification under
an
FDIC risk-based assessment system. An institution's
risk classification is assigned based on
its capital levels and the level
of supervisory concern the institution poses to the regulators.
14
USCB Financial Holdings, Inc.
2023 10-K
Under the current
system, deposit
insurance assessments
are based
on a bank’s
assessment base,
which is
defined
as average total assets minus
average tangible equity.
For established small institutions,
such as the Bank, the
FDIC sets
deposit
assessment
rates
based
on
the
Financial
Ratios
Method,
which
takes
into
account
several
ratios
that
reflect
leverage, asset quality,
and earnings at
each individual institution
and then applies
a pricing multiplier
that is the same
for
all institutions. An
institution’s rate
must be within
a certain minimum
and a certain
maximum, and the
range varies based
on the
institution’s
composite CAMELS
rating. The
deposit insurance
assessment
is calculated
by multiplying
the bank’s
assessment base by the total base assessment rate.
In October 2022, the FDIC finalized a
rule that increased the initial base deposit insurance
assessment rates by 2 basis
points, beginning with the first
quarterly assessment period of 2023
(January 1, 2023 through
March 31, 2023). The FDIC,
as required under the FDIA, established a plan in
September 2020 (the “Restoration Plan”) to restore the DIF
reserve ratio
to meet or exceed
the statutory minimum
of 1.35% within eight
years. The Restoration
Plan did not
include an increase
in
the deposit
insurance assessment
rate. Based
on the
FDIC’s recent
projections,
however,
the FDIC
determined that
the
DIF reserve ratio
is at risk
of not reaching the
statutory minimum by
the statutory deadline
of September 30,
2028 without
increasing the
deposit insurance
assessment rates.
The increased
assessment would
improve the
likelihood that
the DIF
reserve ratio would reach the required minimum by the statutory deadline, consistent with the
FDIC’s amended Restoration
Plan. The FDIC
also concurrently maintained
the Designated Reserve
Ratio (“DDR”) for
the DIF at
2% for 2023. The
new
assessment rate schedules will remain
in effect unless and until the reserve
ratio meets or exceeds 2% in order to support
growth
in
the
DIF
in
progressing
toward
the
FDIC’s
long-term
goal
of
a
2%
DRR.
Progressively
lower
assessment
rate
schedules will
take effect
when the
reserve ratio
reaches 2%,
and again
when it
reaches 2.5%.
The revised
assessment
rate schedule will
remain in effect unless
and until the
reserve ratio meets
or exceeds 2%,
absent further action by
the FDIC.
Under the
FDIA, the
FDIC may
terminate deposit
insurance upon
a finding
that the
institution has
engaged in
unsafe
and unsound
practices,
is in
an unsafe
or unsound
condition
to continue
operations,
or has
violated any
applicable
law,
regulation, rule, order, or condition
imposed by the FDIC.
Depositor Preference
The FDIA provides
that, in the
event of the
"liquidation or other
resolution" of an
insured depository institution, the
claims
of depositors
of the institution
(including the
claims of
the FDIC as
subrogee of
insured depositors)
and certain claims
for
administrative
expenses
of
the
FDIC
as
a
receiver
will
have
priority
over
other
general
unsecured
claims
against
the
institution. Insured and
uninsured depositors,
along with the
FDIC, will have
priority in payment
ahead of unsecured,
non-
deposit creditors,
including U.S.
Century Bank,
with respect
to any
extensions of
credit they
have made
to such
insured
depository institution.
Overdraft Fee Regulation
The Electronic Fund Transfer Act prohibits
financial institutions from charging consumers fees
for paying overdrafts on
automated teller machines, or
ATMs,
and one-time debit card transactions,
unless a consumer consents,
or opts in, to the
overdraft service for those types
of transactions. If a consumer
does not opt in,
any ATM transaction or debit that overdraws
the consumer’s account
will be denied.
Overdrafts on
the payment
of checks
and regular
electronic bill
payments are
not
covered
by
this
new
rule.
Before
opting
in,
the
consumer
must
be
provided
with
a
notice
that
explains
the
financial
institution’s
overdraft
services,
including
the
fees
associated
with
the
service,
and
the
consumer’s
choices.
Financial
institutions
must
provide
consumers
who
do
not
opt
in
with
the
same
account
terms,
conditions
and
features
(including
pricing) that they provide to consumers who do opt in.
Federal Reserve System and Federal Home Loan
Bank System
We are a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, which is one of 11 regional FHLBs. Each FHLB
serves as
a quasi-reserve
bank for
its members
within its
assigned region.
It is
funded primarily
from funds
deposited by
member institutions
and proceeds
from the sale
of consolidated
obligations of
the FHLB
system. A
FHLB makes
loans to
members (i.e., advances) in accordance with policies
and procedures established by the Board of Trustees
of the FHLB.
As a member
of the FHLB
of Atlanta, we are
required to own
capital stock in
the FHLB in
an amount at
least equal to
0.07% (or
7 basis
points), which
is subject
to annual
adjustments, of
the Bank’s
total assets
at the
end of
each calendar
year
(up to
a maximum
of
$15
million),
plus
4.75%
of
our outstanding
advances
(borrowings)
from the
FHLB
of
Atlanta
under the activity-based stock ownership requirement.
15
USCB Financial Holdings, Inc.
2023 10-K
Anti-Money Laundering Regulation
As a financial
institution, we
must maintain
anti-money laundering
programs that
include established
internal policies,
procedures
and
controls,
a
designated
compliance
officer,
an
ongoing
employee
training
program,
and
testing
of
the
program by an independent audit function in accordance with the
Bank Secrecy Act of 1970, as amended (“BSA”), and the
regulations issued
by the
Department of
the Treasury
in 31
CFR Chapter
X, FDIC
Rule 326.8
and the
Florida Control
of
Money Laundering
and Terrorist
Financing in
Financial Institutions
Act. Financial
institutions are
prohibited from
entering
into specified
financial
transactions
and account
relationships
and must
meet enhanced
standards for
due
diligence and
“knowing your customer”
in their dealings
with foreign financial institutions,
foreign customers and other
high risk customers.
Financial
institutions
must
also
take
reasonable
steps
to
conduct
enhanced
scrutiny
of
account
relationships
to
guard
against money laundering
and to report transactions
that meet certain
dollar amount thresholds
as well as
any suspicious
transactions. Recent laws, such as the USA PATRIOT
Act, enacted in 2001, as described below,
provide law enforcement
authorities with increased access to financial information maintained
by banks.
Anti-money laundering
obligations have
been substantially
strengthened
as a
result of
the USA
PATRIOT
Act. Bank
regulators routinely examine institutions for compliance with these obligations, and this area has become a particular focus
of
the
regulators
in
recent
years.
In
addition,
the
regulators
are
required
to
consider
compliance
in
connection
with
the
regulatory
review
of
certain
applications.
In
recent
years,
regulators
have
expressed
concern
over
banking
institutions’
compliance
with
anti-money
laundering
requirements
and,
in
some
cases,
have
delayed
approval
of
their
expansionary
proposals. The regulators and other
governmental authorities have been
active in imposing “cease
and desist” orders and
significant money penalty sanctions against institutions
found to be in violation of the anti-money laundering regulations.
USA PATRIOT
Act
The USA
PATRIOT
Act became
effective
in October
2001 and
amended the
BSA. The
USA PATRIOT
Act requires
banks to establish anti-money laundering programs that
include, at a minimum:
•
a bank
compliance
program
that
contains
internal
policies,
procedures
and
controls
designed
to
implement
and
maintain the
bank’s compliance
with all
of the
requirements of
the USA
PATRIOT
Act, the
BSA and
related laws
and regulations;
bank wide
systems
and procedures
for monitoring
and reporting
of suspicious
transactions
and
activities;
•
a designated compliance officer;
•
employee training for bank employees;
•
an independent audit function to test the efficacy
of the bank’s anti-money laundering program;
•
procedures to verify the identity of each bank customer upon
the opening of accounts;
•
heightened due diligence policies,
procedures and controls applicable to
certain foreign accounts and
relationships;
and
•
required reports to law enforcement and/or financial regulators to assist in the deterrence and prevention of money
laundering activities.
Additionally,
the USA PATRIOT
Act requires each financial
institution to develop a
customer identification program,
or
CIP, as part of its anti-money
laundering program. The
key components of
the CIP are
identification verification, government
list comparison,
notice and
record retention.
The purpose
of the
CIP is
to enable
the financial
institution to
determine the
true identity
and anticipated
account activity
of each
customer.
To
make this
determination, the
financial institution
must,
among other things, collect certain information from customers at the time they enter
into the customer relationship with the
financial institution.
This information must
be verified within
a reasonable time.
Furthermore, all customers
must be
screened
against any CIP-related government
lists of known or suspected
terrorists or other “sanctioned”
persons. In May 2018, the
U.S. Treasury’s
Financial Crimes
Enforcement Network,
or FinCEN,
issued a
final rule
under the
BSA requiring
banks to
identify and verify
the identity of
the natural persons
behind their customers
that are legal
entities—the beneficial
owners.
The
Anti-Money
Laundering
Act
of
2020
(the
“AML
Act’)
and
within
the
AML
Act,
the
Corporate
Transparency
Act
(the
“CTA”),
was enacted in
January 2021. The
AML Act is
intended to be
a comprehensive
reform and modernization
to U.S.
bank
secrecy
and
anti-money
laundering
laws.
Among
other
things,
it
codifies
a
risk-based
approach
to
anti-money
laundering compliance
for financial
institutions; requires the
development of
standards for evaluating
technology and
internal
processes
for BSA
compliance;
expands
enforcement-
and investigation
-related
authority,
including
increasing
available
sanctions
for
certain
BSA
violations
and
instituting
BSA
whistleblower
incentives
and
protections.
The
CTA
establishes
uniform beneficial
ownership reporting
requirements for
corporations, limited
liability companies,
and other similar
entities
formed or
registered to
do business in
the United
States. The
CTA authorizes U.S. Treasury’s Financial Crimes
Enforcement
Network (“FinCEN”) to collect that information and share it with authorized government authorities and
financial institutions,
subject
to
effective
safeguards
and
controls.
In
December
2023,
FinCEN
issued
regulations
regarding
access
to
the
beneficial
ownership
information
collected
under
the
CTA.
We
and
our
affiliates
have
adopted
policies,
procedures
and
controls designed to comply with the BSA, the AML Act, the
CTA and the USA
PATRIOT
Act.
16
USCB Financial Holdings, Inc.
2023 10-K
The Office of Foreign Assets Control
The Office of Foreign Assets Control (the “OFAC”)
is responsible for helping to ensure that U.S. entities do not engage
in transactions with
“enemies” of
the United States,
as defined by
various Executive
Orders and Acts
of Congress.
OFAC
publishes lists of
names of
persons and organizations
suspected of aiding,
harboring or
engaging in terrorist
acts; owned
or
controlled
by,
or
acting
on
behalf
of
target
countries;
and
narcotics
traffickers.
Such
persons
are
referred
to
as
“sanctioned” persons.
If a bank finds
a name on
any transaction, account
or wire transfer
that is on
an OFAC
list, it must
freeze the account
and/or block the transaction or wire transfer. We utilize an outside vendor to oversee
the inspection of our accounts and the
filing of any notifications.
We also monitor
high-risk OFAC
areas such as new
accounts, wire transfers
and customer files.
These checks are performed using software that is updated each time
a modification is made to the lists provided by
OFAC
and other agencies of Specially Designated Nationals
and Blocked Persons.
Consumer Laws and Regulations
Our activities
are subject
to a
variety
of federal
and state
statutes and
regulations
designed to
protect consumers
in
transactions with
banks. Interest
and other
charges collected
or contracted
for by
us are
subject to
state usury
laws and
federal laws concerning interest rates. Our loan
operations are also subject to federal laws
applicable to credit transactions,
such as:
•
the
Truth-In-Lending
Act
(“TILA”),
and
Regulation
Z,
governing
disclosures
of
credit
and
servicing
terms
to
consumer borrowers and including substantial new requirements for mortgage lending and servicing, as mandated
by the Dodd-Frank Act
•
the Home Mortgage Disclosure Act of 1975 and Regulation C, requiring
financial institutions to provide information
to enable the
public and public
officials to
determine whether
a financial institution
is fulfilling its
obligation to help
meet the housing needs of the communities they serve;
•
the Equal Credit
Opportunity Act and
Regulation B, prohibiting
discrimination on the
basis of race,
color,
religion,
or other prohibited factors in extending credit;
•
the Fair
Credit Reporting Act
of 1978,
as amended by
the Fair
and Accurate Credit
Transactions Act, and Regulation
V, as well as the rules and
regulations of the FDIC governing the
use and provision of information
to credit reporting
agencies, certain identity theft protections and certain
credit and other disclosures;
•
the Fair
Debt Collection
Practices Act
and Regulation
F,
governing the
manner in
which consumer
debts may
be
collected by collection agencies; and
•
the Real Estate Settlement Procedures Act,
(“RESPA”), and Regulation X, which governs aspects of the settlement
process for residential mortgage loans.
Our deposit operations are also subject to federal laws,
such as:
•
the FDIA, which, among other things, limits the amount of
deposit insurance available per account to $250,000 and
imposes other limits on deposit-taking;
•
the Right to
Financial Privacy Act,
which imposes a
duty to maintain
the confidentiality of
consumer financial records
and prescribes procedures for complying with administrative subpoenas
of financial records;
•
Check Clearing for
the 21st Century
Act (also known
as “Check 21”),
which gives “substitute
checks,” such as
digital
check images and copies made from that image, the
same legal standing as the original paper check;
•
the Electronic
Funds Transfer
Act and
Regulation E,
which governs
automatic deposits
to and
withdrawals
from
deposit accounts
and customers’
rights and
liabilities arising
from the
use of
ATMs
and other
electronic banking
services; and
•
the Truth
in Savings
Act and
Regulation DD,
which requires
depository institutions
to provide
disclosures so
that
consumers can make meaningful comparisons about depository
institutions and accounts.
These
laws
and
regulations
mandate
certain
disclosure
requirements
and
regulate
the
manner
in
which
financial
institutions must deal with clients when
taking deposits or making loans to
such clients. We must comply with the applicable
provisions of these consumer protection laws and regulations as part of both
our ongoing client relations and our regulatory
compliance obligations.
Financial Privacy and Cybersecurity
Banking organizations
are
subject to
many federal
and state
laws and
regulations
governing the
collection,
use and
protection of customer information.
Under the privacy protection
provisions of the GLB
Act and related regulations,
we are
17
USCB Financial Holdings, Inc.
2023 10-K
limited
in
our
ability
to
disclose
non-public
information
about
consumers
to
nonaffiliated
third
parties.
These
limitations
require disclosure of
privacy policies to consumers
and, in some circumstances,
allow consumers to
prevent disclosure of
certain
personal
information
to
a
nonaffiliated
third
party.
Federal
banking
agencies,
including
the
FDIC,
have
adopted
guidelines for establishing information security standards
and cybersecurity programs for implementing safeguards.
These
guidelines,
along
with
related
regulatory
materials,
increasingly
focus
on
risk
management
and
processes
related
to
information technology and the use of third parties in the
provision of financial services.
In
addition,
the
federal
banking
agencies
have
adopted
a
rule
to
establish
computer-security
incident
notification
requirements
for
bank
holding
companies,
banks
and
their
service
providers.
Under
the
rule,
banking
organizations
are
required to notify their primary
federal regulators within 36 hours
of any incident that has materially
disrupted or degraded,
or is
reasonably
likely to
materially disrupt
or degrade,
the banking
organization’s
ability to
deliver banking
services to
a
material portion of
its client base,
jeopardize the
viability of key
operations, or
impact the financial
stability of
the financial
sector. The rule also imposes
certain notification requirements on third-party bank
service providers when they experience
a computer-security
incident that
has caused,
or is
likely to
cause a
material service
disruption or
degradation for
four or
more hours. In such case, the service provider is required to notify its bank-designated point of contact as soon as possible
upon discovery of the incident.
In addition to federal laws and regulations, we are subject
to state laws governing customer privacy and cybersecurity.
The Florida Information Protection Act of 2014 (“Florida Act”) requires notification of
the Florida Department of Legal Affairs
of any breach involving
personal information that
affects more than
500 people as
well as requiring notification
of affected
individuals of
a breach.
The Florida
Act also
requires us to
take reasonable
measures to protect
and secure
data in
electronic
form containing personal information and take all reasonable measures to dispose, or arrange for the disposal, of
customer
records containing
personal information
within our
custody or
control when
the records
are no
longer to
be retained.
We
incur
significant
costs
and
expenses
in
order
to
address
compliance
with
the
federal
and
state
customer
privacy
and
cybersecurity laws and regulations, and we expect such
costs and expenses will continue into the future.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (“CFPB”) is
an independent regulatory authority housed within the
Federal
Reserve Board. The CFPB has broad authority to regulate the offering and provision of consumer financial products and to
prevent institutions subject to its authority from engaging in “unfair
and deceptive or abusive acts or practices” with respect
to their
offering of consumer
financial products or
services. The CFPB
has the
authority to
supervise and examine
depository
institutions with more than
$10 billion in assets for
compliance with federal consumer
laws. The authority to
supervise and
examine depository institutions with
$10.0 billion or less in assets,
such as U.S. Century Bank,
for compliance with federal
consumer laws
remains largely
with those
institutions’
primary federal
regulators.
However,
the CFPB
may participate
in
examinations of these smaller
institutions on a “sampling
basis” and may refer
potential enforcement actions
against such
institutions to their
primary regulators. As such,
the CFPB may
participate in examinations of
U.S. Century Bank.
In addition,
states are
permitted to
adopt consumer
protection laws
and regulations
that are
stricter than
the regulations
promulgated
by the CFPB, and state attorneys general are permitted to
enforce consumer protection rules adopted by the CFPB against
certain institutions.
The Volcker Rule
The Dodd-Frank Act
prohibits (subject to
certain exceptions) us
and our
affiliates from engaging
in short term
proprietary
trading in securities and derivatives and from investing
in and sponsoring certain investment companies defined
in the rule
as “covered
funds” (including
not only
hedge funds,
commodity pools
and private
equity funds,
but also
a range
of asset
securitization structures
that do not
meet exemptive
criteria in the
final rules). This
statutory provision
is commonly
called
the “Volcker Rule.” At December 31, 2023, we are not
subject to the Volcker Rule because of our asset
size, which is below
the $10.0 billion Volcker Rule
threshold.
Community Reinvestment Act and Fair Lending Requirements
As
previously
noted,
we
are
subject
to
certain
fair
lending
requirements
and
reporting
obligations
involving
home
mortgage
lending
operations.
We
are
also
subject
to
certain
requirements
and
reporting
obligations
under
the
federal
Community Reinvestment Act (“CRA”).
The CRA and
its corresponding regulations are
intended to encourage banks
to help
meet the credit needs of
the communities they serve,
including low- and moderate
-income neighborhoods, consistent with
safe and sound banking practices.
Accordingly,
the
CRA
generally
requires
federal
banking
agencies
to
evaluate
the
record
of
a
financial
institution
in
meeting applicable
CRA requirements.
The CRA
further requires
the agencies
to take
into account
our record
of meeting
community
credit
needs
when
evaluating
applications
for,
among
other
things,
new
branches
or
mergers.
We
are
also
18
USCB Financial Holdings, Inc.
2023 10-K
subject to analogous state CRA requirements
in Florida and certain other states
in which we may establish branch
offices.
In
connection
with
their
assessments
of
CRA
performance,
the
FDIC
and
FOFR
assign
a
rating
of
“outstanding,”
“satisfactory,”
“needs to
improve,” or
“substantial
noncompliance.”
We received
a “satisfactory”
CRA Assessment
Rating
from
both
regulatory
agencies
in
our
most
recent
CRA
examinations
in
2023.
In
addition
to
substantive
penalties
and
corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA
into account when regulating and supervising
other activities of the bank, including
in
acting
on
expansionary
proposals
such
as when
a bank
submits
an
application
to establish
bank
branches,
merge
with
another bank,
or acquire
the assets
and assume
the liabilities
of another bank.
An unsatisfactory
CRA and/or
fair lending
record could
substantially delay or
block any
such transaction.
The regulatory agency's
assessment of
the institution's
record
is
made
available
to
the
public
at
www.ffiec.gov/craratings.
Following
its
most
recent
CRA
performance
evaluation
in
October 2022, U.S. Century Bank received an overall
rating of "Satisfactory."
In October 2023, the
federal banking agencies jointly issued
a final rule to
revise the regulations implementing the
CRA.
The final rule takes effect
on April 1, 2024, with
staggered compliance dates; the applicability date
for most of the provisions
is January
1, 2026.
The changes
are designed
to encourage
banks to
expand access
to credit,
investment
and banking
services in low and moderate income
communities, adapt to changes in
the banking industry including mobile
and internet
banking, provide
greater clarity and
consistency in
the application
of the CRA
regulations and
tailor CRA evaluations
and
data
collection
to
bank
size
and
type.
The
final
rule
implements
a
revised
regulatory
framework
that,
like
the
current
framework, is based on
bank asset size and
business model. Under the
final rule, a new
“Retail Lending Test” is established
except with
banks with
total assets
of less
than $600
million as
of December
31 in
either of
the prior
two calendar
years
have the option to maintain
the current CRA evaluation
framework, referred to in
the final rule as the
“Small Bank Lending
Test,”
or opt into
the Retail Lending
Test.
The Retail Lending
Test
evaluates a bank’s
record of helping
to meet the
credit
needs of
its community
through the
origination and
purchase of
residential
mortgage, multi
-family,
small business,
small
farm and,
in certain
cases, automobile
loans. Banks
of all
sizes will
maintain the
option to
elect to
be evaluated
under a
strategic plan
with the
final rule
updating the
standards
for obtaining
approval for
such plan.
The final
rule continues
the
current
approach
of
requiring
banks
to
delineate
specific
“facility-based
assessment
areas,”
which
comprise
the
areas
around a bank’s main office, branches, and deposit-taking remote service facilities (e.g., ATMs). The final rule allows
banks
to receive CRA credit for any qualified community development
activity, regardless
of location.
Call Reports and Examination Cycle
All institutions, regardless of size, submit
a quarterly call report that includes
data used by federal banking agencies
to
monitor the condition, performance, and
risk profile of individual institutions
and the industry as a whole.
In June 2019, the
federal banking agencies issued a
final rule to permit insured depository
institutions with total assets of
less than $5 billion
that
do
not
engage
in
certain
complex
or international
activities
to
file
the
most
streamlined
version
of the
quarterly
call
report, and to reduce data reportable on certain streamlined
call report submissions.
Effect of Governmental Monetary Policies
The commercial banking
business is affected
not only by
general economic conditions,
but also by
the monetary policies
of the Federal Reserve. Changes in the discount rate
on member bank borrowing, availability of borrowing
at the “discount
window,”
open
market
operations,
changes
in
the
Fed
Funds
target
interest
rate,
the
imposition
of
changes
in
reserve
requirements against member banks’ deposits
and assets of foreign banking centers
and the imposition of and changes in
reserve requirements against certain
borrowings by banks and
their affiliates are
some of the
instruments of monetary
policy
available to the Federal Reserve. These
monetary policies are used in
varying combinations to influence overall growth and
distributions of bank loans, investments and deposits, which may affect interest rates charged
on loans or paid on deposits.
The monetary
policies of
the Federal
Reserve have
had a significant
effect on
the operating
results of
commercial banks
and are
expected to
continue
to do
so in
the future.
The Federal
Reserve’s
policies are
primarily
influenced
by the
dual
mandate
of
price
stability
and
full
employment,
and
to
a
lesser
degree
by
short-term
and
long-term
changes
in
the
international trade
balance and
in the
fiscal policies
of the
U.S. government.
Future changes
in monetary
policy and
the
effect of such changes on our business and earnings
in the future cannot be predicted.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects
the regulation of the financial services industry,
and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating
in those states.
Federal and state
regulatory agencies
also periodically propose
and adopt changes
to their regulations
or
change the manner
in which existing
regulations are
applied or
interpreted. The
substance or
impact of pending
or future
legislation or regulation, or
the application thereof, cannot
be predicted, although enactment
of proposed legislation has
in
the past
and may
in the
future affect
the regulatory
structure under
which we
operate and
may significantly
increase our
costs, impede the efficiency
of our internal business
processes, require us to
increase our regulatory
capital or modify our
19
USCB Financial Holdings, Inc.
2023 10-K
business
strategy,
or
limit
our
ability
to
pursue
business
opportunities
in
an
efficient
manner.
Our
business,
financial
condition, results
of operations
or prospects
may be
adversely affected,
perhaps materially,
as a
result of
any such
new
legislation or regulations.
Federal Securities Laws and the Sarbanes-Oxley Act
USCB
Financial
Holdings,
Inc.’s
common
stock
is
registered
with
the
SEC
under
Section
12(b)
of
the
Securities
Exchange Act of 1934. USCB Financial
Holdings, Inc. is subject to the
proxy and tender offer rules, insider trading reporting
requirements and restrictions, and certain other requirements
under the Securities Exchange Act of 1934.
As a public company,
USCB Financial Holdings, Inc. is also subject to
the Sarbanes-Oxley Act of 2002 (“SOA”), which
is applicable to all companies, both U.S. and non-U.S., that file periodic reports
under the Securities Exchange Act of 1934.
The stated goals of
the SOA were to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing
improprieties
at
publicly
traded
companies
and
to
protect
investors
by
improving
the
accuracy
and
reliability
of
corporate disclosures
pursuant to
the securities
laws. The
SEC is
responsible for
establishing rules
to implement
various
provisions of
the SOA.
The SOA
includes specific
disclosure requirements
and corporate
governance rules,
requires the
SEC and securities exchanges to adopt
extensive additional disclosure, corporate
governance and other related rules
and
mandates
further
studies
of
certain
issues
by
the
SEC.
The
SOA
represents
significant
regulation
of
the
accounting
profession and
corporate governance
practices, such
as the
relationship
between a
board of
directors and
management
and between a board of directors and its committees.
As directed
by the
SOA, USCB
Financial Holdings,
Inc.’s principal
executive officer
and principal
financial officer
are
required to certify that the Corporation’s quarterly and
annual reports do not contain any untrue
statement of a material fact.
The rules adopted by
the SEC under the
SOA have several requirements,
including having these
officers certify that:
they
are responsible for establishing, maintaining and regularly evaluating the effectiveness
of our internal control over financial
reporting; they
have made
certain disclosures
to USCB
Financial Holdings,
Inc.’s auditors
and the audit
committee of
the
Board of Directors
about USCB
Financial Holdings,
Inc.’s internal
control over
financial reporting;
and they
have included
information in USCB Financial Holdings,
Inc.’s quarterly and annual
reports about their evaluation
and whether there have
been
changes
in
USCB
Financial
Holdings,
Inc.’s
internal
control
over
financial
reporting
or
in
other
factors
that
could
materially affect USCB Financial Holdings, Inc.’s
internal control over financial reporting.
In March 2020, the SEC issued
a final rule, effective
April 27, 2020, under the
SOA – Amendments to the Accelerated
Filer and
Large Accelerated
Filer Definitions.
As a
result of
the amendments,
certain low
revenue and/or
low public
float
filers, while they remained obligated to provide a
report by management assessing the effectiveness of their internal control
over financial reporting (“ICFR”), were
not required to provide
an attestation report from
their independent auditor assessing
the effectiveness of their ICFR. USCB Financial Holdings,
Inc. meets the amended definition and is not required to provide
an attestation report from its independent
auditor assessing the effectiveness of its ICFR. In
addition, as long it is
an eligible
emerging growth company,
such auditor attestation
requirement will not
apply to USCB
Financial Holdings, Inc.
However,
U.S. Century Bank
remains subject to
independent auditor attestation required
under FDIC regulations
set forth at
12 C.F.R.
§363.3(b).
Available Information
Our
website
address
is
www.uscentury.com.
Our
electronic
filings
with
the
FDIC
and
the
SEC
(including
all
Annual
Reports on Form 10-K,
Quarterly Reports on
Form 10-Q, Current
Reports on Form
8-K, and if applicable,
amendments to
those reports)
are available
free of
charge on
the website
as soon
as reasonably
practicable after
they are
electronically
filed with,
or furnished
to,
the
FDIC
or
SEC. The
information
posted
on
our website
is
not
incorporated
into
this
Annual
Report
on
Form
10-K.
In
addition,
the
FDIC
and
the
SEC
each
maintains
a
website
that
contains
reports
and
other
information that is filed.
20
USCB Financial Holdings, Inc.
2023 10-K
Item 1A. Risk Factors
This
section
contains
a
description
of
the
material
risk
and
uncertainties
identified
by
management
that
could,
individually or in combination, harm our business, results of
operations, liquidity and financial condition. The risks described
below are
not all
inclusive. We
may face
other risks
that are
not presently
known, or
that we
presently deem
immaterial,
which may also adversely
affect our business, results
of operations, liquidity and
financial condition. If any
of these known
or unknown risks
or uncertainties actually
occur,
our business, results
of operations, liquidity
and financial condition
could
be materially and adversely affected.
Summary of Risk Factors
Our business is subject to
a number of risks that could
cause actual results to differ
materially from those indicated
by
forward-looking statements
made in this
Form 10-K
or presented
elsewhere from
time to time.
These risks
are discussed
more fully in this Item 1A and include, without limitation, the
following:
Risks Related to our Business and Operations
•
Our
business
operations
and
lending
activities
are concentrated
in
South
Florida,
and
we
are
more
sensitive
to
adverse changes in the local economy than our more geographically
diversified competitors.
•
The small- to medium-sized businesses
to which we lend may have
fewer resources to weather adverse
business
developments, which may impair a borrower's ability to
repay a loan.
•
Inflationary pressures and rising prices may affect
our results of operations and financial condition.
•
Financial challenges
at other
banking institutions
could lead
to depositor
concerns that
spread within
the banking
industry causing disruptive deposit outflows and other destabilizing
results.
•
Insufficient
liquidity
could
impair
our
ability
to
fund
operations
and
jeopardize
our
financial
condition,
results
of
operations, growth and prospects.
•
Changes in
U.S. trade policies
and other
global political factors
beyond our
control, including the
imposition of tariffs,
retaliatory
tariffs,
or
other
sanctions,
may
adversely
impact
our
business,
financial
condition
and
results
of
operations.
•
Our lending business is subject to credit risk, which could
lead to unexpected losses.
•
The transition from the use of LIBOR may adversely impact the interest rates paid
on certain financial instruments.
•
Natural
disasters
and
severe
weather
events
in
Florida
could
have
a
material
adverse
impact
on
our
business,
financial condition and operations.
•
Our business is subject to
interest rate risk and variations
in interest rates may
materially and adversely affect
our
financial performance.
•
A
failure
or
the
perceived
risk
of
a
failure
to
raise
the
statutory
debt
limit
of
the
U.S.
in
the
future
could
have
a
material adverse effect on our business, financial
condition and results of operations.
•
Our allowance for credit losses may not be sufficient
to absorb potential losses in our loan portfolio.
•
Our commercial loan portfolio may expose us to increased
credit risk.
•
The imposition of further limits
by the bank regulators
on commercial real estate
lending activities could curtail our
growth and adversely affect our earnings.
•
Our SBA lending program depends on our status as a participant in the SBA's Preferred Lenders Program, and we
face specific risks associated with originating SBA loans
and selling the guaranteed portion thereof.
•
The SBA may not honor its guarantees if we do not originate
loans in compliance with SBA guidelines.
•
Global banking is an important part of our business, which creates
increased BSA/AML risk.
21
USCB Financial Holdings, Inc.
2023 10-K
•
We may not recover all amounts that are contractually
owed to us by our borrowers.
•
Non-performing assets
take significant time
to resolve and
adversely affect
our results of
operations and financial
condition, and could result in further losses in the future.
•
We engage in
lending secured by
real estate and
may foreclose on
the collateral and
own the underlying
real estate,
subjecting us
to the
costs and potential
risks associated with
the ownership
of real
property and
other risks, including
exposure
to
environmental
liability,
or
consumer
protection
initiatives
or
changes
in
state
or
federal
law
may
substantially raise the cost of foreclosure or prevent us
from foreclosing at all.
•
We are exposed to risk of environmental liability when
we take title to property.
•
We are subject to
certain operational risks, including, but
not limited to, customer, employee or
third-party fraud and
data processing system failures and errors.
•
We face significant
operational risks because
the nature of the
financial services business
involves a high volume
of transactions.
•
We have several large depositor
relationships, the loss of
which could force us to
fund our business through more
expensive and less stable sources.
•
Our
securities
portfolio
performance
in
difficult
market
conditions
could
have
adverse
effects
on
our
results
of
operations.
•
We may
not effectively
execute on
our expansion
strategy,
which may
adversely affect
our ability
to maintain
our
historical growth and earnings trends.
•
New lines of business, products, product enhancements
or services may subject us to additional risk.
•
Our business
needs and
future growth
may require us
to raise
additional capital
and that
capital may
not be
available
on terms acceptable to us or may be dilutive to existing shareholders.
•
We may grow through mergers or
acquisitions, a strategy that may
not be successful or, if successful, may produce
risks
in
successfully
integrating
and
managing
the
merged
companies
or
acquisitions
and
may
dilute
our
shareholders.
•
The loss of one or more
of our key personnel, or
our failure to attract and
retain other highly qualified
personnel in
the future, could harm our business.
•
Damage to our reputation could significantly harm our
businesses.
•
We face
strong competition
from financial
services
companies
and other
companies
that offer
banking services,
which could materially and adversely affect our
business.
•
We must respond to rapid technological changes
to remain competitive.
•
We continually
encounter technological change,
and we may
have fewer resources
than many of
our competitors
to invest in technological improvements.
•
A
failure, interruption, or breach in the
security of our systems, or those
of our contracted vendors, could disrupt
our
business, result in the disclosure of confidential information, damage our reputation, and
create significant financial
and legal exposure.
•
We rely on other companies to provide key components of our business infrastructure and our operations could be
interrupted if
our third-party
service providers
experience difficulty,
terminate their
services
or fail
to comply
with
banking regulations.
•
Litigation
and
regulatory
actions,
including
possible
enforcement
actions,
could
subject
us
to
significant
fines,
penalties, judgments
or other requirements
resulting in
increased expenses or
restrictions on
our business
activities.
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USCB Financial Holdings, Inc.
2023 10-K
•
Certain of our
directors may
have conflicts of
interest in determining
whether to present
business opportunities
to
us or another entity with which they are, or may become, affiliated.
Risks Related to Our Tax, Accounting
and Regulatory Compliance
•
Our ability to
recognize the benefits
of our deferred
tax assets is
dependent on future
cash flows and
taxable income
and may be materially impaired upon significant changes
in ownership of our common stock.
•
The accuracy of
our financial statements
and related disclosures
could be affected
if the judgments,
assumptions
or estimates used in our critical accounting policies are inaccurate.
•
As a new public company, we may not efficiently or effectively create an effective internal control environment,
and
any
future
failure
to
maintain
effective
internal
control
over
financial
reporting
could
impair
the
reliability
of
our
financial
statements,
which
in
turn
could
harm
our
business,
impair
investor
confidence
in
the
accuracy
and
completeness of our financial
reports and our access
to the capital
markets, cause the price
of our Class A
common
stock to decline and subject us to regulatory penalties.
•
We operate in a highly
regulated environment, and the
laws and regulations that
govern our operations, corporate
governance, executive
compensation and
accounting principles, or
changes in them,
or our failure
to comply with
them, could adversely affect us.
•
We
face
a
risk
of
noncompliance
with
the
Bank
Secrecy
Act
and
other
anti-money
laundering
statutes
and
regulations and corresponding enforcement proceedings.
•
We are subject to capital adequacy requirements
and may become subject to more stringent capital requirements,
which could adversely affect our financial condition
and operations.
•
We are periodically subject to examination and scrutiny by a number of
banking agencies and, depending upon the
findings and determinations of these agencies, we may
be required to make adjustments to our
business that could
adversely affect us.
•
We are
subject to
numerous laws
and regulations
of certain
regulatory agencies
designed to
protect consumers,
including the
Community Reinvestment
Act, or
CRA, and
fair lending
laws, and
failure to
comply with
these laws
could lead to a wide variety of sanctions.
•
Climate change
and related
legislative and
regulatory initiatives
may materially
affect our
business and
results of
operations.
Risks Related to Our Class A Common Stock
•
Our ability to pay dividends is subject to restrictions.
•
The market price and trading volume of our Class A common stock may be volatile, which could result in rapid and
substantial losses for our shareholders.
•
There are
significant restrictions
in our
Articles of
Incorporation
that restrict
the ability
to sell
our capital
stock
to
shareholders that would own 4.95% or more of our stock,
excluding our Significant Investors.
•
Because
we
are
an
emerging
growth
company
and
because
we
have
decided
to
take
advantage
of
certain
exemptions from various reporting
and other requirements applicable
to emerging growth companies,
our Class A
common stock could be less attractive to investors.
•
Because
we
have
elected
to
use
the
extended
transition
period
for
complying
with
new
or
revised
accounting
standards for an
“emerging growth company,”
our financial statements
may not be comparable
to companies that
comply with these accounting standards as of the public
company effective dates.
•
We have existing investors that
own a significant amount of
our common stock whose individual
interests may differ
from yours.
•
Provisions in our governing documents and Florida
law may have an anti-takeover effect
and there are substantial
regulatory limitations on changes of control of the Company.
23
USCB Financial Holdings, Inc.
2023 10-K
Risks Related to our Business and Operations
Our business
operations and
lending activities
are concentrated
in South
Florida, and
we are
more sensitive
to adverse changes in the local economy than our
more geographically diversified competitors.
Unlike many of
our larger competitors
that maintain significant
operations located
outside of our
market area, most
of
our customers are concentrated in South Florida. In addition, we have
a high concentration of loans secured by real estate
located in
South Florida.
Therefore, our
success depends
upon the
general economic
conditions in
South Florida,
which
may differ from the economic conditions in other areas
of the U.S. or the U.S. generally.
Our real estate
collateral provides
an alternate source
of repayment in
the event
of default by
the borrower;
however,
the value of the collateral may decline during the time the credit is outstanding. The concentration of our loans in the South
Florida area subjects us to
risk that a downturn in the
local economy or recession in
this area could result in
a decrease in
loan originations and increases in delinquencies and foreclosures, which would have a greater negative effect on us than if
our lending were more geographically diversified.
Furthermore, the economic disruption spurred
by the continuing COVID-
19
pandemic
has
particularly
affected
commercial
real
estate
markets.
Additionally,
the
pandemic
has
accelerated
the
adoption of
remote work options,
potentially influencing the
long-term performance of
office properties within
our commercial
real estate portfolio. If we are required
to liquidate our real estate collateral
securing a loan during a period of
reduced real
estate values
to satisfy
the debt,
our earnings
and capital
could be
adversely affected.
Moreover,
since a
large portion
of
our loan portfolio
is secured by
properties located in
South Florida, the occurrence
of a natural
disaster, such as a hurricane,
or a man-made disaster could result in a decline in loan originations,
a decline in the value or the destruction of mortgaged
properties and an increase in
the risk of delinquencies, foreclosures
or loss on loans
originated by us. We may
suffer further
losses due to the decline
in the value of the
properties underlying our mortgage loans, which would
have an adverse impact
on our results of operations and financial condition.
A downturn in the local economy generally may lead to loan losses that are not offset by operations in other markets; it
may also reduce the ability
of our customers to grow
or maintain their deposits with
us. For these reasons, any
regional or
local economic
downturn
that
affects
South Florida,
or existing
or prospective
borrowers
or
depositors
in
South Florida,
could have a material adverse effect on our business,
financial condition and results of operations.
In addition, there are continuing concerns related
to, among other things, the increasing
level of U.S. government debt
and fiscal actions that may be taken to address that debt, price fluctuations
of key natural resources, inflation, the potential
resurgence of economic and political tensions with China,
the continuing war in Ukraine, the
conflict in Gaza and continuing
higher oil prices due to, among other things, Russian supply disruptions resulting from
the ongoing Ukrainian conflict, each
of which may have a destabilizing effect on financial markets and economic activity. Economic pressure on consumers and
overall
economic
uncertainty
may
result
in
changes
in
consumer
and
business
spending,
borrowing
and
saving
habits.
These
economic
conditions
and/or
other
negative
developments
in
the
domestic
or
international
credit
markets
or
economies may significantly
affect the markets
in which we
do business, the
value of our
loans and investments,
and our
ongoing operations, costs and profitability.
The
small-
to
medium-sized
businesses
to
which
we
lend
may
have
fewer
resources
to
weather
adverse
business developments, which may impair a borrower's
ability to repay a loan.
We
target
our
business
development
and
marketing
strategies
primarily
to
serve
the
banking
and
financial
services
needs of SMBs and
the owners and operators of
those businesses. SMBs generally have
fewer financial resources in terms
of capital or
borrowing capacity
than larger entities,
frequently have
smaller market shares
than their competition,
may be
more
vulnerable
to
economic
downturns,
often
need
substantial
additional
capital
to
expand
or
compete,
and
may
experience substantial
volatility in
operating results,
any of
which, individually
or in
the aggregate,
may impair
their ability
as a borrower
to repay a loan.
In addition, the success
of SMBs often
depends on the management
skills, talents and efforts
of a
small group
of key
people, and
the death,
disability or
resignation of
one or
more of
these individuals
could have
an
adverse impact on
the business and
its ability to
repay its loan.
If general economic
conditions negatively impact
the markets
in which we operate
or any of our
borrowers otherwise are affected by adverse
business developments, our SMB borrowers
may be disproportionately affected and their ability to
repay outstanding loans may be adversely affected, which could
have
a material adverse effect on our business, financial
condition and results of operations.
The
continuing
COVID-19
pandemic
has,
and
may
continue
to,
adversely
affect
our
business,
financial
condition, liquidity, capital and results
of operations.
The
COVID-19
pandemic
has
adversely
impacted
the
global
and
national
economy
and
certain
industries
and
geographies in which
our customers operate.
Given its
ongoing and dynamic
nature, it is
difficult to
predict the full
impact
24
USCB Financial Holdings, Inc.
2023 10-K
of the continuing
COVID-19 pandemic
on the business
of the Company,
its customers, employees
and third-party
service
providers.
The
extent
of
such
impact
will
depend
on
future
developments,
which
are
highly
uncertain.
Additionally,
the
responses of various governmental and non-governmental authorities
and consumers to the on-going pandemic may have
material long-term effects on
USCB Financial Holdings and our subsidiary
U.S. Century Bank and its customers
which are
difficult to quantify in the near-term or long-term.
Inflationary pressures and rising prices may affect
our results of operations and financial condition.
Since 2021, there have been market indicators of a pronounced rise in inflation and the Federal Reserve raised certain
benchmark interest rates 11 times in
2022 and 2023 in
an effort to combat
inflation.
Although the rate of
inflation moderated
in the fourth
quarter of 2023,
it is still
at levels not seen
for more than
40 years. As
inflation increases and
market interest
rates rise
the value
of our
investment securities,
particularly those
with longer
maturities, decreases,
although this
effect
can be less
pronounced for floating-rate
instruments. In addition,
inflation generally increases
the cost of
goods and services
we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Also, a
prolonged period of inflation could cause wages and other of our costs to increase, which could adversely affect our results
of operations and financial condition.
Furthermore, our customers are also
affected by inflation and the
rising costs of goods
and services
used in
their households
and businesses,
which could
have a
negative impact
on their
ability to
repay their
loans with
us. In
addition, SMBs
may be
impacted more
during periods
of high
inflation, as
they are
not able
to leverage
economics of
scale to
mitigate
cost
pressures
compared
to larger
businesses.
Consequently,
the
ability of
our business
customers
to
repay
their
loans
may
deteriorate,
and
in
some
cases
this
deterioration
may
occur
quickly,
which
would
adversely impact our results of operations and financial condition.
Financial
challenges
at
other
banking
institutions
could
lead
to
depositor
concerns
that
spread
within
the
banking industry causing disruptive deposit outflows and other
destabilizing results.
In March 2023, certain specialized banking institutions with elevated concentrations of uninsured deposits experienced
large
deposit
outflows,
resulting
in
the
institutions
being
placed
into
FDIC
receiverships.
In
the
aftermath,
there
was
substantial
market
disruption
and
indications
that
deposit
concerns
could
spread
within
the
banking
industry,
leading to
deposit outflows and other destabilizing results. While the Company does not believe that the
circumstances of these bank
failures, including, in
several cases, the
elevated concentrations of uninsured
deposits, are necessarily indicators
of broader
issues for concern
with all other
banks or with
the banking system itself,
the failures are
likely to continue
to have an
adverse
effect on customer
confidence and the
availability of funding
and liquidity,
as well as possibly
lead to increased regulatory
requirements and costs
and negative reputational
ramifications for
institutions in the
banking industry,
including, possibly,
the Company and its depository subsidiary, U.S. Century Bank.
We will continue to closely monitor the ongoing events
and
volatility
in
the
financial
services
industry,
together
with
responsive
measures
by
the
banking
regulators
to
mitigate
or
manage
the
concerns
of
bank
customers
regarding
FDIC
deposit
insurance
coverage
and
the
safety
and
soundness
of
community
banks.
U.S.
Century
Bank
maintains
a
well-diversified
deposit
base.
At
December
31,
2023,
our
top
15
depositors only
hold 20% of
our total portfolio.
As of December
31, 2023,
45% of
our deposits
are estimated
to be FDIC-
insured. Our public funds
are 14% of total
deposits and are partially
collateralized. The estimated
average account size
of
our
deposit
portfolio
is
$97.0
thousand.
In
addition,
the
Bank
was
considered
a
“well
capitalized”
institution
as
of
December 31, 2023 and 2022.
Insufficient liquidity could
impair our ability to
fund operations and jeopardize
our financial condition,
results
of operations, growth and prospects.
Effective liquidity management is essential for the operation of our business. Although we
have implemented strategies
to maintain
sufficient
and
diverse
sources of
funding
to accommodate
planned,
as well
as unanticipated,
liquidity
needs
(including changes
in assets, liabilities, and
off-balance sheet commitments under various
economic conditions), an inability
to
raise
funds
through
deposits,
borrowings,
the
sale
of
investment
securities
and
other
sources
could
have
a
material
adverse effect
on our
liquidity. Our access
to funding
sources in
amounts adequate to
finance our
activities could
be impaired
by factors that affect us specifically or the financial services
industry in general. Factors that could detrimentally impact
our
access to liquidity sources include a decrease in the level of our business activity due to a market disruption, a decrease in
the borrowing capacity assigned to
our pledged assets by our
secured creditors, competition from other
financial institutions
which could drive up the
costs of deposits or adverse
regulatory action against us. Deterioration in
economic conditions and
the loss of
confidence in financial
institutions may increase
our cost of
funding and limit
our access to
some of our
customary
sources of liquidity,
including, but not
limited to, inter-bank
borrowings and borrowings
from the Federal
Home Loan Bank
of Atlanta, or
the FHLB, and
the Federal Reserve
Bank of Atlanta.
Our ability to
acquire deposits
or borrow
could also be
impaired by
factors that
are not
specific to
us, such
as a
severe disruption
of the
financial markets
or negative
views and
expectations
about the
prospects
for the
financial
services
industry generally
as
a result
of conditions
faced
by banking
organizations
in
the
domestic
and
international
credit
markets.
Any decline
in
available
funding
or cost
of liquidity
could
adversely impact our ability to originate loans, invest in securities, meet our expenses
or fulfill obligations such as repaying
25
USCB Financial Holdings, Inc.
2023 10-K
our borrowings or
meeting deposit withdrawal demands,
any of which
could, in turn,
have an adverse
effect on our
business,
financial condition, and results of operations.
Changes in
U.S. trade
policies and
other global
political factors
beyond our
control, including
the imposition
of tariffs, retaliatory tariffs, or other sanctions, may adversely impact our business, financial condition and results
of operations.
There have
been, and
may be
in the
future, changes
with respect
to U.S.
and international
trade policies,
legislation,
treaties and tariffs, embargoes, sanctions and other trade restrictions. Tariffs,
retaliatory tariffs or other trade restrictions on
products
and
materials
that
customers
import
or
export,
or a
trade
war or
other
related governmental
actions
related
to
tariffs,
international
trade
agreements
or
policies
or
other
trade
restrictions
have
the
potential
to
negatively
impact
our
customers' costs, demand
for our products,
or the U.S.
economy or
certain sectors thereof
and, thus, could
adversely impact
our business,
financial condition
and results
of operations.
As a
result of
Russia's invasion
of Ukraine,
the U.S.
imposed,
and is likely to continue to impose material additional, financial and economic sanctions and export controls against certain
Russian organizations and/or individuals, with similar actions either implemented or planned by the European Union ("EU")
and
the
United
Kingdom
(“UK”)
and
other
jurisdictions.
The
U.S.,
the
UK,
and
the
EU
have
each
imposed
packages
of
financial
and
economic
sanctions
that,
in
various
ways,
constrain
transactions
with
numerous
Russian
entities
and
individuals; transactions
in Russian
sovereign debt;
and investment,
trade, and
financing to,
from, or
in certain
regions of
Ukraine. Moreover, actions by Russia, and any
further measures taken by the
U.S. or its allies,
could have negative impacts
on regional and global
financial markets and economic
conditions. To the extent changes in the
global political environment,
including the
continuing war
in Ukraine
and the
continued heightened
tensions between
Russia and
the U.S.,
NATO,
the
EU and the
UK, as well
as the conflict
in Gaza, have
a negative impact
on us or
on the markets
in which we
operate, our
business, results of operations and financial condition could be
materially and adversely impacted.
Our lending business is subject to credit risk, which
could lead to unexpected losses.
Our
primary
business
involves
making
loans
to
customers.
The
business
of
lending
is
inherently
risky
because
the
principal or
interest on
the loan
may not
be repaid
timely or
at all
or the
value of
any collateral
securing the
loan may
be
insufficient to
cover our
outstanding exposure.
These risks
may be affected
by the
strength or
weakness of
the particular
borrower's business sector
and local, regional and
national market and
economic conditions. Many
of our loans are
made
to SMBs that may be
less able to withstand
competitive, economic and financial
pressures than larger borrowers.
Our risk
management practices,
such as
monitoring the
concentration of
our loans
within specific
industries in
which we
lend and
concentrations with individual borrowers
or related borrowers, and
our credit approval
practices, may not adequately
reduce
credit risk. In addition, there are risks inherent in making any loan, including
risks relating to proper loan underwriting, risks
resulting from
changes in
economic and
industry conditions,
risks inherent
in dealing
with individual
borrowers, including
the risk that a borrower may not provide
information to us about their business
in a timely manner,
may present inaccurate
or incomplete information to us, may lack a U.S. credit history,
or may leave the U.S. without fulfilling their loan obligations,
leaving us with
little recourse
to them personally,
and/or risks
relating to the
value of
collateral. In
order to
manage credit
risk successfully,
we must,
among other
things, maintain
disciplined and
prudent underwriting
standards and
ensure that
our lenders follow those standards. The weakening of
these standards for any reason, such as an
attempt to attract higher
yielding loans,
a lack
of discipline
or diligence
by our
employees in
underwriting and
monitoring loans,
the inability
of our
employees to adequately adapt
policies and procedures to
changes in economic or
any other conditions affecting borrowers
and the quality
of our loan portfolio,
may result in loan
defaults, foreclosures and additional charge-offs and
may necessitate
that we significantly increase our allowance for credit losses, each of which could adversely affect our net income. A failure
to effectively
manage
credit risk
associated
with
our loan
portfolio could
lead to
unexpected
losses and
have a
material
adverse effect on our business, financial condition
and results of operations.
The
transition
from
the
use
of
LIBOR
may
adversely
impact
the
interest
rates
paid
on
certain
financial
instruments.
LIBOR was used as a reference rate for certain of the Corporation’s adjustable-rate loans and bonds. In 2017, the U.K.
Financial Conduct
Authority,
which regulates
LIBOR,
announced that
the publication
of LIBOR
would not
be guaranteed
beyond 2021. In December 2020, the
administrator of LIBOR announced its intention to
(i) cease the publication of the
one-
week and two-month
U.S. dollar LIBOR
after December 31,
2021, and (ii)
cease the publication
of all other
tenors of U.S.
dollar LIBOR (one, three, six and 12 month LIBOR) after
June 30, 2023.
There are ongoing efforts to establish an alternative
reference rate. The Federal Reserve Board, in conjunction with
the
Alternative
Reference
Rates
Committee,
a
steering
committee
comprised
of
large
U.S.
financial
institutions,
supports
replacing LIBOR with SOFR, a new index calculated
by short-term repurchase agreements backed by
Treasury securities.
The Bank adopted SOFR as its preferred benchmark as
an alternative to LIBOR for use in new contracts in 2023.
26
USCB Financial Holdings, Inc.
2023 10-K
While
the
Adjustable
Interest
Rate
(LIBOR)
Act
and
implementing
regulations
will
help
to
transition
legacy
LIBOR
contracts to a new benchmark rate, the
substitution of SOFR for LIBOR may
have potentially significant economic impacts
on parties to affected
contracts. SOFR is
different from LIBOR
in that it is
a retrospective-looking secured
rate rather than
a forward-looking
unsecured rate.
Additionally,
while SOFR
appears to
be the
preferred replacement
rate for
LIBOR, it
is
not
possible
to
predict
whether
SOFR
will
ultimately
prevail
in
the
market
as
the
definitive
replacement
for
LIBOR.
Uncertainty
as
to
the
nature
of
alternative
reference
rates,
and
as
to
potential
changes
or
other
reforms
related
to
the
transition from LIBOR, may adversely affect the val
ue of LIBOR-based financial arrangements of the Company.
Natural disasters and severe weather events in Florida
could have a material adverse impact on our
business,
financial condition and operations.
Our
operations
and
our
customer
base
are
primarily
located
in
South
Florida.
This
region
is
vulnerable
to
natural
disasters
and
severe
weather
events
or
acts
of
God,
such
as
hurricanes
or
tropical
storms,
which
can
have
a
material
adverse impact
on our
loan portfolio,
our overall
business, financial
condition and
operations, cause
widespread property
damage and have
the potential to
significantly depress
the local economies
in which we
operate. Future adverse
weather
events in
Florida could
potentially result
in extensive
and costly
property damage
to businesses
and residences,
depress
the value of property serving as collateral for our loans, force the relocation of residents, and
significantly disrupt economic
activity in the region.
We cannot
predict the
extent of
damage that
may result
from such
adverse weather
events, which
will depend
on a
variety of factors that are beyond our control,
including, but not limited to, the
severity and duration of the event,
the timing
and level
of government
responsiveness, the
pace of
economic recovery
and availability
of insurance
to cover
losses. In
addition,
the
nature,
frequency
and
severity
of
these
adverse
weather
events
and
other
natural
disasters
may
be
exacerbated by climate change. If a significant adverse weather event or other natural disaster were to occur, it could have
a materially adverse impact
on our financial
condition, results of operations
and our business, as
well as potentially
increase
our exposure to credit and liquidity risks.
Our business is subject to
interest rate risk, and variations in
interest rates may materially and adversely
affect
our financial performance.
Changes in the
interest rate environment
may reduce our
profits. It is
expected that our
primary source of
income will
continue to be from
the differential or
"spread" between the
interest earned on
loans, securities and
other interest-earning
assets, and the interest paid on
deposits, borrowings and other interest-bearing liabilities. Net
interest spreads are affected,
in part, by the
difference between the maturities and repricing characteristics of
interest-earning assets and interest-bearing
liabilities. Changes
in market
interest rates
generally affect
loan volume,
loan yields,
funding sources
and funding
costs.
Our
net interest
spread
depends
on
many
factors
that
are partly
or completely
out
of our
control,
including
competition,
general economic
conditions, and
federal economic
monetary and
fiscal policies,
and in particular,
the Federal
Reserve's
policy determinations with respect to interest rates.
During 2022
and 2023,
the Federal
Open Market
Committee of
the Federal
Reserve (the
“FOMC”) increased
certain
benchmark interest rates to reduce the rate of inflation to the extent
necessary to reduce inflation to the rate that the FOMC
believes is appropriate. Since March 2022, the FOMC has increased the federal funds rate by
500 basis points. All of these
increases were expressly made in response to inflationary pressures.
Recently the FOMC has paused increases in certain
benchmark interest rates and may consider decreases in such
benchmark rates at some point during 2024. However, there
can be no
assurances as to
any future FOMC
action, including whether
it decreases
the federal funds
rate or implements
further increases.
While an increase in
interest rates may increase
our weighted average
loan yield, it may
adversely affect the
ability of
certain borrowers
with variable rate
loans to pay
the contractual
interest and principal
due to us.
Following an
increase in
interest rates, our
ability to maintain
a positive net
interest spread is
dependent on our ability
to increase our
loan offering
rates, replace
loans that
mature and
repay or
that prepay
before maturity
with new
originations at
higher rates,
minimize
increases on
our deposit
rates, and maintain
an acceptable level
and composition of
funding. We cannot
provide assurances
that we will be
able to increase
our loan offering
rates and continue
to originate loans
due to the competitive
landscape in
which we operate. Additionally, we cannot provide
assurances that we can minimize
the increases in our
deposit rates while
maintaining
an
acceptable
level
of
deposits.
Due
to
competitive
pressures
in
2023,
we
increased
the
rates
paid
on
our
interest-bearing deposits such that
our weighted average cost
of deposits increased from
0.62% for 2022
to 3.04% for
2023.
Finally,
we
cannot
provide
any
assurances
that
we
can
maintain
our
current
levels
of
noninterest-bearing
deposits
as
customers may seek higher-yielding products due to the
increased interest rates being paid on deposits currently.
Accordingly,
changes
in
levels
of
interest
rates
could
materially
and
adversely
affect
our
net
interest
margin,
asset
quality, loan origination
volume, average loan portfolio balance, liquidity,
and overall profitability.
27
USCB Financial Holdings, Inc.
2023 10-K
A failure or the perceived
risk of a failure to raise
the statutory debt limit
of the U.S. in the future
could have a
material adverse effect on our business, financial
condition and results of operations
.
Ongoing
U.S.
debt
ceiling
and
budget
deficit
concerns
have
increased
the
possibility
of
additional
credit-rating
downgrades
and
economic
slowdowns,
or
a
recession
in
the
United
States.
Although
U.S.
lawmakers
have
passed
legislation
in the
past to
raise the
federal debt
ceiling
on multiple
occasions,
including
the most
recent
increase
in June
2023, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The
impact of this or any further
downgrades to the U.S. government’s
sovereign credit rating or its
perceived creditworthiness
could adversely affect the U.S. and global financial markets and economic conditions. Absent further quantitative easing by
the Federal
Reserve,
these
developments
could
cause
interest rates
and borrowing
costs
to rise,
which
may negatively
impact our
ability to
access
the debt
markets on
favorable terms.
In addition,
disagreement over
the federal
budget has
caused the U.S. federal government to shut down for periods of time. Continued adverse
political and economic conditions
could have a material adverse effect on our business,
financial condition and results of operations.
Our allowance for credit losses may not be sufficient
to absorb potential losses in our loan portfolio.
We
maintain
an
allowance
for
credit
losses
that
represents
management's
judgment
of
probable
losses
and
risks
inherent in our loan portfolio.
The level of the allowance
reflects management's continuing
evaluation of general economic
conditions,
present
political
and
regulatory
conditions,
diversification
and
seasoning
of
the
loan
portfolio,
historic
loss
experience, identified credit
problems, delinquency levels
and adequacy of
collateral. Determining the
appropriate level of
our
allowance
for
credit
losses
involves
a
degree
of
subjective
judgment
and
requires
management
to
make
significant
estimates of and assumptions regarding current credit risks
and future trends, all of which may undergo material changes.
Inaccurate
management
assumptions,
deterioration
of
economic
conditions
affecting
borrowers,
new
negative
information
regarding
existing
loans,
identification
of
additional
problem
loans
or deterioration
of existing
problem
loans,
and
other
factors
(including
third-party
review
and
analysis),
both
within
and
outside
of
our
control,
may
require
us
to
increase our allowance for
credit losses. In addition,
our regulators, as an
integral part of their
periodic examinations, review
our methodology for calculating, and
the adequacy of, our allowance
for credit losses and may
direct us to make additions
to the allowance
based on their
judgments about
information available to
them at the
time of their
examination. Further,
if
actual charge-offs in future
periods exceed the
amounts allocated to
our allowance for
credit losses, we
may need additional
provisions for credit losses to restore
the adequacy of our allowance for
credit losses. Finally, the measure of our allowance
for credit losses depends on the
adoption and interpretation of accounting
standards. The Financial Accounting
Standards
Board, or FASB, issued a new credit
impairment model, the Current Expected Credit Loss,
or CECL model, which became
applicable
to
us
on
January
1,
2023.
CECL
requires
financial
institutions
to
estimate
and
develop
a
provision
for
credit
losses over the lifetime of the loan at origination, as opposed to reserving for incurred or probable
losses up to the balance
sheet date. Under the CECL
model, expected credit deterioration
will be reflected in the
income statement in the
period of
origination or acquisition of a loan,
with changes in expected credit losses
due to further credit deterioration or
improvement
reflected in
the periods
in which
the expectation
changes. Accordingly,
implementation of
the CECL
model could
require
financial institutions, like us, to
increase our allowances for
credit losses from levels in place
prior to the implementation of
CECL. As a result of the initial implementation of CECL,
we incurred as of January 1, 2023 a $1.1
million cumulative effect
of the adoption
of CECL. Moreover,
the CECL model
may create more volatility
in our level
of allowance for
credit losses.
If we
are required
to materially
increase our
level of
allowance for
credit losses
for any
reason, such
increase could
adversely
affect our business, prospects, cash flow,
liquidity, financial
condition and results of operations.
Our commercial loan portfolio may expose us to increased
credit risk.
Commercial business
and real
estate loans
generally have
a higher
risk of
loss because
loan balances
are typically
larger
than
residential
real
estate
and
consumer
loans
and
repayment
is
usually
dependent
on
cash
flows
from
the
borrower’s business or the
property securing the loan. Our
commercial business loans are primarily made
to small business
and middle market customers. These loans typically
involve repayment that depends upon income
generated, or expected
to be generated, by the property securing the loan and/or
by the cash flow generated by the business borrower and
may be
adversely affected by changes in the economy or
local market conditions. These loans expose a
lender to the risk of having
to liquidate the collateral securing
these loans at times when
there may be significant fluctuation
of commercial real estate
values or to the
risk of inadequate cash flows to
service the commercial loans. Unexpected deterioration in
the credit quality
of our
commercial business
and/or real
estate loan
portfolio could
require us
to increase
our allowance
for credit
losses,
which would
reduce our
profitability and
could have
an adverse
effect on
our business,
financial condition,
and results
of
operations.
Commercial construction loans generally
have a higher risk of
loss due to the assumptions
used to estimate the value
of property
at completion
and the
cost of
the project,
including interest.
It can
be difficult
to accurately
evaluate the
total
28
USCB Financial Holdings, Inc.
2023 10-K
funds required
to complete
a project,
and construction
lending often
involves the
disbursement
of substantial
funds with
repayment dependent, in large part, on the success of the ultimate project rather than the ability of a borrower or guarantor
to repay the loan from sources other than the subject project. If the assumptions and estimates are inaccurate, the value of
completed property
may fall
below the
related loan
amount. If we
are forced to
foreclose on
a project
prior to
completion,
we may
be
unable
to
recover
the
entire
unpaid
portion
of the
loan,
which
would
lead
to
losses.
In
addition,
we
may
be
required to fund additional amounts to complete a project,
incur taxes, maintenance and compliance costs for
a foreclosed
property and
may have
to hold
the property
for an
indeterminate
period of
time, any
of which
could adversely
affect
our
business, prospects, cash flow,
liquidity, financial
condition and results of operations.
The imposition of
further limits by the
bank regulators on commercial
real estate lending activities
could curtail
our growth and adversely affect our earnings.
The FDIC, the Federal Reserve
and the Office of
the Comptroller of the
Currency have promulgated joint
guidance on
sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this
guidance,
a financial
institution
that,
like
us,
is actively
involved
in
commercial
real
estate
lending should
perform
a risk
assessment to identify
concentrations. Regulatory
guidance on concentrations
in commercial real
estate lending provides
that a bank’s commercial real estate lending exposure could
receive increased supervisory scrutiny where total commercial
real estate
loans, including
loans secured
by multi-family
residential
properties, owner-occupied
and nonowner-occupied
investor real estate, and
construction and land loans, represent 300%
or more of an
institution’s total risk-based capital, and
the outstanding balance of the commercial real estate loan portfolio has increased by
50% or more during the preceding 36
months.
At
December
31,
2023,
our
total
commercial
investor
real
estate
loans,
including
loans
secured
by
apartment
buildings, commercial real estate, and construction
and land loans represented 384% of the Bank’s
total risk-based capital
and the growth in the commercial real estate portfolio exceeded 50% over
the preceding 36 months. The particular focus of
the guidance is on exposure to commercial
real estate loans that are dependent
on the cash flow from the real estate
held
as collateral and that
are likely to be
at greater risk
to conditions in the
commercial real estate
market (as opposed
to real
estate collateral held as a secondary source of repayment
or as an abundance of caution). The purpose
of the guidance is
to guide institutions in developing risk management practices and capital
levels commensurate with the level and nature of
real estate
concentrations.
Management has
established a
commercial real
estate lending
framework
to monitor
specific
exposures and limits by
types within the commercial
real estate portfolio and
takes appropriate actions, as necessary. While
we believe
we have
implemented policies and
procedures with
respect to
our commercial
real estate
loan portfolio
consistent
with this
guidance, the
FDIC, the
Bank’s primary
federal regulator,
could require
us to
implement additional
policies and
procedures pursuant to their interpretation
of the guidance that may result
in additional costs to us. In addition,
If the FDIC
were to impose restrictions on the amount
of commercial real estate loans we can
hold in our portfolio, our earnings would
be adversely affected.
Our
SBA
lending
program
is dependent
upon
the
federal
government
and
our status
as
a participant
in the
SBA's Preferred
Lenders Program,
and we
face specific
risks associated
with originating
SBA loans
and selling
the guaranteed portion thereof.
We
have
been
approved
by
the
SBA
to
participate
in
the
SBA's
Preferred
Lenders
Program.
As
an
SBA
Preferred
Lender,
we enable
our clients
to obtain
SBA loans
without being
subject to
the potentially
lengthy SBA
approval process
necessary
for
lenders
that
are
not
SBA
Preferred
Lenders.
The
SBA
periodically
reviews
the
lending
operations
of
participating
lenders
to
assess,
among
other
things,
whether
the
lender
exhibits
prudent
risk
management.
When
weaknesses are identified, the SBA may request corrective actions
or impose enforcement actions, including revocation of
the lender's
Preferred Lender
status. If
we lose
our status
as an
SBA Preferred
Lender,
we may
lose some
or all
of our
customers to
lenders who
are SBA
Preferred Lenders,
which could
adversely affect
our business,
financial condition
and
results of operations.
We generally sell the guaranteed
portion of our SBA 7(a) loans
in the secondary market. These sales
have resulted in
both premium income for us
at the time of
sale and created a stream
of future servicing income. There
can be no assurance
that we will be able to continue originating these loans, that a secondary market for these loans will continue to exist or that
we will continue to realize
premiums upon the sale of
the guaranteed portion of
these loans. When we sell
the guaranteed
portion of our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on
the non-guaranteed portion of a loan, we share any loss
and recovery related to the loan pro-rata with the SBA.
The laws, regulations and
standard operating procedures
that are applicable to
SBA loan products may
change in the
future. We
cannot predict
the effects
of these
changes on
our business
and profitability.
Because government
regulation
greatly
affects
the
business
and
financial
results
of
all
commercial
banks
and
bank
holding
companies,
especially
our
organization, changes in the laws, regulations
and procedures applicable to SBA loans
could adversely affect our ability
to
operate profitably.
In addition, the
aggregate amount of
SBA 7(a) and 504
loan guarantees by the
SBA must be approved
each fiscal year by the federal
government. We cannot predict
the amount of SBA 7(a)
loan guarantees in any given fiscal
29
USCB Financial Holdings, Inc.
2023 10-K
year. If the federal government were to reduce the amount of SBA loan guarantees, such reduction
could adversely impact
our SBA lending
program, including making and
selling the guaranteed portion
of fewer SBA
7(a) and 504
loans. In addition,
any default by
the U.S. government
on its obligations
or any prolonged
government shutdown
could, among
other things,
impede our ability to originate
SBA loans or sell such loans
in the secondary market, which
could materially and adversely
affect our business, financial condition and results
of operations.
The SBA may not honor its guarantees if we do not originate
loans in compliance with SBA guidelines
.
SBA lending programs
typically guarantee
75.0% of the
principal on
an underlying
loan. If the
SBA establishes
that a
loss on
an
SBA guaranteed
loan
is attributable
to significant
technical
deficiencies
in the
manner
in which
the loan
was
originated,
funded
or serviced
by us,
the
SBA may
seek
recovery
of
the
principal
loss
related
to
the
deficiency
from
us
notwithstanding that a portion of the loan was
guaranteed by the SBA, which could adversely
affect our business, financial
condition and results of
operations. While we
follow the SBA's underwriting
guidelines, our ability to
do so depends on the
knowledge and diligence of our employees
and the effectiveness of controls
we have established. If our employees
do not
follow
the
SBA
guidelines
in
originating
loans
and
if
our
loan
review
and
audit
programs
fail
to
identify
and
rectify
such
failures, the
SBA may
reduce or,
in some
cases, refuse
to honor
its guarantee
obligations and
we may
incur losses
as a
result.
Global banking is an important part of our business, which
creates increased BSA/AML risk.
As our
business
model
includes
correspondent
services
to banks
in Latin
America
and the
Caribbean,
these
cross-
border
correspondent
banking
relationships
pose
unique
risks
because
they
create
situations
in
which
a
U.S.
financial
institution will be
handling funds from
a financial institution
in Latin America
and the Caribbean
whose customers may
not
be transparent to us. Moreover, many foreign financial institutions, including
in Latin America and the Caribbean where our
correspondent banking
services
are located,
are not
subject to
the same
or similar
regulatory
guidelines
as U.S.
banks.
Accordingly,
these
foreign
institutions
may
pose
higher
money
laundering
risk
to
their
respective
U.S.
bank
correspondent(s). Because
of the
large amount
of funds,
multiple transactions,
and our
potential lack
of familiarity
with a
foreign correspondent financial institution's customers, these customers may
be able to more
easily conceal the source and
use of
illicit funds.
Consequently,
we may
have a
higher
risk
of non-compliance
with the
BSA
and
other
AML rules
and
regulations
due
to
our
correspondent
banking
relationships
with
foreign
financial
institutions.
Additionally,
international
private banking
places additional
pressure on
our policies,
procedures and
systems for
complying with
the Bank
Secrecy
Act of 1970,
as amended, or BSA,
and other anti-money laundering,
or AML, statutes
and regulations as
well as the
recently
enacted Corporate
Transparency
Act. Our failure
to strictly
adhere to the
terms and requirements
of our OFAC
license or
our
failure
to
adequately
manage
our
BSA/AML
compliance
risk
in
light
of
our
correspondent
banking
relationship
with
foreign financial institutions and international private banking could result
in regulatory or other actions being taken against
us, which could significantly increase our compliance costs
and materially and adversely affect our results
of operations.
We may not recover all amounts that are contractually
owed to us by our borrowers.
We are
dependent on
the collection
of loan
principal, interest,
and fees
to partially
fund our
operations. A
shortfall in
collections and proceeds may impair our ability to fund
our operations or to repay our existing debt.
When
we
lend
funds,
commit
to
fund
a
loan
or
enter
into
a
letter
of
credit
or
other
credit-related
contract
with
a
counterparty, we incur credit risk. The
credit quality of our
portfolio can have a
significant impact on our
earnings. We expect
to experience charge-offs and delinquencies on our loans
in the future. Many borrowers have been negatively impacted by
the ongoing COVID-19 pandemic and
related economic consequences, and
may continue to be similarly or
more severely
affected in the future.
Our customers' actual operating
results may be worse than
our underwriting contemplated
when we
originated the loans, and in these circumstances, we could incur substantial impairment or loss of
the value on these loans.
We may fail to identify problems
because our customer did not
report them in a timely manner
or, even if the
customer did
report the problem, we may fail to address it quickly enough or at all, or some loans, due to market circumstances, may not
be able
to be
fully rehabilitated.
Even if
customers provide
us with
full and
accurate disclosure
of all
material information
concerning their businesses,
we may misinterpret
or incorrectly analyze
this information. Mistakes
may cause us
to make
loans that we otherwise
would not have made or
to fund advances that we otherwise
would not have funded, either
of which
could result in losses
on loans, or necessitate
that we significantly
increase our allowance
for loan and
lease losses. As
a
result, we could
suffer loan
losses and have
non-performing loans,
which could have
a material adverse
effect on our
net
earnings and results of operations and financial condition, to the extent the losses exceed our allowance for loan and lease
losses.
Some of our
loans are secured
by a lien
on specified collateral
of the borrower
and we may
not obtain or
properly perfect
our liens or the value of the collateral securing any particular loan may not be sufficient to protect us from suffering a partial
or complete
loss
if the
loan becomes
non-performing
and we
proceed to
foreclose
on or
repossess
the collateral.
With
30
USCB Financial Holdings, Inc.
2023 10-K
respect to loans that we originate for condominium or homeowners'
associations, these loans are primarily secured by and
rely upon the
cash flow received
by the Associations
from payments received
from their property
owners, as well
as cash
on hand.
These Associations
rely upon
payments received
from their
property owners
in order
to perform
on these
loans
and for
the
loan collateral.
Accordingly,
our ability
to recover
amounts
on non-performing
loans made
to Associations
is
dependent upon the
Association having sufficient cash on
hand for repayment of
the loan and/or having
the ability to impose
assessments on its property owners, some of whom may not have the ability to pay such assessments. In such events, we
could
suffer
loan
losses,
which
could
have
a
material
adverse
effect
on
our
net
earnings,
allowance
for
loan
and
lease
losses, financial condition, and results of operations.
Non-performing
assets
take
significant
time
to
resolve
and
adversely
affect
our
results
of
operations
and
financial condition, and could result in further losses in
the future.
Non-performing assets adversely
affect our net
income in
various ways. We
do not
record interest income
on nonaccrual
loans or other
real estate
owned (“OREO”),
thereby adversely
affecting our
net income
and returns on
assets and
equity,
increasing our loan administration costs and adversely
affecting our efficiency ratio. When
we take collateral in foreclosure
and similar proceedings, we are
required to mark the collateral to
its then-fair market value, which may
result in a loss. Non-
performing loans
and OREO
also increase our
risk profile
and the level
of capital
our regulators
believe is appropriate
for
us to
maintain in
light of
such risks.
The resolution
of non-performing
assets requires
significant time
commitments from
management and can
be detrimental to
the performance
of their other
responsibilities. If
we experience increases
in non-
performing
loans
and
non-performing
assets,
our
net
interest
income
may
be
negatively
impacted
and
our
loan
administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such
as return on assets and equity.
We engage in
lending secured by
real estate and
may foreclose on
the collateral and
own the underlying
real
estate,
subjecting
us
to
the
costs
and
potential
risks
associated
with
the
ownership
of
real
property,
including
exposure
to
environmental
liability,
or
consumer
protection
initiatives
or
changes
in
state
or
federal
law
may
substantially raise the cost of foreclosure or prevent
us from foreclosing at all.
Since we
originate
loans secured
by real
estate, we
may have
to foreclose
on the
collateral
property
to recover
our
investment and may thereafter own and operate such property,
in which case we would be exposed to the risks inherent in
the
ownership
of
real
estate.
The
amount
that
we,
as
a
mortgagee,
may
realize
after
a
foreclosure
depends
on
factors
outside of our
control, including,
but not limited
to, general or
local economic conditions,
environmental cleanup
liabilities,
various assessments
relating to
the ownership
of the property,
interest rates, real
estate tax rates,
operating expenses
of
the
mortgaged
properties,
our
ability
to
obtain
and
maintain
adequate
occupancy
of
the
properties,
zoning
laws,
governmental and
regulatory rules,
and natural disasters.
Our inability
to manage
the amount
of costs
or size
of the risks
associated with
the ownership
of real
estate, or
write-downs in
the value
of OREO,
could have
an adverse
effect on
our
business, financial condition, and results of operations.
Additionally,
consumer protection initiatives
or changes in state
or federal law may
substantially increase the time
and
expenses associated
with the
residential foreclosure
process or
prevent us
from foreclosing
at all.
A number
of states
in
recent
years
have
either
considered
or
adopted
foreclosure
reform
laws
that
make
it
substantially
more
difficult
and
expensive for
lenders to
foreclose on
residential properties
in default.
Furthermore, federal
regulators have
prosecuted a
number of
mortgage servicing
companies for
alleged consumer
law violations.
If new
state or
federal laws
or regulations
are ultimately enacted
that significantly raise
the cost of residential
foreclosures or raise
outright barriers, they
could have
an adverse effect on our business, financial condition,
and results of operations.
We are exposed to risk of environmental liability
when we take title to property.
A
significant
portion
of
our
loan
portfolio
is
secured
by
real
estate,
and
we
could
become
subject
to
environmental
liabilities with respect
to one or
more of these
properties, or with
respect to properties that
we own in
operating our business.
During the ordinary course of business,
we may foreclose on and take title to
properties securing defaulted loans. In
doing
so, there is
a risk that
hazardous or toxic
substances could
be found on
these properties. If
hazardous conditions
or toxic
substances are found
on these properties,
we may be
liable for remediation
costs, as well
as for personal
injury and property
damage, civil
fines and
criminal penalties
regardless
of when
the hazardous
conditions or
toxic substances
first affected
any particular property.
The costs associated with investigation or
remediation activities could be substantial.
In addition, if
we are the owner or former owner
of a contaminated site, we may be
subject to common law claims by
third parties based
on damages and
costs resulting
from environmental
contamination emanating
from the
property.
If we become
subject to
significant environmental liabilities, our business, financial condition
and results of operations could be adversely affecte
d.
31
USCB Financial Holdings, Inc.
2023 10-K
We
are
subject
to
certain
operational
risks,
including,
but
not
limited
to,
customer,
employee
or
third-party
fraud and data processing system failures and errors.
Employee errors and employee or
customer misconduct could subject us
to financial losses or
regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding unauthorized
activities from us, improper
or unauthorized activities on behalf of our customers or improper use of confidential information. It is not
always possible to
prevent employee
errors and
misconduct, and
the precautions we
take to
prevent and
detect this
activity may
not be
effective
in all cases. Employee errors could also subject us
to financial claims for negligence.
We have
implemented a
system of
internal controls
designed to
mitigate operational
risks, including
data processing
system failures
and errors
and customer
or employee
fraud, as
well as
insurance
coverage
designed to
protect us
from
material
losses
associated
with
these
risks,
including
losses
resulting
from
any
associated
business
interruption.
If
our
internal controls fail
to prevent or
detect an
occurrence, or if
any resulting loss
is not
insured or exceeds
applicable insurance
limits, it could adversely affect our business,
prospects, cash flow, liquidity,
financial condition and results of operations.
We
also
rely
on
the
integrity
and
security
of
a
variety
of
third
party
processors,
payment,
clearing
and
settlement
systems, as well
as the various
participants involved
in these systems,
many of which
have no direct
relationship with us.
Failure
by
these
participants
or
their
systems
to
protect
our
customers'
transaction
data
may
put
us
at
risk
for
possible
losses due
to fraud
or operational
disruption. At
the date
of this
Annual Report
Form 10-K,
there is
no knowledge or
indication
that customer
sensitive information
was compromised
as a
result of
third parties
system vulnerabilities,
but management
continues to monitor developments and vendor communications.
When we originate loans, we rely
heavily upon information supplied by third parties,
including the information contained
in credit
applications, property
appraisals, title
information, equipment
pricing and
valuation and
employment and
income
documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon
which
we
rely
is
misrepresented,
either
fraudulently
or
inadvertently,
and
the
misrepresentation
is
not
detected
prior
to
funding,
the value
of
the
loan may
be significantly
lower
than expected,
or we
may
fund a
loan that
we
would not
have
funded or
on terms
that do
not comply
with our
general underwriting
standards. Whether
a misrepresentation
is made
by
the applicant, the borrower,
one of our employees or another
third party,
we generally bear the risk of
loss associated with
the misrepresentation. A loan
subject to a material
misrepresentation is typically
unsellable or subject to
repurchase if it
is
sold prior to detection of the
misrepresentation. The sources of
the misrepresentations are often
difficult to locate, and
it is
often difficult
to recover
any
of the
resulting monetary
losses we
may suffer,
which
could
adversely
affect
our business,
financial condition and results of operations.
We
face
significant
operational
risks
because
the
nature
of
the
financial
services
business
involves
a
high
volume of transactions
.
We
operate
in
diverse
markets
and
rely
on
the
ability
of
our
employees
and
systems
to
process
a
high
number
of
transactions. Operational
risk is
the risk of
loss resulting from
our operations,
including but not
limited to, the
risk of fraud
by employees or
persons outside
the Company,
the execution
of unauthorized
transactions by
employees, errors
relating
to transaction
processing and technology, breaches of
our internal
control systems and
compliance requirements. Insurance
coverage may
not be available
for such
losses, or
where available, such
losses may
exceed insurance
limits. This
risk of
loss
also
includes
potential
legal
actions
that
could
arise
as
a
result
of
operational
deficiencies
or
as
a
result
of
non-
compliance with applicable regulatory standards,
adverse business decisions or their
implementation, or customer attrition
due to
potential adverse publicity. In the
event of a
breakdown in our
internal control systems,
improper operation of
systems
or improper employee actions, we could suffer financial
loss, face regulatory action, and/or suffer damage to
our reputation.
We have several
large depositor relationships,
the loss of which
could force us to
fund our business
through
more expensive and less stable sources.
Withdrawals of deposits by any
one of our largest depositors
could force us to
rely more heavily on more
expensive and
less stable funding sources.
Consequently,
the occurrence of any
of these events could
have a material adverse
effect on
our business, financial condition and results of operations.
Our securities portfolio performance in difficult market conditions could have adverse effects on
our results of
operations
.
Unrealized losses on
investment securities result from
changes in credit
spreads and liquidity
issues in the
marketplace,
along
with
changes
in
the
credit
profile
of
individual
securities
issuers.
Under
GAAP,
we
are
required
to
review
our
investment
portfolio
periodically
for
the
presence
of credit
losses
of
our securities,
taking
into consideration
current
and
future
market
conditions,
the
extent
and
nature
of
changes
in
fair
value,
issuer
rating
changes
and
trends,
volatility
of
32
USCB Financial Holdings, Inc.
2023 10-K
earnings, current
analysts’ evaluations,
our ability
and intent
to hold
investments until
a recovery
of fair
value, as
well as
other factors. Adverse developments with respect to one or more of
the foregoing factors may require us to deem particular
securities to be impaired, with the credit-related portion of
the reduction in the value recognized as a
charge to our earnings
through an allowance. Subsequent valuations,
in light of factors prevailing at that
time, may result in significant changes
in
the values of these securities in future periods.
Any of these factors could require us to
recognize further impairments in the
value of our securities portfolio, which may have an adverse
effect on our results of operations in future periods.
We may not
effectively execute
on our expansion
strategy, which
may adversely affect
our ability to
maintain
our historical growth and earnings trends.
Our
primary
expansion
strategy
focuses
on
organic
growth,
supplemented
by
potential
acquisitions
of
financial
institutions and
banking teams;
however,
we may
not be
able to
successfully execute
on these
aspects of
our expansion
strategy,
which
may
cause
our
future
growth
rate
to
decline
below
our
recent
historical
levels,
or
may
prevent
us
from
growing at
all. More
specifically,
we may
not be able
to generate
sufficient new
loans and
deposits within
acceptable risk
and
expense
tolerances
or
obtain
the
personnel
or
funding
necessary
for
additional
growth.
Various
factors,
such
as
economic conditions
and competition
with other financial
institutions, may impede
or restrict the
growth of our
operations.
Further, we may be unable to attract
and retain experienced bankers, which could
adversely affect our growth. The success
of our strategy also depends on our ability to manage our growth effectively,
which in turn depends on a number of factors,
including
our
ability
to
adapt
our
credit,
operational,
technology,
risk
management,
internal
controls
and
governance
infrastructure to accommodate expanded operations.
Even if we are successful in continuing our growth,
such growth may
not offer the same
levels of potential profitability,
and we may not
be successful in
controlling costs and maintaining
asset
quality in the
face of that
growth. Accordingly,
our inability
to maintain
growth or
to effectively
manage growth
could have
an adverse effect on our business, financial condition
and results of operations.
New lines of business, products, product enhancements
or services may subject us to additional risk.
From time to time, we
may implement new lines
of business or offer
new products and product
enhancements as well
as new
services within
our existing
lines of
business. There
are substantial
risks and
uncertainties associated
with these
efforts. In
developing, implementing
or marketing new
lines of business,
products, product
enhancements or
services, we
may invest significant time and
resources. We may underestimate the appropriate level
of resources or expertise
necessary
to
make
new
lines
of
business
or
products
successful
or
to
realize
their
expected
benefits.
We
may
not
achieve
the
milestones
set
in
initial
timetables
for
the
development
and
introduction
of
new
lines
of
business,
products,
product
enhancements or services, and price
and profitability targets may not
prove feasible. External factors, such
as compliance
with regulations, competitive
alternatives and shifting
market preferences, may
also impact the
ultimate implementation of
a new line of business or offerings of new products, product
enhancements or services. Any new line of business,
product,
product enhancement or service could have a significant impact on the effectiveness of our system of internal controls. We
may also
decide to
discontinue
businesses
or products,
due to
lack
of customer
acceptance
or unprofitability.
Failure to
successfully develop and implement new lines of business or offerings of new products, product enhancements or services
could have an adverse effect on our business, financial condition and results
of operations and could subject us to new and
unanticipated operational, credit, regulatory and reputational risks,
among other risks.
Our business
needs and
future growth
may require
us to
raise additional
capital and
that capital
may not
be
available on terms acceptable to us or may be dilutive to
existing shareholders.
We believe that we
have sufficient capital
to meet our capital
needs for our current
growth plans. However,
we expect
that we
will need
to raise
additional capital,
in the
form of
debt or
equity securities,
in the
future to
have sufficient
capital
resources
to
meet
our
longer-term
growth
plans,
and/or
if
the
quality
of
our
assets
or
earnings
were
to
deteriorate
significantly.
In addition, we
are required by federal
regulatory authorities to
maintain adequate levels
of capital to support
our operations.
Our ability
to raise
capital will
depend on,
among other
things, conditions
in the
capital markets,
which are
outside of
our control, and our financial performance. Accordingly,
we cannot provide assurance that such capital will
be available on
terms acceptable to us or at all. Any occurrence
that limits our access to capital may adversely
affect our capital costs and
our ability to raise capital. Further, if we need to raise capital in the future, we may have to do so when many other financial
institutions are also
seeking to
raise capital and
would then have
to compete with
those institutions for
investors. Any inability
to raise capital on acceptable terms when needed may cause us to
either issue additional shares of common stock or other
securities on less than
desirable terms or
reduce our rate of
growth until market conditions
become more favorable. If
any
of such
events occur, they could
have a material
adverse effect on
our business, financial
condition and results
of operations
and could be dilutive to both tangible book value and our
share price.
33
USCB Financial Holdings, Inc.
2023 10-K
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank
and to
commit
resources
to support
such subsidiary
bank. Under
the “source
of strength”
doctrine, the
Federal Reserve
may
require
a
holding
company
to
make
capital
injections
into
a
troubled
subsidiary
bank
and
may
charge
the
holding
company with
engaging
in unsafe
and unsound
practices
for failure
to commit
resources
to a
subsidiary
bank. A
capital
injection may be required
at times when the
holding company may
not have the resources
to provide it and
therefore may
be required to attempt to
borrow the funds or raise
capital. Thus, any borrowing that must
be done by the Company
to make
a required
capital injection becomes
more difficult and
expensive and
could have
an adverse
effect on our
business, financial
condition and results of operations.
Moreover, it is possible that we will be
unable to borrow funds or
otherwise raise capital
at a
time when
it is
needed. In
addition, an
inability to
raise capital
when needed
may subject
us to
increased regulatory
supervision and
the
imposition of
restrictions
on our
growth
and business.
These restrictions
could
negatively
affect
our
ability
to
operate
or
further
expand
our
operations
through
loan
growth,
acquisitions
or
the
establishment
of
additional
branches. These restrictions may also
result in increases in operating
expenses and reductions in revenues
that could have
a material adverse effect on our financial condition,
results of operations and our share price.
We may
grow through
mergers or
acquisitions,
a strategy
that may
not be
successful or,
if successful,
may
produce risks in successfully integrating and managing the merged companies or acquisitions and may dilute our
shareholders.
As
part
of
our
growth
strategy,
we
may
pursue
mergers
and
acquisitions
of
banks
and
non-bank
financial
services
companies within or outside our principal market areas that fit within the mission-driven values of our franchise and that we
believe support our business and make financial and strategic
sense. We may have difficulty identifying suitable acquisition
candidates or executing on acquisitions that we pursue, and we may
not realize the anticipated benefits of any transactions
we complete. Additionally,
for any opportunistic
acquisition we were
to consider,
we expect to
face significant
competition
from
numerous
other
financial
services
institutions,
many
of
which
will
have
greater
financial
resources
than
we
do.
Accordingly,
attractive opportunistic
acquisitions
may
not be
available to
us. There
can be
no assurance
that we
will
be
successful in identifying or completing any future acquisitions.
Mergers and acquisitions involve numerous risks, any
of which could harm our business, including:
•
the possibility that expected benefits
may not materialize in the
time frame expected or at
all, or may be more
costly
to achieve, or that the acquired business will not perform
to our expectations;
•
time,
expense
and
difficulties
in
integrating
the
operations,
management,
products
and
services,
technologies,
existing contracts, accounting processes
and personnel of the target
and realizing the anticipated synergies
of the
combined businesses;
•
incurring the
time and
expense associated with
identifying and
evaluating potential acquisitions
and merger
partners
and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our
existing business;
•
difficulties in supporting and transitioning customers
of the target and disruption of our ongoing banking
business;
•
the price we
pay or other
resources that we
devote may exceed
the value we
realize, or the
value we could
have
realized if we had allocated the purchase consideration
or other resources to another opportunity;
•
entering new markets or areas in which we have limited or
no experience;
•
the possibility that our culture is disrupted as a result of
an acquisition;
•
potential loss of key personnel and customers from either
our business or the target’s business;
•
assumption of unanticipated problems, claims or other liabilities
of the acquired business;
•
an inability to realize expected synergies or returns on
investment;
•
the possibility of regulatory approval for the acquisition being delayed,
impeded, restrictively conditioned, including
the requirement to divest
various activities, or denied
due to existing or
new regulatory issues surrounding
us, the
target institution or the proposed combined entity and
the possibility that any such issues associated with
the target
institution, of which
we may or
may not be
aware at the
time of the
acquisition, could adversely impact
the combined
entity after completion of the acquisition;
•
the possibility that the acquisition may not be timely completed,
if at all;
•
the need to raise capital; and
•
inability to generate sufficient revenue to offset
acquisition costs.
Any acquisition activities we engage in could require us to use a substantial amount of cash, other liquid assets, and/or
incur debt. Also, if
we finance acquisitions by issuing equity securities,
our existing shareholders’ ownership may be
diluted,
which
could
negatively
affect
the
market
price
of
our
Class
A
common
stock.
Additionally,
if
the
goodwill
recorded
in
connection with our potential future acquisitions were determined to be impaired, then we would be required to recognize a
charge against our earnings, which
could materially and adversely affect our
results of operations during the
period in which
the impairment was recognized. Acquisitions
may also involve the payment
of a premium over book
and market values and,
34
USCB Financial Holdings, Inc.
2023 10-K
therefore, some
dilution of
our tangible
book value
and net
income per
common share
may occur
in connection
with any
future transaction.
As a result, we
may not achieve the
anticipated benefits of
any such merger or
acquisition, and we
may incur costs
in
excess
of
what
we
anticipate.
Our
failure
to
successfully
evaluate
and
execute
mergers,
acquisitions
or
investments
or
otherwise adequately address and manage
the risks associated with
such transactions could have
a material adverse effect
on our business, results of operations and financial condition,
including short-term and long-term liquidity.
The loss of
one or more
of our key
personnel, or our
failure to attract
and retain other
highly qualified personnel
in the future, could harm our business.
Our future success will, to some extent, depend on the continued service of our directors, executive officers and senior
management
team.
The
loss
of
the
services
of
any
of
these
individuals
could
have
a
significant
adverse
effect
on
our
business.
In
particular,
we
believe
that
retaining
Luis
de
la
Aguilera,
our
President
and
Chief
Executive
Officer,
Robert
Anderson, our Chief Financial
Officer,
and William Turner,
our Chief Credit Officer,
is important to our continuing
success.
Although
we
have
entered
into
employment
and
other
agreements
with
certain
members
of
our
executive
and
senior
management team,
including Mr.
de la
Aguilera and
Mr.
Anderson, no
assurance can
be given
that these
individuals will
continue to be employed by us. The loss of any of these individuals could negatively affect our ability to achieve our growth
strategy and could have a material adverse effect
on our business and results of operations.
We also need to continue
to attract and retain other senior
management and to recruit qualified
individuals to succeed
existing
key
personnel
to
ensure
the continued
growth
and successful
operation
of our
business.
We
may
be unable
to
attract or
retain qualified
management
and other
key
personnel
in the
future due
to the
intense competition
for qualified
personnel
among
companies
in
the
financial
services
business
and
related
businesses.
The
loss
of
the
services
of any
senior management personnel, or the inability to recruit
and retain qualified personnel in the future, could
have an adverse
effect on our business, results of
operations, financial condition and prospects.
Additionally,
to attract and retain personnel
with appropriate skills and
knowledge to support our
business, we may offer
a variety of benefits, including
equity awards,
which may reduce our earnings or adversely affect our
business, results of operations, financial condition or prospects.
Damage to our reputation could significantly harm
our businesses.
Our ability to attract
and retain customers and
highly-skilled management and employees is impacted
by our reputation.
A negative public
opinion of us
and our business
can result from
any number of
activities, including our
lending practices,
corporate
governance
and
regulatory
compliance,
acquisitions,
customer
complaints
and
actions
taken
by
community
organizations in
response to
these activities.
Furthermore, negative
publicity regarding
us as
an employer
could have
an
adverse
impact on
our reputation,
especially
with respect
to
matters of
diversity,
pay equity
and workplace
harassment.
Significant
harm
to
our
reputation
could
also
arise
as
a
result
of
regulatory
or
governmental
actions,
litigation
and
the
activities of our customers, other
participants in the financial services
industry or our contractual counterparties, such
as our
service providers
and vendors.
The potential
harm
is heightened
given
increased attention
to how
corporations
address
environmental, social
and governance
issues. In
addition, a cybersecurity
event affecting
us or our
customers' data
could
have a negative
impact on our
reputation and
customer confidence
in us and
our cybersecurity
practices. Damage
to our
reputation could also
adversely affect
our credit ratings
and access to
the capital markets.
Additionally,
whereas negative
public opinion once was
primarily driven by adverse
news coverage in traditional
media, the widespread use
of social media
platforms by
virtually every
segment of
society facilitates
the rapid
dissemination
of information
or misinformation,
which
magnifies the potential harm to our reputation.
We
face
strong
competition
from
financial
services
companies
and
other
companies
that
offer
banking
services, which could materially and adversely affect
our business.
The financial
services industry has
become even
more competitive as
a result
of legislative,
regulatory and technological
changes and
continued
banking consolidation,
which
may increase
as a
result of
current economic,
market and
political
conditions. We
face substantial
competition
in all
phases
of our
operations
from
a variety
of competitors,
including local
banks,
regional
banks,
community
banks
and,
more
recently,
financial
technology,
or
"fintech"
companies.
Many
of
our
competitors offer the same banking services that
we offer and our success depends on
our ability to adapt our
products and
services
to
evolving
industry
standards
and
customer
requirements.
Increased
competition
in
our
market
may
result
in
reduced new
loan and
lease production
and/or decreased
deposit balances
or less
favorable terms
on loans
and leases
and/or deposit
accounts. We also
face competition
from many
other types
of financial
institutions, including
without limitation,
non-bank
specialty
lenders,
insurance
companies,
private
investment
funds,
investment
banks,
and
other
financial
intermediaries. Should competition in
the financial services industry
intensify, our ability to market our
products and services
may be adversely affected. If we are unable to attract and retain banking customers, we may be
unable to grow or maintain
35
USCB Financial Holdings, Inc.
2023 10-K
the levels
of our
loans and
deposits and
our results
of operations
and financial
condition may
be adversely
affected as
a
result. Ultimately, we
may not be able to compete successfully against current
and future competitors.
We must respond to rapid technological changes
to remain competitive.
We will
have to respond
to future
technological changes,
which are occurring
at a rapid
pace in the
financial services
industry.
We
expect
that
new
technologies
and
business
processes
applicable
to
the
banking
industry
will
continue
to
emerge, and these
new technologies and business
processes may be
better than those
we currently use. Because
the pace
of technological change
is high and our
industry is intensely
competitive, our future
success will depend,
in part, upon our
ability to address
the needs of
our customers by using
technology to provide products
and services that
will satisfy customer
demands for convenience,
as well as to
create additional efficiencies
in our operations.
We may not
be able to implement
new technology-driven products
and services effectively
or be successful
in marketing these
products and services
to our
customers. Failure to keep pace successfully with technological change affecting the financial services industry could harm
our
ability
to
compete
effectively
and
could
have
an
adverse
effect
on
our
business,
financial
condition
and
results
of
operations. As
these
technologies
improve
in the
future,
we may
be required
to make
significant
capital
expenditures
in
order to remain
competitive, which may increase
our overall expenses
and have an
adverse effect on our
business, financial
condition and results of operations.
We
continually
encounter
technological
change,
and
we
may
have
fewer
resources
than
many
of
our
competitors to invest in technological improvements.
The financial
services industry is
undergoing rapid technological
changes with frequent
introductions of new
technology-
driven products and
services. The effective use
of technology increases efficiency
and enables financial institutions
to better
serve customers and to reduce
costs. Our future success
will depend, in part, upon
our ability to address the
needs of our
clients by using technology to
provide products and services
that will satisfy client demands
for convenience, as well
as to
create additional
efficiencies in our operations. Many national vendors provide turn-key services to community banks, such
as internet banking and remote deposit capture that allow smaller banks to compete
with institutions that have substantially
greater resources
to invest
in technological
improvements.
We
may
not
be
able,
however,
to effectively
implement
new
technology-driven products and services or be successful
in marketing these products and services to our customers.
A
failure,
interruption,
or
breach
in
the
security
of
our
systems,
or
those
of
our
contracted
vendors,
could
disrupt
our
business,
result
in
the
disclosure
of
confidential
information,
damage
our
reputation,
and
create
significant financial and legal exposure.
Although we
devote significant
resources to maintain
and regularly update
our systems and
processes that are
designed
to
protect
the
security
of
our
computer
systems,
software,
networks
and
other
technology
assets,
as
well
as
the
confidentiality,
integrity and availability
of information belonging
to us and
our customers,
there is no
assurance that
all of
our
security
measures
will
provide
absolute
security.
Many
financial
institutions,
including
us,
have
been
subjected
to
attempts to infiltrate the security of their websites or other systems, some involving sophisticated targeted
attacks intended
to obtain
unauthorized access
to confidential
information, destroy
data, disrupt
or degrade
service, sabotage
systems or
cause other damage, including through the introduction of
computer viruses or malware, cyber-attacks and other means. At
this point,
although there
is no
knowledge or
indication that we
have experienced a
material cyber-incident or
security breach
that has been successful in compromising our
data or systems to date, we can
never be certain that all of our
systems are
entirely free from vulnerability to breaches of security or
other technological difficulties or failures.
Despite efforts to
ensure the integrity
and security of
our systems, it
is possible that
we may not
be able to
anticipate,
detect or recognize
threats to our
systems or to
implement effective
preventive measures
against all efforts
to breach our
security inside or outside our business, especially because the techniques used to attack our systems
change frequently or
are
not
recognized
until
launched,
and
because
cyber-attacks
can
originate
from
a
wide
variety
of
sources,
including
individuals or groups who are associated with
external service providers or who are or
may be involved in organized crime
or linked
to terrorist
organizations or
hostile foreign
governments. Those
parties may
also attempt
to fraudulently
induce
employees, customers, third-party service providers or other users of our systems to disclose sensitive information in order
to gain access
to our data or
that of our customers
or clients. Similar
to other companies,
our risks and exposures
related
to cybersecurity attacks have increased as
a result of the related increased
reliance on remote working (largely
as a result
of the COVID-19 pandemic)
and the increase in
digital operations. Such
risks and exposures
are expected to
remain high
for the foreseeable
future due
to the rapidly
evolving nature
and sophistication
of these
threats and
the expanding
use of
technology, as our web
-based product offerings grow and we expand
internal usage of web-based applications.
A successful
penetration
or
circumvention
of the
security
of our
systems,
including those
of our
third-party
vendors,
could
cause
serious
negative
consequences,
including
significant
disruption
of
our
operations,
misappropriation
of
confidential information,
or damage
to computers
or systems,
and may
result in violations
of applicable
privacy and
other
36
USCB Financial Holdings, Inc.
2023 10-K
laws, financial loss,
loss of confidence
in our security measures,
customer dissatisfaction, increased
insurance premiums,
significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on our business,
financial condition, results of operations, and future prospects.
We
rely
on
other
companies
to
provide
key
components
of
our
business
infrastructure
and
our
operations
could
be
interrupted
if
our
third-party
service
providers
experience
difficulty,
terminate
their
services
or
fail
to
comply with banking regulations.
Third parties
provide key
components of
our business
operations such
as data
processing, recording
and monitoring
transactions,
online
banking
interfaces
and services,
Internet
connections
and
network
access.
While
we
have
selected
these third-party
vendors carefully,
performing upfront
due diligence
and ongoing
monitoring activities,
we do
not control
their actions. Any problems caused by these third parties, including those resulting from disruptions in services provided by
a
vendor
(including
as
a
result
of
a
cyber-attack,
other
information
security
event
or
a
natural
disaster),
financial
or
operational difficulties
for the vendor,
issues at third-party
vendors to our
vendors, failure of
a vendor to
handle current or
higher volumes, failure of a vendor to provide services for
any reason, poor performance of services, failure to comply
with
applicable laws
and regulations,
or fraud
or misconduct
on the
part of
employees of
any of
our vendors,
could adversely
affect our ability
to deliver products
and services to
our customers, our
reputation and our
ability to conduct
our business,
which could
adversely affect
our business,
prospects, cash
flow,
liquidity,
financial condition
and results
of operations.
In
certain
situations,
replacing
these
third-party
vendors
could
also
create
significant
delay,
expense,
and
operational
difficulties, which
could also
adversely affect
our business.
Accordingly,
use of
such third
parties creates
an unavoidable
and inherent
risk to
our business
operations. Such
risk is
generally expected
to remain
elevated as
many of
our vendors
have also
been, and
may
further be,
affected
by increased
reliance
on remote
work
environments,
market
volatility
and
other factors
that increase
their risks
of business
disruption or
that may
otherwise affect
their ability
to perform
under the
terms of any agreements with us or provide essential services.
Our operations could be interrupted or
materially impacted if any of our
third-party service providers fail to comply
with
banking regulations
and other
applicable laws.
The Federal
Reserve, FDIC,
FOFR, and
other regulators
expect financial
institutions
to
be
responsible
for
all
aspects
of
their
performance,
including
aspects
that
they
delegate
to
third
parties.
Accordingly,
we will
be responsible
for deficiencies
in our
oversight and
control of
our third
party relationships
and in
the
performance of the parties with which
we have these relationships. As
a result, if our regulators conclude that
we have not
exercised adequate oversight and control over our third party vendors or
other ongoing third party business relationships or
that
such
third
parties
have
not
performed
appropriately,
we
could
be
subject
to
remedial
and/or
enforcement
actions,
including civil
money penalties
or other
administrative
or judicial
penalties or
fines
as well
as requirements
for customer
remediation, any of which could have a material adverse
effect our business, financial condition or results
of operations.
Litigation and regulatory actions,
including possible enforcement actions, could subject
us to significant fines,
penalties,
judgments
or
other
requirements
resulting
in
increased
expenses
or
restrictions
on
our
business
activities.
In the normal course of
business, from time to time, we
have in the past and
may in the future be
named as a defendant
in various
legal actions
arising in
connection with
our current
and/or prior
business
activities. Legal
actions could
include
claims for substantial compensatory and/or
punitive damages or claims for indeterminate
amounts of damages. Further,
in
the future
our
federal
and/or
state
bank
regulators
may
impose
consent
orders,
civil
money
penalties,
matters
requiring
attention, or similar types of
supervisory penalties or criticism. We may also,
from time to time, be
the subject of subpoenas,
requests
for
information,
reviews,
investigations
and
proceedings
(both
formal
and
informal)
by
governmental
agencies
regarding our
current
and/or prior
business
activities.
Any such
legal or
regulatory
actions may
subject
us to
substantial
compensatory
or
punitive
damages,
significant
fines,
penalties,
obligations
to
change
our
business
practices
or
other
requirements resulting
in increased
expenses, diminished
income and
damage to
our reputation.
Our involvement
in any
such matters,
whether tangential
or otherwise
and
even if
the matters
are ultimately
determined
in our
favor,
could also
cause significant harm to our
reputation and divert management attention away from
the operation of our business.
Further,
any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by
government
agencies
may
result
in
litigation,
investigations
or
proceedings
as
other
litigants
and
government
agencies
begin independent
reviews of
the same
activities. As
a result,
the outcome
of legal
and regulatory
actions could
have an
adverse effect on our business, results of operations
and results of operations.
Certain of
our directors may
have conflicts
of interest in
determining whether to
present business
opportunities
to us or another entity with which they are, or may
become, affiliated.
Certain of our
directors are or may
become subject to fiduciary
obligations in connection with
their service on the
boards
of
directors
of
other
corporations,
including
financial
institutions.
A
director's
association
with
other
financial
institutions,
which give rise to
fiduciary or contractual obligations to such other
institutions, may create conflicts of interest. To the extent
37
USCB Financial Holdings, Inc.
2023 10-K
that any of our directors
become aware of acquisition
opportunities that may be
suitable for entities other
than us to which
they have fiduciary or contractual obligations, or they are
presented with such opportunities in their capacities as fiduciaries
to such
entities, they
may honor
such obligations
to such
other entities.
You
should assume
that to
the extent
any of
our
directors become aware
of an opportunity
that may be
suitable both for
us and another
entity to which
such person has
a
fiduciary obligation
or contractual
obligation
to present
such
opportunity as
set forth
above,
he or
she may
first give
the
opportunity to such other entity
or entities and may give
such opportunity to us only
to the extent such other
entity or entities
reject
or
are
unable
to
pursue
such
opportunity.
In
addition,
you
should
assume
that
to
the
extent
any
of
our
directors
become
aware
of
an
acquisition
opportunity
that
does
not
fall
within
the
above
parameters,
but
that
may
otherwise
be
suitable for us, he or she may not present such opportunity
to us.
Pursuant to an agreement between us and each of our Significant Investors
(as defined below), each of the Significant
Investors has the right
to nominate one
director to serve
on our Board, including
Board committees, and
to designate one
non-voting Board
observer.
The directors
and Board
observers
designated by
the Significant
Investors have
the right
to,
and have
no duty
not to,
engage in
the same
or similar
business activities
or lines
of business
as us.
In the
event that
a
director or Board observer designated by a Significant Investor acquires knowledge of a potential transaction or matter that
may be
a corporate opportunity
for us,
such person shall
have no
duty to
communicate or
present such corporate
opportunity
to us
and shall
not be
liable to
us or
our shareholders
for breach
of any
duty by
reason of
the fact
that such
person or
a
related investment fund
thereof, directly or
indirectly, pursues or acquires such opportunity
for itself, directs
such opportunity
to another person, or does not present such opportunity
to us.
Risks Related to Our Tax,
Accounting and Regulatory Compliance
Our ability to recognize
the benefits of
our deferred tax
assets is dependent
on future cash flows
and taxable
income and may be materially impaired upon significant
changes in ownership of our common stock.
We recognize the expected future tax
benefit from deferred tax assets when
it is more likely than
not that the tax benefit
will be
realized. Otherwise,
a valuation
allowance
is applied
against our
deferred
tax assets,
reducing
the value
of such
assets. Assessing
the recoverability
of deferred
tax assets
requires management
to make significant
estimates related
to
expectations
of
future
taxable
income
from
all
sources,
including
reversal
of
taxable
temporary
differences,
forecasted
operating
earnings
and
available
tax
planning
strategies.
Estimates
of
future
taxable
income
are
based
on
forecasted
income from operations and the application of existing tax laws in each jurisdiction. The improved risk profile of the Bank is
a key
component used
in the determination
of our
ability to
realize the
expected future
benefit of
our deferred
tax assets.
To
the extent that future taxable income differs
significantly from estimates as a result
of the interest rate environment and
loan growth capabilities or other factors, our ability to realize
the net deferred tax assets could be negatively
affected.
Subject to certain exceptions, our Class A common stock is subject
to transfer restrictions as set forth in our Articles of
Incorporation that are
designed to preserve
our deferred tax
assets. Notwithstanding these
protective provisions, the
Articles
of Incorporation include
an exception that
allows our Significant
Investors the right
to effect any
transfer that would
otherwise
be prohibited, which transfer could result in the loss of the deferred
tax assets.
Additionally,
significant future
issuances of
common stock
or common
stock equivalents,
or changes
in the
direct or
indirect ownership
of our
common stock
or common
stock equivalents,
could cause
an ownership
change and
could limit
our ability to
utilize our net
operating loss carryforwards
and other tax
attributes pursuant
to Section 382
and Section 383
of the Internal Revenue Code.
Future changes in tax law or
changes in ownership structure could
limit our ability to utilize
our recorded net deferred tax assets.
The
accuracy
of
our
financial
statements
and
related
disclosures
could
be
affected
if
the
judgments,
assumptions or estimates used in our critical accounting
policies are inaccurate.
The
preparation
of
our
financial
statements
and
related
disclosures
in
conformity
with
GAAP
requires
us
to
make
judgments,
assumptions
and
estimates
that
affect
the
amounts
reported
in
our
consolidated
financial
statements
and
accompanying notes. In some cases, management
must select the accounting policy or method
to apply from two or more
alternatives,
any of
which
may be
reasonable
under
the circumstances,
yet
which
may result
in
our
reporting
materially
different
results
than
would
have
been
reported
under
a
different
alternative.
Certain
accounting
policies
are
critical
or
significant to presenting our financial
condition and results of
operations. Our critical accounting policies, which
are included
in the section captioned "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item
7 of this Annual Report
on Form 10-K, describe
those significant accounting
policies and methods used
in the preparation
of
our
consolidated
financial
statements
that
we
consider
critical
because
they
require
judgments,
assumptions
and
estimates that materially affect our consolidated financial statements and related disclosures. As a result, if
future events or
regulatory views concerning such analyses differ significantly from the judgments, assumptions and estimates in
our critical
accounting policies,
those events
or assumptions
could have
a material
impact on
our consolidated
financial statements
38
USCB Financial Holdings, Inc.
2023 10-K
and
related
disclosures,
in
each
case
resulting
in
our
need
to
revise
or
restate
prior
period
financial
statements,
cause
damage to our
reputation and
the price
of our Class
A common stock
and adversely affect
our business, prospects,
cash
flow, liquidity,
financial condition and results of operations.
As a new public
company, we may not efficiently or effectively create an
effective internal control environment,
and any
future failure
to maintain
effective internal
control over
financial reporting
could impair
the reliability
of
our financial
statements, which
in turn could
harm our business,
impair investor
confidence in the
accuracy and
completeness of
our financial
reports and
our access
to the
capital markets,
cause the
price of
our Class
A common
stock to decline and subject us to regulatory penalti
es.
Our management is responsible for establishing
and maintaining adequate internal control over financial
reporting and
for evaluating
and
reporting
on
that
system
of
internal
control.
Our
internal
control
over
financial
reporting
consists
of
a
process
designed
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial statements for external purposes in accordance with GAAP.
As a public company,
we are required to comply with
SEC regulations, including
the Sarbanes-Oxley Act
and other rules
that govern public
companies that we
previously were
not required to comply with
as a private company.
In particular,
we are required to certify
our compliance with Section
404
of the
Sarbanes-Oxley Act, which
requires us to
annually furnish
a report by
management on the
effectiveness of our
internal
control
over
financial
reporting.
When
evaluating
our
internal
controls
over
financial
reporting,
we
may
identify
material
weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance
with the requirements of Section 404 of the Sarbanes-Oxley Act. We periodically review our formal policies, processes and
practices related to financial reporting
and to the identification of
key financial reporting risks, assess
their potential impact
and the linkage of those risks to specific areas and controls
within our organization.
If we fail to achieve and maintain the adequacy of
our internal controls, as such standards are modified, supplemented,
or amended from time to
time, we may not
be able to ensure
that we will be able
to conclude on an ongoing
basis that we
have
effective
internal
controls
over
financial
reporting
in
accordance
with
Section
404
of
the
Sarbanes-Oxley
Act.
We
cannot be certain as to the timing of completion of our evaluation, testing,
and any remediation actions or the impact of the
same on our
operations. If
we fail to
adequately comply
with the requirements
of Section
404 of the
Sarbanes-Oxley Act,
we may be subject to adverse regulatory consequences and
there could be a negative reaction in the
financial markets due
to a loss of investor confidence in us and the
reliability of our financial statements. In addition,
we may be required to incur
costs in improving
our internal control
system and
hiring additional
personnel. Any
such action could
negatively affect
our
business, financial condition, results of operations, and the
price of our Class A common stock may decline.
While we remain an
emerging growth company or a
non-accelerated smaller reporting company, we will not be
required
to
include
an
attestation
report
on
internal
control
over
financial
reporting
issued
by
our
independent
registered
public
accounting firm.
To
prepare for
eventual compliance
with the auditor
attestation requirement
of Section
404 of
Sarbanes-
Oxley once we no
longer qualify as an
emerging growth company
or as a non-accelerated
smaller reporting company,
we
are engaged
in a process
to document
and evaluate
our internal
control over
financial reporting,
which is
both costly
and
challenging. In this regard, we will need to
dedicate internal resources, potentially engage
outside consultants and adopt a
detailed
work
plan
to
assess
and
document
the
adequacy
of
internal
control
over
financial
reporting,
continue
steps
to
improve control
processes as appropriate,
validate through testing
that controls are
functioning as documented
and continue
to refine our
reporting and improvement
process for
internal control over
financial reporting. Despite
our efforts,
there is a
risk that
we will
not be
able to
conclude, within
the prescribed
time frame
or at
all, that
our internal
control over
financial
reporting is effective as
required by Section 404
of Sarbanes-Oxley. If we identify one
or more material weaknesses,
it could
result in an adverse reaction in the financial markets due to a
loss of confidence in the reliability of our financial statements.
We
operate
in
a
highly
regulated
environment,
and
the
laws
and
regulations
that
govern
our
operations,
corporate governance,
executive compensation
and accounting
principles, or
changes in
them, or
our failure
to
comply with them, could adversely affect us.
We operate in a
highly regulated industry and
we are subject to
examination, supervision and comprehensive
regulation
by various federal and state agencies,
including the Federal Reserve, the
FDIC and the FOFR. As
such, we are subject to
extensive regulation, supervision and
legal requirements that govern almost
all aspects of our operations.
These laws and
regulations
are
not
intended
to
protect
our
shareholders.
Rather,
these
laws
and
regulations
are
intended
to
protect
customers, depositors, the Deposit Insurance Fund,
or DIF, and the overall financial health and
stability of the United
States
banking
system.
These
laws
and
regulations,
among
other
matters,
prescribe
minimum
capital
requirements,
impose
limitations on the
business activities
and investments
in which we
can engage, regulate
and restrict our
lending activities,
require us to provide certain banking services broadly within the communities in which we operate,
determine the locations
of our branch
offices and impose certain
specific accounting requirements on us
that may be more
restrictive and may result
in
greater
or
earlier
charges
to
earnings
or
reductions
in
our
capital
than
GAAP
would
require.
We
are
also
subject
to
capitalization
guidelines
established
by
our
regulators,
which
require
us
to
maintain
adequate
capital
to
support
our
39
USCB Financial Holdings, Inc.
2023 10-K
business.
Compliance
with
laws
and
regulations
can
be
difficult
and
costly,
and
changes
to
laws
and
regulations
often
impose additional operating costs. Further, we must obtain approval from our
regulators before engaging in many activities,
and
our
regulators
have
the
ability
to
compel
us
to,
or
restrict
us
from,
taking
certain
actions
entirely.
There
can
be
no
assurance that any regulatory approvals we may require
or otherwise seek will be obtained.
Regulations affecting
banks and
other financial
institutions are
undergoing continuous
review and
frequently change,
and the ultimate effect of such changes cannot be predicted. Changes to the legal and regulatory framework governing our
operations, including
the Dodd-Frank
Wall
Street Reform
and Consumer
Protection Act,
or the
Dodd-Frank
Act, and
the
Economic Growth, Regulatory Relief and Consumer
Protection Act, or the Regulatory Relief
Act, have significantly revised
the laws and regulations under which we operate. Such regulations and laws may be modified or repealed at any time, and
new legislation may be enacted that will affect us and
our subsidiaries.
Our failure to comply with these laws and regulations, even if the failure follows good faith effort
or reflects a difference
in
interpretation,
could
subject
us
to
restrictions
on
our
business
activities,
enforcement
actions
and
fines
and
other
penalties,
any
of
which
could
adversely
affect
our
results
of
operations,
regulatory
capital
levels
and
the
price
of
our
securities. Further, any new laws, rules and
regulations, such as were imposed
under the Dodd-Frank Act or
the Regulatory
Relief Act, could make
compliance more difficult
or expensive or otherwise
adversely affect our
business, prospects, cash
flow, liquidity,
financial condition and results of operations.
We
face
a
risk
of
noncompliance
with
the
Bank
Secrecy
Act
and
other
anti-money
laundering
statutes
and
regulations and corresponding enforcement proceedings.
The
federal
Bank
Secrecy
Act,
the
Uniting
and
Strengthening
America
by
Providing
Appropriate
Tools
Required
to
Intercept and
Obstruct Terrorism
Act of
2001, or
the USA
PATRIOT
Act, and
other laws
and regulations
require financial
institutions, among
other duties,
to institute
and maintain
effective anti-money
laundering programs
and to
file suspicious
activity and
currency transaction
reports, as
appropriate. The
federal Financial
Crimes Enforcement
Network, or
FinCEN,
established by the
U.S. Treasury
Department to
administer the
Bank Secrecy
Act, is authorized
to impose significant
civil
money penalties for
violations of those
requirements and has engaged
in coordinated enforcement efforts
with the individual
federal
banking
regulators,
as
well
as
the
U.S.
Department
of
Justice,
Drug
Enforcement
Administration
and
Internal
Revenue Service. Additionally,
South Florida has been designated as a “High Intensity Financial Crime Area” (“HIFCA”)
by
FinCEN and
a “High
Intensity Drug
Trafficking
Area” (“HIDTA”)
by the
Office of
National Drug
Control Policy.
The HIFCA
program is intended to concentrate law enforcement efforts
to combat money laundering efforts in higher-risk
areas. There
is also increased scrutiny of compliance with
the rules enforced by OFAC. Federal and state bank regulators have for many
years
focused
on
compliance
with
Bank
Secrecy
Act
and
anti-money
laundering
regulations.
In
order
to
comply
with
regulations, guidelines and examination procedures in this area, we have
dedicated significant resources
to our anti-money
laundering program, especially
due to the regulatory
focus on financial
and other institutions
located in South
Florida. Our
business
includes
supporting
our
customers,
including
foreign
financial
institutions,
with
respect
to
their
international
banking
needs
and
our policies,
procedures
and
systems
have
been
designed
to
address
federal
and
state
anti-money
laundering
compliance.
If
our
policies,
procedures
and
systems
are
deemed
deficient
or
the
policies,
procedures
and
systems of the
financial institutions that
we may acquire
are deficient, we
would be subject
to liability,
including fines, and
regulatory actions that are
deemed necessary in order
to remediate such deficiencies
and prevent the recurrence
thereof.
In recent years, sanctions that the regulators have
imposed on banks that have not complied with
all anti-money laundering
requirements
have
been
especially
severe.
Failure
to
maintain
and
implement
adequate
programs
to
combat
money
laundering and
terrorist financing
could also
have serious
reputational consequences
for us,
which could
have a
material
adverse effect on our business, financial condition
and results of operations.
We
are
subject
to
capital
adequacy
requirements
and
may
become
subject
to
more
stringent
capital
requirements, which could adversely affect our
financial condition and operations.
In
2013,
the
federal
banking
agencies
published
new
regulatory
capital
rules
based
on
the
international
standards,
known as
Basel III,
that were
developed by
the Basel
Committee on
Banking Supervision.
The new
rules raised
the risk-
based capital
requirements
and revised
the
methods for
calculating
risk-weighted
assets, usually
resulting
in higher
risk
weights. The new rules now apply to us.
The Basel III rules increased
capital requirements and included
two new capital measurements,
a risk-based common
equity Tier 1 ratio
and a capital conservation buffer.
Common Equity Tier
1 (CET1) capital is a subset
of Tier 1 capital
and
is limited to common
equity (plus related surplus), retained earnings,
accumulated other comprehensive income and certain
other
items.
Other
instruments
that
have
historically
qualified
for
Tier
1
treatment,
including
noncumulative
perpetual
preferred stock,
are consigned
to a
category known
as Additional
Tier
1 capital
and must
be phased
out of
CETI over
a
period of
nine years
beginning in
2014. In
order to
be a
“well-capitalized” depository
institution under
the new
regime, an
institution must maintain a
CET1 capital ratio of 7.0%
or more; a Tier
1 capital ratio of 8.5%
or more; a total capital
ratio of
40
USCB Financial Holdings, Inc.
2023 10-K
10.5% or more; and a leverage ratio of 4% or more.
Institutions must also maintain a capital conservation
buffer consisting
of common equity
Tier 1
capital. In addition
to the higher
required capital ratios
and the new
deductions and adjustments,
the final
rules increased
the risk
weights for
certain assets,
meaning that
we will
have to
hold more
capital against
these
assets. We are also be required to hold capital against
short-term commitments that are not unconditionally cancellable.
While we currently meet these new
requirements of the Basel III-based capital requirements, we
may fail to do so
in the
future. The failure
to meet applicable
regulatory capital
requirements could result
in one or
more of our
regulators placing
limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities,
and could affect customer and investor confidence, our costs of funds and level of required deposit insurance
assessments
to the FDIC,
our ability to
pay dividends on
our capital stock,
our ability to
make acquisitions, and
our business, results
of
operations and financial condition, generally.
In addition,
in the
current economic
and regulatory
environment, including
the COVID-19
pandemic, bank
regulators
may
impose
capital
requirements
that
are
more
stringent
than
those
required
by
applicable
existing
regulations.
The
application of more stringent capital requirements for
us could, among other things, result
in lower returns on equity, require
the raising of additional
capital, and result
in regulatory actions if
we were to be
unable to comply with
such requirements.
Implementation
of
changes
to
asset
risk
weightings
for
risk-based
capital
calculations,
items
included
or
deducted
in
calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business
strategy and could limit our ability to make distributions,
including paying dividends.
We are periodically subject
to examination and
scrutiny by a
number of banking agencies
and, depending upon
the findings and determinations
of these agencies, we may
be required to make adjustments
to our business that
could adversely affect us.
As part of
the bank regulatory process,
the Federal Reserve, the
FDIC and the FOFR
periodically conduct examinations
of our business,
including compliance
with applicable
laws and regulations.
If, as a
result of an
examination, one
of these
banking
agencies
were
to
determine
that
the
financial
condition,
capital
resources,
asset
quality,
asset
concentration,
earnings prospects, management, liquidity sensitivity
to market risk, risk
management and internal controls
or other aspects
of any of our operations has become unsatisfactory, or that we or our management are in violation of any law or regulation,
the banking
agency could
take a
number of
different remedial
or punitive
actions as
it deems
appropriate. These
actions
include the power to prohibit the continuation
of "unsafe or unsound" practices, to require
affirmative actions to correct any
conditions
resulting
from
any
violation
or practice,
to
issue an
administrative
order
or enforcement
that
can
be judicially
enforced, to direct an increase
in our capital, to restrict our
growth, to change the asset composition
of our loan or securities
portfolios
or
balance
sheet,
to
assess
civil
monetary
penalties
against
our
officers
or
directors,
to
remove
officers
and
directors and, if
it is concluded
that such conditions
cannot be corrected
or there is
an imminent risk
of loss to
depositors,
to
terminate
our
deposit
insurance
and
force
us
to
terminate
our
business
operations.
If
we
become
subject
to
such
regulatory actions, our business, financial condition, result
s
of operations and reputation may be negatively impacted.
We
are
subject
to
numerous
laws
and
regulations
of
certain
regulatory
agencies
designed
to
protect
consumers, including the Community Reinvestment
Act, or CRA, and fair lending laws, and failure
to comply with
these laws could lead to a wide variety of sanctions.
The CRA directs all insured depository institutions to help meet the credit needs of the local communities
in which they
operate
branches,
including
low-
and
moderate-income
neighborhoods.
Each
institution
is
examined
periodically
by
its
primary federal
regulator,
which assesses
the institution’s
CRA performance.
The Equal
Credit Opportunity
Act, the
Fair
Housing
Act
and
other
fair
lending
laws
and
regulations
impose
nondiscriminatory
lending
requirements
on
financial
institutions. The U.S. Department of Justice, the Federal Reserve, and other federal agencies are responsible for enforcing
these laws and regulations. A successful regulatory challenge to our performance under the CRA, fair lending or consumer
lending
laws
and
regulations
could
result
in
a
wide
variety
of
sanctions,
including
damages
and
civil
money
penalties,
injunctive
relief,
customer
restitution,
restrictions
on
mergers
and
acquisitions
activity,
restrictions
on
expansion,
and
restrictions
on
entering
new
business
lines.
Private
parties
may
also
have
the
ability
to
challenge
an
institution’s
performance
under
fair
lending
laws
in
private
class
action
litigation.
Such
actions
could
have
an
adverse
effect
on
our
business, financial condition and results of operations.
Climate change and related legislative and regulatory initiatives may materially affect our business and results
of operations.
The effects
of climate change
continue to create
a significant level
of concern
for the state
of the global
environment.
As a result, the global business community has increased
its political and social awareness surrounding the issue,
and the
United States
has entered
into international
agreements in
an attempt
to reduce
global temperatures,
such as
reentering
the Paris Agreement.
Further,
the U.S. Congress,
state legislatures and
federal and state
regulatory agencies
continue to
41
USCB Financial Holdings, Inc.
2023 10-K
propose numerous
initiatives to
supplement the
global effort
to combat
climate change,
including provisions
contained in
the
Inflation
Reduction
Act
of
2022.
Similar
and
even
more
expansive
initiatives
are
expected
under
the
current
administration, including potentially increasing supervisory
expectations with respect to banks’ risk management practices,
accounting for
the effects of
climate change in
stress testing
scenarios and systemic
risk assessments, revising
expectations
for credit portfolio concentrations based on climate-related factors
and encouraging investment by banks in climate-related
initiatives and
lending to
communities disproportionately
impacted by
the effects
of climate
change. The
lack of
empirical
data surrounding the
credit and other
financial risks posed
by climate change
render it difficult, or
even impossible, to
predict
how climate change
may impact our
financial condition
and results of
operations; however,
the physical
effects of
climate
change may also directly impact us. Specifically, unpredictable and more frequent weather disasters may adversely impact
the real property, and/or the
value of the
real property, securing the loans
in our portfolios.
Additionally, if insurance obtained
by
our
borrowers
is
insufficient
to
cover
any
losses
sustained
to
the
collateral,
or
if
insurance
coverage
is
otherwise
unavailable
to
our
borrowers,
the
collateral
securing
our
loans
may
be
negatively
impacted
by
climate
change,
natural
disasters and
related events,
which could
impact our
financial condition
and results
of operations.
Further,
the effects
of
climate change may negatively impact
regional and local economic activity, which could adversely affect our
customers and
the communities in which
we operate. Overall,
climate change, its
effects and the
resulting, unknown impact
could have a
material adverse effect on our financial condition
and results of operations.
Risks Related to Our Class A Common Stock
Our ability to pay dividends is subject to restrictions.
Holders of our Class A common stock
are only entitled to receive cash dividends when, as
and if declared by our Board
out of funds
legally available
for dividends.
The Company
is a bank
holding company
that conducts
substantially all
of its
operations through the Bank,
which is a legal entity
separate and distinct from
the Company.
As a result, our ability
to pay
dividends
on
our
common
stock
will substantially
depend
upon
the
receipt
of
dividends
and
other
distributions
from
the
Bank,
the
profitability
of
which
is
subject
to
the
fluctuating
cost
and
availability
of
money,
changes
in
interest
rates
and
economic conditions in general. There
are numerous laws and banking
regulations and guidance that limit
the Bank's ability
to pay dividends to us and our ability to pay dividends on our
common stock.
The market price and trading volume of our Class A
common stock may be volatile, which could result in rapid
and substantial losses for our shareholders.
The market
price
of
our
Class
A common
stock
may
be highly
volatile
and
could
be
subject
to
wide
fluctuations.
In
addition, the trading volume on
our Class A common stock may
fluctuate and cause significant price variations to
occur. We
cannot assure you that the market price of our Class A common stock will not fluctuate or decline significantly in the future.
Some, but
certainly not
all, of
the factors
that could
negatively affect
the price
of our
Class A
common stock,
or result
in
fluctuations in the price or trading volume of our Class
A common stock, include but not limited to:
•
general market conditions;
•
domestic and international economic factors unrelated
to our performance;
•
variations in our quarterly operating results or failure to
meet the market’s earnings expectations;
•
publication of research reports about us or the financial services
industry in general;
•
the determination of securities analysts to not cover our
Class A common stock;
•
the opinion of securities analysts about our stock as an investment;
•
additions to or departures of our key personnel;
•
future sales of our Class A common stock;
•
adverse market reactions to any indebtedness we may
incur or securities we may issue in the future;
•
actions by our shareholders;
•
the operating and securities price performance of companies
that investors consider to be comparable to us;
•
changes or proposed changes in laws or regulations affecting
our business; and
•
actual or potential litigation and governmental investigations.
In
addition,
if
the
market
for
stocks
in
our
industry,
or
the
stock
market
in
general,
experiences
a
loss
of
investor
confidence, the
trading price
of the
Class A
common stock
could decline
for reasons
unrelated to
our business,
financial
condition or results of operations.
If any of the foregoing occurs,
it could cause our Class A common
stock price to fall and
may expose us to lawsuits that, even if unsuccessful, could
be costly to defend and a distraction to management.
42
USCB Financial Holdings, Inc.
2023 10-K
There are significant restrictions in our Articles of Incorporation that restrict the
ability to sell our capital stock
to shareholders that would own 4.95% or more of our stock,
excluding our Significant Investors.
Because the
continued availability
of our
"deferred tax
assets" depends,
in part,
on the
value of
our stock
owned by
shareholders owning
5% or more
of our stock,
our Articles of
Incorporation, except
as otherwise may
be approved by
the
Board
or
except
for
transfers
by
our
Significant
Investors,
prohibits
any
direct
or
indirect
transfer
of
stock
or
options
to
acquire stock to any
person who, as a
result of the transfer, would own 4.95%
or more of our
stock, as long as the
Company
continues to have "deferred tax assets." Such restrictions may
limit the ability to transfer our stock.
Because
we
are
an
emerging
growth
company
and
because
we
have
decided
to
take
advantage
of
certain
exemptions from
various reporting
and other
requirements applicable
to emerging
growth companies,
our Class
A common stock could be less attractive to investors.
We are
an “emerging
growth company,”
as defined
in the
JOBS Act.
For as
long as
we remain
an emerging
growth
company,
we will
have the
option to take
advantage of
certain exemptions
from various
reporting and
other requirements
that are applicable to other public companies that are not
emerging growth companies, including:
•
we
may
present
only
two
years
of
audited
financial
statements
and
only
two
years
of
related
management’s
discussion and analysis of financial condition and results
of operations
•
we
are
exempt
from
the
requirements
to
obtain
an
attestation
and
report
from
our
auditors
on
management’s
assessment of our internal control over financial reporting
under the Sarbanes-Oxley Act;
•
we are permitted to have less extensive disclosure about our
executive compensation arrangements; and
•
we
are
not
required
to
give
our
shareholders
non-binding
advisory
votes
on
executive
compensation
or
golden
parachute arrangements.
We may
continue to
take advantage
of some
or all
of the
reduced regulatory
and reporting
requirements that
will be
available to
us as
long as
we continue
to
qualify
as an
emerging
growth
company.
We
will remain
an emerging
growth
company until the
earliest to occur
of (i) the
last day of
the first fiscal
year in which
our annual gross
revenues exceed $1.235
billion, (ii) the date that the market value of our Class A common
stock that is held by non-affiliates exceeds $700 million as
of the last business day
in June of that year,
(iii) the date on which
we have, during the
previous three-year period, issued
more than $1 billion in non-convertible debt,
or (iv) the end of fiscal year following the fifth
anniversary of the completion of
our IPO (which will be December 31, 2026).
It is possible
that some
investors may
find our Class
A common stock
less attractive
since we chose
to rely
on these
exemptions. If some investors find our Class A common
stock less attractive, there may be a less
active trading market for
our Class A common stock and our stock price may be
more volatile.
Because we have elected
to use the extended
transition period for complying
with new or revised
accounting
standards for an “emerging growth company,” our financial statements may not be comparable to companies that
comply with these accounting standards as of the
public company effective dates.
As an emerging
growth company,
we elected to
use the extended
transition period
for complying
with new
or revised
accounting standards under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or
revised accounting standards
that have different
effective dates for
public and private
companies until those
standards apply
to private companies. As a
result of this election, our
financial statements may not be
comparable to companies that comply
with these
accounting standards
as of
the public
company effective
dates. Because
our financial
statements
may not
be
comparable
to
companies
that
comply
with
public
company
effective
dates,
investors
may
have
difficulty
evaluating
or
comparing our
business, performance
or prospects
in comparison to
other public
companies, which
may have a
negative
impact on the value and liquidity of our Class A common stock. We cannot predict if investors will find our Class A common
stock
less
attractive
because
we
have
relied
on
this
exemption.
If
some
investors
find
our
Class
A
common
stock
less
attractive as a result, there
may be a less active trading
market for our Class A common
stock and our stock price
may be
more volatile.
We have existing investors that own
a significant amount of our
common stock whose individual interests may
differ from yours.
A significant percentage of our Class A common stock is currently held by a few institutional investors, including Patriot
Financial Partners II,
L.P.
and Patriot Financial
Partners Parallel II, L.P.
(collectively,
"Patriot"), and Priam
Capital Fund II,
LP
("Priam,"
and
together
with
Patriot,
the
"Significant
Investors").
As
of
February
29,
2024
Patriot
and
Priam
own
approximately 22.82% and 22.83%,
respectively,
of our outstanding Class A
common stock. In addition,
Patriot and Priam
are each entitled to nominate a director to our Board and have certain subscription rights to purchase new equity securities
43
USCB Financial Holdings, Inc.
2023 10-K
that we issue
in the future,
in each case
as long as
certain equity ownership
criteria are met.
Patriot and Priam
also have
certain
registration
rights,
including
demand
registration
rights,
and
information
rights.
Although
Patriot
and
Priam
are
independent of each other, these institutional investors will continue to have a significant level of influence over us
because
of their level of
Class A common
stock ownership and
their right to representation
on our Board. For
example, Patriot and
Priam will have a greater ability than our other shareholders to influence the election of directors and the potential outcome
of other matters submitted
to a vote of
our shareholders, including mergers and
other acquisition transactions, amendments
to our
amended Articles
of Incorporation
and Amended
and Restated
Bylaws, and
other extraordinary
corporate matters.
The interests of these investors
could conflict with the interests of our
other shareholders, and any future transfer
by these
investors of their shares
of Class A
common stock to other
investors who have different
business objectives could adversely
affect our business, results of operations, financial condition,
prospects or the market value of our Class A common
stock.
Provisions
in
our
governing
documents
and
Florida
law
may
have
an
anti-takeover
effect
and
there
are
substantial regulatory limitations on changes of control
of the Company.
Our corporate organizational documents and provisions of federal
and state law to which we
are subject contain certain
provisions that could
have an anti-takeover
effect and
may delay,
make more difficult
or prevent an
attempted acquisition
that you may favor or an attempted replacement of our
Board or management.
Our governing documents include provisions that:
•
empower our Board, without shareholder approval, to issue shares of preferred stock, the terms of
which, including
voting power, are set by our
Board;
•
provide that directors may be removed from office only for cause and only upon a majority vote
of the shares of our
Company with voting power;
•
prohibit holders of our Class A common stock to take action
by written consent in lieu of a shareholder meeting;
•
require holders of at least 10% of our Class A common
stock to call a special meeting;
•
do not provide for cumulative voting in elections of our
directors;
•
provide that
our Board
has the
authority to amend
our Amended
and Restated Bylaws
without shareholder approval;
•
require shareholders that wish to bring business before annual or special meetings of shareholders, or to nominate
candidates for election as directors at our annual meeting of shareholders, to provide
timely notice of their intent in
writing and satisfy disclosure requirements; and
•
enable our Board to increase, between
annual meetings, the number of
persons serving as directors and
to fill the
vacancies created
as a
result of
the increase until
the next
meeting of
shareholders by a
majority vote
of the
directors
present at a meeting of directors.
In addition,
certain provisions
of Florida
law may
delay,
discourage, or
prevent an
attempted acquisition
or change
in
control. Furthermore,
banking laws
impose notice,
approval, and
ongoing regulatory
requirements on
any shareholder
or
other party that seeks to acquire direct or indirect "control" of a
bank holding company,
which includes the Change in Bank
Control Act
and the
Bank Holding
Company Act.
These laws
could delay
or prevent
an acquisition.
Also, for
preservation
and continued
availability of
our "deferred
tax assets,"
our Articles of
Incorporation prohibits
any direct or
indirect transfer
of stock or options
to acquire stock
to any person
who, as a
result of the
transfer,
would own 4.95%
or more of
our stock,
as long as we continue
to have "deferred tax
assets," subject to limited
exceptions as provided in
our amended Articles
of
Incorporation.
Because
of
the
requirements
to
overcome
this
restriction,
this
provision
of
the
amended
Articles
of
Incorporation could
have an
anti-takeover effect
and
may delay,
make more
difficult
or prevent
an attempted
acquisition
that you may favor.
44
USCB Financial Holdings, Inc.
2023 10-K
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy Overview
Customers
depend
on
the
Company
to
properly
protect
nonpublic
personal
information
gathered
and
stored
in
connection with the services we provide. The Company realizes that cyber incidents can have financial, reputational,
legal,
and operational impacts that can
significantly adversely affect our customers, capital, and
earnings. Therefore, we integrate
cybersecurity processes throughout the Company as part of our enterprise-wide governance process. Regulatory agencies
are
charged
with
ensuring
the
Company’s
cybersecurity
controls
and
procedures
are
compliant
with
the
intent
of
the
cybersecurity
expectations
set
forth
by
the
Federal
Financial
Institutions
Examination
Council
(“FFIEC”).
The
FFIEC
framework offers a set of guidelines
and best practices to help
financial institutions manage and mitigate cybersecurity risks
effectively.
It focuses on ensuring the confidentiality,
integrity, and availability
of sensitive information and systems.
The Information
Security Officer
(“ISO”) is
an integral
member of
the Risk
Management and
Compliance Department
(“RMCD”) of
the Bank
and who
provides expert
counsel on
matters of
cybersecurity and
presents periodic
reports to
the
Risk Committee of our Board of Directors.
As part
of the
program, periodic
risk assessments
are performed
to determine
the Company’s
inherent and
residual
cybersecurity risk, the
maturity level of the program,
the risk of cyber
threats, and the effectiveness
of controls currently
in
practice. The
Company utilizes
the National
Institute of
Standards and
Technology
(“NIST”) Framework
and the
FFIEC’s
Cybersecurity Assessment Tool
to help management identify its risks and determine the Company’s cybersecurity posture.
Through
the
implementation
of
rigorous
procedures
and
controls,
augmented
by
ongoing
training
initiatives
for
both
management
and
staff,
the
institution
cultivates
a
safe
cybersecurity
environment.
This
approach
encompasses
diverse
methodologies
including
defense-in-depth
and
proactive
security
awareness
training
aimed
at
fortifying
the
institutions
cybersecurity controls and fostering a resilient operational
framework.
Assessment and Response to Cybersecurity Threats
It is the policy of
the Company and its
technology service providers
(“TSPs”) to ensure
they can identify,
mitigate, and
respond to
cyber-attacks involving destructive
malware and invasive
attacks such
as phishing,
ransomware, malware, DDoS
attacks, etc. This commitment aligns
with the Company’s risk
appetite, Incident Response Policy,
and Business Continuity
Plan, which incorporates business continuity planning and testing activities to enhance response and recovery capabilities.
The Company
realizes that it
faces a
variety of
risks from cyber-attacks
involving destructive malware,
including liquidity,
capital, operational,
and reputation
risks, due
to events
such as
fraud, data
loss, and
disruption of
customer
service. As
such, it
is the
policy of
the Company
to ensure
that its
risk management
processes, and
business continuity
planning address
these risks by:
●
Establishing
a
comprehensive
governance
program
encompassing
policies
and
procedures
to
administer
and
oversee
the
information/cybersecurity
programs
to
ensure
adherence
to
regulatory
guidance
and
industry
best
practices.
●
Securely configuring systems and services to mitigate the impact of cyberattacks.
This includes measures such as
logical
network
segmentation,
hard
backups,
maintaining
an
inventory
of
authorized
devices
and
software,
and
physical
segmentation
of
critical
systems.
Consistency
in
system
configuration
fosters
a
secure
network
environment by removing or disabling unused applications, functions,
or components.
●
Implementing and testing
controls around critical
systems on a regular
basis to ensure appropriate
access control
and segregation of duties. Limits on sign-on attempts
for critical systems are enforced, with accounts
being locked
upon
threshold
exceedance.
Alert
systems
notify
of
baseline
control
changes
on
critical
systems,
with
the
effectiveness and
adequacy of controls
periodically tested
and the results
reported to
Senior Management
and, if
applicable,
the
Risk
Committee,
along
with
recommended
risk
mitigation
strategies
and
progress
to
remediate
findings.
●
Performing security
monitoring, prevention,
and risk
mitigation activities
to ensure
the effectiveness
of protection
and detection systems.
This includes maintaining
up-to-date intrusion detection
systems, antivirus protection,
and
properly configured firewall
rules. Systems are
monitored to identify,
prevent, and contain
attack attempts from
all
sources.
45
USCB Financial Holdings, Inc.
2023 10-K
●
Maintaining robust business
continuity planning processes
to swiftly
recover, resume, and maintain
operations post-
cyber-attack incidents
involving destructive
malware. These
processes encompass
data and business
operations
recovery,
network
capability
rebuilding,
and
data
protection
for
offline
backups
in
the
event
of
cyber-attacks
impacting the Company or its critical service providers.
●
Conducting ongoing
information security
risk assessments
to address
new and
evolving threats
to online
deposit
and loan accounts. This involves identifying, prioritizing, and assessing risks to
critical systems, including threats to
applications controlling
various system parameters and implementing
necessary security prevention measures.
●
Reviewing, updating, and testing incident response and business
continuity plans annually to ensure effectiveness.
Testing
encompasses
both
in-house
and
third-party
processor
scenarios
to
validate
employee
understanding
of
responsibilities and adherence to Company protocols.
Executive Oversight and Roles
The
responsibility
for
adopting
and
maintaining
an
effective
cybersecurity
program
is
assigned
to
the
RMCD,
who
collaborates
with
functional
area
management,
departmental
level
managers,
and
other
relevant
staff.
Management
Committees
and
the
Board
of
Directors
review
reports
submitted
by
the
RMCD
detailing
the
Company’s
inherent
and
residual cybersecurity
risk, program
sophistication level,
and high-risk
threats identified
in the
cybersecurity risk assessment.
The
Board
oversees
the
development
and
maintenance
of
the
information
security
program,
holding
management
accountable.
Management
committees
ensure
program
integration
and
effectiveness,
with
the
RMCD
responsible
for
cybersecurity controls and procedures.
The Board receives regular reports
on cybersecurity risk assessment
and program
updates,
providing
expectations
and
requirements
to
management
and
holding
them
accountable
for
oversight
and
coordination, assignment of responsibility,
and the effectiveness of the information and cybersecurity
security program.
Annually, or as required, the RMCD
provides a comprehensive report
to the Board or
a designated committee regarding
the
status
of
the
cybersecurity
program.
This
report
encompasses
internal
assessments,
utilization
of
the
FFIEC
Cybersecurity
Assessment
Tool,
discussion
of
significant
program
matters
such
as
the
annual
risk
assessment,
risk
management
decisions,
monitoring
of
service
provider
compliance,
results
of
key
controls
testing,
security
breaches
or
violations, management's responses, and recommendat
ions for program enhancements.
Engagement with Third Party Vendors
"Private
information,"
which
is
part
of
the
"Internet
Security
and
Privacy
Act"
and
considered
"Highly
Sensitive
Information" under
the Company’s definition,
must not
be released
as storable
data to
third-party consultants without
security
procedures that
demonstrate compliance
with the
Company's third-party
diligence in
protecting the
data and
ensuring its
proper
distribution
when
no
longer
needed.
"Private
or
highly
sensitive
information"
refers
to
personal
information
(e.g.,
information concerning
an individual
which, because
of name,
number,
symbol,
mark, or
other identifier,
can be
used to
identify an
individual) in
combination with
any one
or more
of the
following data
elements: (1)
social security
number; (2)
driver’s
license
number
or
non-driver
identification
card
number;
(3)
account
number,
credit
or
debit
card
number,
in
combination
with
any
required
security
code,
access
code,
or
password
which
would
permit
access
to
an
individual’s
financial account(s) at
the Company including
but not limited
to an individual’s deposit
and loan accounts.
It does not
include
publicly available
information that
is lawfully
made available
to the public
from federal, state,
or local
government records
unless attached in any way to the previously mentioned
documentation.
Compliance with Regulatory Standards
Annual testing or
more frequently if
deemed necessary
of cybersecurity controls
and procedures will
be conducted
to
ensure compliance.
In instances
of identified
deficiencies or
vulnerabilities,
remedial action
plans will
be implemented
to
rectify issues or establish mitigating
controls. Any exceptions deemed significant will
be promptly reported, with remediation
efforts prioritized.
Annually,
or
as
required,
the
RMCD
will
provide
a
comprehensive
report
to
the
Board
or
a
designated
committee
regarding the status of
the cybersecurity Program. This report
will encompass internal assessments, utilization
of the FFIEC
cybersecurity Assessment Tool,
and discussion of other significant program matters.
As of the reporting period, there is
no knowledge or indication that customer sensitive information was compromised as
a
result
of
third-parties’
system
vulnerabilities.
Management
continues
to
monitor
developments
and
vendor
communications.
46
USCB Financial Holdings, Inc.
2023 10-K
Item 2.
Properties
The Company’s corporate offices
are headquartered at 2301 N.W.
87th Avenue, Miami, Florida 33172. The
Company,
through the
Bank,
operates
10 banking
centers
in South
Florida
within
Miami-Dade
and
Broward counties.
From
the
10
banking centers, nine of these locations are leased and one is owned. The
banking center that is owned is located at 3999
Sheridan St, Hollywood, FL 33021. Management
believes that each of these locations are
in good condition and adequate
to meet our present and foreseeable needs, subject to
possible future expansion.
See Note 4 “Leases”
and Note 5 “Premises
and Equipment”
to the Consolidated
Financial Statements included
in this
Annual Report on Form 10-K for additional information.
Item 3.
Legal Proceedings
We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation
arising
in
the
ordinary
course
of
business.
These
claims
and
litigation
may
include,
among
other
things,
allegations
of
violation of banking and other applicable regulations, competition
law, labor laws and consumer
protection laws, as well as
claims or
litigation
relating
to intellectual
property,
securities, breach
of contract
and tort.
We
intend to
defend ourselves
vigorously against any pending or future claims and litigation.
The
Company
previously
disclosed
that
litigation
(the
“Litigation”)
had
been
commenced
on
July
13,
2023
by
three
individuals
who
were
shareholders
of
the
Bank
prior
to
the
Bank’s
reorganization
into
the
holding
company
form
of
organization in 2021
(the “Plaintiffs”)
against six
persons, all
of whom were
directors of
the Bank at
the relevant
time (the
“Defendants”), in the Circuit Court, Eleventh Judicial Circuit for Miami-Dade County, Florida (the “Court”) (Benes et al. v. de
la
Aguilera
et
al.)
alleging
the
Defendants
(i) caused
the
Bank,
as
directors
thereof,
to
engage
in ultra
vires
conduct by
devising
and
approving
the
exchange
transaction
effected
in
July
2021
pursuant
to
which
the
Bank’s
then
outstanding
shares of Class C and Class D preferred stock was exchanged for shares of Class A voting common stock in the
Bank (the
“Exchange Transaction”),
which action
the Plaintiffs
allege was
not permitted
by the
Bank’s Articles
of Incorporation,
and
(ii) breached
their
fiduciary
duty as
directors
of the
Bank
by
approving
and
engaging
in
the
Exchange
Transaction.
The
Plaintiffs sought the
Court to certify the
action as a class
action and to award
damages in an
amount to be
proven at trial.
Plaintiffs
sought
damages
exceeding
$750,000
plus
attorney’s
fees
and
costs
as
well
as
such
other
relief
as
the
Court
determined to award.
The Defendants filed a motion to dismiss the Litigation with
prejudice (the “Motion”). On December 27, 2023, the Court,
after reviewing
the Motion,
the Plaintiff’s response
thereto and
the Defendant’s reply
as well
as the
oral arguments presented
by
the
parties
on
December
14,
2023,
granted
the
Motion,
dismissing
the
Litigation
with
prejudice
and
rendering
final
judgment in favor of the Defendants. The Court reserved jurisdiction
to award costs or grant any post-judgment relief.
There can be no
assurance that any
future legal proceedings
to which we are
a party will not
be decided adversely
to
our interests and have a material adverse effect
on our financial condition and operations.
Item 4.
Mine Safety Disclosures
Not applicable.
47
USCB Financial Holdings, Inc.
2023 10-K
PART II
Item 5.
Market
for
Registrant’s
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities
(a)
Market Information
In July
2021, the Bank’s
Class A common
stock began trading
on the
Nasdaq Stock Market
under ticker
symbol “USCB”.
The listing of our Class
A common stock on
the Nasdaq Stock Market
has resulted in a
more active trading market
for our
Class
A
common
stock.
However,
we
cannot
assure
that
a
liquid
trading
market
for
our
Class
A
common
stock
will
be
sustained.
Effective December 30, 2021, the bank holding company,
or the Company, acquired all issued and
outstanding shares
of Class
A common
stock of
the Bank.
Each of
the outstanding
shares of
the Bank’s
common stock
formerly held
by its
shareholders was converted
into and exchanged
for one newly
issued share
of the Company’s
common stock.
The ticker
symbol “USCB” remained the same.
Prior
to
our
listing
on
the
Nasdaq
Stock
Market
there
was
not
an
established
public
trading
market
for
the
Class
A
common shares. The
following table shows
the quarterly high and
low closing prices
of our Class A
common stock traded
on the Nasdaq Stock Market since going public on July
23, 2021:
Stock Price
High
Low
Quarter Ended:
September 30, 2021
$
13.91
$
10.57
December 31, 2021
$
15.89
$
12.30
March 31, 2022
$
15.49
$
13.30
June 30, 2022
$
14.84
$
11.21
September 30, 2022
$
14.74
$
11.08
December 31, 2022
$
14.30
$
12.16
March 31, 2023
$
12.71
$
9.89
June 30, 2023
$
10.94
$
8.86
September 30, 2023
$
12.09
$
10.31
December 31, 2023
$
12.65
$
10.11
As of
December 31, 2023,
our Class
B common
stock is
not listed
or traded
on any
stock exchange
and no
shares were
issued and outstanding at such date.
Holders
As
of
January
31,
2024,
the
Company’s
Class
A
common
shares
were
held
by
approximately
402
shareholders
of
record,
not including
the number
of persons
or entities
whose stock
is held
in nominee
or “street”
name through
various
brokerage firms and banks.
Dividends
As a bank holding company, the Company’s ability to declare and pay dividends depends on various federal regulatory
considerations, including the guidelines of the Federal Reserve
regarding capital adequacy and dividends.
Because we are
a bank holding
company and currently do
not engage directly in
business activities of a
material nature,
our ability to pay dividends
to our shareholders depends,
in large part, upon
our receipt of dividends
from the Bank, which
is also subject to
numerous limitations on
the payment of dividends
under federal and state
banking laws, regulations
and
policies.
The principal
source of
revenue with
which to
pay dividends
on common
shares are
dividends the
Bank may
declare
and
pay
out
of
funds
legally
available
for
payment
of
dividends.
As
a
Florida
corporation,
we
are
only
permitted
to
pay
dividends to shareholders if, after giving effect to the dividend, (i) the Company is able to pay its debts as they become due
in the ordinary course
of business and
(ii) the Company’s
assets exceeds the
sum of Company’s
(a) liabilities plus
(b) the
amount that
would be
needed for
the Company
to satisfy
the preferential
rights
upon dissolution
of shareholders
whose
preferential rights are superior to those receiving the dividend,
if any.
uscb-20231231p48i0
48
USCB Financial Holdings, Inc.
2023 10-K
Securities Authorized for Issuance Under Equity Compensation
Plans
See Note
9 ”Equity
Based and
Other Compensation
Plans” to
the Consolidated
Financial Statements
included in this
Annual Report Form on 10-K for additional information
required.
Stock Price Performance
The graph below compares the
cumulative total return
to stockholders of our Class
A common stock between July
23,
2021 (the
date the
Bank’s
Class A
common stock
commenced
trading on
the Nasdaq
Stock Market)
and December
31,
2023, with the cumulative total return
of (a) the Nasdaq Bank Index
(b) the NASDAQ ABA Community Bank
Index, and (c)
the Nasdaq
Composite Index
over the same
period. This
graph assumes
the investment
of $100
in our Class
A common
stock at the closing sale price of $10.82 per share on
July
23, 2021, and assumes the reinvestment of dividends,
if any.
The comparisons
shown
in the
graph
below are
based upon
historical
data.
We
caution that
the stock
price
performance
shown
in
the
graph
below
is
not
indicative
of,
nor
is
it
intended
to
forecast,
the
potential
future
performance of our common stock.
07/23/2021
12/31/2021
12/31/2022
12/31/2023
USCB Financial Holdings, Inc. (USCB)
$
100
$
140
$
122
$
123
NASDAQ Bank (BANK)
$
100
$
115
$
94
$
88
NASDAQ ABA Community Bank (QABA)
$
100
$
114
$
101
$
96
NASDAQ Composite (IXIC)
$
100
$
107
$
71
$
102
49
USCB Financial Holdings, Inc.
2023 10-K
Recent Sales of Unregistered Securities
(a) The Company did not sell any of its equity securities
during 2023 that were not registered under the Securities
Act.
(b) Not applicable.
(c) The Company’s repurchases of equity securities
for the quarter ended December 31, 2023 were as
follows:
Total
Number of
Shares
Purchased
Average
Price Paid
Per Share
Total Number of Shares Purchased
as Part of Publicly Announced Plans
or Programs (1)
Maximum Number
of Shares that May
Yet Be Purchased
Under Plans or
Programs (1)
Period
October 1 - 31, 2023
-
$
-
-
172,397
November 1 - 30, 2023
92,317
10.45
92,317
80,080
December 1 - 31, 2023
-
-
-
80,080
92,317
$
10.45
92,317
(1) On January 24, 2022 the Company announced
its initial stock repurchase program to repurchase
up to 750,000 shares of Class A common
stock,
approximately 3.75% of the Company’s then outstanding
shares of common stock.
Purchases of Equity Securities by Issuer and Other
Affiliates
On January
24, 2022,
the Board
approved a
share repurchase
program of
up to
750,000 shares
of Class
A common
stock. Under
the repurchase
program, the
Company
may purchase
shares of
Class
A common
stock on
a discretionary
basis from time
to time through open
market repurchases, privately negotiated
transactions, or otherwise in
compliance with
Rule 10b-18 under the
Exchange Act. As of
December 31, 2023, the
Company had repurchased
669,920 shares of
Class
A common stock.
Item 6.
Reserved
50
USCB Financial Holdings, Inc.
2023 10-K
Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management’s
discussion
and
analysis
of
financial
condition
and
results
of
operations
analyzes
the
consolidated
financial condition and results of operations of the Company and
the Bank, its wholly owned subsidiary, for the years ended
December
31, 2023
and
2022. This
discussion
and
analysis
is best
read
in
conjunction
with
the
Consolidated
Financial
Statements and related
footnotes of the Company
presented in Item
8 “Financial Statements
and Supplementary Data”
of
this Annual Report on Form
10-K. In addition to
historical information, this
discussion contains forward-looking
statements
that
involve
risks,
uncertainties
and
assumptions
that
could
cause
actual
results
to
differ
materially
from
management's
expectations.
Factors
that
could
cause
such
differences
are
discussed
in
the
sections
entitled
"Forward-Looking
Statements" and Item 1A “Risk Factors" of this Annual Report.
In this Annual Report on Form 10-K, unless the context indicated otherwise, references to “we,” “us,”, and “our” refer to
the Company and the Bank, as
the contest dictates. However, if
the discussion relates to a period
before the Effective Date,
the terms refer only to the Bank.
51
USCB Financial Holdings, Inc.
2023 10-K
CAUTIONARY NOTE REGARDING FORWARD
-LOOKING STATEMENTS
This
Annual
Report
on
Form
10-K
contains
statements
that
are
not
historical
in
nature
are
intended
to
be,
and
are
hereby identified as, forward-looking
statements for purposes of
the safe harbor provided by
Section 21E of the Securities
Exchange Act
of 1934,
as amended.
The words
“may,” “will,” “anticipate,” “could,”
“should,” “would,” “believe,”
“contemplate,”
“expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are
intended
to
identify
forward-looking
statements.
These
forward-looking
statements
include
statements
related
to
our
projected
growth,
anticipated
future
financial
performance,
and
management’s
long-term
performance
goals,
as
well
as
statements relating to
the anticipated effects
on results of
operations and financial
condition from expected
developments
or events, or business and growth strategies, including
anticipated internal growth.
These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ
materially from those anticipated in such statements.
Potential risks and uncertainties include, but are not
limited to:
•
the strength of the United States economy
in general and the strength of the local
economies in which we conduct
operations;
•
our ability to successfully manage interest rate risk, credit
risk, liquidity risk, and other risks inherent to our industry;
•
the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss
reserve and deferred tax asset valuation allowance;
•
the efficiency and effectiveness of our
internal control environment;
•
our ability
to comply
with the
extensive laws
and regulations
to which
we are
subject, including
the laws
for each
jurisdiction where we operate;
•
adverse
changes
or
conditions
in
the
capital
and
financial
markets,
including
actual
or
potential
stresses
in
the
banking industry;
•
deposit attrition and the level of our uninsured deposits;
•
legislative or regulatory
changes and changes
in accounting
principles, policies,
practices or guidelines,
including
the on-going effects of the implementation of CECL;
•
the lack of a significantly diversified loan portfolio and concentration in the South Florida market, including the risks
of geographic, depositor,
and industry concentrations,
including our concentration
in loans secured by
real estate,
in particular, commercial real estate;
•
the effects of climate change;
•
the concentration of ownership of our common stock;
•
fluctuations in the price of our common stock;
•
our ability to fund or access the capital markets at attractive
rates and terms and manage our growth, both organic
growth as well as growth through other means, such as
future acquisitions;
•
inflation, interest rate, unemployment rate, market, and monetary
fluctuations;
•
impacts of international hostilities and geopolitical events;
•
increased
competition
and
its
effect
on
the
pricing
of
our
products
and
services
as
well
as
our
net
interest
rate
spread and net interest margin;
•
the loss of key employees;
•
the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,
employee, or third-party fraud and cybersecurity breaches;
and
•
other risks described in this Annual Report on Form 10-K
and other filings we make with the SEC.
All
forward-looking
statements
are
necessarily
only
estimates
of
future
results,
and
there
can
be
no
assurance
that
actual results will
not differ
materially from expectations.
Therefore, you are
cautioned not to
place undue reliance
on any
forward-looking
statements.
Further,
forward-looking
statements
included in
this
Annual Report
on Form
10-K are
made
only
as of
the
date
hereof,
and
we
undertake
no
obligation
to
update
or
revise
any forward
-looking
statement
to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events,
unless required to do so under
the federal securities laws. You
should also review the risk
factors described in this Annual
Report on Form 10-K
and in the reports the
Company filed or will file
with the SEC and, for
periods prior to the completion
of the bank holding company reorganization, the Bank
filed with the FDIC.
Non-GAAP Financial Measures
This Annual Report on Form 10-K includes
financial information determined by methods
other than in accordance with
generally
accepted
accounting
principles
(“GAAP”).
This
financial
information
includes
certain
operating
performance
measures. Management has included these non-GAAP
measures because it believes these measures may
provide useful
supplemental information
for evaluating
the Company’s
underlying performance
trends. Further,
management uses
these
measures
in
managing
and
evaluating
the
Company’s
business
and
intends
to
refer
to
them
in
discussions
about
our
operations and performance.
Operating performance
measures should be
viewed in addition
to, and not
as an alternative
52
USCB Financial Holdings, Inc.
2023 10-K
to or
substitute
for,
measures
determined
in
accordance
with
GAAP,
and
are
not
necessarily
comparable
to non-GAAP
measures
that
may
be
presented
by
other
companies.
To
the
extent
applicable,
reconciliations
of
these
non-GAAP
measures to the most directly
comparable GAAP measures can be found
in the ‘Non-GAAP Reconciliation Tables’ included
in this annual report.
Overview
For the year ended December 31, 2023, the Company reported net income of
$16.5 million compared with net income
of
$20.1 million for the year ended December 31,
2022.
In
evaluating
our
financial
performance,
we
consider
the
level
of
and
trends
in
net
interest
income,
the
net
interest
margin, the
cost of
deposits, growth
and composition
of our
loan portfolio,
levels and
composition of
non-interest income
and non-interest
expense,
performance
ratios,
asset
quality ratios,
regulatory
capital
ratios,
and any
significant
event or
transaction.
The following significant highlights are of note for the year
ended December 31, 2023:
•
Net
interest
income
before
provision
for
credit
losses
totaled
$58.6
million,
a
decrease
of
$5.1
million
or
8.0%,
compared to $63.7 million for the year ended December
31, 2022.
•
Net
interest
margin
(“NIM”)
was
2.79%
for
the
year
ended
December 31,
2023
and
3.38%
for
the
year
ended
December 31, 2022.
•
Total
assets
grew
to
$2.3
billion
at
December
31,
2023,
an
increase
of
$253.3
million
or
12.1%,
compared
to
December 31, 2022.
•
Total
loans
grew
to
$1.8
billion
at
December
31,
2023,
an
increase
of
$273.5
million
or
18.1%,
compared
to
December 31, 2022.
•
The weighted average cost of interest-bearing liabilities increased to 3.07% for the year ended December 31, 2023
from 0.66% in December 31, 2022 as a result of the increase
in market interest rates.
•
Return on average assets for the year ended December
31, 2023 was 0.75% compared to 1.01% in 2022.
•
Return on average stockholders’ equity for the year ended December 31, 2023 was 8.99% compared to 10.73% in
2022.
•
Nonperforming assets was $468 thousand at December
31, 2023 compared to $0 at December 31, 2022.
•
The Company maintained its strong capital position. As of December 31, 2023, the Bank was well-capitalized, with
a total risk-based capital ratio of
12.65%, a tier 1 risk-based
capital ratio of 11.48%, a common
equity tier 1 capital
ratio of
11.48%, and
a leverage
ratio of
9.17%. As
of December
31, 2023
and 2022,
all of
the Bank’s
regulatory
capital ratios exceeded the thresholds to be well-capitalized
under the applicable bank regulatory requirements.
•
During the year
ended December 31,
2023, the Company
repurchased 669,920 shares
of Class A common stock
at
a
weighted
average
price
per
share
of
$11.28.
The
aggregate
purchase
price
for
these
transactions
was
approximately
$7.6
million,
including
transaction
costs.
These
repurchases
were
made
through
open
market
purchases pursuant to the Company’s publicly announced
repurchase program. As of December 31, 2023, 80,080
shares remained authorized for repurchase under this
program.
•
On
January
1,
2023,
the
Company
implemented
Accounting
Standard
Update
(“ASU”)
2016-13
Financial
Instruments - Credit Losses (Topic 326) to calculate the ACL.
•
The Company brought in $50 million of brokered CDs at a weighted average rate of 4.98%
to boost liquidity during
the second quarter of 2023. The CDs renewed in Q1 2024 at weighted
average rate
of 5.13%.
•
The Company
executed two
cash flows
interest swap
with a notional
value of
$50 million
to manage
exposure to
fix interest rate funding.
•
The Company executed four fair
value interest swaps with a
notional value of $200 million
to manage exposure to
interest rate risk by reducing the loan portfolio duration.
53
USCB Financial Holdings, Inc.
2023 10-K
Critical Accounting Policies and Estimates
The
consolidated
financial
statements
are
prepared
based
on
the
application
of
U.S.
GAAP,
the
most
significant
of
which are described
in Note 1 “Summary
of Significant Accounting
Policies” to our
Consolidated Financial Statements.
To
prepare financial statements in conformity with GAAP,
management makes estimates, assumptions,
and judgments based
on
available
information.
These
estimates,
assumptions,
and
judgments
affect
the
amounts
reported
in
the
financial
statements and accompanying notes. These estimates, assumptions, and judgments are based on
information available as
of
the
date
of
the
financial
statements
and,
as
this
information
changes,
actual
results
could
differ
from
the
estimates,
assumptions
and
judgments
reflected
in
the
financial
statements.
In
particular,
management
has
identified
accounting
policies that, due to
the estimates, assumptions
and judgments inherent
in those policies, are
critical in understanding
our
financial statements.
Management
has presented
the application
of these
policies
to the
audit and
risk committee
of our
Board.
Allowance for Credit Losses - Loans
The allowance for credit
losses (“ACL”) is
a valuation allowance that
is established through charges
to earnings in the
form of
a provision for
credit losses. The
amount of the
ACL is
affected by the
following: (i) charge-offs
of loans that
decrease
the allowance;
(ii) subsequent
recoveries on
loans previously
charged off
that increase
the allowance;
and (iii)
provisions
for credit losses charged to income that increase or decrease the allowance. Management considers the policies related to
the ACL as the most critical to the financial statement presentation.
On
January
1,
2023,
the
Company
implemented
ASU
2016-13
Financial
Instruments
-
Credit
Losses
(Topic
326):
Measurement of Credit Losses on Financial Instruments, as amended. This update replaces the incurred
loss methodology
with
the
CECL
methodology.
The
CECL
methodology
measures
expected
credit
losses
and
applies
to
financial
assets
measured at
amortized cost,
including loan
receivables and
held-to-maturity debt
securities. It
also applies
to off-balance
sheet
credit
exposures
not
accounted
for
as
insurance
(e.g.,
loan
commitments,
standby
letters
of
credit,
financial
guarantees, and similar instruments), as
well as net investments in leases
recognized by lessors in accordance
with Topic
842 on leases.
Under CECL, the Company estimates the allowance for credit losses by utilizing pertinent available data, sourced both
internally and
externally,
relating to
past events,
current conditions,
and reasonable
and supportable
forecasts. Historical
credit
losses
provide
the
foundation
for
estimation
of
expected
credit
losses.
Qualitative
adjustments
are
applied
to
the
estimated
expected
credit
losses
for
the
loan
portfolio
to
account
for
potential
constraints
of
the
quantitative
model.
Management
employs
a
scorecard
to
facilitate
the
evaluation
of
qualitative
factor
adjustments
made
to
expected
credit
losses.
The estimation's
quantitative aspect
relies on
the statistical
correlation between
the anticipated
value of
an economic
indicator and the
historical loss
experience implied
within a
selected group
of peers.
The Company conducted
regression
analyses using
peer data,
inclusive of
the Company
itself, where
observed credit
losses and chosen
economic indicators
were utilized to identify
appropriate drivers for
modeling the lifetime
probability of default (“PD”)
rates. A loss given
default
rate (“LGD”) is assigned to each pool
of loans for each period based on
these PD outcomes. The model
primarily employs
an expected
discounted cash
flow (“DCF”)
analysis for
segments within
the loan
portfolio. This
DCF analysis
operates at
the
individual
instrument
level
and
incorporates
various
loan-specific
data
points
and
segment-specific
assumptions
to
ascertain the lifetime expected
loss associated with each
instrument. An implicit "hypothetical
loss" is determined for
each
period of the DCF,
aiding in establishing the
present value of future
cash flows for each
period. The reserve allocated
to a
particular loan represents the disparity
between the sum of the
present value of future cash
flows and the book balance
of
the loan at the measurement date.
Management opted for the Remaining Life (“WARM”) methodology for five segments within the loan portfolio. For each
segment,
a
long-term
average
loss
rate
is
computed
and
applied
quarterly
throughout
the
remaining
life
of
the
pool.
Qualitative assessments
are conducted
to adjust for
economic expectations.
To
estimate the remaining
life, management
employed a software solution utilizing an attrition-based calculation. This software conducts quarterly cohort-based attrition
measurements based on the loan portfolio.
Portfolio
segments
represent
the
level
at
which
loss
assumptions
are
applied
to
a
pool of
loans,
determined
by
the
similarity of
risk characteristics inherent
in the
included instruments, based
on collateral
codes and
FFIEC Call Report
codes.
Currently,
the Company segments
the portfolio based on
collateral codes to establish
reserves. Each segment
is linked to
regression
models
(Loss
Driver
Analyses)
using
peer
data
for
loans
with
similar
risk
characteristics.
The
Company
has
established connections between
internal segmentation and
FFIEC Call Report
codes for this purpose.
The loss driver
for
54
USCB Financial Holdings, Inc.
2023 10-K
each
loan
portfolio
segment
is
derived
from
a
readily
available
and
reasonable
economic
forecast,
including
Federal
Reserve Bank projections
of the U.S.
civilian unemployment
rate and year-over-year
real GDP growth.
For the residential
loan segment, House Price
Index (“HPI”) projections published
by Fannie Mae’s
Economic and Strategic Research
Group
are utilized for
the forecast. Forecasts are
applied for the
first four quarters
of the credit
loss estimate and
then linearly revert
to the historical mean of the economic indicator over the expected
life of the loans.
The model integrates qualitative
factor adjustments to
fine-tune risk calibration
for each portfolio
segment, addressing
aspects that quantitative analysis may
not fully capture. Decisions concerning
qualitative adjustments reflect management's
anticipation of loss conditions deviating from those already accounted
for in the quantitative aspect of the model.
Our ACL
included residential
loans. To
assess the
potential impact
of changes
in qualitative
factors related
to these
loans,
management
performed
a sensitivity
analysis.
The Company
evaluated
the
impact
of the
HPI
used
in calculating
expected losses on the residential loan segment.
As of December 31, 2023, for every
100 basis points increase in the HPI
index, the forecast reduces
reserves by approximately $150
thousand and about 1
basis point to
the reserve coverage ratio,
everything else being
constant. This
sensitivity analysis provides
a hypothetical result
to assess the
sensitivity of the
ACL
and does not represent a change in management’s
judgement.
As of December
31, 2023,
we stress
tested two
qualitative factors
in our commercial
real estate
loan pool,
as it’s
the
largest segment
in our
portfolio. We
evaluated the
impact of
a change
in the
qualitative factors
from no
risk to
maximum
loss
to measure
the
sensitivity
of the
qualitative
factors.
The change
resulted
in
a $6.1
million
or
32.6%
increase
in the
allowance for credit losses.
This sensitivity analysis
provides a hypothetical result
to assess the sensitivity
of the ACL and
does not represent a change in management’s judgement.
The Company calculates a reserve for unfunded commitments, distinct from
the allowance for credit losses reported in
other liabilities.
This reserve
is determined
using both
quantitative and
qualitative factors
identical to
those applied
to the
collectively evaluated loan portfolio.
Income Taxes
Deferred tax
assets and
liabilities are
recognized for
the future
tax consequences
attributable to
differences
between
the financial statement carrying amounts of
existing assets and liabilities and their
respective tax bases and operating loss
and tax credit carryforwards. Deferred tax
assets and liabilities are measured
using enacted tax rates expected
to apply to
taxable income
in the
years in
which those
temporary differences
are expected
to be
recovered or
settled. The
effect
on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
Management is required to assess whether a valuation allowance should be established on the net deferred tax assets
based on the
consideration of
all available evidence
using a more
likely than not
standard. In its
evaluation, management
considers taxable loss
carry-back availability, expectation of sufficient
taxable income, trends
in earnings, the
future reversal
of temporary differences, and available tax planning
strategies.
The Company recognizes positions taken
or expected to be
taken in a tax
return in accordance with existing accounting
guidance on
income taxes
which prescribes
a recognition threshold
and measurement
process. Interest
and penalties
on
tax liabilities, if any, would
be recorded in interest expense and other operating non-interest
expense, respectively.
Segment Reporting
Management monitors the revenue streams for all its various
products and services. The identifiable segments are not
material
and
operations
are
managed
and
financial
performance
is
evaluated
on
an
overall
Company-wide
basis.
Accordingly, all
the financial service
operations are
considered by management
to be
aggregated in one
reportable operating
segment.
55
USCB Financial Holdings, Inc.
2023 10-K
Results of Operations
General
The following tables
present selected balance sheet, income statement, and profitability ratios for the dates and for the
periods indicated (in thousands, except ratios):
As of December 31,
2023
2022
Consolidated Balance Sheets:
Total
assets
$
2,339,093
$
2,085,834
Total
loans
(1)
$
1,780,827
$
1,507,338
Total
deposits
$
1,937,139
$
1,829,281
Total
stockholders' equity
$
191,968
$
182,428
(1)
Loan amounts include deferred fees/costs.
Years Ended December 31,
2023
2022
Consolidated Statements of Operations:
Net interest income before provision for credit losses
$
58,568
$
63,661
Total
non-interest income
$
7,403
$
5,228
Total
non-interest expense
$
41,808
$
39,309
Net income
$
16,545
$
20,141
Net income available to common stockholders
$
16,545
$
20,141
Profitability:
Efficiency ratio
63.37%
57.06%
Net interest margin
2.79%
3.38%
The Company’s results
of operations
depend substantially on
net interest income
and non-interest income.
Other factors
contributing to the
results of operations
include our provision
for credit losses,
non-interest expense, and
the provision for
income taxes.
Net income
for the
year ended
December 31, 2023
was $16.5 million
,
compared with
net income
of $20.1 million
for
the same
period in
2022. The Company
reported net
income per
diluted share
for the
year ended
December 31, 2023
of
$0.84 compared to net income per diluted share for the
same period in 2022 of $1.00.
Net Interest Income
Net
interest
income
is
the
difference
between
interest
earned
on
interest-earning
assets
and
interest
incurred
on
interest-bearing liabilities and
is the
primary driver of
core earnings. Interest
income is generated
from interest and
dividends
on
interest-earning
assets,
including
loans,
investment
securities
and
other
short-term
investments.
Interest
expense
is
incurred
from
interest
paid
on
interest-bearing
liabilities,
including
interest-bearing
deposits,
FHLB
advances
and
other
borrowings.
To evaluate net
interest income, we
measure and monitor
(i) yields on
loans and other
interest-earning assets, (ii)
the
costs of deposits
and other funding
sources, (iii) net
interest spread, and
(iv) net interest margin.
Net interest spread is
equal
to the difference
between the weighted
average yields
earned on interest
-earning assets
and the weighted
average rates
paid on
interest-bearing
liabilities. Net
interest margin
is equal
to the
annualized
net interest
income
divided by
average
interest-earning
assets.
Because
non-interest-bearing
sources
of
funds,
such
as
non-interest-bearing
deposits
and
stockholders’ equity, also fund
interest-earning assets, net interest margin includes
the benefit of these
non-interest-bearing
sources.
Changes in
the market
interest rates
and interest
rates we
earn on
interest-earning assets
or pay on
interest-bearing
liabilities, as well
as the volume
and types of
interest-earning assets and interest-bearing
and non-interest-bearing liabilities,
are usually the
largest drivers of
periodic changes in
net interest spread,
net interest margin
and net interest
income. The
Asset-Liability Committee (“ALCO”) has in place asset-liability management techniques to manage major factors that affect
net interest income and net interest margin.
56
USCB Financial Holdings, Inc.
2023 10-K
The following table contains information related
to average balance sheet, average yields
on assets, and average costs
of liabilities for the periods indicated (in thousands):
Years Ended December 31,
2023
2022
Average
Balance
(1)
Interest
Yield/Rate
Average
Balance
(1)
Interest
Yield/Rate
Assets
Interest-earning assets:
Loans
(2)
$
1,606,960
$
87,884
5.47
%
$
1,341,693
$
60,825
4.53
%
Investment securities
(3)
423,749
10,012
2.36
%
470,508
9,346
1.99
%
Other interest earnings assets
65,986
3,121
4.73
%
70,873
929
1.31
%
Total
interest-earning assets
2,096,695
101,017
4.82
%
1,883,074
71,100
3.78
%
Non-interest earning assets
109,541
107,536
Total
assets
$
2,206,236
$
1,990,610
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits
$
53,324
901
1.69
%
$
64,835
86
0.13
%
Saving and money market deposits
963,708
29,658
3.08
%
803,426
5,173
0.64
%
Time deposits
268,715
8,500
3.16
%
220,319
1,509
0.68
%
Total
interest-bearing deposits
1,285,747
39,059
3.04
%
1,088,580
6,768
0.62
%
Borrowings and repurchase agreements
94,936
3,390
3.57
%
38,463
671
1.74
%
Total
interest-bearing liabilities
1,380,683
42,449
3.07
%
1,127,043
7,439
0.66
%
Non-interest bearing demand deposits
607,506
645,366
Other non-interest-bearing liabilities
34,010
30,449
Total
liabilities
2,022,199
1,802,858
Stockholders' equity
184,038
187,752
Total
liabilities and stockholders' equity
$
2,206,236
$
1,990,610
Net interest income
$
58,568
$
63,661
Net interest spread
(4)
1.74
%
3.12
%
Net interest margin
(5)
2.79
%
3.38
%
(1)
Average balances - Daily average balances are used
to calculate yields/rates.
(2)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred
loan fees, net of deferred loan costs.
(3)
At fair value except for securities held to maturity. This amount includes
FHLB stock.
(4)
Net interest spread is the weighted average
yield on total interest-earning assets minus the weighted
average rate on total interest-bearing liabilities.
(5)
Net interest margin is the ratio of net interest
income to average total interest-earning assets.
Net interest
income before
the provision
for credit
losses was
$58.6 million for
the year
ended December 31,
2023, a
decrease of
$5.1 million or
8.0%, from
$63.7 million for
the year
ended December 31,
2022. This
decrease was
primarily
attributable to higher
cost of funds
due to the interest
rate market.
The increase in
weighted average rates
paid on cost of
funds was greater than the increase in weighted average yields
earned on interest-earning assets.
The net
interest margin was
2.79% for
the year ended
December 31, 2023 and
3.38%
for the
year ended 2022.
Although
the overall
and individual
yields for
interest-earning assets
and interest-bearing
liabilities both
increased in
2023, cost
of
funds had a
greater increase
when compared
to 2022. The
increase in
our cost of
funds was primarily
due to the
interest
rate market.
Provision for Credit Losses
ACL represents expected
credit losses
in our
portfolio as
the measurement
date. We
maintain an
adequate ACL that
can
mitigate
expected
credit
losses
in
the
loan
portfolio.
The ACL
is
increased
by
the
provision
for
credit
losses
and
is
decreased by charge-offs, net
of recoveries on prior
loan charge-offs. There are
multiple credit quality metrics
that we use
to base
our determination
of the
amount
of the
ACL and
corresponding
provision
for credit
losses. These
credit metrics
evaluate the
credit quality
and level
of credit
risk inherent
in our
loan portfolio,
assess
non-performing loans
and charge-
offs levels, considers statistical trends and economic conditions
and other applicable factors.
Provision for credit loss for
the year ended December 31, 2023,
was $2.4 million compared to
$2.5 million in provision
expense for the same period in 2022. The ACL as a percentage of total loans was 1.18% at December 31, 2023 compared
to 1.16% at December 31, 2022.
57
USCB Financial Holdings, Inc.
2023 10-K
See “Allowance
for Credit
Losses” below
for further
discussion on
how the
ACL
was calculated for
the periods
presented.
Non-Interest Income
Net interest income
and other types of
recurring non-interest
income are generated
from our operations.
Our services
and products generate service charges and fees, mainly from our depository accounts. We also
generate income from gain
on sale of loans though our swap and SBA programs. In addition, we own life insurance policies on several employees and
generate income reflecting the increase in the cash surrender value
of these policies.
The following table presents the components of non-interest
income for the periods indicated (in thousands):
Years Ended December 31,
2023
2022
Service fees
$
5,055
$
4,010
Gain (loss) on sale of securities available for sale, net
(1,859)
(2,529)
Gain on sale of loans held for sale, net
801
891
Loan settlement
-
161
Other non-interest income
3,406
2,695
Total
non-interest income
$
7,403
$
5,228
Non-interest income
for the
year ended
December 31,
2023 was
$7.4
million compared
to $5.2
million for
the same
period in
2022. This
increase was
primarily driven by
a $1.0
million increase in
service fees, consisting
mainly of wire
transfer
fees. Additionally, in
both 2023 and 2022, the
Company executed a portfolio restructuring strategy
which resulted in the sale
of lower-yielding available-for-sale securities at a loss in
order to better position our securities portfolio.
The loss on the sale
of
securities
for
2023
was
$1.9
million
and
$2.5
million
for
2022.
Proceeds
from
the
sale
transactions
were
primarily
reinvested in securities and loans yielding higher than the
securities that were sold.
Non-Interest Expense
The following table presents the components of non-interest
expense for the periods indicated (in thousands):
Years Ended December 31,
2023
2022
Salaries and employee benefits
$
24,429
$
23,943
Occupancy
5,230
5,058
Regulatory assessment and fees
1,453
930
Consulting and legal fees
1,899
1,890
Network and information technology services
2,016
1,806
Other operating
6,781
5,682
Total
non-interest expense
$
41,808
$
39,309
Non-interest expense
for the
year ended
December 31, 2023
increased $2.5 million
or 6.4%,
compared to
the same
period in 2022. The increase is
primarily due to other operating expense specially in
the categories of internet banking fees,
promotional expense, audit
and tax
service fees, and
insurance expense due
to increased
activity and fees,
which increased
$1.1 million or 19.7%. Regulatory assessment and fees increased by $523 thousand
or 56.2% compared to the year ended
2022. Salaries and benefits increased by $486 thousand or 2.0%
due to increase in full time employees to 196 from 191
in
2022. The increase
in salaries and
employee benefits
and other operating
costs has
enabled us to
support recent
growth
and has provided us with the necessary technology and
required professionals to execute our growth strategy.
Provision for Income Tax
Fluctuations in the effective tax rate reflect the effect of the differences in the inclusion or deductibility of certain income
and expense for income tax purposes.
Therefore, future decisions on the investments we
choose will affect our effective tax
rate. Changes in the
cash surrender value
of bank-owned life
insurance policies for
key employees, purchasing
municipal
bonds, and overall taxable income will be important elements
in determining our effective tax rate.
Income tax
expense for
the year
ended
December 31,
2023 was
$5.3 million,
compared
to $6.9
million
for the
year
ended December 31, 2022. The
effective tax rate for
the year ended December 31, 2023
was 24.1% and for the
year ended
December 31, 2022 was 25.6%.
58
USCB Financial Holdings, Inc.
2023 10-K
For a further discussion
on income taxes, see
Note 6 “Income Taxes” to
the Consolidated Financial
Statements in this
Annual Report on Form 10-K.
Rate/Volume Analysis
The
table
below
sets
forth
information
regarding
changes
in
interest
income
and
interest
expense
for
the
periods
indicated (in thousands).
For each category of
interest-earning assets and interest-bearing liabilities,
information is provided
on changes attributable to (i) changes in rate (changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); and (iii) changes in rate-volume (change in
rate multiplied by change in volume). Changes in
rate-volume are proportionately allocated between rate and volume
variance (in thousands).
Years Ended 2023 vs. 2022
Years Ended 2022 vs. 2021
Increase (decrease) due to change in
Increase (decrease) due to change in
Volume
Rate
Net
Change
Volume
Rate
Net
Change
Interest-earning assets:
Loans
(1)
$
12,026
$
15,033
$
27,059
$
9,847
$
2,248
$
12,095
Investment securities
(2)
(929)
1,595
666
1,306
154
1,460
Other interest earnings assets
(64)
2,256
2,192
(25)
848
823
Total increase (decrease) in interest income
$
11,033
$
18,884
$
29,917
$
11,128
$
3,250
$
14,378
Interest-bearing liabilities:
Interest-bearing demand deposits
$
(15)
$
830
$
815
$
14
$
13
$
27
Saving and money market deposits
1,032
23,453
24,485
617
2,474
3,091
Time deposits
331
6,660
6,991
(96)
74
(22)
Borrowings and repurchase agreements
985
1,734
2,719
38
79
117
Total increase (decrease) in interest expense
2,333
32,677
35,010
572
2,641
3,213
Increase (decrease) in net interest income
$
8,700
$
(13,793)
$
(5,093)
$
10,556
$
609
$
11,165
(1)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred
loan fees, net of deferred loan costs.
(2)
At fair value except for securities held to maturity. This amount includes
FHLB stock.
Both average yields on
interest-earning assets and
average rates paid on
interest-bearing liabilities increased
in 2023
as a compared to 2022, reflecting the changes in the macro
interest rate environment. However, the average rates paid on
interest-bearing liabilities increased to a greater degree than
yields on interest-earning assets.
Analysis of Financial Condition
Total
assets at December 31, 2023, were $2.3 billion, an increase of $253.3 million, or 12.1%, over total assets of $2.1
billion at
December 31, 2022.
Total loans increased $273.5
million, or
18.1%, to
$1.8 billion
at December 31,
2023 compared
to $1.5 billion
at December 31,
2022.
Total
deposits increased
by $107.9 million,
or 5.9%, to
$1.9 billion at
December 31,
2023 compared to $1.8 billion at December 31, 2022.
Investment Securities
The investment portfolio
is used and
managed to provide
liquidity through cash
flows, marketability
and, if necessary,
collateral for
borrowings. The
investment portfolio
is also
used as
a tool
to manage
interest rate
risk and
the Company’s
capital market risk exposure. The
operating philosophy of the portfolio is
to maximize the Company’s profitability,
taking into
consideration the
Company’s risk
appetite and
tolerance, manage
it’s asset
composition and
diversification, and
maintain
adequate risk-based capital ratios.
The
investment
portfolio
is
managed
in
accordance
with
the
Asset
and
Liability
Management
(“ALM”)
policy,
which
includes an
investment guideline,
approved by
the Board.
Such policy
is reviewed
at least
annually or
more frequently
if
deemed necessary,
depending on
market
conditions
and/or
unexpected
events.
The investment
portfolio
composition
is
subject
to
change
depending
on
the
funding
and
liquidity
needs
of
the
Company,
and
the
interest
risk
management
objectives directed by the ALCO. The portfolio of investments can be used to modify the duration of the balance sheet.
The
allocation of cash into securities takes into consideration anticipated
future cash flows (uses and sources) and all available
sources of credit.
Our
investment
portfolio
consists
primarily
of
securities
issued
by
U.S.
government-sponsored
agencies,
agency
mortgage-backed securities,
collateralized mortgage
obligation securities,
municipal securities,
and other
debt securities,
59
USCB Financial Holdings, Inc.
2023 10-K
all with varying contractual maturities and coupons. Due to the optionality embedded in these securities, the final maturities
do not
necessarily represent the
expected life of
the portfolio. Some
of these
securities will be
called or paid
down depending
on capital market conditions and expectations. The investment portfolio is regularly reviewed by the Chief Financial Officer,
Treasurer, and/or the ALCO of the Company to ensure an appropriate risk and return profile as
well as for adherence to the
Company’s investment policy.
As of December 31, 2023, the investment portfolio consisted of available-for-sale
(“AFS”) and held-to-maturity (“HTM”)
debt
securities.
During
the
third
quarter
of
2022,
26
investment
securities
were
transferred
from
AFS
to
HTM
with
an
amortized cost basis
and fair value
amount of $74.4
million and $63.8
million, respectively.
On the date
of transfer,
these
securities had a total net unrealized loss of $10.6 million. The transfer of the debt securities
from the AFS to HTM category
was made at fair value at the date of transfer.
The unrealized gain or loss at the date of transfer is retained
in accumulated
other comprehensive income (loss)
and in the carrying value
of the HTM securities.
Such amounts are amortized
over the
remaining life
of the
security. There was no
impact to
net income on
the date of
transfer. There were no
securities transferred
from AFS to HTM in 2023.
The book value of the AFS securities is adjusted quarterly for
unrealized gain or loss as a valuation allowance, and any
gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss) in stockholders’ equity.
CECL requires
a loss reserve
for securities
classified as
Held-to-Maturity (HTM).
The reserve should
reflect historical
credit performance
as well
as the
impact of
projected
economic forecast.
For U.S.
Government bonds
and
U.S. Agency
issued bonds in HTM the explicit guarantee
of the US Government is sufficient
to conclude that a credit loss reserve
is not
required. The reserve
requirement is for
three primary assets
groups: municipal bonds,
corporate bonds, and
non-agency
securitizations.
The
Company
calculates
quarterly
the
loss
reserve
utilizing
Moody’s
ImpairmentStudio.
The
CECL
measurement
for
investment
securities
incorporates
historical
data,
containing
defaults
and
recoveries
information,
and
Moody’s baseline
economic forecast.
The solution
uses probability
of default/loss
given default (“PD/LGD”)
approach. PD
represents the likelihood a borrower will
default. Within the Moody’s model,
this is determined using historical
default data,
adjusted for the current economic environment. LGD projects
the expected loss if a borrower were to default.
The Company
monitors the credit
quality of HTM
securities through the
use of
credit ratings. Credit
ratings are monitored
by the Company
on at least
a quarterly basis.
As of December
31, 2023 and
December 31, 2022,
all HTM securities
held
by the Company were rated investment grade.
At year ended
December 31, 2023,
HTM securities included $165.6
million of U.S.
Government and U.S.
Agency issued
bonds and
mortgage-backed
securities.
Because
of the
explicit and/or
implicit
guarantee
on these
bonds,
the
Company
holds no reserves
on these
holdings. The
remaining portion
of the HTM
portfolio is
made up of
$9.4 million
in investment
grade
corporate
bonds.
The
required
reserve
for
these
holdings
is
determined
each
quarter
using
the
model
described
above. For the portion of the HTM
exposed to non-government credit risk,
the Company utilized the PD/LGD
methodology
to estimate a $8 thousand ACL as of December 31,
2023. The book value for debt securities classified
as HTM represents
amortized cost less ACL.
AFS and HTM
investment securities
in aggregate
decreased $14.5 million
or 3.5%
to $404.3 million
at December 31,
2023 from $418.8
million at
December 31, 2022.
Investment securities
decreased over the
past year as
repayments from
securities were
allocated to
fund loan
growth.
Management reinvested
the repayments
of securities
and income
from the
sale of securities into higher
yielding loans. As of December
31, 2023, securities with
a market value of $86.9
million were
pledged to secure public deposits and $132.1 million pledged in securities measured at par to the Federal Reserve Bank of
Atlanta
for
the
BTFP
program.
As
of
December 31,
2023,
the
Company
did
not
have
any
tax-exempt
securities
in
the
portfolio.
60
USCB Financial Holdings, Inc.
2023 10-K
The
following
table
presents
the
amortized
cost
and
fair
value
of
investment
securities
for
the
dates
indicated
(in
thousands):
December 31, 2023
December 31, 2022
Available-for-sale:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
U.S. Government Agency
$
9,664
$
8,173
$
10,177
$
8,655
Collateralized mortgage obligations
103,645
80,606
118,951
95,541
Mortgage-backed securities - residential
63,795
52,187
73,838
60,879
Mortgage-backed securities - commercial
49,212
42,764
32,244
27,954
Municipal securities
25,005
19,338
25,084
18,483
Bank subordinated debt securities
28,106
26,261
15,964
14,919
Corporate bonds
-
-
4,037
3,709
$
279,427
$
229,329
$
280,295
$
230,140
Held-to-maturity:
U.S. Government Agency
$
43,626
$
38,306
$
44,914
$
39,062
U.S. Treasury
-
-
9,841
9,828
Collateralized mortgage obligations
62,735
54,752
68,727
60,925
Mortgage-backed securities - Residential
43,784
39,599
42,685
38,483
Mortgage-backed securities - Commercial
15,439
14,182
11,442
10,777
Corporate bonds
9,398
8,671
11,090
10,013
$
174,982
$
155,510
$
188,699
$
169,088
Allowance for credit losses - securities held-to-maturity
(8)
Securities held-to maturity, net of allowance for credit losses
$
174,974
The following
table shows
the weighted
average yields,
categorized by
contractual maturity,
for investment
securities
as of December 31, 2023 (in thousands, except ratios):
After 1 year through 5
years
After 5 years through
10 years
After 10 years
Total
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Available-for-sale:
U.S. Government Agency
$
-
-
$
2,364
3.16%
$
7,300
2.13%
$
9,664
2.39%
Collateralized mortgage obligations
-
-
-
-
103,645
1.41%
103,645
1.41%
MBS - residential
-
-
-
-
63,795
1.87%
63,795
1.87%
MBS - commercial
-
-
-
-
49,212
2.67%
49,212
2.67%
Municipal securities
-
-
6,720
1.66%
18,285
1.77%
25,005
1.74%
Bank subordinated debt securities
2,710
8.75%
25,396
5.15%
-
-
28,106
5.50%
$
2,710
8.75%
$
34,480
4.33%
$
242,237
1.83%
$
279,427
2.21%
Held-to-maturity:
U.S. Government Agency
$
7,927
1.02%
$
20,153
1.46%
$
15,546
1.84%
$
43,626
1.52%
Collateralized mortgage obligations
-
-
-
-
62,735
1.66%
62,735
1.66%
MBS - residential
4,439
1.85%
5,916
1.74%
33,429
2.40%
43,784
2.26%
MBS - commercial
3,072
1.62%
-
-
12,367
2.61%
15,439
2.42%
Corporate bonds
9,398
2.80%
-
-
-
-
9,398
2.80%
$
24,836
1.92%
$
26,069
1.52%
$
124,077
1.98%
$
174,982
1.90%
Loans
Loans are
the largest
category of
interest-earning assets
on the
Consolidated
Balance Sheets,
and usually
provides
higher yields than the remainder of the Company’s
interest-earning assets. Higher yields typically carry
inherent credit and
liquidity risks in
comparison to lower
yielding assets. The
Company manages and
mitigates such risks
in accordance with
the credit and ALM policies, risk tolerance and balance
sheet composition.
61
USCB Financial Holdings, Inc.
2023 10-K
The following table shows the loan portfolio composition
as of the dates indicated (in thousands):
December 31, 2023
December 31, 2022
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
204,419
11.5
%
$
185,636
12.3
%
Commercial Real Estate
1,047,593
58.8
%
970,410
64.4
%
Commercial and Industrial
219,757
12.4
%
126,984
8.4
%
Foreign Banks
114,945
6.5
%
93,769
6.2
%
Consumer and Other
191,930
10.8
%
130,429
8.7
%
Total
gross loans
1,778,644
100.0
%
1,507,228
100.0
%
Plus: Deferred cost
2,183
110
Total
loans net of deferred cost
1,780,827
1,507,338
Less: Allowance for credit losses
21,084
17,487
Total
net loans
$
1,759,743
$
1,489,851
Total
gross loans increased
by $271.4 million
or 18.0% at
December 31, 2023
compared to December
31, 2022. The
most significant growth
was in the
commercial and
industrial and
commercial real
estate loan pools.
Consumer and
other
loans increased primarily as result of organic growth from our yacht lending business vertical created in January 2022. Our
loan
portfolio
continues
to
diversify
as
commercial
and
industrial
and
consumer
loans,
mostly
yacht
loans,
continue
to
increase as a percentage to
total loans. However,
we do not expect any
significant changes over the
foreseeable future in
the composition of our loan portfolio. Commercial real estate continues to be the main category of our portfolio, reflective of
the market in which we operate.
The
growth
experienced
over
the
last
couple
of
years
is
primarily
due
to
implementation
of
our
relationship-based
banking
model,
our
diversified
business
verticals,
and
the
success
of
our
relationship
managers
in
competing
for
new
business in a highly competitive metropolitan area. Many of
our larger loan clients have lengthy relationships with members
of our senior management team or our relationship managers
that date back to former institutions.
From a
liquidity perspective,
our loan
portfolio provides
us with
additional
liquidity due
to repayments
or unexpected
prepayments.
The
following
table
shows
maturities
and
sensitivity
to
interest
rate
changes
for
the
loan
portfolio
at
December 31, 2023 (in thousands):
Due in 1 year or
less
Due in 1 to 5
years
Due after 5 to 15
years
Due after 15
years
Total
Residential Real Estate
$
4,985
$
29,108
$
77,209
$
93,117
$
204,419
Commercial Real Estate
97,100
186,345
757,106
7,042
1,047,593
Commercial and Industrial
12,254
50,280
117,119
40,104
219,757
Foreign Banks
114,945
-
-
-
114,945
Consumer and Other
2,159
3,232
10,846
175,693
191,930
Total
gross loans
$
231,443
$
268,965
$
962,280
$
315,956
$
1,778,644
Interest rate sensitivity:
Fixed interest rates
$
195,381
$
156,815
$
188,148
$
208,681
$
749,025
Floating or adjustable rates
36,062
112,150
774,132
107,275
1,029,619
Total
gross loans
$
231,443
$
268,965
$
962,280
$
315,956
$
1,778,644
The information
presented
in the
table above
is based
upon the
contractual
maturities of
the individual
loans, which
may be
subject to
renewal at
their contractual
maturity.
Renewals will
depend on
approval by
our credit
department and
balance sheet
composition at the
time of
the analysis,
as well
as any
modification of terms
at the
loan’s maturity. Additionally,
maturity
concentrations,
loan
duration,
prepayment
speeds
and
other
interest
rate
sensitivity
measures
are
discussed,
reviewed, and analyzed by the ALCO. Decisions on term
rate modifications are discussed as well.
As of
December 31,
2023, approximately
57.9%
of the
loans
have adjustable/variable
rates
and
42.1%
of the
loans
have fixed rates.
The adjustable/variable
loans re-price to
different benchmarks
and tenors in
different periods
of time. By
contractual characteristics, there are no
material concentrations on anniversary repricing. Additionally, it is
important to note
that most
of our
loans have
interest rate
floors. This
embedded option
protects the
Company from
a decrease
in interest
rates and positions us to gain in the scenario of higher interest
rates.
62
USCB Financial Holdings, Inc.
2023 10-K
As of
December 31, 2023, the
commercial real estate
portfolio was $1.0
billion or 58.8%
of the
total gross loans
portfolio,
17% of outstanding balances are
characterized as owner occupied and
83% are characterized as non-owner
occupied. The
retail sector was $285.7 million or 33% of the $868.1 million
non-owner occupied CRE portfolio.
The
following
table
is
a
summary
of
the
distribution
of
non-owner
occupied
commercial
real
estate
loans
held
for
investment by loan type (in thousands):
December 31, 2023
Balance
# of Notes
% of Total
Gross Loans
Average Loan Size
Non-Accruals
Weighted Avg
LTV
(1)
Retail
$
285,728
98
16%
$
2,916
$
-
55%
Multifamily
179,976
125
10%
1,440
-
59%
Warehouse
127,824
51
7%
2,506
-
55%
Office
123,938
57
7%
2,174
-
53%
Hotels/Motels
86,490
17
5%
5,088
-
55%
Construction/Land
36,668
16
2%
2,292
-
52%
Other
27,395
18
2%
1,522
-
52%
$
868,019
382
49%
$
2,272
$
-
$
55%
(1) Loan-to-value is calculated based on the real estate value at the time of origination, renewal, or update, whichever is more recent.
The following table is a summary of non-owner occupied commercial real estate loans held for investment by collateral
geographical location (in thousands):
December 31, 2023
South Florida
(1)
Rest of Florida
(2)
Outside Florida
(3)
Balance
% of Non-
Owner
Occupied
CRE Loans
Balance
% of Non-
Owner
Occupied
CRE Loans
Balance
% of Non-
Owner
Occupied
CRE Loans
Retail
$
169,834
20%
$
48,204
6%
$
67,690
8%
Multifamily
138,497
16%
41,480
5%
-
-
Warehouse
75,543
9%
49,705
6%
2,576
0%
Office
83,694
10%
31,157
4%
9,087
1%
Hotels/Motels
63,562
7%
22,927
3%
-
-
Construction/Land
36,093
4%
575
0%
-
-
Other
20,295
2%
7,100
1%
-
-
$
587,518
68%
$
201,148
23%
$
79,353
9%
(1) Miami-Dade, Broward, and West Palm Beach counties
(2) All other Florida counties
(3) Within the U.S.
As of December
31, 2023,
68% of the
non-owner occupied
CRE portfolio
were located
within South Florida,
and only
10 loan
notes with
an outstanding
balance of
$79.4 million
are located
outside Florida.
Balances of
non-owner
occupied
CRE loans outside Florida were: $69.7 million in New York,
$7.1 million in Georgia,
and $2.6 million in New Jersey.
Asset Quality
Our asset quality grading
analysis estimates the capability of
the borrower to repay
the contractual obligation of
the loan
agreement as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly
graded loans. Internal
credit risk
grades are evaluated
at least annually,
or more frequently
if deemed necessary.
Internal
credit
risk
ratings
may
change
based
on
management’s
assessment
of
the
results
from
the
annual
review,
portfolio
monitoring and other developments observed with borrowers.
The internal credit risk grades used by the Company to
assess the credit worthiness of a loan are shown below:
Pass
– Loans indicate different levels of satisfactory
financial condition and performance.
63
USCB Financial Holdings, Inc.
2023 10-K
Special Mention
– Loans classified as special mention have a potential weakness
that deserves management’s
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment
prospects for the loan or of the institution’s
credit position at some future date.
Substandard
– Loans classified as substandard are inadequately protected
by the current net worth and paying
capacity of the obligator or of the collateral pledged, if
any. Loans so classified
have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are
not corrected.
Doubtful
– Loans classified as doubtful have all the weaknesses inherent
in those classified at substandard, with
the added characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Loss
– Loans classified as loss are considered uncollectible.
Loan credit exposures by internally assigned grades are
as follows for the dates indicated (in thousands):
December 31, 2023
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
204,127
$
-
$
292
$
-
$
204,419
Commercial Real Estate
1,040,032
-
7,561
-
1,047,593
Commercial and Industrial
218,129
-
1,628
-
219,757
Foreign Banks
114,945
-
-
-
114,945
Consumer and Other
191,930
-
-
-
191,930
$
1,769,163
$
-
$
9,481
$
-
$
1,778,644
December 31, 2022
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
185,636
$
-
$
-
$
-
$
185,636
Commercial Real Estate
967,465
-
2,945
-
970,410
Commercial and Industrial
126,177
-
807
-
126,984
Foreign Banks
93,769
-
-
-
93,769
Consumer and Other
130,233
-
196
-
130,429
$
1,503,280
$
-
$
3,948
$
-
$
1,507,228
Non-Performing Assets
The following table presents non-performing assets as
of December 31, 2023 and 2022 (in thousands, except
ratios):
2023
2022
Total
non-performing loans
$
468
$
-
Other real estate owned
-
-
Total
non-performing assets
468
-
Asset quality ratios:
(1)
-
-
Allowance for credit losses to total loans
1.18%
1.16%
Allowance for credit losses to non-performing loans
4505%
- %
Non-performing loans to total loans
0.03%
- %
(1) ACL was calculated under CECL methodology for 2023, and incurred loss methodology for 2022
Non-performing
assets
include
all
loans
categorized
as non-accrual
or restructured,
impaired
securities,
OREO
and
other repossessed assets. Problem loans for which the collection or liquidation in full is reasonably uncertain are placed on
a
non-accrual
status.
This
determination
is
based
on
current
existing
facts
concerning
collateral
values
and
the
paying
capacity of the borrower. When the collection of the full contractual balance is unlikely,
the loan is placed on non-accrual to
avoid overstating the Company’s income for a
loan with increased credit risk.
If the
principal or
interest on
a commercial
loan becomes
due and
unpaid for
90 days
or more,
the loan
is placed
on
non-accrual status as of
the date it becomes
90 days past due
and remains in non-accrual
status until it meets
the criteria
for restoration to accrual status.
Residential loans, on
the other hand, are placed
on non-accrual status when
the principal
or interest
becomes due
and unpaid
for 120
days or
more and remains
in non-accrual
status until
it meets
the criteria
for
restoration
to
accrual
status.
Restoring
a
loan
to
accrual
status
is
possible
when
the
borrower
resumes
payment
of
all
64
USCB Financial Holdings, Inc.
2023 10-K
principal and interest
payments for a period
of six months
and the Company
has a documented
expectation of repayment
of the remaining contractual principal and interest or the
loan becomes secured and in the process of collection.
The
Company
may
grant
a
loan
concession
to
a
borrower
experiencing
financial
difficulties.
This
determination
is
performed during
the annual
review process
or whenever
problems are
surfacing regarding
the client’s
ability to
repay in
accordance with
the original
terms of
the loan
or line
of credit.
The concessions
are given
to the
debtor in
various forms,
including interest rate
reductions, principal forgiveness, extension
of maturity date,
waiver, or deferral of
payments and other
concessions intended to minimize potential losses.
For further
discussion on
non-performing loans,
see Note
3 “Loans”
to the
Consolidated Financial
Statements in
this
Annual Report on Form 10-K.
Allowance for Credit Losses
On January 1,
2023, the Company
adopted FASB ASU 2016-13, which
introduced the CECL methodology
and required
us to
estimate all
expected credit
losses over
the remaining
life of
our loan
portfolio. Accordingly,
the ACL
represents an
amount
that,
in
management's
evaluation,
is
adequate
to
provide
coverage
for
all
expected
future
credit
losses
on
outstanding loans as of the
measurement date. Additionally,
qualitative adjustments are made to
the ACL when, based on
management’s judgment, there
are factors impacting
the allowance estimate
not considered by
the quantitative calculations.
See
Note
3
“Loans”
to
the
Consolidated
Financial
Statements
set
forth
in
Item
8
of
Part
1
of
this
Form
10-K
for
more
information on the allowance for credit losses.
The following table presents ACL and net charge-offs to average loans by
type for the periods indicated (in thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2023:
Beginning balance
$
1,352
$
10,143
$
4,163
$
720
$
1,109
$
17,487
Cumulative effect of adoption of
accounting principle
(1)
1,238
1,105
(2,158)
23
858
1,066
Provision for credit losses
(2)
95
(882)
1,897
168
1,225
2,503
Recoveries
10
-
72
-
3
85
Charge-offs
-
-
-
-
(57)
(57)
Ending Balance
$
2,695
$
10,366
$
3,974
$
911
$
3,138
$
21,084
Average loans
$
186,854
$
986,234
$
179,574
$
93,364
$
160,934
$
1,606,960
Net charge-offs (recoveries) to
average loans
(0.01)%
-
(0.04)%
-
0.03%
(0.00)%
December 31, 2022:
Beginning balance
$
2,498
$
8,758
$
2,775
$
457
$
569
$
15,057
Provision for credit losses
(1,179)
1,385
1,474
263
552
2,495
Recoveries
33
-
18
-
4
55
Charge-offs
-
-
(104)
-
(16)
(120)
Ending Balance
$
1,352
$
10,143
$
4,163
$
720
$
1,109
$
17,487
Average loans
$
193,368
$
842,914
$
127,473
$
81,421
$
96,517
$
1,341,693
Net charge-offs (recoveries) to
average loans
(0.02)%
-
0.07%
-
0.01%
0.00%
(1) Impact of CECL adoption on January 1, 2023.
(2) Provision for credit losses excludes $144 thousand release for unfunded commitments included in other liabilities and $8 thousand
provision for investment securities held to maturity.
65
USCB Financial Holdings, Inc.
2023 10-K
The
following
table
presents
ACL
by
type
and
its
individual
percentage
to
total
loans
for
the
periods
indicated
(in
thousands):
December 31,
2023
2022
Loan Category
Allowance
% of Loans in
Each Category to
Total Loans
Allowance
% of Loans in
Each Category to
Total Loans
Residential Real Estate
$
2,695
11.5
%
$
1,352
12.3
%
Commercial Real Estate
10,366
58.8
%
10,143
64.4
%
Commercial and Industrial
3,974
12.4
%
4,163
8.4
%
Foreign Banks
911
6.5
%
720
6.2
%
Consumer and Other
3,138
10.8
%
1,109
8.7
%
Total
$
21,084
100.0
%
$
17,487
100.0
%
Bank-Owned Life Insurance
At
December 31,
2023,
the
combined
cash
surrender
value
of
all
bank-owned
life
insurance
(“BOLI”)
policies
was
$51.8 million.
Changes
in
cash
surrender
value
are
recorded
in
non-interest
income
on
the
Consolidated
Statements
of
Operations. In
2023, the Company
maintained BOLI
policies with
five insurance
carriers. The
Company is
the beneficiary
of these policies.
Deposits
Customer deposits are the
primary funding source for
the Bank’s growth.
Through our network of
banking centers, we
offer a competitive array of deposit
accounts and treasury management services designed
to meet our customers’ business
needs. Our primary
deposit customers
are SMBs,
and the personal
business of owners
and operators
of these SMBs,
as
well as the retail/consumer relationships of the employees
of these businesses. Our focus on quality and customer
service
has created a strong brand recognition within
our depositors, which reflects in the composition
of our deposits; most of our
funding sources
are core
deposits. In
addition to
our banking
centers
network, we
have developed
business
verticals to
diversify our portfolio in
different specialty
industries and we offer
public fund deposit
products to municipalities
and public
agencies in our geographical footprint.
Furthermore, our
personal and
private banking
management
line of
business is
focused on
the needs
of the
owners
and operators of
our business customers,
offering a suite
of checking, savings,
money market and
time deposit accounts,
and utilizing superior
client service
to build and
expand client relationships.
A unique aspect
of our business
model is our
ability to offer correspondent services to banks in
Central America and the Caribbean.
The
following
table
presents
the
daily
average
balance
and
average
rate
paid
on
deposits
by
category
as
of
December 31, 2023 and 2022 (in thousands, except ratios):
Twelve Months Ended December 31,
2023
2022
Average Balance
Average Rate
Paid
Average Balance
Average Rate
Paid
Non-interest bearing demand deposits
$
607,506
0.00%
$
645,366
0.00%
Interest-bearing demand deposits
53,324
1.69%
64,835
0.13%
Saving and money market deposits
963,708
3.08%
803,426
0.64%
Time deposits
268,715
3.16%
220,319
0.68%
$
1,893,253
2.06%
$
1,733,946
0.39%
Total
average deposits for the
year ended December 31, 2023
was $1.9 billion,
an increase of $159.3 million
,
or 9.2%
over total
average deposits
of $1.7 billion
for the
same period
in 2022.
The greatest
increase was
in money
market and
savings deposits which increased
by $160.3 million,
or 19.9%. Non-interest-bearing demand
deposits decreased by $37.9
million or
5.9% due
to customers
moving deposits
to interest
bearing accounts
due to
increases in
rate paid
on deposits
due to increases in the interest rate market.
66
USCB Financial Holdings, Inc.
2023 10-K
The
uninsured
deposits
are
estimated
based
on
the
FDIC
deposit
insurance
limit
of
$250 thousand
for
all
deposit
accounts at
the Bank
per account
holder.
Total
estimated uninsured
deposits was
$1.1 billion
at December 31,
2023 and
2022. As of December 31, 2023, 45%
of our deposits are estimated to be
FDIC-insured.
Our public funds are 13.9% of total
deposits and are partially collateralized. Brokered deposits are 2.6% of total deposits and are FDIC-insured. The estimated
average account size
of our deposit
portfolio is $97
thousand. Time deposits with
balances of $250
thousand or more
totaled
$58.1
million
and
$122.9
million
at
December 31,
2023
and
2022,
respectively.
U.S.
Century
Bank
maintains
a
well-
diversified deposit base. Our top 15 depositors only hold 20%
of our total portfolio.
Critical elements of our liquidity
risk management include: effective corporate governance consisting of
oversight by the
Board and ALCO and
involvement by senior management;
appropriate strategies, policies,
procedures, and limits
used to
identify
and
mitigate
liquidity
risk;
comprehensive
liquidity
risk
measurement
and
monitoring
systems
(including
assessments
of
the
current
and
prospective
cash
flows
or
sources
and
uses
of
funds)
that
are
commensurate
with
the
complexity and business
activities of the
Company; management of intraday
liquidity and collateral;
an appropriately diverse
mix
of
existing
and
potential
future
funding
sources;
adequate
levels
of
highly
liquid
marketable
securities
free
of
legal,
regulatory,
or
operational
impediments,
that
can
be
used
to
meet
liquidity
needs
in
stressful
situations;
comprehensive
contingency
funding
plans
that
sufficiently
address
potential
adverse
liquidity
events
and
emergency
cash
flow
requirements;
and
internal
controls and
internal
audit
processes
sufficient
to
determine
the
adequacy
of
the
institution’s
liquidity risk management process.
We
expect
funds
to
be
available
from
several
basic
banking
activity
sources,
including
the
core
deposit
base,
the
repayment and maturity of loans and investment security
cash flows. Other potential funding sources include
federal funds
purchased, brokered
certificates
of deposit,
listing certificates
of deposit,
Fed funds
lines and
borrowings from
the FHLB
Atlanta. Accordingly, our liquidity resources were at sufficient levels to
fund loans and meet other
cash needs as necessary.
The following table shows scheduled maturities of uninsured
time deposits as of December 31, 2023 (in thousands):
Three months or less
$
16,641
Over three through six months
16,451
Over six though twelve months
24,002
Over twelve months
1,016
$
58,110
Borrowings
As
a
member
of
the
FHLB
Atlanta,
we
are
eligible
to
obtain
advances
with
various
terms
and
conditions.
This
accessibility of additional
funding allows us
to efficiently and
timely meet both
expected and unexpected
outgoing cash flows
and collateral needs without adversely affecting
either daily operations or the financial condition
of the Company.
Outstanding fixed-rate
advances from
the FHLB
were at
$183.0 million
and $46.0
million, as
of December
31, 2023,
and December 31,
2022, respectively.
The weighted average
rate for outstanding
FHLB advances at
December 31,
2023
was 4.4%.
67
USCB Financial Holdings, Inc.
2023 10-K
The following table presents the FHLB fixed rate advances
as of December 31, 2023 (in thousands):
At December 31, 2023
Interest Rate
Type of Rate
Maturity Date
Amount
2.05%
Fixed
March 27, 2025
$
10,000
1.07%
Fixed
July 18, 2025
6,000
1.04%
Fixed
July 30, 2024
5,000
3.76%
Fixed
January 24, 2028
11,000
3.77%
Fixed
April 25, 2028
50,000
5.57%
Fixed
December 26, 2024
101,000
$
183,000
At December 31, 2022
Interest Rate
Type of Rate
Maturity Date
Amount
2.05%
Fixed
March 27, 2025
$
10,000
1.07%
Fixed
July 18, 2025
6,000
1.04%
Fixed
July 30, 2024
5,000
0.81%
Fixed
August 17, 2023
5,000
4.17%
Fixed
January 13, 2023
20,000
$
46,000
We
have
also
established
Fed
Funds
lines
of
credit
with
our
upstream
correspondent
banks
to
manage
temporary
fluctuations in our daily
cash balances. As of
December 31, 2023, there were no
outstanding balances under the Fed
Funds
line of credit and the BTFP.
Off-Balance Sheet Arrangements
We engage
in various financial
transactions in
our operations
that, under GAAP,
may not be
included on
the balance
sheet. To
meet the financing needs
of our customers we may
include commitments to extend
credit and standby letters
of
credit. To
a varying
degree, such
commitments involve
elements of
credit, market,
and interest
rate risk
in excess
of the
amount recognized
in the
balance sheet.
We use
more conservative
credit and
collateral policies
in making
these credit
commitments as we
do for on-balance sheet
items. We are not
aware of any accounting
loss to be
incurred by funding
these
commitments; however,
we maintain an allowance
for off-balance sheet
credit risk which is
recorded under other liabilities
on the Consolidated Balance Sheets.
Since commitments associated with letters of
credit and commitments to extend
credit may expire unused, the
amounts
shown do not necessarily
reflect the actual
future cash funding requirements
.
The following table
presents lending related
commitments outstanding as of December 31, 2023 and
2022 (in thousands):
2023
2022
Commitments to grant loans and unfunded lines of credit
$
85,117
$
95,461
Standby and commercial letters of credit
3,987
4,320
Total
$
89,104
$
99,781
Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition
established
in
the
contract,
for
a
specific
purpose.
Commitments
generally
have
variable
interest
rates,
fixed
expiration
dates or
other
termination
clauses
and
may require
payment
of
a fee.
Since many
of the
commitments
are
expected to
expire without being
fully drawn, the
total commitment
amounts disclosed
above do not
necessarily represent
future cash
requirements.
Unfunded lines of credit represent unused portions of credit facilities to our current borrowers that represent no change
in credit risk in our portfolio. Lines of credit
generally have variable interest rates. The
maximum potential number of future
payments we could
be required to
make is represented
by the contractual
amount of the
commitment, less
the amount of
any advances made.
Letters of credit are
conditional commitments issued
by us to guarantee
the performance of a
client to a third
party.
In
the event of nonperformance by
the client in accordance with the
terms of the agreement with the
third party,
we would be
required to fund
the commitment.
If the commitment
is funded, we
would be entitled
to seek recovery
from the client
from
the underlying collateral,
which can include
commercial real estate,
physical plant and
property, inventory, receivables, cash
or marketable securities.
68
USCB Financial Holdings, Inc.
2023 10-K
Asset and Liability Management Committee
The asset and liability management committee of our Company, or ALCO, consists of members of senior management
and our Board. Senior management is responsible for
ensuring in a timely manner that Board
approved strategies, policies,
and procedures
for managing
and mitigating
risks are
appropriately executed
within the
designated lines
of authority
and
responsibility.
ALCO
oversees
the
establishment,
approval,
implementation,
and
review
of
interest
rate
risk,
management,
and
mitigation strategies, ALM related policies, ALCO procedures
and risk tolerances and appetite.
While some degree of interest
rate risk (“IRR”) exposure is inherent
to the banking business, our ALCO
has established
sound risk management practices in place to identify,
measure, monitor and mitigate IRR exposures.
When assessing the scope
of IRR exposure and
impact on the consolidated
balance sheet, cash flows
and statement
of operations,
management considers
both earnings
and economic
impacts. Asset price
variations, deposits
volatility and
reduced earnings or outright losses could adversely affect
the Company’s liquidity,
performance, and capital adequacy.
Income simulations
are used
to assess
the impact
of changing
rates on
earnings under
different rates
scenarios and
time horizons.
These simulations
utilize both
instantaneous and
parallel changes
in the
level of
interest rates,
as well
as
non-parallel changes such as changing slopes (flat and steeping) and
twists of the yield curve, Static simulation models are
based on current exposures and
assume a constant balance sheet with
no new growth. Dynamic simulation analysis
is also
utilized to have a
more comprehensive assessment
on IRR. This simulation
relies on detailed
assumptions outlined in
our
budget and strategic plan, and in assumptions regarding changes in
existing lines of business, new business, management
strategies and client expected behavior.
To
have
a
more
complete
picture
of
IRR,
the
Company
also
evaluates
the
economic
value
of
equity,
or
EVE.
This
assessment
allows
us
to
measure
the
degree
to
which
the
economic
values
will
change
under
different
interest
rate
scenarios. The economic value of equity approach focuses on
a longer-term time horizon and captures all
future cash flows
expected from existing assets and liabilities.
The economic value model utilizes a
static approach in that the analysis does
not incorporate new business; rather,
the analysis shows a snapshot in time of the risk
inherent in the balance sheet.
Market and Interest Rate Risk Management
According to our ALCO model, as
of December 31, 2023, we were
a slightly asset sensitive/neutral bank
for year one
modeling and asset sensitive for year two modeling. Asset sensitivity indicates that
our assets generally reprice faster than
our
liabilities,
which
results
in
a
favorable
impact
to
net
interest
income
when
market
interest
rates
increase.
Liability
sensitivity indicates
that our
liabilities generally
reprice faster
than
our assets,
which results
in a
favorable
impact to
net
interest income
when market
interest rates
decrease. Many
assumptions are
used to
calculate the
impact of
interest rate
variations
on
our
net
interest
income,
such
as
asset
prepayment
speeds,
non-maturity
deposit
price
sensitivity,
pricing
correlations, deposit truncations and decay rates, and
key interest rate drivers.
Because of the inherent use
of these estimates and
assumptions in the model,
our actual results may,
and most likely
will, differ from static measures results. In
addition, static measures like the economic value
of equity (“EVE“) do not include
actions that management may undertake
to manage the risks in
response to anticipated changes
in interest rates or client
deposit behavior. As part of
our ALM strategy and policy,
management has the ability to modify the balance sheet to either
increase or
decrease asset
duration and
increase or
decrease liability
duration to
modify the
balance sheet
sensitivity to
interest rates.
According to our model, as of
end of 2023, the NIM will
remain fairly stable for static rate
scenarios (-400 basis points:
+400 basis points). For the
static forecast for year one,
the estimated NIM will increase
from 2.81% base case scenario
to
2.86% under a +400-basis
points scenario. Additionally,
utilizing an EVE approach,
we analyze the risk
to capital from the
effects
of various
interest rate
scenarios
through a
long-term discounted
cash flow
model. This
measures
the difference
between the economic
value of our
assets and the
economic value of
our liabilities, which is
a proxy for
our liquidation value.
According to
our balance
sheet composition,
and as
expected, our
model stipulates
that an
increase of
interest rates
will
have a negative impact on
the EVE. Results and analysis are
presented quarterly to the ALCO, and
strategies are reviewed
and refined.
Additionally, in the last year we have been reducing our asset sensitivity by extending asset duration. This has reduced
our NII volatility for the first and
second year in the analysis and has helped us
to maintain the NII in accordance with ALCO
expectations.
69
USCB Financial Holdings, Inc.
2023 10-K
Liquidity
Liquidity is
defined as
a Company’s capacity
to meet
its cash
and collateral
obligations at
a reasonable
cost. Maintaining
an adequate level of liquidity depends on the Company’s ability to
efficiently meet both expected and unexpected cash flow
and collateral needs without adversely affecting
either daily operations or the financial condition of the
Company.
Liquidity risk
is the
risk that
we will
be unable
to meet
our short-term
and long-term
obligations as
they become
due
because of an
inability to liquidate
assets or obtain
adequate funding on
acceptable terms in
a timely matter. The
Company’s
obligations, and the funding sources used to meet them, depend significantly
on our business mix, balance sheet structure
and composition, credit quality of
our assets, interest rate
environment and the cash flow
profiles of our on- and
off-balance
sheet obligations.
In
managing
cash
inflows
and
outflows,
management
regularly
monitors
situations
that
can
give
rise
to
increased
liquidity risk.
These include
funding mismatches, market
constraints on
the ability
to convert
assets (particularly investments)
into cash or in
accessing sources of
funds (i.e., market
liquidity), and contingent
liquidity events. Management
presents to
the ALCO,
on a
quarterly basis, liquidity
stress tests following
the scenarios
described in
the Company’s contingency
funding
plan.
Changes
in
macroeconomic
conditions,
exposure
to
credit
deterioration,
market,
operational,
legal
and
reputational
risks, including cybersecurity risk and
social media events could
also affect the Company’s liquidity risk
profile unexpectedly
and are considered in the assessment of liquidity and ALM
framework.
Management has established
a comprehensive and
holistic management process for
identifying, measuring, monitoring
and
mitigating
liquidity
risk.
Due
to
its
critical
importance
to
the
viability
of
the
Company,
liquidity
risk
management
is
integrated into our risk management processes, Contingency
Funding Plan and ALM policy.
Critical elements of our liquidity
risk management include: effective corporate governance consisting of
oversight by the
Board and ALCO and
involvement by senior management;
strategies, policies, procedures,
and limits used to
identify and
mitigate
liquidity
risk;
comprehensive
liquidity
risk
measurement
and
monitoring
systems
(including
assessments
of
the
current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and
business
activities
of the
Company;
management
of intraday
liquidity and
collateral;
a diverse
mix of
existing
and
potential
future
funding sources; adequate levels of highly liquid marketable securities free
of legal, regulatory, or operational impediments,
that can
be used
to meet
liquidity needs
in stressful situations;
comprehensive contingency
funding plans
that sufficiently
address potential adverse
liquidity events and
emergency cash
flow requirements; and
internal controls and
internal audit
processes sufficient to determine the adequacy
of the institution’s liquidity risk management
process.
We
expect
funds
to
be
available
from
several
basic
banking
activity
sources,
including
the
core
deposit
base,
the
repayment and maturity of loans and investment security
cash flows. Other potential funding sources include
federal funds
purchased, brokered
certificates
of deposit,
listing certificates
of deposit,
Fed funds
lines and
borrowings from
the FHLB
Atlanta. Accordingly, our liquidity resources were at sufficient levels to
fund loans and meet other
cash needs as necessary.
At December 31, 2023,
the Company had $224.8
million in available liquidity
on balance sheet, including
$187.7 million in
unpledged securities available to
use as collateral and
$37.1 million in
excess cash. The Company
had an additional $395.0
million in off balance sheet liquidity,
excluding access to brokered deposits and other off balance
sheet sources of funding.
70
USCB Financial Holdings, Inc.
2023 10-K
Capital Adequacy
As
of
December 31,
2023,
the
Bank
was
well
capitalized
under
the
FDIC’s
prompt
corrective
action
framework.
Additionally,
we follow the
capital conservation buffer
framework, and according
to our actual ratios
the Bank exceeds
the
capital conversation
buffer in
all capital ratios
as of December 31,
2023. The Company
is not subject
to regulatory
capital
requirements because it is deemed by the Federal Reserve
to be a small bank holding company.
The
following
table
presents
the
capital
ratios
for
the
Bank
at
December 31,
2023
and
2022
(in
thousands,
except
ratios):
Actual
Minimum Capital
Requirements
To be Well Capitalized Under
Prompt Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2023
Total
risk-based capital:
$
233,109
12.65%
$
147,432
8.00%
184,290
10.00%
Tier 1 risk-based capital:
$
211,645
11.48%
$
110,574
6.00%
147,432
8.00%
Common equity tier 1 capital:
$
211,645
11.48%
$
82,931
4.50%
119,789
6.50%
Leverage ratio:
$
211,645
9.17%
$
92,328
4.00%
115,410
5.00%
December 31, 2022
Total
risk-based capital:
$
216,693
13.58%
$
127,616
8.00%
159,520
10.00%
Tier 1 risk-based capital:
$
198,909
12.47%
$
95,712
6.00%
127,616
8.00%
Common equity tier 1 capital:
$
198,909
12.47%
$
71,784
4.50%
103,688
6.50%
Leverage ratio:
$
198,909
9.56%
$
83,210
4.00%
104,012
5.00%
Impact of Inflation
Our Consolidated
Financial Statements
and related
notes have been
prepared in
accordance with U.S.
GAAP,
which
requires the
measurement of
financial position
and operating
results in
terms of
historical dollars,
without considering
the
changes
in
the
relative
purchasing
power
of
money
over
time due
to
inflation.
The
impact
of
inflation
is
reflected
in
the
increased cost of operations.
Unlike most industrial companies,
nearly all our assets and
liabilities are monetary in
nature.
As a result,
interest rates have a
greater impact on our
performance than do the
effects of general levels
of inflation. Periods
of high inflation
are often accompanied
by relatively higher
interest rates, and
periods of low
inflation are accompanied
by
relatively lower interest rates.
As market interest rates
rise or fall in relation
to the rates earned
on loans and investments,
the value of these assets decreases or increases respectively.
Recently Issued Accounting Pronouncements
Recently issued accounting
pronouncements are discussed
in Note 1 “Summary
of Significant Accounting
Policies” in
the Consolidated Financial Statements of this Annual Report
on Form 10-K.
71
USCB Financial Holdings, Inc.
2023 10-K
Reconciliation and Management Explanation of Non
-GAAP Financial Measures
Management has included
non-GAAP measures set
forth below because
it believes these
measures may provide
useful
supplemental information
for evaluating
the Company’s
underlying performance
trends. Further,
management uses
these
measures
in
managing
and
evaluating
the
Company’s
business
and
intends
to
refer
to
them
in
discussions
about
our
operations and performance.
Operating performance
measures should be
viewed in addition
to, and not
as an alternative
to or
substitute
for,
measures
determined
in
accordance
with
GAAP,
and
are
not
necessarily
comparable
to non-GAAP
measures
that
may be
presented
by other
companies.
The Company
believes
these
non-GAAP
measurements
are key
indicators of the
earnings power
of the Company.
The following
table reconciles
the non-GAAP
financial measurement
of
operating net income available to common stockholders
for the periods presented (in thousands,
except per share data):
As of and for the years ended December 31,
2023
2022
Pre-Tax Pre-Provision ("PTPP") income: (1)
Net income (GAAP)
$
16,545
$
20,141
Plus: Provision for income taxes
5,251
6,944
Plus: Provision for (recovery of) credit losses
2,367
2,495
PTPP income
$
24,163
$
29,580
Operating net income: (1)
Net income (GAAP)
$
16,545
$
20,141
Less: Net gain (loss) on sale of securities
(1,859)
(2,529)
Less: Tax
effect on sale of securities
471
641
Operating net income
$
17,933
$
22,029
Operating PTPP income: (1)
PTPP income
$
24,163
$
29,580
Less: Net gain (loss) on sale of securities
(1,859)
(2,529)
Operating PTPP Income
$
26,022
$
32,109
(1) The Company believes these non-GAAP measurements are key indicators of the ongoing earnings power of the Company.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company,
we are not required to provide the information required
by this item.
uscb-20231231p73i0
Crowe LLP
Independent Member Crowe Global
73
USCB Financial Holdings, Inc.
2023 10-K
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of
USCB Financial Holdings, Inc.
Doral, Florida
Opinion on the Financial Statements
We
have
audited
the
accompanying
consolidated
balance sheets
of USCB
Financial
Holdings,
Inc. (the
"Company")
as
of
December
31,
2023
and
2022,
the
related
consolidated
statements
of
operations,
comprehensive income
(loss), changes
in stockholders’
equity,
and cash
flows for
the years
then ended,
and the
related
notes
(collectively
referred
to as
the
"financial statements").
In
our opinion,
the
financial
statements present fairly, in all material respects, the
financial position of the Company
as of December 31,
2023 and 2022, and the results
of its operations and its cash
flows for the years then ended, in conformity
with accounting principles generally accepted in the United
States of America.
Explanatory Paragraph - Change in Accounting Principle
As discussed in Note 1 to the financial
statements, the Company has changed its method of accounting for
credit losses effective January 1, 2023 due to the adoption
of ASU 2016-13 Financial Instruments – Credit
Losses
(ASC
Topic
326).
The
Company
adopted
the
new
credit
loss
standard
using
the
modified
retrospective
method
such
that
prior
period
amounts
are
not
adjusted
and
continue
to
be
reported
in
accordance with previously applicable generally accepted accounting
principles.
Basis for Opinion
These financial
statements are
the responsibility
of the
Company's management.
Our responsibility
is to
express an opinion
on the Company's financial
statements based on our
audits. We are a
public accounting
firm registered
with the
Public Company
Accounting Oversight
Board (United
States) ("PCAOB")
and are
required to be
independent with respect to
the Company in accordance
with the U.S.
federal securities laws
and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted
our audits
in accordance
with the
standards of
the PCAOB.
Those standards
require that
we plan and perform the
audit to obtain reasonable
assurance about whether the
financial statements are
free of material misstatement, whether due to error or fraud.
Our
audits
included
performing
procedures
to
assess
the
risks
of
material
misstatement
of
the
financial
statements, whether
due to
error or
fraud, and
performing procedures
that respond
to those
risks.
Such
procedures
included examining,
on a
test basis,
evidence
regarding the
amounts
and disclosures
in the
financial
statements.
Our
audits
also
included
evaluating
the
accounting
principles
used
and
significant
estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that our audits provide a reasonable
basis for our opinion.
/s/ Crowe LLP
Crowe LLP
We have served as the Company's auditor since
2017.
Fort Lauderdale, Florida
March 22, 2024
74
USCB Financial Holdings, Inc.
2023 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands,
except share and per share data)
December 31,
2023
2022
ASSETS:
Cash and due from banks
$
8,019
$
6,605
Interest-bearing deposits in banks
33,043
47,563
Total cash and cash equivalents
41,062
54,168
Investment securities held to maturity net allowance of
$
8
and $0, respectively (fair value $
155,510
and
$
169,088
, respectively)
174,974
188,699
Investment securities available for sale, at fair value
229,329
230,140
Federal Home Loan Bank stock, at cost
10,153
2,882
Loans held for investment, net of allowance of
$
21,084
and $
17,487
, respectively
1,759,743
1,489,851
Accrued interest receivable
10,688
7,546
Premises and equipment, net
4,836
5,263
Bank owned life insurance
51,781
42,781
Deferred tax asset, net
37,282
42,360
Lease right-of-use asset
11,423
14,395
Other assets
7,822
7,749
Total assets
$
2,339,093
$
2,085,834
LIABILITIES:
Deposits:
Demand
$
552,762
$
629,776
Money market and savings accounts
1,048,272
915,853
Interest-bearing checking accounts
47,702
66,675
Time deposits
288,403
216,977
Total deposits
1,937,139
1,829,281
Federal Home Loan Bank advances
183,000
46,000
Lease liability
11,423
14,395
Accrued interest and other liabilities
15,563
13,730
Total liabilities
2,147,125
1,903,406
Commitments and contingencies (See Notes 10
and 18)
(nil)
(nil)
STOCKHOLDERS' EQUITY:
Preferred stock - Class C; $
1.00
par value; $
1,000
per share liquidation preference;
52,748
shares
authorized; 0 issued and 0 outstanding as of
December 31, 2023 and 2022
-
-
Preferred stock - Class D; $
1.00
par value; $
5.00
per share liquidation preference;
12,309,480
shares
authorized; 0 issued and 0 outstanding as of
December 31, 2023 and 2022
-
-
Preferred stock - Class E; $
1.00
par value; $
1,000
per share liquidation preference;
3,185,024
shares
authorized; 0 issued and 0 outstanding as of
December 31, 2023 and 2022
-
-
Common stock - Class A Voting; $
1.00
par value;
45,000,000
shares authorized;
19,575,435
and
20,000,753
issued and outstanding as of December 31,
2023 and 2022
19,575
20,001
Common stock - Class B Non-voting; $
1.00
par value;
8,000,000
shares authorized; 0 issued and 0
outstanding as of December 31, 2023 and 2022
-
-
Additional paid-in capital on common stock
305,212
311,282
Accumulated deficit
( 88,548 )
( 104,104 )
Accumulated other comprehensive income (loss)
( 44,271 )
( 44,751 )
Total stockholders' equity
191,968
182,428
Total liabilities and stockholders' equity
$
2,339,093
$
2,085,834
The accompanying notes are an integral part of
these consolidated financial statements.
75
USCB Financial Holdings, Inc.
2023 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Dollars in thousands,
except per share data)
Years Ended December 31,
2023
2022
Interest income:
Loans, including fees
$
87,884
$
60,825
Investment securities
10,012
9,346
Interest-bearing deposits in financial institutions
3,121
929
Total interest income
101,017
71,100
Interest expense:
Interest-bearing deposits
901
86
Savings and money markets accounts
29,658
5,173
Time deposits
8,500
1,509
Federal Home Loan Bank advances
3,390
671
Total interest expense
42,449
7,439
Net interest income before provision for
credit losses
58,568
63,661
Provision for credit losses
2,367
2,495
Net interest income after provision for
credit losses
56,201
61,166
Non-interest income:
Service fees
5,055
4,010
Bank owned life insurance income
2,160
1,061
Gain (loss) on sale of securities available for sale,
net
( 1,859 )
( 2,529 )
Gain on sale of loans held for sale, net
801
891
Loan settlement
-
161
Other non-interest income
1,246
1,634
Total non-interest income
7,403
5,228
Non-interest expense:
Salaries and employee benefits
24,429
23,943
Occupancy
5,230
5,058
Regulatory assessment and fees
1,453
930
Consulting and legal fees
1,899
1,890
Network and information technology services
2,016
1,806
Audit and tax services fees
1,287
918
Other operating
5,494
4,764
Total non-interest expense
41,808
39,309
Net income before income tax expense
21,796
27,085
Income tax expense
5,251
6,944
Net income
16,545
20,141
Net income available to common stockholders
$
16,545
$
20,141
Per share information:
Class A common stock
Net income per share, basic
$
0.84
$
1.01
Net income per share, diluted
$
0.84
$
1.00
The accompanying notes are an integral part of
these consolidated financial statements.
76
USCB Financial Holdings, Inc.
2023 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Income
(Loss)
(Dollars in thousands)
Years Ended December 31,
2023
2022
Net income
$
16,545
$
20,141
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities
( 1,801 )
( 59,260 )
Amortization of net unrealized gains on securities
transferred from available-for-sale to held-to-maturity
251
120
Reclassification adjustment on sale of available
for sale securities for loss included in net income
1,859
2,529
Unrealized gain on cash flow hedge
334
-
Tax effect
( 163 )
14,376
Total other comprehensive income (loss), net of tax
480
( 42,235 )
Total comprehensive income (loss)
$
17,025
$
( 22,094 )
The accompanying notes are an integral part of
these consolidated financial statements.
77
USCB Financial Holdings, Inc.
2023 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders’
Equity
(Dollars in thousands,
except per share data)
Common Stock
Additional Paid-in
Capital on
Common Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Shares
Par Value
Total
Stockholders'
Equity
Balance at January 1, 2023
20,000,753
$
20,001
$
311,282
$
( 104,104 )
$
( 44,751 )
$
182,428
After tax cumulative effect of adoption of accounting principle
related to
ASC 326
-
-
-
( 989 )
-
( 989 )
Adjusted beginning balance after cumulative effect adjustment
20,000,753
20,001
311,282
( 105,093 )
( 44,751 )
181,439
Net income
-
-
-
16,545
-
16,545
Other comprehensive income
-
-
-
-
480
480
Repurchase of Class A common stock
( 669,920 )
( 670 )
( 6,913 )
-
-
( 7,583 )
Restricted stock issued
242,713
242
( 242 )
-
-
-
Restricted stock forfeiture
( 8,111 )
( 8 )
8
-
-
-
Exercise of stock options
10,000
10
65
-
-
75
Stock-based compensation
-
-
1,012
-
-
1,012
Balance at December 31, 2023
19,575,435
19,575
305,212
( 88,548 )
( 44,271 )
191,968
Balance at January 1, 2022
19,991,753
$
19,992
$
310,666
$
( 124,245 )
$
( 2,516 )
$
203,897
Net income
-
-
-
20,141
-
20,141
Other comprehensive loss
-
-
-
-
( 42,235 )
( 42,235 )
Issuance of common stock - exercised options
9,000
9
93
-
-
102
Stock-based compensation
-
-
523
-
-
523
Balance at December 31, 2022
20,000,753
$
20,001
$
311,282
$
( 104,104 )
$
( 44,751 )
$
182,428
The accompanying notes are an integral part of
these consolidated financial statements.
78
USCB Financial Holdings, Inc.
2023 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
2023
2022
Cash flows from operating activities:
Net income
$
16,545
$
20,141
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses
2,367
2,495
Depreciation and amortization
590
688
(Accretion) amortization of premiums on securities,
net
( 770 )
433
Accretion of deferred loan fees, net
( 184 )
( 1,497 )
Stock-based compensation
1,012
523
Loss on sale of available for sale securities
1,859
2,529
Gain on sale of loans held for sale
( 801 )
( 891 )
Increase in cash surrender value of bank owned
life insurance
( 2,160 )
( 1,061 )
Decrease in deferred tax asset
5,251
6,945
Net change in operating assets and liabilities:
Accrued interest receivable
( 3,142 )
( 1,571 )
Other assets
261
( 3,449 )
Accrued interest and other liabilities
1,718
4,252
Net cash provided by operating activities
22,546
29,537
Cash flows from investing activities:
Purchase of investment securities held to maturity
( 86,788 )
( 14,739 )
Proceeds from maturities and pay-downs of investment
securities held to maturity
101,541
12,237
Purchase of investment securities available for
sale
( 40,379 )
( 53,113 )
Proceeds from maturities and pay-downs of investment
securities available for sale
15,189
40,754
Proceeds from sales of investment securities available
for sale
24,185
60,649
Net increase in loans held for investment
( 239,361 )
( 257,580 )
Purchase of loans held for investment
( 45,645 )
( 70,175 )
Additions to premises and equipment
( 163 )
( 673 )
Proceeds from the sale of loans held for sale
12,530
12,821
Purchase of Bank owned life insurance, net
( 6,840 )
-
Proceeds from the redemption of Federal Home
Loan Bank stock
15,495
3,440
Purchase of Federal Home Loan Bank stock
( 22,766 )
( 4,222 )
Net cash used in investment activities
( 273,002 )
( 270,601 )
(Continued)
The accompanying notes are an integral part of
these consolidated financial statements.
79
USCB Financial Holdings, Inc.
2023 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years Ended December 31,
2023
2022
Cash flows from financing activities:
Proceeds from exercise of Class A common stock
options, net
75
102
Repurchase of Class A common stock
( 7,583 )
-
Net increase in deposits
107,858
238,902
Proceeds from Federal Home Loan Bank advances
529,350
126,000
Repayments on Federal Home Loan Bank advances
( 392,350 )
( 116,000 )
Net cash provided by financing activities
237,350
249,004
Net increase (decrease) in cash and cash equivalents
( 13,106 )
7,940
Cash and cash equivalents at beginning of period
54,168
46,228
Cash and cash equivalents at end of period
$
41,062
$
54,168
Supplemental disclosure of cash flow information:
Interest paid
$
41,306
$
7,306
Supplemental schedule of non-cash investing and
financing activities:
Transfer of loans held for investment to loans held for
sale
$
11,729
$
11,930
Transfer of investment securities from available-for-sale to held-to-maturity
$
-
$
63,798
Lease liability arising from obtaining right-of-use asset
$
-
$
3,203
The accompanying notes are an integral part of
these consolidated financial statements.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
80
USCB Financial Holdings, Inc.
2023 10-K
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Overview
USCB Financial Holdings, Inc., a
Florida corporation incorporated
in 2021, is a bank holding
company with one wholly
owned subsidiary,
U.S. Century Bank (the
“Bank”), together referred to
as “the Company”. The
Bank, established in 2002,
is a Florida
state-chartered, non-member financial institution providing financial
services through its banking
centers located
in South Florida.
In December 2021, USCB Financial
Holdings, Inc. acquired all issued
and outstanding shares of the Class
A common
stock of
the Bank
in connection
with the
reorganization of the
Bank into
a holding
company structure. Each
of the
outstanding
share of
the Bank’s
common stock,
par value
$
1.00
per share,
formerly held
by its
stockholders were
converted into
and
exchanged for one newly issued share of the Company’s
Class A common stock, par value $
1.00
per share.
The Bank
owns a
subsidiary,
Florida Peninsula
Title LLC,
that offers
our clients
title insurance
policies for
real estate
transactions closed at the Bank. Licensed in the State of Florida and approved by the Department of Insurance Regulation,
Florida Peninsula tittle LLC began operations in 2021.
Principles of Consolidation
Intercompany transactions
and balances
are eliminated
in consolidation.
The consolidated
financial statements
have
been prepared in accordance with GAAP.
Risk and Uncertainties
Banking Environment
Industry events
transpiring early
in 2023,
including bank
failures, have
led to
uncertainty and
concerns regarding
the
liquidity positions
of the
banking sector.
The Company’s
deposit base
includes
a combination
of consumer,
commercial,
and public
funds deposits.
The Company’s
largest depositors
include a
mixture of
government-related
organizations and
commercial clients without a high level of industry concentration.
In response
to these
events, the
Treasury
Department, the
Board of
Governors
of the
Federal Reserve
System, and
the FDIC
jointly announced
the Bank
Term
Funding Program
(BTFP) on
March 12,
2023. This
program aims
to enhance
liquidity by allowing institutions to pledge
certain securities at the par value
of the securities, and at a
borrowing rate of ten
basis
points
over
the
one-year
overnight
index
swap
rate.
The
BTFP
was
available
to
eligible
U.S.
federally
insured
depository institutions, with
advances having a
term of up to
one year and
no prepayment penalties.
In January 2024,
the
Company drew
$
80.0
million in the
BTFP; there
were
no
draws in 2023.
No further draws
were permitted
after March 11,
2024. All advances must be paid by January 2025.
Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking
industry.
Additionally,
the
rising
interest
rate
environment
experienced
in
2022
and
2023
has
increased
competition
for
liquidity and the premium at
which liquidity is available to
meet funding needs. The Company
believes its sources of liquidity
are sufficient to meet its needs as of the balance sheet
date.
An unexpected influx
of withdrawals of
deposits could adversely
impact the Company's
ability to
rely on organic
deposits
to primarily
fund its
operations, potentially
requiring greater
reliance on
secondary sources
of liquidity
to meet
withdrawal
demands or to fund continuing operations. These sources may include proceeds from FHLB advances, sales of
investment
securities and loans, federal funds lines of credit from correspondent
banks, and out-of-market time deposits.
Such reliance on secondary funding sources could increase the Company's
overall cost of funding and thereby reduce
net
income.
While
the
Company
believes
its
current
sources
of
liquidity
are
adequate
to
fund
operations,
there
is
no
guarantee they
will suffice
to meet
future
liquidity
demands.
This
may necessitate
slowing
or discontinuing
loan growth,
capital expenditures, or other investments, or liquidating assets.
Use of Estimates
The
Company
has
established
policies
and
control
procedures
that
are
intended
to
ensure
valuation
methods
are
controlled and
applied consistently
from period
to period.
These estimates
and assumptions,
which may
materially affect
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
81
USCB Financial Holdings, Inc.
2023 10-K
the reported amounts of
certain assets, liabilities, revenues
and expenses, are based
on information available as
of the date
of the
financial statements,
and changes
in this
information over
time and
the use
of revised
estimates and
assumptions
could materially affect amounts reported in subsequent
financial statements.
Cash and Cash Equivalents
The
Company
considers
investments
with
a
maturity
of
90
days
or
less
from
its
original
purchase
date
to
be
cash
equivalents. For
the Consolidated
Statements of
Cash Flows,
cash and cash
equivalents include
cash on hand,
amounts
due from banks, and interest-bearing deposits in banks.
Restricted Cash
The Company may be required to maintain
funds at other banks to satisfy
the terms of a loan participation agreement.
The Company reports restricted cash
within cash and cash equivalents.
At the years ended December
31, 2023 and 2022
the company had $
0
in restricted cash.
Interest-Bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions consist
of Federal Reserve Bank, Federal Home Loan
Bank and
other accounts.
Investment Securities
Debt securities
are recorded
at fair
value except
for those
securities which
the Company
has the
positive intent
and
ability to hold to
maturity. Management determines the appropriate classification of its securities at
the time of purchase
and
accounts for them on a trade date basis.
Debt securities that
management has the
positive intent and
ability to hold
to maturity are
classified as "held-to-maturity"
and recorded at amortized cost. Trading securities are
recorded at fair value with
changes in fair value included
in earnings.
Securities not classified
as held-to-maturity or
trading are classified
as "available-for-sale"
and recorded at
fair value, with
unrealized gains and
losses excluded from
earnings and reported
in other comprehensive
income (loss). Equity
investments
must be recorded at fair value with changes in fair value
included in earnings.
Purchase premiums and discounts are amortized or accreted over
the estimated life of the related available-for-sale or
held-to-maturity
security
as
an
adjustment
to
yield
using
the
effective
interest
method.
Prepayments
of
principal
are
considered in determining the estimated life of
the security. Such amortization and accretion are included in interest income
in the Consolidated
Statements of Operations.
Dividend and interest
income are recognized
when earned. Gains
and losses
on the sale of securities are recorded on trade date and are determined
on a specific identification basis.
On
January
1,
2023,
the
Company
adopted
ASU
2016-13
Financial
Instruments
-
Credit
Losses
(Topic
326):
Measurement of Credit Losses
on Financial Instruments,
as amended, which replaces
the incurred loss methodology
with
an expected
loss methodology
that is
referred to as
the CECL
methodology.
The measurement
of expected
credit losses
under the CECL methodology
is applicable to financial
assets measured at amortized
cost, including loan receivables
and
held-to-maturity debt
securities. In
addition, ASC
326 amended
the accounting
for available-for-sale
debt securities.
One
such change is
to require credit
losses to be
presented as an
allowance rather than
as a write-down
on available-for-sale
debt securities management does not intend to sell or
believes that it is more likely than not they will be required
to sell.
CECL requires a loss reserve for securities
classified as HTM. The reserve should reflect
historical credit performance
as well as the impact
of projected economic forecast.
For U.S. Government bonds
and U.S. Agency issued bonds
in HTM
the explicit and/or
implicit guarantee of the
US Government is sufficient to
conclude that a
credit loss reserve is
not required.
The
reserve
requirement
is
for
three
primary
assets
groups:
municipal
bonds,
corporate
bonds,
and
non-agency
securitizations.
The
Company
calculates
quarterly
the
loss
reserve
utilizing
Moody’s
ImpairmentStudio.
The
CECL
measurement
for
investment
securities
incorporates
historical
data,
containing
defaults
and
recoveries
information,
and
Moody’s baseline
economic forecast.
The solution
uses probability
of default/loss
given default (“PD/LGD”)
approach. PD
represents the likelihood a borrower will
default. Within the Moody’s model,
this is determined using historical
default data,
adjusted for the current economic environment. LGD projects
the expected loss if a borrower were to default.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
82
USCB Financial Holdings, Inc.
2023 10-K
Federal Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to
own a certain amount of stock based on the level
of borrowings and
other factors and
may invest in
additional amounts. FHLB
stock is carried
at cost, classified
as a restricted
asset, and
periodically evaluated
for impairment
based on
ultimate recovery
of par
value. As
of December
31, 2023
and
2022, FHLB
stock amounted
to $
10.2
million and
$
2.9
million, respectively,
with no
impairment deemed
necessary.
Both
cash and stock dividends are reported as interest income.
Loans Held for Investment and Allowance for Credit
Losses
Loans held for investment (“loans”) are reported at their outstanding principal
balance net of charge-offs, deferred loan
cost,
unearned
income, and
the ACL.
Interest income
is generally
recognized
when
income is
earned using
the interest
method.
Loan
origination
and
commitment
fees
and
the
costs
associated
with
the
origination
of
loans
are
deferred
and
amortized, using the interest method or the straight-line
method, over the life of the related loan.
If the
principal or
interest on
a commercial
loan becomes
due and
unpaid for
90 days
or more,
the loan
is placed
on
non-accrual status as of
the date it becomes
90 days past due
and remains in non
-accrual status until it
meets the criteria
for restoration to accrual status.
Residential loans, on
the other hand, are placed
on non-accrual status when
the principal
or interest
becomes due
and unpaid
for 120
days or
more and remains
in non-accrual
status until
it meets
the criteria
for
restoration
to
accrual
status.
Restoring
a
loan
to
accrual
status
is
possible
when
the
borrower
resumes
payment
of
all
principal and interest
payments for a period
of six months
and the Company
has a documented
expectation of repayment
of the remaining contractual principal and interest or the loan becomes secured and in the process of collection. All interest
accrued but not
collected for
loans that are
placed on
nonaccrual status
is reversed
against interest
income. The interest
on these
loans is
accounted for
on the
cash-basis
or cost-recovery
method, under
which cash
collections are
applied to
unpaid principal, which may change as conditions dictate.
The Company has determined that the entire balance of
a loan is contractually delinquent for all
classes if the minimum
payment is not received by
the specified due date on
the borrower's statement. Interest and fees
continue to accrue on past
due loans until the date the loan goes into nonaccrual
status.
The Company provides for loan losses through a provision for credit losses charged to operations. When management
believes that a
loan or a portion
of the loan balance
is uncollectible, that
amount is charged
against the ACL.
Subsequent
recoveries, if any,
are credited to the ACL.
The
ACL
reflects
management's
judgment
of
expected
loan
losses
in
the
portfolio
at
the
balance
sheet
date.
Management uses a disciplined
process and methodology
to establish the ACL
each quarter.
To
determine the total
ACL,
the Company
estimates the
reserves needed
for each
segment of
the portfolio,
including loans
analyzed individually
and
loans analyzed on a pooled basis. The ACL consists
of the amount applicable to the following segments:
•
Residential real estate
•
Commercial real estate
•
Commercial and industrial
•
Foreign banks
•
Other loans (secured and unsecured consumer loans)
Residential
real
estate
loans
are
underwritten
following
the
policies
of
the
Company
which
include
a
review
of
the
borrower’s credit, capacity
and the collateral
securing the loan.
The borrower’s ability
to repay involves
an analysis of
factors
including: current income,
employment status, monthly
payment of
the loan,
current debt
obligations, monthly debt
to income
ratio and credit history. The Company relies on appraisals in determining the value of the property.
Risk is mitigated by this
analysis and the diversity of the residential portfolio.
Commercial real estate
loans are
secured by liens
on commercial properties,
land, construction and
multifamily housing.
Underwriting of commercial real estate loans will analyze the key market and business factors to arrive at a decision on the
credit worthiness of the borrower. The analysis may include the capacity of the borrower,
income generated by property for
debt service,
other
sources
of repayment,
sensitivity
analysis
to fluctuations
in market
conditions
including vacancy
and
rental rates in geographic
location and loan
to value. Land
and construction loan
analysis will include
the time to
develop,
sell or lease
the property.
Appraisals are used
to determine the
value of the
underlying collateral.
Risk is mitigated
as the
properties securing the commercial real estate loans
are diverse in type, location, and loan structure.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
83
USCB Financial Holdings, Inc.
2023 10-K
Commercial
and
industrial
loans
are
secured
by
the
business
assets
of
the
company
and
may
include
equipment,
inventory, and receivables.
The loans are underwritten based on the
income capacity of the business, the ability
to service
the debt based
on operating cash
flows, the credit
worthiness of the
borrower,
other sources
of repayment and
collateral.
The Company mitigates the risk in the commercial portfolio
through industry diversification.
Foreign banks
loans
are short
-term
loans with
international
correspondent
banking
institutions
primarily
domiciled
in
Latin America. Most of these loans are for trade capital and have a
life of less than one year. The Company’s
credit review
includes a credit analysis, peer comparison and current
country risk overview.
Annual re-evaluation of the risk rating of the
borrower and country where the borrower is
located and a review by the authorized signer
within the Company.
The risk is
mitigated as these loans are short term, have limited exposure,
and are geographically dispersed.
Other loans are secured and
unsecured consumer loans including
yacht loans, personal loans, overdrafts
and deposit
account collateralized loans. Repayment of these loans are primarily from the personal income of the borrowers. Loans are
underwritten based on the credit worthiness of the borrower.
The risk on these loans is mitigated by small loan balances.
Under
CECL,
the
Company
estimates
the
ACL
using
relevant
available
information,
from
both
internal
and
external
sources,
relating
to
past
events,
current
conditions,
and
reasonable
and
supportable
forecasts.
Historical
credit
losses
provide the basis for estimation of expected credit losses. Qualitative adjustments are applied to the expected credit losses
estimated
for
the
loan
portfolio
in
relation
to
potential
limitations
of
the
quantitative
model.
A
scorecard
is
used
to
aid
management in the assessment of qualitative factor adjustments
applied to expected credit losses.
The
quantitative
component
of
the
estimate
relies
on
the
statistical
relationship
between
the
projected
value
of
an
economic
indicator
and
the
implied
historical
loss
experience
among
a
curated
group
of
peers.
The
Company
utilized
regression
analyses
of peer
data,
in
which
the
Company
was
included,
and
where
observed
credit
losses
and selected
economic factors were used
to determine suitable
loss drivers for modeling
the lifetime rates of
probability of default (PD).
A
loss
given
default
rate
(LGD)
is
assigned
to
each
pool
for
each
period
based
on
these
PD
outcomes.
The
model
fundamentally utilizes
an expected
discounted cash
flow (DCF)
analysis for loan
portfolio segments.
The DCF
analysis is
run
at
the
instrument-level
and
incorporates
an
array
of
loan-specific
data
points
and
segment-implied
assumptions
to
determine the lifetime expected
loss attributable to each
instrument. An implicit "hypothetical
loss" is derived
for each period
of the
DCF and
helps establish
the present
value of
future cash
flows for
each period.
The reserve
applied to
a specific
instrument is the difference
between the sum of the present
value of future cash flows
and the book balance of
the loan at
the measurement date.
Management
elected
the
Remaining
Life
(WARM)
methodology
for
five
loan
portfolio
segments.
For
each
of
these
segments, a
long-term average
loss rate
is calculated
and applied
on a
quarterly basis
for the
remaining life
of the
pool.
Adjustments
for
economic
expectations
are
made
through
qualitative
assessments.
For
the
remaining
life
estimated,
management implemented a software
solution that uses an
attrition-based calculation that performs quarterly, cohort-based
attrition measurements based on the loan portfolio.
Portfolio segments are the level at which loss assumptions
are applied to a pool of loans based on the similarity
of risk
characteristics inherent in the
included instruments, relying on
collateral codes and FFIEC
Call Report codes. The
Company
currently segments the
portfolio based on
collateral codes for
the
purpose of establishing
reserves. Each of
these segments
is
paired
to
regression
models
(Loss
Driver
Analyses)
based
on
peer
data
for
loans
of
similar
risk
characteristics.
The
Company has established relationships between internal segmentation and FFIEC
Call Report codes for this purpose. The
loss driver for each loan
portfolio segment is derived
from a readily available and
reasonable economic forecast, including
the Federal Reserve Bank
projections of U.S. civilian
unemployment rate and the
year-over-year real GDP
growth; for the
residential
loan
segment
the
HPI
projections
published
by
Fannie
Mae’s
Economic
and
Strategic
Research
Group
are
utilized for the
forecast. Forecasts
are applied to
the first four
quarters of the
credit loss estimate
and revert on
a straight-
line basis to the lookback period's historical mean for the
economic indicator over the expected life of loans.
The model incorporates qualitative
factor adjustments in order to
calibrate the model for risk
in each portfolio segment
that may
not be captured
through quantitative
analysis. Determinations
regarding qualitative
adjustments are
reflective of
management's
expectation
of loss
conditions
differing
from those
already
captured
in
the
quantitative
component
of
the
model.
Qualitative factors (“Q-Factors”) used in the ACL methodology
include:
• Changes in lending policies, procedures, and strategies
• Changes in international, national, regional, and local conditions
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
84
USCB Financial Holdings, Inc.
2023 10-K
• Changes in nature and volume of portfolio
• Changes in the volume and severity of past due loans
and other similar conditions
• Concentration risk
• Changes in the value of underlying collateral
• The effect of other external factors: e.g., competition,
legal, and regulatory requirements
• Changes in lending management, among others
The
Company
estimates
a
reserve
for
unfunded
commitments,
which
is
reported
separately
from
the
allowance
for
credit losses within
other liabilities. The
reserve is based
upon the same
quantitative and qualitative
factors applied to
the
collectively evaluated loan portfolio.
Concentration of Credit Risks
Credit
risk
represents
the
accounting
loss
that
would
be
recognized
at
the
reporting
date
if
counterparties
failed
to
perform as contracted and any collateral or security proved to be insufficient
to cover the loss. Concentrations of credit risk
(whether on or off-balance sheet) arising from financial instruments exist in relation to certain
groups of customers. A group
concentration arises
when a number
of counterparties
have similar economic
characteristics that would
cause their ability
to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not
have a significant exposure to any individual customer
or counterparty.
Most of the Company's business activity is
with customers located within its primary market area, which
is generally the
State of Florida. The Company's loan portfolio is concentrated largely in real estate and commercial loans in South Florida.
Many of the
Company's loan
customers are engaged
in real estate
development. Circumstances
which negatively
impact
the South Florida real estate industry
or the South Florida economy, in general, could adversely impact
the Company's loan
portfolio.
At December 31,
2023 and
2022, the
Company had
a concentration
of risk
with loans
outstanding to
the Company’s
top ten lending relationships
totaling $
163.1
million and $
197.9
million, respectively.
At December 31, 2023 and
2022, this
concentration represented
9.2
% and
13.1
% of
net loans
outstanding, respectively.
For the
periods ended
December 31,
2023 and December 31, 2022, the largest commercial real estate loan note
outside Florida was
one
commercial real estate
loan with an outstanding balance of $
20
million collateralized by a 1
st
lien commercial property located in New York
State.
At December 31, 2023,
the Company had
a concentration of
risk with loans
outstanding totaling $
105.4
million to foreign
banks located in Ecuador, Dominican Republic, Honduras, and El Salvador. At December 31, 2022, the Company also had
a concentration of risk
with loans outstanding totaling
$
88.8
million to foreign banks
located in Ecuador,
Honduras, and El
Salvador.
These
banks
maintained
deposits
with
right
of
offset
totaling
$
43.9
million
and
$
31.4
million
at
December 31,
2023 and 2022, respectively.
At various times during
the year,
the Company has maintained
deposits with other
financial institutions. The exposure
to the Company from
these transactions is solely
dependent upon daily balances
and the financial strength
of the respective
institution.
Premises and Equipment, net
Land is
carried at
cost. Premises
and equipment
are stated
at cost
less accumulated
depreciation
and amortization.
Depreciation is computed
on the straight-line
method over the
estimated useful life
of the asset. Leasehold
improvements
are amortized over the
remaining term of the
applicable leases or their
useful lives, whichever
is shorter.
Estimated useful
lives of these assets were as follows:
Building
s
40
years
Furniture, fixtures and equipment
3
to
25
years
Computer hardware and software
3
to
5
years
Leasehold improvements
Shorter of life or term of lease
Maintenance
and
repairs
are
charged
to
expense
as
incurred
while
improvements
and
betterments
are
capitalized.
When items are retired or are
otherwise disposed of, the related costs
and accumulated depreciation and amortization
are
removed from the accounts and any resulting gains or losses
are credited or charged to income.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
85
USCB Financial Holdings, Inc.
2023 10-K
Other Real Estate Owned
OREO consists of real estate
property acquired through, or
in lieu of, foreclosure that
are held for sale and are
initially
recorded at
the fair
value of
the property
less estimated
selling costs
at the
date
of foreclosure,
establishing
a new
cost
basis. Subsequent to
foreclosure, valuations
are periodically performed
by management and
the assets are
carried at the
lower of carrying
amount or
fair value
less cost
to sell.
Subsequent write-downs
are recognized
as a
valuation allowance
with
the
offset
recorded
in
the
Consolidated
Statements
of
Operations.
Carrying
costs
are
charged
to
other
real
estate
owned
expenses
in
the
accompanying
Consolidated
Statements
of
Operation.
Gains
or
losses
on
sale
of
OREO
are
recognized when
consideration has
been exchanged,
all closing
conditions have
been met
and permanent
financing has
been arranged.
Bank Owned Life Insurance
BOLI is carried at
the amount that could
be realized under the
contract at the balance sheet
date, which is typically
cash
surrender
value.
Changes
in
cash
surrender
value
are
recorded
in
non-interest
income.
At
December 31,
2023,
the
Company
maintained
BOLI
policies
with
five
insurance
carriers
with
a
combined
cash
surrender
value
of
$
51.8
million.
These policies cover certain present and former executives
and officers, the Company is the beneficiary
of these policies.
Employee 401(k) Plan
The
Company
has
an
employee
401(k)
plan
covering
substantially
all
eligible
employees.
Employee
401(k)
plan
expense is the amount of matching contributions.
Income Taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax
assets and liabilities are recognized
for the
future
tax
consequences
attributable
to differences
between the
financial
statement
carrying
amounts
of existing
assets and
liabilities and
their respective
tax bases
and operating
loss and
tax credit
carryforwards. Deferred
tax assets
and
liabilities
are
measured
using
enacted
tax
rates
expected
to
apply
to
taxable
income
in
the
years
in
which
those
temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and
liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date.
Management is required to
assess whether a valuation
allowance should be established
on the net deferred tax
asset
based on the
consideration of
all available evidence
using a more
likely than not
standard. In its
evaluation, Management
considers taxable loss
carry-back availability, expectation of sufficient
taxable income, trends
in earnings, the
future reversal
of temporary differences, and available tax planning
strategies.
The Company recognizes positions taken
or expected to be
taken in a tax
return in accordance with existing accounting
guidance on
income taxes
which prescribes
a recognition threshold
and measurement
process. Interest
and penalties
on
tax liabilities, if any, would
be recorded in interest expense and other operating noninterest
expense, respectively.
Impairment of Long-Lived Assets
The Company's long-lived
assets, such as premises
and equipment, are reviewed
for impairment whenever
events or
changes in circumstances
indicate that
the carrying
amount of
an asset may
not be recoverable.
Recoverability of
assets
to be held and
used is measured by a
comparison of the carrying amount of
an asset to estimated undiscounted future
cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge
is recognized
by the
amount by
which the
carrying amount
of the
asset exceeds
the fair
value of
the
asset. Assets
to be
disposed of
would be
separately
presented in
the Consolidated
Balance Sheets
and reported
at the
lower of
the carrying
amount or
fair value
less costs
to sell
and are
no longer
depreciated. The
assets and
liabilities of
a
disposal group classified as held for
sale would be presented separately in
the appropriate asset and liability sections of
the
Consolidated Balance Sheets.
Transfer of Financial Assets
Transfers of
financial assets
are accounted for
as sales,
when control over
the assets
has been surrendered.
Control
over
transferred
assets
is
deemed
to
be
surrendered
when
(i)
the
assets
have
been
isolated
from
the
Company
-
put
presumptively
beyond
the
reach
of
the
transferor
and
its
creditors,
even
in
bankruptcy
or
other
receivership,
(ii)
the
transferee obtains
the right
(free of conditions
that constrain
it from taking
advantage of
that right)
to pledge
or exchange
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
86
USCB Financial Holdings, Inc.
2023 10-K
the transferred
assets,
and
(iii) the
Company
does not
maintain effective
control
over
the transferred
assets
through
an
agreement to repurchase them before their maturity or
the ability to unilaterally cause the holder to return specific assets.
Comprehensive Income (Loss)
Under
GAAP,
certain
changes
in
assets
and
liabilities,
such
as
unrealized
holding
gains
and
losses
on
securities
available-for-sale, are
excluded from
current period
earnings and
reported as
a separate
component of
the stockholders’
equity section of the Consolidated
Balance Sheets, such items,
along with net income, are
components of comprehensive
income (loss).
Additionally,
any unrealized
gains or
losses on
transfers of
investment securities
from available-for-sale
to
held-to-maturity are recorded to
accumulated other comprehensive income (loss)
on the date
of transfer and amortized
over
the remaining life of each security. The amortization
of the unrealized gain or loss on transferred securities is reported as a
component of comprehensive income (loss). See Note 2 “Investment
Securities” for further discussion.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings per Common Share
Basic earnings
per common
share is
net income
available to
common stockholders
divided by
the weighted
average
number
of
common
shares
outstanding
during
the
period.
Diluted
earnings
per
common
share
included
the
effect
of
additional potential
common shares
issuable under
vested stock
options and
unvested restricted
stock. Basic
and diluted
earnings
per
share
are
updated
to
reflect
the
effect
of
stock
splits
as
occurred.
See
Note
14
“Earnings
Per
Share”
for
additional information
on earnings
per common
share. See
Note 13
“Stockholders’ Equity”
for further discussion
on stock
splits.
Interest Income
Interest income is recognized as earned, based upon the principal
amount outstanding, on an accrual basis.
Operating Segments
While the Company monitors
the revenue streams of
the various products
and services, operations
are managed and
financial performance
is evaluated on
a Company wide
basis. Operating results
of the individual
products are
not used to
make resource allocations or performance decisions by Company
management.
Stock-Based Compensation
Stock-based compensation accounting guidance requires that the compensation
cost relating to share-based payment
transactions be recognized in the accompanying Consolidated
Financial Statements. That cost will be measured
based on
the grant
date fair
value of
the equity
or liability
instruments issued.
The stock-based
compensation accounting
guidance
covers
a
wide
range
of
share-based
compensation
arrangements
including
stock
options,
restricted
share
awards,
performance-based awards, share appreciation rights, and
employee share purchase plans.
The stock-based compensation accounting guidance
requires that compensation cost
for all stock
awards be calculated
and recognized
over the
employees' service period,
generally defined as
the vesting
period. For
awards with graded-vesting,
compensation cost
is recognized
on
a straight-line
basis over
the
requisite service
period for
the
entire award.
A Black-
Scholes model is used to estimate the fair value of stock
options.
Loss Contingencies
Loss
contingencies,
including
claims
and
legal
actions
arising
in
the
normal
course
of
business,
are
recorded
as
liabilities when the
likelihood of loss is
probable, and an
amount or range of
loss can be
reasonably estimated. In the
opinion
of management, none of these actions, either individually or in the aggregate, is expected to have a material adverse effect
on the Company’s Consolidated Financial Statements.
See Note 18 “Loss Contingencies” for further details.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
87
USCB Financial Holdings, Inc.
2023 10-K
Dividend Restrictions
Banking
regulations
require
maintaining
certain
capital
levels
and
may
limit
the
dividends
paid
by
the
Bank
to
the
Company or by the Company to the stockholders.
Fair Value Measurements
Fair values
of financial
instruments are
estimated using
relevant market
information and
other assumptions,
as more
fully disclosed in Note
12 “Fair Value
Measurements”. Fair value estimates
involve uncertainties and
matters of significant
judgment. Changes in assumptions or in market conditions
could significantly affect the estimates.
Derivative Instruments
Derivative financial instruments are
carried at fair
value and reflect
the estimated amount that
would have been
received
to
terminate
these
contracts
at
the
reporting
date
based
upon
pricing
or
valuation
models
applied
to
current
market
information.
Rate Swaps Designated as Cash Flow Hedges
The
changes
in
fair
value
on
these
interest
rate
swaps
are
recorded
in
other
assets
or
other
liabilities
with
a
corresponding recognition
in other comprehensive
income (loss)
and subsequently reclassified
to earnings when
gains or
losses are realized. As of December 31, 2023 the cash
flow hedge was effective.
Interest Rate Swaps Designated as Fair Value
Hedges
The
changes
in
fair
value
on
these
interest
rate
swaps
are
recorded
in
other
assets
or
other
liabilities
with
a
corresponding recognition in the assets being hedged.
Interest Rate Swaps
The Company enters into interest rate swaps
agreements to provide commercial loan clients
the ability to swap from a
variable interest rate to a fixed rate. The Company
enters into a floating-rate loan with a customer with
a separately issued
swap agreement allowing
the customer to convert
floating payments on
the loan into a
fixed interest rate. To
mitigate risk,
the Company enters into a matching agreement with
a third party to offset the exposure on
the customer agreement. These
swaps are
not considered
to be
qualified hedging
transactions and
the unmatched
unrealized gain
or loss
is recorded
in
other non-interest income.
Interest
rate
swap
agreements
are
used
by
the
Company
as
part
of
its
asset-liability
management
strategy
to
help
manage its interest
rate risk exposure.
The notional amount
of the interest
rate swaps does
not represent actual
amounts
exchanged by the parties.
The amounts exchanged are determined
by reference to the
notional amount and the
other terms
of the individual interest rate swap agreements.
Revenue from Contracts with Customers
Revenue from
contracts with customers
is recognized in
an amount that
reflects the consideration
the Company expects
to receive for the
services the Company
provides to its
customers. The main
revenue earned by
the Company from
loans
and investment
securities
are excluded
from the
accounting standard
update “Revenue
from Contracts
with Customers”.
Deposit and
service charge
fees, consisting
of primarily
monthly maintenance
fees, wire
fees, ATM
interchange fees
and
other transaction-based fees, are the most
significant types of revenue within
the accounting standard update.
Revenue is
recognized when the service provided by the
Company is complete. The aggregate amount
of revenue within the scope of
this standard that is received from sources other than deposit
service charges and fees is not material.
Cash Flow Statement
The Company reports the net activity rather than gross activity in the Consolidated
Statements of Cash Flows. The net
cash
flows
are
reported
for
loans
held
for
investment,
accrued
interest
receivable,
deferred
tax
assets,
other
assets,
customer deposits, accrued interest payable, other liabilities, and
proceeds from the issuance of Class A common shares.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
88
USCB Financial Holdings, Inc.
2023 10-K
Reclassifications
Certain
amounts
in
the
Consolidated
Financial
Statements
have
been
reclassified
to
conform
to
the
current
presentation. Reclassifications had no impact on the net income
or stockholders’ equity of the Company.
Recently Issued Accounting Standards
Issued and Adopted
Guidance on Accounting for Credit Losses on Financial Instruments
On January 1, 2023, the Company implemented Accounting Standard Update (“ASU”)
2016-13
Financial Instruments -
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended. This update replaces the
incurred
loss
methodology
with
the
CECL
methodology.
The
CECL
methodology
measures
expected
credit
losses
and
applies to
financial assets
measured at
amortized cost,
including loan
receivables and
held-to-maturity debt
securities. It
also applies to off-balance sheet credit
exposures not accounted for as insurance
(e.g., loan commitments, standby letters
of
credit,
financial
guarantees,
and
similar
instruments),
as
well
as
net
investments
in
leases
recognized
by
lessors
in
accordance with Topic 842 on leases. Furthermore, ASC 326 amended the accounting treatment for available-for-sale debt
securities. One notable
change is
the requirement for
credit losses to
be reported
as an allowance
rather than as
a write-
down on available-for-sale debt securities that management does not intend to
sell or believes it is more likely than
not they
will not need
to sell. CECL
requires a
loss reserve
for securities
classified as
held-to-maturity (HTM).
The reserve
should
reflect historical credit performance as well as the impact
of projected economic
forecast.
At adoption
of CECL,
84
% or
$
1.3
billion of
loan receivables
were collectively
evaluated under
the Discounted
Cash
Flow (“DCF)” method
and
16
% or $
251.0
million of loan
receivables were collectively
evaluated under the
Remaining Life
method. The remaining $
7.9
million of loan receivables of the total loan portfolio
were individually evaluated.
The impact of
adoption of the
ASU 2016-13 in
January 1, 2023,
was an increase
to ACL on
loans receivables of
$
1.1
million and
an increase
to the
reserve for
unfunded commitments
of $
259
thousand. This
one-time net
of tax
cumulative
adjustment resulted in
a increase of
$
1.0
million in accumulated
deficit. The following
table reflects the
impact of adopting
CECL on the Company’s consolidated balance sheet
(in thousands):
January 1, 2023
As Reported Under ASC
326
Pre - ASC 326 Adoption
Impact of ASC 326
Adoption
Assets
Allowance for credit losses
$
18,553
$
17,487
$
1,066
Deferred tax asset, net
42,696
42,360
336
Liabilities
Reserve for unfunded credit commitments
516
257
259
Stockholder's Equity
Retained earnings
$
( 105,093 )
$
( 104,104 )
$
( 989 )
See “Allowance for Credit Losses” section in Note 3 for
more information on the ACL.
Guidance on Accounting for Trouble
Debt Restructuring and Vintage Disclosures
In March 2022, the
FASB issued ASU 2022-02, which eliminates creditor accounting guidance for
TDRs for entities that
have adopted ASU 2016-13, Financial Instruments
-Credit Losses (Topic
326) and enhances Vintage Disclosures
of Gross
Write-offs.
This ASU
eliminates Subtopic
310-40 guidance
for TDRs
and requires
creditors to
apply the
loan refinancing
and restructuring
guidance in
Subtopic 310-20
when evaluating
modifications granted
to borrowers
experiencing financial
difficulty to determine
whether the modification is
considered a continuation
of an existing loan
or a new loan.
The vintage
disclosure component of
the ASU requires
entities to disclose
current-period gross write-offs by
origination year for
financing
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
89
USCB Financial Holdings, Inc.
2023 10-K
receivables and investment leases within the scope of Subtopic 326-20. The Company adopted ASU 2022-02 concurrently
with the adoption of ASU 2016-13.
Issued and Not Yet
Adopted
Guidance on Reference Rate Reform
In
March
2020,
the
FASB
issued
ASU
2020-04,
Reference
Rate
Reform
(Topic
848),
Facilitation
of
the
Effects
of
Reference Rate Reform
on Financial Reporting.
In January 2021,
the FASB
clarified the scope
of this guidance
with ASU
2021-01 which provides
optional guidance for
a limited period of
time to ease the
burden in accounting for
(or recognizing
the effects
of) reference
rate reform
on financial
reporting. This
ASU is
effective
March 12,
2020 through
December
31,
2024. The
Company is
evaluating the
impact of
this ASU
and has
not yet
determined whether
LIBOR transition
and this
ASU will have material effects on our business
operations and consolidated financial statements.
2.
INVESTMENT SECURITIES
The following
tables present
a summary
of the amortized
cost, unrealized
or unrecognized
gains and
losses,
and fair
value of investment securities at the dates indicated (in
thousands):
December 31, 2023
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
9,664
$
-
$
( 1,491 )
$
8,173
Collateralized mortgage obligations
103,645
-
( 23,039 )
80,606
Mortgage-backed securities - residential
63,795
-
( 11,608 )
52,187
Mortgage-backed securities - commercial
49,212
56
( 6,504 )
42,764
Municipal securities
25,005
-
( 5,667 )
19,338
Bank subordinated debt securities
28,106
188
( 2,033 )
26,261
$
279,427
$
244
$
( 50,342 )
$
229,329
Held-to-maturity:
U.S. Government Agency
$
43,626
$
2
$
( 5,322 )
$
38,306
Collateralized mortgage obligations
62,735
-
( 7,983 )
54,752
Mortgage-backed securities - residential
43,784
348
( 4,533 )
39,599
Mortgage-backed securities - commercial
15,439
-
( 1,257 )
14,182
Corporate bonds
9,398
-
( 727 )
8,671
$
174,982
$
350
$
( 19,822 )
$
155,510
Allowance for credit losses - securities held-to-maturity
( 8 )
Securities held-to maturity, net of allowance for credit losses
$
174,974
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
90
USCB Financial Holdings, Inc.
2023 10-K
December 31, 2022
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
10,177
$
-
$
( 1,522 )
$
8,655
Collateralized mortgage obligations
118,951
-
( 23,410 )
95,541
Mortgage-backed securities - Residential
73,838
-
( 12,959 )
60,879
Mortgage-backed securities - Commercial
32,244
15
( 4,305 )
27,954
Municipal securities
25,084
-
( 6,601 )
18,483
Bank subordinated debt securities
15,964
5
( 1,050 )
14,919
Corporate bonds
4,037
-
( 328 )
3,709
$
280,295
$
20
$
( 50,175 )
$
230,140
Held-to-maturity:
U.S. Government Agency
$
44,914
$
25
$
( 5,877 )
$
39,062
U.S. Treasury
9,841
-
( 13 )
9,828
Collateralized mortgage obligations
68,727
28
( 7,830 )
60,925
Mortgage-backed securities - Residential
42,685
372
( 4,574 )
38,483
Mortgage-backed securities - Commercial
11,442
-
( 665 )
10,777
Corporate bonds
11,090
-
( 1,077 )
10,013
$
188,699
$
425
$
( 20,036 )
$
169,088
For the year ended December 31, 2023, there were
no
investment securities that were transferred from
AFS to HTM.
For the year
ended December 31,
2022, there
were
26
investment securities
that were
transferred from
AFS to
HTM
with an amortized cost basis and fair value amount
of $
74.4
million and $
63.8
million, respectively.
On the date of transfer,
these securities had a total net unrealized loss of $
10.6
million which was included in AOCI.
Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer.
The
unrealized
gain
or
loss
at
the
date
of
transfer
is
retained
in
AOCI
and
in
the
carrying
value
of
the
held-to-maturity
securities. There was no impact to net income. Such amounts
are amortized over the remaining life of the security.
For the
years
ended
December 31,
2023
and
2022,
total
amortization
out
of
AOCI
for
the
net
unrealized
losses
on
securities
transferred from
AFS to
HTM was
$
251
thousand and
$
120
thousand. In
addition for
these securities,
the balance
of the
net unrealized losses retained in AOCI was $
9.5
million at December 31, 2023 and $
9.8
million at December 31, 2022.
The following
table presents
the proceeds,
realized gross
gains and
realized gross
losses on
sales and
calls of
AFS
debt securities for the years ended December 31, 2023 and
2022 (in thousands):
Available-for-sale:
2023
2022
Proceeds from sales and call of securities
$
24,185
$
60,649
Gross Gains
$
3
$
217
Gross Losses
( 1,862 )
( 2,746 )
Net realized gains (losses)
$
( 1,859 )
$
( 2,529 )
The
amortized
cost
and
fair
value
of
investment
securities,
by
contractual
maturity,
are
shown
below
for
the
date
indicated (in thousands).
Actual maturities may
differ from contractual
maturities because borrowers
may have the right
to
call or prepay
obligations with or
without call or
prepayment penalties. Securities not
due at a
single maturity date are
shown
separately.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
91
USCB Financial Holdings, Inc.
2023 10-K
Available-for-sale
Held-to-maturity
December 31, 2023:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Due within one year
$
-
$
-
$
-
$
-
Due after one year through five years
2,710
2,853
9,398
8,671
Due after five years through ten years
32,116
28,673
-
-
Due after ten years
18,285
14,073
-
-
U.S. Government Agency
9,664
8,173
43,626
38,306
Collateralized mortgage obligations
103,645
80,606
62,735
54,752
Mortgage-backed securities - residential
63,795
52,187
43,784
39,599
Mortgage-backed securities - commercial
49,212
42,764
15,439
14,182
$
279,427
$
229,329
$
174,982
$
155,510
At December 31,
2023 and
2022, there
were no
securities to
any one
issuer,
in an
amount greater
than 10%
of total
stockholders’
equity
other
than
the
U.S.
Government
and
U.S.
Government
Agencies.
All
the
collateralized
mortgage
obligations and mortgage-backed securities are issued
by U.S. sponsored entities at December 31, 2023 and
2022.
Information pertaining
to investment
securities with
gross unrealized
losses, aggregated
by investment
category
and
length of
time that
those
individual securities
have been
in a
continuous
loss position,
are presented
as of
the following
dates (in thousands):
December 31, 2023
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency
$
-
$
-
$
46,479
$
( 8,043 )
$
46,479
$
( 8,043 )
Collateralized mortgage obligations
-
-
135,358
( 35,566 )
135,358
( 35,566 )
Mortgage-backed securities -
residential
5,290
( 47 )
83,484
( 18,365 )
88,774
( 18,412 )
Mortgage-backed securities -
commercial
20,292
( 611 )
33,083
( 8,623 )
53,375
( 9,234 )
Municipal securities
-
-
19,338
( 5,667 )
19,338
( 5,667 )
Bank subordinated debt securities
8,600
( 331 )
12,287
( 1,703 )
20,887
( 2,034 )
Corporate bonds
-
-
8,671
( 406 )
8,671
( 406 )
$
34,182
$
( 989 )
$
338,700
$
( 78,373 )
$
372,882
$
( 79,362 )
December 31, 2022
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency
$
11,407
$
( 1,093 )
$
36,310
$
( 7,616 )
$
47,717
$
( 8,709 )
U.S. Treasury
9,828
( 13 )
-
-
9,828
( 13 )
Collateralized mortgage obligations
16,500
( 963 )
139,965
( 34,962 )
156,465
( 35,925 )
Mortgage-backed securities - residential
5,059
( 564 )
91,742
( 19,348 )
96,801
( 19,912 )
Mortgage-backed securities -
commercial
10,052
( 1,173 )
26,823
( 5,300 )
36,875
( 6,473 )
Municipal securities
-
-
18,483
( 6,601 )
18,483
( 6,601 )
Bank subordinated debt securities
11,295
( 670 )
2,619
( 381 )
13,914
( 1,051 )
Corporate bonds
13,723
( 926 )
-
-
13,723
( 926 )
$
77,864
$
( 5,402 )
$
315,942
$
( 74,208 )
$
393,806
$
( 79,610 )
The
unrealized
losses
associated
with
$
126.8
million
outstanding
of
investment
securities
transferred
from
the
AFS
portfolio to the HTM portfolio represent unrealized losses since the date of purchase, independent of the impact associated
with changes in the cost basis upon transfer between portfolios.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
92
USCB Financial Holdings, Inc.
2023 10-K
On
January
1,
2023,
the
Company
adopted
ASU
2016-13
Financial
Instruments
-
Credit
Losses
(Topic
326):
Measurement of Credit Losses
on Financial Instruments,
as amended, which replaces
the incurred loss methodology
with
an expected
loss methodology
that is
referred to
as CECL.
The measurement
of expected
credit losses
under the
CECL
methodology is applicable
to financial assets
measured at amortized
cost, including loan
receivables and
held-to-maturity
debt securities. In addition, ASC 326 amended the accou
nting for available-for-sale debt securities. One such
change is to
require
credit
losses
to
be
presented
as
an
allowance
rather
than
as
a
write-down
on
available-for-sale
debt
securities
management does not intend to sell or believes that
it is more likely than not they will be required to sell.
CECL requires a loss reserve for securities
classified as HTM. The reserve should reflect
historical credit performance
as well as the impact
of projected economic forecast.
For U.S. Government bonds
and U.S. Agency issued bonds
in HTM
the explicit guarantee of the US Government is sufficient
to conclude that a credit loss reserve is not required.
The reserve
requirement
is
for three
primary
assets
groups:
municipal
bonds,
corporate
bonds,
and
non-agency
securitizations.
The
Company calculates quarterly the loss reserve
utilizing Moody’s ImpairmentStudio. The CECL measurement for investment
securities
incorporates
historical
data,
containing
defaults
and
recoveries
information,
and
Moody’s
baseline
economic
forecast. The
solution uses
probability of
default/loss
given default
(“PD/LGD”)
approach. PD
represents the
likelihood a
borrower will
default.
Within the
Moody’s
model, this
is determined
using historical
default data,
adjusted for
the current
economic environment. LGD projects the expected loss
if a borrower were to default.
The Company monitors
the credit
quality of held
to maturity
securities through
the use of
credit ratings.
Credit ratings
are monitored by the Company on at least a quarterly basis. As of
December 31, 2023 and December 31, 2022, all held-to-
maturity securities held by the Company were rated investment
grade.
At December 31, 2023, HTM securities
included $
165.6
million of U.S. Government and
U.S. Agency issued bonds and
mortgage-backed
securities.
Because
of
the
explicit
and/or
implicit
guarantee
on
these
bonds,
the
Company
holds
no
reserves
on
these
holdings.
The
remaining
portion
of
the
HTM
portfolio
is
made
up
of
$
9.4
million
in
investment
grade
corporate bonds. The required reserve for these
holdings is determined each quarter using the model described above.
For
the portion of the HTM exposed to non-government
credit risk, the Company utilized the PD/LGD
methodology to estimate
a $
8
thousand ACL as
of December 31,
2023. The book
value for debt
securities classified as
HTM represents amortized
cost less ACL.
The
Company
determined
that
an
ACL
on
its
debt
securities
available
for
sale
as
of
December
31,
2023
was
not
required.
At
December
31,
2023,
the
Company
had
$
54.9
million
of
unrealized
losses
on
mortgage-backed
securities
and
collateralized mortgage
obligations of
U.S. Government
sponsored entities
having a
fair value
of $
284.1
million that
were
attributable
to
a
combination
of
factors,
including
relative
changes
in
interest
rates
since
the
time
of
purchase.
The
contractual cash flows for these securities are guaranteed by U.S. Government agencies
and U.S. Government sponsored
entities. The municipal bonds are of high credit
quality and the declines in fair value are
not due to credit quality.
Based on
the assessment of
these mitigating factors, management
believes that the
unrealized losses on these
debt security holdings
are a
function of
changes in
investment spreads
and interest
rate movements and
not changes
in credit
quality. Management
expects to recover the entire amortized cost basis of these securities.
At December 31, 2023, the
Company does not intend to
sell debt securities that are
in an unrealized loss position and
it is not more than likely than not that the Company will be required to sell
these securities before recovery of the amortized
cost basis.
As of December 31, 2023, the Company maintains a master repurchase agreement with a public banking institution for
up
to
$
20.0
million
fully
guaranteed
with
investment
securities
upon
withdrawal.
Any
amounts
borrowed
would
be
at
a
variable interest rate
based on prevailing
rates at the
time funding is
requested. At
December 31, 2023, the
Company did
no
t have any securities pledged under this agreement.
In 2018, the Company became a Qualified Public Depositor (“QPD”) with the State of Florida. As a QPD, the Company
has the
authority to
legally maintain public
deposits from cities,
municipalities, and the
State of
Florida. These public
deposits
are secured by
securities pledged to
the State of
Florida at a
ratio of
25
% of the
average outstanding uninsured
deposits.
The Company must also maintain a minimum amount
of pledged securities to be in the program.
At December 31, 2023, the Company had
twenty-eight
securities with a fair value of $
86.9
million pledged to the State
of Florida
under
the
public
funds
program.
The
Company
held
a total
of
$
268.4
million
in
public
funds
at
December 31,
2023.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
93
USCB Financial Holdings, Inc.
2023 10-K
At December 31,
2022, the Company
had
eighteen
securities with a
fair value of
$
49.0
million pledged to
the State of
Florida under the public funds program. The Company held
a total of $
204.2
million in public funds at December 31, 2022.
The Board
of Governors
of the Federal
Reserve System,
on March
12, 2023,
announced the
creation of
a new
Bank
Term
Funding Program (“BTFP”).
The BTFP offers
loans of up to one year
in length to banks, savings
associations, credit
unions,
and
other
eligible
depository
institutions
pledging
U.S.
Treasuries,
U.S.
agency
debt
and
mortgage-backed
securities, and other qualifying assets as collateral. These
assets will be valued at par.
The Company had
no
borrowing under the
BTFP program as
of December 31,
2023, and had
pledged $
132.1
million
in securities
measured at
par to
the Federal
Reserve Bank
of Atlanta
for the
BTFP program.
The BTFP
program ceased
making new loans as of March 2024.
On January 12, 2024, the Company borrowed $
80
million at a rate of
4.81
%, maturing on January 10, 2025, under the
BTFP program.
3.
LOANS
The following table is a summary of the distribution of
loans held for investment by type (in thousands):
December 31, 2023
December 31, 2022
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
204,419
11.5
%
$
185,636
12.3
%
Commercial Real Estate
1,047,593
58.8
%
970,410
64.4
%
Commercial and Industrial
219,757
12.4
%
126,984
8.4
%
Foreign Banks
114,945
6.5
%
93,769
6.2
%
Consumer and Other
191,930
10.8
%
130,429
8.7
%
Total
gross loans
1,778,644
100.0
%
1,507,228
100.0
%
Plus: Deferred cost
2,183
110
Total
loans net of deferred cost
1,780,827
1,507,338
Less: Allowance for credit losses
21,084
17,487
Total
net loans
$
1,759,743
$
1,489,851
At December 31, 2023 and 2022, the Company had $
534.2
million and $
338.1
million, respectively, of commercial real
estate and residential mortgage loans pledged as collateral on lines of credit with the FHLB and the
Federal Reserve Bank
of Atlanta. At December 31, 2023 and 2022, the Company
had
no
loans in the process of foreclosure.
The Company was a participant of the SBAs Paycheck
Protection Program (“PPP”) loans. These loans were
designed
to provide a direct incentive for small businesses
to keep their workers on payroll and
had to be used towards payroll cost,
mortgage interest, rent,
utilities and other
costs related to
COVID-19. These loans
are forgivable under
specific criteria as
determined by
the SBA.
The Company
had PPP
loans totaling
$
271
thousand at
December 31, 2023
and $
1.3
million at
December 31, 2022, which are categorized as commercial and industrial loans. These PPP
loans had deferred loan fees of
$
6
thousand at December 31, 2023 and $
13
thousand at December 31, 2022.
The
Company
recognized
$
8
thousand
and
$
1.6
million
in
PPP
loan
fees
and
interest
income
for
the
years
ended
December 31,
2023
and
2022,
respectively,
which
is
reported
under
loans,
including
fees
within
the
Consolidated
Statements of Operations.
Allowance for Credit Losses
In general, the Company utilizes
the Discounted Cash Flow (DCF)
method or the Remaining Life
(WARM) methodology
to estimate
the quantitative
portion of the
ACL for
loan pools.
The DCF
uses a
loss driver
analysis (LDA)
and discounted
cash flow analyses.
The Company engaged
advisors and consultants
with experience in
CECL model development
to assist
in development of
a loss driver
analysis based on
regression models
and supportable
forecast. Peer group
data obtained
from FFIEC Call Report
filings is used to
inform regression analyses
to quantify the impact
of reasonable and
supportable
forecasts in projective
models. Economic forecasts
applied to regression
models to estimate
probability of default
for loan
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
94
USCB Financial Holdings, Inc.
2023 10-K
receivables use at least
one of the following economic
indicators: civilian unemployment rate (national), real
gross domestic
product growth
(national
GDP) and/or
the HPI.
For each
of the
segments in
which the
WARM
methodology
is used,
the
long-term average loss rate is calculated and applied on a quarterly basis for the remaining life of the pool. Adjustments for
economic expectations are made through qualitative factors.
Qualitative factors (“Q-Factors”) used in the ACL methodology
include:
• Changes in lending policies, procedures, and strategies
• Changes in international, national, regional, and local conditions
• Changes in nature and volume of portfolio
• Changes in the volume and severity of past due loans
and other similar conditions
• Concentration risk
• Changes in the value of underlying collateral
• The effect of other external factors: e.g., competition,
legal, and regulatory requirements
• Changes in lending management, among others
The
Company
segments
the
portfolio
by
pools
grouping
loans
that
share
similar
risk
characteristics
and
employing
collateral type and lien position to group loans according to risk. The Company evaluates
five segments using the loss rate
methodology 'Remaining
Life Method'
or WARM.
The remaining
is calculated
based on
the annual
attrition rate
observed
for the Company’s own
portfolio experience. The
peer group includes historical
losses for U.S. The
Company also applies
a scorecard methodology
to determine
qualitative factors
for WARM
segments. The
scorecard is
built using
a peer group
loss. The maximum losses for
these peers are derived selecting
periods were higher than normal
loss rates are observed.
In estimating
credit losses,
the Company
also considers
qualitative and
environmental factors
that may
cause estimated
credit losses for the loan portfolio to differ from
historical losses.
ACL
for the
year
ended
December
31,
2023,
was
estimated
under
the
CECL
methodology,
and
for
the
year
ended
December 31, 2022, it was estimated under the incurred
loss model.
Prior to
the adoption
of ASC
326 on
January
1, 2023,
the allowance
for credit
losses
was a
valuation allowance
for
probable incurred credit
losses.
Management estimated the
allowance balance required
using past loan
loss experience,
the
nature
and
volume
of
the
portfolio,
information
about
specific
borrower
situations
and
estimated
collateral
values,
economic
conditions,
and
other
factors.
The
allowance
consisted
of
specific
and
general
components.
The
specific
component
related
to
loans
that
were
individually
classified
as
impaired.
A
loan
was
impaired
when,
based
on
current
information and events,
it was probable
that the Bank
would be
unable to
collect all
amounts due
according to
the contractual
terms of
the loan
agreement. Loans
for which
the terms
had been
modified resulting
in a
concession,
and
for which
the
borrower is experiencing financial difficulties, were
considered troubled debt restructurings and classified as
impaired.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
95
USCB Financial Holdings, Inc.
2023 10-K
Changes in the ACL for the years ended December 31, 2023
and 2022 are as follows (in thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2023:
Beginning balance
$
1,352
$
10,143
$
4,163
$
720
$
1,109
$
17,487
Cumulative effect of adoption of
accounting principle
(1)
1,238
1,105
( 2,158 )
23
858
1,066
Provision for credit losses
(2)
95
( 882 )
1,897
168
1,225
2,503
Recoveries
10
-
72
-
3
85
Charge-offs
-
-
-
-
( 57 )
( 57 )
Ending Balance
$
2,695
$
10,366
$
3,974
$
911
$
3,138
$
21,084
December 31, 2022:
Beginning balance
$
2,498
$
8,758
$
2,775
$
457
$
569
$
15,057
Provision for credit losses
( 1,179 )
1,385
1,474
263
552
2,495
Recoveries
33
-
18
-
4
55
Charge-offs
-
-
( 104 )
-
( 16 )
( 120 )
Ending Balance
$
1,352
$
10,143
$
4,163
$
720
$
1,109
$
17,487
(1) Impact of CECL adoption on January 1, 2023
(2) Provision for credit losses excludes $
144
thousand release for unfunded commitments
included in other liabilities and $
8
thousand provision for
investment securities held to maturity.
Allowance for credit losses and the outstanding balances in
loans as of December 31, 2023 and 2022 are as
follows (in
thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2023:
Allowance for credit losses:
Individually evaluated
$
145
$
-
$
128
$
-
$
-
$
273
Collectively evaluated
2,550
10,366
3,846
911
3,138
20,811
Balances, end of period
$
2,695
$
10,366
$
3,974
$
911
$
3,138
$
21,084
Loans:
Individually evaluated
$
6,994
$
-
$
1,668
$
-
$
-
$
8,662
Collectively evaluated
197,425
1,047,593
218,089
114,945
191,930
1,769,982
Balances, end of period
$
204,419
$
1,047,593
$
219,757
$
114,945
$
191,930
$
1,778,644
December 31, 2022:
Allowance for credit losses:
Individually evaluated for impairment
$
155
$
-
$
41
$
-
$
98
$
294
Collectively evaluated for impairment
1,197
10,143
4,122
720
1,011
17,193
Balances, end of period
$
1,352
$
10,143
$
4,163
$
720
$
1,109
$
17,487
Loans:
Individually evaluated for impairment
$
7,206
$
393
$
82
$
-
$
196
$
7,877
Collectively evaluated for impairment
178,430
970,017
126,902
93,769
130,233
1,499,351
Balances, end of period
$
185,636
$
970,410
$
126,984
$
93,769
$
130,429
$
1,507,228
Credit Quality Indicators
The Company grades loans based on the estimated capability of the borrower to repay the contractual obligation of the
loan agreement based
on relevant information
which may include:
current financial information
on the borrower,
historical
payment
experience,
credit
documentation
and
other
current
economic
trends.
Internal
credit
risk
grades
are
evaluated
periodically.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
96
USCB Financial Holdings, Inc.
2023 10-K
The Company's internally assigned credit risk grades are as follows:
Pass
– Loans indicate different levels of satisfactory
financial condition and performance.
Special Mention
– Loans classified as special mention have a potential weakness
that deserves management’s
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment
prospects for the loan or of the institution’s
credit position at some future date.
Substandard
– Loans classified as substandard are inadequately protected
by the current net worth and paying
capacity of the obligator or of the collateral pledged, if
any. Loans so classified
have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are
not corrected.
Doubtful
– Loans classified as doubtful have all the weaknesses inherent
in those classified at substandard, with
the added characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Loss
– Loans classified as loss are considered uncollectible.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
97
USCB Financial Holdings, Inc.
2023 10-K
Loan credit exposures by internally assigned grades are
presented below for the periods indicated (in thousands):
As of December 31, 2023
Term Loans by Origination Year
Revolving
Loans
Total
2023
2022
2021
2020
2019
Prior
Residential real estate
Pass
$
44,365
$
36,325
$
26,180
$
6,080
$
9,325
$
75,654
$
6,198
$
204,127
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
292
-
-
292
Doubtful
-
-
-
-
-
-
-
-
Total
44,365
36,325
26,180
6,080
9,617
75,654
6,198
204,419
Commercial real estate
Pass
148,311
337,938
184,024
104,182
78,153
182,714
4,710
1,040,032
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
6,867
694
-
-
-
7,561
Doubtful
-
-
-
-
-
-
-
-
Total
148,311
337,938
190,891
104,876
78,153
182,714
4,710
1,047,593
Commercial and
industrial
Pass
97,753
37,414
34,090
6,499
13,706
3,113
25,554
218,129
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
330
-
1,298
-
-
1,628
Doubtful
-
-
-
-
-
-
-
-
Total
97,753
37,414
34,420
6,499
15,004
3,113
25,554
219,757
Foreign banks
Pass
114,945
-
-
-
-
-
-
114,945
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
114,945
-
-
-
-
-
-
114,945
Consumer and other
loans
Pass
71,593
74,387
41,966
615
560
1,337
1,472
191,930
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
Total
71,593
74,387
41,966
615
560
1,337
1,472
191,930
Total
Loans
Pass
476,967
486,064
286,260
117,376
101,744
262,818
37,934
1,769,163
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
7,197
694
1,590
-
-
9,481
Doubtful
-
-
-
-
-
-
-
-
Total
$
476,967
486,064
293,457
118,070
103,334
262,818
37,934
1,778,644
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
98
USCB Financial Holdings, Inc.
2023 10-K
As of December 31, 2022
Pass
Special
Mention
Substandard
Doubtful
Total Loans
Residential real estate:
Home equity line of credit ("HELOC") and other
$
623
$
-
$
-
$
-
$
623
1-4 family residential
132,178
-
-
-
132,178
Condo residential
52,835
-
-
-
52,835
185,636
-
-
-
185,636
Commercial real estate:
Land and construction
38,687
-
-
-
38,687
Multi-family residential
176,820
-
-
-
176,820
Condo commercial
49,601
-
393
-
49,994
Commercial property
702,357
-
2,552
-
704,909
Leasehold improvements
-
-
-
-
-
967,465
-
2,945
-
970,410
Commercial and industrial:
(1)
Secured
120,873
-
807
-
121,680
Unsecured
5,304
-
-
-
5,304
126,177
-
807
-
126,984
Foreign banks
93,769
-
-
-
93,769
Consumer and other loans
130,233
-
196
-
130,429
Total
$
1,503,280
$
-
$
3,948
$
-
$
1,507,228
(1)
All outstanding PPP loans were internally graded
pass.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
99
USCB Financial Holdings, Inc.
2023 10-K
Loan Aging
The Company
also considers the
performance of loans
in grading
and in
evaluating the
credit quality
of the
loan portfolio.
The Company
analyzes credit
quality and
loan grades
based on
payment performance
and the
aging status
of the
loan.
The following table include an aging analysis
of accruing loans and total non-accruing
loans as of December 31, 2023 and
2022 (in thousands):
Accruing
As of December 31, 2023:
Current
Past Due
30-89 Days
Past Due >
90 Days
and Still
Accruing
Total
Accruing
Non-
Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
559
$
-
$
-
$
559
$
-
$
559
1-4 family residential
155,842
711
-
156,553
-
156,553
Condo residential
43,572
3,735
-
47,307
-
47,307
199,973
4,446
-
204,419
-
204,419
Commercial real estate:
Land and construction
33,710
-
-
33,710
-
33,710
Multi-family residential
181,287
-
-
181,287
-
181,287
Condo commercial
58,106
-
-
58,106
-
58,106
Commercial property
772,569
1,890
-
774,459
-
774,459
Leasehold improvements
31
-
-
31
-
31
1,045,703
1,890
-
1,047,593
-
1,047,593
Commercial and industrial:
Secured
200,235
29
-
200,264
468
200,732
Unsecured
19,025
-
-
19,025
-
19,025
219,260
29
-
219,289
468
219,757
Foreign banks
114,945
-
-
114,945
-
114,945
Consumer and other
191,930
-
-
191,930
-
191,930
Total
$
1,771,811
$
6,365
$
-
$
1,778,176
$
468
$
1,778,644
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
100
USCB Financial Holdings, Inc.
2023 10-K
Accruing
As of December 31, 2022:
Current
Past Due
30-89 Days
Past Due
> 90 Days
and Still
Accruing
Total
Accruing
Non-
Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
623
$
-
$
-
$
623
$
-
$
623
1-4 family residential
131,120
1,058
-
132,178
-
132,178
Condo residential
50,310
2,525
-
52,835
-
52,835
182,053
3,583
-
185,636
-
185,636
Commercial real estate:
Land and construction
38,687
-
-
38,687
-
38,687
Multi-family residential
176,820
-
-
176,820
-
176,820
Condo commercial
49,994
-
-
49,994
-
49,994
Commercial property
704,884
25
-
704,909
-
704,909
Leasehold improvements
-
-
-
-
-
-
970,385
25
-
970,410
-
970,410
Commercial and industrial:
Secured
121,649
31
-
121,680
-
121,680
Unsecured
4,332
972
-
5,304
-
5,304
125,981
1,003
-
126,984
-
126,984
Foreign banks
93,769
-
-
93,769
-
93,769
Consumer and other
130,169
260
-
130,429
-
130,429
Total
$
1,502,357
$
4,871
$
-
$
1,507,228
$
-
$
1,507,228
There were
no
loans over 90 days past due and accruing as of December
31, 2023 and 2022.
Non-accrual Status
The following table
includes the amortized
cost basis of
loans on non-accrual
status and loans
past due over
90 days
and still accruing as of December 31, 2023 (in thousands):
December 31, 2023
Nonaccrual
Loans With
No Related
Allowance
Nonaccrual
Loans With
Related
Allowance
Total Non-
accruals
Loans Past
Due Over
90 Days
and Still
Accruing
Residential real estate
$
$
$
$
Commercial real estate
-
-
-
-
Commercial and industrial
-
468
468
-
Consumer and other
-
-
-
-
Total
$
-
$
468
$
468
$
-
The Company did not have loans in non-accrual status
as of December 31, 2022.
Accrued interest
receivable is
excluded from
the estimate
of credit
losses. There
was
no
interest income
recognized
attributable
to non-accrual
loans
outstanding
during the
years
ended
December
31, 2023
and
2022. Interest
income
on
these
loans
for
the
year
ended
December
31,
2023
and
2022,
would
have
been
approximately
$
40
thousand
and
$
0
thousand, respectively,
had these loans performed in accordance with their
original terms.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
101
USCB Financial Holdings, Inc.
2023 10-K
Collateral-Dependent Loans
A
loan
is
collateral
dependent
when
the
borrower
is
experiencing
financial
difficulty
and
repayment
of
the
loan
is
expected to
be provided
substantially through
the sale
or operation
of the
collateral. There
were
no
collateral dependent
loans as of December 31,
2023 or as of December 31, 2022.
Impaired Loans
The following table includes
the unpaid principal balances
for impaired loans with
the associated allowance amount,
if
applicable, on the basis of impairment methodology as of December
31, 2022 (in thousands):
December 31, 2022
Unpaid
Principal
Balance
Net Investment
Balance
Valuation
Allowance
Impaired Loans with No Specific Allowance:
Residential real estate
$
3,551
$
3,544
$
-
Commercial real estate
393
393
-
3,944
3,937
-
Impaired Loans with Specific Allowance:
Residential real estate
3,655
3,626
155
Commercial and industrial
82
82
41
Consumer and other
196
196
98
3,933
3,904
294
Total
$
7,877
$
7,841
$
294
Interest
income
recognized
on
impaired
loans
for
the
year
ended
December
31,
2022
was
$
351
thousand.
Net
investment balance is the unpaid principal balance of the loans
adjusted for the remaining net deferred loan fees.
The following table
presents the average
recorded investment
balance on impaired
loans for the
periods indicated (in
thousands):
2022
Residential real estate
$
7,626
Commercial real estate
575
Commercial and industrial
109
Consumer and other
210
Total
$
8,520
Loan Modifications to Borrowers Experiencing Financial
Difficulties
The following
table present
newly restructured
loans,
by type
of modification,
which occurred
during the
year
ended
December 31, 2023 (in thousands):
Recorded Investment Prior to Modification
Recorded Investment After Modification
Number of
Loans
Combination
Modifications
Total
Modifications
Number of
Loans
Combination
Modifications
Total
Modifications
Residential real estate
-
$
-
$
-
-
$
-
$
-
Commercial real estate
-
-
-
-
-
-
Commercial and industrial
2
650
650
2
650
650
Consumer and other
-
-
-
-
-
-
2
$
650
$
650
2
$
650
$
650
The Company had two new
modifications to borrowers experiencing
financial difficulties for
the year ended December
31, 2023. There were
no
existing loan modifications that subsequently
defaulted during the year
ended December 31, 2023.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
102
USCB Financial Holdings, Inc.
2023 10-K
4.
LEASES
The
Company
enters
into
leases
in
the
normal
course
of
business
primarily
for
banking
centers
and
back-office
operations. As of
December 31, 2023, the
Company leased nine
of the ten
banking centers and
the headquarter building.
The Company
is obligated
under non-cancelable
operating leases
for these
premises with
expiration dates
ranging from
2026 to 2036. Many of these leases have extension
clauses which the Company could exercise which
would extend these
dates.
The Company
has classified
all leases as
operating leases.
Lease expense
for operating
leases are
recognized on
a
straight-line basis over
the lease term.
Right-of-use (“ROU”)
assets represent the
right to use
the underlying
asset for the
lease
term
and
lease
liabilities
represent
the
obligation
to
make
lease
payments
arising
from
the
lease.
The
Company
elected the short-term
lease recognition exemption
for all leases
that qualify,
meaning those with
terms under 12
months.
ROU assets or lease liabilities are not to be recognized
for short-term leases.
ROU assets and
lease liabilities are
recognized at the lease
commencement date based on
the estimated present value
of lease payments
over the
lease term.
In the Company’s
Consolidated Balance
Sheets, ROU
assets are
reported under
other assets while lease liabilities are classified under
accrued interest and other liabilities.
As
most
of
the
Company’s
leases
do
not
provide
an
implicit
rate,
the
incremental
borrowing
rate
based
on
the
information available
at commencement
date is
used. The
Company’s
incremental borrowing
rate is
based on
the FHLB
advance rate matching or nearing the lease term.
The following table presents the ROU assets and lease liabilities
as of December 31, 2023 and 2022 (in thousands):
2023
2022
ROU assets:
Operating leases
$
11,423
$
14,395
Lease liabilities:
Operating leases
$
11,423
$
14,395
The weighted average remaining lease term and weighted average
discount rate as of December 31, 2023 and 2022:
2023
2022
Weighted average remaining lease term (in years):
Operating leases
6.35
6.98
Weighted average discount rate:
Operating leases
2.94
%
2.94
%
Future lease payment obligations and a reconciliation to lease
liability as of December 31, 2023 (in thousands):
2024
$
3,236
2025
3,312
2026
2,383
2027
951
2028
492
Thereafter
2,987
Total
future minimum lease payments
13,361
Less: interest component
( 1,938 )
Total
lease liability
$
11,423
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
103
USCB Financial Holdings, Inc.
2023 10-K
5.
PREMISES AND EQUIPMENT
A summary of premises and equipment are presented
below as of December 31, 2023 and 2022 (in thousands):
2023
2022
Land
$
972
$
972
Building
1,952
1,952
Furniture, fixtures and equipment
8,981
8,841
Computer hardware and software
4,592
4,575
Leasehold improvements
10,457
10,451
Premises and equipment, gross
26,954
26,791
Accumulated depreciation and amortization
( 22,118 )
( 21,528 )
Premises and equipment, net
$
4,836
$
5,263
Depreciation
and
amortization
expense
was
$
590
thousand
and
$
688
thousand
for
the
years
ended
December 31,
2023 and 2022, respectively.
6.
INCOME TAXES
The Company’s provision
for income taxes is
presented in the following
table for the years
ended December 31, 2023
and 2022 (in thousands):
2023
2022
Current:
Federal
$
-
$
-
State
-
-
Total
current
-
-
Deferred:
Federal
4,121
5,462
State
1,130
1,482
Total
deferred
5,251
6,944
Total
tax expense
$
5,251
$
6,944
The actual income
tax expense for the
years ended December 31, 2023
and 2022 differs from
the statutory tax expense
for the year (computed by applying the
U.S. federal corporate tax rate of
21
% for 2023 and 2022 to
income before provision
for income taxes) as follows (in thousands):
2023
2022
Federal taxes at statutory rate
$
4,577
$
5,688
State income taxes, net of federal tax benefit
947
1,177
Bank owned life insurance
( 273 )
( 269 )
Other, net
-
348
Total
tax expense
$
5,251
$
6,944
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
104
USCB Financial Holdings, Inc.
2023 10-K
The following table presents
the deferred tax assets
and deferred tax liabilities
as of December 31, 2023
and 2022 (in
thousands):
2023
2022
Deferred tax assets:
Net operating loss
$
16,430
$
21,720
Allowance for credit losses
5,410
4,432
Lease liability
2,895
3,648
Unrealized loss on available for sale securities
15,114
15,193
Depreciable property
203
158
Equity compensation
630
373
Accruals
382
723
Other, net
10
-
Deferred tax asset
$
41,074
$
46,247
Deferred tax liability:
Deferred loan cost
( 553 )
( 28 )
Lease right of use asset
( 2,895 )
( 3,648 )
Deferred expenses
( 180 )
( 175 )
Cash flow hedge
( 85 )
Other, net
( 79 )
( 36 )
Deferred tax liability
$
( 3,792 )
$
( 3,887 )
Net deferred tax asset
$
37,282
$
42,360
At December 31,
2023 the Company
had approximately $
61.5
million of Federal
and $
84.1
million of State
net operating
loss carryforwards
expiring in
various amounts
from 2032
to 2036
if unused
after 2036,
their utilization
is limited to
future
taxable earnings of the Company.
In assessing the
realizability of deferred
tax assets, management considered
whether it is
more likely than
not that some
portion or
all of
the deferred
tax assets
will not
be realized.
The ultimate
realization
of deferred
tax assets
is dependent
upon the generation of
future taxable income
during the periods
in which those temporary
differences become deductible.
Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable
income, and tax planning
strategies in making this assessment.
The U.S.
Federal jurisdiction
and Florida
are the
major tax
jurisdictions where
the Company
files income
tax returns.
The Company is generally no longer subject to U.S. Federal or
State examinations by tax authorities for years before 2020.
For
the
years
ended
December 31,
2023 and
2022,
the
Company
did
no
t have
any unrecognized
tax benefits
as a
result of
tax positions
taken during
a prior
period or
during the
current period.
Additionally,
no
interest or
penalties
were
recorded as a result of tax uncertainties.
7.
DEPOSITS
The following table presents deposits by type at December 31,
2023 and 2022 (in thousands):
2023
2022
Non-interest bearing deposits
$
552,762
$
629,776
Interest-bearing transaction accounts
47,702
66,675
Saving and money market deposits
1,048,272
915,853
Time deposits
288,403
216,977
Total
deposits
$
1,937,139
$
1,829,281
Time
deposits exceeding
the FDIC
deposit insurance
limit of
$250 thousand
per account
at December 31,
2023 and
2022 were $
117.2
million and $
82.0
million, respectively.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
105
USCB Financial Holdings, Inc.
2023 10-K
The Company brought in $
50
million of brokered CDs at a weighted average rate
of
4.98
% to boost liquidity during the
second quarter of 2023.
The CDs renewed in
Q1 2024 at weighted
average rate
of
5.13
%.There were
no
brokered deposits
as of December 31, 2022.
At December 31, 2023, the scheduled maturities of time deposits
were (in thousands):
2024
$
280,529
2025
6,074
2026
831
2027
874
2028
95
$
288,403
At December 31,
2023 and
2022, the
aggregate amount
of demand
deposits reclassified
to loans
as overdrafts
was
$
213
thousand and $
230
thousand, respectively.
8.
BORROWINGS
Borrowed funds
consist of
fixed-rate advances
from the
FHLB. At
December 31, 2023,
FHLB advances
were $183.0
million and at December 31, 2022 were $46.0 million.
The following table presents outstanding FHLB advances
at December 31, 2023 and 2022 (in thousands):
At December 31, 2023
Interest Rate
Type of Rate
Maturity Date
Amount
2.05
%
Fixed
March 27, 2025
$
10,000
1.07
%
Fixed
July 18, 2025
6,000
1.04
%
Fixed
July 30, 2024
5,000
3.76
%
Fixed
January 24, 2028
11,000
3.77
%
Fixed
April 25, 2028
50,000
5.57
%
Fixed
December 26, 2024
101,000
$
183,000
At December 31, 2022
Interest Rate
Type of Rate
Maturity Date
Amount
2.05
%
Fixed
March 27, 2025
$
10,000
1.07
%
Fixed
July 18, 2025
6,000
1.04
%
Fixed
July 30, 2024
5,000
0.81
%
Fixed
August 17, 2023
5,000
4.14
%
Fixed
January 13, 2023
20,000
$
46,000
The
FHLB
holds
a
blanket
lien
on
the
Company's
loan
portfolio
that
may
be
pledged
as
collateral
for
outstanding
advances, subject
to eligibility
under the
borrowing agreement.
The Company
may also
choose to
assign cash
balances
held at the FHLB as additional collateral. See Note 3 “Loans”
for further discussion on pledged loans.
9.
EQUITY BASED AND OTHER COMPENSATION
PLANS
Employee 401(k) Plan
The Company has an
employee 401(k) plan (the
“Plan”) covering substantially all
eligible employees. The Plan includes
a provision that the employer may contribute to the accounts of eligible employees for whom a salary deferral is made. The
Company contributed $
306
thousand and $
313
thousand to the Plan during
the years ended December 31, 2023 and
2022,
respectively;
the
contributions
are
included
under
salaries
and
employee
benefits
in
the
Consolidated
Statements
of
Operations.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
106
USCB Financial Holdings, Inc.
2023 10-K
Stock-Based Compensation
In
2015,
the
Company's
stockholders
approved
the
2015
Equity
Incentive
Plan
(the
“2015
Option
Plan”),
which
authorized grants
of options
to purchase
up to
2,000,000
shares of
common stock.
The
2015
Option
Plan
provided that
vesting
schedules
will
be
determined
upon
issuance
of
options
by
the
Board
of
Directors
or
compensation
committee.
Options granted
under the
2015 Option
Plan have
a
10
-year life
and, in
no event
shall an
option be
exercisable after
the
expiration of
10
years from
the grant date.
The 2015
Option Plan has
a
10
-year life and
initially would
have terminated
in
2025. In
July 2020,
the stockholders
of the
Company approved
the amendment
of the
2015 Option
plan to
authorize the
issuance of
an additional
3,000,000
shares of common
stock and
extending the
life of
the plan
5
additional years, terminating
in 2030. The
authorized shares,
after being adjusted
to reflect the
1 for 5
reverse stock
split, totaled
1,000,000
shares. In
December
2021,
the
shareholders
of
the
Company
approved
the
amendment
of
the
2015
Option
Plan
to
authorize
the
issuance of
an additional
1,400,000
shares of
common stock
as well
as the
ability to
issue restricted
stock grants
(up to
600,000
shares) for a total of
2,400,000
shares.
At December 31, 2023, there were
1,160,564
shares available for grant under the
2015 Option Plan. At December 31,
2022, there were
1,386,667
shares available for grant under the 2015 Option Plan.
Stock Options
The Company recognizes compensation expense based
on the estimated grant date
fair value method using the
Black-
Scholes
option
pricing
model and
accounts
for this
expense
using
a prorated
straight-line
amortization
method over
the
vesting
period
of
the
option.
Stock-based
compensation
expense
is
based
on
awards
that
the
Company
expects
will
ultimately vest,
reduced by estimated forfeitures.
Estimated forfeitures consider the voluntary
termination trends as well as
actual option forfeitures.
The
compensation
expense
is
reported
under
salaries
and
employee
benefits
in
the
accompanying
Consolidated
Statements
of
Operations.
Compensation
expense
totaling
$
459
thousand
was
recognized
for
the
year
ended
December 31, 2023
and $
523
thousand for
the year
ended December
31, 2022.
There was
no
related tax
benefit for
the
years ended December 31, 2023 and 2022.
Unrecognized compensation cost remaining
on stock-based compensation
totaled $
342
thousand and $
787
thousand
for the years ended December 31, 2023 and 2022, respectively.
Cash
flows
resulting
from
excess
tax
benefits
are
required
to
be
classified
as
a
part
of
cash
flows
from
operating
activities. Excess tax benefits
are realized tax benefits
from tax deductions for
exercised options in
excess of the deferred
tax asset attributable to the compensation cost for such
options.
For the fair value of options granted in 2023 and 2022,
the following were the assumptions:
Assumption
2023
2022
Risk-free interest rate
3.53
%
2.34
%
Expected term
10
years
10
years
Expected stock price volatility
10
%
10
%
Dividend yield
0
%
0
%
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
107
USCB Financial Holdings, Inc.
2023 10-K
The following table presents a summary of stock options
for the years ended December 31, 2023 and 2022:
Stock Options
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Years
Aggregate Intrinsic
Value (in
thousands)
Balance at January 1, 2023
965,667
$
10.91
7.4
Granted
7,500
$
12.41
Exercised
( 10,000 )
$
7.50
Forfeitures
( 16,000 )
$
10.34
Balance at December 31, 2023
947,167
$
10.97
6.5
Exercisable at December 31, 2023
758,000
$
10.71
6.1
$
1,195
Balance at January 1, 2022
959,667
$
10.87
8.4
Granted
15,000
$
14.03
Exercised
( 9,000 )
$
11.35
Balance at December 31, 2022
965,667
$
10.91
7.4
Exercisable at December 31, 2022
560,000
$
10.18
6.4
$
1,131
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value of exercisable options at the
dates presented
(the
difference
between
the
valuation
of the
Company’s
stock
and the
exercise
price,
multiplied
by the
number of
options considered
in-the-money) that
would have
been received
by the
option holders
had all
option holders
exercised their options.
The weighted
average per
share fair value
of options
granted for the
years ended
December 31, 2023
and 2022 was
$
3.91
and $
3.45
, respectively.
Restricted Stock
In 2023 , the Company issued
242,713
shares of Class A common stock to employees and
directors as restricted stock
awards pursuant
to the
Company's 2015
Option Plan.
Awards under
the 2015
Option Plan
may not
be sold
or otherwise
transferred until certain restrictions have lapsed.
There were
no
restricted stock awards outstanding as of December
31, 2022.
The
total
share-based
compensation
expense
for
these
awards
is
determined
based
on
the
market
price
of
the
Company's common
stock as
of the date
of grant
applied to
the total
number of
shares granted
and is
amortized straight
line over the
vesting period
which is
one to
three years.
As of December
31, 2023,
unearned share-based
compensation
expense associated with these awards totaled $
2.3
million.
Compensation expense
totaling $
553
thousand was
recognized for
the year
ended December
31, 2023
and reported
under salaries and benefits in the accompanying Consolidated
Statement of Operations.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
108
USCB Financial Holdings, Inc.
2023 10-K
The following table presents a summary of restricted stock
awards for the year ended December 31, 2023:
Restricted Stock
Weighted Average Grant Date
Fair Value
Balance at January 1, 2023
-
$
-
Granted
242,713
$
12.24
Forfeited
( 8,111 )
$
12.67
Vested
( 16,180 )
$
12.67
Balance at December 31, 2023
218,422
$
12.19
10.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to
meet the financial
needs of
its customers
and to reduce
its own
exposure to
fluctuations in
interest rates.
These financial
instruments include
unfunded commitments
under lines
of credit,
commitments to
extend credit,
standby and
commercial
letters of
credit. Those
instruments involve,
to varying
degrees, elements
of credit
and interest
rate risk
in excess
of the
amount recognized in the Company’s Consolidated Balance Sheets. The Company uses the
same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments.
The Company's
exposure to credit
loss in the
event of nonperformance
by the other
party to the
financial instruments
for unused lines of credit, and standby letters of credit
is represented by the contractual amount of these commitments.
On
January
1,
2023,
the
Company
adopted
ASU
2016-13
Financial
Instruments
-
Credit
Losses
(Topic
326):
Measurement of Credit Losses
on Financial Instruments,
as amended, which replaces
the incurred loss methodology
with
an expected
loss methodology
that is
referred to as
the CECL
methodology.
The measurement
of expected
credit losses
under the CECL methodology
is applicable to financial
assets measured at amortized
cost, including loan receivables
and
held-to-maturity debt
securities. Prior
to the adoption
of ASC 326
on January
2023, the allowance
for credit
losses was
a
valuation allowance for probable incurred credit losses.
The Company
records
a
liability
for
expected
credit
losses
on
off-balance-sheet
credit
exposure
in
accordance
with
ASC
326.
The
Company
uses
the
loss
rate
and
exposure
of
default
framework
to
estimate
a
reserve
for
unfunded
commitments. Loss rates
for the expected funded
balances are determined
based on the
associated pooled loan
analysis
loss rate and the exposure at default is
based on an estimated utilization given
default. The off-balance sheet commitment
allowance were $
372
thousand and $
166
thousand as of December 31, 2023 and December 31,
2022, respectively.
A
summary
of
the
amounts
of
the
Company's
financial
instruments
with
off-balance
sheet
risk
are
shown
below
at
December 31, 2023 and 2022 (in thousands):
2023
2022
Commitments to grant loans and unfunded lines of credit
$
85,117
$
95,461
Standby and commercial letters of credit
3,987
4,320
Total
$
89,104
$
99,781
Commitments to
extend credit
are agreements
to lend
to a
customer as
long as
there is
no violation
of any
condition
established in the contract. Commitments generally have
fixed expiration dates or other termination clauses.
Unfunded lines of
credit and revolving
credit lines are
commitments for possible
future extensions
of credit to
existing
customers. These lines of
credit are uncollateralized and
usually do not contain
a specified maturity date
and ultimately may
not be drawn upon to the total extent to which the Company
is committed.
Standby
and
commercial
letters
of
credit
are
conditional
commitments
issued
by
the
Company
to
guarantee
the
performance of a
customer to
a third
party. Those letters of
credit are
primarily issued to
support public and
private borrowing
arrangements. Essentially all letters of credit have fixed maturity dates and many of them expire without being drawn upon,
they do not generally present a significant liquidity risk
to the Company.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
109
USCB Financial Holdings, Inc.
2023 10-K
11.
DERIVATIVES
The Company utilizes interest rate swap agreements
as part of its asset-liability management strategy to help
manage
its interest
rate risk
position. The
notional amount
of the
interest rate
swaps do
not represent
amounts exchanged
by the
parties. The amounts exchanged are
determined by reference to
the notional amount and the
other terms of the individual
interest rate swap agreements.
Rate Swaps Designated as Cash Flow Hedges
As of December
31, 2023,
the Company had
two
interest rate swap
agreements with
a notional aggregate
amount of
$
50
million that were designated as cash flow hedges of certificates of deposit. The interest rate swap agreements have an
average
maturity
of
2.38
years,
the
weighted
average
fixed-rate
paid
is
3.59
%,
with
the
weighted
average
3-month
compound SOFR (Secured Overnight Financing Rate) being received.
The Company had
no
cash flow hedges outstanding
on December 31, 2022.
The
changes
in
fair
value
on
these
interest
rate
swaps
are
recorded
in
other
assets
or
other
liabilities
with
a
corresponding recognition
in other comprehensive
income (loss)
and subsequently reclassified
to earnings when
gains or
losses are realized.
Interest Rate Swaps Designated as Fair Value
Hedges
As of December
31, 2023, the
Company had
four
interest rate swap
agreements with a
notional aggregate amount
of
$
200
million
that
were
designated
as
fair
value
hedges
on
loans.
The
interest
rate
swap
agreements
have
an
average
maturity of
2.23
years, the weighted average fixed-rate paid
is
4.74
%, with the weighted average
3-month compound SOFR
being received.
The
changes
in
fair
value
on
these
interest
rate
swaps
are
recorded
in
other
assets
or
other
liabilities
with
a
corresponding recognition in the assets being hedged.
Interest Rate Swaps
The Company also
enters into
interest rate swaps
with its
loan customers. The
Company had
20
and
15
interest rate
swaps with loan customers with a notional aggregate
amount of $
46.5
million and $
33.9
million at December 31, 2023 and
2022, respectively.
These interest rate
swaps have maturity
dates of between
2025 and 2051.
The Company entered
into
corresponding
and
offsetting
derivatives
with
third
parties.
The
fair
value
of
liability
on
these
derivatives
requires
the
Company to provide the counterparty
with funds to be held as collateral
which the Company reports as other
assets under
the Consolidated
Balance Sheets.
While these
derivatives represent
economic hedges,
they do
not qualify
as hedges
for
accounting purposes.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
110
USCB Financial Holdings, Inc.
2023 10-K
The following table reflects the Company’s customer
related interest rate swaps at the dates indicated (in
thousands):
Fair Value
Notional
Amount
Collateral
Amount
Balance Sheet Location
Asset
Liability
December 31, 2023:
Derivatives Designated as Cash Flow Hedges
Interest rate swaps
$
50,000
$
-
Other assets
$
334
$
-
Derivatives Designated as Fair Value Hedges
Interest rate swaps
$
200,000
$
-
Other liabilities
$
-
$
3,430
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
46,463
$
1,326
Other assets/Other liabilities
$
4,558
$
4,558
December 31, 2022:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
33,893
$
1,278
Other assets/Other liabilities
$
5,011
$
5,011
12.
FAIR VALUE
MEASUREMENTS
Determination of Fair Value
The Company
uses
fair value
measurements
to record
fair-value
adjustments
to certain
assets
and liabilities
and to
determine fair value
disclosures. In accordance
with the fair
value measurements
accounting guidance, the
fair value of
a
financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market
participants
at the
measurement
date.
Fair value
is best
determined based
upon quoted
market prices.
However, in
many instances, there
are no quoted
market prices for the
Company's various financial
instruments. In cases
where quoted
market prices
are not
available, fair
values are
based on
estimates using
present value
or other
valuation
techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.
The fair
value guidance provides
a consistent definition
of fair
value, which focuses
on exit
price in
an orderly transaction
(that is,
not a
forced
liquidation
or distressed
sale) between
market participants
at the
measurement
date
under current
market conditions.
If there
has been
a significant
decrease
in the
volume
and level
of activity
for the
asset
or liability,
a
change in
valuation technique or
the use
of multiple
valuation techniques may
be appropriate.
In such
instances, determining
the
price
at
which
willing
market
participants
would
transact
at
the
measurement
date
under
current
market
conditions
depends on the facts
and circumstances and
requires the use of
significant judgment. The fair
value is a reasonable
point
within the range that is most representative of fair value under
current market conditions.
Fair Value Hierarchy
In accordance with
this guidance, the
Company groups its
financial assets
and financial liabilities
generally measured
at fair
value in
three
levels, based
on the
markets
in which
the assets
and liabilities
are traded,
and the
reliability
of the
assumptions used to determine fair value.
Level 1
- Valuation
is based
on quoted
prices in
active markets
for identical
assets or
liabilities that
the reporting
entity has
the ability
to access
at the measurement
date. Level
1 assets
and liabilities
generally include
debt and
equity securities that
are traded in
an active exchange
market. Valuations are obtained from
readily available pricing
sources for market transactions involving identical assets
or liabilities.
Level 2
- Valuation
is based on inputs other
than quoted prices included
within Level 1 that are
observable for the
asset
or
liability,
either
directly
or
indirectly.
The
valuation
may
be
based
on
quoted
prices
for
similar
assets
or
liabilities; quoted
prices in
markets that are
not active;
or other inputs
that are observable
or can be
corroborated
by observable market data for substantially the full term of the
asset or liability.
Level 3
- Valuation
is based on
unobservable inputs that
are supported
by little or
no market activity
and that are
significant
to
the
fair
value
of
the
assets
or
liabilities.
Level
3
assets
and
liabilities
include
financial
instruments
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
111
USCB Financial Holdings, Inc.
2023 10-K
whose value
is determined
using pricing
models, discounted
cash
flow
methodologies,
or similar
techniques,
as
well as instruments for which determination of fair value
requires significant management judgment or estimation.
A
financial
instrument's
categorization
within
the
valuation
hierarchy
is
based
upon
the
lowest
level
of
input
that
is
significant to the fair value measurement.
Items Measured at Fair Value
on a Recurring Basis
Investment securities:
When instruments are traded
in secondary markets and
quoted market prices do
not exist for
such securities,
management generally
relies on
prices obtained
from independent
vendors or
third-party broker
-dealers.
Management reviews pricing methodologies provided by the vendors and third-party broker-dealers in order to determine if
observable market information is being utilized. Securities measured with pricing provided by independent vendors or
third-
party broker-dealers
are classified within
Level 2 of
the hierarchy and
often involve using
quoted market
prices for similar
securities, pricing models or discounted cash flow analyses
utilizing inputs observable in the market where available.
Derivatives:
The
fair
value
of
derivatives
are
measured
with
pricing
provided
by
third-party
participants
and
are
classified within Level 2 of the hierarchy.
The following table represents
the Company's assets measured at
fair value on a
recurring basis at December 31, 2023
and 2022 for each of the fair value hierarchy levels (in thousands):
2023
2022
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Investment securities available for sale:
U.S. Government Agency
$
-
$
8,173
$
-
$
8,173
$
-
$
8,655
$
-
$
8,655
Collateralized mortgage obligations
-
80,606
-
80,606
-
95,541
-
95,541
Mortgage-backed securities - residential
-
52,187
-
52,187
-
60,879
-
60,879
Mortgage-backed securities - commercial
-
42,764
-
42,764
-
27,954
-
27,954
Municipal securities
-
19,338
-
19,338
-
18,483
-
18,483
Bank subordinated debt securities
-
26,261
-
26,261
-
14,919
-
14,919
Corporate bonds
-
-
-
-
-
3,709
-
3,709
Total
-
229,329
-
229,329
-
230,140
-
230,140
Derivative assets
-
4,892
-
4,892
-
5,011
-
5,011
Total assets at fair value
$
-
$
234,221
$
-
$
234,221
$
-
$
235,151
$
-
$
235,151
Derivative liabilities
$
-
$
7,988
$
-
$
7,988
$
-
$
5,011
$
-
$
5,011
Total liabilities at fair value
$
-
$
7,988
$
-
$
7,988
$
-
$
5,011
$
-
$
5,011
Items Measured at Fair Value
on a Non-recurring Basis
Individually Evaluated
Loans and
Impaired Loans:
ASC 326
eliminates the
current accounting
model for
impaired
loans effective as
of January 1,
2023. At
December 31, 2022,
in accordance
with provisions
of the
loan impairment
guidance,
individual loans
with a
carrying amount
of $
3.9
million were
written down
to their
fair value
of $
3.6
million, resulting
in an
impairment charge of $
294
thousand, which was included
in the allowance for
credit losses at December
31, 2022. Loans
subject to write
-downs, or
impaired loans,
are estimated
using the present
value of
expected cash
flows or the
appraised
value
of
the
underlying
collateral
discounted
as
necessary
due
to
management's
estimates
of
changes
in
economic
conditions and are considered a Level 3 valuation.
Other Real Estate:
Other real
estate owned are
valued at the
lesser of the
third-party appraisals
less management's
estimate of
the costs to
sell or the
carrying cost of
the other
real estate
owned. Appraisals generally
use the market
approach
valuation technique
and use
market observable
data to
formulate an
opinion of
the fair
value of
the properties.
However,
the appraiser
uses professional
judgment in
determining the
fair value
of the
property and
the Company
may also
adjust
the value for changes in
market conditions subsequent
to the valuation date
when current appraisals
are not available. As
a consequence of the carrying cost or the
third-party appraisal and adjustments therein, the fair values of the properties are
considered a Level 3 valuation.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
112
USCB Financial Holdings, Inc.
2023 10-K
The following table represents the Company’s assets measured at fair value on a non-recurring basis at December 31,
2023 and 2022 for each of the fair value hierarchy levels
(in thousands):
Level 1
Level 2
Level 3
Total
December 31, 2022:
Impaired loans
$
-
$
-
$
3,639
$
3,639
The following table presents
quantified information about
Level 3 fair value
measurements for assets measured
at fair
value on a non-recurring basis at December 31, 2022 (in
thousands):
Fair Value
Valuation Technique(s)
Unobservable Input(s)
December 31, 2022:
Residential real estate
$
3,500
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
41
Discounted cash flow
Adj. for differences in net operating income expectations
Other
98
Discounted cash flow
Adj. for differences in net operating income expectations
Total
impaired loans
$
3,639
There were
no
financial liabilities measured at fair value on a non-recurring
basis at December 31, 2023 and 2022.
Items Not Measured at Fair Value
The carrying amounts and estimated fair values of financial instruments not carried at fair value, at December 31, 2023
and 2022 are as follows (in thousands):
Fair Value Hierarchy
Carrying
Amount
Level 1
Level 2
Level 3
Fair Value
Amount
December 31, 2023:
Financial Assets:
Cash and due from banks
$
8,019
$
8,019
$
-
$
-
$
8,019
Interest-bearing deposits in banks
$
33,043
$
33,043
$
-
$
-
$
33,043
Investment securities held to maturity, net
$
174,974
$
-
$
155,510
$
-
$
155,510
Loans held for investment, net
$
1,759,743
$
-
$
-
$
1,723,210
$
1,723,210
Accrued interest receivable
$
10,688
$
-
$
1,448
$
9,240
$
10,688
Financial Liabilities:
Demand Deposits
$
552,762
$
552,762
$
-
$
-
$
552,762
Money market and savings accounts
$
1,048,272
$
1,048,272
$
-
$
-
$
1,048,272
Interest-bearing checking accounts
$
47,702
$
47,702
$
-
$
-
$
47,702
Time deposits
$
288,403
$
-
$
-
$
287,104
$
287,104
FHLB advances
$
183,000
$
-
$
182,282
$
-
$
182,282
Accrued interest payable
$
1,372
$
-
$
551
$
821
$
1,372
December 31, 2022:
Financial Assets:
Cash and due from banks
$
6,605
$
6,605
$
-
$
-
$
6,605
Interest-bearing deposits in banks
$
47,563
$
47,563
$
-
$
-
$
47,563
Investment securities held to maturity
$
188,699
$
-
$
169,088
$
-
$
169,088
Loans held for investment, net
$
1,489,851
$
-
$
-
$
1,436,877
$
1,436,877
Accrued interest receivable
$
7,546
$
-
$
1,183
$
6,363
$
7,546
Financial Liabilities:
Demand deposits
$
629,776
$
629,776
$
-
$
-
$
629,776
Money market and savings accounts
$
915,853
$
915,853
$
-
$
-
$
915,853
Interest-bearing checking accounts
$
66,675
$
66,675
$
-
$
-
$
66,675
Time deposits
$
216,977
$
-
$
-
$
211,406
$
211,406
FHLB advances
$
46,000
$
-
$
44,547
$
-
$
44,547
Accrued interest payable
$
229
$
-
$
92
$
137
$
229
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
113
USCB Financial Holdings, Inc.
2023 10-K
13.
STOCKHOLDERS’ EQUITY
Common Stock
In 2023 , the Company issued
242,713
shares of Class A common stock to employees and
directors as restricted stock
awards
pursuant
to
the
Company's
2015
Option
Plan.
There
were
no
restricted
stock
awards
issued
in
the
year
ended
December 31, 2022.
During the year ended December
31, 2023, the Company repurchased
669,920
shares of Class A common
stock at a
weighted average price per share
of $
11.28
. The aggregate purchase
price for these transactions was
approximately $
7.6
million, including
transaction
costs.
As of
December 31,
2023,
80,080
shares remained
authorized
for repurchase
under
this program.
Shares of the Company’s Class A common stock issued and
outstanding as of December 31, 2023 and December 31,
2022 were
19,575,435
and
20,000,753
, respectively.
Dividends
Declaration of dividends by the Board is required before dividend payments are made.
No
dividends were approved by
the Board
for the
common
stock classes
for the
years ended
December 31,
2023 and
December 31,
2022. Additionally,
there were
no
dividends declared and unpaid as of December 31, 2023
and 2022.
See Note 19, Subsequent Events, for information regarding
dividends declared in January 2024.
The
Company
and
the
Bank
exceeded
all
regulatory
capital
requirements
and
remained
above
“well-capitalized”
guidelines as of December 31, 2023 and December
31, 2022. At December 31,
2023, the total risk-based capital ratios
for
the Company and the Bank were
12.78
% and
12.65
%, respectively.
14.
EARNINGS PER SHARE
Earnings
per
share
(“EPS”)
for
common
stock
is
calculated
using
the
two-class
method
required
for
participating
securities. Basic EPS
is calculated by
dividing net income
(loss) available to
common stockholders by the
weighted-average
number of common shares outstanding for
the period, without consideration for common
stock equivalents. Diluted EPS is
computed by
dividing net
income (loss)
available to
common stockholders
by the
weighted-average
number
of common
shares outstanding for
the period and
the weighted-average number
of dilutive common
stock equivalents outstanding
for
the period determined using the treasury-stock method. For
purposes of this calculation, common stock equivalents include
common stock options and are only included in the calculation
of diluted EPS when their effect is dilutive.
The
following
table
reflects
the
calculation
of
net
income
available
to
common
stockholders
for
the
years
ended
December 31, 2023 and 2022 (in thousands):
2023
2022
Net Income
$
16,545
$
20,141
Net income available to common stockholders
$
16,545
$
20,141
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
114
USCB Financial Holdings, Inc.
2023 10-K
The following table
reflects the calculation
of basic and
diluted earnings per
common share
class for the
years ended
December 31, 2023 and 2022 (in thousands, except
per share amounts):
2023
2022
Class A
Class A
Basic EPS
Numerator:
Net income available to common shares
$
16,545
$
20,141
Denominator:
Weighted average shares outstanding
19,621,698
19,999,323
Earnings per share, basic
$
0.84
$
1.01
Diluted EPS
Numerator:
Net income available to common shares
$
16,545
$
20,141
Denominator:
Weighted average shares outstanding for basic EPS
19,621,698
19,999,323
Add: Dilutive effects of assumed exercises of stock options
65,936
177,515
Weighted avg. shares including dilutive potential common shares
19,687,634
20,176,838
Earnings per share, diluted
$
0.84
$
1.00
Anti-dilutive stock options excluded from diluted EPS
720,500
15,000
Net income has not been allocated to unvested
restricted stock awards that are participating securities
because the amounts that would be allocated are
not material to net income per share of common
stock. Unvested restricted stock awards that are participating
securities represent less than one percent
of all of the outstanding shares of common stock
for each of the periods presented.
15.
REGULATORY
MATTERS
Banks and
bank holding
companies
are subject
to regulatory
capital requirements
administered by
federal and
state
banking
agencies.
Failure
to
meet
minimum
capital
requirements
can
initiate
certain
mandatory
and
possibly
additional
discretionary actions
by regulators
that, if
undertaken, could
have a
direct material
effect on
the Company's
consolidated
financial
statements.
Under
capital
adequacy
guidelines
and
the
regulatory
framework
for
prompt
corrective
action,
the
Company and the
Bank must meet
specific capital guidelines
that involve quantitative
measures of their
assets, liabilities,
and certain
off-balance-sheet
items as
calculated under
regulatory accounting
practices. The
Company’s and
the Bank’s
capital
amounts
and
classification
are
also
subject
to
qualitative
judgments
by
the
regulators
about
components,
risk
weightings, and other factors.
Based on changes to the Federal Reserve’s definition of a “Small Bank
Holding Company” that increased the threshold
to $3.0 billion in assets
in August 2018, the Company
is not currently subject to
separate minimum capital measurements.
At such time when the Company reaches the
$3.0 billion asset level, it will
be subject to capital measurements independent
of the Bank.
The Bank
elected to
permanently opt-out
of the
inclusion of
accumulated other
comprehensive income
in the
capital
calculations, as
permitted by the
regulations. This
opt-out reduces
the impact of
market volatility on
the Bank’s
regulatory
capital levels.
The Bank is
subject to the
rules of the
Basel III regulatory capital
framework and related Dodd-Frank
Wall Street Reform
and Consumer Protection
Act. The rules include
the implementation of
a
2.5
% capital conservation
buffer that is
added to
the minimum requirements
for capital adequacy
purposes. Failure
to maintain the
required capital conservation
buffer will
limit the ability of
the Bank to pay
dividends, repurchase shares
or pay discretionary
bonuses. At December
31, 2023 and
2022, the capital ratios for the Bank were sufficient
to meet the conservation buffer.
Prompt
corrective
action
regulations
provide
five
classifications:
well
capitalized,
adequately
capitalized,
undercapitalized,
significantly
undercapitalized,
and
critically
undercapitalized,
although
these
terms
are
not
used
to
represent overall financial condition. If
adequately capitalized, regulatory approval
is required to accept brokered
deposits.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
115
USCB Financial Holdings, Inc.
2023 10-K
If
undercapitalized,
capital
distributions
are
limited,
as
is
asset
growth
and
expansion,
and
capital
restoration
plans
are
required.
At December 31,
2023 and
2022, the
most recent
notification from
the regulatory
authorities categorized
the Bank
as
well capitalized
under the
regulatory framework
for prompt
corrective action.
Failure to
meet statutorily
mandated capital
guidelines
could
subject
the
Bank
to
a
variety
of
enforcement
remedies,
including
issuance
of
a
capital
directive,
the
termination of deposit
insurance by the
FDIC, a prohibition
on accepting or
renewing brokered deposits,
limitations on the
rates of
interest that
the Bank
may pay
on
its deposits
and other
restrictions
on
its business.
To
be categorized
as well
capitalized, an institution
must maintain minimum
total risk-based, Tier
1 risk-based and Tier
1 leverage ratios as
set forth
in the
table below.
There are
no conditions
or events
since the
notification that
management believes
have changed
the
Bank’s category.
Actual and required
capital amounts and
ratios are presented
below for the
Bank at December
31, 2023 and
2022 (in
thousands, except ratios). The required amounts for capital adequacy
shown do not include the capital conservation buffer
previously discussed.
Actual
Minimum Capital
Requirements
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2023:
Total
risk-based capital:
$
233,109
12.65
%
$
147,432
8.00
%
$
184,290
10.00
%
Tier 1 risk-based capital:
$
211,645
11.48
%
$
110,574
6.00
%
$
147,432
8.00
%
Common equity tier 1 capital:
$
211,645
11.48
%
$
82,931
4.50
%
$
119,789
6.50
%
Leverage ratio:
$
211,645
9.17
%
$
92,328
4.00
%
$
115,410
5.00
%
December 31, 2022:
Total
risk-based capital:
$
216,693
13.58
%
$
127,616
8.00
%
$
159,520
10.00
%
Tier 1 risk-based capital:
$
198,909
12.47
%
$
95,712
6.00
%
$
127,616
8.00
%
Common equity tier 1 capital:
$
198,909
12.47
%
$
71,784
4.50
%
$
103,688
6.50
%
Leverage ratio:
$
198,909
9.56
%
$
83,210
4.00
%
$
104,012
5.00
%
The Company
is limited in
the amount
of cash
dividends that
it may
pay.
Payment of dividends
is generally
limited to
the Company’s
net income
of the
current year
combined with
the Bank’s
retained income
of the
preceding two
years, as
defined by state banking regulations. However, for any dividend declaration, the Company must consider
additional factors
such as the amount
of current period net
income, liquidity,
asset quality,
capital adequacy and
economic conditions at
the
Bank. It is likely that
these factors would further limit the
amount of dividends which the Company could
declare. In addition,
bank
regulators
have
the
authority
to
prohibit
banks
from
paying
dividends
including
dividends
to
their
parent
holding
company, if they deem
such payment to be an unsafe or unsound practice.
16.
RELATED PARTY
TRANSACTIONS
In
the
ordinary
course
of
business,
principal
officers,
directors,
and
affiliates
may
engage
in
transactions
with
the
Company.
The
following
table
presents
loans
to
and
deposits
from
related
parties
included
within
the
accompanying
Consolidated Financial Statements at December 31, 2023
and 2022 (in thousands):
Years Ended December 31,
2023
2022
Consolidated Balance Sheets:
Loans held for investment, net
$
-
$
-
Deposits
$
2,792
$
6,825
Consolidated Statements of Operations:
Interest income
$
-
$
-
Interest expense
$
154
$
54
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
116
USCB Financial Holdings, Inc.
2023 10-K
Loan Purchases
During 2023, the Bank purchased $
85.1
million of loans from entities that are
deemed to be related parties.
The Bank
paid those entities fees of $
1.9
million.
During 2022, the Bank purchased $
42.8
million of loans from entities that are deemed to be related
parties. The Bank
paid those entities fees of $
881
thousand.
17.
PARENT COMPANY
CONDENSED FINANCIAL INFORMATION
In December
2021, USCB
Financial Holdings,
Inc. was
formed as
the parent
bank holding
company of
U.S. Century
Bank.
The
condensed
balance
sheet
is
presented
below
for
USCB
Financial
Holdings,
Inc.
at
the
dates
indicated
(in
thousands):
December 31, 2023
December 31, 2022
ASSETS:
Cash and Cash Equivalents
$
2,426
$
1,102
Investment in bank subsidiary
188,827
181,326
Other assets
715
-
Total
assets
$
191,968
$
182,428
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities
$
-
$
-
Stockholders' equity
191,968
182,428
Total
liabilities and stockholders' equity
$
191,968
$
182,428
The condensed
income statement
is presented
below for
USCB Financial
Holdings, Inc.
for the
periods indicated
(in
thousands):
Years Ended
December 31, 2023
December 31, 2022
INCOME:
Dividends from subsidiaries
$
11,100
$
1,000
Total
11,100
1,000
EXPENSE:
Employee compensation and benefits
553
-
Other operating
2,268
Total
2,821
-
Income before income taxes and undistributed subsidiary income
8,279
1,000
Provision (benefit) for income taxes
( 715 )
-
Equity in undisbursed subsidiary income
7,551
19,141
Net Income
$
16,545
$
20,141
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
117
USCB Financial Holdings, Inc.
2023 10-K
The condensed cash
flow is presented below
for USCB Financial Holdings,
Inc. for the periods
indicated (in thousands):
Years Ended
December 31, 2023
December 31, 2022
Cash flows from operating activities:
Net income
$
16,545
$
20,141
Adjustments to reconcile net income to net cash provided
by operating
activities:
Equity in undistributed earnings of subsidiaries
( 7,551 )
( 19,141 )
Stock-based compensation
553
Increase in deferred tax asset
( 715 )
Net cash provided by operating activities
8,832
1,000
Cash flows from investing activities:
Capital contributions to subsidiary
-
-
Other
-
-
Net cash used in investing activities
-
-
Cash flows from financing activities:
Dividends paid
-
-
Proceeds from exercise of stock options
75
102
Repurchase of common stock
( 7,583 )
-
Net cash (used in) provided by financing activities
( 7,508 )
102
Net increase in cash and cash equivalents
1,324
1,102
Cash and cash equivalents, beginning of period
1,102
-
Cash and cash equivalents, end of period
$
2,426
$
1,102
18.
LOSS CONTINGENCIES
Loss contingencies,
including claims
and legal actions
may arise in
the ordinary
course of
business. In
the opinion
of
management, none
of these
actions, either
individually or
in the aggregate,
is expected
to have
a material
adverse effect
on the Company’s Consolidated Financial Statements.
19.
SUBSEQUENT EVENTS
Dividends
On January
29,
2024,
the
Company
announced
that
its
Board
of Directors
approved
a cash
dividend
program.
The
quarterly dividend
for the
first quarter
of 2024
was $
0.05
per share
of Class
A common
stock, paid
on March
5, 2024,
to
stockholders of record as of the close of business
on February 15, 2024. Total amount paid to shareholders in dividends on
February 15, 2024 was $
1.0
million.
118
USCB Financial Holdings, Inc.
2023 10-K
Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and its
Chief
Financial
Officer,
we
evaluated
the
effectiveness
of
the
design
and
operation
of
the
Company’s
disclosure
controls
and
procedures
as
of
December 31,
2023.
Based
on
that
evaluation,
management
believes
that
the
Company’s
disclosure
controls
and
procedures
were
effective
to
collect,
process,
and
disclose
the
information
required
to
be
disclosed
in
the
reports filed or
submitted under
the Exchange
Act within the
required time
periods as of
the end of
the period covered
by
this Report.
This
annual
report
does
not
include
an
integrated
audit
report
of
the
Company's
registered
public
accounting
firm
regarding
internal
control
over
financial
reporting.
Management's
report
was
not
subject
to
audit
by
the
Company's
registered public accounting
firm pursuant to
temporary rules
of the Securities
and Exchange Commission
that permit the
Company (non-accelerated filer) to provide only management's
report in this annual report.
Management’s Report on Internal Control
over Financial Reporting
Management is responsible for designing, implementing, documenting, and
maintaining an adequate system of internal
control over financial
reporting, as
such term
is defined
in the Exchange
Act. An
adequate system
of internal control
over
financial reporting encompasses the processes and procedures
that have been established by management to:
•
maintain records that accurately reflect the Company’s
transactions;
•
prepare
financial
statement
and
footnote
disclosures
in
accordance
with
U.S.
GAAP
that
can
be
relied
upon
by
external users; and
•
prevent and detect unauthorized acquisition, use or disposition of the Company's assets that could have a material
effect on the financial statements.
Management conducted
an evaluation
of the
effectiveness
of the
Company's
internal control
over financial
reporting
based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the
Treadway
Commission
(COSO).
Based
on
this
evaluation
under
the
criteria
in
Internal
Control-Integrated
Framework,
management concluded that
internal control over financial
reporting was effective
as of December 31,
2023. Furthermore,
during the conduct of its assessment, management identified no material weakness in
its financial reporting control system.
The Board of USCB
Financial Holdings, Inc., through its
Audit Committee, provides oversight to
management’s conduct
of
the
financial
reporting
process.
The
Audit
Committee,
which
is
composed
entirely
of
independent
directors,
is
also
responsible for the appointment of the independent registered public accounting firm. The
Audit Committee also meets with
management, the internal audit staff,
and the independent registered public accounting
firm throughout the year to provide
assurance as to the adequacy of the
financial reporting process and to monitor the
overall scope of the work performed by
the internal audit staff and the independent public accountants.
Because of its inherent limitations, the disclosure controls and
procedures may not prevent or detect misstatements.
A
control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the
objectives of the control system are met. Because
of the inherent limitations in all control systems, no
evaluation of controls
can provide absolute assurance that all control issues and instances of
fraud, if any,
have been detected. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There has been
no change in
our internal control
over financial reporting
(as defined in
Rules 13a-15(f) and
15d-15(f)
under the
Exchange Act)
during our
most recent
fiscal quarter
that has
materially affected, or
is reasonably
likely to
materially
affect, our internal control over financial reporting.
Item 9B. Other Information
(a)
None
119
USCB Financial Holdings, Inc.
2023 10-K
(b)
During
the
three
months
ended
December
31,
2023,
none
of
the
Company’s
directors
or
Section
16
reporting
officers
adopted
or
terminated
any Rule 10b5-1
trading arrangement or
non-Rule
10b5-1
trading arrangement (as
such terms are defined in Item 408 of the SEC’s
Regulation S-K).
Item 9C. Disclosure Regarding Foreign Jurisdictions
That Prevent Inspections
Not applicable.
120
USCB Financial Holdings, Inc.
2023 10-K
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required
herein is incorporated
by reference from
the sections captioned
“Information with Respect
to
Nominees for Director
and Information About
Executive Officers”
and “Beneficial Ownership
of Common Stock
by Certain
Beneficial Owners and Management
– Delinquent Section 16(a) Reports”
in the Company’s Definitive
Proxy Statement for
the Annual Meeting
of Shareholders
currently expected
to be held
on May
28, 2024,
is expected
to be
filed with the
SEC
within 120 days of December 31, 2023 (“2024 Definitive
Proxy Statement”).
The Company has
adopted a code
of ethics and
business conduct policy,
which applies to
all of its
directors, officers,
including its principal executive officer, principal financial officer, principal accounting officer,
and employees generally. The
Company will
provide a
copy
of its
code
of ethics
to any
person, free
of charge,
upon request.
Any requests
for a
copy
should
be
made
to
the
Corporate
Secretary,
USCB
Financial
Holdings,
Inc.,
2301
N.W.
87th
Avenue,
Doral,
Florida.
In
addition, a
copy
of the
Code of
Ethics is
available at
the Company’s
website
at www.uscentury.com
under
the “Investor
Relations” tab.
There
have
been
no
material
changes
to
the
procedures
by
which
shareholders
may
recommend
nominees
to
the
Company’s Board.
Item 11. Executive Compensation
The information
required herein
is incorporated
by reference
from the
sections captioned
"Executive Compensation"
and “Information with Respect to
Nominees for Director and Information About
Executive Officers – Director Compensation”
in the Company’s 2024 Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
Matters
Security Ownership of Certain Beneficial Owners and
Management
. Information regarding security ownership
of certain beneficial owners and management is incorporated
by reference to “Beneficial Ownership of Common Stock
by
Certain Beneficial Owners and Management” in the 2024 Definitive
Proxy Statement.
Equity Compensation Plan Information
. Information regarding the Company’s equity
plans is incorporated from
Note 9 “Equity Based and Other Compensation Plans”
to the Consolidated Financial Statements included in
this Annual
Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions,
and Director Independence
The information
required herein
is incorporated
by reference
from the
sections captioned
“Certain Relationships
and
Related
Party
Transactions”
and
“Information
with
Respect
to
Nominees
for
Director
and
Information
About
Executive
Officers” in the 2024 Definitive Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required herein is incorporated by reference
from the section captioned “Ratification of
Appointment of Independent Registered Public Accounting
Firm (Proposal Two)
– Audit Fees” in the 2024 Definitive Proxy
Statement.
121
USCB Financial Holdings, Inc.
2023 10-K
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
List of documents filed as part of this Annual Report:
1)
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Operations for the years ended
December 31, 2023 and 2022
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2023 and 2022
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2023 and
2022
Consolidated Statements of Cash Flows for the years
ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
2)
Financial Statement Schedules:
Financial statement schedules are omitted as not required
or not applicable or because the information is
included in the Consolidated Financial Statements or notes
thereto.
(b)
List of Exhibits:
The exhibit list in the Exhibit Index is incorporated herein
by reference as the list of exhibits required as part of
this Annual Report on Form 10-K.
122
USCB Financial Holdings, Inc.
2023 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 herewith.
***
Furnished hereby.
Item 16. Form 10-K Summary
None.
123
USCB Financial Holdings, Inc.
2023 10-K
SIGNATURES
Pursuant to the requirements of the Exchange
Act, the registrant has duly caused this report
to be signed on its behalf
by the undersigned thereunto duly authorized.
USCB FINANCIAL HOLDINGS, INC.
Date: March 22, 2024
By:
/s/ Luis de la Aguilera
Luis de la Aguilera
President and Chief Executive Officer
Pursuant to the requirements
of the Exchange Ac,
this report has been
signed by the following
persons in the capacities
and on the dates indicated.
Signature
Title
Date
/s/ Luis de la Aguilera
Chairman, President, and Chief Executive
Officer (Principal Executive Officer)
March 22, 2024
Luis de la Aguilera
/s/ Robert Anderson
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 22, 2024
Robert Anderson
/s/ Aida Levitan
Director
March 22, 2024
Aida Levitan
/s/ Howard Feinglass
Director
March 22, 2024
Howard Feinglass
/s/ Kirk Wycoff
Director
March 22, 2024
Kirk Wycoff
/s/ Ramon A. Abadin
Director
March 22, 2024
Ramon A. Abadin
/s/ Bernardo B. Fernandez
Director
March 22, 2024
Bernardo B. Fernandez
/s/ Ramon A. Rodriguez
Director
March 22, 2024
Ramon A. Rodriguez
/s/ Maria C. Alonso
Director
March 22, 2024
Maria C. Alonso
/s/ Robert E. Kafafian
Director
March 22, 2024
Robert E. Kafafian
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 1C. CybersecurityItem 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 DataItem 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 MattersNote 9 Equity Based and Other Compensation Plans To The Consolidated Financial Statements Included in This AnnualItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 16. Form 10-k Summary

Exhibits

2.1Agreement and Plan of Share Exchange, dated December 27, 2021, by and between U.S. Century Bank and USCB FinancialHoldings, Inc. (incorporatedby reference toExhibit 2.1 tothe RegistrantsCurrent Report onForm 8-K (FileNo. 001-41196)filed with the Securities and Exchange Commission on December 30, 2021).3.1Articles of Incorporation ofUSCB Financial Holdings, Inc.(incorporated by referenceto Exhibit 3.1to the Registrants QuarterlyReport on Form 10-Q (File No. 001-41196) filed with the Securities and Exchange Commission on August 11,2023).3.2Amended and Restated Bylaws of USCB FinancialHoldings, Inc. (incorporated by reference to Exhibit 3.1to the RegistrantsCurrent Report on Form 8-K (File No. 001-41196) filed with the Securities and Exchange Commission on July 26, 2023).4.1Side Letter Agreement, dated December 30, 2021, between USCB Financial Holdings, Inc., U.S. Century Bank, Priam CapitalFund II, LP, Patriot FinancialPartners II,L.P. and Patriot Financial PartnersParallel II, L.P. (incorporated byreference to Exhibit4.1 to the RegistrantsCurrent Report on Form8-K (File No. 001-41196)filed with the Securitiesand Exchange Commissionon December 30, 2021).4.2Registration Rights Agreement,dated March 17,2015, between U.S.Century Bank, PriamCapital Fund II,LP, Patriot FinancialPartners II, L.P.,Patriot Financial Partners Parallel II, L.P., and certain other shareholders of U.S. Century Bank (incorporatedby reference toExhibit 4.2 tothe Registrants CurrentReport on Form8-K (File No.001-41196)filed with theSecurities andExchange Commission on December 30, 2021).4.3AssignmentandAssumptionofAgreement,datedDecember30,2021,betweenU.S.CenturyBankandUSCBFinancialHoldings, Inc. (incorporatedby reference toExhibit 4.3 tothe RegistrantsCurrent Report onForm 8-K (FileNo. 001-41196)filed with the Securities and Exchange Commission on December 30, 2021).4.4Description of USCB Financial Holdings, Inc.s securities. **10.1U.S.CenturyBankAmendedandRestated2015EquityIncentivePlan(incorporatedbyreferencetoExhibit10.1totheRegistrantsCurrentReportonForm8-K(FileNo.001-41196)filedwiththeSecuritiesandExchangeCommissiononDecember 30, 2021).10.2Amended and RestatedEmployment Agreement byand among USCBFinancial Holdings, Inc.,U.S. Century Bankand Luis de la Aguilera dated asof January 29, 2023 (incorporated by reference toExhibit 10.2 to the RegistrantsCurrentReportonForm8-KdatedasofJanuary29,2023(FileNo.001-41196)filedwiththeSecuritiesandExchange Commission on February 1, 2023).*10.3Amended and RestatedEmployment Agreement byand among USCBFinancial Holdings, Inc.,U.S. Century Bankand Robert Anderson dated asof January 29, 2023 (incorporatedby reference to Exhibit 10.1to the RegistrantsCurrentReportonForm8-KdatedasofJanuary29,2023(FileNo.001-41196)filedwiththeSecuritiesandExchange Commission on February 1, 2023).*21.1Subsidiaries of USCB Financial Holdings, Inc.23.1Consent of Crowe LLP,Independent Registered Public Accounting Firm.31.1Certification of Chief Executive Officer pursuant toRule 13a-14(a) of the Securities Exchange Actof 1934.31.2Certification of Chief Financial Officer pursuant toRule 13a-14(a) of the Securities Exchange Actof 1934.32.1Certification of Chief Executive Officer pursuant to18 U.S.C. Section 1350.32.2Certification of Chief Financial Officer pursuant to18 U.S.C. Section 1350.97.1Compensation Recovery Policy.**