UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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FORM
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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OF THE SECURITIES EXCHANGE ACT OF 1934
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Exchange Act of
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such date less shares held by affiliates). Although directors
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Proxy Statement for the 2025 Annual Meeting of Shareholders (the “2025
Proxy Statement”) are incorporated by
reference into Part III of this report.
FORM 10-K
DECEMBER 31, 2024
TABLE OF CONTENTS
3
USCB Financial Holdings, Inc.
2024 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
(“Exchange
Act”).
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 and
balance
sheet restructuring.
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:
•
operations;
•
•
reserve and deferred tax asset valuation allowance;
•
•
jurisdiction where we operate;
•
banking industry;
•
•
the on-going effects of the implementation of the
Current Expected Credit Losses (“CECL”);
•
of geographic, depositor,
and industry concentrations,
including our concentration
in loans secured by
real estate,
in particular, commercial real estate;
•
•
•
•
growth as well as growth through other means, such as
future acquisitions;
•
•
•
spread and net interest margin;
•
•
employee, or third-party fraud and cybersecurity breaches;
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
USCB Financial
Holdings, Inc.
has filed
or will
file with
the SEC
and, for
periods
prior to
the completion of
the bank holding
company reorganization in
2021, U.S.
Century Bank filed
with the
Federal Deposit
Insurance Corporation (“FDIC”).
4
USCB Financial Holdings, Inc.
2024 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,
2024, the
Company
had total
consolidated
assets
of $2.6
billion.
U.S. Century Bank (the “Bank”)
commenced operations in October
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 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 context 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.
2024 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:
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,
2024, the Bank continued to be
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:
$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:
including deposit collection,
lockbox services, payment
services, and lending
products. Launched in
2016, we
offer our HOA customers a unique combination of market knowledge of
a local bank, and a highly personalized
“white glove” approach to customer service.
•
Jurist Advantage and Private Client
Group services:
provides customized
banking solutions
for law
firms as
well as
their partners,
associates, staff,
and high
net
worth clients.
We also leverage
our relationships with
our law
firm clients to
generate personal deposit
accounts.
•
Correspondent Banking services:
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 correspondent banking, and we have frequent and regular
open communication with our correspondent bank clients to ensure proper compliance controls are maintained
at such institutions.
•
Medical
Advantage:
MD
Advantage
was
launched
in
2024;
this
vertical
provides
concierge-level
banking
services to physicians,
dentists, and veterinarians.
MD
Advantage products and
services were designed
to cater
to the complex banking requirements of medical professionals.
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 insured cash sweep (“ICS”) and certificate of
deposit account
registry service
(“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.
6
USCB Financial Holdings, Inc.
2024 10-K
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
Florida
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.
Seasonality
We do not believe our business to be seasonal
in nature.
Markets
Our
primary
banking
market
is
South
Florida.
South
Florida
has
rapidly
emerged
as
a
top
destination
for
financial
institutions,
driven
by
a
combination
of
factors
that
foster
economic
growth
and
stability.
The
region
offers
a
low-tax
environment, a robust business infrastructure, and access to a
diverse talent pool. With a thriving
real estate market, strong
international
trade
connections,
and
an
increasing
concentration
of
tech
and
finance
sectors,
South
Florida
provides
a
dynamic ecosystem for financial services. Additionally,
the region's strategic location as a gateway to Latin America further
enhances
its appeal
for corporations
looking
to strengthen
global
connectivity
and investment
opportunities.
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
2024 and the three largest population
centers were in Miami-Dade, Broward, and Palm
Beach counties (all located in South
Florida).
According
to
estimates
from
the
United
States
Census
Bureau,
Florida’s
population
increased
to
23.4
million
residents, an increase of 1.8 million new residents
or 8.5% from April 2020 to July 2024.
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 EGCs, 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
7
USCB Financial Holdings, Inc.
2024 10-K
gross revenues exceed $1.235 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.
Human Capital Resources
We respect
the values and
diversity exhibited
throughout our organization
and the community.
Diversity is an
integral
part of
our organization’s
culture. We
seek the
active engagement
and participation
of people
with diverse
backgrounds.
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 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, 2024,
we had 199
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.
8
USCB Financial Holdings, Inc.
2024 10-K
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.
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 $10.0 billion and for large banks with assets of more than $50.0
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
$10.0 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
person
or
entity
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
9
USCB Financial Holdings, Inc.
2024 10-K
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
required at times when, absent this statutory and Federal Reserve policy requirement, a bank holding company may not be
inclined or able 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 the 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.
10
USCB Financial Holdings, Inc.
2024 10-K
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
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, and certain
past due loans
which are assigned
a 150% 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 $15.0 billion in total assets to continue to count certain non-qualifying capital instruments issued prior to May
19, 2010 as Tier 1 capital, including trust preferred securities
and cumulative perpetual preferred stock (subject to a limit of
25% of Tier 1 capital). However, non-qualifying
capital instruments issued on or after May 19, 2010 do not qualify for Tier 1
capital treatment. At December 31, 2024, we had no
such investments.
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 $500.0
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
11
USCB Financial Holdings, Inc.
2024 10-K
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, 2024, 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
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 $10.0
billion in
total consolidated
assets, off
-balance
sheet exposures
of 25%
or less
of total
consolidated
assets,
and
trading
assets
and
liabilities
of 5%
or less
of 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,
2024 and
2023, 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
Annual Report
on 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, 2024, 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,
as
defined
in
the
banking
agencies
guidance,
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.
12
USCB Financial Holdings, Inc.
2024 10-K
As of December
31, 2024, our
ratio of construction
loans to total
risk-based capital
was 23%,
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, 2024, our
ratio of total
commercial real
estate loans
to total risk-based
capital was
366% 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, the 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,
2024,
the
Company
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.
13
USCB Financial Holdings, Inc.
2024 10-K
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
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 Company) 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.
In addition,
loans or other
extensions of
credit by the
financial institution
to the affiliate
are to be
collateralized in
accordance with
the
requirements set for in Section 23 of the Federal Reserve
Act.
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, 2024, the 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
14
USCB Financial Holdings, Inc.
2024 10-K
institutions.
The
deposits
are
insured
by
the
FDIC
up
to
applicable
limits.
As
a
general
matter,
the
maximum
deposit
insurance amount is $250 thousand per depositor.
Additionally,
FDIC-insured depository institutions are
required to pay deposit insurance
assessments to the FDIC. The
amount of
a particular
institution's deposit
insurance assessment
is based
on that
institution's risk
classification under
an
FDIC risk-based assessment system. An institution's
risk classification is assigned based on
its capital levels and the level
of supervisory concern the institution poses to the regulators.
Under the current
system, deposit
insurance assessments
are based
on a bank’s
assessment base,
which is
defined
as average total assets minus
average tangible equity.
For established small institutions,
such as the Bank, the
FDIC sets
deposit
assessment
rates
based
on
the
Financial
Ratios
Method,
which
takes
into
account
several
ratios
that
reflect
leverage, asset quality,
and earnings at
each individual institution
and then applies
a pricing multiplier that
is the same for
all institutions. An
institution’s rate
must be within
a certain minimum
and a certain
maximum, and the
range varies based
on the
institution’s
composite CAMELS
rating. The
deposit insurance
assessment
is calculated
by multiplying
the bank’s
assessment base
by the
total base
assessment rate.
Assessment rates
for most
insured depository
institutions with
less
than $10.0 billion of assets range from 2.5 to 32 basis points
of each institution’s total assets less tangible
capital.
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.
15
USCB Financial Holdings, Inc.
2024 10-K
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
$18.0 million),
plus 4.75%
of our
outstanding advances
(borrowings) from
the FHLB
of Atlanta
under the activity-based stock ownership requirement.
Anti-Money Laundering Regulation
As a financial
institution, we
must maintain
anti-money laundering
programs that
include established
internal policies,
procedures
and
controls,
a
designated
compliance
officer,
an
ongoing
employee
training
program,
and
testing
of
the
program by an independent audit function in accordance with the
Bank Secrecy Act of 1970, as amended (“BSA”), and the
regulations issued by the Department of the Treasury
in 31 CFR Chapter X, FDIC
Section 326.8 of the FDIC’s regulations
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.
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:
•
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;
•
•
•
•
•
and
•
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
16
USCB Financial Holdings, Inc.
2024 10-K
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 FinCEN to collect that information and share
it with
authorized government authorities
and financial institutions,
subject to
effective safeguards and
controls. In December
2024,
a
nationwide
injunction
was
granted,
blocking
the
enforcement
of
the
CTA
pending
the
adjudication
of
the
constitutionality
of
the
CTA.
In
late
January
2025,
the
United
States
Supreme
Court
reversed
the
U.S.
district
court’s
preliminary injunction staying the CTA.
However, a separate nationwide
stay of the CTA
issued earlier in January 2025 by
another U.S.
district court
was not
affected
by the
Supreme Court’s
action. In
mid-February
2025, the
U.S.
district court
stayed the preliminary relief granted
in its early January
2025, order, including the nationwide stay
of the CTA.
On February
19, 2025, FinCEN published an
updated alert stating that,
in view of the U.S. district
court’s decision, beneficial
ownership
information
reporting
requirements
under
the
CTA
will
be
in
effect.
FinCEN
generally
extended
the
deadline
for
most
reporting companies filing initial, updated
and corrected beneficial ownership
reports to March 21, 2025
(30 calendar days
from
February
19,
2025).
Subsequently,
on
March
2,
2025,
the
U.S.
Treasury
announced
that
it
was
suspending
enforcement
of
the
CTA
against
domestic
reporting
companies
and
their
beneficial
owners.
The
U.S.
Treasury
also
announced
that
it
would
be
proposing
revised
rules
applicable
to
foreign
reporting
companies
only.
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.
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:
•
consumer borrowers and including substantial new requirements for mortgage lending and servicing, as mandated
by the Dodd-Frank Act
•
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;
•
or other prohibited factors in extending credit;
•
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;
•
collected by collection agencies; and
•
process for residential mortgage loans.
Our deposit operations are also subject to federal laws,
such as:
•
imposes other limits on deposit-taking;
•
and prescribes procedures for complying with administrative subpoenas
of financial records;
17
USCB Financial Holdings, Inc.
2024 10-K
•
check images and copies made from that image, the
same legal standing as the original paper check;
•
deposit accounts
and customers’
rights and
liabilities arising
from the
use of
ATMs
and other
electronic banking
services; and
•
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 laws
and regulations,
including Florida laws, we are limited in our ability
to disclose non-public information about consumers
to nonaffiliated third
parties. These
limitations
require
disclosure
of
privacy
policies to
consumers
and,
in
some
circumstances,
require
us to
allow
consumers
to
prevent
disclosure
of
certain
personal
information
to
a
nonaffiliated
third
party
and
to
not
disclose
account numbers or
access codes to
non-affiliated third parties for
marketing purposes. 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 $10.0 billion
in assets for compliance with federal
consumer laws. The authority to supervise
and
examine depository institutions with
$10.0 billion or less in assets,
such as 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.
18
USCB Financial Holdings, Inc.
2024 10-K
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, 2024, 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
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 April
2023, the 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 took 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 $600.0 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
19
USCB Financial Holdings, Inc.
2024 10-K
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
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 Class A
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 Exchange Act.
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 Exchange Act. 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 Company’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.
The Company meets
the amended definition
of an accelerated
filer as of
January 1, 2025
and would normally be required to provide an attestation report from its independent auditor assessing
the effectiveness of
its ICFR. However, as long it is an eligible emerging growth company,
such auditor attestation requirement will not apply to
the Company.
However, the
Bank remains subject
to independent auditor
attestation required
under FDIC regulations
set
forth at 12 C.F.R.
§363.3(b).
20
USCB Financial Holdings, Inc.
2024 10-K
Available Information
Our website
address is
www.uscentury.com.
Our electronic
filings with
the FDIC
(prior to
the bank
holding company
reorganization) 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.
21
USCB Financial Holdings, Inc.
2024 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
•
adverse changes in the local economy than our more geographically
diversified competitors.
•
•
developments, which may impair a borrower's ability to
repay a loan.
•
•
•
operations, growth and prospects.
•
retaliatory
tariffs,
or
other
sanctions,
may
adversely
impact
our
business,
financial
condition
and
results
of
operations.
•
•
•
financial condition and operations.
•
financial performance.
•
material adverse effect on our business, financial
condition and results of operations.
•
•
•
growth and adversely affect our earnings.
•
face specific risks associated with originating SBA loans
and selling the guaranteed portion thereof.
•
22
USCB Financial Holdings, Inc.
2024 10-K
•
•
•
condition, and could result in further losses in the future.
•
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.
•
•
data processing system failures and errors.
•
of transactions.
•
expensive and less stable sources.
•
operations.
•
historical growth and earnings trends.
•
•
on terms acceptable to us or may be dilutive to existing shareholders.
•
risks
in
successfully
integrating
and
managing
the
merged
companies
or
acquisitions
and
may
dilute
our
shareholders.
•
the future, could harm our business.
•
•
which could materially and adversely affect our
business.
•
•
to invest in technological improvements.
•
risks.
•
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.
•
interrupted if
our third-party
service providers
experience difficulty,
terminate their
services
or fail
to comply
with
banking regulations.
23
USCB Financial Holdings, Inc.
2024 10-K
•
penalties, judgments
or other requirements
resulting in
increased expenses or
restrictions on
our business
activities.
•
us or another entity with which they are, or may become, affiliated.
Risks Related to Our Tax, Accounting
and Regulatory Compliance
•
and may be materially impaired upon significant changes
in ownership of our common stock.
•
or estimates used in our critical accounting policies are inaccurate.
•
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.
•
governance, executive
compensation and
accounting principles, or
changes in them,
or our failure
to comply with
them, could adversely affect us.
•
regulations and corresponding enforcement proceedings.
•
our
compliance,
regulatory,
and
other
risks
and
costs
and
subject
us
to
legal
and
regulatory
examinations,
investigations, and enforcement actions.
•
which could adversely affect our financial condition
and operations.
•
findings and determinations of these agencies, we may
be required to make adjustments to our
business that could
adversely affect us.
•
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.
•
operations.
•
respect to our environmental, social
and governance practices may
impose additional costs on
us or expose us to
new or additional risks.
Risks Related to Our Class A Common Stock
•
•
substantial losses for our shareholders.
•
shareholders that would own 4.95% or more of our stock,
excluding our Significant Investors.
24
USCB Financial Holdings, Inc.
2024 10-K
•
exemptions from various reporting
and other requirements applicable
to emerging growth companies,
our Class A
common stock could be less attractive to investors.
•
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.
•
from yours.
•
regulatory limitations on changes of control of the Company.
Risks Related to our Business and Operations
Our business
operations and
lending activities
are concentrated
in South
Florida, and
we are
more sensitive
to adverse changes in the local economy than our
more geographically diversified competitors.
Unlike many of
our larger competitors
that maintain significant
operations located
outside of our
market area, most
of
our customers are concentrated in South Florida. In addition, we have
a high concentration of loans secured by real estate
located in
South Florida.
Therefore, our
success depends
upon the
general economic
conditions in
South Florida,
which
may differ from the economic conditions in other areas
of the U.S. or the U.S. generally.
Our real estate
collateral provides
an alternate source
of repayment in
the event
of default by
the borrower;
however,
the value of the collateral may decline during the time the credit is outstanding. The concentration of our loans in the South
Florida area subjects us to
risk that a downturn in the
local economy or recession in
this area could result in
a decrease in
loan originations and increases in delinquencies and foreclosures, which would have a greater negative effect on us than if
our lending were more geographically diversified. Additionally, the COVID-19 pandemic 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 the
level
of oil and
natural gas
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.
25
USCB Financial Holdings, Inc.
2024 10-K
Our concentration of real estate loans in a limited
market area exposes us to lending risks.
At December 31, 2024,
approximately $1,426 million,
or 72.6%, of our
total loan portfolio, was
secured by real
estate,
in particular commercial real
estate, most of which is
located in our primary
lending market area of
the Miami metropolitan
statistical
area.
Future
declines
in
the
real
estate
values
in
our
primary
lending
market
and
surrounding
markets
could
significantly impair
the value
of the
particular real
estate collateral
securing our
loans and
our ability
to sell
the collateral
upon
foreclosure
for
an
amount
necessary
to
satisfy
the
borrower’s
obligations
to
us.
This
could
require
increasing
our
allowance for credit
losses to address
the decrease in
the value of
the real estate
securing our loans,
which could have
a
material adverse effect on our business, financial
condition, results of operations, and growth prospects.
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.
Inflationary pressures and rising prices may affect
our results of operations and financial condition.
The inflationary
outlook in
the United
States remains
uncertain. As
of December
31, 2024,
the consumer
price index
was 2.9% year-over-year. While this
is a significant reduction to the rate of inflation experienced in 2022 and 2023, it is still
above the FRB’s targeted rate. The risks to
our business from inflation depend on the
durability of the inflationary pressures
in our markets. Although
the FRB has reduced
the federal funds rate
three times in 2024,
no assurance can
be given that
it will
continue to
do so.
At the
end of
January 2025,
the FRB
determined not
to reduce
the federal
funds rate.
The resurgence
of elevated levels
of inflation could
lead the FRB
to cease reducing
its benchmark rate
or potentially starting
to increase it
again which could,
in turn, increase
the borrowings costs
of our customers,
making it more
difficult for them
to repay their
loans or
other obligations.
Elevated interest
rates
may be
needed to
tame inflationary
price pressures,
which
could also
push down asset prices, including collateral values, and weaken
economic activity.
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.
The soundness of other financial institutions could
adversely affect us.
Our
ability
to
engage
in
routine
funding
and
other
transactions
could
be
adversely
affected
by
the
actions
and
commercial soundness
of other
financial institutions.
Financial services
companies are
interrelated as
a result
of trading,
clearing,
counterparty
or
other
relationships.
We
have
exposure
to
different
industries
and
counterparties,
and
through
transactions
with
counterparties
in
the
financial
services
industry,
including
brokers
and
dealers,
commercial
banks,
investment
banks,
and
other
institutional
clients.
Defaults
by,
or
even
rumors
or
questions
about,
one
or
more
financial
institutions or market utilities, or
the financial services industry generally, may lead to market-wide liquidity
problems, losses
of depositor,
creditor
and
counterparty
confidence
and
losses
or defaults
by us
or by
other institutions.
These
losses
or
defaults
could
have
a
material
adverse
effect
on
our
business,
financial
condition,
results
of
operations
and
growth
prospects. Additionally,
if our
competitors were
extending credit
on terms
we found
to pose
excessive risks,
or at interest
rates which we believed
did not warrant the
credit exposure, we may not
be able to maintain
our business volume and
could
experience deteriorating financial performance.
26
USCB Financial Holdings, Inc.
2024 10-K
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
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.
In
early
February,
the
new
U.S.
administration
imposed
through
executive
orders
a
new
tariff
policy,
imposing
a
25%
duty
on
merchandise
imports
from
Mexico
and
Canada
alongside
a
10%
tariff
on
Chinese
imports.
The
executive
orders
included
an
exemption
for
Canadian
energy
resources, subject to a reduced 10% tariff. The tariffs were set to take effect on February 4,
2025, but following discussions
between the United States and each
of Canada and Mexico, the U.S.
administration agreed to a pause of
at least 30 days
in the implementation of the duties. The tariffs on China went into
effect as scheduled on February 4, 2025. This led to 10%
to
15%
retaliatory
tariffs
on
U.S.
energy
and
farm
machinery
imports
being
imposed
by
China
on
February
9,
2025.
Subsequently,
the U.S. administration
announced the
United States would
impose a
25% tariff
on all imports
of steel and
aluminum,
coming
into force
in
mid-March
2025.
In
addition,
an
additional
10%
tariff
was
announced
to
be
imposed
on
China in
early March
2025.
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 may
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
27
USCB Financial Holdings, Inc.
2024 10-K
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 (the London
InterBank Offered
Rate) 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. The remaining
synthetic LIBOR was published for the last time
as of September 30, 2024.
Synthetic LIBOR was a temporary measure
to
allow entities to transition to alternative risk-free reference
rates.
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
(Secured
Overnight
Financing
Rate),
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.
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.
28
USCB Financial Holdings, Inc.
2024 10-K
Our business is subject to
interest rate risk, and variations in
interest rates may materially and adversely
affect
our financial performance.
Changes in the
interest rate environment
may reduce our
profits. It is
expected that 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 (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.
All
of
these
increases
were
expressly
made
in
response
to
inflationary
pressures.
In
2024,
the
FOMC
decreased
such
benchmark
rates three
times.
However,
there can
be no
assurances
as to
any future
FOMC
action, including
whether
it
continues to decrease
the federal funds
rate or implements
increases. In late
January 2025, the
FOMC determined to
not
change the federal funds rate at 4.25% to 4.5%.
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.
However,
in 2024,
in light
of the
FOMC’s actions
to decrease
the federal
funds rate
three times,
we decreased
the rates
paid on our interest-bearing deposits. As a result,
while the overall funds increased, the cost of it
increased at a lesser pace
when compared to the
increase in cost of
deposits from 2022 to
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,
as compared to 2023 and 2022.
Accordingly,
changes
in
levels
of
interest
rates
could
materially
and
adversely
affect
our
net
interest
margin,
asset
quality, loan origination
volume, average loan portfolio balance, liquidity,
and overall profitability.
A failure or the perceived
risk of a failure to raise
the statutory debt limit
of the U.S. 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. On
January 1,
2025, the
extension of
the debt
ceiling limit
effected in
June 2023
expired. The
debt ceiling
was reinstated
on
January 2, 2025,
at $36.1 trillion,
a figure reflecting
the total federal
debt accumulated
by that date.
In late January
2025,
the U.S.
Treasury
began employing
various
measures,
such as
suspending
investments
in federal
retirement funds
and
halting the issuance of certain securities, to continue financing government operations. There are proposals to
increase the
debt ceiling limit by $4.0 trillion, subject to agreements on other matters including extending $4.5 trillion in tax cuts from the
2017 Tax
Cuts and Jobs
Act (set to
expire in 2025)
and implementing
$2 trillion in
mandatory spending
reductions over a
decade.
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. These
developments
could cause interest
rates and borrowing
costs to rise
(unless the Federal
Reserve re-initiates
quantitative easing),
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
29
USCB Financial Holdings, Inc.
2024 10-K
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. 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
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
30
USCB Financial Holdings, Inc.
2024 10-K
months.
At
December
31,
2024,
our
total
commercial
investor
real
estate
loans,
including
loans
secured
by
apartment
buildings, commercial real estate, and construction and
land loans represented 366% 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
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.
31
USCB Financial Holdings, Inc.
2024 10-K
Correspondent 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
greater
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
Bank
Secrecy
Act of
1970,
as
amended
(“BSA”)
and
other
anti-money
laundering
(“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
BSA, and
AML statutes
and regulations
as well
as the
recently
enacted CTA.
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, including the imposition
of
civil
money
penalties,
formal
agreements
and
cease
and
desist
orders.
Furthermore,
failure
to
meet
regulatory
requirements could require us to incur additional significant costs in order
to bring our BSA/AML processes and procedures
into compliance, negatively
impact our reputation,
and have a
material adverse
effect on
our business, financial
condition
and results of operations.
In recent
years, sanctions
that the
regulators have
imposed on
banks that
have not
complied with
all BSA
and AML
requirements have been
especially severe. In
order to comply
with regulations, guidelines
and examination procedures
in
this area, we have
dedicated significant resources to our BSA/AML process
and procedures. If our policies, procedures and
systems
are deemed
deficient,
we could
be
subject
to
liability,
including
fines
and
regulatory
actions
such
as additional
restrictions on our ability to pay
dividends and the necessity to obtain
regulatory approvals to proceed with
certain aspects
of our business plan, such as acquisitions.
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.
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
liens
on
specified
collateral
of
the
borrowers
and
we
may
not
obtain
or
properly
perfect our liens or the value
of the collateral securing any
particular loan may not be sufficient
to protect us from suffering
a partial or complete
loss if the loan
becomes non-performing and
we proceed to foreclose
on or repossess
the collateral.
With
respect
to
loans
that
we
originate
for
condominium
or
homeowners'
associations
(“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.
32
USCB Financial Holdings, Inc.
2024 10-K
Non-performing
assets
take
significant
time
to
resolve
and
adversely
affect
our
results
of
operations
and
financial condition, and could result in further losses in
the future.
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.
In
addition,
there
are
legal
fees
associated
with
the
resolution
of
problem
assets
as
well
as
carrying
costs
such
as
taxes,
insurance,
and
maintenance
related to OREO.
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.
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.
33
USCB Financial Holdings, Inc.
2024 10-K
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
such
event
could
have
a
material
adverse
effect
on
our
business, financial condition and results of operations. At
December 31, 2024, our top 10 depositors held
16.7% of our total
portfolio. As of December
31, 2024, 45% of
our deposits are estimated
to be FDIC-insured. At such
date, our public funds
are 5% of total deposits and are partially collateralized. The estimated average account size of our deposit portfolio is $105
thousand.
In
addition,
the
Bank
was
considered
a
“well
capitalized”
institution
as
of
December 31,
2024
and
2023.
Consequently,
the occurrence of
such event 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
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
34
USCB Financial Holdings, Inc.
2024 10-K
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 would 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.
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
35
USCB Financial Holdings, Inc.
2024 10-K
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:
•
to achieve, or that the acquired business will not perform
to our expectations;
•
existing contracts, accounting processes
and personnel of the target
and realizing the anticipated synergies
of the
combined businesses;
•
and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our
existing business;
•
•
realized if we had allocated the purchase consideration
or other resources to another opportunity;
•
•
•
•
•
•
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;
•
•
•
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,
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
36
USCB Financial Holdings, Inc.
2024 10-K
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 Chairman, 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
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.
37
USCB Financial Holdings, Inc.
2024 10-K
We must respond to rapid technological changes
to remain competitive.
We will have to continue to respond
to future technological changes, which are occurring at a
rapid pace in the financial
services industry
in order
to remain
competitive. 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
continues to
undergo
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.
Our current and
future uses of artificial
intelligence (AI) and other
emerging technologies may create additional
risks.
The increasing adoption of AI in financial services
presents significant opportunities but also introduces a range of
risks
that
could
impact
our
operations,
regulatory
compliance,
and
customer
trust.
AI
introduces
model
risk,
where
flawed
algorithms or
biased data could
result in inaccurate
credit decisions,
compliance violations,
or discriminatory
outcomes in
lending or customer
service. Cybersecurity
threats, such
as data breaches,
adversarial attacks,
and data poisoning,
pose
significant challenges,
particularly as these
systems handle
large volumes of
sensitive customer
information. Additionally,
the opaque nature of some AI models, often referred to as "black-box" systems, raises regulatory compliance concerns, as
regulators increasingly require transparency and explainability
in AI-driven decision-making.
Operational risks also arise from potential system failures, over-reliance
on AI, and integration challenges with existing
infrastructure. Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring, and
customer support.
Ethical and reputational
risks, including
unintended consequences
or perceived unfairness
in AI-driven
decisions,
may
erode
customer
trust
and
expose
us
to
regulatory
scrutiny.
Mitigating
these
risks
requires
a
robust
governance
framework,
regularly
testing
and
auditing
of
AI
models,
and
strong
human
oversight.
Investments
in
cybersecurity, data
privacy protections, and employee training are critical
to managing these risks.
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.
38
USCB Financial Holdings, Inc.
2024 10-K
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
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
39
USCB Financial Holdings, Inc.
2024 10-K
regarding our
current
and/or prior
business
activities.
Any such
legal or
regulatory
actions may
subject
us to
substantial
compensatory
or
punitive
damages,
significant
fines,
penalties,
obligations
to
change
our
business
practices
or
other
requirements resulting
in increased
expenses, diminished
income and
damage to
our reputation.
Our involvement
in any
such matters,
whether tangential
or otherwise
and
even if
the matters
are ultimately
determined
in our
favor,
could also
cause significant harm to our
reputation and divert management attention away from
the operation of our business.
Further,
any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by
government
agencies
may
result
in
litigation,
investigations
or
proceedings
as
other
litigants
and
government
agencies
begin independent
reviews of
the same
activities. As
a result,
the outcome
of legal
and regulatory
actions could
have an
adverse effect on our business, results of operations
and results of operations.
Certain of
our directors may
have conflicts
of interest in
determining whether to
present business
opportunities
to us or another entity with which they are, or may
become, affiliated.
Certain of our
directors are or may
become subject to fiduciary
obligations in connection with
their service on the
boards
of
directors
of
other
corporations,
including
financial
institutions.
A
director's
association
with
other
financial
institutions,
which give rise to
fiduciary or contractual obligations to such other
institutions, may create conflicts of interest. To the extent
that any of our directors
become aware of acquisition
opportunities that may be
suitable for entities other
than us to which
they have fiduciary or contractual obligations, or they are
presented with such opportunities in their capacities as fiduciaries
to such
entities, they
may honor
such obligations
to such
other entities.
You
should assume
that to
the extent
any of
our
directors become aware
of an opportunity
that may be
suitable both for
us and another
entity to which
such person has
a
fiduciary obligation
or contractual
obligation
to present
such
opportunity as
set forth
above,
he or
she may
first give
the
opportunity to such other entity
or entities and may give
such opportunity to us only
to the extent such other
entity or entities
reject
or
are
unable
to
pursue
such
opportunity.
In
addition,
you
should
assume
that
to
the
extent
any
of
our
directors
become
aware
of
an
acquisition
opportunity
that
does
not
fall
within
the
above
parameters,
but
that
may
otherwise
be
suitable for us, he or she may not present such opportunity to
us.
Pursuant to an agreement between us and each of our Significant Investors
(as defined below), each of the Significant
Investors has the right
to nominate one
director to serve
on our Board, including
Board committees, and
to designate one
non-voting Board
observer.
The directors
and Board
observers
designated by
the Significant
Investors have
the right
to,
and have
no duty
not to,
engage in
the same
or similar
business activities
or lines
of business
as us.
In the
event that
a
director or Board observer designated by a Significant Investor acquires knowledge of a potential transaction or matter that
may be
a corporate opportunity
for us,
such person shall
have no
duty to
communicate or
present such corporate
opportunity
to us
and shall
not be
liable to
us or
our shareholders
for breach
of any
duty by
reason of
the fact
that such
person or
a
related investment fund
thereof, directly or
indirectly, pursues or acquires such opportunity
for itself, directs
such opportunity
to another person, or does not present such opportunity
to us.
Risks Related to Our Tax,
Accounting and Regulatory Compliance
Our ability to recognize
the benefits of
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,
as 1986, as
amended.
Future changes in
tax law or
changes in ownership
structure could
limit our ability to utilize our recorded net deferred tax assets.
40
USCB Financial Holdings, Inc.
2024 10-K
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
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 public company, we may not efficiently or effectively create an effective internal control environment, and
any future
failure to
maintain
effective
internal control
over financial
reporting
could impair
the reliability
of our
financial
statements,
which
in
turn
could
harm
our
business,
impair
investor
confidence
in
the
accuracy
and
completeness of
our financial
reports and
our access
to the
capital markets,
cause the
price of
our Class
A common
stock to decline and subject us to regulatory penalties.
Our management is responsible for establishing
and maintaining adequate internal control over financial
reporting and
for evaluating
and
reporting
on
that
system
of
internal
control.
Our
internal
control
over
financial
reporting
consists
of
a
process
designed
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial statements for external purposes in accordance with GAAP.
As a public company,
we are required to comply with
SEC regulations, including
the SOA 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
SOA,
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 SOA.
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
SOA. 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 SOA, we may
be subject to adverse
regulatory consequences and there
could be a
negative reaction in
the financial markets due
to a loss
of investor confidence
in us and the
reliability of our
financial statements. In
addition, we may be
required to incur
costs in improving
our internal
control system
and hiring
additional personnel.
Any such
action could
negatively
affect
our business,
financial condition,
results of operations, and the price of our Class A common
stock may decline.
While we
remain an emerging
growth company, we will
not be
required to include
an attestation report
on internal
control
over financial
reporting issued
by our
independent registered
public accounting
firm. To
prepare for
eventual compliance
with
the
auditor
attestation
requirement
of
Section
404
of
the
SOA
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.
41
USCB Financial Holdings, Inc.
2024 10-K
We
operate
in
a
highly
regulated
environment,
and
the
laws
and
regulations
that
govern
our
operations,
corporate governance,
executive compensation
and accounting
principles, or
changes in
them, or
our failure
to
comply with them, could adversely affect us.
We operate in a
highly regulated industry and
we are subject to
examination, supervision and comprehensive
regulation
by various federal and state agencies,
including the Federal Reserve, the
FDIC and the FOFR. As
such, we are subject to
extensive regulation, supervision and
legal requirements that govern almost
all aspects of our operations.
These laws and
regulations
are
not
intended
to
protect
our
shareholders.
Rather,
these
laws
and
regulations
are
intended
to
protect
customers, depositors, the Deposit Insurance Fund,
or DIF, and the overall financial health and
stability of the United
States
banking
system.
These
laws
and
regulations,
among
other
matters,
prescribe
minimum
capital
requirements,
impose
limitations on the
business activities
and investments
in which we
can engage, regulate
and restrict our
lending activities,
require us to provide certain banking services broadly within the communities in which we operate,
determine the locations
of our branch
offices and impose certain
specific accounting requirements on us
that may be more
restrictive and may result
in
greater
or
earlier
charges
to
earnings
or
reductions
in
our
capital
than
GAAP
would
require.
We
are
also
subject
to
capitalization
guidelines
established
by
our
regulators,
which
require
us
to
maintain
adequate
capital
to
support
our
business.
Compliance
with
laws
and
regulations
can
be
difficult
and
costly,
and
changes
to
laws
and
regulations
often
impose additional operating costs. Further, we must obtain approval from our
regulators before engaging in many activities,
and
our
regulators
have
the
ability
to
compel
us
to,
or
restrict
us
from,
taking
certain
actions
entirely.
There
can
be
no
assurance that any regulatory approvals we may require
or otherwise seek will be obtained.
Regulations affecting
banks and
other financial
institutions are
undergoing continuous
review and
frequently change,
and the ultimate effect of such changes cannot be predicted. Changes to the legal and regulatory framework governing our
operations, including
the Dodd-Frank
Wall
Street Reform
and Consumer
Protection Act,
or the
Dodd-Frank
Act, and
the
Economic Growth, Regulatory Relief and Consumer
Protection Act, or the Regulatory Relief
Act, have significantly revised
the laws and regulations under which we operate. Such regulations and laws may be modified or repealed at any time, and
new legislation may be enacted that will affect us and
our subsidiaries.
Our failure to comply with these laws and regulations, even if the failure follows good faith effort
or reflects a difference
in
interpretation,
could
subject
us
to
restrictions
on
our
business
activities,
enforcement
actions
and
fines
and
other
penalties,
any
of
which
could
adversely
affect
our
results
of
operations,
regulatory
capital
levels
and
the
price
of
our
securities. Further, any new laws, rules and
regulations, such as were imposed
under the Dodd-Frank Act or
the Regulatory
Relief Act, could make
compliance more difficult
or expensive or otherwise
adversely affect our
business, prospects, cash
flow, liquidity,
financial condition and results of operations.
We
face
a
risk
of
noncompliance
with
the
Bank
Secrecy
Act
and
other
anti-money
laundering
statutes
and
regulations and corresponding enforcement proceedings.
The BSA, 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.
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 the
BSA 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.
42
USCB Financial Holdings, Inc.
2024 10-K
Significantly
heightened
regulatory
and
supervisory
expectations
and
scrutiny
in
the
United
States
have
increased
our
compliance,
regulatory,
and
other
risks
and
costs
and
subject
us
to
legal
and
regulatory
examinations, investigations, and enforcement actions.
The regulatory and political environment has generally been challenging for
U.S. financial institutions, which have been
subject to
increased regulatory
scrutiny,
including in
the wake
of the failures
of several
regional banks
and other
banking
stresses in recent periods. The
general heightened scrutiny and expectations from
regulators could lead to a more
stringent
regulatory posture by the regulators, investigations and other
inquiries, as well as remediation requirements, regulatory and
operational
restrictions,
more
regulatory
or
other
enforcement
proceedings,
civil
litigation
and
substantial
compliance,
regulatory and other risks and costs.
Our regulators have broad powers
and discretion under their supervisory
authority. A
failure to comply
with regulators’ expectations and
requirements, even if inadvertent,
or to resolve
any identified deficiencies
in
a
timely
and
sufficiently
satisfactory
manner
to
regulators,
could
result
in
increased
regulatory
oversight;
material
restrictions,
including,
among
others,
imposition
of
limitations
on
capital
distributions
or
other
business
activities
or
operations; enforcement proceedings; penalties; and
fines. Responding to regulatory inquiries
and proceedings can be
time
consuming and
costly and
divert management
attention from
our other
business activities.
As a result
of these
regulatory
efforts and pressures,
like many other
financial institutions, from
time to time,
we may be
subject to public
and non-public
written
agreements,
cease
and
desist
orders,
consent
orders,
memoranda
of
understanding
or
other
enforcement
or
supervisory actions by our regulators.
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
10.5%
or more;
and
a
Tier
1 leverage
ratio
of
4% or
more. Institutions
must
also
maintain
a capital
conservation
buffer
consisting of
common equity
Tier
1 capital
(which amount
(2.5%) is
reflected above
in the
CET1, Tier
1 and
total capital
ratios). 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 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
43
USCB Financial Holdings, Inc.
2024 10-K
banking
agencies
were
to
determine
that
the
financial
condition,
capital
resources,
asset
quality,
asset
concentration,
earnings prospects, management, liquidity sensitivity
to market risk, risk
management and internal controls
or other aspects
of any of our operations has become unsatisfactory, or that we or our management are in violation of any law or regulation,
the banking
agency could
take a
number of
different remedial
or punitive
actions as
it deems
appropriate. These
actions
include the power to prohibit the continuation of "unsafe
or unsound" practices, to require affirmative
actions to correct any
conditions
resulting
from
any
violation
or practice,
to
issue an
administrative
order
or enforcement
that
can
be judicially
enforced, to direct an increase
in our capital, to restrict our
growth, to change the asset composition
of our loan or securities
portfolios
or
balance
sheet,
to
assess
civil
monetary
penalties
against
our
officers
or
directors,
to
remove
officers
and
directors and, if
it is concluded
that such conditions
cannot be corrected
or there is
an imminent risk
of loss to
depositors,
to
terminate
our
deposit
insurance
and
force
us
to
terminate
our
business
operations.
If
we
become
subject
to
such
regulatory actions, our business, financial condition, results
of operations and reputation may be negatively impacted.
We
are
subject
to
numerous
laws
and
regulations
of
certain
regulatory
agencies
designed
to
protect
consumers, including the Community Reinvestment
Act, or CRA, and fair lending laws, and failure
to comply with
these laws could lead to a wide variety of sanctions.
The CRA directs all insured depository institutions to help meet the credit needs of the local communities
in which they
operate
branches,
including
low-
and
moderate-income
neighborhoods.
Each
institution
is
examined
periodically
by
its
primary federal
regulator,
which assesses
the institution’s
CRA performance.
The Equal
Credit Opportunity
Act, the
Fair
Housing
Act
and
other
fair
lending
laws
and
regulations
impose
nondiscriminatory
lending
requirements
on
financial
institutions. The U.S. Department of Justice, the Federal Reserve, and other federal agencies are responsible for enforcing
these laws and regulations. A successful regulatory challenge to our performance under the CRA, fair lending or consumer
lending
laws
and
regulations
could
result
in
a
wide
variety
of
sanctions,
including
damages
and
civil
money
penalties,
injunctive
relief,
customer
restitution,
restrictions
on
mergers
and
acquisitions
activity,
restrictions
on
expansion,
and
restrictions
on
entering
new
business
lines.
Private
parties
may
also
have
the
ability
to
challenge
an
institution’s
performance
under
fair
lending
laws
in
private
class
action
litigation.
Such
actions
could
have
an
adverse
effect
on
our
business, financial condition and results of operations.
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
propose numerous
initiatives to
supplement the
global effort
to combat
climate change,
including provisions
contained in
the Inflation Reduction Act
of 2022. Furthermore, additional
initiative may be undertaken
in the future, 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.
Increasing scrutiny
and evolving expectations
from customers,
regulators, investors,
and other stakeholders
with respect to our environmental, social and
governance practices may impose additional
costs on us or expose
us to new or additional risks.
Companies have
faced and
may continue
to face
increased scrutiny
from customers,
regulators, investors,
and other
stakeholders related
to their
environmental, social,
and governance
(“ESG”) practices
and disclosure.
Investor advocacy
groups,
investment
funds,
and
influential
investors
are
also
increasingly
focused
on
these
practices,
especially
as
they
relate
to
the
environment,
health
and
safety,
diversity,
labor
conditions,
and
human
rights.
Increased
ESG-related
compliance costs
could result
in increases
to our
overall operational
costs. Failure
to adapt
to or
comply with
regulatory
44
USCB Financial Holdings, Inc.
2024 10-K
requirements, or
investor or
stakeholder expectations
and standards,
could negatively
impact our
reputation, ability
to do
business with certain partners, and our stock price.
Recent
changes
in
the
regulatory
landscape
under
the
new
U.S.
administration
have
moved
toward
a
reduction
in
emphasis on certain ESG priorities, particularly
around climate change and diversity, equity, and inclusion (“DEI”). This shift
is leading to
the rollback of
regulations that mandate specific
disclosures and operational practices
in these areas.
However,
some
stakeholder
groups
continue
to
demand
greater
transparency
and
action,
resulting
in
a
complex
and
potentially
conflicting environment for
companies. If
regulatory enforcement of
ESG-related policies becomes
less stringent,
companies
may
face
reputational
risks
if
their
practices
are
seen
as
insufficient
or
inconsistent
with
broader
societal
expectations,
especially related to DEI and environmental stewardship. As a result, navigating this evolving regulatory and public opinion
landscape may require us to balance compliance with regulatory requirements against maintaining investor,
customer, and
stakeholder trust.
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
Bank
may
not
pay
dividends
to
the
Company without the prior
approval of the FDIC. Similarly,
we have agreed to notify
the Federal Reserve before
declaring
and paying any dividends on our Class A 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.
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 amended 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
45
USCB Financial Holdings, Inc.
2024 10-K
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:
•
discussion and analysis of financial condition and results
of operations
•
assessment of our internal control over financial reporting
under the SOA;
•
•
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 $700.0 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 $1.0 billion
in non-convertible debt, or
(iv) the end of fiscal
year following the fifth
anniversary of the completion
of our initial public offering (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
28,
2025
Patriot
and
Priam
own
approximately 22.4% and 22.5%, respectively, of our outstanding shares of Class A common stock. In addition, Patriot and
Priam are
each entitled
to nominate
a director
to our
Board and
have certain
subscription rights
to purchase
new equity
securities that we
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,
46
USCB Financial Holdings, Inc.
2024 10-K
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:
•
voting power, are set by our
Board;
•
Company with voting power;
•
•
•
•
•
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
•
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 amended 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.
47
USCB Financial Holdings, Inc.
2024 10-K
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
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
(“Cybersecurity
Assessment”)
to
help
management
identify
its
risks
and
determine
the
Company’s cybersecurity posture.
Through the
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.
It is the policy of
the Company and its
technology service providers
(“TSPs”) to ensure that
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.
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:
●
oversee
the
information/cybersecurity
programs
to
ensure
adherence
to
regulatory
guidance
and
industry
best
practices.
●
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.
●
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.
●
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.
48
USCB Financial Holdings, Inc.
2024 10-K
●
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.
●
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.
●
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
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
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
Cybersecurity
Assessment, 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 recommendations for program enhancements.
Engagement with Third Party Vendors
The engagement
of third-party
providers
involves potential
risks
that may
impact
strategic, reputational,
operational,
transaction,
credit,
financial,
technology
and
compliance
considerations.
Third-party
providers
whose
services
involve
transmittal,
storage
and
processing
of
non-public
personal
information
represent
a
greater
level
of
compliance
risks,
specifically as
it relates
to compliance
requirements of the
Gramm Leach Bliley
Act (GLBA)
regulation and applicable
Privacy
Laws and Regulations.
The Bank has
developed general guidelines for
the identification, risk assessment, monitoring
and management of
risks
associated to the engagement of third-party providers
or vendors.
Certain
aspects
of
the
risk
assessment
process
may
require
the
involvement
of
the
compliance
officer,
technology
officers, finance
officers,
internal auditors,
and legal
counsel to
identify potential
risks that
may arise
from the
third-party
engagement as
well as
identify performance
criteria, internal
controls, reporting
needs and
any contractual
requirements
that should be implemented for the ongoing assessment and
control of risks that derive from the third-party
engagement.
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
Cybersecurity Assessment, and discussion of other significant
program matters.
As of the end of
the reporting period set
forth in this Annual
Report on Form 10-K,
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.
49
USCB Financial Holdings, Inc.
2024 10-K
Item 2.
Properties
The Company’s corporate
offices
are headquartered at
2301 N.W.
87th Avenue, Doral,
Florida 33172. The
Company,
through the Bank,
operates 10 banking
centers in South
Florida within Miami-Dade and
Broward counties. Of
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.
The 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 “Order”). The Court
reserved jurisdiction to award
costs or grant
any post-judgment
relief.
On May 1,
2024, the
Plaintiffs filed
in the Third
District Court
of Appeal for
the State of
Florida (the “Appellate
Court”)
an appeal (the
“Appeal”), appealing
the issuance
of the
Order and seeking
a reversal
of the Order.
The Plaintiffs
claimed
the Court erred by
concluding (i) the Exchange Transaction was not
ultra vires, and (ii)
that the Legacy Shareholders (which
includes the Plaintiffs)
lacked direct standing.
The Plaintiffs
filed their initial
brief and the
Defendants filed
on July 1,
2024
their answer brief (“Answer Brief”) responding to the allegations
contained in the Appeal.
Oral argument was
heard before the
Court on January
14, 2025. On
February 18,
2025, the
Appellate Court
affirmed
the lower court's ruling and dismissed
the lawsuit, in favor of the Defendants
(the “Dismissal”).
The Plaintiffs have the right
to appeal the
Dismissal,
but they have not done so as of the date of the
filing of this Annual Report on Form 10-K.
The Company believes
that the positions
in the Appeal
are legally
and factually without
merit, and it
intends to vigorously
defend against
any appeal
of the
Dismissal of
the Appeal
,
pursue any
potential counterclaims
against the
Plaintiffs
as it
deems appropriate, and seek coverage from its
insurance carriers. Furthermore, there is also no assurance
that we will be
able to secure coverage from
our insurance carriers for
any expenses incurred by us
in connection with defending
against
the Appeal.
At
this
time,
in
the
opinion
of
management,
the
likelihood
is
remote
that
the
impact
of
such
proceedings,
either
individually or
in the
aggregate, would
have a
material adverse
effect
on our
consolidated results
of operations,
financial
condition
or cash
flows. However,
one
or more
unfavorable
outcomes
in any
claim or
litigation
against
us, including
the
aforementioned Appeal
regarding the
Exchange Transaction,
could have
a material
adverse effect
on the period
in which
such claims
or litigation
are resolved.
In addition,
regardless of
their merits
or their
ultimate outcomes,
such matters
are
costly, divert management’s
attention and may materially adversely affect our
reputation, even if resolved in our favor.
50
USCB Financial Holdings, Inc.
2024 10-K
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.
51
USCB Financial Holdings, Inc.
2024 10-K
PART II
Item 5.
Market
for
Registrant’s
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities
(a)
In July
2021, the Bank’s
Class A common
stock began trading
on the
Nasdaq Stock Market
under ticker
symbol “USCB”.
Effective December
30, 2021,
the Company
acquired all
issued and
outstanding shares
of Class
A common
stock of
the
Bank
in
connection
with
the
bank
holding
company
reorganization.
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 Company’s Class A common stock is also listed on the Nasdaq Stock Market and uses
the
same ticker symbol.
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 investors that
a liquid trading market
for our Class A
common stock
will be sustained.
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 for the last two fiscal years
:
Stock Price
High
Low
Quarter Ended:
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
March 31, 2024
$
12.44
$
10.85
June 30, 2024
$
12.83
$
10.25
September 30, 2024
$
16.66
$
11.99
December 31, 2024
$
20.78
$
14.16
As of
December 31, 2024,
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,
2025,
the
Company’s
Class
A
common
shares
were
held
by
approximately
526
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.
The Company
has agreed to provide notice to the Federal Reserve prior to paying
any cash dividends on its Class A common stock.
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 Bank cannot
declare and pay and
cash dividends to
the Company without receiving
the prior approval of
the
FDIC.
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
52
USCB Financial Holdings, Inc.
2024 10-K
amount that
would be
needed for
the Company
to satisfy
the preferential
rights
upon dissolution
of shareholders
whose
preferential rights are superior to those receiving the dividend,
if any.
Securities Authorized for Issuance Under Equity Compensation
Plans
See Note
9 ”Equity
Based and
Other Compensation
Plans” to
the Consolidated
Financial Statements
included in this
Annual Report Form on 10-K for additional information
required.
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,
2024, 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.
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
12/31/2024
USCB Financial Holdings, Inc. (USCB)
$
100
$
140
$
122
$
123
$
166
NASDAQ Bank (BANK)
$
100
$
115
$
94
$
88
$
102
NASDAQ ABA Community Bank (QABA)
$
100
$
114
$
101
$
96
$
106
NASDAQ Composite (IXIC)
$
100
$
107
$
71
$
102
$
130
Recent Sales of Unregistered Securities
The Company did not sell any of its equity securities during
2024 that were not registered under the Securities
Act.
Purchases of Equity Securities by Issuer and Other Affiliates
53
USCB Financial Holdings, Inc.
2024 10-K
On January 24,
2022, the Board
of Directors approved
the first share
repurchase program
of up to
750,000 shares
of
Class A common stock. On April
22, 2024 the Board of
Directors approved the second share repurchase
program of up to
500,000 shares of
Class A common
stock. Under the
repurchase programs,
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, 2024, the
Company
had
repurchased
712,020
shares
of
Class
A
common
stock
under
the
first
program
and
no
shares
under
the
second
repurchase
program.
The
Company
did
not
repurchase
any
of
its equity
securities
for
the
quarter
ended
December
31,
2024.
As
of
December
31,
2024,
537,980
shares
remained
authorized
for
repurchase
under
the
Company’s
two
stock
repurchase programs.
Item 6.
Reserved
54
USCB Financial Holdings, Inc.
2024 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, 2024
and
2023. 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.
55
USCB Financial Holdings, Inc.
2024 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,”
“seek,” “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 and balance sheet restructuring.
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:
•
operations;
•
•
reserve and deferred tax asset valuation allowance;
•
•
jurisdiction where we operate;
•
banking industry;
•
•
the on-going effects of the implementation of CECL;
•
of geographic, depositor,
and industry concentrations,
including our concentration
in loans secured by
real estate,
in particular, commercial real estate;
•
•
•
•
growth as well as growth through other means, such as
future acquisitions;
•
•
•
spread and net interest margin;
•
•
employee, or third-party fraud and cybersecurity breaches;
and
•
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 Effective
Date, 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
56
USCB Financial Holdings, Inc.
2024 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 on form 10-K.
Overview
For the year ended December 31, 2024, the Company reported net income of
$24.7 million compared with net income
of
$16.5 million for the year ended December 31,
2023.
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, 2024:
•
program. The quarterly dividend for all quarters in 2024 was $0.05 per share
of Class A common stock.
•
compared to $58.6 million for the year ended December
31, 2023.
•
the year ended December 31, 2023.
•
billion at December 31, 2023.
•
compared to $1.8 billion at December 31, 2023.
•
•
2023.
•
2023.
•
regulatory capital purposes,
with a
total risk-based capital
ratio of 13.34%,
a tier 1
risk-based capital ratio
of 12.10%,
a common equity tier 1 capital ratio of 12.10%, and a leverage ratio of 9.38%. As of December 31, 2024 and 2023,
all of the Bank’s regulatory
capital ratios exceeded the
thresholds to be well-capitalized
under the applicable bank
regulatory requirements.
•
A common stock or approximately 2.5% of the Company’s then issued and outstanding shares
of common stock.
•
a
weighted
average
price
per
share
of
$11.85.
The
aggregate
purchase
price
for
these
transactions
was
approximately
$501
thousand,
including
transaction
costs.
These repurchases
were
made
through
open
market
purchases
pursuant
to
the
Company’s
publicly
announced
repurchase
programs.
As
of
December
31,
2024,
537,980 shares remained authorized for repurchase under
the current two programs.
•
amount of $200 million.
57
USCB Financial Holdings, Inc.
2024 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 the
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
uses
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 portfolio
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
Federal
Reserve
Bank
projections
of
the
U.S.
civilian
unemployment
rate
and
year-over-year
real
GDP
growth.
For
the
58
USCB Financial Holdings, Inc.
2024 10-K
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, 2024, for every
100 basis points increase in the HPI
index, the
forecast reduces
reserves by
approximately $582
thousand and
about 3
basis points
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, 2024,
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 $9.6
million
or
39.8%
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.
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,
2024
2023
Consolidated Balance Sheets:
Total
assets
$
2,581,216
$
2,339,093
Total
loans
(1)
$
1,972,848
$
1,780,827
Total
deposits
$
2,174,004
$
1,937,139
Total
stockholders' equity
$
215,388
$
191,968
(1)
Loan amounts include deferred fees/costs.
Years Ended December 31,
2024
2023
Consolidated Statements of Operations:
Net interest income before provision for credit losses
$
69,936
$
58,568
Provision fro credit losses
$
3,157
$
2,367
Total
non-interest income
$
12,740
$
7,403
Total
non-interest expense
$
47,042
$
41,808
Net income
$
24,674
$
16,545
Net income available to common stockholders
$
24,674
$
16,545
Profitability:
Efficiency ratio
56.90%
63.37%
Net interest margin
2.94%
2.79%
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.
59
USCB Financial Holdings, Inc.
2024 10-K
Net income
for the
year ended
December 31, 2024
was $24.7 million
,
compared with
net income
of $16.5 million
for
the same
period in
2023. The Company
reported
net income
per diluted
share for
the year
ended December 31,
2024 of
$1.24 compared to net income per diluted share for the
same period in 2023 of $0.84.
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
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.
60
USCB Financial Holdings, Inc.
2024 10-K
The following table
contains information
related to average
balances, average
yields on assets,
and average
costs of
liabilities for the periods indicated (in thousands).
Years Ended December 31,
2024
2023
Average
Balance
Interest
Yield/Rate
Average
Balance
Interest
Yield/Rate
Assets
Interest-earning assets:
Loans
(2)
$
1,862,013
$
115,236
6.19
%
$
1,606,960
$
87,884
5.47
%
Investment securities
(3)
427,567
11,480
2.68
%
423,749
10,012
2.36
%
Other interest-earnings assets
88,758
4,517
5.09
%
65,986
3,121
4.73
%
Total
interest-earning assets
2,378,338
131,233
5.52
%
2,096,695
101,017
4.82
%
Non-interest earning assets
108,215
109,541
Total
assets
$
$2,486,553
$
2,206,236
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits
$
54,667
1,509
2.76
%
$
53,324
901
1.69
%
Savings and money market deposits
1,109,853
40,098
3.61
%
963,708
29,658
3.08
%
Time deposits
326,373
13,354
4.09
%
268,715
8,500
3.16
%
Total
interest-bearing deposits
1,490,893
54,961
3.69
%
1,285,747
39,059
3.04
%
Borrowings and repurchase agreements
158,484
6,336
4.00
%
94,936
3,390
3.57
%
Total
interest-bearing liabilities
1,649,377
61,297
3.72
%
1,380,683
42,449
3.07
%
Non-interest bearing demand deposits
596,073
607,506
Other non-interest-bearing liabilities
37,399
34,010
Total
liabilities
2,282,849
2,022,199
Stockholders' equity
203,704
184,038
Total
liabilities and stockholders' equity
$
$2,486,553
$
2,206,236
Net interest income
$
69,936
$
58,568
Net interest spread
(4)
1.80
%
1.74
%
Net interest margin
(5)
2.94
%
2.79
%
(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
$69.9 million for
the year
ended December 31,
2024, a
increase of $11.4 million
or 19.4%, from
$58.6 million for
the year ended
December 31, 2023. This
increase was
primarily
attributable to increase in weighted average yields on interest-earning assets growing at a higher pace than the increase in
weighted average rates paid on
interest-earning liabilities. Additionally, the increase
in the volume of
interest-earning assets
was higher than interest-earning liabilities.
The net
interest margin was
2.94% for
the year ended
December 31, 2024 and
2.79%
for the
year ended 2023.
Although
the overall and
individual yields for
interest-earning assets
and interest-bearing liabilities
both increased in
2024, the yield
on interest-earning assets, especially on loans, had a greater
increase when compared to 2023. The increase in our yields
and cost of funds was primarily due to the interest rate
market.
The Company did not have any tax-exempt securities
at both December 31, 2024 and 2023.
61
USCB Financial Holdings, Inc.
2024 10-K
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, consider statistical trends and economic conditions
and other applicable factors.
The
provision
for
credit
loss
for
the
year
ended
December 31,
2024,
was
$3.2
million
compared
to
$2.4
million
in
provision expense for the
same period in 2023. The ACL as a
percentage of total
loans was 1.22%
at December 31, 2024
compared to 1.18% at December 31, 2023.
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
interest rate
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,
2024
2023
Service fees
$
8,839
$
5,055
Gain (loss) on sale of securities available for sale, net
14
(1,859)
Gain on sale of loans held for sale, net
747
801
Other non-interest income
3,140
3,406
Total
non-interest income
$
12,740
$
7,403
Non-interest income
for the
year ended
December 31, 2024
was $12.7
million compared
to $7.4
million for
the same
period in 2023. This
increase was primarily
driven by a
$2.9 million increase
in interest rate
swap income, $415
thousand
increase
in
wire
transfer
fees,
and
$530
thousand
increase
in
prepayment
penalties
reported
under
service
fees.
Additionally, in
2023, 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 was
$1.9 million for
2023. Proceeds from
the sale transactions
were primarily reinvested
in securities and
loans bearing yields
higher than those on 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,
2024
2023
Salaries and employee benefits
$
28,793
$
24,429
Occupancy
5,258
5,230
Regulatory assessment and fees
1,766
1,453
Consulting and legal fees
1,568
1,899
Network and information technology services
1,993
2,016
Other operating
7,664
6,781
Total
non-interest expense
$
47,042
$
41,808
Non-interest expense for
the year ended
December 31, 2024
increased $5.2 million
or 12.5%, compared
to the same
period in 2023. The increase is primarily due to $4.4 million or
17.9% increase in salaries and employee benefits consisting
of
a
$1.2
million
or
6.5%
increase
due
to
merit
promotions
and
new
hires,
a
$1.8
million
increase
in
bonus
and
sales
incentives, and a $1.1 million
increase in stock-based compensation
due to the Company’s financial
performance in 2024.
Other operating
expense had
an increase
of $883
thousand or
13.0% consisting
of a
$157 thousand
increase in
internet
62
USCB Financial Holdings, Inc.
2024 10-K
banking fees,
a $123
thousand
increase in
insurance expense,
a $229
thousand
increase in
director’s fees,
and a
$374
thousand in other expenses.
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,
2024 was
$7.8 million,
compared
to $5.3
million
for the
year
ended December 31, 2023. The
effective tax rate for
the year ended December 31, 2024
was 24.0% and for the
year ended
December 31, 2023 was 24.1%.
For a further
discussion on income taxes, see
Note 6 “Income Taxes”
to the Consolidated Financial Statements
set forth
in Item 8 of 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 2024 vs. 2023
Years Ended 2023 vs. 2022
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)
$
13,949
$
13,403
$
27,352
$
12,026
$
15,033
$
27,059
Investment securities
(2)
90
1,378
1,468
(929)
1,595
666
Other interest-earning assets
1,077
319
1,396
(64)
2,256
2,192
Total increase in interest income
$
15,116
$
15,100
$
30,216
$
11,033
$
18,884
$
29,917
Interest-bearing liabilities:
Interest-bearing demand deposits
$
23
$
585
$
608
$
(15)
$
830
$
815
Savings and money market deposits
4,498
5,942
10,440
1,032
23,453
24,485
Time deposits
1,824
3,030
4,854
331
6,660
6,991
Borrowings and repurchase agreements
2,269
677
2,946
985
1,734
2,719
Total increase in interest expense
8,614
10,235
18,848
2,333
32,677
35,010
Increase (decrease) in net interest income
$
6,502
$
4,865
$
11,368
$
8,700
$
(13,793)
$
(5,093)
(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
earned on interest-earning
assets and average
rates paid on
interest-bearing liabilities
increased
in 2024 as a compared to 2023, reflecting the
changes in the macro interest rate environment.
However, the average yields
earned on interest-earning
assets increased to a
greater degree than
rates paid on interest
-bearing liabilities. Additionally,
interest-earning assets volume growth was greater than
the volume growth of interest-bearing liabilities.
The Company did not have any tax-exempt securities
at both December 31, 2024 and December 31, 2023.
Analysis of Financial Condition
Total
assets at December 31, 2024, were $2.6 billion, an increase of $242.1 million, or 10.4%, over total assets of $2.3
billion at
December 31, 2023. Total loans increased
$192.0 million,
or 10.8%,
to $2.0
billion at
December 31, 2024 compared
to $1.8 billion at December 31, 2023. Total
deposits increased by $236.9 million,
or 12.2%, to $2.2 billion at December
31,
2024 compared to $1.9 billion at December 31, 2023.
63
USCB Financial Holdings, Inc.
2024 10-K
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
investment
guidelines,
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,
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, 2024, the investment portfolio consisted of available-for-sale
(“AFS”) and held-to-maturity (“HTM”)
debt securities.
In 2022, the Company transferred investment securities 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 2024 or 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 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 U.S.
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, 2024 and
December 31, 2023,
all HTM securities
held
by the Company were rated investment grade.
At December 31, 2024, HTM securities
included $155.5 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
$9.2
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 $6 thousand
ACL as of
December 31, 2024.
The book value
for debt securities
classified as HTM
represents amortized
cost less ACL.
As of December 31, 2024, securities with a market value of $66.1 million were pledged to secure public deposits.
As of
December 31, 2024, the Company did not have any tax-exempt
securities in the portfolio.
64
USCB Financial Holdings, Inc.
2024 10-K
The
following
table
presents
the
amortized
cost
and
fair
value
of
investment
securities
for
the
dates
indicated
(in
thousands):
December 31, 2024
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
14,279
$
14
$
(1,668)
$
12,625
Collateralized mortgage obligations
101,808
15
(22,918)
78,905
Mortgage-backed securities - residential
58,995
1
(12,063)
46,933
Mortgage-backed securities - commercial
86,604
40
(7,905)
78,739
Municipal securities
24,925
-
(5,614)
19,311
Bank subordinated debt securities
24,314
438
(1,044)
23,708
$
310,925
$
508
$
(51,212)
$
260,221
Held-to-maturity:
U.S. Government Agency
$
42,538
$
-
$
(5,094)
$
37,444
Collateralized mortgage obligations
56,987
57
(7,785)
49,259
Mortgage-backed securities - residential
40,681
53
(4,613)
36,121
Mortgage-backed securities - commercial
15,272
-
(1,385)
13,887
Corporate bonds
9,222
-
(393)
8,829
$
164,700
$
110
$
(19,270)
$
145,540
Allowance for credit losses - securities held-to-maturity
(6)
Securities held-to maturity, net of allowance for credit losses
$
164,694
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
65
USCB Financial Holdings, Inc.
2024 10-K
AFS and
HTM investment
securities in
aggregate increased
$20.6 million
or 5.1%
to $424.9
million at
December 31,
2024 from $404.3 million at December 31, 2023.
The following
table shows
the weighted
average yields,
categorized by
contractual maturity,
for investment
securities
as of December 31, 2024 (in thousands, except ratios):
Within 1 year
After 1 year
through 5 years
After 5 years
through 10 years
After 10 years
Total
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Available-for-sale:
U.S. Government Agency
$
-
-
$
-
-
$
2,379
3.14%
$
11,900
4.61%
$
14,279
4.37%
Collateralized mortgage obligations
-
-
-
-
-
-
101,808
1.62%
101,808
1.62%
Mortgage-backed securities - residential
-
-
-
-
-
-
58,995
1.70%
58,995
1.70%
Mortgage-backed securities - commercial
-
-
1,596
4.41%
4,097
4.71%
80,911
3.25%
86,604
3.34%
Municipal securities
-
-
-
-
20,680
1.72%
4,245
1.86%
24,925
1.75%
Bank subordinated debt securities
-
-
2,926
9.27%
21,388
5.11%
-
-
24,314
5.61%
$
-
-
$
4,522
7.56%
$
48,544
3.54%
$
257,859
2.30%
$
310,925
2.57%
Held-to-maturity:
U.S. Government Agency
$
-
-
$
7,951
1.02%
$
20,078
1.45%
$
14,509
1.85%
$
42,538
1.51%
Collateralized mortgage obligations
-
-
-
-
-
-
56,987
1.66%
56,987
1.66%
Mortgage-backed securities - residential
-
-
4,322
1.86%
5,882
1.75%
30,477
2.38%
40,681
2.23%
Mortgage-backed securities - commercial
-
-
3,057
1.62%
-
-
12,215
2.59%
15,272
2.40%
Corporate bonds
-
-
9,222
2.81%
-
-
-
-
9,222
2.81%
$
-
-
$
24,552
1.92%
$
25,960
1.52%
$
114,188
1.98%
$
164,700
1.90%
The Company did not have any tax-exempt securities
at both December 31, 2024 and 2023.
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.
The following table shows the loan portfolio composition
as of the dates indicated (in thousands):
December 31, 2024
December 31, 2023
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
289,961
14.8
%
$
204,419
11.5
%
Commercial Real Estate
1,136,417
57.8
%
1,047,593
58.8
%
Commercial and Industrial
258,311
13.1
%
219,757
12.4
%
Correspondent Banks
82,438
4.2
%
114,945
6.5
%
Consumer and Other
198,091
10.1
%
191,930
10.8
%
Total
gross loans
1,965,218
100.0
%
1,778,644
100.0
%
Plus: Deferred costs
7,630
2,183
Total
loans net of deferred costs
1,972,848
1,780,827
Less: Allowance for credit losses
24,070
21,084
Total
net loans
$
1,948,778
$
1,759,743
Total
loans
held
for
investment
net
of
deferred
costs
increased
by
$192.0 million
or
10.8%
at
December 31,
2024
compared to December 31, 2023. The most significant growth was in the residential real estate and commercial real estate
loan pools. Our loan
portfolio continues to diversify
as commercial and industrial 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
66
USCB Financial Holdings, Inc.
2024 10-K
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, 2024 (in thousands):
Due in 1 year or
less
Due in 1 to 5
years
Due after 5 to 15
years
Due after 15
years
Total
Residential Real Estate
$
10,713
64,513
68,677
146,059
$
289,961
Commercial Real Estate
85,967
378,704
666,276
5,471
1,136,417
Commercial and Industrial
7,726
82,601
123,166
44,818
258,311
Correspondent Banks
82,438
-
-
-
82,438
Consumer and Other
2,179
1,883
19,118
174,911
198,091
Total
gross loans
$
189,023
$
527,700
$
877,237
$
371,258
$
1,965,218
Interest rate sensitivity:
Fixed interest rates
$
164,523
$
203,861
$
163,800
$
282,633
$
814,817
Floating or adjustable rates
24,500
323,839
713,436
88,626
1,150,401
Total
gross loans
$
189,023
$
527,700
$
877,236
$
371,259
$
1,965,218
The information
presented in
the table
above is
based upon
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 and rate
modifications are discussed as well.
As of
December 31,
2024, approximately
58.5%
of the
loans
have adjustable/variable
rates
and
41.5%
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.
As of
December 31, 2024, the
commercial real estate
portfolio was $1.1
billion or 57.8%
of the
total gross loans
portfolio.
At
such
date,
$200.8
million
of
outstanding
balances
are
characterized
as
owner
occupied
and
$935.6
million
are
characterized as non-owner occupied.
The retail sector
was the largest
segment comprising $305.0 million
of the non-owner
occupied commercial real estate portfolio.
The
following
table
is
a
summary
of
the
distribution
of
non-owner
occupied
commercial
real
estate
loans
held
for
investment by loan type (dollars in thousands):
December 31, 2024
Balance
# of Notes
% of Total
Gross Loans
Average Loan Size
Non-Accruals
Weighted Avg
LTV
(1)
Retail
$
305,027
97
16%
$
3,145
$
-
57%
Multifamily
210,576
7,122
11%
30
-
56%
Warehouse
132,269
56
7%
2,362
-
54%
Office
114,043
54
6%
2,112
-
52%
Hotels/Motels
102,480
20
5%
5,124
-
56%
Construction/Land
37,974
19
2%
1,999
-
47%
Other
33,212
21
2%
1,582
-
55%
$
935,581
7,389
48%
$
127
$
-
$
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.
67
USCB Financial Holdings, Inc.
2024 10-K
The following table is a summary of non-owner occupied commercial real estate loans held for investment by collateral
geographical location (dollars in thousands):
December 31, 2024
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
$
185,838
20%
$
47,007
5%
$
72,182
8%
Multifamily
159,172
17%
51,404
5%
0%
Warehouse
71,438
8%
53,923
6%
6,908
1%
Office
75,813
8%
29,401
3%
8,829
1%
Hotels/Motels
74,439
8%
28,041
3%
0%
Construction/Land
33,277
4%
4,697
1%
0%
Other
26,294
3%
6,919
1%
0%
$
626,271
67%
$
221,392
24%
$
87,919
9%
(1) Miami-Dade, Broward, and West Palm Beach counties
(2) All other Florida counties
(3) Within the U.S.
As of December
31, 2024,
67% of the
non-owner occupied
CRE portfolio
were located
within South Florida,
and only
12 loan
notes with
an outstanding
principal
balance of
$87.9 million
are located
outside Florida.
Balances
of non-owner
occupied CRE loans outside Florida were: $67.2 million in New York, $6.9 million in Georgia,
$4.4 million in Arkansas, $4.2
million in North Carolina, $2.8 million in Indiana, and $2.5 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.
Special Mention
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment
prospects for the loan or of the institution’s
credit position at some future date.
Substandard
– Loans classified as substandard are inadequately protected
by the current net worth and paying
capacity of the obligator or of the collateral pledged, if
any. Loans so classified
have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are
not corrected.
Doubtful
the added characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Loss
– Loans classified as loss are considered uncollectible.
68
USCB Financial Holdings, Inc.
2024 10-K
Loan credit exposures by internally assigned grades are
as follows for the dates indicated (in thousands):
December 31, 2024
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
289,401
$
-
$
560
$
-
$
289,961
Commercial Real Estate
1,133,965
-
2,452
-
1,136,417
Commercial and Industrial
256,031
-
2,280
-
258,311
Correspondent Banks
82,438
-
-
-
82,438
Consumer and Other
196,101
-
1,990
-
198,091
$
1,957,936
$
-
$
7,282
$
-
$
1,965,218
December 31, 2023
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
204,127
$
$
292
$
$
204,419
Commercial Real Estate
1,040,032
7,561
1,047,593
Commercial and Industrial
218,129
1,628
219,757
Correspondent Banks
114,945
114,945
Consumer and Other
191,930
191,930
$
1,769,163
$
$
9,481
$
$
1,778,644
Non-Performing Assets
The following table presents non-performing assets as
of December 31, 2024 and 2023 (in thousands, except
ratios):
2024
2023
Total
non-performing loans
$
2,707
$
468
Other real estate owned
-
-
Total
non-performing assets
2,707
468
Asset quality ratios:
-
-
Allowance for credit losses to total loans
1.22%
1.18%
Allowance for credit losses to non-performing loans
889%
4505%
Non-performing loans to total loans
0.14%
0.03%
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
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
set forth
in Item 8 of this Annual Report on Form 10-K.
69
USCB Financial Holdings, Inc.
2024 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 Annual Report as 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
Correspondent
Banks
Consumer
and Other
Total
December, 31, 2024
Beginning balance
$
2,695
$
10,366
$
3,974
$
911
$
3,138
$
21,084
Provision for credit losses
(1)
2,403
(1,578)
640
(257)
1,752
2,960
Recoveries
23
-
19
-
3
45
Charge-offs
-
-
-
-
(19)
(19)
Ending Balance
$
5,121
$
8,788
$
4,633
$
654
$
4,874
$
24,070
Average loans
$
256,112
$
1,068,574
$
238,266
$
103,345
$
195,716
$
1,862,013
Net charge-offs (recoveries) to
average loans
(0.01)%
-
(0.01)%
-
0.01%
(0.00)%
December, 31, 2023
Beginning balance
$
1,352
$
10,143
$
4,163
$
720
$
1,109
$
17,487
Cumulative effect of adoption of
accounting principle
(2)
1,238
1,105
(2,158)
23
858
1,066
Provision for credit losses
(3)
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)%
(1) Provision for credit losses excludes $199 thousand release for unfunded commitments included in other liabilities and $2 thousand
release for investment securities held to maturity.
(2) Impact of CECL adoption on January 1, 2023.
(3) 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.
70
USCB Financial Holdings, Inc.
2024 10-K
The
following
table
presents
ACL
by
type
and
its
individual
percentage
to
total
loans
for
the
periods
indicated
(in
thousands):
December 31,
2024
2023
Loan Category
Allowance
% of Loans in
Each Category to
Total Loans
Allowance
% of Loans in
Each Category to
Total Loans
Residential Real Estate
$
5,121
21.3
%
$
2,695
11.5
%
Commercial Real Estate
8,788
36.5
%
10,366
58.8
%
Commercial and Industrial
4,633
19.2
%
3,974
12.4
%
Correspondent Banks
654
2.7
%
911
6.5
%
Consumer and Other
4,874
20.3
%
3,138
10.8
%
Total
$
24,070
100.0
%
$
21,084
100.0
%
Bank-Owned Life Insurance
At
December 31,
2024,
the
combined
cash
surrender
value
of
all
bank-owned
life
insurance
(“BOLI”)
policies
was
$53.5 million.
Changes
in
cash
surrender
value
are
recorded
in
non-interest
income
on
the
Consolidated
Statements
of
Operations. In
2024, 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
for the
years
ended December 31, 2024 and 2023 (in thousands, except
ratios):
Years Ended December 31,
2024
2023
Average Balance
Average Rate
Paid
Average Balance
Average Rate
Paid
Non-interest bearing demand deposits
$
596,073
0.00%
$
607,506
0.00%
Interest-bearing demand deposits
54,667
2.76%
53,324
1.69%
Savings and money market deposits
1,109,853
3.61%
963,708
3.08%
Time deposits
326,373
4.09%
268,715
3.16%
$
2,086,966
2.63%
$
1,893,253
2.06%
Total average deposits for the year ended December 31, 2024 was $2.1 billion,
an increase of $193.7 million,
or 10.2%
over total
average deposits
of $1.9 billion
for the
same period
in 2023.
The greatest
increase was
in money
market and
savings deposits which increased
by $146.1 million,
or 15.2%. Non-interest-bearing demand
deposits decreased by $11.4
million or
1.9% 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.
71
USCB Financial Holdings, Inc.
2024 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
$1.2 billion
at December 31,
2024 and
$1.1 billion at December
31, 2023. As of
December 31, 2024,
45%
of our deposits
are estimated to be
FDIC-insured. Our
public funds
are 5%
of total
deposits and
are partially
collateralized.
Brokered deposits
are 6%
of total
deposits and
are
FDIC-insured. The estimated average
account size of our deposit
portfolio is $105 thousand.
Time deposits
with balances
of $250 thousand or more
totaled $94.0 million and
$58.1 million at December 31,
2024 and 2023, respectively.
The Bank
maintains a well-diversified deposit
base. At December 31,
2024, our top
10 depositors only
held 16.7% 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, 2024 (in thousands):
Three months or less
$
38,848
Over three through six months
31,977
Over six through twelve months
22,239
Over twelve months
942
$
94,006
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
$163.0 million and
$183.0 million,
as of December
31, 2024,
and December 31,
2023, respectively.
The weighted average
rate for outstanding
FHLB advances was
3.8% and 4.4%
at
December 31, 2024, and December 31, 2023, respectively.
72
USCB Financial Holdings, Inc.
2024 10-K
The following table presents the FHLB fixed rate advances
as of December 31, 2024 (in thousands):
December, 31, 2024
Interest Rate
Type of Rate
Maturity Date
Amount
2.05%
Fixed
March 27, 2025
$
10,000
1.07%
Fixed
July 18, 2025
6,000
3.76%
Fixed
January 24, 2028
11,000
3.77%
Fixed
April 25, 2028
50,000
3.68%
Fixed
September 13, 2027
21,000
3.79%
Fixed
March 23, 2026
20,000
4.65%
Fixed
February 13, 2025
45,000
$
163,000
December, 31, 2023
Interest Rate
Type of Rate
Maturity Date
Amount
1.04%
Fixed
July 30, 2024
5,000
1.07%
Fixed
July 18, 2025
6,000
2.05%
Fixed
March 27, 2025
$
10,000
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
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, 2024, there were no
outstanding balances under the Fed
Funds
line of credit.
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 offered 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. The
BTFP program ceased making new loans as of March
2024.
The Company paid off $80 million in borrowings under the BTFP
program during the third quarter of 2024. The original
maturity of this borrowing by the Bank under the BTFP program was January 2025, and there are no remaining borrowings
under this program.
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, 2024 and
2023 (in thousands):
December 31, 2024
December 31, 2023
Commitments to grant loans and unfunded lines of credit
$
122,578
$
85,117
Standby and commercial letters of credit
5,389
3,987
Total
$
127,967
$
89,104
Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition
established
in
the
contract,
for
a
specific
purpose.
Commitments
generally
have
variable
interest
rates,
fixed
expiration
dates or
other
termination
clauses
and
may require
payment
of
a fee.
Since many
of the
commitments
are
expected to
73
USCB Financial Holdings, Inc.
2024 10-K
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.
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
what it believes are 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.
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
sensitive for year two. 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.
Neutral indicates
minimal changes
to the net
interest income
due to changes
on the market
interest rate.
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
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
74
USCB Financial Holdings, Inc.
2024 10-K
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 2024, the NIM will
remain fairly stable for static rate
scenarios (-400 basis points:
+400 basis points). 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.
Liquidity
an adequate level of liquidity depends on the Company’s ability to
efficiently meet both expected and unexpected cash flow
and collateral needs without adversely affecting
either daily operations or the financial condition of the
Company.
Liquidity risk
is the
risk that
we will
be unable
to meet
our short-term
and long-term
obligations as
they become
due
because of an
inability to liquidate
assets or obtain
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, 2024,
the Company had $412.8
million in available liquidity
on balance sheet, including
$339.7 million in
unpledged securities available to
use as collateral and
$73.1 million in
excess cash. The Company
had an additional $267.0
million in off-balance sheet liquidity,
excluding access to brokered deposits and other off-balance sheet sources of funding.
75
USCB Financial Holdings, Inc.
2024 10-K
Capital Adequacy
As
of
December 31,
2024,
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, 2024. 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,
2024
and
2023
(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, 2024
Total
risk-based capital:
$
266,387
13.34%
$
159,795
8.00%
199,744
10.00%
Tier 1 risk-based capital:
$
241,740
12.10%
$
119,846
6.00%
159,795
8.00%
Common equity tier 1 capital:
$
241,740
12.10%
$
89,885
4.50%
129,834
6.50%
Leverage ratio:
$
241,740
9.38%
$
103,074
4.00%
128,843
5.00%
December 31, 2023
Total
risk-based capital:
$
233,109
12.65%
$
147,432
8.00%
184,290
10.00%
Tier 1 risk-based capital:
$
211,645
11.48%
$
110,574
6.00%
147,432
8.00%
Common equity tier 1 capital:
$
211,645
11.48%
$
83,931
4.50%
119,789
6.50%
Leverage ratio:
$
211,645
9.17%
$
92,328
4.00%
115,410
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.
76
USCB Financial Holdings, Inc.
2024 10-K
Reconciliation and Management Explanation of Non
-GAAP Financial Measures
Management has included
the 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,
2024
2023
Pre-Tax Pre-Provision ("PTPP") income: (1)
Net income (GAAP)
$
24,674
$
16,545
Plus: Provision for income taxes
7,803
5,251
Plus: Provision for credit losses
3,157
2,367
PTPP income
$
35,634
$
24,163
Operating net income: (1)
Net income (GAAP)
$
24,674
$
16,545
Less: Net gain (loss) on sale of securities
14
(1,859)
Less: Tax
effect on sale of securities
(4)
471
Operating net income
$
24,664
$
17,933
Operating PTPP income: (1)
PTPP income
$
35,634
$
24,163
Less: Net gain (loss) on sale of securities
14
(1,859)
Operating PTPP Income
$
35,620
$
26,022
(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.
77
USCB Financial Holdings, Inc.
2024 10-K
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
, PCAOB ID:
)
Crowe LLP
Independent Member Crowe Global
78
USCB Financial Holdings, Inc.
2024 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, 2024 and 2023, 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,
2024 and 2023, and the results of its operations and its
cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to
express an opinion
on the Company’s financial
statements based on our
audits. We are a
public accounting
firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are
required to be
independent with respect to
the Company in accordance
with the U.S.
federal securities laws
and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are
free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess
the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting
principles used and significant
estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that our audits provide a reasonable
basis for our opinion.
/s/ Crowe LLP
Crowe LLP
We have served as the Company's auditor since
2017.
March 14, 2025
79
USCB Financial Holdings, Inc.
2024 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands,
except share and per share data)
December 31,
2024
2023
ASSETS:
Cash and due from banks
$
$
Interest-bearing deposits in banks
Total cash and cash equivalents
Investment securities held to maturity net allowance of
$
, respectively (fair value $
$
, respectively)
Investment securities available for sale, at fair value
Federal Home Loan Bank stock, at cost
Loans held for investment, net of allowance of
$
, respectively
Accrued interest receivable
Premises and equipment, net
Bank owned life insurance
Deferred tax asset, net
Lease right-of-use asset
Other assets
Total assets
$
$
LIABILITIES:
Deposits:
Non-interest bearing demand deposits
$
$
Savings and money market deposits
Interest-bearing demand deposits
Time deposits
Total deposits
Federal Home Loan Bank advances
Lease liability
Accrued interest and other liabilities
Total liabilities
Commitments and contingencies (See Notes 10
and 19)
(nil)
(nil)
STOCKHOLDERS' EQUITY:
Preferred stock - Class C; $
authorized; 0 issued and 0 outstanding as of
December 31, 2024 and 2023
-
-
Preferred stock - Class D; $
authorized; 0 issued and 0 outstanding as of
December 31, 2024 and 2023
-
-
Preferred stock - Class E; $
authorized; 0 issued and 0 outstanding as of
December 31, 2024 and 2023
-
-
Common stock - Class A Voting; $
Common stock - Class B Non-voting; $
outstanding as of December 31, 2024 and 2023
-
-
Additional paid-in capital on common stock
Accumulated deficit
(
67,813
)
(
88,548
)
Accumulated other comprehensive loss
(
44,534
)
(
44,271
)
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
The accompanying notes are an integral part of
these consolidated financial statements.
80
USCB Financial Holdings, Inc.
2024 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Dollars in thousands,
except per share data)
Years Ended December 31,
2024
2023
Interest income:
$
$
Interest expense:
Provision for credit losses
Non-interest income:
(
1,859
)
Non-interest expense:
Income tax expense
Net income available to common stockholders
$
$
Per share information:
Class A common stock
Net income per share, basic
$
$
Net income per share, diluted
$
$
Weighted average shares outstanding:
Class A common stock
Basic
Diluted
The accompanying notes are an integral part of
these consolidated financial statements.
81
USCB Financial Holdings, Inc.
2024 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Income
(Loss)
(Dollars in thousands)
Years Ended December 31,
2024
2023
Net income
$
$
Other comprehensive income (loss):
Unrealized loss on investment securities
(
592
)
(
1,801
)
Amortization of net unrealized losses on securities transferred
from available-for-sale to held-to-maturity
Reclassification adjustment on sale of available
for sale securities for (income) loss included in net
income
(
14
)
Unrealized (loss) gain on cash flow hedge
(
13
)
Tax effect
(
163
)
Total other comprehensive income (loss), net of tax
(
263
)
Total comprehensive income
$
$
The accompanying notes are an integral part of
these consolidated financial statements.
82
USCB Financial Holdings, Inc.
2024 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, 2024
$
$
$
(
88,548
)
$
(
44,271
)
$
Net income
-
-
-
-
Other comprehensive loss
-
-
-
-
(
263
)
(
263
)
Repurchase of Class A common stock
(
42,100
)
(
42
)
(
459
)
-
-
(
501
)
Restricted stock issued
(
278
)
-
-
-
Restricted stock forfeiture
(
8,625
)
(
8
)
-
-
-
Exercise of stock options
-
-
Dividend payment
-
-
-
(
3,939
)
-
(
3,939
)
Stock-based compensation
-
-
-
-
Balance at December 31, 2024
$
$
$
(
67,813
)
$
(
44,534
)
$
Balance at January 1, 2023
$
$
$
(
104,104
)
$
(
44,751
)
$
After tax cumulative effect of adoption of accounting principle
related to
ASC 326
-
-
-
(
989
)
-
(
989
)
Adjusted beginning balance after cumulative effect adjustment
(
105,093
)
(
44,751
)
Net income
-
-
-
-
Other comprehensive income
-
-
-
-
Repurchase of Class A common stock
(
669,920
)
(
670
)
(
6,913
)
-
-
(
7,583
)
Restricted stock issued
(
242
)
-
-
-
Restricted stock forfeiture
(
8,111
)
(
8
)
-
-
-
Exercise of stock options
-
-
Stock-based compensation
-
-
-
-
Balance at December 31, 2023
$
$
$
(
88,548
)
$
(
44,271
)
$
The accompanying notes are an integral part of
these consolidated financial statements.
83
USCB Financial Holdings, Inc.
2024 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
2024
2023
Cash flows from operating activities:
Net income
$
$
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses
Depreciation and amortization
Accretion of premiums on securities, net
(
521
)
(
770
)
Amortization (accretion) of deferred loan fees, net
(
184
)
Stock-based compensation
(Gain) loss on sale of available for sale securities
(
14
)
Gain on sale of loans held for sale
(
747
)
(
801
)
Increase in cash surrender value of bank owned
life insurance
(
1,691
)
(
2,160
)
Decrease in deferred tax asset
Net change in operating assets and liabilities:
Accrued interest receivable
(
257
)
(
3,142
)
Other assets
(
6,223
)
Accrued interest and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investment securities held to maturity
-
(
86,788
)
Proceeds from maturities and pay-downs of investment
securities held to maturity
Purchase of investment securities available for
sale
(
85,673
)
(
40,379
)
Proceeds from maturities and pay-downs of investment
securities available for sale
Proceeds from sales of investment securities available
for sale
Net increase in loans held for investment
(
134,439
)
(
239,361
)
Purchase of loans held for investment
(
66,605
)
(
45,645
)
Additions to premises and equipment
(
314
)
(
163
)
Proceeds from the sale of loans held for
sale
Purchase of Bank owned life insurance, net
-
(
6,840
)
Proceeds from the redemption of Federal Home
Loan Bank stock
Purchase of Federal Home Loan Bank stock
(
10,959
)
(
22,766
)
Net cash used in investment activities
(
211,861
)
(
273,002
)
(Continued)
The accompanying notes are an integral part of
these consolidated financial statements.
84
USCB Financial Holdings, Inc.
2024 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years Ended December 31,
2024
2023
Cash flows from financing activities:
Proceeds from exercise of Class A common stock
options, net
Cash dividends paid
(
3,939
)
-
Repurchase of Class A common stock
(
501
)
(
7,583
)
Net increase in deposits
Proceeds from Federal Home Loan Bank advances
and other borrowings
Repayments on Federal Home Loan Bank advances
and other borrowings
(
247,000
)
(
392,350
)
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
(
13,106
)
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
$
Supplemental disclosure of cash flow information:
Interest paid
$
$
Supplemental schedule of non-cash investing and
financing activities:
Transfer of loans held for investment to loans held for
sale
$
$
Transfer of investment securities from available-for-sale to held-to-maturity
$
-
$
-
Lease liability arising from obtaining right-of-use asset
$
-
$
-
The accompanying notes are an integral part of
these consolidated financial statements.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
85
USCB Financial Holdings, Inc.
2024 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
direct
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
shares of the Bank’s
common stock, par
value $
exchanged for one newly issued share of the Company’s
Class A common stock, par value $
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.
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
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
both December
31, 2024 and
2023, the
Company
had $
0
Interest-Bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions consist
of Federal Reserve Bank of Atlanta, Federal
Home Loan
Bank of Atlanta 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
generally determines
the appropriate
classification
of its
securities
at the
time of
purchase and accounts for them on a trade date basis.
Debt securities that
management has the
positive intent and
ability to hold
to maturity are
classified as "held-to-maturity"
and recorded at amortized cost. Trading securities are
recorded at fair value with
changes in fair value included
in earnings.
Securities not classified
as held-to-maturity or
trading are classified
as "available-for-sale"
and recorded at
fair value, with
unrealized gains and
losses excluded from
earnings and reported
in other comprehensive
income (loss). Equity
investments
must be recorded at fair value with changes in fair value
included in earnings.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
86
USCB Financial Holdings, Inc.
2024 10-K
Purchase premiums and discounts are amortized or accreted over
the estimated life of the related available-for-sale or
held-to-maturity
security
as
an
adjustment
to
yield
using
the
effective
interest
method.
Prepayments
of
principal
are
considered in determining the estimated life of
the security. Such amortization and accretion are included in interest income
in the Consolidated
Statements of Operations.
Dividend and interest
income are recognized
when earned. Gains
and losses
on the sale of securities are recorded on trade date and are determined
on a specific identification basis.
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
U.S.
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.
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, 2024
and
2023, FHLB
stock amounted
to $
cash and stock dividends are reported as interest income.
Loans Held for Investment and Allowance for Credit
Losses (“ACL”)
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 consecutive months and the Company
has a documented expectation of
repayment of the remaining contractual principal and interest or the loan becomes secured and in the process of collection.
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 loan
categories 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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
87
USCB Financial Holdings, Inc.
2024 10-K
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
•
Correspondent 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.
Commercial
and
industrial
loans
are
secured
by
the
business
assets
of
the
borrower
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.
Correspondent bank 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,
home equity
lines of
credit,
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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
88
USCB Financial Holdings, Inc.
2024 10-K
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
• 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
Management evaluates
on an individual
basis collateral
dependent loans
using the fair
value of the
collateral method
to determine
if a
credit loss
reserve is
necessary.
The ACL
is measured
based on
the difference
of the
fair
value of
the
collateral and
the recorded
investment
(amortized
cost
basis of
the
loan), if
the final
collateral
valuation
is less
than the
recorded investment
of the
loan a
reserve amount
is calculated.
If the
collateral
valuation is
equal to
or greater
than the
recorded investment of the loan, no reserve is determined.
The Company estimates a
reserve for unfunded commitments,
which is reported separately
from the ACL 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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
89
USCB Financial Holdings, Inc.
2024 10-K
At December 31,
2024 and
2023, the
Company had
a concentration
of risk
with loans
outstanding to
the Company’s
top ten lending relationships
totaling $
concentration represented
% and
% of net
loans outstanding,
respectively.
At December
31, 2024 and
December
31,
2023,
the
largest
commercial
real
estate
loan
note
outside
Florida
was
outstanding balance of $
st
in New York
State.
At
December 31,
2024,
the
Company
had
a
concentration
of
risk
with
loans
outstanding
totaling
$
correspondent
banks
located
in
Ecuador,
Dominican
Republic,
Honduras,
and
Panama.
At
December 31,
2023,
the
Company also had a concentration
of risk with loans outstanding
totaling $
Ecuador,
Dominican
Republic, Honduras,
and
El Salvador.
These banks
maintained
deposits
with right
of
offset
totaling
$
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
institutions.
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
Furniture, fixtures and equipment
Computer hardware and software
Leasehold improvements
Shorter of life or term of lease
Maintenance
and
repairs
are
charged
to
expense
as
incurred
while
improvements
and
betterments
are
capitalized.
When items are retired or are
otherwise disposed of, the related costs
and accumulated depreciation and amortization
are
removed from the accounts and any resulting gains or losses
are credited or charged to income.
Other Real Estate Owned
OREO consists of real estate properties 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,
2024,
the
Company
maintained
BOLI
policies
with
five
insurance
carriers
with
a
combined
cash
surrender
value
of
$
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 401(k)
plan covering substantially
all eligible
employees. Employee
401(k) plan
expense is
the
amount of matching contributions.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
90
USCB Financial Holdings, Inc.
2024 10-K
Income Taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax
assets and liabilities are recognized
for the
future
tax
consequences
attributable
to differences
between the
financial
statement
carrying
amounts
of existing
assets and
liabilities and
their respective
tax bases
and operating
loss and
tax credit
carryforwards. Deferred
tax assets
and
liabilities
are
measured
using
enacted
tax
rates
expected
to
apply
to
taxable
income
in
the
years
in
which
those
temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and
liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date.
Management is required to
assess whether a valuation
allowance should be established
on the net deferred tax
asset
based on the
consideration of
all available evidence
using a more
likely than not
standard. In its
evaluation, Management
considers taxable loss
carry-back availability, expectation of sufficient
taxable income, trends
in earnings, the
future reversal
of temporary differences, and available tax planning
strategies.
The Company recognizes positions taken
or expected to be
taken in a tax
return in accordance with existing accounting
guidance on
income taxes
which prescribes
a recognition threshold
and measurement
process. Interest
and penalties
on
tax liabilities, if any, would
be recorded in interest expense and other operating noninterest
expense, respectively.
Impairment of Long-Lived Assets
The Company's long-lived
assets, such as premises
and equipment, are reviewed
for impairment whenever
events or
changes in circumstances
indicate that
the carrying
amount of
an asset may
not be recoverable.
Recoverability of
assets
to be held and
used is measured by a
comparison of the carrying amount of
an asset to estimated undiscounted future
cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge
is recognized
by the
amount by
which the
carrying amount
of the
asset exceeds
the fair
value of
the
asset. Assets
to be
disposed of
would be
separately
presented in
the Consolidated
Balance Sheets
and reported
at the
lower of
the carrying
amount or
fair value
less costs
to sell
and are
no longer
depreciated. The
assets and
liabilities of
a
disposal group classified as held for
sale would be presented separately in
the appropriate asset and liability sections of
the
Consolidated Balance Sheets.
Transfer of Financial Assets
Transfers of
financial assets
are accounted for
as sales,
when control over
the assets
has been surrendered.
Control
over
transferred
assets
is
deemed
to
be
surrendered
when
(i)
the
assets
have
been
isolated
from
the
Company
-
put
presumptively
beyond
the
reach
of
the
transferor
and
its
creditors,
even
in
bankruptcy
or
other
receivership,
(ii)
the
transferee obtains
the right
(free of conditions
that constrain
it from taking
advantage of
that right)
to pledge
or exchange
the transferred
assets,
and
(iii) the
Company
does not
maintain effective
control
over
the transferred
assets
through
an
agreement to repurchase them before their maturity or
the ability to unilaterally cause the holder to return specific assets.
Comprehensive Income (Loss)
Under
GAAP,
certain
changes
in
assets
and
liabilities,
such
as
unrealized
holding
gains
and
losses
on
securities
available-for-sale, are
excluded from
current period
earnings and
reported as
a separate
component of
the stockholders’
equity section of the Consolidated Balance
Sheets. Such items, along with net
income, 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 shares of
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”
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
91
USCB Financial Holdings, Inc.
2024 10-K
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 19 “Loss Contingencies” for further details.
Dividend Restrictions
Banking
regulations
require
maintaining
certain
capital
levels
and
may
limit
the
dividends
paid
by
the
Bank
to
the
Company or by the Company to the 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, 2024, the cash
flow hedge was effective.
Interest Rate Swaps Designated as Fair Value
Hedges
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
92
USCB Financial Holdings, Inc.
2024 10-K
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.
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,
% or
$
Flow (“DCF)” method
and
% or $
method. The remaining $
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
93
USCB Financial Holdings, Inc.
2024 10-K
The impact of
adoption of the
ASU 2016-13 in
January 1, 2023,
was an increase
to ACL on
loans receivables of
$
million and an
increase to the
reserve for unfunded
commitments of
$
adjustment resulted in
a increase of
$
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
$
$
$
Deferred tax asset, net
Liabilities
Reserve for unfunded credit commitments
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
troubled
debt
restructurings (“TDR”)
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
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.
Reference
Rate Reform
In
March
2020,
the
Financial
Accounting
Standards
Board
(“FASB”)
issued
ASU
2020-04,
Reference
Rate
Reform
(Topic
848), aiming to facilitate the impacts
of reference rate reform on financial reporting.
This initiative was subsequently
clarified
in
January
2021
through
ASU
2021-01,
providing
optional
directives
for
a
designated
timeframe
to
alleviate
challenges
associated
with
accounting
for,
or acknowledging
the
effects
of, reference
rate reform
on financial
reporting.
These
amendments
offer
discretionary
guidance
for
a
defined
period
to
alleviate
potential
accounting
complexities
associated with reference rate reform in financial reporting. The
expedients and exceptions provided by these amendments
are not
applicable to
contract modifications
executed and
hedging relationships
initiated or
reviewed after
December 31,
2022, except
for
pre-existing
hedging
relationships
as
of December
31,
2022,
for
which
an
entity
has
opted
for
specific
optional expedients, and which
are retained until the conclusion
of the hedging relationship.
Additionally,
the amendments
permit entities to make a one-time choice to divest, transfer,
or both divest and transfer debt securities categorized as held
to maturity, referencing a rate impacted by reference rate reform,
and classified as held to maturity
prior to January 1, 2020.
In December 2022, the
FASB issued new guidance extending the
expiration date of this
guidance from December 31,
2022,
to December
31, 2024,
after which
entities will
no longer
be authorized
to apply
the relief
provided under
this guidance.
Before this recent guidance, these amendments
were effective for all
entities from March 12, 2020 to
December 31, 2022.
The
Company
executed
its
transition
strategy
in
preparation
for
the
cessation
of
the
London
Intrabank
Offered
Rate
(“LIBOR”) and the adjustment of
its existing financial instruments affecte
d
by LIBOR, whether directly or
indirectly.
LIBOR-
based originations were ceased as of June 30, 2023, and for existing LIBOR-based transactions,
the Company substituted
Secured Overnight
Financing Rate
(“SOFR”) for
LIBOR. The
Company has
completed its
transition away
from LIBOR
for
its loan and other financial instruments.
Improvements to Reportable Segment Disclosures
In November
2023, FASB
issued ASU
No. 2023-07,
Segment Reporting
(Topic
280), aiming
to augments
reportable
segment
disclosure
requirements,
it
enhances
significant
segment
expenses
disclosures.
Additionally,
this
amendment
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
94
USCB Financial Holdings, Inc.
2024 10-K
enhances
interim
disclosure
requirements,
clarifies
multiple
segment
measures
of
profit
or
loss,
provides
new
segment
disclosure
requirements
for
entities
with
a
single
reportable
segment
and
requires
other
disclosure
requirements.
The
Company
adopted
this
ASU
in
December
2024.
The
adoption
of
this
guidance
did
not
have
a
material
impact
on
the
consolidated financial statements.
Issued and Not Yet
Adopted
Improvements to Income Tax
Disclosures
In
December
2023,
the
FASB
issued
Accounting
Standards
Update
(ASU)
2023-09,
Income
Taxes
(Topic
740):
Improvements to Income Tax
Disclosures. This ASU pertains to
disclosures regarding effective
tax rates and cash income
taxes paid with the goal of providing stakeholders with more transparent
and relevant information. This ASU is effective for
public business
entities for
annual periods
beginning after
December
15, 2024.
The Company
is currently
assessing the
potential impact of this
ASU on its financial
reporting and has
not yet concluded whether
the changes will materially
affect
its business operations or 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, 2024
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
$
$
(
1,668
)
$
Collateralized mortgage obligations
(
22,918
)
Mortgage-backed securities - residential
(
12,063
)
Mortgage-backed securities - commercial
(
7,905
)
Municipal securities
-
(
5,614
)
Bank subordinated debt securities
(
1,044
)
$
$
$
(
51,212
)
$
Held-to-maturity:
U.S. Government Agency
$
$
-
$
(
5,094
)
$
Collateralized mortgage obligations
(
7,785
)
Mortgage-backed securities - residential
(
4,613
)
Mortgage-backed securities - commercial
-
(
1,385
)
Corporate bonds
-
(
393
)
$
$
$
(
19,270
)
$
Allowance for credit losses - securities held-to-maturity
(
6
)
Securities held-to maturity, net of allowance for credit losses
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
95
USCB Financial Holdings, Inc.
2024 10-K
December 31, 2023
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
$
-
$
(
1,491
)
$
Collateralized mortgage obligations
-
(
23,039
)
Mortgage-backed securities - residential
-
(
11,608
)
Mortgage-backed securities - commercial
(
6,504
)
Municipal securities
-
(
5,667
)
Bank subordinated debt securities
(
2,033
)
$
$
$
(
50,342
)
$
Held-to-maturity:
U.S. Government Agency
$
$
$
(
5,322
)
$
Collateralized mortgage obligations
-
(
7,983
)
Mortgage-backed securities - residential
(
4,533
)
Mortgage-backed securities - commercial
-
(
1,257
)
Corporate bonds
-
(
727
)
$
$
(
19,822
)
$
Allowance for credit losses - securities held-to-maturity
(
8
)
Securities held-to maturity, net of allowance for credit losses
$
There were
and 2023.
Transfers
of
debt
securities
into
the
HTM
category
from
the
AFS
category
are
made
at
fair
value
as
of
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, 2024 and
2023, total amortization out
of AOCI for the
net unrealized losses on
securities
transferred from AFS to HTM in 2022 was $
the
balance
of
the
net
unrealized
losses
retained
in
AOCI
was
$
December 31, 2023.
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, 2024 and
2023 (in thousands):
Available-for-sale:
2024
2023
Proceeds from sales and call of securities
$
$
Gross Gains
$
$
Gross Losses
(
181
)
(
1,862
)
Net realized gains (losses)
$
$
(
1,859
)
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
96
USCB Financial Holdings, Inc.
2024 10-K
Available-for-sale
Held-to-maturity
December 31, 2024:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Due within one year
$
-
$
-
$
-
$
-
Due after one year through five years
Due after five years through ten years
-
-
Due after ten years
-
-
U.S. Government Agency
Collateralized mortgage obligations
Mortgage-backed securities - residential
Mortgage-backed securities - commercial
$
$
$
$
At December 31,
2024 and
2023, 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, 2024 and
2023.
Information
pertaining
to
investment
securities
both
AFS
and
HTM
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, 2024
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealize
d Losses
Fair Value
Unrealize
d Losses
U.S. Government Agency
$
$
(
76
)
$
$
(
7,817
)
$
$
(
7,893
)
Collateralized mortgage obligations
(
23
)
(
34,998
)
(
35,021
)
Mortgage-backed securities - residential
(
92
)
(
19,031
)
(
19,123
)
Mortgage-backed securities - commercial
(
1,422
)
(
9,312
)
(
10,734
)
Municipal securities
-
-
(
5,613
)
(
5,613
)
Bank subordinated debt securities
-
-
(
1,044
)
(
1,044
)
Corporate bonds
-
-
(
214
)
(
214
)
$
$
(
1,613
)
$
$
(
78,029
)
$
$
(
79,642
)
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
$
-
$
-
$
$
(
8,043
)
$
$
(
8,043
)
Collateralized mortgage obligations
-
-
(
35,566
)
(
35,566
)
Mortgage-backed securities - residential
(
47
)
(
18,365
)
(
18,412
)
Mortgage-backed securities - commercial
(
611
)
(
8,623
)
(
9,234
)
Municipal securities
-
-
(
5,667
)
(
5,667
)
Bank subordinated debt securities
(
331
)
(
1,703
)
(
2,034
)
Corporate bonds
-
-
(
406
)
(
406
)
$
$
(
989
)
$
$
(
78,373
)
$
$
(
79,362
)
The
unrealized
losses
associated
with
$
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.
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
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
97
USCB Financial Holdings, Inc.
2024 10-K
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.
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 U.S.
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
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, 2024 and December 31, 2023, all held-to-
maturity securities held by the Company were rated investment
grade.
At December 31, 2024, HTM securities
included $
mortgage-backed
securities.
Because
of
the
explicit
and/or
implicit
guarantee
on
these
bonds,
the
Company
holds
reserves
on
these
holdings.
The
remaining
portion
of
the
HTM
portfolio
is
made
up
of
$
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 $
cost less ACL.
The
Company
determined
that
an
ACL
on
its
debt
securities
available
for
sale
as
of
December
31,
2024
was
not
required.
At
December
31,
2024,
the
Company
had
$
collateralized mortgage
obligations of
U.S. Government
sponsored entities
having a
fair value
of $
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.
In 2018, the Company
became a Qualified Public Depository
(“QPD”) with the State
of Florida. As a
QPD, the Company
has the
authority to
legally maintain public
deposits from cities,
municipalities, and the
State of
Florida. These public
deposits
are secured by securities pledged to
the State of Florida at a ratio of
% of the average outstanding amount
of uninsured
deposits. The Company must
also maintain a minimum amount of
pledged securities to be in the
program related to these
deposits.
At December 31,
2024, the
Company had
to
the
State
of
Florida
under
the
public
funds
program.
The
Company
held
a
total
of
$
December 31, 2024.
At December 31, 2023, the Company
had
to
the
State
of
Florida
under
the
public
funds
program.
The
Company
held
a
total
of
$
December 31, 2023.
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 offered 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. The
BTFP program ceased making new loans as of March
2024.
The Company
paid off
$
maturity of this
borrowing under the
BTFP program
was January 2025,
and there
are no remaining
borrowings under
this
program.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
98
USCB Financial Holdings, Inc.
2024 10-K
3.
LOANS
The following table is a summary of the distribution of
loans held for investment by type (in thousands):
December 31, 2024
December 31, 2023
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
%
$
%
Commercial Real Estate
%
%
Commercial and Industrial
%
%
Correspondent Banks
%
%
Consumer and Other
%
%
Total
gross loans
%
%
Plus: Deferred costs
Total
loans net of deferred costs
Less: Allowance for credit losses
Total
net loans
$
$
At December 31, 2024 and 2023, the Company had $
estate and residential mortgage loans pledged as collateral on lines of credit with the FHLB and the
Federal Reserve Bank
of Atlanta. At December 31, 2024 and 2023, the Company
had
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
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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
99
USCB Financial Holdings, Inc.
2024 10-K
Changes in the ACL for the years ended December 31, 2024
and 2023 are as follows (in thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Correspondent
Banks
Consumer
and Other
Total
December 31, 2024:
Beginning balance
$
$
$
$
$
$
Provision for credit losses
(1)
(
1,578
)
(
257
)
Recoveries
Charge-offs
(
19
)
(
19
)
Ending Balance
$
$
$
$
$
$
December 31, 2023:
Beginning balance
$
$
$
$
$
$
Cumulative effect of adoption of
accounting principle
(
2,158
)
Provision for credit losses
(3)
(
882
)
Recoveries
Charge-offs
(
57
)
(
57
)
Ending Balance
$
$
$
$
$
$
(1) Provision for credit losses excludes $
investment securities held to maturity.
(2) Impact of CECL adoption on January 1, 2023
(3) Provision for credit losses excludes $
investment securities held to maturity.
Allowance for credit losses and the outstanding balances in
loans as of December 31, 2024 and 2023 are as
follows (in
thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Correspondent
Banks
Consumer
and Other
Total
December 31, 2024:
Allowance for credit losses:
Individually evaluated
$
$
-
$
$
-
$
$
Collectively evaluated
Balances, end of period
$
$
$
$
$
$
Loans:
Individually evaluated
$
$
-
$
$
-
$
$
Collectively evaluated
Balances, end of period
$
$
$
$
$
$
December 31, 2023:
Allowance for credit losses:
Individually evaluated
$
$
-
$
$
-
$
-
$
Collectively evaluated
Balances, end of period
$
$
$
$
$
$
Loans:
Individually evaluated
$
$
-
$
$
-
$
-
$
Collectively evaluated
Balances, end of period
$
$
$
$
$
$
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
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
100
USCB Financial Holdings, Inc.
2024 10-K
payment
experience,
credit
documentation
and
other
current
economic
trends.
Internal
credit
risk
grades
are
evaluated
periodically.
The Company's internally assigned credit risk grades are as follows:
Pass
– Loans indicate different levels of satisfactory
financial condition and performance.
Special Mention
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment
prospects for the loan or of the institution’s
credit position at some future date.
Substandard
– Loans classified as substandard are inadequately protected
by the current net worth and paying
capacity of the obligator or of the collateral pledged, if
any. Loans so classified
have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are
not corrected.
Doubtful
the added characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Loss
– Loans classified as loss are considered uncollectible.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
101
USCB Financial Holdings, Inc.
2024 10-K
Loan credit exposures by internally assigned grades are
presented below for the periods indicated (in thousands):
As of December 31, 2024
Term Loans by Origination Year
Revolving
Loans
Total
2024
2023
2022
2021
2020
Prior
Residential real estate
Pass
$
$
$
$
$
$
$
$
Substandard
-
-
-
-
-
-
Total
Commercial real estate
Pass
Substandard
-
-
-
-
-
Total
Commercial and
industrial
Pass
Substandard
-
-
-
-
Total
Correspondent banks
Pass
-
-
-
-
-
-
Total
-
-
-
-
-
-
Consumer and other
loans
Pass
Substandard
-
-
-
-
-
-
Total
Total
Loans
Pass
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
102
USCB Financial Holdings, Inc.
2024 10-K
As of December 31, 2023
Term Loans by Origination Year
Revolving
Loans
Total
2023
2022
2021
2020
2019
Prior
Residential real estate
Pass
$
$
$
$
$
$
$
$
Substandard
-
-
-
-
-
-
Total
Commercial real estate
Pass
Substandard
-
-
-
-
-
Total
Commercial and
industrial
Pass
Substandard
-
-
-
-
-
Total
Correspondent banks
Pass
-
-
-
-
-
-
Total
-
-
-
-
-
-
Consumer and other
loans
Pass
Total
Total
Loans
Pass
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
103
USCB Financial Holdings, Inc.
2024 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, 2024 and
2023 (in thousands):
Accruing
As of December 31, 2024:
Current
Past Due
30-89 Days
Past Due >
90 Days
and Still
Accruing
Total
Accruing
Non-
Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
$
-
$
-
$
$
-
$
1-4 family residential
-
-
Condo residential
-
-
Commercial real estate:
Land and construction
-
-
-
Multi-family residential
-
-
-
Condo commercial
-
-
-
Commercial property
-
-
Leasehold improvements
-
-
-
-
-
-
-
-
Commercial and industrial:
Secured
-
Unsecured
-
-
-
-
Correspondent banks
-
-
-
Consumer and other
-
-
Total
$
$
$
-
$
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
104
USCB Financial Holdings, Inc.
2024 10-K
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
$
$
-
$
-
$
$
-
$
1-4 family residential
-
-
Condo residential
-
-
-
-
Commercial real estate:
Land and construction
-
-
-
Multi-family residential
-
-
-
Condo commercial
-
-
-
Commercial property
-
-
Leasehold improvements
-
-
-
-
-
Commercial and industrial:
Secured
-
Unsecured
-
-
-
-
Correspondent banks
-
-
-
Consumer and other
-
-
-
Total
$
$
$
-
$
$
$
There were
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, 2024 and December
31, 2023 (in thousands):
December 31, 2024
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 and industrial
-
-
Consumer and other
-
-
Total
$
$
$
$
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
Commercial and industrial
$
-
$
$
$
-
Total
$
-
$
$
$
-
Accrued interest
receivable is
excluded from
the estimate
of credit
losses. There
was
attributable
to non-accrual
loans
outstanding
during the
years
ended
December
31, 2024
and
2023.
Interest
income
on
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
105
USCB Financial Holdings, Inc.
2024 10-K
these
loans
for
the
year
ended
December
31,
2024
and
2023,
would
have
been
approximately
$
thousand, respectively,
had these loans performed in accordance with their
original terms.
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
loans as of December 31, 2024 and
The following
table includes
the amortized cost
basis of
collateral dependent
loans related
to borrowers
experiencing
financial difficulty by type of collateral as of December
31, 2024 (in thousands):
As of December 31, 2024
Collateral type
Boat
Specific Reserves
Consumer and other loans
$
$
Total
$
$
Management evaluates
on an individual
basis collateral
dependent loans
using the fair
value of the
collateral method
to determine
if a
credit loss
reserve is
necessary.
The ACL
is measured
based on
the difference
of the
fair
value of
the
collateral and
the recorded
investment
(amortized
cost
basis of
the
loan), if
the final
collateral
valuation
is less
than the
recorded investment
of the
loan a
reserve amount
is calculated.
If the
collateral
valuation is
equal to
or greater
than the
recorded investment of the loan, no reserve is determined.
Loan Modifications to Borrowers Experiencing Financial
Difficulties
The following
table present
newly restructured
loans, by
type of
modification, which
occurred during
the years
ended
December 31, 2024 and December 31, 2023 (dollars
in thousands):
December 31, 2024
Recorded Investment Prior to Modification
Recorded Investment After Modification
Number of
Loans
Combination
Modifications
Total
Modifications
Number of
Loans
Combination
Modifications
Total
Modifications
Commercial and industrial
$
$
$
$
$
$
$
$
December 31, 2023
Recorded Investment Prior to Modification
Recorded Investment After Modification
Number of
Loans
Combination
Modifications
Total
Modifications
Number of
Loans
Combination
Modifications
Total
Modifications
Commercial and industrial
$
650
$
$
$
$
$
$
$
The Company
had
31,
2024.
The
Company
had
December 31, 2023.
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, 2024, 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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
106
USCB Financial Holdings, Inc.
2024 10-K
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
advances rate matching or nearing the lease term.
The following table presents the ROU assets and lease liabilities
as of December 31, 2024 and 2023 (in thousands):
2024
2023
ROU assets:
Operating leases
$
$
Lease liabilities:
Operating leases
$
$
The weighted average remaining lease term and weighted average
discount rate as of December 31, 2024 and 2023:
2024
2023
Weighted average remaining lease term (in years):
Operating leases
Weighted average discount rate:
Operating leases
%
%
Future lease payment obligations and a reconciliation to lease
liability as of December 31, 2024 (in thousands):
2025
$
2026
2027
2028
2029
Thereafter
Total
future minimum lease payments
Less: interest component
(
1,674
)
Total
lease liability
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
107
USCB Financial Holdings, Inc.
2024 10-K
5.
PREMISES AND EQUIPMENT
A summary of premises and equipment are presented
below as of December 31, 2024 and 2023 (in thousands):
2024
2023
Land
$
$
Building
Furniture, fixtures and equipment
Computer hardware and software
Leasehold improvements
Premises and equipment, gross
Accumulated depreciation and amortization
(
22,705
)
(
22,118
)
Premises and equipment, net
$
$
Depreciation
and
amortization
expense
was
$
2024 and 2023, respectively.
6.
INCOME TAXES
The Company’s provision
for income taxes is
presented in the following
table for the years
ended December 31, 2024
and 2023 (in thousands):
2024
2023
Current:
Federal
$
-
$
-
State
-
-
Total
current
-
-
Deferred:
Federal
State
Total
deferred
Total
tax expense
$
$
The actual income
tax expense for the
years ended December 31, 2024
and 2023 differs from
the statutory tax expense
for the year (computed by applying the U.S. federal
corporate tax rate of
% for 2024 and
% for 2023 to income before
provision for income taxes) as follows (in thousands):
2024
2023
Federal taxes at statutory rate
$
$
State income taxes, net of federal tax benefit
Bank owned life insurance
(
428
)
(
273
)
Other, net
-
-
Total
tax expense
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
108
USCB Financial Holdings, Inc.
2024 10-K
The following table presents
the deferred tax assets
and deferred tax liabilities
as of December 31, 2024
and 2023 (in
thousands):
2024
2023
Deferred tax assets:
Net operating loss
$
$
Allowance for credit losses
Lease liability
Unrealized loss on available for sale securities
Depreciable property
Equity compensation
Accruals
Other, net
Deferred tax asset
$
$
Deferred tax liability:
Deferred loan cost
(
1,934
)
(
553
)
Lease right of use asset
(
2,142
)
(
2,895
)
Deferred expenses
(
224
)
(
180
)
Cash flow hedge
(
81
)
(
85
)
Other, net
-
(
79
)
Deferred tax liability
$
(
4,381
)
$
(
3,792
)
Net deferred tax asset
$
$
At December
31, 2024,
the Company
had approximately $
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 2021.
For
the
years
ended
December 31,
2024 and
2023,
the
Company
did
t have
any unrecognized
tax benefits
as a
result of
tax positions
taken during
a prior
period or
during the
current period.
Additionally,
recorded as a result of tax uncertainties.
7.
DEPOSITS
The following table presents deposits by type at December 31,
2024 and 2023 (in thousands):
2024
2023
Non-interest bearing demand deposits
$
$
Interest-bearing demand deposits
Savings and money market deposits
Time deposits
Total
deposits
$
$
Time
deposits exceeding
the FDIC
deposit insurance
limit of
$250 thousand
per account
at December 31,
2024 and
2023 were $
As of
December
31,
2024,
the Company
had
$
%.
Brokered CDs were
% of total deposits at such date.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
109
USCB Financial Holdings, Inc.
2024 10-K
As
of
December
31,
2023,
the
Company
had
$
%.
Brokered CDs were
% of total deposits at such date.
At December 31, 2024, the scheduled maturities of time deposits
were (in thousands):
2025
$
2026
2027
2028
2029
$
At December 31,
2024 and
2023, the
aggregate amount
of demand
deposits reclassified
to loans
as overdrafts
was
$
8.
BORROWINGS
Borrowed funds
consist of
fixed-rate advances
from the
FHLB. At
December 31, 2024,
FHLB advances
were $
million and at December 31, 2023 were $
The following table presents outstanding FHLB advances
at December 31, 2024 and 2023 (in thousands):
At December 31, 2024
Interest Rate
Type of Rate
Maturity Date
Amount
%
Fixed
$
%
Fixed
%
Fixed
%
Fixed
%
Fixed
%
Fixed
%
Fixed
$
At December 31, 2023
Interest Rate
Type of Rate
Maturity Date
Amount
%
Fixed
$
%
Fixed
%
Fixed
%
Fixed
%
Fixed
%
Fixed
$
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.
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 offered 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. The
BTFP program ceased making new loans as of March
2024.
On January
12, 2024,
the Company
borrowed $
%, maturing
on
, under
the BTFP
program. Subsequently,
the Company
paid off
$
third quarter
2024. The
original maturity
of this
borrowing under
the BTFP
program was
January 2025,
and there
are no
remaining borrowings by the Company under this program.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
110
USCB Financial Holdings, Inc.
2024 10-K
9.
EQUITY BASED AND OTHER COMPENSATION
PLANS
Employee 401(k) Plan
The Company
has an
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
$
respectively;
the
contributions
are
included
under
salaries
and
employee
benefits
in
the
Consolidated
Statements
of
Operations.
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
2015
Option
Plan
provided that
vesting
schedules
will
be
determined
upon
issuance
of
options
by
the
Board
of
Directors
or
compensation
committee.
Options granted
under the
2015 Option
Plan have
a
-year life
and, in
no event
shall an
option be
exercisable after
the
expiration of
-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
in 2030. The
authorized shares,
after being adjusted
to reflect the
1 for 5
reverse stock
split, totaled
December
2021,
the
shareholders
of
the
Company
approved
the
amendment
of
the
2015
Option
Plan
to
authorize
the
issuance of
an additional
At December 31,
2024, there
were
2023, there were
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
$
December 31, 2024
and $
years ended December 31, 2024 and 2023.
Unrecognized compensation
cost remaining
on stock-based
compensation totaled
$
for the years ended December 31, 2024 and 2023, 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.
There were
For the fair value of options granted in 2023, the following
were the assumptions:
Assumption
2023
Risk-free interest rate
%
Expected term
years
Expected stock price volatility
%
Dividend yield
%
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
111
USCB Financial Holdings, Inc.
2024 10-K
The following table presents a summary of stock options
for the years ended December 31, 2024 and 2023:
Stock Options
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Years
Aggregate Intrinsic
Value (in
thousands)
Balance at January 1, 2024
$
Granted
$
Exercised
(
122,000
)
$
Forfeitures
(
100,000
)
$
Balance at December 31, 2024
$
Exercisable at December 31, 2024
$
$
Balance at January 1, 2023
$
Granted
$
Exercised
(
10,000
)
$
Forfeitures
(
16,000
)
$
10.34
Balance at December 31, 2023
$
Exercisable at December 31, 2023
$
$
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 year ended December 31, 2023, was $
; there
were no grants in 2024.
Restricted Stock
In 2024 , the Company issued
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. The Company
primarily issues restricted
stock awards with
a
-year vesting
period. However,
out of
the
% of the
award in a
period of two months in 2024, and
% remaining will vest in the next 2 years.
In 2023 , the Company issued
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.
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
generally
three
years
unless
the
Board
of
Directors
approves
a
different
vesting
schedule for
the grants.
As of
December 31,
2024, unearned
share-based compensation
expense associated
with these
awards totaled $
Compensation expense totaling $
salaries and
benefits in
the
accompanying
Consolidated
Statement
of Operations.
Compensation
expense totaling
$
thousand was recognized for the year ended December
31, 2023.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
112
USCB Financial Holdings, Inc.
2024 10-K
The following table presents a summary of restricted stock
awards for the years ended December 31, 2024 and 2023:
Restricted Stock
Weighted Average Grant Date
Fair Value
Balance at January 1, 2024
$
Granted
$
Forfeited
(
8,625
)
$
Vested
(
85,643
)
$
Balance at December 31, 2024
$
Restricted Stock
Weighted Average Grant Date
Fair Value
Balance at January 1, 2023
$
Granted
$
Forfeited
(
8,111
)
$
Vested
(
16,180
)
$
Balance at December 31, 2023
$
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.
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 $
A
summary
of
the
amounts
of
the
Company's
financial
instruments
with
off-balance
sheet
risk
are
shown
below
at
December 31, 2024 and 2023 (in thousands):
2024
2023
Commitments to grant loans and unfunded lines of credit
$
$
Standby and commercial letters of credit
Total
$
$
Commitments to
extend credit
are agreements
to lend
to a
customer as
long as
there is
no violation
of any
condition
established in the contract. Commitments generally have
fixed expiration dates or other termination clauses.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
113
USCB Financial Holdings, Inc.
2024 10-K
Unfunded lines of
credit and revolving
credit lines are
commitments for possible
future extensions
of credit to
existing
customers. These lines of
credit are uncollateralized and
usually do not contain
a specified maturity date
and ultimately may
not be drawn upon to the total extent to which the Company
is committed.
Standby
and
commercial
letters
of
credit
are
conditional
commitments
issued
by
the
Company
to
guarantee
the
performance of a
customer to
a third
party. Those letters of
credit are
primarily issued to
support public and
private borrowing
arrangements. Essentially all letters of credit have fixed maturity dates and many of them expire without being drawn upon,
they do not generally present a significant liquidity risk
to the Company.
11.
DERIVATIVES
The Company utilizes interest rate swap agreements
as part of its asset-liability management strategy to help
manage
its interest
rate risk
position. The
notional amount
of the
interest rate
swaps do
not represent
amounts exchanged
by the
parties. The amounts exchanged are
determined by reference to
the notional amount and the
other terms of the individual
interest rate swap agreements.
Rate Swaps Designated as Cash Flow Hedges
As of December
31, 2024,
the Company had
$
average
maturity
of
%,
with
the
weighted
average
3-month
compound SOFR (Secured Overnight Financing Rate) being received.
As of December
31, 2023,
the Company had
$
average
maturity
of
%,
with
the
weighted
average
3-month
compound SOFR (Secured Overnight Financing Rate)
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 other comprehensive
income (loss)
and subsequently reclassified
to earnings when
gains or
losses are realized.
Interest Rate Swaps Designated as Fair Value
Hedges
During the
third quarter
in 2024,
the Company
unwound
amount of
$
liability management
strategies. The
early termination fee
to unwind
the fair
value swaps
totaled $
fees allocated to
each loan category
will be amortized
over the remining
life of the
hedge loans on
a monthly
straight-line
basis
with
full
recognition
of
the
unamortized
cost
upon
the
early
payoff
of
the
hedge
loan.
The
amortization
of
the
termination fee
is reflected
in the
loan interest
income line
in the
Company’s Consolidated
Statement of
Operations. The
original
maturities
of
these
fair
value
interest
swaps
were
between
2025
and
2026.
The
fair
value
interest
rate
swap
agreements had an average maturity of
As of
December 31,
2023, the
Company had
amount of
$
average
maturity
of
%,
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
swaps with loan customers with
a notional aggregate amount of $
2023, 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
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
114
USCB Financial Holdings, Inc.
2024 10-K
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.
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, 2024:
Derivatives Designated as Cash Flow Hedges
Interest rate swaps
$
$
-
Other assets
$
$
-
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
$
Other assets/Other liabilities
$
$
December 31, 2023:
Derivatives Designated as Cash Flow Hedges
Interest rate swaps
$
$
-
Other assets
$
$
-
Derivatives Designated as Fair Value Hedges
Interest rate swaps
$
$
-
Other liabilities
$
-
$
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
$
Other assets/Other liabilities
$
$
12.
FAIR VALUE
MEASUREMENTS
Determination of Fair Value
The Company
uses
fair value
measurements
to record
fair-value
adjustments
to certain
assets
and liabilities
and to
determine fair value
disclosures. In accordance
with the fair
value measurements
accounting guidance, the
fair value of
a
financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market
participants
at the
measurement
date.
Fair value
is best
determined based
upon quoted
market prices.
However, in
many instances, there
are no quoted
market prices for the
Company's various financial
instruments. In cases
where quoted
market prices
are not
available, fair
values are
based on
estimates using
present value
or other
valuation
techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.
The fair
value guidance provides
a consistent definition
of fair
value, which focuses
on exit
price in
an orderly transaction
(that is,
not a
forced
liquidation
or distressed
sale) between
market participants
at the
measurement
date
under current
market conditions.
If there
has been
a significant
decrease
in the
volume
and level
of activity
for the
asset
or liability,
a
change in
valuation technique or
the use
of multiple
valuation techniques may
be appropriate.
In such
instances, determining
the
price
at
which
willing
market
participants
would
transact
at
the
measurement
date
under
current
market
conditions
depends on the facts
and circumstances and
requires the use of
significant judgment. The fair
value is a reasonable
point
within the range that is most representative of fair value under
current market conditions.
Fair Value Hierarchy
In accordance with
this guidance, the
Company groups its
financial assets
and financial liabilities
generally measured
at fair
value in
three
levels, based
on the
markets
in which
the assets
and liabilities
are traded,
and the
reliability
of the
assumptions used to determine fair value.
Level 1
entity has
the ability
to access
at the measurement
date. Level
1 assets
and liabilities
generally include
debt and
equity securities that
are traded in
an active exchange
market. Valuations are obtained from
readily available pricing
sources for market transactions involving identical assets
or liabilities.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
115
USCB Financial Holdings, Inc.
2024 10-K
Level 2
asset
or
liability,
either
directly
or
indirectly.
The
valuation
may
be
based
on
quoted
prices
for
similar
assets
or
liabilities; quoted
prices in
markets that are
not active;
or other inputs
that are observable
or can be
corroborated
by observable market data for substantially the full term of the
asset or liability.
Level 3
significant
to
the
fair
value
of
the
assets
or
liabilities.
Level
3
assets
and
liabilities
include
financial
instruments
whose value
is determined
using pricing
models, discounted
cash
flow
methodologies,
or similar
techniques,
as
well as instruments for which determination of fair value
requires significant management judgment or estimation.
A
financial
instrument's
categorization
within
the
valuation
hierarchy
is
based
upon
the
lowest
level
of
input
that
is
significant to the fair value measurement.
Items Measured at Fair Value
on a Recurring Basis
Investment securities:
such securities,
management generally
relies on
prices obtained
from independent
vendors or
third-party broker
-dealers.
Management reviews pricing methodologies provided by the vendors and third-party broker-dealers in order to determine if
observable market information is being utilized. Securities measured with pricing provided by independent vendors or
third-
party broker-dealers
are classified within
Level 2 of
the hierarchy and
often involve using
quoted market
prices for similar
securities, pricing models or discounted cash flow analyses
utilizing inputs observable in the market where available.
Derivatives:
classified within Level 2 of the hierarchy.
The
following
table
represents
the
Company's
assets
and
liabilities
measured
at
fair
value
on
a
recurring
basis
at
December 31, 2024 and 2023 for each of the fair value
hierarchy levels (in thousands):
2024
2023
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Investment securities available for sale:
U.S. Government Agency
$
-
$
$
-
$
$
-
$
$
-
$
Collateralized mortgage obligations
-
-
-
-
Mortgage-backed securities - residential
-
-
-
-
Mortgage-backed securities - commercial
-
-
-
-
Municipal securities
-
-
-
-
Bank subordinated debt securities
-
-
-
-
Total
-
-
-
-
Derivative assets
-
-
-
-
Total assets at fair value
$
-
$
$
-
$
$
-
$
$
-
$
Derivative liabilities
$
-
$
$
-
$
$
-
$
$
-
$
Total liabilities at fair value
$
-
$
$
-
$
$
-
$
$
-
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
116
USCB Financial Holdings, Inc.
2024 10-K
Items Not Measured at Fair Value
The following table
presents the carrying
amounts and estimated
fair values of
financial instruments
not carried at fair
value, at December 31, 2024 and 2023 are as follows (in thousands):
Fair Value Hierarchy
Carrying
Amount
Level 1
Level 2
Level 3
Fair Value
Amount
December 31, 2024:
Financial Assets:
Cash and due from banks
$
$
$
-
$
-
$
Interest-bearing deposits in banks
$
$
$
-
$
-
$
Investment securities held to maturity, net
$
$
-
$
$
-
$
Loans held for investment, net
$
$
-
$
-
$
$
Accrued interest receivable
$
$
-
$
$
$
Financial Liabilities:
Demand Deposits
$
$
$
-
$
-
$
Money market and savings accounts
$
$
$
-
$
-
$
Interest-bearing checking accounts
$
$
$
-
$
-
$
Time deposits
$
$
-
$
-
$
$
FHLB advances
$
$
-
$
$
-
$
Accrued interest payable
$
$
-
$
$
$
December 31, 2023:
Financial Assets:
Cash and due from banks
$
$
$
-
$
-
$
Interest-bearing deposits in banks
$
$
$
-
$
-
$
Investment securities held to maturity, net
$
$
-
$
$
-
$
Loans held for investment, net
$
$
-
$
-
$
$
Accrued interest receivable
$
$
-
$
$
$
Financial Liabilities:
Demand Deposits
$
$
$
-
$
-
$
Money market and savings accounts
$
$
$
-
$
-
$
Interest-bearing checking accounts
$
$
$
-
$
-
$
Time deposits
$
$
-
$
-
$
$
FHLB advances
$
$
-
$
$
-
$
Accrued interest payable
$
$
-
$
$
$
Collateral Dependent Loans Measured for
Expected Credit Losses:
Fair values of collateral-dependent yacht
loans
and real estate loans
are based on recent
boat and real estate
appraisals less estimated costs of
sale, repossession, and/or
holding costs.
Appraisals
are made
by a
third
party,
and
its evaluation
may use
either a
comparative
sales, cost
and/or
income approach or a combination of methodologies.
The fair value
of collateral dependent
loans considered Level 3
in the fair
value hierarchy was $
reserve of $
13.
STOCKHOLDERS’ EQUITY
Common Stock
In July
2021, the
Bank completed
the initial
public offering
of its
Class
A common
stock, in
which it
issued
and sold
million after deducting underwriting discounts and expenses.
In December 2021,
the Company acquired
all the issued
and outstanding shares
of the Class
A common stock
of the
Bank, which at the time were
the only issued and outstanding shares
of the Bank’s capital stock,
in a share exchange (the
“Reorganization”)
effected
under
the
Florida
Business
Corporation
Act.
Each
outstanding
share
of
the
Bank’s
Class
A
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
117
USCB Financial Holdings, Inc.
2024 10-K
common stock,
par value
$
newly
issued
share
of
the
Company’s
Class
A
common
stock,
par
value
$
Company’s wholly owned subsidiary.
In the
Reorganization,
each
shareholder
of the
Bank
received securities
of
the same
class,
having
substantially
the
same designations,
rights,
powers, preferences,
qualifications,
limitations
and restrictions,
as those
that the
shareholder
held in the Bank,
and the Company’s
then current shareholders
owned the same
percentages of the
Company’s common
stock as they previously owned of the Bank’s common
stock.
In 2024, the Company issued
awards pursuant to the Company's 2015 Option Plan.
In 2023, the Company issued
awards pursuant to the Company's 2015 Option Plan.
As previously announced,
on April 22,
2024, the
Board of Directors
approved a
new share repurchase
program of up
to
% of
the Company’s
issued and
outstanding shares
of
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 other means.
The
repurchase
program
has
no
expiration
date
and
may
be
modified,
suspended,
or
terminated
at
any
time.
The
new
repurchase program
will commence
upon completion
of the Company’s
current repurchase
program. Repurchases
under
this new program will be funded from the Company’s
existing cash and cash equivalents or future cash flow.
During the year
ended December
31, 2024,
the Company
repurchased
weighted average price per share of $
. The aggregate purchase price for these transactions was approximately $
thousand, including transaction costs.
As of December 31,
2024,
the Company’s two stock repurchase programs.
During the year ended December
31, 2023, the Company repurchased
weighted average price per share
of $
. The aggregate purchase
price for these transactions was
approximately $
million, including transaction costs. As
of December 31, 2023,
Company’s first stock repurchase program.
Shares of the Company’s Class A common stock issued and
outstanding as of December 31, 2024 and December 31,
2023 were
, respectively.
Dividends
Declaration of dividends
by the Board
is required before
dividend payments
are made. 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
Company’s
retained
income
for
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 since the Bank is
the primary source
of funds to fund
dividends by the Company.
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 and
bank
holding companies from paying dividends if they deem
such payment to be an unsafe or unsound practice.
As
of
December
31,
2024,
the
Company
was
not
subject
to
any
formal
supervisory
restrictions
on
its
ability
to
pay
dividends
but
has
agreed
to
notify
the
Federal
Reserve
Bank
of
Atlanta
in
advance
of
any
proposed
dividend
to
the
Company's shareholders
in light
of the
Bank's negative
retained earnings.
In addition,
under applicable
FDIC regulations
and policy, because the Bank has negative retained
earnings, it must obtain the prior approval of the FDIC before effecting
a cash dividend or other capital distribution.
On January 29, 2024, the
Company announced that its Board of
Directors approved a quarterly cash dividend program.
The quarterly dividend for all quarters in 2024 was $
connection with dividend payments paid during the year
ended December 31, 2024 was $
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
118
USCB Financial Holdings, Inc.
2024 10-K
Declaration Date
Record Date
Payment Date
Dividend Per Share
Dividend Amount
$
$
$
$
$
$
$
$
See Note 20, “Subsequent Events”, for information regarding
dividends declared in January 2025.
The
Company
and
the
Bank
exceeded
all
regulatory
capital
requirements
and
remained
above
“well-capitalized”
guidelines as of December 31, 2024 and December
31, 2023. At December 31, 2024, the total
risk-based capital ratios for
the Company and the Bank were
% and
%, 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, 2024 and 2023 (in thousands):
2024
2023
Net Income
$
$
Net income available to common stockholders
$
$
The following table
reflects the calculation
of basic and
diluted earnings per
common share
class for the
years ended
December 31, 2024 and 2023 (in thousands, except
per share amounts):
2024
2023
Class A
Class A
Basic EPS
Numerator:
Net income available to common shares
$
$
Denominator:
Weighted average shares outstanding
Earnings per share, basic
$
$
Diluted EPS
Numerator:
Net income available to common shares
$
$
Denominator:
Weighted average shares outstanding for basic EPS
Add: Dilutive effects of assumed exercises of stock options
Weighted avg. shares including dilutive potential common shares
Earnings per share, diluted
$
$
Anti-dilutive stock options excluded from diluted EPS
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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
119
USCB Financial Holdings, Inc.
2024 10-K
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
% 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, 2024 and
2023, the capital ratios for the Bank were sufficient
to meet the conservation buffer.
Prompt
corrective
action
regulations
provide
five
classifications:
well
capitalized,
adequately
capitalized,
undercapitalized,
significantly
undercapitalized,
and
critically
undercapitalized,
although
these
terms
are
not
used
to
represent overall financial condition. If
adequately capitalized, regulatory approval
is required to accept brokered
deposits.
If
undercapitalized,
capital
distributions
are
limited,
as
is
asset
growth
and
expansion,
and
capital
restoration
plans
are
required.
At December 31,
2024 and
2023, 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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
120
USCB Financial Holdings, Inc.
2024 10-K
Actual and required
capital amounts and
ratios are presented
below for the
Bank at December
31, 2024 and
2023 (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, 2024:
Total
risk-based capital:
$
%
$
%
$
%
Tier 1 risk-based capital:
$
%
$
%
$
%
Common equity tier 1 capital:
$
%
$
%
$
%
Leverage ratio:
$
%
$
%
$
%
December 31, 2023:
Total
risk-based capital:
$
%
$
%
$
%
Tier 1 risk-based capital:
$
%
$
%
$
%
Common equity tier 1 capital:
$
%
$
%
$
%
Leverage ratio:
$
%
$
%
$
%
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 for the current year combined with the Company’s
retained income for 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, 2024
and 2023 (in thousands):
Years Ended December 31,
2024
2023
Consolidated Balance Sheets:
Loans held for investment, net
$
-
$
-
Deposits
$
$
Consolidated Statements of Operations:
Interest income
$
$
Interest expense
$
$
Loan Purchases
During 2024, the Bank purchased $
paid those entities fees of $
During 2023, the Bank purchased $
paid those entities fees of $
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
121
USCB Financial Holdings, Inc.
2024 10-K
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, 2024
December 31, 2023
ASSETS:
Cash and Cash Equivalents
$
$
Investment in bank subsidiary
Other assets
Total
assets
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities
$
-
$
-
Stockholders' equity
Total
liabilities and stockholders' equity
$
$
The condensed
income statement
is presented
below for
USCB Financial
Holdings, Inc.
for the
periods indicated
(in
thousands):
Years Ended
December 31, 2024
December 31, 2023
INCOME:
Dividends from subsidiaries
$
$
Total
EXPENSE:
Employee compensation and benefits
Other operating
Total
Income before income taxes and undistributed subsidiary income
Benefit from income taxes
(
684
)
(
715
)
Equity in undisbursed subsidiary income
Net Income
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
122
USCB Financial Holdings, Inc.
2024 10-K
The condensed cash
flow is presented below
for USCB Financial Holdings,
Inc. for the periods
indicated (in thousands):
Years Ended
December 31, 2024
December 31, 2023
Cash flows from operating activities:
Net income
$
$
Adjustments to reconcile net income to net cash provided
by operating
activities:
Equity in undistributed earnings of subsidiaries
(
21,689
)
(
7,551
)
Stock-based compensation
Increase in deferred tax asset
(
684
)
(
715
)
Net cash provided by operating activities
Cash flows from investing activities:
Capital contributions to subsidiary
-
-
Other
-
-
Net cash used in investing activities
-
-
Cash flows from financing activities:
Dividends paid
(
3,939
)
-
Proceeds from exercise of stock options
Repurchase of common stock
(
501
)
(
7,583
)
Net cash (used in) provided by financing activities
(
3,121
)
(
7,508
)
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
123
USCB Financial Holdings, Inc.
2024 10-K
18.
SEGMENT REPORTING
Operating
segments
are components
of an
enterprise
about which
separate
financial
information
is available
that
is
evaluated
regularly
by
the
chief
operating
decision
maker
(“CODM”)
in
assessing
performance
and
in
deciding
how
to
allocate resources. The Company’s CODM is the
President, Chief Executive Officer,
and Chairman.
The Company
through the
Bank, its
sole direct
subsidiary,
operates
wide range
of personal
and business
banking products
and services,
and through
a subsidiary
of the
Bank, offers
clients
title insurance policies for real estate transactions closed at
the Bank. The Company’s business activities are similar in their
nature,
operations
and
economic
characteristics,
largely
serving
commercial
and
specialty
banking clients
with products
and services
that are
offered through
similar processes
and platforms.
Accounting policies
for the
products
and services
referenced here are the same as those described in Note 1, “Summary of Significant Accounting Policies”. The Company’s
segment revenue
is driven
primarily by
interest income
on loans
as well
as fee
income from
the origination
of loans
and
from fees charged on loans and deposit
accounts. Lending activities include loans
to individuals, which primarily consist of
home equity lines of credit, residential real estate loans, yacht loans, and consumer loans, and loans to
commercial clients,
which include
commercial and
industrial loans,
commercial real
estate loans,
residential real
estate loans,
correspondent
banking loans, and letters of credit.
The
CODM
regularly
reviews
consolidated
income
and
expenses,
as
presented
on
the
Consolidated
Statements
of
Operations,
in
addition
to
consolidated
assets
presented
on
the
Consolidated
Balance
Sheets.
The
significant
segment
expenses that the CODM receives
regularly are interest expense, provision for
credit losses, salaries and wages, employee
benefits,
and
occupancy.
The
CODM
evaluates
the
performance
of
the
segment
and
allocates
resources
based
on
net
income
that
is
also
reported
on
the
Consolidated
Statements
of
Operations
as
consolidated
net
income
to
maximize
shareholder value
.
Additionally,
consolidated
internal financial
information is
used by
the CODM
to monitor
credit quality
and credit loss expense. Furthermore, net income, as the measure of profit or loss, is used to monitor budget versus actual
results and
to perform
competitive analyses
that benchmark
the Company
to competitors.
As a
result, the
Company has
determined that it has only one reportable segment.
19.
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.
20.
SUBSEQUENT EVENTS
Dividends
On January 21, 2025, the Company’s Board of
Directors declared a quarterly cash dividend of
$
A common stock, to be paid on March 5, 2025, to stockholders of record as of the close of business
on February 14, 2025.
BOLI
In January 2025, the Company acquired a bank owned life insurance policy with a
cash surrender value of $
dollars.
Liquidity
In January
2025, the
Company
entered
into an
agreement
in connection
with
a
$
uncommitted facility with another insured depository institution.
In February
2025, the
Company entered
into an
agreement in
connection with
a $
uncommitted facility with another insured depository institution.
As of February 28, 2025 there are
124
USCB Financial Holdings, Inc.
2024 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 our Chief
Financial
Officer,
we
evaluated
the
effectiveness
of
the
design
and
operation
of
the
Company’s
disclosure
controls
and
procedures
as
of
December 31,
2024.
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 Annual Report on Form 10-K.
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 the
rules of
the SEC
that permit
the Company,
as an
emerging growth company
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,
2024. Furthermore,
during the conduct of its assessment, management identified no material weakness in
its financial reporting control system.
The Board of the Company,
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
company’s
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 registered
public accounting firm.
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)
125
USCB Financial Holdings, Inc.
2024 10-K
(b)
officers
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.
126
USCB Financial Holdings, Inc.
2024 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
27, 2025,
is expected
to be
filed with the
SEC
within 120 days of December 31, 2024 (“2025 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 – Corporate Governance
Principles and Board Matters” and “- Director Compensation”
in the Company’s 2025 Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
Matters
Equity compensation Plan information
. The following table provide information as of December 31,
2024 with
respect to shares of common stock that may be issued
under our existing equity compensation plans, which
consists of
2015 Equity Incentive Plan (the “2015 Option Plan”)
which was approved by our shareholders.
Per Category
Number of
securities issued
or to be upon
exercise of
outstanding
options, warrants
and rights
(a) (1)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b) (1)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
Equity compensation plans approved by security holders
1,127,243
$
10.86
966,436
Equity compensation plans not approved by security holders
-
-
-
Total
1,127,243
$
10.86
966,436
(1)
weighted average exercise price excludes
such restricted stock awards.
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 2025
Definitive Proxy Statement.
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 2025 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 2025 Definitive Proxy
Statement.
127
USCB Financial Holdings, Inc.
2024 10-K
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
1)
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2024 and 2023
Consolidated Statements of Operations for the years ended
December 31, 2024 and 2023
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2024 and 2023
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2024 and
2023
Consolidated Statements of Cash Flows for the years
ended December 31, 2024 and 2023
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)
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.
128
USCB Financial Holdings, Inc.
2024 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.
130
USCB Financial Holdings, Inc.
2024 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 14, 2025
By:
/s/ Luis de la Aguilera
Luis de la Aguilera
President, Chief Executive Officer,
and Chairman
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 14, 2025
Luis de la Aguilera
/s/ Robert Anderson
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 14, 2025
Robert Anderson
/s/ Aida Levitan
Director
March 14, 2025
Aida Levitan
/s/ Howard Feinglass
Director
March 14, 2025
Howard Feinglass
/s/ Kirk Wycoff
Director
March 14, 2025
Kirk Wycoff
/s/ Ramon A. Abadin
Director
March 14, 2025
Ramon A. Abadin
/s/ Bernardo B. Fernandez
Director
March 14, 2025
Bernardo B. Fernandez
/s/ Ramon A. Rodriguez
Director
March 14, 2025
Ramon A. Rodriguez
/s/ Maria C. Alonso
Director
March 14, 2025
Maria C. Alonso
/s/ Robert E. Kafafian
Director
March 14, 2025
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 MattersItem 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