UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
,
,
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code:
)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Indicate by check
mark whether the
registrant (1) has
filed all reports
required to be
filed by Section
13 or 15(d)
of the Securities
Exchange
Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was
required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
☒
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data
File required to be submitted pursuant
to Rule 405
of Regulation S-T
(§232.405 of this
chapter) during the
preceding 12 months
(or for such
shorter period that
the registrant
was required to submit such files).
☒
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company
or
an
emerging
growth
company.
See
the
definitions
of
“large
accelerated
filer,”
“accelerated
filer,”
“non-accelerated
filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
☐
☒
☒
☒
If an
emerging growth
company, indicate by
check mark
if the
registrant has elected
not to
use the
extended transition
period for
complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 1, 2022, the registrant had
A
common stock outstanding.
FORM 10-Q
September 30, 2022
TABLE OF CONTENTS
3
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
PART I
Item 1.
Financial Statements
USCB FINANCIAL HOLDINGS, INC.
Consolidated Balance Sheets - Unaudited
(Dollars in thousands,
except share data)
September 30, 2022
December 31, 2021
ASSETS:
Cash and due from banks
$
$
Interest-bearing deposits in banks
Total cash and cash equivalents
Investment securities held to maturity (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 assets, net
Lease right-of-use asset
Other assets
Total assets
$
$
LIABILITIES:
Deposits:
Demand deposits
$
$
$
605,425
Money market and savings accounts
Interest-bearing checking
Time deposits
Total deposits
Federal Home Loan Bank advances
Lease liability
Accrued interest and other liabilities
Total liabilities
Commitments and contingencies (See Notes 5
and 10)
STOCKHOLDERS' EQUITY:
Preferred stock - Class C; $
authorized;
-
-
Preferred stock - Class D; $
authorized;
-
-
Preferred stock - Class E; $
authorized;
-
-
Common stock - Class A Voting; $
Common stock - Class B Non-voting; $
outstanding as of September 30, 2022 and
December 31, 2021
-
-
Additional paid-in capital on common stock
Accumulated deficit
(
108,538
)
(
124,245
)
Accumulated other comprehensive loss
(
45,202
)
(
2,516
)
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
4
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations - Unaudited
(Dollars in thousands,
except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Interest income:
$
$
$
$
Interest expense:
Provision for credit losses
-
(
160
)
Non-interest income:
(
558
)
(
70
)
(
540
)
-
Non-interest expense:
Income tax expense
Less: Preferred stock dividend
-
-
Less: Exchange and redemption of preferred shares
-
-
Net income (loss) available to common stockholders
$
$
(
83,534
)
$
$
(
76,235
)
Per share information:
(1)
Class A common stock
Net income (loss) per share, basic
$
$
(
5.11
)
$
$
(
8.57
)
Net income (loss) per share, diluted
$
$
(
5.11
)
$
$
(
8.57
)
Class B common stock
Net loss per share, basic
$
-
$
(
1.02
)
$
-
$
(
1.71
)
Net loss per share, diluted
$
-
$
(
1.02
)
$
-
$
(
1.71
)
(1)
For further details on the allocation of net
income available to common stockholders and per
share information, see Note 9 "Earnings per Share".
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
5
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Income
(Loss) - Unaudited
(Dollars in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
Net income
$
$
$
$
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities
(
11,679
)
(
57,577
)
(
4,627
)
Amortization of net unrealized gains on securities
transferred from
available-for-sale to held-to-maturity
(
52
)
(
177
)
Reclassification adjustment for loss (gain) included in
net income
(
179
)
Tax effect
(
324
)
Total other comprehensive income (loss), net of tax
(
8,341
)
(
42,686
)
(
3,596
)
Total comprehensive (loss) income
$
(
2,783
)
$
$
(
26,979
)
$
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
6
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders’
Equity - Unaudited
(Dollars in thousands,
except per share data)
Preferred Stock
Common Stock
Additional Paid-in
Capital on
Common Stock
Accumulated
Deficit
Accumulated Other
Comprehensive
Income (Loss)
Shares
Par Value
Shares
Par Value
Total
Stockholders'
Equity
Balance at July 1, 2022
-
$
-
$
$
$
(
114,096
)
$
(
36,861
)
$
Net income
-
-
-
-
-
-
Other comprehensive loss
-
-
-
-
-
-
(
8,341
)
(
8,341
)
Stock-based compensation
-
-
-
-
-
-
Balance at September 30, 2022
-
$
-
$
$
$
(
108,538
)
$
(
45,202
)
$
Balance at July 1, 2021
$
$
$
$
(
46,362
)
$
$
Net income
-
-
-
-
-
-
Other comprehensive income
-
-
-
-
-
-
Dividends - preferred stock
-
-
-
-
-
(
542
)
-
(
542
)
Issuance of Class A common stock,
net of offering
costs of $
-
-
-
-
Exchange of preferred sock
(
11,109,025
)
(
22,154
)
(
80,628
)
-
-
Redemption of preferred stock
(
1,234,354
)
(
2,462
)
-
-
-
(
8,958
)
-
(
11,420
)
Stock-based compensation
-
-
-
-
-
-
Balance at September 30, 2021
$
-
$
$
$
(
129,897
)
$
$
Preferred Stock
Common Stock
Additional Paid-
in Capital on
Common Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Shares
Par Value
Shares
Par Value
Total
Stockholders'
Equity
Balance at January 1, 2022
-
$
-
$
$
$
(
124,245
)
$
(
2,516
)
$
Net income
-
-
-
-
-
-
Other comprehensive loss
-
-
-
-
-
-
(
42,686
)
(
42,686
)
Exercise of stock options
-
-
-
-
Stock-based compensation
-
-
-
-
-
-
Balance at September 30, 2022
-
$
-
$
$
$
(
108,538
)
$
(
45,202
)
$
Balance at January 1, 2021
$
$
$
$
(
53,622
)
$
$
Reverse stock split 1 for 5 Common A
-
-
(
15,557,626
)
(
15,558
)
-
-
$
-
Adjusted balance at January 1, 2021
(
53,622
)
Net income
-
-
-
-
-
-
Other comprehensive income
-
-
-
-
-
-
(
3,596
)
(
3,596
)
Dividends - preferred stock
-
-
-
-
-
(
2,077
)
-
(
2,077
)
Issuance of Class A common stock,
net of offering
costs of $
-
-
-
-
Exchange of preferred sock
(
11,109,025
)
(
22,154
)
(
80,628
)
-
-
Redemption of preferred stock
(
1,241,854
)
(
9,923
)
-
-
-
(
8,997
)
-
(
18,920
)
Stock-based compensation
-
-
-
-
-
-
Balance at September 30, 2021
$
-
$
$
$
(
129,897
)
$
$
The accompanying notes are an integral
part of these unaudited consolidated financial
statements.
7
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Nine Months Ended September 30,
2022
2021
Cash flows from operating activities:
Net income
$
$
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses
(
160
)
Depreciation and amortization
Amortization of premiums on securities, net
Accretion of deferred loan fees, net
(
1,364
)
(
2,893
)
Stock-based compensation
Loss (gain) on sale of available for sale securities
(
179
)
Gain on sale of loans held for sale
(
686
)
(
1,519
)
Increase in cash surrender value of bank owned
life insurance
(
794
)
(
499
)
Decrease in deferred tax assets
Net change in operating assets and liabilities:
Accrued interest receivable
(
593
)
(
530
)
Other assets
(
4,163
)
(
2,724
)
Accrued interest and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investment securities held
to maturity
(
2,432
)
(
31,919
)
Proceeds from maturities and pay-downs of investment
securities held to maturity
Purchase of investment securities available
for sale
(
49,808
)
(
158,333
)
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
(
177,916
)
(
55,451
)
Purchase of loans held for investment
(
70,175
)
(
93,677
)
Additions to premises and equipment
(
175
)
(
314
)
Proceeds from the sale of loans held for sale
Proceeds from the redemption of Federal
Home Loan Bank stock
Purchase of Federal Home Loan Bank stock
(
2,052
)
-
Net cash used in investment activities
(
200,829
)
(
231,927
)
Cash flows from financing activities:
Proceeds from issuance of Class A common
stock, net
Dividends paid
-
(
2,077
)
Redemption of Preferred stock Class C
-
(
5,275
)
Redemption of Preferred stock Class D
-
(
6,145
)
Redemption of Preferred stock Class E
-
(
7,500
)
Net increase in deposits
Proceeds from Federal Home Loan Bank advances
-
Repayments on Federal Home Loan Bank advances
(
70,000
)
-
Net cash provided by financing activities
Net increase in cash and cash equivalents
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
$
$
Transfer of premises and equipment to assets held
for sale
$
-
$
Lease liability arising from obtaining right-of-use
assets
$
$
666
Exchange of Preferred stock Class C for
Class A common stock
$
-
$
Exchange of Preferred stock Class D for
Class A common stock
$
-
$
The accompanying notes are an integral
part of these unaudited consolidated financial
statements.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
8
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Overview
USCB Financial Holdings, Inc., a
Florida corporation incorporated
in 2021, is a bank holding
company with one wholly
owned subsidiary,
U.S. Century Bank (the
“Bank”), together referred to
as “the Company”. The Bank,
established in 2002,
is a Florida
state-chartered, non-member financial institution providing financial
services through its banking
centers located
in South Florida.
During the year ended December 31,
2021, the Bank completed an initial
public offering (“IPO”) and
its Class A voting
common shares began
trading on the
Nasdaq Stock
Market in July
2021. In December
2021, the Bank
exchanged all the
outstanding
shares
of
Class
B
non-voting
common
stock
for
shares
of
Class
A
voting
common
stock
on
a
one
to
five
exchange. Shortly thereafter,
the Company acquired all issued and
outstanding shares of Class A voting
common stock of
the Bank
in connection with
the reorganization
of the
Bank into
the holding company
form of
structure.
For further information
on the IPO and the exchange and redemption of shares
,
see Note 8 “Stockholders’ Equity”.
The Company’s
Consolidated Financial
Statements consist
of USCB
Financial Holdings,
Inc. and
U.S. Century
Bank
as of
September 30, 2022 and
December 31, 2021 and for
the three and
nine months ended
September 30, 2022 compared
to only U.S. Century Bank as of September 30, 2021
and for the three and nine months ended September
30, 2021.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to
Form 10-Q and
do not include all
the information and
footnotes required by U.S.
generally accepted accounting
principles
(“U.S.
GAAP”)
for
complete
financial
statements.
All
adjustments
consisting
of
normally
recurring
accruals
that,
in
the
opinion
of
management,
are
necessary
for
a
fair
presentation
of
the
financial
position
and
results
of
operations
for
the
periods presented
have been
included. These
unaudited consolidated
financial statements
should be
read in
conjunction
with
the
Company’s
consolidated
financial
statements
and
related
notes
appearing
in the
Company’s
Annual
Report
on
Form 10-K for the year ended December 31, 2021.
Principles of Consolidation
The
Company
consolidates
entities
in
which
it
has
a
controlling
financial
interest.
Intercompany
transactions
and
balances are eliminated in consolidation.
Use of Estimates
To prepare
financial statements in conformity with U.S. GAAP,
management makes estimates and assumptions based
on available
information. These
estimates and
assumptions
affect
the amounts
reported in
the financial
statements. The
most significant
estimates impacting
the Company’s
consolidated financial
statements are
the allowance
for credit
losses
and income taxes.
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 Not Yet Adopted
Measurement of Credit Losses on Financial Instruments
In June
2016, the FASB issued
ASU 2016-13, Financial
Instruments - Credit
Losses (Topic 326); Measurement of
Credit
Losses on Financial Instruments. This accounting standard update (“ASU” or “Update”)
on accounting for current expected
credit
losses
on
financial
instruments
(“CECL”)
will
replace
the
current
probable
incurred
loss
impairment
methodology
under U.S. GAAP
with a methodology
that reflects the
expected credit losses.
The Update is
intended to provide
financial
statement
users
with
more
decision-useful
information
about
expected
credit
losses.
This
Update
is
applicable
to
the
Company
on
a modified
retrospective
basis
for
interim
and
annual
periods
in
fiscal
years
beginning
after
December 15,
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
9
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
2022. Early adoption is permitted for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal
years.
The
Company
expects
to
adopt
this
ASU
on
January 1,
2023.
The
impact
of
adoption
on
the
Company’s
financial statements
will depend on
the composition
of the loan
and investment
securities portfolio
as of January
1, 2023,
general economic conditions,
and other factors that
are not known at
this time. Although
management is in the
process of
evaluating the impact of
adoption of this ASU on
its consolidated financial statements,
management does believe that
this
ASU will lead to significant changes
in accounting policies and disclosures
related to, and the methods used
in estimating,
the
ACL.
The
Company
has
developed
a
detailed
implementation
plan
through
the
date
of
adoption
that
includes
the
implementation of a software solution to assist
with the CECL implementation process and is developing
measurements in
parallel
with
the
current
methodology.
To
date,
the
Company
has
initiated
policy
discussion
with
key
stakeholders,
completed a data
gap analysis
and retained the
services of a
third-party consulting
firm to perform
an independent model
validation prior to adoption.
Reference Rate Reform
In
March
2020,
the
FASB
issued
ASU
2020-04,
Reference
Rate
Reform
(Topic
848),
Facilitation
of
the
Effects
of
Reference Rate Reform
on Financial Reporting.
In January 2021,
the FASB
clarified the scope
of this guidance
with ASU
2021-01 which provides optional
guidance for a limited
period of time to
ease the burden in
accounting for (or
recognizing
the effects of)
reference rate reform on
financial reporting. This ASU
is effective from March 12,
2020 through December 31,
2022. The
Company is
evaluating the
impact of
this ASU
and has
not yet
determined whether
LIBOR transition
and this
ASU will have a material effect on our business operations
and consolidated financial statements.
Trouble Debt Restructuring
In
March
2022,
the
FASB
issued
ASU
2022-02,
Financial
Instruments—Credit
Losses
(Topic
326):
Troubled
Debt
Restructurings and Vintage Disclosures.
This ASU eliminates the recognition and measurement guidance on troubled debt
restructurings for
creditors and
aligns it
with existing
guidance to
determine whether
a loan
modification results
in a
new
loan
or
a
continuation
of
an
existing
loan.
The
new
guidance
also
requires
enhanced
disclosures
about
certain
loan
modifications by
creditors
when a
borrower is
experiencing financial
difficulty.
This ASU
is effective
in periods
beginning
after
December
15,
2022,
using
either
a
prospective
or
modified
retrospective
transition
approach.
Early
adoption
is
permitted for entities that have already adopted CECL.
The Company is in the process of reviewing this
ASU, as part of its
CECL implementation efforts,
to determine
whether it would
have a material
impact on
the Company’s consolidated financial
statements when adopted.
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):
September 30, 2022
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
$
-
$
(
1,372
)
$
Collateralized mortgage obligations
-
(
21,712
)
Mortgage-backed securities - residential
-
(
15,942
)
Mortgage-backed securities - commercial
-
(
3,883
)
Municipal securities
-
(
6,475
)
Bank subordinated debt securities
(
969
)
Corporate bonds
-
(
377
)
$
$
$
(
50,730
)
$
Held-to-maturity:
U.S. Government Agency
$
$
-
$
(
5,804
)
$
Collateralized mortgage obligations
-
(
6,773
)
Mortgage-backed securities - residential
-
(
4,844
)
Mortgage-backed securities - commercial
-
(
516
)
Corporate bonds
-
(
1,189
)
$
$
-
$
(
19,126
)
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
10
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
December 31, 2021
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency
$
$
$
(
50
)
$
Collateralized mortgage obligations
(
3,699
)
Mortgage-backed securities - residential
(
2,029
)
Mortgage-backed securities - commercial
(
608
)
Municipal securities
(
894
)
Bank subordinated debt securities
(
13
)
Corporate bonds
-
$
$
$
(
7,293
)
$
Held-to-maturity:
U.S. Government Agency
$
$
$
(
615
)
$
Collateralized mortgage obligations
-
(
1,021
)
Mortgage-backed securities - residential
-
(
568
)
Mortgage-backed securities - commercial
-
(
90
)
Corporate bonds
-
(
221
)
$
$
$
(
2,515
)
$
During the
quarter ended
September 30, 2022
and year
ended December 31,
2021, the
Company transferred,
at fair
value, $
The
related
net
unrealized
losses
of
$
accumulated
other
comprehensive
income
(“AOCI”)
and
are
being
amortized
over
the
remaining
life
of
the
transferred
securities.
Gains and losses on
the sale of securities are
recorded on the trade date
and are determined on a
specific identification
basis. The following table presents the proceeds, realized
gross gains and realized gross losses on sales and
calls of AFS
debt securities for the three and nine months ended September
30, 2022 and 2021 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
Available-for-sale:
2022
2021
2022
2021
Proceeds from sale and call of securities
$
$
$
$
Gross gains
$
$
$
$
Gross losses
(
560
)
(
142
)
(
758
)
(
331
)
Net realized gain (loss)
$
(
558
)
$
(
70
)
$
(
540
)
$
The amortized
cost
and
fair
value of
investment
securities,
by contractual
maturity,
are shown
below
as of
the date
indicated (in thousands).
Actual maturities may
differ from contractual
maturities because borrowers
may have the right
to
call or prepay
obligations with or
without call or
prepayment penalties. Securities not
due at a
single maturity date are
shown
separately.
Available-for-sale
Held-to-maturity
September 30, 2022:
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
$
$
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
11
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
At September 30,
2022, there
were
10% of total stockholders’
equity other than the United States Government and
Government Agencies. All the collateralized
mortgage
obligations
and
mortgage-backed
securities
are
issued
by
United
States
sponsored
entities
at
September 30,
2022 and December 31, 2021.
Information pertaining
to investment
securities with
gross unrealized
losses, aggregated
by investment
category
and
length of
time that
those
individual securities
have been
in a
continuous
loss position,
are presented
as of
the following
dates (in thousands):
September 30, 2022
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency
$
$
(
3,810
)
$
$
(
4,726
)
$
$
(
8,536
)
Collateralized mortgage obligations
(
9,750
)
(
23,488
)
(
33,238
)
Mortgage-backed securities - residential
(
6,510
)
(
17,019
)
(
23,529
)
Mortgage-backed securities - commercial
(
2,715
)
(
3,194
)
(
5,909
)
Municipal securities
(
200
)
(
6,275
)
(
6,475
)
Bank subordinated debt securities
(
970
)
-
-
(
970
)
Corporate bonds
(
1,045
)
-
-
(
1,045
)
$
$
(
25,000
)
$
$
(
54,702
)
$
$
(
79,702
)
December 31, 2021
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency
$
$
(
254
)
$
$
(
516
)
$
$
(
770
)
Collateralized mortgage obligations
(
3,223
)
(
1,497
)
(
4,720
)
Mortgage-backed securities - residential
(
1,178
)
(
1,274
)
(
2,452
)
Mortgage-backed securities - commercial
(
318
)
(
309
)
(
627
)
Municipal securities
(
395
)
(
499
)
(
894
)
Bank subordinated debt securities
(
13
)
-
-
(
13
)
$
$
(
5,381
)
$
$
(
4,095
)
$
$
(
9,476
)
As of
September 30,
2022,
the unrealized
losses
associated
with
$
from
the
AFS
portfolio
to
the
HTM
portfolio
represent
unrealized
losses
since
the
date
of
purchase,
independent
of
the
impact associated with changes in the cost basis of the
securities upon transfer between portfolios.
The Company performs a review
of the investments that have
an unrealized loss to determine
whether there have been
any changes in the
economic circumstance of the security
issuer to indicate that
the unrealized loss is
impaired on an other-
than-temporary
(“OTTI”) basis. Management
considers several factors in
their analysis including
(i) the severity
and duration
of the impairment,
(ii) the
credit rating
of the
security including
any downgrade,
(iii) the
intent to
sell the security,
or if
it is
more likely than
not that it
will be required
to sell the
security before recovery,
(iv) whether
there have been
any payment
defaults and (v) the underlying guarantor of the securities.
The Company does not consider these
investments to be OTTI as the
decline in market value is attributable
to changes
in market
interest rates
and not
credit quality,
and because
the Company
does not
intend to
sell the
investments before
recovery of
its amortized
cost basis,
which may
be at
maturity,
and it is
more likely than
not that the
Company will
not be
required to sell the securities before maturity.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
12
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Pledged Securities
The Company
maintains a
master repurchase
agreement with
a public
banking institution
for up
to $
guaranteed with investment
securities upon withdrawal.
Any amounts borrowed
would be at a
variable interest rate
based
on prevailing rates
at the time
funding is
requested. As
of September 30,
2022, the
Company did
t have
any securities
pledged under this agreement.
The Company is a Qualified
Public Depositor (“QPD”) with
the State of Florida. As
a QPD, the Company has
the legal
authority to 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 outstanding
uninsured deposits.
The Company
must
also maintain a minimum amount of pledged securities to be
in the public funds program.
As of September 30,
2022, the Company
had a total of
$
pledged
to
the
State
of
Florida
for
these
public
funds
were
$
As of
December 31,
2021, the
Company had
a total
of $
pledged
to
the
State
of
Florida
for
these
public
funds
were
$
3.
LOANS
The following table is a summary of the distribution of loans
held for investment by type (in thousands):
September 30, 2022
December 31, 2021
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
%
$
%
Commercial Real Estate
%
%
Commercial and Industrial
%
%
Foreign Banks
%
%
Consumer and Other
%
%
Total
gross loans
%
%
Less: Deferred fees (cost)
Total
loans net of deferred fees (cost)
Less: Allowance for credit losses
Total
net loans
$
$
At September 30,
2022 and
December 31, 2021,
the Company
had $
commercial
real estate and residential
mortgage loans pledged as
collateral for lines of
credit with the
FHLB and the
Federal
Reserve Bank of Atlanta.
The Company was a participant
in the Small Business
Administration’s (“SBA”) Paycheck
Protection Program (“PPP”)
loans. These
loans were
designed to
provide a
direct incentive
for small
businesses to
keep their
workers on
payroll and
the funds had to be used towards payroll cost, mortgage interest, rent, utilities and other costs related to COVID-19. These
loans are forgivable under specific criteria as determined by the SBA.
The Company had PPP loans totaling $
September 30, 2022
and $
These PPP loans had deferred loan fees of $
The Company
recognized $
ended September 30, 2022
and 2021, respectively,
which is reported
under loans, including
fees, within the
Consolidated
Statements of Operations.
The
Company
segments
the
portfolio
by
pools
grouping
loans
that
share
similar
risk
characteristics
and
employing
collateral type
and lien
position to
group loans
according to
risk. The
Company determines
historical
loss rates
for each
loan
pool
based
on
its
own
loss
experience.
In
estimating
credit
losses,
the
Company
also
considers
qualitative
and
environmental factors that may cause estimated credit losses
for the loan portfolio to differ from historical
losses.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
13
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Changes in
the allowance
for credit
losses for
the three
and nine
months ended
September 30, 2022
and 2021
were
as follows (in thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
Three Months Ended September 30, 2022
Beginning balance
$
$
$
$
$
$
Provision for credit losses
(
1,009
)
Recoveries
-
-
-
-
Charge-offs
-
-
(
88
)
-
(
5
)
(
93
)
Ending Balance
$
$
$
$
$
$
Nine Months Ended September 30, 2022
Beginning balance
$
$
$
$
$
$
Provision for credit losses
(
1,157
)
Recoveries
-
-
Charge-offs
(
16
)
-
(
88
)
-
(
11
)
(
115
)
Ending Balance
$
$
$
$
$
$
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
Three Months Ended September 30, 2021
Beginning balance
$
$
$
$
$
$
Provision for credit losses
(
787
)
(
29
)
(
180
)
-
Recoveries
-
-
Charge-offs
-
-
-
-
(
2
)
(
2
)
Ending Balance
$
$
$
$
$
$
Nine Months Ended September 30, 2021
Beginning balance
$
$
$
$
$
$
Provision for credit losses
(
1,434
)
(
160
)
Recoveries
-
-
Charge-offs
(
229
)
-
-
-
(
12
)
(
241
)
Ending Balance
$
$
$
$
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
14
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Allowance for
credit losses
and the
outstanding balances
in the
specified
loan categories
as of
September 30,
2022
and December 31, 2021 are as follows (in thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
September 30, 2022:
Allowance for credit losses:
Individually evaluated for impairment
$
$
-
$
$
-
$
$
Collectively evaluated for impairment
Balances, end of period
$
$
$
$
$
$
Loans:
Individually evaluated for impairment
$
$
$
$
-
$
$
Collectively evaluated for impairment
Balances, end of period
$
$
$
$
$
$
December 31, 2021:
Allowance for credit losses:
Individually evaluated for impairment
$
$
-
$
$
-
$
$
Collectively evaluated for impairment
Balances, end of period
$
$
$
$
$
$
Loans:
Individually evaluated for impairment
$
$
$
$
-
$
$
Collectively evaluated for impairment
Balances, end of period
$
$
$
$
$
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
15
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Credit Quality Indicators
The Company grades loans based on the estimated capability of the borrower to repay the contractual obligation of the
loan agreement based
on relevant information
which may include:
current financial information
on the borrower,
historical
payment
experience,
credit
documentation
and
other
current
economic
trends.
Internal
credit
risk
grades
are
evaluated
periodically.
The Company's internally assigned credit risk grades are as follows:
Pass
– Loans indicate different levels of satisfactory
financial condition and performance.
Special Mention
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment
prospects for the loan or of the institution’s
credit position at some future date.
Substandard
– Loans classified as substandard are inadequately protected
by the current net worth and paying
capacity of the obligator or of the collateral pledged, if
any. Loans so classified
have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are
not corrected.
Doubtful
the added characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Loss
– Loans classified as loss are considered uncollectible.
Loan credit exposures by internally assigned grades are
presented below for the periods indicated (in thousands):
As of September 30, 2022
Pass
Special
Mention
Substandard
Doubtful
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
-
-
-
-
-
Commercial and industrial:
(1)
Secured
-
-
Unsecured
-
-
-
-
-
Foreign banks
-
-
-
Consumer and other loans
-
-
Total
$
$
-
$
$
-
$
(1)
All outstanding PPP loans were internally graded
pass.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
16
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
As of December 31, 2021
Pass
Special
Mention
Substandard
Doubtful
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:
(1)
Secured
-
-
Unsecured
-
-
-
-
Foreign banks
-
-
-
Consumer and other loans
-
-
Total
$
$
$
$
-
$
(1)
All outstanding PPP loans were internally graded
pass.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
17
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
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
tables include
an aging
analysis of
accruing loans
and total
non-accruing
loans as
of September 30,
2022
and December 31, 2021 (in thousands):
Accruing
As of September 30, 2022:
Current
Past Due 30-
89 Days
Past Due 90
Days or >
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
-
-
-
-
Commercial and industrial:
-
Secured
-
-
-
Unsecured
-
-
-
-
Foreign banks
-
-
-
Consumer and other
-
-
-
Total
$
$
$
-
$
$
-
$
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
18
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Accruing
As of December 31, 2021:
Current
Past Due
30-89 Days
Past Due 90
Days or >
and Still
Accruing
Total
Accruing
Non-Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
$
-
$
-
$
$
-
$
1-4 family residential
-
Condo residential
-
-
-
Commercial real estate:
Land and construction
-
-
-
Multi-family residential
-
-
Condo commercial
-
-
-
Commercial property
-
-
-
Leasehold improvements
-
-
-
-
-
Commercial and industrial:
Secured
-
-
-
Unsecured
-
-
-
-
Foreign banks
-
-
-
Consumer and other
-
-
Total
$
$
$
-
$
$
$
There was
September 30, 2022 and 2021. Interest income on these loans for the three
months ended September 30, 2022 and 2021,
would
have
been
approximately
$
original terms.
Impaired Loans
The following table includes
the unpaid principal balances
for impaired loans with
the associated allowance amount,
if
applicable, on the basis of impairment methodology at
the dates indicated (in thousands):
September 30, 2022
December 31, 2021
Unpaid
Principal
Balance
Net
Investment
Balance
Valuation
Allowance
Unpaid
Principal
Balance
Net
Investment
Balance
Valuation
Allowance
Impaired Loans with No Specific Allowance:
Residential real estate
$
$
$
-
$
$
$
-
Commercial real estate
-
-
-
-
Impaired Loans with Specific Allowance:
Residential real estate
Commercial and industrial
Consumer and other
Total
$
$
$
$
$
$
Net investment balance is the unpaid principal balance
of the loan adjusted for the remaining net deferred loan
fees.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
19
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
The following
table presents
the average
recorded
investment
balance
on impaired
loans for
the dates
indicated
(in
thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Residential real estate
$
$
$
$
Commercial real estate
Commercial and industrial
Consumer and other
Total
$
$
$
$
Interest
income
recognized
on
impaired
loans
for
the
three
months
ended
September 30,
2022
and
2021
was
$
Interest
income
recognized
on
impaired
loans
for
the
nine
months
ended
September 30,
2022
and
2021
was
$
Troubled Debt Restructuring
s
A troubled
debt
restructuring
(“TDR”)
occurs
when
the
Company
has agreed
to
a loan
modification
in
the
form
of
a
concession
for
a
borrower
who
is
experiencing
financial
difficulty.
Modifications
to
loans
can
be
made
for
rate,
term,
payment, conversion of
loan to interest
only for a
limited period of
time or a
combination to include
more than one
type of
modification.
The following table presents performing and non-performing
TDR loans at the dates indicated (in thousands):
September 30, 2022
December 31, 2021
Accrual Status
Non-Accrual
Status
Total TDRs
Accrual Status
Non-Accrual
Status
Total TDRs
Residential real estate
$
$
-
$
$
$
-
$
Commercial real estate
-
-
Commercial and industrial
-
-
Consumer and other
-
-
Total
$
$
-
$
$
$
-
$
The Company had allocated $
2022 and
December 31,
2021, respectively.
There were
ended September
30, 2022
and 2021.
There were
TDR loan customers as of September 30, 2022.
During the
quarter ended
September 30, 2022
and 2021,
there were
TDR within
the prior
12 months.
The Company
also did
t have
any new
TDR
loans during
the three
and nine
months
ended September 30, 2022 and 2021.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
20
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
4.
INCOME TAXES
The Company’s provision for income taxes is presented
in the following table for the dates indicated (in thousands):
Nine Months Ended September 30,
2022
2021
Current:
Federal
$
-
$
-
State
-
-
Total
current
-
-
Deferred:
Federal
State
Total
deferred
Total
tax expense
$
$
The actual income tax expense for the nine months
ended September 30, 2022 and 2021 differs
from the statutory tax
expense
for the
period (computed
by applying
the
U.S.
federal
corporate
tax rate
of
%
for
2022
and
2021 to
income
before provision for income taxes) as follows (in thousands):
Nine Months Ended September 30,
2022
2021
Federal taxes at statutory rate
$
$
State income taxes, net of federal tax benefit
Bank owned life insurance
(
202
)
(
122
)
Other, net
Total
tax expense
$
$
The Company’s deferred tax assets and deferred
tax liabilities as of the dates indicated were (in thousands):
September 30, 2022
December 31, 2021
Deferred tax assets:
Net operating loss
$
$
Allowance for credit losses
Lease liability
Unrealized losses on available for sale securities
Deferred loan fees
Depreciable property
Stock option compensation
Accruals
Other, net
Deferred tax assets:
Deferred tax liability:
Lease right of use asset
(
3,418
)
(
3,595
)
Deferred expenses
(
174
)
(
127
)
Deferred tax liability
(
3,592
)
(
3,722
)
Net deferred tax assets
$
$
The Company
has approximately
$
expiring in various amounts between
2031 and 2036 and which are
limited to offset, to the
extent permitted, future taxable
earnings of the Company.
In assessing the realizability of deferred tax assets, management considers
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
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
21
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
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 major tax
jurisdictions where the
Company files income
tax returns are
the U.S. federal
jurisdiction and
the State
of Florida. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax
authorities for years before 2018.
For the three months ended
September 30, 2022 and
2021, 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.
5.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to
meet the financial
needs of
its customers
and to reduce
its own
exposure to
fluctuations in
interest rates.
These financial
instruments include
unfunded commitments
under lines
of credit,
commitments to
extend credit,
standby and
commercial
letters of
credit. Those
instruments involve,
to varying
degrees, elements
of credit
and interest
rate risk
in excess
of the
amount recognized in the Company’s Consolidated Balance Sheets. The Company uses the
same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments.
The Company's
exposure to credit
loss in the
event of nonperformance
by the other
party to the
financial instruments
for unused lines of credit, and standby letters of credit
is represented by the contractual amount of these commitments.
A
summary
of
the
amounts
of
the
Company's
financial
instruments
with
off-balance
sheet
risk
are
shown
below
at
September 30, 2022 and December 31, 2021 (in thousands):
September 30, 2022
December 31, 2021
Commitments to grant loans and unfunded lines of credit
$
$
Standby and commercial letters of credit
Total
$
$
Commitments to
extend credit
are agreements
to lend
to a
customer as
long as
there is
no violation
of any
condition
established in the contract. Commitments generally have
fixed expiration dates or other termination clauses.
Unfunded lines of
credit and revolving
credit lines are
commitments for possible
future extensions
of credit to
existing
customers. These lines of
credit are uncollateralized and
usually do not contain
a specified maturity date
and ultimately may
not be drawn upon to the total extent to which the Company
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 since
many of them expire without being drawn
upon, they do not generally present a significant liquidity
risk to the Company.
6.
DERIVATIVES
The Company utilizes interest rate swap agreements
as part of its asset liability management strategy
to help manage
its interest rate risk exposure
.
The notional amount of
the interest rate swaps
do 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.
The Company enters into interest rate swaps with its loan customers. The Company had
with
loan
customers
with
an
aggregate
notional
amount
of
$
December 31, 2021,
respectively.
These interest
rate swaps
mature between
2025 and
2051. The
Company entered
into
corresponding
and
offsetting
derivatives
with
third
parties.
The
fair
value
of
liability
on
these
derivatives
requires
the
Company to provide the counterparty
with funds to be held as collateral
which the Company reports as other
assets under
the Consolidated
Balance Sheets.
While these
derivatives represent
economic hedges,
they do
not qualify
as hedges
for
accounting purposes.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
22
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
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
September 30, 2022:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
$
Other assets/Other liabilities
$
$
December 31, 2021:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
$
Other assets/Other liabilities
$
$
7.
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.
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.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
23
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Items Measured at Fair Value
on a Recurring Basis
AFS investment securities:
for such securities,
management generally relies
on prices obtained
from independent vendors
or third-party broker-dealers.
Management reviews pricing methodologies provided by the vendors and third-party broker-dealers in order to determine if
observable market information is being utilized. Securities measured with pricing provided by independent vendors or
third-
party broker-dealers
are classified within
Level 2 of
the hierarchy and
often involve using
quoted market
prices for similar
securities, pricing models or discounted cash flow analyses
utilizing inputs observable in the market where available.
Derivatives:
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
September 30, 2022 and December 31, 2021 for each
of the fair value hierarchy levels (in thousands):
September 30, 2022
December 31, 2021
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
-
-
-
-
Corporate bonds
-
-
-
-
Total
-
-
-
-
Derivative assets
-
-
-
-
Total assets at fair value
$
-
$
$
-
$
$
-
$
$
-
$
Derivative liabilities
$
-
$
$
-
$
$
-
$
$
-
$
Total liabilities at fair value
$
-
$
$
-
$
$
-
$
$
-
$
Items Measured at Fair Value
on a Non-recurring Basis
Impaired Loans:
At September 30, 2022
and December 31, 2021,
in accordance with
provisions of the
loan impairment
guidance, individual loans with
a carrying amount of approximately
$
down to
their
fair value
of
approximately
$
$
2022
and
December 31,
2021,
respectively.
Loans
subject
to
write-downs,
or
impaired
loans,
are
estimated
using
the
present value
of expected
cash flows
or the
appraised value
of the
underlying collateral
discounted as
necessary due
to
management's estimates of changes in economic conditions
are considered a Level 3 valuation.
Other Real
Estate:
estimate of
the costs to
sell or the
carrying cost of
the other
real estate
owned. Appraisals generally
use the market
approach
valuation technique
and use
market observable
data to
formulate an
opinion of
the fair
value of
the properties.
However,
the appraiser
uses professional
judgment in
determining the
fair value
of the
property and
the Company
may also
adjust
the value for changes in
market conditions subsequent
to the valuation date
when current appraisals
are not available. As
a consequence of the carrying cost or the
third-party appraisal and adjustments therein, the fair values of the properties are
considered a Level 3 valuation.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
24
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
The following table represents the Company’s assets measured at
fair value on a non-recurring basis
at September 30,
2022 and December 31, 2021 for each of the fair value
hierarchy levels (in thousands):
Level 1
Level 2
Level 3
Total
September 30, 2022:
Impaired loans
$
-
$
-
$
$
December 31, 2021:
Impaired loans
$
-
$
-
$
$
The following table presents
quantified information about
Level 3 fair value
measurements for assets measured
at fair
value on a non-recurring basis at September 30, 2022
and December 31, 2021 (in thousands):
Fair Value
Valuation Technique(s)
Unobservable Input(s)
September 30, 2022:
Residential real estate
$
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
Discounted cash flow
Adj. for differences in net operating income expectations
Consumer and other loans
Discounted cash flow
Adj. for differences in net operating income expectations
Total
impaired loans
$
December 31, 2021:
Residential real estate
$
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
Discounted cash flow
Adj. for differences in net operating income expectations
Consumer and other loans
Discounted cash flow
Adj. for differences in net operating income expectations
Total
impaired loans
$
There
were
December 31, 2021.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
25
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
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 as of September 30, 2022 and December 31, 2021 (in
thousands):
Fair Value Hierarchy
Carrying
Amount
Level 1
Level 2
Level 3
Fair Value
Amount
September 30, 2022:
Financial Assets:
Cash and due from banks
$
$
$
-
$
-
$
Interest-bearing deposits in banks
$
$
$
-
$
-
$
Investment securities held to maturity
$
$
-
$
$
-
$
Loans held for investment, net
$
$
-
$
-
$
$
Accrued interest receivable
$
$
-
$
$
$
Financial Liabilities:
Demand deposits
$
$
$
-
$
-
$
Money market and savings accounts
$
$
$
-
$
-
$
Interest-bearing checking accounts
$
$
$
-
$
-
$
Time deposits
$
$
-
$
-
$
$
FHLB advances
$
$
-
$
$
-
$
Accrued interest payable
$
$
$
$
$
December 31, 2021:
Financial Assets:
Cash and due from banks
$
$
$
-
$
-
$
Interest-bearing deposits in banks
$
$
$
-
$
-
$
Investment securities held to maturity
$
$
-
$
$
-
$
Loans held for investment, net
$
$
-
$
-
$
$
Accrued interest receivable
$
$
-
$
$
$
Financial Liabilities:
Demand deposits
$
$
$
-
$
-
$
Money market and savings accounts
$
$
$
-
$
-
$
Interest-bearing checking accounts
$
$
$
-
$
-
$
Time deposits
$
$
-
$
-
$
$
FHLB advances
$
$
-
$
$
-
$
Accrued interest payable
$
$
-
$
$
$
8.
STOCKHOLDERS’ EQUITY
Common Stock
The rights
of the
holders of
Class A
common stock
and Class
B common
stock are
the same,
except for
voting and
conversion rights.
Holders of
Class A
common stock
are entitled
to voting
rights, while
holders of
Class B
common stock
have no
voting rights.
Shares of
Class
B common
stock
are convertible
into shares
of Class
A common
stock
if sold
or
transferred.
In June 2021, the Bank effected a 1 for 5
reverse stock split of all the Class A common
stock $
shares of
the Bank’s Class
A common
stock was combined
into
shares
resulting from
this
reverse
stock
split were
rounded
up to
one whole
share.
The
Bank has
adjusted
the Class
A
common stock, earnings per share and stock
options for this 1 for 5 reverse stock
split for all periods in 2021. The Class
B
common stock was not adjusted but if sold or exchanged would be converted
at the 1 for 5 reverse stock split of
Class
A
common
stock
for
5
shares
of
Class
B
common
stock.
Any
dividends
declared
by
the
Board
of
Directors
(the
“Board”) to include
Class B common
stock would also
be paid as if
the Class B common
stock had converted.
The 1 for 5
reverse stock
split resulted
in adjustments
to Consolidated
Balance Sheets,
Consolidated Statements
of Operations,
and
Consolidated Statements of Changes in Stockholders’
Equity.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
26
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
In July 2021,
the Bank completed
the IPO of
its Class A
common stock, in
which it issued
and sold
of
Class
A
common
stock
at
a
price
of
$
deducting underwriting discounts and expenses.
In December 2021,
the Bank entered
into agreements with
the Class B
shareholders to exchange
all outstanding shares
of Class
B common
stock for
shares of
Class A
common stock
at a
ratio of
one share
of Class
A common
stock for
ever
five shares of
Class B common
stock. As
a result, a
total of
for
In December 2021, the
Company acquired all
the issued and outstanding
shares of the Class
A voting 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
of the outstanding
shares of
the Bank’s
Class A common stock, par value $
one 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
current
shareholders
own
the
same
percentages
of
its
common
stock
as
they
previously owned of the Bank’s common stock.
Preferred Stock
In April 2021,
the Board
authorized and
approved the
offer to
repurchase all
outstanding shares
of Class
E preferred
stock at
the liquidation
value of
$
shareholders approved the repurchase which the Bank
completed in April 2021.
The
Bank
offered
the
Class
C
and
Class
D
preferred
stockholders
the
ability
to
exchange
their
shares
for
Class
A
common stock. The offer
to exchange was voluntary
and the preferred stockholders
were given the option to
convert
%
of
their
preferred
shares
for
Class
A
common
stock
with
the
remaining
%
to
be
redeemed
in
the
form
of
cash.
The
exchange ratio for the
shares of Class A
common stock issued in
the preferred stock exchange transaction
was based upon
the IPO price for shares of Class A common stock.
During the year ended December 31, 2021,
D preferred stock converted into an aggregate of
C and Class D preferred shares had
a total liquidation value of $
C preferred stock
and Class
D preferred stock
totaling
value for $
The fair value of consideration
on the preferred stock
exchange and redemption of
the Class C and
Class D preferred
shares
exceeded
the
book
value
causing
a
one-time
reduction
in
net
income
available
to
common
stockholders
of
$
outstanding dividends to be paid.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
27
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Dividends
The following dividend amounts were paid on the preferred shares for the three
and nine months ended September 30,
2022 and 2021 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
Preferred stock - Class C: Non-voting, Non-cumulative, Perpetual:
$
dividend rate of
% of liquidation preference paid quarterly. Quarterly
dividend of $
$
-
$
$
-
$
Preferred stock - Class D: Non-voting, Non-cumulative, Perpetual:
$
dividend rate of
% of par value paid quarterly. Quarterly dividend of
$
-
-
Preferred stock - Class E: Non-voting, Partially Cumulative,
Perpetual: $
annual dividend rate of
% of liquidation preference paid quarterly.
Quarterly dividend of $
-
-
-
Total
dividends paid
$
-
$
$
-
$
Declaration of dividends by the Board is required before dividend payments are made.
the Board for
the common stock classes
for the three
months ended September 30, 2022
and 2021. Additionally, there were
The
Company
and
the
Bank
exceeded
all
regulatory
capital
requirements
and
remained
significantly
above
“well-
capitalized”
guidelines.
At
September 30,
2022,
the
total
risk-based
capital
ratios
for
the
Company
and
the
Bank
were
% and
%, respectively.
9.
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.
To
calculate
EPS
for
the
three
and
nine
months
ended
September 30,
2022,
net
income
available
to
common
stockholders was
not allocated between
Class A and
Class B common
stock since
there were
shares of Class B common stock as of September 30, 2022.
To
calculate
EPS
for
the
three
and
nine
months
ended
September 30,
2021,
net
income
available
to
common
stockholders was allocated as if all the income for
the period were distributed to common stockholders.
The allocation was
based on the
outstanding shares per
common share class to
the total
common shares outstanding during
each period giving
effect for the 1 for
5 reverse stock split.
The Company’s Articles
of Incorporation require that
the distribution of net
income
to Common B
stockholders be
adjusted to
give effect
for Class
A stock splits.
Therefore, the
income allocated
to Class
B
common shares was calculated based on their
% per share equivalent to Class A common shares.
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
28
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
The
following
table
reflects
the
calculation
of
net
income
available
to
common
stockholders
for
the
three
and
nine
months ended September 30, 2022 and 2021 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
Net Income
$
$
$
$
Less: Preferred stock dividends
-
-
Less: Exchange and redemption of preferred shares
-
-
Net income (loss) available to common stockholders
$
$
(
83,534
)
$
$
(
76,235
)
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
29
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
The following table reflects the calculation of basic and diluted earnings per common share class for the three and nine
months ended September 30, 2022 and 2021 (in thousands,
except per share amounts):
Three Months Ended September 30,
2022
2021
Class A
Class B
Class A
Class B
(1)
Basic EPS
Numerator:
Net income (loss) available to common shares before allocation
$
$
-
$
(
83,534
)
$
(
83,534
)
Multiply: % allocated on weighted avg. shares outstanding
-
Net income (loss) available to common shares after allocation
$
$
-
$
(
77,278
)
$
(
6,256
)
Denominator:
Weighted average shares outstanding
-
Earnings (loss) per share, basic
$
$
-
$
(
5.11
)
$
(
1.02
)
Diluted EPS
Numerator:
Net income (loss) available to common shares before allocation
$
$
-
$
(
83,534
)
$
(
83,534
)
Multiply: % allocated on weighted avg. shares outstanding
-
Net income (loss) available to common shares after allocation
$
$
-
$
(
77,278
)
$
(
6,256
)
Denominator:
Weighted average shares outstanding for basic EPS
-
Add: Dilutive effects of assumed exercises of stock options
-
-
-
Weighted avg. shares including dilutive potential common shares
-
Earnings (loss) per share, diluted
$
$
-
$
(
5.11
)
$
(
1.02
)
Anti-dilutive stock options excluded from diluted EPS
-
-
(1)
Net loss available to common shares between Class
A and Class B common stock was allocated based
on the weighted average number of shares
outstanding. The allocation also assumes that
Class B shares had converted to Class
A shares which is equivalent to
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements - Unaudited
30
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Nine Months Ended September 30,
2022
2021
Class A
Class B
Class A
Class B
(1)
Basic EPS
Numerator:
Net income (loss) available to common shares before allocation
$
$
-
$
(
76,235
)
$
(
76,235
)
Multiply: % allocated on weighted avg. shares outstanding
-
$
Net income (loss) available to common shares after allocation
$
$
-
$
(
65,747
)
$
(
10,488
)
Denominator:
Weighted average shares outstanding
-
Earnings (loss) per share, basic
$
$
-
$
(
8.57
)
$
(
1.71
)
Diluted EPS
Numerator:
Net income (loss) available to common shares before allocation
$
$
-
$
$
Multiply: % allocated on weighted avg. shares outstanding
-
Net income (loss) available to common shares after allocation
$
$
-
$
(
65,747
)
$
(
10,488
)
Denominator:
Weighted average shares outstanding for basic EPS
-
Add: Dilutive effects of assumed exercises of stock options
-
-
Weighted avg. shares including dilutive potential common shares
-
Earnings (loss) per share, diluted
$
$
-
$
(
8.57
)
$
(
1.71
)
Anti-dilutive stock options excluded from diluted EPS
-
-
(1)
Net loss available to common shares between Class
A and Class B common stock was allocated based
on the weighted average number of shares
outstanding. The allocation also assumes that
Class B shares had converted to Class
A shares which is equivalent to
See Note 8 “Stockholders’ Equity” for further discussion
of the reverse stock split effected in 2021.
10.
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.
31
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The
following
discussion
and
analysis
is
designed
to
provide
a
better
understanding
of
the
consolidated
financial
condition
and
results
of
operations
of the
Company
and the
Bank,
its wholly
owned subsidiary,
for
the quarter
and nine
months ended
September 30, 2022. This
discussion and analysis
is best
read in
conjunction with
the unaudited consolidated
financial
statements
and
related
footnotes
included
in
this
quarterly
report
on
Form
10-Q
and
the
audited
consolidated
financial statements
and related
footnotes
included in
the Annual
Report filed
on the
Form 10-K
(“2021 form
10-K”) filed
with the Securities and Exchange Commission (“SEC”) for
the year ended December 31, 2021.
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"
below and
in the
2021 Form
10-K filed
with the SEC which is available at the SEC’s website www.sec.gov.
Throughout
this
document,
references
to
“we,”
“us,”
“our,”
and
“the
Company”
generally
refer
to
USCB
Financial
Holdings, Inc.
Forward-Looking Statements
This Quarterly Report
on Form 10-Q
(“Form 10-Q”) contains
statements that are
not historical in
nature and 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,” “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,
but
are
not
limited
to,
statements
related
to
our
projected
growth,
anticipated
future
financial
performance,
and
management’s long-term performance
goals, as
well as
statements relating
to the
anticipated effects on
results of
operations
and
financial
condition
from
expected
developments
or
events,
or
business
and
growth
strategies,
including
anticipated
internal growth.
These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ
materially from those anticipated in such statements.
Potential risks and uncertainties include, but are not
limited to:
•
the strength of the United States economy
in general and the strength of the local
economies in which we conduct
operations;
•
the continuation
of COVID-19
pandemic and
its impact
on us,
our employees,
customers and
third-party
service
providers, and the ultimate extent of the impacts of the
pandemic and related government stimulus programs;
•
our ability to successfully
manage interest rate risk, credit risk, liquidity risk, and
other risks inherent to our industry;
•
the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss
reserve and deferred tax asset valuation allowance;
•
the efficiency and effectiveness of our
internal control environment;
•
our ability
to comply
with the
extensive laws
and regulations
to which
we are
subject, including
the laws
for each
jurisdiction where we operate;
•
legislative or regulatory
changes and changes
in accounting
principles, policies,
practices or guidelines,
including
the effects of the forthcoming implementation
of the Current Expected Credit Losses (“CECL”) standard;
•
the effects
of our
lack of
a diversified
loan portfolio
and concentration
in the
South Florida
market, including
the
risks
of geographic,
depositor,
and
industry concentrations,
including our
concentration
in
loans secured
by real
estate;
•
the concentration of ownership of our Class A common
stock;
•
fluctuations in the price of our Class A common stock;
•
our ability to fund or access the capital markets at attractive
rates and terms and manage our growth, both organic
growth as well as growth through other means, such as
future acquisitions;
•
continuing high
levels of
inflation, changes
in market
interest rates,
the unemployment
rate, as
well as
monetary
fluctuations, in particular in reaction to inflation and changes
in interest rates
•
increased competition and its effect on the pricing
of our products and services as well as our margin;
•
the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,
employee, or third-party fraud and security breaches; and
•
other risks described in this Form 10-Q, the 2021 Form
10-K and other filings we make with the SEC.
All
forward-looking
statements
are
necessarily
only
estimates
of
future
results,
and
there
can
be
no
assurance
that
actual results will
not differ
materially from expectations.
Therefore, you are
cautioned not to
place undue reliance
on any
forward-looking statements.
Further,
forward-looking statements
included in
this Form
10-Q are
made only
as of the
date
32
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
hereof, and we undertake
no obligation to update
or revise any forward-looking
statement to reflect events
or circumstances
occurring after the date
on which the statement
is made or to
reflect the occurrence of
unanticipated events, unless required
to do
so under
the federal
securities laws.
You
should also
review the
risk factors
described in
the reports
the Company
filed or
will file
with the SEC
and, for
periods prior
to the
completion of
the bank
holding company reorganization
in December
2021, U.S. Century Bank (“Bank”) filed with the Federal
Deposit Insurance Corporation (“FDIC”).
Non-GAAP Financial Measures
This Form 10-Q
includes financial information determined by
methods other than in
accordance with generally accepted
accounting principles (“GAAP”). This financial information
includes certain operating performance measures.
Management
has included these non-GAAP measures because it believes these
measures may provide useful supplemental information
for evaluating the Company’s underlying performance trends. Further, management uses these measures in
managing and
evaluating
the
Company’s
business
and
intends
to
refer
to
them
in
discussions
about
our
operations
and
performance.
Operating performance measures
should be viewed in
addition to, and not
as an alternative to
or substitute for,
measures
determined in accordance with GAAP,
and are not necessarily comparable to non-GAAP measures that may
be presented
by other companies. To the extent applicable, reconciliations of these
non-GAAP measures to the most
directly comparable
GAAP
measures
can
be
found
in
the
section
“Reconciliation
and
Management
Explanation
of
Non-GAAP
Financial
Measures” included in this Form 10-Q.
Overview
The Company,
the holding company of
the Bank, reported
net income of
$5.6 million or
$0.28 per diluted
share for Class
A common stock for the three
months ended September 30,
2022, compared with
net income of $6.6
million or $5.11 loss
and $1.02
loss per
diluted
share for
Class A and
Class B
common stock,
respectively, for
the same
period in
2021. The
losses per share for the Class
A and Class
B common stock for the quarter ended September 30, 2021 reflected the effects
of the exchange and redemption
of the Bank’s preferred
shares. In December 2021,
the Company agreed to
exchange all
the outstanding
shares
of Class
B common
stock for
Class A common
stock at
a ratio
of one
share of
Class A common
stock for
each five shares
of Class B
common stock. As
of September 30,
2022 and
December 31, 2021,
the Company’s
only class of securities issued and outstanding was Class A common stock.
During the
first quarter
of 2022,
the Board
of Directors
(the “Board”)
approved a
share repurchase
program of
up to
750,000 shares of Class A common stock.
Under the repurchase program,
the Company may
purchase shares of Class A
common stock
on a
discretionary basis
from time
to time. As
of September 30,
2022, the
Company had
not repurchased
any shares.
In
evaluating
our
financial
performance,
we
consider
the
level
of
and
trends
in
net
interest
income,
the
net
interest
margin, the cost of deposits,
levels and composition of
non-interest income and non-interest
expense, performance ratios,
asset quality ratios, regulatory capital ratios, and any significant
event or transaction.
Unless
otherwise
stated,
all
period
comparisons
in
the
bullet
points
below
are
calculated
for
the
quarter
ended
September 30, 2022 compared to the quarter ended September
30, 2021 and annualized where appropriate:
•
Net
interest
income
increased
$3.3
million
or
24.5%
to
$16.8 million
from
$13.5
million
for
the
quarter
ended
September 30, 2021.
•
Net interest margin (“NIM”) increased to 3.47% from 3.19%
for the third quarter of 2021.
•
Total assets exceeded $2.0 billion, an increase of $183
.5 million or 9.9%, compared to December 31, 2021.
•
Total loans grew to $1.4 billion, an increase of $241.4 million
or 20.3%, compared to December 31, 2021.
•
Total deposits increased $206.3 million or 13.0% to $1.8
billion from $1.6 billion at December 31, 2021.
•
Annualized return on average assets was 1.09% compared
to 1.50% at September 30, 2021.
•
Annualized return on average stockholders’ equity was 11.90% compared to
13.41% at September 30, 2021.
•
The
allowance
for
credit
losses
to
total
loans
ratio
decreased
to
1.16%
at
September 30,
2022
from
1.27%
at
September 30, 2021.
•
Non-performing loans to total loans was 0.00% at September
30, 2022 and September 30, 2021.
33
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
•
At September 30, 2022, the
total risk-based capital ratio for
the Company and the
Bank was 13.65%
and 13.58%,
respectively.
•
Tangible book
value
per common
share (a
Non-GAAP
financial measure)
was $8.87
as of
September 30,
2022,
compared
to
$10.10
at
September 30,
2021.
The
decline
was
primarily
driven
by
unrealized
security
losses
in
accumulated
other
comprehensive
income
at
September 30,
2022.
See
“Reconciliation
and
Management
Explanation for Non-GAAP Financial Measures” for a reconciliation of
this non-GAAP financial measure.
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” in the Company’s 2021 Form 10-K. To prepare
financial
statements
in
conformity
with
GAAP,
management
makes
estimates,
assumptions,
and
judgments
based
on
available information. These estimates,
assumptions, and judgments affect
the amounts reported in
the financial statements
and accompanying notes. These estimates, assumptions,
and judgments are based on information available as of the date
of the financial statements and,
as this information changes, actual results
could differ from the estimates, assumptions and
judgments reflected
in the
financial statements.
In particular,
management
has identified
accounting
policies that,
due to
the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.
Management has presented the application of these policies
to the Audit and Risk Committee of our Board.
Allowance for Credit Losses
The allowance for credit
losses (“ACL”) is
a valuation allowance that
is established through charges
to earnings in the
form of
a provision for
credit losses. The
amount of the
ACL is
affected by the
following: (i) charge-offs
of loans that
decrease
the allowance;
(ii) subsequent
recoveries on
loans previously
charged off
that increase
the allowance;
and (iii)
provisions
for credit losses charged to
income that increase the allowance.
Management considers the policies
related to the ACL as
the most critical to
the financial statement
presentation. The total
ACL includes activity
related to allowances
calculated in
accordance with Accounting Standards Codification (“ASC”) 310,
Receivables, and ASC 450, Contingencies.
Throughout the year,
management estimates the probable
incurred losses in the loan portfolio
to determine if the ACL
is adequate to absorb such losses. The ACL
consists of specific and general components.
The specific component relates
to loans that
are individually classified
as impaired. We
follow a loan
review program to
evaluate the credit
risk existing in
the loan
portfolio. Loans
that have
been identified
as impaired
are reviewed
on a
quarterly basis
to determine
whether a
specific reserve is required. The general component covers non-impaired loans
and is based on our specific historical loan
loss experience,
volume, growth and
composition of the
loan portfolio,
the evaluation
of our
loan portfolio
through our
internal
loan review
process, general
current economic
conditions both
internal and
external to
us that
may affect
the borrower’s
ability to pay, value of collateral and
other qualitative relevant risk factors. Based on a review of these estimates,
we adjust
the ACL to a level determined by management to be adequate.
Estimates of credit losses are inherently subjective as they
involve an exercise of judgment.
Income Taxes
Deferred tax
assets and
liabilities are
recognized for
the future
tax consequences
attributable to
differences
between
the financial statement carrying amounts of
existing assets and liabilities and their
respective tax bases and operating loss
and tax credit carryforwards. Deferred tax
assets and liabilities are measured
using enacted tax rates expected
to apply to
taxable income
in the
years in
which those
temporary differences
are expected
to be
recovered or
settled. The
effect
on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
Management is required to assess whether a valuation allowance should be established on the net deferred tax assets
based on the
consideration of
all available evidence
using a more
likely than not
standard. In its
evaluation, management
considers taxable loss
carry-back availability, expectation of sufficient
taxable income, trends
in earnings, the
future reversal
of temporary differences, and available tax planning
strategies.
The Company recognizes positions taken
or expected to be
taken in a tax
return in accordance with existing accounting
guidance on
income taxes
which prescribes
a recognition threshold
and measurement
process. Interest
and penalties
on
tax liabilities, if any, would
be recorded in interest expense and other operating non-interest
expense, respectively.
34
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Segment Reporting
Management monitors the revenue streams for all its various
products and services. The identifiable segments are not
material
and
operations
are
managed
and
financial
performance
is
evaluated
on
an
overall
Company-wide
basis.
Accordingly, all
the financial service
operations are
considered by management
to be
aggregated in one
reportable operating
segment.
Results of Operations
General
The following
tables present
selected balance
sheet, income
statement, and
profitability ratios
for the
dates indicated
(in thousands, except ratios):
September 30, 2022
December 31, 2021
Consolidated Balance Sheets:
Total
assets
$
2,037,453
$
1,853,939
Total
loans
(1)
$
1,431,513
$
1,190,081
Total
deposits
$
1,796,642
$
1,590,379
Total
stockholders' equity
$
177,417
$
203,897
(1)
Loan amounts include deferred fees/costs.
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Consolidated Statements of Operations:
Net interest income before provision for credit losses
$
16,774
$
13,471
$
46,795
$
38,420
Total
non-interest income
$
1,789
$
4,217
$
5,351
$
8,054
Total
non-interest expense
$
10,132
$
9,007
$
29,295
$
26,358
Net income
$
5,558
$
6,593
$
15,707
$
15,427
Net income (loss) available to common stockholders
$
5,558
$
(83,534)
$
15,707
$
(76,235)
Profitability:
Efficiency ratio
54.58%
50.92%
56.18%
56.72%
Net interest margin
3.47%
3.19%
3.36%
3.22%
The Company’s results
of operations
depend substantially on
net interest income
and non-interest income.
Other factors
contributing
to
the
results
of
operations
include
our
provision
for
credit
losses,
non-interest
expenses,
and
provision
for
income taxes.
Three months ended September 30, 2022 compared to the three months
ended September 30, 2021
Net income decreased
to $5.6 million
for the three
months ended
September 30, 2022
from $6.6
million for the
same
period
in
2021.
Net
income
available
to
common
stockholders
increased
$89.0
million
for
the
three
months
ended
September 30, 2022 compared
to the
same period
in 2021
primarily because the
2021 period
reflected the
effect of
preferred
dividends paid and the $89.6 million exchange and redemption
of the Bank’s preferred shares.
Nine months ended September 30, 2022 compared to nine months ended
September 30, 2021
period in
2021. Net income
available to
common stockholders increased
$91.9 million for
the September 30, 2022
compared
to the same
period in
2021 primarily
because of
an increase
in net interest
income in 2022
and the 2021
period reflected
the effect of preferred dividends paid and the $89.6 million
exchange and redemption of the Bank’s preferred shares.
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
35
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
incurred
from
interest
paid
on
interest-bearing
liabilities,
including
interest-bearing
deposits,
FHLB
advances
and
other
borrowings.
To evaluate net
interest income, we
measure and monitor
(i) yields on
loans and other
interest-earning assets, (ii)
the
costs of deposits
and other funding
sources, (iii) net
interest spread, and
(iv) net interest margin.
Net interest spread is
equal
to the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest
margin is
equal to
the annualized
net interest
income
divided by
average interest
-earning assets.
Because
non-interest-
bearing sources of funds, such as non-interest-bearing deposits
and stockholders’ equity, also fund
interest-earning assets,
net interest margin includes the indirect benefit of these
non-interest-bearing sources.
Changes in
the market
interest rates
and interest
rates we
earn on
interest-earning assets
or pay on
interest-bearing
liabilities, as well
as the volume
and types of
interest-earning assets and interest-bearing
and non-interest-bearing liabilities,
are usually the
largest drivers
of periodic changes
in net interest
spread, net interest
margin and net
interest income.
Our
asset liability committee
(“ALCO”) has
in place asset-liability
management techniques
to manage major
factors that
affect
net interest income and net interest margin.
36
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
The following table contains information related
to average balance sheet, average yields
on assets, and average costs
of liabilities for the periods indicated (in thousands):
Three Months Ended September 30,
2022
2021
Average
Balance
(1)
Interest
Yield/Rate
(2)
Average
Balance
Interest
Yield/Rate
(2)
Assets
Interest-earning assets:
Loans
(3)
$
1,398,761
$
15,954
4.53
%
$
1,144,275
$
12,538
4.29
%
Investment securities
(4)
450,514
2,201
1.94
%
399,745
1,858
1.86
%
Other interest earnings assets
70,540
322
1.81
%
109,639
38
0.14
%
Total
interest-earning assets
1,919,815
18,477
3.82
%
1,653,659
14,434
3.43
%
Non-interest earning assets
106,976
87,764
Total
assets
$
2,026,791
$
1,741,423
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing checking
$
66,585
19
0.11
%
$
55,621
16
0.11
%
Money market and savings accounts
823,521
1,141
0.55
%
627,654
501
0.32
%
Time deposits
217,023
363
0.66
%
229,055
306
0.53
%
Total
interest-bearing deposits
1,107,129
1,523
0.55
%
912,330
823
0.36
%
Borrowings and repurchase agreements
43,935
180
1.63
%
36,000
140
1.52
%
Total
interest-bearing liabilities
1,151,064
1,703
0.59
%
948,330
963
0.40
%
Non-interest bearing demand deposits
655,853
564,928
Other non-interest-bearing liabilities
34,586
33,156
Total
liabilities
1,841,503
1,546,414
Stockholders' equity
185,288
195,009
Total
liabilities and stockholders' equity
$
2,026,791
$
1,741,423
Net interest income
$
16,774
$
13,471
Net interest spread
(5)
3.23
%
3.03
%
Net interest margin
(6)
3.47
%
3.19
%
(1)
Average balances - Daily average balances are used
to calculate yields/rates.
(2)
Annualized.
(3)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred
loan fees, net of deferred loan costs.
(4)
At fair value except for securities held to maturity. Includes FHLB stock.
(5)
Net interest spread is the average yield on
total interest-earning assets minus the average
rate on total interest-bearing liabilities.
(6)
Net interest margin is the ratio of net interest
income to average total interest-earning assets.
37
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Nine Months Ended September 30,
2022
2021
Average
Balance
(1)
Interest
Yield/Rate
(2)
Average
Balance
(1)
Interest
Yield/Rate
(2)
Assets
Interest-earning assets:
Loans
(3)
$
1,302,909
$
42,989
4.41
%
$
1,101,782
$
35,944
4.30
%
Investment securities
(4)
484,489
7,040
1.94
%
374,318
5,670
2.02
%
Other interest-earnings assets
76,655
474
0.83
%
96,561
77
0.11
%
Total
interest-earning assets
1,864,053
50,503
3.62
%
1,572,661
41,691
3.50
%
Non-interest earning assets
105,914
86,407
Total
assets
$
1,969,967
$
1,659,068
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing checking
$
65,798
52
0.11
%
$
50,971
45
0.12
%
Money market and savings accounts
780,564
2,307
0.40
%
601,550
1,572
0.35
%
Time deposits
221,504
893
0.54
%
237,633
1,239
0.70
%
Total
interest-bearing deposits
1,067,866
3,252
0.30
%
890,154
2,856
0.43
%
Borrowings and repurchase agreements
38,788
456
1.57
%
36,000
415
1.52
%
Total
interest-bearing liabilities
1,106,654
3,708
0.45
%
926,154
3,271
0.47
%
Non-interest bearing demand deposits
642,396
528,035
Other non-interest-bearing liabilities
29,608
26,954
Total
liabilities
1,778,658
1,481,143
Stockholders' equity
191,309
177,925
Total
liabilities and stockholders' equity
$
1,969,967
$
1,659,068
Net interest income
$
46,795
$
38,420
Net interest spread
(5)
3.17
%
3.03
%
Net interest margin
(6)
3.36
%
3.22
%
(1)
Average balances - Daily average balances are used
to calculate yields/rates.
(2)
Annualized.
(3)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred loan
fees, net of deferred loan costs.
(4)
At fair value except for securities held to maturity. Includes FHLB stock.
(5)
Net interest spread is the average yield on
total interest-earning assets minus the average
rate on total interest-bearing liabilities.
(6)
Net interest margin is the ratio of net interest
income to average total interest-earning assets.
Three months ended September 30, 2022 compared to the three months
ended September 30, 2021
Net interest income before the provision
for credit losses was $16.8 million
for the three months ended
September 30,
2022, an
increase
of
$3.3 million
or
24.5%,
from
$13.5 million
for
the same
period in
2021. This
increase
was
primarily
attributable to higher income from larger loan and investment portfolios
combined with an increase in the weighted average
loan yield.
Included with loan interest income are PPP interest and loan fees totaling $145
thousand and $1.1 million for the three
months ended
September 30,
2022 and
2021, respectively
.
PPP loan
fees are
recognized upon
loan forgiveness
by the
SBA.
Net interest margin
increased to 3.47%
for the quarter
ended September 30,
2022 from 3.19%
for the same
period in
2021. This increase was primarily due to the yields
for loans and other interest-earning assets increasing.
Nine Months Ended September 30, 2022 compared to nine months ended
September 30, 2021
Net interest income before the provision for credit losses
was $46.8 million for the nine months
ended September 30, 2022,
an increase of $8.4 million
or 21.8%, from $38.4 million
for the same period in
2021. This increase was
primarily attributable
to higher income from larger loan and investment portfolio
s.
Included with loan interest income are
PPP interest and loan fees totaling $1.6
million and $3.5 million for the
nine months
ended September 30, 2022 and 2021, respectively. PPP loan fees are recognized
upon loan forgiveness by the SBA.
38
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Net interest
margin increased to
3.36% at September 30,
2022 from 3.22%
for the
same period in
2021. The
yield on interest
earnings assets increased 12 bps, with a decrease of
2 bps in interest-bearing liability rates.
Provision for Credit Losses
The ACL
represents probable incurred losses in our portfolio. We maintain an adequate ACL
that can mitigate probable
losses inherent
in the
loan portfolio.
The ACL is increased
by the
provision for
credit losses
and is
decreased by
charge-
offs,
net
of
recoveries
on
prior
loan
charge-offs.
There
are
multiple
credit
quality
metrics
that
we
use
to
base
our
determination of
the amount
of the
ACL and
corresponding
provision for
credit losses.
These credit
metrics evaluate
the
credit
quality
and
level
of
credit
risk
inherent
in
our
loan
portfolio,
assess
non-performing
loans
and
charge-offs
levels,
considers statistical and historical trends and economic conditions
and other applicable factors.
Three months ended September 30, 2022 compared to the three months
ended September 30, 2021
The
provision
for
credit
loss
was
$910
thousand
for
the
three
months
ended
September 30,
2022
compared
to
no
provision
recorded
for
the
same
period
in
2021.
The
primary
driver
of
the
provision
expense
in
the
2022
period
was
attributable to loan growth.
Nine Months Ended September 30, 2022 compared to nine months ended
September 30, 2021
of $160 thousand for the same period in 2021. The primary driver of the provision expense was attribut
able to loan growth.
The ACL as a percentage of total loans decreased
to 1.16% at September 30,
2022 compared to 1.27%
at September 30,
2021 due to the growth of the loan portfolio.
See “Allowance for Credit Losses” below for further discussion
on how the ACL is calculated.
Non-Interest Income
Our services and products generate service charges and fees, mainly from our depository
accounts. We also generate
income from gain on sale of loans though our swap and SBA
programs. In addition, we own and are beneficiaries of the life
insurance policies
on some
of our
employees and
generate income
on the
increase in
the cash
surrender value
of these
policies.
The following table presents the components of non-interest
income for the dates indicated (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Service fees
$
934
$
856
$
2,917
$
2,648
Gain (loss) on sale of securities available for sale, net
(558)
(70)
(540)
179
Gain on sale of loans held for sale, net
330
532
686
1,519
Loan settlement
-
2,500
161
2,500
Other non-interest income
1,083
399
2,127
1,208
Total
non-interest income
$
1,789
$
4,217
$
5,351
$
8,054
Three months ended September 30, 2022 compared to the three months
ended September 30, 2021
Non-interest income
for the
three months
ended September 30,
2022 decreased
$2.4 million
or 57.7%,
compared to
the same period in
2021. This decrease was
primarily driven by a
non-recurring $2.5 million
default interest recovery
from
a prior
lending customer
of the Bank.
The loan
was originated
in 2008
and subsequently
went through
many iterations
of
credit collection. This payment reflects the final payment and settlement
of lien judgements against the customer.
Nine Months Ended September 30, 2022 compared to nine months ended
September 30, 2021
Non-interest income for the nine months ended September 30, 2022 decreased $2.7 million or
33.6%, compared to the
same period
in 2021.
This decrease
was primarily
driven by
a non-recurring
$2.5 million
default interest
recovery from
a
prior lending customer of the Bank, as discussed above.
39
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Non-Interest Expense
The following table presents the components of non-interest
expense for the dates indicated (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Salaries and employee benefits
$
6,075
$
5,313
$
17,863
$
15,804
Occupancy
1,281
1,192
3,802
3,990
Regulatory assessment and fees
269
317
708
690
Consulting and legal fees
604
357
1,519
915
Network and information technology services
488
358
1,323
1,198
Other operating
1,415
1,470
4,080
3,761
Total
non-interest expense
$
10,132
$
9,007
$
29,295
$
26,358
Three months ended September 30, 2022 compared to the three months
ended September 30, 2021
Non-interest expense
for the
three months
ended September 30,
2022 increased
$1.1 million
or 12.5%,
compared to
the same period in 2021. The increase
was primarily driven by higher salaries
and employee benefits expense
due to new
hires and increased salary compensation.
Nine Months Ended September 30, 2022 compared to nine months ended
September 30, 2021
Non-interest expense for the nine months
ended September 30, 2022 increased $2.9 million or
11.1%, compared to the
same period in 2021.
The increase was primarily driven by
higher salaries and employee benefits expense
due to new hires
and increased salary compensation.
Provision for Income Tax
Fluctuations in the effective tax rate reflect the effect of the differences in the inclusion or deductibility of certain income
and expenses for
income tax purposes.
Therefore, future
decisions on the
investments we choose
will affect our
effective
tax rate.
The cash
surrender value
of bank-owned
life insurance
policies covering
key employees,
purchasing municipal
bonds, and overall levels of taxable income will be important
elements in determining our effective tax rate.
Three months ended September 30, 2022 compared to the three months
ended September 30, 2021
Income tax
expense for
the three
months ended
September 30, 2022
decreased to
$2.0 million
from $2.1 million
for
the same period
in 2021. The
effective tax
rate for the
three months
ended September 30,
2022 was
26.1% compared
to
24.1% for the same period in 2021.
Nine Months Ended September 30, 2022 compared to nine months ended
September 30, 2021
Income tax expense for the
nine months ended September 30,
2022 increased to $5.5
million from $4.8 million for
the
same period
in 2021.
The Company’s
effective tax
rate was
26.0% for
the 2022
period compared
to 23.9%
for the
same
period in 2021.
For
a
further
discussion
of
income
taxes,
see
Note
4
“Income
Taxes”
to
the
unaudited
Consolidated
Financial
Statements in this Form 10-Q.
Analysis of Financial Condition
Total
assets at September 30,
2022 were $2.0 billion,
an increase of $183.5
million, or 9.9%, over
total assets of $1.9
billion
at
December 31,
2021.
Total
loans
increased
$241.4
million,
or
20.3%,
to
$1.4
billion
at
September 30,
2022
compared
to
$1.2
billion
at
December 31,
2021.
Total
deposits
increased
by
$206.3
million,
or
13.0%,
to
$1.8
billion
at
September 30, 2022 compared to December 31, 2021.
Investment Securities
The investment portfolio
is used and
managed to provide
liquidity through cash
flows, marketability
and, if necessary,
collateral for
borrowings. The
investment portfolio
is also
used as
a tool
to manage
interest rate
risk and
the Company’s
40
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
capital
market
risk
exposure.
The
philosophy
of
the
portfolio
is
to
maximize
the
Company’s
profitability
taking
into
consideration the Company’s
risk appetite and
tolerance, manage
the 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 objective
directed
by
the
ALCO.
The
portfolio
of
investments
also
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,
U.S.
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 the ALCO
of the Company
to ensure an
appropriate risk and
return profile as
well as for
adherence to the
investment policy.
During the
quarter ended
September 30, 2022
and year
ended December 31,
2021, the
Company transferred,
at fair
value, $63.8 million and $68.7 million, respectively, of securities from available-for-sale (“AFS”) to held-to-maturity (“HTM”).
The
related
net
unrealized
losses
of
$10.6
million
and
net
unrealized
gains
of
$1.1 million,
respectively,
remained
in
accumulated
other
comprehensive
income
(“AOCI”)
and
are
being
amortized
over
the
remaining
life
of
the
transferred
securities. No gains or losses were recognized to income at
transfer date.
The book value of the AFS securities is adjusted monthly
for unrealized gain or loss as a valuation allowance,
and any
gain
or
loss
is
reported
on
an
after-tax
basis
as
a
component
of
other
comprehensive
income
in
stockholders’
equity.
Periodically,
we
may
need
to
assess
whether
there
have
been
any
events
or
unexpected
economic
circumstances
to
indicate that
a security
on which
there is
an unrealized
loss is
impaired on
an other-than-temporary
basis (“OTTI”).
If the
impairment
is
deemed
to
be
permanent,
an
analysis
is
then
made
considering
many
factors,
including
the
severity
and
duration of the impairment, the severity
of the event, our intent and
ability to hold the security for a
period of time sufficient
for a
recovery in
value, recent
events specific
to the
issuer or
industry,
any related
credit events,
and for
debt securities,
external
credit
ratings
and
recent
downgrades
related
to
deterioration
of
credit
quality.
Securities
on
which
there
is
an
unrealized loss
that is
deemed to
be OTTI
are written
down to
fair value,
with the
write-down recorded
as a
realized loss
under line item
“Gain (loss) on
sale of securities
available-for-sale,
net” of the Consolidated
Statements of Operations.
As
of September 30,
2022, there
are no
securities
which management
has classified
as OTTI.
For further
discussion
of our
analysis
on
impaired
investment
securities
for
OTTI,
see
Note 2
“Investment
Securities”
to
the
unaudited
Consolidated
Financial Statements in this Form 10-Q.
AFS and
HTM investment
securities decreased
$96.8 million or
18.5% to
$427.4 million at
September 30, 2022
from
$524.2 million
at December
31, 2021.
Investment
securities
decreased
due to
payments received
and
higher unrealized
losses.
Management
reinvested
excess
cash
balances
into
high
credit
quality
investments
to
increase
the
Company’s
profitability
and
modify
the
Company’s
balance
sheet
duration
according
to
the
ALM
policy.
As
of
September 30,
2022,
corporate
bond
securities
with
a
market
value
of
$39.1 million
were
pledged
to
secure
public
deposits.
The
investment
portfolio does not have any tax-exempt securities.
41
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
The
following
table
presents
the
amortized
cost
and
fair
value
of
investment
securities
for
the
dates
indicated
(in
thousands):
September 30, 2022
December 31, 2021
Available-for-sale:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
U.S. Government Agency
$
10,400
$
9,028
$
10,564
$
10,520
Collateralized mortgage obligations
121,760
100,048
160,506
156,829
Mortgage-backed securities - residential
92,649
76,707
120,643
118,842
Mortgage-backed securities - commercial
30,818
26,935
49,905
50,117
Municipal securities
25,104
18,629
25,164
24,276
Bank subordinated debt securities
14,503
13,562
27,003
28,408
Corporate bonds
4,039
3,662
12,068
12,550
$
299,273
$
248,571
$
405,853
$
401,542
Held-to-maturity:
U.S. Government Agency
$
45,243
$
39,439
$
34,505
$
33,904
Collateralized mortgage obligations
70,424
63,651
44,820
43,799
Mortgage-backed securities - residential
40,574
35,730
26,920
26,352
Mortgage-backed securities - commercial
11,483
10,967
3,103
3,013
Corporate bonds
11,141
9,952
13,310
13,089
$
178,865
$
159,739
$
122,658
$
120,157
The following
table shows
the weighted
average yields,
categorized by
contractual maturity,
for investment
securities
as of September 30, 2022 (in thousands,
except ratios):
Within 1 year
After 1 year through
5 years
After 5 years through
10 years
After 10 years
Total
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Available-for-sale:
U.S. Government Agency
$
-
0.00%
$
-
0.00%
$
-
0.00%
$
10,400
2.03%
$
10,400
2.03%
U.S. Treasury
-
0.00%
-
0.00%
-
0.00%
-
0.00%
-
0.00%
Collateralized mortgage obligations
-
0.00%
-
0.00%
-
0.00%
121,760
1.50%
121,760
1.50%
MBS - residential
-
0.00%
-
0.00%
-
0.00%
92,649
1.62%
92,649
1.62%
MBS - commercial
-
0.00%
-
0.00%
-
0.00%
30,818
1.90%
30,818
1.90%
Municipal securities
-
0.00%
-
0.00%
1,000
2.05%
24,104
1.72%
25,104
1.73%
Bank subordinated debt securities
-
0.00%
-
0.00%
14,503
4.57%
-
0.00%
14,503
4.57%
Corporate bonds
-
0.00%
4,039
2.50%
-
0.00%
-
0.00%
4,039
2.50%
$
-
$
4,039
$
15,503
$
279,731
$
299,273
1.78%
Held-to-maturity:
U.S. Government Agency
$
-
0.00%
$
7,896
1.03%
$
20,342
1.45%
$
17,005
2.03%
$
45,243
1.59%
Collateralized mortgage obligations
-
0.00%
-
0.00%
-
0.00%
70,424
1.66%
70,424
1.66%
MBS - residential
-
0.00%
1,337
2.98%
9,204
1.61%
30,033
1.72%
40,574
1.74%
MBS - commercial
-
0.00%
-
0.00%
3,092
1.62%
8,391
1.69%
11,483
1.67%
Corporate bonds
1,522
2.25%
9,619
2.79%
-
0.00%
-
0.00%
11,141
2.71%
$
1,522
$
18,852
$
32,638
$
125,853
$
178,865
1.73%
Loans
Loans are the
largest category of
interest-earning assets
on the unaudited
Consolidated Balance
Sheets, and usually
provide
higher
yields
than
the
remainder
of
the
interest-earning
assets.
Higher
yields
typically
carry
inherent
credit
and
liquidity risks in comparison to lower
yield assets. The Company manages
and mitigates such risks in accordance
with the
credit and ALM policies, risk tolerance and balance sheet composition.
42
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
The following table shows the loan portfolio composition
as of the dates indicated (in thousands):
September 30, 2022
December 31, 2021
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
186,551
13.0
%
$
201,359
16.9
%
Commercial Real Estate
928,531
64.9
%
704,988
59.2
%
Commercial and Industrial
121,145
8.5
%
146,592
12.3
%
Foreign Banks
94,450
6.6
%
59,491
5.0
%
Consumer and Other
100,845
7.0
%
79,229
6.6
%
Total
gross loans
1,431,522
100.0
%
1,191,659
100.0
%
Less: Deferred fees (cost)
9
1,578
Total
loans net of deferred fees (cost)
1,431,513
1,190,081
Less: Allowance for credit losses
16,604
15,057
Total
net loans
$
1,414,909
$
1,175,024
Total
loans
increased
by
$241.4 million
or
20.3%
at
September 30,
2022
compared
to
December 31,
2021.
The
commercial real estate
and to
a lesser
extent, foreign banks
and consumer and
other loan
segments had the
most significant
growth partially offset
by declines in
the commercial and
industrial and residential
real estate loan
segments. Commercial
and industrial loans declined primarily because of continuing
PPP loan forgiveness.
Our
loan
portfolio
continues
to
grow,
with
commercial
real
estate
lending
as
the
primary
focus
which
represented
approximately 64.9% of the total
gross loan portfolio as of
September 30, 2022. We do
not expect any significant changes
over the foreseeable
future in
the composition
of our
loan portfolio
or in
our emphasis
on commercial
real estate
lending.
Our loan growth strategy since inception has been reflective of the market
in which we operate and of our strategic plan as
approved by the Board.
Most of the
commercial real estate
exposure represents
loans to commercial
businesses secured
by owner-occupied
real estate.
The growth
experienced in
recent years
is primarily
due to
implementation of
our relationship-based
banking
model and
the success
of our
relationship managers
in competing
for new
business
in a
highly competitive
metropolitan
area. Many
of our
larger loan
clients have
long-term 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
September 30, 2022 (in thousands):
Due in 1 year or
less
Due in 1 to 5
years
Due after 5 to 15
years
Due after 15
years
Total
Residential Real Estate
$
10,603
$
12,527
$
82,484
$
80,937
$
186,551
Commercial Real Estate
39,073
204,811
672,940
11,707
928,531
Commercial and Industrial
12,219
26,366
41,570
40,990
121,145
Foreign Banks
94,450
-
-
-
94,450
Consumer and Other
2,522
2,552
6,480
89,291
100,845
Total
gross loans
$
158,867
$
246,256
$
803,474
$
222,925
$
1,431,522
Interest rate sensitivity:
Fixed interest rates
$
130,707
$
162,789
$
151,089
$
115,904
$
560,489
Floating or adjustable rates
28,160
83,467
652,385
107,021
871,033
Total
gross loans
$
158,867
$
246,256
$
803,474
$
222,925
$
1,431,522
The information
presented
in the
table above
is based
upon the
contractual
maturities of
the individual
loans, which
may be
subject to
renewal at
their contractual
maturity.
Renewals will
depend on
approval by
our credit
department and
balance sheet
composition at the
time of
the analysis,
as well
as any
modification of terms
at the
loan’s maturity. Additionally,
maturity
concentrations,
loan
duration,
prepayment
speeds
and
other
interest
rate
sensitivity
measures
are
discussed,
reviewed, and analyzed by the ALCO. Decisions on term
rate modifications are discussed as well.
As of
September 30, 2022,
approximately 60.8%
of the
loans have
adjustable/variable
rates and
39.2% of
the loans
have fixed rates. The adjustable/variable rate loans re-price to different benchmarks
and tenors in different periods of time.
43
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
By contractual characteristics,
there are no material concentrations
on anniversary repricing. Additionally,
it is important to
note that
most of
our loans have
interest rate floors.
This embedded option
protects the Company
from a decrease
in interest
rates and positions us to gain in the scenario of higher interest
rates.
Asset Quality
Our asset quality grading
analysis estimates the capability of
the borrower to repay
the contractual obligation of
the loan
agreement as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly
graded loans. Internal credit
risk grades are reviewed
at least once a
year, and
more frequently as
needed. Internal credit
risk ratings
may change
based on
management’s
assessment of
the results
from the
annual review,
portfolio monitoring,
and other developments observed with borrowers.
The internal credit risk grades used by the Company to
assess the credit worthiness of a loan are shown below:
Pass
– Loans indicate different levels of satisfactory
financial condition and performance.
Special Mention
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment
prospects for the loan or of the institution’s
credit position at some future date.
Substandard
– Loans classified as substandard are inadequately protected
by the current net worth and paying
capacity of the obligator or of the collateral pledged, if
any. Loans so classified
have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are
not corrected.
Doubtful
the added characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Loss
– Loans classified as loss are considered uncollectible.
Loan credit exposures by internally assigned grades are
as follows for the dates indicated (in thousands):
September 30, 2022
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
186,551
$
-
$
-
$
-
$
186,551
Commercial Real Estate
928,131
-
400
-
928,531
Commercial and Industrial
120,806
-
339
-
121,145
Foreign Banks
94,450
-
-
-
94,450
Consumer and Other
100,642
-
203
-
100,845
$
1,430,580
$
-
$
942
$
-
$
1,431,522
December 31, 2021
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
196,778
$
-
$
4,581
$
-
$
201,359
Commercial Real Estate
703,349
1,222
417
-
704,988
Commercial and Industrial
146,039
-
553
-
146,592
Foreign Banks
59,491
-
-
-
59,491
Consumer and Other
79,005
-
224
-
79,229
$
1,184,662
$
1,222
$
5,775
$
-
$
1,191,659
44
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Non-Performing Assets
The following table presents non-performing assets as
of the dates shown (in thousands,
except ratios):
September 30, 2022
December 31, 2021
Non-accrual loans, less non-accrual TDR loans
$
-
$
1,190
Non-accrual TDRs
-
-
Loans past due over 90 days and still accruing
-
-
Total
non-performing loans
-
1,190
Other real estate owned
-
-
Total
non-performing assets
$
-
$
1,190
Asset quality ratios:
Allowance for credit losses to total loans
1.16%
1.27%
Allowance for credit losses to non-performing loans
0%
1,265%
Non-performing loans to total loans
0%
0.10%
Non-performing
assets include
all loans
categorized as
non-accrual or
restructured,
impaired securities,
non-accrual
troubled debt restructuring
(“TDRs”), other real
estate owned (“OREO”)
and other repossessed
assets. Problem
loans for
which the collection
or liquidation
in full
is reasonably
uncertain are
placed on
a non-accrual
status. This
determination is
based on current existing facts concerning collateral values and the paying capacity of
the borrower. When the collection of
the full contractual
balance is unlikely,
the loan is
placed on non-accrual
to avoid overstating
the Company’s
income for a
loan with increased credit risk.
If the
principal or
interest on
a commercial
loan becomes
due and
unpaid for
90 days
or more,
the loan
is placed
on
non-accrual status as of
the date it becomes
90 days past due
and remains in non-accrual
status until it meets
the criteria
for restoration to accrual status.
Residential loans, on
the other hand, are placed
on non-accrual status when
the principal
or interest
becomes due
and unpaid
for 120
days or
more and
remains in
non-accrual status
until it
meets the
criteria for
restoration
to
accrual
status.
Restoring
a
loan
to
accrual
status
is
possible
when
the
borrower
resumes
payment
of
all
principal and interest
payments for a period
of six months
and the Company
has a documented
expectation of repayment
of the remaining contractual principal and interest or the
loan becomes secured and in the process of collection.
A TDR is
a debtor
that is experiencing
financial difficulties
and to whom
the Company grants
a loan concession.
This
determination is performed during the annual review process
or whenever problems surface regarding the client’s ability
to
repay in
accordance with
the original
terms of
the loan
or line
of credit.
In general,
a borrower
that can
obtain funds
from
sources other than the Company at market interest rates at or near those for non-troubled debt is not involved in a troubled
debt restructuring.
The concessions
are given
to the
debtor in
various
forms,
including interest
rate reductions,
principal
forgiveness,
extension
of
maturity
date,
waiver,
or
deferral
of
payments
and
other
concessions
intended
to
minimize
potential losses.
The following tables present performing and non-performing
TDRs at the dates indicated (in thousands):
September 30, 2022
December 31, 2021
Accrual Status
Non-Accrual
Status
Total TDRs
Accrual Status
Non-Accrual
Status
Total TDRs
Residential real estate
$
7,257
$
-
$
7,257
$
7,815
$
-
$
7,815
Commercial real estate
586
-
586
696
-
696
Commercial and industrial
92
-
92
141
-
141
Consumer and other
203
-
203
224
-
224
Total
$
8,138
$
-
$
8,138
$
8,876
$
-
$
8,876
The Company allocated $309 thousand and $360
thousand of specific allowance for TDR loans
at September 30, 2022
and December 31, 2021, respectively. There was no commitment to lend additional funds to these TDR
customers at either
date.
During
the
quarter
ended
September 30,
2022
and
2021,
there
were
no
defaults
on
TDR
loans
within
the
prior
12
months. Additionally,
the Company did
not have any
new TDR loans
during the three
months ended September
30, 2022
and 2021.
For further discussion
on non-performing loans,
see Note 3
“Loans” to the
unaudited Consolidated Financial Statements
on this Form 10-Q.
45
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Allowance for Credit Losses
In
determining
the
balance
of
the
allowance
account,
loans
are
pooled
by
product
segments
with
similar
risk
characteristics and management
evaluates the ACL on
each segment and on
a regular basis to maintain
the allowance at
an
adequate
level
based
on
factors
which,
in
management’s
judgment,
deserve
current
recognition
in
estimating
credit
losses.
Such
factors
include
changes
in
prevailing
economic
conditions,
historical
loss
experience,
delinquency
trends,
changes in the composition and size of the loan portfolio
and the overall credit worthiness of the borrowers.
Additionally,
qualitative adjustments
are made to
the ACL when,
based on management’s
judgment, there are
factors
impacting the allowance estimate not considered by the
quantitative calculations.
The following table presents ACL and net charge-offs to average loans by
type for the periods indicated (in thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
Three Months Ended September 30, 2022
Beginning balance
$
2,366
$
9,290
$
2,671
$
651
$
808
$
15,786
Provision for credit losses
(1,009)
695
1,126
74
24
910
Recoveries
1
-
-
-
-
1
Charge-offs
-
-
(88)
-
(5)
(93)
Ending Balance
$
1,358
$
9,985
$
3,709
$
725
$
827
$
16,604
Average loans
$
190,757
887,000
119,993
94,628
106,382
1,398,761
Net charge-offs to average loans
0.00%
0.00%
0.29%
0.00%
0.02%
0.03%
Nine Months Ended September 30, 2022
Beginning balance
$
2,498
$
8,758
$
2,775
$
457
$
569
$
15,057
Provision for credit losses
(1,157)
1,227
1,011
268
266
1,615
Recoveries
33
-
11
-
3
47
Charge-offs
(16)
-
(88)
-
(11)
(115)
Ending Balance
$
1,358
$
9,985
$
3,709
$
725
$
827
$
16,604
Average loans
$
195,863
809,411
128,625
77,237
91,773
1,302,909
Charge-offs
-0.02%
0.00%
0.12%
0.00%
0.02%
0.01%
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
Three Months Ended September 30, 2021
Beginning balance
$
2,540
$
8,752
$
2,467
$
554
$
535
$
14,848
Provision for credit losses
(787)
719
277
(29)
(180)
-
Recoveries
48
-
3.00
-
3
54
Charge-offs
-
-
-
-
(2)
(2)
Ending Balance
$
1,801
$
9,471
$
2,747
$
525
$
356
$
14,900
Average loans
$
218,295
$
690,923
$
170,874
$
51,538
$
12,645
$
1,144,275
Net charge-offs to average loans
-0.09%
0.00%
-0.01%
0.00%
-0.03%
-0.02%
Nine Months Ended September 30, 2021
Beginning balance
$
3,408
$
9,453
$
1,689
$
348
$
188
$
15,086
Provision for credit losses
(1,434)
18
904
177
175
(160)
Recoveries
56
-
154
-
5
215
Charge-offs
(229)
-
-
-
(12)
(241)
Ending Balance
$
1,801
$
9,471
$
2,747
$
525
$
356
$
14,900
Average loans
$
217,511
$
648,692
$
156,985
$
49,974
$
28,620
$
1,101,782
Net charge-offs to average loans
0.16%
0.00%
-0.20%
0.00%
0.05%
0.00%
46
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Bank-Owned Life Insurance
As of September 30,
2022, the combined
cash surrender
value of all
bank-owned life
insurance (“BOLI”)
policies was
$42.5
million.
Changes
in
cash
surrender
value
are
recorded
to
non-interest
income
in
the
unaudited
Consolidated
Statements of Operations. The Company had 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
small-to-medium
sized
businesses
(“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.
The following table
presents the daily
average balance and
average rate paid
on deposits by
category for
the periods
presented (in thousands, except ratios):
Three Months Ended September 30,
2022
2021
Average Balance
Average Rate
Paid
Average Balance
Average Rate
Paid
Non-interest-bearing checking
$
655,853
0.00%
$
564,928
0.00%
Interest-bearing checking
66,585
0.11%
55,621
0.11%
Money market and savings deposits
823,521
0.55%
627,654
0.32%
Time deposits
217,023
0.66%
229,055
0.53%
Total
$
1,762,982
0.34%
$
1,477,258
0.22%
The
uninsured
deposits
are
estimated
based
on
the
FDIC
deposit
insurance
limit
of
$250 thousand
for
all
deposit
accounts
at
the
Bank
per
account
holder.
Total
estimated
uninsured
deposits
were
$1.1 billion
and
$897.8 million
at
September 30, 2022 and December 31, 2021, respectively.
The following table shows
scheduled maturities of uninsured time deposits as of September
30, 2022 (in thousands):
September 30, 2022
Three months or less
$
23,451
Over three through six months
27,044
Over six though twelve months
27,134
Over twelve months
24,555
$
102,184
Other Liabilities
The Company collects from commercial loan customers
funds which are held in escrow for future payment of
real
estate taxes and insurance. These escrow funds are disbursed
by the Company directly to the insurance companies
and
taxing authority of the borrower.
Escrow funds are recorded as other liabilities.
As of September 30, 2022 escrow balances totaled $15.3 million
compared to $4.0 million at December 31, 2021.
Borrowings
As a member
of the FHLB,
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.
As of
September 30,
2022, we
had $26.0
million
of fixed-rate
advances
outstanding
from the
FHLB with
a weighted
average rate of 1.39%.
Maturity dates for the
advances are between
third quarter 2023
and third quarter
2025 as detailed
in the table below.
47
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
The following table presents the FHLB fixed rate advances
as of September 30, 2022 (in thousands):
Interest Rate
Type of Rate
Maturity Date
Amount
2.05%
Fixed
March 27, 2025
$
10,000
1.07%
Fixed
July 18, 2025
6,000
1.04%
Fixed
July 30, 2024
5,000
0.81%
Fixed
August 17, 2023
5,000
$
26,000
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 September 30, 2022, there were no outstanding balances with the Fed Funds
lines of credit.
Off-Balance Sheet Arrangements
We engage
in various financial
transactions in
our operations
that, under GAAP,
may not be
included on
the balance
sheet. To
meet the financing needs
of our customers we may
include commitments to extend
credit and standby
letters of
credit. To
a varying
degree, such
commitments involve
elements of
credit, market,
and interest
rate risk
in excess
of the
amount recognized
in the
balance sheet.
We use
more conservative
credit and
collateral policies
in making
these credit
commitments than
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 unaudited 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
actual
future
cash
funding
requirements.
The
following
table
presents
lending
related
commitments outstanding as of the dates indicated (in thousands
):
September 30, 2022
December 31, 2021
Commitments to grant loans and unfunded lines of credit
$
119,830
$
134,877
Standby and commercial letters of credit
5,413
6,420
Total
$
125,243
$
141,297
Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition
established
in
the
contract,
for
a
specific
purpose.
Commitments
generally
have
variable
interest
rates,
fixed
expiration
dates or
other
termination
clauses
and
may require
payment
of
a fee.
Since many
of the
commitments
are
expected to
expire without being
fully drawn, the
total commitment
amounts disclosed
above do not
necessarily represent
future cash
requirements.
Unfunded lines of credit represent unused portions of credit facilities to our current borrowers that represent no change
in credit risk in our portfolio. Lines
of credit generally have variable interest
rates. The maximum potential amount
of future
payments we could
be required to
make is represented
by the contractual
amount of the
commitment, less
the amount of
any advances made.
Letters of credit are
conditional commitments issued
by us to guarantee
the performance of a
client to a third
party.
In
the event of nonperformance by
the client in accordance with the
terms of the agreement with the
third party,
we would be
required to fund
the commitment.
If the commitment
is funded, we
would be entitled
to seek recovery
from the client
from
the underlying collateral,
which can include
commercial real estate,
physical plant and
property, inventory, receivables, cash
or marketable securities.
Asset and Liability Management Committee
Members
of
senior
management
and
our
Board
make
up
the
asset
and
liability
management
committee,
or
ALCO.
Senior management is responsible for ensuring that Board
approved strategies, policies, and procedures for managing and
mitigating risks are appropriately executed within the designated
lines of authority and responsibility in a timely
manner.
ALCO
oversees
the
establishment,
approval,
implementation,
and
review
of
interest
rate
risk,
management,
and
mitigation strategies, ALM related policies, ALCO procedures
and risk tolerances and appetite.
While some degree
of IRR (“Interest
Rate Risk”) is
inherent to the banking
business, we
believe our ALCO
has put in
place sound risk management practices to identify,
quantify, monitor,
and limit IRR exposures.
48
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
When assessing
the scope
of IRR
exposure
and
impact on
the consolidated
balance
sheet, cash
flows and
income
statement,
management
considers
both
earnings
and
economic
impacts.
Asset
price
variations,
deposit
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
(“EVE”).
This
assessment
allows
us
to
measure
the
degree
to
which
the
economic
values
will
change
under
different
interest
rate
scenarios (parallel and non-parallel). The economic value approach focuses on a longer-term time horizon and captures all
future cash flows expected
from existing assets and
liabilities. The economic value
model utilizes a static
approach in that
the analysis
does not
incorporate new
business; rather,
the analysis
shows a
snapshot in
time of
the risk
inherent in
the
balance sheet.
Market and Interest Rate Risk Management
According to our last
ALCO model run as
of September 30, 2022,
we are net interest
income neutral for year
one and
asset-sensitive
for
year
two. This
indicates
that for
year
one,
our net
interest
income
fluctuations
will be
minimal due
to
changes
in interest
rates
and
for year
two,
that
our assets
generally reprice
faster
than our
liabilities,
which
results
in
a
favorable impact to
net interest income
when market
interest rates increase.
Many assumptions are
used to
calculate the
impact of interest rate variations
on our net interest income, such
as asset prepayment speeds,
non-maturity deposit price
sensitivity, pricing correlations,
deposit truncations and decay rates, and key rate drivers.
Because of the inherent use
of these estimates and
assumptions in the model,
our actual results may,
and most likely
will, differ from static measures results.
In addition, static measures like EVE
do not include actions that management
may
undertake to manage the risks in response to anticipated changes in interest rates or client deposit behavior. As part of our
ALM strategy
and
policy,
management
has the
ability
to modify
the
balance sheet
to
either increase
asset
duration
and
decrease liability
duration to reduce
asset sensitivity,
or to decrease
asset duration and
increase liability duration
in order
to increase asset sensitivity.
According to
our model,
as of
September 30, 2022,
NIM will
remain mostly
flat for
year one
and should
increase for
year
two
under
static
rate
scenarios
(-400
basis
points
or
+400
basis
points).
For
the
static
forecast
in
year
one,
the
estimated NIM
will remain
stable from
the base
case scenario
to
a +400
basis points
scenario. Additionally,
utilizing an
EVE
approach,
we
analyze
the
risk
to
capital
from
the
effects
of
various
interest
rate
scenarios
through
a
long-term
discounted cash
flow model.
This measures
the difference
between the
economic
value of
our assets
and the
economic
value
of
our
liabilities,
which
is
a
proxy
for
our
liquidation
value.
According
to
our
balance
sheet
composition,
and
as
expected, our model stipulates
that an increase of
rates will have a
negative impact on
the EVE. Results and
analysis are
presented quarterly to the Board, and strategies are defined.
Liquidity
Liquidity is defined
as a Company’s
capacity to meet
its cash and
collateral obligations at
a reasonable cost.
Maintaining
an adequate level of liquidity depends on the Company’s ability to
efficiently meet both expected and unexpected cash flow
and collateral needs without adversely affecting
either daily operations or the financial condition of the
Company.
Liquidity risk
is the
risk that
we will
be unable
to meet
our short-term
and long-term
obligations as
they become
due
because of an inability
to liquidate assets or
obtain relatively adequate funding. The
Company’s obligations, and the funding
sources
used
to
meet
them,
depend
significantly
on
our
business
mix,
balance
sheet
structure
and
composition,
credit
quality of our assets and the cash flow profiles of our on-
and off-balance sheet obligations.
In managing
inflows and
outflows,
management
regularly
monitors situations
that can
give rise
to increased
liquidity
risk. These
include funding
mismatches, market
constraints on
the ability
to convert
assets (particularly
investments) into
cash or in accessing sources of funds (i.e., market liquidity),
and contingent liquidity events.
49
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Changes in macroeconomic conditions, as well as exposure
to credit, market, operational, legal and reputational
risks,
such as
cybersecurity risk,
could have
an unexpected
impact on
the Company’s
liquidity risk
profile and
are factored
into
the assessment of liquidity and the 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 active
involvement of senior
management; appropriate strategies, policies,
procedures, and limits
used to identify
and mitigate liquidity risk; comprehensive liquidity risk measurement and
monitoring systems (including assessments of the
current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and
business
activities of
the Company;
active management
of intraday
liquidity and
collateral; an
appropriately diverse
mix of
existing
and
potential
future
funding
sources;
adequate
levels
of
highly
liquid
marketable
securities
free
of
legal,
regulatory,
or
operational
impediments,
that
can
be
used
to
meet
liquidity
needs
in
stressful
situations;
comprehensive
contingency
funding plans
that sufficiently address
potential adverse liquidity
events and emergency
cash flow
requirements; and internal
controls
and
internal
audit
processes
sufficient
to
determine
the
adequacy
of
the
institution’s
liquidity
risk
management
process.
We
expect
funds
to
be
available
from
several
basic
banking
activity
sources,
including
the
core
deposit
base,
the
repayment and maturity of loans and investment security
cash flows. Other potential funding sources include
federal funds
purchased, brokered certificates
of deposit, listing
certificates of deposit,
and borrowings
from the FHLB.
Accordingly,
our
liquidity
resources
were
adequate
to
fund
loans
and
meet
other
cash
needs
as
necessary.
We
do
not
expect
liquidity
resources to be compromised at this time.
Capital Adequacy
As of
September 30,
2022, the
Bank was
well capitalized
under the
FDIC’s
prompt corrective
action framework.
We
also follow the capital conservation buffer framework, and
as of September 30, 2022, we exceeded the
capital conversation
buffer in all capital ratios,
according to our actual ratios. The
following table presents the capital ratios
for both the Company
and the Bank at the dates indicated (in thousands,
except ratios):
Actual
Minimum Capital
Requirements
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
September 30, 2022:
(1)
Total
risk-based capital:
USCB Financial Holdings, Inc.
$
210,887
13.65
%
$
123,613
8.00
%
$
154,517
10.00
%
U.S. Century Bank
$
209,784
13.58
%
$
123,613
8.00
%
$
154,517
10.00
%
Tier 1 risk-based capital:
USCB Financial Holdings, Inc.
$
194,036
12.56
%
$
92,710
6.00
%
$
123,613
8.00
%
U.S. Century Bank
$
192,933
12.49
%
$
92,710
6.00
%
$
123,613
8.00
%
Common equity tier 1 capital:
USCB Financial Holdings, Inc.
$
194,036
12.56
%
$
69,532
4.50
%
$
100,436
6.50
%
U.S. Century Bank
$
192,933
12.49
%
$
69,532
4.50
%
$
100,436
6.50
%
Leverage ratio:
USCB Financial Holdings, Inc.
$
194,036
9.48
%
$
81,829
4.00
%
$
102,286
5.00
%
U.S. Century Bank
$
192,933
9.43
%
$
81,829
4.00
%
$
102,286
5.00
%
December 31, 2021:
(1)
Total
risk-based capital
$
186,735
14.92
%
$
100,125
8.00
%
$
125,157
10.00
%
Tier 1 risk-based capital
$
171,484
13.70
%
$
75,094
6.00
%
$
100,125
8.00
%
Common equity tier 1 capital
$
171,484
13.70
%
$
56,321
4.50
%
$
81,352
6.50
%
Leverage ratio
$
171,484
9.55
%
$
71,825
4.00
%
$
89,781
5.00
%
(1)
As of December 31, 2021, the regulatory capital
ratios for both USCB Financial Holdings, Inc. and
U.S. Century Bank were the same since there
was no activity between both of these entities.
The Company is not subject to regulatory capital
requirements as a small bank holding
company.
Accordingly, the Company's capital ratios are provided for informational purposes
only.
50
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Impact of Inflation
Our
Consolidated
Financial
Statements
and
related
notes
have
been
prepared
in
accordance
with
U.S.
GAAP,
which require the measurement of financial
position and operating results in terms
of historical dollars, without considering
the changes in the
relative purchasing power
of money over time
due to inflation. The
impact of inflation is
reflected in the
increased cost of operations.
Unlike most industrial companies,
nearly all our assets and
liabilities are monetary in
nature.
As a result,
interest rates have a
greater impact on our
performance than do the
effects of general levels
of inflation. Periods
of high inflation
are often accompanied
by relatively higher
interest rates, and
periods of low
inflation are accompanied
by
relatively lower interest rates.
As market interest rates
rise or fall in relation
to the rates earned
on loans and investments,
the
value
of
these
assets
decreases
or
increases
respectively.
Inflation
can
also
impact
core
non-interest
expenses
associated with delivering the Company’s services.
Recently Issued Accounting Pronouncements
Recently issued accounting
pronouncements are discussed
in Note 1 “Summary
of Significant Accounting Policies”
to
the unaudited Consolidated Financial Statements in this
Form 10-Q.
51
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Reconciliation and Management Explanation of Non
-GAAP Financial Measures
Management
has
included
these
non-GAAP
measures
because
it
believes
these
measures
may
provide
useful
supplemental information
for evaluating
the Company’s
underlying performance
trends. Further,
management uses
these
measures
in
managing
and
evaluating
the
Company’s
business
and
intends
to
refer
to
them
in
discussions
about
our
operations and performance.
Operating performance
measures should be
viewed in addition
to, and not
as an alternative
to or
substitute
for,
measures
determined
in
accordance
with
GAAP,
and
are
not
necessarily
comparable
to non-GAAP
measures that may be presented by other
companies. The following table reconciles the non-GAAP financial measurement
of operating net income available
to common stockholders for the periods presented (in thousands,
except per share data):
As of or For the Three Months Ended
9/30/2022
6/30/2022
3/31/2022
12/31/2021
9/30/2021
Pre-Tax Pre-Provision ("PTPP") Income:
$
5,558
$
5,295
$
4,854
$
5,650
$
6,593
1,963
1,708
$
1,858
$
1,751
$
2,088
910
705
$
-
$
-
$
-
$
8,431
$
7,708
$
6,712
$
7,401
$
8,681
PTPP Return on Average Assets:
$
8,431
$
7,708
$
6,712
$
7,401
$
8,681
$
2,026,791
$
1,968,381
$
1,913,484
$
1,828,037
$
1,741,423
(1)
1.65%
$
1.57%
$
1.42%
$
1.61%
$
1.98%
Operating Net Income:
$
5,558
$
5,295
$
4,854
$
5,650
$
6,593
(558)
$
(3)
$
21
$
35
$
(70)
141
$
1
$
(5)
$
(9)
$
17
$
5,975
$
5,297
$
4,838
$
5,624
$
6,646
Operating PTPP Income:
$
8,431
$
7,708
$
6,712
$
7,401
$
8,681
(558)
$
(3)
$
21
$
35
$
(70)
$
8,989
$
7,711
$
6,691
$
7,366
$
8,751
Operating PTPP Return on Average Assets:
$
8,989
$
7,711
$
6,691
$
7,366
$
8,751
$
2,026,791
$
1,968,381
$
1,913,484
$
1,828,037
$
1,741,423
(1)
1.76%
$
1.57%
$
1.42%
$
1.60%
$
1.99%
Operating Return on Average Assets:
$
5,975
$
5,297
$
4,838
$
5,624
$
6,646
$
2,026,791
$
1,968,381
$
1,913,484
$
1,828,037
$
1,741,423
(1)
1.17%
$
1.08%
$
1.03%
$
1.22%
$
1.51%
(1)
Annualized.
52
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
As of or For the Three Months Ended
9/30/2022
6/30/2022
3/31/2022
12/31/2021
9/30/2021
Tangible book value per common share (at period-end):
(1)
Total stockholders' equity
$
177,417
$
180,068
$
192,039
$
203,897
$
201,918
Less: Intangible assets
-
-
-
-
-
Less: Preferred stock
-
-
-
-
-
Tangible stockholders' equity
$
177,417
$
180,068
$
192,039
$
203,897
$
201,918
Total shares issued and outstanding (at period-end):
(2)
Class A common shares
20,000,753
20,000,753
20,000,753
19,991,753
18,767,541
Class B common shares
-
-
-
-
1,224,212
Total common shares issued and outstanding
20,000,753
20,000,753
20,000,753
19,991,753
19,991,753
Tangible book value per common share
(3)
$
8.87
$
9.00
$
9.60
$
10.20
$
10.10
Operating net income available to common stockholders:
(1)
Net income
$
5,558
$
5,295
$
4,854
$
5,650
$
6,593
Less: Preferred dividends
-
-
-
-
542
Less: Exchange and redemption of preferred shares
(2)
-
-
-
-
89,585
Net income (loss) available to common stockholders
5,558
5,295
4,854
5,650
(83,534)
Add back: Exchange and redemption of preferred
shares
-
-
-
-
89,585
Operating net income avail. to common stock
$
5,558
$
5,295
$
4,854
$
5,650
$
6,051
Allocation of operating net income per common
stock class:
Class A common stock
$
5,558
$
5,295
$
4,854
$
5,650
$
5,598
Class B common stock
$
-
$
-
$
-
$
-
$
453
Weighted average shares outstanding:
Class A common stock
Basic
20,000,753
20,000,753
19,994,953
18,913,914
15,121,460
Diluted
20,148,208
20,171,261
20,109,783
19,023,686
15,121,460
Class B common stock
Basic
-
-
-
-
6,121,052
Diluted
-
-
-
-
6,121,052
Diluted EPS:
(4) (5)
Class A common stock
Net income (loss) per diluted share
$
0.28
$
0.26
$
0.24
$
0.30
$
(5.11)
Add back: Exchange and redemption of preferred
shares
-
-
-
-
5.48
Operating net income per diluted share
$
0.28
$
0.26
$
0.24
$
0.30
$
0.37
Class B common stock
Net loss per diluted share
$
-
$
-
$
-
$
-
$
(1.02)
Add back: Exchange and redemption of preferred
shares
-
-
-
-
1.09
Operating net income per diluted share
$
-
$
-
$
-
$
-
$
0.07
(1)
The Company believes these non-GAAP measurements are
a key indicator of the ongoing earnings power
of the Company.
(2)
During the quarter ended September 30, 2021,
47,473 shares of Class C preferred stock and
11,061,552 shares of Class D preferred stock were
converted into 10,278,072 shares of Class A common
stock. Additionally, the Bank completed its initial public offering of its Class
A common stock on
July 27, 2021, in which it issued 4,600,000 shares
of Class A common stock. As such, the total
shares issued and outstanding of Class A common stock
was 18,767,541 shares at September 30, 2021.
(3) Excludes the dilutive effect, if any, of shares of common stock issuable
upon exercise of outstanding stock options.
(4)
During the quarter ended September 30, 2021,
basic net loss per share is the same as
diluted net loss per share as the inclusion of all
potential
common shares outstanding would have been antidilutive.
(5)
During the quarter ended December 31, 2021,
the Company entered into agreements with
the Class B shareholders to exchange all
outstanding
Class B non-voting common stock for Class A
voting common stock at a ratio of 1 share of Class
A common stock for each 5 shares of Class B non-
voting common stock. In calculating net income
(loss) per diluted share for the prior quarters
presented, the allocation of operating net income
available
to common stockholders was based on the weighted
average shares outstanding per common share
class to the total weighted average shares
outstanding during each period. The operating net
income allocation was calculated using the weighted
average shares outstanding of Class B common
stock on an as-converted basis.
53
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company,
we are not required to provide the information required
by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the
supervision and with
the participation of
our management, including
our President and
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 defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of September 30, 2022.
Based on that
evaluation, management believes
that the Company’s
disclosure controls and
procedures were effective
to
collect, process, and disclose the information required to be
disclosed in the reports filed or submitted under the Exchange
Act within the required time periods as of the end of the
period covered by this Form 10-Q.
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 the period covered by this Form 10-Q that has
materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
Limitations on Effectiveness of Controls and Procedures
In
designing
and
evaluating
the
disclosure
controls
and
procedures,
management
recognizes
that
any
controls
and
procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving
the desired control objectives.
In addition, the design
of disclosure controls and
procedures must reflect the
fact that there
are resource constrains and that
management is required to apply
judgment in evaluating the
benefits of possible controls
and procedures relative to their costs.
54
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
PART II
Item 1.
Legal Proceedings
We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation
arising
in
the
ordinary
course
of
business.
These
claims
and
litigation
may
include,
among
other
things,
allegations
of
violation of banking and other applicable regulations, competition
law, labor laws and consumer
protection laws, as well as
claims or
litigation
relating
to intellectual
property,
securities, breach
of contract
and tort.
We
intend to
defend ourselves
vigorously against any pending or future claims and litigation.
Item 1A. Risk Factors
For detailed information about certain risk factors that could materially affect our business, financial
condition, or future
results, see
“Part I,
Item 1A
– Risk
Factors” of
the 2021
Form 10-K.
There have
been no
material changes
from the
risk
factors previously disclosed in the 2021 Form 10-K.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) Not applicable.
(c)
As
previously
described
The
Board
adopted
a
stock
repurchase
program
covering
750,000
shares
of
Class
A
common stock.
No shares
were purchased
pursuant to
such program
by the
Company during
the three
and nine
months
ended September 30, 2022.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
55
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
Item 6. Exhibits
Exhibit No.
Description of Exhibit
*
*
*
*
101
The following financial
statements from
the Company’s Quarterly
Report on
Form 10-Q for
the quarter ended
September 30,
2022 formatted
in Inline
XBRL: (i)
Consolidated Balance
Sheets (unaudited),
(ii) Consolidated
Statements of
Operations
(unaudited), (iii) Consolidated
Statements
of Comprehensive
Income (unaudited), (iv)
Consolidated Statements
of Changes
in Stockholders’
Equity (unaudited),
(v) Consolidated
Statements of
Cash Flows
(unaudited), (vi)
Notes to
Consolidated
Financial Statements (unaudited).
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Filed herewith.
56
USCB Financial Holdings, Inc.
Q3 2022 Form 10-Q
SIGNATURES
Pursuant to the
requirements of
the Securities
Exchange Act of
1934, the registrant
has duly caused
this report to
be
signed on its behalf by the undersigned thereunto duly authorized.
USCB FINANCIAL HOLDINGS, INC.
(Registrant)
Signature
Title
Date
/s/ Luis de la Aguilera
President, Chief Executive Officer,
and Director
November 10, 2022
Luis de la Aguilera
(Principal Executive Officer)
/s/ Robert Anderson
Chief Financial Officer
November 10, 2022
Robert Anderson
(Principal Financial Officer and Principal
Accounting Officer)
TABLE OF CONTENTS
Part IItem 1. Financial StatementsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits