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USCB FINANCIAL HOLDINGS, INC. - Annual Report: 2021 (Form 10-K)

uscb-10K-20211231
 
 
 
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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
 
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission File Number:
001-41196
USCB Financial Holdings, Inc.
(Exact name of registrant as specified in its
 
charter)
 
Florida
87-4070846
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2301 NW 87th Avenue
,
Doral
,
FL
33172
(Address of principal executive offices) (zip
 
code)
Registrant’s telephone number, including area code:
 
(
305
)
715-5200
Securities registered pursuant to Section 12(b)
 
of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $1.00 par value per
share
USCB
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g)
 
of the Act:
 
None
Indicate by check mark if the registrant is a well-known
 
seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes
 
No
Indicate by check mark if the registrant is not required
 
to file reports pursuant to Section 13 or Section
 
15(d) of the Act.
 
Yes
 
No
Indicate by check mark
 
whether the registrant (1) has
 
filed all reports
 
required to be filed
 
by Section 13 or
 
15(d) of the Securities
 
Exchange Act of
1934 during the
 
preceding 12 months (or
 
for such shorter
 
period that the
 
registrant was required to
 
file such reports),
 
and (2) has
 
been subject to
such filing requirements for the past 90 days.
 
Yes
 
No
Indicate by check mark whether the registrant has
 
submitted electronically every Interactive Data File required
 
to be submitted pursuant to Rule 405
of Regulation S-T
 
(§232.405 of this chapter)
 
during the preceding
 
12 months (or for
 
such shorter period
 
that the registrant
 
was required to submit
such files).
 
Yes
 
No
Indicate by check mark whether
 
the registrant is a large
 
accelerated filer, an accelerated filer, a non-accelerated
 
filer, a smaller reporting company or
an emerging growth company. See the definitions of “large
 
accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of
 
the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant
 
has elected not to use the extended
 
transition period for complying with any
new or revised financial accounting standards provided
 
pursuant to Section 13(a) of the Exchange
 
Act.
Indicate by check mark
 
whether the registrant has
 
filed a report on
 
and attestation to its
 
management’s assessment of the
 
effectiveness of its internal
control over
 
financial reporting
 
under Section
 
404(b) of
 
the Sarbanes-Oxley
 
Act (15
 
U.S.C.7262(b)) by
 
the registered
 
public accounting
 
firm that
prepared or issued its audit report.
 
 
Indicate by check mark whether the registrant is a
 
shell company (as defined in Rule 12b-2 of the
 
Securities Exchange Act of 1934). Yes
 
No
The aggregate market
 
value of the
 
voting and non-voting
 
common stock
 
held by non-affiliates
 
of the registrant
 
on March 1,
 
2022, based on
 
the closing
price of $13.41 for shares of
 
the Registrant’s Class A common
 
stock as reported by the Nasdaq
 
Stock Market was approximately $
268.1
 
million. The
registrant has elected to
 
use March 1, 2022
 
as the calculation date
 
because on June 30,
 
2021 (the last
 
business day of the
 
Registrant’s second fiscal
quarter),
 
the
 
Registrant
 
was
 
a
 
privately
 
held
 
company. As
 
of
 
March
 
1,
 
2022,
 
the
 
registrant
 
had
20,000,753
 
shares
 
of
 
Class
 
A
 
common
 
stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Proxy Statement for the 2022 Annual Meeting of Shareholders (the “2022 Proxy Statement”) are incorporated by
reference into Part III of this report.
uscb-10K-20211231p1i0.jpg
FORM 10-K
DECEMBER 31, 2021
TABLE OF CONTENTS
 
CAUTIONARY NOTE REGARDING FORWARD
 
-LOOKING STATEMENTS
This
 
Annual
 
Report
 
on
 
Form
 
10-K
 
contains
 
statements
 
that
 
are
 
not
 
historical
 
in
 
nature
 
are
 
intended
 
to
 
be,
 
and
 
are
hereby identified as, forward-looking
 
statements for purposes of
 
the safe harbor provided by
 
Section 21E of the Securities
Exchange
 
Act
 
of
 
1934,
 
as
 
amended.
 
The
 
words
 
“may,”
 
“will,”
 
“anticipate,”
 
“should,”
 
“would,”
 
“believe,”
 
“contemplate,”
“expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are
intended
 
to
 
identify
 
forward-looking
 
statements.
 
These
 
forward-looking
 
statements
 
include
 
statements
 
related
 
to
 
our
projected
 
growth,
 
anticipated
 
future
 
financial
 
performance,
 
and
 
management’s
 
long-term
 
performance
 
goals,
 
as
 
well
 
as
statements relating to
 
the anticipated effects
 
on results of
 
operations and financial
 
condition from expected
 
developments
or events, or business and growth strategies, including
 
anticipated internal growth.
These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ
materially from those anticipated in such statements.
 
Potential risks and uncertainties include, but are not
 
limited to:
 
the strength of the United States economy
 
in general and the strength of the local
 
economies in which we conduct
operations;
 
the COVID-19 pandemic and its impact on
 
us, our employees, customers and third-party service providers, and the
ultimate extent of the impacts of the pandemic and related government
 
stimulus programs;
 
 
our ability to successfully manage interest rate risk, credit
 
risk, liquidity risk, and other risks inherent to our industry;
 
the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss
reserve and deferred tax asset valuation allowance;
 
the efficiency and effectiveness of our
 
internal control environment;
 
our ability
 
to comply
 
with the
 
extensive laws
 
and regulations
 
to which
 
we are
 
subject, including
 
the laws
 
for each
jurisdiction where we operate;
 
legislative or regulatory
 
changes and changes
 
in accounting
 
principles, policies,
 
practices or
 
guidelines, including
the effects of the forthcoming implementation
 
of the Current Expected Credit Losses (“CECL”) standard
 
;
 
the effects
 
of our
 
lack of
 
a diversified
 
loan portfolio
 
and concentration
 
in the
 
South Florida
 
market, including
 
the
risks
 
of geographic,
 
depositor,
 
and
 
industry concentrations,
 
including our
 
concentration
 
in
 
loans secured
 
by real
estate;
 
the concentration of ownership of our Class A common
 
stock;
 
fluctuations in the price of our Class A common stock;
 
our ability to fund or access the capital markets at attractive
 
rates and terms and manage our growth, both organic
growth as well as growth through other means, such as
 
future acquisitions;
 
inflation, interest rate, unemployment rate, market, and monetary
 
fluctuations;
 
increased competition and its effect on pricing
 
of our products and services as well as our margins;
 
 
the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,
employee, or third-party fraud and security breaches; and
 
 
other
 
risks
 
described
 
this
 
Form
 
10-K
 
and
 
other
 
filings
 
we
 
make
 
with
 
the
 
Securities
 
and
 
Exchange
 
Commission
(“SEC”).
All
 
forward-looking
 
statements
 
are
 
necessarily
 
only
 
estimates
 
of
 
future
 
results,
 
and
 
there
 
can
 
be
 
no
 
assurance
 
that
actual results will
 
not differ
 
materially from expectations.
 
Therefore, you are
 
cautioned not to
 
place undue reliance
 
on any
forward-looking statements. Further,
 
forward-looking statements included in this presentation
 
are made only as of the date
hereof, and we undertake
 
no obligation to update
 
or revise any forward-looking
 
statement to reflect events
 
or circumstances
after the date on which the statement is made or to reflect the occurrence of unanticipated events, unless required to do so
under the federal securities laws. You
 
should also review the risk factors
 
described in the reports the Company
 
filed or will
file with the
 
SEC and,
 
for periods
 
prior to
 
the completion
 
of the bank
 
holding company
 
reorganization, the
 
Bank filed
 
with
the Federal Deposit Insurance Corporation (“FDIC”).
 
 
 
4
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
PART I
Item 1. Business
Overview
USCB Financial Holdings, Inc.,
 
a Florida corporation (the “Company”), was formed on December 17, 2021, to serve as
the holding company for U.S. Century Bank, a Florida state-chartered bank (the “Bank”), and is a bank holding company (a
“BHC”)
 
registered
 
with
 
the
 
Board
 
of Governors
 
of the
 
Federal
 
Reserve
 
System (the
 
“Federal
 
Reserve”)
 
under
 
the
 
Bank
Holding Company Act
 
of 1956, as
 
amended (the “BHC Act”).
 
The Company is
 
headquartered in Miami, Florida,
 
and, through
the Bank, its sole
 
subsidiary, operates 10 banking centers in South Florida providing a wide
 
range of personal and business
banking products and services. As of December 31, 2021,
 
the Company had total consolidated assets of $1.9 billion.
The Bank commenced operations
 
on October 28, 2002 and
 
is a Florida state-chartered, non-Federal
 
Reserve System
member bank. Over the course
 
of 2021, the Bank simplified
 
its capitalization structure by
 
exchanging and/or repurchasing
all of its issued
 
and outstanding preferred
 
shares, including Class
 
C, Class D, and
 
Class E preferred stock.
 
Most recently,
in December 2021,
 
the Bank reached
 
agreements with
 
holders of
 
its Class B
 
common stock,
 
to exchange
 
all outstanding
Class B common stock for Class A common stock in a
 
1-for-5 reverse stock split.
On July 27,
 
2021, the Bank
 
completed an initial
 
public offering of 4,600,000
 
shares of its
 
Class A common
 
stock. Shares
of the Bank’s Class
 
A common stock were
 
sold at a price
 
to the public
 
of $10.00 per share
 
and began trading on
 
the Nasdaq
Stock Market under ticker symbol “USCB”.
 
On December
 
30, 2021
 
(the
 
“Effective
 
Date”),
 
the Company
 
acquired
 
all of
 
the
 
issued
 
and
 
outstanding
 
stock
 
of the
Bank in a
 
share exchange
 
(the “Reorganization”)
 
effected under
 
the Florida
 
Business Corporation
 
Act and
 
in accordance
with the
 
terms of
 
an Agreement and
 
Plan of
 
Share Exchange dated
 
December 27, 2021
 
between the Bank
 
and the
 
Company
(the “Share Exchange Agreement”). The Reorganization and
 
the Share Exchange Agreement were approved
 
by the Bank’s
stockholders at a special meeting of the Bank’s stockholders held on December 20,
 
2021. Pursuant to the Share Exchange
Agreement, on the Effective
 
Date each issued and outstanding
 
share of the Bank’s
 
Class A common stock was
 
converted
into
 
and
 
exchanged
 
for
 
one
 
share
 
of
 
the
 
Company’s
 
Class
 
A
 
common
 
stock.
 
As
 
a
 
result,
 
the
 
Bank
 
became
 
the
 
sole
subsidiary
 
of
 
the
 
Company,
 
the
 
Company
 
became
 
the
 
holding
 
company
 
for
 
the
 
Bank
 
and
 
the
 
stockholders
 
of the
 
Bank
became stockholders of the Company.
Prior
 
the
 
Effective
 
Date,
 
the
 
Bank’s
 
Class
 
A
 
common
 
stock
 
was
 
registered
 
under
 
Section
 
12(b)
 
of
 
the
 
Securities
Exchange Act of 1934 (the “Exchange
 
Act”), and the Bank was subject to
 
the information requirements of the Exchange
 
Act
and, in accordance with Section 12(i) thereof, filed quarterly reports, proxy statements and other information with the FDIC.
As a result of the Reorganization, pursuant to Rule 12g-3(a) under the Exchange Act, the Company became the successor
registrant
 
to the
 
Bank, the
 
Company’s
 
Class
 
A common
 
stock
 
was
 
deemed
 
to
 
be
 
registered
 
under
 
Section
 
12(b)
 
of the
Exchange Act, and the Company became subject to the information requirements of the Exchange Act and is now required
to file
 
reports, proxy
 
statements and
 
other information with
 
the SEC.
 
The trading
 
symbol for
 
the Company’s Class
 
A Common
Stock is “USCB”, which is the same as the Bank’s
 
former trading symbol.
Prior to
 
the Reorganization,
 
the Company
 
had no
 
material assets
 
and had
 
not conducted
 
any business
 
or operations
except for activities related to its incorporation and the
 
Reorganization.
Our strategy in becoming a publicly traded company and forming a BHC is to continue pursuing organic growth
 
as well
as strategic acquisitions
 
if the opportunity
 
arises which
 
efforts will
 
be further facilitated
 
by access to
 
public capital and
 
the
added flexibility provided by a BHC structure.
In this Annual Report, unless the context indicated otherwise, references
 
to “we,” “us,”, and “our” refer to the Company
and the Bank. However, if the
 
discussion relates to a period before the Effective
 
Date, the terms refer only to the Bank.
Products and Services
Lending Services
Our mission
 
is to
 
provide high
 
value, relationship
 
-based banking
 
products, services
 
and solutions
 
to a
 
diverse
 
set of
clients in the
 
markets we serve. We focus
 
on serving small-to-medium sized businesses (“SMBs”) and
 
catering to the needs
of
 
local
 
business
 
owners,
 
entrepreneurs
 
and
 
professionals
 
in
 
South
 
Florida.
 
We
 
have
 
further
 
leveraged
 
our
 
success
 
in
providing comprehensive banking solutions
 
to SMBs to also secure the personal
 
retail deposit relationships of the owners,
operators, and employees of our commercial lending clients, which has
 
been a cornerstone of our deposit growth strategy.
 
 
 
5
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
In addition
 
to our
 
traditional commercial
 
banking services,
 
we are
 
among a
 
select number
 
of banks
 
of our
 
size within
our market
 
area that
 
can offer
 
certain specialty
 
banking products,
 
services and
 
solutions designed
 
for small
 
businesses,
homeowner associations,
 
law firms, medical
 
practices and other
 
professional services
 
firms, and global
 
banking services.
Our major specialty banking offerings include
 
the following:
Small Business Administration
 
(SBA) lending:
 
Our SBA platform
 
originates loans under Sections
 
7(a) and
504 of the SBA program. The 7(a) loan
 
program, SBA's most common
 
loan program, includes financial help for
small businesses with special requirements while
 
the 504 loan program provides long-term, fixed
 
rate financing
of up to
 
$5.0 million for
 
major fixed assets
 
that promote business
 
growth and job
 
creation. Since its
 
formation
in 2018, the platform
 
serves as an
 
opportunity to generate
 
commercial and industrial
 
loans, or C&I loans,
 
and
to diversify our revenue
 
stream through originating
 
and selling SBA
 
7(a) loans. As
 
of December 31, 2021,
 
the
Bank is a Preferred Lending
 
Partner with the SBA
 
which allows us to offer
 
the full range of SBA
 
loan products
and
 
to
 
exercise
 
lending
 
authority
 
at
 
the
 
local
 
Bank
 
level,
 
allowing
 
us
 
to
 
make
 
timely
 
credit
 
decisions
 
for
prospective clients.
Yacht lending:
 
In 2021, two portfolios
 
of yacht loans were
 
purchased as part of
 
our strategic initiative to
 
launch
a new business vertical and diversify our portfolio.
 
Homeowner
 
Association
 
(HOA)
 
services:
 
We
 
provide
 
banking
 
services
 
to HOAs
 
and
 
property
 
managers,
including deposit collection,
 
lockbox services, payment
 
services, and lending
 
products. Launched in
 
2016, we
offer our HOA customers a unique combination of market knowledge of
 
a local bank, and a highly personalized
“white glove” approach to customer service.
Jurist Advantage and Private Client
 
Group services:
 
Our Jurist Advantage and Private
 
Client Group vertical
provides customized
 
banking solutions
 
for law
 
firms as
 
well as
 
their partners,
 
associates, staff,
 
and high
 
net
worth clients.
 
We also leverage
 
our relationships with
 
our law
 
firm clients to
 
generate personal deposit
 
accounts.
Global
 
Banking
 
services:
 
Our
 
Global
 
Banking
 
vertical
 
provides
 
correspondent
 
banking
 
services
 
for
 
banks
headquartered
 
in
 
certain
 
Latin
 
America
 
and
 
the
 
Caribbean
 
countries.
 
We
 
also
 
cross-sell
 
our
 
correspondent
banking relationships to
 
generate international personal
 
banking clients for
 
our Bank. Our compliance
 
team is
experienced in issues related to foreign banking, and we have consistent open communication with our foreign
bank clients to ensure
 
proper compliance controls are maintained at
 
such institutions.
Credit Practices
Our underwriting process is informed by a conservative credit culture
 
that encourages prudent lending. We believe our
strong
 
asset
 
quality
 
is
 
due
 
to
 
our
 
understanding
 
of
 
and
 
experience
 
with
 
businesses
 
within
 
Florida,
 
our
 
long-standing
relationships with clients
 
and our disciplined
 
underwriting processes.
 
Our thorough underwriting
 
processes collaboratively
engage our seasoned business bankers, credit underwriters
 
and portfolio managers in the analysis of each loan request.
 
We manage our credit risk by analyzing metrics related
 
to our different lines of business, which allows us to
 
maintain a
conservative
 
and
 
well-diversified
 
loan portfolio
 
reflective
 
of our
 
assessment
 
of various
 
industry
 
sectors.
 
Based
 
upon our
aggregate exposure to any given borrower relationship, we undertake a scaled review
 
of loan originations that may involve
senior credit officers, our Chief Credit Officer,
 
our Credit Committee or,
 
ultimately,
 
our Board of Directors (“Board”).
Deposit Products
We offer
 
traditional deposit
 
products including
 
commercial
 
and consumer
 
checking
 
accounts,
 
money market
 
deposit
accounts, savings accounts and certificates of deposit with a
 
variety of terms and rates as well
 
as a robust suite of
 
treasury,
commercial payments
 
and cash
 
management services.
 
We offer
 
commercial and
 
consumer deposit
 
products
 
across our
primary geographic footprint.
Seasonality
We do not believe our business to be seasonal
 
in nature.
 
 
 
6
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Markets
Our primary banking market is South
 
Florida. Due to the recent
 
acceptance and expected ongoing emphasis on remote
work, coupled
 
with a
 
low tax
 
environment, warm
 
weather and
 
a strong
 
real estate
 
market has
 
encouraged companies
 
to
relocate some or all of their
 
operations to South Florida. We
 
believe this trend is further
 
demonstrated by recent relocation
initiatives undertaken by large financial institutions such as Blackstone Group Inc., Goldman Sachs Group Inc., and Citadel
Advisors
 
LLC,
 
all
 
of
 
which
 
have
 
established
 
operations
 
in
 
South
 
Florida.
 
We
 
believe
 
Florida
 
offers
 
long-term
 
attractive
banking opportunities.
 
Our largest concentration is in the Miami metropolitan statistical area; however, we are also focused
on growth in other urban Florida markets in which we
 
have a presence, such as Broward and Palm Beach counties
 
.
 
According to the 2020
 
United States Census Bureau,
 
Florida was the third
 
most populous state
 
in the country and the
three largest populations
 
were in Miami-Dade,
 
Broward, and Palm
 
Beach counties, all
 
located in South Florida.
 
According
to
 
estimates
 
from
 
the
 
United
 
States
 
Census
 
Bureau,
 
from
 
2010
 
to
 
2021,
 
Florida’s
 
population
 
increased
 
to
 
21.8
 
million
residents, an increase of 3.0 million new residents. The percentage change
 
in Florida’s population between April 2020 and
July 2021 alone was 1.1% according to the United States
 
Census Bureau.
 
Competition
Our markets are highly competitive,
 
and we compete with a wide range of lenders and other financial institutions within
our markets,
 
including local,
 
regional,
 
national,
 
and international
 
commercial
 
banks
 
and credit
 
unions.
 
We
 
also compete
with mortgage companies, brokerage
 
firms, trust service providers, consumer
 
finance companies, mutual funds,
 
securities
firms,
 
insurance
 
companies,
 
third-party
 
payment
 
processors,
 
financial
 
technology
 
companies,
 
or
 
Fintechs,
 
and
 
other
financial intermediaries on various
 
of our products and
 
services. Some of our competitors
 
are not subject to the
 
regulatory
restrictions
 
and
 
the
 
level
 
of
 
regulatory
 
supervision
 
applicable
 
to
 
us.
 
Many
 
of
 
our
 
competitors
 
are
 
much
 
larger
 
financial
institutions that have greater financial
 
resources than we do
 
and compete aggressively for market
 
share. These competitors
attempt to gain market share through their financial product
 
mix, pricing strategies and larger banking center networks.
Interest rates
 
on both
 
loans and
 
deposits and
 
prices of
 
fee-based services
 
are significant
 
competitive factors
 
among
financial
 
institutions
 
generally.
 
Other
 
important
 
competitive
 
factors
 
include
 
convenience,
 
quality
 
of
 
customer
 
service,
availability and quality of digital offerings, community
 
reputation, and continuity of personnel and services.
 
Emerging Growth Company
We are an “emerging growth
 
company,”
 
or “EGC”, as defined in the Jumpstart
 
Our Business Startups Act of 2012 (the
“JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are
applicable
 
to
 
other
 
public
 
companies
 
that
 
are
 
not
 
“emerging
 
growth
 
companies,”
 
including,
 
but
 
not
 
limited
 
to,
 
not
 
being
required to comply with the auditor
 
attestation requirements of Section
 
404 of the Sarbanes-Oxley Act,
 
reduced disclosure
obligations
 
regarding
 
executive
 
compensation
 
in
 
our
 
periodic
 
reports
 
and
 
proxy
 
statements,
 
and
 
exemptions
 
from
 
the
requirements of
 
holding a
 
non-binding advisory
 
vote on
 
executive compensation
 
and shareholder
 
approval of
 
any golden
parachute payments not previously approved.
In addition,
 
Section
 
107
 
of
 
the
 
JOBS
 
Act
 
also
 
provides
 
that
 
an
 
EGC can
 
take
 
advantage
 
of
 
the
 
extended
 
transition
period provided
 
in Section
 
7(a)(2)(B) of
 
the Securities
 
Act of
 
1933, as
 
amended (the
 
“Securities Act”),
 
for complying
 
with
new or revised accounting standards. In other
 
words, an EGC can delay the adoption
 
of certain accounting standards until
those standards would otherwise apply to private
 
companies. We intend to take advantage
 
of the benefits of this extended
transition period, for as long as it is available.
 
Human Capital Resources
We respect the values
 
and diversity throughout our organization
 
and the community. Diversity and inclusion are integral
parts of
 
our organization’s
 
culture. We
 
seek the
 
active engagement
 
and participation
 
of people
 
with diverse
 
backgrounds
and
 
ethnicities.
 
We
 
are
 
taking
 
steps
 
to
 
create
 
programs
 
to
 
ensure
 
that
 
we
 
are
 
organized
 
in
 
a
 
way
 
where
 
the
 
unique
contributions of each individual in our Company is
 
recognized and supported. Each team member is to
 
be treated fairly with
equal access to opportunities and resources for success. Additionally,
 
we run homebuyer educational and financial literacy
workshops in an effort
 
to reach the
 
financing needs of
 
the sectors of our
 
communities in which
 
these workshops are
 
most
needed.
At December 31, 2021,
 
we had 187
 
full-time equivalent employees.
 
None of our
 
employees are parties
 
to a collective
bargaining agreement. We believe that our employees are our greatest asset and vital to our success. As such, we seek to
hire and retain the best
 
candidate for each position, without regard to
 
age, gender, ethnicity, or other protected class status,
 
 
 
7
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
but
 
with
 
an
 
appreciation
 
for
 
a
 
diversity
 
of
 
perspectives
 
and
 
experiences.
 
We
 
have
 
designed
 
a
 
compensation
 
structure
including an array of benefit plans and programs that
 
we believe is attractive to our current and prospective
 
employees.
Regulation and Supervision
Bank
 
holding
 
companies,
 
banks,
 
and
 
their
 
affiliates
 
are
 
extensively
 
regulated
 
under
 
federal
 
and
 
state
 
law.
 
These
regulations have
 
a material
 
effect on
 
the operations
 
of the
 
Company and
 
its direct
 
and indirect
 
subsidiaries, including
 
the
Bank, which is currently the Company’s only subsidiary
 
.
Statutes, regulations and policies limit the activities in which we may engage and the
 
conduct of our permitted activities
and
 
establish
 
capital
 
requirements
 
with
 
which
 
we
 
must
 
comply.
 
The
 
regulatory
 
framework
 
is
 
intended
 
primarily
 
for
 
the
protection of depositors, borrowers,
 
customers and clients, the
 
FDIC insurance funds
 
and the banking system
 
as a whole,
and not for the protection
 
of our stockholders or creditors.
 
In many cases, the applicable
 
regulatory authorities have broad
enforcement power over
 
bank holding companies,
 
banks and their subsidiaries,
 
including the power
 
to impose substantial
fines,
 
remove
 
officers
 
and
 
directors
 
from
 
their
 
positions,
 
force
 
the
 
termination
 
of
 
certain
 
activities
 
and
 
the
 
divestures
 
of
certain investments and other penalties for violations of
 
laws and regulations.
 
Further,
 
the
 
regulatory
 
system
 
imposes
 
reporting
 
and
 
information
 
collection
 
obligations.
 
Banking
 
statutes
 
and
regulations are subject
 
to change,
 
and additional
 
statutes, regulations,
 
and corresponding
 
guidance may
 
be adopted. We
are unable to predict these future changes or the effects, if any, that these changes could have on the business, prospects,
revenues, and results of operations of our Bank and Company.
The material
 
statutory and
 
regulatory requirements
 
that are
 
applicable to
 
us are
 
summarized below.
 
The description
below is not
 
intended to summarize
 
all laws and
 
regulations applicable to us.
 
These summary descriptions are
 
not complete,
and you should refer to the full text of the statutes, regulations,
 
and corresponding guidance for more information.
Bank and Bank Holding Company Regulation
As
 
a
 
Florida
 
state-chartered
 
bank,
 
the
 
Bank
 
is
 
subject
 
to
 
ongoing
 
and
 
comprehensive
 
supervision,
 
regulation,
examination, and enforcement by the FDIC and Florida Office of Financial Regulation (“FOFR”). The FOFR supervises and
regulates all areas
 
of our operations
 
including, without limitation,
 
the making of
 
loans, the issuance
 
of securities, the
 
conduct
of our corporate affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and
 
the establishment
or closing of banking centers. In addition, our deposit accounts are insured by the Deposit Insurance Fund administered by
the FDIC to the maximum extent permitted by law, and the FDIC has certain supervisory
 
and enforcement powers over us.
Any entity
 
that directly
 
or indirectly
 
controls a
 
bank must
 
be approved
 
by the
 
Federal Reserve
 
Board under
 
the Bank
Holding
 
Company
 
Act
 
of
 
1956
 
(the
 
“BHC
 
Act”)
 
to
 
become
 
a
 
BHC,
 
BHCs
 
and
 
their
 
bank
 
affiliates.
 
BHCs
 
are
 
subject
 
to
regulation, inspection,
 
examination, supervision
 
and enforcement
 
by the Federal
 
Reserve Board
 
under the
 
BHC Act.
 
The
Federal Reserve
 
Board's jurisdiction
 
also extends
 
to any
 
company
 
(except, in
 
most instances,
 
a bank)
 
that
 
is directly
 
or
indirectly controlled by a BHC.
The Company,
 
which controls the Bank, is a BHC and,
 
as such, is subject to ongoing and comprehensive
 
supervision,
regulation, examination and enforcement by the Federal
 
Reserve Board.
Prior Notice and Approval Requirements Related to
 
Control
Banking laws impose prior notice,
 
approval, and ongoing regulatory requirements on
 
any stockholder or other party
 
that
seeks to
 
acquire,
 
and subsequently
 
acquires,
 
direct or
 
indirect "control"
 
of an
 
FDIC-insured
 
depository institution.
 
These
laws include the BHC Act and the Change in Bank Control Act. Among other things, these laws require regulatory filings by
individuals
 
or
 
companies
 
that
 
seek
 
to
 
acquire
 
direct
 
or
 
indirect
 
"control"
 
of
 
an
 
FDIC-insured
 
depository
 
institution.
 
The
determination
 
of
 
whether
 
an
 
investor
 
"controls"
 
a
 
depository
 
institution
 
is
 
based
 
on
 
all
 
of
 
the
 
facts
 
and
 
circumstances
surrounding the investment.
 
As a general
 
matter, a
 
party is deemed
 
to control a
 
depository institution
 
or other company
 
if
the party
 
owns or
 
controls 25%
 
or more
 
of any
 
class of
 
voting stock
 
of the
 
depository institution,
 
control the
 
election of
 
a
majority of the board of directors of the depositary institution and/or exercises a controlling influence over
 
the management
and policies of such institution. Subject to
 
rebuttal, a party generally may be presumed
 
to control a depository institution or
other
 
company
 
if
 
the
 
investor
 
owns
 
or
 
controls
 
10%
 
or
 
more
 
of
 
any
 
class
 
of
 
voting
 
stock.
 
Except
 
under
 
very
 
limited
circumstances, bank holding
 
companies are prohibited
 
from acquiring, without
 
prior approval, control
 
of any other
 
bank or
BHC or substantially
 
all the assets
 
thereof or more
 
than 5%
 
of the voting
 
shares of
 
a bank or
 
BHC which is
 
not already a
subsidiary.
 
 
 
8
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Source of Strength
All companies, including BHCs, that directly
 
or indirectly control an insured depository
 
institution, are required to serve
as a source
 
of strength for
 
the institution. Under
 
this requirement,
 
the Company in
 
the future could
 
be required to
 
provide
financial assistance to
 
the Bank should it
 
experience financial distress. Such
 
support may be
 
required at times when,
 
absent
this statutory and Federal Reserve Policy requirement, a
 
BHC may not be inclined to provide it.
Safety and Soundness Regulation
As
 
an
 
insured
 
depository
 
institution,
 
the
 
Bank
 
is
 
subject
 
to
 
prudential
 
regulation
 
and
 
supervision
 
and
 
must
 
undergo
regular
 
on-site
 
examinations
 
by
 
our
 
state
 
and
 
federal
 
bank
 
regulatory
 
agencies.
 
The
 
cost
 
of
 
examinations
 
of
 
insured
depository institutions and
 
any affiliates are
 
assessed by
 
the appropriate agency
 
against each institution
 
or affiliate
 
that is
subject to examination
 
as it deems
 
necessary or appropriate. We
 
file quarterly consolidated reports
 
of condition and
 
income,
or call reports, with the FDIC and FOFR.
The federal banking
 
agencies have also
 
adopted guidelines establishing safety
 
and soundness standards for
 
all insured
depository institutions including our
 
Bank. The safety and soundness
 
guidelines relate to, among
 
other things, our internal
controls, information systems, internal
 
audit systems, liquidity, capital adequacy, loan underwriting and documentation,
 
anti-
money laundering policies and procedures, transactions
 
with insiders, risk management, compensation, asset
 
growth, and
interest
 
rate
 
exposure.
 
These
 
standards
 
assist
 
the
 
federal
 
banking
 
agencies
 
with
 
early
 
identification
 
and
 
resolution
 
of
problems at insured depository
 
institutions. If we were
 
to fail to meet or
 
otherwise comply with
 
any of these standards,
 
the
FDIC could require us to submit a
 
plan for achieving and maintaining compliance.
 
If a financial institution fails to
 
submit an
acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by the
FDIC, the FDIC is
 
required to issue an
 
order directing the institution
 
to cure the deficiency.
 
Until the deficiency cited
 
in the
order is cured, the
 
FDIC may restrict
 
the financial institution’s
 
rate of growth, require
 
the financial institution to
 
increase its
capital, restrict
 
the rates
 
the institution
 
pays on
 
deposits or
 
require the
 
institution to
 
take any
 
action the
 
regulator deems
appropriate
 
under
 
the
 
circumstances.
 
Noncompliance
 
with
 
the
 
standards
 
established
 
by
 
the
 
safety
 
and
 
soundness
guidelines may
 
also constitute
 
grounds for
 
other
 
enforcement
 
action,
 
including cease
 
and desist
 
orders
 
and
 
civil
 
money
penalty assessments. In addition,
 
the FDIC could terminate
 
our deposit insurance if
 
it determines that
 
our financial condition
was unsafe or
 
unsound or that
 
we engaged in unsafe
 
or unsound practices that
 
violated applicable rules, regulations,
 
orders
or conditions enacted or imposed on us by our regulators.
During
 
the
 
past
 
decade,
 
the
 
bank
 
regulatory
 
agencies
 
have
 
increasingly
 
emphasized
 
the
 
importance
 
of
 
sound
 
risk
management processes
 
and strong
 
internal controls
 
when evaluating
 
the activities
 
of the
 
financial institutions they
 
supervise.
Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become
even more
 
important as
 
new technologies, product
 
innovation and
 
the size
 
and speed
 
of financial
 
transactions have
 
changed
the nature of
 
banking markets. The
 
agencies have identified
 
a spectrum of
 
risks facing a
 
banking institution including,
 
but
not limited to, credit, market, liquidity, interest rate, cybersecurity, operational, legal and reputational risk. Recent regulatory
pronouncements
 
have focused
 
on operational
 
risk, which
 
arises
 
from the
 
potential that
 
inadequate
 
information systems,
operational problems, breaches
 
in internal controls, fraud
 
or unforeseen deficiencies
 
will result in unexpected
 
losses. New
products
 
and
 
services,
 
use
 
of
 
outside
 
vendors
 
and
 
cybersecurity
 
are
 
critical
 
sources
 
of
 
operational
 
risk
 
that
 
financial
institutions are expected
 
to address
 
in the current
 
environment. We
 
expect to have
 
active Board
 
and senior
 
management
oversight;
 
adequate
 
policies,
 
procedures
 
and
 
risk
 
limits;
 
adequate
 
risk
 
measurement
 
and
 
monitoring
 
and
 
adequate
management information systems; and comprehensive internal
 
controls to address these various risks.
Permissible Activities and Investments
Bank regulatory
 
laws generally
 
restrict the
 
ability of
 
the Company,
 
as a
 
BHC, to
 
engage in
 
activities other
 
than those
determined by the
 
Federal Reserve Board
 
to be
 
so closely
 
related to banking
 
as to be
 
a proper incident
 
thereto. The Gramm-
Leach-Bliley Act (the “GLB Act”) expanded the scope of permissible activities for a BHC that qualifies as a financial holding
company. Under the regulations implementing the GLB Act, a financial
 
holding company may engage in additional
 
activities
that are
 
financial
 
in nature
 
or incidental
 
or complementary
 
to a
 
financial activity.
 
The Company
 
is not
 
a financial
 
holding
company.
In addition, as a general matter, the establishment or
 
acquisition by the Company,
 
of a non-bank entity, or the initiation
of a non-banking
 
activity,
 
requires prior
 
regulatory approval
 
from the Federal
 
Reserve Board.
 
In approving
 
acquisitions or
the addition of
 
activities, the Federal Reserve
 
Board considers, among
 
other things, whether the
 
acquisition or the
 
additional
activities can reasonably be
 
expected to produce benefits
 
to the public,
 
such as greater convenience,
 
increased competition
or gains in efficiency, that outweigh such possible adverse
 
effects as undue concentration of resources,
 
decreased or unfair
competition, conflicts of interest or unsound banking practices
 
.
 
 
 
9
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Regulatory Capital Requirements
The federal banking
 
regulators have adopted
 
risk-based capital adequacy
 
guidelines for bank
 
holding companies and
their subsidiary banks
 
and banks without bank
 
holding companies based on
 
the Basel III
 
standards. Under these guidelines,
assets and off-balance sheet items are assigned to specific risk categories, each with designated risk weightings. The risk-
based capital guidelines are designed to make regulatory
 
capital requirements more sensitive to differences
 
in risk profiles
among banks and bank holding
 
companies, to account for off-balance sheet exposure,
 
to minimize disincentives for holding
liquid assets, and
 
to achieve greater
 
consistency in
 
evaluating the capital
 
adequacy of
 
major banks throughout
 
the world.
The resulting
 
capital ratio requirements
 
represent capital as
 
a percentage of
 
total risk-weighted assets
 
and off-balance sheet
items. Final rules
 
implementing the capital
 
adequacy guidelines became
 
effective, with various
 
phase-in periods, on
 
January
1, 2015
 
for
 
community
 
banks
 
such
 
as us.
 
All
 
of
 
the
 
rules
 
were
 
fully
 
phased
 
in
 
as of
 
January
 
1,
 
2019.
 
These
 
final
 
rules
represent a significant change to the prior general risk-based capital rules and are
 
designed to substantially conform to the
Basel III international standards.
In computing
 
total risk-weighted
 
assets, bank
 
and bank
 
holding company
 
assets are
 
given risk-weights
 
of 0%,
 
20%,
50%, 100%
 
and 150%.
 
In addition,
 
certain
 
off-balance
 
sheet items
 
are given
 
similar credit
 
conversion
 
factors
 
to convert
them to asset
 
equivalent amounts
 
to which an
 
appropriate risk-weight
 
will apply.
 
Most loans will
 
be assigned to
 
the 100%
risk category,
 
except for
 
performing first
 
mortgage loans
 
fully secured
 
by 1-to-4
 
family and
 
certain multi-family
 
residential
property, which carry a 50% risk rating. Most investment securities
 
(including, primarily, general
 
obligation claims on states
or
 
other
 
political
 
subdivisions
 
of
 
the
 
United
 
States)
 
will
 
be
 
assigned
 
to
 
the
 
20%
 
category,
 
except
 
for
 
municipal
 
or
 
state
revenue bonds, which have a 50% risk-weight,
 
and direct obligations of the U.S.
 
Treasury or obligations backed
 
by the full
faith
 
and
 
credit
 
of
 
the
 
U.S.
 
government,
 
which
 
have
 
a
 
0%
 
risk-weight.
 
In
 
covering
 
off-balance
 
sheet
 
items,
 
direct
 
credit
substitutes,
 
including
 
general
 
guarantees
 
and
 
standby
 
letters
 
of
 
credit
 
backing
 
financial
 
obligations,
 
are
 
given
 
a
 
100%
conversion
 
factor.
 
Transaction-related
 
contingencies
 
such
 
as
 
bid
 
bonds,
 
standby
 
letters
 
of
 
credit
 
backing
 
nonfinancial
obligations,
 
and undrawn
 
commitments
 
(including
 
commercial
 
credit lines
 
with
 
an initial
 
maturity
 
of more
 
than
 
one year)
have
 
a
 
50%
 
conversion
 
factor.
 
Short-term
 
commercial
 
letters
 
of
 
credit
 
are
 
converted
 
at
 
20%
 
and
 
certain
 
short-term
unconditionally cancelable commitments have a 0% factor.
Under
 
the
 
final
 
rules,
 
minimum
 
requirements
 
increased
 
for
 
both
 
the
 
quality
 
and
 
quantity
 
of
 
capital
 
held
 
by
 
banking
organizations. In this respect, the final rules
 
implement strict eligibility criteria for regulatory capital instruments and improve
the methodology for
 
calculating risk-weighted
 
assets to enhance
 
risk sensitivity.
 
Consistent with the
 
international Basel III
framework, the rules include a new
 
minimum ratio of Common Equity
 
Tier 1 Capital to Risk-Weighted
 
Assets of 4.5%. The
rules also create a Common Equity Tier 1 Capital
 
conservation buffer of 2.5% of risk
 
-weighted assets. This buffer is added
to each of the three risk-based capital
 
ratios to determine whether an institution
 
has established the buffer.
 
The rules raise
the minimum ratio of Tier 1 Capital to Risk-Weighted Assets from 4% to 6% and
 
include a minimum leverage ratio of 4% for
all banking
 
organizations. If
 
a financial
 
institution’s
 
capital conservation
 
buffer
 
falls below
 
2.5% —
 
e.g., if
 
the institution’s
Common Equity
 
Tier
 
1 Capital
 
to Risk
 
-Weighted
 
Assets is
 
less than
 
7.0% —
 
then capital
 
distributions
 
and
 
discretionary
payments will
 
be limited
 
or prohibited
 
based on
 
the size
 
of the
 
institution’s
 
buffer.
 
The types
 
of payments
 
subject to
 
this
limitation
 
include
 
dividends,
 
share
 
buybacks,
 
discretionary
 
payments
 
on
 
Tier
 
1
 
instruments,
 
and
 
discretionary
 
bonus
payments.
The new capital regulations
 
may also impact the
 
treatment of accumulated
 
other comprehensive income,
 
or AOCI, for
regulatory capital purposes. Under
 
the new rules, AOCI generally
 
flows through to regulatory
 
capital, however,
 
community
banks and their holding companies (if any)
 
may make a one-time irrevocable opt-out
 
election to continue to treat AOCI the
same as
 
under the
 
old regulations
 
for regulatory
 
capital purposes.
 
This election
 
was required
 
to be
 
made on
 
the first
 
call
report filed after
 
January 1, 2015.
 
We made the
 
opt-out election. Additionally,
 
the new rules
 
also permit community
 
banks
with less than $15.0 billion in total assets to continue to count certain non-qualifying capital instruments issued prior to May
19, 2010 as Tier 1 capital, including trust preferred securities
 
and cumulative perpetual preferred stock (subject to a limit of
25% of Tier 1 capital). However, non-qualifying
 
capital instruments issued on or after May 19, 2010 do not qualify for Tier 1
capital treatment.
On
 
September
 
17,
 
2019,
 
the
 
federal
 
banking
 
agencies
 
jointly
 
finalized
 
a
 
rule
 
to
 
be
 
effective
 
January
 
1,
 
2020
 
and
intended to
 
simplify
 
the regulatory
 
capital requirements
 
described above
 
for qualifying
 
community
 
banking
 
organizations
that opt into the
 
Community Bank Leverage Ratio, or
 
CBLR, framework, as required by Section
 
201 of the Regulatory Relief
Act.
 
The
 
final
 
rule
 
became
 
effective
 
on
 
January
 
1,
 
2020,
 
and
 
the
 
CBLR
 
framework
 
became
 
available
 
for
 
banks
 
to
 
use
beginning with
 
their March
 
31, 2020 call
 
reports. Under
 
the final rule,
 
if a qualifying
 
community banking
 
organization opts
into
 
the
 
CBLR
 
framework
 
and
 
meets
 
all
 
requirements
 
under
 
the
 
framework,
 
it
 
will
 
be
 
considered
 
to
 
have
 
met
 
the
 
well-
capitalized ratio
 
requirements
 
under the
 
prompt corrective
 
action regulations
 
described elsewhere
 
in this
 
offering circular
and will not
 
be required to
 
report or calculate
 
risk-based capital.
 
In order to
 
qualify for the
 
CBLR framework,
 
a community
banking organization must
 
have a tier
 
1 leverage ratio
 
of greater than
 
9%, less than
 
$10.0 billion in
 
total consolidated assets,
off-balance sheet
 
exposures of 25%
 
or less of total
 
consolidated assets, and
 
trading assets and
 
liabilities of 5%
 
or less of
 
 
 
10
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
total consolidated assets. However, Section
 
4012 of the CARES Act required that the CBLR be temporarily lowered to 8%.
The federal regulators issued a rule implementing the lower CBLR effective April 23, 2020. The
 
rule also established a two-
quarter grace period
 
for a qualifying
 
institution whose
 
leverage ratio falls
 
below the
 
8% CBLR
 
requirement so
 
long as the
bank maintains a leverage ratio of 7% or greater.
 
Another rule was issued to transition back to the 9% CBLR
 
by increasing
the
 
ratio
 
to
 
8.5%
 
for
 
calendar
 
year
 
2021
 
and
 
9%
 
thereafter.
 
Although
 
the
 
Bank
 
is
 
a
 
qualifying
 
community
 
banking
organization, the Bank has elected
 
not to opt in to the CBLR framework
 
at this time and will continue to
 
follow the Basel III
capital requirements as described above.
As
 
of
 
December 31,
 
2021
 
and
 
2020,
 
the
 
Bank
 
qualified
 
as
 
a
 
“well
 
capitalized”
 
institution.
 
See
 
Note
 
15
 
“Regulatory
Matters” of the Consolidated Financial Statements filed herewith
 
for further details.
Prompt Corrective Action
Under the Federal
 
Deposit Insurance Act
 
(“FDIA”), the
 
federal bank regulatory
 
agencies must take
 
"prompt corrective
action"
 
against
 
undercapitalized
 
U.S.
 
depository
 
institutions.
 
The
 
capital-based
 
regulatory
 
framework
 
contains
 
five
categories
 
of
 
compliance
 
with
 
regulatory
 
capital
 
requirements,
 
including
 
"well
 
capitalized,"
 
"adequately
 
capitalized,"
"undercapitalized,"
 
"significantly
 
undercapitalized,"
 
and
 
"critically
 
undercapitalized,"
 
and
 
depository
 
institutions
 
are
subjected to differential regulation corresponding
 
to the capital category within which the institution falls.
 
As of December 31,
 
2021, a depository
 
institution was
 
deemed to be
 
"well capitalized"
 
if the banking
 
institution had
 
a
total risk-based
 
capital
 
ratio
 
of
 
10.0%
 
or greater,
 
a tier
 
1 risk-based
 
capital
 
ratio
 
of
 
8.0%
 
or
 
greater,
 
a
 
CET1
 
risk-based
capital
 
ratio
 
of
 
6.5%
 
and
 
a
 
leverage
 
ratio
 
of
 
5.0%
 
or
 
greater,
 
and
 
the
 
institution
 
was
 
not
 
subject
 
to
 
an
 
order,
 
written
agreement,
 
capital
 
directive,
 
or
 
prompt
 
corrective
 
action
 
directive
 
to
 
meet
 
and
 
maintain
 
a
 
specific
 
level
 
for
 
any
 
capital
measure.
 
Under
 
certain
 
circumstances,
 
a
 
well-capitalized,
 
adequately
 
capitalized
 
or
 
undercapitalized
 
institution
 
may
 
be
treated as
 
if the
 
institution were
 
in the
 
next lower
 
capital category
 
if it’s
 
determined
 
that the
 
institution is
 
in an
 
unsafe or
unsound condition or
 
is engaging in
 
an unsafe or
 
unsound practice. The
 
degree of
 
regulatory scrutiny of
 
a financial institution
will
 
increase,
 
and
 
the
 
permissible
 
activities
 
of
 
the
 
institution
 
will
 
decrease,
 
as
 
it
 
moves
 
downward
 
through
 
the
 
capital
categories.
 
A
 
banking
 
institution
 
that
 
is
 
undercapitalized
 
is required
 
to
 
submit
 
a
 
capital restoration
 
plan.
 
Failure
 
to
 
meet
capital guidelines
 
could subject
 
the institution
 
to a
 
variety of
 
enforcement remedies
 
by federal
 
bank regulatory
 
agencies,
including: termination
 
of deposit insurance
 
by the FDIC,
 
restrictions on certain
 
business activities, and
 
appointment of the
FDIC as conservator or receiver,
 
depending upon the severity of the capital deficiency
 
.
Commercial Real Estate Concentration Guidelines
The federal
 
banking regulators
 
have implemented
 
guidelines to
 
address increased
 
concentrations in
 
commercial real
estate
 
loans.
 
These
 
guidelines
 
describe
 
the
 
criteria
 
regulatory
 
agencies
 
will
 
use
 
as
 
indicators
 
to
 
identify
 
institutions
potentially
 
exposed
 
to
 
unacceptably
 
high
 
levels
 
of
 
commercial
 
real
 
estate
 
concentration
 
risk.
 
An
 
institution
 
that
 
has
 
(i)
experienced
 
rapid
 
growth
 
in
 
commercial
 
real
 
estate
 
lending,
 
(ii)
 
notable
 
exposure
 
to
 
a
 
specific
 
type
 
of
 
commercial
 
real
estate, (iii)
 
total reported loans
 
for construction, land
 
development, and other
 
land representing 100%
 
or more
 
of total
 
capital,
or
 
(iv)
 
total
 
commercial
 
real
 
estate
 
(including
 
construction)
 
loans
 
representing
 
300%
 
or
 
more
 
of
 
total
 
capital
 
and
 
the
outstanding balance of
 
the institutions commercial
 
real estate portfolio
 
has increased by
 
50% or more
 
in the prior
 
36 months,
may be identified for further supervisory analysis of a potential
 
concentration risk.
As of
 
December 31, 2021,
 
our ratio
 
of construction
 
loans to
 
total capital
 
was 30%,
 
and therefore,
 
we were
 
under the
100% threshold
 
set forth
 
in clause
 
(iii) in
 
the paragraph
 
above. With
 
respect to
 
clause (iv)
 
in the
 
paragraph above,
 
as of
December 31, 2021, our
 
ratio of total
 
commercial real estate
 
loans to total
 
capital was 298%,
 
but the outstanding
 
balance
of our
 
commercial real
 
estate portfolio
 
has not
 
increased by
 
50% or
 
more in
 
the prior
 
36 months.
 
As a
 
result, we
 
are not
deemed to have a concentration in commercial real estate
 
lending under applicable regulatory guidelines.
 
 
 
11
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Payment of Dividends
The ability of
 
the board of
 
directors of an
 
insured depository
 
institution to declare
 
a cash dividend
 
or other distribution
with
 
respect
 
to
 
capital
 
stock
 
is
 
subject
 
to
 
statutory
 
and
 
regulatory
 
restrictions
 
that
 
limit
 
the
 
amount
 
available
 
for
 
such
distribution
 
depending
 
upon
 
earnings,
 
financial
 
condition
 
and
 
cash
 
needs
 
of
 
the
 
institution,
 
as
 
well
 
as
 
general
 
business
conditions. Insured
 
depository
 
institutions are also
 
prohibited from
 
paying management
 
fees to any
 
controlling persons
 
or
other affiliates or,
 
with certain limited exceptions,
 
making capital distributions,
 
including dividends, if
 
after such transaction
the
 
institution
 
would
 
be
 
less
 
than
 
adequately
 
capitalized.
 
Under
 
Florida
 
law,
 
we
 
may
 
generally
 
declare
 
a
 
dividend
 
from
retained net profits which accrued prior to
 
the preceding two years, but we must, before the declaration of
 
a dividend on our
common stock, carry 20% of
 
our net profits for such
 
preceding period as is covered by
 
the dividend to our surplus
 
fund, until
the same
 
shall at
 
least equal
 
the amount
 
of our
 
common stock
 
and preferred
 
stock
 
then issued
 
and outstanding.
 
Under
Florida law, we are prohibited from declaring
 
a dividend at any time
 
at which our net
 
income from the current year
 
combined
with the retained net income from the preceding two years is a loss or which would cause our capital accounts to fall below
the minimum amount required by law, regulation, order,
 
or any written agreement with a state or federal regulatory agency.
In addition,
 
because we
 
are a
 
BHC, we
 
are dependent
 
upon the
 
payment
 
of dividends
 
by the
 
Bank as
 
our principal
source of funds
 
to pay dividends
 
in the future,
 
if any,
 
and to make
 
other payments.
 
It is the
 
policy of the
 
Federal Reserve
Board that BHCs
 
should pay cash
 
dividends on common
 
stock only out
 
of income available
 
over the past
 
year and only
 
if
prospective earnings retention
 
is consistent with
 
the organization’s expected future
 
needs and financial
 
condition. The policy
provides that
 
a BHC
 
should not
 
pay cash
 
dividends at
 
a level
 
that undermines
 
the BHC’s
 
ability to
 
serve as
 
a source
 
of
strength to its banking subsidiaries.
Incentive Compensation
Guidelines adopted by
 
the federal
 
banking agencies pursuant
 
to the
 
FDIA prohibit
 
excessive compensation as
 
an unsafe
and
 
unsound
 
practice
 
and
 
describe
 
compensation
 
as
 
excessive
 
when
 
the
 
amounts
 
paid
 
are
 
unreasonable
 
or
disproportionate to the services performed by an executive
 
officer, employee,
 
director or principal shareholder.
In June 2010,
 
the federal banking
 
agencies jointly
 
adopted the
 
Guidance on Sound
 
Incentive Compensation
 
Policies,
or GSICP.
 
The GSICP intended to
 
ensure that banking organizations
 
do not undermine the
 
safety and soundness of
 
such
organizations
 
by
 
encouraging
 
excessive
 
risk-taking.
 
This
 
guidance,
 
which
 
covers
 
all
 
employees
 
that
 
have
 
the
 
ability
 
to
expose the
 
organization
 
to material
 
amounts of
 
risk, either
 
individually or
 
as part
 
of a
 
group, is
 
based upon
 
a set
 
of key
principles relating to
 
a banking organization’s
 
incentive compensation arrangements.
 
Specifically,
 
incentive compensation
arrangements should (i)
 
provide employee incentives
 
that appropriately balance risk
 
in a manner that does
 
not encourage
employees to expose their
 
organizations to imprudent risk,
 
(ii) be compatible with
 
effective controls and risk
 
management,
and (iii) be supported by
 
strong corporate governance,
 
including active and effective
 
oversight by the organization’s
 
board
of directors. Any deficiencies in our compensation practices
 
could lead to supervisory or enforcement actions
 
by the FDIC.
The
 
Dodd-Frank
 
Act
 
requires
 
the
 
federal
 
banking
 
agencies
 
and
 
the
 
SEC
 
to
 
establish
 
joint
 
regulations
 
or
 
guidelines
prohibiting incentive-based payment arrangements at specified regulated entities, such as us, having at least $1.0 billion in
total
 
assets
 
that
 
encourage
 
inappropriate
 
risk-taking
 
by
 
providing
 
an
 
executive
 
officer,
 
employee,
 
director
 
or
 
principal
shareholder
 
with
 
excessive
 
compensation,
 
fees,
 
or
 
benefits
 
or
 
that
 
could
 
lead
 
to
 
material
 
financial
 
loss
 
to
 
the
 
entity.
 
In
addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-
based compensation
 
arrangements. The
 
federal banking
 
agencies proposed
 
such regulations
 
in April
 
2011
 
and issued
 
a
second proposed rule in April 2016. The second proposed rule would apply to all banks
 
with at least $1.0 billion in average
total consolidated assets. Final
 
regulations have not been
 
adopted as of the date
 
hereof. If adopted, these or
 
other similar
regulations would impose
 
limitations on the manner
 
in which we may
 
structure compensation for our
 
executives and other
employees
 
that
 
could
 
go
 
beyond
 
the
 
requirements
 
of
 
GSICP.
 
The
 
scope
 
and
 
content
 
of
 
the
 
federal
 
banking
 
agencies’
policies
 
on
 
incentive
 
compensation
 
are
 
continuing
 
to
 
develop
 
and
 
are
 
likely
 
to
 
continue
 
evolving,
 
but
 
the
 
timeframe
 
for
finalization of such policies is not known at this time.
 
 
 
12
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Limits on Transactions with Affiliates and
 
Insiders
Insured depository institutions are subject to restrictions
 
on their ability to conduct transactions with
 
affiliates and other
related parties. Section 23A of the Federal Reserve Act imposes quantitative limits, qualitative requirements,
 
and collateral
requirements
 
on
 
certain
 
loan
 
transactions
 
by
 
an
 
insured
 
depository
 
institution
 
with,
 
or
 
for
 
the
 
benefit
 
of,
 
its
 
affiliates.
Transactions covered by Section 23A include loans, extensions of credit, investment in securities issued by an
 
affiliate, and
acquisitions of assets from an
 
affiliate. Section 23B of
 
the Federal Reserve Act requires
 
that most types of transactions by
an
 
insured
 
depository
 
institution
 
with,
 
or
 
for
 
the
 
benefit
 
of,
 
an
 
affiliate
 
be
 
on
 
terms
 
at
 
least
 
as
 
favorable
 
to
 
the
 
insured
depository institution as
 
if the transaction
 
were conducted between
 
the insured depository institution
 
and an unaffiliated third
party.
An affiliate of a
 
bank is any entity that controls,
 
is controlled by or
 
is under common control with
 
the bank. In a holding
company context, the
 
parent bank holding
 
company,
 
such as USCB
 
Financial Holdings, Inc.,
 
and any companies
 
that are
controlled by such parent holding company (excluding
 
subsidiaries of the bank) are affiliates of the bank.
Loans to executive officers and directors of an insured depository institution or any of its affiliates or to any person who
directly or indirectly, or acting through or in concert with one or more persons,
 
owns, controls or has the power to vote more
than 10% of any class of voting securities of a bank, which we
 
refer to as 10% shareholders, or to any political or campaign
committee the
 
funds or
 
services of
 
which will
 
benefit those
 
executive officers,
 
directors, or
 
10% shareholders
 
or which
 
is
controlled by those executive officers, directors
 
or 10% shareholders, are subject to
 
Sections 22(g) and 22(h) of
 
the Federal
Reserve Act
 
and the
 
corresponding
 
regulations
 
(Regulation
 
O) and
 
Section 13(k)
 
of the
 
Exchange Act
 
(as applied
 
to us
through FDIC regulations) relating to the prohibition on personal loans to executives (which exempts financial institutions in
compliance with the insider lending restrictions of Section
 
22(h) of the Federal Reserve Act).
FDIC Deposit Insurance
The FDIC is
 
an independent
 
federal agency
 
that insures the
 
deposits of federally
 
insured depository
 
institutions up
 
to
applicable limits. The FDIC also has certain regulatory,
 
examination and enforcement powers with respect to FDIC-insured
institutions.
 
The
 
deposits
 
are
 
insured
 
by
 
the
 
FDIC
 
up
 
to
 
applicable
 
limits.
 
As
 
a
 
general
 
matter,
 
the
 
maximum
 
deposit
insurance amount which an insured bank may offer
 
is $250 thousand per depositor.
Additionally,
 
FDIC-insured depository institutions are
 
required to pay deposit insurance
 
assessments to the FDIC. The
amount of
 
a particular
 
institution's deposit
 
insurance assessment
 
is based
 
on that
 
institution's risk
 
classification under
 
an
FDIC risk-based assessment system. An institution's
 
risk classification is assigned based on
 
its capital levels and the level
of supervisory concern the institution poses to the regulators.
Under the current
 
system, deposit
 
insurance assessments
 
are based
 
on a bank’s
 
assessment base,
 
which is
 
defined
as average total assets minus
 
average tangible equity.
 
For established small institutions,
 
such as the Bank, the
 
FDIC sets
deposit
 
assessment
 
rates
 
based
 
on
 
the
 
Financial
 
Ratios
 
Method,
 
which
 
takes
 
into
 
account
 
several
 
ratios
 
that
 
reflect
leverage, asset quality,
 
and earnings at
 
each individual institution
 
and then applies
 
a pricing multiplier
 
that is the same
 
for
all institutions. An
 
institution’s rate
 
must be within
 
a certain minimum
 
and a certain
 
maximum range, and
 
the range varies
based on
 
the institution’s
 
composite CAMELS
 
rating. The
 
deposit insurance
 
assessment
 
is calculated
 
by multiplying
 
the
bank’s assessment base by the total base assessment
 
rate.
Under the
 
FDIA, the
 
FDIC may
 
terminate deposit
 
insurance upon
 
a finding
 
that the
 
institution has
 
engaged in
 
unsafe
and unsound
 
practices,
 
is in
 
an unsafe
 
or unsound
 
condition
 
to continue
 
operations,
 
or has
 
violated any
 
applicable
 
law,
regulation, rule, order, or condition
 
imposed by the FDIC.
Depositor Preference
The FDIA provides
 
that, in the
 
event of the
 
"liquidation or other
 
resolution" of an
 
insured depository institution, the
 
claims
of depositors
 
of the institution
 
(including the
 
claims of
 
the FDIC as
 
subrogee of
 
insured depositors)
 
and certain claims
 
for
administrative
 
expenses
 
of
 
the
 
FDIC
 
as
 
a
 
receiver
 
will
 
have
 
priority
 
over
 
other
 
general
 
unsecured
 
claims
 
against
 
the
institution.
 
Insured
 
and
 
uninsured
 
depositors
 
will
 
have
 
priority
 
in
 
payment
 
ahead
 
of
 
unsecured,
 
non-deposit
 
creditors,
including the Company,
 
with respect to any extensions of credit they may have made to such insured depository institution.
Overdraft Fee Regulation
The Electronic Fund Transfer Act prohibits
 
financial institutions from charging consumers fees
 
for paying overdrafts on
automated teller machines, or
 
ATMs,
 
and one-time debit card transactions,
 
unless a consumer consents,
 
or opts in, to the
overdraft service for those types
 
of transactions. If a consumer
 
does not opt in,
 
any ATM transaction or debit that overdraws
 
 
 
13
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
the consumer’s account
 
will be denied.
 
Overdrafts on
 
the payment
 
of checks
 
and regular
 
electronic bill
 
payments are
 
not
covered
 
by
 
this
 
new
 
rule.
 
Before
 
opting
 
in,
 
the
 
consumer
 
must
 
be
 
provided
 
with
 
a
 
notice
 
that
 
explains
 
the
 
financial
institution’s overdraft
 
services, including
 
the fees
 
associated with
 
the service,
 
and the consumer’s
 
choices with
 
respect to
participating in the overdraft service offering. Financial institutions must provide
 
consumers who do not opt in with
 
the same
account terms, conditions and features (including pricing)
 
that they provide to consumers who do opt in.
Federal Home Loan Bank System
We are
 
a member
 
of the FHLB
 
of Atlanta,
 
which is
 
one of 11
 
regional FHLBs.
 
Each FHLB
 
serves as
 
a quasi-reserve
bank
 
for
 
its
 
members
 
within
 
its
 
assigned
 
region.
 
It
 
is
 
funded
 
primarily
 
from
 
funds
 
deposited
 
by
 
member
 
institutions
 
and
proceeds from the sale of consolidated obligations
 
of the FHLB system. A FHLB makes
 
loans to members (i.e., advances)
in accordance with policies and procedures established by
 
the Board of Trustees of the FHLB.
As a member
 
of the FHLB
 
of Atlanta, we are
 
required to own
 
capital stock in
 
the FHLB in
 
an amount at
 
least equal to
0.09% (or
 
9 basis
 
points), which
 
is subject
 
to annual
 
adjustments, of
 
the Bank’s
 
total assets
 
at the
 
end of
 
each calendar
year (up
 
to a
 
maximum of
 
$15.0 million),
 
plus 4.25%
 
of its
 
outstanding advances
 
(borrowings) from
 
the FHLB
 
of Atlanta
under the activity-based stock ownership requirement.
Anti-Money Laundering Regulation
As
 
a
 
financial
 
institution,
 
the
 
Bank
 
must
 
maintain
 
anti-money
 
laundering
 
programs
 
that
 
include
 
established
 
internal
policies, procedures
 
and controls, a
 
designated compliance
 
officer,
 
an ongoing employee
 
training program,
 
and testing of
the
 
program
 
by an
 
independent
 
audit
 
function
 
in
 
accordance
 
with
 
the
 
Bank
 
Secrecy
 
Act
 
of
 
1970,
 
as
 
amended,
 
and
 
the
regulations issued
 
by the
 
Department of
 
the Treasury
 
in 31
 
CFR Chapter
 
X, FDIC
 
Rule 326.8
 
and the
 
Florida Control
 
of
Money Laundering
 
and Terrorist
 
Financing in
 
Financial Institutions
 
Act. Financial
 
institutions are
 
prohibited from
 
entering
into certain specified financial transactions and account relationships and must meet enhanced standards for due diligence
and “knowing
 
your customer”
 
in their
 
dealings with
 
foreign
 
financial
 
institutions, foreign
 
customers
 
and other
 
high risk
 
or
sanctioned
 
customers.
 
Financial
 
institutions
 
must
 
also
 
take
 
reasonable
 
steps
 
to
 
conduct
 
enhanced
 
scrutiny
 
of
 
account
relationships to
 
guard against
 
money laundering
 
and to
 
report transactions
 
that meet
 
certain dollar
 
amount thresholds
 
as
well as any
 
suspicious transactions.
 
Certain laws, such
 
as the USA
 
PATRIOT
 
Act, enacted
 
in 2001 and
 
renewed through
2019, as
 
described below,
 
provide law
 
enforcement authorities
 
with increased
 
access to
 
financial information
 
maintained
by banks.
 
Anti-money laundering
 
obligations have
 
been substantially
 
strengthened
 
as a
 
result of
 
the USA
 
PATRIOT
 
Act. Bank
regulators routinely examine institutions for compliance with these obligations, and this area has become a particular focus
of the regulators in recent years. In
 
addition, the regulators are required to consider compliance with the
 
USA PATRIOT
 
Act
in connection
 
with the
 
regulatory review
 
of certain
 
applications. In
 
recent years,
 
regulators have
 
expressed
 
concern over
banking institutions’
 
compliance with
 
anti-money laundering
 
requirements and,
 
in some
 
cases, have
 
delayed approval
 
of
their expansionary proposals because
 
of deficiencies in such
 
institutions’ anti-money laundering
 
programs. The regulators
and
 
other
 
governmental
 
authorities
 
have
 
been
 
active
 
in
 
imposing
 
“cease
 
and
 
desist”
 
orders
 
and
 
significant
 
civil
 
money
penalty sanctions against institutions found to be in
 
violation of the anti-money laundering regulations.
The Office of Foreign Assets Control
The Office of Foreign Assets Control (the “OFAC
 
”) is responsible for helping to ensure that U.S. entities do not engage
in transactions with
 
“enemies” of
 
the United States,
 
as defined by
 
various Executive
 
Orders and Acts
 
of Congress.
 
OFAC
publishes lists of
 
names of
 
persons and organizations
 
suspected of aiding,
 
harboring or
 
engaging in terrorist
 
acts; owned
or
 
controlled
 
by,
 
or
 
acting
 
on
 
behalf
 
of
 
target
 
countries;
 
and
 
narcotics
 
traffickers.
 
Such
 
persons
 
are
 
referred
 
to
 
as
“sanctioned” persons.
 
If a bank finds
 
a name on
 
any transaction, account
 
or wire transfer
 
that is on
 
an OFAC
 
list, it must
 
freeze the account
and/or block the transaction or
 
wire transfer.
 
We utilize an outside
 
vendor to oversee the
 
daily monitoring and surveillance
of
 
our
 
accounts
 
and
 
the
 
filing
 
of
 
any
 
notifications.
 
We
 
also
 
monitor
 
high-risk
 
OFAC
 
areas
 
such
 
as
 
new
 
accounts,
 
wire
transfers and customer files. These checks are performed
 
using software that is updated each time a modification
 
is made
to the lists provided by OFAC
 
and other agencies of Specially Designated Nationals
 
and Blocked Persons.
 
 
 
14
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Consumer Laws and Regulations
Our activities
 
are subject
 
to a
 
variety
 
of federal
 
and state
 
statutes and
 
regulations
 
designed to
 
protect consumers
 
in
transactions with
 
banks. Interest
 
and other
 
charges collected
 
or contracted
 
for by
 
us are
 
subject to
 
state usury
 
laws and
federal laws concerning interest rates. Our loan
 
operations are also subject to federal laws
 
applicable to credit transactions,
such as:
 
the
 
Truth-In-Lending
 
Act,
 
or
 
TILA,
 
and
 
Regulation
 
Z,
 
governing
 
disclosures
 
of
 
credit
 
and
 
servicing
 
terms
 
to
consumer borrowers
 
and including
 
substantial requirements
 
for mortgage
 
lending and
 
servicing, as
 
mandated by
the Dodd-Frank Act
 
the Home Mortgage Disclosure Act of 1975 and Regulation C, requiring
 
financial institutions to provide information
to enable the
 
public and public
 
officials to
 
determine whether
 
a financial institution
 
is fulfilling its
 
obligation to help
meet the housing needs of the communities they serve;
 
the Equal Credit
 
Opportunity Act and
 
Regulation B, prohibiting
 
discrimination on the
 
basis of race,
 
color,
 
religion,
or other prohibited factors in extending credit;
 
the Fair
 
Credit Reporting Act
 
of 1978,
 
as amended by
 
the Fair
 
and Accurate Credit
 
Transactions Act, and Regulation
V, as well as the rules and
 
regulations of the FDIC governing the
 
use and provision of information
 
to credit reporting
agencies, certain identity theft protections and certain
 
credit and other disclosures;
 
the Fair
 
Debt Collection
 
Practices Act
 
and Regulation
 
F,
 
governing the
 
manner in
 
which consumer
 
debts may
 
be
collected by collection agencies; and
 
the Real Estate Settlement Procedures Act, or RESPA, and Regulation X, which governs aspects of the settlement
process for residential mortgage loans.
Our deposit operations are also subject to federal laws,
 
such as:
 
the
 
FDIA,
 
which,
 
among
 
other
 
things,
 
limits
 
the
 
amount
 
of
 
deposit
 
insurance
 
available
 
per
 
depositor
 
to
 
$250
thousand and imposes other limits on deposit-taking;
 
the Right to
 
Financial Privacy Act,
 
which imposes a
 
duty to maintain
 
the confidentiality of
 
consumer financial records
and prescribes procedures for complying with administrative subpoenas
 
of financial records;
 
the Electronic
 
Funds Transfer
 
Act and
 
Regulation E,
 
which governs
 
automatic
 
deposits to
 
and withdrawals
 
from
deposit accounts
 
and customers’
 
rights and
 
liabilities arising
 
from the
 
use of
 
ATMs
 
and other
 
electronic banking
services; and
 
the Truth
 
in Savings
 
Act and
 
Regulation DD,
 
which requires
 
depository institutions
 
to provide
 
disclosures so
 
that
consumers can make meaningful comparisons about depository
 
institutions and accounts.
These
 
laws
 
and
 
regulations
 
mandate
 
certain
 
disclosure
 
requirements
 
and
 
regulate
 
the
 
manner
 
in
 
which
 
financial
institutions must deal with clients when taking
 
deposits or making loans to such
 
clients. We must comply with the applicable
provisions of these consumer protection laws and regulations as part of both
 
our ongoing client relations and our regulatory
compliance obligations.
Financial Privacy and Cybersecurity
Banking organizations
 
are
 
subject to
 
many federal
 
and state
 
laws and
 
regulations
 
governing the
 
collection,
 
use and
protection
 
of
 
customer
 
information.
 
Under
 
the
 
privacy
 
protection
 
provisions
 
of
 
the
 
Gramm-Leach-Bliley
 
Act
 
of
 
1999
 
and
related regulations,
 
we are
 
limited in
 
our ability
 
to disclose
 
non-public
 
information
 
about consumers
 
to nonaffiliated
 
third
parties. These limitations require disclosure of privacy policies to
 
consumers and, in some circumstances, allow consumers
to
 
prevent
 
disclosure
 
of
 
certain
 
personal
 
customer
 
information
 
to
 
nonaffiliated
 
third
 
parties.
 
Federal
 
banking
 
agencies,
including the FDIC, have adopted guidelines for establishing information security standards and
 
cybersecurity programs for
implementing safeguards. These guidelines,
 
along with related
 
regulatory guidance, increasingly focus
 
on risk management
and processes related to information technology and the use
 
of third parties in the provision of financial services.
In addition to federal laws and regulations, we are subject
 
to state laws governing customer privacy and cybersecurity.
The Florida Information Protection Act of 2014 requires notification to the Florida Department of Legal Affairs of any breach
involving personal
 
information that
 
affects more
 
than 500
 
people as well
 
as requiring
 
notification of
 
affected individuals
 
of
any
 
such
 
breach.
 
The
 
Act
 
also
 
requires
 
us
 
to
 
take
 
reasonable
 
measures
 
to
 
protect
 
and
 
secure
 
data
 
in
 
electronic
 
form
containing
 
personal
 
information
 
and
 
take
 
all
 
reasonable
 
measures
 
to
 
dispose,
 
or
 
arrange
 
for
 
the
 
disposal,
 
of
 
customer
records containing
 
personal information
 
within our
 
custody or
 
control when
 
the records
 
are no
 
longer to
 
be retained.
 
We
incur
 
significant
 
costs
 
and
 
expenses
 
in
 
order
 
to
 
address
 
compliance
 
with
 
the
 
federal
 
and
 
state
 
customer
 
privacy
 
and
cybersecurity laws and regulations, and we expect such
 
costs and expenses will continue into the future.
 
 
 
15
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (“CFPB”) is
 
an independent regulatory authority housed within the
 
Federal
Reserve. The CFPB
 
has broad authority
 
to regulate the
 
offering and provision of
 
consumer financial products and
 
to prevent
institutions subject to its authority
 
from engaging
 
in “unfair and deceptive or
 
abusive acts or practices”
 
with respect to their
offering
 
of
 
consumer
 
financial
 
products
 
or
 
services.
 
The
 
CFPB
 
has
 
the
 
authority
 
to
 
supervise
 
and
 
examine
 
depository
institutions with more than $10.0 billion
 
in assets for compliance with federal
 
consumer laws. The authority to supervise
 
and
examine depository institutions with $10.0 billion or less in assets, such as our Bank, for compliance with federal consumer
laws remains
 
largely with those
 
institutions’ primary regulators.
 
However, the CFPB may
 
participate in examinations
 
of these
smaller
 
institutions
 
on
 
a
 
“sampling
 
basis”
 
and
 
may
 
refer
 
potential
 
enforcement
 
actions
 
against
 
such
 
institutions
 
to
 
their
primary regulators.
 
As such,
 
the
 
CFPB
 
may participate
 
in examinations
 
of our
 
Bank. In
 
addition,
 
states
 
are permitted
 
to
adopt consumer protection laws
 
and regulations that are
 
stricter than the regulations
 
promulgated by the CFPB,
 
and state
attorneys general are permitted to enforce consumer protection
 
rules adopted by the CFPB against certain
 
institutions.
The Volcker Rule
The Dodd-Frank Act
 
prohibits (subject to
 
certain exceptions) us
 
and our
 
affiliates from engaging
 
in short term
 
proprietary
trading in
 
securities and
 
derivatives and
 
from investing
 
in and/or
 
sponsoring certain
 
investment companies
 
defined in
 
the
rule as “covered funds”
 
(including not only hedge
 
funds, commodity pools and
 
private equity funds, but
 
also a range of
 
asset
securitization structures
 
that do not
 
meet exemptive
 
criteria in the
 
final rules).
 
This statutory
 
provision is
 
commonly called
the “Volcker Rule.” At December 31, 2021, we are not
 
subject to the Volcker Rule because of our asset
 
size, which is below
the $10.0 billion in assets Volcker
 
Rule threshold.
Community Reinvestment Act and Fair Lending Requirements
We
 
are
 
subject
 
to
 
certain
 
fair
 
lending
 
requirements
 
and
 
reporting
 
obligations
 
involving
 
home
 
mortgage
 
lending
operations.
 
We
 
are
 
also
 
subject
 
to
 
certain
 
requirements
 
and
 
reporting
 
obligations
 
under
 
the
 
federal
 
Community
Reinvestment Act (“CRA”).
 
The CRA and its
 
corresponding regulations are
 
intended to encourage
 
banks to help meet
 
the
credit needs of the communities
 
they serve, including low-
 
and moderate-income neighborhoods,
 
consistent with safe and
sound banking practices.
 
Accordingly,
 
the
 
CRA
 
generally
 
requires
 
federal
 
banking
 
agencies
 
to
 
evaluate
 
the
 
record
 
of
 
a
 
financial
 
institution
 
in
meeting applicable
 
CRA requirements.
 
The CRA
 
further requires
 
the agencies
 
to take
 
into account
 
our record
 
of meeting
community credit
 
needs when
 
evaluating applications
 
for,
 
among other
 
things, new
 
banking centers
 
or mergers.
 
We are
also subject
 
to analogous
 
state CRA
 
requirements in
 
Florida and
 
certain other
 
states in
 
which we
 
may establish
 
banking
centers. In connection
 
with their assessments
 
of CRA
 
performance, the FDIC
 
and FOFR assign
 
a rating of
 
“outstanding,”
“satisfactory,”
 
“needs
 
to
 
improve,”
 
or
 
“substantial
 
noncompliance.”
 
The
 
Bank
 
received
 
a
 
“satisfactory”
 
CRA
 
Assessment
Rating
 
from
 
both
 
regulatory
 
agencies
 
in
 
our
 
most
 
recent
 
CRA
 
examinations.
 
In
 
addition
 
to
 
substantive
 
penalties
 
and
corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA
 
into account when regulating and supervising
 
other activities of the bank, including
 
in
acting on
 
expansionary proposals such
 
as when
 
a bank
 
submits an
 
application to
 
establish bank
 
centers, merge
 
with another
bank, or
 
acquire the
 
assets and
 
assume the
 
liabilities of
 
another bank.
 
An unsatisfactory
 
CRA and/or
 
fair lending
 
record
could substantially
 
delay or
 
block any
 
such transaction.
 
The regulatory
 
agency's assessment
 
of the
 
institution's record
 
is
made available to the public at www.ffiec.gov/craratings
 
.
Call Reports and Examination Cycle
All
 
banking
 
institutions,
 
regardless
 
of
 
size,
 
submit
 
a
 
quarterly
 
call
 
report
 
to
 
their
 
primary
 
federal
 
bank
 
regulator
 
that
includes
 
data
 
used
 
by
 
federal
 
banking
 
agencies
 
to
 
monitor
 
the
 
condition,
 
performance,
 
and
 
risk
 
profile
 
of
 
individual
institutions and
 
the industry
 
as a
 
whole. In
 
June 2019,
 
the federal
 
banking agencies
 
issued a
 
final rule
 
to permit
 
insured
depository
 
institutions
 
with
 
total
 
assets
 
of
 
less
 
than
 
$5.0
 
billion
 
that
 
do
 
not
 
engage
 
in
 
certain
 
complex
 
or
 
international
activities to file
 
the most streamlined
 
version of the
 
quarterly call report,
 
and to reduce
 
data reportable on
 
certain streamlined
call report submissions.
Effect of Governmental Monetary Policies
The commercial banking
 
business is affected
 
not only by
 
general economic conditions,
 
but also by
 
the monetary policies
of the Federal Reserve. Changes in the discount rate
 
on member bank borrowing, availability of borrowing
 
at the “discount
window,”
 
open
 
market
 
operations,
 
changes
 
in
 
the
 
Fed
 
Funds
 
target
 
interest
 
rate,
 
the
 
imposition
 
of
 
changes
 
in
 
reserve
requirements against member banks’ deposits
 
and assets of foreign banking centers
 
and the imposition of and changes in
reserve requirements against certain
 
borrowings by banks and
 
their affiliates are
 
some of the
 
instruments of monetary
 
policy
 
 
 
16
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
available to the Federal Reserve. These
 
monetary policies are used in
 
varying combinations to influence overall growth and
distributions of bank loans, investments and deposits, which may affect interest
 
rates charged on loans or paid on deposits.
The monetary
 
policies of
 
the Federal
 
Reserve have
 
had a significant
 
effect on
 
the operating
 
results of
 
commercial banks
and are
 
expected to
 
continue
 
to do
 
so in
 
the future.
 
The Federal
 
Reserve’s
 
policies are
 
primarily
 
influenced
 
by the
 
dual
mandate of price
 
stability and full
 
employment in the
 
U.S., and to
 
a lesser degree
 
by short-term and
 
long-term changes in
the international trade balance and in the fiscal policies of the U.S. government. Future changes in monetary policy and
 
the
effect of such changes on our business and earnings
 
in the future cannot be predicted.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects
 
the regulation of the financial services industry,
 
and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating
in those states.
 
Federal and state
 
regulatory agencies
 
also periodically propose
 
and adopt changes
 
to their regulations
 
or
change the manner
 
in which existing
 
regulations are
 
applied or
 
interpreted. The
 
substance or
 
impact of pending
 
or future
legislation or regulation, or
 
the application thereof, cannot
 
be predicted, although enactment
 
of proposed legislation has
 
in
the past
 
and may
 
in the
 
future affect
 
the regulatory
 
structure under
 
which we
 
operate and
 
may significantly
 
increase our
costs, impede the efficiency
 
of our internal business
 
processes, require us to
 
increase our regulatory
 
capital or modify our
business
 
strategy,
 
or
 
limit
 
our
 
ability
 
to
 
pursue
 
business
 
opportunities
 
in
 
an
 
efficient
 
manner.
 
Our
 
business,
 
financial
condition, results
 
of operations
 
or prospects
 
may be
 
adversely affected,
 
perhaps materially,
 
as a
 
result of
 
any such
 
new
legislation or regulations.
The CARES Act and Initiatives Related to COVID-19
On March 27, 2020, the CARES Act was signed into law and provided for approximately $2.2 trillion in direct economic
relief in
 
response to
 
the public
 
health and
 
economic impacts
 
of COVID-19.
 
Many of
 
the CARES
 
Act’s programs
 
are, and
remain, dependent
 
upon the
 
direct involvement
 
of financial
 
institutions like
 
us. These
 
programs have
 
been implemented
through rules and guidance adopted by federal
 
departments and agencies, including the
 
U.S. Department of Treasury,
 
the
Federal Reserve and
 
other federal bank
 
regulatory authorities,
 
including those with
 
direct supervisory
 
jurisdiction over us.
Furthermore, as the COVID-19 pandemic evolves,
 
federal regulatory authorities continue
 
to issue additional guidance with
respect
 
to
 
the
 
implementation,
 
life
 
cycle,
 
and
 
eligibility
 
requirements
 
for
 
the
 
various
 
CARES
 
Act
 
programs,
 
as
 
well
 
as
industry-specific
 
recovery
 
procedures
 
for
 
COVID-19.
 
In
 
addition,
 
it
 
is
 
possible
 
that
 
Congress
 
will
 
enact
 
supplementary
COVID-19 response legislation, including
 
amendments to the CARES
 
Act or new bills comparable
 
in scope to the CARES
Act.
 
We
 
continue
 
to
 
assess
 
the
 
impact
 
of
 
the
 
CARES
 
Act,
 
the
 
Consolidated
 
Appropriations
 
Act,
 
2021
 
and
 
the
 
potential
impact
 
of
 
new
 
COVID-19
 
legislation
 
and
 
other
 
statutes,
 
regulations
 
and
 
supervisory
 
guidance
 
related
 
to
 
the
 
COVID-19
pandemic.
A
 
principal
 
provision
 
of
 
the
 
CARES
 
Act
 
amended
 
the
 
SBA’s
 
loan
 
program
 
to
 
create
 
a
 
guaranteed,
 
unsecured
 
loan
program, the Paycheck
 
Protection Program, or PPP, to fund operational
 
costs of eligible
 
businesses, organizations and self-
employed persons
 
impacted by COVID
 
-19. These loans
 
are fully guaranteed
 
by the SBA
 
and are eligible
 
to be forgiven
 
if
certain conditions
 
are satisfied.
 
Additionally,
 
loan payments
 
will also
 
be deferred
 
for the
 
first six
 
months of
 
the loan
 
term.
The PPP
 
commenced on
 
April 3,
 
2020 and
 
was available
 
to qualified
 
borrowers through
 
August 8,
 
2020. No
 
collateral or
personal guarantees were required. On December 27, 2020, President Trump signed the Consolidated Appropriations
 
Act,
2021 into
 
law which
 
included the
 
Economic Aid
 
to Hard-Hit
 
Small Businesses,
 
Nonprofits, and
 
Venues
 
Act, or
 
the HHSB
Act. Among other things, the HHSB Act renewed the PPP,
 
allocating $284.5 billion for both new first time PPP loans under
the
 
existing
 
PPP
 
and
 
the
 
expansion
 
of
 
existing
 
PPP
 
loans
 
for
 
certain
 
qualified,
 
existing
 
PPP
 
borrowers.
 
In
 
addition
 
to
extending and amending the
 
PPP,
 
the HHSB Act also
 
creates a new grant program
 
for “shuttered venue operators.”
 
As of
December 31, 2021, we had 414 active PPP loans remaining
 
totaling $42.4 million in outstanding principal balances.
The CARES
 
Act,
 
as
 
extended
 
by certain
 
provisions
 
of the
 
Consolidated
 
Appropriations
 
Act,
 
2021,
 
permits
 
banks
 
to
suspend requirements under
 
generally accepted accounting
 
principles (“GAAP”) for
 
loan modifications
 
to borrowers affected
by COVID-19 that may
 
otherwise be characterized
 
as troubled debt restructurings
 
and suspend any determination
 
related
thereto if (i) the
 
borrower was not
 
more than 30
 
days past due
 
as of December
 
31, 2019, (ii)
 
the modifications are
 
related
to COVID-19, and (iii)
 
the modification occurs between
 
March 1, 2020
 
and the earlier of
 
60 days after
 
the date of termination
of the national
 
emergency or January 1,
 
2022. Federal bank
 
regulatory authorities also issued
 
guidance to encourage banks
to
 
make
 
loan
 
modifications
 
for
 
borrowers
 
affected
 
by
 
COVID-19.
 
As
 
of
 
December 31,
 
2021,
 
there
 
were
 
no
 
loans
 
in
 
our
portfolio in deferral status associated with the COVID-19 pandemic.
See Note 3 “Loans” of the Consolidated Financial Statements
 
filed herewith for further details.
 
 
 
17
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Available Information
Our
 
website
 
address
 
is
 
www.uscentury.com.
 
Our
 
electronic
 
filings
 
with
 
the
 
FDIC
 
and
 
the
 
SEC
 
(including
 
all
 
Annual
Reports on Form 10-K,
 
Quarterly Reports on
 
Form 10-Q, Current
 
Reports on Form
 
8-K, and if applicable,
 
amendments to
those reports)
 
are available
 
free of
 
charge on
 
the website
 
as soon
 
as reasonably
 
practicable after
 
they are
 
electronically
filed with,
 
or furnished
 
to,
 
the
 
FDIC
 
or
 
SEC. The
 
information
 
posted
 
on
 
our website
 
is
 
not
 
incorporated
 
into
 
this
 
Annual
Report. In addition, the FDIC and the SEC maintains a
 
website that contains reports and other information that
 
is filed.
 
 
 
18
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Item 1A. Risk Factors
This
 
section
 
contains
 
a
 
description
 
of
 
the
 
material
 
risk
 
and
 
uncertainties
 
identified
 
by
 
management
 
that
 
could,
individually or in combination, harm our business, results of
 
operations, liquidity and financial condition. The risks described
below are not all inclusive. We may face other risks
 
that are not presently known, or that we presently deem
 
immaterial.
 
Summary of Risk Factors
Our business is subject to
 
a number of risks that could
 
cause actual results to differ
 
materially from those indicated
 
by
forward-looking statements
 
made in this
 
Form 10-K
 
or presented
 
elsewhere from
 
time to time.
 
These risks
 
are discussed
more fully in this Item 1A and include, without limitation,
 
the following:
Risks Related to our Business and Operations
 
Our
 
business
 
operations
 
and
 
lending
 
activities
 
are concentrated
 
in
 
South
 
Florida,
 
and
 
we
 
are
 
more
 
sensitive
 
to
adverse changes in the local economy than our more geographically
 
diversified competitors.
 
The small- to medium-sized businesses
 
to which we lend may have
 
fewer resources to weather adverse
 
business
developments, which may impair a borrower's ability to
 
repay a loan.
 
The ongoing COVID-19 pandemic has adversely impacted
 
and could continue to adversely impact us.
 
 
Changes in U.S. trade policies and other global political
 
factors beyond our control may adversely impact
 
us.
 
 
Our lending business is subject to credit risk, which could
 
lead to unexpected losses.
 
 
The potential for the replacement or discontinuation of London Inter-bank Offered Rate, or LIBOR, as a benchmark
interest rate could present operational problems and result
 
in market disruption.
 
 
Natural disasters and severe weather events in Florida
 
could have a material adverse impact on us.
 
 
Our business is subject to interest rate risk.
 
 
Our allowance for credit losses may not be sufficie
 
nt to absorb potential losses in our loan portfolio.
 
 
Our commercial loan portfolio may expose us to increased
 
credit risk.
 
 
Our SBA lending program depends on our status as a participant in the SBA's Preferred Lenders Program, and we
face specific risks associated with originating SBA loans
 
and selling the guaranteed portion thereof.
 
 
The SBA may not honor its guarantees if we do not originate
 
loans in compliance with SBA guidelines.
 
 
Global banking is an important part of our business, which creates
 
increased BSA/AML risk.
 
 
We may not recover all amounts that are contractually
 
owed to us by our borrowers.
 
 
Non-performing assets take significant time to resolve and
 
adversely affect us.
 
 
We engage in
 
lending secured by
 
real estate and
 
may foreclose on
 
the collateral and
 
own the underlying
 
real estate,
subjecting us to the costs and potential risks associated
 
with the ownership
 
of real property and other risks.
 
 
We are subject to certain operational risks, such as fraud
 
and data processing system failures and errors.
 
 
We are subject to liquidity risk, which could adversely
 
affect our financial condition and results of
 
operations.
 
 
We have several large depositor relationships, the
 
loss of which could adversely affect us.
 
 
The value of our securities in our investment portfolio
 
may decline in the future.
 
 
We may not effectively execute on our expansion
 
strategy.
 
 
 
 
19
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
 
New lines of business, products, product enhancements
 
or services may subject us to additional risk.
 
 
Additional capital we need may not be available on terms
 
acceptable to us or may dilute our shareholders.
 
 
Our strategy to grow through mergers or acquisitions may not be
 
successful or, if successful,
 
may produce risks in
successfully integrating and managing the merged companies
 
or acquisitions and may dilute our shareholders.
 
 
We may lose one or more of our key personnel
 
or fail to attract and retain other highly qualified personnel.
 
 
Damage to our reputation could significantly harm our
 
businesses.
 
 
We face strong competition and must respond
 
to rapid technological changes to remain competitive.
 
 
A failure, interruption, or breach in the security of our or our contracted vendors’ systems could adversely affect us.
 
 
We rely on other companies to provide key components
 
of our business infrastructure.
 
 
Litigation and regulatory actions could subject us to significant
 
liabilities or restrictions.
 
 
Certain of our directors may have conflicts of interest
 
in presenting business opportunities to us.
 
Risks Related to Our Tax, Accounting
 
and Regulatory Compliance
 
 
We may be unable to recognize the benefits of deferred
 
tax assets.
 
The accuracy of our financial statements could be affected
 
by our judgments, assumptions or estimates.
 
 
As a new public company,
 
we may not create an effective internal control
 
environment.
 
We operate in a highly regulated environment.
 
Our participation in the SBA PPP loan program exposes
 
us to noncompliance risk and litigation risk.
 
 
We face a risk of noncompliance with the Bank
 
Secrecy Act and other anti-money laundering laws.
 
We are subject to capital adequacy requirements
 
that may become more stringent.
 
We are periodically subject to examination and scrutiny
 
by a number of banking agencies.
 
We are subject to numerous laws and regulations
 
of certain regulatory agencies designed to protect consumers.
Risks Related to Our Class A Common Stock
 
We do not anticipate paying dividends on our common
 
stock.
 
The market price and trading volume of our Class A common
 
stock may be volatile.
 
There are significant restrictions in our Articles of Incorporation
 
that restrict the ability to sell our capital stock.
 
We
 
are
 
an
 
emerging
 
growth
 
company
 
and
 
have
 
decided
 
to
 
take
 
advantage
 
of
 
certain
 
exemptions
 
from
 
various
reporting and other requirements applicable to emerging growth
 
companies.
 
We have existing investors that
 
own a significant amount of
 
our common stock whose individual
 
interests may differ
from yours.
 
 
Provisions in our governing documents and Florida
 
law may have an anti-takeover effect
 
and there are substantial
regulatory limitations on changes of control of the Company.
 
 
 
20
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Risks Related to our Business and Operations
Our business
 
operations and
 
lending activities
 
are concentrated
 
in South
 
Florida, and
 
we are
 
more sensitive
to adverse changes in the local economy than our
 
more geographically diversified competitors.
 
Unlike many of
 
our larger competitors
 
that maintain significant
 
operations located
 
outside of our
 
market area, most
 
of
our customers are concentrated in South Florida. In addition, we have
 
a high concentration of loans secured by real estate
located in
 
South Florida.
 
Therefore, our
 
success depends
 
upon the
 
general economic
 
conditions in
 
South Florida,
 
which
may differ from the economic conditions in other areas
 
of the U.S. or the U.S. generally.
Our real estate
 
collateral provides
 
an alternate source
 
of repayment in
 
the event
 
of default by
 
the borrower;
 
however,
the value of the collateral may decline during the time the credit is outstanding. The concentration of our loans in the South
Florida area subjects us to
 
risk that a downturn in the
 
local economy or recession in
 
this area could result in
 
a decrease in
loan originations and increases in delinquencies and foreclosures, which would have a greater negative effect on us than if
our lending
 
were more
 
geographically diversified.
 
If we
 
are required
 
to liquidate
 
our real
 
estate collateral
 
securing a
 
loan
during
 
a
 
period
 
of
 
reduced
 
real
 
estate
 
values
 
to
 
satisfy
 
the
 
debt,
 
our
 
earnings
 
and
 
capital
 
could
 
be
 
adversely
 
affected.
Moreover, since a large portion of our portfolio is
 
secured by properties located in South
 
Florida, the occurrence of a natural
disaster, such as a hurricane, or a man-made disaster could result in a decline in loan originations, a decline in the value or
destruction of
 
mortgaged properties
 
and an
 
increase in
 
the risk
 
of delinquencies,
 
foreclosures or
 
loss on
 
loans originated
by us. We may
 
suffer further losses
 
due to the decline
 
in the value of the
 
properties underlying our mortgage
 
loans, which
would have an adverse impact on our results of operations
 
and financial condition.
A downturn in the local economy generally may lead to loan losses that are not offset by operations in other markets; it
may also reduce the ability
 
of our customers to grow
 
or maintain their deposits with
 
us. For these reasons, any
 
regional or
local economic
 
downturn
 
that
 
affects
 
South Florida,
 
or existing
 
or prospective
 
borrowers
 
or
 
depositors
 
in
 
South Florida,
could have a material adverse effect on our business,
 
financial condition and results of operations.
In addition, there are
 
continuing concerns related
 
to, among other things,
 
the level of U.S.
 
government debt and
 
fiscal
actions that may
 
be taken to
 
address that debt,
 
price fluctuations of key
 
natural resources, inflation, the
 
potential resurgence
of economic
 
and political
 
tensions
 
with China,
 
the Russian
 
invasion
 
of Ukraine
 
and increasing
 
oil prices
 
due to
 
Russian
supply disruptions,
 
each of
 
which
 
may have
 
a destabilizing
 
effect
 
on financial
 
markets
 
and economic
 
activity.
 
Economic
pressure
 
on
 
consumers
 
and
 
overall
 
economic
 
uncertainty
 
may
 
result
 
in
 
changes
 
in
 
consumer
 
and
 
business
 
spending,
borrowing
 
and
 
saving
 
habits.
 
These
 
economic
 
conditions
 
and/or
 
other
 
negative
 
developments
 
in
 
the
 
domestic
 
or
international credit
 
markets or
 
economies
 
may significantly
 
affect
 
the markets
 
in which
 
we do
 
business, the
 
value of
 
our
loans and investments, and our ongoing operations, costs
 
and profitability.
The
 
small-
 
to
 
medium-sized
 
businesses
 
to
 
which
 
we
 
lend
 
may
 
have
 
fewer
 
resources
 
to
 
weather
 
adverse
business developments, which may impair a borrower's
 
ability to repay a loan.
We
 
target
 
our
 
business
 
development
 
and
 
marketing
 
strategies
 
primarily
 
to
 
serve
 
the
 
banking
 
and
 
financial
 
services
needs of small-
 
to medium-sized businesses, or SMBs, and
 
the owners and operators of
 
those businesses. SMBs generally
have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market
shares than their competition, may be
 
more vulnerable to economic downturns,
 
often need substantial additional
 
capital to
expand
 
or
 
compete,
 
and
 
may
 
experience
 
substantial
 
volatility
 
in
 
operating
 
results,
 
any
 
of
 
which,
 
individually
 
or
 
in
 
the
aggregate, may impair
 
their ability as
 
a borrower to
 
repay a loan.
 
These factors may
 
impact SMBs significantly
 
more as a
result of the effects of the COVID-19 pandemic. In addition, the success of SMBs often depends on the management skills,
talents and efforts of a small group of
 
key people, and the death, disability or
 
resignation of one or more of these individuals
could have
 
an adverse
 
impact on
 
the business
 
and its
 
ability to
 
repay its
 
loan. If
 
general economic
 
conditions negatively
impact the markets in which we operate
 
or any of our borrowers otherwise are
 
affected by adverse business developments,
our
 
SMB
 
borrowers
 
may
 
be
 
disproportionately
 
affected
 
and
 
their
 
ability
 
to
 
repay
 
outstanding
 
loans
 
may
 
be
 
negatively
affected, which could have a material adverse effect
 
on our business, financial condition and results of operations.
 
 
 
21
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
The ongoing COVID-19
 
pandemic and resulting
 
substantial disruption
 
to global and
 
domestic economies has
adversely
 
impacted,
 
and
 
could
 
continue
 
to
 
adversely
 
impact,
 
our
 
business
 
operations,
 
asset
 
valuations,
 
and
financial results.
The
 
ongoing
 
COVID-19
 
pandemic
 
has
 
created
 
global
 
and
 
domestic
 
economic
 
and
 
financial
 
disruptions
 
that
 
have
adversely affected, and could
 
continue to adversely
 
affect, our business
 
operations, asset valuations
 
and financial results.
The pandemic has negatively
 
impacted the global and
 
domestic economies, disrupted supply chains,
 
lowered certain equity
market
 
valuations
 
in
 
certain
 
sectors,
 
and
 
created
 
significant
 
volatility
 
and
 
disruption
 
in
 
financial
 
markets.
 
Certain
 
large,
medium and small
 
businesses within certain
 
industries have been
 
particularly hard hit
 
both in the U.S.
 
and internationally,
including
 
the
 
aviation
 
industry,
 
the
 
travel,
 
hotel
 
and
 
hospitality
 
industry,
 
the
 
restaurant
 
industry,
 
property
 
management
industry and the retail
 
industry.
 
In addition, the pandemic
 
has resulted in remote
 
working environments, travel
 
restrictions,
business
 
entry
 
requirements,
 
and
 
proposed
 
return-to-office
 
vaccination
 
and
 
testing
 
requirements.
 
Should
 
the
 
negative
economic impacts
 
of COVID-19
 
persist or
 
worsen, this
 
could have
 
a continued
 
adverse impact
 
on our
 
business, financial
condition and
 
results of
 
operations, as
 
these circumstances
 
continue to
 
impact our
 
core SMB
 
customers. Additionally,
 
an
expected recovery
 
from the
 
impacts of
 
COVID-19 may
 
not occur
 
as fast
 
as anticipated,
 
and any
 
such recovery
 
may not
yield the same benefits to us as other financial institutions
 
or other companies in other industries.
 
Because there have been no comparable recent global pandemics
 
or similar disruptions that resulted in a
 
similar global
impact, the full extent to which the COVID-19 pandemic
 
will impact our business operations, asset valuations
 
and financial
results will depend on future developments which remain uncertain and cannot be
 
predicted at this time. These include the
scope and duration
 
of the pandemic,
 
including the
 
introduction of
 
new strains
 
of the virus,
 
the efficacy
 
and distribution
 
of,
and participation in,
 
vaccination programs, the
 
continued effectiveness of
 
our business continuity
 
plan, the
 
direct and indirect
impact of the
 
pandemic on our
 
employees, customers and third-party
 
service providers, as
 
well as other
 
market participants,
and the effectiveness
 
of actions
 
taken by governmental
 
authorities and
 
other third parties
 
in response
 
to the pandemic.
 
If
the pandemic continues to
 
spread, morph or otherwise
 
results in a continuation
 
or worsening of
 
the current economic
 
and
commercial environments, our business,
 
financial condition, results of
 
operations, cash flows, and
 
ability to pay dividends,
as well as our regulatory capital and liquidity ratios could be
 
materially adversely affected.
Changes in
 
U.S. trade
 
policies and
 
other global
 
political factors
 
beyond our
 
control, including
 
the imposition
of tariffs, retaliatory tariffs, or other sanctions, may adversely impact our business, financial condition and results
of operations.
 
There have
 
been, and
 
may be
 
in the
 
future, changes
 
with respect
 
to U.S.
 
and international
 
trade policies,
 
legislation,
treaties and tariffs, embargoes, sanctions and other trade restrictions. Tariffs,
 
retaliatory tariffs or other trade restrictions on
products
 
and
 
materials
 
that
 
customers
 
import
 
or
 
export,
 
or a
 
trade
 
war or
 
other
 
related governmental
 
actions
 
related
 
to
tariffs,
 
international
 
trade
 
agreements
 
or
 
policies
 
or
 
other
 
trade
 
restrictions
 
have
 
the
 
potential
 
to
 
negatively
 
impact
 
our
customers' costs, demand
 
for our products,
 
or the U.S.
 
economy or
 
certain sectors thereof
 
and, thus, could
 
adversely impact
our business, financial
 
condition and results
 
of operations. As
 
a result of
 
Russia's invasion of
 
Ukraine, the U.S.
 
has imposed,
and is
 
likely to
 
impose material
 
additional, financial
 
and economic
 
sanctions and
 
export controls
 
against certain
 
Russian
organizations and/or individuals, with similar
 
actions either implemented or planned
 
by the European Union ("EU") and
 
the
U.K. and other
 
jurisdictions. The
 
U.S., the U.K.,
 
and the EU
 
each imposed
 
packages of
 
financial and economic
 
sanctions
that,
 
in
 
various
 
ways,
 
constrain
 
transactions
 
with
 
numerous
 
Russian
 
entities
 
and
 
individuals;
 
transactions
 
in
 
Russian
sovereign debt; and investment, trade, and
 
financing to, from, or in
 
certain regions of Ukraine. Moreover, actions by Russia,
and
 
any
 
further
 
measures
 
taken
 
by
 
the
 
U.S.
 
or
 
its
 
allies,
 
could
 
have
 
negative
 
impacts
 
on
 
regional
 
and
 
global
 
financial
markets and economic conditions. To
 
the extent changes in the global
 
political environment, including Russia's invasion
 
of
Ukraine and the escalating
 
tensions between Russia
 
and the U.S., NATO,
 
the EU and the
 
UK, have a negative
 
impact on
us or
 
on the
 
markets in
 
which we
 
operate, our
 
business, results
 
of operations
 
and financial
 
condition could
 
be materially
and adversely impacted.
Our lending business is subject to credit risk, which
 
could lead to unexpected losses.
 
Our
 
primary
 
business
 
involves
 
making
 
loans
 
to
 
customers.
 
The
 
business
 
of
 
lending
 
is
 
inherently
 
risky
 
because
 
the
principal or
 
interest on
 
the loan
 
may not
 
be repaid
 
timely or
 
at all
 
or the
 
value of
 
any collateral
 
securing the
 
loan may
 
be
insufficient to
 
cover our
 
outstanding exposure.
 
These risks
 
may be affected
 
by the
 
strength or
 
weakness of
 
the particular
borrower's business sector
 
and local, regional and
 
national market and
 
economic conditions. Many
 
of our loans are
 
made
to SMBs that may be
 
less able to withstand
 
competitive, economic and financial
 
pressures than larger borrowers.
 
Our risk
management practices,
 
such as
 
monitoring the
 
concentration of
 
our loans
 
within specific
 
industries in
 
which we
 
lend and
concentrations with individual borrowers
 
or related borrowers, and
 
our credit approval
 
practices, may not adequately
 
reduce
credit risk. In addition, there are risks inherent in making any loan, including
 
risks relating to proper loan underwriting, risks
resulting from
 
changes in
 
economic and
 
industry conditions,
 
risks inherent
 
in dealing
 
with individual
 
borrowers, including
the risk that a borrower may not provide
 
information to us about their business
 
in a timely manner,
 
may present inaccurate
 
 
 
22
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
or incomplete information to us, may lack a U.S. credit history,
 
or may leave the U.S. without fulfilling their loan obligations,
leaving us with
 
little recourse
 
to them personally,
 
and/or risks
 
relating to the
 
value of
 
collateral. In
 
order to
 
manage credit
risk successfully,
 
we must,
 
among other
 
things, maintain
 
disciplined and
 
prudent underwriting
 
standards and
 
ensure that
our lenders follow those standards. The weakening of
 
these standards for any reason, such as an
 
attempt to attract higher
yielding loans,
 
a lack
 
of discipline
 
or diligence
 
by our
 
employees in
 
underwriting and
 
monitoring loans,
 
the inability
 
of our
employees to adequately adapt
 
policies and procedures to
 
changes in economic or
 
any other conditions affecting borrowers
and the quality
 
of our loan portfolio,
 
may result in loan
 
defaults, foreclosures and additional
 
charge-offs and may necessitate
that we significantly increase our allowance for credit losses, each of which could adversely affect our net income. A failure
to effectively
 
manage
 
credit risk
 
associated
 
with
 
our loan
 
portfolio could
 
lead to
 
unexpected
 
losses and
 
have a
 
material
adverse effect on our business, financial condition
 
and results of operations.
The
 
potential
 
for
 
the
 
replacement
 
or
 
discontinuation
 
of
 
London
 
Inter-bank
 
Offered
 
Rate,
 
or
 
LIBOR,
 
as
 
a
benchmark
 
interest
 
rate
 
and
 
a
 
transition
 
to
 
an
 
alternative
 
reference
 
interest
 
rate
 
could
 
present
 
operational
problems and result in market disruption.
In 2017, the
 
Financial Conduct
 
Authority announced
 
that after 2021
 
it will no
 
longer compel banks
 
to submit the
 
rates
required to
 
calculate
 
LIBOR.
 
In November
 
2020, the
 
administrator
 
of LIBOR
 
announced
 
it will
 
consult
 
on its
 
intention to
extend the retirement date
 
of certain offered
 
rates whereby the publication
 
of the one week
 
and two month LIBOR
 
offered
rates will cease after December 31, 2021; but, the publication of the remaining
 
LIBOR offered rates will continue until June
30,
 
2023.
 
Given
 
consumer
 
protection,
 
litigation,
 
and
 
reputation
 
risks,
 
the
 
bank
 
regulatory
 
agencies
 
have
 
indicated
 
that
entering into new
 
contracts that use
 
LIBOR as a
 
reference rate after
 
December 31, 2021
 
would create safety
 
and soundness
risks and that
 
they will examine
 
bank practices accordingly.
 
Therefore, the agencies
 
encouraged banks to
 
cease entering
into new contracts that use LIBOR as a reference rate
 
as soon as practicable and in any event by December
 
31, 2021.
There is
 
uncertainty as
 
to what
 
rate or
 
rates may
 
become accepted
 
alternatives
 
to LIBOR,
 
or what
 
the effect
 
of any
such changes
 
in views
 
or alternatives
 
may be
 
on the
 
markets for
 
LIBOR-indexed
 
financial
 
instruments. In
 
response,
 
the
Board of Governors
 
of the
 
Federal Reserve
 
System, or
 
the Federal Reserve,
 
based on
 
the recommendations
 
of the New
York
 
Federal Reserve's Alternative Reference
 
Rate Committee, has begun
 
publishing SOFR, which is
 
intended to replace
LIBOR, and has
 
encouraged banks to
 
transition away
 
from LIBOR as
 
soon as practicable.
 
Although SOFR
 
appears to be
the preferred replacement
 
rate for LIBOR,
 
there are conceptual
 
and technical differences
 
between LIBOR and
 
SOFR that
remain unresolved at this time.
 
Accordingly,
 
it is unclear if other benchmarks
 
may emerge or if other rates
 
will be adopted
outside
 
of
 
the
 
United
 
States.
 
The
 
replacement
 
of
 
LIBOR
 
also
 
may
 
result
 
in
 
economic
 
mismatches
 
between
 
different
categories of instruments
 
that now consistently
 
rely on the
 
LIBOR benchmark. Markets
 
are slowly developing
 
in response
to these
 
new rates,
 
and questions
 
around liquidity
 
in these
 
rates and
 
how to
 
appropriately adjust
 
these rates
 
to eliminate
any economic value transfer at the time of transition remain
 
a significant concern.
Certain of our financial products are
 
tied to LIBOR. Inconsistent approaches to
 
a transition from LIBOR to
 
an alternative
rate among
 
different market
 
participants and
 
for different
 
financial products
 
may cause
 
market disruption
 
and operational
problems, which
 
could adversely
 
affect us,
 
including by
 
exposing us
 
to increased
 
interest rate
 
risk and
 
associated costs,
including, but not limited to, creating the possibility of disagreements
 
with counterparties.
Natural disasters and severe weather events in Florida
 
could have a material adverse impact on our
 
business,
financial condition and operations.
 
Our
 
operations
 
and
 
our
 
customer
 
base
 
are
 
primarily
 
located
 
in
 
South
 
Florida.
 
This
 
region
 
is
 
vulnerable
 
to
 
natural
disasters
 
and
 
severe
 
weather
 
events
 
or
 
acts
 
of
 
God,
 
such
 
as
 
hurricanes
 
or
 
tropical
 
storms,
 
which
 
can
 
have
 
a
 
material
adverse impact
 
on our
 
loan portfolio,
 
our overall
 
business, financial
 
condition and
 
operations, cause
 
widespread property
damage and have
 
the potential to
 
significantly depress
 
the local economies
 
in which we
 
operate. Future adverse
 
weather
events in
 
Florida could
 
potentially result
 
in extensive
 
and costly
 
property damage
 
to businesses
 
and residences,
 
depress
the value of property serving as collateral for our loans, force the relocation of residents, and
 
significantly disrupt economic
activity in the region.
 
We cannot
 
predict the
 
extent of
 
damage that
 
may result
 
from such
 
adverse weather
 
events, which
 
will depend
 
on a
variety of factors that are beyond our control,
 
including, but not limited to, the
 
severity and duration of the event,
 
the timing
and level
 
of government
 
responsiveness, the
 
pace of
 
economic recovery
 
and availability
 
of insurance
 
to cover
 
losses. In
addition,
 
the
 
nature,
 
frequency
 
and
 
severity
 
of
 
these
 
adverse
 
weather
 
events
 
and
 
other
 
natural
 
disasters
 
may
 
be
exacerbated by climate change. If a significant adverse weather event or other natural disaster were to occur, it could have
a materially adverse impact
 
on our financial
 
condition, results of operations
 
and our business, as
 
well as potentially
 
increase
our exposure to credit and liquidity risks.
 
 
 
23
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Our business is subject to
 
interest rate risk, and variations in
 
interest rates may materially and adversely
 
affect
our financial performance.
 
Changes in the interest
 
rate environment may
 
reduce our profits. It
 
is expected that we
 
will continue to
 
realize income
from the differential or "spread" between the interest earned on loans, securities
 
and other interest-earning assets, and the
interest paid on deposits, borrowings
 
and other interest-bearing
 
liabilities. Net interest spreads
 
are affected, in part,
 
by the
difference
 
between
 
the
 
maturities
 
and
 
repricing
 
characteristics
 
of
 
interest-earning
 
assets
 
and
 
interest-bearing
 
liabilities.
Changes
 
in
 
market
 
interest
 
rates
 
generally
 
affect
 
loan
 
volume,
 
loan
 
yields,
 
funding
 
sources
 
and
 
funding
 
costs.
 
Our
 
net
interest
 
spread
 
depends
 
on
 
many
 
factors
 
that
 
are
 
partly
 
or completely
 
out
 
of
 
our
 
control,
 
including
 
competition,
 
general
economic
 
conditions,
 
and
 
federal
 
economic
 
monetary
 
and
 
fiscal
 
policies,
 
and
 
in
 
particular,
 
the
 
Federal
 
Reserve's
 
policy
determinations with
 
respect to
 
interest rates.
 
After steadily
 
increasing the
 
target federal
 
funds rate
 
in 2017
 
and 2018,
 
the
Federal
 
Reserve
 
in
 
2019
 
decreased
 
the
 
target
 
federal
 
funds
 
rate
 
by
 
75
 
basis
 
points,
 
and
 
in
 
response
 
to
 
the
 
COVID-19
pandemic in
 
March 2020,
 
effected an
 
additional 150
 
basis point
 
decrease to
 
a range
 
of 0.00%
 
to 0.25%
 
as of
 
March 31,
2020 where it had remained until the Federal Reserve increased the target federal
 
funds rate by 25 basis points to a range
of 0.25% to
 
0.50% in March 2022.
 
A prolonged low interest
 
rate environment could negatively
 
impact our net interest
 
margin
as assets reprice that are not subject to interest rate floors. The Federal Reserve Board has signaled that further increases
in rates are coming but the exact timing and extent remain
 
unknown and are largely subject to economic conditions.
While an increase
 
in interest rates
 
may increase our
 
loan yield, it
 
may adversely affect
 
the ability of
 
certain borrowers
with variable rate
 
loans to pay
 
the contractual
 
interest and principal
 
due to us.
 
Following an increase
 
in interest rates,
 
our
ability to maintain a positive net interest spread is
 
dependent on our ability to increase our loan offering rates, replace loans
that mature and
 
repay or
 
that prepay before
 
maturity with new
 
originations at higher
 
rates, minimize increases
 
on our
 
deposit
rates, and maintain an acceptable
 
level and composition of
 
funding. We cannot
 
provide assurances that we
 
will be able to
increase
 
our
 
loan
 
offering
 
rates
 
and
 
continue
 
to
 
originate
 
loans
 
due
 
to
 
the
 
competitive
 
landscape
 
in
 
which
 
we
 
operate.
Additionally,
 
we cannot
 
provide assurances
 
that we
 
can minimize
 
the increases
 
in our
 
deposit rates
 
while maintaining
 
an
acceptable
 
level
 
of
 
deposits.
 
Finally,
 
we
 
cannot
 
provide
 
any
 
assurances
 
that
 
we
 
can
 
maintain
 
our
 
current
 
levels
 
of
noninterest-bearing deposits as customers may seek higher
 
-yielding products when interest rates increase.
Accordingly,
 
changes
 
in
 
levels
 
of
 
interest
 
rates
 
could
 
materially
 
and
 
adversely
 
affect
 
our
 
net
 
interest
 
margin,
 
asset
quality, loan origination
 
volume, average loan portfolio balance, liquidity,
 
and overall profitability.
Our allowance for credit losses may not be sufficient
 
to absorb potential losses in our loan portfolio.
 
We
 
maintain
 
an
 
allowance
 
for
 
credit
 
losses
 
that
 
represents
 
management's
 
judgment
 
of
 
probable
 
losses
 
and
 
risks
inherent in our loan portfolio.
 
The level of the allowance
 
reflects management's continuing
 
evaluation of general economic
conditions,
 
present
 
political
 
and
 
regulatory
 
conditions,
 
diversification
 
and
 
seasoning
 
of
 
the
 
loan
 
portfolio,
 
historic
 
loss
experience, identified credit
 
problems, delinquency levels
 
and adequacy of
 
collateral. Determining the
 
appropriate level of
our
 
allowance
 
for
 
credit
 
losses
 
involves
 
a
 
degree
 
of
 
subjective
 
judgment
 
and
 
requires
 
management
 
to
 
make
 
significant
estimates of and assumptions regarding current credit risks
 
and future trends, all of which may undergo material changes.
Inaccurate
 
management
 
assumptions,
 
deterioration
 
of
 
economic
 
conditions
 
affecting
 
borrowers,
 
new
 
negative
information
 
regarding
 
existing
 
loans,
 
identification
 
of
 
additional
 
problem
 
loans
 
or deterioration
 
of existing
 
problem
 
loans,
and
 
other
 
factors
 
(including
 
third-party
 
review
 
and
 
analysis),
 
both
 
within
 
and
 
outside
 
of
 
our
 
control,
 
may
 
require
 
us
 
to
increase our allowance for
 
credit losses. In addition,
 
our regulators, as an
 
integral part of their
 
periodic examinations, review
our methodology for calculating, and
 
the adequacy of, our allowance
 
for credit losses and may
 
direct us to make additions
to the allowance
 
based on their
 
judgments about
 
information available to
 
them at the
 
time of their
 
examination. Further,
 
if
actual charge-offs in future
 
periods exceed the
 
amounts allocated to
 
our allowance for
 
credit losses, we
 
may need additional
provisions for credit losses to restore
 
the adequacy of our allowance for
 
credit losses. Finally, the measure of our allowance
for credit losses depends on the
 
adoption and interpretation of accounting
 
standards. The Financial Accounting
 
Standards
Board,
 
or
 
FASB,
 
issued
 
a
 
new
 
credit
 
impairment
 
model,
 
the
 
Current
 
Expected
 
Credit
 
Loss,
 
or
 
CECL
 
model,
 
which
 
is
expected
 
to
 
become
 
applicable
 
to
 
us
 
on
 
January
 
1,
 
2023
 
after
 
the
 
FASB
 
elected
 
to
 
delay
 
implementation
 
for
 
smaller
reporting companies. CECL
 
will require financial
 
institutions to estimate
 
and develop a
 
provision for credit
 
losses over the
lifetime of
 
the loan
 
at origination,
 
as opposed
 
to reserving
 
for incurred
 
or probable
 
losses up
 
to the
 
balance sheet
 
date.
Under the CECL model, expected
 
credit deterioration would be reflected in
 
the income statement in the
 
period of origination
or acquisition of a loan,
 
with changes in expected
 
credit losses due to further
 
credit deterioration or improvement
 
reflected
in the
 
periods in
 
which the
 
expectation changes.
 
Accordingly,
 
implementation of
 
the CECL
 
model could
 
require financial
institutions, like
 
us, to
 
increase our
 
allowances for
 
credit losses
 
from levels
 
in place
 
prior to
 
the implementation
 
of CECL.
Moreover,
 
the
 
CECL
 
model
 
may
 
create
 
more
 
volatility
 
in
 
our
 
level
 
of
 
allowance
 
for
 
credit
 
losses.
 
If
 
we
 
are
 
required
 
to
materially increase our
 
level of
 
allowance for credit
 
losses for any
 
reason, such increase
 
could adversely affect
 
our business,
prospects, cash flow, liquidity,
 
financial condition and results of operations.
 
 
 
 
24
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Our commercial loan portfolio may expose us to increased
 
credit risk.
Commercial business
 
and real
 
estate loans
 
generally have
 
a higher
 
risk of
 
loss because
 
loan balances
 
are typically
larger
 
than
 
residential
 
real
 
estate
 
and
 
consumer
 
loans
 
and
 
repayment
 
is
 
usually
 
dependent
 
on
 
cash
 
flows
 
from
 
the
borrower’s business or the
 
property securing the loan. Our
 
commercial business loans are primarily made
 
to small business
and middle market customers. These loans typically
 
involve repayment that depends upon income
 
generated, or expected
to be generated, by the property securing the loan
 
and/or by the cash flow generated by the business borrower and
 
may be
adversely affected by changes in the economy or
 
local market conditions. These loans expose a
 
lender to the risk of having
to liquidate the collateral securing
 
these loans at times when there
 
may be significant fluctuation of
 
commercial real estate
values or to the
 
risk of inadequate cash flows to
 
service the commercial loans. Unexpected deterioration in
 
the credit quality
of our
 
commercial business
 
and/or real
 
estate loan
 
portfolio could
 
require us
 
to increase
 
our allowance
 
for credit
 
losses,
which would
 
reduce our
 
profitability and
 
could have
 
an adverse
 
effect on
 
our business,
 
financial condition,
 
and results
 
of
operations.
Commercial construction loans generally
 
have a higher risk of
 
loss due to the assumptions
 
used to estimate the value
of property
 
at completion
 
and the
 
cost of
 
the project,
 
including interest.
 
It can
 
be difficult
 
to accurately
 
evaluate the
 
total
funds required
 
to complete
 
a project,
 
and construction
 
lending often
 
involves the
 
disbursement
 
of substantial
 
funds with
repayment dependent, in large part, on the success of the ultimate project rather than the ability of a borrower or guarantor
to repay the loan from sources other than the subject project. If the assumptions and estimates are inaccurate, the value of
completed property
 
may fall
 
below the
 
related loan
 
amount. If we
 
are forced to
 
foreclose on
 
a project
 
prior to
 
completion,
we may
 
be
 
unable
 
to
 
recover
 
the
 
entire
 
unpaid
 
portion
 
of the
 
loan,
 
which
 
would
 
lead
 
to
 
losses.
 
In
 
addition,
 
we
 
may
 
be
required to fund additional amounts to complete a project,
 
incur taxes, maintenance and compliance costs for
 
a foreclosed
property and
 
may have
 
to hold
 
the property
 
for an
 
indeterminate
 
period of
 
time, any
 
of which
 
could adversely
 
affect
 
our
business, prospects, cash flow,
 
liquidity, financial
 
condition and results of operations.
Our
 
SBA
 
lending
 
program
 
is dependent
 
upon
 
the
 
federal
 
government
 
and
 
our status
 
as
 
a participant
 
in the
SBA's Preferred
 
Lenders Program,
 
and we
 
face specific
 
risks associated
 
with
 
originating SBA
 
loans and
 
selling
the guaranteed portion thereof.
We
 
have
 
been
 
approved
 
by
 
the
 
SBA
 
to
 
participate
 
in
 
the
 
SBA's
 
Preferred
 
Lenders
 
Program.
 
As
 
an
 
SBA
 
Preferred
Lender,
 
we enable
 
our clients
 
to obtain
 
SBA loans
 
without being
 
subject to
 
the potentially
 
lengthy SBA
 
approval process
necessary
 
for
 
lenders
 
that
 
are
 
not
 
SBA
 
Preferred
 
Lenders.
 
The
 
SBA
 
periodically
 
reviews
 
the
 
lending
 
operations
 
of
participating
 
lenders
 
to
 
assess,
 
among
 
other
 
things,
 
whether
 
the
 
lender
 
exhibits
 
prudent
 
risk
 
management.
 
When
weaknesses are identified, the SBA may request corrective actions
 
or impose enforcement actions, including revocation of
the lender's
 
Preferred Lender
 
status. If
 
we lose
 
our status
 
as an
 
SBA Preferred
 
Lender,
 
we may
 
lose some
 
or all
 
of our
customers to
 
lenders who
 
are SBA
 
Preferred Lenders,
 
which could
 
adversely affect
 
our business,
 
financial condition
 
and
results of operations.
We generally sell the guaranteed
 
portion of our SBA 7(a) loans
 
in the secondary market. These sales
 
have resulted in
both premium income for us
 
at the time of
 
sale and created a stream
 
of future servicing income. There
 
can be no assurance
that we will be able to continue originating these loans, that a secondary market for these loans will continue to exist or that
we will continue to realize
 
premiums upon the sale of
 
the guaranteed portion of
 
these loans. When we sell
 
the guaranteed
portion of our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on
the non-guaranteed
 
portion of a loan, we share any loss and recovery related
 
to the loan pro-rata with the SBA.
The laws, regulations and
 
standard operating procedures
 
that are applicable to
 
SBA loan products may
 
change in the
future. We
 
cannot predict
 
the effects
 
of these
 
changes on
 
our business
 
and profitability.
 
Because government
 
regulation
greatly
 
affects
 
the
 
business
 
and
 
financial
 
results
 
of
 
all
 
commercial
 
banks
 
and
 
bank
 
holding
 
companies,
 
especially
 
our
organization, changes in the laws, regulations
 
and procedures applicable to SBA
 
loans could adversely affect our
 
ability to
operate profitably.
 
In addition, the
 
aggregate amount of
 
SBA 7(a) and 504
 
loan guarantees by the
 
SBA must be approved
each fiscal year by the federal
 
government. We cannot predict
 
the amount of SBA 7(a)
 
loan guarantees in any given fiscal
year. If the federal government were to reduce the amount of SBA loan guarantees, such reduction
 
could adversely impact
our SBA lending
 
program, including making and
 
selling the guaranteed portion
 
of fewer SBA
 
7(a) and 504 loans.
 
In addition,
any default by
 
the U.S. government
 
on its obligations
 
or any prolonged
 
government shutdown
 
could, among
 
other things,
impede our ability to originate
 
SBA loans or sell such loans
 
in the secondary market, which
 
could materially and adversely
affect our business, financial condition and results
 
of operations.
The SBA may not honor its guarantees if we do not originate
 
loans in compliance with SBA guidelines
.
 
SBA lending programs
 
typically guarantee
 
75.0% of the
 
principal on
 
an underlying
 
loan. If the
 
SBA establishes
 
that a
loss on
 
an
 
SBA guaranteed
 
loan
 
is attributable
 
to significant
 
technical
 
deficiencies
 
in the
 
manner
 
in which
 
the loan
 
was
 
 
 
25
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
originated,
 
funded
 
or serviced
 
by us,
 
the
 
SBA may
 
seek
 
recovery
 
of
 
the
 
principal
 
loss
 
related
 
to
 
the
 
deficiency
 
from
 
us
notwithstanding that a portion of the loan was
 
guaranteed by the SBA, which could adversely
 
affect our business, financial
condition and results of
 
operations. While we
 
follow the SBA's underwriting
 
guidelines, our ability
 
to do so depends on
 
the
knowledge and diligence of our employees
 
and the effectiveness of controls
 
we have established. If our employees
 
do not
follow
 
the
 
SBA
 
guidelines
 
in
 
originating
 
loans
 
and
 
if
 
our
 
loan
 
review
 
and
 
audit
 
programs
 
fail
 
to
 
identify
 
and
 
rectify
 
such
failures, the
 
SBA may
 
reduce or,
 
in some
 
cases, refuse
 
to honor
 
its guarantee
 
obligations and
 
we may
 
incur losses
 
as a
result.
Global banking is an important part of our business, which
 
creates increased BSA/AML risk.
As our
 
business
 
model
 
includes
 
correspondent
 
services
 
to banks
 
in Latin
 
America
 
and the
 
Caribbean,
 
these
 
cross-
border
 
correspondent
 
banking
 
relationships
 
pose
 
unique
 
risks
 
because
 
they
 
create
 
situations
 
in
 
which
 
a
 
U.S.
 
financial
institution will be
 
handling funds from
 
a financial institution
 
in Latin America
 
and the Caribbean
 
whose customers may
 
not
be transparent to us. Moreover, many foreign financial institutions, including
 
in Latin America and the Caribbean where our
correspondent banking
 
services
 
are located,
 
are not
 
subject to
 
the same
 
or similar
 
regulatory
 
guidelines
 
as U.S.
 
banks.
Accordingly,
 
these
 
foreign
 
institutions
 
may
 
pose
 
higher
 
money
 
laundering
 
risk
 
to
 
their
 
respective
 
U.S.
 
bank
correspondent(s). Because
 
of the
 
large amount
 
of funds,
 
multiple transactions,
 
and our
 
potential lack
 
of familiarity
 
with a
foreign correspondent financial institution's customers, these customers may
 
be able to more
 
easily conceal the source and
use of
 
illicit funds.
 
Consequently,
 
we may
 
have a
 
higher
 
risk
 
of non-compliance
 
with the
 
BSA
 
and
 
other
 
AML rules
 
and
regulations
 
due
 
to
 
our
 
correspondent
 
banking
 
relationships
 
with
 
foreign
 
financial
 
institutions.
 
Additionally,
 
international
private banking
 
places additional
 
pressure on
 
our policies,
 
procedures and
 
systems for
 
complying with
 
the Bank
 
Secrecy
Act of 1970, as amended, or BSA, and other anti-money laundering, or AML, statutes and regulations. Our failure to strictly
adhere to the terms and
 
requirements of our OFAC
 
license or our failure
 
to adequately manage our
 
BSA/AML compliance
risk
 
in
 
light
 
of
 
our correspondent
 
banking
 
relationship
 
with
 
foreign
 
financial
 
institutions
 
and
 
international
 
private
 
banking
could result
 
in regulatory or
 
other actions
 
being taken
 
against us, which
 
could significantly
 
increase our compliance
 
costs
and materially and adversely affect our results of
 
operations.
We may not recover all amounts that are contractually
 
owed to us by our borrowers.
 
We are
 
dependent on
 
the collection
 
of loan
 
principal, interest,
 
and fees
 
to partially
 
fund our
 
operations. A
 
shortfall in
collections and proceeds may impair our ability to fund
 
our operations or to repay our existing debt.
When
 
we
 
lend
 
funds,
 
commit
 
to
 
fund
 
a
 
loan
 
or
 
enter
 
into
 
a
 
letter
 
of
 
credit
 
or
 
other
 
credit-related
 
contract
 
with
 
a
counterparty, we incur credit risk. The
 
credit quality of our
 
portfolio can have a
 
significant impact on our
 
earnings. We expect
to experience charge-offs and delinquencies on our loans
 
in the future. Many borrowers have been negatively impacted by
the COVID-19 pandemic and related
 
economic consequences, and may continue
 
to be similarly or more severely
 
affected
in the future. Our
 
customers' actual operating results may be
 
worse than our underwriting contemplated when we
 
originated
the loans, and in these
 
circumstances, we could incur
 
substantial impairment or loss
 
of the value on these
 
loans. We may
fail to identify problems because our customer did not report them in
 
a timely manner or, even if the customer did report the
problem, we may fail to address it quickly enough or at all, or some loans, due
 
to market circumstances, may not be able to
be fully rehabilitated.
 
Even if customers
 
provide us with
 
full and accurate
 
disclosure of
 
all material information
 
concerning
their businesses, we may misinterpret or incorrectly analyze this
 
information. Mistakes may cause us to make loans
 
that we
otherwise would not have made or to fund
 
advances that we otherwise would not
 
have funded, either of which could result
in losses
 
on loans,
 
or necessitate
 
that we
 
significantly
 
increase our
 
allowance
 
for loan
 
and lease
 
losses. As
 
a result,
 
we
could suffer
 
loan losses
 
and have
 
non-performing loans,
 
which could
 
have a
 
material adverse
 
effect on
 
our net
 
earnings
and results of operations and financial condition, to the extent
 
the losses exceed our allowance for loan and lease
 
losses.
Some of our
 
loans are secured
 
by a lien
 
on specified collateral
 
of the borrower
 
and we may
 
not obtain or
 
properly perfect
our liens or the value of the collateral securing any particular loan may not be sufficient to protect us from suffering a partial
or complete
 
loss
 
if the
 
loan becomes
 
non-performing
 
and we
 
proceed to
 
foreclose
 
on or
 
repossess
 
the collateral.
 
With
respect
 
to
 
loans
 
that
 
we
 
originate
 
for
 
condominium
 
or
 
homeowners'
 
associations,
 
or
 
the
 
Associations,
 
these
 
loans
 
are
primarily secured by and rely
 
upon the cash flow received
 
by the Associations from
 
payments received from their
 
property
owners, as well
 
as cash on
 
hand. These Associations
 
rely upon payments
 
received from their
 
property owners in
 
order to
perform
 
on
 
these
 
loans
 
and
 
for
 
the
 
loan
 
collateral.
 
Accordingly,
 
our
 
ability
 
to
 
recover
 
amounts
 
on
 
non-performing
 
loans
made to Associations
 
is dependent
 
upon the Association
 
having sufficient
 
cash on hand
 
for repayment of
 
the loan and/or
having
 
the
 
ability
 
to
 
impose
 
assessments
 
on
 
its
 
property
 
owners,
 
some
 
of
 
whom
 
may
 
not
 
have
 
the
 
ability
 
to
 
pay
 
such
assessments. In such events, we could suffer loan losses,
 
which could have a material adverse effect on our
 
net earnings,
allowance for loan and lease losses, financial condition,
 
and results of operations.
 
 
 
26
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Non-performing
 
assets
 
take
 
significant
 
time
 
to
 
resolve
 
and
 
adversely
 
affect
 
our
 
results
 
of
 
operations
 
and
financial condition, and could result in further losses in
 
the future.
Our
 
non-performing
 
assets
 
adversely
 
affect
 
our
 
net
 
income
 
in
 
various
 
ways.
 
We
 
do
 
not
 
record
 
interest
 
income
 
on
nonaccrual loans
 
or OREO,
 
thereby adversely
 
affecting our
 
net income
 
and returns
 
on assets
 
and equity,
 
increasing our
loan administration
 
costs
 
and
 
adversely
 
affecting
 
our
 
efficiency
 
ratio.
 
When we
 
take
 
collateral
 
in foreclosure
 
and similar
proceedings, we
 
are required
 
to mark
 
the collateral
 
to its
 
then-fair market
 
value,
 
which may
 
result in
 
a loss.
 
These non-
performing loans
 
and OREO
 
also increase our
 
risk profile
 
and the level
 
of capital
 
our regulators
 
believe is appropriate
 
for
us to
 
maintain in
 
light of
 
such risks.
 
The resolution
 
of non-performing
 
assets requires
 
significant time
 
commitments from
management and can
 
be detrimental to
 
the performance
 
of their other
 
responsibilities. If
 
we experience increases
 
in non-
performing
 
loans
 
and
 
non-performing
 
assets,
 
our
 
net
 
interest
 
income
 
may
 
be
 
negatively
 
impacted
 
and
 
our
 
loan
administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such
as return on assets and equity.
We engage in
 
lending secured by
 
real estate and
 
may foreclose on
 
the collateral and
 
own the underlying
 
real
estate, subjecting us to the costs
 
and potential risks associated with the
 
ownership of real property,
 
or consumer
protection initiatives or
 
changes in state
 
or federal law
 
may substantially
 
raise the cost
 
of foreclosure
 
or prevent
us from foreclosing at all.
 
Since we
 
originate
 
loans secured
 
by real
 
estate, we
 
may have
 
to foreclose
 
on the
 
collateral
 
property
 
to recover
 
our
investment and may thereafter own and operate such property,
 
in which case we would be exposed to the risks inherent in
the
 
ownership
 
of
 
real
 
estate.
 
The
 
amount
 
that
 
we,
 
as
 
a
 
mortgagee,
 
may
 
realize
 
after
 
a
 
foreclosure
 
depends
 
on
 
factors
outside of our
 
control, including,
 
but not limited
 
to, general or
 
local economic conditions,
 
environmental cleanup
 
liabilities,
various assessments
 
relating to
 
the ownership
 
of the property,
 
interest rates, real
 
estate tax rates,
 
operating expenses
 
of
the
 
mortgaged
 
properties,
 
our
 
ability
 
to
 
obtain
 
and
 
maintain
 
adequate
 
occupancy
 
of
 
the
 
properties,
 
zoning
 
laws,
governmental and
 
regulatory rules,
 
and natural disasters.
 
Our inability
 
to manage
 
the amount
 
of costs
 
or size
 
of the risks
associated with
 
the ownership
 
of real
 
estate, or
 
write-downs in
 
the value
 
of OREO,
 
could have
 
an adverse
 
effect on
 
our
business, financial condition, and results of operations.
Additionally,
 
consumer protection initiatives
 
or changes in state
 
or federal law may
 
substantially increase the
 
time and
expenses associated
 
with the
 
residential foreclosure
 
process or
 
prevent us
 
from foreclosing
 
at all.
 
A number
 
of states
 
in
recent
 
years
 
have
 
either
 
considered
 
or
 
adopted
 
foreclosure
 
reform
 
laws
 
that
 
make
 
it
 
substantially
 
more
 
difficult
 
and
expensive for
 
lenders to
 
foreclose on
 
residential properties
 
in default.
 
Furthermore, federal
 
regulators have
 
prosecuted a
number of
 
mortgage servicing
 
companies for
 
alleged consumer
 
law violations.
 
If new
 
state or
 
federal laws
 
or regulations
are ultimately enacted
 
that significantly raise
 
the cost of residential
 
foreclosures or raise
 
outright barriers, they
 
could have
an adverse effect on our business, financial condition,
 
and results of operations.
We are exposed to risk of environmental liability
 
when we take title to property.
 
In the
 
course
 
of our
 
business,
 
we may
 
foreclose on
 
and take
 
title to
 
real
 
estate.
 
As a
 
result, we
 
could
 
be subject
 
to
environmental liabilities with
 
respect to these properties.
 
We may be held
 
liable to a governmental
 
entity or to third
 
parties
for
 
property
 
damage,
 
personal
 
injury,
 
investigation
 
and
 
clean-up
 
costs
 
incurred
 
by
 
these
 
parties
 
in
 
connection
 
with
environmental
 
contamination
 
or
 
may
 
be
 
required
 
to
 
investigate
 
or
 
clean
 
up
 
hazardous
 
or
 
toxic
 
substances
 
or
 
chemical
releases at a property.
 
The costs associated with
 
investigation or remediation
 
activities could be substantial.
 
In addition, if
we are the owner or former owner
 
of a contaminated site, we may be
 
subject to common law claims by
 
third parties based
on damages and
 
costs resulting
 
from environmental
 
contamination emanating
 
from the
 
property.
 
If we become
 
subject to
significant environmental liabilities, our business, financial condition
 
and results of operations could be adversely affecte
 
d.
We
 
are
 
subject
 
to
 
certain
 
operational
 
risks,
 
including,
 
but
 
not
 
limited
 
to,
 
customer,
 
employee
 
or
 
third-party
fraud and data processing system failures and errors.
 
Employee errors and employee or
 
customer misconduct could subject us
 
to financial losses or
 
regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding unauthorized
 
activities from us, improper
or unauthorized activities on behalf of our customers or improper use of confidential information. It is not
 
always possible to
prevent employee
 
errors and
 
misconduct, and
 
the precautions we
 
take to
 
prevent and
 
detect this
 
activity may
 
not be
 
effective
in all cases. Employee errors could also subject us to financial
 
claims for negligence.
We have
 
implemented a
 
system of
 
internal controls
 
designed to
 
mitigate operational
 
risks, including
 
data processing
system failures
 
and errors
 
and customer
 
or employee
 
fraud, as
 
well as
 
insurance
 
coverage
 
designed to
 
protect us
 
from
material
 
losses
 
associated
 
with
 
these
 
risks,
 
including
 
losses
 
resulting
 
from
 
any
 
associated
 
business
 
interruption.
 
If
 
our
 
 
 
27
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
internal controls fail
 
to prevent or
 
detect an
 
occurrence, or if
 
any resulting loss
 
is not
 
insured or exceeds
 
applicable insurance
limits, it could adversely affect our business,
 
prospects, cash flow, liquidity,
 
financial condition and results of operations.
When we originate loans, we rely
 
heavily upon information supplied by third parties,
 
including the information contained
in credit
 
applications, property
 
appraisals, title
 
information, equipment
 
pricing and
 
valuation and
 
employment and
 
income
documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon
which
 
we
 
rely
 
is
 
misrepresented,
 
either
 
fraudulently
 
or
 
inadvertently,
 
and
 
the
 
misrepresentation
 
is
 
not
 
detected
 
prior
 
to
funding,
 
the value
 
of
 
the
 
loan may
 
be significantly
 
lower
 
than expected,
 
or we
 
may
 
fund a
 
loan that
 
we
 
would not
 
have
funded or
 
on terms
 
that do
 
not comply
 
with our
 
general underwriting
 
standards. Whether
 
a misrepresentation
 
is made
 
by
the applicant, the borrower,
 
one of our employees or another
 
third party,
 
we generally bear the risk of
 
loss associated with
the misrepresentation. A loan
 
subject to a material
 
misrepresentation is typically
 
unsellable or subject
 
to repurchase if it
 
is
sold prior to detection of the
 
misrepresentation. The sources of the
 
misrepresentations are often difficult
 
to locate, and it is
often difficult
 
to recover
 
any
 
of the
 
resulting monetary
 
losses we
 
may suffer,
 
which
 
could
 
adversely
 
affect
 
our business,
financial condition and results of operations.
We are subject to liquidity risk, which could adversely
 
affect our financial condition and results
 
of operations.
 
Effective liquidity management is essential for the operation of our business. Although we
 
have implemented strategies
to maintain
 
sufficient
 
and
 
diverse
 
sources of
 
funding
 
to accommodate
 
planned,
 
as well
 
as unanticipated,
 
liquidity
 
needs
(including changes in assets,
 
liabilities, and off-balance sheet
 
commitments under various economic
 
conditions), an inability
to
 
raise
 
funds
 
through
 
deposits,
 
borrowings,
 
the
 
sale
 
of
 
investment
 
securities
 
and
 
other
 
sources
 
could
 
have
 
a
 
material
adverse effect
 
on our
 
liquidity. Our access
 
to funding
 
sources in
 
amounts adequate to
 
finance our
 
activities could
 
be impaired
by factors that affect us specifically or the financial services
 
industry in general. Factors that could detrimentally impact
 
our
access to liquidity sources include a decrease in the level of our business activity due to a market disruption, a decrease in
the borrowing capacity assigned to
 
our pledged assets by our
 
secured creditors, competition from other
 
financial institutions
which could drive up the
 
costs of deposits or adverse
 
regulatory action against us. Deterioration in
 
economic conditions and
the loss of
 
confidence in financial
 
institutions may increase
 
our cost of
 
funding and limit
 
our access to
 
some of our
 
customary
sources of liquidity,
 
including, but not
 
limited to, inter-bank
 
borrowings and borrowings
 
from the Federal
 
Home Loan Bank
of Atlanta, or
 
the FHLB, and
 
the Federal Reserve
 
Bank of Atlanta.
 
Our ability to
 
acquire deposits
 
or borrow
 
could also be
impaired by
 
factors that
 
are not
 
specific to
 
us, such
 
as a
 
severe disruption
 
of the
 
financial markets
 
or negative
 
views and
expectations
 
about the
 
prospects
 
for the
 
financial
 
services
 
industry generally
 
as
 
a result
 
of conditions
 
faced
 
by banking
organizations
 
in
 
the
 
domestic
 
and
 
international
 
credit
 
markets.
 
Any decline
 
in
 
available
 
funding
 
or cost
 
of liquidity
 
could
adversely impact our ability to originate loans, invest in securities, meet our expenses
 
or fulfill obligations such as repaying
our borrowings or
 
meeting deposit withdrawal demands,
 
any of which
 
could, in turn,
 
have an adverse
 
effect on our
 
business,
financial condition, and results of operations.
We have several
 
large depositor relationships,
 
the loss of which
 
could force us to
 
fund our business
 
through
more expensive and less stable sources.
 
Withdrawals of deposits by any
 
one of our largest depositors
 
could force us to
 
rely more heavily on more
 
expensive and
less stable funding sources.
 
Consequently,
 
the occurrence of any
 
of these events could
 
have a material adverse
 
effect on
our business, financial condition and results of operations.
The value of our securities in our investment portfolio
 
may decline in the future.
 
The
 
fair
 
market
 
value
 
of
 
our
 
investment
 
securities
 
may
 
be
 
adversely
 
affected
 
by
 
general
 
economic
 
and
 
market
conditions, including
 
changes
 
in interest
 
rates,
 
credit
 
spreads, and
 
the
 
occurrence
 
of any
 
events
 
adversely
 
affecting
 
the
issuer of particular securities in our investments
 
portfolio or any given market segment or industry in
 
which we are invested.
Any of these factors, among others, could cause OTTI and realized and/or unrealized losses in future periods and declines
in
 
other
 
comprehensive
 
income,
 
which
 
could
 
have
 
an
 
adverse
 
effect
 
on
 
our
 
business,
 
financial
 
condition
 
and
 
results
 
of
operations.
 
The
 
process
 
for
 
determining
 
whether
 
impairment
 
of
 
a
 
security
 
is
 
OTTI
 
usually
 
requires
 
complex,
 
subjective
judgments about the
 
future financial performance
 
and liquidity of
 
the issuer,
 
any collateral underlying
 
the security and
 
our
intent and ability to hold the security for a sufficient period of time to allow for any anticipated recovery in fair value, in order
to assess the probability of receiving
 
all contractual principal and interest
 
payments on the security.
 
Our failure to correctly
and timely assess
 
any impairments or
 
losses with respect
 
to our securities
 
could have an
 
adverse effect
 
on our business,
financial condition and results of operations.
 
 
 
28
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
We may not
 
effectively execute
 
on our expansion
 
strategy, which
 
may adversely affect
 
our ability to
 
maintain
our historical growth and earnings trends.
 
Our primary
 
expansion strategy
 
focuses on
 
organic growth,
 
supplemented by
 
acquisitions of
 
financial institutions
 
and
banking teams;
 
however,
 
we may
 
not be
 
able to
 
successfully execute
 
on these
 
aspects of
 
our expansion
 
strategy,
 
which
may cause our future growth rate
 
to decline below our recent historical
 
levels, or may prevent us
 
from growing at all. More
specifically, we may not
 
be able
 
to generate sufficient
 
new loans and
 
deposits within acceptable
 
risk and expense
 
tolerances
or
 
obtain
 
the
 
personnel
 
or
 
funding
 
necessary
 
for
 
additional
 
growth.
 
Various
 
factors,
 
such
 
as
 
economic
 
conditions
 
and
competition with other financial institutions, may impede or restrict the growth of our operations. Further, we may be unable
to
 
attract
 
and
 
retain
 
experienced
 
bankers,
 
which
 
could
 
adversely
 
affect
 
our
 
growth.
 
The
 
success
 
of
 
our
 
strategy
 
also
depends on our ability to manage our growth effectively,
 
which in turn depends on a number of factors, including our ability
to
 
adapt
 
our
 
credit,
 
operational,
 
technology,
 
risk
 
management,
 
internal
 
controls
 
and
 
governance
 
infrastructure
 
to
accommodate
 
expanded
 
operations.
 
Even
 
if we
 
are
 
successful
 
in
 
continuing
 
our
 
growth,
 
such
 
growth
 
may
 
not offer
 
the
same levels of potential profitability,
 
and we may not be successful
 
in controlling costs and maintaining asset
 
quality in the
face of
 
that growth.
 
Accordingly,
 
our inability
 
to maintain
 
growth or
 
to effectively
 
manage growth
 
could
 
have an
 
adverse
effect on our business, financial condition and results
 
of operations.
New lines of business, products, product enhancements
 
or services may subject us to additional risk.
 
 
From time to
 
time, we may
 
implement new lines
 
of business or
 
offer new products
 
and product enhancements
 
as
well as
 
new
 
services
 
within
 
our
 
existing
 
lines
 
of
 
business.
 
There
 
are
 
substantial
 
risks
 
and
 
uncertainties
 
associated
 
with
these efforts. In developing,
 
implementing or marketing new
 
lines of business, products,
 
product enhancements or services,
we
 
may
 
invest
 
significant
 
time
 
and
 
resources.
 
We
 
may
 
underestimate
 
the
 
appropriate
 
level
 
of
 
resources
 
or
 
expertise
necessary to make new lines of business
 
or products successful or to realize their
 
expected benefits. We may
 
not achieve
the
 
milestones
 
set
 
in
 
initial
 
timetables
 
for
 
the
 
development
 
and
 
introduction
 
of
 
new
 
lines
 
of
 
business,
 
products,
 
product
enhancements or services, and price
 
and profitability targets may not
 
prove feasible. External factors, such
 
as compliance
with regulations, competitive
 
alternatives and shifting
 
market preferences, may
 
also impact the
 
ultimate implementation of
a new line of business or offerings of new products, product
 
enhancements or services. Any new line of business,
 
product,
product enhancement or service could have a significant impact on the effectiveness of our system of internal controls. We
may also
 
decide to
 
discontinue
 
businesses
 
or products,
 
due to
 
lack
 
of customer
 
acceptance
 
or unprofitability.
 
Failure to
successfully develop and implement new lines of business or offerings of new products, product enhancements or services
could have an adverse effect on our business, financial condition and results
 
of operations and could subject us to new and
unanticipated operational, credit, regulatory and reputational risks,
 
among other risks.
Our business
 
needs and
 
future growth
 
may require
 
us to
 
raise additional
 
capital and
 
that capital
 
may not
 
be
available on terms acceptable to us or may be diluti
 
ve to existing shareholders.
 
We believe that we
 
have sufficient capital
 
to meet our capital
 
needs for our current
 
growth plans. However,
 
we expect
that we
 
will need
 
to raise
 
additional capital,
 
in the
 
form of
 
debt or
 
equity securities,
 
in the
 
future to
 
have sufficient
 
capital
resources
 
to
 
meet
 
our
 
longer-term
 
growth
 
plans,
 
and/or
 
if
 
the
 
quality
 
of
 
our
 
assets
 
or
 
earnings
 
were
 
to
 
deteriorate
significantly.
 
In addition, we
 
are required by federal
 
regulatory authorities to
 
maintain adequate levels
 
of capital to support
our operations.
Our ability
 
to raise
 
capital will
 
depend on,
 
among other
 
things, conditions
 
in the
 
capital markets,
 
which are
 
outside of
our control, and our financial performance. Accordingly,
 
we cannot provide assurance that such capital will
 
be available on
terms acceptable to us or at all. Any occurrence
 
that limits our access to capital may adversely
 
affect our capital costs and
our ability to raise capital. Further, if we need to raise capital in the future, we may have to do so when many other financial
institutions are also
 
seeking to
 
raise capital and
 
would then have
 
to compete with
 
those institutions for
 
investors. Any inability
to raise capital on acceptable terms when needed may cause us to
 
either issue additional shares of common stock or other
securities on less than
 
desirable terms or
 
reduce our rate of
 
growth until market conditions
 
become more favorable. If
 
any
of such
 
events occur, they could
 
have a material
 
adverse effect on
 
our business, financial
 
condition and results
 
of operations
and could be dilutive to both tangible book value and our
 
share price.
 
In addition,
 
an inability
 
to raise
 
capital when
 
needed may
 
subject us
 
to increased
 
regulatory supervision
 
and the
imposition of
 
restrictions
 
on
 
our growth
 
and
 
business.
 
These restrictions
 
could
 
negatively
 
affect
 
our
 
ability
 
to operate
 
or
further
 
expand
 
our
 
operations
 
through
 
loan
 
growth,
 
acquisitions
 
or
 
the
 
establishment
 
of
 
additional
 
branches.
 
These
restrictions
 
may
 
also
 
result
 
in
 
increases
 
in
 
operating
 
expenses
 
and
 
reductions
 
in
 
revenues
 
that
 
could
 
have
 
a
 
material
adverse effect on our financial condition, results
 
of operations and our share price.
 
 
 
29
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
We may
 
grow through
 
mergers or
 
acquisitions,
 
a strategy
 
that may
 
not be
 
successful or,
 
if successful,
 
may
produce risks in successfully integrating and managing the merged companies or acquisitions and may dilute our
shareholders.
 
As
 
part
 
of
 
our
 
growth
 
strategy,
 
we
 
may
 
pursue
 
mergers
 
and
 
acquisitions
 
of
 
banks
 
and
 
non-bank
 
financial
 
services
companies within or outside our principal market areas that fit within the mission-driven values of our franchise and that we
believe support our business and make financial and strategic
 
sense. We may have difficulty identifying suitable acquisition
candidates or executing on acquisitions that we pursue, and we may
 
not realize the anticipated benefits of any transactions
we complete. Additionally,
 
for any opportunistic
 
acquisition we were
 
to consider,
 
we expect to
 
face significant
 
competition
from
 
numerous
 
other
 
financial
 
services
 
institutions,
 
many
 
of
 
which
 
will
 
have
 
greater
 
financial
 
resources
 
than
 
we
 
do.
Accordingly,
 
attractive opportunistic
 
acquisitions
 
may
 
not be
 
available to
 
us. There
 
can be
 
no assurance
 
that we
 
will
 
be
successful in identifying or completing any future acquisitions.
Mergers and acquisitions involve numerous risks, any
 
of which could harm our business, including:
 
the possibility that expected benefits
 
may not materialize in the
 
time frame expected or at
 
all, or may be more
 
costly
to achieve, or that the acquired business will not perform
 
to our expectations;
 
time,
 
expense
 
and
 
difficulties
 
in
 
integrating
 
the
 
operations,
 
management,
 
products
 
and
 
services,
 
technologies,
existing contracts, accounting processes
 
and personnel of the target
 
and realizing the anticipated synergies
 
of the
combined businesses;
 
incurring the
 
time and
 
expense associated with
 
identifying and
 
evaluating potential acquisitions
 
and merger
 
partners
and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our
existing business;
 
difficulties in supporting and transitioning customers
 
of the target and disruption of our ongoing banking
 
business;
 
the price we
 
pay or other
 
resources that we
 
devote may exceed
 
the value we
 
realize, or the
 
value we could
 
have
realized if we had allocated the purchase consideration
 
or other resources to another opportunity;
 
entering new markets or areas in which we have limited or
 
no experience;
 
the possibility that our culture is disrupted as a result of
 
an acquisition;
 
potential loss of key personnel and customers from either
 
our business or the target’s business;
 
assumption
 
of unanticipated problems, claims or other liabilities of the acquired
 
business;
 
an inability to realize expected synergies or returns on
 
investment;
 
the possibility of regulatory approval for the acquisition
 
being delayed, impeded, restrictively conditioned
 
or denied
due to existing or new regulatory
 
issues surrounding us, the target institution
 
or the proposed combined entity
 
and
the possibility that any
 
such issues associated
 
with the target institution,
 
of which we may
 
or may not be
 
aware at
the time of the acquisition, could adversely impact the combined
 
entity after completion of the acquisition;
 
the possibility that the acquisition may not be timely completed,
 
if at all;
 
the need to raise capital; and
 
inability to generate sufficient revenue to offs
 
et acquisition costs.
Our acquisition
 
activities could
 
require us
 
to use
 
a substantial
 
amount of
 
cash, other
 
liquid assets,
 
and/or incur
 
debt.
Also,
 
if
 
we
 
finance
 
acquisitions
 
by issuing
 
equity
 
securities,
 
our
 
existing
 
shareholders’
 
ownership
 
may be
 
diluted,
 
which
could negatively
 
affect the
 
market price of
 
our Class
 
A common stock.
 
Additionally,
 
if the goodwill
 
recorded in
 
connection
with our
 
potential future
 
acquisitions
 
were determined
 
to be
 
impaired,
 
then
 
we would
 
be required
 
to recognize
 
a charge
against our
 
earnings, which
 
could materially
 
and adversely
 
affect our
 
results of
 
operations during
 
the period
 
in which
 
the
impairment was
 
recognized. Acquisitions
 
may also
 
involve the
 
payment of
 
a premium
 
over book
 
and market
 
values and,
therefore, some
 
dilution of
 
our tangible
 
book value
 
and net
 
income per
 
common share
 
may occur
 
in connection
 
with any
future transaction.
 
As a result, we
 
may not achieve the
 
anticipated benefits of
 
any such merger or
 
acquisition, and we
 
may incur costs
 
in
excess
 
of
 
what
 
we
 
anticipate.
 
Our
 
failure
 
to
 
successfully
 
evaluate
 
and
 
execute
 
mergers,
 
acquisitions
 
or
 
investments
 
or
otherwise adequately address and
 
manage the risks associated
 
with such transactions could have
 
a material adverse effect
on our business, results of operations
 
and financial condition, including short-term and long-term liquidity.
 
 
 
30
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
The loss of
 
one or more
 
of our key
 
personnel, or our
 
failure to attract
 
and retain other
 
highly qualified personnel
in the future, could harm our business.
 
Our future success will, to some extent, depend on the continued service of our directors, executive officers and senior
management
 
team.
 
The
 
loss
 
of
 
the
 
services
 
of
 
any
 
of
 
these
 
individuals
 
could
 
have
 
a
 
significant
 
adverse
 
effect
 
on
 
our
business.
 
In
 
particular,
 
we
 
believe
 
that
 
retaining
 
Luis
 
de
 
la
 
Aguilera,
 
our
 
President
 
and
 
Chief
 
Executive
 
Officer,
 
Robert
Anderson, our Chief Financial Officer,
 
and Benigno Pazos, our Chief Credit Officer,
 
is important to our continuing success.
Although
 
we
 
have
 
entered
 
into
 
employment
 
and
 
other
 
agreements
 
with
 
certain
 
members
 
of
 
our
 
executive
 
and
 
senior
management team,
 
including Mr.
 
de la
 
Aguilera and
 
Mr.
 
Anderson, no
 
assurance can
 
be given
 
that these
 
individuals will
continue to be employed by us. The loss of any of these individuals could negatively affect our ability to achieve our growth
strategy and could have a material adverse effect
 
on our business and results of operations.
We also need to continue
 
to attract and retain other senior
 
management and to recruit qualified
 
individuals to succeed
existing
 
key
 
personnel
 
to
 
ensure
 
the continued
 
growth
 
and successful
 
operation
 
of our
 
business.
 
We
 
may
 
be unable
 
to
attract or
 
retain qualified
 
management
 
and other
 
key
 
personnel
 
in the
 
future due
 
to the
 
intense competition
 
for qualified
personnel
 
among
 
companies
 
in
 
the
 
financial
 
services
 
business
 
and
 
related
 
businesses.
 
The
 
loss
 
of
 
the
 
services
 
of any
senior management personnel, or the inability to recruit
 
and retain qualified personnel in the future, could
 
have an adverse
effect on our business, results of
 
operations, financial condition and prospects.
 
Additionally,
 
to attract and retain personnel
with appropriate
 
skills and
 
knowledge to
 
support our
 
business, we
 
may offer
 
a variety
 
of benefits,
 
which may
 
reduce our
earnings or adversely affect our business, results
 
of operations, financial condition or prospects.
Damage to our reputation could significantly harm
 
our businesses.
Our ability to attract
 
and retain customers and
 
highly-skilled management and employees is
 
impacted by our reputation.
A negative public
 
opinion of us
 
and our business
 
can result from
 
any number of
 
activities, including our
 
lending practices,
corporate
 
governance
 
and
 
regulatory
 
compliance,
 
acquisitions,
 
customer
 
complaints
 
and
 
actions
 
taken
 
by
 
community
organizations in
 
response to
 
these activities.
 
Furthermore, negative
 
publicity regarding
 
us as
 
an employer
 
could have
 
an
adverse
 
impact on
 
our reputation,
 
especially
 
with respect
 
to
 
matters of
 
diversity,
 
pay equity
 
and workplace
 
harassment.
Significant
 
harm
 
to
 
our
 
reputation
 
could
 
also
 
arise
 
as
 
a
 
result
 
of
 
regulatory
 
or
 
governmental
 
actions,
 
litigation
 
and
 
the
activities of our customers, other
 
participants in the financial services
 
industry or our contractual counterparties, such
 
as our
service providers
 
and vendors.
 
The potential
 
harm
 
is heightened
 
given
 
increased attention
 
to how
 
corporations
 
address
environmental, social
 
and governance
 
issues. In
 
addition, a cybersecurity
 
event affecting
 
us or our
 
customers' data
 
could
have a negative
 
impact on our
 
reputation and
 
customer confidence
 
in us and
 
our cybersecurity
 
practices. Damage
 
to our
reputation could also
 
adversely affect
 
our credit ratings
 
and access to
 
the capital markets.
 
Additionally,
 
whereas negative
public opinion once was
 
primarily driven by adverse
 
news coverage in traditional
 
media, the widespread use
 
of social media
platforms by
 
virtually every
 
segment of
 
society facilitates
 
the rapid
 
dissemination
 
of information
 
or misinformation,
 
which
magnifies the potential harm to our reputation.
We
 
face
 
strong
 
competition
 
from
 
financial
 
services
 
companies
 
and
 
other
 
companies
 
that
 
offer
 
banking
services, which could materially and adversely affect
 
our business.
 
The financial
 
services industry has
 
become even
 
more competitive as
 
a result
 
of legislative,
 
regulatory and technological
changes and
 
continued
 
banking consolidation,
 
which
 
may increase
 
as a
 
result of
 
current economic,
 
market and
 
political
conditions. We
 
face substantial
 
competition
 
in all
 
phases
 
of our
 
operations
 
from
 
a variety
 
of competitors,
 
including local
banks,
 
regional
 
banks,
 
community
 
banks
 
and,
 
more
 
recently,
 
financial
 
technology,
 
or
 
"fintech"
 
companies.
 
Many
 
of
 
our
competitors offer the same banking services that
 
we offer and our success depends on
 
our ability to adapt our
 
products and
services
 
to
 
evolving
 
industry
 
standards
 
and
 
customer
 
requirements.
 
Increased
 
competition
 
in
 
our
 
market
 
may
 
result
 
in
reduced new
 
loan and
 
lease production
 
and/or decreased
 
deposit balances
 
or less
 
favorable terms
 
on loans
 
and leases
and/or deposit
 
accounts. We also
 
face competition
 
from many
 
other types
 
of financial
 
institutions, including
 
without limitation,
non-bank
 
specialty
 
lenders,
 
insurance
 
companies,
 
private
 
investment
 
funds,
 
investment
 
banks,
 
and
 
other
 
financial
intermediaries. Should competition in
 
the financial services industry
 
intensify, our ability to market our
 
products and services
may be adversely affected. If we are unable to attract and retain banking customers, we may be
 
unable to grow or maintain
the levels
 
of our
 
loans and
 
deposits and
 
our results
 
of operations
 
and financial
 
condition may
 
be adversely
 
affected as
 
a
result. Ultimately, we
 
may not be able to compete successfully against current
 
and future competitors.
We must respond to rapid technological changes
 
to remain competitive.
 
We will
 
have to respond
 
to future
 
technological changes,
 
which are occurring
 
at a rapid
 
pace in the
 
financial services
industry.
 
We
 
expect
 
that
 
new
 
technologies
 
and
 
business
 
processes
 
applicable
 
to
 
the
 
banking
 
industry
 
will
 
continue
 
to
emerge, and these
 
new technologies and business
 
processes may be
 
better than those
 
we currently use. Because
 
the pace
of technological change
 
is high and our
 
industry is intensely
 
competitive, our future
 
success will depend,
 
in part, upon our
 
 
 
31
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
ability to address
 
the needs of
 
our customers by using
 
technology to provide products
 
and services that
 
will satisfy customer
demands for convenience,
 
as well as to
 
create additional efficiencies
 
in our operations.
 
We may not
 
be able to implement
new technology-driven products
 
and services effectively
 
or be successful
 
in marketing these
 
products and services
 
to our
customers. Failure to keep pace successfully with technological change affecting the financial services industry could harm
our
 
ability
 
to
 
compete
 
effectively
 
and
 
could
 
have
 
an
 
adverse
 
effect
 
on
 
our
 
business,
 
financial
 
condition
 
and
 
results
 
of
operations. As
 
these
 
technologies
 
improve
 
in the
 
future,
 
we may
 
be required
 
to make
 
significant
 
capital
 
expenditures
 
in
order to remain
 
competitive, which may increase
 
our overall expenses
 
and have an
 
adverse effect on our
 
business, financial
condition and results of operations.
A
 
failure,
 
interruption,
 
or
 
breach
 
in
 
the
 
security
 
of
 
our
 
systems,
 
or
 
those
 
of
 
our
 
contracted
 
vendors,
 
could
disrupt
 
our
 
business,
 
result
 
in
 
the
 
disclosure
 
of
 
confidential
 
information,
 
damage
 
our
 
reputation,
 
and
 
create
significant financial and legal exposure.
Although we
 
devote significant
 
resources to maintain
 
and regularly update
 
our systems and
 
processes that are
 
designed
to
 
protect
 
the
 
security
 
of
 
our
 
computer
 
systems,
 
software,
 
networks
 
and
 
other
 
technology
 
assets,
 
as
 
well
 
as
 
the
confidentiality,
 
integrity and availability
 
of information belonging
 
to us and
 
our customers,
 
there is no
 
assurance that
 
all of
our
 
security
 
measures
 
will
 
provide
 
absolute
 
security.
 
Many
 
financial
 
institutions,
 
including
 
us,
 
have
 
been
 
subjected
 
to
attempts
 
to
 
infiltrate
 
the
 
security
 
of
 
their
 
websites
 
or
 
other
 
systems,
 
some
 
involving
 
sophisticated
 
and
 
targeted
 
attacks
intended
 
to
 
obtain
 
unauthorized
 
access
 
to
 
confidential
 
information,
 
destroy
 
data,
 
disrupt
 
or
 
degrade
 
service,
 
sabotage
systems or cause
 
other damage, including through
 
the introduction of
 
computer viruses or malware,
 
cyber-attacks and other
means. We
 
have been
 
targeted by
 
individuals and
 
groups using
 
phishing campaigns,
 
pretext calling,
 
malicious code
 
and
viruses and expect to
 
be subject to such
 
attacks in the future.
 
While we have not
 
experienced a material cyber
 
-incident or
security breach that has
 
been successful in compromising
 
our data or systems
 
to date, we can
 
never be certain that
 
all of
our systems are entirely free from vulnerability to breaches
 
of security or other technological difficulties or
 
failures.
Despite efforts to
 
ensure the integrity
 
and security of
 
our systems, it
 
is possible that
 
we may not
 
be able to
 
anticipate,
detect or recognize
 
threats to our
 
systems or to
 
implement effective
 
preventive measures
 
against all efforts
 
to breach our
security inside or outside our business, especially because the techniques used to attack our systems
 
change frequently or
are
 
not
 
recognized
 
until
 
launched,
 
and
 
because
 
cyber-attacks
 
can
 
originate
 
from
 
a
 
wide
 
variety
 
of
 
sources,
 
including
individuals or groups who are associated with
 
external service providers or who are or
 
may be involved in organized crime
or linked
 
to terrorist
 
organizations or
 
hostile foreign
 
governments. Those
 
parties may
 
also attempt
 
to fraudulently
 
induce
employees, customers, third-party service providers or other users of our systems to disclose sensitive information in order
to gain access
 
to our data or
 
that of our customers
 
or clients. Similar
 
to other companies,
 
our risks and exposures
 
related
to cybersecurity
 
attacks have
 
increased as
 
a result
 
of the COVID
 
-19 pandemic,
 
the related
 
increased reliance
 
on remote
working and increase in digital operations. Such
 
risks and exposures are expected to remain high
 
for the foreseeable future
due to
 
the rapidly
 
evolving nature
 
and sophistication
 
of these
 
threats and
 
the expanding
 
use of
 
technology,
 
as our
 
web-
based product offerings grow and we expand internal
 
usage of web-based applications.
A successful
 
penetration
 
or
 
circumvention
 
of the
 
security
 
of our
 
systems,
 
including those
 
of our
 
third-party
 
vendors,
could
 
cause
 
serious
 
negative
 
consequences,
 
including
 
significant
 
disruption
 
of
 
our
 
operations,
 
misappropriation
 
of
confidential information,
 
or damage
 
to computers
 
or systems,
 
and may
 
result in violations
 
of applicable
 
privacy and
 
other
laws, financial loss,
 
loss of confidence
 
in our security measures,
 
customer dissatisfaction, increased
 
insurance premiums,
significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on our business,
financial condition, results of operations, and future prospects.
We
 
rely
 
on
 
other
 
companies
 
to
 
provide
 
key
 
components
 
of
 
our
 
business
 
infrastructure
 
and
 
our
 
operations
could
 
be
 
interrupted
 
if
 
our
 
third-party
 
service
 
providers
 
experience
 
difficulty,
 
terminate
 
their
 
services
 
or
 
fail
 
to
comply with banking regulations.
 
Third parties
 
provide key
 
components of
 
our business
 
operations such
 
as data
 
processing, recording
 
and monitoring
transactions,
 
online
 
banking
 
interfaces
 
and services,
 
Internet
 
connections
 
and
 
network
 
access.
 
While
 
we
 
have
 
selected
these third-party
 
vendors carefully,
 
performing upfront
 
due diligence
 
and ongoing
 
monitoring activities,
 
we do
 
not control
their actions. Any problems caused by these third parties, including those resulting from disruptions in services provided by
a
 
vendor
 
(including
 
as
 
a
 
result
 
of
 
a
 
cyber-attack,
 
other
 
information
 
security
 
event
 
or
 
a
 
natural
 
disaster),
 
financial
 
or
operational difficulties
 
for the vendor,
 
issues at third-party
 
vendors to our
 
vendors, failure of
 
a vendor to
 
handle current or
higher volumes, failure of a vendor to provide services for any reason,
 
poor performance of services, failure to comply with
applicable laws
 
and regulations,
 
or fraud
 
or misconduct
 
on the
 
part of
 
employees of
 
any of
 
our vendors,
 
could adversely
affect our ability
 
to deliver products
 
and services to
 
our customers, our
 
reputation and our
 
ability to conduct
 
our business,
which could
 
adversely affect
 
our business,
 
prospects, cash
 
flow,
 
liquidity,
 
financial condition
 
and results
 
of operations.
 
In
certain
 
situations,
 
replacing
 
these
 
third-party
 
vendors
 
could
 
also
 
create
 
significant
 
delay,
 
expense,
 
and
 
operational
difficulties, which
 
could also
 
adversely affect
 
our business.
 
Accordingly,
 
use of
 
such third
 
parties creates
 
an unavoidable
 
 
 
32
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
and
 
inherent
 
risk
 
to
 
our
 
business
 
operations.
 
Such
 
risk
 
is
 
generally
 
expected
 
to
 
remain
 
elevated
 
until
 
the
 
COVID-19
pandemic
 
subsides
 
and
 
may
 
remain
 
elevated
 
thereafter,
 
as
 
many
 
of
 
our
 
vendors
 
have
 
also
 
been,
 
and
 
may
 
further
 
be,
affected by increased
 
reliance on remote work
 
environments, market volatility
 
and other factors that
 
increase their risks
 
of
business disruption or
 
that may otherwise
 
affect their ability
 
to perform under
 
the terms of
 
any agreements with
 
us or provide
essential services.
Our operations could be interrupted or
 
materially impacted if any of our
 
third-party service providers fail to comply
 
with
banking regulations
 
and other
 
applicable laws.
 
The Federal
 
Reserve, FDIC,
 
the Florida
 
Office of
 
Financial Regulation,
 
or
the FOFR, and other regulators expect financial institutions to be responsible for all aspects of their performance, including
aspects that they delegate
 
to third parties. Accordingly,
 
we will be responsible
 
for deficiencies in
 
our oversight and control
of our third party relationships
 
and in the performance
 
of the parties with which
 
we have these relationships.
 
As a result, if
our regulators
 
conclude that
 
we have
 
not exercised
 
adequate oversight
 
and control
 
over our
 
third party
 
vendors or
 
other
ongoing third party business
 
relationships or that such
 
third parties have not performed
 
appropriately,
 
we could be subject
to remedial and/or enforcement actions,
 
including civil money penalties or
 
other administrative or judicial penalties
 
or fines
as well as requirements for customer remediation, any
 
of which could have a material
 
adverse effect our business, financial
condition or results of operations.
Litigation and regulatory actions,
 
including possible enforcement actions, could subject
 
us to significant fines,
penalties,
 
judgments
 
or
 
other
 
requirements
 
resulting
 
in
 
increased
 
expenses
 
or
 
restrictions
 
on
 
our
 
business
activities.
 
In the normal course of
 
business, from time to time, we
 
have in the past and
 
may in the future be
 
named as a defendant
in various
 
legal actions
 
arising in
 
connection with
 
our current
 
and/or prior
 
business
 
activities. Legal
 
actions could
 
include
claims for substantial compensatory
 
or punitive damages
 
or claims for indeterminate
 
amounts of damages.
 
Further, in
 
the
future
 
our
 
regulators
 
may
 
impose
 
consent
 
orders,
 
civil
 
money
 
penalties,
 
matters
 
requiring
 
attention,
 
or
 
similar
 
types
 
of
supervisory penalties
 
or criticism.
 
We may
 
also, from
 
time to
 
time, be
 
the subject
 
of subpoenas,
 
requests for
 
information,
reviews, investigations and proceedings (both formal and informal) by governmental agencies
 
regarding our current and/or
prior
 
business
 
activities.
 
Any
 
such
 
legal
 
or
 
regulatory
 
actions
 
may
 
subject
 
us
 
to
 
substantial
 
compensatory
 
or
 
punitive
damages,
 
significant
 
fines,
 
penalties,
 
obligations
 
to
 
change
 
our
 
business
 
practices
 
or
 
other
 
requirements
 
resulting
 
in
increased
 
expenses,
 
diminished
 
income
 
and
 
damage
 
to
 
our
 
reputation.
 
Our
 
involvement
 
in
 
any
 
such
 
matters,
 
whether
tangential or otherwise and
 
even if the matters are
 
ultimately determined in our
 
favor, could
 
also cause significant harm
 
to
our reputation and divert management attention away from the operation of
 
our business. Further, any
 
settlement, consent
order or adverse
 
judgment in
 
connection with
 
any formal
 
or informal
 
proceeding or
 
investigation by
 
government agencies
may result in
 
litigation, investigations or proceedings
 
as other litigants
 
and government agencies begin
 
independent reviews
of the same
 
activities. As a
 
result, the outcome of
 
legal and regulatory
 
actions could have
 
an adverse effect on
 
our business,
results of operations and results of operations.
Certain of
 
our directors may
 
have conflicts
 
of interest in
 
determining whether to
 
present business
 
opportunities
to us or another entity with which they are, or may
 
become, affiliated.
 
Certain of our
 
directors are or may
 
become subject to fiduciary
 
obligations in connection with
 
their service on the
 
boards
of
 
directors
 
of
 
other
 
corporations,
 
including
 
financial
 
institutions.
 
A
 
director's
 
association
 
with
 
other
 
financial
 
institutions,
which give rise to fiduciary or contractual obligations to
 
such institutions, may create conflicts of interest.
 
To
 
the extent that
any of our directors become aware of
 
acquisition opportunities that may be
 
suitable for entities other than us
 
to which they
have fiduciary
 
or contractual
 
obligations, or they
 
are presented
 
with such
 
opportunities in
 
their capacities
 
as fiduciaries
 
to
such
 
entities,
 
they
 
may
 
honor
 
such
 
obligations
 
to
 
such
 
other
 
entities.
 
You
 
should
 
assume
 
that
 
to
 
the
 
extent
 
any
 
of
 
our
directors become aware
 
of an opportunity
 
that may be
 
suitable both for
 
us and another
 
entity to which
 
such person has
 
a
fiduciary obligation
 
or contractual
 
obligation
 
to present
 
such
 
opportunity as
 
set forth
 
above,
 
he or
 
she may
 
first give
 
the
opportunity to such other entity
 
or entities and may give
 
such opportunity to us only
 
to the extent such other
 
entity or entities
reject
 
or
 
are
 
unable
 
to
 
pursue
 
such
 
opportunity.
 
In
 
addition,
 
you
 
should
 
assume
 
that
 
to
 
the
 
extent
 
any
 
of
 
our
 
directors
become
 
aware
 
of
 
an
 
acquisition
 
opportunity
 
that
 
does
 
not
 
fall
 
within
 
the
 
above
 
parameters,
 
but
 
that
 
may
 
otherwise
 
be
suitable for us, he or she may not present such opportunity
 
to us.
 
Pursuant
 
to
 
an
 
agreement
 
between
 
us
 
and
 
our
 
Significant
 
Investors
 
(as
 
defined
 
herein),
 
each
 
of
 
the
 
Significant
Investors have the right to nominate one director to serve on our Board, including Board committees,
 
and to designate one
non-voting Board
 
observer.
 
The directors
 
and Board
 
observers
 
designated by
 
the Significant
 
Investors have
 
the right
 
to,
and have
 
no duty
 
not to,
 
engage in
 
the same
 
or similar
 
business activities
 
or lines
 
of business
 
as us.
 
In the
 
event that
 
a
director or Board observer designated by a Significant Investor acquires knowledge of a potential transaction or matter that
may be
 
a corporate opportunity
 
for us,
 
such person shall
 
have no
 
duty to
 
communicate or
 
present such corporate
 
opportunity
to us
 
and shall
 
not be
 
liable to
 
us or
 
our shareholders
 
for breach
 
of any
 
duty by
 
reason of
 
the fact
 
that such
 
person or
 
a
 
 
 
33
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
related investment fund
 
thereof, directly or
 
indirectly, pursues or acquires such opportunity
 
for itself, directs
 
such opportunity
to another person, or does not present such opportunity
 
to us.
 
Risks Related to Our Tax,
 
Accounting and Regulatory Compliance
Our
 
ability
 
to
 
recognize
 
the
 
benefits
 
of
 
deferred
 
tax
 
assets
 
is
 
dependent
 
on
 
future
 
cash
 
flows
 
and
 
taxable
income and may be materially impaired upon significant
 
changes in ownership of our common stock.
We recognize the expected future tax
 
benefit from deferred tax assets when
 
it is more likely than
 
not that the tax benefit
will be realized. Otherwise, a valuation allowance is applied against deferred tax assets, reducing the value of such assets.
Assessing
 
the
 
recoverability
 
of
 
deferred
 
tax
 
assets
 
requires
 
management
 
to
 
make
 
significant
 
estimates
 
related
 
to
expectations
 
of
 
future
 
taxable
 
income
 
from
 
all
 
sources,
 
including
 
reversal
 
of
 
taxable
 
temporary
 
differences,
 
forecasted
operating
 
earnings
 
and
 
available
 
tax
 
planning
 
strategies.
 
Estimates
 
of
 
future
 
taxable
 
income
 
are
 
based
 
on
 
forecasted
income from operations and the application of existing tax laws in each jurisdiction. The improved risk profile of the Bank is
a key
 
component used
 
in the determination
 
of our
 
ability to
 
realize the
 
expected future
 
benefit of
 
our deferred
 
tax assets.
To
 
the extent that future taxable income differs
 
significantly from estimates as a result
 
of the interest rate environment
 
and
loan growth capabilities or other factors, our ability to realize
 
the net deferred tax assets could be negatively
 
affected.
Subject to certain exceptions, our Class A common stock is subject
 
to transfer restrictions as set forth in our Articles of
Incorporation that are
 
designed to preserve
 
our deferred tax
 
assets. Notwithstanding these
 
protective provisions, the
 
Articles
of Incorporation include
 
an exception that
 
allows our Significant
 
Investors the right
 
to effect any
 
transfer that would
 
otherwise
be prohibited, which transfer could result in the loss of the deferred
 
tax assets.
Additionally,
 
significant future
 
issuances of
 
common stock
 
or common
 
stock equivalents,
 
or changes
 
in the
 
direct or
indirect ownership
 
of our
 
common stock
 
or common
 
stock equivalents,
 
could cause
 
an ownership
 
change and
 
could limit
our ability to
 
utilize our net
 
operating loss carryforwards
 
and other tax
 
attributes pursuant
 
to Section 382
 
and Section 383
of the Internal Revenue Code.
 
Future changes in tax law
 
or changes in ownership structure
 
could limit our ability to utilize
our recorded net deferred tax assets.
 
The
 
accuracy
 
of
 
our
 
financial
 
statements
 
and
 
related
 
disclosures
 
could
 
be
 
affected
 
if
 
the
 
judgments,
assumptions or estimates used in our critical accounting
 
policies are inaccurate.
The
 
preparation
 
of
 
our
 
financial
 
statements
 
and
 
related
 
disclosures
 
in
 
conformity
 
with
 
GAAP
 
requires
 
us
 
to
 
make
judgments,
 
assumptions
 
and
 
estimates
 
that
 
affect
 
the
 
amounts
 
reported
 
in
 
our
 
consolidated
 
financial
 
statements
 
and
accompanying notes. In some cases, management
 
must select the accounting policy or method
 
to apply from two or more
alternatives,
 
any of
 
which
 
may be
 
reasonable
 
under
 
the circumstances,
 
yet
 
which
 
may result
 
in
 
our
 
reporting
 
materially
different
 
results
 
than
 
would
 
have
 
been
 
reported
 
under
 
a
 
different
 
alternative.
 
Certain
 
accounting
 
policies
 
are
 
critical
 
or
significant to presenting our financial
 
condition and results of
 
operations. Our critical accounting policies, which
 
are included
in the section captioned
 
"Management's Discussion and
 
Analysis of Financial Condition
 
and Results of Operations"
 
in this
Annual Report
 
on Form
 
10-K, describe
 
those significant
 
accounting
 
policies and
 
methods used
 
in the
 
preparation of
 
our
consolidated financial statements that we
 
consider critical because they
 
require judgments, assumptions and estimates that
materially affect
 
our consolidated
 
financial
 
statements
 
and related
 
disclosures.
 
As a
 
result,
 
if future
 
events
 
or regulatory
views concerning such
 
analyses differ significantly from
 
the judgments, assumptions and
 
estimates in our
 
critical accounting
policies, those
 
events or
 
assumptions could
 
have a
 
material impact
 
on our
 
consolidated financial
 
statements and
 
related
disclosures, in each
 
case resulting in
 
our need to
 
revise or restate
 
prior period financial
 
statements, cause
 
damage to our
reputation and
 
the price
 
of our
 
Class A
 
common stock
 
and adversely
 
affect
 
our business,
 
prospects, cash
 
flow,
 
liquidity,
financial condition and results of operations.
As a new public
 
company, we may not efficiently or effectively create an
 
effective internal control environment,
and any
 
future failure
 
to maintain
 
effective internal
 
control over
 
financial reporting
 
could impair
 
the reliability
 
of
our financial
 
statements, which
 
in turn could
 
harm our business,
 
impair investor
 
confidence in the
 
accuracy and
completeness of
 
our financial
 
reports and
 
our access
 
to the
 
capital markets,
 
cause the
 
price of
 
our Class
 
A common
stock to decline and subject us to regulatory penalties.
Our management is responsible for establishing
 
and maintaining adequate internal control over financial
 
reporting and
for evaluating
 
and
 
reporting
 
on
 
that
 
system
 
of
 
internal
 
control.
 
Our
 
internal
 
control
 
over
 
financial
 
reporting
 
consists
 
of
 
a
process
 
designed
 
to
 
provide
 
reasonable
 
assurance
 
regarding
 
the
 
reliability
 
of
 
financial
 
reporting
 
and
 
the
 
preparation
 
of
financial statements for external purposes in accordance with GAAP.
 
As a public company,
 
we are required to comply with
SEC regulations, including
 
the Sarbanes-Oxley Act
 
and other rules
 
that govern public
 
companies that we
 
previously were
not required to
 
comply with
 
as a private
 
company.
 
In particular,
 
we will be
 
required to
 
certify our
 
compliance with
 
Section
404 of
 
the Sarbanes-Oxley
 
Act beginning
 
with our
 
second annual
 
report on
 
Form 10-K,
 
which will
 
require us
 
to annually
 
 
 
34
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
furnish a
 
report by
 
management on
 
the effectiveness
 
of our
 
internal control
 
over financial
 
reporting. When
 
evaluating our
internal controls over financial reporting, we may identify material
 
weaknesses that we may not be able to
 
remediate in time
to meet
 
the applicable
 
deadline imposed
 
upon us
 
for compliance
 
with the
 
requirements
 
of Section
 
404 of
 
the Sarbanes-
Oxley Act. We are in the process of
 
reviewing our formal policies, processes and practices related to financial reporting
 
and
to the identification of key
 
financial reporting risks, assessment of their potential
 
impact and linkage of those
 
risks to specific
areas and controls within our organization.
If we fail to achieve and maintain the adequacy of
 
our internal controls, as such standards are modified, supplemented,
or amended from time to
 
time, we may not
 
be able to ensure
 
that we will be able
 
to conclude on an ongoing
 
basis that we
have
 
effective
 
internal
 
controls
 
over
 
financial
 
reporting
 
in
 
accordance
 
with
 
Section
 
404
 
of
 
the
 
Sarbanes-Oxley
 
Act.
 
We
cannot be certain as to the timing of completion of our evaluation, testing,
 
and any remediation actions or the impact of the
same on our
 
operations. If
 
we fail to
 
adequately comply
 
with the requirements
 
of Section
 
404 of the
 
Sarbanes-Oxley Act,
we may be subject to adverse regulatory consequences and
 
there could be a negative reaction in the
 
financial markets due
to a loss of investor confidence in us and the
 
reliability of our financial statements.
 
In addition, we may be required to incur
costs in improving
 
our internal control
 
system and
 
hiring additional
 
personnel. Any
 
such action could
 
negatively affect
 
our
business, financial condition, results of operations, and the price
 
of our Class A common stock may decline.
While we
 
remain an emerging
 
growth company, we will
 
not be
 
required to include
 
an attestation report
 
on internal
 
control
over financial
 
reporting issued
 
by our
 
independent registered
 
public accounting
 
firm. To
 
prepare for
 
eventual compliance
with the auditor attestation requirement of
 
Section 404 of Sarbanes-Oxley once
 
we no longer qualify as
 
an emerging growth
company,
 
we are
 
currently
 
engaged in
 
a process
 
to document
 
and
 
evaluate our
 
internal control
 
over financial
 
reporting,
which is both costly and challenging. In
 
this regard, we will need to dedicate
 
internal resources, potentially engage
 
outside
consultants and adopt
 
a detailed work
 
plan to assess
 
and document the
 
adequacy of internal
 
control over financial
 
reporting,
continue
 
steps
 
to
 
improve
 
control
 
processes
 
as
 
appropriate,
 
validate
 
through
 
testing
 
that
 
controls
 
are
 
functioning
 
as
documented
 
and
 
continue
 
to
 
refine
 
our
 
reporting
 
and
 
improvement
 
process
 
for
 
internal
 
control
 
over
 
financial
 
reporting.
Despite our
 
efforts, there
 
is a
 
risk that
 
we will
 
not be
 
able to
 
conclude, within
 
the prescribed
 
time frame
 
or at
 
all, that
 
our
internal control over financial reporting is effective as required by
 
Section 404 of Sarbanes-Oxley. If we identify one or more
material
 
weaknesses,
 
it
 
could
 
result
 
in
 
an
 
adverse
 
reaction
 
in
 
the
 
financial
 
markets
 
due
 
to
 
a
 
loss
 
of
 
confidence
 
in
 
the
reliability of our financial statements.
We
 
operate
 
in
 
a
 
highly
 
regulated
 
environment,
 
and
 
the
 
laws
 
and
 
regulations
 
that
 
govern
 
our
 
operations,
corporate governance,
 
executive compensation
 
and accounting
 
principles, or
 
changes in
 
them, or
 
our failure
 
to
comply with them, could adversely affect us.
We operate in a
 
highly regulated industry and
 
we are subject to
 
examination, supervision and comprehensive
 
regulation
by various federal and state agencies,
 
including the Federal Reserve, the
 
FDIC and the FOFR. As
 
such, we are subject to
extensive regulation, supervision and
 
legal requirements that govern almost
 
all aspects of our operations.
 
These laws and
regulations
 
are
 
not
 
intended
 
to
 
protect
 
our
 
shareholders.
 
Rather,
 
these
 
laws
 
and
 
regulations
 
are
 
intended
 
to
 
protect
customers, depositors, the Deposit Insurance
 
Fund, or DIF, and the overall financial health and
 
stability of the United
 
States
banking
 
system.
 
These
 
laws
 
and
 
regulations,
 
among
 
other
 
matters,
 
prescribe
 
minimum
 
capital
 
requirements,
 
impose
limitations on the
 
business activities
 
and investments
 
in which we
 
can engage, regulate
 
and restrict our
 
lending activities,
require us to provide certain banking services broadly within the communities in which we operate,
 
determine the locations
of our branch
 
offices and impose certain
 
specific accounting requirements on us
 
that may be more
 
restrictive and may result
in
 
greater
 
or
 
earlier
 
charges
 
to
 
earnings
 
or
 
reductions
 
in
 
our
 
capital
 
than
 
GAAP
 
would
 
require.
 
We
 
are
 
also
 
subject
 
to
capitalization
 
guidelines
 
established
 
by
 
our
 
regulators,
 
which
 
require
 
us
 
to
 
maintain
 
adequate
 
capital
 
to
 
support
 
our
business.
 
Compliance
 
with
 
laws
 
and
 
regulations
 
can
 
be
 
difficult
 
and
 
costly,
 
and
 
changes
 
to
 
laws
 
and
 
regulations
 
often
impose additional operating costs. Further, we must obtain approval from our
 
regulators before engaging in many activities,
and
 
our
 
regulators
 
have
 
the
 
ability
 
to
 
compel
 
us
 
to,
 
or
 
restrict
 
us
 
from,
 
taking
 
certain
 
actions
 
entirely.
 
There
 
can
 
be
 
no
assurance that any regulatory approvals we may require
 
or otherwise seek will be obtained.
Regulations affecting
 
banks and
 
other financial
 
institutions are
 
undergoing continuous
 
review and
 
frequently change,
and the ultimate effect of such changes cannot be predicted. Changes to the legal and regulatory framework governing our
operations, including
 
the Dodd-Frank
 
Wall
 
Street Reform
 
and Consumer
 
Protection Act,
 
or the
 
Dodd-Frank
 
Act, and
 
the
Economic Growth, Regulatory Relief and Consumer
 
Protection Act, or the Regulatory Relief
 
Act, have significantly revised
the laws and regulations under which we operate. Such regulations and laws may be modified or repealed at any time, and
new legislation may be enacted that will affect us and
 
our subsidiaries.
Our failure to comply with these laws and regulations, even if the failure follows good faith effort
 
or reflects a difference
in
 
interpretation,
 
could
 
subject
 
us
 
to
 
restrictions
 
on
 
our
 
business
 
activities,
 
enforcement
 
actions
 
and
 
fines
 
and
 
other
penalties,
 
any
 
of
 
which
 
could
 
adversely
 
affect
 
our
 
results
 
of
 
operations,
 
regulatory
 
capital
 
levels
 
and
 
the
 
price
 
of
 
our
securities. Further, any new laws, rules and
 
regulations, such as were imposed
 
under the Dodd-Frank Act or
 
the Regulatory
 
 
 
35
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Relief Act, could make
 
compliance more difficult
 
or expensive or otherwise
 
adversely affect our
 
business, prospects, cash
flow, liquidity,
 
financial condition and results of operations.
Our participation in the SBA PPP loan program exposes us to risks related to
 
noncompliance with the PPP,
 
as
well as litigation
 
risk related to
 
our administration of
 
the PPP loan
 
program, which
 
could have a
 
material adverse
impact on our business, financial condition, and results
 
of operations.
 
We are a
 
participating lender in
 
the PPP, a loan program administered
 
through the SBA,
 
that was created
 
to help eligible
businesses, organizations
 
and self-employed persons
 
fund their operational
 
costs during the
 
COVID-19 pandemic.
 
Under
this program, the SBA guarantees 100% of the amounts
 
loaned under the PPP.
The PPP opened on April 3, 2020; however,
 
because of the short window between
 
the passing of the CARES Act and
the opening
 
of the
 
PPP,
 
there was
 
some ambiguity
 
in the
 
laws, rules
 
and guidance
 
regarding the
 
operation
 
of the
 
PPP.
Subsequent rounds of
 
legislation and associated
 
agency guidance have
 
not provided needed
 
clarity and in
 
certain instances
have
 
potentially
 
created
 
additional
 
inconsistencies
 
and
 
ambiguities.
 
Accordingly,
 
we
 
are
 
exposed
 
to
 
risks
 
relating
 
to
noncompliance with the PPP.
Additionally, since the launch of the PPP, several larger banks have been
 
subject to litigation regarding
 
the process and
procedures
 
that
 
such
 
banks
 
used
 
in
 
processing
 
applications
 
for
 
the
 
PPP,
 
as
 
well
 
as
 
litigation
 
regarding
 
the
 
alleged
nonpayment of
 
fees that
 
may be
 
due to
 
certain agents
 
who facilitated
 
PPP loan
 
applications. We
 
may be
 
exposed to
 
the
risk of PPP-related litigation, from
 
both customers and non-customers
 
that approached us regarding PPP
 
loans, regarding
our process and procedures used in processing
 
applications for the PPP.
 
If any such litigation is filed against
 
us and is not
resolved
 
in
 
a
 
manner
 
favorable
 
to
 
us,
 
it
 
may
 
result
 
in
 
significant
 
financial
 
liability
 
or
 
adversely
 
affect
 
our
 
reputation.
Regardless of outcome, litigation can be costly and distracting. Any financial liability, litigation costs or reputational damage
caused by
 
PPP-related litigation
 
could have
 
a material
 
adverse impact
 
on our
 
business, financial
 
condition and
 
results of
operations.
PPP loans are fixed,
 
low interest rate loans
 
that are guaranteed by
 
the SBA and subject
 
to numerous other regulatory
requirements, and a borrower may apply to have all
 
or a portion of the loan forgiven. If PPP
 
borrowers fail to qualify for loan
forgiveness, we face
 
a heightened risk
 
of holding these
 
loans at unfavorable
 
interest rates for
 
an extended period
 
of time.
While the PPP loans are guaranteed
 
by the SBA, various regulatory
 
requirements will apply to our
 
ability to seek recourse
under the guarantees, and related procedures are currently subject
 
to uncertainty.
In
 
addition,
 
we
 
may
 
be
 
exposed
 
to
 
credit
 
risk
 
on
 
PPP
 
loans
 
if
 
a
 
determination
 
is
 
made
 
by
 
the
 
SBA
 
that
 
there
 
is
 
a
deficiency
 
in
 
the
 
manner
 
in
 
which
 
the
 
loan
 
was
 
originated,
 
funded,
 
or
 
serviced,
 
such
 
as
 
an
 
issue
 
with
 
the
 
eligibility
 
of
borrower to receive a PPP
 
loan, which may or may
 
not be related to the
 
ambiguity in the laws, rules
 
and guidance regarding
the operations of the PPP. If a deficiency is identified, the SBA may deny its liability under the guaranty,
 
reduce the amount
of the guaranty,
 
or, if it has already paid
 
under the guaranty,
 
seek recovery of any loss related to the deficiency from us.
We
 
face
 
a
 
risk
 
of
 
noncompliance
 
with
 
the
 
Bank
 
Secrecy
 
Act
 
and
 
other
 
anti-money
 
laundering
 
statutes
 
and
regulations and corresponding enforcement proceedings.
The
 
federal
 
Bank
 
Secrecy
 
Act,
 
the
 
Uniting
 
and
 
Strengthening
 
America
 
by
 
Providing
 
Appropriate
 
Tools
 
Required
 
to
Intercept and
 
Obstruct Terrorism
 
Act of
 
2001, or
 
the USA
 
PATRIOT
 
Act, and
 
other laws
 
and regulations
 
require financial
institutions, among
 
other duties,
 
to institute
 
and maintain
 
effective anti-money
 
laundering programs
 
and to
 
file suspicious
activity and
 
currency transaction
 
reports, as
 
appropriate. The
 
federal Financial
 
Crimes Enforcement
 
Network, or
 
FinCEN,
established by the
 
U.S. Treasury
 
Department to administer
 
the Bank Secrecy
 
Act, is authorized
 
to impose significant
 
civil
money penalties for
 
violations of those
 
requirements and has engaged
 
in coordinated enforcement efforts
 
with the individual
federal
 
banking
 
regulators,
 
as
 
well
 
as
 
the
 
U.S.
 
Department
 
of
 
Justice,
 
Drug
 
Enforcement
 
Administration
 
and
 
Internal
Revenue Service.
 
Additionally,
 
South Florida
 
has been
 
designated as
 
a “High
 
Intensity Financial
 
Crime Area,”
 
or HIFCA,
by FinCEN and a
 
“High Intensity Drug Trafficking Area,” or HIDTA, by the Office of
 
National Drug Control Policy. The HIFCA
program is intended to concentrate law enforcement efforts
 
to combat money laundering efforts in higher-risk
 
areas. There
is also increased scrutiny of compliance
 
with the rules enforced by the
 
Office of Foreign Assets Control,
 
or OFAC. Federal
and state bank
 
regulators have for
 
many years focused
 
on compliance with
 
Bank Secrecy
 
Act and anti-money
 
laundering
regulations. In
 
order to
 
comply with
 
regulations,
 
guidelines and
 
examination
 
procedures
 
in this
 
area, we
 
have dedicated
significant resources
 
to our
 
anti-money laundering
 
program, especially
 
due to
 
the regulatory
 
focus on
 
financial and
 
other
institutions located in South
 
Florida. Our business includes supporting
 
our customers, including foreign financial
 
institutions,
with respect to their international banking needs and our policies, procedures and systems have been designed to address
federal and
 
state anti-money
 
laundering compliance.
 
If our policies,
 
procedures and
 
systems are
 
deemed deficient
 
or the
policies,
 
procedures
 
and
 
systems
 
of
 
the
 
financial
 
institutions
 
that
 
we
 
may
 
acquire
 
are
 
deficient,
 
we
 
would
 
be
 
subject
 
to
liability,
 
including
 
fines,
 
and
 
regulatory
 
actions
 
that
 
are
 
deemed
 
necessary
 
in
 
order
 
to
 
remediate
 
such
 
deficiencies
 
and
 
 
 
36
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
prevent the recurrence
 
thereof. In recent
 
years, sanctions that
 
the regulators have
 
imposed on banks
 
that have not
 
complied
with
 
all
 
anti-money
 
laundering
 
requirements
 
have
 
been
 
especially
 
severe.
 
Failure
 
to
 
maintain
 
and
 
implement
 
adequate
programs to
 
combat money
 
laundering and
 
terrorist financing
 
could also
 
have serious
 
reputational consequences
 
for us,
which could have a material adverse effect on
 
our business, financial condition and results of operations.
We
 
are
 
subject
 
to
 
capital
 
adequacy
 
requirements
 
and
 
may
 
become
 
subject
 
to
 
more
 
stringent
 
capital
requirements, which could adversely affect our
 
financial condition and operations.
In July 2013, the federal banking agencies published new regulatory capital rules based on the
 
international standards,
known as
 
Basel III,
 
that were
 
developed by
 
the Basel
 
Committee on
 
Banking Supervision.
 
The new
 
rules raised
 
the risk-
based capital
 
requirements
 
and revised
 
the
 
methods for
 
calculating
 
risk-weighted
 
assets, usually
 
resulting
 
in higher
 
risk
weights. The new rules now apply to us.
The Basel III rules increased
 
capital requirements and included
 
two new capital measurements,
 
a risk-based common
equity Tier 1 ratio
 
and a capital conservation buffer.
 
Common Equity Tier
 
1 (CET1) capital is a subset
 
of Tier 1 capital
 
and
is limited to common
 
equity (plus related surplus), retained earnings,
 
accumulated other comprehensive income and certain
other
 
items.
 
Other
 
instruments
 
that
 
have
 
historically
 
qualified
 
for
 
Tier
 
1
 
treatment,
 
including
 
noncumulative
 
perpetual
preferred stock,
 
are consigned
 
to a
 
category known
 
as Additional
 
Tier
 
1 capital
 
and must
 
be phased
 
out of
 
CETI over
 
a
period of
 
nine years
 
beginning in
 
2014. In
 
order to
 
be a
 
“well-capitalized” depository
 
institution under
 
the new
 
regime, an
institution must maintain a
 
CET1 capital ratio of 7.0%
 
or more; a Tier
 
1 capital ratio of 8.5%
 
or more; a total capital
 
ratio of
10.5% or more; and a leverage ratio of 4% or more.
 
Institutions must also maintain a capital conservation
 
buffer consisting
of common equity
 
Tier 1
 
capital. In addition
 
to the higher
 
required capital ratios
 
and the new
 
deductions and adjustments,
the final
 
rules increased
 
the risk
 
weights for
 
certain assets,
 
meaning that
 
we will
 
have to
 
hold more
 
capital against
 
these
assets. We will also be required to hold capital
 
against short-term commitments that are not unconditionally
 
cancellable.
While we currently meet these new
 
requirements of the Basel III-based capital requirements, we
 
may fail to do so in
 
the
future. The failure
 
to meet applicable
 
regulatory capital
 
requirements could result
 
in one or
 
more of our
 
regulators placing
limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities,
and could affect customer and investor confidence, our costs of funds and level of required deposit insurance
 
assessments
to the FDIC,
 
our ability to
 
pay dividends on
 
our capital stock,
 
our ability to
 
make acquisitions, and
 
our business,
 
results of
operations and financial condition, generally.
In addition,
 
in the
 
current economic
 
and regulatory
 
environment, including
 
the COVID-19
 
pandemic, bank
 
regulators
may
 
impose
 
capital
 
requirements
 
that
 
are
 
more
 
stringent
 
than
 
those
 
required
 
by
 
applicable
 
existing
 
regulations.
 
The
application of more stringent capital requirements for
 
us could, among other things, result
 
in lower returns on equity, require
the raising of additional
 
capital, and result
 
in regulatory actions if
 
we were to be
 
unable to comply with
 
such requirements.
Implementation
 
of
 
changes
 
to
 
asset
 
risk
 
weightings
 
for
 
risk-based
 
capital
 
calculations,
 
items
 
included
 
or
 
deducted
 
in
calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business
strategy and could limit our ability to make distributions,
 
including paying dividends.
We are periodically subject
 
to examination and
 
scrutiny by a
 
number of banking agencies
 
and, depending upon
the findings and determinations
 
of these agencies, we may
 
be required to make adjustments
 
to our business that
could adversely affect us.
As part of
 
the bank regulatory process,
 
the Federal Reserve, the
 
FDIC and the FOFR
 
periodically conduct examinations
of our business,
 
including compliance
 
with applicable
 
laws and regulations.
 
If, as a
 
result of an
 
examination, one
 
of these
banking
 
agencies
 
were
 
to
 
determine
 
that
 
the
 
financial
 
condition,
 
capital
 
resources,
 
asset
 
quality,
 
asset
 
concentration,
earnings prospects, management, liquidity sensitivity to
 
market risk, risk management
 
and internal controls or
 
other aspects
of any of our operations has become unsatisfactory, or that we or our management are in violation of any law or regulation,
the banking
 
agency could
 
take a
 
number of
 
different remedial
 
or punitive
 
actions as
 
it deems
 
appropriate. These
 
actions
include the power to prohibit the continuation of "unsafe
 
or unsound" practices, to require affirmative
 
actions to correct any
conditions
 
resulting
 
from
 
any
 
violation
 
or practice,
 
to
 
issue an
 
administrative
 
order
 
or enforcement
 
that
 
can
 
be judicially
enforced, to direct an increase
 
in our capital, to restrict our
 
growth, to change the asset composition
 
of our loan or securities
portfolios
 
or
 
balance
 
sheet,
 
to
 
assess
 
civil
 
monetary
 
penalties
 
against
 
our
 
officers
 
or
 
directors,
 
to
 
remove
 
officers
 
and
directors and, if
 
it is concluded
 
that such conditions
 
cannot be corrected
 
or there is
 
an imminent risk
 
of loss to
 
depositors,
to
 
terminate
 
our
 
deposit
 
insurance
 
and
 
force
 
us
 
to
 
terminate
 
our
 
business
 
operations.
 
If
 
we
 
become
 
subject
 
to
 
such
regulatory actions, our business, financial condition, results
 
of operations and reputation may be negatively impacted.
 
 
 
37
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
We
 
are
 
subject
 
to
 
numerous
 
laws
 
and
 
regulations
 
of
 
certain
 
regulatory
 
agencies
 
designed
 
to
 
protect
consumers, including the Community Reinvestment
 
Act, or CRA, and fair lending laws, and failure
 
to comply with
these laws could lead to a wide variety of sanctions.
The CRA directs all insured depository institutions to help meet the credit needs of the local communities
 
in which they
operate
 
branches,
 
including
 
low-
 
and
 
moderate-income
 
neighborhoods.
 
Each
 
institution
 
is
 
examined
 
periodically
 
by
 
its
primary federal
 
regulator,
 
which assesses
 
the institution’s
 
CRA performance.
 
The Equal
 
Credit Opportunity
 
Act, the
 
Fair
Housing
 
Act
 
and
 
other
 
fair
 
lending
 
laws
 
and
 
regulations
 
impose
 
nondiscriminatory
 
lending
 
requirements
 
on
 
financial
institutions. The U.S. Department of Justice, the Federal Reserve, and other federal agencies are responsible for enforcing
these laws and regulations. A successful regulatory challenge to our performance under the CRA, fair lending or consumer
lending
 
laws
 
and
 
regulations
 
could
 
result
 
in
 
a
 
wide
 
variety
 
of
 
sanctions,
 
including
 
damages
 
and
 
civil
 
money
 
penalties,
injunctive
 
relief,
 
customer
 
restitution,
 
restrictions
 
on
 
mergers
 
and
 
acquisitions
 
activity,
 
restrictions
 
on
 
expansion,
 
and
restrictions
 
on
 
entering
 
new
 
business
 
lines.
 
Private
 
parties
 
may
 
also
 
have
 
the
 
ability
 
to
 
challenge
 
an
 
institution’s
performance
 
under
 
fair
 
lending
 
laws
 
in
 
private
 
class
 
action
 
litigation.
 
Such
 
actions
 
could
 
have
 
an
 
adverse
 
effect
 
on
 
our
business, financial condition and results of operations.
Risks Related to Our Class A Common Stock
We do not anticipate paying dividends on our common stock, and our future ability to pay dividends is subject
to restrictions.
We currently
 
do not
 
intend to
 
pay any
 
cash dividends
 
on our
 
common stock
 
in the
 
foreseeable future.
 
Holders of
 
our
Class A common stock are
 
only entitled to receive
 
cash dividends when, as and
 
if declared by our
 
Board out of funds
 
legally
available for
 
dividends. The
 
Company is
 
a bank
 
holding company
 
that conducts
 
substantially all
 
of its
 
operations through
the Bank,
 
which is
 
a legal
 
entity separate
 
and distinct
 
from the
 
Company.
 
As a
 
result, our
 
ability to
 
pay dividends
 
on our
common stock will substantially depend upon the receipt of dividends and other distributions from the Bank, the profitability
of which
 
is subject
 
to the
 
fluctuating cost
 
and availability
 
of money,
 
changes in
 
interest rates
 
and economic
 
conditions in
general. There are numerous laws and banking regulations and guidance that limit the Bank's
 
ability to pay dividends to us
and our ability to pay dividends on our common stock.
The market price and trading volume of our Class A
 
common stock may be volatile, which could result in rapid
and substantial losses for our shareholders.
The market
 
price
 
of
 
our
 
Class
 
A common
 
stock
 
may
 
be highly
 
volatile
 
and
 
could
 
be
 
subject
 
to
 
wide
 
fluctuations.
 
In
addition, the trading volume on
 
our Class A common stock may
 
fluctuate and cause significant price variations to
 
occur. We
cannot assure you that the market price of our Class A common stock will not fluctuate or decline significantly in the future.
Some, but
 
certainly not
 
all, of
 
the factors
 
that could
 
negatively affect
 
the price
 
of our
 
Class A
 
common stock,
 
or result
 
in
fluctuations in the price or trading volume of our Class
 
A common stock, include:
 
general market conditions;
 
domestic and international economic factors unrelated
 
to our performance;
 
variations in our quarterly operating results or failure to
 
meet the market’s earnings expectations;
 
publication of research reports about us or the financial services
 
industry in general;
 
the failure of securities analysts to cover our Class
 
A common stock after this offering;
 
additions or departures of our key personnel;
 
future sales of our Class A common stock;
 
adverse market reactions to any indebtedness we may
 
incur or securities we may issue in the future;
 
actions by our shareholders;
 
the expiration of contractual lock-up agreements;
 
the operating and securities price performance of companies
 
that investors consider to be comparable to
us;
 
changes or proposed changes in laws or regulations affecting
 
our business; and
 
actual or potential litigation and governmental investigations.
In
 
addition,
 
if
 
the
 
market
 
for
 
stocks
 
in
 
our
 
industry,
 
or
 
the
 
stock
 
market
 
in
 
general,
 
experiences
 
a
 
loss
 
of
 
investor
confidence, the
 
trading price
 
of the
 
Class A
 
common stock
 
could decline
 
for reasons
 
unrelated to
 
our business,
 
financial
condition or results of operations. If
 
any of the foregoing occurs,
 
it could cause our Class A common
 
stock price to fall and
may expose us to lawsuits that, even if unsuccessful, could
 
be costly to defend and a distraction to management.
 
 
 
38
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
There are significant restrictions in our Articles of Incorporation that restrict the
 
ability to sell our capital stock
to shareholders that would own 4.95% or more of our stock,
 
excluding our Significant Investors.
Because the
 
continued availability
 
of our
 
"deferred tax
 
assets" depends,
 
in part,
 
on the
 
value of
 
our stock
 
owned by
shareholders owning
 
5% or more
 
of our stock,
 
our Articles of
 
Incorporation, except
 
as otherwise may
 
be approved by
 
the
Board
 
or
 
except
 
for
 
transfers
 
by
 
our
 
Significant
 
Investors,
 
prohibits
 
any
 
direct
 
or
 
indirect
 
transfer
 
of
 
stock
 
or
 
options
 
to
acquire stock to any
 
person who, as a
 
result of the transfer, would own 4.95%
 
or more of our
 
stock, as long as the
 
Company
continues to have "deferred tax assets." Such restrictions may
 
limit the ability to transfer our stock.
Because
 
we
 
are
 
an
 
emerging
 
growth
 
company
 
and
 
because
 
we
 
have
 
decided
 
to
 
take
 
advantage
 
of
 
certain
exemptions from
 
various reporting
 
and other
 
requirements applicable
 
to emerging
 
growth companies,
 
our Class
A common stock could be less attractive to investors.
We are
 
an “emerging
 
growth company,”
 
as defined
 
in the
 
JOBS Act.
 
For as
 
long as
 
we remain
 
an emerging
 
growth
company,
 
we will
 
have the
 
option to take
 
advantage of
 
certain exemptions
 
from various
 
reporting and
 
other requirements
that are applicable to other public companies that are not
 
emerging growth companies, including:
 
we
 
may
 
present
 
only
 
two
 
years
 
of
 
audited
 
financial
 
statements
 
and
 
only
 
two
 
years
 
of
 
related
 
management’s
discussion and analysis of financial condition and results
 
of operations
 
we may provide less than five years of selected historical
 
financial information;
 
we
 
are
 
exempt
 
from
 
the
 
requirements
 
to
 
obtain
 
an
 
attestation
 
and
 
report
 
from
 
our
 
auditors
 
on
 
management’s
assessment of our internal control over financial reporting
 
under the Sarbanes-Oxley Act;
 
we are permitted to have less extensive disclosure about our
 
executive compensation arrangements; and
 
we
 
are
 
not
 
required
 
to
 
give
 
our
 
shareholders
 
non-binding
 
advisory
 
votes
 
on
 
executive
 
compensation
 
or
 
golden
parachute arrangements.
We may
 
continue to
 
take advantage
 
of some
 
or all
 
of the
 
reduced regulatory
 
and reporting
 
requirements that
 
will be
available to
 
us as
 
long as
 
we continue
 
to
 
qualify
 
as an
 
emerging
 
growth
 
company.
 
We
 
will remain
 
an emerging
 
growth
company until the earliest of (i)
 
the last day of the first fiscal year in
 
which our annual gross revenues
 
exceed $1.07 billion,
(ii) the date that the market value of our Class A common stock that
 
is held by non-affiliates exceeds $700 million as of the
last business day of
 
June 30 of that
 
year, (iii) the date on which
 
we have, during the
 
previous three-year period, issued
 
more
than $1 billion
 
in non-convertible
 
debt, or
 
(iv) the end
 
of fiscal year
 
following the
 
fifth anniversary
 
of the completion
 
of our
IPO.
It is
 
possible that
 
some investors
 
could find
 
our Class
 
A common
 
stock less
 
attractive if
 
we choose
 
to rely
 
on these
exemptions. If some investors find our Class A common
 
stock less attractive, there may be a less
 
active trading market for
our Class A common stock and our stock price may be
 
more volatile.
Because we have elected
 
to use the extended
 
transition period for complying
 
with new or revised
 
accounting
standards for an “emerging growth company,” our financial statements may not be comparable to companies that
comply with these accounting standards as of the public
 
company effective dates.
We have elected
 
to use the
 
extended transition
 
period for complying
 
with new or
 
revised accounting standards
 
under
Section 7(a)(2)(B) of
 
the Securities Act.
 
This election allows
 
us to delay
 
the adoption of
 
new or revised
 
accounting standards
that have different
 
effective dates for
 
public and private
 
companies until those standards
 
apply to private companies.
 
As a
result of
 
this election,
 
our financial
 
statements
 
may not
 
be comparable
 
to companies
 
that
 
comply with
 
these
 
accounting
standards as of
 
the public company effective dates.
 
Because our financial statements
 
may not be
 
comparable to companies
that
 
comply
 
with
 
public
 
company
 
effective
 
dates,
 
investors
 
may
 
have
 
difficulty
 
evaluating
 
or
 
comparing
 
our
 
business,
performance or
 
prospects in
 
comparison to
 
other public
 
companies, which
 
may have
 
a negative
 
impact on
 
the value
 
and
liquidity of
 
our Class
 
A common
 
stock. We
 
cannot predict
 
if investors
 
will find
 
our Class
 
A common
 
stock less
 
attractive
because we
 
plan to
 
rely on
 
this exemption.
 
If some
 
investors
 
find our
 
Class
 
A common
 
stock less
 
attractive as
 
a result,
there may be a less active trading market for our Class A common
 
stock and our stock price may be more volatile.
We have existing investors that own
 
a significant amount of our
 
common stock whose individual interests may
differ from yours.
 
A significant percentage of our Class A common stock is currently held by a few institutional investors, including Patriot
Financial Partners II,
 
L.P.
 
and Patriot Financial
 
Partners Parallel II, L.P.
 
(collectively,
 
"Patriot"), and Priam
 
Capital Fund II,
LP
 
("Priam,"
 
and
 
together
 
with
 
Patriot,
 
the
 
"Significant
 
Investors").
 
Patriot
 
and
 
Priam
 
own
 
approximately
 
22.44%
 
and
22.44%, respectively, of our outstanding
 
Class A common
 
stock. In addition,
 
Patriot and Priam
 
are each entitled
 
to nominate
a director to our
 
Board and have certain
 
subscription rights to
 
purchase new equity
 
securities that we issued
 
in the future,
 
 
 
39
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
in each
 
case as
 
long as
 
certain equity
 
ownership criteria
 
are met.
 
Patriot and
 
Priam also
 
have certain
 
registration rights,
including
 
demand
 
registration
 
rights,
 
and
 
information
 
rights.
 
Although
 
Patriot
 
and
 
Priam
 
are
 
independent
 
of
 
each
 
other,
these institutional
 
investors will
 
continue to
 
have a
 
significant level
 
of influence
 
over us
 
because of
 
their level
 
of Class
 
A
common stock ownership and their right to representation on our Board. For example, Patriot and Priam will have a greater
ability than our
 
other shareholders to influence
 
the election of
 
directors and the potential
 
outcome of other
 
matters submitted
to
 
a
 
vote
 
of
 
our
 
shareholders,
 
including
 
mergers
 
and
 
other
 
acquisition
 
transactions,
 
amendments
 
to
 
our
 
Articles
 
of
Incorporation
 
and
 
Amended
 
and
 
Restated
 
Bylaws,
 
and
 
other
 
extraordinary
 
corporate
 
matters.
 
The
 
interests
 
of
 
these
investors could conflict
 
with the interests of
 
our other shareholders, and
 
any future transfer
 
by these investors of
 
their shares
of Class
 
A common
 
stock to
 
other investors
 
who have
 
different
 
business objectives
 
could adversely
 
affect
 
our business,
results of operations, financial condition, prospects or the market
 
value of our Class A common stock.
Provisions
 
in
 
our
 
governing
 
documents
 
and
 
Florida
 
law
 
may
 
have
 
an
 
anti-takeover
 
effect
 
and
 
there
 
are
substantial
 
regulatory limitations on changes of control of the
 
Company.
Our corporate organizational documents and provisions of federal
 
and state law to which we
 
are subject contain certain
provisions that could
 
have an anti-takeover
 
effect and
 
may delay,
 
make more difficult
 
or prevent an
 
attempted acquisition
that you may favor or an attempted replacement of our Board
 
or management.
Our governing documents include provisions that:
 
empower our Board, without shareholder
 
approval, to issue our preferred
 
stock, the terms of
 
which, including voting
power, are to be set by our
 
Board;
 
provide that directors may be removed from office only for cause and only upon a majority vote
 
of the shares of our
Bank with voting power;
 
prohibit holders of our Class A common stock to take
 
action by written consent in lieu of a shareholder meeting;
 
 
require holders of at least 10% of our Class A common
 
stock to call a special meeting;
 
do not provide for cumulative voting in elections of our
 
directors;
 
provide that our Board has the authority to amend our Amended
 
and Restated Bylaws;
 
require shareholders that wish to bring business before annual or special meetings of shareholders, or to nominate
candidates for election as directors at our annual meeting of shareholders, to provide
 
timely notice of their intent in
writing and satisfy disclosure requirements; and
 
enable our Board to increase, between
 
annual meetings, the number of
 
persons serving as directors and
 
to fill the
vacancies created
 
as a
 
result of
 
the increase until
 
the next
 
meeting of
 
shareholders by a
 
majority vote
 
of the
 
directors
present at a meeting of directors.
In addition,
 
certain provisions
 
of Florida
 
law may
 
delay,
 
discourage, or
 
prevent an
 
attempted acquisition
 
or change
 
in
control. Furthermore,
 
banking laws
 
impose notice,
 
approval, and
 
ongoing regulatory
 
requirements on
 
any shareholder
 
or
other party that seeks to acquire direct or indirect "control" of a
 
bank holding company,
 
which includes the Change in Bank
Control
 
Act.
 
These
 
laws
 
could
 
delay
 
or
 
prevent
 
an
 
acquisition.
 
Also,
 
for
 
preservation
 
and
 
continued
 
availability
 
of
 
our
"deferred tax assets," our Articles
 
of Incorporation prohibits any direct
 
or indirect transfer of
 
stock or options to acquire
 
stock
to any
 
person
 
who,
 
as
 
a result
 
of the
 
transfer,
 
would
 
own
 
4.95%
 
or more
 
of
 
our
 
stock,
 
as long
 
as we
 
continue
 
to
 
have
"deferred tax assets," subject to
 
limited exceptions as provided in
 
our Articles of Incorporation. Because
 
of the requirements
to overcome this restriction, this provision of the Articles of Incorporation could have an anti-takeover effect and may delay,
make more difficult or prevent an attempted acquisition
 
that you may favor.
 
 
 
40
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Item 1B. Unresolved Staff Comments
None.
Item 2.
 
Properties
The Company’s corporate offices
 
are headquartered at 2301 N.W.
 
87th Avenue, Miami, Florida 33172. The
 
Company,
through the
 
Bank,
 
operates
 
10 banking
 
centers
 
in South
 
Florida
 
within
 
Miami-Dade
 
and
 
Broward counties.
 
From the
 
10
banking centers, nine of these locations are leased and one is owned.
 
The banking center that is owned is located at 3999
Sheridan St, Hollywood, FL 33021. Management
 
believes that each of these locations
 
are in good condition and adequate
to meet our present and foreseeable needs, subject to
 
possible future expansion.
 
See Note 4 “Leases”
 
and Note 5 “Premises
 
and Equipment”
 
to the Consolidated
 
Financial Statements included
 
in this
Form 10-K for additional information.
Item 3.
 
Legal Proceedings
We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation
arising
 
in
 
the
 
ordinary
 
course
 
of
 
business.
 
These
 
claims
 
and
 
litigation
 
may
 
include,
 
among
 
other
 
things,
 
allegations
 
of
violation of banking and other applicable regulations, competition
 
law, labor laws and consumer
 
protection laws, as well as
claims or
 
litigation
 
relating
 
to intellectual
 
property,
 
securities, breach
 
of contract
 
and tort.
 
We
 
intend to
 
defend ourselves
vigorously against any pending or future claims and litigation.
Item 4.
 
Mine Safety Disclosures
Not applicable.
 
 
 
 
 
 
 
 
 
 
 
 
41
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
PART II
Item 5.
 
Market
 
for
 
Registrant’s
 
Common
 
Equity,
 
Related
 
Stockholder
 
Matters
 
and
 
Issuer
 
Purchases
 
of
 
Equity
Securities
Market Information
In July
 
2021, the Bank’s
 
Class A common
 
stock began trading
 
on the
 
Nasdaq Stock Market
 
under ticker
 
symbol “USCB”.
The listing of our Class
 
A common stock on
 
the Nasdaq Stock Market
 
has resulted in a
 
more active trading market
 
for our
Class
 
A
 
common
 
stock.
 
However,
 
we
 
cannot
 
assure
 
that
 
a
 
liquid
 
trading
 
market
 
for
 
our
 
Class
 
A
 
common
 
stock
 
will
 
be
sustained.
 
Effective December 30, 2021, the bank holding company,
 
or the Company, acquired all issued and
 
outstanding shares
of Class
 
A common
 
stock of
 
the Bank.
 
Each of
 
the outstanding
 
shares of
 
the Bank’s
 
common stock
 
formerly held
 
by its
shareholders was converted
 
into and exchanged
 
for one newly
 
issued share
 
of the Company’s
 
common stock.
 
The ticker
symbol “USCB” remained the same.
Prior
 
to
 
our
 
listing
 
on
 
the
 
Nasdaq
 
Stock
 
Market
 
there
 
was
 
not
 
an
 
established
 
public
 
trading
 
market
 
for
 
the
 
Class
 
A
common shares. The
 
following table shows
 
the quarterly high and
 
low closing prices
 
of our Class A
 
common stock traded
on the Nasdaq Stock Market since going public on July
 
23, 2021:
Stock Price
High
Low
Quarter Ended:
September 30, 2021
$
13.91
$
10.57
December 31, 2021
$
15.89
$
12.30
As of December 31, 2021, our Class B common stock is not
 
listed or traded on any stock exchange.
Holders
As of January 31, 2022, the Company’s Class A common
 
shares were held by approximately 529 shareholders
 
.
Dividends
As a bank holding company, the Company’s ability to declare and pay dividends depends on various federal regulatory
considerations, including the guidelines of the Federal
 
Reserve regarding capital adequacy and dividends.
Because we are
 
a bank holding
 
company and currently do
 
not engage directly in
 
business activities of a
 
material nature,
our ability to pay dividends
 
to our shareholders depends,
 
in large part, upon
 
our receipt of dividends
 
from the Bank, which
is also subject to numerous limitations on the payment
 
of dividends under federal banking laws, regulations and policies.
The principal
 
source of
 
revenue with
 
which to
 
pay dividends
 
on common
 
shares are
 
dividends the
 
Bank may
 
declare
and
 
pay
 
out
 
of
 
funds
 
legally
 
available
 
for
 
payment
 
of
 
dividends.
 
As
 
a
 
Florida
 
corporation,
 
we
 
are
 
only
 
permitted
 
to
 
pay
dividends to shareholders if, after giving effect to the dividend, (i) the Company is able to pay its debts as they become due
in the ordinary course
 
of business and
 
(ii) the Company’s
 
assets exceeds the
 
sum of Company’s
 
(a) liabilities plus
 
(b) the
amount that
 
would be
 
needed for
 
the Company
 
to satisfy
 
the preferential
 
rights
 
upon dissolution
 
of shareholders
 
whose
preferential rights are superior to those receiving the dividend,
 
if any.
Securities Authorized for Issuance Under Equity Compensation
 
Plans
See
 
Note
 
9
 
”Equity
 
Based
 
and
 
Other
 
Compensation
 
Plans”
 
to
 
the
 
Consolidated
 
Financial
 
Statements
 
herein
 
for
additional information required.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
uscb-10K-20211231p42i0.gif
 
 
 
 
 
 
 
 
 
 
 
42
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
 
$90
 
$100
 
$110
 
$120
 
$130
 
$140
 
$150
 
$160
COMPARISON OF CUMULATIVE RETURN SINCE COMPANY IPO
Among USCB Financial Holdings, Inc., the NASDAQ Bank
 
Index, the NASDAQ ABA
Community Bank Index, and the NASDAQ Composite
USCB
NASDAQ Bank
NASDAQ ABA Community Bank
NASDAQ Composite
Stock Price Performance
The graph below compares the
 
cumulative total return
 
to stockholders of our Class
 
A common stock between July
 
23,
2021 (the
 
date the
 
Bank’s
 
Class A
 
common stock
 
commenced
 
trading on
 
the Nasdaq
 
Stock Market)
 
and December
 
31,
2021, with the cumulative total return
 
of (a) the Nasdaq Bank Index
 
(b) the NASDAQ ABA Community Bank
 
Index, and (c)
the Nasdaq
 
Composite Index
 
over the same
 
period. This
 
graph assumes
 
the investment
 
of $100
 
in our Class
 
A common
stock at the closing sale price of $10.82 per share on
 
July 23, 2021, and assumes the reinvestment of dividends,
 
if any.
 
The comparisons shown
 
in the graph
 
below are based
 
upon historical data.
 
We caution that
 
the stock price
 
performance
shown in the graph below is not indicative of, nor is it intended to forecast, the potential future performance
 
of our common
stock.
 
07/23/2021
09/30/2021
12/31/2021
USCB Financial Holdings, Inc. (USCB)
$
100
$
122
$
140
NASDAQ Bank (BANK)
$
100
$
110
$
115
NASDAQ ABA Community Bank (QABA)
$
100
$
108
$
114
NASDAQ Composite (IXIC)
$
100
$
98
$
107
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Other
 
Affiliates
 
As of
 
December 31, 2021, the
 
Company nor any
 
of its
 
affiliates purchased any
 
Class A common
 
shares of
 
the Company.
Item 6.
 
Reserved
 
 
43
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Item 7.
 
Management's Discussion and Analysis of Financial Condition
 
and Results of Operations
 
Management’s
 
discussion
 
and
 
analysis
 
of
 
financial
 
condition
 
and
 
results
 
of
 
operations
 
analyzes
 
the
 
consolidated
financial condition and results of operations of the Company and the
 
Bank, its wholly owned subsidiary, for the years ended
December 31, 2021
 
and
 
2020. This
 
discussion and
 
analysis are
 
best read
 
in conjunction
 
with the
 
Consolidated Financial
Statements and related footnotes
 
of our Company presented
 
in Item 8 “Financial
 
Statements and Supplementary
 
Data” of
this Annual
 
Report.
 
In
 
addition
 
to
 
historical
 
information,
 
this
 
discussion
 
contains
 
forward-looking statements
 
that
 
involve
risks, uncertainties
 
and assumptions
 
that could
 
cause actual
 
results to
 
differ materially
 
from management's
 
expectations.
Factors that
 
could cause
 
such differences
 
are discussed
 
in the
 
sections entitled
 
"Forward-Looking Statements"
 
and Item
1A “Risk Factors" of this Annual Report.
Throughout this document, references to “we,” “us,” “our,” and “the
 
Company” refer to USCB Financial Holdings, Inc.
 
Forward-Looking Statements
This
 
Annual
 
Report
 
on
 
Form
 
10-K
 
contains
 
statements
 
that
 
are
 
not
 
historical
 
in
 
nature
 
are
 
intended
 
to
 
be,
 
and
 
are
hereby identified as, forward-looking
 
statements for purposes of
 
the safe harbor provided by
 
Section 21E of the Securities
Exchange
 
Act
 
of
 
1934,
 
as
 
amended.
 
The
 
words
 
“may,”
 
“will,”
 
“anticipate,”
 
“should,”
 
“would,”
 
“believe,”
 
“contemplate,”
“expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are
intended
 
to
 
identify
 
forward-looking
 
statements.
 
These
 
forward-looking
 
statements
 
include
 
statements
 
related
 
to
 
our
projected
 
growth,
 
anticipated
 
future
 
financial
 
performance,
 
and
 
management’s
 
long-term
 
performance
 
goals,
 
as
 
well
 
as
statements relating to
 
the anticipated effects
 
on results of
 
operations and financial
 
condition from expected
 
developments
or events, or business and growth strategies, including
 
anticipated internal growth.
These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ
materially from those anticipated in such statements.
 
Potential risks and uncertainties include, but are not
 
limited to:
 
the strength of the United States economy
 
in general and the strength of the local
 
economies in which we conduct
operations;
 
the COVID-19 pandemic and its impact on
 
us, our employees, customers and third-party service providers, and the
ultimate extent of the impacts of the pandemic and related government
 
stimulus programs;
 
 
our ability to successfully manage interest rate risk, credit
 
risk, liquidity risk, and other risks inherent to our industry;
 
the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss
reserve and deferred tax asset valuation allowance;
 
the efficiency and effectiveness of our
 
internal control environment;
 
our ability
 
to comply
 
with the
 
extensive laws
 
and regulations
 
to which
 
we are
 
subject, including
 
the laws
 
for each
jurisdiction where we operate;
 
legislative or regulatory
 
changes and changes
 
in accounting
 
principles, policies,
 
practices or guidelines,
 
including
the effects of the forthcoming implementation
 
of the Current Expected Credit Losses (“CECL”) standard;
 
the effects
 
of our
 
lack of
 
a diversified
 
loan portfolio
 
and concentration
 
in the
 
South Florida
 
market, including
 
the
risks
 
of geographic,
 
depositor,
 
and
 
industry concentrations,
 
including our
 
concentration
 
in
 
loans secured
 
by real
estate;
 
the concentration of ownership of our Class A common
 
stock;
 
fluctuations in the price of our Class A common stock;
 
our ability to fund or access the capital markets at attractive
 
rates and terms and manage our growth, both organic
growth as well as growth through other means, such as
 
future acquisitions;
 
inflation, interest rate, unemployment rate, market, and monetary
 
fluctuations;
 
increased competition and its effect on pricing
 
of our products and services as well as our margins;
 
 
the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,
employee, or third-party fraud and security breaches; and
 
 
other
 
risks
 
described
 
this
 
Form
 
10-K
 
and
 
other
 
filings
 
we
 
make
 
with
 
the
 
Securities
 
and
 
Exchange
 
Commission
(“SEC”).
All
 
forward-looking
 
statements
 
are
 
necessarily
 
only
 
estimates
 
of
 
future
 
results,
 
and
 
there
 
can
 
be
 
no
 
assurance
 
that
actual results will
 
not differ
 
materially from expectations.
 
Therefore, you are
 
cautioned not to
 
place undue reliance
 
on any
forward-looking statements. Further,
 
forward-looking statements included in this presentation
 
are made only as of the date
hereof, and we undertake
 
no obligation to update
 
or revise any forward-looking
 
statement to reflect events
 
or circumstances
after the date on which the statement is made or to reflect the occurrence of unanticipated events, unless required to do so
under the federal securities laws. You
 
should also review the risk factors
 
described in the reports the Company
 
filed or will
file with the
 
SEC and,
 
for periods
 
prior to
 
the completion
 
of the bank
 
holding company
 
reorganization, the
 
Bank filed
 
with
the FDIC.
 
 
44
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Non-GAAP Financial Measures
This Annual Report on Form 10-K includes
 
financial information determined by methods
 
other than in accordance with
generally
 
accepted
 
accounting
 
principles
 
(“GAAP”).
 
This
 
financial
 
information
 
includes
 
certain
 
operating
 
performance
measures. Management has included these non-GAAP
 
measures because it believes these measures may
 
provide useful
supplemental information
 
for evaluating
 
the Company’s
 
underlying performance
 
trends. Further,
 
management uses
 
these
measures
 
in
 
managing
 
and
 
evaluating
 
the
 
Company’s
 
business
 
and
 
intends
 
to
 
refer
 
to
 
them
 
in
 
discussions
 
about
 
our
operations and performance.
 
Operating performance
 
measures should be
 
viewed in addition
 
to, and not
 
as an alternative
to or
 
substitute
 
for,
 
measures
 
determined
 
in
 
accordance
 
with
 
GAAP,
 
and
 
are
 
not
 
necessarily
 
comparable
 
to non-GAAP
measures
 
that
 
may
 
be
 
presented
 
by
 
other
 
companies.
 
To
 
the
 
extent
 
applicable,
 
reconciliations
 
of
 
these
 
non-GAAP
measures to the most directly
 
comparable GAAP measures can be found
 
in the ‘Non-GAAP Reconciliation Tables’ included
in this annual report.
Overview
For the year ended December 31, 2021, the
 
Company reported net income of $21.1
 
million compared with net income
of
 
$10.8 million
 
for the
 
year ended
 
December 31, 2020,
 
representing
 
a 94.8%
 
increase. The
 
results from
 
2021 included
closing our initial public offering of the Class A common stock and the simplification of the Bank’s capital structure.
 
In
 
evaluating
 
our
 
financial
 
performance,
 
we
 
consider
 
the
 
level
 
of
 
and
 
trends
 
in
 
net
 
interest
 
income,
 
the
 
net
 
interest
margin, the cost of deposits,
 
levels and composition of
 
non-interest income and non-interest
 
expense, performance ratios,
asset quality ratios, regulatory capital ratios, and any significant
 
event or transaction.
The following significant highlights are of note for the year
 
ended December 31, 2021:
 
Net interest
 
income
 
after
 
provision
 
for credit
 
losses totaled
 
$52.7
 
million, an
 
increase of
 
$12.3
 
million or
 
30.5%,
compared to $40.3 million at December 31, 2020.
 
 
Net interest
 
margin (“NIM”)
 
remained the
 
same at
 
3.26%
 
for the
 
years ended
 
December 31, 2021
 
and 2020.
 
The
yield on earning assets decreased to 3.52% in 2021, compared to 3.93% in 2020. The yield on earning assets was
negatively impacted by certain floating rate investment securities,
 
loans with variable rate pricing features, and
 
new
loans originated in the lower interest rate environment,
 
including PPP loans which carry a rate of 1.0%.
 
 
NIM, excluding PPP loans, was 3.16% and 3.30% for the years ended December 31, 2021 and 2020, respectively.
 
 
Total assets grew to $1.9 billion, an increase of $352.2
 
million or 23.5%, compared to December 31, 2020.
 
Loans grew to $1.2 billion, an increase of $151.6 million
 
or 14.6%, compared to December 31, 2020.
 
The cost of interest-bearing liabilities
 
decreased
 
to 0.45%
 
in 2021 from 1.07% in
 
2020 as a result of the continued
downward repricing of deposits and continued improvement in
 
deposit mix.
 
Return on average assets for the year ended December
 
31, 2021 was 1.24% compared to 0.76% in 2020.
 
Return on average stockholders’ equity for the year ended December 31, 2021 was
 
11.45% compared to 6.54% in
2020.
 
Nonperforming
 
assets
 
totaled
 
$1.2
 
million,
 
a
 
decrease
 
of
 
$0.4
 
million
 
or
 
24.6%,
 
compared
 
to
 
$1.6
 
million
 
at
December 31, 2020.
 
 
The Company maintained its strong capital position. As of December 31, 2021, the Bank was well-capitalized, with
a total risk-based capital ratio of 14.92%,
 
a tier 1 risk-based capital ratio of
 
13.70%, a common equity tier 1 capital
ratio of
 
13.70%,
 
and a
 
leverage ratio
 
of 9.55%.
 
As of
 
December 31, 2021
 
and 2020,
 
all of
 
our regulatory
 
capital
ratios exceeded the thresholds to be well-capitalized under
 
the applicable bank regulatory requirements.
 
In April 2021,
 
the Bank
 
repurchased
 
all of
 
its issued
 
and outstanding
 
Class E
 
preferred
 
shares at
 
the liquidation
value of $7.5
 
million along with
 
declared dividends approved
 
by the Board
 
of Directors (the
 
“Board”) with the
 
goal
to simplify its capital structure.
 
 
45
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
 
In July
 
2021, the
 
Bank completed
 
the initial
 
public offering
 
of 4,600,000
 
shares of
 
Class A common
 
stock, which
included an additional 600,000 shares in connection with the exercise in full of the underwriters’
 
option to purchase
additional shares. In a continuation effort to simplify the Company’s capital structure, an exchange and redemption
of then outstanding Class C and Class D preferred shares
 
was also completed.
 
In December 2021,
 
the Bank
 
entered into agreements
 
with the Class
 
B shareholders
 
to exchange all
 
outstanding
Class B non-voting common stock for Class A voting common
 
stock.
 
 
The Company became the parent bank
 
holding company of the Bank effective
 
December 28, 2021. Each share of
the
 
Bank
 
was
 
exchanged
 
for
 
one
 
share
 
of
 
the
 
Company,
 
making
 
the
 
Bank
 
a
 
wholly
 
owned
 
subsidiary
 
of
 
the
Company. Shares
 
of the Company continue to trade under ticker symbol “USCB”
 
on the Nasdaq Stock Market.
Critical Accounting Policies and Estimates
The
 
consolidated
 
financial
 
statements
 
are
 
prepared
 
based
 
on
 
the
 
application
 
of
 
U.S.
 
GAAP,
 
the
 
most
 
significant
 
of
which are described
 
in Note 1 “Summary
 
of Significant Accounting
 
Policies” to our
 
Consolidated Financial Statements.
 
To
prepare financial statements in conformity with GAAP,
 
management makes estimates, assumptions,
 
and judgments based
on
 
available
 
information.
 
These
 
estimates,
 
assumptions,
 
and
 
judgments
 
affect
 
the
 
amounts
 
reported
 
in
 
the
 
financial
statements and accompanying notes. These estimates, assumptions, and judgments are based on
 
information available as
of
 
the
 
date
 
of
 
the
 
financial
 
statements
 
and,
 
as
 
this
 
information
 
changes,
 
actual
 
results
 
could
 
differ
 
from
 
the
 
estimates,
assumptions
 
and
 
judgments
 
reflected
 
in
 
the
 
financial
 
statements.
 
In
 
particular,
 
management
 
has
 
identified
 
accounting
policies that, due to
 
the estimates, assumptions
 
and judgments inherent
 
in those policies, are
 
critical in understanding
 
our
financial statements.
 
Management
 
has presented
 
the application
 
of these
 
policies
 
to the
 
audit and
 
risk committee
 
of our
Board.
 
Allowance for Credit Losses
The allowance for credit
 
losses (“ACL”) is
 
a valuation allowance that
 
is established through charges
 
to earnings in the
form of
 
a provision for
 
credit losses. The
 
amount of the
 
ACL is
 
affected by the
 
following: (i) charge-offs of
 
loans that decrease
the allowance;
 
(ii) subsequent
 
recoveries on
 
loans previously
 
charged off
 
that increase
 
the allowance;
 
and (iii)
 
provisions
for credit losses charged to
 
income that increase the allowance.
 
Management considers the policies
 
related to the ACL as
the most critical to
 
the financial statement
 
presentation. The total
 
ACL includes activity
 
related to allowances
 
calculated in
accordance with Accounting Standards Codification (“ASC”) 310,
 
Receivables, and ASC 450, Contingencies.
Throughout the year,
 
management estimates the probable
 
incurred losses in the loan portfolio
 
to determine if the ACL
is adequate to absorb such losses. The ACL
 
consists of specific and general components.
 
The specific component relates
to loans that are
 
individually classified as
 
impaired. We follow
 
a loan review program
 
to evaluate the credit
 
risk in the loan
portfolio. Loans
 
that have
 
been identified
 
as impaired
 
are reviewed
 
on a
 
quarterly basis
 
in order
 
to determine
 
whether a
specific reserve is
 
required. The general
 
component covers
 
non-impaired loans
 
and is based
 
on industry and
 
our specific
historical loan
 
loss experience,
 
volume, growth
 
and composition
 
of the
 
loan portfolio,
 
the evaluation
 
of our
 
loan portfolio
through our
 
internal
 
loan review
 
process, general
 
current
 
economic
 
conditions
 
both
 
internal and
 
external to
 
us that
 
may
affect the borrower’s ability to pay,
 
value of collateral and other qualitative relevant risk factors. Based on a review
 
of these
estimates, we
 
adjust the ACL
 
to a
 
level determined by
 
management to be
 
adequate. Estimates of
 
credit losses are
 
inherently
subjective as they involve an exercise of judgment.
The
 
CARES
 
Act,
 
as
 
amended
 
by
 
the
 
Consolidated
 
Appropriations
 
Act,
 
2021,
 
specified
 
that
 
COVID-19
 
related
 
loan
modifications executed
 
between March 1,
 
2020 and
 
the earlier
 
of (i)
 
60 days
 
after the
 
date of
 
termination
 
of the
 
national
emergency declared by President Trump and (ii) January 1, 2022, on loans
 
that were current as of December 31, 2019,
 
are
not TDRs. Additionally,
 
under guidance from the federal banking agencies,
 
other short-term modifications made on a good
faith basis
 
in response
 
to COVID-19
 
to borrowers
 
that were
 
current prior
 
to any
 
relief are
 
not TDRs
 
under ASC
 
Subtopic
310-40,
 
“Troubled
 
Debt
 
Restructurings
 
by
 
Creditors.”
 
These
 
modifications
 
include
 
short-term
 
(i.e.,
 
up
 
to
 
six
 
months)
modifications
 
such
 
as
 
payment
 
deferrals,
 
fee
 
waivers,
 
extensions
 
of
 
repayment
 
terms,
 
or
 
delays
 
in
 
payment
 
that
 
are
insignificant. The Company’s charge-off policy is to continuously
 
review all impaired loans to monitor the Company’s ability
to collect them in full at the applicable maturity date and/or in accordance
 
with terms of any restructurings. For loans which
are collateral dependent,
 
or deemed to
 
be uncollectible, any
 
shortfall in the
 
fair value of
 
the collateral relative to
 
the recorded
investment in the loan is charged off. The amount charged
 
-off conforms to the amount necessary
 
to comply with GAAP.
Income Taxes
Deferred tax
 
assets and
 
liabilities are
 
recognized for
 
the future
 
tax consequences
 
attributable to
 
differences
 
between
the financial statement carrying amounts of
 
existing assets and liabilities and their
 
respective tax bases and operating loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
46
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
and tax credit carryforwards. Deferred tax
 
assets and liabilities are measured
 
using enacted tax rates expected
 
to apply to
taxable income
 
in the
 
years in
 
which those
 
temporary differences
 
are expected
 
to be
 
recovered or
 
settled. The
 
effect
 
on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
 
Management is required to assess whether a valuation allowance should be established on the net deferred tax assets
based on the
 
consideration of
 
all available evidence
 
using a more
 
likely than not
 
standard. In its
 
evaluation, management
considers taxable loss
 
carry-back availability, expectation of sufficient
 
taxable income, trends
 
in earnings, the
 
future reversal
of temporary differences, and available tax planning
 
strategies.
The Company recognizes positions taken
 
or expected to be
 
taken in a tax
 
return in accordance with existing accounting
guidance on
 
income taxes
 
which prescribes
 
a recognition threshold
 
and measurement
 
process. Interest
 
and penalties
 
on
tax liabilities, if any, would
 
be recorded in interest expense and other operating non-interest
 
expense, respectively.
Segment Reporting
Management monitors the revenue streams for all its various
 
products and services. The identifiable segments are not
material
 
and
 
operations
 
are
 
managed
 
and
 
financial
 
performance
 
is
 
evaluated
 
on
 
an
 
overall
 
Company-wide
 
basis.
Accordingly, all
 
the financial service
 
operations are
 
considered by management
 
to be
 
aggregated in one
 
reportable operating
segment.
Results of Operations
General
The following
 
tables present
 
selected balance
 
sheet, income
 
statement, and
 
profitability ratios
 
for the
 
dates indicated
(in thousands, except ratios):
As of December 31,
2021
2020
Consolidated Balance Sheets:
Total
 
assets
$
1,853,939
$
1,501,742
Total
 
loans
(1)
$
1,190,081
$
1,038,504
Total
 
deposits
$
1,590,379
$
1,273,402
Total
 
stockholders' equity
$
203,897
$
171,001
(1)
 
Loan amounts include deferred fees/costs.
Years Ended December 31,
2021
2020
Consolidated Statements of Operations:
Net interest income before provision for credit losses
$
52,496
$
43,597
Total
 
non-interest income
$
10,698
$
6,097
Total
 
non-interest expense
$
35,677
$
33,036
Net income
 
$
21,077
$
10,820
Net income (loss) available to common stockholders
$
(70,585)
$
7,693
Profitability:
Efficiency ratio
56.31%
71.13%
Net interest margin
 
3.26%
3.26%
The Company’s results
 
of operations
 
depend substantially on
 
net interest income
 
and non-interest income.
 
Other factors
contributing
 
to
 
the
 
results
 
of
 
operations
 
include
 
our
 
provision
 
for
 
credit
 
losses,
 
non-interest
 
expenses,
 
and
 
provision
 
for
income taxes.
Net income
 
for the
 
year ended
 
December 31, 2021
 
was $21.1 million
 
,
 
compared with
 
net income
 
of $10.8 million
 
for
the same period in 2020. The Company reported net loss per diluted
 
share for the year ended December 31, 2021 of $6.72
compared to net income per diluted share for the same period in 2020 of $1.50 and $0.30 for
 
Class A
 
and Class B common
stock, respectively, after adjusted to reflect the 1
 
for 5 reverse stock split on
 
Class A
 
common stock. The net loss per diluted
share for the year ended December 31, 2021 was attributable to the one-time reduction in net income available to common
stockholders for the
 
exchange and redemption
 
of the Class
 
C and Class D
 
preferred shares. During
 
third quarter of
 
2021,
 
 
47
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
the
 
Company
 
completed
 
an
 
exchange
 
of
 
then
 
outstanding
 
preferred
 
shares
 
for
 
Class A
 
common
 
shares
 
and
 
thereafter
redeemed the remaining outstanding preferred shares, at a liquidation value that exceeded book value, causing a one-time
reduction in
 
net income
 
available to
 
common stockholders
 
of $89.6
 
million. At December 31,
 
2021, there
 
were no
 
issued
and outstanding preferred shares.
 
Operating net
 
income per
 
diluted share
 
(non-GAAP) for
 
the year
 
ended December 31,
 
2021 was
 
$1.81 compared
 
to
operating net income per
 
diluted share (non-GAAP)
 
for the same period
 
in 2020 of $1.50
 
and $0.30 for Class A and Class
B, respectively.
 
Operating net
 
income per
 
diluted share
 
(non-GAAP) for
 
the year
 
ended December 31,
 
2021 excludes
 
the
$89.6 million one-time accounting
 
impact of
 
the exchange
 
and redemption of
 
the preferred
 
shares. The
 
operating net
 
income
per diluted share
 
for the year
 
ended December 31,
 
2020 was adjusted
 
to reflect the
 
1 for 5
 
reverse stock
 
split on Class A
common stock.
 
To see
 
a reconciliation
 
of non-GAAP
 
measures to
 
GAAP measures
 
refer to
 
section below
 
“Reconciliation
and Management Explanation of Non-GAAP Financial
 
Measures”.
 
Net Interest Income
Net interest
 
income is
 
the difference
 
between interest
 
earned on interest
 
earning assets
 
and interest
 
incurred on
 
interest-
bearing liabilities
 
and is
 
the primary
 
driver of
 
core earnings.
 
Interest income
 
is generated
 
from interest
 
and dividends
 
on
interest-earning
 
assets,
 
including
 
loans,
 
investment
 
securities
 
and
 
other
 
short-term
 
investments.
 
Interest
 
expense
 
is
incurred
 
from
 
interest
 
paid
 
on
 
interest-bearing
 
liabilities,
 
including
 
interest-bearing
 
deposits,
 
FHLB
 
advances
 
and
 
other
borrowings.
To evaluate net
 
interest income, we
 
measure and monitor
 
(i) yields on
 
loans and other
 
interest-earning assets, (ii)
 
the
costs of deposits
 
and other funding
 
sources, (iii) net
 
interest spread, and
 
(iv) net interest margin.
 
Net interest spread is
 
equal
to the difference between rates
 
earned on interest-earning assets
 
and rates paid on interest-bearing
 
liabilities. Net interest
margin is
 
equal to
 
the annualized
 
net interest
 
income
 
divided by
 
average interest
 
-earning assets.
 
Because
 
non-interest-
bearing sources of funds, such as non-interest-bearing deposits
 
and stockholders’ equity, also fund interest-earning assets,
net interest margin includes the benefit of these non-interest-bearing
 
sources.
Changes in
 
the market
 
interest rates
 
and interest
 
rates we
 
earn on
 
interest-earning assets
 
or pay on
 
interest-bearing
liabilities, as well
 
as the volume
 
and types of
 
interest-earning assets and interest-bearing
 
and non-interest-bearing liabilities,
are usually the
 
largest drivers
 
of periodic changes
 
in net interest
 
spread, net interest
 
margin and net
 
interest income.
 
Our
asset liability committee
 
(“ALCO”) has
 
in place asset-liability
 
management techniques
 
to manage major
 
factors that
 
affect
net interest income and net interest margin.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
48
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
The following table contains information related
 
to average balance sheet, average yields
 
on assets, and average costs
of liabilities for the periods indicated (in thousands):
Years Ended December 31,
2021
2020
Average
Balance
Interest
Yield/Rate
 
Average
Balance
Interest
Yield/Rate
 
Assets
Interest-earning assets:
Loans
(1)
$
1,116,142
$
48,730
4.37
%
$
1,026,905
$
47,078
4.58
%
Investment securities
(2)
403,677
7,886
1.95
%
201,073
5,248
2.61
%
Other interest earnings assets
92,430
106
0.11
%
110,898
307
0.28
%
Total
 
interest-earning assets
1,612,249
56,722
3.52
%
1,338,876
52,633
3.93
%
Non-interest earning assets
89,409
90,059
Total
 
assets
$
1,701,658
$
1,428,935
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits
$
52,379
59
0.11
%
$
46,819
158
0.34
%
Saving and money market deposits
619,810
2,082
0.34
%
473,028
3,095
0.65
%
Time deposits
235,127
1,531
0.65
%
276,462
4,709
1.70
%
Total
 
interest-bearing deposits
907,316
3,672
0.40
%
796,309
7,962
1.00
%
Borrowings and repurchase agreements
36,000
554
1.54
%
51,362
1,074
2.09
%
Total
 
interest-bearing liabilities
943,316
4,226
0.45
%
847,671
9,036
1.07
%
Non-interest bearing demand deposits
547,116
390,467
Other non-interest-bearing liabilities
27,142
25,281
Total
 
liabilities
1,517,574
1,263,419
Stockholders' equity
184,084
165,516
Total
 
liabilities and stockholders' equity
$
1,701,658
$
1,428,935
Net interest income
$
52,496
$
43,597
Net interest spread
(3)
3.07
%
2.86
%
Net interest margin
(4)
3.26
%
3.26
%
(1)
 
Average loan balances include non-accrual loans. Interest income
 
on loans includes accretion of deferred
 
loan fees, net of deferred loan costs.
(2)
 
At fair value except for securities held to maturity.
(3)
 
Net interest spread is the average yield on
 
total interest-earning assets minus the average
 
rate on total interest-bearing liabilities.
(4)
 
Net interest margin is the ratio of net interest
 
income to total interest-earning assets.
Net interest income before the provision
 
for credit losses was $52.5 million
 
for the year ended December
 
31, 2021, an
increase of
 
$8.9 million or
 
20.4%, from
 
$43.6 million for
 
the year
 
ended December
 
31, 2020.
 
This increase
 
was primarily
attributable to higher
 
income from investment
 
securities and loan
 
fees as well
 
as lower costs
 
for interest-bearing liabilities
because of lower interest rate benchmarks.
 
Included with loan interest income are PPP fees totaling $3.6 million and $2.3 million for the year ended December
 
31,
2021 and 2020, respectively.
 
PPP loan fees are recognized upon forgiveness.
 
The net
 
interest margin
 
remained the
 
same at
 
3.26% for
 
the years
 
ended December 31,
 
2021 and
 
2020. The
 
overall
and individual yields for interest-bearing assets and interest-bearing
 
liabilities both decreased in 2021 compared to 2020.
Provision for Credit Losses
The allowance for credit losses
 
(“ACL”) represents probable incurred
 
losses in our portfolio. We
 
maintain an adequate
ACL that can mitigate probable losses incurred in the loan portfolio. The ACL is increased by the provision for credit losses
and is decreased
 
by charge-offs,
 
net of recoveries
 
on prior
 
loan charge-offs.
 
There are multiple
 
credit quality
 
metrics that
we use
 
to
 
base our
 
determination
 
of
 
the
 
amount of
 
the ACL and
 
corresponding
 
provision
 
for credit
 
losses. These
 
credit
metrics evaluate
 
the credit
 
quality and
 
level of
 
credit risk
 
inherent in
 
our loan
 
portfolio, assess
 
non-performing
 
loans and
charge-offs levels, considers statistical trends and economic
 
conditions and other applicable factors.
 
Provision for
 
credit loss
 
for the
 
year ended
 
December 31,
 
2021, was
 
a net
 
reduction of
 
$160 thousand
 
compared to
$3.3 million in provision
 
expense for the same
 
period in 2020. The primary
 
driver of the decrease
 
was the improvement of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
49
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
the credit risk
 
associated with the
 
COVID-19 pandemic. The
 
ACL as
 
a percentage of
 
total loans was
 
1.27%
 
at December 31,
2021 compared to 1.45% at December 31, 2020.
See “Allowance for Credit Losses” below for further discussion
 
on how the ACL is calculated.
 
Non-Interest Income
Net interest income
 
and other types of
 
recurring non-interest
 
income are generated
 
from our operations.
 
Our services
and products generate service charges and fees, mainly from our depository accounts. We also
 
generate income from gain
on sale of
 
loans though
 
our swap and
 
SBA programs. In addition,
 
we own insurance
 
on several employees
 
and generate
income on the increase in the cash surrender value of
 
these policies.
The following table presents the components of non-interest
 
income for the dates indicated (in thousands):
Years Ended December 31,
2021
2020
Service fees
$
3,609
$
3,266
Gain on sale of securities available for sale, net
214
434
Gain on sale of loans held for sale, net
1,626
839
Gain on sale of premises and equipment, net
983
-
Loan settlement
2,500
-
Other non-interest income
1,766
1,558
Total
 
non-interest income
$
10,698
$
6,097
Non-interest income
 
for the
 
year ended
 
December 31,
 
2021 increased
 
$4.6 million or
 
75.5%, compared
 
to the
 
same
period in 2020.
 
This increase was primarily
 
driven by the default
 
interest recovery of a
 
prior lending customer for $2.5
 
million
and a gain on the sale of a previously owned building for $983 thousand as well as higher deposit service fees and gain on
sales of loans due
 
to increased activity
 
in our SBA program. Further,
 
the default interest recovery
 
of $2.5 million was
 
for a
loan that was originated
 
in 2008 and subsequently
 
went through many iterations
 
of credit collection. This payment
 
reflects
the final payment and settlement of lien judgments against
 
the customer.
Non-Interest Expense
The following table presents the components of non-interest
 
expense for the dates indicated (in thousands):
Years Ended December 31,
2021
2020
Salaries and employee benefits
$
21,438
$
19,204
Occupancy
5,257
5,656
Regulatory assessment and fees
783
691
Consulting and legal fees
1,454
1,045
Network and information technology services
1,466
1,536
Other operating
5,279
4,904
Total
 
non-interest expense
$
35,677
$
33,036
Non-interest expense
 
for the
 
year ended
 
December 31, 2021
 
increased $2.6 million
 
or 8.0%,
 
compared to
 
the same
period in
 
2020.
 
The increase
 
is primarily
 
due to
 
an increase
 
in salaries
 
and employee
 
benefit costs
 
of $2.2 million
 
for the
year ended
 
December 31, 2021,
 
compared to
 
the same
 
period in
 
2020. The
 
headcount of
 
full-time equivalent
 
employees
increased
 
from
 
179
 
at
 
December 31,
 
2020
 
to
 
187
 
at
 
December 31,
 
2021.
 
Further,
 
consulting
 
and
 
legal
 
fees
 
and
 
other
operating
 
expenses
 
increased
 
$0.4
 
million
 
or
 
39.1%
 
and
 
$0.4 million
 
or
 
7.6%,
 
respectively,
 
during
 
the
 
year
 
ended
December 31,
 
2021 compared
 
to the
 
same
 
period
 
in
 
2020
 
due
 
to our
 
operations
 
as a
 
publicly traded
 
company
 
and
 
the
formation of a bank holding company.
 
The increase in salaries and employee benefits, consulting and legal fees, and other
operating costs has enabled
 
us to support recent growth
 
and has provided us with
 
the necessary technology and required
professionals to execute our growth strategy.
 
Provision for Income Tax
Fluctuations in the effective tax rate reflect the effect of the differences in the inclusion or deductibility of certain income
and expenses for
 
income tax purposes.
 
Therefore, future
 
decisions on the
 
investments we choose
 
will affect our
 
effective
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
50
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
tax rate. Surrender value of bank-owned life
 
insurance policies for key employees, purchasing municipal bonds, and
 
overall
taxable income will be important elements in determining our
 
effective tax rate.
Income tax
 
expense for
 
the year
 
ended
 
December 31,
 
2021 was
 
$6.6 million,
 
compared
 
to $2.
 
6
 
million
 
for the
 
year
ended December 31, 2020. The
 
effective tax rate for
 
the year ended December 31, 2021
 
was 23.8% and for the
 
year ended
December 31, 2020 was 19.3%.
For a further discussion
 
on income taxes, see
 
Note 6 “Income Taxes” to
 
the Consolidated Financial
 
Statements in this
Form 10-K.
Rate/Volume Analysis
The
 
table
 
below
 
sets
 
forth
 
information
 
regarding
 
changes
 
in
 
interest
 
income
 
and
 
interest
 
expense
 
for
 
the
 
periods
indicated (in thousands).
 
For each category of
 
interest-earning assets and interest-bearing liabilities,
 
information is provided
on changes attributable to (i) changes in rate (changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); and (iii) changes in rate-volume (change in
 
rate multiplied by change in volume). Changes in
rate-volume are proportionately allocated between rate and volume
 
variance.
Years Ended 2021 vs. 2020
Years Ended 2020 vs. 2019
Increase (decrease) due to change in
Increase (decrease) due to change in
Volume
Rate
Net
Change
Volume
Rate
Net
Change
Interest-earning assets:
Loans
(1)
$
4,091
$
(2,439)
$
1,652
$
4,573
$
(2,229)
$
2,344
Investment securities
(2)
5,288
(2,650)
2,638
397
(596)
(199)
Other interest earnings assets
(51)
(150)
(201)
1,412
(1,866)
(454)
Total increase (decrease) in interest income
9,328
(5,239)
4,089
6,382
(4,691)
1,691
Interest-bearing liabilities:
Interest-bearing demand deposits
19
(118)
(99)
$3
(6.00)
(3)
Saving and money market deposits
960
(1,973)
(1,013)
692
(2,738)
(2,046)
Time deposits
(704)
(2,474)
(3,178)
1,106
(1,242)
(136)
Borrowings and repurchase agreements
(321)
(199)
(520)
(952)
(81)
(1,033)
Total increase (decrease) in interest expense
(46)
(4,764)
(4,810)
849
(4,067)
(3,218)
Increase (decrease) in net interest income
$
9,374
$
(475)
$
8,899
$
5,533
$
(624)
$
4,909
(1)
 
Average loan balances include non-accrual loans. Interest income
 
on loans includes accretion of deferred
 
loan fees, net of deferred loan costs.
(2)
 
At fair value except for securities held to maturity.
Both average yields on
 
interest earning assets and
 
average rates paid on interest
 
bearing liabilities have been declining
over the
 
periods presented,
 
reflecting the
 
macro interest
 
rate environment
 
and ongoing
 
initiatives to
 
reduce the
 
cost and
improve the mix of deposits.
Analysis of Financial Condition
Total
 
assets at December 31, 2021, were $1.9 billion, an increase of $352.2 million, or 23.5%, over total assets of $1.5
billion at
 
December 31, 2020. Total loans increased
 
$151.6 million,
 
or 14.6%,
 
to $1.2
 
billion at
 
December 31, 2021 compared
to
 
$1.0
 
billion
 
at
 
December 31,
 
2020.
 
The
 
increase
 
in
 
loans
 
includes
 
purchased
 
loans
 
totaling
 
$129.5
 
million
 
including
deferred
 
fees.
 
Total
 
deposits
 
increased
 
by
 
$317.0
 
million,
 
or
 
24.9%,
 
to
 
$1.6
 
billion
 
at
 
December 31,
 
2021
 
compared
 
to
December 31, 2020.
Investment Securities
The investment portfolio
 
is used and
 
managed to provide
 
liquidity through cash
 
flows, marketability
 
and, if necessary,
collateral for
 
borrowings. The
 
investment portfolio
 
is also
 
used as
 
a tool
 
to manage
 
interest rate
 
risk and
 
the Company’s
capital
 
market
 
risk
 
exposure.
 
The
 
philosophy
 
of
 
the
 
portfolio
 
is
 
to
 
maximize
 
the
 
Company’s
 
profitability
 
taking
 
into
consideration the Company’s risk appetite and tolerance, manage the assets composition
 
and diversification, and maintain
adequate risk-based capital ratios.
The
 
investment
 
portfolio
 
is
 
managed
 
in
 
accordance
 
with
 
the
 
Asset
 
and
 
Liability
 
Management
 
(“ALM”)
 
policy,
 
which
includes an
 
investment guideline,
 
approved by
 
the Board.
 
Such policy
 
is reviewed
 
at least
 
annually or
 
more frequently
 
if
deemed necessary,
 
depending on
 
market
 
conditions
 
and/or
 
unexpected
 
events.
 
The investment
 
portfolio
 
composition
 
is
 
 
51
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
subject to change
 
depending on the
 
funding and liquidity
 
needs of
 
the Company, and the interest
 
risk management objective
directed by the ALCO. The portfolio of investments can be used to modify the duration of the balance
 
sheet. The allocation
of cash into
 
securities takes
 
into consideration
 
anticipated future cash
 
flows (uses
 
and sources) and
 
all available sources
of credit.
Our
 
investment
 
portfolio
 
consists
 
primarily
 
of
 
securities
 
issued
 
by
 
U.S.
 
government-sponsored
 
agencies,
 
agency
mortgage-backed securities,
 
collateralized mortgage
 
obligation securities,
 
municipal securities,
 
and other
 
debt securities,
all with varying contractual maturities and coupons. Due to the optionality embedded in these securities, the final maturities
do not
 
necessarily represent the
 
expected life of
 
the portfolio. Some
 
of these
 
securities will be
 
called or paid
 
down depending
on capital market conditions and expectations. The investment portfolio is regularly reviewed by the Chief Financial Officer,
Treasurer,
 
or
 
ALCO
 
of
 
the
 
Company
 
to
 
ensure
 
an
 
appropriate
 
risk
 
and
 
return
 
profile
 
as
 
well
 
as
 
for
 
adherence
 
to
 
the
investment policy.
As of December 31, 2021, the investment portfolio consisted of available-for-sale
 
(“AFS”) and held-to-maturity (“HTM”)
debt securities.
 
During the third quarter
 
of 2021, there were
 
28 investment securities that
 
were transferred from AFS
 
to HTM
with an amortized cost basis and fair value amount
 
of $67.6 million and $68.7 million, respectively.
 
On the date of transfer,
these securities had a
 
total net unrealized gain of
 
$1.1 million. The transfer of debt
 
securities from the AFS
 
to HTM category
were made at fair value at the date of
 
transfer. The unrealized gain or loss at the date of transfer is retained in accumulated
other
 
comprehensive
 
income
 
and
 
in
 
the
 
carrying
 
value
 
of
 
the
 
HTM
 
securities.
 
Such
 
amounts
 
are
 
amortized
 
over
 
the
remaining life of the security.
 
There was no impact to net income on the date of transfer.
The book value of the AFS securities is adjusted monthly
 
for unrealized gain or loss as a valuation allowance,
 
and any
gain
 
or
 
loss
 
is
 
reported
 
on
 
an
 
after-tax
 
basis
 
as
 
a
 
component
 
of
 
other
 
comprehensive
 
income
 
in
 
stockholders’
 
equity.
Periodically,
 
we
 
may
 
need
 
to
 
assess
 
whether
 
there
 
have
 
been
 
any
 
events
 
or
 
unexpected
 
economic
 
circumstances
 
to
indicate that
 
a security
 
on which
 
there is
 
an unrealized
 
loss is
 
impaired on
 
an other-than-temporary
 
basis (“OTTI”).
 
If the
impairment is
 
deemed to
 
be permanent,
 
an analysis
 
would be
 
made considering
 
many factors,
 
including the
 
severity and
duration of the impairment, the severity
 
of the event, our intent and
 
ability to hold the security for a
 
period of time sufficient
for a
 
recovery in
 
value, recent
 
events specific
 
to the
 
issuer or
 
industry,
 
any related
 
credit events,
 
and for
 
debt securities,
external
 
credit
 
ratings
 
and
 
recent
 
downgrades
 
related
 
to
 
deterioration
 
of
 
credit
 
quality.
 
Securities
 
on
 
which
 
there
 
is
 
an
unrealized loss
 
that is
 
deemed to
 
be OTTI
 
are written
 
down to
 
fair value,
 
with the
 
write-down recorded
 
as a
 
realized loss
under line item
 
“Gain (loss) on
 
sale of securities
 
available-for-sale,
 
net” of the Consolidated
 
Statements of Operations.
 
As
of December
 
31,
 
2021, there
 
are no
 
securities
 
which
 
management
 
has
 
classified
 
as
 
OTTI.
 
For
 
further discussion
 
of our
analysis
 
on
 
impaired
 
investment
 
securities
 
for
 
OTTI,
 
see
 
Note 2
 
“Investment
 
Securities”
 
to
 
the
 
Consolidated
 
Financial
Statements in this Form 10-K.
AFS and
 
HTM investment
 
securities increased
 
$189.9 million or
 
56.8% to
 
$524.2 million at
 
December 31,
 
2021 from
$334.3 million at December 31, 2020. Investment securities increased over the past year due to higher than expected cash
balances.
 
Management
 
reinvested
 
idle
 
cash
 
balances
 
into
 
high
 
credit
 
quality
 
investments
 
to
 
increase
 
the
 
Company’s
profitability
 
and
 
modify
 
the
 
Company’s
 
balance
 
sheet
 
duration
 
according
 
to
 
the
 
ALM
 
policy.
 
As
 
of
 
December 31,
 
2021,
corporate bond securities with a market value of $20.4 million were pledged to secure
 
public deposits. As of December 31,
2021, the Company did not have any tax-exempt securities
 
in the portfolio.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
52
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
The
 
following
 
table
 
presents
 
the
 
amortized
 
cost
 
and
 
fair
 
value
 
of
 
investment
 
securities
 
for
 
the
 
dates
 
indicated
 
(in
thousands):
December 31, 2021
December 31, 2020
Available-for-sale:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
U.S. Government Agency - SBA
$
-
$
-
$
1,488
$
1,552
U.S. Government Agency
10,564
10,520
20,196
20,032
Collateralized mortgage obligations
160,506
156,829
104,426
104,650
Mortgage-backed securities - Residential
120,643
118,842
80,110
81,301
Mortgage-backed securities - Commercial
49,905
50,117
45,802
48,331
Municipal securities
25,164
24,276
24,230
24,211
Bank subordinated debt securities
27,003
28,408
24,004
24,630
Corporate bonds
12,068
12,550
27,733
29,615
$
405,853
$
401,542
$
327,989
$
334,322
Held-to-maturity:
U.S. Government Agency - SBA
$
12,004
$
11,641
$
-
$
-
U.S. Government Agency
 
22,501
22,263
-
-
Collateralized mortgage obligations
44,820
43,799
-
-
Mortgage-backed securities - Residential
26,920
26,352
-
-
Mortgage-backed securities - Commercial
3,103
3,013
-
-
Corporate bonds
13,310
13,089
-
-
$
122,658
$
120,157
$
-
$
-
The following
 
table shows
 
the weighted
 
average yields,
 
categorized by
 
contractual maturity,
 
for investment
 
securities
as of December 31, 2021 (in thousands, except ratios):
 
Within 1 year
After 1 year through
5 years
After 5 years through
10 years
After 10 years
Total
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Available-for-sale:
U.S. Government Agency
 
$
-
0.00 %
$
-
0.00 %
$
-
0.00 %
$
10,564
1.74%
$
10,564
0.00 %
Collateralized mortgage obligations
-
0.00 %
-
0.00 %
-
0.00 %
160,506
1.32%
160,506
1.32%
MBS - Residential
-
0.00 %
-
0.00 %
1,002
0.00 %
119,641
2.26%
120,643
1.38%
MBS - Commercial
-
0.00 %
-
0.00 %
-
0.00 %
49,905
2.82%
49,905
2.82%
Municipal securities
 
-
0.00 %
-
0.00 %
1,000
2.05%
24,164
1.38%
25,164
1.73%
Bank subordinated debt securities
-
0.00 %
-
0.00 %
26,003
4.98%
1,000
6.13%
27,003
5.02%
Corporate bonds
1,992
3.39%
5,983
4.24%
4,093
2.54%
-
0.00 %
12,068
3.52%
$
1,992
$
5,983
$
32,098
$
365,780
$
405,853
1.87%
Held-to-maturity:
U.S. Government Agency - SBA
$
-
0.00 %
$
-
0.00 %
$
3,953
1.58%
$
8,051
1.58%
$
12,004
1.58%
U.S. Government Agency
 
-
0.00 %
2,982
0.64%
19,519
1.26%
-
0.00 %
22,501
1.18%
Collateralized mortgage obligations
-
0.00 %
-
0.00 %
-
0.00 %
44,820
1.46%
44,820
1.46%
MBS - Residential
-
0.00 %
2,836
2.98%
9,264
1.61%
14,820
1.62%
26,920
1.76%
MBS - Commercial
-
0.00 %
-
0.00 %
3,103
1.61%
-
0.00 %
3,103
1.61%
Corporate bonds
2,017
3.07%
11,293
2.71%
-
0.00 %
-
0.00 %
13,310
2.76%
$
2,017
$
17,111
$
35,839
$
67,691
$
122,658
1.62%
Loans
Loans are
 
the largest
 
category of
 
interest-earning assets
 
on the
 
Consolidated
 
Balance Sheets,
 
and usually
 
provides
higher yields
 
than the
 
rest of
 
the interest-earning
 
assets. Higher
 
yields typically
 
carry inherent
 
credit and
 
liquidity risks
 
in
comparison to lower yield assets.
 
The Company manages and mitigates
 
such risks in accordance with the
 
credit and ALM
policies, risk tolerance and balance sheet composition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
53
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
The following table shows the loan portfolio composition
 
as of the dates indicated (in thousands):
 
December 31, 2021
December 31, 2020
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
201,359
16.9
%
$
232,754
22.3
%
Commercial Real Estate
704,988
59.2
%
606,425
58.2
%
Commercial and Industrial
146,592
12.3
%
157,330
15.1
%
Foreign Banks
59,491
5.0
%
38,999
3.7
%
Consumer and Other
 
79,229
6.6
%
5,507
0.5
%
Total
 
gross loans
1,191,659
100.0
%
1,041,015
99.8
%
Less: Unearned income
1,578
2,511
Total
 
loans net of unearned income
1,190,081
1,038,504
Less: Allowance for credit losses
15,057
15,086
Total
 
net loans
$
1,175,024
$
1,023,418
Total
 
gross loans increased
 
by $150.6 million
 
or 14.5%
 
at December 31,
 
2021 compared to
 
the same period
 
in 2020.
The most
 
significant growth
 
was in
 
the commercial
 
real estate
 
and consumer
 
and other
 
loan pools,
 
offset by
 
a decline
 
in
the residential real
 
estate and commercial
 
and industrial loan
 
pools. Consumer and
 
other loans increased
 
because of two
yacht loan portfolios that were purchased for $93.7 million,
 
including deferred fees, for the year ended December 31, 2021.
Commercial and industrial loans decreased because of
 
continuing PPP loan forgiveness
 
as expected.
The loan portfolio has continued to experience growth in the past two years. Since our inception, the primary focus has
been
 
on
 
commercial
 
real
 
estate
 
lending,
 
representing
 
approximately
 
59.2%
 
of
 
the
 
total
 
gross
 
loan
 
portfolio
 
as
 
of
December 31, 2021. In the past, we supplemented our core commercial growth with the origination of 1-4 family residential
loans and
 
the acquisition
 
of 1-4
 
family residential
 
loan portfolios
 
to further
 
diversify our
 
loan portfolio.
 
However,
 
we have
determined not to further pursue this line of business and
 
are focused on growing our commercial portfolio.
 
Other than the previous
 
mentioned shifts, we
 
do not expect any
 
significant changes
 
over the foreseeable future
 
in the
composition
 
of
 
our
 
loan
 
portfolio
 
or
 
in
 
our
 
emphasis
 
on
 
commercial
 
real
 
estate
 
lending.
 
Our
 
loan
 
growth
 
strategy
 
since
inception has been reflective of the market in which we
 
operate and of our strategic plan as approved by the
 
Board.
Most of the
 
commercial real estate
 
exposure represents
 
loans to commercial
 
businesses secured
 
by owner-occupied
real estate.
 
The growth
 
experienced
 
over the
 
last couple
 
of years
 
is primarily
 
due to
 
implementation
 
of our
 
relationship-
based banking model and the success
 
of our relationship managers in
 
competing for new business in
 
a highly competitive
metropolitan area. Many of our
 
larger loan clients have lengthy
 
relationships with members of our senior management
 
team
or our relationship managers that date back to former institutions.
 
From a
 
liquidity perspective,
 
our loan
 
portfolio provides
 
us with
 
additional
 
liquidity due
 
to repayments
 
or unexpected
prepayments.
 
The
 
following
 
table
 
shows
 
maturities
 
and
 
sensitivity
 
to
 
interest
 
rate
 
changes
 
for
 
the
 
loan
 
portfolio
 
at
December 31, 2021 (in thousands):
Due in 1 year or
less
Due in 1 to 5
years
Due after 5 to 15
years
Due after 15
years
Total
Residential Real Estate
$
7,745
$
18,350
$
83,595
$
91,669
$
201,359
Commercial Real Estate
24,279
163,931
513,333
3,445
704,988
Commercial and Industrial
15,263
67,833
31,336
32,160
146,592
Foreign Banks
59,491
-
-
-
59,491
Consumer and Other
2,005
3,465
2,505
71,254
79,229
Total
 
gross loans
$
108,783
$
253,579
$
630,769
$
198,528
$
1,191,659
Interest rate sensitivity:
Fixed interest rates
$
82,940
$
170,406
$
136,429
$
78,859
$
468,634
Floating or adjustable rates
25,843
83,173
494,340
119,669
723,025
Total
 
gross loans
$
108,783
$
253,579
$
630,769
$
198,528
$
1,191,659
The information
 
presented
 
in the
 
table above
 
is based
 
upon the
 
contractual
 
maturities of
 
the individual
 
loans, which
may be
 
subject to
 
renewal at
 
their contractual
 
maturity.
 
Renewals will
 
depend on
 
approval by
 
our credit
 
department and
balance sheet
 
composition at the
 
time of
 
the analysis,
 
as well
 
as any
 
modification of terms
 
at the
 
loan’s maturity. Additionally,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
54
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
maturity
 
concentrations,
 
loan
 
duration,
 
prepayment
 
speeds
 
and
 
other
 
interest
 
rate
 
sensitivity
 
measures
 
are
 
discussed,
reviewed, and analyzed by the ALCO. Decisions on term
 
rate modifications are discussed as well.
 
As of
 
December 31,
 
2021, approximately
 
60.7%
 
of the
 
loans
 
have adjustable/variable
 
rates
 
and
 
39.3%
 
of the
 
loans
have fixed rates.
 
The adjustable/variable
 
loans re-price to
 
different benchmarks
 
and tenors in
 
different periods
 
of time. By
contractual characteristics, there are no
 
material concentrations on anniversary repricing. Additionally, it is
 
important to note
that most
 
of our
 
loans have
 
interest rate
 
floors. This
 
embedded option
 
protects the
 
Company from
 
a decrease
 
in interest
rates and positions us to gain in the scenario of higher interest
 
rates.
Asset Quality
 
Our asset quality grading
 
analysis estimates the capability of
 
the borrower to repay
 
the contractual obligation of
 
the loan
agreement as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly
graded loans. Internal
 
credit risk
 
grades are evaluated
 
at least annually,
 
or more frequently
 
if deemed necessary.
 
Internal
credit
 
risk
 
ratings
 
may
 
change
 
based
 
on
 
management’s
 
assessment
 
of
 
the
 
results
 
from
 
the
 
annual
 
review,
 
portfolio
monitoring and other developments observed with borrowers.
 
The internal credit risk grades used by the Company to
 
assess the credit worthiness of a loan are shown below:
Pass
– Loans indicate different levels of satisfactory
 
financial condition and performance.
 
Special Mention
 
– Loans classified as special mention have a potential weakness
 
that deserves management’s
close attention. If left uncorrected, these potential weaknesses
 
may result in deterioration of the repayment
prospects for the loan or of the institution’s
 
credit position at some future date.
 
Substandard
– Loans classified as substandard are inadequately protected
 
by the current net worth and paying
capacity of the obligator or of the collateral pledged, if
 
any. Loans so classified
 
have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt.
 
They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are
 
not corrected.
 
Doubtful
 
– Loans classified as doubtful have all the weaknesses inherent
 
in those classified at substandard, with
the added characteristic that the weaknesses make collection
 
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
 
Loss
– Loans classified as loss are considered uncollectible.
Loan credit exposures by internally assigned grades are
 
as follows for the dates indicated (in thousands):
 
December 31, 2021
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
196,778
$
-
$
4,581
$
-
$
201,359
Commercial Real Estate
703,349
1,222
417
-
704,988
Commercial and Industrial
146,039
-
553
-
146,592
Foreign Banks
59,491
-
-
-
59,491
Consumer and Other
 
79,005
-
224
-
79,229
$
1,184,662
$
1,222
$
5,775
$
-
$
1,191,659
December 31, 2020
Pass
Special Mention
Substandard
Doubtful
Total
Residential Real Estate
$
225,861
$
-
$
6,893
$
-
$
232,754
Commercial Real Estate
605,180
-
1,245
-
606,425
Commercial and Industrial
157,097
-
233
-
157,330
Foreign Banks
38,999
-
-
-
38,999
Consumer and Other
 
5,229
-
278
-
5,507
$
1,032,366
$
-
$
8,649
$
-
$
1,041,015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
55
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Non-Performing Assets
The following table presents non-performing assets as
 
of December 31, 2021 and 2020 (in thousands, except
 
ratios):
2021
2020
Non-accrual loans, less non-accrual TDR loans
$
1,190
$
303
Non-accrual TDRs
-
1,275
Loans past due over 90 days and still accruing
-
-
Total
 
non-performing loans
1,190
1,578
Other real estate owned
-
-
Total
 
non-performing assets
$
1,190
$
1,578
Asset quality ratios:
Allowance for credit losses to total loans
1.27%
1.45%
Allowance for credit losses to non-performing loans
1265%
956%
Non-performing loans to total loans
0.10%
0.15%
Non-performing
 
assets include
 
all loans
 
categorized as
 
non-accrual or
 
restructured,
 
impaired securities,
 
non-accrual
TDRs, other
 
real estate owned
 
(“OREO”) and other
 
repossessed assets. Problem
 
loans for
 
which the
 
collection or liquidation
in
 
full
 
is
 
reasonably
 
uncertain
 
are
 
placed
 
on
 
a
 
non-accrual
 
status.
 
This
 
determination
 
is
 
based
 
on
 
current
 
existing
 
facts
concerning collateral values
 
and the paying capacity
 
of the borrower.
 
When the collection of
 
the full contractual balance
 
is
unlikely, the loan is
 
placed on non-accrual to avoid overstating the Company’s
 
income for a loan with increased credit risk.
 
If the
 
principal or
 
interest on
 
a commercial
 
loan becomes
 
due and
 
unpaid for
 
90 days
 
or more,
 
the loan
 
is placed
 
on
non-accrual status as of
 
the date it becomes
 
90 days past due
 
and remains in non-accrual
 
status until it meets
 
the criteria
for restoration to accrual status.
 
Residential loans, on
 
the other hand, are placed
 
on non-accrual status when
 
the principal
or interest
 
becomes due
 
and unpaid
 
for 120
 
days or
 
more and remains
 
in non-accrual
 
status until
 
it meets
 
the criteria
 
for
restoration
 
to
 
accrual
 
status.
 
Restoring
 
a
 
loan
 
to
 
accrual
 
status
 
is
 
possible
 
when
 
the
 
borrower
 
resumes
 
payment
 
of
 
all
principal and interest
 
payments for a period
 
of six months
 
and the Company
 
has a documented
 
expectation of repayment
of the remaining contractual principal and interest or the
 
loan becomes secured and in the process of collection.
A TDR is
 
a debtor that
 
is experiencing
 
financial difficulties
 
and the Company
 
grants a concession.
 
This determination
is performed during the annual review process or whenever problems
 
are surfacing regarding the client’s ability to repay
 
in
accordance with
 
the original
 
terms of
 
the loan
 
or line
 
of credit.
 
In general,
 
a borrower
 
that can
 
obtain funds
 
from sources
other than
 
the Company
 
at market
 
interest rates
 
at or
 
near those
 
for non-troubled
 
debt is
 
not involved
 
in a
 
troubled debt
restructuring.
 
The
 
concessions
 
are
 
given
 
to
 
the
 
debtor
 
in
 
various
 
forms,
 
including
 
interest
 
rate
 
reductions,
 
principal
forgiveness,
 
extension
 
of
 
maturity
 
date,
 
waiver,
 
or
 
deferral
 
of
 
payments
 
and
 
other
 
concessions
 
intended
 
to
 
minimize
potential losses.
The following tables present performing and non-performing
 
TDRs for the dates indicated (in thousands):
December 31, 2021
Accruing
Non-Accruing
Total
Residential Real Estate
$
7,815
$
-
$
7,815
Commercial Real Estate
696
-
696
Commercial and Industrial
141
-
141
Consumer and Other
 
224
-
224
$
8,876
$
-
$
8,876
December 31, 2020
Accruing
Non-Accruing
Total
Residential Real Estate
$
8,884
$
777
$
9,661
Commercial Real Estate
733
-
733
Commercial and Industrial
179
23
202
Consumer and Other
 
278
-
278
$
10,074
$
800
$
10,874
The Company had
 
allocated $360 thousand
 
and $453 thousand of
 
specific allowance for
 
TDR loans at
 
December 31,
2021 and 2020, respectively.
 
There was no commitment to lend additional funds to these
 
TDR customers.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
56
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Charge-offs on
 
TDR loans
 
for the years
 
ended December 31,
 
2021 and
 
2020 was $18
 
thousand and
 
$153 thousand,
respectively.
 
There
 
were
 
no
 
defaults
 
on
 
TDR
 
loans
 
at
 
December 31,
 
2021
 
and
 
2020
 
within
 
the
 
prior
 
12
 
months.
 
The
Company did not have any new TDR loans for the year
 
ended December 31, 2021.
The
 
Company
 
provided
 
financial
 
relief
 
to
 
borrowers
 
impacted
 
by
 
COVID-19
 
and
 
provided
 
modifications
 
to
 
include
interest
 
only
 
deferral
 
or
 
principal
 
and
 
interest
 
deferral.
 
These
 
modifications
 
are
 
excluded
 
from
 
TDR,
 
classification
 
under
Section 4013 of the CARES Act or under applicable interagency
 
guidance of the federal banking regulators.
 
For further
 
discussion on
 
non-performing loans,
 
see Note
 
3 “Loans”
 
to the
 
Consolidated Financial
 
Statements of
 
this
Form 10-K.
Allowance for Credit Losses
In
 
determining
 
the
 
balance
 
of
 
the
 
allowance
 
account,
 
loans
 
are
 
pooled
 
by
 
product
 
segments
 
with
 
similar
 
risk
characteristics and management
 
evaluates the ACL on
 
each segment and on
 
a regular basis to maintain
 
the allowance at
an
 
adequate
 
level
 
based
 
on
 
factors
 
which,
 
in
 
management’s
 
judgment,
 
deserve
 
current
 
recognition
 
in
 
estimating
 
credit
losses.
 
Such
 
factors
 
include
 
changes
 
in
 
prevailing
 
economic
 
conditions,
 
historical
 
loss
 
experience,
 
delinquency
 
trends,
changes in the composition and size of the loan portfolio
 
and the overall credit worthiness of the borrowers.
Additionally,
 
qualitative adjustments
 
are made to
 
the ACL when,
 
based on management’s
 
judgment, there are
 
factors
impacting the allowance estimate not considered by the
 
quantitative calculations.
 
The following table presents ACL and net charge-offs to average loans by
 
type for the periods indicated (in thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
 
Banks
Consumer
and Other
Total
December 31, 2021:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,408
$
9,453
$
1,689
$
348
$
188
$
15,086
Provision for credit losses
(919)
(695)
955
109
390
(160)
Recoveries
238
-
149
-
5
392
Charge-offs
(229)
-
(18)
-
(14)
(261)
Ending Balance
 
$
2,498
$
8,758
$
2,775
$
457
$
569
$
15,057
Average loans
$
212,867
$
654,723
$
153,763
$
52,187
$
42,602
$
1,116,142
Net charge-offs to average loans
 
- %
 
- %
 
(0.08)%
 
- %
 
0.02%
 
(0.01)%
December 31, 2020:
 
 
 
 
 
 
Beginning balance
$
3,749
$
6,591
$
1,214
$
332
$
112
$
11,998
Provision for credit losses
(36)
2,861
321
16
88
3,250
Recoveries
168
1
307
-
18
494
Charge-offs
(473)
-
(153)
-
(30)
(656)
Ending Balance
 
$
3,408
$
9,453
$
1,689
$
348
$
188
$
15,086
Average loans
$
258,728
$
596,022
$
122,177
$
43,433
$
6,545
$
1,026,905
Net charge-offs to average loans
0.12%
- %
(0.13)%
- %
0.18%
0.02%
Bank-Owned Life Insurance
At
 
December 31,
 
2021,
 
the
 
combined
 
cash
 
surrender
 
value
 
of
 
all
 
bank-owned
 
life
 
insurance
 
(“BOLI”)
 
policies
 
was
$41.7 million.
 
Changes
 
in
 
cash
 
surrender
 
value
 
are
 
recorded
 
in
 
non-interest
 
income
 
on
 
the
 
Consolidated
 
Statements
 
of
Operations. In
 
2021, the Company
 
maintained BOLI
 
policies with
 
five insurance
 
carriers. The Company
 
is the beneficiary
of these policies.
Deposits
Customer deposits are the
 
primary funding source for
 
the Bank’s growth.
 
Through our network of
 
banking centers, we
offer a competitive array of deposit
 
accounts and treasury management services designed
 
to meet our customers’ business
needs. Our primary
 
deposit customers
 
are SMBs,
 
and the personal
 
business of owners
 
and operators
 
of these
 
SMBs, as
well as the retail/consumer relationships of the employees
 
of these businesses. Our focus on quality and customer
 
service
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
57
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
has created a strong brand recognition within
 
our depositors, which reflects in the composition
 
of our deposits; most of our
funding sources are core deposits.
Additionally, our personal and private banking management line of business is focused on the needs of the
 
owners and
operators of our business
 
customers, offering
 
a suite of checking,
 
savings, money market
 
and time deposit
 
accounts, and
utilizing superior client service to build and expand client relationships. A unique aspect of our business model is our ability
to offer correspondent services to banks in Central America
 
and the Caribbean.
The
 
following
 
table
 
presents
 
the
 
daily
 
average
 
balance
 
and
 
average
 
rate
 
paid
 
on
 
deposits
 
by
 
category
 
as
 
of
December 31, 2021 and 2020 (in thousands, except ratios):
2021
2020
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Non-interest-bearing deposits
$
547,116
0.00
%
$
390,467
0.00
%
Interest-bearing transaction accounts
52,379
0.11
%
46,819
0.34
%
Saving and money market deposits
619,810
0.34
%
473,028
0.65
%
Time deposits
235,127
0.65
%
276,462
1.70
%
 
Total
 
deposits
$
1,454,432
0.25
%
$
1,186,777
0.67
%
To
tal
 
average
 
deposits
 
at
 
December 31,
 
2021
 
was
 
$1.5 billion,
 
an
 
increase
 
of
 
$267.7 million,
 
or
 
22.6%
 
over
 
total
average deposits of $1.2 billion
 
for the same period
 
in 2020. Our focus on
 
demand deposits has resulted
 
in an increase in
average balances of
 
$156.6 million,
 
or 40.1%, in non-interest
 
bearing demand deposits
 
and an increase of
 
$146.8 million,
or 31.0%, in saving and money market deposits when
 
comparing the average balances for the
 
years ended December 31,
2021 and 2020.
The
 
uninsured
 
deposits
 
are
 
estimated
 
based
 
on
 
the
 
FDIC
 
deposit
 
insurance
 
limit
 
of
 
$250 thousand
 
for
 
all
 
deposit
accounts
 
at
 
the
 
Bank
 
per
 
account
 
holder.
 
Total
 
estimated
 
uninsured
 
deposits
 
were
 
$897.8 million
 
and
 
$606.1 million
 
at
December 31, 2021 and
 
2020, respectively.
 
Time deposits
 
with balances of $250
 
thousand or more totaled
 
$119.4 million
and $104.1 million at December 31, 2021 and 2020,
 
respectively.
The following table shows scheduled maturities of uninsured
 
time deposits as of December 31, 2021 (in thousands):
Three months or less
$
28,707
Over three through six months
7,948
Over six though twelve months
42,106
Over twelve months
24,094
$
102,855
Borrowings
As a
 
member of
 
the FHLB, we
 
are eligible for
 
advances with various
 
terms and conditions.
 
This accessibility of
 
additional
funding allows
 
us to
 
efficiently
 
and timely
 
meet both
 
expected and
 
unexpected outgoing
 
cash flows
 
and collateral
 
needs
without adversely affecting either daily operations
 
or the financial condition of the Company.
As of December 31,
 
2021 and 2020,
 
there was $36.0 million
 
of fixed rate advances
 
from the FHLB outstanding
 
with a
weighted average rate of 1.52%. Most of the advances
 
are due in the first two quarters of 2025.
 
The following table presents the FHLB fixed rate advances
 
as of December 31, 2021 (in thousands):
Interest Rate
Type of Rate
Maturity Date
Amount
0.81%
Fixed
August 17, 2023
$
5,000
1.04%
Fixed
July 30, 2024
5,000
2.05%
Fixed
March 27, 2025
10,000
1.91%
Fixed
March 28, 2025
5,000
1.81%
Fixed
April 17, 2025
5,000
1.07%
Fixed
July 18, 2025
6,000
$
36,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
58
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
We
 
have
 
also
 
established
 
Fed
 
Funds
 
lines
 
of
 
credit
 
with
 
our
 
upstream
 
correspondent
 
banks
 
to
 
manage
 
temporary
fluctuations in our daily cash balances. As of
 
December 31, 2021, there were no
 
outstanding balances with the Fed Funds
line of credit.
Off-Balance Sheet Arrangements
We engage
 
in various financial
 
transactions in
 
our operations
 
that, under GAAP,
 
may not be
 
included on
 
the balance
sheet. To
 
meet the financing needs
 
of our customers we may
 
include commitments to extend
 
credit and standby letters
 
of
credit. To
 
a varying
 
degree, such
 
commitments involve
 
elements of
 
credit, market,
 
and interest
 
rate risk
 
in excess
 
of the
amount recognized
 
in the
 
balance sheet.
 
We use
 
more conservative
 
credit and
 
collateral policies
 
in making
 
these credit
commitments as we
 
do for on-balance sheet
 
items. We are not
 
aware of any accounting
 
loss to be
 
incurred by funding
 
these
commitments; however,
 
we maintain an allowance
 
for off-balance sheet
 
credit risk which is
 
recorded under other liabilities
on the Consolidated Balance Sheets.
Since commitments associated with letters of
 
credit and commitments to extend
 
credit may expire unused, the
 
amounts
shown do not necessarily
 
reflect the actual
 
future cash funding requirements
 
.
 
The following table
 
presents lending related
commitments outstanding as of December 31, 2021 and
 
2020 (in thousands):
2021
2020
Commitments to grant loans and unfunded lines of credit
$
134,877
$
107,553
Standby and commercial letters of credit
6,420
1,813
Total
$
141,297
$
109,366
Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition
established
 
in
 
the
 
contract,
 
for
 
a
 
specific
 
purpose.
 
Commitments
 
generally
 
have
 
variable
 
interest
 
rates,
 
fixed
 
expiration
dates or
 
other
 
termination
 
clauses
 
and
 
may require
 
payment
 
of
 
a fee.
 
Since many
 
of the
 
commitments
 
are
 
expected to
expire without being
 
fully drawn, the
 
total commitment
 
amounts disclosed
 
above do not
 
necessarily represent
 
future cash
requirements.
Unfunded lines of credit represent unused portions of credit facilities to our current borrowers that represent no change
in credit risk in our portfolio. Lines
 
of credit generally have variable interest
 
rates. The maximum potential amount
 
of future
payments we could
 
be required to
 
make is represented
 
by the contractual
 
amount of the
 
commitment, less
 
the amount of
any advances made.
Letters of credit are
 
conditional commitments issued
 
by us to guarantee
 
the performance of a
 
client to a third
 
party.
 
In
the event of nonperformance by
 
the client in accordance with the
 
terms of the agreement with the
 
third party,
 
we would be
required to fund
 
the commitment.
 
If the commitment
 
is funded, we
 
would be entitled
 
to seek recovery
 
from the client
 
from
the underlying collateral,
 
which can include
 
commercial real estate,
 
physical plant and
 
property, inventory, receivables, cash
or marketable securities.
Asset and Liability Management Committee
The asset and liability management committee of our Company, or ALCO, consists of members of senior management
and our Board. Senior management is responsible for
 
ensuring in a timely manner that Board
 
approved strategies, policies,
and procedures
 
for managing
 
and mitigating
 
risks are
 
appropriately executed
 
within the
 
designated lines
 
of authority
 
and
responsibility.
ALCO
 
oversees
 
the
 
establishment,
 
approval,
 
implementation,
 
and
 
review
 
of
 
interest
 
rate
 
risk,
 
management,
 
and
mitigation strategies, ALM related policies, ALCO procedures
 
and risk tolerances and appetite.
While some
 
degree of
 
IRR (“Internal
 
Rate of
 
Return”) is
 
inherent to
 
the banking
 
business, our
 
ALCO has
 
established
sound risk management practices in place to identify,
 
measure, monitor and mitigate IRR exposures.
When assessing
 
the scope
 
of IRR
 
exposure
 
and
 
impact on
 
the consolidated
 
balance sheet,
 
cash
 
flows and
 
income
statement,
 
management
 
considers
 
both
 
earnings
 
and
 
economic
 
impacts.
 
Asset
 
price
 
variations,
 
deposits
 
volatility
 
and
reduced earnings or outright losses could adversely affect
 
the Company’s
 
liquidity, performance,
 
and capital adequacy.
Income simulations
 
are used
 
to assess
 
the impact
 
of changing
 
rates on
 
earnings under
 
different rates
 
scenarios and
time horizons.
 
These simulations
 
utilize both
 
instantaneous
 
and parallel
 
changes in
 
the level
 
of interest
 
rates, as
 
well as
non-parallel changes such as changing slopes (flat and steeping) and
 
twists of the yield curve, Static simulation models are
based on current exposures and
 
assume a constant balance sheet with
 
no new growth. Dynamic simulation analysis
 
is also
 
 
59
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
utilized to have a
 
more comprehensive assessment
 
on IRR. This simulation
 
relies on detailed
 
assumptions outlined in
 
our
budget and strategic plan, and in assumptions regarding changes in
 
existing lines of business, new business, management
strategies and client expected behavior.
To
 
have
 
a
 
more
 
complete
 
picture
 
of
 
IRR,
 
the
 
Company
 
also
 
evaluates
 
the
 
economic
 
value
 
of
 
equity,
 
or
 
EVE.
 
This
assessment
 
will
 
allow
 
us
 
to
 
measure
 
the
 
degree
 
to
 
which
 
the
 
economic
 
values
 
will
 
change
 
under
 
different
 
interest
 
rate
scenarios (parallel and non-parallel). The economic-value approach focuses on a longer-term time horizon and
 
captures all
future cash flows expected
 
from existing assets and
 
liabilities. The economic
 
value model utilizes a
 
static approach in that
the analysis
 
does not
 
incorporate new
 
business; rather,
 
the analysis
 
shows a
 
snapshot in
 
time of
 
the risk
 
inherent in
 
the
balance sheet.
Market and Interest Rate Risk Management
 
According to our ALCO model, as of December 31, 2021,
 
we were an asset sensitive company. This indicates that our
assets generally
 
reprice faster
 
than our
 
liabilities, which
 
results in
 
a favorable
 
impact to
 
net interest
 
income when
 
market
interest rates
 
increase. Many
 
assumptions are
 
used to
 
calculate the
 
impact of
 
interest rate
 
variations
 
on our
 
net interest
income, such as
 
asset prepayment speeds,
 
non-maturity deposit
 
price sensitivity,
 
pricing correlations, deposit
 
truncations
and decay rates, and key rate drivers.
Because of the inherent use
 
of these estimates and
 
assumptions in the model,
 
our actual results may,
 
and most likely
will, differ from static measures results. In addition, static measures like
 
EVEs do not include actions that management may
undertake to manage the risks in response to anticipated changes in interest rates or client deposit behavior. As part of our
ALM strategy
 
and
 
policy,
 
management
 
has the
 
ability
 
to modify
 
the
 
balance sheet
 
to
 
either increase
 
asset
 
duration
 
and
decrease liability
 
duration to reduce
 
asset sensitivity,
 
or to decrease
 
asset duration and
 
increase liability duration
 
in order
to increase asset sensitivity.
According to our model, as of December 31, 2021, the NIM will remain fairly stable for static rate scenarios (-400
 
basis
points:
 
+400
 
basis
 
points).
 
For
 
the
 
static
 
forecast
 
for
 
year
 
one,
 
the
 
estimated
 
NIM
 
will
 
decrease
 
from
 
3.09%
 
base
 
case
scenario to 3.08%
 
under a +400-basis
 
points scenario. Additionally, utilizing an economic
 
value of equity, or EVE,
 
approach,
we analyze the
 
risk to capital
 
from the
 
effects of
 
various interest
 
rate scenarios
 
through a long-term
 
discounted cash
 
flow
model. This
 
measures the
 
difference between
 
the economic
 
value of
 
our assets
 
and the
 
economic value
 
of our
 
liabilities,
which is
 
a proxy for
 
our liquidation value.
 
According to
 
our balance sheet
 
composition, and as
 
expected, our model
 
stipulates
that an increase of rates
 
will have a negative impact
 
on the EVE. Results and
 
analysis are presented quarterly to the
 
Board,
and strategies are defined.
Additionally, in the last couple of quarters we
 
have been reducing our asset
 
sensitivity by extending asset duration.
 
This
has reduced our NII volatility
 
for the first and second
 
year and has helped us
 
to maintain the NII in
 
accordance with ALCO
expectations.
 
Liquidity
 
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.
Changes in macroeconomic conditions or exposure
 
to credit, market, operational, legal
 
and reputational risks, including
cybersecurity risk could also affect the Company’s
 
liquidity risk profile unexpectedly and are considered
 
in the assessment
of liquidity and ALM framework.
Management has established
 
a comprehensive and
 
holistic management process for
 
identifying, measuring, monitoring
and
 
mitigating
 
liquidity
 
risk.
 
Due
 
to
 
its
 
critical
 
importance
 
to
 
the
 
viability
 
of
 
the
 
Company,
 
liquidity
 
risk
 
management
 
is
integrated into our risk management processes and ALM
 
policy.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
60
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Critical elements of our liquidity
 
risk management include: effective corporate governance consisting of
 
oversight by the
Board and
 
active involvement
 
by senior
 
management; appropriate strategies,
 
policies, procedures, and
 
limits used
 
to identify
and mitigate liquidity risk; comprehensive liquidity risk measurement and
 
monitoring systems (including assessments of the
current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and
 
business
activities of
 
the Company;
 
active management
 
of intraday
 
liquidity and
 
collateral; an
 
appropriately diverse
 
mix of
 
existing
and
 
potential
 
future
 
funding
 
sources;
 
adequate
 
levels
 
of
 
highly
 
liquid
 
marketable
 
securities
 
free
 
of
 
legal,
 
regulatory,
 
or
operational
 
impediments,
 
that
 
can
 
be
 
used
 
to
 
meet
 
liquidity
 
needs
 
in
 
stressful
 
situations;
 
comprehensive
 
contingency
funding plans
 
that sufficiently address
 
potential adverse liquidity
 
events and emergency
 
cash flow
 
requirements; and internal
controls
 
and
 
internal
 
audit
 
processes
 
sufficient
 
to
 
determine
 
the
 
adequacy
 
of
 
the
 
institution’s
 
liquidity
 
risk
 
management
process.
We
 
expect
 
funds
 
to
 
be
 
available
 
from
 
several
 
basic
 
banking
 
activity
 
sources,
 
including
 
the
 
core
 
deposit
 
base,
 
the
repayment and maturity of loans and investment security
 
cash flows. Other potential funding sources include
 
federal funds
purchased, brokered
 
certificates of
 
deposit, listing
 
certificates of
 
deposit, Fed
 
funds lines
 
and borrowings
 
from the
 
FHLB.
Accordingly, our liquidity resources
 
were at sufficient levels to fund loans and meet other cash needs as necessary.
 
We do
not expect liquidity resources to be compromised at this
 
time.
Capital Adequacy
As
 
of
 
December 31,
 
2021,
 
the
 
Bank
 
was
 
well
 
capitalized
 
under
 
the
 
FDIC’s
 
prompt
 
corrective
 
action
 
framework.
Additionally,
 
we follow the
 
capital conservation buffer
 
framework, and according
 
to our actual
 
ratios the Bank
 
exceeds the
capital conversation buffer
 
in all capital
 
ratios as of
 
December 31, 2021.
 
The following table
 
presents the capital
 
ratios for
both the Bank and the Company at December 31, 2021
 
and 2020 (in thousands,
 
except ratios):
Actual
Minimum Capital
Requirements
 
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2021:
Total
 
risk-based capital
$
186,735
14.92
%
$
100,125
8.00
%
$
125,157
10.00
%
Tier 1 risk-based capital
$
171,484
13.70
%
$
75,094
6.00
%
$
100,125
8.00
%
Common equity tier 1 capital
$
171,484
13.70
%
$
56,321
4.50
%
$
81,352
6.50
%
Leverage ratio
$
171,484
9.55
%
$
71,825
4.00
%
$
89,781
5.00
%
December 31, 2020:
Total
 
risk-based capital
$
139,326
14.24
%
$
78,260
8.00
%
$
97,825
10.00
%
Tier 1 risk-based capital
$
127,061
12.99
%
$
58,695
6.00
%
$
78,260
8.00
%
Common equity tier 1 capital
$
94,984
9.71
%
$
44,021
4.50
%
$
63,587
6.50
%
Leverage ratio
$
127,061
8.61
%
$
59,053
4.00
%
$
73,817
5.00
%
Impact of Inflation
Our Consolidated
 
Financial Statements
 
and related
 
notes have been
 
prepared in
 
accordance with
 
U.S. GAAP,
 
which
require the
 
measurement
 
of financial
 
position and
 
operating results
 
in terms
 
of historical
 
dollars,
 
without considering
 
the
changes
 
in
 
the
 
relative
 
purchasing
 
power
 
of
 
money
 
over
 
time due
 
to
 
inflation.
 
The
 
impact
 
of
 
inflation
 
is
 
reflected
 
in
 
the
increased cost of operations.
 
Unlike most industrial companies,
 
nearly all our assets and
 
liabilities are monetary in
 
nature.
As a result,
 
interest rates have a
 
greater impact on our
 
performance than do the
 
effects of general levels
 
of inflation. Periods
of high inflation
 
are often accompanied
 
by relatively higher
 
interest rates, and
 
periods of low
 
inflation are accompanied
 
by
relatively lower interest rates.
 
As market interest rates
 
rise or fall in relation
 
to the rates earned
 
on loans and investments,
the
 
value
 
of
 
these
 
assets
 
decreases
 
or
 
increases
 
respectively.
 
Inflation
 
can
 
also
 
impact
 
core
 
non-interest
 
expenses
associated with delivering the Company’s services.
Recently Issued Accounting Pronouncements
 
Recently issued accounting
 
pronouncements are discussed
 
in Note 1 “Summary
 
of Significant Accounting Policies”
 
to
the Consolidated Financial Statements of this Form 10-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
61
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Reconciliation and Management Explanation of Non
 
-GAAP Financial Measures
Management
 
has
 
included
 
these
 
non-GAAP
 
measures
 
because
 
it
 
believes
 
these
 
measures
 
may
 
provide
 
useful
supplemental information
 
for evaluating
 
the Company’s
 
underlying performance
 
trends. Further,
 
management uses
 
these
measures
 
in
 
managing
 
and
 
evaluating
 
the
 
Company’s
 
business
 
and
 
intends
 
to
 
refer
 
to
 
them
 
in
 
discussions
 
about
 
our
operations and performance.
 
Operating performance
 
measures should be
 
viewed in addition
 
to, and not
 
as an alternative
to or
 
substitute
 
for,
 
measures
 
determined
 
in
 
accordance
 
with
 
GAAP,
 
and
 
are
 
not
 
necessarily
 
comparable
 
to non-GAAP
measures that may be presented by other
 
companies. The following table reconciles the non-GAAP financial measurement
of operating net income available to common stockholders for the periods presented (in thousands,
 
except per share data):
As of and for the years ended December 31,
2021
2020
Pre-Tax Pre-Provision ("PTPP") Income:
Net income
$
21,077
$
10,820
Plus: Provision for income taxes
6,600
2,588
Plus: Provision for (recovery of) credit losses
(160)
3,250
PTPP income
$
27,517
$
16,658
PTPP Return on Average Assets:
PTPP income
$
27,517
$
16,658
Average assets
$
1,701,658
$
1,428,935
PTPP return on average assets
 
1.62%
1.17%
Operating Net Income:
Net income
$
21,077
$
10,820
Less: Net gains on sale of securities
214
434
Less: Tax
 
effect on sale of securities
(52)
(106)
Operating net income
$
20,915
$
10,492
Operating PTPP Income:
PTPP income
$
27,517
$
16,658
Less: Net gains on sale of securities
214
434
Operating PTPP Income
$
27,303
$
16,224
Operating PTPP Return on Average Assets:
Operating PTPP income
$
27,303
$
16,224
Average assets
$
1,701,658
$
1,428,935
Operating PTPP Return on average assets
 
1.60%
1.14%
Operating Return on Average Asset:
Operating net income
$
20,915
$
10,492
Average assets
$
1,701,658
$
1,428,935
Operating return on average assets
 
1.23%
0.73%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
62
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Years Ended December 31,
2021
2020
Operating Net Income Available to Common Stockholders:
Net income (GAAP)
$
21,077
$
10,820
Less: Preferred dividends
2,077
3,127
Less: Exchange and redemption of preferred shares
89,585
-
Net income (loss) available to common stockholders (GAAP)
(70,585)
7,693
Add back: Exchange and redemption of preferred shares
89,585
-
Operating net income avail. to common stock (non-GAAP)
(1)
$
19,000
$
7,693
Allocation of operating net income per common stock class:
Class A common stock
$
19,000
$
5,851
Class B common stock
$
-
$
1,842
Weighted average shares outstanding:
Class A common stock
 
Basic
10,507,530
3,887,480
 
Diluted
10,507,530
3,911,290
Class B common stock
 
Basic
-
6,121,052
 
Diluted
-
6,121,052
Diluted EPS:
(1)(2)
Class A common stock
Net income (loss) per diluted share (GAAP)
$
(6.72)
$
1.50
Add back: Exchange and redemption of preferred shares
8.53
-
 
Operating net income per diluted share (non-GAAP)
 
$
1.81
$
1.50
Class B common stock
Net income per diluted share (GAAP)
$
-
$
0.30
Add back: Exchange and redemption of preferred shares
-
-
 
Operating net income per diluted share (non-GAAP)
 
$
-
$
0.30
(1)
 
The Company believes these non-GAAP measurements
 
are a key indicator of the ongoing earnings
 
power of the Company.
(2)
 
During the year ended December 31, 2021,
 
the Company entered into agreements with the Class
 
B shareholders to exchange all outstanding
Class B non-voting stock for Class A voting common
 
stock on a 1 for 5 reverse stock split As such,
 
there are no issued and outstanding shares
 
of Class
B common stock at December 31, 2021.
 
 
63
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company,
 
we are not required to provide the information required
 
by this item.
 
 
 
 
64
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
Item 8.
 
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED
 
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
 
(
Crowe LLP
, PCAOB ID:
173
)
65
uscb-10K-20211231p65i0.jpg uscb-10K-20211231p65i1.gif
 
Crowe LLP
Independent Member Crowe Global
 
65
 
USCB Financial Holdings, Inc.
 
2021 10-K
 
REPORT OF INDEPENDENT REGISTERED PUBLIC
 
ACCOUNTING FIRM
Shareholders and the Board of Directors of USCB Financial
 
Holdings, Inc.
Doral, Florida
Opinion on the Financial Statements
We
 
have
 
audited
 
the
 
accompanying
 
consolidated
 
balance sheets
 
of USCB
 
Financial
 
Holdings,
 
Inc.
 
(the
"Company")
 
as
 
of
 
December
 
31,
 
2021
 
and
 
2020,
 
the
 
related
 
consolidated
 
statements
 
of
 
operations,
comprehensive income, changes in stockholders’ equity,
 
and cash flows for the years then ended, and the
related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly,
 
in all material respects, the financial
 
position of the Company as
 
of December 31, 2021 and
2020,
 
and
 
the
 
results
 
of
 
its
 
operations
 
and
 
its
 
cash
 
flows
 
for
 
the
 
years
 
then
 
ended,
 
in
 
conformity
 
with
accounting principles generally accepted in the United
 
States of America.
Explanatory Paragraph – Financial Statement Consistency
As discussed
 
in
 
Note 1
 
to
 
the consolidated
 
financial
 
statements,
 
the stockholders
 
of U.S.
 
Century
 
Bank
exchanged their Class A
 
common shares of U.S.
 
Century Bank for shares of
 
USCB Financial Holdings, Inc.
on a 1
 
share for
 
1 share basis
 
during the year
 
ended December
 
31, 2021.
 
Stockholders of U.S.
 
Century
Bank became stockholders
 
of USCB Financial Holdings,
 
Inc., and USCB Financial
 
Holdings, Inc. became
the sole
 
stockholder
 
of U.S.
 
Century Bank.
 
The consolidated
 
financial statements
 
as of
 
and for
 
the year
ended December
 
31, 2020, do
 
not include
 
USCB Financial
 
Holdings, Inc.
 
The 2020 financial
 
statements
of U.S.
 
Century
 
Bank
 
are
 
presented
 
with
 
the 2021
 
consolidated
 
financial
 
statements
 
of USCB
 
Financial
Holdings, Inc. since U.S. Century Bank’s assets,
 
liabilities, and operations comprise substantially all
 
of the
consolidated assets, liabilities, and operations.
 
Our opinion is not modified with respect to this matter.
Basis for Opinion
These financial
 
statements are
 
the responsibility
 
of the
 
Company's management.
 
Our responsibility
 
is to
express an opinion
 
on the Company's financial
 
statements based on our
 
audits. We are a
 
public accounting
firm registered
 
with the
 
Public Company
 
Accounting Oversight
 
Board (United
 
States) ("PCAOB")
 
and are
required to be
 
independent with respect to
 
the Company in accordance
 
with the U.S.
 
federal securities laws
and the applicable rules and regulations of the Securities
 
and Exchange Commission and the PCAOB.
 
We conducted
 
our audits
 
in accordance
 
with the
 
standards of
 
the PCAOB.
 
Those standards
 
require that
we plan and perform the
 
audit to obtain reasonable
 
assurance about whether the
 
financial statements are
free of material misstatement, whether due to error or fraud.
 
Our audits included performing procedures to
assess the
 
risks of
 
material misstatement
 
of the
 
financial statements,
 
whether due
 
to error
 
or fraud,
 
and
performing procedures
 
that respond
 
to those risks.
 
Such procedures
 
included examining,
 
on a test
 
basis,
evidence
 
regarding
 
the
 
amounts
 
and
 
disclosures
 
in
 
the
 
financial
 
statements.
 
Our
 
audits
 
also
 
included
evaluating
 
the
 
accounting
 
principles
 
used
 
and
 
significant
 
estimates
 
made
 
by
 
management,
 
as
 
well
 
as
evaluating
 
the
 
overall
 
presentation
 
of
 
the
 
financial
 
statements.
 
We
 
believe
 
that
 
our
 
audits
 
provide
 
a
reasonable basis for our opinion.
/s/ Crowe LLP
Crowe LLP
We have served as the Company's auditor since
 
2017.
Fort Lauderdale, Florida
March 24, 2022
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
66
 
USCB Financial Holdings, Inc.
 
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands,
 
except share and per share data)
 
December 31,
 
2021
2020
ASSETS:
Cash and due from banks
$
6,477
$
9,828
Interest-bearing deposits in banks
39,751
37,906
Total cash and cash equivalents
46,228
47,734
Investment securities held to maturity (fair value $
120,157
)
122,658
-
Investment securities available for sale, at fair value
401,542
334,322
Federal Home Loan Bank stock, at cost
2,100
2,711
Loans held for investment, net of allowance of $
15,057
 
and $
15,086
, respectively
1,175,024
1,023,418
Accrued interest receivable
5,975
5,547
Premises and equipment, net
5,278
6,347
Bank owned life insurance
41,720
25,961
Deferred tax asset, net
34,929
39,159
Lease right-of-use asset
14,185
14,513
Other assets
4,300
2,030
Total assets
$
1,853,939
$
1,501,742
LIABILITIES:
Deposits:
Demand
$
605,425
$
$442,467
Money market and savings accounts
703,856
527,373
Interest-bearing checking accounts
55,878
45,132
Time deposits over $250,000
119,401
104,140
Time deposits $250,000 or less
105,819
154,290
Total deposits
1,590,379
1,273,402
Federal Home Loan Bank advances
36,000
36,000
Lease liability
14,185
14,513
Accrued interest and other liabilities
9,478
6,826
Total liabilities
1,650,042
1,330,741
Commitments and contingencies (See Note 10
 
and 18)
nil
nil
STOCKHOLDERS' EQUITY:
Preferred stock - Class C; $
1.00
 
par value; $
1,000
 
per share liquidation preference;
52,748
 
shares
authorized;
0
 
and
52,748
 
issued and outstanding as of December 31,
 
2021 and 2020
-
12,325
Preferred stock - Class D; $
1.00
 
par value; $
5.00
 
per share liquidation preference;
12,309,480
 
shares
authorized;
0
 
and
12,290,631
 
issued and outstanding as of December
 
31, 2021 and 2020
-
12,291
Preferred stock - Class E; $
1.00
 
par value; $
1,000
 
per share liquidation preference;
3,185,024
 
shares
authorized;
0
 
and
7,500
 
issued and outstanding as of December 31,
 
2021 and 2020
-
7,461
Common stock - Class A Voting; $
1.00
 
par value;
45,000,000
 
shares authorized;
19,991,753
 
and
3,889,469
 
issued and outstanding as of December 31,
 
2021 and 2020
(1)
19,992
3,889
Common stock - Class B Non-voting; $
1.00
 
par value;
8,000,000
 
shares authorized;
0
 
and
6,121,052
issued and outstanding as of December 31, 2021
 
and 2020
-
6,121
Additional paid-in capital on common stock
(1)
310,666
177,755
Accumulated deficit
(124,245)
(53,622)
Accumulated other comprehensive income (loss)
(2,516)
4,781
Total stockholders' equity
203,897
171,001
Total liabilities and stockholders' equity
$
1,853,939
$
1,501,742
(1)
 
Class A common stock outstanding and additional
 
paid-in-capital for December 31, 2020 were adjusted
 
to reflect the 1 for 5 reverse stock split. See
Note 13 "Stockholders' Equity" for further discussion
 
on the stock split.
The accompanying notes are an integral part of
 
these consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
67
 
USCB Financial Holdings, Inc.
 
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Dollars in thousands,
 
except per share data)
 
Years Ended December 31,
 
2021
2020
Interest income:
 
Loans, including fees
$
48,730
$
47,078
 
Investment securities
7,886
5,248
 
Interest-bearing deposits in financial institutions
106
307
 
Total interest income
56,722
52,633
Interest expense:
 
Interest-bearing deposits
59
158
 
Savings and money markets accounts
2,082
3,095
 
Time deposits
1,531
4,709
 
Federal Home Loan Bank advances
554
1,074
 
Total interest expense
4,226
9,036
 
Net interest income before provision for
 
credit losses
52,496
43,597
Provision for credit losses
(160)
3,250
 
Net interest income after provision for
 
credit losses
52,656
40,347
Non-interest income:
 
Service fees
3,609
3,266
 
Gain on sale of securities available for sale, net
214
434
 
Gain on sale of loans held for sale, net
1,626
839
 
Gain on sale of premises and equipment,
 
net
983
-
 
Loan settlement
2,500
-
 
Other non-interest income
1,766
1,558
 
Total non-interest income
10,698
6,097
Non-interest expense:
 
Salaries and employee benefits
21,438
19,204
 
Occupancy
5,257
5,656
 
Regulatory assessment and fees
783
691
 
Consulting and legal fees
1,454
1,045
 
Network and information technology services
1,466
1,536
 
Other operating
5,279
4,904
 
Total non-interest expense
35,677
33,036
 
Net income before income tax expense
27,677
13,408
Income tax expense
6,600
2,588
 
Net income
21,077
10,820
Less: Preferred stock dividend
2,077
3,127
Less: Exchange and redemption of preferred shares
89,585
-
Net income (loss) available to common stockholders
$
(70,585)
$
7,693
Per share information:
(1)
Class A common stock
(2)
Net income (loss) per share, basic
$
(6.72)
$
1.51
Net income (loss) per share, diluted
$
(6.72)
$
1.50
Class B common stock
Net income per share, basic
$
-
$
0.30
Net income per share, diluted
$
-
$
0.30
(1)
 
See Note 14 "Earnings per Share" for information
 
on the allocation of income available to common stockholders.
(2)
 
For the year ended December 31, 2020, the
 
common stock outstanding, weighted average
 
shares and net income per share for the Class A
common stock were adjusted to reflect the 1
 
for 5 reverse stock split that occurred in June of 2021.
The accompanying notes are an integral part of
 
these consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
68
 
USCB Financial Holdings, Inc.
 
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
 
Years Ended December 31,
2021
2020
Net income
$
21,077
$
10,820
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities
(9,561)
4,175
Amortization of net unrealized gains on securities
 
transferred from available-for-sale to held-to-maturity
108
-
Reclassification adjustment for gain included in net
 
income
(214)
(434)
Tax effect
2,370
(917)
Total other comprehensive income (loss), net of tax
(7,297)
2,824
Total comprehensive income
$
13,780
$
13,644
The accompanying notes are an integral part of
 
these consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
69
 
USCB Financial Holdings, Inc.
 
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders’
 
Equity
(Dollars in thousands,
 
except per share data)
 
Preferred Stock
Common Stock
Additional Paid-
in Capital on
Common Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Shares
Par Value
Shares
Par Value
Total
Stockholders'
Equity
Balance at January 1, 2021
12,350,879
$
32,077
25,568,147
$
25,568
$
162,197
$
(53,622)
$
4,781
$
171,001
Reverse stock split 1 for 5 Common A
-
-
(15,557,626)
(15,558)
15,558
-
-
-
Adjusted balance at January 1, 2021
 
12,350,879
32,077
10,010,521
10,010
177,755
(53,622)
4,781
171,001
Net income
-
-
-
-
-
21,077
-
21,077
Other comprehensive loss
-
-
-
-
-
-
(7,297)
(7,297)
Dividends - preferred stock
-
-
-
-
-
(2,077)
-
(2,077)
Issuance of Class A common stock, net of
offering costs of $
6,174
-
-
4,600,000
4,600
35,226
-
-
39,826
Exchange of preferred stock
(11,109,025)
(22,154)
10,278,072
10,279
92,501
(80,626)
-
-
Redemption of preferred stock
(1,241,854)
(9,923)
-
-
-
(8,997)
-
(18,920)
Exchange of Class B to Class A common stock
-
-
(4,896,840)
(4,897)
4,897
-
-
-
Stock based compensation
-
-
-
-
287
-
-
287
Balance at December 31, 2021
-
$
-
19,991,753
$
19,992
$
310,666
$
(124,245)
$
(2,516)
$
203,897
Balance at January 1, 2020
(1)
12,350,879
$
32,077
10,008,521
$
10,008
$
177,555
$
(61,315)
$
1,957
$
160,282
Net income
-
-
-
-
-
10,820
-
10,820
Other comprehensive income
-
-
-
-
-
-
2,824
2,824
Dividends - preferred stock
-
-
-
-
-
(3,127)
-
(3,127)
Stock based compensation
-
-
-
-
187
-
-
187
Exercise of stock options
-
-
2,000
2
13
-
-
15
Balance at December 31, 2020
12,350,879
$
32,077
10,010,521
$
10,010
$
177,755
$
(53,622)
$
4,781
$
171,001
(1)
 
Common stock shares, par value, and additional paid-in
 
capital for common stock for 2020 was adjusted
 
to reflect the 1 for 5 reverse stock split. See Note
 
13 "Stockholders' Equity" for further details.
The accompanying notes are an integral part of
 
these consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
70
 
USCB Financial Holdings, Inc.
 
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
2021
2020
Cash flows from operating activities:
Net income
 
$
21,077
$
10,820
Adjustments to reconcile net income to net
 
cash provided by operating activities:
Provision for credit losses
 
(160)
3,250
Depreciation and amortization
1,033
1,272
Amortization of premiums on securities, net
596
358
Accretion of deferred loan fees, net
(3,754)
(2,661)
Stock based compensation
287
187
Gain on sale of available for sale securities
(214)
(434)
Gain on sale of loans held for sale
(1,626)
(839)
Gain on sale of premises and equipment, net
(983)
-
Increase in cash surrender value of bank owned
 
life insurance
(759)
(712)
Decrease in deferred tax asset
6,600
2,588
Net change in operating assets and liabilities:
Accrued interest receivable
(428)
(1,998)
Other assets
(2,270)
473
Accrued interest and other liabilities
2,652
798
Net cash provided by operating activities
22,051
13,102
Cash flows from investing activities:
Purchase of investment securities held to maturity
(57,917)
-
Proceeds from maturities and pay-downs of investment
 
securities held to maturity
3,736
-
Purchase of investment securities available for
 
sale
 
(258,767)
(253,993)
Proceeds from maturities and pay-downs of investment
 
securities available for sale
61,047
48,441
Proceeds from sales of investment securities available
 
for sale
48,940
55,169
Proceeds from call of investment securities available
 
for sale
3,034
2,140
Net increase in loans held for investment
(33,515)
(42,527)
Purchase of loans held for investment
(129,531)
-
Additions to premises and equipment
(633)
(347)
Proceeds from the sale of loans held for
 
sale
16,980
9,295
Proceeds from the sale of property
1,652
-
Proceeds from the redemption of Federal Home
 
Loan Bank stock
611
4,972
Purchase of Federal Home Loan Bank stock
-
(1,926)
Purchase of bank owned life insurance
(15,000)
-
Net cash used in investment activities
(359,363)
(178,776)
(Continued)
The accompanying notes are an integral part of
 
these consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
71
 
USCB Financial Holdings, Inc.
 
2021 10-K
USCB FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years Ended December 31,
2021
2020
Cash flows from financing activities:
Proceeds from issuance of Class A common stock, net
39,826
15
Cash dividends paid
(2,077)
(3,127)
Redemption of Preferred stock Class C
(5,275)
-
Redemption of Preferred stock Class D
(6,145)
-
Redemption of Preferred stock Class E
(7,500)
-
Net increase in deposits
316,977
255,779
Proceeds from Federal Home Loan Bank advances
-
79,000
Repayments on Federal Home Loan Bank advances
-
(154,000)
Net cash provided by financing activities
335,806
177,667
Net increase (decrease) in cash and cash equivalents
(1,506)
11,993
Cash and cash equivalents at beginning of year
47,734
35,741
Cash and cash equivalents at end of year
$
46,228
$
47,734
Supplemental disclosure of cash flow information:
Interest paid
$
4,286
$
8,844
Supplemental schedule of non-cash investing and
 
financing activities:
Transfer of loans held for investment to loans held for
 
sale
$
15,354
$
8,456
Transfer of investment securities from available-for-sale to held-to-maturity
$
68,667
$
-
Transfer of premises and equipment to assets held for
 
sale
$
652
$
-
Lease liability arising from obtaining right-of-use assets
$
328
$
-
Exchange of Preferred C for Class A common
 
stock
$
47,473
$
-
Exchange of Preferred D for Class A common
 
stock
$
55,308
$
-
Exchange of Class B common stock for Class
 
A common stock
$
4,897
$
-
The accompanying notes are an integral part of
 
these consolidated financial statements.
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
72
 
USCB Financial Holdings, Inc.
 
2021 10-K
1.
 
SUMMARY OF SIGNIFICANT ACCOUNTING
 
POLICIES
Overview
USCB Financial Holdings, Inc., a
 
Florida corporation incorporated
 
in 2021, is a bank holding
 
company with one wholly
owned subsidiary,
 
U.S. Century Bank (the
 
“Bank”), together referred to
 
as “the Company”. The
 
Bank, established in 2002,
is a Florida
 
state-chartered, non-member financial institution providing financial
 
services through its banking
 
centers located
in South Florida.
In December 2021, USCB Financial
 
Holdings, Inc. acquired all issued
 
and outstanding shares of the Class
 
A common
stock of the Bank. Each of the outstanding shares of
 
the Bank’s common stock, par value $
1.00
 
per share, formerly held by
its shareholders were
 
converted into and exchanged
 
for one newly
 
issued share of
 
the Company’s common stock, par
 
value
$
1.00
 
per share.
The Company’s
 
2015 Option
 
Plan has
 
a
10
-year life
 
that will terminate
 
in 2025.
 
In July
 
2020, the
 
shareholders of
 
the
Company approved to amend the 2015 Option plan authorizing the issuance of an additional
3,000,000
 
shares of common
stock and extending
 
the life of
 
the plan
5
 
additional years,
 
terminating in 2030.
 
The approved
 
shares after being
 
adjusted
to reflect
 
the
1 for 5
 
reverse
 
stock
 
split totaled
1,000,000
 
shares.
 
In December
 
2021,
 
during the
 
same time
 
of the
 
bank
holding company
 
formation,
 
the shareholders
 
of the
 
Company
 
approved
 
to amend
 
the 2015
 
Option
 
plan
 
authorizing
 
the
issuance of an additional
1,400,000
 
shares of common stock.
The Company’s
 
Consolidated Financial
 
Statements consist
 
of USCB
 
Financial Holdings,
 
Inc. and
 
U.S. Century
 
Bank
as
 
of
 
and
 
for
 
the
 
year
 
ended
 
December
 
31,
 
2021
 
compared
 
to
 
only
 
U.S.
 
Century
 
Bank
 
as
 
of
 
and
 
for
 
the
 
year
 
ended
December 31, 2020.
 
Principles of Consolidation
Intercompany transactions
 
and balances
 
are eliminated
 
in consolidation.
 
The Consolidated
 
financial statements
 
have
been prepared in accordance with U.S. Generally Accepted
 
Accounting Principles ("GAAP").
Initial Public Offering and Exchange and Redemption
 
of Shares
On July 27, 2021,
 
the Company completed
 
an initial public
 
offering (the “IPO”)
 
and its Class
 
A voting common
 
shares
began trading
 
on the
 
Nasdaq Stock
 
Market under
 
ticker symbol
 
“USCB”. Following
 
the IPO,
 
the Company
 
completed an
exchange
 
of
 
then
 
outstanding
 
preferred
 
shares
 
for
 
Class
 
A
 
common
 
shares
 
and
 
thereafter
 
redeemed
 
the
 
remaining
outstanding preferred shares.
 
In December 2021,
 
the Company reached
 
agreements with the
 
Class B common
 
shareholders to receive
 
Class A voting
common
 
stock
 
in
 
exchange
 
for
 
all
 
outstanding
 
Class
 
B
 
non-voting
 
common
 
stock
 
in
 
a
 
1
 
for
 
5
 
reverse
 
stock
 
split. As
 
of
December 31,
 
2021,
 
there
 
were
 
no
 
issued
 
and
 
outstanding
 
preferred
 
shares
 
or
 
Class
 
B
 
common
 
shares.
 
See
 
Note
 
13
“Stockholders’ Equity” for further information about the IPO and
 
the exchange and redemption of shares.
 
Use of Estimates
In preparing the consolidated financial statements, management is required
 
to make estimates and assumptions based
on available information that affect the amounts reported
 
in the financial statements and the disclosures provided.
The coronavirus (“COVID-19”)
 
pandemic has negatively
 
affected many of
 
the Company’s
 
clients and could
 
still impair
their ability to fulfill
 
their financial obligations.
 
The Company’s business
 
is dependent upon the
 
willingness and ability
 
of its
associates and customers to conduct banking and other financial transactions.
 
While we believe conditions have improved
as of December 31, 2021, if there is a resurgence in the virus, the Company could experience further adverse effects on its
business,
 
financial
 
condition,
 
results
 
of operations
 
and
 
cash
 
flows.
 
While
 
it
 
is not
 
possible
 
to know
 
the
 
full
 
extent
 
of
 
the
impact the
 
COVID-19
 
pandemic will
 
have on
 
the
 
Company's
 
future operations,
 
the Company
 
continues
 
to
 
communicate
with its associates and customers
 
to understand their challenges, which
 
allows us to respond to
 
their needs and issues as
they arise.
While there was
 
not a
 
material impact to
 
the Company’s Consolidated Financial
 
Statements as of
 
and for
 
the year ended
December 31, 2021,
 
future increases
 
in the
 
allowance for
 
credit losses
 
(“ACL”) may
 
be required
 
because of
 
the potential
economic
 
downturn
 
that
 
a
 
resurgence
 
in
 
the virus
 
may
 
cause
 
and those
 
ACL
 
increases
 
can be
 
material.
 
It
 
is difficult
 
to
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
73
 
USCB Financial Holdings, Inc.
 
2021 10-K
quantify the
 
impact that
 
COVID-19 will
 
have on
 
the estimates
 
and assumptions
 
used to
 
prepare the
 
financial statements.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The
 
Company
 
considers
 
investments
 
with
 
a
 
maturity
 
of
 
90
 
days
 
or
 
less
 
from
 
its
 
original
 
purchase
 
date
 
to
 
be
 
cash
equivalents. For
 
the Consolidated
 
Statements of
 
Cash Flows,
 
cash and cash
 
equivalents include
 
cash on hand,
 
amounts
due from banks, and interest-bearing deposits in banks.
Restricted Cash
The Company may
 
be required to
 
maintain funds at
 
other banks to
 
satisfy a loan
 
participation agreement. The Company
reports restricted cash within cash and cash equivalents.
 
Interest-Bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions consist
 
of Federal Reserve Bank, Federal Home Loan
 
Bank and
other accounts.
Investment Securities
Debt securities
 
are recorded
 
at fair
 
value except
 
for those
 
securities which
 
the Company
 
has the
 
positive intent
 
and
ability to hold to
 
maturity. Management determines the appropriate classification of its securities at
 
the time of purchase
 
and
accounts for them on a trade date basis.
 
Debt securities that
 
management has the
 
positive intent and
 
ability to hold
 
to maturity are
 
classified as "held-to-maturity"
and recorded at amortized cost. Trading securities are
 
recorded at fair value with
 
changes in fair value included
 
in earnings.
Securities not classified
 
as held-to-maturity or
 
trading are classified
 
as "available-for-sale"
 
and recorded at
 
fair value, with
unrealized gains and
 
losses excluded from
 
earnings and reported
 
in other comprehensive
 
income (loss). Equity
 
investments
must be classified as trading and recorded at fair value
 
with changes in fair value included in earnings.
 
Purchase premiums and discounts are amortized or accreted over
 
the estimated life of the related available-for-sale or
held-to-maturity
 
security
 
as
 
an
 
adjustment
 
to
 
yield
 
using
 
the
 
effective
 
interest
 
method.
 
Prepayments
 
of
 
principal
 
are
considered in determining the estimated life of
 
the security. Such amortization and accretion are included in interest income
in the Consolidated
 
Statements of Operations.
 
Dividend and interest
 
income are recognized when
 
earned. Gains and
 
losses
on the sale of securities are recorded on trade date and are determined
 
on a specific identification basis.
Declines
 
in
 
the
 
fair
 
value
 
of
 
available-for-sale
 
debt
 
securities
 
below
 
their
 
cost
 
that
 
are
 
deemed
 
to
 
be
 
other-than-
temporary
 
are
 
reflected
 
in
 
earnings
 
as
 
realized
 
losses.
 
In
 
determining
 
whether
 
other-than-temporary
 
impairment
 
exists,
management considers several factors in their analysis including
 
(i) severity and duration of the
 
impairment, (ii) credit rating
of security including any downgrade, (iii) intent to sell the security, or if it is more likely than not that it will be required to sell
the
 
security
 
before
 
recovery,
 
(iv)
 
whether
 
there
 
have
 
been
 
any
 
payment
 
defaults
 
and
 
(v)
 
underlying
 
guarantor
 
of
 
the
securities.
Federal Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to
 
own a certain amount of stock based on the level
of borrowings and
 
other factors and
 
may invest in
 
additional amounts. FHLB
 
stock is carried
 
at cost, classified
 
as a restricted
asset, and
 
periodically evaluated
 
for impairment
 
based on
 
ultimate recovery
 
of par
 
value. As
 
of December
 
31, 2021
 
and
2020,
 
FHLB
 
stock
 
amounted
 
to
 
$
2.1
 
million
 
and
 
$
2.7
 
million,
 
respectively,
 
with
 
no
 
impairment
 
deemed
 
necessary.
 
Both
cash and stock dividends are reported as interest income.
Loans Held for Investment and Allowance for Credit
 
Losses
Loans held for investment (“loans”) are reported at their outstanding principal
 
balance net of charge-offs, deferred loan
fees, unearned
 
income
 
and
 
the
 
ACL.
 
Interest
 
income
 
is generally
 
recognized
 
when
 
income
 
is earned
 
using
 
the
 
interest
method.
 
Loan
 
origination
 
and
 
commitment
 
fees
 
and
 
the
 
costs
 
associated
 
with
 
the
 
origination
 
of
 
loans
 
are
 
deferred
 
and
amortized, using the interest method or the straight-line
 
method, over the life of the related loan.
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
74
 
USCB Financial Holdings, Inc.
 
2021 10-K
If the
 
principal or
 
interest on
 
a commercial
 
loan becomes
 
due and
 
unpaid for
 
90 days
 
or more,
 
the loan
 
is placed
 
on
non-accrual status as of
 
the date it becomes
 
90 days past due
 
and remains in non-accrual
 
status until it meets
 
the criteria
for restoration to accrual status.
 
Residential loans, on
 
the other hand, are placed
 
on non-accrual status when
 
the principal
or interest
 
becomes due
 
and unpaid
 
for 120
 
days or
 
more and remains
 
in non-accrual
 
status until
 
it meets
 
the criteria
 
for
restoration
 
to
 
accrual
 
status.
 
Restoring
 
a
 
loan
 
to
 
accrual
 
status
 
is
 
possible
 
when
 
the
 
borrower
 
resumes
 
payment
 
of
 
all
principal and interest
 
payments for a period
 
of six months
 
and the Company
 
has a documented
 
expectation of repayment
of the remaining contractual principal and interest or the loan becomes secured and in the process of collection. All interest
accrued but not
 
collected for
 
loans that are
 
placed on
 
nonaccrual status
 
is reversed
 
against interest
 
income. The interest
on these
 
loans is
 
accounted for
 
on the
 
cash-basis
 
or cost-recovery
 
method, under
 
which cash
 
collections are
 
applied to
unpaid principal, which may change as conditions dictate.
 
The Company has determined that the entire balance of
 
a loan is contractually delinquent for all
 
classes if the minimum
payment is not received by
 
the specified due date on
 
the borrower's statement. Interest and fees
 
continue to accrue on past
due loans until the date the loan goes into nonaccrual
 
status.
The Company provides for loan losses through a provision for credit losses charged to operations. When management
believes that a
 
loan or a portion
 
of the loan balance
 
is uncollectible, that
 
amount is charged
 
against the ACL.
 
Subsequent
recoveries, if any,
 
are credited to the ACL.
The ACL
 
reflects management's
 
judgment of
 
probable loan
 
losses inherent
 
in the
 
portfolio at
 
the balance
 
sheet date.
Management uses a disciplined
 
process and methodology
 
to establish the ACL
 
each quarter.
 
To
 
determine the total
 
ACL,
the Company
 
estimates the
 
reserves needed
 
for each
 
segment of
 
the portfolio,
 
including loans
 
analyzed individually
 
and
loans analyzed on a pooled basis. The ACL consists
 
of the amount applicable to the following segments:
 
Residential real estate
 
Commercial real estate
 
Commercial and industrial
 
Foreign banks
 
Other loans (secured and unsecured consumer loans)
Residential
 
real
 
estate
 
loans
 
are
 
underwritten
 
following
 
the
 
policies
 
of
 
the
 
Company
 
which
 
includes
 
a
 
review
 
of
 
the
borrower’s credit, capacity
 
and the collateral
 
securing the loan.
 
The borrower’s ability
 
to repay involves
 
an analysis of
 
factors
including: current
 
income, employment
 
status, monthly
 
payment of loan,
 
current debt obligations,
 
monthly debt
 
to income
ratio and credit history. The Company relies on appraisals in determining the value of the property.
 
Risk is mitigated by this
analysis and the diversity of the residential portfolio.
Commercial real estate
 
loans are
 
secured by liens
 
on commercial properties,
 
land, construction and
 
multifamily housing.
Underwriting
 
of
 
commercial
 
loans
 
will
 
analyze
 
the
 
key
 
market
 
and
 
business
 
factors
 
to
 
arrive
 
at
 
a
 
decision
 
on
 
the
 
credit
worthiness of the borrower.
 
The analysis may include
 
the capacity of the borrower,
 
income generated by property
 
for debt
service, other
 
sources of
 
repayment, sensitivity
 
analysis to
 
fluctuations in
 
market conditions
 
including vacancy
 
and rental
rates in geographic location and loan to value. Land and construction analysis will include the time to develop, sell or lease
the property.
 
Appraisals
 
are used
 
to determine
 
the value
 
of the
 
underlying
 
collateral.
 
Risk
 
is mitigated
 
as the
 
properties
securing the commercial real estate loans are diverse in
 
type, location, and loan structure.
 
Commercial
 
and
 
industrial
 
loans
 
are
 
secured
 
by
 
the
 
business
 
assets
 
of
 
the
 
company
 
and
 
may
 
include
 
equipment,
inventory, and receivables.
 
The loans are underwritten based on the
 
income capacity of the business, the ability
 
to service
the debt based
 
on operating cash
 
flows, the credit
 
worthiness of the
 
borrower,
 
other sources
 
of repayment and
 
collateral.
The Company mitigates the risk in the commercial portfo
 
lio through industry diversification.
 
Foreign Banks
 
loans are
 
short term
 
loans with
 
international correspondent
 
banking institutions
 
primarily
 
domiciled in
Latin America. Most of these loans are for trade capital and have a
 
life of less than one year.
 
The Company’s credit review
includes a credit analysis, peer comparison and current
 
country risk overview.
 
Annual re-evaluation of the risk rating of the
borrower and country and a review of authorized
 
signer within the Company.
 
The risk is mitigated as these loans are short
term, have limited exposure, and are geographically dispersed.
 
Other
 
loans
 
are
 
secured
 
and
 
unsecured
 
consumer
 
loans
 
including
 
personal
 
loans,
 
overdrafts
 
and
 
deposit
 
account
collateralized
 
loans.
 
Repayment
 
of
 
these
 
loans
 
are
 
primarily
 
from
 
the
 
personal
 
income
 
of
 
the
 
borrowers.
 
Loans
 
are
underwritten based on the credit worthiness of the borrower.
 
The risk on these loans is mitigated by small loan balances.
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
75
 
USCB Financial Holdings, Inc.
 
2021 10-K
In
 
determining
 
the
 
balance
 
of
 
the
 
ACL,
 
loans
 
are
 
pooled
 
by
 
product
 
segments
 
with
 
similar
 
risk
 
characteristics
 
and
management evaluates
 
the ACL
 
on each
 
segment and
 
as a whole
 
to maintain
 
the allowance
 
at an
 
adequate level
 
based
on factors which, in
 
management's judgment, deserve
 
current recognition in estimating
 
credit losses. Such
 
factors include
changes in prevailing economic conditions, historical loss experience,
 
delinquency trends, changes in the composition and
size of the loan portfolio and the overall credit worthiness
 
of the borrowers.
The ACL
 
consists of
 
general and
 
specific components.
 
The following
 
is how
 
management determines
 
the balance
 
of
the general component for the ACL account for each segment
 
of the loans as described above.
 
The loan segments are
 
primarily grouped by
 
collateral type with similar
 
risk characteristics and
 
a historical loss
 
rate is
determined based on a ten year look back period. The Company applies time
 
weights to consider various stages of a credit
cycle.
 
The
 
ACL
 
calculation
 
is
 
based
 
on
 
the
 
Company’s
 
own
 
net
 
loss
 
experience
 
adjusted
 
for
 
certain
 
qualitative
 
and
environmental factors. To
 
estimate the impact of
 
non-recurrent losses, management
 
has developed a statistical
 
study that
tracks historical non-recurring
 
losses at a
 
loan level. This
 
analysis is
 
used to estimate
 
an adjusted
 
loss rate for
 
each loan
pool. Management believes the
 
effect of these losses
 
results in a loss
 
rate that is more consistent
 
with the behavior of
 
the
loan portfolio in the normal course of business.
 
Qualitative
 
factors
 
are
 
applied
 
to
 
historical
 
loss
 
rates
 
based
 
on
 
management's
 
experience
 
and
 
assessment.
 
The
following are the factors used to adjust the historical loss
 
rates:
 
 
Loan quality review
 
Lending and credit management /staff expertise
 
and practices
 
Economic and business conditions
 
Lending and credit underwriting policies and procedures
 
Problem loan levels and trends
 
Collateral concentrations
 
Large obligor concentration
 
New loan volumes
 
Combined loan to value (“CLTV”)
 
qualitative adjustment for substandard accrual loan segment
Changes in these factors could
 
result in material adjustments to the
 
ACL. The losses the Company may
 
ultimately incur
could differ materially from the amounts estimated
 
in arriving at the ACL.
In addition
 
to the
 
ACL, the
 
Company also
 
estimates probable
 
losses related
 
to financial
 
instruments with
 
off-balance
sheet risk, such as letters
 
of credit and unfunded loan
 
commitments, and records these estimates
 
in other liabilities on the
Consolidated
 
Balance
 
Sheets
 
with
 
the
 
offset
 
recorded
 
in
 
non-interest
 
expense
 
on
 
the
 
Consolidated
 
Statements
 
of
Operations.
 
Financial
 
instruments
 
with
 
off-balance
 
sheet
 
risk
 
are
 
subject
 
to
 
review
 
on
 
an
 
aggregate
 
basis.
 
Past
 
loss
experience and
 
any other
 
pertinent information is
 
reviewed, resulting in
 
the estimation
 
of the
 
reserve for
 
financial instruments
with off-balance sheet risk.
A loan is considered
 
impaired when, based
 
on current information
 
and events, it
 
is probable that
 
the Company will
 
be
unable to
 
collect the
 
scheduled payments
 
of principal
 
or interest
 
when due
 
according to
 
the contractual
 
terms of
 
the loan
agreement or when the loan
 
is designated as a Troubled
 
Debt Restructuring (“TDR”). Factors
 
considered by management
in determining impairment include payment status, collateral value, and the probability of
 
collecting scheduled principal and
interest payments when due.
 
Loans that experience insignificant
 
payment delays and payment
 
shortfalls generally are not
classified as impaired. Impairment is measured on a loan by loan basis by either the present value
 
of expected future cash
flows discounted at the loan's effective
 
interest rate, the loan's obtainable
 
fair value, or the fair value of
 
the collateral, if the
loan
 
is
 
collateral
 
dependent.
 
If
 
management
 
determines
 
that
 
the
 
value
 
of
 
the
 
impaired
 
loan
 
is
 
less
 
than
 
the
 
recorded
investment in the loan (outstanding principal balance plus accrued interest, net of previous charge-offs, and net of deferred
loan fees or cost), impairment is recognized through an allowance
 
estimate or a charge-off to the ACL.
In
 
situations
 
where,
 
due
 
to
 
a
 
borrower's
 
financial
 
difficulties,
 
management
 
grants
 
a
 
concession
 
for
 
other
 
than
 
an
insignificant period of time to the borrower that would not
 
otherwise be granted, the loan is classified as a TDR.
 
On March 27,
 
2020, the Coronavirus Aid,
 
Relief, and Economic
 
Security Act (“CARES Act”)
 
was signed by
 
the President
of the United
 
States. The
 
CARES Act
 
has certain
 
provisions which
 
encourage financial
 
institutions to
 
prudently work
 
with
borrowers impacted
 
by COVID
 
-19. Under
 
these provisions,
 
modifications
 
deemed
 
to be
 
COVID-19 related
 
would not
 
be
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
76
 
USCB Financial Holdings, Inc.
 
2021 10-K
considered a TDR if the loan was not more than 30 days past
 
due as of December 31, 2019. The deferral would need to be
executed March
 
1, 2020
 
and the
 
earlier of
 
60 days
 
after the
 
date of
 
termination
 
of the
 
COVID-19 national
 
emergency
 
or
December 31,
 
2020. Additional
 
legislation was
 
passed in
 
December
 
of 2020
 
that
 
extended
 
the TDR
 
relief to
 
January
 
1,
2022. Banking regulators issued similar guidance clarifying that a COVID-19
 
related modification should not be considered
a TDR if the borrower was current on payments at the time the
 
underlying loan modification program was implemented and
considered short-term. See Note 3 “Loans” for additional disclosures
 
of loans that were modified and not considered TDR.
 
In addition to the
 
allowance for the
 
pooled portfolios, management
 
has developed a
 
separate allowance for
 
loans that
are identified as
 
impaired through a
 
TDR. These loans
 
are excluded from
 
the general component
 
of the ACL,
 
and a separate
reserve is provided under the accounting guidance for loan
 
impairment. Residential loans whose terms have been modified
in a TDR are also individually analyzed for estimated impairment.
The Company's charge-off policy is to review all impaired loans
 
on a quarterly basis in order to monitor the Company's
ability to
 
collect
 
them
 
in
 
full
 
at maturity
 
date
 
and/or
 
in
 
accordance
 
with
 
terms
 
of
 
any restructurings.
 
For
 
loans
 
which are
collateral dependent,
 
or deemed to
 
be uncollectible,
 
any shortfall
 
in the fair
 
value of
 
the collateral
 
relative to
 
the recorded
investment in the loan is charged off.
 
Concentration of Credit Risks
Credit
 
risk
 
represents
 
the
 
accounting
 
loss
 
that
 
would
 
be
 
recognized
 
at
 
the
 
reporting
 
date
 
if
 
counterparties
 
failed
 
to
perform as contracted and any collateral or security proved to be insufficient
 
to cover the loss. Concentrations of credit risk
(whether on or off-balance sheet) arising from financial instruments exist in relation to certain
 
groups of customers. A group
concentration arises when
 
a number of
 
counterparties have
 
similar economic characteristics
 
that would cause
 
their ability
to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not
have a significant exposure to any individual customer
 
or counterparty.
Most of the Company's business activity is
 
with customers located within its primary market area, which
 
is generally the
State of Florida. The Company's loan portfolio is concentrated largely in real estate and commercial loans in South Florida.
Many of the Company's
 
loan customers are engaged
 
in real estate development.
 
Circumstances, which negatively
 
impact
the South Florida real estate industry
 
or the South Florida economy, in general, could adversely impact
 
the Company's loan
portfolio.
At December 31,
 
2021 and
 
2020, the
 
Company had
 
a concentration
 
of risk
 
with loans
 
outstanding to
 
the Company’s
top ten lending relationships
 
totaling $
156.4
 
million and $
141.5
 
million, respectively.
 
At December 31, 2021 and
 
2020, this
concentration represented
13.1
% and
13.6
%, respectively,
 
of the net loans outstanding.
 
At December 31,
 
2021, the
 
Company also
 
had a
 
concentration of
 
risk with
 
loans outstanding
 
totaling $
47.9
 
million to
foreign
 
banks
 
located
 
in
 
Ecuador,
 
Honduras,
 
and
 
El
 
Salvador.
 
At
 
December 31,
 
2020,
 
the
 
Company
 
also
 
had
 
a
concentration of
 
risk with
 
loans outstanding
 
totaling
 
$
38.8
 
million to
 
foreign banks
 
located in
 
Ecuador,
 
Honduras, and
 
El
Salvador.
 
These
 
banks
 
maintained
 
deposits
 
with
 
right
 
of
 
offset
 
totaling
 
$
28.9
 
million
 
and
 
$
18.2
 
million
 
at
 
December 31,
2021 and 2020, respectively.
At various times during
 
the year,
 
the Company has maintained
 
deposits with other
 
financial institutions. The exposure
to the Company from
 
these transactions is solely
 
dependent upon daily balances
 
and the financial strength
 
of the respective
institution.
Premises and Equipment, net
Land is
 
carried at
 
cost. Premises
 
and equipment
 
are stated
 
at cost
 
less accumulated
 
depreciation
 
and amortization.
Depreciation is computed
 
on the straight-line
 
method over the
 
estimated useful life
 
of the asset. Leasehold
 
improvements
are amortized over the
 
remaining term of the
 
applicable leases or their
 
useful lives, whichever
 
is shorter.
 
Estimated useful
lives of these assets were as follows:
Building
 
40
 
years
Furniture, fixtures and equipment
 
3
 
to
25
 
years
Computer hardware and software
 
3
 
to
5
 
years
Leasehold improvements
 
Shorter of life or term of lease
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
77
 
USCB Financial Holdings, Inc.
 
2021 10-K
Maintenance
 
and
 
repairs
 
are
 
charged
 
to
 
expense
 
as
 
incurred
 
while
 
improvements
 
and
 
betterments
 
are
 
capitalized.
When items are retired or are
 
otherwise disposed of, the related costs
 
and accumulated depreciation and amortization
 
are
removed from the accounts and any resulting gains or losses
 
are credited or charged to income.
Other Real Estate Owned
Other real estate
 
owned (“OREO”)
 
consists of real
 
estate property
 
acquired through,
 
or in lieu
 
of, foreclosure
 
that are
held for sale and are initially recorded at
 
the fair value of the property less estimated selling
 
costs at the date of foreclosure,
establishing a
 
new cost
 
basis. Subsequent
 
to foreclosure,
 
valuations are
 
periodically performed
 
by management
 
and the
assets are carried at the lower of carrying amount or fair value less cost to sell. Subsequent write-downs are recognized as
a valuation allowance with the offset recorded in the Consolidated Statements of
 
Operations. Carrying costs are charged to
other real estate owned expenses
 
in the accompanying Consolidated
 
Statements of Operation. Gains
 
or losses on sale of
OREO
 
are
 
recognized
 
when
 
consideration
 
has
 
been
 
exchanged,
 
all
 
closing
 
conditions
 
have
 
been
 
met
 
and
 
permanent
financing has been arranged.
 
Bank Owned Life Insurance
Bank owned
 
life insurance
 
(“BOLI”) is
 
carried at
 
the amount
 
that could
 
be realized
 
under the
 
contract at
 
the balance
sheet date, which is typically
 
cash surrender value. Changes
 
in cash surrender value are recorded
 
in non-interest income.
At December 31, 2021, the Company maintained BOLI policies with
 
five insurance carriers with a combined cash surrender
value
 
of
 
$
41.7
 
million.
 
These
 
policies
 
cover
 
certain
 
present
 
and
 
former
 
executives
 
and
 
officers,
 
the
 
Company
 
is
 
the
beneficiary of these policies.
Employee 401(k) Plan
The
 
Company
 
has
 
an
 
employee
 
401(k)
 
plan
 
covering
 
substantially
 
all
 
eligible
 
employees.
 
Employee
 
401(k)
 
plan
expense is the amount of matching contributions.
Income Taxes
Income taxes are accounted for under the
 
asset and liability method. Deferred tax
 
assets and liabilities are recognized
for the
 
future
 
tax
 
consequences
 
attributable
 
to differences
 
between the
 
financial
 
statement
 
carrying
 
amounts
 
of existing
assets and
 
liabilities and
 
their respective
 
tax bases
 
and operating
 
loss and
 
tax credit
 
carryforwards. Deferred
 
tax assets
and
 
liabilities
 
are
 
measured
 
using
 
enacted
 
tax
 
rates
 
expected
 
to
 
apply
 
to
 
taxable
 
income
 
in
 
the
 
years
 
in
 
which
 
those
temporary differences are expected to be recovered or
 
settled. The effect on deferred tax assets and liabilities
 
of a change
in tax rates is recognized in income in the period that includes
 
the enactment date.
 
Management is required to
 
assess whether a valuation
 
allowance should be established
 
on the net deferred tax
 
asset
based on the
 
consideration of
 
all available evidence
 
using a more
 
likely than not
 
standard. In its
 
evaluation, Management
considers taxable loss
 
carry-back availability, expectation of sufficient
 
taxable income, trends
 
in earnings, the
 
future reversal
of temporary differences, and available tax planning
 
strategies.
 
The Company recognizes positions taken
 
or expected to be
 
taken in a tax
 
return in accordance with existing accounting
guidance on
 
income taxes
 
which prescribes
 
a recognition threshold
 
and measurement
 
process. Interest
 
and penalties
 
on
tax liabilities, if any, would
 
be recorded in interest expense and other operating noninterest
 
expense, respectively.
Impairment of Long-Lived Assets
The Company's long-lived
 
assets, such as premises
 
and equipment, are reviewed
 
for impairment whenever
 
events or
changes in circumstances
 
indicate that
 
the carrying
 
amount of
 
an asset may
 
not be recoverable.
 
Recoverability of
 
assets
to be held and
 
used is measured by a
 
comparison of the carrying amount of
 
an asset to estimated undiscounted future
 
cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge
 
is recognized
 
by the
 
amount by
 
which the
 
carrying amount
 
of the
 
asset exceeds
 
the fair
 
value of
 
the
asset. Assets
 
to be
 
disposed of
 
would be
 
separately
 
presented in
 
the Consolidated
 
Balance Sheets
 
and reported
 
at the
lower of
 
the carrying
 
amount or
 
fair value
 
less costs
 
to sell
 
and are
 
no longer
 
depreciated. The
 
assets and
 
liabilities of
 
a
disposal group classified as held for
 
sale would be presented separately in
 
the appropriate asset and liability sections of
 
the
Consolidated Balance Sheets.
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
78
 
USCB Financial Holdings, Inc.
 
2021 10-K
Transfer of Financial Assets
Transfers of
 
financial assets
 
are accounted for
 
as sales,
 
when control over
 
the assets
 
has been surrendered.
 
Control
over
 
transferred
 
assets
 
is
 
deemed
 
to
 
be
 
surrendered
 
when
 
(i)
 
the
 
assets
 
have
 
been
 
isolated
 
from
 
the
 
Company
 
-
 
put
presumptively
 
beyond
 
the
 
reach
 
of
 
the
 
transferor
 
and
 
its
 
creditors,
 
even
 
in
 
bankruptcy
 
or
 
other
 
receivership,
 
(ii)
 
the
transferee obtains
 
the right
 
(free of conditions
 
that constrain
 
it from taking
 
advantage of
 
that right)
 
to pledge
 
or exchange
the transferred
 
assets,
 
and
 
(iii) the
 
Company
 
does not
 
maintain effective
 
control
 
over
 
the transferred
 
assets
 
through
 
an
agreement to repurchase them before their maturity or
 
the ability to unilaterally cause the holder to return specific assets.
Comprehensive Income (Loss)
Under
 
GAAP,
 
certain
 
changes
 
in
 
assets
 
and
 
liabilities,
 
such
 
as
 
unrealized
 
holding
 
gains
 
and
 
losses
 
on
 
securities
available-for-sale, are
 
excluded from
 
current period
 
earnings and
 
reported as
 
a separate
 
component of
 
the stockholders’
equity
 
section
 
of
 
the
 
Consolidated
 
Balance
 
Sheets,
 
such
 
items,
 
along
 
with
 
net
 
income
 
(loss),
 
are
 
components
 
of
comprehensive
 
income
 
(loss).
 
Additionally,
 
any
 
unrealized
 
gains
 
or
 
losses
 
on
 
transfers
 
of
 
investment
 
securities
 
from
available-for-sale to held-to-maturity are recorded to accumulated other comprehensive
 
income on the date of transfer and
amortized over the remaining life of
 
each security.
 
The amortization of the unrealized
 
gain or loss on transferred securities
is reported as a component of comprehensive income
 
(loss). See Note 2 “Investment Securities” for further discussion.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings per Common Share
Basic earnings
 
per common
 
share is
 
net income
 
available to
 
common stockholders
 
divided by
 
the weighted
 
average
number
 
of
 
common
 
shares
 
outstanding
 
during
 
the
 
period.
 
Diluted
 
earnings
 
per
 
common
 
share
 
included
 
the
 
effect
 
of
additional potential common shares issuable under vested stock options. Basic and diluted earnings per share are updated
to reflect the effect of stock splits as occurred. See Note 14 “Earnings Per Share” for additional information on earnings per
common share. See Note 13 “Stockholders’ Equity” for further
 
discussion on stock splits.
Interest Income
Interest income is recognized as earned, based upon the principal
 
amount outstanding, on an accrual basis.
Operating Segments
While the Company monitors
 
the revenue streams of
 
the various products
 
and services, operations
 
are managed and
financial performance
 
is evaluated on
 
a Company wide
 
basis. Operating results
 
of the individual
 
products are
 
not used to
make resource allocations or performance decisions by Company
 
management.
Stock-Based Compensation
Stock based compensation accounting guidance requires
 
that the compensation cost relating to share-based payment
transactions be recognized in the accompanying Consolidated
 
Financial Statements. That cost will be measured
 
based on
the grant
 
date fair
 
value of
 
the equity
 
or liability
 
instruments issued.
 
The stock-based
 
compensation accounting
 
guidance
covers
 
a
 
wide
 
range
 
of
 
share-based
 
compensation
 
arrangements
 
including
 
stock
 
options,
 
restricted
 
share
 
plans,
performance-based awards, share appreciation rights, and
 
employee share purchase plans.
The stock-based compensation accounting guidance
 
requires that compensation cost
 
for all stock
 
awards be calculated
and recognized
 
over the
 
employees' service period,
 
generally defined as
 
the vesting
 
period. For
 
awards with graded-vesting,
compensation cost
 
is recog
 
nized on
 
a straight-line
 
basis over
 
the
 
requisite service
 
period for
 
the
 
entire award.
 
A Black-
Scholes model is used to estimate the fair value of stock
 
options.
Loss Contingencies
Loss
 
contingencies,
 
including
 
claims
 
and
 
legal
 
actions
 
arising
 
in
 
the
 
normal
 
course
 
of
 
business,
 
are
 
recorded
 
as
liabilities when the
 
likelihood of loss is
 
probable, and an
 
amount or range of
 
loss can be
 
reasonably estimated. In the
 
opinion
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
79
 
USCB Financial Holdings, Inc.
 
2021 10-K
of management, none of these actions, either individually or in the aggregate, is expected to have a material adverse effect
on the Company’s Consolidated Financial Statements.
 
See Note 18 “Loss Contingencies” for further details.
Dividend Restrictions
Banking
 
regulations
 
require
 
maintaining
 
certain
 
capital
 
levels
 
and
 
may
 
limit
 
the
 
dividends
 
paid
 
by
 
the
 
Bank
 
to
 
the
Company or by the Company to the shareholders.
Fair Value Measurements
Fair values
 
of financial
 
instruments are
 
estimated using
 
relevant market
 
information and
 
other assumptions,
 
as more
fully disclosed in Note
 
12 “Fair Value
 
Measurements”. Fair value estimates
 
involve uncertainties and
 
matters of significant
judgment. Changes in assumptions or in market conditions
 
could significantly affect the estimates.
Derivative Instruments
Derivative financial instruments are
 
carried at fair
 
value and reflect
 
the estimated amount that
 
would have been
 
received
to
 
terminate
 
these
 
contracts
 
at
 
the
 
reporting
 
date
 
based
 
upon
 
pricing
 
or
 
valuation
 
models
 
applied
 
to
 
current
 
market
information.
The
 
Company
 
enters
 
into
 
interest
 
rate
 
swaps
 
to
 
provide
 
commercial
 
loan
 
clients
 
the
 
ability
 
to
 
swap
 
from
 
a
 
variable
interest rate
 
to a
 
fixed rate.
 
The Company
 
enter
 
into a
 
floating-rate
 
loan with
 
a
 
customer with
 
a separately
 
issued swap
agreement allowing
 
the customer
 
to convert
 
floating
 
payments of
 
the loan
 
into a
 
fixed interest
 
rate. To
 
mitigate risk,
 
the
Company will enter into a matching agreement with a
 
third party to offset the exposure on the
 
customer agreement. These
swaps are
 
not considered
 
to be
 
qualified hedging
 
transactions and
 
the unmatched
 
unrealized gain
 
or loss
 
is recorded
 
in
other noninterest income.
 
Revenue from Contracts with Customers
Revenue from
 
contracts with customers
 
is recognized in
 
an amount that
 
reflects the consideration
 
the Company expects
to receive for the
 
services the Company
 
provides to its
 
customers. The main
 
revenue earned by
 
the Company from
 
loans
and investment
 
securities
 
are excluded
 
from the
 
accounting standard
 
update “Revenue
 
from Contracts
 
with Customers”.
 
Deposit and
 
service charge
 
fees, consisting
 
of primarily
 
monthly maintenance
 
fees, wire
 
fees, ATM
 
interchange fees
 
and
other transaction-based fees, are the
 
most significant types of revenue within
 
the accounting standard update.
 
Revenue is
recognized when the service provided by the
 
Company is complete. The aggregate amount
 
of revenue within the scope of
this standard that is received from sources other than deposit
 
service charges and fees in not material.
 
Cash Flow Statement
The Company reports the net activity rather than gross activity in the Consolidated
 
Statements of Cash Flows. The net
cash flows
 
are reported for
 
loans held
 
for investment, accrued
 
interest receivable, deferred
 
tax asset, other
 
assets, customer
deposits, accrued interest payable, other liabilities, and proceeds
 
from issuance of Class A common shares.
Reclassifications
Certain
 
amounts
 
in
 
the
 
Consolidated
 
Financial
 
Statements
 
have
 
been
 
reclassified
 
to
 
conform
 
to
 
the
 
current
presentation. Reclassifications had no impact on the net income
 
or stockholders’ equity of the Company.
Recently Issued Accounting Standards – Not Yet
 
Adopted
Measurement of Credit Losses on Financial Instruments
In June
 
2016, the FASB issued
 
ASU 2016-13, Financial
 
Instruments - Credit
 
Losses (Topic 326); Measurement of
 
Credit
Losses on Financial Instruments. This accounting standard update (“ASU” or “Update”)
 
on accounting for current expected
credit
 
losses
 
on
 
financial
 
instruments
 
(“CECL”)
 
will
 
replace
 
the
 
current
 
probable
 
incurred
 
loss
 
impairment
 
methodology
under U.S. GAAP
 
with a methodology
 
that reflects the
 
expected credit losses.
 
The Update is
 
intended to provide
 
financial
statement
 
users
 
with
 
more
 
decision-useful
 
information
 
about
 
expected
 
credit
 
losses.
 
This
 
Update
 
is
 
applicable
 
to
 
the
Company
 
on
 
a modified
 
retrospective
 
basis
 
for
 
interim
 
and
 
annual
 
periods
 
in
 
fiscal
 
years
 
beginning
 
after
 
December 15,
2022. Early adoption is permitted for fiscal years beginning after December 15, 2019, including interim periods within those
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
80
 
USCB Financial Holdings, Inc.
 
2021 10-K
fiscal
 
years.
 
The
 
Company
 
expects
 
to
 
adopt
 
this
 
ASU
 
on
 
January 1,
 
2023.
 
The
 
impact
 
of
 
adoption
 
on
 
the
 
Company’s
financial statements
 
will depend on
 
the composition
 
of the loan
 
and investment
 
securities portfolio
 
as of January
 
1, 2023,
general economic conditions,
 
and other factors that
 
are not known at
 
this time. Although
 
management is in the
 
process of
evaluating the impact of
 
adoption of this ASU on
 
its consolidated financial statements,
 
management does believe that
 
this
ASU will lead to significant changes
 
in accounting policies and disclosures
 
related to, and the methods used
 
in estimating,
the ACL.
 
To
 
date, the
 
Company has
 
executed a
 
detailed implementation
 
plan through
 
the adoption
 
date, implemented
 
a
software solution to assist with the CECL estimation process,
 
and has completed a data gap analysis.
Reference Rate Reform
In
 
March
 
2020,
 
the
 
FASB
 
issued
 
ASU
 
2020-04,
 
Reference
 
Rate
 
Reform
 
(Topic
 
848),
 
Facilitation
 
of
 
the
 
Effects
 
of
Reference Rate Reform
 
on Financial Reporting.
 
In January 2021,
 
the FASB
 
clarified the scope
 
of this guidance
 
with ASU
2021-01 which provides optional
 
guidance for a limited
 
period of time to
 
ease the burden in
 
accounting for (or
 
recognizing
the effects
 
of) reference
 
rate
 
reform on
 
financial
 
reporting.
 
This
 
ASU is
 
effective
 
March 12,
 
2020 through
 
December 31,
2022. The
 
Company is
 
evaluating the
 
impact of
 
this ASU
 
and has
 
not yet
 
determined whether
 
LIBOR transition
 
and this
ASU will have material effects on our business
 
operations and consolidated financial statements.
2.
 
INVESTMENT SECURITIES
 
The following
 
tables present
 
a summary
 
of the amortized
 
cost, unrealized
 
or unrecognized
 
gains and
 
losses,
 
and fair
value of investment securities at the dates indicated (in
 
thousands):
December 31, 2021
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency - SBA
$
10,564
$
6
$
(50)
$
10,520
Collateralized mortgage obligations
160,506
22
(3,699)
156,829
Mortgage-backed securities - Residential
120,643
228
(2,029)
118,842
Mortgage-backed securities - Commercial
49,905
820
(608)
50,117
Municipal securities
25,164
6
(894)
24,276
Bank subordinated debt securities
27,003
1,418
(13)
28,408
Corporate bonds
12,068
482
-
12,550
$
405,853
$
2,982
$
(7,293)
$
401,542
Held-to-maturity:
U.S. Government Agency - SBA
$
12,004
$
-
$
(363)
$
11,641
U.S. Government Agency
 
22,501
14
(252)
22,263
Collateralized mortgage obligations
44,820
-
(1,021)
43,799
Mortgage-backed securities - Residential
26,920
-
(568)
26,352
Mortgage-backed securities - Commercial
3,103
-
(90)
3,013
Corporate bonds
13,310
-
(221)
13,089
$
122,658
$
14
$
(2,515)
$
120,157
December 31, 2020
Available-for-sale:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. Government Agency -SBA
$
1,488
$
64
$
-
$
1,552
U.S. Government Agency
20,196
4
(168)
20,032
Collateralized mortgage obligations
104,426
386
(162)
104,650
Mortgage-backed securities - Residential
80,110
1,368
(177)
81,301
Mortgage-backed securities - Commercial
45,802
2,549
(20)
48,331
Municipal securities
24,230
39
(58)
24,211
Bank subordinated debt securities
24,004
631
(5)
24,630
Corporate bonds
27,733
1,882
-
29,615
$
327,989
$
6,923
$
(590)
$
334,322
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
81
 
USCB Financial Holdings, Inc.
 
2021 10-K
For the year
 
ended December 31,
 
2021, there were
28
 
investment securities
 
that were transferred
 
from available-for-
sale
 
(“AFS”)
 
to
 
held-to-maturity
 
(“HTM”)
 
with
 
an
 
amortized
 
cost
 
basis
 
and
 
fair
 
value
 
amount
 
of
 
$
67.6
 
million
 
and
$
68.7
 
million, respectively.
 
On the
 
date of
 
transfer,
 
these securities
 
had a
 
total net
 
unrealized gain
 
of $
1.1
 
million with
 
no
impact to net income.
Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer.
The unrealized gain or loss at the
 
date of transfer is retained in
 
accumulated other comprehensive income
 
(“AOCI”) and in
the carrying value of the held-to-maturity securities. Such amounts are amortized
 
over the remaining life of the security.
 
As
of December 31,
 
2021, total
 
amortization
 
out of
 
AOCI for
 
the net
 
unrealized
 
gains
 
on securities
 
transferred
 
from AFS
 
to
HTM was $
108
 
thousand.
 
The following
 
table presents
 
the proceeds,
 
realized gross
 
gains and
 
realized gross
 
losses on
 
sales and
 
calls of
 
AFS
debt securities for the years ended December 31, 2021 and
 
2020 (in thousands):
Available-for-sale:
2021
2020
Proceeds from sales and call of securities
$
51,974
$
57,309
Gross Gains
$
545
$
862
Gross Losses
(331)
(428)
Net realized gains
$
214
$
434
The
 
amortized
 
cost
 
and
 
fair
 
value
 
of
 
investment
 
securities,
 
by
 
contractual
 
maturity,
 
are
 
shown
 
below
 
for
 
the
 
date
indicated (in thousands).
 
Actual maturities may
 
differ from contractual
 
maturities because borrowers
 
may have the right
 
to
call or prepay
 
obligations with or
 
without call or
 
prepayment penalties. Securities not
 
due at a
 
single maturity date are
 
shown
separately.
 
Available-for-sale
Held-to-maturity
December 31, 2021:
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Due within one year
$
1,992
$
2,036
$
2,017
$
2,013
Due after one year through five years
5,983
6,288
11,293
11,076
Due after five years through ten years
31,096
32,512
-
-
Due after ten years
25,164
24,398
-
-
U.S. Government Agency - SBA
10,564
10,520
12,004
11,641
U.S. Government Agency
 
 
-
 
 
-
 
22,501
22,263
Collateralized mortgage obligations
160,506
156,829
44,820
43,799
Mortgage-backed securities - Residential
 
120,643
118,842
26,920
26,352
Mortgage-backed securities - Commercial
 
49,905
50,117
3,103
3,013
$
405,853
$
401,542
$
122,658
$
120,157
At December 31,
 
2021 and
 
2020, there
 
were no
 
securities to
 
any one
 
issuer,
 
in an
 
amount greater
 
than 10%
 
of total
stockholders’ equity
 
other than
 
the United
 
States Government
 
and Government
 
Agencies. All
 
the collateralized
 
mortgage
obligations
 
and
 
mortgage-backed
 
securities
 
are
 
issued
 
by
 
United
 
States
 
sponsored
 
entities
 
at
 
December 31,
 
2021
 
and
2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
82
 
USCB Financial Holdings, Inc.
 
2021 10-K
Information pertaining
 
to investment
 
securities with
 
gross unrealized
 
losses, aggregated
 
by investment
 
category
 
and
length of
 
time that
 
those
 
individual securities
 
have been
 
in a
 
continuous
 
loss position,
 
are presented
 
as of
 
the following
dates (in thousands):
December 31, 2021
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency - SBA
$
19,165
$
(146)
$
-
$
-
$
19,165
$
(146)
U.S. Government Agency
 
6,786
(108)
15,477
(516)
22,263
(624)
Collateralized mortgage obligations
155,668
(3,223)
38,459
(1,497)
194,127
(4,720)
Mortgage-backed securities -
Residential
88,772
(1,178)
37,373
(1,274)
126,145
(2,452)
Mortgage-backed securities -
Commercial
25,289
(318)
7,507
(309)
32,796
(627)
Municipal securities
 
11,292
(395)
11,978
(499)
23,270
(894)
Bank subordinated debt securities
4,487
(13)
-
-
4,487
(13)
$
311,459
$
(5,381)
$
110,794
$
(4,095)
$
422,253
$
(9,476)
December 31, 2020
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government Agency - SBA
$
-
$
-
$
-
$
-
$
-
$
-
U.S. Government Agency
 
14,030
(168)
-
-
14,030
(168)
Collateralized mortgage obligations
49,185
(162)
-
-
49,185
(162)
Mortgage-backed securities -
41,611
(177)
-
-
41,611
(177)
Mortgage-backed securities -
8,219
(20)
-
-
8,219
(20)
Municipal securities
 
3,878
(58)
-
-
3,878
(58)
Bank subordinated debt securities
995
(5)
-
-
995
(5)
$
117,918
$
(590)
$
-
$
-
$
117,918
$
(590)
The unrealized
 
losses associated
 
with $
66.4
 
million of
 
investment securities
 
transferred from
 
the AFS
 
portfolio to
 
the
HTM portfolio during
 
the third quarter
 
of 2021 represent
 
unrealized losses
 
since the date
 
of purchase, independent
 
of the
impact associated with changes in the cost basis upon
 
transfer between portfolios.
The Company performs a review
 
of the investments that have
 
an unrealized loss to determine
 
whether there have been
any changes in the
 
economic circumstance of the security
 
issuer to indicate that
 
the unrealized loss is
 
impaired on an other-
than-temporary (“OTTI”) basis. Management considers several factors in their analysis including (i) severity and duration of
the impairment, (ii) credit
 
rating of the security
 
including any downgrade,
 
(iii) intent to sell
 
the security,
 
or if it is
 
more likely
than not that it will be required to
 
sell the security before recovery,
 
(iv) whether there have been any payment
 
defaults and
(v) underlying guarantor of the securities.
The Company does not consider these
 
investments to be OTTI as the
 
decline in market value is attributable
 
to changes
in market
 
interest rates
 
and not
 
credit quality,
 
and because
 
the Company
 
does not
 
intend to
 
sell the
 
investments before
recovery of
 
their amortized
 
cost basis,
 
which may
 
be maturity,
 
and it
 
is more
 
likely than
 
not that
 
the Company
 
will not
 
be
required to sell the securities before maturity.
As of December 31, 2021, the Company maintains a master repurchase agreement with a public banking institution for
up
 
to
 
$
20.0
 
million
 
fully
 
guaranteed
 
with
 
investment
 
securities
 
upon
 
withdrawal.
 
Any
 
amounts
 
borrowed
 
would
 
be
 
at
 
a
variable interest rate
 
based on prevailing
 
rates at the
 
time funding is
 
requested. At
 
December 31, 2021, the
 
Company did
not have any securities pledged under this agreement.
In 2018, the Company became a Qualified Public Depositor (“QPD”) with the State of Florida. As a QPD, the Company
has the
 
authority to
 
legally maintain public
 
deposits from cities,
 
municipalities, and the
 
State of
 
Florida. These public
 
deposits
are
 
secured
 
by
 
securities
 
pledged
 
to
 
the
 
State
 
of
 
Florida
 
at
 
a
 
ratio
 
of
 
25%
 
of
 
the
 
outstanding
 
uninsured
 
deposits.
 
The
Company must also maintain a minimum amount of
 
pledged securities to be in the program.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
83
 
USCB Financial Holdings, Inc.
 
2021 10-K
At December 31, 2021, the
 
Company had
eleven
 
Corporate Bonds with a
 
fair value of
 
$
20.4
 
million pledged to the
 
State
of Florida under the public funds program. The Company held
 
a total of $
37.3
 
million in public funds at December 31, 2021.
At December 31, 2020, the Company had
four
 
Corporate Bonds with a fair value of $
7.8
 
million pledged to the State of
Florida under the public funds program. The Company held
 
a total of $
14.1
 
million in public funds at December 31, 2020.
3.
 
LOANS
The following table is a summary of the distribution of
 
loans held for investment by type (in thousands):
 
December 31, 2021
December 31, 2020
Total
Percent of
Total
Total
Percent of
Total
Residential Real Estate
$
201,359
16.9
%
$
232,754
22.3
%
Commercial Real Estate
704,988
59.2
%
606,425
58.2
%
Commercial and Industrial
146,592
12.3
%
157,330
15.1
%
Foreign Banks
59,491
5.0
%
38,999
3.7
%
Consumer and Other
 
79,229
6.6
%
5,507
0.5
%
Total
 
gross loans
1,191,659
100.0
%
1,041,015
99.8
%
Less: Unearned income
1,578
2,511
Total
 
loans net of unearned income
1,190,081
1,038,504
Less: Allowance for credit losses
15,057
15,086
Total
 
net loans
$
1,175,024
$
1,023,418
At December 31, 2021 and 2020, the Company had $
185.1
 
million and $
250.7
 
million, respectively,
 
of commercial real
estate and residential mortgage loans pledged as collateral on lines of credit with the FHLB
 
and the Federal Reserve Bank
of Atlanta. At December 31, 2021 and
 
2020, the Company had one loan
 
for $
1.2
 
million and $
0
 
million, respectively,
 
in the
process of foreclosure.
The Company was a participant
 
of the Small Business Administration’s
 
(“SBA”) Paycheck Protection Program
 
(“PPP”)
loans. These
 
loans were
 
designed to
 
provide a
 
direct incentive
 
for small
 
businesses to
 
keep their
 
workers on
 
payroll and
had to be used towards payroll cost, mortgage interest, rent, utilities and other costs
 
related to COVID-19. These loans are
forgivable under specific criteria as determined by the SBA.
 
The Company had PPP loans of $
42.4
 
million at December 31,
2021
 
and
 
$
104.8
 
million
 
at
 
December 31,
 
2020,
 
which
 
are
 
categorized
 
as
 
commercial
 
and
 
industrial
 
loans.
 
These
 
PPP
loans had deferred loan fees of $
1.5
 
million at December 31, 2021 and $
1.8
 
million at December 31, 2020.
The
 
Company
 
recognized
 
$
4.5
 
million
 
and
 
$
3.1
 
million
 
in
 
PPP
 
loan
 
fees
 
and
 
interest
 
income
 
for
 
the
 
years
 
ended
December 31,
 
2021
 
and
 
2020,
 
respectively,
 
which
 
is
 
reported
 
under
 
loans,
 
including
 
fees
 
within
 
the
 
Consolidated
Statements of Operations.
 
The
 
Company
 
segments
 
the
 
portfolio
 
by
 
pools
 
grouping
 
loans
 
that
 
share
 
similar
 
risk
 
characteristics
 
and
 
employing
collateral type
 
and lien
 
position to
 
group loans
 
according to
 
risk. The
 
Company determines
 
historical
 
loss rates
 
for each
loan
 
pool
 
based
 
on
 
its
 
own
 
loss
 
experience.
 
In
 
estimating
 
credit
 
losses,
 
the
 
Company
 
also
 
considers
 
qualitative
 
and
environmental factors that may cause estimated credit losses
 
for the loan portfolio to differ from historical
 
losses.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
84
 
USCB Financial Holdings, Inc.
 
2021 10-K
Changes
 
in
 
the
 
allowance
 
for
 
credit
 
losses
 
for
 
the
 
years
 
ended
 
December 31,
 
2021
 
and
 
2020
 
are
 
as
 
follows
 
(in
thousands):
 
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2021:
Beginning balance
$
3,408
$
9,453
$
1,689
$
348
$
188
$
15,086
Provision for credit losses
(919)
(695)
955
109
390
(160)
Recoveries
238
 
-
149
 
-
5
392
Charge-offs
(229)
 
-
(18)
 
-
(14)
(261)
Ending Balance
 
$
2,498
$
8,758
$
2,775
$
457
$
569
$
15,057
December 31, 2020:
Beginning balance
$
3,749
$
6,591
$
1,214
$
332
$
112
$
11,998
Provision for credit losses
(36)
2,861
321
16
88
3,250
Recoveries
168
1
307
 
-
18
494
Charge-offs
(473)
-
(153)
 
-
(30)
(656)
Ending Balance
 
$
3,408
$
9,453
$
1,689
$
348
$
188
$
15,086
Allowance for credit losses and the outstanding balances in
 
loans as of December 31, 2021 and 2020 are as
 
follows (in
thousands):
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Foreign
Banks
Consumer
and Other
Total
December 31, 2021:
Allowance for credit losses:
Individually evaluated for impairment
$
178
$
-
$
71
$
-
$
111
$
360
Collectively evaluated for impairment
2,320
8,758
2,704
457
458
14,697
Balances, end of period
$
2,498
$
8,758
$
2,775
$
457
$
569
$
15,057
Loans:
Individually evaluated for impairment
$
9,006
$
696
$
141
$
-
$
224
$
10,067
Collectively evaluated for impairment
192,353
704,292
146,451
59,491
79,005
1,181,592
Balances, end of period
$
201,359
$
704,988
$
146,592
$
59,491
$
79,229
$
1,191,659
December 31, 2020:
Allowance for credit losses:
Individually evaluated for impairment
$
220
$
-
$
108
$
-
$
125
$
453
Collectively evaluated for impairment
3,188
9,453
1,581
348
63
14,633
Balances, end of period
$
3,408
$
9,453
$
1,689
$
348
$
188
$
15,086
Loans:
Individually evaluated for impairment
$
10,439
$
733
$
202
$
-
$
278
$
11,652
Collectively evaluated for impairment
222,315
605,692
157,128
38,999
5,229
1,029,363
Balances, end of period
$
232,754
$
606,425
$
157,330
$
38,999
$
5,507
$
1,041,015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
85
 
USCB Financial Holdings, Inc.
 
2021 10-K
Credit Quality Indicators
The Company grades loans based on the estimated capability of the borrower to repay the contractual obligation of the
loan agreement based
 
on relevant information
 
which may include:
 
current financial information
 
on the borrower,
 
historical
payment
 
experience,
 
credit
 
documentation
 
and
 
other
 
current
 
economic
 
trends.
 
Internal
 
credit
 
risk
 
grades
 
are
 
evaluated
periodically.
 
The Company's internally assigned credit risk grades are as follows:
Pass
– Loans indicate different levels of satisfactory
 
financial condition and performance.
 
Special Mention
 
– Loans classified as special mention have a potential weakness
 
that deserves management’s
close attention. If left uncorrected, these potential weaknesses
 
may result in deterioration of the repayment
prospects for the loan or of the institution’s
 
credit position at some future date.
 
Substandard
– Loans classified as substandard are inadequately protected
 
by the current net worth and paying
capacity of the obligator or of the collateral pledged, if
 
any. Loans so classi
 
fied have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt.
 
They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are
 
not corrected.
 
Doubtful
 
– Loans classified as doubtful have all the weaknesses inherent
 
in those classified at substandard, with
the added characteristic that the weaknesses make collection
 
or liquidation in full on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
 
Loss
– Loans classified as loss are considered uncollectible.
Loan credit exposures by internally assigned grades are
 
presented below for the periods indicated (in thousands):
As of December 31, 2021
Pass
Special
Mention
Substandard
Doubtful
Total Loans
Residential real estate:
Home equity line of credit ("HELOC") and other
$
701
$
-
$
-
$
-
$
701
1-4 family residential
130,840
-
4,581
-
135,421
Condo residential
65,237
-
-
-
65,237
196,778
-
4,581
-
201,359
Commercial real estate:
Land and construction
24,581
-
-
-
24,581
Multi family residential
127,489
-
-
-
127,489
Condo commercial
41,983
-
417
-
42,400
Commercial property
509,189
1,222
-
-
510,411
Leasehold improvements
107
-
-
-
107
703,349
1,222
417
-
704,988
Commercial and industrial:
(1)
Secured
97,605
-
536
-
98,141
Unsecured
48,434
-
17
-
48,451
146,039
-
553
-
146,592
Foreign banks
59,491
-
-
-
59,491
Consumer and other loans
79,005
-
224
-
79,229
Total
$
1,184,662
$
1,222
$
5,775
$
-
$
1,191,659
(1)
 
All outstanding PPP loans were internally graded
 
pass.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
86
 
USCB Financial Holdings, Inc.
 
2021 10-K
As of December 31, 2020
Pass
Special
Mention
Substandard
Doubtful
Total Loans
Residential real estate:
Home equity line of credit ("HELOC") and other
$
905
$
-
$
-
$
-
$
905
1-4 family residential
151,940
-
6,748
-
158,688
Condo residential
73,016
-
145
-
73,161
225,861
-
6,893
-
232,754
Commercial real estate:
Land and construction
37,348
-
-
-
37,348
Multi family residential
111,047
-
-
-
111,047
Condo commercial
37,171
-
442
-
37,613
Commercial property
415,967
-
803
-
416,770
Leasehold improvements
3,647
-
-
-
3,647
605,180
-
1,245
-
606,425
Commercial and industrial:
(1)
Secured
44,255
-
202
-
44,457
Unsecured
112,842
-
31
-
112,873
157,097
-
233
-
157,330
Foreign banks
38,999
-
-
-
38,999
Consumer and other loans
5,229
-
278
-
5,507
Total
$
1,032,366
$
-
$
8,649
$
-
$
1,041,015
(1)
 
All outstanding PPP loans were internally graded
 
pass.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
87
 
USCB Financial Holdings, Inc.
 
2021 10-K
Loan Aging
The Company
 
also considers the
 
performance of loans
 
in grading
 
and in
 
evaluating the
 
credit quality
 
of the
 
loan portfolio.
The Company
 
analyzes credit
 
quality and
 
loan grades
 
based on
 
payment performance
 
and the
 
aging status
 
of the
 
loan.
 
The following table include an aging analysis
 
of accruing loans and total non-accruing
 
loans as of December 31, 2021 and
2020 (in thousands):
Accruing
As of December 31, 2021:
Current
Past Due 30-
89 Days
Past Due >
90 Days and
Still
Accruing
Total
Accruing
Non-Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
701
$
 
-
$
-
$
701
$
-
$
701
1-4 family residential
133,942
289
-
134,231
1,190
135,421
Condo residential
64,243
994
-
65,237
-
65,237
198,886
1,283
-
200,169
1,190
201,359
Commercial real estate:
Land and construction
24,581
 
-
-
24,581
-
24,581
Multi family residential
127,053
436
-
127,489
-
127,489
Condo commercial
42,400
 
-
-
42,400
-
42,400
Commercial property
510,411
 
-
-
510,411
-
510,411
Leasehold improvements
107
 
-
-
107
-
107
704,552
436
-
704,988
-
704,988
Commercial and industrial:
Secured
98,141
-
-
98,141
-
98,141
Unsecured
48,041
410
-
48,451
-
48,451
146,182
410
-
146,592
-
146,592
Foreign banks
59,491
-
-
59,491
-
59,491
Consumer and other
78,969
260
-
79,229
-
79,229
Total
$
1,188,080
$
2,389
$
-
$
1,190,469
$
1,190
$
1,191,659
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
88
 
USCB Financial Holdings, Inc.
 
2021 10-K
Accruing
As of December 31, 2020:
Current
Past Due
30-89 Days
Past Due >
90 Days and
Still
Accruing
Total
Accruing
Non-Accrual
Total Loans
Residential real estate:
Home equity line of credit and other
$
905
$
-
$
-
$
905
$
-
$
905
1-4 family residential
154,779
2,354
-
157,133
1,555
158,688
Condo residential
72,625
536
-
73,161
 
-
 
73,161
228,309
2,890
-
231,199
1,555
232,754
Commercial real estate:
Land and construction
37,348
-
-
37,348
-
37,348
Multi family residential
111,047
-
-
111,047
-
111,047
Condo commercial
37,475
138
-
37,613
-
37,613
Commercial property
416,770
-
-
416,770
-
416,770
Leasehold improvements
3,647
-
-
3,647
-
3,647
606,287
138
-
606,425
-
606,425
Commercial and industrial:
Secured
44,378
56
-
44,434
23
44,457
Unsecured
112,873
-
-
112,873
-
112,873
157,251
56
-
157,307
23
157,330
Foreign banks
38,999
-
-
38,999
-
38,999
Consumer and other
5,198
309
-
5,507
-
5,507
Total
$
1,036,044
$
3,393
$
-
$
1,039,437
$
1,578
$
1,041,015
There was
no
 
interest income recognized attributable to
 
nonaccrual loans outstanding at
 
December 31, 2021 and 2020.
Interest
 
income
 
on
 
these
 
loans
 
for
 
the
 
years
 
ended
 
December 31,
 
2021
 
and
 
2020,
 
would
 
have
 
been
 
approximately
$
5
 
thousand and $
47
 
thousand, respectively,
 
had these loans performed in accordance with their original
 
terms.
 
There were no loans over 90 days past due and accruing
 
as of December 31, 2021 and 2020.
Impaired Loans
The following table includes
 
the unpaid principal balances
 
for impaired loans with
 
the associated allowance amount,
 
if
applicable, on the basis of impairment methodology for the dates
 
indicated (in thousands):
December 31, 2021
December 31, 2020
Unpaid
Principal
Balance
Net
Investment
Balance
Valuation
Allowance
Unpaid
Principal
Balance
Net
Investment
Balance
Valuation
Allowance
Impaired Loans with No Specific Allowance:
Residential real estate
$
5,021
$
5,035
$
-
$
5,100
$
5,093
$
-
Commercial real estate
696
695
-
733
732
-
5,717
5,730
-
5,833
5,825
-
Impaired Loans with Specific Allowance:
Residential real estate
3,985
3,950
178
5,339
5,302
220
Commercial and industrial
141
141
71
202
202
108
Consumer and other
224
224
111
278
278
125
4,350
4,315
360
5,819
5,782
453
Total
$
10,067
$
10,045
$
360
$
11,652
$
11,607
$
453
Net investment balance is the unpaid principal balance
 
of the loan adjusted for the remaining net deferred loan
 
fees.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
89
 
USCB Financial Holdings, Inc.
 
2021 10-K
The following table presents the
 
average recorded investment balance on impaired
 
loans as of December 31, 2021
 
and
2020 (in thousands):
2021
2020
Residential real estate
$
8,791
$
6,869
Commercial real estate
714
1,722
Commercial and industrial
178
230
Consumer and other
254
56
Total
$
9,937
$
8,877
Interest income
 
recognized on
 
impaired loans
 
for the
 
years ended December
 
31, 2021
 
and 2020
 
was $
415
 
thousand
and $
446
 
thousand, respectively.
Troubled Debt Restructuring
A troubled
 
debt
 
restructuring
 
(“TDR”)
 
occurs
 
when
 
the
 
Company
 
has agreed
 
to
 
a loan
 
modification
 
in
 
the
 
form
 
of
 
a
concession for a borrower who is experiencing financial difficulty.
 
The following table presents performing and non-performing
 
TDRs for the dates indicated (in thousands):
December 31, 2021
December 31, 2020
Accrual Status
Non-Accrual
Status
Total TDRs
Accrual Status
Non-Accrual
Status
Total TDRs
Residential real estate
$
7,815
$
-
$
7,815
$
8,884
$
777
$
9,661
Commercial real estate
696
-
696
733
-
733
Commercial and industrial
141
-
141
179
23
202
Consumer and other
 
224
-
224
278
-
278
Total
$
8,876
$
-
$
8,876
$
10,074
$
800
$
10,874
The Company had
 
allocated $
360
 
thousand and $
453
 
thousand of specific
 
allowance for TDR
 
loans at December 31,
2021
 
and
 
2020,
 
respectively.
 
Charge-offs
 
on
 
TDR
 
loans
 
for
 
the
 
years
 
ended
 
December 31,
 
2021
 
and
 
2020
 
was
 
$
18
thousand and $
153
 
thousand, respectively.
 
There was
no
 
commitment to lend additional funds to these TDR
 
customers.
The Company did not have any new TDR loans for the year ended December 31, 2021. For the year ended December
31, 2020, the Company had the following new TDR loans
 
(in thousands, except number of loans):
Recorded Investment Prior to Modification
Recorded Investment After Modification
Number of Loans
Total Modifications
Number of Loans
Total Modifications
Residential real estate
6
$
5,679
6
$
5,679
Commercial real estate
1
451
1
451
Commercial and industrial
2
255
2
255
Consumer and other
1
279
1
275
10
$
6,664
10
$
6,660
Modifications to
 
loans can
 
be made
 
for rate,
 
term, payment,
 
conversion of
 
loan to
 
interest only
 
for a
 
limited time
 
or a
combination to include more than one type of modification.
 
As of December 31, 2021 and 2020, there were no defaults on loans which were modified as a TDR within
 
the prior 12
months.
CARES Act Modifications
The
 
Company
 
provided
 
financial
 
relief
 
to
 
borrowers
 
impacted
 
by
 
COVID-19
 
and
 
provided
 
modifications
 
to
 
include
interest
 
only
 
deferral
 
or
 
principal
 
and
 
interest
 
deferral.
 
These
 
modifications
 
are
 
excluded
 
from
 
TDR
 
classification
 
under
Section 4013 of the CARES Act or under applicable interagency
 
guidance of the federal banking regulators.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
90
 
USCB Financial Holdings, Inc.
 
2021 10-K
During the year ended December 31, 2020, the Company had modified
132
 
loans with outstanding balances of $
185.9
million. At December 31, 2020,
two
 
modified loans totaling $
777
 
thousand were classified as non-accrual and
two
 
modified
loans totaling $
1.4
 
million were past due.
During
 
the
 
year
 
ended
 
December 31,
 
2021,
 
the
 
Company
 
did
 
not
 
modify
 
any
 
new
 
loans
 
to
 
borrowers
 
impacted
 
by
COVID-19. At December 31, 2021, there was
one
 
loan past due for $
289
 
thousand that was modified in 2020.
4.
 
LEASES
The
 
Company
 
enters
 
into
 
leases
 
in
 
the
 
normal
 
course
 
of
 
business
 
primarily
 
for
 
banking
 
centers
 
and
 
back-office
operations. As of
 
December 31, 2021, the
 
Company leased nine
 
of the ten
 
banking centers and
 
the headquarter building.
The Company
 
is obligated
 
under non-cancelable
 
operating leases
 
for these
 
premises with
 
expiration dates
 
ranging from
2022 to 2036, many of these leases have extension
 
clauses which the Company could exercise which
 
would extend these
dates.
 
The Company
 
has classified
 
all leases as
 
operating leases.
 
Lease expense
 
for operating
 
leases are
 
recognized on
 
a
straight-line basis over
 
the lease term.
 
Right-of-use (“ROU”)
 
assets represent the
 
right to use
 
the underlying
 
asset for the
lease
 
term
 
and
 
lease
 
liabilities
 
represent
 
the
 
obligation
 
to
 
make
 
lease
 
payments
 
arising
 
from
 
the
 
lease.
 
The
 
Company
elected the short-term
 
lease recognition exemption
 
for all leases
 
that qualify,
 
meaning those with
 
terms under 12
 
months.
ROU assets or lease liabilities are not to be recognized
 
for short-term leases.
ROU assets and
 
lease liabilities are
 
recognized at the lease
 
commencement date based on
 
the estimated present value
of lease payments
 
over the
 
lease term.
 
In the Company’s
 
Consolidated Balance
 
Sheets, ROU
 
assets are
 
reported under
other assets while lease liabilities are classified under
 
accrued interest and other liabilities.
 
As
 
most
 
of
 
the
 
Company’s
 
leases
 
do
 
not
 
provide
 
an
 
implicit
 
rate,
 
the
 
incremental
 
borrowing
 
rate
 
based
 
on
 
the
information available
 
at commencement
 
date is
 
used. The
 
Company’s
 
incremental borrowing
 
rate is
 
based on
 
the FHLB
advance rate matching or nearing the lease term.
 
The following table presents the ROU assets and lease liabilities
 
as of December 31, 2021 and 2020 (in thousands):
2021
2020
ROU assets:
Operating leases
 
$
14,185
$
14,513
Lease liabilities:
Operating leases
 
$
14,185
$
14,513
The weighted average remaining lease term and weighted average
 
discount rate as of December 31, 2021 and 2020:
2021
2020
Weighted average remaining lease term (in years):
Operating leases
8.28
9.13
Weighted average discount rate:
Operating leases
 
2.32
%
2.49
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
91
 
USCB Financial Holdings, Inc.
 
2021 10-K
Future lease payment obligations and a reconciliation to lease
 
liability as of December 31, 2021 (in thousands):
2022
$
2,837
2023
2,471
2024
2,540
2025
2,606
2026
1,675
Thereafter
3,968
Total
 
future minimum lease payments
16,097
Less: interest component
(1,912)
Total
 
lease liability
$
14,185
5.
 
PREMISES AND EQUIPMENT
 
A summary of premises and equipment are presented
 
below as of December 31, 2021 and 2020 (in thousands):
2021
2020
Land
$
972
$
1,372
Building
1,947
2,625
Furniture, fixtures and equipment
8,726
9,080
Computer hardware and software
4,552
4,471
Leasehold improvements
9,921
9,650
Premises and equipment, gross
26,118
27,198
Accumulated depreciation and amortization
(20,840)
(20,851)
Premises and equipment, net
$
5,278
$
6,347
Depreciation and amortization
 
expense was $
1.0
 
million and $
1.3
 
million for the years
 
ended December 31, 2021
 
and
2020, respectively.
 
During 2021, the Company
 
eliminated $
0.6
 
million in assets due
 
to the sale of one
 
banking center and
relocation
 
of
 
another
 
banking
 
center.
 
The
 
depreciation
 
on
 
these
 
assets
 
was
 
$
0.6
 
million
 
with
 
the
 
remaining
 
amount
recognized as an immaterial loss. The Company eliminated $
0.5
 
million in assets which were fully depreciated in 2020.
6.
 
INCOME TAXES
 
The Company’s provision
 
for income taxes is
 
presented in the following
 
table for the years
 
ended December 31, 2021
and 2020 (in thousands):
2021
2020
Current:
Federal
$
-
$
-
State
-
-
Total
 
current
-
-
Deferred:
Federal
5,314
2,074
State
1,286
514
Total
 
deferred
6,600
2,588
Total
 
tax expense
$
6,600
$
2,588
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
92
 
USCB Financial Holdings, Inc.
 
2021 10-K
The actual income
 
tax expense for the
 
years ended December 31, 2021
 
and 2020 differs from
 
the statutory tax expense
for the year (computed by applying the
 
U.S. federal corporate tax rate of
21
% for 2021 and 2020 to
 
income before provision
for income taxes) as follows (in thousands):
2021
2020
Federal taxes at statutory rate
$
5,812
$
2,815
State income taxes, net of federal tax benefit
969
469
Bank owned life insurance
(186)
(174)
Other, net
5
(522)
Total
 
tax expense
$
6,600
$
2,588
The following table presents
 
the deferred tax assets
 
and deferred tax liabilities
 
as of December 31, 2021
 
and 2020 (in
thousands):
2021
2020
Deferred tax assets:
Net operating loss
$
28,819
$
35,506
Allowance for credit losses
3,816
3,824
Lease liability
3,595
3,617
Unrealized loss on available for sale securities
817
-
Deferred loan fees
400
636
Depreciable property
361
285
Stock option compensation
241
169
Accruals
600
349
Other, net
2
7
Deferred tax asset
38,651
44,393
Deferred tax liability:
Unrealized gain on available for sale securities
-
(1,553)
Lease right of use asset
(3,595)
(3,617)
Deferred expenses
(127)
(64)
Deferred tax liability
(3,722)
(5,234)
Net deferred tax asset
$
34,929
$
39,159
The Company has approximately $
109.5
 
million of Federal and $
132.2
 
million of State net operating loss carryforwards
expiring in various amounts from 2031 to 2036. Their utilization
 
is limited to future taxable earnings of the Company.
In assessing the
 
realizability of deferred
 
tax assets, management considered
 
whether it is
 
more likely than
 
not that some
portion or
 
all of
 
the deferred
 
tax assets
 
will not
 
be realized.
 
The ultimate
 
realization
 
of deferred
 
tax assets
 
is dependent
upon the generation of
 
future taxable income
 
during the periods
 
in which those temporary
 
differences become deductible.
Management considers the scheduled reversal
 
of deferred tax liabilities, projected future taxable
 
income, and tax planning
strategies in making this assessment.
The U.S.
 
Federal jurisdiction
 
and Florida
 
are the
 
major tax
 
jurisdictions where
 
the Company
 
files income
 
tax returns.
The Company is generally no longer subject to U.S. Federal or
 
State examinations by tax authorities for years before 2018.
For
 
the
 
years
 
ended
 
December 31,
 
2021 and
 
2020,
 
the
 
Company
 
did
no
t have
 
any unrecognized
 
tax benefits
 
as a
result of
 
tax positions
 
taken during
 
a prior
 
period or
 
during the
 
current period.
 
Additionally,
no
 
interest or
 
penalties
 
were
recorded as a result of tax uncertainties.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
93
 
USCB Financial Holdings, Inc.
 
2021 10-K
7.
 
DEPOSITS
The following table presents deposits by type at December 31,
 
2021 and 2020 (in thousands):
2021
2020
Non-interest bearing deposits
$
605,425
$
442,467
Interest-bearing transaction accounts
55,878
45,132
Saving and money market deposits
703,856
527,373
Time deposits
225,220
258,430
Total
 
deposits
$
1,590,379
$
1,273,402
Time
 
deposits
 
exceeding
 
the
 
FDIC
 
insurance
 
limit
 
of
 
$250
 
thousand
 
at
 
December 31,
 
2021
 
and
 
2020
 
were
approximately $
119.4
 
million and $
104.1
 
million, respectively.
 
At December 31, 2021, the scheduled maturities of time deposits
 
were (in thousands):
2022
$
184,495
2023
15,111
2024
4,164
2025
1,172
2026
20,271
Thereafter
7
$
225,220
At December 31,
 
2021 and
 
2020, the
 
aggregate amount
 
of demand
 
deposits reclassified
 
to loans
 
as overdrafts
 
was
$
247
 
thousand and $
224
 
thousand, respectively.
8.
 
BORROWINGS
 
Borrowed funds consist of fixed rate advances from the FHLB. At December 31, 2021 and 2020, FHLB advances were
$
36.0
 
million.
The following table presents
 
the fixed interest rates
 
and expected maturities
 
of the FHLB advances
 
at both December
31, 2021 and 2020 (in thousands):
Interest Rate
Type of Rate
Maturity Date
Amount
0.81%
Fixed
August 17, 2023
$
5,000
1.04%
Fixed
July 30, 2024
5,000
2.05%
Fixed
March 27, 2025
10,000
1.91%
Fixed
March 28, 2025
5,000
1.81%
Fixed
April 17, 2025
5,000
1.07%
Fixed
July 18, 2025
6,000
$
36,000
The
 
FHLB
 
holds
 
a
 
blanket
 
lien
 
on
 
the
 
Company's
 
loan
 
portfolio
 
that
 
may
 
be
 
pledged
 
as
 
collateral
 
for
 
outstanding
advances, subject
 
to eligibility
 
under the
 
borrowing agreement.
 
The Company
 
may also
 
choose to
 
assign cash
 
balances
held at the FHLB as additional collateral. See Note 3 “Loans”
 
for further discussion on pledged loans.
9.
 
EQUITY BASED AND OTHER COMPENSATION
 
PLANS
 
Employee 401(k) Plan
The Company has an
 
employee 401(k) plan (the
 
“Plan”) covering substantially all
 
eligible employees. The Plan includes
a provision
 
that
 
the employer
 
may contribute
 
to the
 
accounts
 
of eligible
 
employees
 
for whom
 
a salary
 
deferral
 
is made.
There was $
296
 
thousand and $
282
 
thousand of Company contributions to the Plan during the years ended December 31,
2021 and
 
2020, respectively
 
,
 
and are
 
included
 
under
 
salaries and
 
employee
 
benefits in
 
the Consolidated
 
Statements
 
of
Operations.
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
94
 
USCB Financial Holdings, Inc.
 
2021 10-K
Stock-Based Compensation
Stock option
 
balances,
 
weighted average
 
exercise
 
price,
 
and weighted
 
average
 
fair value
 
of options
 
granted
 
for the
years ended December 31, 2021 and
 
2020 were adjusted to
 
reflect the
1 for 5
 
reverse stock split on
 
Class A common stock.
Stock options are only exercisable
 
to Class A common stock.
 
See Note 13 “Stockholders’ Equity”
 
for further discussion on
stock split.
In
 
2015,
 
the
 
Company's
 
shareholders
 
approved
 
the
 
2015
 
Equity
 
Incentive
 
Plan
 
(the
 
“2015
 
Option
 
Plan”),
 
which
authorized grants
 
of options
 
to purchase
 
up to
2,000,000
 
shares of
 
common stock.
 
The
2015
Option
 
Plan
 
provided that
vesting
 
schedules
 
will
 
be
 
determined
 
upon
 
issuance
 
of
 
options
 
by
 
the
 
Board
 
of
 
Directors
 
or
 
compensation
 
committee.
Options
 
granted
 
under
 
the
 
2015
 
Option
 
Plan
 
have
 
a
10
-year
 
life,
 
in
 
no
 
event
 
shall
 
an
 
option
 
be
 
exercisable
 
after
 
the
expiration of
10
 
years from the grant date. The 2015 Option Plan has a
10
-year life and will terminate in 2025. In July 2020,
the
 
shareholders
 
of
 
the
 
Company
 
approved
 
to
 
amend
 
the
 
2015
 
Option
 
plan
 
authorizing
 
the
 
issuance
 
of
 
an
 
additional
3,000,000
 
shares of common stock and extending the life of the plan
5
 
additional years, terminating in 2030. The approved
shares
 
after
 
being
 
adjusted
 
to
 
reflect
 
the
1 for 5
 
reverse
 
stock
 
split
 
totaled
1,000,000
 
shares.
 
In
 
December
 
2021,
 
the
shareholders of the Company approved to amend the
 
2015 Option plan authorizing the issuance of
 
an additional
1,400,000
shares of common stock.
At December 31, 2021, there were
1,401,667
 
shares available for grant under the
 
2015 Option Plan. At December 31,
2020, there were
621,667
shares available for grant under the 2015 Option Plan
 
after the
1 for 5
 
reverse stock split.
 
The Company recognizes compensation expense based
 
on the estimated grant date
 
fair value method using the
 
Black-
Scholes
 
option
 
pricing
 
model and
 
accounts
 
for this
 
expense
 
using
 
a prorated
 
straight-line
 
amortization
 
method over
 
the
vesting
 
period
 
of
 
the
 
option.
 
Stock
 
based
 
compensation
 
expense
 
is
 
based
 
on
 
awards
 
that
 
the
 
Company
 
expects
 
will
ultimately vest,
 
reduced by estimated forfeitures.
 
Estimated forfeitures consider the voluntary
 
termination trends as well as
actual option forfeitures.
The
 
compensation
 
expense
 
is
 
reported
 
under
 
salaries
 
and
 
employee
 
benefits
 
in
 
the
 
accompanying
 
Consolidated
Statements
 
of
 
Operations.
 
Compensation
 
expense
 
totaling
 
$
287
 
thousand
 
was
 
recognized
 
for
 
the
 
year
 
ended
December 31, 2021
 
and $
187
 
thousand for
 
the year
 
ended December
 
31, 2020.
 
There was
no
 
related tax
 
benefit for
 
the
years ended December 31, 2021 and 2020.
Unrecognized compensation cost remaining
 
on stock-based compensation totaled
 
$
1.3
 
million and $
0.1
 
million for the
years ended December 31, 2021 and 2020.
Cash
 
flows
 
resulting
 
from
 
excess
 
tax
 
benefits
 
are
 
required
 
to
 
be
 
classified
 
as
 
a
 
part
 
of
 
cash
 
flows
 
from
 
operating
activities. Excess tax benefits
 
are realized tax benefits
 
from tax deductions for
 
exercised options in
 
excess of the deferred
tax asset attributable to the compensation cost for such
 
options.
The fair value of options
 
granted was determined using
 
the following weighted-average
 
assumptions at December 31,
2021:
Assumption
2021
Risk-free interest rate
 
1.49%
 
Expected term
10
 
years
Expected stock price volatility
10
%
Dividend yield
0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
95
 
USCB Financial Holdings, Inc.
 
2021 10-K
The following table presents a summary of stock options
 
for the years ended December 31, 2021 and 2020:
Stock Options
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Years
Aggregate Intrinsic
Value
Balance at January 1, 2021
339,667
$
9.37
7.1
Granted
620,000
$
11.69
Balance at December 31, 2021
959,667
$
10.87
8.4
Exercisable at December 31, 2021
319,667
$
9.07
6.0
$
663
Balance at January 1, 2020
(1)
365,667
$
9.30
8.5
Exercised
(2,000)
$
7.50
Forfeited
(24,000)
$
8.17
Balance at December 31, 2020
339,667
$
9.37
7.1
Exercisable at December 31, 2020
242,333
$
8.71
6.6
$
208
(1)
 
Class A common stock outstanding and additional
 
paid-in-capital for December 31, 2020 were adjusted
 
to reflect the 1 for 5 reverse stock split. See
Note 13 "Stockholders' Equity" for further discussion
 
on the stock split.
The aggregate intrinsic value in
 
the table above represents
 
the total pre-tax intrinsic
 
value (the difference between
 
the
valuation of the Company’s stock and the exercise price, multiplied by
 
the number of options considered in-the-money) that
would have been received by the option holders had all option
 
holders exercised their options.
The weighted average
 
fair value of
 
options granted for
 
the years ended
 
December 31, 2021 and
 
2020 was $
2.32
 
and
$
0.00
, respectively.
10.
 
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to
meet the financial
 
needs of
 
its customers
 
and to reduce
 
its own
 
exposure to
 
fluctuations in
 
interest rates.
 
These financial
instruments include
 
unfunded commitments
 
under lines
 
of credit,
 
commitments to
 
extend credit,
 
standby and
 
commercial
letters of
 
credit. Those
 
instruments involve,
 
to varying
 
degrees, elements
 
of credit
 
and interest
 
rate risk
 
in excess
 
of the
amount recognized in the Company’s Consolidated Balance Sheets. The Company uses the
 
same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
 
instruments.
The Company's exposure
 
to credit loss
 
in the event
 
of nonperformance by
 
the other party
 
to the financial
 
instruments
for unused lines of credit, and standby letters of credit
 
is represented by the contractual amount of these commitments.
A
 
summary
 
of
 
the
 
amounts
 
of
 
the
 
Company's
 
financial
 
instruments
 
with
 
off-balance
 
sheet
 
risk
 
are
 
shown
 
below
 
at
December 31, 2021 and 2020 (in thousands):
 
2021
2020
Commitments to grant loans and unfunded lines of credit
$
134,877
$
107,553
Standby and commercial letters of credit
6,420
1,813
Total
$
141,297
$
109,366
Commitments to
 
extend credit
 
are agreements
 
to lend
 
to a
 
customer as
 
long as
 
there is
 
no violation
 
of any
 
condition
established in the contract. Commitments generally have
 
fixed expiration dates or other termination clauses.
Unfunded lines of
 
credit and revolving
 
credit lines are
 
commitments for possible
 
future extensions
 
of credit to
 
existing
customers. These lines of
 
credit are uncollateralized and
 
usually do not contain
 
a specified maturity date
 
and ultimately may
not be drawn upon to the total extent to which the Company
 
is committed.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
96
 
USCB Financial Holdings, Inc.
 
2021 10-K
Standby
 
and
 
commercial
 
letters
 
of
 
credit
 
are
 
conditional
 
commitments
 
issued
 
by
 
the
 
Company
 
to
 
guarantee
 
the
performance of a
 
customer to
 
a third
 
party. Those letters of
 
credit are
 
primarily issued to
 
support public and
 
private borrowing
arrangements. Essentially all letters of credit have fixed maturity dates and many of them expire without being drawn upon,
they do not generally present a significant liquidity risk
 
to the Company.
11.
 
DERIVATIVES
 
The Company utilizes interest rate swap agreements
 
as part of its asset liability management strategy
 
to help manage
its interest
 
rate risk
 
position. The
 
notional amount
 
of the
 
interest rate
 
swaps do
 
not represent
 
amounts exchanged
 
by the
parties. The amounts exchanged are
 
determined by reference to
 
the notional amount and the
 
other terms of the individual
interest rate swap agreements.
 
The Company enters into interest rate swaps with its loan customers. The Company had
18
 
and
15
 
interest rate swaps
with loan customers with
 
a notional amount of
 
$
39.2
 
million and $
30.6
 
million at December 31, 2021
 
and 2020, respectively.
These interest
 
rate swaps
 
have a
 
maturity date
 
between 2025
 
and 2051.
 
The Company
 
entered into
 
corresponding
 
and
offsetting derivatives
 
with third
 
parties. The fair
 
value of liability
 
on these derivatives
 
requires the Company
 
to provide the
counterparty with funds to
 
be held as collateral
 
which the Company reports as
 
other assets under the Consolidated
 
Balance
Sheets. While these derivatives represent economic hedges,
 
it does not qualify as hedges for accounting purposes.
 
The following table reflects the Company’s customer
 
related interest rate swaps for the dates indicated
 
(in thousands):
 
Fair Value
Notional
Amount
Collateral
Amount
Balance Sheet Location
Asset
Liability
December 31, 2021:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
39,156
$
1,260
Other assets/Other liabilities
$
1,434
$
1,434
December 31, 2020:
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans
$
30,611
$
260
Other assets/Other liabilities
$
500
$
500
12.
 
FAIR VALUE
 
MEASUREMENTS
 
Determination of Fair Value
The Company
 
uses
 
fair value
 
measurements
 
to record
 
fair-value
 
adjustments
 
to certain
 
assets
 
and liabilities
 
and to
determine fair value
 
disclosures. In accordance
 
with the fair
 
value measurements
 
accounting guidance, the
 
fair value of
 
a
financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market
 
participants
 
at the
 
measurement
 
date.
 
Fair value
 
is best
 
determined based
 
upon quoted
 
market prices.
However, in
 
many instances, there
 
are no quoted
 
market prices for the
 
Company's various financial
 
instruments. In cases
where quoted
 
market prices
 
are not
 
available, fair
 
values are
 
based on
 
estimates using
 
present value
 
or other
 
valuation
techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. Accordingly, the fair value estimates may not be realized in
 
an immediate settlement of the instrument.
The fair
 
value guidance provides
 
a consistent definition
 
of fair
 
value, which focuses
 
on exit
 
price in
 
an orderly transaction
(that is,
 
not a
 
forced
 
liquidation
 
or distressed
 
sale) between
 
market participants
 
at the
 
measurement
 
date
 
under current
market conditions.
 
If there
 
has been
 
a significant
 
decrease
 
in the
 
volume
 
and level
 
of activity
 
for the
 
asset
 
or liability,
 
a
change in
 
valuation technique or
 
the use
 
of multiple
 
valuation techniques may
 
be appropriate.
 
In such
 
instances, determining
the
 
price
 
at
 
which
 
willing
 
market
 
participants
 
would
 
transact
 
at
 
the
 
measurement
 
date
 
under
 
current
 
market
 
conditions
depends on the facts
 
and circumstances and
 
requires the use of
 
significant judgment. The fair
 
value is a reasonable
 
point
within the range that is most representative of fair value under
 
current market conditions.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
97
 
USCB Financial Holdings, Inc.
 
2021 10-K
Fair Value Hierarchy
In accordance with
 
this guidance, the
 
Company groups its
 
financial assets
 
and financial liabilities
 
generally measured
at fair
 
value in
 
three
 
levels, based
 
on the
 
markets
 
in which
 
the assets
 
and liabilities
 
are traded,
 
and the
 
reliability
 
of the
assumptions used to determine fair value.
Level 1
 
- Valuation
 
is based
 
on quoted
 
prices in
 
active markets
 
for identical
 
assets or
 
liabilities that
 
the reporting
entity has
 
the ability
 
to access
 
at the measurement
 
date. Level
 
1 assets
 
and liabilities
 
generally include
 
debt and
equity securities that
 
are traded in
 
an active exchange
 
market. Valuations are obtained from
 
readily available pricing
sources for market transactions involving identical assets
 
or liabilities.
Level 2
 
- Valuation
 
is based on inputs other
 
than quoted prices included
 
within Level 1 that are
 
observable for the
asset
 
or
 
liability,
 
either
 
directly
 
or
 
indirectly.
 
The
 
valuation
 
may
 
be
 
based
 
on
 
quoted
 
prices
 
for
 
similar
 
assets
 
or
liabilities; quoted
 
prices in
 
markets that are
 
not active;
 
or other inputs
 
that are observable
 
or can be
 
corroborated
by observable market data for substantially the full term of the
 
asset or liability.
Level 3
 
- Valuation
 
is based on
 
unobservable inputs that
 
are supported
 
by little or
 
no market activity
 
and that are
significant
 
to
 
the
 
fair
 
value
 
of
 
the
 
assets
 
or
 
liabilities.
 
Level
 
3
 
assets
 
and
 
liabilities
 
include
 
financial
 
instruments
whose value
 
is determined
 
using pricing
 
models, discounted
 
cash
 
flow
 
methodologies,
 
or similar
 
techniques,
 
as
well as instruments for which determination of fair value
 
requires significant management judgment or estimation.
A
 
financial
 
instrument's
 
categorization
 
within
 
the
 
valuation
 
hierarchy
 
is
 
based
 
upon
 
the
 
lowest
 
level
 
of
 
input
 
that
 
is
significant to the fair value measurement.
Items Measured at Fair Value
 
on a Recurring Basis
Investment securities:
 
When instruments are traded
 
in secondary markets and
 
quoted market prices do
 
not exist for
such securities,
 
management generally
 
relies on
 
prices obtained
 
from independent
 
vendors or
 
third-party broker-dealers.
Management reviews pricing methodologies provided by the vendors and third-party broker-dealers in order to determine if
observable market information is being utilized. Securities measured with pricing provided by independent vendors or
 
third-
party broker-dealers
 
are classified within
 
Level 2 of
 
the hierarchy and
 
often involve using
 
quoted market
 
prices for similar
securities, pricing models or discounted cash flow analyses
 
utilizing inputs observable in the market where available.
Derivatives:
 
The
 
fair
 
value
 
of
 
derivatives
 
are
 
measured
 
with
 
pricing
 
provided
 
by
 
third-party
 
participants
 
and
 
are
classified within Level 2 of the hierarchy.
The following table represents
 
the Company's assets measured at
 
fair value on a
 
recurring basis at December 31, 2021
and 2020 for each of the fair value hierarchy levels (in thousands):
2021
2020
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Investment securities available for sale:
U.S. Government Agency - SBA
$
-
$
10,520
$
-
$
10,520
$
-
$
1,552
$
-
$
1,552
U.S. Government Agency
 
-
-
-
-
-
20,032
-
20,032
Collateralized mortgage obligations
-
156,829
-
156,829
-
104,650
-
104,650
Mortgage-backed securities - Residential
 
-
118,842
-
118,842
-
81,301
-
81,301
Mortgage-backed securities - Commercial
-
50,117
-
50,117
-
48,331
-
48,331
Municipal Securities
-
24,276
-
24,276
-
24,211
-
24,211
Bank subordinated debt securities
-
28,408
-
28,408
-
24,630
-
24,630
Corporate Bond
-
12,550
-
12,550
-
29,615
-
29,615
Total
-
401,542
-
401,542
-
334,322
-
334,322
Derivative assets
-
1,434
-
1,434
-
500
-
500
Total assets at fair value
$
-
$
402,976
$
-
$
402,976
$
-
$
334,822
$
-
$
334,822
Derivative liabilities
$
-
$
1,434
$
-
$
1,434
$
-
$
500
$
-
$
500
Total liabilities at fair value
$
-
$
1,434
$
-
$
1,434
$
-
$
500
$
-
$
500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
98
 
USCB Financial Holdings, Inc.
 
2021 10-K
Items Measured at Fair Value
 
on a Non-recurring Basis
 
Impaired Loans:
At December
 
31,
 
2021 and
 
2020,
 
in accordance
 
with
 
provisions of
 
the
 
loan impairment
 
guidance,
individual loans
 
with a
 
carrying amount
 
of approximately
 
$
4.4
 
million and
 
$
5.8
 
million, respectively,
 
were written
 
down to
their
 
fair
 
value
 
of
 
approximately
 
$
4.0
 
million
 
and
 
$
5.4
 
million,
 
respectively,
 
resulting
 
in
 
an
 
impairment
 
charge
 
of
$
360
 
thousand
 
and $
453
 
thousand,
 
respectively,
 
which
 
was included
 
in the
 
allowance
 
for credit
 
losses
 
at December
 
31,
2021 and 2020, respectively.
 
Loans applicable to write-downs, or impaired
 
loans, are estimated using the present
 
value of
expected
 
cash
 
flows
 
or
 
the
 
appraised
 
value
 
of
 
the
 
underlying
 
collateral
 
discounted
 
as
 
necessary
 
due
 
to
 
management's
estimates of changes in economic conditions are considered
 
a Level 3 valuation.
Other Real
 
Estate:
 
Other real
 
estate owned are
 
valued at the
 
lesser of the
 
third-party appraisals
 
less management's
estimate of
 
the costs to
 
sell or the
 
carrying cost of
 
the other
 
real estate
 
owned. Appraisals generally
 
use the market
 
approach
valuation technique
 
and use
 
market observable
 
data to
 
formulate an
 
opinion of
 
the fair
 
value of
 
the properties.
 
However,
the appraiser
 
uses professional
 
judgment in
 
determining the
 
fair value
 
of the
 
property and
 
the Company
 
may also
 
adjust
the value for changes in
 
market conditions subsequent
 
to the valuation date
 
when current appraisals
 
are not available. As
a consequence of the carrying cost or the
 
third-party appraisal and adjustments therein, the fair values of the properties are
considered a Level 3 valuation.
 
The following table represents the Company’s assets measured at fair value on a non-recurring basis at December 31,
2021 and 2020 for each of the fair value hierarchy levels
 
(in thousands):
Level 1
Level 2
Level 3
Total
December 31, 2021:
Impaired loans
$
-
$
-
$
3,990
$
3,990
December 31, 2020:
Impaired loans
$
-
$
-
$
5,366
$
5,366
The following table presents
 
quantified information about
 
Level 3 fair value
 
measurements for assets measured
 
at fair
value on a non-recurring basis at December 31, 2021 and 2020
 
(in thousands):
Fair Value
Valuation Techniqu
 
e(s)
Unobservable Input(s)
December 31, 2021:
Residential real estate
$
3,807
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
70
Discounted cash flow
Adj. for differences in net operating income expectations
Other
113
Discounted cash flow
Adj. for differences in net operating income expectations
Total
 
impaired loans
$
3,990
December 31, 2020:
Residential real estate
$
5,119
Sales comparison approach
Adj. for differences between comparable sales
Commercial and industrial
94
Discounted cash flow
Adj. for differences in net operating income expectations
Other
153
Discounted cash flow
Adj. for differences in net operating income expectations
Total
 
impaired loans
$
5,366
There were
no
 
financial liabilities measured at fair value on a non-recurring
 
basis at December 31, 2021 and 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
99
 
USCB Financial Holdings, Inc.
 
2021 10-K
Items Not Measured at Fair Value
The carrying amounts and estimated fair values of financial instruments not carried at fair value, at December 31, 2021
and 2020 are as follows (in thousands):
Fair Value Hierarchy
Carrying
Amount
Level 1
Level 2
Level 3
Fair Value
Amount
December 31, 2021:
Financial Assets:
Cash and due from banks
$
6,477
$
6,477
$
-
$
-
$
6,477
Interest-bearing deposits in banks
$
39,751
$
39,751
$
-
$
-
$
39,751
Investment securities held to maturity
$
122,658
$
-
$
120,157
$
-
$
120,157
Loans held for investment, net
$
1,175,024
$
-
$
-
$
1,189,191
$
1,189,191
Accrued interest receivable
$
5,975
$
-
$
1,222
$
4,753
$
5,975
Financial Liabilities:
Demand Deposits
$
605,425
$
605,425
$
-
$
-
$
605,425
Money market and savings accounts
$
703,856
$
703,856
$
-
$
-
$
703,856
Interest-bearing checking accounts
$
55,878
$
55,878
$
-
$
-
$
55,878
Time deposits
$
225,220
$
-
$
-
$
224,688
$
224,688
FHLB advances
$
36,000
$
-
$
36,479
$
-
$
36,479
Accrued interest payable
$
96
$
-
$
50
$
46
$
96
December 31, 2020:
Financial Assets:
Cash and due from banks
$
9,828
$
9,828
$
-
$
-
$
9,828
Interest-bearing deposits in banks
$
37,906
$
37,906
$
-
$
-
$
37,906
Loans held for investment, net
$
1,023,418
$
-
$
-
$
1,046,782
$
1,046,782
Accrued interest receivable
$
5,547
$
-
$
874
$
4,673
$
5,547
Financial Liabilities:
Demand Deposits
$
442,467
$
442,467
$
-
$
-
$
442,467
Money market and savings accounts
$
527,373
$
527,373
$
-
$
-
$
527,373
Interest-bearing checking accounts
$
45,132
$
45,132
$
-
$
-
$
45,132
Time deposits
$
258,430
$
-
$
-
$
259,857
$
259,857
FHLB advances
$
36,000
$
-
$
37,543
$
-
$
37,543
Accrued interest payable
$
156
$
-
$
49
$
107
$
156
13.
 
STOCKHOLDERS’ EQUITY
Common Stock
The rights
 
of the
 
holders of
 
Class A
 
common stock
 
and Class
 
B common
 
stock are
 
the same,
 
except for
 
voting and
conversion rights.
 
Holders of
 
Class A
 
common stock
 
are entitled
 
to voting
 
rights, while
 
holders of
 
Class B
 
common stock
have no
 
voting rights.
 
Shares of
 
Class
 
B common
 
stock
 
are convertible
 
into shares
 
of Class
 
A common
 
stock
 
if sold
 
or
transferred.
On June 16, 2021, the Company effected a
1 for 5
 
reverse stock split of all the Class A common stock $
1.00
 
par value.
As of
 
the effective
 
date of
 
June 16,
 
2021, each
 
five shares
 
of the
 
Company’s Class
 
A common
 
stock was
 
combined into
one
 
fully paid share of Class A common stock. Any fractional shares resulting from this reverse stock split
 
were rounded up
to one whole share. The Company has adjusted the Class A
 
common stock, earnings per share and stock options adjusted
for this
1 for 5
 
reverse stock split for all
 
periods here. The Class B common
 
stock were not adjusted but
 
if sold or exchanged
would be converted at the
1 for 5
 
reverse stock split of 5 Class B common stock for
1
 
share of Class A common stock. Any
dividends declared by
 
the Board of
 
Directors (the “Board”)
 
to include Class
 
B common stock
 
will also be
 
paid as if
 
converted.
The
1 for 5
 
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
 
100
 
USCB Financial Holdings, Inc.
 
2021 10-K
On July
 
27, 2021,
 
the Company
 
completed the
 
Initial Public
 
Offering (“IPO”)
 
of its
 
Class A
 
common stock,
 
in which
 
it
issued and
 
sold
4,600,000
 
shares of
 
Class A
 
common stock
 
at a
 
price of
 
$
10.00
 
per share.
 
The Company
 
received total
net proceeds of $
40.0
 
million after deducting underwriting discounts and expenses.
On
 
December
 
21,
 
2021,
 
the
 
Company
 
entered
 
into
 
agreements
 
with
 
the
 
Class
 
B
 
shareholders
 
to
 
exchange
 
all
outstanding Class
 
B non-voting
 
common stock
 
for Class
 
A voting
 
common stock
 
at a
 
ratio of
5
 
to 1.
 
On the
 
same day,
 
a
total of
6,121,052
 
shares of Class B common stock was exchanged for
1,224,212
 
shares of Class A common stock.
 
In December 2021,
 
USCB Financial Holdings,
 
Inc. (the “Company”)
 
acquired all the
 
issued and outstanding
 
shares of
the Class A voting
 
common stock of
 
U.S. Century Bank
 
(the “Bank”), which are
 
the only issued and
 
outstanding shares of
the Bank’s capital
 
stock, in a share
 
exchange (the “Reorganization”)
 
effected under the
 
Florida Business Corporation
 
Act.
Each of the outstanding
 
shares of the
 
Bank’s common stock,
 
par value $
1.00
 
per share, formerly
 
held by its
 
shareholders
was converted into and
 
exchanged for one newly issued
 
share of the Company’s common
 
stock, par value $
1.00
 
per share,
and
 
the
 
Bank
 
became
 
the
 
Company’s
 
wholly-owned
 
subsidiary.
 
Prior
 
to
 
filing
 
the
 
bank
 
holding
 
company
 
formation,
 
the
Company
 
had
 
no
 
material
 
assets
 
and
 
had
 
not
 
conducted
 
any
 
business
 
or operations
 
except
 
for activities
 
related to
 
our
organization and the Reorganization.
In the
 
Reorganization,
 
each
 
shareholder
 
of the
 
Bank
 
received securities
 
of
 
the same
 
class,
 
having
 
substantially
 
the
same designations,
 
rights,
 
powers, preferences,
 
qualifications,
 
limitations
 
and restrictions,
 
as those
 
that the
 
shareholder
held
 
in
 
the
 
Bank,
 
and
 
the
 
Company’s
 
current
 
shareholders
 
own
 
the
 
same
 
percentages
 
of
 
its
 
common
 
stock
 
as
 
they
previously owned of the Bank’s common stock.
Preferred Stock
On April 5, 2021,
 
the Board authorized and
 
approved the offer to
 
repurchase all outstanding shares of
 
Class E preferred
stock at
 
the liquidation
 
value of
 
$
7.5
 
million along
 
with declared
 
dividends of
 
$
103
 
thousand.
 
All Class
 
E preferred
 
stock
shareholders approved the repurchase which the Company
 
completed on April 26, 2021.
 
The Company offered the
 
Class C and Class D preferred
 
stockholders the ability to exchange
 
their shares for Class A
common stock. The offer
 
to exchange was voluntary
 
and the preferred stockholders
 
were given the option to
 
convert
90
%
of
 
their
 
preferred
 
shares
 
for
 
Class
 
A
 
common
 
stock
 
with
 
the
 
remaining
10
%
 
to
 
be
 
redeemed
 
in
 
the
 
form
 
of
 
cash.
 
The
exchange ratio for the shares of
 
Class A common stock issued in the
 
exchange transaction was based upon
 
the IPO price
for shares of Class A common stock.
 
During the year ended December 31, 2021,
47,473
 
shares of Class C preferred stock
 
and
11,061,552
 
shares of Class
D preferred stock
 
converted into
10,278,072
 
shares of Class
 
A common stock.
 
The exchange of
 
the Class C
 
and Class D
preferred
 
shares
 
had
 
a total
 
liquidation
 
value
 
of
 
$
102.8
 
million.
 
The remaining
 
unconverted
 
shares
 
of Class
 
C preferred
stock
 
and
 
Class
 
D
 
preferred
 
stock
 
totaling
1,234,354
 
shares
 
were
 
subsequently
 
redeemed
 
at
 
liquidation
 
value
 
for
$
11.4
 
million.
 
The fair value of
 
consideration on the exchange and redemption
 
of the Class C and
 
Class D preferred shares exceeded
the
 
book
 
value
 
causing
 
a
 
one-time
 
reduction
 
in
 
net
 
income
 
available
 
to
 
common
 
stockholders
 
of
 
$
89.6
 
million.
 
As
 
of
December 31, 2021, there were
no
 
preferred shares and
no
 
outstanding dividends to be paid.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
101
 
USCB Financial Holdings, Inc.
 
2021 10-K
Dividends
The Board approved
 
the following dividend
 
amounts on the
 
preferred shares for
 
the years ended
 
December 31, 2021
and 2020 (in thousands):
 
2021
2020
Preferred stock - Class C: Non-voting, Non-cumulative, Perpetual: $
1.00
 
par value; $
1,000
per share liquidation preference; annual dividend rate of
4
% of liquidation preference paid
quarterly. Quarterly dividend of $
10.00
 
per share.
$
1,494
$
2,110
Preferred stock - Class D: Non-voting, Non-cumulative, Perpetual: $
1.00
 
par value; $
5.00
per share liquidation preference; annual dividend rate of
4
% of par value paid quarterly.
Quarterly dividend of $
0.01
 
per share.
348
492
Preferred stock - Class E: Non-voting, partially cumulative, Perpetual: $
1.00
 
par value;
$
1,000
 
per share liquidation preference; annual dividend rate of
7
% of liquidation
preferences paid quarterly. Quarterly dividend of $
17.50
 
per share.
235
525
Total
 
dividends paid
$
2,077
$
3,127
Declaration of dividends by the Board is required before dividend payments are made. The dividend payment dates for
Class C and
 
Class D preferred shares
 
were set by
 
the Board while
 
the Class E preferred
 
shares had a
 
set dividend payment
date on the fifteenth of February,
 
May, August, and November.
No
 
dividends were approved by
 
the Board for the common
 
stock classes for the years
 
ended December 31, 2021 and
2020. Additionally, there
 
were
no
 
dividends declared and unpaid at December 31, 2021
 
and 2020.
14.
 
EARNINGS PER SHARE
Earnings
 
per
 
share
 
(“EPS”)
 
for
 
common
 
stock
 
is
 
calculated
 
using
 
the
 
two-class
 
method
 
required
 
for
 
participating
securities. Basic EPS
 
is calculated by
 
dividing net income
 
(loss) available to
 
common stockholders by the
 
weighted-average
number of common shares outstanding for
 
the period, without consideration for common
 
stock equivalents. Diluted EPS is
computed by
 
dividing net
 
income (loss)
 
available to
 
common stockholders
 
by the
 
weighted-average
 
number
 
of common
shares outstanding for
 
the period and
 
the weighted-average number
 
of dilutive common
 
stock equivalents outstanding
 
for
the period determined using the treasury-stock method. For
 
purposes of this calculation, common stock equivalents include
common stock options and are only included in the calculation
 
of diluted EPS when their effect is dilutive.
 
In
 
calculating
 
EPS
 
for
 
the
 
year
 
ended
 
December 31,
 
2021,
 
net
 
income
 
available
 
to
 
common
 
stockholders
 
was
 
not
allocated between Class A and
 
Class B common stock since
 
there was no issued and outstanding
 
Class B common stock
at year-end.
In calculating EPS for the
 
year ended December 31, 2020, net
 
income available to common stockholders was allocated
as if all
 
the income for
 
the period were
 
distributed to common
 
stockholders. The
 
allocation was
 
based on the
 
outstanding
shares per
 
common share
 
class to
 
the total
 
common
 
shares outstanding
 
during
 
each period
 
giving effect
 
for the
1 for 5
reverse
 
stock
 
split.
 
The
 
Company’s
 
Articles
 
of
 
Incorporation
 
require
 
that
 
the
 
distribution
 
of
 
net
 
income
 
to
 
Common
 
B
stockholders be adjusted to give effect for Class A stock splits. Therefore, the income allocated to Class B common shares
was calculated based on their
20
% per share equivalent to Class A common shares.
The following table
 
reflects the calculation
 
of net income
 
(loss) available to
 
common stockholders
 
for the years
 
ended
December 31, 2021 and 2020 (in thousands):
2021
2020
Net Income
$
21,077
$
10,820
Less: Preferred stock dividends
 
2,077
3,127
Less: Exchange and redemption of preferred shares
89,585
-
Net income (loss) available to common stockholders
$
(70,585)
$
7,693
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
102
 
USCB Financial Holdings, Inc.
 
2021 10-K
The following
 
table reflects
 
the calculation
 
of basic
 
and diluted
 
earnings (loss)
 
per common
 
share class
 
for the
 
years
ended December 31, 2021 and 2020 (in thousands, except
 
per share amounts):
2021
2020
Class A
Class B
 
Class A
Class B
(1)
Basic EPS
Numerator:
Net income (loss) available to common shares before allocation
$
(70,585)
$
-
$
7,693
$
7,693
Multiply: % allocated on weighted avg. shares outstanding
100.0%
- %
76.1%
23.9%
Net income (loss) available to common shares after allocation
$
(70,585)
$
-
$
5,854
$
1,839
Denominator:
Weighted average shares outstanding
10,507,530
-
3,887,480
6,121,052
Earnings (loss) per share, basic
$
(6.72)
$
-
$
1.51
$
0.30
Diluted EPS
Numerator:
Net income (loss) available to common shares before allocation
$
(70,585)
$
-
$
7,693
$
7,693
Multiply: % allocated on weighted avg. shares outstanding
100.0%
- %
76.1%
23.9%
Net income (loss) available to common shares after allocation
$
(70,585)
$
-
$
5,854
$
1,839
Denominator:
Weighted average shares outstanding for basic EPS
10,507,530
-
3,887,480
6,121,052
Add: Dilutive effects of assumed exercises of stock options
-
-
23,810
-
Weighted avg. shares including dilutive potential common shares
10,507,530
-
3,911,290
6,121,052
Earnings (loss) per share, diluted
$
(6.72)
$
-
$
1.50
$
0.30
Anti-dilutive stock options excluded from diluted EPS
183,303
-
75,666
-
(1)
 
Net income (loss) available to common shares
 
between Class A and Class B common stock was
 
allocated based on the weighted average
 
number
of shares outstanding. The allocation also assumes
 
that Class B shares are converted to Class A which
 
is equivalent to
0.20
 
per share of Class B or
1,224,212
 
shares of Class A shares.
For the year
 
ended December 31, 2021,
 
the Company was
 
in a net
 
loss position after
 
adjusting for the
 
exchange and
redemption of the Class C and Class D preferred
 
shares, making basic net loss per share
 
the same as diluted net loss per
share as the inclusion of all potential common shares outstanding
 
would have been antidilutive.
See Note 13 “Stockholders’ Equity” for further discussion
 
on the stock splits.
15.
 
REGULATORY
 
MATTERS
Banks and
 
bank holding
 
companies
 
are subject
 
to regulatory
 
capital requirements
 
administered by
 
federal and
 
state
banking
 
agencies.
 
Failure
 
to
 
meet
 
minimum
 
capital
 
requirements
 
can
 
initiate
 
certain
 
mandatory
 
and
 
possibly
 
additional
discretionary actions
 
by regulators
 
that, if
 
undertaken, could
 
have a
 
direct material
 
effect on
 
the Company's
 
consolidated
financial
 
statements.
 
Under
 
capital
 
adequacy
 
guidelines
 
and
 
the
 
regulatory
 
framework
 
for
 
prompt
 
corrective
 
action,
 
the
Company and the
 
Bank must meet
 
specific capital guidelines
 
that involve quantitative
 
measures of their
 
assets, liabilities,
and
 
certain
 
off-balance-sheet
 
items
 
as
 
calculated
 
under
 
regulatory
 
accounting
 
practices.
 
The
 
Company
 
and
 
the
 
Bank’s
capital
 
amounts
 
and
 
classification
 
are
 
also
 
subject
 
to
 
qualitative
 
judgments
 
by
 
the
 
regulators
 
about
 
components,
 
risk
weightings, and other factors.
Based on changes to the Federal Reserve’s definition of a “Small Bank
 
Holding Company” that increased the threshold
to $3.0 billion in assets
 
in August 2018, the Company
 
is not currently subject to
 
separate minimum capital measurements.
At such time when the Company reaches the
 
$3.0 billion asset level, it will
 
be subject to capital measurements independent
of the Bank.
The Bank has
 
elected to permanently opt-out
 
of the inclusion
 
of accumulated other comprehensive
 
income in the
 
capital
calculations, as permitted by the regulations. This
 
opt-out will reduce the impact of
 
market volatility on the Bank’s regulatory
capital levels.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
103
 
USCB Financial Holdings, Inc.
 
2021 10-K
The Bank is
 
subject to the
 
rules of the
 
Basel III regulatory capital
 
framework and related Dodd-Frank
 
Wall Street Reform
and Consumer Protection
 
Act. The rules include
 
the implementation of
 
a
2.5
% capital conservation
 
buffer that is
 
added to
the minimum requirements
 
for capital adequacy
 
purposes. Failure
 
to maintain the
 
required capital conservation
 
buffer will
limit the ability of
 
the Bank to pay
 
dividends, repurchase shares
 
or pay discretionary
 
bonuses. At December
 
31, 2021 and
2020, the capital ratios for the Bank were sufficient
 
to meet the conservation buffer.
Prompt
 
corrective
 
action
 
regulations
 
provide
 
five
 
classifications:
 
well
 
capitalized,
 
adequately
 
capitalized,
undercapitalized,
 
significantly
 
undercapitalized,
 
and
 
critically
 
undercapitalized,
 
although
 
these
 
terms
 
are
 
not
 
used
 
to
represent overall financial condition. If
 
adequately capitalized, regulatory approval
 
is required to accept brokered
 
deposits.
If
 
undercapitalized,
 
capital
 
distributions
 
are
 
limited,
 
as
 
is
 
asset
 
growth
 
and
 
expansion,
 
and
 
capital
 
restoration
 
plans
 
are
required.
 
At December 31,
 
2021 and
 
2020, the
 
most recent
 
notification from
 
the regulatory
 
authorities categorized
 
the Bank
 
as
well capitalized
 
under the
 
regulatory framework
 
for prompt
 
corrective action.
 
Failure to
 
meet statutorily
 
mandated capital
guidelines
 
could
 
subject
 
the
 
Bank
 
to
 
a
 
variety
 
of
 
enforcement
 
remedies,
 
including
 
issuance
 
of
 
a
 
capital
 
directive,
 
the
termination of deposit
 
insurance by the
 
FDIC, a prohibition
 
on accepting or
 
renewing brokered deposits,
 
limitations on the
rates of
 
interest that
 
the Bank
 
may pay
 
on
 
its deposits
 
and other
 
restrictions
 
on
 
its business.
 
To
 
be categorized
 
as well
capitalized, an institution
 
must maintain minimum
 
total risk-based, Tier
 
1 risk-based and Tier
 
1 leverage ratios as
 
set forth
in the
 
table below.
 
There are
 
no conditions
 
or events
 
since the
 
notification that
 
management believes
 
have changed
 
the
Bank’s category.
 
Actual
 
and
 
required
 
capital
 
amounts
 
and
 
ratios
 
are
 
presented
 
below
 
for
 
both
 
the
 
Bank
 
and
 
the
 
Company
 
at
December 31,
 
2021
 
and
 
2020
 
(in
 
thousands,
 
except
 
ratios).
 
The
 
required
 
amounts
 
for
 
capital
 
adequacy
 
shown
 
do
 
not
include the capital conservation buffer previously
 
discussed.
Actual
Minimum Capital
Requirements
 
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2021:
Total
 
risk-based capital
$
186,735
14.92
%
$
100,125
8.00
%
$
125,157
10.00
%
Tier 1 risk-based capital
$
171,484
13.70
%
$
75,094
6.00
%
$
100,125
8.00
%
Common equity tier 1 capital
$
171,484
13.70
%
$
56,321
4.50
%
$
81,352
6.50
%
Leverage ratio
$
171,484
9.55
%
$
71,825
4.00
%
$
89,781
5.00
%
December 31, 2020:
Total
 
risk-based capital
$
139,326
14.24
%
$
78,260
8.00
%
$
97,825
10.00
%
Tier 1 risk-based capital
$
127,061
12.99
%
$
58,695
6.00
%
$
78,260
8.00
%
Common equity tier 1 capital
$
94,984
9.71
%
$
44,021
4.50
%
$
63,587
6.50
%
Leverage ratio
$
127,061
8.61
%
$
59,053
4.00
%
$
73,817
5.00
%
As
 
of
 
December 31,
 
2021,
 
there
 
was
 
no
 
activity
 
between
 
the
 
parent
 
bank
 
holding
 
company
 
and
 
its
 
subsidiaries
 
to
disclose on the statements of operations or statements
 
of cash flows.
Effective December 28, 2021, the Company acquired the Bank in a merger and
 
reorganization through the formation of
a bank holding company.
 
Pursuant to this transaction, all of the
 
outstanding shares of the Bank’s
 
$
1.00
 
par value common
stock formerly
 
held by
 
its shareholders
 
was converted
 
into and
 
exchanged for
 
one newly
 
issued share
 
of the
 
Company’s
par value common
 
stock, and the Bank
 
became a subsidiary of
 
the Company. See Note 13 “Stockholders’ Equity”
 
for further
details.
The Company
 
is limited in
 
the amount
 
of cash
 
dividends that
 
it may
 
pay.
 
Payment of dividends
 
is generally
 
limited to
the Company’s
 
net income
 
of the
 
current year
 
combined with
 
the Bank’s
 
retained income
 
of the
 
preceding two
 
years, as
defined by state banking regulations. However, for any dividend declaration, the Company must consider
 
additional factors
such as the amount
 
of current period net
 
income, liquidity,
 
asset quality,
 
capital adequacy and
 
economic conditions at
 
the
Bank. It is likely that
 
these factors would further limit the
 
amount of dividends which the Company could
 
declare. In addition,
bank regulators have
 
the authority to
 
prohibit banks from
 
paying dividends
 
if they deem
 
such payment to
 
be an unsafe
 
or
unsound practice.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USCB FINANCIAL HOLDINGS, INC.
Notes to the Consolidated Financial Statements
 
104
 
USCB Financial Holdings, Inc.
 
2021 10-K
16.
 
RELATED PARTY
 
TRANSACTIONS
 
In
 
the
 
ordinary
 
course
 
of
 
business,
 
principal
 
officers,
 
directors,
 
and
 
affiliates
 
may
 
engage
 
in
 
transactions
 
with
 
the
Company.
 
The
 
following
 
table
 
presents
 
loans
 
to
 
and
 
deposits
 
from
 
related
 
parties
 
included
 
within
 
the
 
accompanying
Consolidated Financial Statements at December 31, 2021
 
and 2020 (in thousands):
2021
2020
Consolidated Balance Sheets:
Loans held for investment, net
 
$
-
$
-
Deposits
$
1,905
$
1,793
Consolidated Statements of Operations:
Interest income
$
-
$
-
Interest expense
$
16
$
23
17.
 
PARENT COMPANY
 
CONDENSED FINANCIAL INFORMATION
 
In December
 
2021, USCB
 
Financial Holdings,
 
Inc. was
 
formed as
 
the parent
 
bank holding
 
company of
 
U.S. Century
Bank. The
 
condensed
 
balance
 
sheets
 
are presented
 
below for
 
USCB
 
Financial
 
Holdings,
 
Inc. at
 
the
 
dates
 
indicated
 
(in
thousands):
December 31, 2021
December 31, 2020
ASSETS:
Investment in bank subsidiary
$
203,897
$
-
Other assets
-
-
Total
 
assets
$
203,897
$
-
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities
$
-
$
-
Stockholders' equity
203,897
-
Total
 
liabilities and stockholders' equity
$
203,897
$
-
At December 31, 2021, there was no activity between the parent bank holding company and
 
its subsidiaries to disclose
on the statements of operations or statements of cash flows.
 
18.
 
LOSS CONTINGENCIES
 
Loss contingencies,
 
including claims
 
and legal actions
 
may arise in
 
the ordinary
 
course of
 
business. In
 
the opinion
 
of
management, none
 
of these
 
actions, either
 
individually or
 
in the aggregate,
 
is expected
 
to have
 
a material
 
adverse effect
on the Company’s
 
Consolidated Financial Statements.
19.
 
SUBSEQUENT EVENTS
 
Management has
 
evaluated subsequent
 
events from
 
January 1,
 
2022 through
 
March 24,
 
2022, which
 
is the
 
date this
Form 10-K was available to be issued.
Share Repurchase Program
On January
 
24, 2022,
 
the Board
 
approved a
 
share repurchase
 
program of
 
up to
750,000
 
shares of
 
Class A
 
common
stock. Under
 
the repurchase
 
program, the
 
Company
 
may purchase
 
shares of
 
Class
 
A common
 
stock on
 
a discretionary
basis from
 
time to
 
time through
 
open market
 
repurchases, privately negotiated
 
transactions, or
 
other means.
 
The repurchase
program
 
has
 
no
 
expiration
 
date
 
and
 
may
 
be
 
modified,
 
suspended,
 
or
 
terminated
 
at
 
any
 
time.
 
Repurchases
 
under
 
this
program will be funded from the Company’s
 
existing cash and cash equivalents or future cash flow.
 
 
105
 
USCB Financial Holdings, Inc.
 
2021 10-K
Item 9.
 
Changes in and Disagreements with Accountants on
 
Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and its
 
Chief
Financial
 
Officer,
 
we
 
evaluated
 
the
 
effectiveness
 
of
 
the
 
design
 
and
 
operation
 
of
 
the
 
Company’s
 
disclosure
 
controls
 
and
procedures
 
as
 
of
 
December 31,
 
2021.
 
Based
 
on
 
that
 
evaluation,
 
management
 
believes
 
that
 
the
 
Company’s
 
disclosure
controls
 
and
 
procedures
 
were
 
effective
 
to
 
collect,
 
process,
 
and
 
disclose
 
the
 
information
 
required
 
to
 
be
 
disclosed
 
in
 
the
reports filed or
 
submitted under
 
the Exchange
 
Act within the
 
required time
 
periods as of
 
the end of
 
the period covered
 
by
this Report.
Management’s Report on Internal Control
 
over Financial Reporting
This Annual
 
Report does
 
not include
 
a report
 
of management’s
 
assessment
 
regarding internal
 
control
 
over
 
financial
reporting or an attestation
 
report of the Company’s
 
registered public accounting
 
firm due to a
 
transition period established
by rules of the SEC for newly public companies.
Changes in Internal Control Over Financial Reporting
There has been
 
no change in
 
our internal control
 
over financial reporting
 
(as defined in
 
Rules 13a-15(f) and
 
15d-15(f)
under the
 
Exchange Act)
 
during our
 
most recent
 
fiscal quarter
 
that has
 
materially affected, or
 
is reasonably
 
likely to
 
materially
affect, our internal control over financial reporting.
 
 
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions
 
That Prevent Inspections
Not applicable.
 
 
106
 
USCB Financial Holdings, Inc.
 
2021 10-K
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information
 
required by
 
Item 10
 
is incorporated
 
by reference
 
to the
 
information that
 
appears under
 
the headings
Board Meetings and Committees in our Proxy Statement
 
for the 2022 Annual Meeting of Shareholders.
Item 11. Executive Compensation
The information
 
required by
 
Item 11
 
is incorporated
 
by reference
 
to the
 
information that
 
appears under
 
the headings
Executive Compensation in our Proxy Statement for the
 
2022 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial
 
Owners and Management and Related Stockholder
 
Matters
The information
 
required by
 
Item 12
 
is incorporated
 
by reference
 
to the
 
information that
 
appears under
 
the headings
Beneficial Owners in our Proxy Statement for the 2022
 
Annual Meeting of Shareholders.
 
Item 13. Certain Relationships and Related Transactions,
 
and Director Independence
The information
 
required by
 
Item 13
 
is incorporated
 
by reference
 
to the
 
information that
 
appears under
 
the headings
Certain Relationships
 
and Related
 
Transactions,
 
and Director
 
Independence in
 
our Proxy
 
Statement for
 
the 2022
 
Annual
Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services
The information
 
required by
 
Item 14
 
is incorporated
 
by reference
 
to the
 
information that
 
appears under
 
the headings
Ratification of Auditors in our Proxy Statement for the 2022
 
Annual Meeting of Shareholders.
 
 
 
107
 
USCB Financial Holdings, Inc.
 
2021 10-K
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
 
List of documents filed as part of this Annual Report:
1)
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended
 
December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income for
 
the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years
 
ended December 31, 2021 and 2020
Consolidated Statements of Changes in Stockholders'
 
Equity for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
2)
Financial Statement Schedules:
Financial statement schedules are omitted as not required
 
or not applicable or because the information is
included in the Consolidated Financial Statements or notes
 
thereto.
(b)
 
List of Exhibits:
The exhibit list in the Exhibit Index is incorporated herein
 
by reference as the list of exhibits required as part
 
of
this Annual Report.
 
 
 
 
108
 
USCB Financial Holdings, Inc.
 
2021 10-K
EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
 
**
**
**
**
***
***
101
The following financial statements
 
from the Company’s Annual Report
 
on Form 10-K for
 
the year ended December
 
31, 2021,
formatted
 
in Inline
 
XBRL: (i)
 
Consolidated
 
Balance Sheets,
 
(ii) Consolidated
 
Statements of
 
Operations, (iii)
 
Consolidated
 
Statements
 
of Comprehensive Income, (iv)
 
Consolidated Statements of Changes
 
in Stockholders’ Equity,
 
(v) Consolidated
 
Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Management contract or compensatory plan or arrangement.
**
Filed herwith.
***
Furnished hereby.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
109
 
USCB Financial Holdings, Inc.
 
2021 10-K
SIGNATURES
Pursuant to the
 
requirements of
 
the Securities Exchange
 
Act of 1934,
 
the registrant has
 
duly caused this
 
report to be
signed on its behalf by the undersigned thereunto duly authorized.
USCB FINANCIAL HOLDINGS, INC.
Date: March 24, 2022
By:
/s/ Luis de la Aguilera
Luis de la Aguilera
President and Chief Executive Officer
Pursuant
 
to
 
the
 
requirements
 
of
 
the
 
Securities
 
Exchange
 
Act
 
of
 
1934,
 
this
 
report
 
has
 
been
 
signed
 
by
 
the
 
following
persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Luis de la Aguilera
President, Chief Executive Officer,
 
and Director
(Principal Executive Officer)
March 24, 2022
Luis de la Aguilera
/s/ Robert Anderson
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 24, 2022
Robert Anderson
/s/ Aida Levitan
Director
March 24, 2022
Aida Levitan
/s/ Howard Feinglass
Director
March 24, 2022
Howard Feinglass
/s/ Kirk Wycoff
Director
March 24, 2022
Kirk Wycoff
/s/ Ramon A. Abadin
Director
March 24, 2022
Ramon A. Abadin
/s/ Bernardo B. Fernandez
Director
March 24, 2022
Bernardo B. Fernandez
/s/ Ramon A. Rodriguez
Director
March 24, 2022
Ramon A. Rodriguez