Item 1. Business
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.
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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.
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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,
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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.
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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
.
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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
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10
USCB Financial Holdings, Inc.
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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.
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11
USCB Financial Holdings, Inc.
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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.
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12
USCB Financial Holdings, Inc.
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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
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13
USCB Financial Holdings, Inc.
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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.
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14
USCB Financial Holdings, Inc.
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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.
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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
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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.
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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.
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18
USCB Financial Holdings, Inc.
2021 10-K