USCB FINANCIAL HOLDINGS, INC. 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 Consolidated Balance Sheets 66 Consolidated Statements of Operations 67 Consolidated Statements of Comprehensive Income 68 Consolidated Statements of Changes in Stockholders’ Equity 69 Consolidated Statements of Cash Flows 70 Notes to the Consolidated Financial Statements 72 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 Table of Contents 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. Table of Contents 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. Table of Contents 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. Table of Contents 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. Table of Contents 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. Table of Contents 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. Table of Contents 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 Table of Contents 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. Table of Contents 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. Table of Contents 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 Table of Contents 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 Table of Contents 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. Table of Contents 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 Table of Contents 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 Table of Contents 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 Table of Contents 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. Table of Contents 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. Table of Contents 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. Table of Contents 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 Table of Contents 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. Table of Contents 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. Table of Contents 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 Table of Contents 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. Table of Contents 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. Table of Contents 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 % Table of Contents 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 Table of Contents 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. Table of Contents 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. Table of Contents 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 % Table of Contents 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. Table of Contents 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. Table of Contents 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 Table of Contents 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. Table of Contents 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. Table of Contents 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. Table of Contents 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 Table of Contents 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. Table of Contents 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. Table of Contents 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. Table of Contents 105 USCB Financial Holdings, Inc. 2021 10-K Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.