USCB FINANCIAL HOLDINGS, INC. 10-Q

Item 1. Financial Statements USCB FINANCIAL HOLDINGS, INC. Consolidated Balance Sheets - Unaudited (Dollars in thousands, except share data) June 30, 2022 December 31, 2021 ASSETS: Cash and due from banks $ 7,448 $ 6,477 Interest-bearing deposits in banks 75,824 39,751 Total cash and cash equivalents 83,272 46,228 Investment securities held to maturity (fair value $ 101,067 and $ 120,157 , respectively) 116,671 122,658 Investment securities available for sale, at fair value 339,464 401,542 Federal Home Loan Bank stock, at cost 3,402 2,100 Loans held for investment, net of allowance of $ 15,786 and $ 15,057 , respectively 1,356,947 1,175,024 Accrued interest receivable 5,991 5,975 Premises and equipment, net 5,088 5,278 Bank owned life insurance 42,249 41,720 Deferred tax asset, net 43,059 34,929 Lease right-of-use asset 13,574 14,185 Other assets 6,369 4,300 Total assets $ 2,016,086 $ 1,853,939 LIABILITIES: Deposits: Demand $ 653,708 $ $ 605,425 Money market and savings accounts 802,841 703,856 Interest-bearing checking accounts 63,416 55,878 Time deposits 218,755 225,220 Total deposits 1,738,720 1,590,379 Federal Home Loan Bank advances 66,000 36,000 Lease liability 13,574 14,185 Accrued interest and other liabilities 17,724 9,478 Total liabilities 1,836,018 1,650,042 Commitments and contingencies (See Notes 5 and 10) STOCKHOLDERS' EQUITY: Preferred stock - Class C; $ 1.00 par value; $ 1,000 per share liquidation preference; 52,748 shares authorized; 0 and 0 issued and outstanding as of June 30, 2022 and December 31, 2021 - - Preferred stock - Class D; $ 1.00 par value; $ 5.00 per share liquidation preference; 12,309,480 shares authorized; 0 and 0 issued and outstanding as of June 30, 2022 and December 31, 2021 - - Preferred stock - Class E; $ 1.00 par value; $ 1,000 per share liquidation preference; 3,185,024 shares authorized; 0 and 0 issued and outstanding as of June 30, 2022 and December 31, 2021 - - Common stock - Class A Voting; $ 1.00 par value; 45,000,000 shares authorized; 20,000,753 and 19,991,753 issued and outstanding as of June 30, 2022 and December 31, 2021 20,001 19,992 Common stock - Class B Non-voting; $ 1.00 par value; 8,000,000 shares authorized; 0 and 0 issued and outstanding as of June 30, 2022 and December 31, 2021 - - Additional paid-in capital on common stock 311,024 310,666 Accumulated deficit ( 114,096 ) ( 124,245 ) Accumulated other comprehensive loss ( 36,861 ) ( 2,516 ) Total stockholders' equity 180,068 203,897 Total liabilities and stockholders' equity $ 2,016,086 $ 1,853,939 The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 4 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Operations - Unaudited (Dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Interest income: Loans, including fees $ 14,053 $ 11,538 $ 27,035 $ 23,406 Investment securities 2,510 1,968 4,839 3,812 Interest-bearing deposits in financial institutions 121 23 152 39 Total interest income 16,684 13,529 32,026 27,257 Interest expense: Interest-bearing deposits 17 15 33 29 Money market and savings accounts 615 523 1,166 1,071 Time deposits 271 379 530 933 Federal Home Loan Bank advances 139 138 276 275 Total interest expense 1,042 1,055 2,005 2,308 Net interest income before provision for credit losses 15,642 12,474 30,021 24,949 Provision for credit losses 705 - 705 ( 160 ) Net interest income after provision for credit losses 14,937 12,474 29,316 25,109 Non-interest income: Service fees 1,083 903 1,983 1,792 Gain (loss) on sale of securities available for sale, net ( 3 ) 187 18 249 Gain on sale of loans held for sale, net 22 23 356 987 Loan settlement - - 161 - Other non-interest income 515 403 1,044 809 Total non-interest income 1,617 1,516 3,562 3,837 Non-interest expense: Salaries and employee benefits 5,913 5,213 11,788 10,491 Occupancy 1,251 1,411 2,521 2,798 Regulatory assessment and fees 226 195 439 373 Consulting and legal fees 398 373 915 558 Network and information technology services 448 332 835 840 Other operating expense 1,315 1,150 2,665 2,291 Total non-interest expense 9,551 8,674 19,163 17,351 Income before income tax expense 7,003 5,316 13,715 11,595 Income tax expense 1,708 1,263 3,566 2,761 Net income 5,295 4,053 10,149 8,834 Less: Preferred stock dividend - 754 - 1,535 Net income available to common stockholders $ 5,295 $ 3,299 $ 10,149 $ 7,299 Per share information: (1) Class A common stock Net income per share, basic $ 0.26 $ 0.65 $ 0.51 $ 1.43 Net income per share, diluted $ 0.26 $ 0.64 $ 0.50 $ 1.41 Class B common stock Net income per share, basic $ - $ 0.13 $ - $ 0.29 Net income per share, diluted $ - $ 0.13 $ - $ 0.29 (1) For further details on the allocation of net income available to common stockholders and per share information, see Note 9 "Earnings per Share". The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 5 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Comprehensive Income (Loss) - Unaudited (Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 5,295 $ 4,053 $ 10,149 $ 8,834 Other comprehensive income (loss): Unrealized gain (loss) on investment securities ( 23,253 ) 233 ( 45,898 ) ( 5,837 ) Amortization of net unrealized gains on securities transferred from available-for-sale to held-to-maturity ( 61 ) - ( 126 ) - Reclassification adjustment for (gain) loss included in net income 3 ( 187 ) ( 18 ) ( 249 ) Tax effect 5,908 ( 12 ) 11,697 1,491 Total other comprehensive income (loss), net of tax ( 17,403 ) 34 ( 34,345 ) ( 4,595 ) Total comprehensive (loss) income $ ( 12,108 ) $ 4,087 $ ( 24,196 ) $ 4,239 The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 6 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Changes in Stockholders’ Equity - Unaudited (Dollars in thousands, except per share data) Preferred Stock Common Stock Additional Paid- in Capital on Common Stock Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Shares Par Value Shares Par Value Total Stockholders' Equity Balance at April 1, 2022 - $ - 20,000,753 $ 20,001 $ 310,887 $ ( 119,391 ) $ ( 19,458 ) $ 192,039 Net income - - - - - 5,295 - 5,295 Other comprehensive loss - - - - - - ( 17,403 ) ( 17,403 ) Stock-based compensation - - - - 137 - - 137 Balance at June 30, 2022 - $ - 20,000,753 $ 20,001 $ 311,024 $ ( 114,096 ) $ ( 36,861 ) $ 180,068 Balance at April 1, 2021 12,350,879 $ 32,077 10,010,521 $ 10,010 $ 177,808 $ ( 49,622 ) $ 152 $ 170,425 Net income - - - - - 4,053 - 4,053 Other comprehensive income - - - - - - 34 34 Dividends - preferred stock - - - - - ( 754 ) - ( 754 ) Preferred stock repurchase ( 7,500 ) ( 7,461 ) - - - ( 39 ) - ( 7,500 ) Stock-based compensation - - - - 44 - - 44 Balance at June 30, 2021 12,343,379 $ 24,616 10,010,521 $ 10,010 $ 177,852 $ ( 46,362 ) $ 186 $ 166,302 Preferred Stock Common Stock Additional Paid- in Capital on Common Stock Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Shares Par Value Shares Par Value Total Stockholders' Equity Balance at January 1, 2022 - $ - 19,991,753 $ 19,992 $ 310,666 $ ( 124,245 ) $ ( 2,516 ) $ 203,897 Net income - - - - - 10,149 - 10,149 Other comprehensive loss - - - - - - ( 34,345 ) ( 34,345 ) Exercise of stock options - - 9,000 9 93 - - 102 Stock-based compensation - - - - 265 - - 265 Balance at June 30, 2022 - $ - 20,000,753 $ 20,001 $ 311,024 $ ( 114,096 ) $ ( 36,861 ) $ 180,068 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 - - - - - 8,834 - 8,834 Other comprehensive loss - - - - - - ( 4,595 ) ( 4,595 ) Dividends - preferred stock - - - - - ( 1,535 ) - ( 1,535 ) Preferred stock repurchase ( 7,500 ) ( 7,461 ) - - - ( 39 ) - ( 7,500 ) Stock-based compensation - - - - 97 - 97 Balance at June 30, 2021 12,343,379 $ 24,616 10,010,521 $ 10,010 $ 177,852 $ ( 46,362 ) $ 186 $ 166,302 The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 7 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flows - Unaudited (Dollars in thousands) Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net income $ 10,149 $ 8,834 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 705 ( 160 ) Depreciation and amortization 363 642 Amortization of premiums on securities, net 306 192 Accretion of deferred loan fees, net ( 508 ) ( 2,016 ) Stock-based compensation 265 97 Gain on sale of available for sale securities ( 18 ) ( 249 ) Gain on sale of loans held for sale ( 356 ) ( 987 ) Increase in cash surrender value of bank owned life insurance ( 529 ) ( 335 ) Decrease in deferred tax asset 3,567 2,760 Net change in operating assets and liabilities: Accrued interest receivable ( 16 ) ( 65 ) Other assets ( 2,069 ) ( 863 ) Accrued interest and other liabilities 8,246 6,001 Net cash provided by operating activities 20,105 13,851 Cash flows from investing activities: Purchase of investment securities held to maturity ( 2,432 ) - Proceeds from maturities and pay-downs of investment securities held to maturity 8,173 - Purchase of investment securities available for sale ( 42,794 ) ( 138,937 ) Proceeds from maturities and pay-downs of investment securities available for sale 26,950 28,159 Proceeds from sales of investment securities available for sale 31,838 43,266 Net increase in loans held for investment ( 115,607 ) ( 68,609 ) Purchase of loans held for investment ( 70,175 ) ( 44,868 ) Additions to premises and equipment ( 173 ) ( 240 ) Proceeds from the sale of loans held for sale 4,018 9,811 Proceeds from the redemption of Federal Home Loan Bank stock - 611 Purchase of Federal Home Loan Bank stock ( 1,302 ) - Net cash used in investment activities ( 161,504 ) ( 170,807 ) Cash flows from financing activities: Proceeds from issuance of Class A common stock, net 102 - Dividends paid - ( 1,535 ) Redemption of Preferred stock Class E - ( 7,500 ) Net increase in deposits 148,341 165,374 Proceeds from Federal Home Loan Bank advances 30,000 - Net cash provided by financing activities 178,443 156,339 Net increase in cash and cash equivalents 37,044 ( 617 ) Cash and cash equivalents at beginning of period 46,228 47,734 Cash and cash equivalents at end of period $ 83,272 $ 47,117 Supplemental disclosure of cash flow information: Interest paid $ 2,002 $ 2,359 Supplemental schedule of non-cash investing and financing activities: Transfer of loans held for investment to loans held for sale $ 3,662 $ 8,824 Transfer of premises and equipment to assets held for sale $ - $ 656 Lease liability arising from obtaining right-of-use assets $ 898 $ - 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 - Unaudited 8 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Overview USCB Financial Holdings, Inc., a Florida corporation incorporated in 2021, is a bank holding company with one wholly owned subsidiary, U.S. Century Bank (the “Bank”), together referred to as “the Company”. The Bank, established in 2002, is a Florida state-chartered, non-member financial institution providing financial services through its banking centers located in South Florida. During the year ended December 31, 2021, the Bank completed an initial public offering (“IPO”) and its Class A voting common shares began trading on the Nasdaq Stock Market in July 2021. In December 2021, the Bank exchanged all the outstanding shares of Class B non-voting common stock for shares of Class A voting common stock on a one to five exchange. Shortly thereafter, USCB Financial Holdings, Inc. acquired all issued and outstanding shares of Class A voting common stock of the Bank in connection with the reorganization of the Bank into the holding company form of structure. For further information on the IPO and the exchange and redemption of shares, see Note 8 “Stockholders’ Equity”. The Company’s Consolidated Financial Statements consist of USCB Financial Holdings, Inc. and U.S. Century Bank as of June 30, 2022 and December 31, 2021 and for the three and six month ended June 30, 2022 compared to only U.S. Century Bank as of June 30, 2021 and for the three and six months periods ended June 30, 2021. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Principles of Consolidation The Company consolidates entities in which it has a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation. Use of Estimates To prepare financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements. The most significant estimates impacting the Company’s consolidated financial statements are the allowance for credit losses and income taxes. Reclassifications Certain amounts in the Consolidated Financial Statements have been reclassified to conform to the current presentation. Reclassifications had no impact on the net income or stockholders’ equity of the Company. Recently Issued Accounting Standards Issued and Not Yet Adopted Measurement of Credit Losses on Financial Instruments In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. This accounting standard update (“ASU” or “Update”) on accounting for current expected credit losses on financial instruments (“CECL”) will replace the current probable incurred loss impairment methodology under U.S. GAAP with a methodology that reflects the expected credit losses. The Update is intended to provide financial statement users with more decision-useful information about expected credit losses. This Update is applicable to the Company on a modified retrospective basis for interim and annual periods in fiscal years beginning after December 15, Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 9 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q 2022. Early adoption is permitted for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company expects to adopt this ASU on January 1, 2023. The impact of adoption on the Company’s financial statements will depend on the composition of the loan and investment securities portfolio as of January 1, 2023, general economic conditions, and other factors that are not known at this time. Although management is in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements, management does believe that this ASU will lead to significant changes in accounting policies and disclosures related to, and the methods used in estimating, the ACL. The Company has developed a detailed implementation plan through the date of adoption that includes the implementation of a software solution to assist with the CECL implementation process and is developing measurements in parallel with the current methodology. To date, the Company has initiated policy discussion with key stakeholders, completed a data gap analysis and retained the services of a third-party consulting firm to perform an independent model validation prior to adoption. Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB clarified the scope of this guidance with ASU 2021-01 which provides optional guidance for a limited period of time to ease the burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This ASU is effective from March 12, 2020 through December 31, 2022. The Company is evaluating the impact of this ASU and has not yet determined whether LIBOR transition and this ASU will have a material effect on our business operations and consolidated financial statements. Trouble Debt Restructuring In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the recognition and measurement guidance on troubled debt restructurings for creditors and aligns it with existing guidance to determine whether a loan modification results in a new loan or a continuation of an existing loan. The new guidance also requires enhanced disclosures about certain loan modifications by creditors when a borrower is experiencing financial difficulty. This ASU is effective in periods beginning after December 15, 2022, using either a prospective or modified retrospective transition approach. Early adoption is permitted for entities that have already adopted CECL. The Company is in the process of reviewing this ASU, as part of its CECL implementation efforts, to determine whether it would have a material impact on the Company’s consolidated financial statements when adopted. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 10 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q 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): June 30, 2022 Available-for-sale: Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. Government Agency $ 27,816 $ - $ ( 1,966 ) $ 25,850 U.S. Treasury 2,468 - (31) 2,437 Collateralized mortgage obligations 155,340 - ( 21,520 ) 133,820 Mortgage-backed securities - residential 111,708 - ( 15,726 ) 95,982 Mortgage-backed securities - commercial 44,670 - ( 4,549 ) 40,121 Municipal securities 25,124 - ( 5,522 ) 19,602 Bank subordinated debt securities 16,503 53 ( 584 ) 15,972 Corporate bonds 6,062 - ( 382 ) 5,680 $ 389,691 $ 53 $ ( 50,280 ) $ 339,464 Held-to-maturity: U.S. Government Agency $ 34,100 $ - $ ( 4,692 ) $ 29,408 Collateralized mortgage obligations 40,806 - ( 5,513 ) 35,293 Mortgage-backed securities - residential 27,478 - ( 3,954 ) 23,524 Mortgage-backed securities - commercial 3,095 - ( 403 ) 2,692 Corporate bonds 11,192 - ( 1,042 ) 10,150 $ 116,671 $ - $ ( 15,604 ) $ 101,067 December 31, 2021 Available-for-sale: Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. Government Agency $ 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 $ 34,505 $ 14 $ ( 615 ) $ 33,904 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 During the year ended December 31, 2021, a total of 28 investment securities with an amortized cost basis and fair value of $ 67.6 million and $ 68.7 million, respectively, were transferred from available-for-sale (“AFS”) to held-to-maturity (“HTM”). These securities had a net unrealized gain of $ 1.1 million on the date of transfer, with no immediate impact to net income on the transfer date. The unrealized gain or loss of each security at the date of transfer was retained in accumulated other comprehensive income (“AOCI”) and in the carrying value of the HTM securities. The net unrealized gains that were retained in AOCI are being amortized over the remaining life of the transferred securities. For the three months and the six months ended June 30, 2022, total amortization out of AOCI for net unrealized gains on securities transferred from AFS to HTM was $ 61 thousand and $ 126 thousand, respectively. Two of these transferred securities totaling $ 2.0 million matured during the second quarter of 2022. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 11 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Gains and losses on the sale of securities are recorded on the trade date and are determined on a specific identification basis. The following table presents the proceeds, realized gross gains and realized gross losses on sales and calls of AFS debt securities for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Six Months Ended June 30, Available-for-sale: 2022 2021 2022 2021 Proceeds from sale and call of securities $ 17,280 $ 29,018 $ 31,838 $ 43,266 Gross gains $ 58 $ 363 $ 216 $ 438 Gross losses ( 61 ) ( 176 ) ( 198 ) ( 189 ) Net realized gain (loss) $ ( 3 ) $ 187 $ 18 $ 249 The amortized cost and fair value of investment securities, by contractual maturity, are shown below as of the date indicated (in thousands). Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. Available-for-sale Held-to-maturity June 30, 2022: Amortized Cost Fair Value Amortized Cost Fair Value Due after one year through five years $ 8,530 $ 8,117 $ 11,192 $ 10,150 Due after five years through ten years 17,503 16,822 - - Due after ten years 24,124 18,752 - - U.S. Government Agency 27,816 25,850 34,100 29,408 Collateralized mortgage obligations 155,340 133,820 40,806 35,293 Mortgage-backed securities - residential 111,708 95,982 27,478 23,524 Mortgage-backed securities - commercial 44,670 40,121 3,095 2,692 $ 389,691 $ 339,464 $ 116,671 $ 101,067 At June 30, 2022, there were no securities held in the portfolio from 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 June 30, 2022 and December 31, 2021. Information pertaining to investment securities with gross unrealized losses, aggregated by investment category and length of time that those individual securities have been in a continuous loss position, are presented as of the following dates (in thousands): June 30, 2022 Less than 12 months 12 months or more Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government Agency $ 40,053 $ ( 3,976 ) $ 15,205 $ ( 2,787 ) $ 55,258 $ ( 6,763 ) U.S. Treasury 2,437 (31) - - 2,437 (31) Collateralized mortgage obligations 100,414 ( 14,042 ) 68,699 ( 12,991 ) 169,113 ( 27,033 ) Mortgage-backed securities - residential 77,724 ( 10,426 ) 41,782 ( 8,927 ) 119,506 ( 19,353 ) Mortgage-backed securities - commercial 36,712 ( 3,830 ) 6,101 ( 1,057 ) 42,813 ( 4,887 ) Municipal securities 6,050 ( 1,560 ) 13,552 ( 3,962 ) 19,602 ( 5,522 ) Bank subordinated debt securities 11,919 ( 584 ) - - 11,919 ( 584 ) Corporate bonds 15,830 ( 859 ) - - 15,830 ( 859 ) $ 291,139 $ ( 35,308 ) $ 145,339 $ ( 29,724 ) $ 436,478 $ ( 65,032 ) Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 12 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q 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 $ 25,951 $ ( 254 ) $ 15,477 $ ( 516 ) $ 41,428 $ ( 770 ) 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 ) As of June 30, 2022, the unrealized losses associated with $ 62.2 million of investment securities transferred from the AFS portfolio to the HTM portfolio represent unrealized losses since the date of purchase, independent of the impact associated with changes in the cost basis upon transfer between portfolios. The Company performs a review of the investments that have an unrealized loss to determine whether there have been any changes in the economic circumstance of the security issuer to indicate that the unrealized loss is impaired on an other- than-temporary (“OTTI”) basis. Management considers several factors in their analysis including (i) the severity and duration of the impairment, (ii) the credit rating of the security including any downgrade, (iii) the intent to sell the security, or if it is more likely than not that it will be required to sell the security before recovery , (iv) whether there have been any payment defaults and (v) the underlying guarantor of the securities. The company does not consider these investments to be OTTI as the decline in market value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of its amortized cost basis, which may be maturity, and it is more likely than not that the Company will not be required to sell the securities before maturity. Pledged Securities 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. As of June 30, 2022, the Company did not have any securities pledged under this agreement. The Company is a Qualified Public Depositor (“QPD”) with the state of Florida. As a QPD, the Company has the legal authority to maintain public deposits from cities, municipalities, and the state of Florida. These public deposits are secured by securities pledged to the state of Florida at a ratio of 25 % of the outstanding uninsured deposits. The Company must also maintain a minimum amount of pledged securities to be in the public funds program. As of June 30, 2022, the Company had a total of $ 93.7 million in deposits under the public funds program and pledged to the state of Florida for these public funds were fourteen corporate bonds with an aggregate fair value of $ 23.6 million. As of December 31, 2021, the Company had a total of $ 37.3 million in deposits under the public funds program and pledged to the state of Florida for these public funds were eleven corporate bonds with an aggregate fair value of $ 20.4 million. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 13 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q 3. LOANS The following table is a summary of the distribution of loans held for investment by type (in thousands): June 30, 2022 December 31, 2021 Total Percent of Total Total Percent of Total Residential Real Estate $ 203,662 14.8 % $ 201,359 16.9 % Commercial Real Estate 843,445 61.5 % 704,988 59.2 % Commercial and Industrial 131,271 9.5 % 146,592 12.3 % Foreign Banks 84,770 6.2 % 59,491 5.0 % Consumer and Other 109,250 8.0 % 79,229 6.6 % Total gross loans 1,372,398 100.0 % 1,191,659 100.0 % Less: Deferred fees (cost) ( 335 ) 1,578 Total loans net of deferred fees (cost) 1,372,733 1,190,081 Less: Allowance for credit losses 15,786 15,057 Total net loans $ 1,356,947 $ 1,175,024 At June 30, 2022 and December 31, 2021, the Company had $ 159.9 million and $ 185.1 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. The Company was a participant in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) loans. These loans were designed to provide a direct incentive for small businesses to keep their workers on payroll and the funds had to be used towards payroll cost, mortgage interest, rent, utilities and other costs related to COVID-19. These loans are forgivable under specific criteria as determined by the SBA. The Company had PPP loans of $ 13.5 million at June 30, 2022 and $ 42.4 million at December 31, 2021, which are categorized as commercial and industrial loans. These PPP loans had deferred loan fees of $ 149 thousand at June 30, 2022 and $ 1.5 million at December 31, 2021. The Company recognized $ 1.5 million and $ 2.4 million in PPP loan fees and interest income during the six months ended June 30, 2022 and 2021, respectively, which is reported under loans, including fees, within the Consolidated Statements of Operations. The Company segments the portfolio by pools grouping loans that share similar risk characteristics and employing collateral type and lien position to group loans according to risk. The Company determines historical loss rates for each loan pool based on its own loss experience. In estimating credit losses, the Company also considers qualitative and environmental factors that may cause estimated credit losses for the loan portfolio to differ from historical losses. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 14 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Changes in the allowance for credit losses for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands): Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other Total Three Months Ended June 30, 2022 Beginning balance $ 2,357 $ 9,183 $ 2,355 $ 491 $ 688 $ 15,074 Provision for credit losses 9 107 311 160 118 705 Recoveries - - 5 - 3 8 Charge-offs - - - - ( 1 ) ( 1 ) Ending Balance $ 2,366 $ 9,290 $ 2,671 $ 651 $ 808 $ 15,786 Six Months Ended June 30, 2022 Beginning balance $ 2,498 $ 8,758 $ 2,775 $ 457 $ 569 $ 15,057 Provision for credit losses ( 148 ) 532 ( 115 ) 194 242 705 Recoveries 32 - 11 - 3 46 Charge-offs (16) - - - ( 6 ) ( 22 ) Ending Balance $ 2,366 $ 9,290 $ 2,671 $ 651 $ 808 $ 15,786 Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other Total Three Months Ended June 30, 2021 Beginning balance $ 3,087 $ 9,320 $ 2,005 $ 407 $ 190 $ 15,009 Provision for credit losses ( 322 ) ( 568 ) 398 147 345 - Recoveries 4 - 64 - 1 69 Charge-offs ( 229 ) - - - ( 1 ) ( 230 ) Ending Balance $ 2,540 $ 8,752 $ 2,467 $ 554 $ 535 $ 14,848 Six Months Ended June 30, 2021 Beginning balance $ 3,408 $ 9,453 $ 1,689 $ 348 $ 188 $ 15,086 Provision for credit losses ( 647 ) ( 701 ) 627 206 355 ( 160 ) Recoveries 8 - 151 - 2 161 Charge-offs ( 229 ) - - - ( 10 ) ( 239 ) Ending Balance $ 2,540 $ 8,752 $ 2,467 $ 554 $ 535 $ 14,848 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 15 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Allowance for credit losses and the outstanding balances in loans as of June 30, 2022 and December 31, 2021 are as follows (in thousands): Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other Total June 30, 2022: Allowance for credit losses: Individually evaluated for impairment $ 165 $ - $ 50 $ - $ 104 $ 319 Collectively evaluated for impairment 2,201 9,290 2,621 651 704 15,467 Balances, end of period $ 2,366 $ 9,290 $ 2,671 $ 651 $ 808 $ 15,786 Loans: Individually evaluated for impairment $ 7,307 $ 594 $ 99 $ - $ 210 $ 8,210 Collectively evaluated for impairment 196,355 842,851 131,172 84,770 109,040 1,364,188 Balances, end of period $ 203,662 $ 843,445 $ 131,271 $ 84,770 $ 109,250 $ 1,372,398 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 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 16 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Credit Quality Indicators The Company grades loans based on the estimated capability of the borrower to repay the contractual obligation of the loan agreement based on relevant information which may include: current financial information on the borrower, historical payment experience, credit documentation and other current economic trends. Internal credit risk grades are evaluated periodically. The Company's internally assigned credit risk grades are as follows: Pass – Loans indicate different levels of satisfactory financial condition and performance. Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligator or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified at substandard, with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss – Loans classified as loss are considered uncollectible. Loan credit exposures by internally assigned grades are presented below for the periods indicated (in thousands): As of June 30, 2022 Pass Special Mention Substandard Doubtful Total Loans Residential real estate: Home equity line of credit ("HELOC") and other $ 707 $ - $ - $ - $ 707 1-4 family residential 144,937 - - - 144,937 Condo residential 58,018 - - - 58,018 203,662 - - - 203,662 Commercial real estate: Land and construction 37,326 - - - 37,326 Multi-family residential 134,535 - - - 134,535 Condo commercial 48,103 - 406 - 48,509 Commercial property 621,789 1,197 - - 622,986 Leasehold improvements 89 - - - 89 841,842 1,197 406 - 843,445 Commercial and industrial: (1) Secured 111,293 - 462 - 111,755 Unsecured 19,516 - - - 19,516 130,809 - 462 - 131,271 Foreign banks 84,770 - - - 84,770 Consumer and other loans 109,040 - 210 - 109,250 Total $ 1,370,123 $ 1,197 $ 1,078 $ - $ 1,372,398 (1) All outstanding PPP loans were internally graded pass. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 17 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q 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 - Unaudited 18 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Loan Aging The Company also considers the performance of loans in grading and in evaluating the credit quality of the loan portfolio. The Company analyzes credit quality and loan grades based on payment performance and the aging status of the loan. The following tables include an aging analysis of accruing loans and total non-accruing loans as of June 30, 2022 and December 31, 2021 (in thousands): Accruing As of June 30, 2022: Current Past Due 30- 89 Days Past Due 90 Days or > and Still Accruing Total Accruing Non-Accrual Total Loans Residential real estate: Home equity line of credit and other $ 707 $ - $ - $ 707 $ - $ 707 1-4 family residential 144,937 - - 144,937 - 144,937 Condo residential 57,338 680 - 58,018 - 58,018 202,982 680 - 203,662 - 203,662 Commercial real estate: - Land and construction 37,326 - - 37,326 - 37,326 Multi-family residential 134,535 - - 134,535 - 134,535 Condo commercial 48,509 - - 48,509 - 48,509 Commercial property 622,986 - - 622,986 - 622,986 Leasehold improvements 89 - - 89 - 89 843,445 - - 843,445 - 843,445 Commercial and industrial: - Secured 111,556 199 - 111,755 - 111,755 Unsecured 19,516 - - 19,516 - 19,516 131,072 199 - 131,271 - 131,271 - Foreign banks 84,770 - - 84,770 - 84,770 Consumer and other 109,250 - - 109,250 - 109,250 - Total $ 1,371,519 $ 879 $ - $ 1,372,398 $ - $ 1,372,398 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 19 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Accruing As of December 31, 2021: Current Past Due 30-89 Days Past Due 90 Days or > and Still Accruing Total Accruing Non-Accrual Total Loans Residential real estate: Home equity line of credit and other $ 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 There was no interest income recognized attributable to nonaccrual loans outstanding during June 30, 2022 and 2021. Interest income on these loans for the three months ended June 30, 2022 and 2021, would have been approximately $ 0 and $ 1 thousand, respectively, had these loans performed in accordance with their original terms. Impaired Loans The following table includes the unpaid principal balances for impaired loans with the associated allowance amount, if applicable, on the basis of impairment methodology at the dates indicated (in thousands): June 30, 2022 December 31, 2021 Unpaid Principal Balance Net Investment Balance Valuation Allowance Unpaid Principal Balance Net Investment Balance Valuation Allowance Impaired Loans with No Specific Allowance: Residential real estate $ 3,598 $ 3,592 $ - $ 5,021 $ 5,035 $ - Commercial real estate 593 593 - 696 695 - 4,191 4,185 - 5,717 5,730 - Impaired Loans with Specific Allowance: Residential real estate 3,710 3,677 165 3,985 3,950 178 Commercial and industrial 99 99 50 141 141 71 Consumer and other 210 210 104 224 224 111 4,019 3,986 319 4,350 4,315 360 Total $ 8,210 $ 8,171 $ 319 $ 10,067 $ 10,045 $ 360 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 - Unaudited 20 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q The following table presents the average recorded investment balance on impaired loans for the dates indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Residential real estate $ 7,332 $ 8,321 $ 7,890 $ 9,027 Commercial real estate 599 718 631 723 Commercial and industrial 115 188 124 192 Consumer and other 214 262 217 268 Total $ 8,260 $ 9,489 $ 8,862 $ 10,210 Interest income recognized on impaired loans for the three months ended June 30, 2022 and 2021 was $ 90 thousand and $ 105 thousand, respectively. Interest income recognized on impaired loans for the six months ended June 30, 2022 and 2021 was $ 181 thousand and $ 214 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. Modifications to loans can be made for rate, term, payment, conversion of loan to interest only for a limited period of time or a combination to include more than one type of modification. The following table presents performing and non-performing TDRs at the dates indicated (in thousands): June 30, 2022 December 31, 2021 Accrual Status Non-Accrual Status Total TDRs Accrual Status Non-Accrual Status Total TDRs Residential real estate $ 7,307 $ - $ 7,307 $ 7,815 $ - $ 7,815 Commercial real estate 594 - 594 696 - 696 Commercial and industrial 99 - 99 141 - 141 Consumer and other 210 - 210 224 - 224 Total $ 8,210 $ - $ 8,210 $ 8,876 $ - $ 8,876 The Company had allocated $ 319 thousand and $ 360 thousand of specific allowance for TDR loans at June 30, 2022 and December 31, 2021, respectively. There were no charge-offs on TDR loans during the three and six months ended June 30, 2022 and 2021. There were no commitments outstanding to lend additional funds to any of these TDR customers as of June 30, 2022. During the quarter ended June 30, 2022 and 2021, there were no defaults on loans which were modified as a TDR within the prior 12 months. The Company also did no t have any new TDR loans for the three and six months ended June 30, 2022 and 2021. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 21 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q 4. INCOME TAXES The Company’s provision for income taxes is presented in the following table for the dates indicated (in thousands): Six Months Ended June 30, 2022 2021 Current: Federal $ - $ - State - - Total current - - Deferred: Federal 2,778 2,268 State 788 493 Total deferred 3,566 2,761 Total tax expense $ 3,566 $ 2,761 The actual income tax expense for the six months ended June 30, 2022 and 2021 differs from the statutory tax expense for the year (computed by applying the U.S. federal corporate tax rate of 21 % for 2022 and 2021 to income before provision for income taxes) as follows (in thousands): Six Months Ended June 30, 2022 2021 Federal taxes at statutory rate $ 2,880 $ 2,435 State income taxes, net of federal tax benefit 596 406 Bank owned life insurance ( 134 ) ( 82 ) Other, net 224 2 Total tax expense $ 3,566 $ 2,761 The Company’s deferred tax assets and deferred tax liabilities as of the dates indicated were (in thousands): June 30, 2022 December 31, 2021 Deferred tax assets: Net operating loss $ 25,768 $ 28,819 Allowance for credit losses 4,001 3,816 Lease liability 3,440 3,595 Unrealized losses on available for sale securities 12,514 817 Deferred loan fees - 400 Depreciable property 134 361 Stock option compensation 298 241 Accruals 447 600 Other, net 144 2 Deferred tax assets: 46,746 38,651 Deferred tax liability: Deferred loan cost ( 85 ) - Lease right of use asset ( 3,440 ) ( 3,595 ) Deferred expenses ( 162 ) ( 127 ) Deferred tax liability ( 3,687 ) ( 3,722 ) Net deferred tax assets $ 43,059 $ 34,929 The Company has approximately $ 97.8 million of federal and $ 120.5 million of state net operating loss carryforwards expiring in various amounts between 2031 and 2036 and are limited to future taxable earnings of the Company. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 22 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The major tax jurisdictions where the Company files income tax returns are the U.S. federal jurisdiction and the state of Florida. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2018. For the three months ended June 30, 2022 and 2021, 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. 5. OFF-BALANCE SHEET ARRANGEMENTS The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include unfunded commitments under lines of credit, commitments to extend credit, standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s Consolidated Balance Sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for unused lines of credit, and standby letters of credit is represented by the contractual amount of these commitments. A summary of the amounts of the Company's financial instruments with off-balance sheet risk are shown below at June 30, 2022 and December 31, 2021 (in thousands): June 30, 2022 December 31, 2021 Commitments to grant loans and unfunded lines of credit $ 142,498 $ 134,877 Standby and commercial letters of credit 3,843 6,420 $ 146,341 $ 141,297 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Unfunded lines of credit and revolving credit lines are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn upon to the total extent to which the Company committed. Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit have fixed maturity dates and many of them expire without being drawn upon, they do not generally present a significant liquidity risk to the Company. 6. DERIVATIVES The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk 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 17 and 18 interest rate swaps with loan customers with an aggregate notional amount of $ 36.3 million and $ 39.2 million at June 30, 2022 and December 31, 2021, respectively. These interest rate swaps mature between 2025 and 2051. The Company entered into corresponding and offsetting derivatives with third parties. The fair value of liability on these derivatives requires the Company to provide the counterparty with funds to be held as collateral which the Company reports as other assets under Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 23 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q the Consolidated Balance Sheets. While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes. The following table reflects the Company’s customer-related interest rate swaps at the dates indicated (in thousands): Fair Value Notional Amount Collateral Amount Balance Sheet Location Asset Liability June 30, 2022: Derivatives not designated as hedging instruments: Interest rate swaps related to customer loans $ 36,315 $ 1,260 Other assets/Other liabilities $ 3,831 $ 3,831 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 7. FAIR VALUE MEASUREMENTS Determination of Fair Value The Company uses fair value measurements to record fair-value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements accounting guidance, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. Fair Value Hierarchy In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value. Level 1 - 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. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 24 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Items Measured at Fair Value on a Recurring Basis AFS 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 June 30, 2022 and December 31, 2021 for each of the fair value hierarchy levels (in thousands): June 30, 2022 December 31, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Investment securities available for sale: U.S. Government Agency $ - $ 25,850 $ - $ 25,850 $ - $ 10,520 $ - $ 10,520 U.S. Treasury 2,437 - - 2,437 - - - - Collateralized mortgage obligations - 133,820 - 133,820 - 156,829 - 156,829 Mortgage-backed securities - residential - 95,982 - 95,982 - 118,842 - 118,842 Mortgage-backed securities - commercial - 40,121 - 40,121 - 50,117 - 50,117 Municipal Securities - 19,602 - 19,602 - 24,276 - 24,276 Bank subordinated debt securities - 15,972 - 15,972 - 28,408 - 28,408 Corporate bonds - 5,680 - 5,680 - 12,550 - 12,550 Total 2,437 337,027 - 339,464 - 401,542 - 401,542 Derivative assets - 3,831 - 3,831 - 1,434 - 1,434 Total assets at fair value $ 2,437 $ 340,858 $ - $ 343,295 $ - $ 402,976 $ - $ 402,976 Derivative liabilities $ - $ 3,831 $ - $ 3,831 $ - $ 1,434 $ - $ 1,434 Total liabilities at fair value $ - $ 3,831 $ - $ 3,831 $ - $ 1,434 $ - $ 1,434 Items Measured at Fair Value on a Non-recurring Basis Impaired Loans: At June 30, 2022 and December 31, 2021, in accordance with provisions of the loan impairment guidance, individual loans with a carrying amount of approximately $ 4.0 million and $ 4.4 million, respectively, were written down to their fair value of approximately $ 3.7 million and $ 4.0 million, respectively, resulting in an impairment charge of $ 319 thousand and $ 360 thousand, respectively, which was included in the allowance for credit losses at June 30, 2022 and December 31, 2021, 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 is 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. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 25 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q The following table represents the Company’s assets measured at fair value on a non-recurring basis at June 30, 2022 and December 31, 2021 for each of the fair value hierarchy levels (in thousands): Level 1 Level 2 Level 3 Total June 30, 2022: Impaired loans $ - $ - $ 3,700 $ 3,700 December 31, 2021: Impaired loans $ - $ - $ 3,990 $ 3,990 The following table presents quantified information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis at June 30, 2022 and December 31, 2021 (in thousands): Fair Value Valuation Technique(s) Unobservable Input(s) June 30, 2022: Residential real estate $ 3,546 Sales comparison approach Adj. for differences between comparable sales Commercial and industrial 48 Discounted cash flow Adj. for differences in net operating income expectations Consumer and other loans 106 Discounted cash flow Adj. for differences in net operating income expectations Total impaired loans $ 3,700 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 Consumer and other loans 113 Discounted cash flow Adj. for differences in net operating income expectations Total impaired loans $ 3,990 There were no financial liabilities measured at fair value on a non-recurring basis at June 30, 2022 and December 31, 2021. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 26 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Items Not Measured at Fair Value The following table presents the carrying amounts and estimated fair values of financial instruments not carried at fair value as of June 30, 2022 and December 31, 2021 (in thousands): Fair Value Hierarchy Carrying Amount Level 1 Level 2 Level 3 Fair Value Amount June 30, 2022: Financial Assets: Cash and due from banks $ 7,448 $ 7,448 $ - $ - $ 7,448 Interest-bearing deposits in banks $ 75,824 $ 75,824 $ - $ - $ 75,824 Investment securities held to maturity $ 116,671 $ - $ 101,067 $ - $ 101,067 Loans held for investment, net $ 1,356,947 $ - $ - $ 1,339,283 $ 1,339,283 Accrued interest receivable $ 5,991 $ - $ 1,246 $ 4,745 $ 5,991 Financial Liabilities: Demand deposits $ 653,708 $ 653,708 $ - $ - $ 653,708 Money market and savings accounts $ 802,841 $ 802,841 $ - $ - $ 802,841 Interest-bearing checking accounts $ 63,416 $ 63,416 $ - $ - $ 63,416 Time deposits $ 218,755 $ - $ - $ 214,737 $ 214,737 FHLB advances $ 66,000 $ - $ 64,985 $ - $ 64,985 Accrued interest payable $ 99 $ - $ 50 $ 49 $ 99 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 $ 225,200 $ - $ - $ 224,688 $ 224,688 FHLB advances $ 36,000 $ - $ 36,479 $ - $ 36,479 Accrued interest payable $ 96 $ - $ 50 $ 46 $ 96 8. STOCKHOLDERS’ EQUITY Common Stock The rights of the holders of Class A common stock and Class B common stock are the same, except for voting and conversion rights. Holders of Class A common stock are entitled to voting rights, while holders of Class B common stock have no voting rights. Shares of Class B common stock are convertible into shares of Class A common stock if sold or transferred. In June 2021, the Bank effected a 1 for 5 reverse stock split of all the Class A common stock $ 1.00 par value. Each five shares of the Bank’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 Bank has adjusted the Class A common stock, earnings per share and stock options for this 1 for 5 reverse stock split for all periods in 2021. The Class B common stock was not adjusted but if sold or exchanged would be converted at the 1 for 5 reverse stock split of 1 share of Class A common stock for 5 shares of Class B common stock. Any dividends declared by the Board of Directors (the “Board”) to include Class B common stock 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 - Unaudited 27 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q In July 2021, the Bank completed the 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 Bank received total net proceeds of $ 40.0 million after deducting underwriting discounts and expenses. In December 2021, the Bank entered into agreements with the Class B shareholders to exchange all outstanding Class B common stock for Class A common stock at a ratio of 5 to 1. As a result, a total of 6,121,052 shares of Class B common stock were 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 “Reorga nization”) 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. In the Reorganization, each shareholder of the Bank received securities of the same class, having substantially the same designations, rights, powers, preferences, qualifications, limitations and restrictions, as those that the shareholder held in the Bank, and the Company’s current shareholders own the same percentages of its common stock as they previously owned of the Bank’s common stock. Preferred Stock In April 2021, the Board authorized and approved the offer to repurchase all outstanding shares of Class E preferred stock at the liquidation value of $ 7.5 million along with declared dividends of $ 103 thousand. All Class E preferred stock shareholders approved the repurchase which the Bank completed in April 2021. The Bank offered the Class C and Class D preferred stockholders the ability to exchange their shares for Class A common stock. The offer to exchange was voluntary and the preferred stockholders were given the option to convert 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 preferred stock 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 an aggregate of 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 their liquidation value for $ 11.4 million. The fair value of consideration on the preferred stock exchange and redemption of the Class C and Class D preferred shares exceeded the book value causing a one-time reduction in net income available to common stockholders of $ 89.6 million. As of June 30, 2022 and December 31, 2021, there were no preferred shares and no outstanding dividends to be paid these on. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 28 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Dividends The following dividend amounts were paid on the preferred shares for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 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. $ - $ 528 $ - $ 1,055 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. - 123 - 246 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 preference paid quarterly. Quarterly dividend of $ 17.50 per share. - 103 - 234 Total dividends paid $ - $ 754 $ - $ 1,535 Declaration of dividends by the Board is required before dividend payments are made. No dividends were approved by the Board for the common stock classes for the three months ended June 30, 2022 and 2021. Additionally, there were no dividends declared and unpaid as of June 30, 2022 and 2021. The Company and the Bank exceeded all regulatory capital requirements and remained significantly above “well- capitalized” guidelines. At June 30, 2022, total risk-based capital ratio for the Company and the Bank were 13.74 % and 13.67 %, respectively. 9. EARNINGS PER SHARE Earnings per share (“EPS”) for common stock is calculated using the two-class method required for participating securities. Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period and the weighted-average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock equivalents include common stock options and are only included in the calculation of diluted EPS when their effect is dilutive. To calculate EPS for the three and six months ended June 30, 2022, net income available to common stockholders was not allocated between Class A and Class B common stock since there were no issued and outstanding shares of Class B common stock as of June 30, 2022. To calculate EPS for the three and six months ended June 30, 2021, net income available to common stockholders was allocated as if all the income for the period were distributed to common stockholders. The allocation was based on the outstanding shares per common share class to the total common shares outstanding during each period giving effect for the 1 for 5 reverse stock split. The Company’s Articles of Incorporation require that the distribution of net income to Common B stockholders be adjusted to give effect for Class A stock splits. Therefore, the income allocated to Class B common shares was calculated based on their 20 % per share equivalent to Class A common shares. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 29 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q The following table reflects the calculation of net income available to common stockholders for three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net Income $ 5,295 $ 4,053 $ 10,149 $ 8,834 Less: Preferred stock dividends - 754 - 1,535 Net income available to common stockholders $ 5,295 $ 3,299 $ 10,149 $ 7,299 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 30 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q The following table reflects the calculation of basic and diluted earnings per common share class for the three and six months ended June 30, 2022 and 2021 (in thousands, except per share amounts): Three Months Ended June 30, 2022 2021 Class A Class B Class A Class B (1) Basic EPS Numerator: Net income available to common shares before allocation $ 5,295 $ - $ 3,299 $ 3,299 Multiply: % allocated on weighted avg. shares outstanding 100.0 % - 76.0 % 24.0 % Net income available to common shares after allocation $ 5,295 $ - $ 2,509 $ 790 Denominator: Weighted average shares outstanding 20,000,753 - 3,889,469 6,121,052 Earnings per share, basic $ 0.26 $ - $ 0.65 $ 0.13 Diluted EPS Numerator: Net income available to common shares before allocation $ 5,295 $ - $ 3,299 $ 3,299 Multiply: % allocated on weighted avg. shares outstanding 100.0 % - 76.0 % 24.0 % Net income available to common shares after allocation $ 5,295 $ - $ 2,509 $ 790 Denominator: Weighted average shares outstanding for basic EPS 20,000,753 - 3,889,469 6,121,052 Add: Dilutive effects of assumed exercises of stock options 170,508 - 44,167 - Weighted avg. shares including dilutive potential common shares 20,171,261 - 3,933,636 6,121,052 Earnings per share, diluted $ 0.26 $ - $ 0.64 $ 0.13 Anti-dilutive stock options excluded from diluted EPS 15,000 - 103,666 - (1) Net income available to common shares between Class A and Class B common stock was allocated based on the weighted average number of shares outstanding. The allocation also assumes that Class B shares had converted to Class A shares which is equivalent to 0.20 per share of Class B or 1,224,212 shares of Class A shares. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 31 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q Six Months Ended June 30, 2022 2021 Class A Class B Class A Class B (1) Basic EPS Numerator: Net income available to common shares before allocation $ 10,149 $ - $ 7,299 $ 7,299 Multiply: % allocated on weighted avg. shares outstanding 100.0 % - 76.1 % 23.9 % Net income available to common shares after allocation $ 10,149 $ - $ 5,551 $ 1,748 Denominator: Weighted average shares outstanding 19,997,869 - 3,889,469 6,121,052 Earnings per share, basic $ 0.51 $ - $ 1.43 $ 0.29 Diluted EPS Numerator: Net income available to common shares before allocation $ 10,149 $ - $ 7,299 $ 7,299 Multiply: % allocated on weighted avg. shares outstanding 100.0 % - 76.1 % 23.9 % Net income available to common shares after allocation $ 10,149 $ - $ 5,551 $ 1,748 Denominator: Weighted average shares outstanding for basic EPS 19,997,869 - 3,889,469 6,121,052 Add: Dilutive effects of assumed exercises of stock options 195,049 - 44,167 - Weighted avg. shares including dilutive potential common shares 20,192,918 - 3,933,636 6,121,052 Earnings per share, diluted $ 0.50 $ - $ 1.41 $ 0.29 Anti-dilutive stock options excluded from diluted EPS 15,000 - 103,666 - (1) Net income available to common shares between Class A and Class B common stock was allocated based on the weighted average number of shares outstanding. The allocation also assumes that Class B shares had converted to Class A shares which is equivalent to 0.20 per share of Class B or 1,224,212 shares of Class A shares. See Note 8 “Stockholders’ Equity” for further discussion of the stock split. 10. LOSS CONTINGENCIES Loss contingencies, including claims and legal actions may arise in the ordinary course of business. In the opinion of management, none of these actions, either individually or in the aggregate, is expected to have a material adverse effect on the Company’s Consolidated Financial Statements. Table of Contents 32 USCB Financial Holdings, Inc. Q2 2022 Form 10-Q