Item 1. Business
Item 1. Business
Overview
USCB Financial Holdings, Inc.,
a Florida corporation (the “Company”), was formed on December 17, 2021, to serve as
the holding company for U.S. Century Bank, a Florida state-chartered bank (the “Bank”), and is a bank holding company (a
“BHC”)
registered
with
the
Board
of
Governors
of
the
Federal
Reserve
System
(the “Federal
Reserve”)
under
the
Bank
Holding Company Act
of 1956, as
amended (the “BHC Act”).
The Company is
headquartered in Miami, Florida,
and, through
the Bank, its sole
subsidiary, operates 10 banking centers in South Florida providing a wide
range of personal and business
banking products and services. As of December 31, 2022,
the Company had total consolidated assets of $2.1 billion.
The Bank commenced operations
on October 28, 2002 and
is a Florida state-chartered, non-Federal
Reserve System
member bank. Over the course
of 2021, the Bank
simplified its capitalization structure
by exchanging and/or repurchasing
all of
its issued
and outstanding
preferred shares,
including Class
C, Class
D, and
Class E
preferred stock.
In December
2021, the
Bank reached agreements
with holders
of its
Class B
common stock, to
exchange all
outstanding Class B
common
stock for Class A common stock in a 1-for-5 stock
exchange.
On July 27,
2021, the Bank
completed an initial
public offering of 4,600,000
shares of its
Class A common stock.
Shares
of the Bank’s Class A
common stock were sold
at a price to
the public of $10.00
per share and began
trading on the Nasdaq
Stock Market under ticker symbol “USCB”.
On December
30, 2021
(the
“Effective
Date”),
the Company
acquired
all of
the
issued
and
outstanding
stock
of
the
Bank in a
share exchange
(the “Reorganization”)
effected under
the Florida
Business Corporation
Act and
in accordance
with the
terms of an
Agreement and Plan
of Share Exchange
dated December 27,
2021 between the
Bank and
the Company
(the “Share Exchange Agreement”). The Reorganization and
the Share Exchange Agreement were approved
by the Bank’s
stockholders at a special meeting of the Bank’s stockholders held on December 20,
2021. Pursuant to the Share Exchange
Agreement, on the Effective
Date each issued and
outstanding share of the
Bank’s Class A common
stock was converted
into and exchanged
for one share
of the Company’s Class
A common stock.
As a result,
the Bank became the
wholly owned
subsidiary
of
the
Company,
the
Company
became
the
holding
company
for
the
Bank
and
the
stockholders
of
the
Bank
became stockholders of the Company.
Prior
the
Effective
Date,
the
Bank’s
Class
A
common
stock
was
registered
under
Section
12(b)
of
the
Securities
Exchange Act of 1934 (the “Exchange
Act”), and the Bank was subject to
the information requirements of the Exchange
Act
and, in
accordance with Section
12(i) thereof, filed
quarterly reports, proxy
statements and other
information with the
Federal
Deposit Insurance Corporation
(“FDIC”).
As a result of the Reorg
anization, pursuant to Rule
12g-3(a) under the Exchange
Act, the Company became the successor registrant to the Bank, the Company’s Class A common stock was deemed to be
registered under Section 12(b)
of the Exchange Act,
and the Company became
subject to the information
requirements of
the Exchange Act and
is now required to
file reports, proxy statements
and other information with
the U. S. Securities
and
Exchange Commission
(“SEC”). The
trading symbol
for the
Company’s
Class A
Common Stock
is “USCB”,
which is
the
same as the Bank’s former trading symbol.
Prior to
the Reorganization,
the Company
had no material
assets and
had not conducted
any business
or operations
except for activities related to its incorporation and the
Reorganization.
Our strategy
in becoming
a publicly
traded company
and forming
a BHC
was to continue
pursuing organic
growth as
well as strategic acquisitions if the opportunity arises,
which efforts will be further facilitated by access
to public capital and
the added flexibility provided by a holding company structure.
In this Annual Report on Form 10-K, unless the context indicated otherwise, references to “we,” “us,”, and “our” refer to
the Company and the Bank,
as the contest dictates. However, if the discussion
relates to a period before
the Effective Date,
the terms refer only to the Bank.
Products and Services
Lending Services
Our mission
is to
provide high
value, relationship-based
banking products,
services and
solutions to
a diverse
set of
clients in the
markets we serve. We focus on
serving small-to-medium sized businesses (“SMBs”) and
catering to the needs
of
local
business
owners,
entrepreneurs
and
professionals
in
South
Florida.
We
have
further
leveraged
our
success
in
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5
USCB Financial Holdings, Inc.
2022 10-K
providing comprehensive banking solutions
to SMBs to also secure the personal
retail deposit relationships of the
owners,
operators, and employees of our commercial lending clients, which has
been a cornerstone of our deposit growth strategy.
In addition
to our
traditional commercial
banking services,
we are
among a
select number
of banks
of our
size within
our market
area that
can offer
certain specialty
banking products,
services and
solutions designed
for small
businesses,
homeowner associations,
law firms, medical
practices and other
professional services
firms, and global
banking services.
Our major specialty banking offerings include
the following:
•
Small
Business
Administration
(“SBA”)
lending:
Our
SBA
platform
originates
loans
under
Sections
7(a)
and 504
of the
SBA program.
The 7(a)
loan program,
SBA's most
common
loan program,
includes financial
help for small businesses
with special requirements
while the 504 loan program
provides long-term, fixed
rate
financing of
up to $5.0
million for
major fixed
assets that
promote business
growth and
job creation.
Since its
formation in
2018, the
platform
serves as
an opportunity
to generate
commercial and
industrial loans,
or C&I
loans, and to diversify our revenue stream through originating and
selling SBA 7(a) loans. As of December 31,
2022, the Bank is a Preferred Lending Partner with the SBA
which allows us to offer the full range of SBA loan
products and
to exercise
lending authority
at the
local bank
level, allowing
us to
make timely
credit decisions
for prospective clients.
•
Yacht lending:
Our yacht lending vertical
provides yacht financing for
larger vessels, transactions range
from
$750 thousand to $7.5 million.
We target high
net-worth clients, in one
of the most active
yacht markets in the
country.
In 2021,
two portfolios
of yacht
loans were
purchased as
part of
our strategic
initiative to
launch this
new business vertical and diversify our portfolio.
•
Homeowner Association (“HOA”)
services:
We provide banking
services to HOAs and
property managers,
including deposit collection,
lockbox services, payment
services, and lending
products. Launched in
2016, we
offer our HOA customers a unique combination of market knowledge of
a local bank, and a highly personalized
“white glove” approach to customer service.
•
Jurist Advantage and Private Client
Group services:
Our Jurist Advantage and Private
Client Group vertical
provides customized
banking solutions
for law
firms
as well
as their
partners, assoc
iates, staff,
and high
net
worth clients.
We also leverage
our relationships with
our law
firm clients to
generate personal deposit
accounts.
•
Global
Banking
services:
Our
Global
Banking
vertical
provides
correspondent
banking
services
for
banks
headquartered
in
certain
Latin
America
and
the
Caribbean
countries.
We
also
cross-sell
our
correspondent
banking relationships to
generate international personal
banking clients for
our Bank. Our
compliance team is
experienced in issues
related to foreign
banking, and we
have frequent and regular
open communication with
our foreign bank clients to ensure proper compliance
controls are maintained at such institutions.
Credit Practices
Our underwriting process is informed by a conservative credit culture
that encourages prudent lending. We
believe our
strong asset quality
is due
to our understanding
of and experience
with businesses within
Florida,
in particular South
Florida,
our
long-standing
relationships
with
clients
and
our
disciplined
underwriting
processes.
Our
thorough
underwriting
processes
collaboratively
engage
our
seasoned
business
bankers,
credit
underwriters
and
portfolio
managers
in
the
analysis of each loan request.
We manage our credit risk by analyzing metrics related
to our different lines of business, which allows us to
maintain a
conservative
and
well-diversified
loan portfolio
reflective
of
our assessment
of
various industry
sectors.
Based
upon our
aggregate exposure to any given borrower relationship, we undertake
a scaled review of loan originations that may involve
senior credit officers, our Chief Credit Officer,
our Credit Committee or, ultimately,
our Board of Directors (“Board”).
Deposit Products
We
offer
traditional deposit
products including
commercial
and consumer
checking accounts,
money market
deposit
accounts, savings accounts and certificates of deposit with a
variety of terms and rates as well
as a robust suite of treasury,
commercial payments and cash
management services. Additionally,
we offer deposit products
for municipalities and other
public entities. Our deposit products are mainly offered
across our primary geographic footprint.
Title Services
Florida
Peninsula
Title
LLC
is
a
subsidiary
of
the
Bank
that
offers
our
clients
title
insurance
policies
for
real
estate
transactions closed at the Bank. Licensed in the State of Florida and approved by the Department of Insurance Regulation,
Florida Peninsula
Title LLC
began operations
in 2021.
Our title
service business
not only provides
diversification for
non-
interest income but also provides our clients with access
to tile insurance services.
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6
USCB Financial Holdings, Inc.
2022 10-K
Seasonality
We do not believe our business to be seasonal
in nature.
Markets
Our primary banking market is South
Florida. Due to the recent
acceptance and expected ongoing emphasis on remote
work, coupled
with a
low tax
environment, warm
weather and
a strong
real estate
market has
encouraged companies
to
relocate some or all of their
operations to South Florida. We
believe this trend is further demonstrated
by recent relocation
initiatives undertaken by large financial institutions such as Blackstone Group Inc., Goldman Sachs Group Inc., and Citadel
Advisors
LLC,
all
of
which
have
established
operations
in
South
Florida.
We
believe
Florida
offers
long-term
attractive
banking opportunities.
Our largest concentration is in the Miami metropolitan statistical area; however, we are also focused
on growth in other urban Florida markets in which we
have a presence, such as Broward and Palm Beach counties
.
According to the 2020
United States Census Bureau,
Florida was the third most
populous state in the country
and the
three
largest
population
centers
were
in
Miami-Dade,
Broward,
and
Palm
Beach
counties,
all
located
in
South
Florida.
According to estimates
from the
United States Census
Bureau, from
2010 to 2021,
Florida’s population
increased to 21.8
million residents
,
an increase
of 3.0
million new
residents.
The percentage
change
in Florida’s
population between
April
2020 and July 2021 alone was 1.1% according to the
United States Census Bureau.
Competition
Our markets are highly competitive,
and we compete with a wide range of lenders and other financial institutions within
our markets,
including local,
regional,
national,
and international
commercial
banks
and credit
unions. We
also compete
with mortgage companies, brokerage
firms, trust service providers, consumer
finance companies, mutual funds,
securities
firms,
insurance
companies,
third-party
payment
processors,
financial
technology
companies,
or
Fintechs,
and
other
financial intermediaries on various
of our products and
services. Some of our competitors
are not subject to the
regulatory
restrictions
and
the
level
of
regulatory
supervision
applicable
to
us.
Many
of
our
competitors
are
much
larger
financial
institutions that have greater financial
resources than we do
and compete aggressively for market
share. These competitors
attempt to gain market share through their financial product
mix, pricing strategies and larger banking center networks.
Interest rates
on both
loans and
deposits and
prices of
fee-based services
are significant
competitive factors
among
financial
institutions
generally.
Other
important
competitive
factors
include
convenience,
quality
of
customer
service,
availability and quality of digital offerings, community
reputation, and continuity of personnel and services.
Emerging Growth Company
We are an “emerging growth
company,” or
“EGC”, as defined in the Jumpstart
Our Business Startups Act of 2012 (the
“JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are
applicable
to
other
public
companies
that
are
not
“emerging
growth
companies,”
including,
but
not
limited
to,
not
being
required to comply with the auditor
attestation requirements of Section
404 of the Sarbanes-Oxley Act,
reduced disclosure
obligations
regarding
executive
compensation
in
our
periodic
reports
and
proxy
statements,
and
exemptions
from
the
requirements of
holding a
non-binding advisory
vote on
executive compensation
and shareholder
approval of
any golden
parachute payments not previously approved.
In addition,
Section
107
of
the
JOBS
Act
also
provides
that
an
EGC can
take
advantage
of
the
extended
transition
period provided
in Section
7(a)(2)(B) of
the Securities
Act of
1933, as
amended (the
“Securities Act”),
for complying
with
new or revised accounting standards. In other
words, an EGC can delay the adoption of
certain accounting standards until
those standards would otherwise apply to private
companies. We intend to take
advantage of the benefits of this extended
transition period, for as long as it is available.
Human Capital Resources
We respect the values
and diversity throughout our organization
and the community. Diversity and inclusion are integral
parts of
our organization’s
culture. We
seek the active
engagement and
participation of
people with
diverse backgrounds
and
ethnicities.
We
are
taking
steps
to
create
programs
to
ensure
that
we
are
organized
in
a
way
where
the
unique
contributions of each individual in our Company is
recognized and supported. Each team member is to be
treated fairly with
equal access to opportunities and resources for success. Additionally,
we run homebuyer educational and financial literacy
workshops in an effort
to reach the financing
needs of the
sectors of our
communities in which
these workshops are
most
needed.
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7
USCB Financial Holdings, Inc.
2022 10-K
At December 31, 2022,
we had 191 full
-time equivalent employees.
None of our
employees are parties
to a collective
bargaining agreement. We believe that our employees are our greatest asset and vital to our success. As such, we seek to
hire and retain the best
candidate for each position, without regard to
age, gender, ethnicity, or other protected class status,
but
with
an
appreciation
for
a
diversity
of
perspectives
and
experiences.
We
have
designed
a
compensation
structure
including an array of benefit plans and programs
that we believe is attractive to our current and prospective employees.
Regulation and Supervision
Bank
holding
companies,
banks,
and
their
affiliates
are
extensively
regulated
under
federal
and
state
law.
These
regulations have a material
effect on the operations
of USCB Financial Holdings,
Inc. and its
direct and indirect subsidiaries,
including U.S. Century Bank.
Statutes, regulations and
regulatory policies limit
the activities in
which we
may engage and
the conduct of
our permitted
activities and establish capital requirements with which we must comply. The regulatory framework
is intended primarily for
the
protection
of
depositors,
borrowers,
customers
and
clients,
the
Federal
Deposit
Insurance
Corporation
(“FDIC”)
insurance funds
and the
banking system
as a
whole, and
not for
the protection
of our
shareholders or
creditors. In
many
cases, the applicable regulatory
authorities have broad enforcement
power over bank holding
companies, banks and their
subsidiaries, including the power to impose substantial fines
and other penalties for violations of laws and regulations.
Further,
the
regulatory
system
imposes
reporting
and
information
collection
obligations.
Banking
statutes
and
regulations are subject
to change,
and additional statutes,
regulations, and corresponding
guidance may
be adopted. We
are unable to predict these future changes or the effects, if any, that these changes could have on the business, prospects,
revenues, and results of operations of our Bank and Company.
The material
statutory and
regulatory requirements
that are
applicable to
us are
summarized below.
The description
below is not
intended to summarize
all laws and
regulations applicable to us.
These summary descriptions are
not complete,
and you should refer to the full text of the statutes, regulations,
and corresponding guidance for more information.
Bank and Bank Holding Company Regulation
As
a
Florida
state
bank,
U.S.
Century
Bank
is
subject
to
ongoing
and
comprehensive
supervision,
regulation,
examination, and enforcement by the FDIC and the Florida Office
of Financial Regulation (“FOFR”). The FOFR supervises
and regulates
all areas
of our
operations including,
without limitation,
the making
of loans,
the issuance
of securities,
the
conduct
of
our
corporate
affairs,
the
satisfaction
of
capital
adequacy
requirements,
the
payment
of
dividends,
and
the
establishment or closing
of banking centers.
In addition, our
deposit accounts
are insured
by the Deposit
Insurance Fund
administered by the FDIC to the maximum extent permitted by law, and the FDIC has certain supervisory
and enforcement
powers over us.
Any entity
that directly
or indirectly
controls a
bank must
be approved
by the
Federal Reserve
Board under
the Bank
Holding
Company
Act
of
1956
(the
“BHC
Act”)
to
become
a
bank
holding
company.
BHCs
are
subject
to
regulation,
inspection,
examination,
supervision
and
enforcement
by
the
Federal
Reserve
Board
under
the
BHC
Act.
The
Federal
Reserve Board's jurisdiction also extends to any company
that is directly or indirectly controlled by a BHC.
USCB Financial
Holdings,
Inc, which
controls
U.S. Century
Bank,
is a
BHC and,
as such,
is subject
to ongoing
and
comprehensive supervision, regulation, examination and
enforcement by the Federal Reserve Board.
Notice and Approval Requirements Related to Control
Banking
laws
impose
notice,
approval,
and
ongoing
regulatory
requirements
on
any shareholder
or
other
party
that
seeks to acquire direct
or indirect "control"
of an FDIC-insured
depository institution. These
laws include the
BHC Act and
the Change in Bank Control Act. Among other things,
these laws require regulatory filings by individuals
or companies that
seek to
acquire direct or
indirect "control" of
an FDIC-insured depository
institution. The determination
of whether an
investor
"controls" a depository
institution is based
on all of
the facts and
circumstances surrounding
the investment.
As a general
matter, a party
is deemed to control
a depository institution or
other company if the
party owns or controls
25% or more of
any class of voting stock. Subject to rebuttal, a party may be presumed
to control a depository institution or other company
if the investor owns or controls 10%
or more of any class of voting
stock (and the entity’s securities are registered under the
Exchange
Act
or,
if
not,
the
investor
would
be
the
largest
shareholder).
Except
under
limited
circumstances,
BHCs
are
prohibited from acquiring, without prior approval,
control of any other bank
or BHC or substantially all the assets
thereof or
more than 5% of the voting shares of a bank or BHC
which is not already a subsidiary.
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8
USCB Financial Holdings, Inc.
2022 10-K
Source of Strength
All companies, including BHCs, that directly
or indirectly control an insured depository
institution, are required to serve
as a
source
of
strength
for
the
institution.
Under
this
requirement,
USCB
Financial
Holdings,
Inc.
in
the
future
could
be
required to provide financial assistance
to U.S. Century Bank should
it experience financial distress.
Such support may be
required at times when,
absent this statutory and
Federal Reserve Policy
requirement, a BHC
may not be
inclined to provide
it.
Safety and Soundness Regulation
As an insured depository
institution, we are subject to
prudential regulation and supervision
and must undergo regular
on-site examinations by our state and federal banking agencies. The cost of examinations of insured depository institutions
and any affiliates are assessed
by the appropriate agency against
each institution or affiliate that
is subject to examination
as it deems
necessary or appropriate.
We file
quarterly consolidated
reports of
condition and income,
or call reports,
with
the FDIC and FOFR.
The federal banking
agencies have also
adopted guidelines establishing safety
and soundness standards for
all insured
depository institutions including
the Bank. The safety
and soundness guidelines
relate to, among other
things, our internal
controls, information systems, internal audit systems, loan underwriting and documentation, anti-money laundering policies
and
procedures,
transactions
with
insiders,
risk
management,
compensation,
asset
growth,
and
interest
rate
exposure.
These
standards
assist
the
federal
banking
agencies
with
early
identification
and
resolution
of
problems
at
insured
depository institutions.
If we
were to fail
to meet or
otherwise comply
with any of
these standards, the
FDIC could require
us
to
submit
a
plan
for
achieving
and
maintaining
compliance.
If
a
financial
institution
fails
to
submit
an
acceptable
compliance plan, or fails
in any material respect
to implement a compliance
plan that has been
accepted by the FDIC,
the
FDIC is
required to
issue an
order directing
the institution
to cure
the deficiency.
Until the
deficiency cited
in the
order is
cured, the FDIC
may restrict the
financial institution’s
rate of growth,
require the financial
institution to increase
its capital,
restrict the rates the institution pays on
deposits or require the institution to take any
action the regulator deems appropriate
under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also
constitute grounds
for other
enforcement action,
including cease
and desist
orders and civil
money penalty
assessments.
In
addition,
the
FDIC
could
terminate
our
deposit
insurance
if
it
determines
that
our
financial
condition
was
unsafe
or
unsound or that we engaged in unsafe or unsound practices that violated applicable rules, regulations, orders or conditions
enacted or imposed on us by our regulators.
During
the
past
decade,
the
bank
regulatory
agencies
have
increasingly
emphasized
the
importance
of
sound
risk
management processes and
strong internal
controls when
evaluating the
activities of
the financial
institutions they
supervise.
Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become
even more
important as
new technologies, product
innovation and
the size
and speed
of financial
transactions have
changed
the nature of
banking markets. The
agencies have identified
a spectrum
of risks facing
a banking institution
including, but
not limited
to, credit,
market, liquidity, interest rate,
cybersecurity, operational, legal and
reputational risk. In
particular, recent
regulatory pronouncements
have focused
on operational
risk, which
arises from
the potential that
inadequate information
systems,
operational problems,
breaches in
internal
controls, fraud
or unforeseen
catastrophes
will result
in unexpected
losses. New
products and
services, use
of outside
vendors and
cybersecurity are
critical sources
of operational
risk that
financial institutions
are expected
to address
in the
current environment.
We
have active
Board and
senior management
oversight
policies,
procedures
and
risk
limits;
adequate
risk
measurement
and
monitoring
and
adequate
management
information systems; and comprehensive internal controls
to address these various risks.
Permissible Activities and Investments
Banking
laws
generally
restrict
the
ability
of
USCB
Financial
Holdings,
Inc.
to
engage
in
activities
other
than
those
determined by the
Federal Reserve Board
to be
so closely
related to banking
as to be
a proper incident
thereto. The Gramm-
Leach-Bliley Act (the “GLB Act”) expanded the scope of permissible activities for a BHC that qualifies as a financial holding
company. Under the regulations implementing the GLB Act, a financial
holding company may engage in additional
activities
that are
financial
in nature
or incidental
or complementary
to a
financial
activity.
USCB Financial
Holdings,
Inc., is
not a
financial holding company.
In addition, as
a general matter, the establishment or
acquisition by USCB Financial
Holdings, Inc., of a
non-bank entity,
or
the
initiation
of
a
non-banking
activity,
requires
prior
regulatory
approval.
In
approving
acquisitions
or
the
addition
of
activities, the Federal Reserve Board considers, among other things, whether the acquisition or the additional activities can
reasonably be expected
to produce benefits
to the public, such
as greater convenience,
increased competition or
gains in
efficiency,
that
outweigh
such
possible
adverse
effects
as
undue
concentration
of
resources,
decreased
or
unfair
competition, conflicts of interest or unsound banking practices.
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9
USCB Financial Holdings, Inc.
2022 10-K
Regulatory Capital Requirements
The federal banking
regulators have adopted
risk-based capital
adequacy guidelines for
bank holding companies
and
their subsidiary banks and
banks without bank holding
companies based on the
Basel III standards.
Under these guidelines,
assets and off-balance sheet items are assigned to specific risk categories, each with designated risk weightings. The risk-
based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences
in risk profiles
among banks and bank holding
companies, to account for off-balance sheet
exposure, to minimize disincentives for holding
liquid assets, and
to achieve greater
consistency in
evaluating the
capital adequacy
of major
banks throughout the
world.
The resulting
capital ratio requirements
represent capital as
a percentage of
total risk-weighted assets
and off-balance sheet
items. Final
rules implementing the
capital adequacy guidelines
became effective, with
various phase-in periods,
on January
1, 2015
for
community
banks
such
as us.
All
of
the
rules
were
fully
phased
in
as of
January
1,
2019.
These
final
rules
represent a significant change to the prior general risk-based capital rules and are
designed to substantially conform to the
Basel III international standards.
In computing
total risk-weighted
assets, bank
and bank
holding company
assets are
given risk-weights
of 0%,
20%,
50%, 100%
and 150%.
In addition,
certain
off-balance
sheet items
are given
similar
credit conversion
factors
to convert
them to asset
equivalent amounts
to which an
appropriate risk-weight
will apply.
Most loans will
be assigned to
the 100%
risk
category,
except
for
performing
first
mortgage
loans
fully
secured
by 1-to
-4
family or
certain
multi-family
residential
properties, which carry
a 50%
risk rating. Most
investment securities (including,
primarily, general obligation claims on
states
or
other
political
subdivisions
of
the
United
States)
will
be
assigned
to
the
20%
category,
except
for
municipal
or
state
revenue bonds, which have a 50% risk-weight,
and direct obligations of the U.S.
Treasury or obligations backed
by the full
faith
and
credit
of
the
U.S.
government,
which
have
a
0%
risk-weight.
In
covering
off-balance
sheet
items,
direct
credit
substitutes,
including
general
guarantees
and
standby
letters
of
credit
backing
financial
obligations,
are
given
a
100%
conversion
factor.
Transaction-related
contingencies
such
as
bid
bonds,
standby
letters
of
credit
backing
nonfinancial
obligations,
and undrawn
commitments
(including commercial
credit lines
with
an initial
maturity
of more
than one
year)
have
a
50%
conversion
factor.
Short-term
commercial
letters
of
credit
are
converted
at
20%
and
certain
short-term
unconditionally cancelable commitments have a 0% factor.
Under
the
final
rules,
minimum
requirements
increased
for
both
the
quality
and
quantity
of
capital
held
by
banking
organizations. In this respect, the final rules
implement strict eligibility criteria for regulatory capital instruments and improve
the methodology for
calculating risk-weighted
assets to enhance
risk sensitivity.
Consistent with the
international Basel III
framework, the rules include a new
minimum ratio of Common
Equity Tier 1 Capital to Risk
-Weighted Assets of 4.5%. The
rules also create a Common Equity Tier 1 Capital conservation
buffer of 2.5% of risk-weighted assets. This
buffer is added
to each of the three risk-based capital
ratios to determine whether an institution
has established the buffer.
The rules raise
the minimum ratio of Tier 1 Capital to Risk-Weighted Assets from 4% to 6% and
include a minimum leverage ratio of 4% for
all banking
organizations. If
a financial
institution’s
capital conservation
buffer
falls below
2.5% —
e.g., if
the institution’s
Common
Equity Tier
1 Capital
to Risk
-Weighted
Assets is
less than
7.0% —
then capital
distributions
and
discretionary
payments
will
be
limited
or
prohibited
based
on
the
size
of
the
institution’s
conservation
buffer.
The
types
of
payments
subject to this limitation include
dividends, share buybacks, discretionary payments on
Tier 1 instruments, and discretionary
bonus payments.
The
capital
regulations
may
also
impact
the
treatment
of
accumulated
other
comprehensive
income,
or,
AOCI,
for
regulatory capital purposes. Under
the rules, AOCI generally
flows through to regulatory
capital, however, community banks
and their holding companies (if any) were allowed to make a
one-time irrevocable opt-out election to continue to treat AOCI
the same
as under
the old
regulations for
regulatory capital
purposes. This
election was
required to
be made
on the
first
call report
filed after
January 1,
2015. We
made the
opt-out election.
Additionally,
the rules
also permit
community banks
with less than
$15 billion in
total assets to
continue to count
certain non-qualifying
capital instruments
issued prior to
May
19, 2010 as Tier 1 capital, including trust preferred securities
and cumulative perpetual preferred stock (subject to a limit of
25% of Tier 1 capital). However, non-qualifying
capital instruments issued on or after May 19, 2010 do not qualify for Tier 1
capital treatment.
On September 17, 2019, the
federal banking agencies jointly finalized
a rule intended to simplify
the regulatory capital
requirements described above for qualifying community banking organizations
that opt into the Community Bank Leverage
Ratio, or
CBLR,
framework,
as required
by Section
201 of
the Regulatory
Relief
Act. The
final rule
became
effective
on
January 1,
2020,
and the
CBLR framework
became
available for
banks
to use
beginning
with their
March
31, 2020
call
reports. Under
the final
rule, if
a qualifying
community banking
organization opts
into the
CBLR framework
and meets
all
requirements under the
framework, it will
be considered to
have met the
well-capitalized ratio requirements
under the
prompt
corrective action regulations described elsewhere
in this Form 10-K
and will not be
required to report or
calculate risk-based
capital. In order to
qualify for the CBLR
framework, a community
banking organization must
have a tier 1 leverage
ratio of
greater
than
9%,
less
than
$10
billion
in
total
consolidated
assets,
off-balance
sheet
exposures
of
25%
or
less
of
total
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10
USCB Financial Holdings, Inc.
2022 10-K
consolidated assets, and trading assets and
liabilities of 5% or less of total consolidated
assets. However, Section
4012 of
the Coronavirus Aid,
Relief and Economic
Security Act (the
“CARES Act”) required
that the CBLR
be temporarily lowered
to 8%. The federal regulators issued a
rule implementing the lower CBLR effective April 23, 2020. The
rule also established
a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% CBLR requirement so long as
the
bank
maintains
a
leverage
ratio
of
7%
or
greater.
Another
rule
was
issued
to
transition
back
to
the
9%
CBLR
by
increasing the ratio to 8.5%
for calendar year 2021 and
9% thereafter. Although the Bank is a
qualifying community banking
organization, the Bank has elected
not to opt in to the CBLR framework
at this time and will continue to follow
the Basel III
capital requirements as described above.
As of
December 31,
2022
and
2021, the
Bank
qualified
as a
“well capitalized”
institution.
See Note
15
“Regulatory
Matters” of the Consolidated Financial Statements
included in this Annual Report Form 10-K for further details.
Prompt Corrective Action
Under the Federal
Deposit Insurance Act
(“FDIA”), the
federal bank regulatory
agencies must
take "prompt corrective
action"
against
undercapitalized
U.S.
depository
institutions.
The
capital-based
regulatory
framework
contains
five
categories
of
compliance
with
regulatory
capital
requirements,
including
"well
capitalized,"
"adequately
capitalized,"
"undercapitalized,"
"significantly
undercapitalized,"
and
"critically
undercapitalized,"
and
are
subjected
to
differential
regulation corresponding to the capital category within which the
institution falls.
As of December
31, 2021, a
depository institution
was deemed to
be "well capitalized"
if the banking
institution had
a
total risk-based
capital
ratio
of
10.0%
or greater,
a tier
1 risk-based
capital
ratio
of
8.0%
or
greater,
a
CET1
risk-based
capital
ratio
of
6.5%
and
a
leverage
ratio
of
5.0%
or
greater,
and
the
institution
was
not
subject
to
an
order,
written
agreement,
capital
directive,
or
prompt
corrective
action
directive
to
meet
and
maintain
a
specific
level
for
any
capital
measure.
Under
certain
circumstances,
a
well-capitalized,
adequately
capitalized
or
undercapitalized
institution
may
be
treated as
if the
institution were
in the
next lower
capital category
if it’s
determined
that the
institution is
in an
unsafe or
unsound condition or
is engaging in
an unsafe or
unsound practice. The
degree of regulatory
scrutiny of a
financial institution
will
increase,
and
the
permissible
activities
of
the
institution
will
decrease,
as
it
moves
downward
through
the
capital
categories.
A
banking
institution
that
is
undercapitalized
is required
to
submit
a
capital restoration
plan.
Failure
to
meet
capital guidelines
could subject
the institution
to a
variety of
enforcement
remedies by
federal bank
regulatory agencies,
including: termination
of deposit insurance
by the FDIC,
restrictions on certain
business activities, and
appointment of
the
FDIC as conservator or receiver.
Commercial Real Estate Concentration Guidelines
The federal
banking regulators
have implemented
guidelines to
address increased
concentrations in
commercial real
estate
loans.
These
guidelines
describe
the
criteria
regulatory
agencies
will
use
as
indicators
to
identify
institutions
potentially
exposed
to
commercial
real
estate
concentration
risk.
An
institution
that
has
(i)
experienced
rapid
growth
in
commercial real
estate lending,
(ii) notable
exposure to
a specific
type of
commercial real
estate, (iii)
total reported
loans
for construction, land development,
and other land representing
100% or more of
total capital, or (iv) total
commercial real
estate
(including
construction)
loans
representing
300%
or
more
of
total
capital
and
the
outstanding
balance
of
the
institution’s
commercial
real estate
portfolio has
increased
by 50%
or more
in the
prior 36
months,
may be
identified for
further supervisory analysis of a potential concentration
risk.
As of December
31, 2022, our
ratio of construction
loans to total
risk-based capital
was 27%, and
therefore, we
were
under
the
100%
threshold
set
forth
in
clause
(iii)
in
the
paragraph
above.
However,
with
respect
to
clause
(iv)
in
the
paragraph above, as
of December
31, 2022, our
ratio of total
commercial real
estate loans
to total
risk-based capital
was
390% and the outstanding balance of
the institution’s commercial real estate portfolio increased by 50%
or more in the prior
36 months.
As a
result, we
are deemed
to have
a concentration
in commercial
real estate
lending under
applicable regulatory
guidelines.
If a
concentration is
present, under
the federal
banking regulator’
guidance, management
should employ
heightened
risk management practices that address key elements,
including board and management oversight and strategic
planning,
portfolio management,
development
of underwriting
standards,
risk
assessment and
monitoring
through
market analysis
and stress
testing, and
maintenance of
increased capital
levels as
needed to
support the
level of
commercial real
estate
lending.
To address the commercial real estate lending concentration,
USCB Financial Holdings has
previously established
a commercial
real estate
lending framework
to monitor
specific exposures
and limits
by types
within the
commercial real
estate
portfolio,
including,
among
other
things,
annual
stress
testing
of
the
commercial
real
estate
portfolio,
and
takes
appropriate actions, as necessary.
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11
USCB Financial Holdings, Inc.
2022 10-K
Payment of Dividends
The ability of
the board of
directors of an
insured depository
institution to declare
a cash dividend
or other distribution
with respect to capital
is subject to statutory
and regulatory restrictions
that limit the
amount available for
such distribution
depending
upon
earnings,
financial
condition
and
cash
needs
of
the
institution,
as
well
as
general
business
conditions.
Insured depository institutions are also prohibited from
paying management fees to any controlling persons
or, with certain
limited exceptions,
making
capital distributions,
including dividends,
if after
such transaction
the institution
would be
less
than
adequately
capitalized.
We
may
generally
declare
a
dividend
from
retained
net
profits
which
accrued
prior
to
the
preceding two years, but we must, before the declaration of a dividend on our common stock, under applicable Florida law,
carry 20% of our net profits for such preceding period as is
covered by the dividend to our surplus fund, until the same shall
at least equal the amount of our common stock and preferred stock, if
any, then issued and outstanding. Under Florida law,
we are prohibited
from declaring
a dividend
at any time
at which
our net
income from
the current
year combined
with the
retained net
income
from
the preceding
two
years is
a loss
or which
would cause
our capital
accounts
to fall
below the
minimum amount required by law,
regulation, order, or
any written agreement with a state or federal regulatory agency.
In addition,
because
we are
a BHC,
we are
dependent
upon the
payment
of dividends
by the
Bank
as our
principal
source of funds
to pay dividends
in the future,
if any,
and to make
other payments. It
is the policy
of the Federal
Reserve
Board that BHCs
should pay cash
dividends on common
stock only out
of income available
over the past
year and only
if
prospective earnings retention
is consistent with
the organization’s expected future
needs and
financial condition. The
policy
provides that BHCs should not maintain a level of cash dividends that undermines the BHC’s ability to serve as a source of
strength to its banking subsidiaries.
Incentive Compensation
Guidelines adopted by
the federal banking
agencies pursuant to
the FDIA
prohibit excessive compensation
as an
unsafe
and
unsound
practice
and
describe
compensation
as
excessive
when
the
amounts
paid
are
unreasonable
or
disproportionate to the services performed by an executive
officer, employee, director
or principal shareholder.
In June 2010,
the federal banking
agencies jointly
adopted the
Guidance on Sound
Incentive Compensation
Policies,
or GSICP.
The GSICP intended to
ensure that banking organizations
do not undermine the
safety and soundness of
such
organizations
by
encouraging
excessive
risk-taking.
This
guidance,
which
covers
all
employees
that
have
the
ability
to
expose the
organization
to material
amounts of
risk, either
individually or
as part
of a
group, is
based upon
a set
of key
principles relating to
a banking organization’s
incentive compensation arrangements.
Specifically,
incentive compensation
arrangements should (i)
provide employee incentives
that appropriately balance risk
in a manner that does
not encourage
employees to expose their
organizations to imprudent risk,
(ii) be compatible with effective
controls and risk management,
and (iii) be supported by
strong corporate governance,
including active and effective
oversight by the organization’s
board
of directors. Any deficiencies in our compensation practices
could lead to supervisory or enforcement actions
by the FDIC.
The
Dodd-Frank
Act
requires
the
federal
banking
agencies
and
the
SEC
to
establish
joint
regulations
or
guidelines
prohibiting incentive-based
payment arrangements
at specified regulated
entities, such
as us,
having at least
$1 billion in
total
assets
that
encourage
inappropriate
risk-taking
by
providing
an
executive
officer,
employee,
director
or
principal
shareholder
with
excessive
compensation,
fees,
or
benefits
or
that
could
lead
to
material
financial
loss
to
the
entity.
In
addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-
based compensation
arrangements. The
federal banking
agencies proposed
such regulations
in April
2011
and issued
a
second proposed
rule in
April 2016.
The second
proposed rule
would apply to
all banks,
among other
institutions, with
at
least $1 billion in average total
consolidated assets. Final regulations have not been adopted as
of the date of this Form 10-
K.
If
adopted,
these
or
other
similar
regulations
would
impose
limitations
on
the
manner
in
which
we
may
structure
compensation for our executives and other
employees that go beyond the requirements
of GSICP.
The scope and content
of the
federal banking
agencies’ policies
on incentive
compensation are
continuing
to develop
and are
likely to
continue
evolving, but the timeframe for finalization of such policies
is not known at this time.
Limits on Transactions with Affiliates and
Insiders
Insured depository institutions are subject to restrictions
on their ability to conduct transactions
with affiliates and other
related parties. Section 23A of the Federal Reserve Act imposes quantitative limits, qualitative requirements,
and collateral
requirements on certain transactions by
an insured depository institution with,
or for the benefit
of, its affiliates. Transactions
covered by Section 23A include loans,
extensions of credit, investment
in securities issued by an affiliate,
and acquisitions
of assets from
an affiliate. Section
23B of the
Federal Reserve
Act requires that
most types of
transactions by
an insured
depository
institution
with,
or
for
the
benefit
of,
an
affiliate
be
on
terms
at
least
as
favorable
to
the
insured
depository
institution as if the transaction were conducted with an
unaffiliated third party.
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12
USCB Financial Holdings, Inc.
2022 10-K
An affiliate of a bank
is any company or entity
that controls, is controlled by
or is under common
control with the bank.
In
a
holding
company
context,
the
parent
bank
holding
company,
such
as
USCB
Financial
Holdings,
Inc.,
and
any
companies that are
controlled by such
parent holding company
(excluding subsidiaries of the
bank) are affiliates of
the bank.
Loans to executive officers and directors of an insured depository institution or any of its affiliates or to any person who
directly or indirectly, or acting through or in concert with one or more persons,
owns, controls or has the power to vote
more
than 10% of any class of voting securities of a bank, which we
refer to as 10% shareholders, or to any political or campaign
committee the
funds or
services of
which will
benefit those
executive officers,
directors, or
10% shareholders
or which
is
controlled by those executive officers, directors
or 10% shareholders, are subject to
Sections 22(g) and 22(h) of
the Federal
Reserve
Act
and
the
corresponding
regulations
(Regulation
O)
and
Section
13(k)
of
the
Exchange
Act
relating
to
the
prohibition
on
personal
loans
to
executives
(which
exempts
financial
institutions
in
compliance
with
the
insider
lending
restrictions of Section 22(h) of the Federal Reserve Act).
FDIC Deposit Insurance
The FDIC is
an independent
federal agency
that insures the
deposits of federally
insured depository
institutions up
to
applicable limits. The FDIC also has certain regulatory,
examination and enforcement powers with respect to FDIC-insured
institutions.
The
deposits
are
insured
by
the
FDIC
up
to
applicable
limits.
As
a
general
matter,
the
maximum
deposit
insurance amount is $250 thousand per depositor.
Additionally, FDIC
-insured depository institutions are required
to pay deposit insurance assessments
to the FDIC. The
amount of
a particular
institution's deposit
insurance assessment
is based
on that
institution's risk
classification under
an
FDIC risk-based assessment system. An institution's
risk classification is assigned based on
its capital levels and the level
of supervisory concern the institution poses to the regulators.
Under the current
system, deposit
insurance assessments
are based
on a bank’s
assessment base,
which is defined
as average total assets minus
average tangible equity.
For established small institutions,
such as the Bank, the
FDIC sets
deposit
assessment
rates
based
on
the
Financial
Ratios
Method,
which
takes
into
account
several
ratios
that
reflect
leverage, asset quality,
and earnings at
each individual institution
and then applies
a pricing multiplier that
is the same
for
all institutions. An
institution’s rate must
be within a
certain minimum and
a certain maximum,
and the range varies
based
on the
institution’s
composite CAMELS
rating. The
deposit insurance
assessment
is calculated
by multiplying
the bank’s
assessment base by the total base assessment
rate.
In October
2022, the
FDIC finalized
a rule
that will
increase the
initial base
deposit insurance
assessment rates
by 2
basis points, beginning
with the first quarterly
assessment period of
2023 (January 1,
2023 through March
31, 2023). The
FDIC, as required
under the Federal
Deposit Insurance
Act, established
a plan in
September 2020 to
restore the Deposit
Insurance Fund (“DIF”) reserve ratio to meet or exceed
the statutory minimum of 1.35 percent within eight
years. This plan
did not
include an
increase in
the deposit
insurance assessment
rate. Based
on the
FDIC’s recent
projections, however,
the FDIC determined that the DIF reserve
ratio is at risk of not reaching
the statutory minimum by the statutory
deadline of
September 30, 2028 without increasing
the deposit insurance assessment rates. The
increased assessment would improve
the likelihood
that the
DIF reserve
ratio would
reach the
required minimum
by the
statutory deadline,
consistent
with the
FDIC’s Amended Restoration
Plan. The FDIC also
concurrently maintained the
Designated Reserve Ratio
(“DDR”) for the
DIF at 2 percent for 2023. The new assessment rate
schedules will remain in effect unless and until the reserve ratio meets
or exceeds 2 percent
in order to support
growth in the DIF
in progressing toward
the FDIC’s long-term
goal of a 2 percent
DRR. Progressively lower assessment
rate schedules will take effect
when the reserve ratio reaches
2 percent, and again
when it reaches
2.5 percent. The
revised assessment
rate schedule will remain
in effect unless
and until the
reserve ratio
meets or exceeds 2 percent, absent further action by the FDIC.
Under the
FDIA, the
FDIC may
terminate deposit
insurance upon
a finding
that the
institution has
engaged in
unsafe
and unsound
practices,
is in
an unsafe
or unsound
condition
to continue
operations,
or has
violated any
applicable
law,
regulation, rule, order, or condition
imposed by the FDIC.
Depositor Preference
The FDIA provides
that, in the
event of the
"liquidation or other
resolution" of an
insured depository institution, the
claims
of depositors
of the institution
(including the
claims of
the FDIC as
subrogee of
insured depositors)
and certain
claims for
administrative
expenses
of
the
FDIC
as
a
receiver
will
have
priority
over
other
general
unsecured
claims
against
the
institution. Insured and
uninsured depositors,
along with the
FDIC, will have
priority in payment
ahead of unsecured,
non-
deposit creditors,
including U.S.
Century Bank,
with respect
to any
extensions of
credit they
have made
to such
insured
depository institution.
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Overdraft Fee Regulation
The Electronic Fund Transfer Act prohibits
financial institutions from charging consumers
fees for paying overdrafts on
automated teller machines, or
ATMs,
and one-time debit card transactions,
unless a consumer consents,
or opts in, to the
overdraft service for those types
of transactions. If a consumer does
not opt in, any
ATM transaction or debit that overdraws
the consumer’s
account will
be denied. Overdrafts
on the payment
of checks
and regular electronic
bill payments
are not
covered
by
this
new
rule.
Before
opting
in,
the
consumer
must
be
provided
with
a
notice
that
explains
the
financial
institution’s
overdraft
services,
including
the
fees
associated
with
the
service,
and
the
consumer’s
choices.
Financial
institutions
must
provide consumers
who do
not
opt
in
with
the
same
account
terms,
conditions
and
features
(including
pricing) that they provide to consumers who do opt in.
Federal Reserve System and Federal Home Loan
Bank System
We are
a member
of the FHLB
of Atlanta,
which is
one of
11
regional FHLBs.
Each FHLB
serves as
a quasi-reserve
bank
for
its members
within
its
assigned
region.
It
is
funded
primarily
from
funds
deposited
by member
institutions
and
proceeds from the sale of consolidated obligations
of the FHLB system. A FHLB makes
loans to members (i.e., advances)
in accordance with policies and procedures established by
the Board of Trustees of the FHLB.
As a member
of the FHLB
of Atlanta, we are
required to own
capital stock in
the FHLB in
an amount at
least equal to
0.05% (or
5 basis
points), which
is subject
to annual
adjustments, of
the Bank’s
total assets
at the
end of
each calendar
year (up
to
a maximum
of $15
million),
plus
4.25%
of
our outstanding
advances
(borrowings)
from
the FHLB
of
Atlanta
under the activity-based stock ownership requirement.
Anti-Money Laundering Regulation
As a financial
institution, we
must maintain
anti-money laundering
programs that
include established
internal policies,
procedures
and
controls,
a
designated
compliance
officer,
an
ongoing
employee
training
program,
and
testing
of
the
program by an independent audit function in accordance
with the Bank Secrecy Act of 1970, as amended (“BSA”), and the
regulations issued
by the
Department of
the Treasury
in 31
CFR Chapter
X, FDIC
Rule 326.8
and the
Florida Control
of
Money Laundering
and Terrorist
Financing in
Financial Institutions
Act. Financial
institutions are
prohibited from
entering
into specified
financial
transactions
and account
relationships
and must
meet enhanced
standards for
due
diligence and
“knowing your customer” in
their dealings with
foreign financial institutions, foreign
customers and other
high risk customers.
Financial
institutions
must
also
take
reasonable
steps
to
conduct
enhanced
scrutiny
of
account
relationships
to
guard
against money laundering
and to report transactions
that meet certain
dollar amount thresholds
as well as
any suspicious
transactions. Recent laws,
such as
the USA PATRIOT Act, enacted in
2001 and renewed
through 2019, as
described below,
provide law enforcement authorities with increased access
to financial information maintained by banks.
Anti-money laundering
obligations have
been substantially
strengthened
as a
result of
the USA
PATRIOT
Act. Bank
regulators routinely examine institutions for compliance with these obligations, and this area has become a particular focus
of
the
regulators
in
recent
years.
In
addition,
the
regulators
are
required
to
consider
compliance
in
connection
with
the
regulatory
review
of
certain
applications.
In
recent
years,
regulators
have
expressed
concern
over
banking
institutions’
compliance
with
anti-money
laundering
requirements
and,
in
some
cases,
have
delayed
approval
of
their
expansionary
proposals. The regulators and other
governmental authorities have
been active in imposing
“cease and desist” orders
and
significant money penalty sanctions against institutions
found to be in violation of the anti-money laundering regulations.
USA PATRIOT
Act
The USA PATRIOT Act became effective on October 26, 2001 and amended
the BSA. The USA PATRIOT Act requires
banks to establish anti-money laundering programs
that include, at a minimum:
•
a bank
compliance
program
that contains
internal
policies,
procedures
and
controls
designed
to
implement
and
maintain the
bank’s compliance
with all
of the
requirements
of the
USA PATRIOT
Act, the
BSA and
related laws
and regulations;
bank wide
systems
and procedures
for monitoring
and reporting
of suspicious
transactions
and
activities;
•
a designated compliance officer;
•
employee training for bank employees;
•
an independent audit function to test the efficacy
of the bank’s anti-money laundering program;
•
procedures to verify the identity of each bank customer upon
the opening of accounts;
•
heightened due diligence policies,
procedures and controls applicable to
certain foreign accounts and
relationships;
and
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•
required reports to law enforcement and/or financial regulators to assist in the deterrence and prevention of money
laundering activities.
Additionally,
the USA PATRIOT
Act requires each financial
institution to develop a
customer identification program,
or
CIP, as part of its anti-money
laundering program. The key
components of the
CIP are identification
verification, government
list comparison,
notice and
record retention.
The purpose
of the
CIP is
to enable
the financial
institution to
determine the
true identity
and anticipated
account activity
of each
customer.
To
make this
determination, the
financial institution
must,
among other things, collect certain information from customers at the time they enter
into the customer relationship with the
financial institution.
This information must
be verified
within a
reasonable time. Furthermore,
all customers
must be
screened
against any CIP-related government lists of known or suspected terrorists or other “sanctioned” persons. On May 11, 2018,
the U.S. Treasury’s
Financial Crimes Enforcement
Network, or FinCEN, issued
a final rule under
the BSA requiring
banks
to identify and verify the
identity of the natural persons behind
their customers that are legal entities—the beneficial owners.
We
and
our
affiliates
have
adopted
policies,
procedures
and
controls
designed
to
comply
with
the
BSA
and
the
USA
PATRIOT
Act.
The Office of Foreign Assets Control
The Office of Foreign Assets Control (the “OFAC”)
is responsible for helping to ensure that U.S. entities do not engage
in transactions with
“enemies” of
the United States,
as defined by
various Executive Orders
and Acts of
Congress. OFAC
publishes lists of
names of
persons and organizations
suspected of aiding,
harboring or
engaging in terrorist
acts; owned
or
controlled
by,
or
acting
on
behalf
of
target
countries;
and
narcotics
traffickers.
Such
persons
are
referred
to
as
“sanctioned” persons.
If a bank
finds a name on
any transaction, account
or wire transfer
that is on an
OFAC list,
it must freeze
the account
and/or block the transaction or wire transfer. We utilize an outside vendor to oversee
the inspection of our accounts and the
filing of any notifications.
We also monitor
high-risk OFAC
areas such as new
accounts, wire transfers
and customer files.
These checks are performed using software that is updated each time
a modification is made to the lists provided by
OFAC
and other agencies of Specially Designated Nationals
and Blocked Persons.
Consumer Laws and Regulations
Our activities
are subject
to a
variety of
federal and
state statutes
and regulations
designed to
protect consumers
in
transactions with
banks. Interest
and other
charges collected
or contracted
for by
us are
subject to
state usury
laws and
federal laws concerning interest rates. Our loan
operations are also subject to federal laws
applicable to credit transactions,
such as:
•
the
Truth-In-Lending
Act,
or
TILA,
and
Regulation
Z,
governing
disclosures
of
credit
and
servicing
terms
to
consumer borrowers and including substantial new requirements for mortgage lending and servicing, as mandated
by the Dodd-Frank Act
•
the Home Mortgage Disclosure Act of 1975 and Regulation C, requiring
financial institutions to provide information
to enable the
public and public
officials to
determine whether
a financial institution
is fulfilling its
obligation to help
meet the housing needs of the communities they serve;
•
the Equal Credit
Opportunity Act and
Regulation B, prohibiting
discrimination on the
basis of race,
color, religion,
or other prohibited factors in extending credit;
•
the Fair
Credit Reporting Act
of 1978,
as amended by
the Fair
and Accurate Credit
Transactions Act, and Regulation
V, as well as the rules and
regulations of the FDIC governing the
use and provision of information
to credit reporting
agencies, certain identity theft protections and certain
credit and other disclosures;
•
the Fair
Debt Collection
Practices Act
and Regulation
F,
governing the
manner in
which consumer
debts may
be
collected by collection agencies; and
•
the Real Estate Settlement Procedures Act, or RESPA, and Regulation X, which governs aspects of the settlement
process for residential mortgage loans.
Our deposit operations are also subject to federal laws,
such as:
•
the FDIA, which, among other things, limits the amount of
deposit insurance available per account to $250,000 and
imposes other limits on deposit-taking;
•
the Right to
Financial Privacy Act,
which imposes a
duty to
maintain the confidentiality
of consumer financial
records
and prescribes procedures for complying with administrative subpoenas
of financial records;
•
the Electronic
Funds Transfer
Act and
Regulation E,
which governs
automatic
deposits to
and withdrawals
from
deposit accounts
and customers’
rights and
liabilities arising
from
the use
of ATMs
and other
electronic
banking
services; and
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•
the Truth
in Savings
Act and
Regulation DD,
which requires
depository institutions
to provide
disclosures so
that
consumers can make meaningful comparisons about depository
institutions and accounts.
These
laws
and
regulations
mandate
certain
disclosure
requirements
and
regulate
the
manner
in
which
financial
institutions must deal with clients when
taking deposits or making loans to
such clients. We must comply with the applicable
provisions of these consumer protection laws and regulations as part of both
our ongoing client relations and our regulatory
compliance obligations.
Financial Privacy and Cybersecurity
Banking organizations
are
subject to
many federal
and state
laws and
regulations
governing the
collection,
use and
protection
of
customer
information. Under
the
privacy
protection
provisions
of
the
Gramm-Leach-Bliley
Act
of
1999 and
related regulations,
we are
limited in
our ability
to disclose
non-public
information
about consumers
to nonaffiliated
third
parties. These limitations require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers
to prevent disclosure
of certain personal
information to a
nonaffiliated third
party.
Federal banking agencies,
including the
FDIC, have adopted
guidelines for establishing information
security standards and cybersecurity
programs for implementing
safeguards.
These
guidelines,
along
with
related
regulatory
materials,
increasingly
focus
on
risk
management
and
processes related to information technology and the use
of third parties in the provision of financial services.
In addition to federal laws and regulations, we are subject
to state laws governing customer privacy and cybersecurity.
The Florida Information Protection Act of 2014 (“Florida Act”) requires notification of the
Florida Department of Legal Affairs
of any breach involving
personal information that
affects more than
500 people as
well as requiring notification
of affected
individuals of
a breach.
The Florida
Act also
requires us to
take reasonable measures
to protect
and secure
data in
electronic
form containing personal information and take all reasonable measures to dispose, or arrange for the disposal, of
customer
records containing
personal information
within our
custody or
control when
the records
are no
longer to
be retained.
We
incur
significant
costs
and
expenses
in
order
to
address
compliance
with
the
federal
and
state
customer
privacy
and
cybersecurity laws and regulations, and we expect such
costs and expenses will continue into the future.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (“CFPB”) is
an independent regulatory authority housed within the Federal
Reserve Board. The CFPB has broad authority to regulate the offering and provision of consumer
financial products and to
prevent institutions subject to its authority from engaging in “unfair
and deceptive or abusive acts or practices” with respect
to their
offering of consumer
financial products or
services. The CFPB
has the
authority to
supervise and examine
depository
institutions with more than
$10 billion in assets for
compliance with federal consumer
laws. The authority to supervise
and
examine depository
institutions with
$10 billion or
less in assets,
such as the
Bank, for
compliance with federal
consumer
laws remains largely with those institutions’ primary
federal regulators. However, the CFPB may participate in examinations
of these smaller institutions
on a “sampling basis”
and may refer potential
enforcement actions against
such institutions to
their primary regulators.
As such, the
CFPB may participate
in examinations of
the Bank. In
addition, states are
permitted
to adopt consumer
protection laws and
regulations that are stricter
than the regulations promulgated
by the CFPB,
and state
attorneys general are permitted to enforce consumer
protection rules adopted by the CFPB against certain institutions.
The Volcker Rule
The Dodd-Frank Act
prohibits (subject to
certain exceptions) us
and our
affiliates from engaging
in short term
proprietary
trading in securities and derivatives and from
investing in and sponsoring certain investment companies defined
in the rule
as “covered
funds” (including
not only
hedge funds,
commodity pools
and private
equity funds,
but also
a range
of asset
securitization structures
that do not
meet exemptive
criteria in the
final rules). This
statutory provision
is commonly
called
the “Volcker Rule.” At December 31, 2022, we are not
subject to the Volcker Rule because of our asset
size, which is below
the $10.0 billion Volcker
Rule threshold.
Community Reinvestment Act and Fair Lending Requirements
As
previously
noted,
we
are
subject
to
certain
fair
lending
requirements
and
reporting
obligations
involving
home
mortgage
lending
operations.
We
are
also
subject
to
certain
requirements
and
reporting
obligations
under
the
federal
Community Reinvestment Act (“CRA”).
The CRA and
its corresponding regulations are
intended to encourage banks
to help
meet the credit needs of
the communities they serve,
including low-
and moderate-income neighborhoods,
consistent with
safe and sound banking practices.
Accordingly,
the
CRA
generally
requires
federal
banking
agencies
to
evaluate
the
record
of
a
financial
institution
in
meeting applicable
CRA requirements.
The CRA
further requires
the agencies
to take
into account our
record of
meeting
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community
credit
needs
when
evaluating
applications
for,
among
other
things,
new
branches
or
mergers.
We
are
also
subject to analogous state CRA requirements
in Florida and certain other states
in which we may establish branch
offices.
In
connection
with
their
assessments
of
CRA
performance,
the
FDIC
and
FOFR
assign
a
rating
of
“outstanding,”
“satisfactory,”
“needs to
improve,” or
“substantial
noncompliance.” We
received a
“satisfactory” CRA
Assessment
Rating
from
both regulatory
agencies
in our
most
recent CRA
examinations.
In addition
to substantive
penalties
and corrective
measures that may
be required for
a violation of
certain fair lending
laws, the federal
banking agencies may
take compliance
with such
laws and
CRA into
account when
regulating and
supervising other
activities of
the bank,
including in
acting on
expansionary proposals such as when a bank submits
an application to establish bank branches, merge with
another bank,
or acquire
the assets
and assume
the liabilities
of another
bank. An
unsatisfactory
CRA and/or
fair lending
record could
substantially delay
or block
any such
transaction. The
regulatory agency's
assessment of
the institution's
record is
made
available to the
public at
www.ffiec.gov/craratings.
Following its most
recent CRA performance
evaluation in March
2020,
U.S. Century Bank received an overall rating of "Satisfactory."
Call Reports and Examination Cycle
All institutions, regardless of size, submit
a quarterly call report that includes
data used by federal banking agencies
to
monitor the condition, performance, and
risk profile of individual institutions
and the industry as a
whole. In June 2019, the
federal banking agencies issued a
final rule to permit insured depository
institutions with total assets of
less than $5 billion
that
do
not
engage
in
certain
complex
or international
activities
to
file
the
most
streamlined
version
of
the
quarterly
call
report, and to reduce data reportable on certain streamlined
call report submissions.
Effect of Governmental Monetary Policies
The commercial banking
business is affected
not only by
general economic conditions,
but also by
the monetary policies
of the
Federal Reserve
Board. Changes
in the
discount
rate on
member
bank borrowing,
availability of
borrowing at
the
“discount
window,”
open market
operations, changes
in the
Fed Funds
target
interest rate,
the
imposition of
changes in
reserve requirements
against
member
banks’
deposits
and
assets
of
foreign
banking
centers
and
the
imposition
of
and
changes in
reserve requirements
against certain
borrowings by
banks
and their
affiliates
are some
of the
instruments
of
monetary
policy
available
to
the
Federal
Reserve
Board.
These
monetary
policies
are
used
in
varying
combinations
to
influence overall growth and distributions of bank loans, investments and deposits,
which may affect interest rates charged
on
loans
or
paid
on
deposits.
The
monetary
policies
of
the
Federal
Reserve
Board
have
had
a
significant
effect
on the
operating results
of commercial
banks and
are expected
to continue
to do
so in
the future.
The Federal
Reserve Board’s
policies are primarily influenced by the dual mandate of price stability and
full employment, and to a lesser degree by short-
term
and
long-term
changes
in
the
international
trade
balance
and
in
the
fiscal
policies
of
the
U.S.
government.
Future
changes in monetary policy and the effect of such changes on our business and earnings in the future cannot be
predicted.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects
the regulation of the financial services industry,
and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating
in those states.
Federal and state
regulatory agencies
also periodically propose
and adopt changes
to their regulations
or
change the manner
in which existing
regulations are
applied or
interpreted. The
substance or
impact of pending
or future
legislation or regulation, or
the application thereof, cannot
be predicted, although enactment
of proposed legislation has
in
the past
and may
in the
future affect
the regulatory
structure under
which we
operate and
may significantly
increase our
costs, impede the efficiency
of our internal business
processes, require us to
increase our regulatory capital
or modify our
business
strategy,
or
limit
our
ability
to
pursue
business
opportunities
in
an
efficient
manner.
Our
business,
financial
condition, results
of operations
or prospects
may be
adversely affected,
perhaps materially,
as a
result of
any such
new
legislation or regulations.
The CARES Act and Initiatives Related to COVID-19
On March 27, 2020, the CARES Act was signed into law and provided for approximately $2.2 trillion in direct economic
relief in
response to
the public
health and
economic impacts
of COVID-19.
Many of
the CARES
Act’s programs
are, and
remain, dependent
upon the
direct involvement
of financial
institutions like
us. These
programs
have been
implemented
through rules and guidance adopted by federal
departments and agencies, including the U.S.
Department of Treasury,
the
Federal Reserve and
other federal bank
regulatory authorities, including
those with direct
supervisory jurisdiction
over us.
Furthermore, as the COVID-19 pandemic
evolves, federal regulatory authorities continue
to issue additional guidance with
respect
to
the
implementation,
life
cycle,
and
eligibility
requirements
for
the
various
CARES
Act
programs,
as
well
as
industry-specific
recovery
procedures
for
COVID-19.
In
addition,
it
is
possible
that
Congress
will
enact
supplementary
COVID-19 response legislation, including
amendments to the CARES
Act or new bills comparable
in scope to the CARES
Act. We
continue to
assess
the
impact
of
the
CARES
Act,
the
Consolidated
Appropriations
Act,
2021
and
the
potential
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17
USCB Financial Holdings, Inc.
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impact
of
new
COVID-19
legislation
and
other
statutes,
regulations
and
supervisory
guidance
related
to
the
COVID-19
pandemic.
A
principal
provision
of
the
CARES
Act
amended
the
SBA’s
loan
program
to
create
a
guaranteed,
unsecured
loan
program, the Paycheck Protection
Program, or PPP, to fund operational costs
of eligible businesses, organizations
and self-
employed persons impacted by COVID-19. These loans are eligible to be forgiven if
certain conditions are satisfied and are
fully guaranteed by the SBA. Additionally,
loan payments will also be deferred
for the first six months of the
loan term. The
PPP commenced on
April 3,
2020 and was
available to qualified
borrowers through August
8, 2020.
No collateral
or personal
guarantees were required. On December 27, 2020,
President Trump signed the Consolidated Appropriations Act, 2021 into
law which included the Economic Aid to Hard-Hit Small Businesses,
Nonprofits, and Venues Act, or
the HHSB Act. Among
other things, the HHSB Act renewed the
PPP,
allocating $284.45 billion for both new first time PPP
loans under the existing
PPP and
the expansion
of existing
PPP loans
for certain
qualified, existing
PPP borrowers.
In addition
to extending
and
amending the PPP,
the HHSB Act also creates
a new grant program
for “shuttered venue operators.”
As of December 31,
2022, we had 6 active PPP loans remaining totaling $1.3
million.
The
CARES
Act,
as
extended
by certain
provisions
of
the
Consolidated
Appropriations
Act,
2021,
permits
banks
to
suspend
requirements
under
GAAP
for
loan
modifications
to
borrowers
affected
by
COVID-19
that
may
otherwise
be
characterized as troubled
debt restructurings and
suspend any determination
related thereto if (i)
the borrower was
not more
than 30
days past
due as
of December
31, 2019,
(ii) the
modifications are
related to
COVID-19, and
(iii) the
modification
occurs between March 1, 2020 and
the earlier of 60 days after the
date of termination of the national emergency or
January
1,
2022.
Federal
bank
regulatory
authorities
also
issued
guidance
to
encourage
banks
to
make
loan
modifications
for
borrowers affected by
COVID-19. As of
December 31, 2022, there
were no
loans in
our portfolio
in deferral
status associated
with the COVID-19 pandemic.
See
Note
3
“Loans”
of
the
Consolidated
Financial
Statements
included
in
this
Annual
Report
Form
10-K
for
further
details.
Available Information
Our
website
address
is
www.uscentury.com.
Our
electronic
filings
with
the
FDIC
and
the
SEC
(including
all
Annual
Reports on Form
10-K, Quarterly Reports
on Form 10-Q,
Current Reports on Form
8-K, and if applicable,
amendments to
those reports)
are available
free of
charge on
the website
as soon
as reasonably
practicable after
they are
electronically
filed
with, or
furnished
to,
the
FDIC
or
SEC. The
information
posted
on
our
website
is
not
incorporated
into
this
Annual
Report
on
Form
10-K.
In
addition,
the
FDIC
and
the
SEC
each
maintains
a
website
that
contains
reports
and
other
information that is filed.
Table of Contents
18
USCB Financial Holdings, Inc.
2022 10-K