USCB FINANCIAL HOLDINGS, INC. 10-Q

Item 1. Financial Statements USCB FINANCIAL HOLDINGS, INC. Consolidated Balance Sheets - Unaudited (Dollars in thousands, except share data) March 31, 2023 December 31, 2022 ASSETS: Cash and due from banks $ 5,586 $ 6,605 Interest-bearing deposits in banks 57,665 47,563 Total cash and cash equivalents 63,251 54,168 Investment securities held to maturity, net of allowance for credit losses of $ 0 (fair value $ 169,167 and $ 169,088 , respectively) 186,428 188,699 Investment securities available for sale, at fair value 229,409 230,140 Federal Home Loan Bank stock, at cost 6,143 2,882 Loans held for investment, net of allowance of $ 18,887 and $ 17,487 , respectively 1,561,507 1,489,851 Accrued interest receivable 8,216 7,546 Premises and equipment, net 5,135 5,263 Bank owned life insurance 43,048 42,781 Deferred tax assets, net 39,567 42,360 Lease right-of-use asset 13,652 14,395 Other assets 7,465 7,749 Total assets $ 2,163,821 $ 2,085,834 LIABILITIES: Deposits: Demand deposits $ 633,606 $ 629,776 Money market and savings accounts 900,478 915,853 Interest-bearing checking 50,573 66,675 Time deposits 245,805 216,977 Total deposits 1,830,462 1,829,281 Federal Home Loan Bank advances 120,000 46,000 Lease liability 13,652 14,395 Accrued interest and other liabilities 15,849 13,730 Total liabilities 1,979,963 1,903,406 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 March 31, 2023 and December 31, 2022 - - 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 March 31, 2023 and December 31, 2022 - - 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 March 31, 2023 and December 31, 2022 - - Common stock - Class A Voting; $ 1.00 par value; 45,000,000 shares authorized; 19,622,380 issued and outstanding as of March 31, 2023, 20,000,753 issued and outstanding as of December 31, 2022 19,622 20,001 Common stock - Class B Non-voting; $ 1.00 par value; 8,000,000 shares authorized; 0 and 0 issued and outstanding as of March 31, 2023 and December 31, 2022 - - Additional paid-in capital on common stock 305,921 311,282 Accumulated deficit ( 99,620 ) ( 104,104 ) Accumulated other comprehensive loss ( 42,065 ) ( 44,751 ) Total stockholders' equity 183,858 182,428 Total liabilities and stockholders' equity $ 2,163,821 $ 2,085,834 The accompanying notes are an integral part of these unaudited consolidated financial statements. Table of Contents 4 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Operations - Unaudited (Dollars in thousands, except per share data) Three Months Ended March 31, 2023 2022 Interest income: Loans, including fees $ 19,711 $ 12,982 Investment securities 2,286 2,329 Interest-bearing deposits in financial institutions 382 31 Total interest income 22,379 15,342 Interest expense: Interest-bearing checking 43 16 Money market and savings accounts 4,785 551 Time deposits 1,057 259 Federal Home Loan Bank advances and other borrowings 497 137 Total interest expense 6,382 963 Net interest income before provision for credit losses 15,997 14,379 Provision for credit losses 201 - Net interest income after provision for credit losses 15,796 14,379 Non-interest income: Service fees 1,205 900 (Loss) gain on sale of securities available for sale, net ( 21 ) 21 Gain on sale of loans held for sale, net 347 334 Loan settlement - 161 Other non-interest income 539 529 Total non-interest income 2,070 1,945 Non-interest expense: Salaries and employee benefits 6,377 5,875 Occupancy 1,299 1,270 Regulatory assessment and fees 224 213 Consulting and legal fees 358 517 Network and information technology services 478 387 Other operating expense 1,440 1,350 Total non-interest expense 10,176 9,612 Income before income tax expense 7,690 6,712 Income tax expense 1,881 1,858 Net income $ 5,809 $ 4,854 Per share information: Net income per share, basic $ 0.29 $ 0.24 Net income per share, diluted $ 0.29 $ 0.24 The accompanying notes are an integral part of these unaudited consolidated financial statements. Table of Contents 5 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Comprehensive Income (Loss) - Unaudited (Dollars in thousands) Three Months Ended March 31, 2023 2022 Net income $ 5,809 $ 4,854 Other comprehensive income (loss): Unrealized gain (loss) on investment securities 3,637 ( 22,775 ) Amortization of net unrealized (loss) gain on securities transferred from available-for-sale to held-to-maturity ( 60 ) 65 Reclassification adjustment for loss (gain) included in net income 21 ( 21 ) Tax effect ( 912 ) 5,789 Total other comprehensive income (loss), net of tax 2,686 ( 16,942 ) Total comprehensive income (loss) $ 8,495 $ ( 12,088 ) The accompanying notes are an integral part of these unaudited consolidated financial statements. Table of Contents 6 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Changes in Stockholders’ Equity - Unaudited (Dollars in thousands, except per share data) Common Stock Additional Paid-in Capital on Common Stock Accumulated Deficit Accumulated Other Comprehensive Loss Shares Par Value Total Stockholders' Equity Balance at December 31, 2022 20,000,753 $ 20,001 $ 311,282 $ ( 104,104 ) $ ( 44,751 ) $ 182,428 Cumulative effect of adoption of accounting principle related to ASC 326 - - - ( 1,325 ) - (1,325) Adjusted beginning balance after cumulative effect adjustment 20,000,753 20,001 311,282 ( 105,429 ) ( 44,751 ) 181,103 Net income - - - 5,809 - 5,809 Other comprehensive income - - - - 2,686 2,686 Repurchase of Class A common stock ( 500,000 ) ( 500 ) ( 5,367 ) - - ( 5,867 ) Restricted stock issued 121,627 121 ( 121 ) - - - Stock based compensation - - 127 - - 127 Balance at March 31, 2023 19,622,380 $ 19,622 $ 305,921 $ ( 99,620 ) $ ( 42,065 ) $ 183,858 Balance at January 1, 2022 19,991,753 $ 19,992 $ 310,666 $ ( 124,245 ) $ ( 2,516 ) $ 203,897 Net income - - - 4,854 - 4,854 Other comprehensive loss - - - - ( 16,942 ) ( 16,942 ) Exercise of stock options 9,000 9 93 - - 102 Stock-based compensation - - 128 - - 128 Balance at March 31, 2022 20,000,753 $ 20,001 $ 310,887 $ ( 119,391 ) $ ( 19,458 ) $ 192,039 Table of Contents 7 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flows - Unaudited (Dollars in thousands) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 5,809 $ 4,854 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 201 - Depreciation and amortization 150 188 (Accretion) Amortization of premiums on securities, net ( 38 ) 169 Accretion of deferred loan fees, net ( 93 ) ( 807 ) Stock-based compensation 127 128 Loss (gain) on sale of available for sale securities 21 ( 21 ) Gain on sale of loans held for sale ( 347 ) ( 334 ) Increase in cash surrender value of bank owned life insurance ( 267 ) ( 266 ) Decrease in deferred tax assets 1,881 1,858 Net change in operating assets and liabilities: Accrued interest receivable ( 670 ) ( 328 ) Other assets 284 ( 2,838 ) Accrued interest and other liabilities 1,943 3,000 Net cash provided by operating activities 9,001 5,603 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 2,406 2,626 Purchase of investment securities available for sale ( 7,667 ) ( 42,794 ) Proceeds from maturities and pay-downs of investment securities available for sale 3,261 14,788 Proceeds from sales of investment securities available for sale 8,617 14,558 Net increase in loans held for investment ( 77,413 ) ( 617 ) Purchase of loans held for investment - ( 70,175 ) Additions to premises and equipment ( 22 ) ( 155 ) Proceeds from the sale of loans held for sale 4,847 3,643 Proceeds from the redemption of Federal Home Loan Bank stock 3,570 - Purchase of Federal Home Loan Bank stock ( 6,831 ) (177) Net cash used in investment activities ( 69,232 ) ( 80,735 ) Cash flows from financing activities: Proceeds from issuance of Class A common stock, net - 102 Repurchase of Class A common stock ( 5,867 ) - Net increase in deposits 1,181 122,915 Proceeds from Federal Home Loan Bank advances 158,000 - Repayments on Federal Home Loan Bank advances ( 84,000 ) - Net cash provided by financing activities 69,314 123,017 Net increase in cash and cash equivalents 9,083 47,885 Cash and cash equivalents at beginning of period 54,168 46,228 Cash and cash equivalents at end of period $ 63,251 $ 94,113 Supplemental disclosure of cash flow information: Interest paid $ 6,044 $ 961 Supplemental schedule of non-cash investing and financing activities: Transfer of loans held for investment to loans held for sale $ 4,500 $ 3,309 The accompanying notes are an integral part of these unaudited consolidated financial statements. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 8 USCB Financial Holdings, Inc. Q1 2023 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. The Bank owns a subsidiary, Florida Peninsula Title LLC, 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. 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/A for the year ended December 31, 2022. 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 Adoption of New Accounting Standards Measurement of Credit Losses on Financial Instruments On January 1st, 2023, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (e.g., loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 amended the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities, that management does not intend to sell or believes that it is more likely than not they will be required to sell. Under CECL, the Company estimates the allowance for credit losses using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 9 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Historical credit losses provide the basis for estimation of expected credit losses. Qualitative adjustments are applied to the expected credit losses estimated for the loan portfolio in relation to potential limitations of the quantitative model. A scorecard is used to aid management in the assessment of qualitative factor adjustments applied to expected credit losses. The quantitative component of the estimate relies on the statistical relationship between the projected value of an economic indicator and the implied historical loss experience among a curated group of peers. The Company utilized regression analyses of peer data, in which the Company was included, and where observed credit losses and selected economic factors were used to determine suitable loss drivers for modeling the lifetime rates of probability of default (PD). A loss given default rate (LGD) is assigned to each pool for each period based on these PD outcomes. The model fundamentally utilizes an expected discounted cash flow (DCF) analysis for loan portfolio segments. The DCF analysis is run at the instrument-level and incorporates an array of loan-specific data points and segment- implied assumptions to determine the lifetime expected loss attributable to each instrument. An implicit "hypothetical loss" is derived for each period of the DCF and helps establish the present value of future cash flows for each period. The reserve applied to a specific instrument is the difference between the sum of the present value of future cash flows and the book balance of the loan at the measurement date. Management elected the Remaining Life (WARM) methodology for five portfolio segments. For each of these segments, a long-term average loss rate is calculated and applied on a quarterly basis for the remaining life of the pool. Adjustments for economic expectations are made through qualitative assessments. For the remaining life estimated management implemented a software that uses an attrition-based calculation that performs quarterly, cohort-based attrition measurements based on the loan portfolio. For loans collectively evaluated, $ 1.3 billion of loan receivables or 84 % were evaluated under Discounted Cash Flow method and $ 251.0 million of loan receivables or 16 % were evaluated under the Remaining Life method. The remaining $ 7.9 million loan receivable of the total loan portfolio were individually evaluated. Portfolio segments are the level at which loss assumptions are applied to a pool of loans based on the similarity of risk characteristics inherent in the included instruments, relying on collateral codes and FFIEC Call Report codes. The Company currently segments the portfolio based on collateral codes for purpose of establishing reserves. Each of these segments is paired to regression models (Loss Driver Analyses) based on peer data for loans of similar risk characteristics. The Company has established relationships between internal segmentation and FFIEC Call Report codes for this purpose. The loss driver for each loan portfolio segment is derived from a readily available and reasonable economic forecast, including the Federal Reserve Bank projections of U.S. civilian unemployment rate and the year-over-year real GDP growth; for the residential loan segment the House Price index (“HPI”) projections published by Fannie Mae’s Economic and Strategic Research Group are utilized for the forecast. Forecasts are applied the first four quarters of the credit loss estimate and revert on a straight-line basis to the lookback period's historical mean for the economic indicator over the expected life of loans. The model incorporates qualitative factor adjustments in order to calibrate the model for risk in each portfolio segment that may not be captured through quantitative analysis. Determinations regarding qualitative adjustments are reflective of management's expectation of loss conditions differing from those already captured in the quantitative component of the model. The Company estimates a reserve for unfunded commitments, which is reported separately from the allowance for credit losses within other liabilities. The reserve is based upon the same quantitative and qualitative factors applied to the collectively evaluated loan portfolio. The impact of adoption of the ASU 2016-13 was an increase to the allowance for credit losses on loans receivables of $ 1.1 million and an increase to the reserve for unfunded commitments of $ 259 thousand. This one-time cumulative adjustment resulted in a decrease of $ 1. 3 million in retained earnings. See “Allowance for Credit Losses” section in Note 3 for more information on the allowance of credit losses (”ACL”). Trouble Debt Restructuring In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022- 02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures. The standard addresses the following: 1) eliminates the accounting guidance for TDRs, will require an entity to determine whether a modification results in a new loan or a continuation of an existing loan, 2) expands disclosures related to modifications, and 3) will require disclosure of current period gross write-offs of financing receivables within the vintage Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 10 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q disclosures table (see footnote 3 “Loans”). The Company adopted ASU 2022-02 effective January 1, 2023 on a prospective basis. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements. Issued and Not Yet Adopted 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, 2024. 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. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 11 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q 2. INVESTMENT SECURITIES On January 1st, 2023, the Company adopted ASU 2016-13 Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. In addition, ASC 326 amended the accounting for available- for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write- down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. CECL requires loss reserve for securities classified as Held-to-Maturity (“HTM”). The reserve should reflect historical credit performance as well as the impact of projected economic forecast. For U.S. Government bonds and U.S. Agency issued bonds in HTM the explicit guarantee of the US Government is sufficient to conclude that a credit loss reserve is not required. The reserve requirement is for three primary assets groups: municipal bonds, corporate bond, and non-agency securitizations. The Company calculates quarterly the loss reserve utilizing Moody’s ImpairmentStudio. The CECL measurement for investment securities incorporates historical data, containing defaults and recoveries information, and Moody’s baseline economic forecast. The solution uses probability of default/loss given default (“PD/LGD”) approach. PD represents the likelihood a borrower will default. Within the Moody’s model, this is determined using historical default data, adjusted for the current economic environment. LGD projects the expected loss if a borrower were to default. At quarter end, HTM securities included $ 175.4 million of U.S. Government and U.S. Agency issued bonds and mortgage-backed securities, because of the explicit and/or implicit guarantee on these bonds the Company holds no reserves on these holdings. The remaining portion of the HTM portfolio is made up of $ 11.0 million in investment grade corporate bonds. The required reserve for these holdings is determined each quarter using the model described above. The resulting amount of allowance was immaterial at March 31, 2023. There was no allowance for Available for Sale (“AFS”) securities that needed to be recorded as of March 31, 2023. 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): March 31, 2023 Available-for-sale: Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. Government Agency $ 10,184 $ - $ ( 1,353 ) $ 8,831 Collateralized mortgage obligations 110,180 - ( 21,343 ) 88,837 Mortgage-backed securities - residential 72,690 - ( 12,124 ) 60,566 Mortgage-backed securities - commercial 37,043 6 ( 4,449 ) 32,600 Municipal securities 25,064 - ( 5,754 ) 19,310 Bank subordinated debt securities 16,831 18 ( 1,352 ) 15,497 Corporate bonds 4,035 - ( 267 ) 3,768 $ 276,027 $ 24 $ ( 46,642 ) $ 229,409 Held-to-maturity: U.S. Government Agency $ 44,792 $ 126 $ ( 5,182 ) $ 39,736 U.S. Treasury 9,951 - ( 8 ) 9,943 Collateralized mortgage obligations 67,404 161 ( 7,019 ) 60,546 Mortgage-backed securities - residential 41,842 483 ( 4,237 ) 38,088 Mortgage-backed securities - commercial 11,399 - ( 644 ) 10,755 Corporate bonds 11,040 - ( 941 ) 10,099 $ 186,428 $ 770 $ ( 18,031 ) $ 169,167 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 12 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q December 31, 2022 Available-for-sale: Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. Government Agency $ 10,177 $ - $ ( 1,522 ) $ 8,655 Collateralized mortgage obligations 118,951 - ( 23,410 ) 95,541 Mortgage-backed securities - residential 73,838 - ( 12,959 ) 60,879 Mortgage-backed securities - commercial 32,244 15 ( 4,305 ) 27,954 Municipal securities 25,084 - ( 6,601 ) 18,483 Bank subordinated debt securities 15,964 5 ( 1,050 ) 14,919 Corporate bonds 4,037 - ( 328 ) 3,709 $ 280,295 $ 20 $ ( 50,175 ) $ 230,140 Held-to-maturity: U.S. Government Agency $ 44,914 $ 25 $ ( 5,877 ) $ 39,062 U.S. Treasury 9,841 - ( 13 ) 9,828 Collateralized mortgage obligations 68,727 28 ( 7,830 ) 60,925 Mortgage-backed securities - residential 42,685 372 ( 4,574 ) 38,483 Mortgage-backed securities - commercial 11,442 - ( 665 ) 10,777 Corporate bonds 11,090 - ( 1,077 ) 10,013 $ 188,699 $ 425 $ ( 20,036 ) $ 169,088 During the year ended December 31, 2022, a total of 26 investment securities with an amortized cost basis and fair value of $ 74.4 million and $ 63.8 million, respectively, were transferred from AFS to HTM. These securities had a net unrealized loss of $ 10.6 million on the date of transfer. The net unrealized loss that was retained in accumulated other comprehensive income (“AOCI”) is being amortized over the remaining life of the securities. For the three months ended March 31, 2023, total amortization out of AOCI for net unrealized losses on securities transferred from AFS to HTM was $ 60 thousand. The unamortized net unrealized loss at March 31, 2023 was $ 9.7 million. Gains and losses on the sale of securities are recorded on the trade date and are determined on the 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 months ended March 31, 2023 and 2022 (in thousands): Three Months Ended Mach 31, Available-for-sale: 2023 2022 Proceeds from sale and call of securities $ 8,617 $ 14,558 Gross gains $ 3 $ 158 Gross losses ( 24 ) ( 137 ) Net realized (loss) gain $ ( 21 ) $ 21 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 13 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q 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 March 31, 2023: Amortized Cost Fair Value Amortized Cost Fair Value Due within one year $ - $ - $ 11,460 $ 11,426 Due after one year through five years 4,035 3,768 9,531 8,616 Due after five years through ten years 17,831 16,329 - - Due after ten years 24,064 18,478 - - U.S. Government Agency 10,184 8,831 44,792 39,736 Collateralized mortgage obligations 110,180 88,837 67,404 60,546 Mortgage-backed securities - residential 72,690 60,566 41,842 38,088 Mortgage-backed securities - commercial 37,043 32,600 11,399 10,755 $ 276,027 $ 229,409 $ 186,428 $ 169,167 At March 31, 2023, 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 March 31, 2023 and December 31, 2022. 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): March 31, 2023 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 $ 4,281 $ ( 245 ) $ 44,285 $ ( 7,474 ) $ 48,566 $ ( 7,719 ) U.S. Treasury 9,943 ( 8 ) - - 9,943 ( 8 ) Collateralized mortgage obligations - - 149,381 ( 32,872 ) 149,381 ( 32,872 ) Mortgage-backed securities - residential - - 96,290 ( 18,600 ) 96,290 ( 18,600 ) Mortgage-backed securities - commercial 4,185 ( 55 ) 36,610 ( 6,534 ) 40,795 ( 6,589 ) Municipal securities - - 19,310 ( 5,754 ) 19,310 ( 5,754 ) Bank subordinated debt securities 6,245 ( 220 ) 8,369 ( 1,131 ) 14,614 ( 1,351 ) Corporate bonds - - 13,867 ( 770 ) 13,867 ( 770 ) $ 24,654 $ ( 528 ) $ 368,112 $ ( 73,135 ) $ 392,766 $ ( 73,663 ) December 31, 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 $ 11,407 ( 1,093 ) 36,310 ( 7,616 ) 47,717 $ ( 8,709 ) U.S. Treasury 9,828 ( 13 ) - - 9,828 ( 13 ) Collateralized mortgage obligations 16,500 ( 963 ) 139,965 ( 34,962 ) 156,465 ( 35,925 ) Mortgage-backed securities - residential 5,059 ( 564 ) 91,742 ( 19,348 ) 96,801 ( 19,912 ) Mortgage-backed securities - commercial 10,052 ( 1,173 ) 26,823 ( 5,300 ) 36,875 ( 6,473 ) Municipal securities - - 18,483 ( 6,601 ) 18,483 ( 6,601 ) Bank subordinated debt securities 11,295 ( 670 ) 2,619 ( 381 ) 13,914 ( 1,051 ) Corporate bonds 13,723 ( 926 ) - - 13,723 ( 926 ) $ 77,864 $ ( 5,402 ) $ 315,942 $ ( 74,208 ) $ 393,806 $ ( 79,610 ) Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 14 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q As of March 31, 2023, the unrealized losses associated with $ 133.4 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 of the securities upon transfer between portfolios. ASC Topic 326 amended the existing other-than-temporary-impairment guidance for AFS securities, requiring credit losses to be recorded as an allowance rather than through a permanent write-down. When evaluating AFS debt securities under ASC Topic 326, the Company has evaluated whether the decline in fair value is attributed to credit losses or other factors like interest rate risk, using both quantitative and qualitative analyses, including company performance analysis, review of credit ratings, remaining payment terms, prepayment speeds and analysis of macro-economic conditions. Each investment is expected to recover its price depreciations over its holding period as it moves to maturity and the Company has the intent and ability to hold these securities to maturity if necessary. As a result of this evaluation, the Company concluded that no allowance was required. At December 31, 2022, the Company had $ 53.7 million of unrealized losses on mortgage backed securities and collateralized mortgage obligations of government sponsored entities having a fair value of $ 294.6 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government sponsored entities. The municipal bonds are of high credit quality and the declines in fair value are not due to credit quality. Based on the assessment of these mitigating factors, management believed that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. At December 31, 2022, the Company does not intend to sell debt securities that are in an unrealized loss position and it is not more than likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis. Therefore, management does not consider any investment to be other than temporarily impaired at December 31, 2022. 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 March 31, 2023, the Company did no t 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 March 31, 2023, the Company had a total of $ 206.3 million in deposits under the public funds program and pledged to the State of Florida for these public funds were twenty one corporate bonds with an aggregate fair value of $ 62.3 million. As of December 31, 2022, the Company had a total of $ 204.2 million in deposits under the public funds program and pledged to the State of Florida for these public funds were eighteen corporate bonds with an aggregate fair value of $ 49.0 million. The Federal Reserve Board, on March 12, 2023, announced the creation of a new Bank Term Funding Program (BTFP). The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The Company had no borrowing under the BTFP program and had pledged $ 24.3 million in securities measured at par to the Federal Reserve Bank of Atlanta for the BTFP program. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 15 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q 3. LOANS On January 1, 2023, the Company adopted FASB ASC Topic 326 using the modified retrospective methodology in accordance with the amendments of FASB ASU 2016-13. Through the adoption of CECL, the Company developed an allowance for credit losses (“ACL”) methodology that replaces its previous allowance for loan losses methodology. See the ACL section in this note for further information regarding the Company’s ACL. Prior periods balance for ACL are presented under legacy GAAP and may not be comparable to current period presentation. The following table is a summary of the distribution of loans held for investment by type (in thousands): March 31, 2023 December 31, 2022 Total Percent of Total Total Percent of Total Residential Real Estate $ 184,427 11.7 % $ 185,636 12.3 % Commercial Real Estate 987,757 62.5 % 970,410 64.4 % Commercial and Industrial 160,947 10.2 % 126,984 8.4 % Foreign Banks 97,405 6.1 % 93,769 6.2 % Consumer and Other 149,410 9.5 % 130,429 8.7 % Total gross loans 1,579,946 100.0 % 1,507,228 100.0 % Less: Deferred fees (cost) 448 ( 110 ) Total loans net of deferred fees (cost) 1,580,394 1,507,338 Less: Allowance for credit losses 18,887 17,487 Total net loans $ 1,561,507 $ 1,489,851 At March 31, 2023 and December 31, 2022, the Company had $ 358.8 million and $ 338.1 million respectively, of commercial real estate and residential mortgage loans pledged as collateral for 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 totaling $ 308 thousand at March 31, 2023 and $ 1.3 million at December 31, 2022, which are categorized as commercial and industrial loans. The Company recognized $ 1 thousand and $ 1.0 million in PPP loan fees and interest income during the three months ended March 31, 2023 and 2022, respectively, which is reported under loans, including fees, within the Consolidated Statements of Operations. Allowance for Credit Losses In general, the Company utilizes the Discounted Cash Flow (DCF) method or the Remaining Life (WARM) methodology to estimate the quantitative portion of the ACL for loan pools. The DCF uses a loss driver analysis (LDA) and discounted cash flow analyses. Management engaged advisors and consultants with expertise in CECL model development to assist in development of a loss driver analysis based on regression models and supportable forecast. Peer group data obtained from FFIEC Call Report filings is used to inform regression analyses to quantify the impact of reasonable and supportable forecasts in projective models. Economic forecasts applied to regression models to estimate probability of default for loan receivables use at least one of the following economic indicators: civilian unemployment rate (national), real gross domestic product growth (national GDP) and/or the HPI. For each of the segments in which the WARM methodology is used, the long-term average loss rate is calculated and applied on a quarterly basis for the remaining life of the pool. Adjustments for economic expectations are made through qualitative factors. Qualitative factors used in the ACL methodology include: • Changes in lending policies, procedures, and strategies • Changes in international, national, regional, and local conditions • Changes in nature and volume of portfolio • Changes in the volume and severity of past due loans and other similar conditions Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 16 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q • Concentration risk • Changes in the value of underlying collateral • The effect of other external factors: e.g., competition, legal, and regulatory requirements • Changes in lending management, among others ACL for the three months ended March 31, 2023, was estimated under the CECL methodology, and for the three months ended December 31, 2022, and prior periods, it was estimated under the incurred loss model. Changes in the allowance for credit losses for the three months ended March 31, 2023 and 2022 were as follows (in thousands): Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other Total Three Months Ended March 31, 2023 Beginning balance $ 1,352 $ 10,143 $ 4,163 $ 720 $ 1,109 $ 17,487 Cumulative effect of adoption of accounting principle (1) 1,238 1,105 ( 2,158 ) 23 858 1,066 Provision for credit losses (2) 221 ( 795 ) 318 29 512 285 Recoveries 8 - 44 - 2 54 Charge-offs - - - - ( 5 ) ( 5 ) Ending Balance $ 2,819 $ 10,453 $ 2,367 $ 772 $ 2,476 $ 18,887 Three Months Ended March 31, 2022 Beginning balance $ 2,498 $ 8,758 $ 2,775 $ 457 $ 569 $ 15,057 Provision for credit losses ( 157 ) 425 ( 426 ) 34 124 - Recoveries 32 - 6 - - 38 Charge-offs ( 16 ) - - - ( 5 ) ( 21 ) Ending Balance $ 2,357 $ 9,183 $ 2,355 $ 491 $ 688 $ 15,074 (1) Impact of CECL adoption on January 1, 2023 (2) Provision for credit losses excludes $ 84 thousand reduction due to unfunded commitments included in other liabilities. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 17 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q The ACL and the outstanding balances in the specified loan categories as of March 31, 2023 and December 31, 2022 are as follows (in thousands): Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other Total March 31, 2023: Allowance for credit losses: Individually evaluated for impairment $ 149 $ - $ 96 $ - $ 94 $ 339 Collectively evaluated for impairment 2,670 10,453 2,271 772 2,382 18,548 Balances, end of period $ 2,819 $ 10,453 $ 2,367 $ 772 $ 2,476 $ 18,887 Loans: Individually evaluated for impairment $ 7,155 $ - $ 558 $ - $ 171 $ 7,884 Collectively evaluated for impairment 177,272 987,757 160,389 97,405 149,239 1,572,062 Balances, end of period $ 184,427 $ 987,757 $ 160,947 $ 97,405 $ 149,410 $ 1,579,946 December 31, 2022: Allowance for credit losses: Individually evaluated for impairment $ 155 $ - $ 41 $ - $ 98 $ 294 Collectively evaluated for impairment 1,197 10,143 4,122 720 1,011 17,193 Balances, end of period $ 1,352 $ 10,143 $ 4,163 $ 720 $ 1,109 $ 17,487 Loans: Individually evaluated for impairment $ 7,206 $ 393 $ 82 $ - $ 196 $ 7,877 Collectively evaluated for impairment 178,430 970,017 126,902 93,769 130,233 1,499,351 Balances, end of period $ 185,636 $ 970,410 $ 126,984 $ 93,769 $ 130,429 $ 1,507,228 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. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 18 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Loan credit exposures by internally assigned grades are presented below for the periods indicated (in thousands): As of March 31, 2023 Term Loans by Origination Year Revolving Loans Total 2023 2022 2021 2020 2019 Prior Residential real estate Pass $ 2,736 $ 40,571 $ 27,348 $ 7,224 $ 10,119 $ 90,718 $ 5,711 $ 184,427 Total 2,736 40,571 27,348 7,224 10,119 90,718 5,711 184,427 Commercial real estate Pass 25,800 342,353 226,774 107,237 81,305 197,272 4,474 985,215 Substandard - - 1,842 700 - - - 2,542 Total 25,800 342,353 228,616 107,937 81,305 197,272 4,474 987,757 Commercial and industrial Pass 35,181 39,173 35,534 9,402 17,571 2,994 19,928 159,783 Substandard - - - - 486 308 370 1,164 Total 35,181 39,173 35,534 9,402 18,057 3,302 20,298 160,947 Foreign banks Pass 47,410 49,995 - - - - - 97,405 Total 47,410 49,995 - - - - - 97,405 Consumer and other loans Pass 18,948 76,401 49,777 714 501 1,504 1,394 149,239 Substandard - - - - - 171 - 171 Total 18,948 76,401 49,777 714 501 1,675 1,394 149,410 Total Loans Pass 130,075 548,493 339,433 124,577 109,496 292,488 31,507 1,576,069 Special Mention - - - - - - - - Substandard - - 1,842 700 486 479 370 3,877 Doubtful - - - - - - - - Total $ 130,075 $ 548,493 $ 341,275 $ 125,277 $ 109,982 $ 292,967 $ 31,877 $ 1,579,946 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 19 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q As of December 31, 2022 Pass Special Mention Substandard Doubtful Total Loans Residential real estate: Home equity line of credit and other $ 623 $ - $ - $ - $ 623 1-4 family residential 132,178 - - - 132,178 Condo residential 52,835 - - - 52,835 185,636 - - - 185,636 - Commercial real estate: Land and construction 38,687 - - - 38,687 Multi-family residential 176,820 - - - 176,820 Condo commercial 49,601 - 393 - 49,994 Commercial property 702,357 - 2,552 - 704,909 967,465 - 2,945 - 970,410 Commercial and industrial: Secured 120,873 - 807 - 121,680 Unsecured 5,304 - - - 5,304 126,177 - 807 - 126,984 Foreign banks 93,769 - - - 93,769 Consumer and other loans 130,233 - 196 - 130,429 Total $ 1,503,280 $ - $ 3,948 $ - $ 1,507,228 The Company had charge offs totaling $ 5 thousand for the quarter ended as of March 31, 2023 on loans that were all originated within 2023. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 20 USCB Financial Holdings, Inc. Q1 2023 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 March 31, 2023 and December 31, 2022 (in thousands): Accruing As of March 31, 2023 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 $ 606 $ - $ - $ 606 $ - $ 606 1-4 family residential 128,622 1,156 - 129,778 - 129,778 Condo residential 52,859 1,184 - 54,043 - 54,043 182,087 2,340 - 184,427 - 184,427 Commercial real estate: Land and construction 34,986 - - 34,986 - 34,986 Multi-family residential 175,358 - - 175,358 - 175,358 Condo commercial 53,583 - - 53,583 - 53,583 Commercial property 723,770 - - 723,770 - 723,770 Leasehold improvements 60 - - 60 - 60 987,757 - - 987,757 - 987,757 Commercial and industrial: Secured 153,810 2,343 - 156,153 486 156,639 Unsecured 4,059 249 - 4,308 - 4,308 157,869 2,592 - 160,461 486 160,947 Foreign banks 97,405 - - 97,405 - 97,405 Consumer and other 149,239 171 - 149,410 - 149,410 Total $ 1,574,357 $ 5,103 $ - $ 1,579,460 $ 486 $ 1,579,946 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 21 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Accruing As of December 31, 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 $ 623 $ - $ - $ 623 $ - $ 623 1-4 family residential 131,120 1,058 - 132,178 - 132,178 Condo residential 50,310 2,525 - 52,835 - 52,835 182,053 3,583 - 185,636 - 185,636 Commercial real estate: Land and construction 38,687 - - 38,687 - 38,687 Multi-family residential 176,820 - - 176,820 - 176,820 Condo commercial 49,994 - - 49,994 - 49,994 Commercial property 704,884 25 - 704,909 - 704,909 Leasehold improvements - - - - - - 970,385 25 - 970,410 - 970,410 Commercial and industrial: Secured 121,649 31 - 121,680 - 121,680 Unsecured 4,332 972 - 5,304 - 5,304 125,981 1,003 - 126,984 - 126,984 Foreign banks 93,769 - - 93,769 - 93,769 Consumer and other 130,169 260 - 130,429 - 130,429 Total $ 1,502,357 $ 4,871 $ - $ 1,507,228 $ - $ 1,507,228 Nonaccrual Status The following table includes the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of March 31, 2023: March 31, 2023 Nonaccrual Loans With No Related Allowance Nonaccrual Loans With Related Allowance Total Nonaccruals Loans Past Due Over 90 Days and Still Accruing Residential real estate $ - $ - $ - $ - Commercial real estate - - - - Commercial and industrial - 486 486 - Consumer and other - - - - $ - $ 486 $ 486 $ - The Company did no t have loans in nonaccrual status as of December 31, 2022. Accrued interest receivable is excluded from the estimate of credit losses. There was no interest income recognized attributable to nonaccrual loans outstanding during the three months ended March 31, 2023 and 2022. Interest income on these loans for the three months ended March 31, 2023 and 2022, would have been approximately $ 2 and $ 0 thousand, respectively, had these loans performed in accordance with their original terms. Collateral-Dependent Loans A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale or operation of the collateral. There were no collateral dependent loans as of March 31, 2023 and as of December 31, 2022. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 22 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q 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 as of December 31, 2022 (in thousands): December 31, 2022 Unpaid Principal Balance Net Investment Balance Valuation Allowance Impaired Loans with No Specific Allowance: Residential real estate $ 3,551 $ 3,544 $ - Commercial real estate 393 393 - 3,944 3,937 - Impaired Loans with Specific Allowance: Residential real estate 3,655 3,626 155 Commercial and industrial 82 82 41 Consumer and other 196 196 98 3,933 3,904 294 Total $ 7,877 $ 7,841 $ 294 Net investment balance is the unpaid principal balance of the loan adjusted for the remaining net deferred loan fees. The following table presents the average recorded investment balance on impaired loans for the date indicated (in thousands): Three Months Ended March 31, 2022 Residential real estate $ 8,181 Commercial real estate 649 Commercial and industrial 137 Consumer and other 220 Total $ 9,187 Interest income recognized on impaired loans for the three months ended March 31, 2022 was $ 91 thousand. Loan Modifications to Borrowers Experiencing Financial Difficulties The Company did no t have new modifications to borrowers experiencing financial difficulties and no loan modifications that subsequently defaulted during for the three months ended March 31, 2023. 4. INCOME TAXES The Company’s provision for income taxes is presented in the following table for the dates indicated (in thousands): Three Months Ended March 31, 2023 2022 Current: Federal $ - $ - State - - Total current - - Deferred: Federal 1,472 1,442 State 409 416 Total deferred 1,881 1,858 Total tax expense $ 1,881 $ 1,858 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 23 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q The actual income tax expense for the three months ended March 31, 2023 and 2022 differs from the statutory tax expense for the period (computed by applying the U.S. federal corporate tax rate of 21 % for 2023 and 2022 to income before provision for income taxes) as follows (in thousands): Three Months Ended March 31, 2023 2022 Federal taxes at statutory rate $ 1,615 $ 1,409 State income taxes, net of federal tax benefit 334 289 Bank owned life insurance ( 68 ) ( 67 ) Other, net - 227 Total tax expense $ 1,881 $ 1,858 The Company’s deferred tax assets and deferred tax liabilities as of the dates indicated were (in thousands): March 31, 2023 December 31, 2022 Deferred tax assets: Net operating loss $ 19,998 $ 21,720 Allowance for credit losses 4,787 4,432 Lease liability 3,460 3,648 Unrealized losses on available for sale securities 14,281 15,193 Deferred loan fees - - Depreciable property 170 158 Stock option compensation 406 373 Accruals 234 723 Deferred tax assets: 43,336 46,247 Deferred tax liability: Deferred loan cost ( 113 ) ( 28 ) Lease right of use asset ( 3,460 ) ( 3,648 ) Deferred expenses ( 165 ) ( 175 ) Other, net ( 31 ) ( 36 ) Deferred tax liability ( 3,769 ) ( 3,887 ) Net deferred tax assets $ 39,567 $ 42,360 The Company has approximately $ 75.0 million of federal and $ 97.7 million of state net operating loss carryforwards expiring in various amounts between 2031 and 2036 and which are limited to offset, to the extent permitted, future taxable earnings of the Company. 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 2019. For the three months ended March 31, 2023 and 2022, the Company did no t have any unrecognized tax benefits as a result of tax positions taken during a prior period or during the current period. Additionally, no interest or penalties were recorded as a result of tax uncertainties. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 24 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q 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 March 31, 2023 and December 31, 2022 (in thousands): March 31, 2023 December 31, 2022 Commitments to grant loans and unfunded lines of credit $ 81,506 $ 95,461 Standby and commercial letters of credit 3,542 4,320 Total $ 85,048 $ 99,781 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 since 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 exposure. The notional amount of the interest rate swaps do not represent actual 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 15 interest rate swaps with loan customers with an aggregate notional amount of $ 40.9 million and $ 33.9 million at March 31, 2023 and December 31, 2022, 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 the Consolidated Balance Sheets. While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 25 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q 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 March 31, 2023: Derivatives not designated as hedging instruments: Interest rate swaps related to customer loans $ 40,896 $ 1,287 Other assets/Other liabilities $ 4,673 $ 4,673 December 31, 2022: Derivatives not designated as hedging instruments: Interest rate swaps related to customer loans $ 33,893 $ 1,278 Other assets/Other liabilities $ 5,011 $ 5,011 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 26 USCB Financial Holdings, Inc. Q1 2023 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 and liabilities measured at fair value on a recurring basis at March 31, 2023 and December 31, 2022 for each of the fair value hierarchy levels (in thousands): March 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Investment securities available for sale: U.S. Government Agency $ - $ 8,831 $ - $ 8,831 $ - $ 8,655 $ - $ 8,655 Collateralized mortgage obligations - 88,837 - 88,837 - 95,541 - 95,541 Mortgage-backed securities - residential - 60,566 - 60,566 - 60,879 - 60,879 Mortgage-backed securities - commercial - 32,600 - 32,600 - 27,954 - 27,954 Municipal securities - 19,310 - 19,310 - 18,483 - 18,483 Bank subordinated debt securities - 15,497 - 15,497 - 14,919 - 14,919 Corporate bonds - 3,768 - 3,768 - 3,709 - 3,709 Total - 229,409 - 229,409 - 230,140 - 230,140 Derivative assets - 4,673 - 4,673 - 5,011 - 5,011 Total assets at fair value $ - $ 234,082 $ - $ 234,082 $ - $ 235,151 $ - $ 235,151 Derivative liabilities $ - $ 4,673 $ - $ 4,673 $ - $ 5,011 $ - $ 5,011 Total liabilities at fair value $ - $ 4,673 $ - $ 4,673 $ - $ 5,011 $ - $ 5,011 Items Measured at Fair Value on a Non-recurring Basis Individually Evaluated Loans and Impaired Loans: ASC 326 eliminates the current accounting model for impaired loans effective as of January 1, 2023. At December 31, 2022, in accordance with provisions of the loan impairment guidance, individual loans with a carrying amount of approximately $ 3.9 million, were written down to their fair value of approximately $ 3.6 million, resulting in an impairment charge of $ 294 thousand, which was included in the allowance for credit losses at December 31, 2022. Loans subject 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 27 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q The following table represents the Company’s assets measured at fair value on a non-recurring basis at March 31, 2023 and December 31, 2022 for each of the fair value hierarchy levels (in thousands): Level 1 Level 2 Level 3 Total March 31, 2023: Individually evaluated loans $ - $ - $ - $ - December 31, 2022: Impaired loans $ - $ - $ 3,639 $ 3,639 The following table presents quantified information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis at December 31, 2022 (in thousands): Fair Value Valuation Technique(s) Unobservable Input(s) December 31, 2022: Residential real estate $ 3,500 Sales comparison approach Adj. for differences between comparable sales Commercial and industrial 41 Discounted cash flow Adj. for differences in net operating income expectations Consumer and other loans 98 Discounted cash flow Adj. for differences in net operating income expectations Total impaired loans $ 3,639 There were no financial liabilities measured at fair value on a non-recurring basis at March 31, 2023 and December 31, 2022. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 28 USCB Financial Holdings, Inc. Q1 2023 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 December 31, 2022 (in thousands): Fair Value Hierarchy Carrying Amount Level 1 Level 2 Level 3 Fair Value Amount March 31, 2023: Financial Assets: Cash and due from banks $ 5,586 $ 5,586 $ - $ - $ 5,586 Interest-bearing deposits in banks $ 57,665 $ 57,665 $ - $ - $ 57,665 Investment securities held to maturity, net $ 186,428 $ - $ 169,167 $ - $ 169,167 Loans held for investment, net $ 1,561,507 $ - $ - $ 1,518,178 $ 1,518,178 Accrued interest receivable $ 8,216 $ - $ 1,248 $ 6,968 $ 8,216 Financial Liabilities: Demand deposits $ 633,606 $ 633,606 $ - $ - $ 633,606 Money market and savings accounts $ 900,478 $ 900,478 $ - $ - $ 900,478 Interest-bearing checking accounts $ 50,573 $ 50,573 $ - $ - $ 50,573 Time deposits $ 245,805 $ - $ - $ 241,263 $ 241,263 FHLB advances $ 120,000 $ - $ 118,852 $ - $ 118,852 Accrued interest payable $ 567 $ - $ 327 $ 240 $ 567 December 31, 2022: Financial Assets: Cash and due from banks $ 6,605 $ 6,605 $ - $ - $ 6,605 Interest-bearing deposits in banks $ 47,563 $ 47,563 $ - $ - $ 47,563 Investment securities held to maturity $ 188,699 $ - $ 169,088 $ - $ 169,088 Loans held for investment, net $ 1,489,851 $ - $ - $ 1,436,877 $ 1,436,877 Accrued interest receivable $ 7,546 $ - $ 1,183 $ 6,363 $ 7,546 Financial Liabilities: Demand deposits $ 629,776 $ 629,776 $ - $ - $ 629,776 Money market and savings accounts $ 915,853 $ 915,853 $ - $ - $ 915,853 Interest-bearing checking accounts $ 66,675 $ 66,675 $ - $ - $ 66,675 Time deposits $ 216,977 $ - $ - $ 211,406 $ 211,406 FHLB advances $ 46,000 $ - $ 44,547 $ - $ 44,547 Accrued interest payable $ 229 $ - $ 92 $ 137 $ 229 8. STOCKHOLDERS’ EQUITY Common Stock In July 2021, the Bank completed the initial public offering 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 Company acquired all the issued and outstanding shares of the Class A voting common stock of the Bank, which at the time were the only issued and outstanding shares of the Bank’s capital stock, in a share exchange (the “Reorganization”) effected under the Florida Business Corporation Act. Each outstanding share of the Bank’s Class A 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 Class A 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 then current shareholders owned the same percentages of the Company’s common stock as they previously owned of the Bank’s common stock. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 29 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q The Company issued 121,627 shares of Class A common stock to employees and directors as restricted stock awards pursuant to the Company’s 2015 equity incentive plan in March 2023. During the first quarter of 2023, the Company repurchased 500,000 shares of USCB Financial Holdings Inc at a weighted average price per share of $ 11.74 . The aggregate purchase price for these transactions was approximately $ 5.9 million, including transaction costs. These repurchases were made through open market purchases pursuant to the Company’s publicly announced repurchase program. As of March 31, 2023, 250,000 shares remained authorized for repurchase under this program. Shares of the Company’s Class A common stock issued and outstanding as of March 31, 2023 and December 31, 2022 were 19,622,380 and 20,000,753 , respectively. Dividends 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 March 31, 2023 and 2022. Additionally, there were no dividends declared and unpaid as of March 31, 2023 and 2022. The Company and the Bank exceeded all regulatory capital requirements and remained significantly above “well- capitalized” guidelines as of December 31, 2022 and March 31, 2023. At March 31, 2023, the total risk-based capital ratios for the Company and the Bank were 13.20 % and 13.12 %, 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. The following table reflects the calculation of net income available to common stockholders for the three months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Net Income $ 5,809 $ 4,854 Less: Preferred stock dividends - - Net income available to common stockholders $ 5,809 $ 4,854 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements - Unaudited 30 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q The following table reflects the calculation of basic and diluted earnings per common share class for the three months ended March 31, 2023 and 2022 (in thousands, except per share amounts): Three Months Ended March 31, 2023 2022 Class A Class A Basic EPS Numerator: Net income available to common shares $ 5,809 $ 4,854 Denominator: Weighted average shares outstanding 19,855,409 19,994,953 Earnings per share, basic $ 0.29 $ 0.24 Diluted EPS Numerator: Net income available to common shares $ 5,809 $ 4,854 Denominator: Weighted average shares outstanding for basic EPS 19,855,409 19,994,953 Add: Dilutive effects of assumed exercises of stock options 85,197 114,830 Weighted avg. shares including dilutive potential common shares 19,940,606 20,109,783 Earnings per share, diluted $ 0.29 $ 0.24 Anti-dilutive stock options excluded from diluted EPS 572,500 - 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 31 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q