USCB FINANCIAL HOLDINGS, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is designed to provide a better understanding of the consolidated financial condition and results of operations of the Company and the Bank, its wholly owned subsidiary, for the quarter and three months ended March 31, 2023. This discussion and analysis is best read in conjunction with the unaudited consolidated financial statements and related footnotes included in this quarterly report on Form 10-Q and the audited consolidated financial statements and related footnotes included in the Annual Report on Form 10-K/A (“2022 Form 10-K/A”) filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2022. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-Looking Statements" and Item 1A “Risk Factors" below and in the 2022 Form 10-K filed with the SEC which is available at the SEC’s website www.sec.gov. Throughout this document, references to “we,” “us,” “our,” and “the Company” generally refer to USCB Financial Holdings, Inc. Forward-Looking Statements This Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements that are not historical in nature and are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act”). The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “aim,” “plan,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements related to our projected growth, anticipated future financial performance, and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from expected developments or events, or business and growth strategies, including anticipated internal growth and balance sheet restructuring. These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Potential risks and uncertainties include, but are not limited to: • the strength of the United States economy in general and the strength of the local economies in which we conduct operations; • our ability to successfully manage interest rate risk, credit risk, liquidity risk, and other risks inherent to our industry; • the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss reserve and deferred tax asset valuation allowance; • the efficiency and effectiveness of our internal control environment; • our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate; • adverse changes or conditions in capital and financial markets, including actual or potential stresses in the banking industry; • deposit attrition and the level of our uninsured deposits; • legislative or regulatory changes and changes in accounting principles, policies, practices or guidelines, including the on-going effects of the implementation of the Current Expected Credit Losses (“CECL”) standard; • the effects of our lack of a diversified loan portfolio and concentration in the South Florida market, including the risks of geographic, depositor, and industry concentrations, including our concentration in loans secured by real estate; • effects of climate change; • the concentration of ownership of our common stock; • fluctuations in the price of our common stock; • our ability to fund or access the capital markets at attractive rates and terms and manage our growth, both organic growth as well as growth through other means, such as future acquisitions; • inflation, interest rate, unemployment rate, market and monetary fluctuations; • impacts of international hostilities and geopolitical events; • increased competition and its effect on the pricing of our products and services as well as our margin; • the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client, employee, or third-party fraud and security breaches; and • other risks described in this Form 10-Q, the 2022 Form 10-K/A and other filings we make with the Securities and Exchange Commission (“SEC”). Table of Contents 32 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations. Therefore, you are cautioned not to place undue reliance on any forward-looking statements. Further, forward-looking statements included in this Form 10-Q are made only as of the date hereof, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events, unless required to do so under the federal securities laws. You should also review the risk factors described in the reports the Company filed or will file with the SEC and, for periods prior to the completion of the bank holding company reorganization in December 2021, the Bank filed with the FDIC. Overview The Company reported net income of $5.8 million or $0.29 per diluted share for Class A common stock for the three months ended March 31, 2023, compared with net income of $4.9 million or $0.24 per diluted share for Class A common stock, respectively, for the same period in 2022. 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 purchase pursuant to the Company’s publicly announced repurchase program. As of March 31, 2023, 250,000 shares remain authorized for repurchase under this program. In evaluating our financial performance, the Company considers the level of and trends in net interest income, the net interest margin, the cost of deposits, levels and composition of non-interest income and non-interest expense, performance ratios, asset quality ratios, regulatory capital ratios, and any significant event or transaction. Unless otherwise stated, all period comparisons in the bullet points below are calculated for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 and annualized where appropriate: • Net interest income increased $1.6 million or 11.3% to $16.0 million from $14.4 million for the quarter ended March 31, 2022. • Net interest margin (“NIM”) was 3.22% for both quarters ended at March 31, 2023 and 2022. • Total assets were $2.2 billion at March 31, 2023, representing an increase of $196.6 million or 10.0% from March 31, 2022 and an increase of $78.0 million or 15.2% annualized from December 31, 2022. • Total loans were $1.6 billion at March 31, 2023, representing an increase of $322.0 million or 25.6% from March 31, 2022 and an increase of $73.1 million or 19.7% annualized from December 2022. • Total deposits were $1.8 billion at March 31, 2023, representing an increase of $117.2 million or 6.8% from March 31, 2022 and $1.2 million from December 31, 2022. • Annualized return on average assets was 1.11% compared to 1.03% at March 31, 2022. • Annualized return on average stockholders’ equity was 12.85% compared to 9.75% for quarter ended March 31, 2022. • The allowance for credit losses to total loans was 1.20% for March 31, 2023 and 1.16% for December 31, 2022. ACL was calculated under the CECL methodology for the first quarter 2023 and the incurred loss methodology for the first quarter 2022. • Non-performing loans to total loans was 0.03% at March 31, 2023 compared to 0.0% at December 31, 2022. • At March 31, 2023, the total risk-based capital ratios for the Company and the Bank were 13.20% and 13.12%, respectively. • Tangible book value per common share of $9.37 as of March 31, 2023 was negatively affected by $2.14 due to after tax unrealized security losses of $42.1 million at March 31, 2023. At March 31, 2022, tangible book value of $9.60 was negatively affected by $0.97 due to $19.5 million after tax unrealized security losses. See “Reconciliation and Table of Contents 33 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Management Explanation for Non-GAAP Financial Measures” for a reconciliation of this non-GAAP financial measure. Critical Accounting Policies and Estimates The consolidated financial statements are prepared based on the application of U.S. GAAP, the most significant of which are described in Note 1 “Summary of Significant Accounting Policies” in the Company’s 2022 Form 10-K/A. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions, and judgments based on available information. These estimates, assumptions, and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements. Management has presented the application of these policies to the Audit and Risk Committee of our Board. Allowance for Credit Losses On January 1, 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. See Note 1 “Summary of Significant Accounting Policies” for more information on the adoption ASC 326 and the allowance of credit losses. As of March 31, 2023, our ACL included a concentration of commercial real estate loans. To assess the potential impact of changes in qualitative factors related to these loans, management performed a sensitivity analysis. Specially we evaluated the impact of two scenarios: (1) an increase in qualitative factors to simulate a maximum loss scenario and (2) a reduction to all qualitative factors to zero. Under the first scenario, the ACL increased by $4.6 million or 24.2% and under the second scenario the ACL was reduced by $1.1 million or 6.3%. This sensitivity analysis provides a hypothetical result to assess the sensitivity of the ACL and does not represent a change in management’s judgement. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management is required to assess whether a valuation allowance should be established on the net deferred tax assets based on the consideration of all available evidence using a more likely than not standard. In its evaluation, management considers taxable loss carry-back availability, expectation of sufficient taxable income, trends in earnings, the future reversal of temporary differences, and available tax planning strategies. The Company recognizes positions taken or expected to be taken in a tax return in accordance with existing accounting guidance on income taxes which prescribes a recognition threshold and measurement process. Interest and penalties on tax liabilities, if any, would be recorded in interest expense and other operating non-interest expense, respectively. Non-GAAP Financial Measures This Form 10-Q includes financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). This financial information includes certain operating performance measures. Management has included these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating the Company’s underlying performance trends. Further, management uses these measures in managing and evaluating the Company’s business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the section “Reconciliation and Management Explanation of Non-GAAP Financial Measures” included in this Form 10-Q. Table of Contents 34 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Segment Reporting Management monitors the revenue streams for all its various products and services. The identifiable segments are not material and operations are managed and financial performance is evaluated on an overall Company-wide basis. Accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment. Results of Operations General The following tables present selected balance sheet, income statement, and profitability ratios for the dates indicated (in thousands, except ratios): March 31, 2023 December 31, 2022 Consolidated Balance Sheets: Total assets $ 2,163,821 $ 2,085,834 Total loans (1) $ 1,580,394 $ 1,507,338 Total deposits $ 1,830,462 $ 1,829,281 Total stockholders' equity $ 183,858 $ 182,428 (1) Loan amounts include deferred fees/costs. Three Months Ended March 31, 2023 2022 Consolidated Statements of Operations: Net interest income before provision for credit losses $ 15,997 $ 14,379 Total non-interest income $ 2,070 $ 1,945 Total non-interest expense $ 10,176 $ 9,612 Net income $ 5,809 $ 4,854 Profitability: Efficiency ratio 56.32% 58.88% Net interest margin 3.22% 3.22% The Company’s results of operations depend substantially on net interest income and non-interest income. Other factors contributing to the results of operations include our provision for credit losses, non-interest expenses, and provision for income taxes. Three months ended March 31, 2023 compared to the three months ended March 31, 2022 Net income increased to $5.8 million for the three months ended March 31, 2023 from $4.9 million for the same period in 2022 due to higher interest income generated by a larger loan portfolio and higher yields. Net Interest Income Net interest income is the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities and is the primary driver of core earnings. Interest income is generated from interest and dividends on interest-earning assets, including loans, investment securities and other short-term investments. Interest expense is incurred from interest paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances and other borrowings. To evaluate net interest income, we measure and monitor (i) yields on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources, (iii) net interest spread, and (iv) net interest margin. Net interest spread is equal to the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is equal to the annualized net interest income divided by average interest-earning assets. Because non-interest- bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the indirect benefit of these non-interest-bearing sources. Table of Contents 35 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets and interest-bearing and non-interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Our asset liability committee (“ALCO”) has in place asset-liability management techniques to manage major factors that affect net interest income and net interest margin. The following table contains information related to average balance sheet, average yields on assets, and average costs of liabilities for the periods indicated (dollars in thousands): Three Months Ended March 31, 2023 2022 Average Balance Interest Yield/Rate (1) Average Balance Interest Yield/Rate (1) Assets Interest-earning assets: Loans (2) $ 1,547,393 $ 19,711 5.17% $ 1,211,432 $ 12,982 4.35% Investment securities (3) 421,717 2,286 2.20% 510,257 2,329 1.85% Other interest-earnings assets 43,084 382 3.60% 90,137 31 0.14% Total interest-earning assets 2,012,194 22,379 4.51% 1,811,826 15,342 3.43% Non-interest-earning assets 108,024 101,658 Total assets $ 2,120,218 $ 1,913,484 Liabilities and stockholders' equity Interest-bearing liabilities: Interest-bearing checking $ 58,087 43 0.30% $ 64,436 16 0.10% Saving and money market deposits 897,061 4,785 2.16% 736,134 551 0.30% Time deposits 224,730 1,057 1.91% 223,274 259 0.47% Total interest-bearing deposits 1,179,878 5,885 2.02% 1,023,844 826 0.33% FHLB advances and other borrowings 61,600 497 3.27% 36,011 137 1.54% Total interest-bearing liabilities 1,241,478 6,382 2.08% 1,059,855 963 0.37% Non-interest-bearing demand deposits 664,369 626,400 Other non-interest-bearing liabilities 31,000 25,369 Total liabilities 1,936,847 1,711,624 Stockholders' equity 183,371 201,860 Total liabilities and stockholders' equity $ 2,120,218 $ 1,913,484 Net interest income $ 15,997 $ 14,379 Net interest spread (4) 2.43% 3.07% Net interest margin (5) 3.22% 3.22% (1) Annualized. (2) Average loan balances include non-accrual loans. Interest income on loans includes accretion of deferred loan fees, net of deferred loan costs. (3) At fair value except for securities held to maturity. This amount includes FHLB stock. (4) Net interest spread is the average yield on total interest-earning assets minus the average rate on total interest-bearing liabilities. (5) Net interest margin is the ratio of net interest income to total interest-earning assets. Three months ended March 31, 2023 compared to the three months ended March 31, 2022 Net interest income before the provision for credit losses was $16.0 million for the three months ended March 31, 2023, an increase of $1.6 million or 11.3%, from $14.4 million for the same period in 2022. This increase was primarily attributable to higher income from a larger loan portfolio combined with an increase in the weighted average loan yield. Included with loan interest income are PPP interest and loan fees totaling $1 thousand and $1.0 million for the three months ended March 31, 2023 and 2022, respectively. PPP loan fees are recognized upon loan forgiveness by the SBA. Net interest margin was at 3.22% for both the quarters ended March 31, 2023 and 2022. The increase in loan yields was partially offset by higher interest-bearing liabilities cost. Increase in deposit cost was mainly attributed to current interest market conditions. Table of Contents 36 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Provision for Credit Losses The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for all expected credit losses. The provision for credit losses is impacted by growth in our loan portfolio, recent historical and projected future economic conditions, our internal assessment of the credit quality of the loan portfolio and net charge-offs. Three months ended March 31, 2023 compared to the three months ended March 31, 2022 The provision for credit loss was $201 thousand for the three months ended March 31, 2023 compared to no provision recorded for the same period in 2022. The primary driver of the provision expense in 2023 was attributable to loan growth. See “Allowance for Credit Losses” below for further discussion on how the ACL is calculated. Non-Interest Income Our services and products generate service charges and fees, mainly from our depository accounts. We also generate income from gain on sale of loans though our swap and SBA programs. In addition, we own and are beneficiaries of the life insurance policies on some of our employees and generate income on the increase in the cash surrender value of these policies. The following table presents the components of non-interest income for the dates indicated (in thousands): Three Months Ended March 31, 2023 2022 Service fees $ 1,205 $ 900 Gain (loss) 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 Three months ended March 31, 2023 compared to the three months ended March 31, 2022 Non-interest income for the three months ended March 31, 2023 increased $125 thousand or 6.4%, compared to the same period in 2022. This increase was primarily driven by a $305 thousand increase in fees related to SWAP loans. For the period ended March 31, 2022 the Company recognized $161 thousand interest recovery from a prior lending customer of the Bank. This payment reflected the final payment and settlement of lien judgements against the customer. Non-Interest Expense The following table presents the components of non-interest expense for the dates indicated (in thousands): Three Months Ended March 31, 2023 2022 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 1,440 1,350 Total non-interest expense $ 10,176 $ 9,612 Three months ended March 31, 2023 compared to the three months ended March 31, 2022 Non-interest expense for the three months ended March 31, 2023 increased $564 thousand or 5.9%, compared to the same period in 2022. The increase was primarily driven by higher salaries and employee benefits expense due to new hires and increased salary compensation. Table of Contents 37 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Provision for Income Tax Fluctuations in the effective tax rate reflect the effect of the differences in the inclusion or deductibility of certain income and expenses for income tax purposes. Therefore, future decisions on the investments we choose will affect our effective tax rate. The cash surrender value of bank-owned life insurance policies covering key employees, purchasing municipal bonds, and overall levels of taxable income will be important elements in determining our effective tax rate. Three months ended March 31, 2023 compared to the three months ended March 31, 2022 Income tax expense for both the quarters ended March 31, 2023 and 2022 was $1.9 million. The effective tax rate for the three months ended March 31, 2023 was 24.5% compared to 27.7% for the same period in 2022. The Company’s effective tax rate in the quarter ended March 31, 2022 was higher primarily because the Company recorded a one-time adjustment of $300 thousand to deferred tax assets which increased the income tax provision. For a further discussion of income taxes, see Note 4 “Income Taxes” to the unaudited Consolidated Financial Statements in this Form 10-Q. Analysis of Financial Condition Total assets at March 31, 2023 were $2.2 billion, an increase of $78.0 million, or 3.7%, over total assets of $2.1 billion at December 31, 2022. Total loans increased $73.1 million, or 4.8%, to $1.6 billion at March 31, 2023 compared to $1.5 billion at December 31, 2022. Total deposits increased by $1.2 million to $1.8 billion at March 31, 2023 compared to December 31, 2022. Investment Securities The investment portfolio is used and managed to provide liquidity through cash flows, marketability and, if necessary, collateral for borrowings. The investment portfolio is also used as a tool to manage interest rate risk and the Company’s capital market risk exposure. The philosophy of the portfolio is to maximize the Company’s profitability taking into consideration the Company’s risk appetite and tolerance, manage the asset composition and diversification, and maintain adequate risk-based capital ratios. The investment portfolio is managed in accordance with the Asset and Liability Management (“ALM”) policy, which includes investment guidelines, approved by the Board. Such policy is reviewed at least annually or more frequently if deemed necessary, depending on market conditions and/or unexpected events. The investment portfolio composition is subject to change depending on the funding and liquidity needs of the Company, and the interest risk management objective directed by the ALCO. The portfolio of investments also can be used to modify the duration of the balance sheet. The allocation of cash into securities takes into consideration anticipated future cash flows (uses and sources) and all available sources of credit. Our investment portfolio consists primarily of securities issued by U.S. government-sponsored agencies, U.S. agency mortgage-backed securities, collateralized mortgage obligation securities, municipal securities, and other debt securities, all with varying contractual maturities and coupons. Due to the optionality embedded in these securities, the final maturities do not necessarily represent the expected life of the portfolio. Some of these securities will be called or paid down depending on capital market conditions and expectations. The investment portfolio is regularly reviewed by the Chief Financial Officer, Treasurer, and the ALCO of the Company to ensure an appropriate risk and return profile as well as for adherence to the investment policy. 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 appropriate. AFS and HTM investment securities decreased $3.0 million or 1.0% to $415.8 million at March 31, 2023 from $418.8 million at December 31, 2022. Investment securities decreased due to payments received and sales of securities during the quarter. Management reinvested excess cash balances into high credit quality investments to increase the Company’s profitability and modify the Company’s balance sheet duration according to the ALM policy. As of March 31, Table of Contents 38 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q 2023, investment securities with a market value of $83.5 million were pledged to secure public deposits and Fed Borrowing Program. The investment portfolio does not have any tax-exempt securities. The following table presents the amortized cost and fair value of investment securities for the dates indicated (in thousands): March 31, 2023 December 31, 2022 Available-for-sale: Amortized Cost Fair Value Amortized Cost Fair Value U.S. Government Agency $ 10,184 $ 8,831 $ 10,177 $ 8,655 Collateralized mortgage obligations 110,180 88,837 118,951 95,541 Mortgage-backed securities - residential 72,690 60,566 73,838 60,879 Mortgage-backed securities - commercial 37,043 32,600 32,244 27,954 Municipal securities 25,064 19,310 25,084 18,483 Bank subordinated debt securities 16,831 15,497 15,964 14,919 Corporate bonds 4,035 3,768 4,037 3,709 $ 276,027 $ 229,409 $ 280,295 $ 230,140 Held-to-maturity: U.S. Government Agency $ 44,792 $ 39,736 $ 44,914 $ 39,062 U.S. Treasury 9,951 9,943 9,841 9,828 Collateralized mortgage obligations 67,404 60,546 68,727 60,925 Mortgage-backed securities - residential 41,842 38,088 42,685 38,483 Mortgage-backed securities - commercial 11,399 10,755 11,442 10,777 Corporate bonds 11,040 10,099 11,090 10,013 $ 186,428 $ 169,167 $ 188,699 $ 169,088 The following table shows the weighted average yields, categorized by contractual maturity, for investment securities as of March 31, 2023 (in thousands, except ratios): Within 1 year After 1 year through 5 years After 5 years through 10 years After 10 years Total Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Available-for-sale: U.S. Government Agency $ - 0.00% $ - 0.00% $ 2,352 3.18% $ 7,832 2.04% $ 10,184 2.30% U.S. Treasury - 0.00% - 0.00% - 0.00% - 0.00% - 0.00% Collateralized mortgage obligations - 0.00% - 0.00% - 0.00% 110,180 1.40% 110,180 1.40% MBS - residential - 0.00% - 0.00% - 0.00% 72,690 1.67% 72,690 1.67% MBS - commercial - 0.00% - 0.00% - 0.00% 37,043 2.17% 37,043 2.17% Municipal securities - 0.00% - 0.00% 1,000 2.05% 24,064 1.72% 25,064 1.74% Bank subordinated debt securities - 0.00% - 0.00% 16,831 4.99% - 0.00% 16,831 4.99% Corporate bonds - 0.00% 4,035 2.50% - 0.00% - 0.00% 4,035 2.50% $ - $ 4,035 $ 20,183 $ 251,809 $ 276,027 1.87% Held-to-maturity: U.S. Government Agency $ - 0.00% $ 7,909 1.03% $ 20,346 1.45% $ 16,537 1.98% $ 44,792 1.57% U.S. Treasury 9,951 4.44% - 0.00% - 0.00% - 0.00% 9,951 4.44% Collateralized mortgage obligations - 0.00% - 0.00% - 0.00% 67,404 1.69% 67,404 1.69% MBS - residential - 0.00% 4,526 1.84% 5,941 1.74% 31,375 2.24% 41,842 2.12% MBS - commercial - 0.00% - 0.00% 3,084 1.62% 8,315 1.69% 11,399 1.67% Corporate bonds 1,509 2.25% 9,531 2.79% - 0.00% - 0.00% 11,040 2.72% $ 11,460 $ 21,966 $ 29,371 $ 123,631 $ 186,428 1.96% Loans Loans are the largest category of interest-earning assets on the unaudited Consolidated Balance Sheets, and usually provide higher yields than the remainder of the interest-earning assets. Higher yields typically carry inherent credit and liquidity risks in comparison to lower yield assets. The Company manages and mitigates such risks in accordance with the credit and ALM policies, risk tolerance and balance sheet composition. Table of Contents 39 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q The following table shows the loan portfolio composition as of the dates indicated (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 Total loans increased by $73.1 million or 4.8% at March 31, 2023 compared to December 31, 2022. The commercial and industrial, and to a lesser extent, consumer and other loan and commercial real estate segments had the most significant growth partially offset by declines in the residential real estate loan segment. Our loan portfolio continues to grow, with commercial real estate lending as the primary focus which represented approximately 62.5% of the total gross loan portfolio as of March 31, 2023. We do not expect any significant changes over the foreseeable future in the composition of our loan portfolio or in our emphasis on commercial real estate lending. Our loan growth strategy since inception has been reflective of the market in which we operate and of our strategic plan as approved by the Board. Most of the commercial real estate exposure represents loans to commercial businesses secured by owner-occupied real estate. The growth experienced in recent years is primarily due to implementation of our relationship-based banking model and the success of our relationship managers in competing for new business in a highly competitive metropolitan area. Many of our larger loan clients have long-term relationships with members of our senior management team or our relationship managers that date back to former institutions. From a liquidity perspective, our loan portfolio provides us with additional liquidity due to repayments or unexpected prepayments. The following table shows maturities and sensitivity to interest rate changes for the loan portfolio at March 31, 2023 (in thousands): Due in 1 year or less Due in 1 to 5 years Due after 5 to 15 years Due after 15 years Total Residential Real Estate $ 15,740 $ 7,809 $ 84,011 $ 76,867 $ 184,427 Commercial Real Estate 92,411 155,604 729,841 9,901 987,757 Commercial and Industrial 8,392 30,996 80,925 40,634 160,947 Foreign Banks 97,405 - - - 97,405 Consumer and Other 3,424 1,992 10,980 133,014 149,410 Total gross loans $ 217,372 $ 196,401 $ 905,757 $ 260,416 $ 1,579,946 Interest rate sensitivity: Fixed interest rates $ 186,433 $ 105,797 $ 176,867 $ 155,007 $ 624,104 Floating or adjustable rates 30,939 90,604 728,890 105,409 955,842 Total gross loans $ 217,372 $ 196,401 $ 905,757 $ 260,416 $ 1,579,946 The information presented in the table above is based upon the contractual maturities of the individual loans, which may be subject to renewal at their contractual maturity. Renewals will depend on approval by our credit department and balance sheet composition at the time of the analysis, as well as any modification of terms at the loan’s maturity. Additionally, maturity concentrations, loan duration, prepayment speeds and other interest rate sensitivity measures are discussed, reviewed, and analyzed by the ALCO. Decisions on term rate modifications are discussed as well. As of March 31, 2023, approximately 60.5% of the loans have adjustable/variable rates and 39.5% of the loans have fixed rates. The adjustable/variable rate loans re-price to different benchmarks and tenors in different periods of time. By contractual characteristics, there are no material concentrations on anniversary repricing. Additionally, it is important to note Table of Contents 40 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q that most of our loans have interest rate floors. This embedded option protects the Company from a decrease in interest rates and positions us to gain in the scenario of higher interest rates. Asset Quality Our asset quality grading analysis estimates the capability of the borrower to repay the contractual obligation of the loan agreement as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans. Internal credit risk grades are reviewed at least once a year, and more frequently as needed. Internal credit risk ratings may change based on management’s assessment of the results from the annual review, portfolio monitoring, and other developments observed with borrowers. The internal credit risk grades used by the Company to assess the credit worthiness of a loan are shown below: Pass – Loans indicate different levels of satisfactory financial condition and performance. Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligator or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified at substandard, with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss – Loans classified as loss are considered uncollectible. Loan credit exposures by internally assigned grades are as follows for the dates indicated (in thousands): March 31, 2023 Pass Special Mention Substandard Doubtful Total Residential Real Estate $ 184,427 $ - $ - $ - $ 184,427 Commercial Real Estate 985,214 - 2,542 - 987,756 Commercial and Industrial 159,783 - 1,164 - 160,947 Foreign Banks 97,405 - - - 97,405 Consumer and Other 149,239 - 171 - 149,410 $ 1,576,068 $ - $ 3,877 $ - $ 1,579,945 December 31, 2022 Pass Special Mention Substandard Doubtful Total Residential Real Estate $ 185,636 $ - $ - $ - $ 185,636 Commercial Real Estate 967,465 - 2,945 - 970,410 Commercial and Industrial 126,177 - 807 - 126,984 Foreign Banks 93,769 - - - 93,769 Consumer and Other 130,233 - 196 - 130,429 $ 1,503,280 $ - $ 3,948 $ - $ 1,507,228 Table of Contents 41 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Non-Performing Assets The following table presents non-performing assets as of the dates shown (in thousands, except ratios): March 31, 2023 December 31, 2022 Total non-performing loans $ 486 $ - Other real estate owned - - Total non-performing assets $ 486 $ - Asset quality ratios: (1) Allowance for credit losses to total loans 1.20% 1.16% Allowance for credit losses to non-performing loans 3886% - % Non-performing loans to total loans 0.03% - % (1) ACL was calculated under CECL methodology for first quarter 2023, and incurred loss methodology for fourth quarter 2022 Non-performing assets include all loans categorized as non-accrual or restructured, impaired securities, other real estate owned (“OREO”) and other repossessed assets. Problem loans for which the collection or liquidation in full is reasonably uncertain are placed on a non-accrual status. This determination is based on current existing facts concerning collateral values and the paying capacity of the borrower. When the collection of the full contractual balance is unlikely, the loan is placed on non-accrual to avoid overstating the Company’s income for a loan with increased credit risk. If the principal or interest on a commercial loan becomes due and unpaid for 90 days or more, the loan is placed on non-accrual status as of the date it becomes 90 days past due and remains in non-accrual status until it meets the criteria for restoration to accrual status. Residential loans, on the other hand, are placed on non-accrual status when the principal or interest becomes due and unpaid for 120 days or more and remains in non-accrual status until it meets the criteria for restoration to accrual status. Restoring a loan to accrual status is possible when the borrower resumes payment of all principal and interest payments for a period of six months and the Company has a documented expectation of repayment of the remaining contractual principal and interest or the loan becomes secured and in the process of collection. The Company may grant a loan concession to a borrower experiencing financial difficulties. This determination is performed during the annual review process or whenever problems surface regarding the client’s ability to repay in accordance with the original terms of the loan or line of credit. The concessions are given to the debtor in various forms, including interest rate reductions, principal forgiveness, extension of maturity date, waiver, or deferral of payments and other concessions intended to minimize potential losses. For further discussion on non-performing loans and borrowers experiencing financial difficulties, see Note 3 “Loans” to the unaudited Consolidated Financial Statements on this Form 10-Q. Allowance for Credit Losses On January 1, 2023, the Company adopted FASB ASU 2016-13, which introduced the current expected credit losses (CECL) methodology and required us to estimate all expected credit losses over the remaining life of our loan portfolio. Accordingly, the ACL represents an amount that, in management's evaluation, is adequate to provide coverage for all expected future credit losses on outstanding loans. Additionally, qualitative adjustments are made to the ACL when, based on management’s judgment, there are factors impacting the allowance estimate not considered by the quantitative calculations. See Note 3 “Loans” for more information on the allowance for credit losses on this Form 10-Q. Table of Contents 42 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q The following table presents ACL and net charge-offs to average loans by type for the periods indicated (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 Average loans $ 194,355 964,682 158,509 89,020 140,826 1,547,392 Net charge-offs to average loans -0.02% 0.00% -0.11% 0.00% 0.01% -0.01% (1) Impact of CECL adoption as of January 1, 2023 (2) Provision for credit losses excludes $84 thousand reduction due to unfunded commitments included in other liabilities. Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other Total 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 Average loans $ 198,162 $ 739,732 $ 139,781 $ 59,667 $ 74,090 $ 1,211,432 Net charge-offs to average loans -0.03% - -0.02% - 0.03% -0.01% Bank-Owned Life Insurance As of March 31, 2023, the combined cash surrender value of all bank-owned life insurance (“BOLI”) policies was $43.0 million. Changes in cash surrender value are recorded to non-interest income in the unaudited Consolidated Statements of Operations. The Company had BOLI policies with five insurance carriers. The Company is the beneficiary of these policies. Deposits Customer deposits are the primary funding source for the Bank’s growth. Through our network of banking centers, we offer a competitive array of deposit accounts and treasury management services designed to meet our customers’ business needs. Our primary deposit customers are small-to-medium sized businesses (“SMBs”), and the personal business of owners and operators of these SMBs, as well as the retail/consumer relationships of the employees of these businesses. The following table presents the daily average balance and average rate paid on deposits by category for the periods presented (in thousands, except ratios): Three Months Ended March 31, 2023 2022 Average Balance Average Rate Paid Average Balance Average Rate Paid Non-interest-bearing checking $ 664,369 0.00% $ 626,400 0.00% Interest-bearing checking 58,087 0.30% 64,436 0.10% Money market and savings deposits 897,061 2.16% 736,134 0.30% Time deposits 224,730 1.91% 223,274 0.47% Total $ 1,844,247 1.29% $ 1,650,244 0.20% Table of Contents 43 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q The Company has a granular deposit portfolio with outstanding balances comprised of 54% in commercial deposits, 35% personal deposits and 11% public funds, which are partially collateralized. The Company has approximately 19 thousand deposits accounts with the majority in personal accounts, approximately 12 thousand or 64.4%. The total amount of uninsured deposits adjusted by the collateralized portion of public funds is 56% at March 31, 2023, a decrease of 3% compared to December 31, 2022 and below the 2022 average. The estimated average account size of our deposit portfolio is $96 thousand as of March 31, 2023. The Company also offers Insured Cash Sweep (“ICS”) and Certificate of Deposit Account Registry Service (“CDARS”) deposit products to fully insure our clients. The uninsured deposits are estimated based on the FDIC deposit insurance limit of $250 thousand for all deposit accounts at the Company per account holder. Total estimated uninsured deposits adjusted for collateralized public deposits were $1.0 billion and $1.1 billion at March 31, 2023 and December 31, 2022, respectively. The following table shows scheduled maturities of uninsured time deposits as of March 31, 2023 (in thousands): March 31, 2023 Three months or less $ 21,116 Over three through six months 26,996 Over six though twelve months 29,135 Over twelve months 23,038 $ 100,285 Other Liabilities The Company collects from commercial loan customers funds which are held in escrow for future payment of real estate taxes and insurance. These escrow funds are disbursed by the Company directly to the insurance companies and taxing authority of the borrower. Escrow funds are recorded as other liabilities. As of March 31, 2023 escrow balances totaled $8.3 million compared to $3.5 million at December 31, 2022. Borrowings As a member of the FHLB, we are eligible to obtain advances with various terms and conditions. This accessibility of additional funding allows us to efficiently and timely meet both expected and unexpected outgoing cash flows and collateral needs without adversely affecting either daily operations or the financial condition of the Company. As of March 31, 2023, we had $120.0 million of fixed-rate advances outstanding from the FHLB with a weighted average rate of 4.15%. Maturity dates for the advances are between third quarter 2023 and third quarter 2025 as detailed in the table below. The following table presents the FHLB fixed rate advances as of March 31, 2023 (in thousands): Interest Rate Type of Rate Maturity Date Amount 2.05% Fixed March 27, 2025 $ 10,000 1.07% Fixed July 18, 2025 6,000 1.04% Fixed July 30, 2024 5,000 0.81% Fixed August 17, 2023 5,000 5.07% Daily December 22, 2023 83,000 3.76% Fixed January 24, 2028 11,000 $ 120,000 We have also established Fed Funds lines of credit with our upstream correspondent banks to manage temporary fluctuations in our daily cash balances. As of March 31, 2023, there were no outstanding balances with the Fed Funds lines of credit. Off-Balance Sheet Arrangements We engage in various financial transactions in our operations that, under GAAP, may not be included on the balance sheet. To meet the financing needs of our customers we may include commitments to extend credit and standby letters of credit. To a varying degree, such commitments involve elements of credit, market, and interest rate risk in excess of the Table of Contents 44 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q amount recognized in the balance sheet. We use more conservative credit and collateral policies in making these credit commitments than we do for on-balance sheet items. We are not aware of any accounting loss to be incurred by funding these commitments; however, we maintain an allowance for off -balance sheet credit risk which is recorded under other liabilities on the unaudited Consolidated Balance Sheets. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect actual future cash funding requirements. The following table presents lending related commitments outstanding as of the dates indicated (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 funds to a client, as long as there is no violation of any condition established in the contract, for a specific purpose. Commitments generally have variable interest rates, fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn, the total commitment amounts disclosed above do not necessarily represent future cash requirements. Unfunded lines of credit represent unused portions of credit facilities to our current borrowers that represent no change in credit risk in our portfolio. Lines of credit generally have variable interest rates. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment, less the amount of any advances made. Letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. In the event of nonperformance by the client in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. If the commitment is funded, we would be entitled to seek recovery from the client from the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash or marketable securities. Asset and Liability Management Committee Members of senior management and our Board make up the asset and liability management committee, or ALCO. Senior management is responsible for ensuring that Board approved strategies, policies, and procedures for managing and mitigating risks are appropriately executed within the designated lines of authority and responsibility in a timely manner. ALCO oversees the establishment, approval, implementation, and review of interest rate risk, management, and mitigation strategies, ALM related policies, ALCO procedures and risk tolerances and appetite. While some degree of IRR (“Interest Rate Risk”) is inherent to the banking business, we believe our ALCO has put in place sound risk management practices to identify, quantify, monitor, and limit IRR exposures. When assessing the scope of IRR exposure and impact on the consolidated balance sheet, cash flows and income statement, management considers both earnings and economic impacts. Asset price variations, deposit volatility and reduced earnings or outright losses could adversely affect the Company’s liquidity, performance, and capital adequacy. Income simulations are used to assess the impact of changing rates on earnings under different rates scenarios and time horizons. These simulations utilize both instantaneous and parallel changes in the level of interest rates, as well as non-parallel changes such as changing slopes (flat and steeping) and twists of the yield curve. Static simulation models are based on current exposures and assume a constant balance sheet with no new growth. Dynamic simulation analysis is also utilized to have a more comprehensive assessment on IRR. This simulation relies on detailed assumptions outlined in our budget and strategic plan, and in assumptions regarding changes in existing lines of business, new business, management strategies and client expected behavior. To have a more complete picture of IRR, the Company also evaluates the economic value of equity (“EVE”). This assessment allows us to measure the degree to which the economic values will change under different interest rate scenarios (parallel and non-parallel). The economic value approach focuses on a longer-term time horizon and captures all future cash flows expected from existing assets and liabilities. The economic value model utilizes a static approach in that the analysis does not incorporate new business; rather, the analysis shows a snapshot in time of the risk inherent in the balance sheet. Table of Contents 45 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Market and Interest Rate Risk Management According to our ALCO model, as of March 31, 2023, we were a liability sensitive Bank for year one modeling and asset sensitive for year two modeling. Asset sensitivity indicates that our assets generally reprice faster than our liabilities, which results in a favorable impact to net interest income when market interest rates increase. Liability sensitivity indicates that our liabilities generally reprice faster than our assets, which results in a favorable impact to net interest income when market interest rates decrease. Many assumptions are used to calculate the impact of interest rate variations on our net interest income, such as asset prepayment speeds, non-maturity deposit price sensitivity, pricing correlations, deposit truncations and decay rates, and key interest rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most likely will, differ from static measures results. In addition, static measures like EVE do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates or client deposit behavior. As part of our ALM strategy and policy, management has the ability to modify the balance sheet to either increase asset duration and decrease liability duration to reduce asset sensitivity, or to decrease asset duration and increase liability duration in order to increase asset sensitivity. According to our model, as of March 31, 2023, NIM most likely will decrease for year one and should increase for year two under static rate scenarios (-400 basis points or +400 basis points). For the static forecast in year one, the estimated NIM will decrease from the base case scenario to a +400 basis points scenario. Additionally, utilizing an EVE approach, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model. This measures the difference between the economic value of our assets and the economic value of our liabilities, which is a proxy for our liquidation value. According to our balance sheet composition, and as expected, our model stipulates that an increase of rates will have a negative impact on the EVE and lower rates and positive impact. Results and analysis are presented quarterly to the ALCO, and strategies are defined. Liquidity Liquidity is defined as a Company’s capacity to meet its cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the Company’s ability to efficiently meet both expected and unexpected cash flow and collateral needs without adversely affecting either daily operations or the financial condition of the Company. Liquidity risk is the risk that we will be unable to meet our short-term and long-term obligations as they become due because of an inability to liquidate assets or obtain relatively adequate funding. The Company’s obligations, and the funding sources used to meet them, depend significantly on our business mix, balance sheet structure and composition, credit quality of our assets and the cash flow profiles of our on- and off-balance sheet obligations. In managing inflows and outflows, management regularly monitors situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints on the ability to convert assets (particularly investments) into cash or in accessing sources of funds (i.e., market liquidity), and contingent liquidity events. Changes in macroeconomic conditions, as well as exposure to credit, market, operational, legal and reputational risks, such as cybersecurity risk, could have an unexpected impact on the Company’s liquidity risk profile and are factored into the assessment of liquidity and the ALM framework. Management has established a comprehensive and holistic management process for identifying, measuring, monitoring and mitigating liquidity risk. Due to its critical importance to the viability of the Company, liquidity risk management is integrated into our risk management processes, Contingency Funding Plan and ALM policy. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the Board and active involvement of senior management; appropriate strategies, policies, procedures, and limits used to identify and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the Company; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the institution’s liquidity risk management process. Table of Contents 46 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q We expect funds to be available from several basic banking activity sources, including the core deposit base, the repayment and maturity of loans and investment security cash flows. Other potential funding sources include federal funds purchased, brokered certificates of deposit, listing certificates of deposit, The Bank Term Funding Program, and borrowings from the FHLB. Accordingly, our liquidity resources were adequate to fund loans and meet other cash needs as necessary. Capital Adequacy As of March 31, 2023, the Bank was well capitalized under the FDIC’s prompt corrective action framework. We also follow the capital conservation buffer framework, and as of March 31, 2023, we exceeded the capital conversation buffer in all capital ratios, according to our actual ratios. The following table presents the capital ratios for the Bank at the dates indicated (in thousands, except ratios). Actual Minimum Capital Requirements To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio March 31, 2023 Total risk-based capital $ 218,621 13.12 % $ 133,293 8.00 % $ 166,616 10.00 % Tier 1 risk-based capital $ 199,301 11.96 % $ 99,970 6.00 % $ 133,293 8.00 % Common equity tier 1 capital $ 199,301 11.96 % $ 74,977 4.50 % $ 108,301 6.50 % Leverage ratio $ 199,301 9.30 % $ 85,760 4.00 % $ 107,201 5.00 % December 31, 2022: Total risk-based capital $ 216,693 13.58 % $ 127,616 8.00 % $ 159,520 10.00 % Tier 1 risk-based capital $ 198,909 12.47 % $ 95,712 6.00 % $ 127,616 8.00 % Common equity tier 1 capital $ 198,909 12.47 % $ 71,784 4.50 % $ 103,688 6.50 % Leverage ratio $ 198,909 9.56 % $ 83,210 4.00 % $ 104,012 5.00 % The Company is not subject to capital ratios imposed by Basel III on bank holding companies because the Company is deemed to be a small bank holding company. Impact of Inflation Our Consolidated Financial Statements and related notes have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the rates earned on loans and investments, the value of these assets decreases or increases respectively. Inflation can also impact core non-interest expenses associated with delivering the Company’s services. Recently Issued Accounting Pronouncements Recently issued accounting pronouncements are discussed in Note 1 “Summary of Significant Accounting Policies” to the unaudited Consolidated Financial Statements in this Form 10-Q. Table of Contents 47 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Reconciliation and Management Explanation of Non-GAAP Financial Measures Management has included these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating the Company’s underlying performance trends. Further, management uses these measures in managing and evaluating the Company’s business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies. The following table reconciles the non-GAAP financial measurement of operating net income available to common stockholders for the periods presented (in thousands, except per share data): Table of Contents 48 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q USCB FINANCIAL HOLDINGS, INC. NON-GAAP FINANCIAL MEASURES (UNAUDITED) (Dollars in thousands) As of or For the Three Months Ended 3/31/2023 12/31/2022 9/30/2022 6/30/2022 3/31/2022 Pre-tax pre-provision ("PTPP") income: Net income $ 5,809 $ 4,434 $ 5,558 $ 5,295 $ 4,854 Plus: Provision for income taxes 1,881 1,415 1,963 1,708 1,858 Plus: Provision for credit losses 201 880 910 705 - PTPP income $ 7,891 $ 6,729 $ 8,431 $ 7,708 $ 6,712 PTPP return on average assets: PTPP income $ 7,891 $ 6,729 $ 8,431 $ 7,708 $ 6,712 Average assets $ 2,120,218 $ 2,051,867 $ 2,026,791 $ 1,968,381 $ 1,913,484 PTPP return on average assets (1) 1.51% 1.30% 1.65% 1.57% 1.42% Operating net income: Net income $ 5,809 $ 4,434 $ 5,558 $ 5,295 $ 4,854 Less: Net gains (losses) on sale of securities (21) (1,989) (558) (3) 21 Less: Tax effect on sale of securities 5 504 141 1 (5) Operating net income $ 5,825 $ 5,919 $ 5,975 $ 5,297 $ 4,838 Operating PTPP income: PTPP income $ 7,891 $ 6,729 $ 8,431 $ 7,708 $ 6,712 Less: Net gains (losses) on sale of securities (21) (1,989) (558) (3) 21 Operating PTPP income $ 7,912 $ 8,718 $ 8,989 $ 7,711 $ 6,691 Operating PTPP return on average assets: Operating PTPP income $ 7,912 $ 8,718 $ 8,989 $ 7,711 $ 6,691 Average assets $ 2,120,218 $ 2,051,867 $ 2,026,791 $ 1,968,381 $ 1,913,484 Operating PTPP return on average assets (1) 1.51% 1.69% 1.76% 1.57% 1.42% Operating return on average assets: Operating net income $ 5,825 $ 5,919 $ 5,975 $ 5,297 $ 4,838 Average assets $ 2,120,218 $ 2,051,867 $ 2,026,791 $ 1,968,381 $ 1,913,484 Operating return on average assets (1) 1.11% 1.14% 1.17% 1.08% 1.03% Operating return on average equity: Operating net income $ 5,825 $ 5,919 $ 5,975 $ 5,297 $ 4,838 Average equity $ 183,371 $ 177,556 $ 185,288 $ 186,597 $ 201,860 Operating return on average equity 12.88% 13.23% 12.79% 11.39% 9.72% Operating Revenue: Net interest income $ 15,997 $ 16,866 $ 16,774 $ 15,642 $ 14,379 Non-interest income 2,070 (123) 1,789 1,617 1,945 Less: Net gains (losses) on sale of securities (21) (1,989) (558) (3) 21 Operating revenue $ 18,088 $ 18,732 $ 19,121 $ 17,262 $ 16,303 Operating Efficiency Ratio: Total non-interest expense $ 10,176 $ 10,014 $ 10,132 $ 9,551 $ 9,612 Operating revenue $ 18,088 $ 18,732 $ 19,121 $ 17,262 $ 16,303 Operating efficiency ratio 56.26% 53.46% 52.99% 55.33% 58.96% (1) Annualized. Table of Contents 49 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q USCB FINANCIAL HOLDINGS, INC. NON-GAAP FINANCIAL MEASURES (UNAUDITED) (Dollars in thousands, except per share data) As of or For the Three Months Ended 3/31/2023 12/31/2022 9/30/2022 6/30/2022 3/31/2022 Tangible book value per common share (at period-end): (1) Total stockholders' equity $ 183,858 $ 182,428 $ 177,417 $ 180,068 $ 192,039 Less: Intangible assets - - - - - Tangible stockholders' equity $ 183,858 $ 182,428 $ 177,417 $ 180,068 $ 192,039 Total shares issued and outstanding (at period-end): Total common shares issued and outstanding 19,622,380 20,000,753 20,000,753 20,000,753 20,000,753 Tangible book value per common share (2) $ 9.37 $ 9.12 $ 8.87 $ 9.00 $ 9.60 Operating diluted net income per common share: (1) Operating net income $ 5,825 $ 5,919 $ 5,975 $ 5,297 $ 4,838 Total weighted average diluted shares of common stock 19,940,606 20,172,438 20,148,208 20,171,261 20,109,783 Operating diluted net income per common share: $ 0.29 $ 0.29 $ 0.30 $ 0.26 $ 0.24 Tangible Common Equity/Tangible Assets Tangible stockholders' equity $ 183,858 $ 182,428 $ 177,417 $ 180,068 $ 192,039 Tangible assets $ 2,163,821 $ 2,085,834 $ 2,037,453 $ 2,016,086 $ 1,967,252 Tangible Common Equity/Tangible Assets 8.50% 8.75% 8.71% 8.93% 9.76% (1) The Company believes these non-GAAP measurements are key indicators of the ongoing earnings power of the Company. (2) Excludes the dilutive effect, if any, of shares of common stock issuable upon exercise of outstanding stock options. Table of Contents 50 USCB Financial Holdings, Inc. Q1 2023 Form 10-Q Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, we are not required to provide the information required by this item.