USCB FINANCIAL HOLDINGS, INC. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ( Crowe LLP , PCAOB ID: 173 ) 73 Consolidated Balance Sheets 74 Consolidated Statements of Operations 75 Consolidated Statements of Comprehensive Income (Loss) 76 Consolidated Statements of Changes in Stockholders’ Equity 77 Consolidated Statements of Cash Flows 78 Notes to the Consolidated Financial Statements 80 Crowe LLP Independent Member Crowe Global 73 USCB Financial Holdings, Inc. 2023 10-K REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and the Board of Directors of USCB Financial Holdings, Inc. Doral, Florida Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of USCB Financial Holdings, Inc. (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Explanatory Paragraph - Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of ASU 2016-13 Financial Instruments – Credit Losses (ASC Topic 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Crowe LLP Crowe LLP We have served as the Company's auditor since 2017. Fort Lauderdale, Florida March 22, 2024 Table of Contents 74 USCB Financial Holdings, Inc. 2023 10-K USCB FINANCIAL HOLDINGS, INC. Consolidated Balance Sheets (Dollars in thousands, except share and per share data) December 31, 2023 2022 ASSETS: Cash and due from banks $ 8,019 $ 6,605 Interest-bearing deposits in banks 33,043 47,563 Total cash and cash equivalents 41,062 54,168 Investment securities held to maturity net allowance of $ 8 and $0, respectively (fair value $ 155,510 and $ 169,088 , respectively) 174,974 188,699 Investment securities available for sale, at fair value 229,329 230,140 Federal Home Loan Bank stock, at cost 10,153 2,882 Loans held for investment, net of allowance of $ 21,084 and $ 17,487 , respectively 1,759,743 1,489,851 Accrued interest receivable 10,688 7,546 Premises and equipment, net 4,836 5,263 Bank owned life insurance 51,781 42,781 Deferred tax asset, net 37,282 42,360 Lease right-of-use asset 11,423 14,395 Other assets 7,822 7,749 Total assets $ 2,339,093 $ 2,085,834 LIABILITIES: Deposits: Demand $ 552,762 $ 629,776 Money market and savings accounts 1,048,272 915,853 Interest-bearing checking accounts 47,702 66,675 Time deposits 288,403 216,977 Total deposits 1,937,139 1,829,281 Federal Home Loan Bank advances 183,000 46,000 Lease liability 11,423 14,395 Accrued interest and other liabilities 15,563 13,730 Total liabilities 2,147,125 1,903,406 Commitments and contingencies (See Notes 10 and 18) (nil) (nil) STOCKHOLDERS' EQUITY: Preferred stock - Class C; $ 1.00 par value; $ 1,000 per share liquidation preference; 52,748 shares authorized; 0 issued and 0 outstanding as of December 31, 2023 and 2022 - - Preferred stock - Class D; $ 1.00 par value; $ 5.00 per share liquidation preference; 12,309,480 shares authorized; 0 issued and 0 outstanding as of December 31, 2023 and 2022 - - Preferred stock - Class E; $ 1.00 par value; $ 1,000 per share liquidation preference; 3,185,024 shares authorized; 0 issued and 0 outstanding as of December 31, 2023 and 2022 - - Common stock - Class A Voting; $ 1.00 par value; 45,000,000 shares authorized; 19,575,435 and 20,000,753 issued and outstanding as of December 31, 2023 and 2022 19,575 20,001 Common stock - Class B Non-voting; $ 1.00 par value; 8,000,000 shares authorized; 0 issued and 0 outstanding as of December 31, 2023 and 2022 - - Additional paid-in capital on common stock 305,212 311,282 Accumulated deficit ( 88,548 ) ( 104,104 ) Accumulated other comprehensive income (loss) ( 44,271 ) ( 44,751 ) Total stockholders' equity 191,968 182,428 Total liabilities and stockholders' equity $ 2,339,093 $ 2,085,834 The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 75 USCB Financial Holdings, Inc. 2023 10-K USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Operations (Dollars in thousands, except per share data) Years Ended December 31, 2023 2022 Interest income: Loans, including fees $ 87,884 $ 60,825 Investment securities 10,012 9,346 Interest-bearing deposits in financial institutions 3,121 929 Total interest income 101,017 71,100 Interest expense: Interest-bearing deposits 901 86 Savings and money markets accounts 29,658 5,173 Time deposits 8,500 1,509 Federal Home Loan Bank advances 3,390 671 Total interest expense 42,449 7,439 Net interest income before provision for credit losses 58,568 63,661 Provision for credit losses 2,367 2,495 Net interest income after provision for credit losses 56,201 61,166 Non-interest income: Service fees 5,055 4,010 Bank owned life insurance income 2,160 1,061 Gain (loss) on sale of securities available for sale, net ( 1,859 ) ( 2,529 ) Gain on sale of loans held for sale, net 801 891 Loan settlement - 161 Other non-interest income 1,246 1,634 Total non-interest income 7,403 5,228 Non-interest expense: Salaries and employee benefits 24,429 23,943 Occupancy 5,230 5,058 Regulatory assessment and fees 1,453 930 Consulting and legal fees 1,899 1,890 Network and information technology services 2,016 1,806 Audit and tax services fees 1,287 918 Other operating 5,494 4,764 Total non-interest expense 41,808 39,309 Net income before income tax expense 21,796 27,085 Income tax expense 5,251 6,944 Net income 16,545 20,141 Net income available to common stockholders $ 16,545 $ 20,141 Per share information: Class A common stock Net income per share, basic $ 0.84 $ 1.01 Net income per share, diluted $ 0.84 $ 1.00 The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 76 USCB Financial Holdings, Inc. 2023 10-K USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Comprehensive Income (Loss) (Dollars in thousands) Years Ended December 31, 2023 2022 Net income $ 16,545 $ 20,141 Other comprehensive income (loss): Unrealized gain (loss) on investment securities ( 1,801 ) ( 59,260 ) Amortization of net unrealized gains on securities transferred from available-for-sale to held-to-maturity 251 120 Reclassification adjustment on sale of available for sale securities for loss included in net income 1,859 2,529 Unrealized gain on cash flow hedge 334 - Tax effect ( 163 ) 14,376 Total other comprehensive income (loss), net of tax 480 ( 42,235 ) Total comprehensive income (loss) $ 17,025 $ ( 22,094 ) The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 77 USCB Financial Holdings, Inc. 2023 10-K USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Changes in Stockholders’ Equity (Dollars in thousands, except per share data) Common Stock Additional Paid-in Capital on Common Stock Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Shares Par Value Total Stockholders' Equity Balance at January 1, 2023 20,000,753 $ 20,001 $ 311,282 $ ( 104,104 ) $ ( 44,751 ) $ 182,428 After tax cumulative effect of adoption of accounting principle related to ASC 326 - - - ( 989 ) - ( 989 ) Adjusted beginning balance after cumulative effect adjustment 20,000,753 20,001 311,282 ( 105,093 ) ( 44,751 ) 181,439 Net income - - - 16,545 - 16,545 Other comprehensive income - - - - 480 480 Repurchase of Class A common stock ( 669,920 ) ( 670 ) ( 6,913 ) - - ( 7,583 ) Restricted stock issued 242,713 242 ( 242 ) - - - Restricted stock forfeiture ( 8,111 ) ( 8 ) 8 - - - Exercise of stock options 10,000 10 65 - - 75 Stock-based compensation - - 1,012 - - 1,012 Balance at December 31, 2023 19,575,435 19,575 305,212 ( 88,548 ) ( 44,271 ) 191,968 Balance at January 1, 2022 19,991,753 $ 19,992 $ 310,666 $ ( 124,245 ) $ ( 2,516 ) $ 203,897 Net income - - - 20,141 - 20,141 Other comprehensive loss - - - - ( 42,235 ) ( 42,235 ) Issuance of common stock - exercised options 9,000 9 93 - - 102 Stock-based compensation - - 523 - - 523 Balance at December 31, 2022 20,000,753 $ 20,001 $ 311,282 $ ( 104,104 ) $ ( 44,751 ) $ 182,428 The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 78 USCB Financial Holdings, Inc. 2023 10-K USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flows (Dollars in thousands) Years Ended December 31, 2023 2022 Cash flows from operating activities: Net income $ 16,545 $ 20,141 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 2,367 2,495 Depreciation and amortization 590 688 (Accretion) amortization of premiums on securities, net ( 770 ) 433 Accretion of deferred loan fees, net ( 184 ) ( 1,497 ) Stock-based compensation 1,012 523 Loss on sale of available for sale securities 1,859 2,529 Gain on sale of loans held for sale ( 801 ) ( 891 ) Increase in cash surrender value of bank owned life insurance ( 2,160 ) ( 1,061 ) Decrease in deferred tax asset 5,251 6,945 Net change in operating assets and liabilities: Accrued interest receivable ( 3,142 ) ( 1,571 ) Other assets 261 ( 3,449 ) Accrued interest and other liabilities 1,718 4,252 Net cash provided by operating activities 22,546 29,537 Cash flows from investing activities: Purchase of investment securities held to maturity ( 86,788 ) ( 14,739 ) Proceeds from maturities and pay-downs of investment securities held to maturity 101,541 12,237 Purchase of investment securities available for sale ( 40,379 ) ( 53,113 ) Proceeds from maturities and pay-downs of investment securities available for sale 15,189 40,754 Proceeds from sales of investment securities available for sale 24,185 60,649 Net increase in loans held for investment ( 239,361 ) ( 257,580 ) Purchase of loans held for investment ( 45,645 ) ( 70,175 ) Additions to premises and equipment ( 163 ) ( 673 ) Proceeds from the sale of loans held for sale 12,530 12,821 Purchase of Bank owned life insurance, net ( 6,840 ) - Proceeds from the redemption of Federal Home Loan Bank stock 15,495 3,440 Purchase of Federal Home Loan Bank stock ( 22,766 ) ( 4,222 ) Net cash used in investment activities ( 273,002 ) ( 270,601 ) (Continued) The accompanying notes are an integral part of these consolidated financial statements. Table of Contents 79 USCB Financial Holdings, Inc. 2023 10-K USCB FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flows (Continued) (Dollars in thousands) Years Ended December 31, 2023 2022 Cash flows from financing activities: Proceeds from exercise of Class A common stock options, net 75 102 Repurchase of Class A common stock ( 7,583 ) - Net increase in deposits 107,858 238,902 Proceeds from Federal Home Loan Bank advances 529,350 126,000 Repayments on Federal Home Loan Bank advances ( 392,350 ) ( 116,000 ) Net cash provided by financing activities 237,350 249,004 Net increase (decrease) in cash and cash equivalents ( 13,106 ) 7,940 Cash and cash equivalents at beginning of period 54,168 46,228 Cash and cash equivalents at end of period $ 41,062 $ 54,168 Supplemental disclosure of cash flow information: Interest paid $ 41,306 $ 7,306 Supplemental schedule of non-cash investing and financing activities: Transfer of loans held for investment to loans held for sale $ 11,729 $ 11,930 Transfer of investment securities from available-for-sale to held-to-maturity $ - $ 63,798 Lease liability arising from obtaining right-of-use asset $ - $ 3,203 The accompanying notes are an integral part of these consolidated financial statements. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 80 USCB Financial Holdings, Inc. 2023 10-K 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Overview USCB Financial Holdings, Inc., a Florida corporation incorporated in 2021, is a bank holding company with one wholly owned subsidiary, U.S. Century Bank (the “Bank”), together referred to as “the Company”. The Bank, established in 2002, is a Florida state-chartered, non-member financial institution providing financial services through its banking centers located in South Florida. In December 2021, USCB Financial Holdings, Inc. acquired all issued and outstanding shares of the Class A common stock of the Bank in connection with the reorganization of the Bank into a holding company structure. Each of the outstanding share of the Bank’s common stock, par value $ 1.00 per share, formerly held by its stockholders were converted into and exchanged for one newly issued share of the Company’s Class A common stock, par value $ 1.00 per share. 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 tittle LLC began operations in 2021. Principles of Consolidation Intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements have been prepared in accordance with GAAP. Risk and Uncertainties Banking Environment Industry events transpiring early in 2023, including bank failures, have led to uncertainty and concerns regarding the liquidity positions of the banking sector. The Company’s deposit base includes a combination of consumer, commercial, and public funds deposits. The Company’s largest depositors include a mixture of government-related organizations and commercial clients without a high level of industry concentration. In response to these events, the Treasury Department, the Board of Governors of the Federal Reserve System, and the FDIC jointly announced the Bank Term Funding Program (BTFP) on March 12, 2023. This program aims to enhance liquidity by allowing institutions to pledge certain securities at the par value of the securities, and at a borrowing rate of ten basis points over the one-year overnight index swap rate. The BTFP was available to eligible U.S. federally insured depository institutions, with advances having a term of up to one year and no prepayment penalties. In January 2024, the Company drew $ 80.0 million in the BTFP; there were no draws in 2023. No further draws were permitted after March 11, 2024. All advances must be paid by January 2025. Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking industry. Additionally, the rising interest rate environment experienced in 2022 and 2023 has increased competition for liquidity and the premium at which liquidity is available to meet funding needs. The Company believes its sources of liquidity are sufficient to meet its needs as of the balance sheet date. An unexpected influx of withdrawals of deposits could adversely impact the Company's ability to rely on organic deposits to primarily fund its operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawal demands or to fund continuing operations. These sources may include proceeds from FHLB advances, sales of investment securities and loans, federal funds lines of credit from correspondent banks, and out-of-market time deposits. Such reliance on secondary funding sources could increase the Company's overall cost of funding and thereby reduce net income. While the Company believes its current sources of liquidity are adequate to fund operations, there is no guarantee they will suffice to meet future liquidity demands. This may necessitate slowing or discontinuing loan growth, capital expenditures, or other investments, or liquidating assets. Use of Estimates The Company has established policies and control procedures that are intended to ensure valuation methods are controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 81 USCB Financial Holdings, Inc. 2023 10-K the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Cash and Cash Equivalents The Company considers investments with a maturity of 90 days or less from its original purchase date to be cash equivalents. For the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand, amounts due from banks, and interest-bearing deposits in banks. Restricted Cash The Company may be required to maintain funds at other banks to satisfy the terms of a loan participation agreement. The Company reports restricted cash within cash and cash equivalents. At the years ended December 31, 2023 and 2022 the company had $ 0 in restricted cash. Interest-Bearing Deposits in Other Financial Institutions Interest-bearing deposits in other financial institutions consist of Federal Reserve Bank, Federal Home Loan Bank and other accounts. Investment Securities Debt securities are recorded at fair value except for those securities which the Company has the positive intent and ability to hold to maturity. Management determines the appropriate classification of its securities at the time of purchase and accounts for them on a trade date basis. Debt securities that management has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held-to-maturity or trading are classified as "available-for-sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Equity investments must be recorded at fair value with changes in fair value included in earnings. Purchase premiums and discounts are amortized or accreted over the estimated life of the related available-for-sale or held-to-maturity security as an adjustment to yield using the effective interest method. Prepayments of principal are considered in determining the estimated life of the security. Such amortization and accretion are included in interest income in the Consolidated Statements of Operations. Dividend and interest income are recognized when earned. Gains and losses on the sale of securities are recorded on trade date and are determined on a specific identification basis. 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 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 a loss reserve for securities classified as 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 and/or implicit 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 bonds, 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. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 82 USCB Financial Holdings, Inc. 2023 10-K Federal Home Loan Bank (FHLB) Stock The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted asset, and periodically evaluated for impairment based on ultimate recovery of par value. As of December 31, 2023 and 2022, FHLB stock amounted to $ 10.2 million and $ 2.9 million, respectively, with no impairment deemed necessary. Both cash and stock dividends are reported as interest income. Loans Held for Investment and Allowance for Credit Losses Loans held for investment (“loans”) are reported at their outstanding principal balance net of charge-offs, deferred loan cost, unearned income, and the ACL. Interest income is generally recognized when income is earned using the interest method. Loan origination and commitment fees and the costs associated with the origination of loans are deferred and amortized, using the interest method or the straight-line method, over the life of the related loan. If the principal or interest on a commercial loan becomes due and unpaid for 90 days or more, the loan is placed on non-accrual status as of the date it becomes 90 days past due and remains in non -accrual status until it meets the criteria for restoration to accrual status. Residential loans, on the other hand, are placed on non-accrual status when the principal or interest becomes due and unpaid for 120 days or more and remains in non-accrual status until it meets the criteria for restoration to accrual status. Restoring a loan to accrual status is possible when the borrower resumes payment of all principal and interest payments for a period of six months and the Company has a documented expectation of repayment of the remaining contractual principal and interest or the loan becomes secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual status is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, under which cash collections are applied to unpaid principal, which may change as conditions dictate. The Company has determined that the entire balance of a loan is contractually delinquent for all classes if the minimum payment is not received by the specified due date on the borrower's statement. Interest and fees continue to accrue on past due loans until the date the loan goes into nonaccrual status. The Company provides for loan losses through a provision for credit losses charged to operations. When management believes that a loan or a portion of the loan balance is uncollectible, that amount is charged against the ACL. Subsequent recoveries, if any, are credited to the ACL. The ACL reflects management's judgment of expected loan losses in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to establish the ACL each quarter. To determine the total ACL, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. The ACL consists of the amount applicable to the following segments: • Residential real estate • Commercial real estate • Commercial and industrial • Foreign banks • Other loans (secured and unsecured consumer loans) Residential real estate loans are underwritten following the policies of the Company which include a review of the borrower’s credit, capacity and the collateral securing the loan. The borrower’s ability to repay involves an analysis of factors including: current income, employment status, monthly payment of the loan, current debt obligations, monthly debt to income ratio and credit history. The Company relies on appraisals in determining the value of the property. Risk is mitigated by this analysis and the diversity of the residential portfolio. Commercial real estate loans are secured by liens on commercial properties, land, construction and multifamily housing. Underwriting of commercial real estate loans will analyze the key market and business factors to arrive at a decision on the credit worthiness of the borrower. The analysis may include the capacity of the borrower, income generated by property for debt service, other sources of repayment, sensitivity analysis to fluctuations in market conditions including vacancy and rental rates in geographic location and loan to value. Land and construction loan analysis will include the time to develop, sell or lease the property. Appraisals are used to determine the value of the underlying collateral. Risk is mitigated as the properties securing the commercial real estate loans are diverse in type, location, and loan structure. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 83 USCB Financial Holdings, Inc. 2023 10-K Commercial and industrial loans are secured by the business assets of the company and may include equipment, inventory, and receivables. The loans are underwritten based on the income capacity of the business, the ability to service the debt based on operating cash flows, the credit worthiness of the borrower, other sources of repayment and collateral. The Company mitigates the risk in the commercial portfolio through industry diversification. Foreign banks loans are short -term loans with international correspondent banking institutions primarily domiciled in Latin America. Most of these loans are for trade capital and have a life of less than one year. The Company’s credit review includes a credit analysis, peer comparison and current country risk overview. Annual re-evaluation of the risk rating of the borrower and country where the borrower is located and a review by the authorized signer within the Company. The risk is mitigated as these loans are short term, have limited exposure, and are geographically dispersed. Other loans are secured and unsecured consumer loans including yacht loans, personal loans, overdrafts and deposit account collateralized loans. Repayment of these loans are primarily from the personal income of the borrowers. Loans are underwritten based on the credit worthiness of the borrower. The risk on these loans is mitigated by small loan balances. Under CECL, the Company estimates the ACL using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. 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 loan 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 solution that uses an attrition-based calculation that performs quarterly, cohort-based attrition measurements based on the loan portfolio. 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 the 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 HPI projections published by Fannie Mae’s Economic and Strategic Research Group are utilized for the forecast. Forecasts are applied to 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. Qualitative factors (“Q-Factors”) used in the ACL methodology include: • Changes in lending policies, procedures, and strategies • Changes in international, national, regional, and local conditions Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 84 USCB Financial Holdings, Inc. 2023 10-K • Changes in nature and volume of portfolio • Changes in the volume and severity of past due loans and other similar conditions • 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 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. Concentration of Credit Risks Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted and any collateral or security proved to be insufficient to cover the loss. Concentrations of credit risk (whether on or off-balance sheet) arising from financial instruments exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have a significant exposure to any individual customer or counterparty. Most of the Company's business activity is with customers located within its primary market area, which is generally the State of Florida. The Company's loan portfolio is concentrated largely in real estate and commercial loans in South Florida. Many of the Company's loan customers are engaged in real estate development. Circumstances which negatively impact the South Florida real estate industry or the South Florida economy, in general, could adversely impact the Company's loan portfolio. At December 31, 2023 and 2022, the Company had a concentration of risk with loans outstanding to the Company’s top ten lending relationships totaling $ 163.1 million and $ 197.9 million, respectively. At December 31, 2023 and 2022, this concentration represented 9.2 % and 13.1 % of net loans outstanding, respectively. For the periods ended December 31, 2023 and December 31, 2022, the largest commercial real estate loan note outside Florida was one commercial real estate loan with an outstanding balance of $ 20 million collateralized by a 1 st lien commercial property located in New York State. At December 31, 2023, the Company had a concentration of risk with loans outstanding totaling $ 105.4 million to foreign banks located in Ecuador, Dominican Republic, Honduras, and El Salvador. At December 31, 2022, the Company also had a concentration of risk with loans outstanding totaling $ 88.8 million to foreign banks located in Ecuador, Honduras, and El Salvador. These banks maintained deposits with right of offset totaling $ 43.9 million and $ 31.4 million at December 31, 2023 and 2022, respectively. At various times during the year, the Company has maintained deposits with other financial institutions. The exposure to the Company from these transactions is solely dependent upon daily balances and the financial strength of the respective institution. Premises and Equipment, net Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the remaining term of the applicable leases or their useful lives, whichever is shorter. Estimated useful lives of these assets were as follows: Building s 40 years Furniture, fixtures and equipment 3 to 25 years Computer hardware and software 3 to 5 years Leasehold improvements Shorter of life or term of lease Maintenance and repairs are charged to expense as incurred while improvements and betterments are capitalized. When items are retired or are otherwise disposed of, the related costs and accumulated depreciation and amortization are removed from the accounts and any resulting gains or losses are credited or charged to income. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 85 USCB Financial Holdings, Inc. 2023 10-K Other Real Estate Owned OREO consists of real estate property acquired through, or in lieu of, foreclosure that are held for sale and are initially recorded at the fair value of the property less estimated selling costs at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Subsequent write-downs are recognized as a valuation allowance with the offset recorded in the Consolidated Statements of Operations. Carrying costs are charged to other real estate owned expenses in the accompanying Consolidated Statements of Operation. Gains or losses on sale of OREO are recognized when consideration has been exchanged, all closing conditions have been met and permanent financing has been arranged. Bank Owned Life Insurance BOLI is carried at the amount that could be realized under the contract at the balance sheet date, which is typically cash surrender value. Changes in cash surrender value are recorded in non-interest income. At December 31, 2023, the Company maintained BOLI policies with five insurance carriers with a combined cash surrender value of $ 51.8 million. These policies cover certain present and former executives and officers, the Company is the beneficiary of these policies. Employee 401(k) Plan The Company has an employee 401(k) plan covering substantially all eligible employees. Employee 401(k) plan expense is the amount of matching contributions. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management is required to assess whether a valuation allowance should be established on the net deferred tax asset based on the consideration of all available evidence using a more likely than not standard. In its evaluation, Management considers taxable loss carry-back availability, expectation of sufficient taxable income, trends in earnings, the future reversal of temporary differences, and available tax planning strategies. The Company recognizes positions taken or expected to be taken in a tax return in accordance with existing accounting guidance on income taxes which prescribes a recognition threshold and measurement process. Interest and penalties on tax liabilities, if any, would be recorded in interest expense and other operating noninterest expense, respectively. Impairment of Long-Lived Assets The Company's long-lived assets, such as premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the Consolidated Balance Sheets and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the Consolidated Balance Sheets. Transfer of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company - put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 86 USCB Financial Holdings, Inc. 2023 10-K the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Comprehensive Income (Loss) Under GAAP, certain changes in assets and liabilities, such as unrealized holding gains and losses on securities available-for-sale, are excluded from current period earnings and reported as a separate component of the stockholders’ equity section of the Consolidated Balance Sheets, such items, along with net income, are components of comprehensive income (loss). Additionally, any unrealized gains or losses on transfers of investment securities from available-for-sale to held-to-maturity are recorded to accumulated other comprehensive income (loss) on the date of transfer and amortized over the remaining life of each security. The amortization of the unrealized gain or loss on transferred securities is reported as a component of comprehensive income (loss). See Note 2 “Investment Securities” for further discussion. Advertising Costs Advertising costs are expensed as incurred. Earnings per Common Share Basic earnings per common share is net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share included the effect of additional potential common shares issuable under vested stock options and unvested restricted stock. Basic and diluted earnings per share are updated to reflect the effect of stock splits as occurred. See Note 14 “Earnings Per Share” for additional information on earnings per common share. See Note 13 “Stockholders’ Equity” for further discussion on stock splits. Interest Income Interest income is recognized as earned, based upon the principal amount outstanding, on an accrual basis. Operating Segments While the Company monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. Operating results of the individual products are not used to make resource allocations or performance decisions by Company management. Stock-Based Compensation Stock-based compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in the accompanying Consolidated Financial Statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock-based compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share awards, performance-based awards, share appreciation rights, and employee share purchase plans. The stock-based compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees' service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black- Scholes model is used to estimate the fair value of stock options. Loss Contingencies Loss contingencies, including claims and legal actions arising in the normal course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. In the opinion of management, none of these actions, either individually or in the aggregate, is expected to have a material adverse effect on the Company’s Consolidated Financial Statements. See Note 18 “Loss Contingencies” for further details. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 87 USCB Financial Holdings, Inc. 2023 10-K Dividend Restrictions Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to the stockholders. Fair Value Measurements Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 12 “Fair Value Measurements”. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates. Derivative Instruments Derivative financial instruments are carried at fair value and reflect the estimated amount that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information. Rate Swaps Designated as Cash Flow Hedges The changes in fair value on these interest rate swaps are recorded in other assets or other liabilities with a corresponding recognition in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized. As of December 31, 2023 the cash flow hedge was effective. Interest Rate Swaps Designated as Fair Value Hedges The changes in fair value on these interest rate swaps are recorded in other assets or other liabilities with a corresponding recognition in the assets being hedged. Interest Rate Swaps The Company enters into interest rate swaps agreements to provide commercial loan clients the ability to swap from a variable interest rate to a fixed rate. The Company enters into a floating-rate loan with a customer with a separately issued swap agreement allowing the customer to convert floating payments on the loan into a fixed interest rate. To mitigate risk, the Company enters into a matching agreement with a third party to offset the exposure on the customer agreement. These swaps are not considered to be qualified hedging transactions and the unmatched unrealized gain or loss is recorded in other non-interest income. Interest rate swap agreements are used by the Company as part of its asset-liability management strategy to help manage its interest rate risk exposure. The notional amount of the interest rate swaps does 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. Revenue from Contracts with Customers Revenue from contracts with customers is recognized in an amount that reflects the consideration the Company expects to receive for the services the Company provides to its customers. The main revenue earned by the Company from loans and investment securities are excluded from the accounting standard update “Revenue from Contracts with Customers”. Deposit and service charge fees, consisting of primarily monthly maintenance fees, wire fees, ATM interchange fees and other transaction-based fees, are the most significant types of revenue within the accounting standard update. Revenue is recognized when the service provided by the Company is complete. The aggregate amount of revenue within the scope of this standard that is received from sources other than deposit service charges and fees is not material. Cash Flow Statement The Company reports the net activity rather than gross activity in the Consolidated Statements of Cash Flows. The net cash flows are reported for loans held for investment, accrued interest receivable, deferred tax assets, other assets, customer deposits, accrued interest payable, other liabilities, and proceeds from the issuance of Class A common shares. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 88 USCB Financial Holdings, Inc. 2023 10-K Reclassifications Certain amounts in the Consolidated Financial Statements have been reclassified to conform to the current presentation. Reclassifications had no impact on the net income or stockholders’ equity of the Company. Recently Issued Accounting Standards Issued and Adopted Guidance on Accounting for Credit Losses on Financial Instruments On January 1, 2023, the Company implemented Accounting Standard Update (“ASU”) 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended. This update replaces the incurred loss methodology with the CECL methodology. The CECL methodology measures expected credit losses and applies 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 similar instruments), as well as net investments in leases recognized by lessors in accordance with Topic 842 on leases. Furthermore, ASC 326 amended the accounting treatment for available-for-sale debt securities. One notable change is the requirement for credit losses to be reported as an allowance rather than as a write- down on available-for-sale debt securities that management does not intend to sell or believes it is more likely than not they will not need to sell. CECL requires a 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. At adoption of CECL, 84 % or $ 1.3 billion of loan receivables were collectively evaluated under the Discounted Cash Flow (“DCF)” method and 16 % or $ 251.0 million of loan receivables were collectively evaluated under the Remaining Life method. The remaining $ 7.9 million of loan receivables of the total loan portfolio were individually evaluated. The impact of adoption of the ASU 2016-13 in January 1, 2023, was an increase to ACL on loans receivables of $ 1.1 million and an increase to the reserve for unfunded commitments of $ 259 thousand. This one-time net of tax cumulative adjustment resulted in a increase of $ 1.0 million in accumulated deficit. The following table reflects the impact of adopting CECL on the Company’s consolidated balance sheet (in thousands): January 1, 2023 As Reported Under ASC 326 Pre - ASC 326 Adoption Impact of ASC 326 Adoption Assets Allowance for credit losses $ 18,553 $ 17,487 $ 1,066 Deferred tax asset, net 42,696 42,360 336 Liabilities Reserve for unfunded credit commitments 516 257 259 Stockholder's Equity Retained earnings $ ( 105,093 ) $ ( 104,104 ) $ ( 989 ) See “Allowance for Credit Losses” section in Note 3 for more information on the ACL. Guidance on Accounting for Trouble Debt Restructuring and Vintage Disclosures In March 2022, the FASB issued ASU 2022-02, which eliminates creditor accounting guidance for TDRs for entities that have adopted ASU 2016-13, Financial Instruments -Credit Losses (Topic 326) and enhances Vintage Disclosures of Gross Write-offs. This ASU eliminates Subtopic 310-40 guidance for TDRs and requires creditors to apply the loan refinancing and restructuring guidance in Subtopic 310-20 when evaluating modifications granted to borrowers experiencing financial difficulty to determine whether the modification is considered a continuation of an existing loan or a new loan. The vintage disclosure component of the ASU requires entities to disclose current-period gross write-offs by origination year for financing Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 89 USCB Financial Holdings, Inc. 2023 10-K receivables and investment leases within the scope of Subtopic 326-20. The Company adopted ASU 2022-02 concurrently with the adoption of ASU 2016-13. Issued and Not Yet Adopted Guidance on Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB clarified the scope of this guidance with ASU 2021-01 which provides optional guidance for a limited period of time to ease the burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This ASU is effective March 12, 2020 through December 31, 2024. The Company is evaluating the impact of this ASU and has not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements. 2. INVESTMENT SECURITIES The following tables present a summary of the amortized cost, unrealized or unrecognized gains and losses, and fair value of investment securities at the dates indicated (in thousands): December 31, 2023 Available-for-sale: Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. Government Agency $ 9,664 $ - $ ( 1,491 ) $ 8,173 Collateralized mortgage obligations 103,645 - ( 23,039 ) 80,606 Mortgage-backed securities - residential 63,795 - ( 11,608 ) 52,187 Mortgage-backed securities - commercial 49,212 56 ( 6,504 ) 42,764 Municipal securities 25,005 - ( 5,667 ) 19,338 Bank subordinated debt securities 28,106 188 ( 2,033 ) 26,261 $ 279,427 $ 244 $ ( 50,342 ) $ 229,329 Held-to-maturity: U.S. Government Agency $ 43,626 $ 2 $ ( 5,322 ) $ 38,306 Collateralized mortgage obligations 62,735 - ( 7,983 ) 54,752 Mortgage-backed securities - residential 43,784 348 ( 4,533 ) 39,599 Mortgage-backed securities - commercial 15,439 - ( 1,257 ) 14,182 Corporate bonds 9,398 - ( 727 ) 8,671 $ 174,982 $ 350 $ ( 19,822 ) $ 155,510 Allowance for credit losses - securities held-to-maturity ( 8 ) Securities held-to maturity, net of allowance for credit losses $ 174,974 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 90 USCB Financial Holdings, Inc. 2023 10-K 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 For the year ended December 31, 2023, there were no investment securities that were transferred from AFS to HTM. For the year ended December 31, 2022, there were 26 investment securities that were transferred from AFS to HTM with an amortized cost basis and fair value amount of $ 74.4 million and $ 63.8 million, respectively. On the date of transfer, these securities had a total net unrealized loss of $ 10.6 million which was included in AOCI. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized gain or loss at the date of transfer is retained in AOCI and in the carrying value of the held-to-maturity securities. There was no impact to net income. Such amounts are amortized over the remaining life of the security. For the years ended December 31, 2023 and 2022, total amortization out of AOCI for the net unrealized losses on securities transferred from AFS to HTM was $ 251 thousand and $ 120 thousand. In addition for these securities, the balance of the net unrealized losses retained in AOCI was $ 9.5 million at December 31, 2023 and $ 9.8 million at December 31, 2022. The following table presents the proceeds, realized gross gains and realized gross losses on sales and calls of AFS debt securities for the years ended December 31, 2023 and 2022 (in thousands): Available-for-sale: 2023 2022 Proceeds from sales and call of securities $ 24,185 $ 60,649 Gross Gains $ 3 $ 217 Gross Losses ( 1,862 ) ( 2,746 ) Net realized gains (losses) $ ( 1,859 ) $ ( 2,529 ) The amortized cost and fair value of investment securities, by contractual maturity, are shown below for the date indicated (in thousands). Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 91 USCB Financial Holdings, Inc. 2023 10-K Available-for-sale Held-to-maturity December 31, 2023: Amortized Cost Fair Value Amortized Cost Fair Value Due within one year $ - $ - $ - $ - Due after one year through five years 2,710 2,853 9,398 8,671 Due after five years through ten years 32,116 28,673 - - Due after ten years 18,285 14,073 - - U.S. Government Agency 9,664 8,173 43,626 38,306 Collateralized mortgage obligations 103,645 80,606 62,735 54,752 Mortgage-backed securities - residential 63,795 52,187 43,784 39,599 Mortgage-backed securities - commercial 49,212 42,764 15,439 14,182 $ 279,427 $ 229,329 $ 174,982 $ 155,510 At December 31, 2023 and 2022, there were no securities to any one issuer, in an amount greater than 10% of total stockholders’ equity other than the U.S. Government and U.S. Government Agencies. All the collateralized mortgage obligations and mortgage-backed securities are issued by U.S. sponsored entities at December 31, 2023 and 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): December 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 $ - $ - $ 46,479 $ ( 8,043 ) $ 46,479 $ ( 8,043 ) Collateralized mortgage obligations - - 135,358 ( 35,566 ) 135,358 ( 35,566 ) Mortgage-backed securities - residential 5,290 ( 47 ) 83,484 ( 18,365 ) 88,774 ( 18,412 ) Mortgage-backed securities - commercial 20,292 ( 611 ) 33,083 ( 8,623 ) 53,375 ( 9,234 ) Municipal securities - - 19,338 ( 5,667 ) 19,338 ( 5,667 ) Bank subordinated debt securities 8,600 ( 331 ) 12,287 ( 1,703 ) 20,887 ( 2,034 ) Corporate bonds - - 8,671 ( 406 ) 8,671 ( 406 ) $ 34,182 $ ( 989 ) $ 338,700 $ ( 78,373 ) $ 372,882 $ ( 79,362 ) 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 ) The unrealized losses associated with $ 126.8 million outstanding of investment securities transferred from the AFS portfolio to the HTM portfolio represent unrealized losses since the date of purchase, independent of the impact associated with changes in the cost basis upon transfer between portfolios. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 92 USCB Financial Holdings, Inc. 2023 10-K 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 CECL. 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 accou nting 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 a loss reserve for securities classified as 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 bonds, 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. The Company monitors the credit quality of held to maturity securities through the use of credit ratings. Credit ratings are monitored by the Company on at least a quarterly basis. As of December 31, 2023 and December 31, 2022, all held-to- maturity securities held by the Company were rated investment grade. At December 31, 2023, HTM securities included $ 165.6 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 $ 9.4 million in investment grade corporate bonds. The required reserve for these holdings is determined each quarter using the model described above. For the portion of the HTM exposed to non-government credit risk, the Company utilized the PD/LGD methodology to estimate a $ 8 thousand ACL as of December 31, 2023. The book value for debt securities classified as HTM represents amortized cost less ACL. The Company determined that an ACL on its debt securities available for sale as of December 31, 2023 was not required. At December 31, 2023, the Company had $ 54.9 million of unrealized losses on mortgage-backed securities and collateralized mortgage obligations of U.S. Government sponsored entities having a fair value of $ 284.1 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 believes 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, 2023, 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. As of December 31, 2023, the Company maintains a master repurchase agreement with a public banking institution for up to $ 20.0 million fully guaranteed with investment securities upon withdrawal. Any amounts borrowed would be at a variable interest rate based on prevailing rates at the time funding is requested. At December 31, 2023, the Company did no t have any securities pledged under this agreement. In 2018, the Company became a Qualified Public Depositor (“QPD”) with the State of Florida. As a QPD, the Company has the authority to legally maintain public deposits from cities, municipalities, and the State of Florida. These public deposits are secured by securities pledged to the State of Florida at a ratio of 25 % of the average outstanding uninsured deposits. The Company must also maintain a minimum amount of pledged securities to be in the program. At December 31, 2023, the Company had twenty-eight securities with a fair value of $ 86.9 million pledged to the State of Florida under the public funds program. The Company held a total of $ 268.4 million in public funds at December 31, 2023. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 93 USCB Financial Holdings, Inc. 2023 10-K At December 31, 2022, the Company had eighteen securities with a fair value of $ 49.0 million pledged to the State of Florida under the public funds program. The Company held a total of $ 204.2 million in public funds at December 31, 2022. The Board of Governors of the Federal Reserve System, 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, U.S. 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 as of December 31, 2023, and had pledged $ 132.1 million in securities measured at par to the Federal Reserve Bank of Atlanta for the BTFP program. The BTFP program ceased making new loans as of March 2024. On January 12, 2024, the Company borrowed $ 80 million at a rate of 4.81 %, maturing on January 10, 2025, under the BTFP program. 3. LOANS The following table is a summary of the distribution of loans held for investment by type (in thousands): December 31, 2023 December 31, 2022 Total Percent of Total Total Percent of Total Residential Real Estate $ 204,419 11.5 % $ 185,636 12.3 % Commercial Real Estate 1,047,593 58.8 % 970,410 64.4 % Commercial and Industrial 219,757 12.4 % 126,984 8.4 % Foreign Banks 114,945 6.5 % 93,769 6.2 % Consumer and Other 191,930 10.8 % 130,429 8.7 % Total gross loans 1,778,644 100.0 % 1,507,228 100.0 % Plus: Deferred cost 2,183 110 Total loans net of deferred cost 1,780,827 1,507,338 Less: Allowance for credit losses 21,084 17,487 Total net loans $ 1,759,743 $ 1,489,851 At December 31, 2023 and 2022, the Company had $ 534.2 million and $ 338.1 million, respectively, of commercial real estate and residential mortgage loans pledged as collateral on lines of credit with the FHLB and the Federal Reserve Bank of Atlanta. At December 31, 2023 and 2022, the Company had no loans in the process of foreclosure. The Company was a participant of the SBAs Paycheck Protection Program (“PPP”) loans. These loans were designed to provide a direct incentive for small businesses to keep their workers on payroll and had to be used towards payroll cost, mortgage interest, rent, utilities and other costs related to COVID-19. These loans are forgivable under specific criteria as determined by the SBA. The Company had PPP loans totaling $ 271 thousand at December 31, 2023 and $ 1.3 million at December 31, 2022, which are categorized as commercial and industrial loans. These PPP loans had deferred loan fees of $ 6 thousand at December 31, 2023 and $ 13 thousand at December 31, 2022. The Company recognized $ 8 thousand and $ 1.6 million in PPP loan fees and interest income for the years ended December 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. The Company engaged advisors and consultants with experience 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 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 94 USCB Financial Holdings, Inc. 2023 10-K 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 (“Q-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 • 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 The Company segments the portfolio by pools grouping loans that share similar risk characteristics and employing collateral type and lien position to group loans according to risk. The Company evaluates five segments using the loss rate methodology 'Remaining Life Method' or WARM. The remaining is calculated based on the annual attrition rate observed for the Company’s own portfolio experience. The peer group includes historical losses for U.S. The Company also applies a scorecard methodology to determine qualitative factors for WARM segments. The scorecard is built using a peer group loss. The maximum losses for these peers are derived selecting periods were higher than normal loss rates are observed. In estimating credit losses, the Company also considers qualitative and environmental factors that may cause estimated credit losses for the loan portfolio to differ from historical losses. ACL for the year ended December 31, 2023, was estimated under the CECL methodology, and for the year ended December 31, 2022, it was estimated under the incurred loss model. Prior to the adoption of ASC 326 on January 1, 2023, the allowance for credit losses was a valuation allowance for probable incurred credit losses. Management estimated the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. The allowance consisted of specific and general components. The specific component related to loans that were individually classified as impaired. A loan was impaired when, based on current information and events, it was probable that the Bank would be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms had been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, were considered troubled debt restructurings and classified as impaired. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 95 USCB Financial Holdings, Inc. 2023 10-K Changes in the ACL for the years ended December 31, 2023 and 2022 are as follows (in thousands): Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other Total December 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) 95 ( 882 ) 1,897 168 1,225 2,503 Recoveries 10 - 72 - 3 85 Charge-offs - - - - ( 57 ) ( 57 ) Ending Balance $ 2,695 $ 10,366 $ 3,974 $ 911 $ 3,138 $ 21,084 December 31, 2022: Beginning balance $ 2,498 $ 8,758 $ 2,775 $ 457 $ 569 $ 15,057 Provision for credit losses ( 1,179 ) 1,385 1,474 263 552 2,495 Recoveries 33 - 18 - 4 55 Charge-offs - - ( 104 ) - ( 16 ) ( 120 ) Ending Balance $ 1,352 $ 10,143 $ 4,163 $ 720 $ 1,109 $ 17,487 (1) Impact of CECL adoption on January 1, 2023 (2) Provision for credit losses excludes $ 144 thousand release for unfunded commitments included in other liabilities and $ 8 thousand provision for investment securities held to maturity. Allowance for credit losses and the outstanding balances in loans as of December 31, 2023 and 2022 are as follows (in thousands): Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other Total December 31, 2023: Allowance for credit losses: Individually evaluated $ 145 $ - $ 128 $ - $ - $ 273 Collectively evaluated 2,550 10,366 3,846 911 3,138 20,811 Balances, end of period $ 2,695 $ 10,366 $ 3,974 $ 911 $ 3,138 $ 21,084 Loans: Individually evaluated $ 6,994 $ - $ 1,668 $ - $ - $ 8,662 Collectively evaluated 197,425 1,047,593 218,089 114,945 191,930 1,769,982 Balances, end of period $ 204,419 $ 1,047,593 $ 219,757 $ 114,945 $ 191,930 $ 1,778,644 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. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 96 USCB Financial Holdings, Inc. 2023 10-K 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 97 USCB Financial Holdings, Inc. 2023 10-K Loan credit exposures by internally assigned grades are presented below for the periods indicated (in thousands): As of December 31, 2023 Term Loans by Origination Year Revolving Loans Total 2023 2022 2021 2020 2019 Prior Residential real estate Pass $ 44,365 $ 36,325 $ 26,180 $ 6,080 $ 9,325 $ 75,654 $ 6,198 $ 204,127 Special Mention - - - - - - - - Substandard - - - - 292 - - 292 Doubtful - - - - - - - - Total 44,365 36,325 26,180 6,080 9,617 75,654 6,198 204,419 Commercial real estate Pass 148,311 337,938 184,024 104,182 78,153 182,714 4,710 1,040,032 Special Mention - - - - - - - - Substandard - - 6,867 694 - - - 7,561 Doubtful - - - - - - - - Total 148,311 337,938 190,891 104,876 78,153 182,714 4,710 1,047,593 Commercial and industrial Pass 97,753 37,414 34,090 6,499 13,706 3,113 25,554 218,129 Special Mention - - - - - - - - Substandard - - 330 - 1,298 - - 1,628 Doubtful - - - - - - - - Total 97,753 37,414 34,420 6,499 15,004 3,113 25,554 219,757 Foreign banks Pass 114,945 - - - - - - 114,945 Special Mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total 114,945 - - - - - - 114,945 Consumer and other loans Pass 71,593 74,387 41,966 615 560 1,337 1,472 191,930 Special Mention - - - - - - - - Substandard - - - - - - - - Doubtful - Total 71,593 74,387 41,966 615 560 1,337 1,472 191,930 Total Loans Pass 476,967 486,064 286,260 117,376 101,744 262,818 37,934 1,769,163 Special Mention - - - - - - - - Substandard - - 7,197 694 1,590 - - 9,481 Doubtful - - - - - - - - Total $ 476,967 486,064 293,457 118,070 103,334 262,818 37,934 1,778,644 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 98 USCB Financial Holdings, Inc. 2023 10-K As of December 31, 2022 Pass Special Mention Substandard Doubtful Total Loans Residential real estate: Home equity line of credit ("HELOC") 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 Leasehold improvements - - - - - 967,465 - 2,945 - 970,410 Commercial and industrial: (1) 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 (1) All outstanding PPP loans were internally graded pass. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 99 USCB Financial Holdings, Inc. 2023 10-K Loan Aging The Company also considers the performance of loans in grading and in evaluating the credit quality of the loan portfolio. The Company analyzes credit quality and loan grades based on payment performance and the aging status of the loan. The following table include an aging analysis of accruing loans and total non-accruing loans as of December 31, 2023 and 2022 (in thousands): Accruing As of December 31, 2023: Current Past Due 30-89 Days Past Due > 90 Days and Still Accruing Total Accruing Non- Accrual Total Loans Residential real estate: Home equity line of credit and other $ 559 $ - $ - $ 559 $ - $ 559 1-4 family residential 155,842 711 - 156,553 - 156,553 Condo residential 43,572 3,735 - 47,307 - 47,307 199,973 4,446 - 204,419 - 204,419 Commercial real estate: Land and construction 33,710 - - 33,710 - 33,710 Multi-family residential 181,287 - - 181,287 - 181,287 Condo commercial 58,106 - - 58,106 - 58,106 Commercial property 772,569 1,890 - 774,459 - 774,459 Leasehold improvements 31 - - 31 - 31 1,045,703 1,890 - 1,047,593 - 1,047,593 Commercial and industrial: Secured 200,235 29 - 200,264 468 200,732 Unsecured 19,025 - - 19,025 - 19,025 219,260 29 - 219,289 468 219,757 Foreign banks 114,945 - - 114,945 - 114,945 Consumer and other 191,930 - - 191,930 - 191,930 Total $ 1,771,811 $ 6,365 $ - $ 1,778,176 $ 468 $ 1,778,644 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 100 USCB Financial Holdings, Inc. 2023 10-K Accruing As of December 31, 2022: Current Past Due 30-89 Days Past Due > 90 Days and Still Accruing Total Accruing Non- Accrual Total Loans Residential real estate: Home equity line of credit and other $ 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 There were no loans over 90 days past due and accruing as of December 31, 2023 and 2022. Non-accrual Status The following table includes the amortized cost basis of loans on non-accrual status and loans past due over 90 days and still accruing as of December 31, 2023 (in thousands): December 31, 2023 Nonaccrual Loans With No Related Allowance Nonaccrual Loans With Related Allowance Total Non- accruals Loans Past Due Over 90 Days and Still Accruing Residential real estate $ $ $ $ Commercial real estate - - - - Commercial and industrial - 468 468 - Consumer and other - - - - Total $ - $ 468 $ 468 $ - The Company did not have loans in non-accrual 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 non-accrual loans outstanding during the years ended December 31, 2023 and 2022. Interest income on these loans for the year ended December 31, 2023 and 2022, would have been approximately $ 40 thousand and $ 0 thousand, respectively, had these loans performed in accordance with their original terms. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 101 USCB Financial Holdings, Inc. 2023 10-K 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 December 31, 2023 or as of December 31, 2022. 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 Interest income recognized on impaired loans for the year ended December 31, 2022 was $ 351 thousand. Net investment balance is the unpaid principal balance of the loans adjusted for the remaining net deferred loan fees. The following table presents the average recorded investment balance on impaired loans for the periods indicated (in thousands): 2022 Residential real estate $ 7,626 Commercial real estate 575 Commercial and industrial 109 Consumer and other 210 Total $ 8,520 Loan Modifications to Borrowers Experiencing Financial Difficulties The following table present newly restructured loans, by type of modification, which occurred during the year ended December 31, 2023 (in thousands): Recorded Investment Prior to Modification Recorded Investment After Modification Number of Loans Combination Modifications Total Modifications Number of Loans Combination Modifications Total Modifications Residential real estate - $ - $ - - $ - $ - Commercial real estate - - - - - - Commercial and industrial 2 650 650 2 650 650 Consumer and other - - - - - - 2 $ 650 $ 650 2 $ 650 $ 650 The Company had two new modifications to borrowers experiencing financial difficulties for the year ended December 31, 2023. There were no existing loan modifications that subsequently defaulted during the year ended December 31, 2023. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 102 USCB Financial Holdings, Inc. 2023 10-K 4. LEASES The Company enters into leases in the normal course of business primarily for banking centers and back-office operations. As of December 31, 2023, the Company leased nine of the ten banking centers and the headquarter building. The Company is obligated under non-cancelable operating leases for these premises with expiration dates ranging from 2026 to 2036. Many of these leases have extension clauses which the Company could exercise which would extend these dates. The Company has classified all leases as operating leases. Lease expense for operating leases are recognized on a straight-line basis over the lease term. Right-of-use (“ROU”) assets represent the right to use the underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning those with terms under 12 months. ROU assets or lease liabilities are not to be recognized for short-term leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. In the Company’s Consolidated Balance Sheets, ROU assets are reported under other assets while lease liabilities are classified under accrued interest and other liabilities. As most of the Company’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The Company’s incremental borrowing rate is based on the FHLB advance rate matching or nearing the lease term. The following table presents the ROU assets and lease liabilities as of December 31, 2023 and 2022 (in thousands): 2023 2022 ROU assets: Operating leases $ 11,423 $ 14,395 Lease liabilities: Operating leases $ 11,423 $ 14,395 The weighted average remaining lease term and weighted average discount rate as of December 31, 2023 and 2022: 2023 2022 Weighted average remaining lease term (in years): Operating leases 6.35 6.98 Weighted average discount rate: Operating leases 2.94 % 2.94 % Future lease payment obligations and a reconciliation to lease liability as of December 31, 2023 (in thousands): 2024 $ 3,236 2025 3,312 2026 2,383 2027 951 2028 492 Thereafter 2,987 Total future minimum lease payments 13,361 Less: interest component ( 1,938 ) Total lease liability $ 11,423 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 103 USCB Financial Holdings, Inc. 2023 10-K 5. PREMISES AND EQUIPMENT A summary of premises and equipment are presented below as of December 31, 2023 and 2022 (in thousands): 2023 2022 Land $ 972 $ 972 Building 1,952 1,952 Furniture, fixtures and equipment 8,981 8,841 Computer hardware and software 4,592 4,575 Leasehold improvements 10,457 10,451 Premises and equipment, gross 26,954 26,791 Accumulated depreciation and amortization ( 22,118 ) ( 21,528 ) Premises and equipment, net $ 4,836 $ 5,263 Depreciation and amortization expense was $ 590 thousand and $ 688 thousand for the years ended December 31, 2023 and 2022, respectively. 6. INCOME TAXES The Company’s provision for income taxes is presented in the following table for the years ended December 31, 2023 and 2022 (in thousands): 2023 2022 Current: Federal $ - $ - State - - Total current - - Deferred: Federal 4,121 5,462 State 1,130 1,482 Total deferred 5,251 6,944 Total tax expense $ 5,251 $ 6,944 The actual income tax expense for the years ended December 31, 2023 and 2022 differs from the statutory tax expense for the year (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): 2023 2022 Federal taxes at statutory rate $ 4,577 $ 5,688 State income taxes, net of federal tax benefit 947 1,177 Bank owned life insurance ( 273 ) ( 269 ) Other, net - 348 Total tax expense $ 5,251 $ 6,944 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 104 USCB Financial Holdings, Inc. 2023 10-K The following table presents the deferred tax assets and deferred tax liabilities as of December 31, 2023 and 2022 (in thousands): 2023 2022 Deferred tax assets: Net operating loss $ 16,430 $ 21,720 Allowance for credit losses 5,410 4,432 Lease liability 2,895 3,648 Unrealized loss on available for sale securities 15,114 15,193 Depreciable property 203 158 Equity compensation 630 373 Accruals 382 723 Other, net 10 - Deferred tax asset $ 41,074 $ 46,247 Deferred tax liability: Deferred loan cost ( 553 ) ( 28 ) Lease right of use asset ( 2,895 ) ( 3,648 ) Deferred expenses ( 180 ) ( 175 ) Cash flow hedge ( 85 ) Other, net ( 79 ) ( 36 ) Deferred tax liability $ ( 3,792 ) $ ( 3,887 ) Net deferred tax asset $ 37,282 $ 42,360 At December 31, 2023 the Company had approximately $ 61.5 million of Federal and $ 84.1 million of State net operating loss carryforwards expiring in various amounts from 2032 to 2036 if unused after 2036, their utilization is limited to future taxable earnings of the Company. In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The U.S. Federal jurisdiction and Florida are the major tax jurisdictions where the Company files income tax returns. The Company is generally no longer subject to U.S. Federal or State examinations by tax authorities for years before 2020. For the years ended December 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. 7. DEPOSITS The following table presents deposits by type at December 31, 2023 and 2022 (in thousands): 2023 2022 Non-interest bearing deposits $ 552,762 $ 629,776 Interest-bearing transaction accounts 47,702 66,675 Saving and money market deposits 1,048,272 915,853 Time deposits 288,403 216,977 Total deposits $ 1,937,139 $ 1,829,281 Time deposits exceeding the FDIC deposit insurance limit of $250 thousand per account at December 31, 2023 and 2022 were $ 117.2 million and $ 82.0 million, respectively. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 105 USCB Financial Holdings, Inc. 2023 10-K The Company brought in $ 50 million of brokered CDs at a weighted average rate of 4.98 % to boost liquidity during the second quarter of 2023. The CDs renewed in Q1 2024 at weighted average rate of 5.13 %.There were no brokered deposits as of December 31, 2022. At December 31, 2023, the scheduled maturities of time deposits were (in thousands): 2024 $ 280,529 2025 6,074 2026 831 2027 874 2028 95 $ 288,403 At December 31, 2023 and 2022, the aggregate amount of demand deposits reclassified to loans as overdrafts was $ 213 thousand and $ 230 thousand, respectively. 8. BORROWINGS Borrowed funds consist of fixed-rate advances from the FHLB. At December 31, 2023, FHLB advances were $183.0 million and at December 31, 2022 were $46.0 million. The following table presents outstanding FHLB advances at December 31, 2023 and 2022 (in thousands): At December 31, 2023 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 3.76 % Fixed January 24, 2028 11,000 3.77 % Fixed April 25, 2028 50,000 5.57 % Fixed December 26, 2024 101,000 $ 183,000 At December 31, 2022 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 4.14 % Fixed January 13, 2023 20,000 $ 46,000 The FHLB holds a blanket lien on the Company's loan portfolio that may be pledged as collateral for outstanding advances, subject to eligibility under the borrowing agreement. The Company may also choose to assign cash balances held at the FHLB as additional collateral. See Note 3 “Loans” for further discussion on pledged loans. 9. EQUITY BASED AND OTHER COMPENSATION PLANS Employee 401(k) Plan The Company has an employee 401(k) plan (the “Plan”) covering substantially all eligible employees. The Plan includes a provision that the employer may contribute to the accounts of eligible employees for whom a salary deferral is made. The Company contributed $ 306 thousand and $ 313 thousand to the Plan during the years ended December 31, 2023 and 2022, respectively; the contributions are included under salaries and employee benefits in the Consolidated Statements of Operations. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 106 USCB Financial Holdings, Inc. 2023 10-K Stock-Based Compensation In 2015, the Company's stockholders approved the 2015 Equity Incentive Plan (the “2015 Option Plan”), which authorized grants of options to purchase up to 2,000,000 shares of common stock. The 2015 Option Plan provided that vesting schedules will be determined upon issuance of options by the Board of Directors or compensation committee. Options granted under the 2015 Option Plan have a 10 -year life and, in no event shall an option be exercisable after the expiration of 10 years from the grant date. The 2015 Option Plan has a 10 -year life and initially would have terminated in 2025. In July 2020, the stockholders of the Company approved the amendment of the 2015 Option plan to authorize the issuance of an additional 3,000,000 shares of common stock and extending the life of the plan 5 additional years, terminating in 2030. The authorized shares, after being adjusted to reflect the 1 for 5 reverse stock split, totaled 1,000,000 shares. In December 2021, the shareholders of the Company approved the amendment of the 2015 Option Plan to authorize the issuance of an additional 1,400,000 shares of common stock as well as the ability to issue restricted stock grants (up to 600,000 shares) for a total of 2,400,000 shares. At December 31, 2023, there were 1,160,564 shares available for grant under the 2015 Option Plan. At December 31, 2022, there were 1,386,667 shares available for grant under the 2015 Option Plan. Stock Options The Company recognizes compensation expense based on the estimated grant date fair value method using the Black- Scholes option pricing model and accounts for this expense using a prorated straight-line amortization method over the vesting period of the option. Stock-based compensation expense is based on awards that the Company expects will ultimately vest, reduced by estimated forfeitures. Estimated forfeitures consider the voluntary termination trends as well as actual option forfeitures. The compensation expense is reported under salaries and employee benefits in the accompanying Consolidated Statements of Operations. Compensation expense totaling $ 459 thousand was recognized for the year ended December 31, 2023 and $ 523 thousand for the year ended December 31, 2022. There was no related tax benefit for the years ended December 31, 2023 and 2022. Unrecognized compensation cost remaining on stock-based compensation totaled $ 342 thousand and $ 787 thousand for the years ended December 31, 2023 and 2022, respectively. Cash flows resulting from excess tax benefits are required to be classified as a part of cash flows from operating activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to the compensation cost for such options. For the fair value of options granted in 2023 and 2022, the following were the assumptions: Assumption 2023 2022 Risk-free interest rate 3.53 % 2.34 % Expected term 10 years 10 years Expected stock price volatility 10 % 10 % Dividend yield 0 % 0 % Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 107 USCB Financial Holdings, Inc. 2023 10-K The following table presents a summary of stock options for the years ended December 31, 2023 and 2022: Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Years Aggregate Intrinsic Value (in thousands) Balance at January 1, 2023 965,667 $ 10.91 7.4 Granted 7,500 $ 12.41 Exercised ( 10,000 ) $ 7.50 Forfeitures ( 16,000 ) $ 10.34 Balance at December 31, 2023 947,167 $ 10.97 6.5 Exercisable at December 31, 2023 758,000 $ 10.71 6.1 $ 1,195 Balance at January 1, 2022 959,667 $ 10.87 8.4 Granted 15,000 $ 14.03 Exercised ( 9,000 ) $ 11.35 Balance at December 31, 2022 965,667 $ 10.91 7.4 Exercisable at December 31, 2022 560,000 $ 10.18 6.4 $ 1,131 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value of exercisable options at the dates presented (the difference between the valuation of the Company’s stock and the exercise price, multiplied by the number of options considered in-the-money) that would have been received by the option holders had all option holders exercised their options. The weighted average per share fair value of options granted for the years ended December 31, 2023 and 2022 was $ 3.91 and $ 3.45 , respectively. Restricted Stock In 2023 , the Company issued 242,713 shares of Class A common stock to employees and directors as restricted stock awards pursuant to the Company's 2015 Option Plan. Awards under the 2015 Option Plan may not be sold or otherwise transferred until certain restrictions have lapsed. There were no restricted stock awards outstanding as of December 31, 2022. The total share-based compensation expense for these awards is determined based on the market price of the Company's common stock as of the date of grant applied to the total number of shares granted and is amortized straight line over the vesting period which is one to three years. As of December 31, 2023, unearned share-based compensation expense associated with these awards totaled $ 2.3 million. Compensation expense totaling $ 553 thousand was recognized for the year ended December 31, 2023 and reported under salaries and benefits in the accompanying Consolidated Statement of Operations. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 108 USCB Financial Holdings, Inc. 2023 10-K The following table presents a summary of restricted stock awards for the year ended December 31, 2023: Restricted Stock Weighted Average Grant Date Fair Value Balance at January 1, 2023 - $ - Granted 242,713 $ 12.24 Forfeited ( 8,111 ) $ 12.67 Vested ( 16,180 ) $ 12.67 Balance at December 31, 2023 218,422 $ 12.19 10. OFF-BALANCE SHEET ARRANGEMENTS The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include unfunded commitments under lines of credit, commitments to extend credit, standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s Consolidated Balance Sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for unused lines of credit, and standby letters of credit is represented by the contractual amount of these commitments. 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 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. Prior to the adoption of ASC 326 on January 2023, the allowance for credit losses was a valuation allowance for probable incurred credit losses. The Company records a liability for expected credit losses on off-balance-sheet credit exposure in accordance with ASC 326. The Company uses the loss rate and exposure of default framework to estimate a reserve for unfunded commitments. Loss rates for the expected funded balances are determined based on the associated pooled loan analysis loss rate and the exposure at default is based on an estimated utilization given default. The off-balance sheet commitment allowance were $ 372 thousand and $ 166 thousand as of December 31, 2023 and December 31, 2022, respectively. A summary of the amounts of the Company's financial instruments with off-balance sheet risk are shown below at December 31, 2023 and 2022 (in thousands): 2023 2022 Commitments to grant loans and unfunded lines of credit $ 85,117 $ 95,461 Standby and commercial letters of credit 3,987 4,320 Total $ 89,104 $ 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 is committed. Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit have fixed maturity dates and many of them expire without being drawn upon, they do not generally present a significant liquidity risk to the Company. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 109 USCB Financial Holdings, Inc. 2023 10-K 11. DERIVATIVES The Company utilizes interest rate swap agreements as part of its asset-liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps do not represent amounts exchanged by the parties. The amounts exchanged are determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Rate Swaps Designated as Cash Flow Hedges As of December 31, 2023, the Company had two interest rate swap agreements with a notional aggregate amount of $ 50 million that were designated as cash flow hedges of certificates of deposit. The interest rate swap agreements have an average maturity of 2.38 years, the weighted average fixed-rate paid is 3.59 %, with the weighted average 3-month compound SOFR (Secured Overnight Financing Rate) being received. The Company had no cash flow hedges outstanding on December 31, 2022. The changes in fair value on these interest rate swaps are recorded in other assets or other liabilities with a corresponding recognition in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized. Interest Rate Swaps Designated as Fair Value Hedges As of December 31, 2023, the Company had four interest rate swap agreements with a notional aggregate amount of $ 200 million that were designated as fair value hedges on loans. The interest rate swap agreements have an average maturity of 2.23 years, the weighted average fixed-rate paid is 4.74 %, with the weighted average 3-month compound SOFR being received. The changes in fair value on these interest rate swaps are recorded in other assets or other liabilities with a corresponding recognition in the assets being hedged. Interest Rate Swaps The Company also enters into interest rate swaps with its loan customers. The Company had 20 and 15 interest rate swaps with loan customers with a notional aggregate amount of $ 46.5 million and $ 33.9 million at December 31, 2023 and 2022, respectively. These interest rate swaps have maturity dates of 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 110 USCB Financial Holdings, Inc. 2023 10-K 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 December 31, 2023: Derivatives Designated as Cash Flow Hedges Interest rate swaps $ 50,000 $ - Other assets $ 334 $ - Derivatives Designated as Fair Value Hedges Interest rate swaps $ 200,000 $ - Other liabilities $ - $ 3,430 Derivatives not designated as hedging instruments: Interest rate swaps related to customer loans $ 46,463 $ 1,326 Other assets/Other liabilities $ 4,558 $ 4,558 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 12. FAIR VALUE MEASUREMENTS Determination of Fair Value The Company uses fair value measurements to record fair-value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements accounting guidance, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. 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 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 111 USCB Financial Holdings, Inc. 2023 10-K whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Items Measured at Fair Value on a Recurring Basis Investment securities: When instruments are traded in secondary markets and quoted market prices do not exist for such securities, management generally relies on prices obtained from independent vendors or third-party broker -dealers. Management reviews pricing methodologies provided by the vendors and third-party broker-dealers in order to determine if observable market information is being utilized. Securities measured with pricing provided by independent vendors or third- party broker-dealers are classified within Level 2 of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow analyses utilizing inputs observable in the market where available. Derivatives: The fair value of derivatives are measured with pricing provided by third-party participants and are classified within Level 2 of the hierarchy. The following table represents the Company's assets measured at fair value on a recurring basis at December 31, 2023 and 2022 for each of the fair value hierarchy levels (in thousands): 2023 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Investment securities available for sale: U.S. Government Agency $ - $ 8,173 $ - $ 8,173 $ - $ 8,655 $ - $ 8,655 Collateralized mortgage obligations - 80,606 - 80,606 - 95,541 - 95,541 Mortgage-backed securities - residential - 52,187 - 52,187 - 60,879 - 60,879 Mortgage-backed securities - commercial - 42,764 - 42,764 - 27,954 - 27,954 Municipal securities - 19,338 - 19,338 - 18,483 - 18,483 Bank subordinated debt securities - 26,261 - 26,261 - 14,919 - 14,919 Corporate bonds - - - - - 3,709 - 3,709 Total - 229,329 - 229,329 - 230,140 - 230,140 Derivative assets - 4,892 - 4,892 - 5,011 - 5,011 Total assets at fair value $ - $ 234,221 $ - $ 234,221 $ - $ 235,151 $ - $ 235,151 Derivative liabilities $ - $ 7,988 $ - $ 7,988 $ - $ 5,011 $ - $ 5,011 Total liabilities at fair value $ - $ 7,988 $ - $ 7,988 $ - $ 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 $ 3.9 million were written down to their fair value of $ 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 and are considered a Level 3 valuation. Other Real Estate: Other real estate owned are valued at the lesser of the third-party appraisals less management's estimate of the costs to sell or the carrying cost of the other real estate owned. Appraisals generally use the market approach valuation technique and use market observable data to formulate an opinion of the fair value of the properties. However, the appraiser uses professional judgment in determining the fair value of the property and the Company may also adjust the value for changes in market conditions subsequent to the valuation date when current appraisals are not available. As a consequence of the carrying cost or the third-party appraisal and adjustments therein, the fair values of the properties are considered a Level 3 valuation. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 112 USCB Financial Holdings, Inc. 2023 10-K The following table represents the Company’s assets measured at fair value on a non-recurring basis at December 31, 2023 and 2022 for each of the fair value hierarchy levels (in thousands): Level 1 Level 2 Level 3 Total 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 Other 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 December 31, 2023 and 2022. Items Not Measured at Fair Value The carrying amounts and estimated fair values of financial instruments not carried at fair value, at December 31, 2023 and 2022 are as follows (in thousands): Fair Value Hierarchy Carrying Amount Level 1 Level 2 Level 3 Fair Value Amount December 31, 2023: Financial Assets: Cash and due from banks $ 8,019 $ 8,019 $ - $ - $ 8,019 Interest-bearing deposits in banks $ 33,043 $ 33,043 $ - $ - $ 33,043 Investment securities held to maturity, net $ 174,974 $ - $ 155,510 $ - $ 155,510 Loans held for investment, net $ 1,759,743 $ - $ - $ 1,723,210 $ 1,723,210 Accrued interest receivable $ 10,688 $ - $ 1,448 $ 9,240 $ 10,688 Financial Liabilities: Demand Deposits $ 552,762 $ 552,762 $ - $ - $ 552,762 Money market and savings accounts $ 1,048,272 $ 1,048,272 $ - $ - $ 1,048,272 Interest-bearing checking accounts $ 47,702 $ 47,702 $ - $ - $ 47,702 Time deposits $ 288,403 $ - $ - $ 287,104 $ 287,104 FHLB advances $ 183,000 $ - $ 182,282 $ - $ 182,282 Accrued interest payable $ 1,372 $ - $ 551 $ 821 $ 1,372 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 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 113 USCB Financial Holdings, Inc. 2023 10-K 13. STOCKHOLDERS’ EQUITY Common Stock In 2023 , the Company issued 242,713 shares of Class A common stock to employees and directors as restricted stock awards pursuant to the Company's 2015 Option Plan. There were no restricted stock awards issued in the year ended December 31, 2022. During the year ended December 31, 2023, the Company repurchased 669,920 shares of Class A common stock at a weighted average price per share of $ 11.28 . The aggregate purchase price for these transactions was approximately $ 7.6 million, including transaction costs. As of December 31, 2023, 80,080 shares remained authorized for repurchase under this program. Shares of the Company’s Class A common stock issued and outstanding as of December 31, 2023 and December 31, 2022 were 19,575,435 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 years ended December 31, 2023 and December 31, 2022. Additionally, there were no dividends declared and unpaid as of December 31, 2023 and 2022. See Note 19, Subsequent Events, for information regarding dividends declared in January 2024. The Company and the Bank exceeded all regulatory capital requirements and remained above “well-capitalized” guidelines as of December 31, 2023 and December 31, 2022. At December 31, 2023, the total risk-based capital ratios for the Company and the Bank were 12.78 % and 12.65 %, respectively. 14. EARNINGS PER SHARE Earnings per share (“EPS”) for common stock is calculated using the two-class method required for participating securities. Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period and the weighted-average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock equivalents include common stock options and are only included in the calculation of diluted EPS when their effect is dilutive. The following table reflects the calculation of net income available to common stockholders for the years ended December 31, 2023 and 2022 (in thousands): 2023 2022 Net Income $ 16,545 $ 20,141 Net income available to common stockholders $ 16,545 $ 20,141 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 114 USCB Financial Holdings, Inc. 2023 10-K The following table reflects the calculation of basic and diluted earnings per common share class for the years ended December 31, 2023 and 2022 (in thousands, except per share amounts): 2023 2022 Class A Class A Basic EPS Numerator: Net income available to common shares $ 16,545 $ 20,141 Denominator: Weighted average shares outstanding 19,621,698 19,999,323 Earnings per share, basic $ 0.84 $ 1.01 Diluted EPS Numerator: Net income available to common shares $ 16,545 $ 20,141 Denominator: Weighted average shares outstanding for basic EPS 19,621,698 19,999,323 Add: Dilutive effects of assumed exercises of stock options 65,936 177,515 Weighted avg. shares including dilutive potential common shares 19,687,634 20,176,838 Earnings per share, diluted $ 0.84 $ 1.00 Anti-dilutive stock options excluded from diluted EPS 720,500 15,000 Net income has not been allocated to unvested restricted stock awards that are participating securities because the amounts that would be allocated are not material to net income per share of common stock. Unvested restricted stock awards that are participating securities represent less than one percent of all of the outstanding shares of common stock for each of the periods presented. 15. REGULATORY MATTERS Banks and bank holding companies are subject to regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3.0 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time when the Company reaches the $3.0 billion asset level, it will be subject to capital measurements independent of the Bank. The Bank elected to permanently opt-out of the inclusion of accumulated other comprehensive income in the capital calculations, as permitted by the regulations. This opt-out reduces the impact of market volatility on the Bank’s regulatory capital levels. The Bank is subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules include the implementation of a 2.5 % capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. Failure to maintain the required capital conservation buffer will limit the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. At December 31, 2023 and 2022, the capital ratios for the Bank were sufficient to meet the conservation buffer. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 115 USCB Financial Holdings, Inc. 2023 10-K If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2023 and 2022, the most recent notification from the regulatory authorities categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Failure to meet statutorily mandated capital guidelines could subject the Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the Bank may pay on its deposits and other restrictions on its business. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category. Actual and required capital amounts and ratios are presented below for the Bank at December 31, 2023 and 2022 (in thousands, except ratios). The required amounts for capital adequacy shown do not include the capital conservation buffer previously discussed. Actual Minimum Capital Requirements To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2023: Total risk-based capital: $ 233,109 12.65 % $ 147,432 8.00 % $ 184,290 10.00 % Tier 1 risk-based capital: $ 211,645 11.48 % $ 110,574 6.00 % $ 147,432 8.00 % Common equity tier 1 capital: $ 211,645 11.48 % $ 82,931 4.50 % $ 119,789 6.50 % Leverage ratio: $ 211,645 9.17 % $ 92,328 4.00 % $ 115,410 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 limited in the amount of cash dividends that it may pay. Payment of dividends is generally limited to the Company’s net income of the current year combined with the Bank’s retained income of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Company must consider additional factors such as the amount of current period net income, liquidity, asset quality, capital adequacy and economic conditions at the Bank. It is likely that these factors would further limit the amount of dividends which the Company could declare. In addition, bank regulators have the authority to prohibit banks from paying dividends including dividends to their parent holding company, if they deem such payment to be an unsafe or unsound practice. 16. RELATED PARTY TRANSACTIONS In the ordinary course of business, principal officers, directors, and affiliates may engage in transactions with the Company. The following table presents loans to and deposits from related parties included within the accompanying Consolidated Financial Statements at December 31, 2023 and 2022 (in thousands): Years Ended December 31, 2023 2022 Consolidated Balance Sheets: Loans held for investment, net $ - $ - Deposits $ 2,792 $ 6,825 Consolidated Statements of Operations: Interest income $ - $ - Interest expense $ 154 $ 54 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 116 USCB Financial Holdings, Inc. 2023 10-K Loan Purchases During 2023, the Bank purchased $ 85.1 million of loans from entities that are deemed to be related parties. The Bank paid those entities fees of $ 1.9 million. During 2022, the Bank purchased $ 42.8 million of loans from entities that are deemed to be related parties. The Bank paid those entities fees of $ 881 thousand. 17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION In December 2021, USCB Financial Holdings, Inc. was formed as the parent bank holding company of U.S. Century Bank. The condensed balance sheet is presented below for USCB Financial Holdings, Inc. at the dates indicated (in thousands): December 31, 2023 December 31, 2022 ASSETS: Cash and Cash Equivalents $ 2,426 $ 1,102 Investment in bank subsidiary 188,827 181,326 Other assets 715 - Total assets $ 191,968 $ 182,428 LIABILITIES AND STOCKHOLDERS' EQUITY: Other liabilities $ - $ - Stockholders' equity 191,968 182,428 Total liabilities and stockholders' equity $ 191,968 $ 182,428 The condensed income statement is presented below for USCB Financial Holdings, Inc. for the periods indicated (in thousands): Years Ended December 31, 2023 December 31, 2022 INCOME: Dividends from subsidiaries $ 11,100 $ 1,000 Total 11,100 1,000 EXPENSE: Employee compensation and benefits 553 - Other operating 2,268 Total 2,821 - Income before income taxes and undistributed subsidiary income 8,279 1,000 Provision (benefit) for income taxes ( 715 ) - Equity in undisbursed subsidiary income 7,551 19,141 Net Income $ 16,545 $ 20,141 Table of Contents USCB FINANCIAL HOLDINGS, INC. Notes to the Consolidated Financial Statements 117 USCB Financial Holdings, Inc. 2023 10-K The condensed cash flow is presented below for USCB Financial Holdings, Inc. for the periods indicated (in thousands): Years Ended December 31, 2023 December 31, 2022 Cash flows from operating activities: Net income $ 16,545 $ 20,141 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries ( 7,551 ) ( 19,141 ) Stock-based compensation 553 Increase in deferred tax asset ( 715 ) Net cash provided by operating activities 8,832 1,000 Cash flows from investing activities: Capital contributions to subsidiary - - Other - - Net cash used in investing activities - - Cash flows from financing activities: Dividends paid - - Proceeds from exercise of stock options 75 102 Repurchase of common stock ( 7,583 ) - Net cash (used in) provided by financing activities ( 7,508 ) 102 Net increase in cash and cash equivalents 1,324 1,102 Cash and cash equivalents, beginning of period 1,102 - Cash and cash equivalents, end of period $ 2,426 $ 1,102 18. LOSS CONTINGENCIES Loss contingencies, including claims and legal actions may arise in the ordinary course of business. In the opinion of management, none of these actions, either individually or in the aggregate, is expected to have a material adverse effect on the Company’s Consolidated Financial Statements. 19. SUBSEQUENT EVENTS Dividends On January 29, 2024, the Company announced that its Board of Directors approved a cash dividend program. The quarterly dividend for the first quarter of 2024 was $ 0.05 per share of Class A common stock, paid on March 5, 2024, to stockholders of record as of the close of business on February 15, 2024. Total amount paid to shareholders in dividends on February 15, 2024 was $ 1.0 million. Table of Contents 118 USCB Financial Holdings, Inc. 2023 10-K Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.