Management's Discussion and Analysis of Financial Condition
and Results of Operations Management's discussion and analysis of financial condition and results of operations analyzes the consolidated
financial condition and results of operations of the Company and the
Bank, its wholly owned subsidiary, for the years endedDecember 31, 2022 and 2021. This discussion and analysis are best read in conjunction with the Consolidated Financial
Statements and related footnotes
of our Company presented in Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. In addition to historical information, this
discussion contains forward-looking
statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-Looking
Statements" and Item 1A "Risk Factors" of this Annual Report. In this Annual Report on Form 10-K, unless the context indicated otherwise, references to "we,"
"us,", and "our" refer to the Company and the Bank, as
the contest dictates. However, if
the discussion relates to a period
before the Effective Date, the terms refer only to the Bank. Forward-Looking Statements This Annual Report on Form 10-K contains statements that are not historical in nature are intended to be, and are
hereby identified as, forward-looking
statements for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. The words "may," "will," "anticipate," "should," "would," "believe," "contemplate," "expect," "aim," "plan," "estimate," "continue," and "intend," as well as other similar words and expressions of the future, are intended to identify forward-looking statements. These forward-looking statements include statements related to our projected growth, anticipated future financial performance, and management's long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from expected developments or events, or business and growth strategies, including anticipated internal growth. These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ materially from those anticipated in such statements.
Potential risks and uncertainties include, but are not
limited to: • the strength ofthe United States economy in general and the strength of the local economies in which we conduct operations; • the COVID-19 pandemic and its impact on us, our employees, customers and third-party service providers, and the ultimate extent of the impact of the pandemic and related government stimulus programs; •
our ability to successfully manage interest rate risk, credit
risk, liquidity risk, and other risks inherent to our
industry; • the accuracy of our financial statement estimates and assumptions, including the estimates used for our credit loss
reserve and deferred tax asset valuation allowance; •
the efficiency and effectiveness of
our internal control environment; • our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate; • legislative or regulatory changes and changes in accounting principles, policies, practices or guidelines, including the
effects of the implementation of the Current Expected
Credit Losses ("CECL") standard on
the effects of our lack of a diversified loan portfolio and concentration in the
industry concentrations, including our concentration in loans
secured by real estate; • effects of climate change; •
the concentration of ownership of our common stock; •
fluctuations in the price of our Class A common
stock; • our ability to fund or access the capital markets at attractive rates and terms and manage our growth, both organic
growth as well as growth through other means, such as
future acquisitions; •
inflation, interest rate, unemployment rate, market,
and potential monetary fluctuations; •
impacts of international hostilities and geopolitical events; •
increased competition and its effect
on the pricing of our products and services as well as our margin; • the effectiveness of our risk management strategies, including operational risks, including, but not limited to, client,
employee, or third-party fraud and security breaches; and •
other risks described in this Annual Report and other
filings we make with theSEC . All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations. Therefore, you are cautioned not to place undue reliance on any forward-looking statements. Further, forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof, and we undertake no obligation to update or revise any forward -looking statement
to reflect events or circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events, unless required to do so under the federal securities laws. You should also review the risk factors described herein and in Table of Contents 45
2022 10-K
the reports the Company filed or will file with the
prior to the completion of the bank holding company
reorganization in
financial information determined by methods
other than in accordance with generally accepted accounting principles ("GAAP"). This financial information includes certain operating performance
measures. Management has included these non-GAAP
measures because it believes these measures may
provide useful supplemental information for evaluating the Company's underlying performance trends. Further, management uses these measures in managing and evaluating the Company's business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly
comparable GAAP measures can be found
in the 'Non-GAAP Reconciliation Tables' included in this annual report. Overview For the year endedDecember 31, 2022 , the Company reported net income of$20.1 million compared with net income of
In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, the cost of deposits, levels and composition of
non-interest income and non-interest
expense, performance ratios, asset quality ratios,
regulatory capital ratios, and any significant event or transaction
.
The following significant highlights are of note for the
year endedDecember 31, 2022 : • Net interest income before provision for credit losses totaled$63.7 million , an increase of$11.2 million or 21.3%,
compared to
31, 2021.
•
Net interest margin ("NIM") was 3.38% for the year ended
to 3.52% for 2021. • Total assets grew to$2.1 billion atDecember 31, 2022 , an increase of$231.9 million or 12.5%, compared toDecember 31, 2021 . • Total loans grew to$1.5 billion atDecember 31, 2022 , an increase of$317.3 million or 26.7%, compared toDecember 31, 2021 . • The cost of interest-bearing liabilities increased to 0.66% for the year endedDecember 31, 2022 from 0.45% in
interest rates.
•
Return on average assets for the year ended December
31, 2022 was 1.01% compared to 1.24% in 2021. • Return on average stockholders' equity for the year endedDecember 31, 2022 was 10.73% compared to 11.45% in 2021. •
Nonperforming assets was
31, 2022 compared to
31, 2021. •
The Company maintained its strong capital position. As of
a tier 1 risk-based capital ratio of
12.53%, a common equity tier 1 capital ratio of 12.53%, and a leverage ratio of 9.61%. As ofDecember 31, 2022 and 2021, all of our regulatory capital
ratios exceeded the thresholds to be well-capitalized under the
applicable bank regulatory requirements. •
The Company became the parent bank
holding company of the Bank effective
December 30, 2021 . Each share of the Bank was exchanged for one share of the Company, making the Bank a wholly owned subsidiary of the Company. Shares
of the Company trade under ticker symbol "USCB" on the Nasdaq
Stock Market. Table of Contents 46USCB Financial Holdings, Inc. 2022 10-K Critical Accounting Policies and Estimates The consolidated financial statements are prepared based on the application ofU.S. GAAP, the most significant of which are described in Note 1 "Summary of Significant Accounting Policies" to our
Consolidated Financial Statements
.
To
prepare financial statements in conformity with GAAP,
management makes estimates, assumptions,
and judgments based on available information. These estimates, assumptions, and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements. Management has presented the application of these policies to the audit and risk committee of our Board. Allowance for Credit Losses The allowance for credit losses ("ACL") is a valuation allowance that
is established through charges
to earnings in the form of a provision for credit losses. The amount of the ACL is affected by the following: (i) charge-offs of loans that decrease the allowance; (ii) subsequent recoveries on loans previously charged off that increase the allowance; and (iii) provisions for credit losses charged to income that increase or decrease the allowance. Management considers the policies related to the ACL as the most critical to the financial statement presentation. The total ACL includes activity related to allowances
calculated in accordance with Accounting Standards Codification ("ASC")
310, Receivables, and ASC 450, Contingencies. Throughout the year,
management estimates the probable
incurred losses in the loan portfolio
to determine if the ACL is adequate to absorb such losses. The ACL
consists of specific and general components.
The specific component relates to loans that are individually classified as impaired. We follow a loan review program to evaluate the credit risk in the loan portfolio. Loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. The general component covers non-impaired loans and is based on industry and our specific historical loan loss experience, volume, growth and composition of the loan portfolio, the evaluation of our loan portfolio through our internal loan review process, general current economic conditions both internal and external to us that may
affect the borrower's ability to pay,
value of collateral and other qualitative relevant risk factors. Based on a review of these estimates, we adjust the ACL to a level determined by management to be adequate. Estimates of credit losses are inherently subjective as they involve an exercise of judgment. The CARES Act, as amended by the Consolidated Appropriations Act, 2021, specified that COVID-19 related loan modifications executed betweenMarch 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared byPresident Trump and (ii)January 1, 2022 , on loans
that were current as of
are
not TDRs. Additionally,
under guidance from the federal banking agencies,
other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under ASC Subtopic 310-40, "Troubled Debt Restructurings by Creditors." These modifications include short-term (i.e., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are
insignificant. The Company's charge-off
policy is to continuously review all impaired loans to monitor the Company's ability to collect them in full at the applicable maturity date and/or in
accordance with terms of any restructurings. For loans
which are collateral dependent, or deemed to be uncollectible, any shortfall in the fair value of the collateral relative to the recorded investment
in the loan is charged off. The amount charged-off
conforms to the amount necessary to comply with GAAP. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of
existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured
using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Management is required to assess whether a valuation allowance should be established on the net deferred tax assets based on the consideration of all available evidence using a more likely than not standard. In its evaluation, management considers taxable loss
carry-back availability, expectation of sufficient taxable
income, trends in earnings, the future reversal
of temporary differences, and available tax planning
strategies. Table of Contents 47
2022 10-K
The Company recognizes positions taken
or expected to be
taken in a tax
return in accordance with existing accounting guidance on income taxes which prescribes a recognition threshold and measurement process. Interest and penalties on tax liabilities, if any,
would be recorded in interest expense and other operating
non-interest expense, respectively. Other than temporary impairment The Company reviews investments quarterly for other than temporary impairment ("OTTI"). The following primary factors are considered for securities identified for OTTI testing: percent decline in fair value, rating downgrades,
subordination, duration, the Company's ability to hold the debt security, and the ability of the issuers to pay all amounts
due in accordance with the contractual terms. Prices obtained from pricing services are usually not adjusted. Based on our
internal review procedures
and the fair values
provided by the pricing
services, we believe that
the fair values provided
by the pricing services are consistent with the principles of ASC Topic 820, Fair Value Measurement. The Company may at times validate the observed prices using the observed prices for similar securities to determine the fair value of its securities. Changes in the fair values, as
a result of deteriorating economic conditions
and credit spread changes, should only
be temporary. Further, management believes that the Company's other sources of liquidity, as well as the cash flow from principal and interest payments from its securities portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity. Segment Reporting Management monitors the revenue streams for
all its various products and services. The identifiable segments
are not material and operations are managed and financial performance is evaluated on an overall Company-wide basis. Accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment. Results of Operations General The following tables present selected balance sheet, income statement, and profitability ratios for the dates indicated (in thousands, except ratios): As ofDecember 31, 2022 2021 Consolidated Balance Sheets: Total assets$ 2,085,834 $ 1,853,939 Total loans (1)$ 1,507,338 $ 1,190,081 Total deposits$ 1,829,281 $ 1,590,379 Total stockholders' equity$ 182,428 $ 203,897 (1) Loan amounts include deferred fees/costs. Years EndedDecember 31, 2022 2021 Consolidated Statements of Operations: Net interest income before provision for credit losses$ 63,661 $ 52,496 Total non-interest income$ 5,228 $ 10,698 Total non-interest expense$ 39,309 $ 35,677 Net income$ 20,141 $ 21,077 Net income (loss) available to common stockholders$ 20,141 $ (70,585) Profitability: Efficiency ratio 57.06% 56.31% Net interest margin 3.38% 3.26% The Company's results of operations depend substantially on net interest income and
non-interest income. Other
factors contributing to the results of operations include our provision for credit losses,
non-interest expense, and
the provision for income taxes. Table of Contents 48
2022 10-K Net income for the year endedDecember 31, 2022 was$20.1 million , compared with net income of$21.1 million for the same period in 2021. The Company reported net income per diluted share for the year endedDecember 31, 2022 of$1.00 compared to net loss per diluted share for the same period in 2021 of$6.72 . The net loss per diluted share for the year ended 2021 was
attributable to the one-time
reduction in net income
available to common stockholders
reflecting the exchange and redemption of the Class C and Class D preferred shares. During the third quarter of 2021, the Company completed an exchange of the outstanding preferred shares for Class A common shares and thereafter redeemed the remaining outstanding preferred shares, at a liquidation value that exceeded book value, causing a one-time reduction in net income available to common stockholders of$89.6 million . AtDecember 31, 2022 , there were no issued and outstanding preferred shares. Adjusted diluted net income per common share (non-GAAP) for the year endedDecember 31, 2022 was$1.00 compared to adjusted net income per diluted share (non-GAAP) for the same period in 2021 of$1.81 . Adjusted net income per diluted share (non-GAAP) for the year ended 2021 excludes the$89.6 million one-time accounting impact of the
exchange and redemption of the
preferred shares. To see a reconciliation of non-GAAP measures, to GAAP measures refer to section below "Reconciliation and Management Explanatio n
of Non-GAAP Financial Measures".
Net Interest Income Net interest income is the difference between interest earned on interest earning assets and interest incurred on interest- bearing liabilities and is the primary driver of core earnings. Interest income is generated from interest and dividends on interest-earning assets, including loans, investment securities and other short-term investments. Interest expense is incurred from interest paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances and other borrowings. To evaluate net interest income, we measure and monitor (i) yields on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources, (iii) net interest spread, and (iv) net interest margin. Net interest spread is equal
to the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is
equal to the annualized net interest income divided by average interest -earning assets. Because
non-interest-
bearing sources of funds, such as non-interest-bearing deposits
and stockholders'
equity, also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources. Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning
assets and interest-bearing and
non-interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. The ALCO has in place
asset-liability management techniques
to manage major factors that affect net interest income and net interest margin. Table of Contents 49USCB Financial Holdings, Inc. 2022 10-K
The following table contains information related
to average balance sheet, average yields
on assets, and average costs of liabilities for the periods indicated (in thousands): Years EndedDecember 31, 2022 2021 Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate Assets Interest-earning assets: Loans (1)$ 1,341,693 $ 60,825 4.53 %$ 1,116,142 $ 48,730 4.37 % Investment securities (2) 470,508 9,346 1.99 % 403,677 7,886 1.95 % Other interest earnings assets 70,873 929 1.31 % 92,430 106 0.11 % Total interest-earning assets 1,883,074 71,100 3.78 % 1,612,249 56,722 3.52 % Non-interest earning assets 107,536 89,409 Total assets$ 1,990,610 $ 1,701,658
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits$ 64,835 86 0.13 %$ 52,379 59 0.11 % Saving and money market deposits 803,426 5,173 0.64 % 619,810 2,082 0.34 % Time deposits 220,319 1,509 0.68 % 235,127 1,531 0.65 % Total interest-bearing deposits 1,088,580 6,768 0.62 % 907,316 3,672 0.40 % Borrowings and repurchase agreements 38,463 671 1.74 % 36,000 554 1.54 % Total interest-bearing liabilities 1,127,043 7,439 0.66 % 943,316 4,226 0.45 % Non-interest bearing demand deposits 645,366 547,116 Other non-interest-bearing liabilities 30,449 27,142 Total liabilities 1,802,858 1,517,574 Stockholders' equity 187,752 184,084 Total liabilities and stockholders' equity$ 1,990,610 $ 1,701,658 Net interest income$ 63,661 $ 52,496 Net interest spread (3) 3.12 % 3.07 % Net interest margin (4) 3.38 % 3.26 % (1)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred
loan fees, net of deferred loan costs. (2)
At fair value except for securities held to maturity. This amount includes
FHLB stock. (3)
Net interest spread is the average yield on
total interest-earning assets minus the average
rate on total interest-bearing liabilities. (4)
Net interest margin is the ratio of net interest
income to total interest-earning assets. Net interest income before the provision
for credit losses was
million for the year ended December
31, 2022, an increase of$11.2 million or 21.3%, from$52.5 million for the year endedDecember 31, 2021 . This increase was primarily attributable to higher income from a larger loan portfolio and
higher yield on earning assets.
Included with loan interest income are PPP fees totaling
year endedDecember 31, 2022 and 2021, respectively.
PPP loan fees are fully recognized upon forgiveness. As of
million of PPP loans remaining in our portfolio. The net interest margin was 3.38% for the year endedDecember 31, 2022 and 3.26% for the year ended 2021. The overall and individual yields for interest-bearing assets and interest -bearing liabilities both increased in 2022 compared to 2021 due primarily to increases in market rates of interest. Provision for Credit Losses ACL represents probable incurred losses in our portfolio. We maintain an adequate ACL that can mitigate probable losses incurred in the loan portfolio. The ACL is increased by the provision for credit losses and is decreased by charge- offs, net of recoveries on prior loan charge-offs. There are multiple credit quality metrics that we use to base our determination of the amount of the ACL and corresponding provision for credit losses. These credit metrics evaluate the credit quality and level of credit risk inherent in our loan portfolio, assess non-performing loans and charge-offs levels,
considers statistical trends and economic conditions and other
applicable factors. Table of Contents 50
2022 10-K Provision for credit loss for the year endedDecember 31, 2022 , was$2.5 million compared to a net reduction of$160 thousand in provision expense for the same period in 2021. The primary driver of the increase was loan growth. The ACL as a percentage of total loans was 1.16%
at
31, 2021. See "Allowance for Credit Losses" below for further discussion on how the ACL was calculated for the periods presented. Non-Interest Income Net interest income and other types of recurring non-interest income are generated from our operations.
Our services and products generate service charges and fees, mainly from our depository accounts.
We also generate income from gain on sale of loans though our swap and SBA programs. In addition, we own insurance on several employees and generate income reflecting the increase in the cash surrender value of these policies. The following table presents the components of non-interest income for the dates indicated (in thousands): Years EndedDecember 31, 2022 2021 Service fees$ 4,010 $ 3,609 Gain (loss) on sale of securities available for sale, net (2,529) 214 Gain on sale of loans held for sale, net 891 1,626 Gain on sale of premises and equipment, net - 983 Loan settlement 161 2,500 Other non-interest income 2,695 1,766 Total non-interest income$ 5,228 $ 10,698 Non-interest income for the year endedDecember 31, 2022 was$5.2 million compared to$10.7 million for the same period in 2021. This decrease was primarily driven by$2.5 million loss on sale of securities in 2022 and one-time items that generated income in 2021 but not in 2022. One-time items in 2021 include a$2.5 million interest recovery related to a prior lending customer and a gain on the sale of a previously owned building for$983 thousand . In the fourth quarter of 2022, the Company executed a portfolio restructuring strategy which resulted in a sale of$17.0 million of its lower-yielding available-for-sale securities for a loss of$2.0 million . Proceeds from the sale will be reinvested in securities and loans
currently yielding higher than the securities that were sold. Non-Interest Expense The following table presents the components of non-interest
expense for the dates indicated (in thousands): Years EndedDecember 31, 2022 2021 Salaries and employee benefits$ 23,943 $ 21,438 Occupancy 5,058 5,257 Regulatory assessment and fees 930 783 Consulting and legal fees 1,890 1,454 Network and information technology services 1,806 1,466 Other operating 5,682 5,279 Total non-interest expense$ 39,309 $ 35,677 Non-interest expense for the year endedDecember 31, 2022 increased$3.6 million or 10.2%, compared to the same period in 2021. The increase is primarily due to an increase in salaries and employee benefit costs of$2.5 million for the year endedDecember 31, 2022 , compared to the same period in 2021. The headcount of full-time equivalent employees increased from 187 atDecember 31, 2021 to 191 atDecember 31, 2022 . Further, consulting and legal fees and other operating expenses increased$436 thousand or 30.0% and$403 thousand or 7.6%, respectively, during the year endedDecember 31, 2022 compared to the same period in 2021 due to our first full year of operations as a publicly reporting company.
The increase in salaries and employee
benefits, consulting and legal fees,
and other operating costs has
enabled us to support recent growth and has provided us
with the necessary technology and
required professionals to execute
our growth strategy. Table of Contents 51
2022 10-K
Provision for Income Tax Fluctuations in the effective tax rate reflect the effect of the differences in the inclusion or deductibility of certain income and expense for income tax purposes.
Therefore, future decisions on the investments we
choose will affect our effective tax rate. Changes in the cash surrender value of bank-owned life insurance policies for key employees, purchasing municipal bonds, and overall taxable income will be important elements in determining our effective tax rate. Income tax expense for the year endedDecember 31, 2022 was$6.9 million , compared to$6.6 million for the year
ended
tax rate for the year
ended
and for the year endedDecember 31, 2021 was 23.8%. For a further discussion on income taxes, see Note 6 "Income Taxes" to the Consolidated Financial Statements in this Annual Report on Form 10-K. Rate /Volume Analysis The table below sets forth information regarding changes in interest income and interest expense for the periods indicated (in thousands). For each category of
interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rate (changes in rate multiplied by old volume); (ii) changes in volume (changes in volume multiplied by old rate); and (iii) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume
variance.
Years Ended 2022 vs. 2021 Years Ended 2021 vs. 2020 Increase (decrease) due to change in Increase (decrease) due to change in Volume Rate Net Change Volume Rate Net Change Interest-earning assets: Loans (1)$ 9,847 $ 2,248 $ 12,095 $ 4,091 $ (2,439) $ 1,652 Investment securities (2) 1,306 154 1,460 5,288 (2,650) 2,638 Other interest earnings assets (25) 848 823 (51) (150) (201) Total increase (decrease) in interest income$ 11,128 $ 3,250 $ 14,378 $ 9,328 $ (5,239) $ 4,089 Interest-bearing liabilities: Interest-bearing demand deposits$ 14 $ 13 $ 27 $$19 $ (118) $ (99) Saving and money market deposits 617 2,474 3,091 960 (1,973) (1,013) Time deposits (96) 74 (22) (704) (2,474) (3,178) Borrowings and repurchase agreements 38 79 117 (321) (199) (520) Total increase (decrease) in interest expense 572 2,641 3,213 (46) (4,764) (4,810) Increase (decrease) in net interest income$ 10,556 $ 609 $ 11,165 $ 9,374 $ (475) $ 8,899 (1)
Average loan balances include non-accrual loans. Interest income
on loans includes accretion of deferred
loan fees, net of deferred loan costs. (2) At fair value except for securities held to maturity. This amount includes FHLB
stock. Both average yields on interest earning assets and average rates paid on interest bearing liabilities increased in 2022 as a compared to 2021, reflecting the changes in the macro interest rate environment. Analysis of Financial Condition Total
assets at
$317.3 million , or 26.7%, to$1.5 billion atDecember 31, 2022 compared to$1.2 billion atDecember 31, 2021 . The increase in loans includes purchased loans totaling$70.2 million including
deferred fees. Total deposits
increased by$238.9 million , or 15.0%, to$1.8 billion atDecember 31, 2022 compared to$1.6 billion atDecember 31, 2021 .Investment Securities The investment portfolio is used and managed to provide liquidity through cash flows, marketability and, if necessary, collateral for borrowings. The investment portfolio is also used as a tool to manage interest rate risk and the Company's capital market risk exposure. The
operating philosophy of the portfolio is
to maximize the Company's profitability,
taking into consideration the Company's risk appetite and tolerance, manage the assets composition
and diversification, and maintain adequate risk-based capital ratios. Table of Contents 52
2022 10-K The investment portfolio is managed in accordance with the Asset and Liability Management ("ALM") policy, which includes an investment guideline, approved by the Board. Such policy is reviewed at least annually or more frequently if deemed necessary, depending on market conditions and/or unexpected events. The investment portfolio composition is subject to change depending on the funding and liquidity needs of the
Company, and the interest risk
management objective directed by the ALCO. The portfolio of investments can be used to modify the duration of
the balance sheet. The allocation of cash into securities takes into consideration anticipated future cash flows (uses and sources) and all available sources of credit. Our investment portfolio consists primarily of securities issued byU.S. government-sponsored agencies, agency mortgage-backed securities, collateralized mortgage obligation securities, municipal securities, and other
debt securities, all with varying contractual maturities and coupons. Due to the optionality embedded in these securities, the final maturities do not
necessarily represent the expected life of the portfolio. Some of these securities will be called or paid down depending on capital market conditions and expectations. The investment portfolio is regularly reviewed by the Chief Financial Officer, Treasurer, or the ALCO of the Company to ensure an appropriate risk and return profile as well as for adherence to the investment policy. As of December
31, 2022, the investment portfolio consisted of available-for-sale ("AFS") and held-to-maturity
("HTM") debt securities.
During the third quarter of 2022, there were 26 investment securities that was
transferred from AFS to HTM with an amortized cost basis and fair value amount
of
On the date of transfer, these securities had a total net unrealized loss of$10.6 million . The transfer of the debt securities from the AFS to HTM category was made at fair value at the date of transfer. The unrealized gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the HTM securities. Such amounts are amortized
over the remaining life of the security.
There was no impact to net income on the date of transfer. The book value of the AFS securities is adjusted monthly
for unrealized gain or loss as a valuation allowance,
and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in stockholders' equity. Periodically, we may need to assess whether there have been any events or unexpected economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis ("OTTI"). If the impairment is deemed to be permanent, an analysis would be made considering many factors, including the severity and
duration of the impairment, the severity
of the event, our intent and
ability to hold the security for
a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, any related credit events, and for debt securities, external credit ratings and recent downgrades related to deterioration of credit quality. Securities on which there is an unrealized loss that is deemed to be OTTI are written down to fair value, with the write-down recorded as a realized loss under line item "Gain (loss) on sale of securities available-for-sale, net" of the Consolidated Statements of Operations. As ofDecember 31, 2022 , there are no securities which management has classified as OTTI. For further discussion of our analysis on impaired investment securities for OTTI, see Note 2 "Investment Securities" to the Consolidated Financial Statements in this Annual Report on Form 10-K. AFS and HTM investment securities
in aggregate decreased
to$418.8 million atDecember 31, 2022 from$524.2 million atDecember 31, 2021 . Investment securities decreased over the past year as repayments from securities were allocated to fund loan growth. Management reinvested the repayments of securities and income from the sale of securities into higher
yielding loans. As of December
31, 2022, securities with a
market value of
were pledged to secure public deposits. As ofDecember 31, 2022 , the Company did not have any tax-exempt securities in the portfolio. Table of Contents 53
2022 10-K The following table presents the amortized cost and fair value of investment securities for the dates indicated (in thousands):December 31, 2022 December 31, 2021 Available-for-sale: Amortized Cost Fair Value Amortized Cost Fair ValueU.S. Government Agency $ 10,177 $ 8,655 $ 10,564 $ 10,520 Collateralized mortgage obligations 118,951 95,541 160,506 156,829 Mortgage-backed securities - Residential 73,838 60,879 120,643 118,842 Mortgage-backed securities - Commercial 32,244 27,954 49,905 50,117 Municipal securities 25,084 18,483 25,164 24,276 Bank subordinated debt securities 15,964 14,919 27,003 28,408 Corporate bonds 4,037 3,709 12,068 12,550$ 280,295 $ 230,140 $ 405,853 $ 401,542 Held-to-maturity:U.S. Government Agency $ 44,914 $ 39,062 $ 34,505 $ 33,904 U.S. Treasury 9,841 9,828 - - Collateralized mortgage obligations 68,727 60,925 44,820 43,799 Mortgage-backed securities - Residential 42,685 38,483 26,920 26,352 Mortgage-backed securities - Commercial 11,442 10,777 3,103 3,013 Corporate bonds 11,090 10,013 13,310 13,089$ 188,699 $ 169,088 $ 122,658 $ 120,157 The following table shows the weighted average yields, categorized by contractual maturity, for investment securities
as of
Within 1 year After 1 year through 5 years After 5 years through 10 years After 10 years Total Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Amortized Cost Yield Available-for-sale:U.S. Government Agency $ - - $ - - $ - -$ 10,177 2.31%$ 10,177 2.31% Collateralized mortgage obligations - - - - - - 118,951 1.57% 118,951 1.57% MBS - Residential - - - - - - 73,838 1.65% 73,838 1.65% MBS - Commercial - - - - - - 32,244 2.01% 32,244 2.01% Municipal securities - - - - 1,000 2.05% 24,084 1.72% 25,084 1.74% Bank subordinated debt securities - - - - 15,964 4.76% - - 15,964 4.76% Corporate bonds - - 4,037 2.50% - - - - 4,037 2.50% $ - -$ 4,037 2.50%$ 16,964 4.60%$ 259,294 1.69%$ 280,295 1.88% Held-to-maturity:U.S. Government Agency $ - - 7,902 1.03% 20,354 1.46% 16,658 1.85% 44,914 1.53%U.S. Treasury 9,841 4.49% - - - - - - 9,841 4.49% Collateralized mortgage obligations - - - - - - 68,727 1.66% 68,727 1.66% MBS - Residential - - 4,554 1.84% 5,950 1.74% 32,181 2.12% 42,685 2.04% MBS - Commercial - - - - 3,088 1.62% 8,354 1.69% 11,442 1.67% Corporate bonds 1,515 2.25% 9,575 2.79% - - - - 11,090 2.71%$ 11,356 4.19%$ 22,031 1.96%$ 29,392 1.53%$ 125,920 1.81%$ 188,699 1.92% Loans Loans are the largest category of interest-earning assets on the Consolidated Balance Sheets, and usually provides
higher yields than the remainder of the Company's
interest-earning assets. Higher yields typically carry
inherent credit and liquidity risks in comparison to lower yielding assets. The Company manages and mitigates such risks in accordance with the credit and ALM policies, risk tolerance and balance sheet composition. Table of Contents 54
2022 10-K
The following table shows the loan portfolio composition
as of the dates indicated (in thousands):
December 31, 2022 December 31, 2021 Total Percent of Total Total Percent of TotalResidential Real Estate $ 185,636 12.3 %$ 201,359 16.9 %Commercial Real Estate 970,410 64.4 % 704,988 59.2 % Commercial and Industrial 126,984 8.4 % 146,592 12.3 % Foreign Banks 93,769 6.2 % 59,491 5.0 % Consumer and Other 130,429 8.7 % 79,229 6.6 % Total gross loans 1,507,228 100.0 % 1,191,659 100.0 % Less: Unearned income (110) 1,578 Total loans net of unearned income 1,507,338 1,190,081 Less: Allowance for credit losses 17,487 15,057 Total net loans$ 1,489,851 $ 1,175,024 Tot
al gross loans increased by
31, 2022 compared to
The most significant growth was in the commercial real estate and consumer and other loan pools, offset by a decline in the
residential real estate and commercial and industrial loan pools. Consumer
and other loans increased primarily as result of organic growth from our yacht lending business vertical created inJanuary 2022 . Commercial and industrial loans
decreased primarily because of continuing PPP loan forgiveness
as expected. Other than the shifts note above, we do not expect any significant changes over the foreseeable future in the composition of our loan portfolio or in our emphasis on commercial real estate lending. Our loan growth strategy since
inception has been reflective of the market in which we
operate and of our strategic plan as approved by the
Board. The growth experienced over the last couple of years is primarily due to implementation of our relationship-based banking model and the success of our relationship managers in competing for new business in a highly competitive
metropolitan area. Many of our
larger loan clients have lengthy
relationships with members of our senior
management team or our relationship managers that date back to former institutions. From a liquidity perspective, our loan portfolio provides us with additional liquidity due to repayments or unexpected prepayments. The following table shows maturities and sensitivity to interest rate changes for the loan portfolio atDecember 31, 2022 (in thousands): Due in 1 year or less Due in 1 to 5 years Due after 5 to 15 years Due after 15 years TotalResidential Real Estate $ 16,199 $ 9,411 $ 81,858 $ 78,168 $ 185,636 Commercial Real Estate 69,565 166,885 724,288 9,672 970,410 Commercial and Industrial 9,000 29,688 47,480 40,816 126,984 Foreign Banks 93,769 - - - 93,769 Consumer and Other 2,553 2,527 9,060 116,289 130,429 Total gross loans$ 191,086 $ 208,511 $ 862,686 $ 244,945 $ 1,507,228 Interest rate sensitivity: Fixed interest rates$ 160,781 $ 127,603 $ 144,441 $ 142,813 $ 575,638 Floating or adjustable rates 30,305 80,908 718,245 102,132 931,590 Total gross loans$ 191,086 $ 208,511 $ 862,686 $ 244,945 $ 1,507,228 The information presented in the table above is based upon the contractual maturities of the individual loans, which may be subject to renewal at their contractual maturity. Renewals will depend on approval by our credit department and balance sheet composition at the time of the analysis, as well as any modification of terms at the loan's maturity. Additionally, maturity concentrations, loan duration, prepayment speeds and other interest rate sensitivity measures are discussed,
reviewed, and analyzed by the ALCO. Decisions on term
rate modifications are discussed as well.
As ofDecember 31, 2022 , approximately 61.8% of the loans have adjustable/variable rates and 38.2% of the loans have fixed rates. The adjustable/variable loans re-price to different benchmarks and tenors in different periods of time. By
contractual characteristics, there are no
material concentrations on anniversary repricing. Additionally, it is
important to note Table of Contents 55
2022 10-K that most of our loans have interest rate floors. This embedded option protects the Company from a decrease in interest rates and positions us to gain in the scenario of higher interest rates. Asset Quality Our asset quality grading
analysis estimates the capability of
the borrower to
repay the contractual obligation of
the loan agreement as scheduled or at all. The Company's internal credit risk grading system is based on experiences with similarly graded loans. Internal credit risk grades are evaluated at least annually, or more frequently if deemed necessary. Internal credit risk ratings may change based on management's assessment of the results from the annual review, portfolio
monitoring and other developments observed with borrowers.
The internal credit risk grades used by the Company to
assess the credit worthiness of a loan are shown below: Pass - Loans indicate different levels of satisfactory financial
condition and performance.
Special Mention
- Loans classified as special mention have a potential weakness
that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's
credit position at some future date.
Substandard
- Loans classified as substandard are inadequately protected
by the current net worth and paying capacity of the obligator or of the collateral pledged, if
any. Loans so classified
have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are
not corrected.
Doubtful
- Loans classified as doubtful have all the weaknesses
inherent in those classified at substandard, with the added characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss
- Loans classified as loss are considered uncollectible. Loan credit exposures by internally assigned grades are
as follows for the dates indicated (in thousands):
December 31, 2022 Pass Special Mention Substandard Doubtful TotalResidential Real Estate $ 185,636 $ - $ - $ -$ 185,636 Commercial Real Estate 967,465 - 2,945 - 970,410 Commercial and Industrial 126,177 - 807 - 126,984 Foreign Banks 93,769 - - - 93,769 Consumer and Other 130,233 - 196 - 130,429$ 1,503,280 $ -$ 3,948 $ -$ 1,507,228 December 31, 2021 Pass Special Mention Substandard Doubtful TotalResidential Real Estate $ 196,778 $ -$ 4,581 $ -$ 201,359 Commercial Real Estate 703,349 1,222 417 - 704,988 Commercial and Industrial 146,039 - 553 - 146,592 Foreign Banks 59,491 - - - 59,491 Consumer and Other 79,005 - 224 - 79,229$ 1,184,662 $ 1,222 $ 5,775 $ -$ 1,191,659 Table of Contents 56USCB Financial Holdings, Inc. 2022 10-K Non-Performing Assets The following table presents non-performing assets as
of
ratios):
2022
2021
Non-accrual loans, less non-accrual TDR loans $ -$ 1,190 Non-accrual TDRs - - Loans past due over 90 days and still accruing - - Total non-performing loans - 1,190 Other real estate owned - - Total non-performing assets $ -$ 1,190 Asset quality ratios: - - Allowance for credit losses to total loans 1.16% 1.27% Allowance for credit losses to non-performing loans 0.00% 1,265.00% Non-performing loans to total loans 0.00% 0.10% Non-performing assets include all loans categorized as non-accrual or restructured, impaired securities, non-accrual troubled debt restructurings ('TDRs"), OREO and other repossessed assets. Problem loans for which the collection or
liquidation in full is reasonably uncertain
are placed on a non-accrual status. This
determination is based on current existing facts concerning collateral values and the paying capacity of the borrower. When the collection of the full contractual balance is unlikely, the loan is placed on non-accrual to avoid overstating the Company's income for a loan with increased credit risk. If the principal or interest on a commercial loan becomes due and unpaid for 90 days or more, the loan is placed on non-accrual status as of the date it becomes 90 days past due and remains in non-accrual status until it meets the criteria for restoration to accrual status. Residential loans, on the other hand, are placed on non-accrual status when the principal or interest becomes due and unpaid for 120 days or more and remains in non-accrual status until it meets the criteria for restoration to accrual status. Restoring a loan to accrual status is possible when the borrower resumes payment of all principal and interest payments for a period of six months and the Company has a documented expectation of repayment of the remaining contractual principal and interest or the loan becomes secured and in the process of collection. A TDR is a debtor that is experiencing financial difficulties and the Company grants a concession. This determination
is performed during the annual review process or whenever problems
are surfacing regarding the client's ability to repay in accordance with the original terms of the loan or line of credit. In general, a borrower that can obtain funds from sources other than the Company at market interest rates at or near those for non-troubled debt is not involved in a troubled debt restructuring. The concessions are given to the debtor in various forms, including interest rate reductions, principal forgiveness, extension of maturity date, waiver, or deferral of payments and other concessions intended to minimize potential losses. The following tables present performing and non-performing TDRs for the dates indicated (in thousands):December 31, 2022 Accruing Non-Accruing TotalResidential Real Estate $ 7,206 $ -$ 7,206 Commercial Real Estate 393 - 393 Commercial and Industrial 82 - 82 Consumer and Other 196 - 196$ 7,877 $ -$ 7,877 December 31, 2021 Accruing Non-Accruing TotalResidential Real Estate $ 7,815 $ -$ 7,815 Commercial Real Estate 696 - 696 Commercial and Industrial 141 - 141 Consumer and Other 224 - 224$ 8,876 $ -$ 8,876
The Company had allocated
for TDR loans atDecember 31, 2022 and 2021, respectively.
There was no commitment to lend additional funds to
these TDR customers. Table of Contents 57USCB Financial Holdings, Inc. 2022 10-K
Charge-offs on TDR loans for the years ended
2022 and 2021 were$0 and$18 thousand , respectively. There were no defaults on TDR loans atDecember 31, 2022 and 2021 within the prior 12 months . The Company did not have any new TDR loans for the year endedDecember 31, 2022 . There were no TDRs or modifications due to COVID-19 as ofDecember 31, 2022 . For further discussion on non-performing loans, see Note 3 "Loans" to the Consolidated Financial Statements in this Annual Report on Form 10-K. Allowance for Credit Losses In determining the balance of the allowance account, loans are pooled by product segments with similar risk
characteristics and management
evaluates the ACL on each segment and on a regular basis to maintain the allowance at an adequate level based on factors which, in management's judgment, deserve current recognition in estimating credit losses. Such factors include changes in prevailing economic conditions, historical loss experience, delinquency trends,
changes in the composition and size of the loan portfolio and
the overall credit worthiness of the borrowers. Additionally, qualitative adjustments are made to the ACL when, based on management's judgment, there are factors
impacting the allowance estimate not considered by the
quantitative calculations.
The following table presents ACL and net charge-offs to average loans by
type for the periods indicated (in thousands):Residential Real Estate Commercial Real Estate Commercial and Industrial Foreign Banks Consumer and Other TotalDecember 31, 2022 : Beginning balance$ 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 Average loans$ 193,368 $ 842,914 $ 127,473 $ 81,421 $ 96,517 $ 1,341,693 Net charge-offs to average loans (0.02)% - 0.07% - 0.01% 0.00%December 31, 2021 : Beginning balance$ 3,408 $ 9,453 $ 1,689 $ 348 $ 188 $ 15,086 Provision for credit losses (919) (695) 955 109 390 (160) Recoveries 238 - 149 - 5 392 Charge-offs (229) - (18) - (14) (261) Ending Balance$ 2,498 $ 8,758 $ 2,775 $ 457 $ 569 $ 15,057 Average loans$ 212,867 $ 654,723 $ 153,763 $ 52,187 $ 42,602 $ 1,116,142 Net charge-offs to average loans - - (0.08)% - 0.02% (0.01)% Table of Contents 58USCB Financial Holdings, Inc. 2022 10-K The following table presents ACL by type and its individual percentage to total loans for the periods indicated (in thousands):December 31, 2022 2021 Loan Category Allowance % of Loans in Each Category to Total Loans Allowance % of Loans in Each Category to Total LoansResidential Real Estate $ 1,352 12.3 %$ 2,498 16.9 %Commercial Real Estate 10,143 64.4 % 8,758 59.2 % Commercial and Industrial 4,163 8.4 % 2,775 12.3 % Foreign Banks 720 6.2 % 457 5.0 % Consumer and Other 1,109 8.7 % 569 6.6 % Total$ 17,487 100.0 %$ 15,057 100.0 % Bank-Owned Life Insurance AtDecember 31, 2022 , the combined cash surrender value of all bank-owned life insurance ("BOLI") policies was$42.8 million . Changes in cash surrender value are recorded in non-interest income on the Consolidated Statements of Operations. In 2022, the Company maintained BOLI policies with five insurance carriers. The Company is the beneficiary of these policies. Deposits Customer deposits are the primary funding source for the Bank's growth. Through our network of banking centers, we offer a competitive array of deposit
accounts and treasury management services designed
to meet our customers' business needs. Our primary deposit customers are SMBs, and the personal business of owners and operators of these SMBs, as
well as the retail/consumer relationships of the employees
of these businesses. Our focus on quality and customer
service
has created a strong brand recognition within
our depositors, which reflects in the composition
of our deposits; most of our funding sources are core deposits. In addition to our banking centers network, we developed business verticals to diversify our portfolio in different specialty industries and
we offer public fund deposit products
to municipalities and public agencies in our geographical footprint. Furthermore, our personal and private banking management line of business is focused on the needs of the owners and operators of our business customers, offering a suite of checking, savings, money market and time deposit accounts, and utilizing superior client service to build and expand client relationships. A unique aspect of our business model is our ability to offer correspondent services to banks inCentral America and theCaribbean . The following table presents the daily average balance and average rate paid on deposits by category as ofDecember 31, 2022 and 2021 (in thousands, except ratios): Twelve Months EndedDecember 31, 2022 2021 Average Balance Average Rate Paid Average Balance Average Rate Paid Non-interest bearing demand deposits$ 645,366 0.00%$ 547,116 0.00% Interest-bearing demand deposits 64,835 0.13% 52,379 0.11% Saving and money market deposits 803,426 0.64% 619,810 0.34% Time deposits 220,319 0.68% 235,127 0.65%$ 1,733,946 0.39%$ 1,454,431 0.25% To tal average deposits for the year endedDecember 31, 2022 was$1.7 billion ,
an increase of
or 19.2% over total average deposits of$1.5 billion for the same period in 2021. Our focus on demand deposits resulted in an increase
in average balances of
or 18.0%, in non-interest bearing demand deposits and an increase of
when comparing the average balances for the
years endedDecember 31, 2022 and 2021. The uninsured deposits are estimated based on theFDIC deposit insurance limit of$250 thousand for all deposit accounts at the Bank per account holder. Total estimated uninsured deposits were$1.1 billion and$897.8 million at Table of Contents 59USCB Financial Holdings, Inc. 2022 10-KDecember 31, 2022 and 2021, respectively.U.S. Century Bank maintains a well-diversified deposit base. Our top 15 depositors only hold 12% of our total portfolio. As ofDecember 31, 2022 , 39% of our deposits are estimated to beFDIC - insured. Our public funds are 11% of total deposits and are partially collateralized. The estimated average account size of our deposit portfolio is$95 thousand . Time deposits with balances of$250 thousand or more totaled$122.9 million and$119.4 million at December
31, 2022 and 2021, respectively.
Critical elements of our liquidity
risk management include: effective corporate governance consisting of
oversight by the Board and ALCO and active involvement by senior management; appropriate strategies, policies, procedures, and limits used to identify and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the
complexity and business activities of the Company; active management of intraday liquidity and collateral; an appropriately diverse mix
of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the institution's liquidity risk management process. We expect funds to be available from several basic banking activity sources, including the core deposit base, the
repayment and maturity of loans and investment security
cash flows. Other potential funding sources include
federal funds purchased, brokered certificates of deposit, listing certificates of deposit, Fed funds lines and borrowings from the FHLBAtlanta . Accordingly, our liquidity resources were at sufficient levels to
fund loans and meet other
cash needs as necessary. The following table shows scheduled maturities of uninsured time deposits as ofDecember 31, 2022 (in thousands): Three months or less$ 10,669 Over three through six months 17,573 Over six though twelve months 29,891 Over twelve months 23,840$ 81,973 Borrowings As a member of the FHLBAtlanta , we are eligible to obtain advances with various terms and conditions. This accessibility of additional funding allows us to efficiently and timely meet both expected and unexpected outgoing cash flows and collateral needs without adversely affecting
either daily operations or the financial condition
of the Company. Outstanding fixed-rate advances from the FHLB were at$46.0 million and$36.0 million , as ofDecember 31, 2022 , andDecember 31, 2021 , respectively. The weighted average rate for outstanding FHLB advances atDecember 31, 2022 was
2.60%. Most of the advances are due in 2023.
Table of Contents 60USCB Financial Holdings, Inc. 2022 10-K
The following table presents the FHLB fixed rate advances
as ofDecember 31, 2022 (in thousands): AtDecember 31, 2022 Interest Rate Type of Rate Maturity Date Amount 2.05% FixedMarch 27, 2025 $ 10,000 1.07% FixedJuly 18, 2025 6,000 1.04% FixedJuly 30, 2024 5,000 0.81% FixedAugust 17, 2023 5,000 4.17% FixedJanuary 13, 2023 20,000$ 46,000 AtDecember 31, 2021 Interest Rate Type of Rate Maturity Date Amount 0.81% FixedAugust 17, 2023 $ 5,000 1.04% FixedJuly 30, 2024 5,000 2.05% FixedMarch 27, 2025 10,000 1.91% FixedMarch 28, 2025 5,000 1.81% FixedApril 17, 2025 5,000 1.07% FixedJuly 18, 2025 6,000$ 36,000 We have also established Fed Funds lines of credit with our upstream correspondent banks to manage temporary fluctuations in our daily
cash balances. As of
2022, there were no
outstanding balances under the Fed
Funds
line of credit. Off-Balance Sheet Arrangements We engage in various financial transactions in our operations that, under GAAP, may not be included on the balance sheet. To meet the financing needs of our customers we may
include commitments to extend
credit and standby letters of credit. To a varying degree, such commitments involve elements of credit, market, and interest rate risk in excess of the amount recognized in the balance sheet. We use more conservative credit and collateral policies in making these credit commitments as we do for on-balance sheet items. We are not aware of any accounting loss to be incurred by funding these commitments; however,
we maintain an allowance for
off-balance sheet credit risk
which is recorded under other
liabilities
on the Consolidated Balance Sheets. Since commitments associated with letters of
credit and commitments to extend
credit may expire unused, the
amounts shown do not necessarily reflect the actual future cash funding requirements. The following table presents lending related commitments outstanding as ofDecember 31, 2022 and 2021 (in thousands): 2022 2021 Commitments to grant loans and unfunded lines of credit$ 95,461 $ 134,877 Standby and commercial letters of credit 4,320 6,420 Total$ 99,781 $ 141,297 Commitments to extend credit are agreements to lend funds to a client, as long as there is no violation of any condition established in the contract, for a specific purpose. Commitments generally have variable interest rates, fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn, the total commitment amounts disclosed above do not necessarily represent future cash requirements. Unfunded lines of credit represent unused portions of credit facilities to our current borrowers that represent no change in credit risk in our portfolio. Lines
of credit generally have variable interest
rates. The maximum potential amount
of future payments we could be required to make is represented by the contractual amount of the commitment, less the amount of any advances made. Letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. In the event of nonperformance by the
client in accordance with the terms
of the agreement with the third party,
we would be required to fund the commitment. If the commitment is funded, we would be entitled to seek recovery from the client from the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash or marketable securities. Table of Contents 61
2022 10-K
Asset and Liability Management Committee The asset and liability management committee of our Company, or ALCO, consists of members of senior management and our Board. Senior management is responsible for
ensuring in a timely manner that Board
approved strategies, policies, and procedures for managing and mitigating risks are appropriately executed within the designated lines of authority and responsibility. ALCO oversees the establishment, approval, implementation, and review of interest rate risk, management, and
mitigation strategies, ALM related policies, ALCO procedures
and risk tolerances and appetite. While some degree of interest
rate risk ("IRR") exposure is inherent
to the banking business, our ALCO
has established sound risk management practices in place to identify, measure, monitor and mitigate IRR exposures. When assessing the scope of IRR exposure and impact on the consolidated balance sheet, cash flows and income statement, management considers both earnings and economic impacts. Asset price variations, deposits volatility and
reduced earnings or outright losses could adversely affect
the Company's liquidity,
performance, and capital adequacy. Income simulations are used to assess the impact of changing rates on earnings under different rates scenarios and time horizons. These simulations utilize both instantaneous and parallel changes in the level of interest rates, as well as
non-parallel changes such as changing slopes (flat and steeping) and
twists of the yield curve, Static simulation models are based on current exposures and
assume a constant balance sheet with
no new growth. Dynamic simulation analysis is
also
utilized to have a
more comprehensive assessment
on IRR. This simulation relies on detailed assumptions outlined in our
budget and strategic plan, and in assumptions regarding changes in
existing lines of business, new business, management strategies and client expected behavior. To have a more complete picture of IRR, the Company also evaluates the economic value of equity, or EVE. This assessment allows us to measure the degree to which the economic values will change under different interest rate
scenarios. The economic value of equity approach focuses on
a longer-term time horizon and captures all
future cash flows expected from existing assets and liabilities.
The economic value model utilizes a
static approach in that the analysis does not incorporate new business; rather,
the analysis shows a snapshot in time of the risk
inherent in the balance sheet. Market and Interest Rate Risk Management
According to our ALCO model, as of
liability sensitive bank for year one modeling and asset sensitive for year two modeling.
Asset sensitivity indicates that our
assets generally reprice faster than
our liabilities, which results in a favorable impact to net interest income when market interest rates increase.
Liability sensitivity indicates that our liabilities generally reprice faster than our assets, which results in a favorable impact to net interest income when market interest rates decrease. Many assumptions are used to calculate the impact of interest rate variations on our net interest income, such as asset prepayment speeds, non-maturity deposit price sensitivity, pricing correlations, deposit truncations and decay rates, and key interest rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most likely will, differ from static measures results. In addition, static measures like EVEs do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates or client deposit behavior. As part of our ALM strategy and policy, management has the ability to modify the balance sheet to either increase asset duration and decrease liability duration to reduce asset sensitivity, or to decrease asset duration and increase liability duration in order to increase asset sensitivity. According to our model, as ofDecember 31, 2022 , the NIM will remain fairly stable for static rate scenarios (-400 basis points: +400 basis points). For the static forecast for year one, the estimated NIM will decrease from 3.38% base case scenario to 3.20% under a +400-basis
points scenario. Additionally, utilizing an economic
value of equity, or EVE, approach, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model. This measures the difference between the economic value of our assets and the economic value of our liabilities, which is a proxy for our liquidation value. According to our balance sheet composition, and as expected, our model stipulates that an increase of interest rates will have a negative impact on the EVE. Results and analysis are presented quarterly to
the ALCO, and strategies are reviewed and refined. Additionally, in the last couple of quarters we
have been reducing our asset
sensitivity by extending asset duration.
This has reduced our NII volatility for the first and second year in the analysis and has helped us to maintain the NII in accordance with ALCO expectations. Table of Contents 62
2022 10-K Liquidity Liquidity is defined as a Company's capacity to meet its cash and collateral obligations at a reasonable
cost. Maintaining an adequate level of liquidity depends on the Company's ability to efficiently meet both expected and
unexpected cash flow and collateral needs without adversely affecting
either daily operations or the financial condition of
the Company. Liquidity risk is the risk that we will be unable to meet our short-term and long-term obligations as they become due because of an inability to
liquidate assets or obtain adequate funding on
acceptable terms. The Company's obligations, and the funding sources used
to meet them, depend
significantly on our business mix, balance
sheet structure and composition, credit quality of our assets and the cash flow profiles of our on- and off-balance sheet obligations. In managing inflows and outflows, management regularly monitors situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints on the ability to convert assets (particularly investments) into cash or in accessing sources of funds (i.e., market liquidity), and contingent
liquidity events. Management
presents to the ALCO, on a quarterly basis, liquidity stress tests foll
owing the scenarios described in the Bank's
contingency funding plan.
Changes in macroeconomic conditions or exposure
to credit, market, operational, legal
and reputational risks, including cybersecurity risk could also affect the Company
's liquidity risk profile unexpectedly
and are considered in the assessment of liquidity and ALM framework. Management has established
a comprehensive and
holistic management process for
identifying, measuring, monitoring and mitigating liquidity risk. Due to its critical importance to the viability of the Company, liquidity risk management is
integrated into our risk management processes and ALM
policy.
Critical elements of our liquidity
risk management include: effective corporate governance consisting of
oversight by the Board and ALCO and active involvement by senior management; appropriate strategies, policies, procedures, and limits used to identify and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the
complexity and business activities of the Company; active management of intraday liquidity and collateral; an appropriately diverse mix
of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the institution's liquidity risk management process. We expect funds to be available from several basic banking activity sources, including the core deposit base, the
repayment and maturity of loans and investment security
cash flows. Other potential funding sources include
federal funds purchased, brokered certificates of deposit, listing certificates of deposit, Fed funds lines and borrowings from the FHLBAtlanta . Accordingly, our liquidity resources were at sufficient levels to fund loans and meet other cash needs as necessary. Table of Contents 63
2022 10-K Capital Adequacy As ofDecember 31, 2022 , the Bank was well capitalized under theFDIC's prompt corrective action framework. Additionally, we follow the capital conservation buffer framework, and according to our actual ratios the Bank exceeds the capital conversation buffer in all capital ratios as ofDecember 31, 2022 . The following table presents the capital ratios for
both the Bank and the Company at
and 2021 (in thousands, except ratios): ActualMinimum Capital Requirements To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount RatioDecember 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 %December 31, 2021 : (1) Total risk-based capital$ 186,735 14.92 %$ 100,125 8.00 %$ 125,157 10.00 % Tier 1 risk-based capital$ 171,484 13.70 %$ 75,094 6.00 %$ 100,125 8.00 % Common equity tier 1 capital$ 171,484 13.70 %$ 56,321 4.50 %$ 81,352 6.50 % Leverage ratio$ 171,484 9.55 %$ 71,825 4.00 %$ 89,781 5.00 % Impact of Inflation Our Consolidated Financial Statements and related notes have been prepared in accordance withU.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased cost of operations.
Unlike most industrial companies,
nearly all our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by
relatively lower interest rates.
As market interest rates rise or fall in relation to the rates earned on loans and investments, the value of these assets decreases or increases respectively. Inflation can also impact core non-interest expenses
associated with delivering the Company's
services.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Note 1 "Summary of Significant Accounting Policies" in the Consolidated Financial Statements of this Annual Report on Form 10-K. Table of Contents 64
2022 10-K
Reconciliation and Management Explanation of Non
-GAAP Financial Measures Management has included these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating the Company's underlying performance trends. Further, management uses these measures in managing and evaluating the Company's business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GA AP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies. The Company believes these non-GAAP measurements are key indicators of the earnings power of the Company. The following table reconciles the non-GAAP financial measurement of
operating net income available to common stockholders
for the periods presented (in thousands,
except per share data): As of and for the years endedDecember 31, 2022 2021 Pre-Tax Pre-Provision ("PTPP") Income: Net income$ 20,141 $ 21,077 Plus: Provision for income taxes 6,944 6,600 Plus: Provision for (recovery of) credit losses 2,495 (160) PTPP income$ 29,580 $ 27,517 PTPP Return on Average Assets: PTPP income$ 29,580 $ 27,517 Average assets$ 1,990,610 $ 1,701,658 PTPP return on average assets 1.49% 1.62% Operating Net Income: Net income$ 20,141 $ 21,077 Less: Net gain (loss) on sale of securities (2,529) 214 Less: Tax effect on sale of securities 641 (52) Operating net income$ 22,029 $ 20,915 Operating PTPP Income: PTPP income$ 29,580 $ 27,517 Less: Net gain (loss) on sale of securities (2,529) 214 Operating PTPP Income$ 32,109 $ 27,303 Operating PTPP Return on Average Assets: Operating PTPP income$ 32,109 $ 27,303 Average assets$ 1,990,610 $ 1,701,658 Operating PTPP Return on average assets
1.61%
1.60%
Operating Return on Average Assets: Operating net income$ 22,029 $ 20,915 Average assets$ 1,990,610 $ 1,701,658 Operating return on average assets 1.11% 1.23% Table of Contents 65
2022 10-K Years EndedDecember 31, 2022 2021 Adjusted Net Income Available to Common Stockholders: Net income (GAAP)$ 20,141 $ 21,077 Less: Preferred dividends - 2,077 Less: Exchange and redemption of preferred shares - 89,585 Net income (loss) available to common stockholders (GAAP) 20,141 (70,585) Add back: Exchange and redemption of preferred shares - 89,585 Adjusted net income available to common stock (non-GAAP)$ 20,141 $ 19,000 Weighted average shares outstanding: Class A common stock Basic 19,999,323 10,507,530 Diluted 20,176,838 10,507,530 Diluted EPS: Class A common stock Net income (loss) per diluted share (GAAP)$ 1.00 $ (6.72) Add back: Exchange and redemption of preferred shares - 8.53
Adjusted net income available to common stockholders per diluted share (non-GAAP)
$ 1.00 $ 1.81 Item 7A.
Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company,
we are not required to provide the information required by
this item. Table of Contents 66
2022 10-K
© Edgar Online, source