43
USCB Financial Holdings, Inc.
Q1 2025 Form 10-Q
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”) is inherent to the banking business, we believe our ALCO implements
sound risk management practices to identify,
quantify,
monitor, and limit IRR exposures.
When assessing
the scope
of IRR
exposure
and
impact on
the consolidated
balance sheet,
cash
flows and
income
statement,
management
considers
both
earnings
and
economic
impacts.
Asset
price
variations,
deposit
volatility
and
reduced earnings or outright losses could adversely affect
the Company’s liquidity,
performance, and capital adequacy.
Income simulations
are used
to assess
the impact
of changing
rates on
earnings under
different rates
scenarios and
time horizons.
These simulations
utilize both
instantaneous and
parallel changes
in the
level of
interest rates,
as well
as
non-parallel changes such as
changing slopes (flat and steepening)
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
is also
utilized to have a
more comprehensive assessment
on IRR. This simulation
relies on detailed
assumptions outlined in
our
budget and strategic plan, and in assumptions regarding changes in
existing lines of business, new business, management
strategies and client expected behavior.
To
have
a
more
complete
picture
of
IRR,
the
Company
also
evaluates
the
economic
value
of
equity
(“EVE”).
This
assessment
allows
us
to
measure
the
degree
to
which
the
economic
values
will
change
under
different
interest
rate
scenarios (parallel and non-parallel). The economic value approach focuses on a longer-term time horizon and captures all
future cash flows expected
from existing assets and
liabilities. The economic value
model utilizes a static
approach in that
the analysis
does not
incorporate new
business; rather,
the analysis
shows a
snapshot in
time of
the risk
inherent in
the
balance sheet.
Market and Interest Rate Risk Management
According to our ALCO model, as of March
31, 2025, we had a neutral to slightly asset
sensitive balance sheet both for
year one,
and an
asset sensitivity
balance sheet
for year
two, using
the static
model. 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 (betas), pricing correlations, deposit truncations
and decay rates, and key interest rate drivers.
Because of the inherent use
of these estimates and
assumptions in the model,
our actual results may,
and most likely
will, differ from static measures results.
In addition, static measures like EVE
do not include actions that management
may
undertake to manage the risks in response to anticipated changes in interest rates or customer deposit behavior. As part of
our ALM strategy and policy, management
has the ability to modify the balance sheet to either increase asset duration and
decrease liability
duration to reduce
asset sensitivity,
or to decrease
asset duration and
increase liability duration
in order
to increase asset sensitivity.
According to our model, as of March 31, 2025, our balance sheet is neutral to slightly asset sensitive
for year one more
asset sensitivity and year two
under interest static rate scenarios (an
increase or decrease of 400 basis
points). This means
that the impact of rates variations will be minimal to our NIM. Additionally, utilizing an EVE approach, we analyze the risk to
capital from the
effects of
various interest rate
scenarios through
a long-term discounted
cash flow model.
This measures
the difference between
the economic value of
our assets and the
economic value of
our liabilities, which is
a proxy for our
liquidation value.
According to
our balance
sheet composition,
and as
expected, our
model stipulates
that an
increase in
interest rates will have a
negative impact on the EVE
and lower rates, a positive
impact. Results and analysis are presented
quarterly to the ALCO, and strategies are reviewed and defined.
Liquidity
Liquidity is defined
as a Company’s
capacity to meet
its cash and
collateral obligations at
a reasonable cost.
Maintaining
an adequate level of liquidity depends on the Company’s ability to
efficiently meet both expected and unexpected cash flow
and collateral needs without adversely affecting
either daily operations or the financial condition of the
Company.
Liquidity risk
is the
risk that
we will
be unable
to meet
our short-term
and long-term
obligations as
they become
due
because of an inability
to liquidate assets or
obtain relatively adequate funding. The
Company’s obligations, and the funding
sources
used
to
meet
them,
depend
significantly
on
our
business
mix,
balance
sheet
structure
and
composition,
credit
quality of our assets and the cash flow profiles of our on-
and off-balance sheet obligations.