CMS Case Study

Current Position Assessment - 9/30/2020

Balance Sheet: The total asset size contracted by $6 million over the quarter, to $686 million, as cash was used to cover deposit outflows (including both Non-Maturity Deposits and CDs). Shifts in mix also occurred on each side of the balance sheet as cash funded bond purchases (MBS and munis) while retail repurchase agreements partially replaced deposit runoff. The aggregate yield on assets declined by 4bps to 3.09% driven mainly by loan origination and refinance rates below existing portfolio averages. The cost of funds experienced 8bps of relief (declining to 0.39%) due to the maturity/renewal of time deposits into lower current rate offerings and reduction in higher costing CDs. Accordingly, the balance sheet spread widened by 4bps to 2.70%. Liquidity: Lower liquid assets levels, due to the reduction in cash coupled with an increase in demand on MBS collateral (resulting from an uptick in secured retail repos and muni deposits requiring pledging) lessened the Tier 1 Basic Surplus measure by $14 million over the quarter, to $64 million, or 9% of assets. This metric includes a $46 million reserve for deposit contingencies which was more-or-less unchanged since the prior review. Remaining loan based borrowing capacity at the FHLB fell by $3 million (to $4 million) due to lower amounts of qualifying loan collateral pledged, resulting in a Tier 2 Basic Surplus position of $68 million or 10% of assets. With an additional $103 million in funding flexibility via the brokered deposit market the Tier 3 Basic Surplus equates to $171 million or 25% of assets. All measures of liquidity continue to exceed internal policy guidelines and remain sufficient to support balance sheet growth and/or unanticipated deposit outflows Interest Rate Risk : While changes to balance sheet size and spread would suggest a relatively unchanged initial level of projected Net Interest Income (NII) relative to the prior review, the year one comparative NII measures lower due primarily to a reduction in assumed asset extension (cash into MBS) coupled with less assumed realized PPP fee income. In the second year of the simulation, projected NII drops further below last quarter’s results due to timing of CD maturities/MBS cash flow and assumed recycling into current lower rates. The interest rate risk profile continues to illustrate an asset sensitive posture with sustained flat and falling rate environments proving to be the worst-case scenario for the longer-term annual run rate of NII. All modeled exposures to NII remain within policy risk parameters. However, EVE results display a policy violation in the -100bp scenario due to the impact of the current low/flat yield curve and the functional cost assumption on non-maturity deposit valuations, resulting in a larger implied loss in the non-maturity deposit base.

Current Rates: NII is projected to trend downward throughout the entirety of the simulation as asset cash flow replacing/repricing into current lower rates outweighs the benefit of retail CD maturities being assumed to roll into lower than existing rates.

Rising Rates : Projected NII trends upward and above the Current Rates scenario throughout the five-year simulation as investment and loan cash flows reprice/replace into the elevated rate environment more than offset funding costs cycling upward.

Falling Rates : NII is projected to trend downward and slightly below the Current Rates scenario throughout the five-year simulation as higher levels of asset cash flow (driven by accelerated prepayment speeds) adjust into lower rates while funding cost relief remains limited relative to assumed floors on deposits. Capital: As of 9/30/2020, the Community Bank Leverage Ratio (CBLR) measures 9.00% (minimum ratio of 9% per guidance). As a result of the CARES Act, the minimum CBLR has been reduced to 8.00% through 2020. Notwithstanding, capital levels, allowance for loan loss and credit conditions should be closely monitored.

Cloyd Bank & Trust - Page 4