CMS Case Study

Additionally, the Bank will measure a Tier 2 Basic Surplus/Deficit that includes net available loan collateral at FHLB, as well as a Tier 3 Basic Surplus/Deficit that includes the capital to access and utilize brokered CDs. It is the Bank’s policy to target liquidity minimums as follows: Parameter Policy Limit or Level 3 Risk Level 2 Risk Level 1 Risk Tier 1 Basic Surplus/Deficit 0.0% Minimum 1.5% Minimum 3.0% Minimum Tier 2 Basic Surplus/Deficit 4.0% Minimum 5.0% Minimum 6.0% Minimum Tier 3 Basic Surplus/Deficit 8.0% Minimum 9.0% Minimum 10.0% Minimum Liquidity and Funding Management is also addressed in Appendix A, B, and C of this policy. ALCO will monitor all ratios quarterly unless otherwise specified. Section 8. Interest Rate Risk Measurement and Management It is the Bank's objective to manage its exposure to interest rate risk, bearing in mind that we will always be in the business of taking on rate risk and that complete rate risk immunization is not possible. Also, it is recognized that as exposure to interest rate risk is reduced, this may come at a cost to current earnings via reduction of net interest margin. Interest rate risk (IRR) can result from:  Mismatch Risk: timing differences in the maturity/repricing of an institution's assets, liabilities, and off-balance sheet contracts  Option Risk: the effect of embedded options, such as call/put options, loan prepayments, periodic/lifetime caps and floors, and deposit withdrawals  Yield Curve Risk: unexpected shifts in the capital markets that affect both the slope and shape of the yield curve Given the various potential factors that may contribute to IRR, it is important the Bank maintain an appropriate process and set of measurement tools, which enables it to identify and quantify its primary sources of IRR. The Bank also recognizes that effective management of IRR includes an understanding of when potential adverse changes of net interest margin attributed to changing interest rates will flow through the profit and loss statement. Accordingly, the Bank will manage its position so that it monitors its exposure to net interest income over both a one year planning horizon (accounting perspective) and a longer-term strategic horizon (economic perspective). The Bank will monitor and manage both its short-term and long-term IRR exposures in the following manner: The Bank will use income simulations, an analysis of core funding utilization, and economic value of equity (EVE) simulations as its primary tools in measuring and managing IRR. These tools will be utilized to quantify the potential earnings impact of changing interest rates over a two year simulation horizon (income simulations) as well as identify expected earnings trends given longer term rate cycles (long term simulations, core funding utilizations, and EVE simulation). A standard gap report and funding matrix will also be utilized to provide supporting detailed information on the expected timing of cashflow and repricing opportunities. Model Assumption Development Any risk measurement system is only as useful as the reasonableness of the underlying assumptions. Accordingly, management will develop reasonable rate sensitivity assumptions that reflect their informed estimates regarding key pricing factors (e.g. how depositors and borrowers will react to changes in interest rates) and cashflow variation factors (e.g. prepayment estimates on loans). Assumptions used in the model will be reviewed/updated in conjunction with each  Basis Risk: difference in the behavior of rates for similarly gapped assets and liabilities

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Approved by Board of Directors 1/20/22