CMS Case Study

quarterly analysis, and the process of assumption development will be formerly discussed by the ALCO on an annual basis (or more frequently if significant assumption development process changes warrant it). Interest Rate Scenarios There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and, can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty, and is as much of an art form as it is a science. Additionally, this reality raises credibility questions regarding concepts such as a “most likely” scenario and/or the practice of forecasting future interest rates with an undue emphasis on the assumption that the current yield curve is a meaningful predictor of future interest rates. Accordingly, the Bank’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between the theoretical and the practical; especially given that the primary objective of the Bank’s overall asset/liability management process is to facilitate meaningful strategy development and implementation. Therefore, the Bank will model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios; the collective impact of which will enable the Bank to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined. Plausible rate scenarios must also capture the notion of “rational expectations” as it relates to how the impact of rate changes “are likely” to flow through the Bank’s actual earnings. With this as a backdrop, the Bank has designed its interest rate risk measurement activities to include the following core elements:  a set of “benchmark” rate scenarios  interest rate ramps and shocks  parallel and non-parallel yield curve shifts  a set of alternative scenarios, the nature of which will change based upon prevailing market conditions “Benchmark” Rate Scenarios Arguments can be made to perform numerous rate scenario simulations, with various increments of rate change levels, and under a variety of various assumptions. While this may or may not provide useful information, it can create confusion and noise, such that decision making is actually impeded rather than enhanced. It can also hinder the ability to meaningfully track and compare historical rate risk and the impact of executed strategies. Further, the cost of performing simulations that add little incremental value to the understanding and assessment of risk can bring into question the cost-benefit of such analyses. Because of this, net interest income simulations will always be analyzed at a minimum under three standard and plausible interest rate scenarios: Current/Flat Rates, and +/- 200bps parallel yield curve shift rate ramps over 12-months. These rising/falling rate scenarios are deemed appropriate because they are neither too modest (e.g. +/-100bps) or too extreme (e.g. +/-400bps) given economic/rate cycles that have unfolded in the last 25 years. Historical assessment of actual rate changes support that rate ramps appear to present a more realistic expectation for rate movements versus shocks. This analysis will also provide the foundation for historical tracking of interest rate risk. As discussed in the next section, the Bank might also prepare alternative scenarios, including a selected “shock” analysis, depending upon prevailing market conditions. EVE will be based on interest rate “shocks” of +/- 100bps, 200bps, and 300bps. Rate “shocks” are deemed more appropriate for EVE, which accelerates future interest rate risk into current capital via a present value calculation of all future cash flows from the bank’s existing inventory of assets and liabilities.

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Approved by Board of Directors 1/20/22