CMS Case Study

Investment/ALCO Committee Meeting Minutes 2/18/21

ALCO Committee Meeting February 18, 2021

The ALCO/Investment Committee meeting was held on February 18, 2021. Those in attendance were: Chairman of the Board , Four outside Directors , President/CEO , COO , CFO , Senior Loan Officer , and Frank of Darling Consulting Group. Mr. Chairman called the meeting to order. The committee discussed the industry-wide concerns in the current environment: • Deposit balances are still growing • Impact of additional Stimulus rounds is unknown • Acceleration of asset cash flows and continued increase in cash at 5-10 bps • Slowing loan pipelines and very competitive pricing given liquidity • Residential volume/Refi demand • Diminishing impact of deposit rate reductions resulting in NII sloping downward • Questions about credit quality and capital resiliency • Many preparing for potential losses to develop in 2021 or 2022 The Committee discussed that regardless of current market concerns, the Bank is still experiencing tremendous growth and excellent credit quality. While many businesses are struggling, others are doing very well. Management is cautiously optimistic about the year ahead and continues to impress upon lenders to stay in front of their borrowers in order to stay informed on how their business are adapting and progressing. Mr. Frank presented the Bank’s Balance Sheet changes, which showed significant growth for the quarter of $33MM, but a decline in spread of about .15%. Net loans were up $4MM, Fided Residential up $5MM, and CRE up $6MM. PPP loan paydowns amount to $14MM. Deposits were up $37MM with the growth in NMD inflows of $39MM. Repurchase agreements experienced normal fluctuations and were down $4MM. The impact of the quarterly Balance Sheet changes were higher levels of liquidity; similar starting NII with more pressure over time; increased asset sensitivity with higher NMDs, and a CD shift to Cloyd NOW with lower beta assumption to rising rates. Mrs. CFO stated that the Bank had grown another $50MM since 12/31, with all growth in NMD. The Committee discussed the Bank’s appetite/capacity for longer term loans and held the same opinion of continuing to hold high credit quality residential mortgage loans originated by mortgage department if the Refi wave continues. Mrs. CFO stated that the Bank had retained >$16MM for the quarter, and a total of $26MM for the year. Mr. Frank presented an alternative investment strategy comparing investing $40MM in discounted bonds – 10yr DUS & 30yr MBS vs $35MM of 15 yr. MBS at Premiums. The simulation assumed the discounted bond purchases at a weighted average yield of 1.50% and the premium 15 yr MBS at .85% and all purchases funded with cash. The impact in the base and down 100bps