CMS Case Study

Current Position Assessment - 12/31/2020

Balance Sheet: The balance sheet size expanded by $34 million to $720 million over the quarter, as non-maturity deposit inflows (primarily high tier NOW and MMDA balances) funded loan demand and covered time deposit and customer repo runoff. Excess funds bolstered the FRB cash position. Note, there was a mix shift within the loan portfolio as PPP loan forgiveness supported lending activity. The increase in lower yielding cash coupled with loan origination yields below current portfolio averages more than outweighed the shift from low-rate PPP loans into core loan growth, resulting in a 15bp decline in the aggregate asset yield to 2.94%. The cost of funds fell by 5bps to 0.33% driven by the maturity/ renewal of time deposits into lower current offering rates and to a lesser extent a reduction in secured retail costs. As such, the balance sheet spread tightened by 9bps to 2.61%. Liquidity: Higher liquid assets levels (mainly cash and to a lesser extent more available MBS collateral due to a reduction in public deposits requiring security pledging) elevated the Tier 1 Basic Surplus position by $32 million to $97 million, or 13% of assets. Non-maturity deposit inflows resulted a modest increase the deposit contingency reserve which mitigated the increase in Tier 1 measure over the quarter. Remaining loan based borrowing capacity at the FHLB increased by $4 million (to $7 million) due to an uptick in qualifying residential loan collateral. Accordingly, the Tier 2 Basic Surplus position increased by a net $36 million to $104 million, or 14% of assets. An additional $108 million in funding is available through the brokered deposit market (per 15% of assets internal policy limit) bringing the Tier 3 Basic Surplus to $212 million, or 29% of assets. All measures of liquidity continue to exceed internal policy guidelines. Interest Rate Risk: The impact of the larger earning asset base was largely offset by the tighter balance sheet spread and lower assumed asset replacement rates, leading to a relatively unchanged starting level of projected net interest income (NII) when compared to the September review. Excluding any PPP related fee income, December results perform similarly to the prior review as the simulation progresses. The balance sheet remains asset sensitive with the benefit to rising rates enhanced quarter-over-quarter due to the elevated cash position and growth in the non-maturity deposit base (exacerbated by the assumption changes in which all PPP loan cash flows are held in cash, and a portion of time deposit maturities migrate to less rate sensitive NOW C loyd Prime products). All modeled exposures to earnings and EVE remain within policy risk parameters with exception of the EVE Shock Down 100bp scenario. Policy contravention is influenced by the impact of the historically low market rate environment and functional cost assumption on the non-maturity deposit base, which is suggested to be less valuable than alternative wholesale funding sources (a conclusion that is not realistic and should be put into context when discussing and considering interest-rate risk strategies). Current Rates: Assumed fee income and spread generated from the PPP loan program over the first 2 years of the simulation results in a noticeable dow n ward trend in NII as the loans are forgiven and held in cash. Thereafter, NII is projected to trend modestly downward as loan cash flow continues to be replaced at lower than portfolio yields, outpacing term funding cost relief. Rising Rates: NII is projected to trend above the Current Rates environment over the life of the simulation as the asset base reprices/resets higher and to a greater extent than the less rate sensitive funding base. Falling Rates: NII is projected to trend along the Current Rates environment in the near-term as assumed funding cost relief offsets pressure on asset yields. Thereafter, NII is projected to decline below the Current Rates scenario for the remainder of the simulation as funding cost declines expire while there is continued pressure on the replacement/repricing of fixed and adjustable-rate loan cash flow at lower rates. Capital: As of 12/31/2020, 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 8.50% through 2021. Notwithstanding, capital levels, allowance for loan loss and credit conditions should be closely monitored.

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