CMS Case Study

Strategy Formulation - 12/31/2020

Objectives: 

Increase current earnings  Minimum capital ratios

- Tier 1 leverage ratio @ 7.50% - Risk-based capital @ 12.00%

 Maintain adequate liquidity - Targeted Total Basic Surplus > 15%  Maximum decline in Net Interest Income of 15% in +/- 200BP rate change over one-year period

Elements of Strategies : Capital  Update outlook on economy, credit conditions, and loan portfolio performance  Discuss growth outlook for 2021 and reassess credit loss buffers  Discuss 2 nd wave of COVID cases, potential for a 2 nd national shut down, and related impact on outlook for credit/capital/income Loan/Credit Issues and Trends  Discuss outlook for loan production (3-6 months expected strong) and price/volume break-even earnings dynamic  PPP outlook – forgiveness of PPP 1.0 ; game plan and expectations for PPP 2.0

 Update on prepayment/payoff cash flow headwinds  Assess capacity and appetite for added duration - Impact to IRR as rates rise and shift in deposit mix/balances (Covid related and typical historical patterns)

Deposits/Funding  Discuss recent strong NMD trends and outlook for accounts and balances - Impact of CARES Act 2.0…and potential for Deposit Surge 2.0 - Discuss reliability/longevity of 2020 liquidity surge if vaccine leads to shift in savings/spending behaviors  Cost of funds management – near bottom after recent lowering of rates, discuss room for lowering rates; time to reassess and/or update fee structure?

 Discuss wholesale funding strategies, as necessary (plenty of capacity at historic low rates)  Contingency liquidity risk management – discuss the value of “worst case” scenarios

Investments & Capital Markets  Bond market Update: (10yr USTs up 60bps since August trough. Purchased/sold MBS over quarter; purchase of “Premium” bonds - risk of negative yields  Discuss difficult investment choices…Premium risk vs. credit risk vs. duration risk vs. liquidity ( i.e., secondary market) risk

Other Discussion Items:  Discuss change in IRR profile year over year and new balance sheet within the balance sheet (Covid related impact)  Discuss key model assumptions and potential changes ahead  Review quarterly “sensitivity” stress testing EVE

Cloyd Bank & Trust - Page 36