CMS Case Study

Alternative EVE Stress Methodology - 12/31/2020

Alternative Economic Value Stress Methodology

Basis/Rationale: Retail deposits are valuable because they often represent a cheap and stable funding source which can increase an institution’s financial performance (e.g. ROE/ROA) as well as its franchise value (core deposit premium). Earnings simulations assume constant non-maturity deposit volumes; however, an Economic Value of Equity (EVE) or Net Economic Value (NEV) model is based upon estimating all future cash flows associated with current non-maturity deposit account balances, including an assumed terminal life. Specifically, a primary EVE/NEV modeling assumption is the identification of when deposits on a “point in time” balance sheet will run off (decay). Deposit balances that run off slowly (longer average lives) are usually more valuable than deposits that decay more quickly (shorter average lives). Another key driver in the EVE/NEV model is the inclusion of functional costs on the deposit base. In the current low rate environment, the value of non-maturity deposits (relative to alternative funding sources) is often negligible, and can even be negative, especially when the cost of deposits includes an allocation of associated overhead costs (e.g. staffing, fixed assets, etc.). Sourced from the former OTS Pricing Tables, stated functional costs are: NIB accounts 2.57%, Transaction accounts 1.80%, Passbook accounts 1.39%, MMDA’s 0.86% and Retail CD’s 0.20%.

Behavior characteristics and costs can change. As a result, the following stress tests examine a substantial change to these key variables.

Detail :

Stress Test Scenario – Assumptions

Expected Results

1. Reduce current average life assumption on non-maturity deposits by 50%

 In comparison to average life assumption used: o Lower 0 shock EVE/NEV ratio

o Reduced benefit/increased exposure to rising rates o Increased benefit/decreased exposure to falling rates * Expected results may vary based upon average life assumptions and rate levels and/or the shape of the yield curve

 In comparison to a EVE/NEV w/functional costs: o Higher EVE/NEV ratio in all shock scenarios

2. Remove Functional costs on non-maturity and time deposit accounts.

Cloyd Bank & Trust - Page 43