CMS Case Study

Summary of Simulation Assumption Methodologies - 12/31/2020

ensure their scenarios are severe but plausible in light of the existing level of rates and the interest rate cycle.” With this as a backdrop, the Institution has designed its interest rate risk measurement activities to include the following core elements: Interest rate ramps and shocks Parallel and non-parallel yield curve shifts A set of “benchmark” rate scenarios A set of alternative rate 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. Because of this, net interest income simulations will always be analyzed at a minimum under three standard and plausible (“benchmark”) interest rate scenarios (to the extent current market rates allow): 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 30 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. Additional scenarios (e.g. steepening, flattening, prolonged, twists, etc.), are included to compliment the Benchmark analysis, depending upon the prevailing and/or prospective economic environment as well as the specific risk components embedded within the balance sheet. These additional scenarios, are provided to augment ALCO's understanding of the interest rate risk posture. EVE/NEV will be based on interest rate “shocks” of +/- 100bps, 200bps, 300bps, and 400bps. Rate “shocks” are deemed more appropriate for EVE/NEV, which accelerates future interest rate risk into current capital via a present value calculation of all future cash flows from the Institution’s existing inventory of assets and liabilities. In both the NII and EVE/NEV simulations, certain rate scenarios might be suspended or modified if the performance or if economic conditions make such scenarios mathematically improbable. In such cases, the rationale for the change will be discussed and ratified by the ALCO, and reported to the Board for approval. Market rates (treasury rates, swap rates, fed funds, etc.) are as of 02/05/2021 Loan rates are as of 2/9/2021 Deposit rates are as of 2/9/2021 A detailed summary of the changes can be found on the following page. 1. Assumed floors for Fed Funds, Treasury yields and SOFR are 0.01%. Prime is floored at 3.00%. All other market rates (e.g. LIBOR, FHLB, Brokered CD, AMERIBOR) are floored at 0.25% to reflect credit spread. If the current rate falls below 25bps then that rate becomes the assumed floor. 2. This quarter's NII model includes $26.6MM of PPP loans of which 85% will be forgiven in Q1/Q2 2021, with the remaining 15% amortized off evenly over the following 12 months. Accordingly, 100% of PPP loan cash flows are assumed to be parked in short-term cash (@ 0.10%). 3. The NII model also includes PPP fee income totaling $673K (following the same schedule as PPP forgiveness).

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