CMS Case Study

Current Position Assessment - 3/31/2021

Balance Sheet: The balance sheet increased to $70 million to $790 million in the first quarter, as non-maturity deposit inflows (primarily high tier NOW, and DDA and to a lesser extent MMDA and Savings balances) funded investment purchases (primarily MBS) with excess balances settling in overnight cash. Furthermore, asset and liability mix shifts occurred as loan runoff (including PPP forgiveness) also accumulated in cash balances/supported investment purchase activity while time deposit maturities were replaced by non-maturity deposits and retail repos. The increase in lower yielding cash combined with loan origination yields below existing portfolio averages drove the aggregate asset yield down by 25bps to 2.70%.. Note, extension in the MBS/ CMO portfolio due to the sell-off in longer term market rates over the quarter (which resulted in slower assumed prepayment speeds and amortization of premiums) mitigated the pressure on the overall asset yield. The cost of funds declined by 2bps to 0.31% due to the maturity/renewal of time deposits into lower current rate offerings coupled with the replacement of time deposits with lower costing non-maturity deposits. Accordingly, the balance sheet spread tightened by 22bps to 2.39%. It should be noted, that subsequent to quarter-end the Bank purchased $75 million bonds funded with cash. When factoring in subsequent activity the aggregate asset yield is bolstered by 10bps in the first month of the model. Liquidity: Higher liquid assets levels (cash and available security collateral) as a result of continued deposit inflows bolstered the Tier 1 Basic Surplus position by $47 million to $144 million, or 18% of assets. Note, an uptick in public deposit requiring additional MBS collateral coupled with an increase in the assumed deposit contingency reserve, due to non-maturity deposit inflows lessened the increase in the Tier 1 measure. Remaining loan-based borrowing capacity at the FHLB increased by $3 million (to $10 million) due to an increase in qualifying residential loan collateral. Accordingly, the Tier 2 Basic Surplus position increased by a net $50 million to $154 million, or 19% of assets. An additional $119 million in funding is available through the brokered deposit market (per 15% of assets internal policy limit) bringing the Tier 3 Basic Surplus to $272 million, or 34% of assets. All measures of liquidity continue to exceed internal policy guidelines and are sufficient to support balance sheet growth and/or unanticipated deposit outflows. Interest Rate Risk : The larger earning asset base combined with an increase in assumed cash extension (used to purchase bonds) and uptick in PPP related fee income (due to round 2 originations) outweighed the tightening of balance sheet spread, resulting in a higher starting level of projected net interest income (NII) when compared to the December review. As the simulation progresses, the benefit to comparative NII increases due to higher assumed investment cash flow replacement rates (due to the recent steepening of the yield curve). The current balance sheet composition remains asset sensitive with the benefit to rising rates decreasing over the quarter, due to the increase in assumed cash extension (used to fund bond purchases) resulting in lower fully rate sensitive cash levels compared to the prior model. The steepening of the yield curve also resulted in heightened falling rate exposure over the quarter, as asset cash flow replacement rates (which are tied to 5 10Y points on the curve) have a greater capacity to price downward compared to the prior model. All modeled exposures to earnings and EVE remain within policy risk guidelines with exception of the EVE Shock Down 100bp scenario. The observed pressure for the Shock Down 100bp EVE calculation is primarily triggered by the current economic conditions of historically low market rates and the functional cost assumption on non-maturity deposit valuations, which imply lower (or even negative) values on non-maturity deposits when compared to wholesale replacement funds.

Current Rates: Assuming a static asset size, NII is projected to trend modestly downward over the five-year simulation as investment and loan cash flow continuously replaces/resets at lower than portfolio yields which outpaces term funding rolling into lower current rates.

Rising Rates : Higher market rate environments suggest projected NII will outperform the Current Rates scenario from the outset of the model as asset cash flow cycling into elevated rates outweighs deposit rate increases and higher rollover costs on term funding maturities. Benefit in rising rate scenarios is dependent upon the timing and magnitude of higher rates as well as the stability of the deposit inflows that have occurred in the last 12 months. Falling Rates : NII is projected to trend modestly below the Current Rates environment in the near term as incremental assumed funding cost relief largely offsets pressure on asset yields. Thereafter, the projected downward trend in NII (below the Current Rates scenario) is more pronounced for the remainder of the simulation as funding cost declines slow while there is continued pressure on the replacement/repricing of fixed and adjustable-rate loan cash flow at lower rates.

Capital: As of 3/31/2021, the Leverage, Common Equity Tier 1, and Total Risk Based Capital ratios of 8.51%, 14.70%, and 15.95% respectively, remain well above both internal policy guidelines and regulatory minimums for “well capitalized” institutions.

Cloyd Bank & Trust - Page 4