CMS Case Study

Investment/ALCO Committee Meeting Minutes 08/19/21

Management had continued with the same investment strategy previously agreed of deploying excess liquidity into a variety of products (MBS, CMBS Pools, Munis, SBAs, and UST), terms (7 30 years), and coupons (1-2.875). The portfolio had net growth of $100MM for the quarter resulting in a portfolio book value of $293MM and yields of 1.79/1.44 (accounting/market). Mr. Frank continued to stress that the Bank’s overall ALM position still supports longer duration assets. The Committee agreed to continue deploying excess liquidity of at least $10MM/weekly with the goal of investing excess liquidity not needed to fund loans or replace any potential deposit outflows. Mrs. CFO also stated due to recent purchases, agency passthroughs were at 28.6% of assets as of 7/31, and purchases have been made in block sizes up to $5MM. Given the size of the Bank today and the level of capital growth, larger block sizes are warranted for better pricing, salability, and efficient execution. As such, most MBS purchases have been executed in $2-3MM blocks and two US Treasury blocks have been executed at $3MM and $5 MM. The Committee acknowledged that the amount of excess liquidity needing to be deployed, and the time sensitive nature of purchasing securities that will complement the Bank’s portfolio justify larger block purchases without prior approval on an individual transaction basis. Mrs. CFO presented those exceptions and a policy revision to the full Board that afternoon. Mrs. CFO reminded the committee that the Cloyd Prime, Cloyd Money Market & Business Money Market account rate reductions previously report had become effective in June 2,2021, and only slight relief in COF of 1 bps had been experienced for the month due the mix in balances. Mr. Frank presented the Executive Summary noting that the Earnings at Risk Shock Scenarios and the EVE calculation are both outside of policy guidelines in the -100 bp scenario, in both YR1 & YR2 simulations. IRR showed Yr1 -6, and Yr2 -21.2, versus policy guidelines of -5 & -10 respectively. EVE showed Yr1-14.3, and Yr2 6.3, versus policy of -10.0, and 6.0 respectively. While the bank’s greatest risk is to the current and falling rate scenarios, the Y2 metrics are currently skewed due to the inclusion of PPP fee income in Y1. If the fee income were removed from the simulation, both the Yr2 metrics would be compliant (Yr2 shock down 100bp and ramp down 100bp). The Yr1 shock down 100bp scenario essentially knocks another 100bp from our investment and loan yields with minimal offsets on deposit rates. If this were to occur, aggressive reduction of cost of funds would bring the numbers back into policy. However, outside of taking rates negative, there is no way to hedge against a simulation that further pressures rates on the asset side. The entire industry has exposure to rates at the zero bound. In terms of Balance Sheet strategy, the reality of margin pressure is not only resulting in continued emphasis on lowering the rates on deposits, but also on re-evaluating all fee structures to offset some of the lost income. The Committee accepted the policy exceptions, agreeing that corrective action was still not necessary, but ongoing monitoring and discussion was necessary. As of quarter-end, the Bank’s Tier 1 Leverage Ratio including the $22MM PPP loans, had increase to 9.26%, a result of the $10MM capital injection from the HC that was noted last quarter. The ALCO committee adjourned at 9:45 am.