CMS Case Study

Current Position Assessment - 6/30/2021

Balance Sheet: The balance sheet expanded by $40 million over the quarter, to $831 million, as non-maturity deposit inflows (primarily NOW C loyd Prime accounts and DDA) funded security purchases (MBS and treasuries). Additionally, asset mix shifts occurred as cash and loan runoff also supported bond market activity. Note, asset growth was also augmented by an increase in capital. Security purchases and loan originations at yields below portfolio averages (driven by the continued flattening on the long end of the yield curve and competitive lending landscape) combined with lower levels of higher yielding loans outweighed the extension of cash and resulted in a 4bp decline in the aggregate asset yield, to 2.66%. The cost of funds fell 4bps, declining to 0.27%, due to non-maturity deposit rate cuts, the maturity/ renewal of time deposits into lower current costs and the increase in lower costing DDA and equity balances. Accordingly, the balance sheet spread was unchanged at 2.39% Liquidity: Higher levels of available security collateral bolstered the Tier 1 Basic Surplus measure by $19 million to $163 million or 20% of assets. Note, cash used to purchase bonds was a liquidity neutral event. Remaining loan-based borrowing capacity at the FHLB was unchanged at $10 million resulting in a net increase of $10 million to the Tier 2 Basic Surplus position to $173 million or 21% of assets. An additional $125 million in funding is available through the brokered deposit market bringing the Tier 3 Basic Surplus position to $298 million or 36% of assets. With meaningful levels of on balance sheet liquidity and wholesale funding capacity available, the ability to support balance sheet growth and/or unanticipated deposit outflow remains strong. Interest Rate Risk : The larger earning asset base and unchanged balance sheet spread combined with higher assumed levels of assumed PPP fee income realization ($328 thousand was actually realized in July) resulted in a higher starting level of projected net interest income (NII) when compared to the March review. Once the total realization of PPP fee income occurs the benefit to comparative NII drops accordingly and pressure to NII resumes due a combination of lower levels of assumed cash extension into bonds and lower assumed commercial real estate cash flow replacement yields. The current balance sheet mix continues to be asset sensitive with the benefit to rising rates, albeit diminished over the quarter due to the increase on longer duration assets (cash to fund MBS/treasury purchases) which outweighed the benefit of higher levels of low/zero-cost funding (DDA and equity). Note the relative exposure to falling rates increased due to the recent rally in longer term market rates, which has resulted in an increase in assumed prepayment activity on MBS, shortening the average life in a falling rate environment versus last quarter. All modeled exposures to NII and EVE simulations remain within policy guidelines with the exception of the NII Down 100bps ramp and shock scenarios in year 1 and 2 (sensitivity metric is change vs. Year 1 Base NII) and EVE Shock Down 100bps. The NII policy violation in year 2 is in large part influenced by the assumed realization of PPP fees in Year 1 and drop in projected income once the majority of PPP loans are assumed to be forgiven. 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: NII is projected to trend gradually downward as loan and investment cash flow continues to be replaced/repriced at lower than portfolio rates while term funding cost relief is marginal (note non-maturity deposit base remains static at 27bps). Rising Rates : NII is projected to outperform the Current Rates scenario from the outset of the simulation as investment and loan cash flow continues to replace/reprice into the elevated rate environment, more than offsetting funding cost pressure from non-maturity deposit cost increases and term funding replacing into higher rates. To the extent market rate movements take longer to materialize, the overall rising rate benefit will be tempered (see Alt. Delayed Ramp Scenarios ). Falling Rates : NII is projected to trend along the Current Rates environment in the near term as assumed non-maturity and term deposit funding cost relief offsets asset cash flow resetting/ replacing into lower market yields. Thereafter, NII is projected to fall below the Current Rates environment for the remainder of the simulation as funding cost declines expire while there is continued pressure on the replacement/repricing of fixed and adjustable-rate loan cash flow into the lower market rate environment. Capital: As of 6/30/2021, the Leverage, Common Equity Tier 1, and Total Risk Based Capital ratios of 9.26%, 16.59% and 17.84% respectively, remain well above both internal policy guidelines and regulatory minimums for “well capitalized” institutions.

Cloyd Bank & Trust - Page 4