CMS Case Study

Loan Pricing Stress Methodology - 6/30/2021

Loan Pricing Stress Methodology

Basis/Rationale:

There are a myriad of factors that can impact an institution’s loan pricing and spreads. For example, in a depressed economy loan/credit spreads are typically wide to reflect the lender’s outlook for higher default risk. Other elements such as competition (supply/demand) and local market demographics can also impact loan pricing. Historically, as rates rise, loan spreads also tend to narrow as: 1) rising rates are typically an indication of a recovering economy which translates into lower default expectations and, 2) an expanding economy increases competition for loan demand, driving prices down. Unfortunately, tighter loan spreads can have an adverse effect on the overall margin of the banking industry regardless of the environment.

The following stress tests were designed to identify the potential exposure caused by narrowing loans spreads or the inability to increase loan rates in conjunction with benchmark market rate movements in a variety of rate environments.

Detail:

Stress Test Scenario - Assumptions

Expected Results

(1) In the rising rate scenarios, assume all new volume loan origination rates have a beta of 75%.  For example, in a parallel Up 200 scenario where all market rates increase 200bps, assume new loan rates only increase 150bps.

Lower levels of NII

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 Reduced benefit/increased exposure to rising rates

(2) In the Base Scenario, assume all new volume loan assumptions are reduced by 25bps.

Lower levels of NII

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Cloyd Bank & Trust - Page 40