CMS Case Study

Investment/ALCO Committee Meeting Minutes 11/18/2021

There was ~$43 MM in loan originations for the quarter at a weighted average yield of 3.84%, which was an improvement over 3Qs 3.63%. Net loan growth was % 5.5MM for the quarter, but PPP paydowns were $12.5MM ; therefore, core net loan growth for the quarter was $18MM. The Bank’s loan pipeline continues to be strong with p otential 45 day fundings of $5 2MM as of 5/18. Mr. Frank also present a Deposit Analytics report to quantify the deposit surge that had taken place since March of 2020. The report outlined NMD growth by product and tier and the number of accounts. NMDS were up $285MM and CDS down $25MM for the period. $150MM of the NMD growth was in accounts $1MM and over, and the bank opened over 2000 new accounts for the same timeframe. Many of Darling’s clients showed flat or down for the same period with NMD up slightly, but CDs closed to a much greater extent than CB&Ts. Mrs. CFO reported that ~$6MM of originated Residential Mortgages (5/1 Arms, and 10, 15, 30 fixed products) were retained for the quarter ($20MM YTD). She also stated that in keeping with previous strategy discussions of deploying excess liquidity, $117MM of securities had been purchased, again in a variety of products (MBS, CMBS Pools, Munis, SBAs, UST, and Sub Debt), terms ( 5 -30 years), coupons ( .5 -3.00), with limited premium risk. She also reiterated that the $2MM Bank of OZK Sub Debt investment, approved via email on 9/10, had settled on 9/16. The portfolio book balance at quarter end was $396MM , with yields of 1.65/1.33 (accounting/market). She also noted that with the significant purchase at low premiums as suggested, the Bank’s price risk had shifted from 10.49% to 17% in the +300 environment. Mr. Frank continued to stress avoiding premium risk should take priority at this time. The Committee also discussed that the projected existing investment portfolio cashflow for was $12MM/90 days and $62 MM/12 mths. In addition, normal loan paydowns had been averaging ~$11MM/month. The Committee agreed that continuing to deploy excess liquidity not needed to fund loans or potential deposit roll-off was prudent. Mr. Frank continued to stress that the Bank’s overall ALM position still supports longer duration assets. Mrs. CFO summarized the email communication sent to the Board and approved on 11/12 to 1) downstream up to $7MM immediately to the Bank for growth via deposits or inexpensive wholesale funding opportunities; and 2) t ake down wholesale funding up to $25 MM immediately and proceed with current investment strategy if not needed to fund loans or replace deposit roll off. She stated that Management was able to execute on the FHLB callable advance structure (10yr final/3mth call) offered at .01%. It settled on 11/12 and the $7MM capital would be downstreamed in November. Mr. Frank presented the Executive Summary noting that the Earnings at Risk Shock Scenarios and the EVE calculation are both still outside of policy guidelines in the -100 bp scenario, in both YR1 & YR2 simulations. IRR showed Yr1 -7 and Yr2 -17.0, versus policy guidelines of - 5 & -10 respectively. The Bank’s greatest risk continues to be in the current and falling rate scenarios. The Committee was reminded of previous discussions that t he 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