CMS Case Study

Current Position Assessment - 9/30/2021

Balance Sheet: The balance sheet grew by $66 million, to $897 million, as non-maturity deposit inflows funded investment purchases (mainly MBS) and to a lesser extent loan demand. Additionally, shifts in asset and funding mix occurred as cash and PPP loan cash flow supported investment and lending activity while non maturity deposits replaced maturing time deposits. The aggregate asset yield was unchanged at 2.66% as the increase in higher yielding core loan balances was offset by a larger percentage increase in lower yielding investments. The cost of funds declined by 2bps to 0.25% due to inflows of lower costing deposits (NOW) and the maturity/renewal/ shift of time deposits into lower current rates. As such, the balance sheet spread widened by 2bps to 2.41%. Liquidity: Higher levels of available security collateral bolstered the Tier 1 Basic Surplus measure by $41 million to $204 million or 23% of assets. Note, cash used to purchase bonds was essentially a liquidity neutral event. Remaining loan-based borrowing capacity at the FHLB was relatively unchanged at $11.5 million resulting in a net increase of $42 million to the Tier 2 Basic Surplus position, to $216 million or 24% of assets. An additional $134 million in funding is available through the brokered deposit market bringing the Tier 3 Basic Surplus position to $350 million or 39% 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 wider balance sheet spread outweighed lower assumed levels of assumed PPP fee income realization resulting in a higher starting level of projected net interest income (NII) when compared to the June review. As the simulation progresses the benefit to comparative NII improves driven by higher cash flow replacement rates for investment and commercial loans. The interest rate risk profile remains asset sensitive with the benefit to rising rates reduced over the quarter due to asset extension (cash to fund MBS/treasury purchases) which outweighed the benefit of higher levels of low-cost/less rate sensitive funding (NOW). Note the relative exposure to falling rates increased due to a combination of an increase in assumed prepayment activity on MBS, shortening the average life in a falling rate environment and the steepening of the yield curve which results in asset cash flow tied to that part of the yield curve having more room to price downward versus last quarter. Exposures to NII and EVE simulations remain within most 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 and Up 300 and 400bps scenarios. 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 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. The observed pressure for the Shock Up 300bp and 400bp EVE calculation is driven by asset extension over the quarter (reduction in cash and increase in longer duration securities, exacerbated by higher long-term rates and thus lower assumed prepay activity in rising rates). See alternative EVE calculations with functional costs removed and longer-term average lives assigned to NMDs.

Current Rates: NII is projected to trend downward over the life of the model as asset cash flow is continuously replaced/repriced at lower than portfolio rates while term funding cost relief is marginal (note non-maturity deposit base currently 22bps).

Rising Rates: NII is projected to trend above the Current Rates scenario from the outset of the simulation as investment and loan cash flow is re-casted into the elevated rate environment, more than offsetting funding cost pressure from non-maturity deposit cost increases and term funding rollover into higher costs. 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 9/30/2021, the Leverage, Common Equity Tier 1, and Total Risk Based Capital ratios of 9.26%, 15.98% and 17.24% respectively, remain well above both internal policy guidelines and regulatory minimums for “well capitalized” institutions.

Cloyd Bank & Trust - Page 4