CMS Case Study

4. Investment Accounting Consistent with the Bank’s overall business and asset/liability management plan, which focuses on sustaining adequate levels of core earnings, the base premise of the Bank’s investment portfolio is that all securities purchased will be suitable for holding to maturity. The Bank’s accounting for its investment portfolio will follow General Accepted Accounting Principles (GAAP). In satisfaction of the mark to market identification requirements of Section 475 of the Internal Revenue Code, our intentions are to hold all investments, both debt and equity, and all loans (not otherwise labeled as held for sale) as held for investment. This provision will apply to all securities held on October 31, 1993 and acquired in the future, unless explicitly modified by the Asset/Liability Committee. The above notwithstanding, for accounting purposes ASC 320 requires that the Bank declare at the time of purchase its intent to either hold the security to maturity, make it available for sale prior to maturity, or trade the security. Refer to Appendix A for related accounting treatment. The following summarizes the Bank’s policy regarding these three different investment intents. Held to Maturity (HTM): Held to maturity securities are accounted for at amortized cost with unrealized gains and losses noted, but not reflected in the balance sheet and income statement. Sale prior to maturity due to unforeseen circumstances is warranted in some cases. For example, investments may be sold if the credit quality of an investment deteriorates, regulatory changes warrant, or material changes in the tax law arise. Any sale transaction of a held to maturity security is an exception that must be approved by the Asset/Liability Committee and ratified by the Board of Directors at its next meeting. Sales prior to maturity risk tainting the remaining held to maturity securities in a manner which may result in the recognition of unrealized gains/losses The Bank may establish an Available for Sale portfolio to house specifically identified securities or classes of securities which it might sell prior to maturity if one or more events were to occur and the likelihood of occurrence was other than remote. The Bank will delineate securities Available for Sale at time of purchase. Because it is impossible to hold equity securities to maturity, any holdings of equity securities or mutual funds that do not have an explicit maturity date will be placed in the Available for Sale portfolio. Accounting treatment for the Available for Sale portfolio differs substantially from either trading or held to maturity (see Appendix A) in that the net unrealized gain/loss of the entire related portfolio is reflected in the balance sheet as an adjustment to the asset carrying value with a related offset to capital for the after tax effect. Therefore, closely monitoring the value of this portfolio and the impact of market value changes on the Bank’s reported capital ratios is of utmost importance. Accordingly, as market conditions warrant, the Bank may establish or modify limits to the amount of acceptable unrealized losses carried within the portfolio expressed in absolute terms and/or as a percentage of capital. The estimated amount of change in market value of the Available for Sale portfolio given a 300 basis point immediate change in rates will be reported monthly to the Board of Directors. ALCO will be informed at each regularly scheduled meeting. Trading Account: Since trading account portfolios are carried on the Bank’s balance sheet at Fair Value and “marked-to market” through the Income Statement, volatility in reported earnings and capital can be material unless closely and actively monitored/managed. Trading portfolios typically exist to generate profit (e.g. enhance investment portfolio yield/return) through the active management of short-term price fluctuations in specifically identified fixed income securities (which trade in liquid/active markets). The Bank has not and at present has no intention of engaging in trading activities. However, if conditions as an adjustment to capital. Available for Sale (AFS):

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Board Approval 8/19/21