CMS Case Study

6. Approved Security Dealers/Investment Bankers Recognizing the potential for significant losses from purchase and sale transactions with dealers/investment bankers that are unregulated or undercapitalized, the Bank shall not engage in securities transactions with any securities firm prior to designation of that firm as an approved broker/dealer by the Board of Directors. The CFO (or equivalent) shall investigate any securities firm prior to submitting that firm for approval to the Board of Directors. Documentation supporting the CFO (or equivalent)’s investigation shall be maintained on file. This may include a review of the firm’s financial statement, background of the sales representative, references and the custodial procedures employed. All approved dealers must be fully-licensed and registered NASD broker/dealers. The CFO (or equivalent) will recommend to the Board of Directors the appointment of approved broker/dealers and their limits, and will submit follow-up recommendations at least annually. See Appendix E for currently approved list. 7. Limitations on Interbank Liabilities The Bank recognizes the credit, liquidity and operational risks inherent in dealing with other depository institutions; particularly in the Federal Funds market. Accordingly, to prevent excessive exposure to any single correspondent, the Bank has established general standards for selecting correspondents as well as internal limits for allowable exposure to any single correspondent. Refer to Appendix D. 8. Risk Diversification The CFO (or equivalent) or her designee shall evaluate each purchase in the light of the overall diversification of the portfolio. They shall take into account concentrations resulting from the obligations of a single/related issuer or industry, credit rating, geographic and type distributions. See Appendix C for additional discussion of risks inherent in capital market instruments. The sale of Federal Funds or the purchase of securities under agreement to resell to any bank or dealer shall be carefully monitored to ensure that there are no inappropriate concentrations. Federal Funds transactions shall be with banks acting as principal, unless otherwise approved by the Board of Directors. The Bank must also monitor, from a capital adequacy perspective, the investment portfolio mix and its impact on the risk-based capital measurement. The following guidelines will apply for each investment purchase:

MINIMUM INVESTMENT QUALITY

Investment Rating Standard

Type of Investment Commercial Paper Corporate Debt Municipal Securities

Moody’s & Poors Value Line

A-1

P-1 n/a

A A A

A

n/a

A n/a

Non-Agency pass-through securities

A

n/a

Certificates of Deposit and Time Deposits . Negotiable and/or >$100,000 – banks must be well or adequately capitalized . $100,000 or less (including Brokered) – n/a (< $100,000 are covered by FDIC insurance) Preferred Stocks A A n/a Common Stocks n/a B+ B+ It should be noted that ratings for debt instruments and stocks are not directly comparable. “Split” ratings where one agency rating differs from another will be reviewed on a case by case basis. A change in rating below purchase standards does not require automatic disposal of the asset. An analysis will be conducted in each situation with an appropriate recommendation made in each case. Rating enhancements in the forms of letters

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Board Approval 8/19/21