CMS Case Study

General Obligation Bonds For general obligation bonds the following factors shall be considered in evaluating the merits of each bond. The following factors should be evaluated at the time of: A. Ratio of debt burden to assess valuation B. Debt burden per capita C. Level of debt and debt paying ability including overlapping debt D. Large taxpayers in the issuer’s geographic area E. Assessed and market valuation, when available F. Property tax collections vs. taxes levied G. Economic climate of the issuer, per capita income and unemployment rate GO bonds should have a debt to assessed valuation ratio less of less than 15% and a per capita debt of less than $5,000 . Exceptions to these ratios should be addressed at the time of purchase. Revenue Bonds Revenue bonds will be purchased after analysis of the issue using the criteria below and based upon performance history and the credit rating of the security and the issuer. The bank will purchase primarily “essential service “revenue bonds that are for water, sewer or utility facilities. Other revenue bonds purchased for other projects may be purchased only following careful analysis of the issue. 1. Annual pledged revenues must be equal to or exceed all applicable bond reserve and rate covenants found within the issue’s bond indenture. 2. If the bond indenture does not specify any reserve or rate covenants, annual pledged revenues should cover the applicable debt service by no less than 1.25 times coverage except for the following: a. “Advanced School Refunding” revenue bonds, which will be replaced by voted general obligation bonds; b. “Double Barrel” revenue bonds secured by either the issuer’s, residing county’s or higher level municipality’s full faith and credit pledge; c. Lease or mortgage revenue bonds secured by the underlying asset being leased and; d. Mortgage revenue bonds secured by FNMA, FHLMC and/or GNMA provided the issue maintains a AAA rating. Other factors to be considered include the segregation of revenue funds from general funds, the flow of revenues from general funds and the existence of any unusual or special covenants in the bond indenture. The bank shall monitor the credit quality of municipal portfolio by maintaining a municipal bond “watch list.” The criteria for inclusion on the muni watch list are shown at Exhibit 7. This list will be reviewed by the bank’s Investment Committee on a quarterly basis. On a quarterly basis, all municipal securities on the “watch list” shall be assessed for possible downgrade to substandard or doubtful status based on the degree of credit deterioration. This assessment shall be consistent with the risk grading methodology included in the Bank’s lending policy. All downgrades shall be reviewed by the Bank’s ALCO and downgrades of any single bond issuer in which we own in excess of $500,000 par value shall be reviewed by the Board of Directors. Additionally these securities shall be evaluated for possible impairment under section XIV of this policy (Assessment for Possible “Other Than Temporary Impairment”). For any security that is downgraded or written down under the OTTI policy, an action plan shall be prepared by the portfolio manager that addresses the continued monitoring, holding or liquidation of that asset. Mortgage-Backed Securities Analysis A pre-purchase analysis will be completed and documented in the file for each individual pool, including a rate shock analysis which utilizes a wide spectrum of prepayment assumptions reflecting price, yield and cashflow/average life volatility in changing interest rates. A determination of the diversification of the underlying mortgages will be done prior to purchase. The following criteria will be reviewed:

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Board Approval 8/19/21