Citizens Savings Bank & Trust

LIQUIDITY TRAINING

What is Liquidity
Liquidity is defined as a Bank's capability to meet

customer demands for deposit withdrawals while funding all creditworthy loans.

Board Responsibilities

It is the responsibility of the Board of Directors and

Senior Management to ensure that capital and liquidity levels are adequate, that appropriate capital and liquidity planning processes are in place, to approve the liquidity methodology.

Liquidity Risk
Liquidity risk is the risk of not being able to obtain

funds at a reasonable price within a reasonable time period to meet obligations as they become due.
Liquidity strategies can be Asset based

maintaining pools of highly liquid and marketable securities, or loans available for sale and or

Liability

based or off balance sheet -

funding partly through securitization, brokered/internet deposits, or borrowings

What makes up Adjusted Liquidity

Liquid Assets. Liquid assets include any excess cash the Bank may have

either in its vaults or on deposit with a Federal Reserve Bank or a correspondent Bank.

It also includes any non-loan earning asset that is unpledged, available

for sale, and whose current market value is not less than 80% of the par
amount as of the reporting date.

Types of Liquid Assets

Cash on hand (including items in the process of collection); Demand deposits due from banks; U.S. treasury bills and notes; Obligations due from federal agencies;

Certificates of deposit with other banks and savings and loan

institutions due within 1 year;

Federal funds sold; and Municipal bonds

Liquid Assets Adjusted

Includes all Liquid Asset plus loans that are 100%

owned by the Bank, categorized as "available for sale", secured by cash, or any performing loans with

a risk grade 3 or better, that are collateralized and

fully documented.

Non-Liquid Assets.
All other assets are deemed to be non-liquid.

Adjusted Volatile Liabilities

Volatile liabilities are deposits the Bank cannot depend on remaining

with the Bank and include any liabilities the Bank may be forced to pay

within the next six months. The Bank does not consider its reciprocal
CDARS deposits with core customers to be volatile.
Volatile Liabilities Adjusted. Volatile liabilities excluding CDARs

Reciprocal Deposits and Certificate of Deposits $100K and Over that meets the definition of Core Customers as defined by the Bank.

Non-Core Funding.
Non-core funding by regulatory definition is

Certificate of Deposits $100K and Over, Brokered Deposits, Internet Deposits and all Borrowed

Funds.

FDIC
In accordance with Section 38 of the FDIC Act and

Part 337.6 of the FDICs Rules and Regulations :A Well Capitalized insured depository institution may solicit and accept, renew or roll over any brokered deposits without restriction.

Non-Core Funding Dependency Ratio.

A determination of how much long term assets are funded with non-core

funds.

The Bank defines its non-core funding dependency ratio as :

Certificate of Deposits $100K and Over Plus (+) Brokered Deposits, Internet Deposits & Borrowed Funds minus(-) Non-Interest Due From, Cash & Coin, Fed Funds Sold and Interest Bearing Balances DIVIDED BY

Net Loans Plus (+) Securities issued by U.S. Gov't Agencies, and States
and Political Subdivisions greater than 1yr.

Core Customers.
The Bank defines Core Customers as customers of

the Bank who seek to have or have a long term relationship with the Bank and who became customers through the efforts of the Bank.
Core customers may have deposits in the Banks CDARS program for insurance coverage purposes or have certificate of deposits greater than or equal to $100,000, but the bank does not consider these deposits to be highly sensitive to interest rate changes.

CDARS.
The Certificate of Deposit Account Registry Service,

that allows depositors to place large cash deposits quickly and confidently through Citizens Bank into CDs issued by multiple network banks and be eligible for full FDIC insurance.

Qwickrate
Qwickrate is the premier non-brokered marketplace

for funding and investing

Fully compliant with the FDIC as a non-brokered

Direct Deposit CD listing service; Direct CD deposits generated through Qwickrate are classified as core deposits.

Criteria

Listing Service vs. Deposit Broker

Criteria
A Listing Service is a company that complies

information about interest rates offered on certificates of deposits (CDs) by insured depository institutions.
A Deposit Broker is any person engaged in the

business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions.

Criteria
Compensation:

A Listing Service is compensated by means of subscription fees only, i.e. flat subscription fees. Deposit Broker fees are calculated on the basis of the number of dollar amount of deposits placed.

Current Liquidity Position

The Bank utilizes a liquidity chart spreadsheet to estimate

the liquid and non-liquid portions of each asset category, in addition to the volatile and reliable portions of each liability account.
To complete the process, all Banks liquid assets and all

volatile liabilities are totaled. The volatile liabilities are subtracted from the liquid assets to arrive at the Bank's current liquidity position.

Liquidity Position Contd

Zero liquidity is defined as being neither liquid nor

non-liquid. Positive liquidity numbers represent excess liquidity and negative liquidity numbers represent a non-liquid position.

Liquidity Ratio
By dividing the liquidity position by total average assets, the Bank
arrives at a liquidity ratio. The Bank's assets and liabilities are managed to achieve a liquidity ratio of at least +/-25%.
Since the liquidity position can be positive or negative, the ratio can be

positive or negative.

Liquidity Goals
A positive liquidity position means only that the Bank is more liquid

than it needs to be. A positive liquidity position is not a danger signal.

However, it may mean that the Bank is sacrificing profits

unnecessarily to achieve a liquidity position that is too liquid.

A negative liquidity position greater than +/-25% represents too much

non-liquidity and requires close monitoring. However, If the adjusted

liquidity ratio is negative and larger than -15% the Bank is approaching
a position that is dangerously non-liquid and is cause for concern.

Adjusted Liquidity Position

To complete the process, all Banks liquid assets and

all volatile liabilities are totaled.

The volatile liabilities excluding all Core Customer

are subtracted from the liquid assets, that may include Available for Sale Loans, to arrive at the Bank's Adjusted Liquidity Position.

Measuring Liquidity
The Bank utilizes a forward approach to measuring

liquidity. This method projects future funding sources which includes monitoring volatile deposit

relationships to ensure adequate liquidity.

Measuring Liquidity contd

Since no single ratio can define adequate liquidity,

the Bank utilizes several ratios to monitor, measure, and construct, the most accurate picture of the institutions position.
It is the ALCOs intention to balance the need for

liquidity with the need for earnings and measures the Banks ability to meet expected and unexpected withdrawals and loan funding.

Measuring Liquidity Contd

Liquidity Ratio Non-Core Funding/Total Assets Net Non-Core Funding Dependency Ratio Average CDs $100K and Over Total Brokered Deposits/Total Assets Total Brokered Deposits/Total Deposits

Core CDARs Reciprocal/Total Brokered

Core CDARs Reciprocal/Non-Core Funding Core Deposits/Total Assets Non-Core Deposits/Total Assets Gross Loans/Deposits Gross Loans / Total Assets Risk Based Capital

+ / - 15% 50% or less 35% or less $1,000,000/CD 30% or less 35% or less 100% 50%-60% 55% + 45% or less 85-95% 70 80% 10% & greater

Calculations
Liquidity Position/Total Assets

Net Liquidity Position divided by Total Assets

Non Core Funding/Total Assets

CDs over $100,000, Fed Funds purchased, FHLB borrowings, broker deposits(including CDARS) and volatile deposits (Qwickrate) as a % of Total Assets
Non Core Funding Dependency ratio= funding long term assets with short term

liabilities (non core funds) Non core funding (CDs $100,000 or greater, Fed Funds purchased, FHLB borrowings, broker deposits and volatile deposits minus (-) cash and non interest due from, fed funds sold, and interest bearing bank balances)

Higher ratios reflect a reliance on funding sources that may not be available when needed

Calculations
Avg CDs $100,000 & over

Average dollar amount per relationship over $100,00 The bank have determined that if a single customer left with $1mm it would not have an material effect on the bank

Broker deposits/total assets

Includes CDARs, Volatile deposits over $100k, volatile CDs under $100k as a % of Total Assets

Broker deposits/ total deposits

Includes CDARSs, Volatile deposits over $100k, volatile CDs under $100k as a % of Total Deposits

Calculations

Core CDARS/ Total Broker Deposits Core CDARS as a %of total broker (including total CDARS, volatile CDs over $100k, volatile CDs under $100k)

Core CDARS/ Non-Core Funding Core CDARS to CDs over $100,000, fed funds purchased, FHLB borrowings, broker deposits(CDARS) and volatile deposits (Qwickrate) as a % of total assets

Core deposits/ total assets Deposits (including DDA & Savings, MMA) , CDs under $100k as a % of of total assets

Calculations
Non core deposits/ total assets

CDs over $100k, brokered deposits, volatile deposits as a % of Total Assets

Gross Loans/ Total deposits

Loans less Unearned income as a % of Total Deposits

Gross Loans/ Total Assets

Loans less Unearned income as a % of Total Assets

Well Capitalized

Total Risk Based Capital Tier I Risk Base Capital Leverage Ratio

10% 6% 5%

Calculations

Adjusted Ratios: All Current Ratios less Core Customers Adjusted Ratios cannot exceed Bank established

Policies.

Liquidity Position
Liquidity Position = Net Liquid Assets less (-) Non

Core & Volatile Liabilities

Liquid Assets are defined as: -US Treasury & Agency securities less pledge securities -Other securities (Stock held at other institutions) -Interest bearing bank balances (CDs held at other institutions) -Cash and non-interest due from
Non core/volatile liabilities are defined as: - CDs over $100,000 -Broker deposits (including CDARS) - Volatile deposits (Quickrate CDs) and -FHLB borrowing

Liquidity Contingency Strategies

The Banks contingency plan includes the following

strategies:

Sale of Loans Liquidation of securities Use of FHLB Borrowings Use of Fed Funds Purchasing Lines Use of TLGP Lines Increase Broker deposits up to policy guideline 30% of Assets Increase in Internet deposits (Qwikrate) Reduce growth of the Bank

Adjusted Liquidity Position

Adjusted Liquidity Position equal (=) Net Liquid

Assets less (-) adjusted non-core & volatile liabilities

Net Liquid assets= US Treasury & Agency securities less pledge securities, other securities (Stock held at other institutions), Interest bearing bank balances (CDs held at other institutions), cash and non-interest due from
Adjusted non-core & volatile liabilities are defined as: - CDs over $100,000K - CDARS deposits - Volatile deposits (Qwickrate, etc.) less (-) Core Customers with CDs over $100,000, Reciprocal CDARs deposits, and Volatile deposits

Liquidity

Questions