liquidity management (1)

7/31/2019 Liquidity Management (1)

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LIQUIDITY TRAINING

Citizens Savings Bank & Trust


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What is Liquidity

Liquidity is defined as a Bank's capability to meet

customer demands for deposit withdrawals while

funding all creditworthy loans.


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Board Responsibilities

It is the responsibility of the Board of Directors and

Senior Management to ensure that capital andliquidity levels are adequate, that appropriate capital

and liquidity planning processes are in place, to

approve the liquidity methodology.


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Liquidity Risk

Liquidity risk is the risk of not being able to obtainfunds at a reasonable price within a reasonable timeperiod 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


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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.


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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


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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.


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Non-Liquid Assets.

All other assets are deemed to be non-liquid.


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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.


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Non-Core Funding.

Non-core funding by regulatory definition is

Certificate of Deposits $100K and Over, Brokered

Deposits, Internet Deposits and all Borrowed

Funds.


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FDIC

In accordance with Section 38 of the FDIC Act andPart 337.6 of the FDICs Rules and Regulations :-

A Well Capitalized insured depository institutionmay solicit and accept, renew or roll over anybrokered deposits without restriction.


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Core Customers.

The Bank defines Core Customers as customers ofthe Bank who seek to have or have a long termrelationship with the Bank and who becamecustomers through the efforts of the Bank.

Core customers may have deposits in the BanksCDARS program for insurance coverage purposes

or have certificate of deposits greater than or equalto $100,000, but the bank does not consider thesedeposits to be highly sensitive to interest ratechanges.


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CDARS.

The Certificate of Deposit Account Registry Service,that allows depositors to place large cash depositsquickly and confidently through Citizens Bank intoCDs issued by multiple network banks and be eligiblefor full FDIC insurance.


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Qwickrate

Qwickrate is the premier non-brokered marketplacefor funding and investing

Fully compliant with the FDIC as a non-brokeredDirect Deposit CD listing service;

Direct CD deposits generated through Qwickrate areclassified as core deposits.


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Criteria

Listing Service

vs.Deposit Broker


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Criteria

A Listing Service is a company that compliesinformation about interest rates offered oncertificates of deposits (CDs) by insured depositoryinstitutions.

A Deposit Broker is any person engaged in thebusiness of placing deposits, or facilitating the

placement of deposits, of third parties with insureddepository institutions.


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Criteria

Compensation:

A Listing Service is compensated by means ofsubscription fees only, i.e. flat subscription fees.

Deposit Broker fees are calculated on the basis ofthe number of dollar amount of deposits placed.


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Current Liquidity Position

The Bank utilizes a liquidity chart spreadsheet to estimatethe liquid and non-liquid portions of each asset category, inaddition to the volatile and reliable portions of each liabilityaccount.

To complete the process, all Banks liquid assets and allvolatile liabilities are totaled. The volatile liabilities aresubtracted from the liquid assets to arrive at the Bank's

current liquidity position.


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Liquidity Position Contd

Zero liquidity is defined as being neither liquid nornon-liquid. Positive liquidity numbers representexcess liquidity and negative liquidity numbers

represent a non-liquid position.


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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.


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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.


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Adjusted Liquidity Position

To complete the process, all Banks liquid assets andall volatile liabilities are totaled.

The volatile liabilities excluding all Core Customerare subtracted from the liquid assets, that mayinclude Available for Sale Loans, to arrive at theBank's Adjusted Liquidity Position.


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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.


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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 theinstitutions position.

It is the ALCOs intention to balance the need forliquiditywith the need for earnings and measures

the Banks ability to meet expected and unexpectedwithdrawals and loan funding.


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Measuring Liquidity Contd

Liquidity Ratio + / - 15%

Non-Core Funding/Total Assets 50% or less

Net Non-Core Funding Dependency Ratio 35% or less

Average CDs $100K and Over $1,000,000/CD

Total Brokered Deposits/Total Assets 30% or less Total Brokered Deposits/Total Deposits 35% or less

Core CDARs Reciprocal/Total Brokered 100%

Core CDARs Reciprocal/Non-Core Funding 50%-60%

Core Deposits/Total Assets 55% +

Non-Core Deposits/Total Assets 45% or less

Gross Loans/Deposits 85-95%

Gross Loans / Total Assets 70 80%

Risk Based Capital 10% & greater


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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 % ofTotal Assets

Non Core Funding Dependency ratio= funding long term assets with short termliabilities (non core funds)

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

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


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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$100kas a % of Total Assets

Broker deposits/ total deposits Includes CDARSs, Volatile deposits over $100k, volatile CDs under

$100kas a % of Total Deposits


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Calculations

Core CDARS/ Total Broker Deposits

Core CDARS as a %oftotal 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, brokerdeposits(CDARS) and volatile deposits (Qwickrate) as a % oftotal assets

Core deposits/ total assets

Deposits (including DDA & Savings, MMA) , CDs under $100kas a % ofof total assets


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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 % ofTotal Deposits

Gross Loans/ Total Assets

Loans less Unearned income as a % of Total Assets

Well Capitalized

Total Risk Based Capital 10%

Tier I Risk Base Capital 6%

Leverage Ratio 5%


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Calculations

Adjusted Ratios: - All Current Ratios less Core Customers

Adjusted Ratios cannot exceed Bank establishedPolicies.


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Liquidity Position

Liquidity Position = Net Liquid Assets less (-) NonCore & 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


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Liquidity Contingency Strategies

The Banks contingency plan includes the followingstrategies:

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


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Adjusted Liquidity Position

Adjusted Liquidity Position equal (=) Net LiquidAssets less (-) adjusted non-core & volatile liabilities

Net Liquid assets= US Treasury & Agency securities less pledgesecurities, other securities (Stock held at other institutions),

Interest bearing bank balances (CDs held at otherinstitutions), 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, ReciprocalCDARs deposits, and Volatile deposits


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