I. PURPOSE

This Liquidity Management Policy of the MidState Federal Credit Union, hereafter referred to as the Credit Union, sets forth policies, procedures, and guidelines to be followed in the management of the liquidity position. The contents of this Policy are approved by the Board of Directors and are to be followed by Management and the Asset-Liability Management Committee (ALCO).

II. RESPONSIBILITY

The Board of Directors delegates decision-making authority to the CEO to conduct routine, day-to-day liquidity and cash management activities. However, liquidity management problems that extend beyond routine, day-to-day operations will involve consultation with the ALM Committee (ALCO).

III. LIQUIDITY MANAGEMENT OBJECTIVE

The objective of this Policy is to provide a framework to minimize the adverse effects of a significant and sustained liquidity crisis. This can result from changing economic or interest rate conditions, deposit outflows, unusually strong loan demand, intense competition, an international crisis, reputation risk (including adverse publicity) or any other factors that can deplete the liquidity of the Credit Union.

IV. LIQUIDITY MANAGEMENT STRATEGIES

In the event of a serious and sustained liquidity crisis, the various strategies outlined in this section will be considered by Management in consultation with the ALCO. The Board recognizes that some of these strategies are preventative and must be implemented prior to the onset of a crisis. Other strategies are reactive and may be implemented immediately. The strategies will differ in terms of the implementation time, costs, risks, financial implications and regulatory consequences.

ALM Position

The most important preventative liquidity management strategy is a sound ALM position. Such a position is reflected by the ability to increase dividend rates commensurate with the market to minimize deposit outflows without significantly impairing the fundamental earning power of the Credit Union. This ability is evaluated by risk management guidelines related to Net Economic Value (NEV) and Income Simulation results. These guidelines are specified in the ALM Policy.

The Board recognizes that notwithstanding the ALM position, the Credit Union can only minimize and not necessarily eliminate liquidity pressure that results from external events beyond the control of Management. This necessitates the use of multiple strategies.

Monitor Loan Rates and Loans/Assets Ratio

Although one of the primary roles of the Credit Union is to make loans to its members, Management will review and adjust loan rates as necessary to ensure a reasonable balance between loan demand, runoff, other cash flows and the Loans/Assets ratio. Ordinarily, the Loans/Assets ratio should not exceed 85%.

Loan demand that exceeds the runoff of existing loans is a major contributor to liquidity problems. Accordingly, Management will monitor the net volume of new loans relative to the projected runoff of existing loans and other cash flows such as investment maturities.

Monitor MMA and Certificate Rates

on savings products must be monitored and adjusted to remain competitive in the local and national markets to minimize deposit outflows and disintermediation. Special attention will be focused on pricing the Money Market Account and member Certificates.

Investment Portfolio Management

The investment portfolio may be used in the following ways to cope with liquidity pressure:

Maturities.The primary role of the investment portfolio is to provide liquidity by means of a laddered structure with predictable cash flows. Management will maintain a laddered structure that reflects a balance between the size of the portfolio, effective block size, the overall ALM position, and income needs. Generally, a smaller portfolio will emphasize liquidity by means of a shorter ladder with few securities containing embedded options whereas a larger portfolio relative to the total assets will emphasize both liquidity and income using longer maturities and may include callable bonds. Data regarding the maturity/call distribution and shocked distribution is provided in the Fixed-Rate Investment Distribution Reports. Maturity Distribution Reports. The Investments/Assets ratio ordinarily should not be less than 10%.

Sale of Securities.The sale of securities is a reactive strategy. The extent to which securities may be sold to meet liquidity needs depends on the accounting classification and the amount of market losses resulting from the sale. Accordingly, Management will periodically review the accounting classification (AFS or HTM) to ensure that a sufficient amount of securities are classified as Available-for-Sale (AFS). Such an evaluation will be made in light of the maturity distribution of the portfolio with a short distribution requiring fewer AFS securities. The Board recognizes that liquidity problems are usually accompanied by market conditions that depress bond prices. Thus, the sale of investments would result in realized losses, the magnitude of which depends on the maturity and/or embedded options in the instrument being sold.

Special Offerings of Certificates

An integral part of a sound ALM position is a sizable member certificate program with effective early withdrawal penalties. This is a preventative strategy. However, there are two reactive variations of certificate strategies:

Term Certificate Specials—Members. In response to a liquidity crunch Management may offer certificates to members at rates that are above market rates. This strategy may be continuous or for a specified period of time. However, to minimize the potential risk of future liquidity problems, the certificates should be diversified over multiple maturities rather than concentrated in one maturity. (If a special rate is offered on a single term certificate and external interest rates rise, the current liquidity problem may be shifted into the future and magnified by all the new funds maturing at once.) As with any term certificates, adequate early withdrawal penalties should be assigned to these certificates.

Non-Member Certificates.A variation of this funding process is to offer non-member certificates to other credit unions. The extent of such funding must comply with regulations. The maturities of these funds must be diversified over time. Non-member certificates should not exceed 5% of total assets. As with any term certificates, adequate early withdrawal penalties should be assigned to these certificates.

Borrowing Power

Short-term borrowing from the Corporate Central, Federal Home Loan Bank or other sources may be used to complement routine cash management activities or in the early stages of an emerging liquidity problem. However, the Board recognizes that funding a liquidity crisis with large amounts of short-term borrowings on a sustained basis increases interest rate risk because such borrowings reprice on short notice, often daily. Accordingly, Management and the ALCO should consider longer term funding sources and diversify the borrowings over time when borrowings are expected to be sizable and sustained. Ordinarily, borrowed funds should not exceed 5% of total assets.

Sale of Mortgage Loans

As a preventative strategy, Management should consider the sale of new mortgage loans simultaneously upon origination when a) the Loans/Assets ratio exceeds 85% and/or b) the interest rate risk and/or income risk of additional holdings is excessive. This is not a mandate to sell mortgage loans because the lack of liquidity and/or risks can be offset by other strategies such as increasing the amount of certificates or the sale of investments.

The Board recognizes that a liquidity crisis is usually accompanied by rising interest rates that, in turn, may cause significant market losses on mortgage loans. Thus, the sale of existing mortgage loans in reaction to a liquidity crisis or excessive interest rate risk is unlikely to be an effective strategy because of the realization of such losses.

V. LIQUIDITY MANAGEMENT GUIDELINES

In this section, numerical and qualitative guidelines rather than rigid policies are summarized. The nature of a liquidity crisis is such that external factors are beyond the control of Management and this may cause the following Guidelines to be exceeded:

Guidelines

1. ALM Position. The Credit Union’s ALM position should be in compliance with the Risk Guidelines specified in the ALM Policy.

2. Monitor Loan Rates and the Loans/Assets Ratio. This ratio should not exceed 85%. This ratio is shown on Line 2a of the quarterly Historical Key Ratios Report.

3. Monitor MMA and Certificate Rates. These rates should be adjusted to remain competitive in the local and national markets.

4. Investments/Assets Ratio. Ordinarily, this ratio should not be less than 10%. This ratio is shown on Line 3 of the quarterly Historical Key Ratios Report. The investment maturities within this 10% minimum should be relatively short for liquidity purposes. (Cash is not an investment for the purpose of this ratio and minimum. Cash is not a form of liquidity because it is necessary for day-to-day operations.)

5. Non-Member Certificates/Total Assets. Ordinarily, this ratio should not exceed 5%. This ratio ordinarily appears on Line 101 of the Financial Statement produced using CU/ALM-ware when non-member certificates are on the books.

6. Borrowed Funds/Total Assets. For general liquidity and cash management purposes, the ratio should not exceed 5%. A higher percentage is permissible as part of an income enhancement strategy provided a written plan, including the higher percentage, is approved by the Board of Directors. This ratio is shown on Line 10 of the quarterly Historical Key Ratios Report.

7. The Credit Union will keep a minimum of 3% of assets in our Corporate account for liquidity purposes.

Implementation & Reporting

Management and ALCO will monitor the indicated statistics as well as other relevant information to monitor the liquidity position. Significant changes in the liquidity position, both actual and projected, will be reported to the Board along with strategies designed to minimize the liquidity problems.

VII. EXCEPTION AND REVIEW

The Board recognizes that deviations from the Guidelines in this Policy Statement may occur because of external forces that are beyond the control of Management and ALCO. The intent of this Policy, therefore, is to provide a framework for the establishment of an effective liquidity management process during a period of stressful financial or economic conditions. Major exceptions to this Policy and the related Guidelines resulting from managerial action should be avoided. The Policy should be reviewed periodically by Management, ALCO, and the Board of Directors and amended as circumstances warrant.