Robert W. Bain Chair. Stephen W. Johnson Director. Gail Koehler Executive Vice President** **Retired January 2014.

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1 2013 Purdue Federal Volunteer Committees Board of Directors Robert W. Bain Chair Mark M. Moriarty Vice Chair Stephen E. Brewer Treasurer Steven D. Mogensen Secretary Jayne L. Feathers Secretary* Stephen W. Johnson Director Christiane E. Keck Director Matthew G. Lerzak Director Scott W. Seidle Director Asset & Liability Committee Stephen E. Brewer, Chair Stephen W. Johnson Christiane E. Keck Matthew G. Lerzak Scott W. Seidle Edgar Cyr A. Charlene Sullivan Supervisory Committee *Resigned February Lucia Anderson, Chair Marcus Rogers, Secretary Dan Collins Rick Davis Stephen W. Johnson Executive Leadership Membership Services Committee Mark M. Moriarty, Chair Steven D. Mogensen Scott W. Seidle Bob Falk President/CEO Gail Koehler Executive Vice President** Brian Musser Vice President Finance/CFO Kristen Edmundson Vice President Audit and Compliance Nikki Gaylord Vice President Lending Heather Nally Vice President Retail Sales & Service Evelyn Royer Vice President Risk Management & Support Services Phillip Thoben Vice President Member Business Services **Retired January Purdue Federal Credit Union PO Box 1950 West Lafayette, IN // purduefed.com Jackie Hofman Vice President Human Resources & Marketing Scott Ksander Vice President Information Technology 2013 Defining who we are. Annual Report We would like to start our 2013 annual report with two definitions of federal credit union : The term Federal credit union means a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes. Federal Credit Union Act An enterprise or organization owned by and operated for the benefit of those using its services. Merriam Webster These definitions are important to frame the discussion of what Purdue Federal Credit Union (Purdue Federal) accomplished in 2013 and will continue to guide our future path. Our credit union s organizational documents that were approved by the U.S. Congress in 1934 specifically mention the word cooperative. deposit and loan balances, usage of services and transaction volume. Instead of issuing a dividend each year where the recipient does not know the algorithm, we chose to provide our cooperative member-owners the complete algorithm so they could ultimately control their benefit level or perks from their financial cooperative. Purdue Federal is a financial services cooperative. To take the definition further, you can see that Merriam Webster defines a cooperative as owned and operated for the benefit of those using its services. This is one of the largest differences between credit unions and other financial institutions. We are excited to offer this very unique program to our membership and we look forward to adding additional perks to the program over time. This is clearly an opportunity to show the credit union cooperative difference in action. We also built this entire program on top of already competitive rates and fees. So all our members, regardless of their My Member Perks status, will receive top of market rates and fees in most situations while higher status members will receive better than market rates and fees. Our goal is to have a long-term, sustainable program through which our members can control the benefit or perk from their cooperative. Your credit union started a program in 2013 called My Member Perks. This program was designed to deliver on what Congress intended in Some credit unions issue a dividend to their members on occasion and this dividend is based on some measurement of usage of the credit union s services. Your credit union spent more than a year analyzing and measuring various metrics of usage and ultimately developed our own scoring model that accounts for length of membership, We hope that we have built the type of credit union that our government intended in 1934 when credit unions were created. Seven Cooperative Principles 1. Voluntary & Open Membership Membership is open to all. 2. Democratic Member Control Members actively participate in setting policies and making decisions. 3. Member Economic Participation Member participation leads to rates, fees and services that benefit the entire credit union. Bob Falk President/CEO 4. Autonomy & Independence Controlled by the members not by outside shareholders. 5. Education, Training & Information Financial education should be free and available to all. 6. Cooperation Among Cooperatives Cooperation among cooperatives is vital. 7. Concern for Community Cooperatives work for the sustainability of their communities. Bob Bain Board Chair

2 HONORS EARNED $506,541 given back to members during the first five months (August-December) of the program. 59% of members in Silver Status and above as of August % of members in Silver Status and above as of December 31. MEMBERSHIP SUCCESS 63,877 members at the close of % membership growth! 97.9% membership satisfaction, up from 96.5% in Loan Growth Ranked 2 nd WINNER R Credit Union R Checking Account R Mortgage Lender R Savings Account R Workplace ( ) R Financial Planner COMMUNITY INVOLVEMENT Student +119% hours volunteered by employees through our Volunteer Time Off benefit. Business % Visa % Home +4.25% $37,000 donated by employees and $21,000 donated by the credit union to the United Way of Greater Lafayette, in addition to money raised for many other local nonprofit organizations. $50,000 donated by Purdue Federal and The Brees Dream Foundation to Purdue Athletes Life Success (PALS) program. 372 vehicles were unloaded at our Lafayette-West Lafayette and LaPorte Community Shred Days. 13,753 pounds of paper were shredded; that s more than six tons! Auto -1.48% 4,103 members attended at least one of our free financial literacy sessions

3 TREASURER S REPORT SUPERVISORY COMMITTEE S REPORT ACCOUNTANTS REPORT and CONSOLIDATED FINANCIAL STATEMENTS

4 Treasurer s Report on 2013 Your volunteer board of directors is pleased to report that in 2013 Purdue Federal Credit Union (Purdue Federal) continued its history of financial strength. Your credit union remains financially strong. Highlights include: Grew total assets by 5% to $794 million. Grew member deposits by $33 million to $711 million. Had total net loan growth of $42 million to $541 million. Provided net income of $5 million. Increased our capital position to 9.6% of assets, well above the 7% minimum regulatory level for well capitalized credit unions. Increased total membership by approximately 1,600 to 63,877. Had a significant improvement in the overall loan delinquency rate well below peer comparisons. As for the economic environment in which Purdue Federal operated, 2013 saw a cautious U.S. economy slightly improve. Real GDP rose by 2.5%, improving over 2012 s 2% increase. The U.S. unemployment rate declined from 7.8% in 2012 to 6.7% in 2013 due in large part to a lower labor participation rate. Tippecanoe and La Porte counties saw improved unemployment rates, to 5.5% and 8.3% respectively. The Consumer Confidence Index continued to edge upward. The 2013 inflation rate averaged 1.7% virtually identical to For 2013, Purdue Federal s total loans grew in excess of 8%. As a highlight, secured member business lending grew 27% while Visa loans rose 12% and second mortgages increased more than 10%. As anticipated, 2013 saw the wind down of the mortgage loan refinance boom. Our members financed or refinanced 1,058 loans totaling more than $174 million an extraordinary year in itself, but down over 25% from Your credit union remains the top financial institution in Tippecanoe County mortgage lending market share. Total deposits grew 5% in Money market and savings accounts both grew in excess of 9%, checking balances increased in excess of 2%, and certificate accounts declined by 6%. Over the past five years, deposits have grown at an annualized 8% rate. In this economic climate, our strong deposit growth can be attributed to member confidence in our service, safety and soundness. Both loan delinquencies and charge-offs had very positive performances and remain a healthy cornerstone of your credit union. For example, our loan delinquencies (>59 days) of.31% at year end compares favorably to peer credit unions at.91% and similarly sized banks at 4.13%. Further, 2013 charge-offs were.29% of loans while losses at peer credit unions were.49% and banks at.40% of total loans. Our credit quality remains high. In addition, reserves for future loan losses represented 2.4 times the 2013 net charge-off amount. In August 2013, Purdue Federal rolled out a new, innovative and multifaceted My Member Perks program designed to increase and more clearly demonstrate the benefits of belonging to this credit union. Achievement of Purdue Federal s capital goal allows greater returns directly to members. The greater your relationship with your credit union, the more you will benefit. Your board and staff are delighted to enhance returns to members while maintaining a strong and stable organization that is focused on and serves our communities in many ways. Respectfully submitted on behalf of the Purdue Federal Credit Union Board of Directors, Steve Brewer, Treasurer

5 Supervisory Committee s Report on 2013 The Supervisory Committee is a volunteer group of Purdue Federal members, which is appointed by the Board of Directors to ensure the financial condition of the credit union is accurately and fairly presented in the organization s financial statements, and that the creditt union s management practices and procedures are in accordance with federal regulations and are sufficient to safeguard member assets and sensitive member information. Under the direction of the Supervisory Committee, an annual audit is performed by an independent, outside accounting firm with proven knowledge of credit union regulations and operations. This year that firm is BKD. The committee then works with the Board and the creditt union s Management Team to address any areas of concern raised in the audit. After completion of this year s external audit, BKD met with the Supervisory Committee on March 13, The discussion items includedd a complete review of thee financial statement and audit reports. BKD has issued an unmodified opinion of Purdue Federal s financial statements and didd not note any material weaknesses or significant deficiencies relating to internal controls at Purdue Federal. All financial and required letters were reviewed with no major exceptions found. So, once again this year, the result of the audit is very positive news. The Internal Audit Department staff also reports to the Supervisory Committee at regular meetings. Internal Audit staff performs internal audits, review internal controls, and coordinate specialized external audits. Additionally, the new position of Vice President of Audit & Compliance was created and filled this year to help guide the credit union through increasing federal regulatory burdens. The audit opinion from BKD reflects the good leadership and careful work of the Purdue Federal Internal Audit Department and Management Team. The Supervisory Committee would like to acknowledge the outstanding support and professionalism exhibited by the credit union staff. We thank the Management Team for the exceptional care and high ethical standards during these challenging financial times. I would also like to acknowledge and thank all the members of the Supervisory Committee for volunteering their time and expertise. It is a pleasure to servee you, the members. Lucia Anderson Supervisory Committee Chair March 13, 2014

6 Auditor s Report and Consolidated Financial Statements

7 Contents Independent Auditor s Report... 1 Consolidated Financial Statements Balance Sheets... 3 Statements of Income... 4 Statements of Comprehensive Income... 5 Statements of Changes in Members Equity... 6 Statements of Cash Flows... 7 Notes to Financial Statements... 8

8 Independent Auditor s Report Board of Directors and Supervisory Committee Purdue Federal Credit Union West Lafayette, Indiana We have audited the accompanying consolidated financial statements of Purdue Federal Credit Union and its subsidiary, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in members' equity and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

9 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Purdue Federal Credit Union and its subsidiary as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Indianapolis, Indiana March 21,

10 Consolidated Balance Sheets Assets Cash and due from banks $ 7,606,744 $ 8,924,936 Interest-bearing demand deposits 70,980,305 58,973,726 Cash and cash equivalents 78,587,049 67,898,662 Interest-bearing deposits 13,378,000 12,745,000 Available-for-sale securities 117,502, ,101,666 Loans held for sale 1,029,184 2,232,549 Loans, net of allowance for loan losses of $3,665,000 and $3,300,000 at 541,310, ,093,283 Premises and equipment, net 12,828,351 13,204,424 National Credit Union Share Insurance Fund (NCUSIF) deposit 6,503,226 6,160,515 Federal Home Loan Bank stock, at cost 2,893,000 2,572,300 Cash surrender value of life insurance 11,958,070 11,932,186 Interest receivable 1,328,795 1,446,601 Other 6,705,430 6,047,632 Liabilities Total assets $ 794,023,961 $ 756,434,818 Members' deposits $ 711,366,597 $ 678,602,289 Other liabilities 6,924,378 6,503,627 Total liabilities 718,290, ,105,916 Members Equity Regular reserve 7,502,640 7,502,640 Undivided earnings 67,828,551 62,819,355 Accumulated other comprehensive income 401,795 1,006,907 Total members equity 75,732,986 71,328,902 Total liabilities and members equity $ 794,023,961 $ 756,434,818 See 3

11 Consolidated Statements Income Interest Income Loans $ 23,891,904 $ 24,375,707 Securities 1,347,078 2,229,952 Interest-earning deposits with other financial institutions 324, ,973 25,563,915 26,836,632 Interest Expense Members' deposits 2,958,884 3,650,575 Short-term borrowings Total interest expense 2,958,898 3,650,593 Net Interest Income 22,605,017 23,186,039 Provision for Loan Losses 1,880,339 1,625,062 Net Interest Income After Provision for Loan Losses 20,724,678 21,560,977 Other Income Customer service fees 2,987,173 3,458,551 Card transaction interchange 6,083,361 5,688,853 Net gains on loan sales 2,192,160 3,588,522 Gain on sales of securities 9,477 14,505 Loss on sale/disposal of premises and equipment (12,022) (14,701) Other 924, ,371 Total other income 12,184,465 13,018,101 Other Expenses Salaries and employee benefits 11,891,970 10,995,941 Net occupancy expense 1,388,237 1,363,690 Office operations and equipment expense 4,479,750 4,241,640 Loan servicing 4,856,752 3,020,829 ATM and debit card expense 2,163,487 1,862,270 NCUA premium expense 520, ,249 Advertising and marketing expense 1,549,248 1,480,283 Other 1,050,245 1,209,626 Total other expenses 27,899,947 24,759,528 Net Income $ 5,009,196 $ 9,819,550 See 4

12 Consolidated Statements of Comprehensive Income Years Ended Net Income $ 5,009,196 $ 9,819,550 Other Comprehensive Income (Loss) Unrealized appreciation (depreciation) on available-for-sale securities (595,635) 512,059 Less: reclassification adjustment for realized gains included in net income 9,477 14,505 (605,112) 497,554 Comprehensive Income $ 4,404,084 $ 10,317,104 See 5

13 Consolidated Statements of Changes in Members Equity Years Ended Accumulated Other Regular Undivided Comprehensive Reserve Earnings Income Total Balance, January 1, 2012 $ 7,502,640 $ 52,999,805 $ 509,353 $ 61,011,798 Net income 9,819,550 9,819,550 Other comprehensive income 497, ,554 Balance, December 31, ,502,640 62,819,355 1,006,907 71,328,902 Net income 5,009,196 5,009,196 Other comprehensive loss (605,112) (605,112) Balance, December 31, 2013 $ 7,502,640 $ 67,828,551 $ 401,795 $ 75,732,986 See 6

14 Consolidated Statements of Cash Flows Years Ended Operating Activities Net income $ 5,009,196 $ 9,819,550 Items not requiring (providing) cash Depreciation and amortization 1,516,978 1,516,978 Provision for loan losses 1,880,339 1,625,062 Accretion and amortization 1,586,823 2,007,662 Gain on sale of available-for-sale securities (9,477) (14,505) Loss on the sale/disposal of fixed assets 12,022 14,701 Changes in Interest receivable 117, ,638 Loans held for sale 1,203,365 (142,734) Other assets (683,682) (1,045,450) Other liabilities 420,751 (1,384,714) Net cash provided by operating activities 11,054,121 12,685,188 Investing Activities Proceeds from maturities of available-for-sale securities 50,541,774 53,057,537 Proceeds from sales of available-for-sale securities 5,010,575 3,734,171 Net change in interest-bearing time deposits (633,000) (6,025,000) Net change in loans (43,097,461) (29,477,810) Purchase of available-for-sale securities (43,135,592) (68,973,052) Purchase of premises and equipment (1,152,927) (2,163,328) Purchase of life insurance - (9,271,325) Purchase of FHLB stock (320,700) - Net change in NCUSIF deposit (342,711) (537,506) Net cash used in investing activities (33,130,042) (59,656,313) Financing Activity - net change in members' deposits 32,764,308 47,706,723 Increase in Cash and Cash Equivalents 10,688, ,598 Cash and Cash Equivalents, Beginning of Year 67,898,662 67,163,064 Cash and Cash Equivalents, End of Year $ 78,587,049 $ 67,898,662 Supplemental Cash Flows Information Interest paid $ 2,958,898 $ 3,650,593 See 7

15 Note 1: Nature of Operations and Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Purdue Federal Credit Union and its wholly owned credit union service organization, CU Channels, LLC (CUSO). All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations Purdue Federal Credit Union (Credit Union) is a federally chartered credit union with locations in Tippecanoe and La Porte counties in Indiana. The Credit Union offers a broad range of financial services to its members. The Credit Union s primary services include accepting members deposits and making loans. The Credit Union grants loans primarily to members who are individuals (including family members) employed at or attending Purdue University campuses. The majority of its loans are collateralized by specific items, including consumer assets, residential real estate and member deposit balances. Additional services include financial planning, investment, trust and insurance services to Credit Union members through CUNA Brokerage Services, Inc., a third-party provider. The CUSO provides services to nonmember credit unions, primarily first mortgage loan origination and servicing for other credit unions. The CUSO is a 14% owner of Passageways LLC, a software development company providing portal solutions to credit unions and community banks. Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported and disclosed in the consolidated financial statements, and future results could differ from those estimates. The collectibility of loans, valuation and amortization of loan-servicing rights and fair values of financial instruments are particularly subject to change. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and fair values of financial instruments. Cash and Cash Equivalents The Credit Union considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2013, the Credit Union s cash accounts exceeded the insured limits by approximately $57,237,000. This amount represents uninsured funds held with the Federal Reserve Bank and Federal Home Loan Bank of Indianapolis, which are not federally insured. Interest-Bearing Deposits Interest-bearing deposits mature within two years and are carried at cost. 8

16 Securities Available-for-sale securities, which include any federal agencies, mortgage-backed, mutual funds and an annuity contract for which the Credit Union has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded in other comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Federal Home Loan Bank (FHLB) Stock FHLB stock is a required investment based upon predetermined formulas and is carried at cost. The FHLB stock may only be sold to the FHLB at par value. Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Loans sold in the secondary market are primarily sold with the servicing of the loans being retained. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 9

17 Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Credit Union s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. A loan is considered impaired when, based on current information and events, it is probable that the Credit Union will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan s effective interest rate, the loan s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Credit Union does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. 10

18 Premises and Equipment Premises and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Leasehold improvements are amortized over the shorter of the estimated useful lives of the related assets or the lease term. NCUSIF Deposit The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is required by NCUA regulations in an amount equal to 1 percent of the Credit Union s insured shares. The fund was created by Congress in 1970 to insure member deposits in credit unions and currently insures member deposits up to $250,000. Administered by NCUA, the NCUSIF is backed by the full faith and credit of the U.S. Government. The deposit would be refunded to the Credit Union if its insurance coverage is terminated, it converts to insurance coverage from another source, or the operations of the fund are transferred from the NCUA Board. NCUA Insurance Premiums A credit union is required to pay an annual insurance premium to the NCUSIF equal to one-twelfth of one percent of its total insured shares, unless the payment is waived or reduced by the NCUA Board. In addition, beginning in 2010, federally insured credit unions are assessed annual insurance premiums by the Temporary Corporate Credit Union Stabilization Fund (TCCUSF). The TCCUSF was created for the purposes of accruing the losses of the corporate credit union system and, over time, assess the credit union system for recovery of such losses. Current legislation specifies that the TCCUSF will terminate on June 30, The Credit Union paid approximately $520,000 and $585,000 in share insurance premiums in 2013 and 2012, respectively. Members' Deposits Members' deposits are subordinated to all other liabilities of the Credit Union upon liquidation. Interest on members' deposits is based on available earnings and is not guaranteed by the Credit Union. Interest rates on members' deposits are set by the board of directors, based on an evaluation of a number of factors, including market conditions. Members' Equity The Credit Union is required by regulation to maintain a statutory reserve. This reserve, which represents a regulatory restriction of retained earnings, is not available for the payment of interest to members. 11

19 Comprehensive Income Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale, which is recognized as a separate component of members equity. Income Taxes The Credit Union is exempt by statute from federal and state income taxes. Note 2: Securities The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows: 2013 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government and Federal agencies $ 14,259,799 $ 2,433 $ (166,414) $ 14,095,818 Mortgage-backed securities Government-sponsored entities (GSE) residential 100,472, ,706 (813,060) 99,882,258 Mutual funds 1,386, ,474-1,895,612 Annuity contract 982, ,655-1,628,763 Total investment securities $ 117,100,657 $ 1,381,268 $ (979,474) $ 117,502, Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government and Federal agencies $ 26,229,887 $ 92,618 $ (1,621) $ 26,320,884 Mortgage-backed securities Government-sponsored entities (GSE) residential 102,551, ,213 (127,483) 102,812,036 Mutual funds 1,331, ,461-1,559,919 Annuity contract 982, ,719-1,408,827 Total investment securities $ 131,094,759 $ 1,136,011 $ (129,104) $ 132,101,666 12

20 The amortized cost and fair value of available-for-sale securities at December 31, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-Sale Amortized Fair Cost Value Within one year $ 2,007,263 $ 2,009,696 One to five years 12,252,536 12,086,122 14,259,799 14,095,818 Mortgage-backed securities Government-sponsored entities (GSE) residential 100,472,612 99,882,258 Mutual funds 1,386,138 1,895,612 Annuity contract 982,108 1,628,763 Totals $ 117,100,657 $ 117,502,451 Gross gains of approximately $9,000 resulting from sales of available-for-sale securities were realized for Securities in the amount of approximately $5,011,000 were sold in Gross gains of approximately $15,000 resulting from sales of available-for-sale securities were realized for Securities in the amount of approximately $3,734,000 were sold in Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2013 and 2012 was approximately $75,196,000 and $28,654,000, which is 64% and 22%, respectively, of the Credit Union s available-for-sale investment portfolio. These declines in fair values primarily resulted from changes in market interest rates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the otherthan-temporary impairment is identified. 13

21 The following tables show the Credit Union s investments gross unrealized losses and fair value of the Credit Union s investments with unrealized losses that are not deemed to be other-thantemporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at : 2013 Less Than 12 Months 12 Months or More Total Description of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses U.S. Government and Federal agencies $ 10,082,864 $ (148,969) $ 2,003,258 $ (17,445) $ 12,086,122 $ (166,414) Mortgage-backed securities GSE residential 49,268,764 (671,038) 13,840,660 (142,022) 63,109,424 (813,060) Total $ 59,351,628 $ (820,007) $ 15,843,918 $ (159,467) $ 75,195,546 $ (979,474) 2012 Less Than 12 Months 12 Months or More Total Description of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses U.S. Government and Federal agencies $ 2,025,490 $ (1,621) $ - $ - $ 2,025,490 $ (1,621) Mortgage-backed securities GSE residential 16,333,578 (70,331) 10,294,815 (57,152) 26,628,393 (127,483) Total $ 18,359,068 $ (71,952) $ 10,294,815 $ (57,152) $ 28,653,883 $ (129,104) The unrealized losses on U.S. Government and Federal agencies and mortgage-backed securities at were primarily due to changes in interest rates. The Credit Union expects to recover the amortized cost basis of these securities over the terms of the securities. Because the Credit Union does not intend to sell the investments, and it is not likely the Credit Union will be required to sell the investments before recovery of their amortized cost basis prior to maturity, the Credit Union does not consider these investments to be other-than-temporarily impaired at December 31,

22 Note 3: Loans Portfolio segments of loans at December 31 include: Consumer - secured $ 50,984,693 $ 51,763,608 Consumer - unsecured 69,531,171 62,115,030 Residential - first mortgage 271,028, ,408,379 Residential - home equity 49,596,340 45,042,388 Commercial 102,552,112 80,690,241 Subtotal 543,693, ,019,646 Net deferred loan origination costs 1,282,111 1,373,637 Allowance for loan losses (3,665,000) (3,300,000) $ 541,310,405 $ 500,093,283 In the normal course of business, the Credit Union makes loans to directors, supervisory committee members and executive officers. The aggregate dollar amount of these loans amounted to approximately $3,802,000 and $4,576,000 at, respectively. The risk characteristics of each loan portfolio segment are as follows: Consumer Secured, Consumer Unsecured, Residential First Mortgage, Residential Home Equity Consumer and residential loans consist of four segments - consumer secured, consumer unsecured, residential first mortgage and residential home equity loans. Consumer secured loans are secured by personal assets, such as automobiles or recreational vehicles. Consumer unsecured loans are primarily made up of outstanding VISA credit card balances. For residential first mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Credit Union generally establishes a maximum loan-to-value ratio of 80% and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family primary residences. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. 15

23 Commercial The Credit Union s commercial loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Credit Union s commercial real estate portfolio are diverse. However, most properties are located within the Credit Union s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The following presents, by portfolio segment, the activity in the allowance for loan losses for the years ended : 2013 Consumer Consumer Residential Residential Secured Unsecured First Mortgage Home Equity Commercial Total Beginning Balance $ 333,780 $ 1,771,836 $ 429,244 $ 511,447 $ 253,693 $ 3,300,000 Provision 215, ,312 56, , ,455 1,880,339 Loans charged off (261,699) (1,103,160) (79,173) (413,001) (5,088) (1,862,121) Recoveries 59, ,971 16,336 38, ,782 Ending Balance $ 347,005 $ 1,747,959 $ 422,441 $ 646,015 $ 501,580 $ 3,665, Consumer Consumer Residential Residential Secured Unsecured First Mortgage Home Equity Commercial Total Beginning Balance $ 445,306 $ 1,364,860 $ 249,902 $ 472,667 $ 389,311 $ 2,922,046 Provision 107,417 1,373, ,880 57,475 (133,152) 1,625,062 Loans charged off (289,708) (1,227,301) (46,124) (26,431) (3,972) (1,593,536) Recoveries 70, ,835 5,586 7,736 1, ,428 Ending Balance $ 333,780 $ 1,771,836 $ 429,244 $ 511,447 $ 253,693 $ 3,300,000 16

24 The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on the portfolio segment and impairment method as of December 31, 2013 and 2012: 2013 Consumer Consumer Residential Residential Secured Unsecured First Mortgage Home Equity Commercial Total Allowance Balances: Individually evaluated for impairment $ - $ - $ 50,906 $ - $ 100,000 $ 150,906 Collectively evaluated for impairment 347,005 1,747, , , ,580 3,514,094 Total allowance for loan losses $ 347,005 $ 1,747,959 $ 422,441 $ 646,015 $ 501,580 $ 3,665,000 Loan Balances: Individually evaluated for impairment $ - $ - $ 367,502 $ 237,014 $ 2,454,469 $ 3,058,985 Collectively evaluated for impairment 50,984,693 69,531, ,661,476 49,359, ,097, ,634,309 Total loan balances $ 50,984,693 $ 69,531,171 $ 271,028,978 $ 49,596,340 $ 102,552,112 $ 543,693, Consumer Consumer Residential Residential Secured Unsecured First Mortgage Home Equity Commercial Total Allowance Balances: Individually evaluated for impairment $ - $ - $ 67,429 $ 386,662 $ - $ 454,091 Collectively evaluated for impairment 333,780 1,771, , , ,693 2,845,909 Total allowance for loan losses $ 333,780 $ 1,771,836 $ 429,244 $ 511,447 $ 253,693 $ 3,300,000 Loan Balances: Individually evaluated for impairment $ - $ - $ 1,178,922 $ 544,168 $ 427,869 $ 2,150,959 Collectively evaluated for impairment 51,763,608 62,115, ,229,457 44,498,220 80,262, ,868,687 Total loan balances $ 51,763,608 $ 62,115,030 $ 262,408,379 $ 45,042,388 $ 80,690,241 $ 502,019,646 17

25 Management s general practice is to proactively classify loans individually evaluated for impairment to the fair value on the underlying collateral. Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. Generally, charge-offs occur within six months or when collateral is obtained, whichever is later. The Credit Union s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined. Management grades all loans except commercial loans as performing or nonperforming. Nonperforming are defined as those loans that are more than 90 days past due and nonaccruing. The following tables present the credit risk profile of the Credit Union s consumer and residential loan portfolio based on rating category and payment activity as of : 2013 Consumer Consumer Residential Residential Secured Unsecured First Mortgage Home Equity Total Grade: Performing $ 50,912,162 $ 69,035,234 $ 270,937,084 $ 49,492,976 $ 440,377,456 Nonperforming 72, ,937 91, , ,726 Total $ 50,984,693 $ 69,531,171 $ 271,028,978 $ 49,596,340 $ 441,141, Consumer Consumer Residential Residential Secured Unsecured First Mortgage Home Equity Total Grade: Performing $ 51,661,209 $ 61,654,886 $ 261,271,949 $ 44,341,567 $ 418,929,611 Nonperforming 102, ,144 1,136, ,821 2,399,794 Total $ 51,763,608 $ 62,115,030 $ 262,408,379 $ 45,042,388 $ 421,329,405 For commercial loans, the Credit Union promptly classifies loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower s ability to adequately meet its obligations. 18

26 Internal Risk Categories Commercial loan grades are numbered 1 through 6. Grades 1 through 4 are considered satisfactory grades. The grades of 5-6, or Substandard, 7, or Doubtful, and 8, or Loss, refer to assets that are classified. The use and application of these grades by the Credit Union will be uniform and shall conform to the Credit Union s policy. Pass (1-4) loans are of reasonable credit strength and repayment ability providing an acceptable credit risk due to one or more underlying weaknesses. Substandard (5-6) loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a welldefined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Credit Union will sustain some loss if the deficiencies are not corrected. Doubtful (7) loans have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable. Loss (8) loans are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off even though partial recovery may be affected in the future. The following table presents the credit risk profile of the Credit Union s commercial loan portfolio based on internal rating category and payment activity as of : Commercial Grade: Pass (1-4) $ 100,097,643 $ 80,264,320 Substandard (5-6) 2,454, ,921 Doubtful (7) - - Loss (8) - - Total $ 102,552,112 $ 80,690,241 19

27 The following tables present the Credit Union s loan portfolio aging analysis of the recorded investment in loans as of : 2013 Greater Days Days Than Total Total Past Due Past Due 90 Days Past Due Current Loans Consumer - secured $ 135,843 $ 71,179 $ 72,531 $ 279,553 $ 50,705,140 $ 50,984,693 Consumer - unsecured 368, , ,937 1,117,793 68,413,378 69,531,171 Residential - first mortgage 328, ,899 91, , ,494, ,028,978 Residential - home equity 137,217 38, , ,212 49,317,128 49,596,340 Commercial - 20, , , ,100, ,552,112 Total loans $ 969,851 $ 498,012 $ 1,195,221 $ 2,663,084 $ 541,030,210 $ 543,693, Greater Days Days Than Total Total Past Due Past Due 90 Days Past Due Current Loans Consumer - secured $ 396,535 $ 45,978 $ 102,399 $ 544,912 $ 51,218,696 $ 51,763,608 Consumer - unsecured 255, , , ,872 61,207,158 62,115,030 Residential - first mortgage 449, ,414 1,136,430 1,758, ,650, ,408,379 Residential - home equity 91, , ,875 44,250,513 45,042,388 Commercial 4, , ,120 80,260,121 80,690,241 Total loans $ 1,196,487 $ 410,952 $ 2,825,715 $ 4,433,154 $ 497,586,492 $ 502,019,646 All loans greater than 90 days past due are nonaccrual loans. There were no accruing loans delinquent 90 days or more at. 20

28 The following tables present impaired loans for the years ended : Average Unpaid Investment in Interest Recorded Principal Specific Impaired Income Balance Balance Allowance Loans Recognized Impaired loans without a specific valuation allowance: Consumer - secured $ - $ - $ - $ - $ - Consumer - unsecured Residential - first mortgage ,825 9,493 Residential - home equity 237, , ,924 - Commercial 2,028,548 2,028,548-1,201,561 66, Total impaired loans with no related specific reserve $ 2,265,562 $ 2,265,562 $ - $ 1,993,310 $ 75,569 Impaired loans with a specific valuation allowance: Consumer - secured $ - $ - $ - $ - $ - Consumer - unsecured Residential - first mortgage 367, ,502 50, ,602 16,273 Residential - home equity Commercial 425, , , ,735 13,915 Total impaired loans with an allowance recorded $ 793,423 $ 793,423 $ 150,906 $ 799,337 $ 30,188 Total impaired loans $ 3,058,985 $ 3,058,985 $ 150,906 $ 2,792,647 $ 105,757 21

29 2012 Average Unpaid Investment in Interest Recorded Principal Specific Impaired Income Balance Balance Allowance Loans Recognized Impaired loans without a specific valuation allowance: Consumer - secured $ - $ - $ - $ - $ - Consumer - unsecured Residential - first mortgage 446, , ,266 - Residential - home equity Commercial 427, , ,317 14,083 Total impaired loans with no related specific reserve $ 874,135 $ 874,135 $ - $ 874,583 $ 14,083 Impaired loans with a specific valuation allowance: Consumer - secured $ - $ - $ - $ - $ - Consumer - unsecured Residential - first mortgage 732, ,656 67, ,985 15,223 Residential - home equity 544, , , ,168 - Commercial Total impaired loans with an allowance recorded $ 1,276,824 $ 1,276,824 $ 454,091 $ 1,281,153 $ 15,223 Total impaired loans $ 2,150,959 $ 2,150,959 $ 454,091 $ 2,155,736 $ 29,306 Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Credit Union requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. When cash payments are received on impaired loans in any loan classification, the Credit Union records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the negotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with renegotiated terms for a period of at least six months. 22