CALIFORNIA CREDIT UNION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017

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1 CONSOLIDATED FINANCIAL STATEMENTS

2 TABLE OF CONTENTS Page Independent Auditor s Report 1 Consolidated Statement of Financial Condition 2 Consolidated Statement of Income 3 Consolidated Statement of Comprehensive Income 4 Consolidated Statement of Members Equity 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7

3 INDEPENDENT AUDITOR S REPORT Board of Directors and Supervisory Committee California Credit Union We have audited the accompanying consolidated financial statements of California Credit Union (the credit union) and subsidiary, which comprise the consolidated statement of financial condition as of December 31, 2017, the consolidated statements of income, comprehensive income, members equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated 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 of 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 audit. We conducted our audit 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 of 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 controls relevant to the credit union 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 credit union s internal controls. 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of California Credit Union and subsidiary as of December 31, 2017, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Burbank, California April 19,

4 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION ASSETS Cash and cash equivalents $ 253,191 Investments: Trading securities 9,845 Securities available for sale, at fair value 328,605 Securities held to maturity 580 Other 15,879 Loans held for sale 5,357 Loans receivable, net 2,147,551 Accrued interest receivable 8,226 Property and equipment, net of accumulated depreciation 120,355 Note receivable 7,290 National Credit Union Share Insurance Fund (NCUSIF) deposit 22,962 Goodwill 23,115 Other assets 88,338 Total assets $ 3,031,294 LIABILITIES AND MEMBERS EQUITY Liabilities: Members share accounts $ 2,517,867 Borrowed funds 140,000 Accrued expenses and other liabilities 70,850 Total liabilities 2,728,717 Members equity: Regular reserve 16,459 Undivided earnings 157,826 Equity acquired in merger 167,986 Accumulated other comprehensive loss (39,694) Total members equity 302,577 Total liabilities and members equity $ 3,031,294 The accompanying notes are an integral part of these consolidated financial statements. 2

5 CONSOLIDATED STATEMENT OF INCOME YEAR ENDED INTEREST INCOME Cash balances $ 2,289 Loans receivable 82,948 Investments 8,379 Total interest income 93,616 INTEREST EXPENSE Members share accounts 6,649 Borrowed funds 1,467 Total interest expense 8,116 NET INTEREST INCOME 85,500 PROVISION FOR LOAN LOSSES 5,387 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 80,113 NON-INTEREST INCOME Member fees and service charges 14,831 Interchange Income 9,832 Service income and other 3,689 Net gain on sale of loans 3,942 Net gain on sale of investments 69 Net real estate rental income 4,355 Total non-interest income 36,718 NON-INTEREST EXPENSE Compensation and benefits 55,732 Office occupancy 10,122 Other 35,565 Total non-interest expense 101,419 NET INCOME $ 15,412 The accompanying notes are an integral part of these consolidated financial statements. 3

6 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME YEAR ENDED NET INCOME $ 15,412 OTHER COMPREHENSIVE LOSS Unrealized losses on securities available for sale: Unrealized holding losses arising during the year (29) Reclassification adjustment for net gain included in net income (69) (98) Defined benefit plan: Net loss recognized during the year (5,778) Amortization of periodic service cost and actuarial loss included in net periodic benefit cost 5,445 (333) Total other comprehensive loss (431) COMPREHENSIVE INCOME $ 14,981 The accompanying notes are an integral part of these consolidated financial statements. 4

7 CONSOLIDATED STATEMENT OF MEMBERS EQUITY YEAR ENDED Accumulated Equity Other Regular Undivided Acquired Comprehensive Reserve Earnings in Merger Loss Total Balance, December 31, 2016, as previously reported $ 16,459 $ 143,801 $ - $ (39,263) $ 120,997 Prior period adjustment (Note 17) - (1,387) - - (1,387) Balance, December 31, 2016, restated 16, ,414 - (39,263) 119,610 Comprehensive income: Net income - 15, ,412 Other comprehensive loss - - (431) (431) Total comprehensive income 14,981 Captial arising from acquisition of North Island Credit Union , ,986 Balance, December 31, 2017 $ 16,459 $ 157,826 $ 167,986 $ (39,694) $ 302,577 The accompanying notes are an integral part of these consolidated financial statements. 5

8 CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 15,412 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,387 Gain on sale of loans (3,942) Gain on sale of investments (69) Gain on trading securities (934) Amortization of fair value adjustment of acquired loans 4,592 Amortization of deferred loan costs, net 404 Amortization of securities, net 2,793 Depreciation and amortization 7,456 Amortization of core deposit intangible 5,452 Net change in operating assets and liabilities: Loans held for sale (717) Accrued interest receivable (683) NCUSIF deposit (1,272) Other assets (20,528) Accrued expenses and other liabilities 6,670 Net cash provided by operating activities 20,021 CASH FLOWS FROM INVESTING ACTIVITIES Cash received from merger 137,717 Purchases of trading securities (29) Purchases of securities available for sale (51,240) Proceeds from sales, maturities and prepayments of securities available for sale 57,649 Proceeds from sales, maturities and prepayments of securities held to maturity 83 Net decrease in other investments 8,959 Net increase in loans receivable (245,191) Net decrease in note receivable 442 Proceeds from sale of loans 166,016 Purchases of property and equipment (6,506) Net cash provided by investing activities 67,900 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in members share accounts 108,822 Net cash provided by financing activities 108,822 NET INCREASE IN CASH AND CASH EQUIVALENTS 196,743 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 56,448 CASH AND CASH EQUIVALENTS, END OF YEAR $ 253,191 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid on members share accounts and borrowed funds $ 8,010 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Fair value of assets acquired in merger $ 1,143,508 Fair value of liabilities assumed in merger 1,136,355 The accompanying notes are an integral part of these consolidated financial statements. 6

9 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: California Credit Union (the credit union) is a state-chartered credit union organized under the California Credit Union Act. Membership in the credit union is limited to qualified individuals as defined in its charter and bylaws. The credit union s primary source of revenue is providing loans to members. The credit union conducts its operations through 24 branches located in Los Angeles County and San Diego County, California. Field of Membership and Sponsor: Membership in the credit union is limited to those individuals who qualify under defined terms specified in the bylaws, including any employee of any public or private California school, community college, state college, university or their governing organizations (districts, regions, etc.), or any member of any organization affiliated with and recognized by said entities, and their successor organizations; or any and all persons who live, regularly work, currently attend school or currently worship in San Diego County, California, Orange County, California, or Riverside County, California, as well as any businesses, corporations and other legal entities in those counties. Principles of Consolidation: The consolidated financial statements include the accounts of the credit union and its wholly owned subsidiary, California Members Title Insurance Company (CMTIC). CMTIC is 100% owner of California Members Title Company (CMTC). CMTC is engaged in the business of preparing title searches, title examinations, title reports, certificates or abstracts of title upon the basis of which a title insurer writes title policies. All significant intercompany accounts and transactions have been eliminated in the consolidation. Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the actuarial estimate of the defined benefit obligation and the fair value of financial instruments. Fair Value: Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements, provides a framework for measuring fair value that requires an entity to determine fair value based on the exit price in the principal market for the asset or liability being measured. Fair value is defined as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants. The guidance also establishes a three-level fair value hierarchy that describes the inputs used to measure assets and liabilities. Level 1 asset and liability fair values are based on quoted prices in active markets for identical assets and liabilities. Level 2 asset and liability fair values are based on observable inputs that include quoted market prices for similar assets or liabilities, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 assets and liabilities are financial instruments whose value is calculated by the use of pricing models and/or discounted cash flow methodologies, as well as financial instruments for which the determination of fair value requires significant management judgment or estimation. The credit union s financial instruments and other accounts subject to fair value measurement and/or disclosure are summarized in Note 9. 7

10 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and Cash Equivalents: For purposes of the consolidated statements of financial condition and cash flows, cash and cash equivalents include cash on hand and in banks and all highly liquid debt instruments with original maturities of three months or less. Investments: Trading securities are measured at fair value as of the consolidated statement of financial condition date as they occur, with changes in fair value recognized in earnings. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the credit union to retain its investments in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date, and the costs of securities sold are determined using the specific-identification method. Other investments are classified separately and stated at cost. Federal Home Loan Bank (FHLB) Stock: The credit union, as a member of the FHLB of San Francisco system, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of its membership asset value, subject to a cap of $15 million or 2.7% of advances from the FHLB. There is no ready market for the FHLB stock; therefore, it has no quoted market value and is reported on the consolidated statement of financial condition at cost. Loans Held for Sale: Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to income. All sales are made without recourse. Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the credit union. Gains and losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying amount of the related mortgage loans sold. Loans Receivable, Net: The credit union grants commercial, residential real estate and consumer loans to members and purchases U.S. government-guaranteed loans. The members or borrowers ability to honor their loan agreements is dependent upon the economic stability of the various groups that compose the credit union s field of membership and commercial real estate borrowers. Loans that the credit union has the intent and ability to hold for the foreseeable future are stated at unpaid principal balances, less an allowance for loan losses and net deferred loan origination fees and costs. Interest on loans is recognized over the term of the loan and calculated using the simple-interest method on principal amounts outstanding. The accrual of interest on loans is discontinued at the time a loan is 90 days delinquent. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if management believes, after considering economic conditions, business conditions and collection efforts, that collection of principal or interest is considered doubtful. 8

11 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) All interest accrued but not collected for loans placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until the associated loans qualify 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. The credit union s policy for repossessing collateral is that when all other collection efforts have been exhausted, the credit union enforces its first lienholder status and repossesses the collateral. Repossessed collateral normally consists of commercial and residential real estate and vehicles. Loan Origination Fees: Nonrefundable loan origination fees and certain direct costs associated with the origination or purchase of real estate loans are deferred and recognized over the seven-year life of the related loans as an adjustment of the loan s yield using the interest method. Troubled Debt Restructurings (TDRs): In situations where, for economic or legal reasons related to a member s financial difficulties, the credit union grants a concession to a member for other than an insignificant period of time that the credit union would not otherwise consider, the related loan is classified as a TDR. The credit union strives to identify members in financial difficulty early and work with them to modify their loan to more affordable terms before it reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and avoid foreclosure or repossession of the collateral. In cases where the credit union grants a member new terms that provide for a reduction of interest or principal, the credit union measures any impairment on the restructuring using the methodology for individually impaired loans. Loans classified as TDRs are reported as impaired loans. Allowance for Loan Losses: The credit union maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing monthly assessments of the probable estimated losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and decreased by charge-offs when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management develops and documents its systematic methodology for determining the allowance for loan losses by first dividing its portfolio into four segments: commercial, U.S. government guaranteed, residential real estate and consumer. The credit union further divides the portfolio segments into classes based on initial measurement attributes, risk characteristics or its method of monitoring and assessing credit risk. The commercial segment comprises commercial real estate loans. The classes within the residential real estate portfolio segment are first mortgage and home equity line of credit (HELOC) and other mortgage. The classes within the consumer portfolio segment are automobile, credit card and other consumer. The allowance for loan losses is evaluated on a regular basis by management and is based on 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, the 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. In addition, regulatory agencies, as an integral part of their examination process, periodically review the credit union s allowance for loan losses and may require the credit union to make additions to the allowance based on their judgment about the information available to them at the time of their examinations. 9

12 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The allowance for loan losses consists of the specific loan loss allowance for impaired loans and the general loan loss allowance. The credit union evaluates the residential real estate and consumer segments for impairment on a pooled basis, unless they represent TDRs, as part of the general loan loss allowance and evaluates the commercial segment individually. Impaired loans are subject to the specific loan loss allowance. Loans are considered impaired when the individual evaluation of current information regarding the borrower s financial condition, loan collateral and cash flows indicates that the credit union will be unable to collect all amounts due according to the contractual terms of the loan agreement, including interest payments. Impairment is measured based on the present value of the expected future cash flows discounted at the loan s effective interest rate or, as an expedient, at the loan s observable market price or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. A general loan loss allowance is provided on loans not specifically identified as impaired. The allowance is determined by pooling residential real estate, consumer and non-impaired commercial loans by portfolio class and applying a historical loss percentage to each class. The credit union s historical loss percentage may be adjusted for significant qualitative and environmental factors that, in management s judgment, affect the collectibility of the portfolio as of the evaluation date. The conditions evaluated for qualitative and environmental factors may include existing general economic and business conditions affecting the key lending areas and products of the credit union, credit quality trends and risk identification, collateral values, loan volumes, underwriting standards and concentrations, specific industry conditions within portfolio segments, recent loss experience in particular classes of the portfolio, and the duration of the current business cycle. In estimating the allowance for loan losses, significant risk characteristics considered for the residential real estate segment were historical and expected future charge-offs, borrower s credit and property collateral. Significant characteristics considered for the commercial segment were type of property, geographical concentrations and risks, and individual borrower financial condition. Loans Acquired in Merger: Loans that the credit union has acquired in merger are aggregated into pools with similar risk characteristics. For loans with evidence of credit deterioration, expected cash flows are estimated, and, if they are less than the carrying value, a credit risk discount is established. The credit union calculates the carrying values of the pools, effective yields, impairment and underlying loans based on actual and projected events. The excess of the expected cash flows is considered to be accretable yield and is recognized as interest income over the estimated life of the loans. The accretable yield may fluctuate due to changes in the timing and amounts of expected cash flows. Property and Equipment: Land is carried at cost. Buildings, leasehold improvements, and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the lesser of the useful life of the assets or the expected terms of the related leases. Estimated useful lives of the assets are as follows: Buildings Furniture and equipment Leasehold improvements years 3 5 years 5 years NCUSIF Deposit: The deposit in the NCUSIF is in accordance with National Credit Union Administration (NCUA) regulations, which require the maintenance of a deposit by each insured credit union in an amount equal to 1% of its insured shares. The deposit will be refunded to the credit union if its insurance coverage is terminated, if it converts insurance coverage to another source, or if the operations of the fund are transferred from the NCUA Board. 10

13 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NCUSIF Insurance Premium and Temporary Corporate Credit Union Stabilization Fund (TCCUSF) Assessment: The credit union is required to pay an annual insurance premium and/or TCCUSF assessment based on a percentage of its total insured shares as declared by the NCUA Board, unless the payment is waived by the Board. The NCUA did not approve an assessment during the year ended December 31, Goodwill: On March 1, 2017, the credit union merged with North Island Credit Union (NICU). The merger resulted in goodwill of $23,114,683. The amount represents the fair value of the acquired entity as a whole in excess of the fair value of the individual assets and liabilities. Goodwill is determined to have an indefinite useful life and is not amortized. Management reviews goodwill for impairment on an annual basis. If impairment is noted, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds its estimated fair value. See Note 16 for a discussion of the merger. Other Real Estate Owned: Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at fair value less estimated selling costs at the date of foreclosure. Any write-downs based on the asset s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations (assuming multiple properties are involved) are performed by management and property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less costs to sell. There is no other real estate owned as of December 31, Loan Servicing: Servicing assets are recognized as separate assets initially measured at fair value when the credit union sells mortgage loans with servicing retained. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, discount rate, custodial earnings rate, inflation rate, ancillary income, prepayment speeds, and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as non-interest income when earned. Servicing assets are evaluated for impairment based on the fair value of the rights as compared to amortized cost. Impairment is determined through stratifying servicing rights by predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the credit union later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to have been surrendered when (1) the assets have been isolated from the credit union, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the credit union does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. 11

14 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Members Share Accounts: Members share accounts are the deposit accounts of the members of the credit union. Share ownership entitles a member to vote in the annual elections of the Board of Directors and on other credit union matters. Irrespective of the amount of shares owned, no member has more than one vote. Members share accounts are subordinated to all other liabilities of the credit union upon liquidation. Interest on members share accounts is based on available earnings at the end of an interest period and is not guaranteed by the credit union. Interest rates on members share accounts are set by the Asset Liability Committee and ratified by the Board of Directors based on an evaluation of current and future market conditions. Regular Reserve: 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. Equity Acquired in Merger: Equity acquired in merger represents the aggregated entity value of NICU at acquisition, measured using a weighted approach that emphasizes probable future discounted cash flows (income approach) and takes into consideration guideline transaction and market value approaches. Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale and defined benefit plan adjustments, are reported as separate components of the members equity section on the consolidated statement of financial condition. Accumulated other comprehensive loss consists of the following: Net unrealized loss on securities available for sale $ (2,978) Unrecognized prior service cost of net actuarial loss of defined benefit plan (36,716) $ (39,694) Income Taxes: The credit union is exempt by statute from federal income taxes under the provisions of Section 501 of the Internal Revenue Code of 1986 and from state income taxes; however, the credit union is subject to taxes on unrelated business income as further discussed in Note 8. Recent Accounting Pronouncement: On March 30, 2017, the FASB published Accounting Standards Update (ASU) No Receivables Nonrefundable Fees and Other Costs (Subtopic ): Premium Amortization on Purchased Callable Debt Securities. This new guidance shortens the amortization period for certain callable debt securities held at a premium. The amendments in ASU No require the premium to be amortized to the earliest call date. There is no required change for securities held at a discount, and the discount continues to be amortized to maturity. For public entities, the amendments in ASU No are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, beginning after December 15, Early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU No in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The amendments should be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption, and an entity should provide disclosures about a change in accounting principle in the period of adoption. The credit union does not anticipate that ASU No will have a material impact on its consolidated financial statements. Subsequent Events: Subsequent events have been evaluated through April 19, 2018, which is the date the consolidated financial statements were available to be issued. 12

15 NOTE 2 INVESTMENTS The estimated fair value of trading securities is as follows: Mutual funds $ 9,845 The net realized and unrealized gains recognized on trading securities amounted to approximately $934,000 during the year ended December 31, The amortized cost and fair value of securities available for sale are as follows: Amortized Gross Unrealized Fair Cost Gains Losses Value Federal agency securities $ 119,936 $ 99 $ (1,448) $ 118,587 Mortgage-backed securities 152, (1,164) 151,792 Collateralized mortgage obligations 58, (547) 57,986 Negotiable certificates of deposit (5) 240 $ 331,583 $ 186 $ (3,164) $ 328,605 The weighted average yield on securities available for sale was 2.21% at December 31, The amortized cost and fair value of securities held to maturity are as follows: Amortized Gross Unrealized Fair Cost Gains Losses Value Federal agency securities $ 2 $ - $ - $ 2 Mortgage-backed securities $ 580 $ 2 $ - $ 582 The weighted average yield on securities held to maturity was 2.22% at December 31, Gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position as of December 31, 2017 are as follows: Less Than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Available for Sale Value Losses Value Losses Value Losses Federal agency securities $ 43,789 $ (336) $ 53,008 $ (1,112) $ 96,797 $ (1,448) Mortgage-backed securities 103,479 (730) 25,113 (434) 128,592 (1,164) Collateralized mortgage obligations 47,040 (547) ,040 (547) Negotiable certificates of deposit (5) 240 (5) $ 194,308 $ (1,613) $ 78,361 $ (1,551) $ 272,669 $ (3,164) Management evaluates securities for other-than-temporary impairment on at least a quarterly basis and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the credit union to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 13

16 NOTE 2 INVESTMENTS (CONTINUED) As of December 31, 2017, 12 federal agency securities, 32 mortgage-backed securities and 21 collateralized mortgage obligation have been in a continuous unrealized loss position for less than 12 months; 9 federal agency securities and 9 mortgage-backed securities have been in a continuous unrealized loss position for 12 months or longer. The unrealized losses associated with these investments are considered temporary, as the credit union has both the intent and ability to hold these investments for a period of time sufficient to allow for any anticipated recovery in fair value. Other investments consist of the following: Share certificates at other credit unions $ 200 Perpetual contributed capital in a corporate credit union 1,500 FHLB stock 14,179 $ 15,879 Share certificates are generally non-negotiable and non-transferable and may incur substantial penalties for withdrawal prior to maturity. The weighted average yield on share certificates was 0.10% at December 31, The weighted average yield on perpetual contributed capital was 0.75% at December 31, The amortized cost and fair value of investments by contractual maturity at December 31, 2017 are shown below. Because borrowers may prepay obligations with or without call or prepayment penalties, the expected maturities of mortgage-backed securities and collateralized mortgage obligations may differ from the contractual maturities. Mortgage-backed securities and collateralized mortgage obligations are therefore classified with no specific maturity date. Available for Sale Held to Maturity Amortized Fair Amortized Fair Maturity Cost Value Cost Value Other No contractual maturity $ - $ - $ - $ - $ 15,679 Less than one year Due in one to five years 11,135 11, Due in five to ten years 5,929 5, Due in more than ten years 102, , , , ,879 Mortgage-backed securities 152, , Collateralized mortgage obligations 58,523 57, $ 331,583 $ 328,605 $ 580 $ 582 $ 15,879 14

17 NOTE 3 LOANS RECEIVABLE, NET Total loans outstanding by portfolio segment and class of loan are as follows: Commercial: Commercial real estate $ 277,940 U.S. government guaranteed 136,721 Residential real estate: First mortgage 896,537 HELOC and other mortgage 329,433 1,225,970 Consumer: Automobile 396,105 Credit card 54,454 Other consumer 80, ,916 Total loans 2,171,547 Interest rate discount (11,246) Credit risk discount (4,606) Allowance for loan losses (8,144) Total loans, net $ 2,147,551 Loans include the loans acquired in the business combination for which nonaccretable and accretable yields were recorded. The following table provides additional information about these loans and the associated approximate amounts as of December 31, 2017: Nonaccretable Accretable Carrying Amount Loans Balance Yield of Loans Receivable Outstanding Outstanding Receivable Commercial real estate $ 124,127 $ 394 $ 808 $ 122,925 First mortgage 300,040 1,369 6, ,992 HELOC and other mortgage 117, , ,789 Automobile 145,265 1,085 2, ,728 Credit card 19,351 1,132 (553) 18,772 Other consumer 15, (84) 14,979 $ 721,037 $ 4,606 $ 11,246 $ 705,185 15

18 NOTE 3 LOANS RECEIVABLE, NET (CONTINUED) The allowance for loan losses and the recorded investment in loans, by portfolio segment, are as follows: U.S. Government Residential Commercial Guaranteed Real Estate Consumer Total Allowance for loan losses: Beginning balance $ 484 $ - $ 2,814 $ 2,695 $ 5,993 Charge-offs (85) - (60) (5,075) (5,220) Provision (credit) for loan losses (2,069) 7,317 5,387 Recoveries ,984 Ending balance $ 608 $ - $ 1,647 $ 5,889 $ 8,144 Individually evaluated for impairment $ 594 $ - $ 1,584 $ - $ 2,178 Collectively evaluated for impairment ,889 5,966 Ending balance $ 608 $ - $ 1,647 $ 5,889 $ 8,144 Recorded investment in loans: Individually evaluated for impairment $ 13,029 $ - $ 19,826 $ 1 $ 32,856 Collectively evaluated for impairment 257, ,721 1,124, ,780 1,978,109 Loans acquired with deteriorated credit quality 7,517-81,930 71, ,582 Ending balance $ 277,940 $ 136,721 $ 1,225,970 $ 530,916 $ 2,171,547 Credit Risk Discount: Loans acquired through a merger with deteriorated credit quality are evaluated and pooled separately from the allowance for loan losses calculation. The following presents activity in the credit risk discount valuation account by portfolio segment, including accretion (reclassifications of nonaccretable discount to accretable yield), amounts of loans charged off and any recoveries: Residential Commercial Real Estate Consumer Total Beginning balance $ - $ - $ - $ - Additions 415 1,883 4,742 7,040 Charge-offs - - (1,261) (1,261) Accretion (20) (153) (1,000) (1,173) $ 395 $ 1,730 $ 2,481 $ 4,606 Changes in Accounting Methodology: The credit union did not change its allowance for loan losses methodology during the year ended December 31, Credit Quality Indicators for Commercial Segment: The credit union assesses the credit quality of its commercial loans with an eight-grade risk rating system whereby a higher grade represents a higher level of credit risk. The eight-grade risk rating system can generally be classified into the following categories: pass or watch, special mention, substandard, doubtful and loss. The risk ratings reflect the relative strength of the sources of repayment. 16

19 NOTE 3 LOANS RECEIVABLE, NET (CONTINUED) Pass or watch loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. These borrowers may have some credit risk that requires monitoring, but full repayment is expected. Special mention loans are considered to have potential weaknesses that warrant close attention by management. Special mention is considered a transitory grade, and generally, the credit union has not had a loan remain categorized as special mention for longer than six months. If any potential weaknesses are resolved, the loan is upgraded to a pass or watch grade. If negative trends in the borrower s financial status or other information is presented indicating that the repayment sources may become inadequate, the loan is downgraded to substandard. Substandard loans are considered to have well-defined weaknesses that jeopardize the full and timely repayment of the loan. Substandard loans have a distinct possibility of loss if the deficiencies are not corrected. Additionally, when management has assessed a potential for loss but a distinct possibility of loss is not recognizable, the loan is still classified as substandard. Doubtful loans have insufficient sources of repayment and a high probability of loss. Loss loans are considered to be uncollectible and are therefore charged off. These internal risk ratings are reviewed continuously and adjusted for changes in borrower status and the likelihood of loan repayment. The following table presents the credit quality of commercial loans graded internally based on the commonly used internal classification system: Internal Grade Pass/Excellent $ 1,743 Pass/Strong 99,173 Pass/Satisfactory 139,547 Pass/Watch 26,249 Special Mention 4,850 Substandard 5,326 Doubtful 1,052 $ 277,940 Credit Quality Indicators for U.S. Government-Guaranteed Segment: The credit union purchased small business loans that are fully backed by the U.S. government and full repayment is expected; therefore, no allowance was provided for this segment. Credit Quality Indicators for Residential Real Estate and Consumer Segment: The credit union assesses the credit quality of its residential real estate and consumer loans by recent FICO score and loan-to-value (LTV) ratio. FICO Scores: The credit union obtains FICO scores at loan origination, and the scores are updated at least quarterly. Loans that trend toward higher levels are generally associated with a lower risk factor, whereas loans that migrate toward lower ratings will generally result in a higher risk factor being applied to the related loan balances. 17

20 NOTE 3 LOANS RECEIVABLE, NET (CONTINUED) The FICO score distribution is as follows: First HELOC and Credit Other Mortgage Other Mortgage Automobile Card Consumer Total 800 and above $ 370,414 $ 131,661 $ 109,892 $ 4,760 $ 12,291 $ 629, to ,656 79,210 98,431 10,185 18, , to ,697 81, ,431 29,536 34, , to ,967 13,455 20,093 5,194 4,373 60, and below 11,285 12,416 12,829 3,422 2,670 42,622 Unknown 31,518 11,270 4,429 1,357 8,759 57,333 $ 896,537 $ 329,433 $ 396,105 $ 54,454 $ 80,357 $ 1,756,886 LTV and Combined LTV (CLTV) Ratios: Residential real estate loans are assessed for credit quality by LTV or CLTV, the ratio of the loan s unpaid principal balance to the value of the collateral securing repayment of the loan. If the credit union is in a junior lien position, only the excess collateral value over the amounts necessary to retire any senior lien positions is considered. LTVs are updated quarterly using a cascade approach that first uses values provided by an automated valuation model (AVM) for a property. If an AVM is not available, the value is estimated using the original appraised value adjusted by the change in Home Price Index (HPI) for the property location. If an HPI is not available, the original appraised value is used. Although residential real estate markets experienced significant declines in property values several years ago, recent analysis, as shown in the table below, highlights improvement in all mortgage categories. These trends are considered in the way the credit union monitors credit risk and establishes the residential real estate allowance for loan losses. LTV does not necessarily reflect the likelihood of performance of a given loan but does provide an indication of collateral value. In the event of default, any loss to the credit union should be approximately limited to the portion of the loan amount in excess of the net realizable value of the underlying real estate collateral. The LTV distribution of first mortgage and HELOC and other mortgage loans is as follows: Less Than 100% or 80% 80% 89% 90% 99% Greater Unknown Total First mortgage $ 663,463 $ 147,551 $ 43,315 $ 27,313 $ 14,895 $ 896,537 HELOC and other mortgage 291,544 17,113 9,319 7,689 3, ,433 $ 955,007 $ 164,664 $ 52,634 $ 35,002 $ 18,663 $ 1,225,970 18

21 NOTE 3 LOANS RECEIVABLE, NET (CONTINUED) Nonaccrual and Past Due Loans: Information relating to the age and nonaccrual status of the loans by class is shown below. There were no loans 90 days or more past due and still accruing interest as of December 31, Days Loans on Days Days Days or More Nonaccrual Current Past Due Past Due Past Due Past Due Total Status Commercial real estate $ 276,640 $ 616 $ 128 $ - $ 556 $ 277,940 $ 594 U.S. government guaranteed 136, ,721 - First mortgage 880,513 8,246 5,861 1, ,537 5,061 HELOC and other mortgage 321,021 5,312 2, ,433 1,985 Automobile 393,232 2, , Credit card 53, , Other consumer 79, , $ 2,140,768 $ 17,319 $ 10,338 $ 1,387 $ 1,735 $ 2,171,547 $ 8,505 Impaired Loans: Impaired loans individually evaluated for impairment are summarized below. The average balances are calculated based on the month-end balances of the loans for the period reported, and the interest income on impaired loans is recognized on a cash basis when received. Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized With no related allowance recorded: Commercial real estate $ 7,902 $ 7,902 $ - $ 7,629 $ 472 First mortgage HELOC and other mortgage Credit card ,771 8,771-8, With an allowance recorded: Commercial real estate 5,127 5, , First mortgage 13,469 13, , HELOC and other mortgage 5,489 5, , Credit card ,085 24,085 2,178 24, Total: Commercial real estate 13,029 13, , First mortgage 13,847 13, , HELOC and other mortgage 5,979 5, , Credit card $ 32,856 $ 32,856 $ 2,178 $ 33,546 $ 1,385 19

22 NOTE 3 LOANS RECEIVABLE, NET (CONTINUED) TDRs: Loans modified as TDRs during the year ended December 31, 2017 and the type of concession granted, presented by class, are as follows: Type of Concession Interest Maturity Principal Rate Date Reduction Other Total Commercial real estate $ 924 $ - $ - $ - $ 924 HELOC and other mortgage $ 1,144 $ - $ - $ - $ 1,144 Loans modified as TDRs during the year ended December 31, 2017, presented by class, and those restructurings for which there was a payment default subsequent to the restructuring, but within 12 months of the restructuring, are as follows: TDRs TDRs That Subsequently Defaulted Number of Principal Allowance Number of Principal Allowance Loans Balance Impact Loans Balance Impact (dollars in thousands) Commercial real estate 2 $ 924 $ 5 - $ - $ - HELOC and other mortgage $ 1,144 $ 68 - $ - $ - NOTE 4 PROPERTY AND EQUIPMENT The composition of property and equipment is summarized as follows: Land $ 43,138 Buildings 75,455 Leasehold improvements 17,369 Furniture and equipment 37, ,476 Accumulated depreciation and amortization (55,545) 117,931 Construction in progress 2,424 $ 120,355 20

23 NOTE 4 PROPERTY AND EQUIPMENT (CONTINUED) The following is a schedule of minimum future gross rental income on noncancelable operating leases: Years Ending December 31, 2018 $ 5, , , , ,498 Thereafter 3,001 $ 20,390 NOTE 5 MEMBERS SHARE ACCOUNTS A summary of members share accounts by type is as follows: Weighted Average Cost Regular shares 0.08% $ 1,369,155 Checking 0.03% 137,576 Money market 0.26% 555,705 IRA shares 0.12% 34,286 2,096,722 Share certificates 1.13% 370,167 IRA certificates 1.05% 50, ,145 $ 2,517,867 As allowed by the Federal Reserve Bank, the linked savings sub-account portions of checking accounts ($611 million as of December 31, 2017) are classified as regular shares in these consolidated financial statements in order to accurately reflect the deposit structure and reserve requirements of these balances. The aggregate amount of share and IRA certificates in denominations that met or exceeded the NCUSIF insurance limit was approximately $51 million as of December 31, A summary of share and IRA certificates by maturity is as follows: Years Ending December 31, 2018 $ 284, , , , ,731 Thereafter 186 $ 421,145 21