The Path to a New Beginning

Transcription

1 The Path to a New Beginning 2013 Annual Report Consolidated Financial Statements Divisions of Chartway Federal Credit Union

2 CONSOLIDATED FINANCIAL STATEMENTS C O N T E N T S Page Independent Auditors Report... 1 Consolidated Financial Statements: 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

3 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT Supervisory Committee Virginia Beach, Virginia We have audited the accompanying consolidated financial statements of Chartway Federal Credit Union and Subsidiaries, which comprise the consolidated statement of financial condition as of September 30, 2013, and the related consolidated statements of income, comprehensive income, changes in members' equity, and cash flows for the year then ended, and the related notes to the consolidated 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditors 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 auditors 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of as of September 30, 2013, and the results of their operations and their cash flow for the year then ended in conformity with principles generally accepted in the United States of America. CliftonLarsonAllen LLP Boston, Massachusetts January 24, 2014 An independent member of Nexia International

4 Page 2 Consolidated Statement of Financial Condition September 30, 2013 ASSETS Cash and Cash Equivalents $ 292,493,874 Investments: Securities - Available-for-Sale, at estimated fair value 5,472,084 Securities - Held-to-Maturity, at cost 377,613,755 Other 5,551,603 Loans Held-for-Sale 863,551 Loans, Net 1,087,067,799 Accrued Interest Receivable 5,268,246 Foreclosed Assets, Net 6,354,231 Property and Equipment, Net 38,849,298 National Credit Union Share Insurance Fund Deposit 17,133,282 Goodwill 71,488,504 Core Deposit Intangible 1,120,840 Other Assets 30,991,664 Total Assets $ 1,940,268,731 LIABILITIES AND MEMBERS' EQUITY LIABILITIES Members' Shares $ 1,768,192,653 Accrued Expenses and Other Liabilities 22,769,000 Total Liabilities 1,790,961,653 Commitments and Contingent Liabilities (Notes 10 & 11) MEMBERS' EQUITY Retained Earnings 149,267,067 Accumulated Other Comprehensive Income 40,011 Total Members' Equity 149,307,078 Total Liabilities and Members' Equity $ 1,940,268,731 The accompanying notes are an integral part of these consolidated financial statements.

5 Page 3 Consolidated Statement of Income INTEREST INCOME Interest on Loans $ 56,102,454 Interest on Investments and Cash Equivalents 3,619,772 Total Interest Income 59,722,226 INTEREST EXPENSE Dividends on Members' Shares 8,473,783 Net Interest Income 51,248,443 PROVISION FOR LOAN LOSSES 9,245,498 Net Interest Income After Provision for Loan Losses 42,002,945 NONINTEREST INCOME Fee Income 23,587,058 Other Operating Income 1,794,782 Net Gain on Sale of Loans 1,404,602 Total Non-Interest Income 26,786,442 NONINTEREST EXPENSE Salaries and Benefits 31,168,571 Operations 19,797,987 Occupancy 5,836,758 Member Share Insurance Premium Assessment 1,366,970 Total Non-Interest Expense 58,170,286 NET INCOME $ 10,619,101 The accompanying notes are an integral part of these consolidated financial statements.

6 Page 4 Consolidated Statement of Comprehensive Income NET INCOME $ 10,619,101 OTHER COMPREHENSIVE INCOME Unrealized Holding Gain Arising During the Period 39,586 TOTAL COMPREHENSIVE INCOME $ 10,658,687 The accompanying notes are an integral part of these consolidated financial statements.

7 Page 5 Consolidated Statement of Members Equity Accumulated Other Regular Comprehensive Reserves Unappropriated Income Total BALANCES AT SEPTEMBER 30, 2012 $ 18,529,735 $ 120,118,231 $ 425 $ 138,648,391 Net Income - 10,619,101-10,619,101 Other Comprehensive Income ,586 39,586 BALANCES AT SEPTEMBER 30, 2013 $ 18,529,735 $ 130,737,332 $ 40,011 $ 149,307,078 The accompanying notes are an integral part of these consolidated financial statements.

8 Page 6 Consolidated Statement of Cash Flows Year ended September 30, 2013 RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 10,619,101 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 2,808,823 Amortization of Investments, Net 1,689,938 Amortization of Core Deposit Intangibles 377,915 Provision for Loan Losses 9,245,498 Accretion of Aquired Loans, Net (3,114,737) Loss on Disposal of Assets, Net 238,169 Loss on Sale of Foreclosed Assets, Net 61,715 Changes in: Loans Held-for-Sale 387,411 Accrued Interest Receivable 956,115 Other Assets (6,007,401) Accrued Expenses and Other Liabilities (4,459,315) Net Cash Provided by Operating Activities 12,803,232 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of Securities Available-for-Sale (3,973,363) Held-to-Maturity (240,843,536) Proceeds from Maturities of Securities Available-for-Sale 4,021,886 Held-to-Maturity 96,344,554 Net Change in Other Investments (2,085,124) Principal Collected, net of Loans Originated on Loans to Members 72,834,221 Decrease in NCUSIF Deposit 176,298 Proceeds from Sales of Foreclosed Assets 5,622,060 Proceeds from Sales of Premises and Equipment 209,306 Purchase of Premises and Equipment (13,775,299) Net Cash Used by Investing Activities (81,468,997) CASH FLOWS FROM FINANCING ACTIVITIES Net Increase in Members' Shares 81,006,461 Net Cash Provided by Financing Activities 81,006,461 NET INCREASE IN CASH AND CASH EQUIVALENTS 12,340,696 Cash and Cash Equivalents at Beginning of Year 280,153,178 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 292,493,874 Member Savings Interest Paid $ 8,459,954 Transfers of Loans to Foreclosed and Repossessed Assets $ 5,005,693 The accompanying notes are an integral part of these consolidated financial statements.

9 Page 7 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Chartway Federal Credit Union is a cooperative association holding a corporate charter under the provisions of the Federal Credit Union Act. Participation in the Credit Union is limited to those individuals who qualify for membership. The field of membership is defined in the Credit Union s Charter and Bylaws. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Chartway Federal Credit Union and its wholly owned subsidiaries, CFS, Inc., and Newtown Associates, Inc. (the Credit Union ). These subsidiaries are engaged in related financial service activities, including selling insurance and investment products, whose activities are insignificant to the Credit Union as a whole. All significant intercompany balances and transactions have been eliminated in consolidation. Significant Accounting Policies The Credit Union follows the accounting standards set by the Financial Accounting Standards Board ( FASB ). The FASB establishes accounting principles generally accepted in the United States of America, ( GAAP ) that are followed to ensure consistent reporting of the financial condition, results of operations, and cash flows of the Credit Union. References to GAAP issued by the FASB in these footnotes are to The FASB Accounting Standards Codification commonly referred to as the Codification or ASC. Use of Estimates in the Preparation of the Consolidated Financial Statements The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 are the allowance for loan losses, fair value of financial instruments, and goodwill. Concentrations of Credit Risk Most of the Credit Union s business activity is with its members who reside in or are employed in the states of Virginia and Utah. The Credit Union may be exposed to credit risk from a regional economic standpoint, since a significant concentration of its borrowers work or reside in these states. The loan portfolio is well-diversified, the Credit Union does not have any significant concentrations of credit risk except unsecured loans, which by their nature increase the risk of loss compared to those loans that are collateralized. The types of lending that the Credit Union engages in are included in Note 3. The types of securities that the Credit Union invests in are discussed in Note 2. Management believes that the Credit Union does not have any significant concentrations in any customer or industry.

10 Page 8 1. SIGNIFICANT ACCOUNTING POLICIES continued Fair Value The Codification defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement. The Codification also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Fair value measures are disclosed by level within that hierarchy. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Valuation techniques are to be consistent with the market approach, the income approach, and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the Codification establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 - Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3 - Significant unobservable inputs that reflect a reporting entity s own assumptions about the assumptions that market participants would use in pricing an asset or liability. A summary of the Credit Union s consolidated financial instruments, including methodologies and resulting values, is discussed in Note 15 to these consolidated financial statements. Cash and Cash Equivalents For the purpose of the consolidated statement of financial condition and the consolidated statement of cash flow, cash and cash equivalents includes cash on hand, amounts due from financial institutions, and highly liquid debt instruments classified as cash equivalents that were purchased with maturities of three months or less. Amounts due from financial institutions may, at times, exceed federally insured limits.

11 Page 9 1. SIGNIFICANT ACCOUNTING POLICIES continued Investments Investment securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Trading securities, if any, are carried at fair value, with unrealized gains and losses recognized in earnings. 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 net income and reported in other comprehensive income. For other-than-temporary impairment of debt securities, the Credit Union determines whether it intends to sell or is more likely than not that it will be required to sell a security before recovery of the debt securities amortized cost basis less any current-period credit losses. In determining whether other-than-temporary impairment exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer; (3) the current liquidity and volatility of the market for each of the individual security categories; (4) the projected cash flows from the specific security type; (5) the financial guarantee and financial rating of the issuer; and (6) the intent and ability of the Credit Union to retain its investment in the issue for a period of time sufficient to allow any anticipated recovery in fair value. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the investments. Gains and losses on the sale of investments are recorded on the trade date and are determined using the specific identification method. Other investments are classified separately and accounted for under the cost method. Other investments consist of certificates of deposit in other financial institutions, member capital accounts in corporate credit unions, and stock with the Federal Home Loan Bank of Seattle and Atlanta ( FHLB ). If such investments are deemed to be impaired, the recorded cost is reduced by the amount of impairment. Federal Home Loan Bank Stock The Credit Union, as a member of the FHLBs of Seattle and Atlanta, is required to maintain an investment in capital stock of the FHLB which is based on the Credit Union s total assets plus a percentage of outstanding advances. No ready market exists for the FHLB stock and it has no quoted market value. The Credit Union reviews for impairment based on the ultimate recoverability of the cost basis in the stock. As of September 30, 2013, no impairment has been recognized.

12 Page SIGNIFICANT ACCOUNTING POLICIES continued Loans Held-for-Sale Mortgage 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. All sales are made without recourse subject to the customary representations and warranties. Loans, Net The Credit Union grants residential real estate, consumer and commercial loans to members, and participates in loans with other financial institutions. The ability of the borrowers to honor their contracts is dependent upon the real estate and general economic conditions of the area. Loans that the Credit Union has originated with the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, less an allowance for loan losses and net deferred origination fees and costs. Interest income on loans is recognized over the term of the loan and is calculated using the simple interest method on principal amounts outstanding. In addition to originating loans, the Credit Union has acquired loans through acquisitions. Loans acquired in acquisitions are recorded at fair value at the date of acquisition with no carryover of the prior allowance for loan losses. Loans acquired for which it is probable at acquisition that all contractually required payments will not be collected have resulted in a discount at the time of acquisition. The discount on such loans consists of an accretable yield (the excess cash flows expected to be collected over the fair value) and a nonaccretable difference (the amount of the total contractual cash flows less the amount expected to be collected). The accretable yield is recognized in interest income using the effective interest method. Because cash flows on these loans are written down to an amount expected to be collected at the date of the acquisition, these loans are not considered nonaccrual even though such loans may be contractually past due. Subsequent to the acquisition, decreases in expected cash flows result in the establishment of an allowance for loan losses through a provision for loan losses in the consolidated statement of income. In contrast, increases in expected cash flows will generally result in an increase in interest income over the remaining life of the loans. Prepayments are not considered in the determination of contractual cash flows to be collected. The accrual of interest income on loans is discontinued at the time the loan is 90 days past due, unless the credit is well-secured and in the process of collection. 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 the collection of principal and interest is considered doubtful. All interest accrued but not collected for loans that are 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 qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Credit Union s historical prepayment experience.

13 Page SIGNIFICANT ACCOUNTING POLICIES continued Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred though a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is likely. 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 the 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 information available to them at the time of their examinations. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Credit Union over the most recent three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis for repayment. These risk categories and the relevant risk characteristics are as follows: Residential real estate loans This portfolio segment consists of wholly owned loans for which the Credit Union possesses a senior or secondary lien on the underlying collateral. Repayment is dependent on the borrower s financial condition and real estate values. Consumer loans Generally these loans are smaller in size and are homogenous because they exhibit similar characteristics. The Credit Union has identified two segments in this category, including secured and unsecured. Commercial loans This portfolio class consists of commercial real estate secured and unsecured loans. Repayment of these loans is expected from the cash flows of the business and the value of the real property in cases where the loan is secured by real estate. These portfolio classes are based on loan types and the underlying risk factor presented in each loan type and are periodically reviewed by management and revised as deemed appropriate. See Note 3.

14 Page SIGNIFICANT ACCOUNTING POLICIES continued Allowance for Loan Losses continued A loan is impaired when, based on current information and events, it is probable that the Credit Union will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings ( TDRs ) and classified as impaired. These concessions may include rate reductions, extension of maturity date and other actions intended to minimize potential losses. The Credit Union considers a TDR delinquent more than 90 days to be re-defaulted. 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. Delinquent loans are individually evaluated for impairment once certain conditions have been met. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the fair value of collateral. Large groups of smaller balance homogeneous loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. TDRs are individually evaluated for impairment based on the present value of expected cash flows. 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 be 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. During the year ended September 30, 2013, the Credit union accounted for all transfers of financial assets as sales. Foreclosed Assets, Net The Credit Union s policy for repossessing collateral is that when all other collection efforts have been exhausted, the Credit Union enforces its first lien-holder status and repossesses the collateral. The Credit Union has full and complete access to repossessed collateral. Repossessed collateral normally consists of vehicles and real estate. Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in noninterest expenses.

15 Page SIGNIFICANT ACCOUNTING POLICIES continued Property and Equipment, Net Land is carried at cost. Buildings, leasehold improvements, and furniture and equipment are carried at cost, less accumulated depreciation and amortization and 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 terms of the related leases. Management of the Credit Union reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill and Core Deposit Intangibles The Credit Union recognized and measured goodwill and core deposit intangibles arising from the acquisitions of Heritagewest Federal Credit Union, Southwest Community Federal Credit Union, and Utah Central Credit Union with effective acquisition dates of January 1, 2010, July 1, 2010, and April 29, 2011, respectively. Goodwill is subject to at least an annual impairment test each year by applying a fair-value-based test. Management of the Credit Union has elected June 30th as its annual impairment test date. No impairment charge was recorded for the year ended September 30, The core deposit intangibles are amortized using the straight-line method over the estimated useful lives, which range between five and eight years. National Credit Union Share Insurance Fund ( NCUSIF ) Deposit and Insurance Premium The deposit in the NCUSIF is in accordance with National Credit Union Administration ( NCUA ) regulations, which require the maintenance of a deposit by each federally insured credit union in an amount equal to 1 percent of its insured members shares. The deposit would be refunded to the Credit Union if its insurance coverage is terminated, if it converts its insurance coverage to another source or if management of the fund is transferred from the NCUA Board. Legislation was passed by Congress to permit NCUA to create a temporary Corporate Credit Union Stabilization Fund ( CCUSF ) to absorb costs and borrowings incurred by the Fund related to the corporate credit union collapse. It is anticipated that the NCUA Board will assess annual premiums to repay these stabilization costs through the year 2021 at its discretion. Members Shares Members shares are the savings deposit accounts of the owners of the Credit Union. Share ownership entitles the members to vote in the annual elections of the Board of Directors and on other corporate matters. Irrespective of the amount of shares owned, no member has more than one vote. Members shares are subordinated to all other liabilities of the Credit Union upon liquidation. Dividends on members shares are based on available earnings at the end of a dividend period and are not guaranteed by the Credit Union. Dividend rates are set by the Credit Union s Board of Directors.

16 Page SIGNIFICANT ACCOUNTING POLICIES continued Advertising Costs Advertising costs are expensed as incurred. Income Taxes The Credit Union is exempt, by statute, from federal and state income taxes. The Credit Union s wholly owned subsidiaries, however, are subject to federal and state income taxes, which are immaterial to the statements as a whole. Management has evaluated the Credit Union s tax positions and concluded that the Credit Union had taken no uncertain tax positions that require adjustment to the financial statements. 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 available-for-sale securities, are reported as a separate component of the members equity section of the consolidated statements of financial condition and as a component of total comprehensive income. Subsequent Events Management of the Credit Union has evaluated subsequent events through January 24, 2014, the date on which the financial statements were available to be issued.

17 Page INVESTMENTS Investments classified as available-for-sale as of September 30, 2013, consist of the following: Estimated Gross Gross Fair Value Amortized Unrealized Unrealized (Carrying Cost Gains Losses Value) U.S. Government Obligation and Federal Agency Securities $ 2,526,399 $ 23,152 $ (6,568) $ 2,542,983 Federal Agency Mortgage Backed Securities 1,250,823 - (1,593) 1,249,230 Money Market 186, ,103 Mutual Funds 1,468,748 33,562 (8,542) 1,493,768 $ 5,432,073 $ 56,714 $ (16,703) $ 5,472,084 Investments classified as held-to-maturity as of September 30, 2013, consist of the following: Amortized Cost Gross Gross Estimated (Carrying Unrealized Unrealized Fair Value) Gains Losses Value U.S. Government Obligation and Federal Agency Securities $ 345,792,797 $ 703,711 $ (1,401,446) $ 345,095,062 Federal Agency Mortgage Backed Securities 31,820,958 - (389,317) 31,431,641 $ 377,613,755 $ 703,711 $ (1,790,763) $ 376,526,703

18 Page INVESTMENTS continued Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows, as of September 30, 2013: Less Than Twelve Months Greater Than Twelve Months Gross Estimated Gross Estimated Unrealized Fair Unrealized Fair Losses Value Losses Value Available-for-sale U.S. Government Obligation and Federal Agency Securities $ (2,164) $ 1,180,697 $ (4,404) $ 662,497 Federal Agency Mortgage Backed Securities (1,593) 1,249, Mutual Funds (6,515) 267,754 (2,027) 61,602 Total Available-for-Sale $ (10,272) $ 2,697,681 $ (6,431) $ 724,099 Held-to-Maturity U.S. Government Obligation and Federal Agency Securities $ (1,401,446) $ 184,812,285 $ - $ - Federal Agency Mortgage Backed Securities (389,317) 31,431, Total Held-to-Maturity $ (1,790,763) $ 216,243,926 $ - $ - At September 30, 2013, the investments portfolio included fifty four investments with unrealized losses existing for less than one year and eight existing for greater than one year. Unrealized loss represents less than one percent depreciation from the Credit Union s amortized cost of the related securities as of September 30, All of these securities are either guaranteed by federal insurance or the U.S. Government. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer s financial condition. As management has the ability to hold securities until maturity or the foreseeable future for those classified as available-for-sale, no declines are deemed to be other-than-temporary. In general, investments are exposed to various risks, such as interest rate, credit and overall market volatility risk. Due to the level of risk associated with certain investments, it is reasonably possible that changes in the values of the investments will occur in the near term and that such change could be material.

19 Page INVESTMENTS continued Other investments at September 30, 2013 consist of the following: Certificates of Deposit in Financial Institutions $ 1,398,098 Member Capital Accounts in Corporate Credit Unions 1,136,905 Federal Home Loan Bank Capital Stock 3,016,600 $ 5,551,603 Certificates of deposit are generally nonnegotiable and nontransferable, and may incur substantial penalties for withdrawal prior to maturity. The Credit Union intends to hold the certificates until maturity. Membership capital accounts in corporate credit unions are an uninsured equity capital account and are redeemable only if called by the corporate credit unions. The investment in Federal Home Loan Bank (FHLB) stock allows the Credit Union access to other FHLB financial services. The stock qualifies as a restricted stock and as such is not subject to investment security accounting treatment and is reported at cost. Investments by maturity as of September 30, 2013, are summarized as follows: Available-for-Sale Held-to-Maturity Estimated Fair Value Cost (Carrying (Carrying Estimated Cost Value) Value) Fair Value Other Less Than One Year $ 1,449,786 $ 1,443,410 $ 5,027,281 $ 5,032,850 $ 190,000 One to Five Years 2,350,202 2,348, ,132, ,516, ,000 Five to Ten Years ,820,958 31,431,641 - After Ten Years ,633,449 19,546,027 - No Contractual Maturity 1,654,438 1,679, ,076,603 $ 5,454,426 $ 5,472,084 $ 377,613,755 $ 376,526,703 $ 5,551,603 Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgage loans underlying the securities are subject to prepayment and are, therefore, classified separately with no specific maturity date.

20 Page LOANS, NET Residential Real Estate: Mortgages $ 229,952,751 Equity Loans/Lines 181,596, ,549,052 Consumer: Vehicle 493,505,322 Credit Cards 96,715,558 Other 46,752, ,973,024 Commercial: Real Estate 36,933,043 Other, Unsecured 13,406,854 50,339,897 Total Loans Receivable 1,098,861,973 Net Deferred Loan Origination Costs 5,112,337 Allowance for Loan Losses (16,906,511) $ 1,087,067,799 Loan participations purchased consist of vehicle and commercial loans originated by other credit unions. All participation loans are carried on the Credit Union s books at the unpaid principal balance and are reduced monthly by the amount of principal repayment. These participation loans are purchased without recourse, secured by vehicles and commercial property and serviced by the originating institutions. Outstanding vehicle and commercial participation loans as of September 30, 2013 are approximately $202,966,000. As of September 30, 2013, loans receivable include loans acquired in business combinations for which an accretable yield and nonaccretable difference were recorded and consist of the following: Remaining contractual payments $ 101,595,579 Remaining accretable yield and nonaccretable difference (17,700,580) Remaining carrying value $ 83,894,999

21 Page LOANS, NET continued Contractual payments on acquired loans for the year ended September 30, 2013 Balance, beginning of the year $ 212,357,303 Acquired loans foreclosed (4,397,651) Acquired loans charged off (5,145,287) Contractual principal payments received (101,218,786) (110,761,724) Balance, end of year $ 101,595,579 Accretable yield and nonaccretable difference for the year ended at September 30, 2013 Balance, beginning of the year $ (25,897,708) Acquired loans charged off 5,082,391 Accretion 3,114,737 Balance, end of year $ (17,700,580) Management has evaluated the expected cash flows associated with the acquired loans and has determined that certain loan pools have experienced changes in cash flows since the acquisition date. At September 30, 2013, allowance allocations on loans acquired with deteriorated credit quality totaled approximately $1,157,000.

22 Page LOANS, NET continued The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the year ended September 30, 2013: Residential Real Estate Consumer Commercial Total Allowance for Loan Losses: Balance at Beginning of Year $ 2,890,750 $ 9,813,298 $ 1,144,695 $ 13,848,743 Provision for Loan Losses 5,789,631 5,225,563 (1,769,696) 9,245,498 Loans Charged-Off (1,583,921) (6,480,709) - (8,064,630) Recoveries of Loans Previously Charged-Off 53, , ,946 1,876,900 Balance at End of Year $ 7,150,110 $ 9,439,456 $ 316,945 $ 16,906,511 Ending Balance: Individually Evaluated for Impairment $ 529,203 $ 277,940 $ 28,552 $ 835,695 Ending Balance: Collectively Evaluated for Impairment $ 5,492,047 $ 9,133,635 $ 288,007 $ 14,913,689 Ending Balance: Loans Acquired with Deteriorated Credit Quality $ 1,128,860 $ 27,881 $ 386 $ 1,157,127 Total Allowance for Loan Losses $ 7,150,110 $ 9,439,456 $ 316,945 $ 16,906,511 Loans: Ending Balance: Individually Evaluated for Impairment $ 6,615,035 $ 3,474,245 $ 356,897 $ 10,446,177 Ending Balance: Collectively Evaluated for Impairment $ 355,708,069 $ 618,531,326 $ 30,281,402 $ 1,004,520,797 Ending Balance: Loans Acquired with Deteriorated Credit Quality $ 49,225,948 $ 14,967,453 $ 19,701,598 $ 83,894,999 Total Loans $ 411,549,052 $ 636,973,024 $ 50,339,897 $ 1,098,861,973

23 Page LOANS, NET continued The Credit Union assigns a risk rating to commercial loans and periodically performs detailed internal reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Credit Union s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into the following major categories, defined as follows: Pass: Loans classified as pass are loans with no existing or known potential weaknesses deserving of management s close attention. Special Mention: Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Credit Union to sufficient risk to warrant adverse classification Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as Substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well defined weaknesses include a borrower s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Credit Union will sustain some loss if the deficiencies are not corrected. Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss: Loans classified as loss are considered uncollectible and anticipated to be charged off. The following tables show the commercial loan portfolio segments allocated by management s internal risk ratings: September 30, 2013 Commercial Credit Risk Profile by Risk Rating Commercial Commercial Risk Rating: Real Estate Other Total Pass $ 30,796,774 $ 11,231,828 $ 42,028,602 Special Mention 2,031, ,033 2,779,315 Substandard 2,506,016 1,299,232 3,805,248 Doubtful 1,598, ,761 1,726,732 Loss Total $ 36,933,043 $ 13,406,854 $ 50,339,897

24 Page LOANS, NET continued The following tables show the classes within the homogeneous loan portfolio segments allocated by payment activity. Loans are deemed performing if they are less than 90 days delinquent and still accruing interest. September 30, 2013 Performing Non Performing Total Residential Real Estate: Mortgages $ 224,684,664 $ 5,268,087 $ 229,952,751 Equity Loans/Lines 178,486,102 3,110, ,596,301 Consumer: Vehicle 491,519,131 1,986, ,505,322 Credit Cards 95,753, ,258 96,715,558 Other 46,440, ,520 46,752,144 Total $ 1,036,883,821 $ 11,638,255 $ 1,048,522,076 The allowance for loan losses is considered by management of the Credit Union as adequate to cover probable losses inherent in the loan portfolio at September 30, However, no assurance can be given that the Credit Union will not sustain loan losses that exceed the allowance, or that subsequent evaluation of the loan portfolio, in light of then-prevailing factors, including economic conditions, credit quality of the assets comprising the portfolio and the ongoing evaluation process, will not require significant changes in the allowance for loan losses. Included in the impaired loans with an allowance are troubled debt restructured loans of approximately $10,446,000, at September 30, The associated allowance for troubled debt restructured loan loans is approximately $836,000 at September 30, The following presents additional information on loans that became trouble debt restructurings during the year ended September 30, 2013: Pre-Modification Outstanding Number of Recorded Contracts Investments Residential real estate: Mortgage 8 $ 935,614 Equity loans/lines 23 1,247,387 Consumer: Vehicle 86 1,164,731 Credit Card 5 37,226 Other 12 91, $ 3,476,865 Pre-modification outstanding recorded investments approximate post-modification outstanding balances.

25 Page LOANS, NET continued Troubled debt restructured loans consist of loans receiving a rate change, term extension or combination of both. The Credit Union did not grant any principal forgiveness related to troubled debt restructured loans during the year ended September 30, There were two contracts restructured that re-defaulted in 2013 totaling $9,825. Residential, consumer and commercial loans are assessed for credit quality based on the contractual aging status of the loan and payment activity. Such assessment is completed at the end of each reporting period. The Credit Union considers all nonaccrual loans and any loans over 90 days delinquent to be nonperforming. Loans require payments on a monthly basis in accordance with loan terms. The Credit Union did not have any loans that were greater than 90 days delinquent and still accruing interest. The following is an aging analysis of the recorded investment of past due loans as of September 30, 2013: Accruing Interest Nonaccrual Days or 90 Days or Total Current Days Past Due More Past Due More Past Due Loans Residential Real Estate: Mortgages $ 222,666,251 $ 2,018,413 $ - $ 5,268,087 $ 229,952,751 Equity Loans/Lines 175,037,220 3,448,880-3,110, ,596,301 Consumer: Vehicle 482,697,954 8,821,177-1,986, ,505,322 Credit Cards 93,962,384 1,790, ,258 96,715,558 Other 45,341,345 1,099, ,520 46,752,144 Commercial Real Estate 36,198, ,739 36,933,043 Other, Unsecured 12,653, , ,953 13,406,854 $ 1,068,557,155 $ 17,503,869 $ - $ 12,800,947 $ 1,098,861,973

26 Page LOANS, NET continued The following table presents additional detail of impaired loans, segregated by class, as of September 30, The unpaid principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents member balances net of any partial charge-offs recognized on the loans. Unpaid Average Recorded Principal Related Recorded Investment Balance Allowance Investment Residential Real Estate: Mortgages $ 3,577,083 $ 3,577,083 $ 286,167 $ 2,783,232 Equity Loans/Lines 3,037,952 3,037, ,036 2,479,767 Consumer: Vehicle 2,426,880 2,426, ,150 1,795,443 Credit Cards 10,260 10, ,130 Other 1,037,105 1,037,105 82, ,815 Commercial Real Estate 356, ,897 28, ,535 Other, Unsecured Total Impaired Loans: $ 10,446,177 $ 10,446,177 $ 835,695 $ 7,988, PROPERTY AND EQUIPMENT, NET Property and equipment at September 30, 2013 are summarized as follows: Estimated Useful Lives Land $ 7,781,919 Building 26,736, years Furniture and Equipment 29,716,417 5 years Leasehold Improvements 5,086,298 term of lease Construction in Progress 11,846,979 81,168,270 Less: Accumulated Depreciation and Amortization (42,318,972) $ 38,849,298 The Credit Union leases several offices. The operating leases contain renewal options and provisions requiring the Credit Union to pay property taxes and operating expenses over base period amounts. All rental payments are dependent only upon the lapse of time.

27 Page PROPERTY AND EQUIPMENT, NET continued Minimum rental payments under operating leases with initial or remaining terms of one year or more at September 30, 2013, are as follows: Years Ending September 30: 2014 $ 1,076, , , , ,718 Thereafter 52,813 $ 4,059,538 Rental expense for the year ended September 30, 2013, for all facilities leased under operating leases totaled $1,370, FORECLOSED ASSETS Foreclosed assets are presented net of a valuation allowance. During the year ended September 30, 2013, the Credit Union incurred expenses related to selling foreclosed assets in the amount of $403,480. Analysis of the foreclosed assets for the period ended September 30, 2013, are as follows: Foreclosed assets: Balance, beginning of year $ 7,032,313 Additions to foreclosed assets 5,005,693 Gain on sale of foreclosed assets, net 61,715 Sales proceeds (5,745,490) Balance, end of year $ 6,354, OTHER ASSETS Included in other assets are several life insurance policies. The Credit Union is the owner and beneficiary of these policies. The policies provide for investments in various unit investment trusts administered by various life insurance companies. The cash surrender value of these policies as of September 30, 2013 is $13,488,010.

28 Page GOODWILL AND CORE DEPOSIT INTANGIBLE Goodwill of $71,488,504 was unimpaired as of September 30, Core deposit intangibles at September 30, 2013 are summarized as follows: Core deposit intangible $ 2,327,859 Accumulated amortization (1,207,019) $ 1,120,840 For the year ended September 30, 2013, amortization expense of core deposit intangibles was $377,915. Future amortization expense is estimated as follows: 8. MEMBERS SHARES 2014 $ 377, , , ,392 Subsequent years 58,783 Members shares at September 30, 2013 are summarized as follows: $ 1,120,840 Regular Shares Accounts $ 417,620,382 Share Draft Accounts 360,151,827 Money Market Accounts 286,884,087 IRA Share Accounts 52,417,814 Club Accounts 25,494,398 Certificates 625,624,145 $ 1,768,192,653

29 Page MEMBERS SHARES continued Shares by maturity as of September 30, 2013, are summarized as follows: 0-1 Year Maturity $ 436,893, Year Maturity 64,228, Year Maturity 64,686, Year Maturity 23,281, Year Maturity 35,551,492 Over 5 Years Maturity 981,821 $ 625,624,145 Regular shares, share draft accounts, money market accounts, and individual retirement account (IRA) shares have no contractual maturity. The NCUSIF insures members shares and certain individual retirement and Keogh accounts up to $250,000 on all members share accounts. The aggregate amount of certificates in denominations of $100,000 or more at September 30, 2013, is approximately $243,582, BORROWED FUNDS The Credit Union utilizes a demand loan agreement with the Federal Home Loan Bank of Atlanta with a borrowing limit of $290,010,000. The terms of the agreement call for pledging certain mortgages and certain investments held in safekeeping by the FHLB and a portion of the Credit Union s mortgage portfolio. At September 30, 2013, there were no borrowings under this agreement. The Credit Union has a line of credit with Mid-Atlantic Corporate Federal Credit Union with a borrowing limit of $5,000,000 as of September 30, The terms of the agreement call for the security to be all of the Credit Union s assets. As of September 30, 2013 the Credit Union had no advances outstanding on this line. The line of credit is periodically evaluated by the lender. The Credit Union is also eligible to borrow from the Federal Reserve Bank of Richmond discount window (Federal Reserve). These borrowings require collateral and could be secured by a portion of the Credit Union s investment portfolio. The maximum borrowing limit is based on the value of securities that are held for safekeeping by the Federal Reserve Bank. The interest rate is determined by the Federal Reserve. At September 30, 2013, there were no borrowings under this agreement.

30 Page OFF-BALANCE SHEET ACTIVITIES The Credit Union is party to conditional commitments to lend funds in the normal course of business to meet the financing needs of its members. These commitments represent financial instruments to extend credit that includes lines of credit, credit cards and home equity lines that involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements. The Credit Union s exposure to credit loss is represented by the contractual amount of these commitments. The Credit Union follows the same credit policies in making commitments as it does for those loans recorded in the consolidated financial statements. Outstanding loan commitments at September 30, 2013, total approximately $2,779,330. Unfunded loan commitments under lines of credit at September 30, 2013 are summarized as follows: Credit Card $ 158,266,000 Home Equity 110,551,000 Other Consumer 12,136,000 Overdraft Protection 59,319,000 Commercial 5,444,000 $ 345,716,000 Commitments to extend credit are agreements to lend to a member as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Credit Union evaluates each member s creditworthiness on a case-by-case basis. The amount of collateral obtained to secure borrowing on the lines of credit is based on management s credit evaluation of the member. Unfunded commitments under revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn upon to the total extent to which the Credit Union is committed. 11. COMMITMENTS AND CONTINGENT LIABILITIES The Credit Union is a party to various legal actions normally associated with collections of loans and other business activities of financial institutions, the aggregate effect of which, in management s opinion, would not have a material adverse effect on the financial condition or results of operations of the Credit Union.

31 Page EMPLOYEE BENEFITS The Credit Union has a 401(k) pension plan that allows employees to defer a portion of their salary into the 401(k) plan. The Credit Union matches a portion of employees wage reductions. Pension costs are accrued and funded on a current basis. The Credit Union contributed $918,502 to the plan for the year ended September 30, The Credit Union entered into deferred compensation agreements with members of the Executive Management Team that provides benefits payable to these employees based on years of service with the Credit Union as defined in the agreement. The estimated liability under the agreements is being accrued on a straight-line basis over the remaining years until the eligible employees attain age 65. The Credit Union has accrued $5,389,956 under these agreements for the year ended September 30, MEMBERS EQUITY The Credit Union is subject to various regulatory capital requirements administered by the NCUA. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Credit Union s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Credit Union must meet specific capital guidelines that involve quantitative measures of the Credit Union s assets, liabilities, and certain off-balance sheet items as calculated under GAAP. The Credit Union s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Credit Union to maintain minimum amounts and ratios (set forth in the table below) of net worth to total assets. Further, credit unions over $10,000,000 in assets are also required to calculate a Risk- Based Net Worth (RBNW) requirement that establishes whether or not the Credit Union will be considered complex under the regulatory framework. The Credit Union s RBNW requirements as of September 30, 2013, were 5.14 percent. The minimum requirement to be considered complex under the regulatory framework is 6 percent. Management believes, as of September 30, 2013, that the Credit Union meets all capital adequacy requirements to which it is subject. As of September 30, 2013, the most recent Call reporting period, the NCUA categorized the Credit Union as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Credit Union must maintain a minimum net worth ratio of 7 percent of assets. There are no conditions or events since that notification that management believes have changed the institution s category including the acquisition transactions that occurred during the year.

32 Page MEMBERS EQUITY continued The Credit Union s actual capital amounts and ratios are presented in the following table: September 30, 2013 Ratio/ Amount Requirement Amount needed to be classified as adequately capitalized $ 115,597, % Amount needed to be classified as well-capitalized $ 134,863, % Actual regulatory net worth $ 140,180, % Because the RBNW requirement is less than the net worth ratio, the Credit Union retains its original category. Further, in performing its calculation of total assets, the Credit Union used the average of the current and three preceding calendar quarter-end balances option, as permitted by regulation. 14. RELATED-PARTY TRANSACTIONS In the normal course of business, the Credit Union extends credit to Directors, Supervisory Committee members and executive officers. Loans to related parties at September 30, 2013, are approximately $180,000. Deposits from related parties at September 30, 2013, are approximately $2,742,000.

33 Page FAIR VALUE As described in Note 1 to the financial statements, the following methods and assumptions were used by the Credit Union in estimating fair values of financial instruments as disclosed herein: Cash and Cash Equivalents The carrying amounts of cash and cash equivalents approximate their fair value. Investments Government sponsored enterprise securities, mortgage-backed securities, and mutual funds of government sponsored enterprise securities are classified as either available-for-sale or held-tomaturity. The Credit Union obtains fair value measurements from various third-party pricing sources. The inputs used to calculate fair value may include dealer quotes, market spreads, cash flows, market consensus prepayment speeds, and a bond s terms and conditions, among other things. Available-for-sale securities are reported at fair value utilizing Level 2 inputs. Loans, Net For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-tofour family residential) and other consumer loans are estimated using a discounted cash flow calculation that applies interest rates currently being offered similar loans to a schedule of aggregated expected monthly maturities of these loans. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Loans Held-for-Sale The carrying amount of loans held for sale approximates fair value. Foreclosed Assets, Net Fair value is based on market prices of comparable properties, obtained in appraisals or as obtained as part of a third party valuation at the acquisition date of the property. Accrued Interest Receivable Accrued interest receivable represents interest on loans and investments. The carrying amount of accrued interest receivable approximates fair value.

34 Page FAIR VALUE continued Members Shares The fair values disclosed for regular shares, share draft, money market, individual retirement accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of regular shares, share draft, money market, individual retirement accounts approximate their fair values at the reporting date. Fair values for share certificates are estimated using a discounted cash flow calculation that applies interest rates currently being offered on share certificates to a schedule of aggregated expected monthly maturities on the Credit Union s current share certificates. Off-Balance Sheet Credit-Related Instruments Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. The fair value for such financial instruments is nominal. Fair Value on a Recurring Basis The table below presents the balances of assets measured and presented in the consolidated statements of financial condition at fair value on a recurring basis as of September 30, Level 1 Level 2 Level 3 Total Available-for-Sale Securities: U.S. Government Obligation and Federal Agency Securities $ - $ 2,542,983 $ - $ 2,542,983 Federal Agencies Mortgage-Backed Securities - 1,249,230-1,249,230 Money Market 186, ,103 Mutual Funds 1,493, ,493,768 Total Assets $ 1,679,871 $ 3,792,213 $ - $ 5,472,084

35 Page FAIR VALUE continued Fair Value on a Nonrecurring Basis Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the consolidated statements of financial condition by caption and by level within the valuation hierarchy for which a nonrecurring change in fair value has been recorded as of September 30, Level 1 Level 2 Level 3 Total Foreclosed Assets $ - $ - $ 6,354,231 $ 6,354,231 Impaired Loans - - 9,610,482 9,610,482 $ - $ - $ 15,964,713 $ 15,964,713 Financial Instruments The estimated fair value of the Credit Union s consolidated financial instruments is summarized as follows as of September 30, 2013: Carrying Amount Fair Value Financial Assets Cash and Cash Equivalents $ 292,493,874 $ 292,493,874 Investments: Available-for-Sale 5,472,084 5,472,084 Held-to-Maturity 377,613, ,526,703 Other Investments 5,551,603 5,551,603 Loans Held-for-Sale 863, ,551 Loans, Net 1,087,067,799 1,096,272,000 Accrued Interest Receivable 5,268,246 5,268,246 Foreclosed Assets 6,354,231 6,354,231 Financial Liabilities Member's Shares $ 1,768,192,653 $ 1,773,262,000 Accrued Interest Payable 22,769,000 22,769,000 * * * * * * * *

36 Supporting Our Communities As the charitable arm of Chartway, HeritageWest and SouthWest Community credit unions, the We Promise Foundation is dedicated to making dreams come true for children in our communities who battle with severe illness or tremendous hardship. To donate, volunteer or find out more information, visit (757) (800) This credit union is federally insured by the National Credit Union Administration. Membership eligibility subject to verification.