THE EPISCOPAL DIOCESE OF WEST TEXAS CONSOLIDATING FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND with

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1 CONSOLIDATING FINANCIAL STATEMENTS FOR THE YEARS ENDED with INDEPENDENT AUDITORS REPORT

2 TABLE OF CONTENTS Independent Auditors Report Consolidating Statement of Financial Position Consolidating Statement of Financial Position Consolidating Statement of Activities Consolidating Statement of Activities Consolidating Statement of Cash Flows Consolidating Statement of Cash Flows... 7 Notes to Consolidating Financial Statements...8

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4 CONSOLIDATING STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2012 ASSETS Budget Fund Episcopal Church Corporation Episcopal Church Foundation Interfund Eliminations TOTAL 2012 Cash and cash equivalents $ 1,697,264 $ 786,456 $ 6,308,722 $ - $ 8,792,442 Investments ,601,965-42,602,714 Accounts receivable 169,797 13,636 39, ,107 Prepaid expenses 232, ,566 Notes receivable, net of allowance of $652, , ,213 Equity interest in Christ Chapel - 355, ,000 Property and equipment, net - 10,556,911 1,140,000-11,696,911 Assets held in trust - - 2,626,159-2,626,159 Contributions receivable from remainder trusts - 969, ,418 Beneficial interest in perpetual trusts - 2,051, ,051,719 Interfund receivable 1,388,624 17,250,550 - (18,639,174) - TOTAL $ 3,488,251 $ 32,647,652 $ 52,716,520 $ (18,639,174) $ 70,213,249 LIABILITIES AND NET ASSETS LIABILITIES: Accounts payable $ 30,355 $ 2,033 $ 505 $ - $ 32,893 Accrued liabilities 94, ,428 Deferred revenue 62, ,079 Funds held for third parties 18,208-26,522,425-26,540,633 Liability under unitrusts - - 1,201,872-1,201,872 Interfund payable 49, ,822 18,400,638 (18,639,174) - 255, ,130 46,125,440 (18,639,174) 27,932,905 NET ASSETS: Unrestricted 2,610,619 25,359, ,801-28,104,292 Temporarily restricted 622,123 3,693,048 4,976,982-9,292,153 Permanently restricted - 3,403,602 1,480,297-4,883,899 3,232,742 32,456,522 6,591,080-42,280,344 TOTAL $ 3,488,251 $ 32,647,652 $ 52,716,520 $ (18,639,174) $ 70,213,249 See notes to consolidating financial statements 2

5 CONSOLIDATING STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2011 ASSETS Budget Fund Episcopal Church Corporation Episcopal Church Foundation Interfund Eliminations TOTAL 2011 Cash and cash equivalents $ 1,465,645 $ 496,326 $ 6,210,347 $ - $ 8,172,318 Investments ,124,985-38,125,490 Accounts receivable 187,895 13,636 12, ,475 Prepaid expenses 261, ,090 Notes receivable, net of allowance of $664, , ,215 Equity interest in Christ Chapel - 365, ,000 Property and equipment, net - 9,675,090 1,140,000-10,815,090 Assets held in trust , ,988 Contributions receivable from remainder trusts - 813, ,842 Beneficial interest in perpetual trusts - 1,932, ,932,183 Interfund receivable 1,275,218 16,313,468 - (17,588,686) - TOTAL $ 3,189,848 $ 30,404,265 $ 46,236,264 $ (17,588,686) $ 62,241,691 LIABILITIES AND NET ASSETS LIABILITIES: Accounts payable $ 32,960 $ 15,111 $ 2,121 $ - $ 50,192 Accrued liabilities 70, ,234 Deferred revenue 62,118 11, ,453 Funds held for third parties 17,894-23,270,896-23,288,790 Liability under unitrusts , ,787 Interfund payable 31, ,234 17,379,212 (17,588,686) - 214, ,680 41,166,016 (17,588,686) 23,996,456 NET ASSETS: Unrestricted 2,394,357 23,361, ,346-25,866,451 Temporarily restricted 581,045 3,553,771 3,486,306-7,621,122 Permanently restricted - 3,284,066 1,473,596-4,757,662 2,975,402 30,199,585 5,070,248-38,245,235 TOTAL $ 3,189,848 $ 30,404,265 $ 46,236,264 $ (17,588,686) $ 62,241,691 See notes to consolidating financial statements 3

6 CONSOLIDATING STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2012 BUDGET FUND EPISCOPAL CHURCH CORPORATION EPISCOPAL CHURCH FOUNDATION Unrestricted Temporarily Restricted Permanently Restricted TOTAL Unrestricted Temporarily Restricted Permanently Restricted TOTAL Unrestricted Temporarily Restricted Permanently Restricted TOTAL Interfund Eliminations 2012 SUPPORT AND REVENUE Apportionments $ 3,772,416 $ - $ - $ 3,772,416 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 3,772,416 Endowments and contributions - 36,231-36,231 6,200 1,454,778-1,460,978-1,223,020 6,701 1,229,721-2,726,930 Realized investment income 69,222 12,550-81, , , ,904 2, , ,001-1,197,677 Unrealized gain on investments 20,696 26,725-47, , , , , ,751-1,173,523 Change in value of split-interest agreements , , ,112-28,932-28, ,044 Net gain on sale of fixed assets , , ,870 Fees for service 780, , , ,269 (96,591) 784,914 Designated receipts 502, , ,779 82,232 9,006-91, ,004,017 Other revenue and rents 21, ,836 18, , ,246 Interest , , ,175 Total 5,166, ,824-5,652,691 1,709,348 1,873, ,536 3,702, ,121 1,660,852 6,701 1,771,674 (96,591) 11,029,812 EXPENSES Program services: General church program 200, , ,569 Missions 604, ,848 5, ,625 14, , ,473 Camps and conferences 1,486, ,486, , , ,622,202 Social services 487, , ,866 Education 86, , ,852 Communication 247, , ,508 Evangelism 6, , ,729 Specialized ministries 462, , , , ,408 Educational aid 135, ,344 17, ,000 75, , ,054 Cathedral park 31, , ,556 Other program services 193, ,108 30, ,375 13, , ,497 Total program services 3,944, ,944, , , , ,724-4,352,714 Supporting services: Bishop Jones Center 185, , ,892 Salaries and allowances 1,350, ,350, , ,852-1,393,336 Professional services 23, ,883 12, ,520 19, ,562-55,965 Property taxes and expenses , , ,333 Investment management fees 5, ,446 73, ,848 17, ,297 (96,591) - Insurance 197, , ,789 Depreciation , , ,528 Other expenses 97, ,252 5, ,194 2, , ,698 Total supporting services 1,860, ,860, , ,423 81, ,963 (96,591) 2,577,541 Fundraising , , ,448 Total expenses 5,804, ,804,751 1,101, ,101, , ,687 (96,591) 6,994,703 Change in net assets from activities (637,884) 485,824 - (152,060) 607,492 1,873, ,536 2,600,182 (80,566) 1,660,852 6,701 1,586,987-4,035,109 Transfers of net assets: Which meet donor restrictions 574,668 (478,969) - 95,699 1,654,110 (1,729,809) - (75,699) 120,021 (140,021) - (20,000) - - From (to) the budget fund (263,478) (4,068) - (267,546) (16,000) (30,155) - (46,155) 313,701 - From (to) the corporation 263,478 4, , (267,546) - From (to) the foundation 16,000 30,155-46, (46,155) - CHANGE IN NET ASSETS 216,262 41, ,340 1,998, , ,536 2,256,937 23,455 1,490,676 6,701 1,520,832-4,035,109 NET ASSETS beginning of year 2,394, ,045-2,975,402 23,361,748 3,553,771 3,284,066 30,199, ,346 3,486,306 1,473,596 5,070,248-38,245,235 NET ASSETS end of year $ 2,610,619 $ 622,123 $ - $ 3,232,742 $ 25,359,872 $ 3,693,048 $ 3,403,602 $ 32,456,522 $ 133,801 $ 4,976,982 $ 1,480,297 $ 6,591,080 $ - $ 42,280,344 See notes to consolidating financial statements 4

7 CONSOLIDATING STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2011 BUDGET FUND EPISCOPAL CHURCH CORPORATION EPISCOPAL CHURCH FOUNDATION Unrestricted Temporarily Restricted Permanently Restricted TOTAL Unrestricted Temporarily Restricted Permanently Restricted TOTAL Unrestricted Temporarily Restricted Permanently Restricted TOTAL Interfund Eliminations TOTAL 2011 SUPPORT AND REVENUE Apportionments $ 3,706,872 $ - $ - $ 3,706,872 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 3,706,872 Endowments and contributions - 36,768-36,768 5, , ,440-43, , , ,414 Realized investment income 23,568 9,952-33, ,016 84, , , , ,105 Unrealized loss on investments (17,691) (10,506) - (28,197) (415,083) (61,527) - (476,610) - (85,810) - (85,810) - (590,617) Change in value of split-interest agreements ,931 (133,496) (91,565) - (3,023) - (3,023) - (94,588) Net loss on sale of fixed assets (369) - - (369) (369) Fees for service 754, , , ,241 (99,620) 759,035 Designated receipts 316, , ,172-10,856-10, ,028 Other revenue and rents 22, ,983 15, , ,063 Interest , , ,981 Total 4,806, ,056-5,275,532 97, ,538 (133,496) 701, ,241 58, , ,345 (99,620) 6,139,924 EXPENSES Program services: General church program 122, , ,858 Missions 522, ,171 5, ,213 14, , ,384 Camps and conferences 1,434, ,434, , , ,576,228 Social services 673, , ,818 Education 36, , ,353 Communication 241, , ,368 Evangelism 5, , ,823 Specialized ministries 524, ,600 12, , ,600 Educational aid 122, ,804 52, ,330 70, , ,311 Cathedral park 19, , ,921 Other program services 186, ,822 29, ,415 44, , ,177 Total program services 3,891, ,891, , , , ,117-4,260,841 Supporting services: Bishop Jones Center 204, , ,380 Salaries and allowances 1,340, ,340, , ,428-1,381,515 Professional services 24, ,729 12, ,500 21, ,095-58,324 Property taxes and expenses , , ,709 Investment management fees 5, ,358 76, ,930 17, ,332 (99,620) - Insurance 195, , ,075 Depreciation , , ,728 Other expenses 88, ,543 4, ,617 2, ,091-95,251 Total supporting services 1,858, ,858, , ,484 81, ,946 (99,620) 2,560,982 Fundraising , , ,031 Total expenses 5,749, ,749,677 1,001, ,001, , ,063 (99,620) 6,862,854 Change in net assets from activities (943,201) 469,056 - (474,145) (904,109) 737,538 (133,496) (300,067) (106,822) 58, ,056 51,282 - (722,930) Transfers of net assets: Which meet donor restrictions 747,859 (612,668) - 135, ,631 (403,822) - (130,191) 146,449 (151,449) - (5,000) - - From (to) the budget fund (328,660) (107,997) - (436,657) (16,230) (13,762) - (29,992) 466,649 - From (to) the corporation 328, , , (436,657) - From (to) the foundation 16,230 13,762-29, (29,992) - CHANGE IN NET ASSETS 149,548 (21,853) - 127,695 (959,138) 225,719 (133,496) (866,915) 23,397 (107,163) 100,056 16,290 - (722,930) NET ASSETS beginning of year 2,244, ,898-2,847,707 24,320,886 3,328,052 3,417,562 31,066,500 86,949 3,593,469 1,373,540 5,053,958-38,968,165 NET ASSETS end of year $ 2,394,357 $ 581,045 $ - $ 2,975,402 $ 23,361,748 $ 3,553,771 $ 3,284,066 $ 30,199,585 $ 110,346 $ 3,486,306 $ 1,473,596 $ 5,070,248 $ - $ 38,245,235 See notes to consolidating financial statements 5

8 CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2012 Episcopal Church Corporation Episcopal Church Foundation TOTAL 2012 Budget Fund Cash flows from operating activities: Increase in net assets $ 257,340 $ 2,256,937 $ 1,520,832 $ 4,035,109 Adjustments to reconcile the change in net assets to net cash provided by (used in) operating activities: Depreciation - 591, ,528 Contributions restricted for long-term purposes - (1,431,990) (6,701) (1,438,691) Interest income restricted for long-term purposes - (164) - (164) Noncash donation of securities - - (33,473) (33,473) Reinvested dividends - - (1,417,052) (1,417,052) Unrealized gain on investments - (244) (1,958,147) (1,958,391) Net realized gain on investments - - (1,303,176) (1,303,176) Recapture of bad debts - (12,930) - (12,930) Net gain on sale of fixed assets - (13,870) - (13,870) Changes in assets and liabilities: Accounts receivable 18,098 - (26,730) (8,632) Prepaid expenses 28, ,524 Equity interest in Christ Chapel - 10,000-10,000 Perpetual and remainder trusts - (275,112) (1,878,171) (2,153,283) Accounts payable (2,605) (13,078) (1,616) (17,299) Accrued liabilities 24, ,194 Deferred revenue 686 (11,060) - (10,374) Funds held for third parties 314-3,251,529 3,251,843 Liabilities under Unitrusts , ,085 Interfund receivable (113,406) (937,082) - (1,050,488) Interfund payable 18,474 10,588 1,021,426 1,050,488 Net cash provided by (used in) operating activities 231, ,523 (143,194) 261,948 Cash flows from investing activities: Purchase of investments - - (12,383,551) (12,383,551) Proceeds from sale of investments ,618,419 12,618,419 Purchase of property and equipment - (1,493,979) - (1,493,979) Proceeds from sale of property and equipment - 34,500-34,500 Repayment of notes receivable - 386, ,022 Advances on notes receivable - (242,090) - (242,090) Net cash (used in) provided by investing activities - (1,315,547) 234,868 (1,080,679) Cash flows from financing activities: Contributions restricted for long-term purposes - 1,431,990 6,701 1,438,691 Interest income restricted for long-term purposes Net cash provided by financing activities - 1,432,154 6,701 1,438,855 Net increase in cash and cash equivalents 231, ,130 98, ,124 Cash and cash equivalents at beginning of year 1,465, ,326 6,210,347 8,172,318 Cash and cash equivalents at end of year $ 1,697,264 $ 786,456 $ 6,308,722 $ 8,792,442 Supplemental disclosure of cash flow information: Cash paid during the year for interest $ - $ - $ - $ - See notes to consolidating financial statements 6

9 CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2011 Episcopal Church Corporation Episcopal Church Foundation TOTAL 2011 Budget Fund Cash flows from operating activities: Increase (decrease) in net assets $ 127,695 $ (866,915) $ 16,290 $ (722,930) Adjustments to reconcile the change in net assets to net cash provided by (used in) operating activities: Depreciation - 600, ,728 Contributions restricted for long-term purposes - (595,005) (100,056) (695,061) Interest income restricted for long-term purposes - (149) - (149) Noncash donation of securities - - (979) (979) Reinvested dividends - - (1,196,328) (1,196,328) Unrealized loss on investments ,154,261 1,154,458 Net realized gain on investments - - (117,839) (117,839) Net loss on sale of fixed assets Changes in assets and liabilities: Accounts receivable 48,150 24,668 (9,028) 63,790 Prepaid expenses (44,331) - - (44,331) Equity interest in Christ Chapel - 10,000-10,000 Perpetual and remainder trusts - 91,565 39, ,475 Accounts payable 4,445 15,103 2,121 21,669 Accrued liabilities (17,188) - - (17,188) Deferred revenue 950 6,788-7,738 Funds held for third parties (1,011) - 815, ,145 Liabilities under Unitrusts - - (36,887) (36,887) Interfund receivable 3, , ,690 Interfund payable (7,296) (29,100) (322,294) (358,690) Net cash provided by (used in) operating activities 115,323 (386,970) 244,327 (27,320) Cash flows from investing activities: Purchase of investments - - (4,592,629) (4,592,629) Proceeds from sale of investments - - 2,984,919 2,984,919 Purchase of property and equipment - (197,522) - (197,522) Proceeds from sale of property and equipment - 30,512-30,512 Repayment of notes receivable - 58,885-58,885 Advances on notes receivable - (17,969) - (17,969) Net cash used in investing activities - (126,094) (1,607,710) (1,733,804) Cash flows from financing activities: Contributions restricted for long-term purposes - 595, , ,061 Interest income restricted for long-term purposes Net cash provided by financing activities - 595, , ,210 Net increase (decrease) in cash and cash equivalents 115,323 82,090 (1,263,327) (1,065,914) Cash and cash equivalents at beginning of year 1,350, ,236 7,473,674 9,238,232 Cash and cash equivalents at end of year $ 1,465,645 $ 496,326 $ 6,210,347 $ 8,172,318 Supplemental disclosure of cash flow information: Cash paid during the year for interest $ - $ - $ - $ - See notes to consolidating financial statements 7

10 Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization The Episcopal Diocese of West Texas (the Diocese) is the governing body of the Episcopal churches in south and central Texas in an area that covers 60 counties. Programs of the organization include the support of mission churches, foreign ministries and assistance to social charities. Additionally, the Diocese operates the 76-acre Camp Capers retreat center located in Waring, Texas and the Mustang Island Conference Center located in Port Aransas, Texas. Basis of Accounting The consolidating financial statements are presented under the accrual basis, reflecting revenues as they are earned and expenses as incurred, regardless of when cash is received or disbursed. The consolidating financial statements include the financial position, the results of operation and cash flows of the Budget Fund, which represents the operating accounts of the Diocese, the Episcopal Church Corporation in West Texas, and the Episcopal Church Foundation in West Texas. The significant intercompany transactions and balances have been eliminated in consolidation. Financial Statement Presentation Financial statement presentation follows the recommendations of the Financial Accounting Standards Board in its Accounting Standards Codification (ASC) 958, Not-For-Profit Entities. Under ASC 958, the Diocese is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily-restricted net assets and permanently-restricted net assets. Estimates The preparation of consolidating financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents The Diocese considers cash on hand, cash in banks and all highly-liquid investments with an original maturity of three months or less to be cash equivalents. Cash held for permanently-restricted net assets amounted to $8,380 and $16,359 as of December 31, 2012 and 2011, respectively. Property and Equipment Acquisitions of property and equipment in excess of $1,000 are capitalized. Fixed assets are recorded at cost if purchased or fair value if contributed; and are depreciated using the straight-line method. Buildings are depreciated over 30 to 40 years; furniture, fixtures and equipment are depreciated over 5 to 10 years; and automobiles and other such vehicles are depreciated over 5 years. Land, fine art and construction in progress are not depreciated. Repairs and maintenance are expensed as incurred. 8

11 Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Donated Materials And Contributed Services Donated property, marketable securities, and other non-cash donations are recorded as contributions at their estimated market value at the date of donation. The Diocese receives a substantial amount of services donated by those interested in the Diocese s programs. The kinds of services provided generally involve the contribution of time to organize and administer programs. Because of the difficulty in assigning values for such services, these items are generally not reflected in the accompanying consolidating financial statements. Restricted and Unrestricted Revenue and Support Contributions received are recorded as unrestricted, temporarily-restricted, or permanently-restricted support, depending on the existence and/or nature of any donor-designated restrictions. Revenues are reported as increases in unrestricted net assets unless the use of the assets received is limited by donor-imposed restrictions. Restricted support is reported as an increase in temporarily or permanently-restricted net assets, depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished) temporarily-restricted net assets are reclassified to unrestricted net assets and reported in the Statements of Activities as net assets released from restrictions. Absent explicit donor stipulations about the length of time long-lived assets must be maintained, the Diocese reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Subsequent Events Management has considered subsequent events through April 25, 2013, which is the date the financial statements have been available to be issued. Income Taxes The Diocese is a non-profit organization and is exempt from federal income tax under Internal Revenue Code Section 501(c)(3). In addition, the Diocese qualifies for the charitable contribution deduction under Section 509(a)(2). The Diocese also qualifies as a religious order in accordance with IRS Sections , , and This makes the Diocese exempt from filing federal Form 990, Return of Organizations Exempt from Income Tax. 9

12 Note 2 - CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following at December 31, 2012: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Cash on hand $ 2,213 $ - $ - Cash in banks 411,518 69, ,489 Cash in money markets 1,283, ,753 6,195,233 Note 3 - INVESTMENTS $ 1,697,264 $ 786,456 $ 6,308,722 Investments are stated at fair value on a recurring basis using level 1 inputs and are determined by reference to quoted prices in active markets. No level 2 inputs (significant other observable inputs) level 3 inputs (significant unobservable inputs) were used. A provision for unrealized gains or losses is made in each year to adjust to the appropriate fair value. Realized and unrealized gains or losses are determined by comparison of cost to proceeds or market, respectively. Cost is determined by historical purchase price or, in the case of donated investments, the fair value of those investments at the date of the gift. The fair value of investments held at each fund at December 31, 2012 and 2011, is as follows: Cost Fair Value Cost Fair Value Episcopal Church Corporation $ 329 $ 749 $ 329 $ 505 Episcopal Church Foundation 40,834,217 42,601,965 38,315,384 38,124,985 Investments are comprised of the following: $40,834,546 $42,602,714 $38,315,713 $38,125, Cost Fair Value Cost Fair Value Mutual funds: Equities $27,888,393 $29,178,982 $25,522,809 $25,182,034 Fixed income 12,946,153 13,423,732 12,792,904 12,943,456 $40,834,546 $42,602,714 $38,315,713 $38,125,490 10

13 Note 4 - RESTRICTED USE OF CASH, CASH EQUIVALENTS AND INVESTMENTS Cash and investments restricted permanently or for use for long-term purposes are as follows at December 31, 2012: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Cash and cash equivalents $ - $ 11,231 $ 1,280,633 Investments - - 2,715,921 $ - $ 11,231 $ 3,996,554 Cash and investments restricted permanently or for use for long-term purposes are as follows at December 31, 2011: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Cash and cash equivalents $ - $ 11,231 $ 1,418,448 Investments - - 2,724,675 Note 5 - NOTES RECEIVABLE - RELATED PARTY Notes receivable at December 31, 2012 and 2011 consisted of the following: $ - $ 11,231 $ 4,143, Churches $ 1,315,282 $ 1,459,214 Less allowance for doubtful accounts 652, ,999 $ 663,213 $ 794,215 Notes receivable consist principally of amounts advanced to Diocese churches for capital improvements. Management periodically reviews past due notes receivable for collectability and based on the financial condition and outlook of each church, adjusts the allowance for losses if the collectibility of the note receivable is deemed to be remote. It is the policy of the Diocese to maintain records of past due notes receivable and to indefinitely maintain them in the allowance until the obligor is able to repay the debt. Interest is not accrued on loans that are past due one month or more. 11

14 Note 6 - PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31, 2012 and 2011: Land $ 2,809,630 $ 2,809,630 Fine Art 112, ,811 Buildings and improvements 13,119,628 13,108,197 Furniture and equipment 1,236,598 1,305,890 Automobiles 177, ,914 Land held for resale 1,140,000 1,140,000 Construction in progress 1,581, ,094 20,177,332 18,900,536 Less accumulated depreciation 8,480,421 8,085,446 Net property and equipment $ 11,696,911 $ 10,815,090 Note 7 - CONTRIBUTIONS RECEIVABLE FROM REMAINDER TRUSTS The Diocese is the remainder beneficiary of irrevocable charitable trusts for which it is a trustee and also for which a third party is trustee. Under ASC 958, the Diocese recognizes the present value of the contribution at the date of the creation of the instrument. Present value is computed based upon the quoted market prices of the assets in trust reduced by the present value of the future payments to the donor or other beneficiaries based on life expectancy and the applicable federal mid-term discount rate. The Remainder trusts held by third party trustees use the federal mid-term discount rate as of the balance sheet date, which at December 31, 2012 and 2011 was 1.2% and 1.6%, respectively. For remainder trusts where the Organization is Trustee, the discount rate at the date of the trust s creation is used, which was 5% for two trusts, 7.6% for one trust and 1.4% for another trust. Changes in the value of the split-interest agreements result from revaluations of future benefits due donors and amortization of discounts initially set up to account for future benefits. These changes are reflected in the statement of activities. The interest of the Diocese in the split-interest agreements, net of the donors interest, is presented as temporarily-restricted assets. Revocable or conditional agreements are not recognized as either contributions or assets. The assets held in the various trusts consist of cash, bonds, common stocks and mutual funds having an aggregate fair market value of $4,207,174 and $2,248,880 at December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011, $2,626,159 and $747,988, respectively, of these assets was reported as assets held in trust, with a corresponding liability to beneficiaries of $1,201,872 and $513,787, respectively. The remaining trust assets reflect trusts held by third party trustees and are reported as the present value of the estimated future distributions to the Diocese which were $969,418 and $813,842 at December 31, 2012 and 2011, respectively. In accordance with ASC 958, these amounts are recorded as a contribution receivable. During 2012, the Diocese was named beneficiary in a Charitable Remainder Trust and recorded $1,161,154 of temporarily-restricted contributions related to this trust. 12

15 Note 8 - BENEFICIAL INTEREST IN PERPETUAL TRUST The Diocese is the income beneficiary of two irrevocable perpetual trusts which are held by third party trustees. Revocable or conditional agreements are not recognized. The Diocese s interest in perpetual trusts is the present value of estimated future cash receipts from the trusts, which is best measured by the fair market value of the trusts assets. This interest is classified as permanentlyrestricted net assets. The assets of these trusts consist of cash, bonds, common stocks and mutual funds. Based upon the fair market value of these assets from quoted market prices at December 31, 2012 and 2011, the beneficial interest is estimated at $2,051,719 and $1,932,183, respectively. Distributions to the Diocese, totaling $62,799 for 2012 and $75,117 for 2011, were reported as unrestricted investment income as received. Note 9 - FUNDS HELD FOR THIRD PARTIES The Diocese holds and invests funds for the benefit of parishes, the Good Samaritan Center (which is a related party of the Diocese) and other various religious purposes. These investments consist of cash, bonds, stocks and mutual funds and are as follows at December 31, 2012: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Churches $ - $ - $ 25,290,326 Good Samaritan Center ,353 Other religious purposes 18, ,746 Funds invested for third parties are as follows at December 31, 2011: $ 18,208 $ - $ 26,522,425 Episcopal Episcopal Budget Church Church Fund Corporation Foundation Churches $ - $ - $ 22,007,378 Good Samaritan Center ,327 Other religious purposes 17, ,191 $ 17,894 $ - $ 23,270,896 13

16 Note 10 - RESTRICTIONS ON NET ASSETS Temporarily-restricted net assets are available for the following purposes as of December 31, 2012: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Outreach, missions and development $ 131,240 $ 1,676,150 $ 1,140,000 Education 8, ,169 1,538,620 Pastoral programs 461, , ,338 Facilities maintenance 21, ,602 83,737 Time restrictions - 969,418 1,424,287 $ 622,123 $ 3,693,048 $ 4,976,982 Temporarily-restricted net assets are available for the following purposes as of December 31, 2011: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Outreach, missions and development $ 87,207 $ 1,846,526 $ 1,140,000 Education 4, ,486 1,368,143 Pastoral programs 464, , ,334 Facilities maintenance 24,784 87, ,628 Time restrictions - 813, ,201 $ 581,045 $ 3,553,771 $ 3,486,306 Temporarily-restricted net assets released from donor restrictions by incurring expenditures satisfying the purpose of donors are as follows for the year ended December 31, 2012: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Outreach, missions and development $ 176,701 $ 172,960 $ - Education 90,297-75,710 Pastoral programs 182,582 94,071 37,074 Facilities maintenance and construction 29,389 1,462,778 27,237 $ 478,969 $ 1,729,809 $ 140,021 14

17 Note 10 - RESTRICTIONS ON NET ASSETS (continued) Temporarily-restricted net assets released from donor restrictions by incurring expenditures satisfying the purpose of donors are as follows for the year ended December 31, 2011: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Outreach, missions and development $ 281,194 $ 43,031 $ - Education 95,924 26,969 70,177 Pastoral programs 222, ,414 68,462 Facilities maintenance 12, ,408 12,810 $ 612,668 $ 403,822 $ 151,449 Permanently-restricted net asset amounts and restrictions as of December 31, 2012 are as follows: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Education $ - $ 383,500 $ 602,875 Facilities maintenance - 668,089 - Pastoral programs - 75, ,422 Capital assets - 225,003 - Time restrictions - 2,051,719 - $ - $ 3,403,602 $ 1,480,297 Permanently-restricted net asset amounts and restrictions as of December 31, 2011 are as follows: Episcopal Episcopal Budget Church Church Fund Corporation Foundation Education $ - $ 383,500 $ 601,875 Facilities maintenance - 668,089 - Pastoral programs - 75, ,721 Capital assets - 225,003 - Time restrictions - 1,932,183 - $ - $ 3,284,066 $ 1,473,596 15

18 Note 11 - DESIGNATIONS ON UNRESTRICTED NET ASSETS Designated unrestricted net assets available at December 31, 2012 and 2011 are as follows: Designated unrestricted: Budget Fund $ 2,025,766 $ 1,785,494 Episcopal Church Corporation 10,621,119 10,008,980 Episcopal Church Foundation Note 12 - ENDOWMENT $ 12,647,385 $ 11,794,974 The Diocese s endowment consists of donor-restricted funds established for property maintenance, scholarships, and pastoral programs. As required by GAAP, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law Management has interpreted the State Prudent Management of Institutional Funds Act (SPMIFA) as requiring the preservation of the corpus of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations of the contrary. As a result of this interpretation, the Diocese classifies as permanently-restricted net assets the original value of gifts donated to the permanent endowment and the original value of subsequent gifts to the permanent endowment. The remaining portion of the donor-restricted endowment fund that is not classified in permanentlyrestricted net assets is classified as temporarily-restricted and unrestricted net assets until those amounts are appropriated for expenditure by the Diocese in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the Diocese considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: the duration and preservation of the fund, the purposes of the Diocese and the donor-restricted endowment fund, general economic conditions, the possible effect of inflation and deflation, the expected total return from income and the appreciation of investments, other resources of the Diocese, and the investment policies of the Diocese. Return Objectives and Risk Parameters The Diocese has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment. Endowment assets include those assets of donor-restricted funds that the Diocese must hold in perpetuity. Under this policy, as approved by management, the endowment assets are invested in a manner that is intended to produce regular investment returns while assuming a reasonable level of investment risk. The Diocese expects its endowment funds, over time, to provide an average total rate of return of approximately 9% annually. Actual returns in any given year may vary from this amount. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the Diocese relies on a total return strategy, in which investment returns are achieved through both current yield (interest and dividends) and capital appreciation (realized and unrealized). The Diocese targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term objectives. 16

19 Note 12 - ENDOWMENT (continued) Spending Policy and How the Investment Objectives Relate to Spending Policy The Diocese has a policy of regular distributions of approximately 5% from its endowment funds. In establishing this policy, the Diocese considered the long-term expected return on its endowment. Accordingly, over the long term, the Diocese expects the current spending policy to allow its endowment to grow at an average rate of 4% annually, as uses of the endowment typically do not exceed growth of the endowment. Composition and Change of Endowment Assets For the years ended December 31, 2012 and 2011, the endowment net assets of the Diocese did not consist of unrestricted endowment funds. The changes of donor-restricted endowment assets for the years ended 2012 and 2011 are as follows: Temporarily Permanently Restricted Restricted Total Endowment net assets December 31, 2010 $ 1,963,274 $ 2,500,421 $ 4,463,695 Contributions , ,456 Investment return: Investment income 122, ,522 Net unrealized loss (111,704) - (111,704) Total investment return 10,818-10,818 Intercompany transfer (32,722) - (32,722) Endowment assets released from restrictions (141,201) - (141,201) Endowment net assets December 31, ,800,569 2,600,477 4,401,046 Contributions 16,704 6,701 23,405 Investment return: Investment income 272, ,875 Net unrealized gain 229, ,857 Total investment return 502, ,732 Intercompany transfer (89,111) - (89,111) Endowment assets released from restrictions (34,132) - (34,132) Endowment net assets December 31, 2012 $ 2,196,762 $ 2,607,178 $ 4,803,940 17

20 Note 13 - PENSION PLAN Lay employees of the Diocese become eligible for a pension plan administered by the Church Pension Group upon completion of at least one year of service and who are twenty-five years of age, provided the employee is hired prior to the age of sixty. Clergy employees of the Diocese become eligible upon ordination. The Diocese helps to fund this plan by sending 9% of eligible Diocesan lay employees and 18% of eligible Diocesan staff clergy salaries to the Church Pension Group. Pension expense for 2012 and 2011 was $166,298 and $156,472, respectively. Note 14 - OPERATING LEASE AGREEMENTS Effective September 1, 2008, the Diocese began leasing land and building to the Messianic Fellowship Church of Corpus Christi, Inc. at a rate of $500 per month with a term of one year. This agreement was renewed September 1, 2010 at the same rate and expired September 1, Subsequent to December 31, 2011, this lease was restructured to lease the same land and building for $1 per year with the Messianic Fellowship Church responsible for property maintenance and upkeep. Future minimum rentals at December 31, 2012 are as follows: $1 Effective October 1, 2009, the Diocese entered into a related party operating lease with Texas Military Institute to lease chapel space at a rate of $250 per worship service event and $100 per music rehearsal event. This lease automatically renewed yearly, had no stated minimum lease payments and could be terminated by either party. During 2011, the Diocese terminated the lease. Lease payments made during 2011 was $0. Effective April 30, 2008, the Diocese entered into a lease agreement with Documation to lease copier equipment. This agreement calls for base monthly payments of $1,592 for 63 months. Lease payments made during 2012 and 2011 were $22,740 and $21,636, respectively. Future minimum lease payments at December 31, 2012 are as follows: $11,144. Effective November 17, 2010, the Diocese entered into a lease agreement with US Bank to lease copier equipment. This agreement calls for base monthly payments of $2,275 for 63 months. Lease payments made during 2012 and 2011 were $28,239 and $27,482, respectively. Future minimum lease payments at December 31, 2012 are as follows: $27,300; ,300; $27,300; and $6,825. As part of this agreement, US Bank provided the Diocese with the funds to make payments on the prior copier equipment lease, an amount equal to $52,600. The Episcopal Church Corporation entered into an operating lease agreement with First Baptist Church of Boulder, Colorado for the use of James Park in order to operate a Christian church camp. The lease term was for the month of July 2012, with automatic renewals for each July thereafter. The agreement calls for a payment of $5,000 annually to be paid on or before July 1 st of each year. The lease may be terminated by either party if done before December 31 st. In addition to the annual rent, the Church Corporation is obligated to pay up to $5,000 per calendar year for maintenance and repairs. Rent and repairs expense under this lease was $9,294 and $10,000 for 2012 and 2011, respectively. Future minimum payments under this lease at December 31, 2012 were $10,

21 Note 15 - INTENTIONS TO GIVE In connection with the Diocesan Development Campaign, the Diocese had approximately $6,062,009 and $5,871,623 in outstanding intentions to give at December 31, 2012 and 2011, respectively. The intentions to give may be rescinded or modified by the donors at any time. As such, the intentions to give do not meet the criteria for revenue recognition under ASC 958. These intentions to give are recorded as contributions when funds are received. Note 16 - RELATED PARTY TRANSACTIONS The Diocese is a related party to all congregations and schools under its authority, the Good Samaritan Center of San Antonio and Texas Military Institute. These entities receive extensive support from the Diocese and the congregations contribute apportionments to help pay for the management of the Diocese. Support received from the congregations is shown as apportionments on these consolidating financial statements and totaled $3,772,416 and $3,706,872 for the years ended December 31, 2012 and 2011, respectively. Additionally, endowments and contributions as reported on the statements of activities included amounts donated by Churches within the Diocese of $90,670 and $56,542 for the years ended December 31, 2012 and 2011, respectively. The Diocese provided direct support to the mission congregations of the Diocese, which approximated $604,848 and $522,171 for the years ended December 31, 2012 and 2011, respectively. The Diocese support of the programs at the Good Samaritan Center totaled approximately $261,100 and $155,000 for the years ended December 31, 2012 and 2011, respectively. The Diocese support of the programs of Texas Military Institute totaled approximately $118,835 and $280,222 for the years ended December 31, 2012 and 2011, respectively. Additionally, at December 31, 2012, $687,538 of the temporarily restricted funds in the Episcopal Church Foundation are purposed for the benefit of Texas Military Institute. The Diocese invested $430,677 and $330,000 in 2008 and 2007, respectively, to become a 50% owner of Christ Chapel at Texas State University San Marcos (Christ Chapel). The remaining 50% of this non-profit corporation is owned by the Evangelical Lutheran Church in America. Christ Chapel s assets consisted of real property with an estimated value, based on the agreed price for the property in 2007, of $1,500,000. Christ Chapel used this property, which is adjacent to the Texas State University in San Marcos, Texas, to provide campus ministries. In September of 2010, Christ Chapel sold this property for $1,500,000. The sales price consisted of cash of $750,000 and a note receivable for $750,000 at 10% interest, payable in 10 annual installments at the first of each year beginning January 1, A corresponding lease was also entered into whereas Christ Chapel leases the same property for a period of 10 years beginning September 15, Lease payments consist of $1 per year in addition to a reduction of the expected annual note payments by $20,000 per year. The Diocese s interest in half of Christ Chapel s note receivable is reported as Equity interest in Christ Chapel on the 2012 and 2011 statements of financial position. No note payments have been collected on the notes receivable to date. However, during both 2012 and 2011, the equity interest reported on the statement of financial position was reduced by $10,000, or 50% of the note receivable reduction per the lease agreement. Salary and related costs for Christ Chapel ministries were $0 and $12,918 during 2012 and 2011, respectively. 19

22 Note 17 - CONCENTRATION OF CREDIT RISK The Diocese had more than the insured limit of $250,000 in one financial institution. At December 31, 2012, cash deposits exceeded federally insured limits by $2,585,710. Management monitors the creditworthiness of the institution, and believes the risk of loss due to credit risk to be remote. Note 18 - ASSETS HELD FOR THE BENEFIT OF CHURCHES The Diocese, through the Church Corporation, holds title to real property used by parishes within the Diocese. This real property is not recorded as assets of the Diocese and the historical costs of this property are unknown since the funds raised for construction were raised and managed by the individual parishes. Certain of these properties are encumbered for borrowings used by the parishes in construction. Canon 21 of the Diocesan Canons provides that no real property, consecrated or unconsecrated, of any congregation, institution or other diocesan body shall be alienated or encumbered without the consent of the Church Corporation. Any debt created in such an approved transaction may encumber the property but can in no way become an obligation, direct or otherwise, of the Diocese or the Church Corporation. 20