YEARS ENDED DECEMBER 31, 2012 AND 2011 FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS REPORT

Transcription

1 YEARS ENDED DECEMBER 31, 2012 AND 2011 IDB- IIC F E D E RA L C R E D I T U NI O N FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS REPORT

2 Table of Contents Independent Auditors Report on the Financial Statements.1 Statements of Financial Condition 2 Statements of Income and Comprehensive Income. 3 Statements of Changes in Members Equity.4 Statements of Cash Flows.5 Notes to Financial Statements.6-31

3 INDEPENDENT AUDITORS REPORT Supervisory Committee and Board of Directors IDB-IIC Federal Credit Union Washington, DC We have audited the accompanying financial statements of IDB-IIC Federal Credit Union (the Credit Union), which comprise the statements of financial condition as of, and the related statements of income and comprehensive income, changes in members equity, and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the 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 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 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 financial statements referred to above present fairly, in all material respects, the financial position of IDB-IIC Federal Credit Union as of, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. DeLeon & Stang DeLeon & Stang, CPAs Gaithersburg, Maryland April 29, 2013

4 Statements of Financial Condition ASSETS Cash and cash equivalents $ 66,197,555 $ 55,487,564 Investment securities, available-for-sale, at fair value 75,895,230 82,150,485 Investment securities, held-to-maturity, at amortized cost 6,450,000 11,107,200 Other investments 14,232,900 6,726,000 Loans to members, net of allowance for loan losses 276,928, ,835,815 Accrued interest receivable 957, ,983 Prepaid expenses and other receivables 4,493,147 1,699,830 Premises and equipment, net of accumulated depreciation and amortization 206, ,430 Ownership interests in credit union service organizations (CUSOs) 85,421 85,421 NCUSIF deposit 2,753,626 2,611,787 Total assets $ 448,200,438 $ 400,928,515 LIABILITIES AND MEMBERS' EQUITY Liabilities: Members' share and savings accounts $ 342,067,097 $ 316,177,027 Borrowed funds 55,858,571 36,877,857 Accounts payable and other liabilities 1,370,282 1,494,716 Total liabilities 399,295, ,549,600 Members' equity, substantially restricted 48,904,488 46,378,915 Total liabilities and members' equity $ 448,200,438 $ 400,928,515 See Accompanying Notes to Financial Statements Page 2

5 Statements of Income and Comprehensive Income For the Years Ended INTEREST INCOME Member loans $ 9,520,429 $ 9,714,422 Investment securities 941, ,369 Total interest income 10,461,782 10,589,791 INTEREST EXPENSE Dividends on members' share and savings accounts 1,950,633 2,367,621 Borrowed funds 1,273,721 1,227,463 Total interest expense 3,224,354 3,595,084 Net interest income 7,237,428 6,994,707 PROVISION FOR LOAN LOSSES 60,000 60,000 Net interest income after provision for loan losses 7,177,428 6,934,707 NON-INTEREST INCOME Fees and charges for services 1,225,768 1,309,865 Loan servicing fees 54,101 16,433 Realized gain on sale of available-for-sale securities and equipment 462, ,221 Other 24,635 (6,480) Total non-interest income 1,767,397 2,224,039 NON-INTEREST EXPENSE Employee compensation and benefits 2,770,888 2,879,900 Member insurance NCUSIF premium and TCCUSF assessment 261, ,947 Office occupancy 498, ,500 Other operating expenses 2,506,686 2,258,722 Total non-interest expense 6,038,070 6,235,069 Net income 2,906,755 2,923,677 OTHER COMPREHENSIVE INCOME (LOSS) Net unrealized gains (losses) on investment securities arising during the year (381,182) 786,311 Total other comprehensive income (loss) (381,182) 786,311 Total comprehensive income $ 2,525,573 $ 3,709,988 See Accompanying Notes to Financial Statements Page 3

6 Statements of Changes in Members' Equity For the Years Ended Accumulated Other Regular Undivided Comprehensive Reserves Earnings Income Total Balance at December 31, 2010 $ 4,300,000 $ 37,808,143 $ 560,784 $ 42,668,927 Comprehensive Income: Net income - 2,923,677-2,923,677 Net change in accumulated other comprehensive income , ,311 Balance at December 31, ,300,000 40,731,820 1,347,095 46,378,915 Comprehensive Income: Net income - 2,906,755-2,906,755 Net change in accumulated other comprehensive income - - (381,182) (381,182) Balance at December 31, 2012 $ 4,300,000 $ 43,638,575 $ 965,913 $ 48,904,488 See Accompanying Notes to Financial Statements Page 4

7 Cash Flows From Operating Activities: IDB-IIC FEDERAL CREDIT UNION Statements of Cash Flows For the Years Ended Net income $ 2,906,755 $ 2,923,677 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 117, ,305 Amortization of net premium on securities 597, ,773 Realized gain on disposal of available-for-sale securities (462,893) (904,221) Realized loss on disposal of equipment - 2,080 Provision for loan losses 60,000 60,000 Increase in interest receivable (2,482) (45,575) Increase in prepaid expenses and other assets (2,793,317) (1,210,804) Increase (decrease) in accounts payable and accrued expenses (124,434) 272,218 Total adjustments (2,608,739) (979,224) Net cash provided by operating activities 298,016 1,944,453 Cash Flows From Investing Activities: Purchases of investment securities available-for-sale (26,097,702) (96,120,341) Proceeds from sale and maturity of investment securities available-for-sale 31,894,668 88,154,694 Purchases of investment securities held-to-maturity (1,000,000) (9,004,249) Proceeds from sale or maturity of investment securities held-to-maturity 5,600,000 24,000,000 Net increase in other investments (7,506,900) (791,200) Net increase in loans to members (37,152,416) (20,454,119) Proceeds from sale of equipment Purchases of furniture and equipment (54,620) (88,953) Increase in NCUSIF deposit (141,839) (93,021) Net cash used in investing activities (34,458,809) (14,396,948) Cash Flows From Financing Activities: Net increase in members' share and savings accounts 25,890,070 10,027,133 Proceeds from borrowings 25,850,000 2,000,000 Repayment of borrowed funds (6,869,286) (419,285) Net cash provided by financing activities 44,870,784 11,607,848 Net increase (decrease) in cash and cash equivalents 10,709,991 (844,647) Cash and cash equivalents at beginning of year 55,487,564 56,332,211 Cash and cash equivalents at end of year $ 66,197,555 $ 55,487,564 Supplemental Disclosures: Cash paid during the year for Dividends on member accounts $ 1,868,655 $ 2,349,620 Interest on borrowed funds $ 1,265,457 $ 1,272,391 See Accompanying Notes to Financial Statements Page 5

8 Notes to Financial Statements NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION IDB-IIC Federal Credit Union (the 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 that qualify for membership including principally staff members, officers and retirees of Inter-American Development Bank (the Bank) and Inter-American Investment Corporation (IIC). The field of membership is defined in the Credit Union s Charter and Bylaws. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Credit Union follows the accounting standards set by the Financial Accounting Standards Board (FASB). The FASB establishes U. S. generally accepted accounting principles (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 notes to the financial statements are The FASB Accounting Standards Codification, commonly referred to as the Codification or ASC. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the fair value of financial instruments. Fair Value The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification provides a framework for measuring fair value, which requires an entity to derive fair value from the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date within its principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. To increase consistency and comparability in fair value measurements and related disclosures, a three-level hierarchy prioritizes the inputs to valuation techniques used to measure fair value with the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as further described below: Page 6

9 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value (Continued) 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 other 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 financial instruments and other accounts subject to fair value, including methodologies and resulting values, is presented in Note 15 to these financial statements. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, amounts due from financial institutions and debt securities purchased with maturities of three months or less. Amounts due from financial institutions may, at times, exceed federally insured limits. Investments Investments in securities are classified and accounted for in accordance with the provisions of the Investments Debt and Equity Securities Topic of the FASB Accounting Standards Codification. Debt securities that the Credit Union has the intent and ability to hold to maturity are classified as held-to-maturity securities and reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity, unless a decline in value is deemed other than temporary, in which case the carrying value is reduced. Those securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and marked to fair value through earnings. All other qualifying securities are classified as available-for-sale and reported at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a component of equity. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Page 7

10 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments (Continued) Any unrealized losses deemed other than temporary are included in current period earnings and removed from accumulated other comprehensive income. Investment securities are reviewed for other-than-temporary impairment periodically or when economic or market concerns warrant such evaluation. The determination of other-thantemporary impairment will often depend on numerous 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, and (3) the intent and ability of the Credit Union to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and requires judgment. If the Credit Union expects to recover the entire amortized cost basis of the security and does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, no impairment charge will be recognized. Gains and losses on the sale of securities are recorded on the trade date and the costs of securities sold are determined using the specific identification method. Other investments consist of Federal Home Loan Bank of Atlanta (FHLB) stock and certificates of deposit. The Credit Union, as a member of the FHLB system, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1 percent of its outstanding mortgage loans or 5 percent of advances from the FHLB as described in Note 3. No ready market exists for the FHLB stock and it has no quoted market value. Other investments are classified separately in the statements of financial condition and are stated at cost. If such investments are deemed to be impaired, the recorded cost is reduced by the amount of impairment. Certificates of deposits are not subject to the accounting guidance set forth in the Investments Debt and Equity Securities Topic of the FASB Accounting Standard Codification. Loans to Members and Allowance for Loan Losses Loans receivable are stated at unpaid principal balances, less an allowance for loan losses and net deferred loan origination fees and discounts. Interest on loans is recognized over the term of the loan and is calculated using the simple-interest method on principal amounts outstanding. The Credit Union discontinues the accrual of interest on loans that are more than three months delinquent. Interest income on non-accrual loans is recognized only to the extent cash payments are received. Page 8

11 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans to Members and Allowance for Loan Losses (Continued) 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. Commitment fees and costs relating to commitments whose likelihood of exercise is remote are recognized over the commitment period on a straight-line basis. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield. The allowance for loan losses is established as losses are estimated to have occurred through 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 confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The Credit Union's allowance for loan and lease losses is that amount considered adequate to absorb probable losses in the portfolio based on management's evaluations of the size and current risk characteristics of the loan portfolio. Such evaluations consider prior loss experience, the risk rating distribution of the portfolios, the impact of current internal and external influences on credit loss and the levels of nonperforming loans. Specific allowances for loan losses are established for large impaired loans on an individual basis. The specific allowance established for these loans and leases is based on a thorough analysis of the most probable source of repayment, including the present value of the loan's expected future cash flow, the loan's estimated market value, or the estimated fair value of the underlying collateral. Page 9

12 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans to Members and Allowance for Loan Losses (Continued) General allowances are established for loans that can be grouped into pools based on similar characteristics. In this process, general allowance factors are based on an analysis of historical charge-off experience and expected losses given default derived from the Credit Union's internal risk rating process. These factors are developed and applied to the portfolio in terms of loan type. The qualitative factors associated with the allowances are subjective and require a high degree of management judgment. These factors include the credit quality statistics, recent economic uncertainty, losses incurred from recent events, and lagging data. Premises and Equipment Leasehold improvements and equipment are carried at cost, less accumulated depreciation and amortization. Equipment is 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. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. The Credit Union reviews its premises and equipment for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Transfers of Financial Assets The Transfers and Servicing Topic of the FASB Accounting Standards Codification requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in 1) a transfer of the servicer s financial assets that meets the requirements for sale accounting, 2) a transfer of the servicer s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with the Investments Debt and Equity Securities Topic of the FASB Accounting Standards Codification, or 3) an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its affiliates, if material. The accounting guidance requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. Fair value is estimated based on market prices, when available, or an appropriate alternative valuation method. As of, the Credit Union s mortgage servicing rights were immaterial and have not been recognized. Loan servicing activity is discussed in Note 4. Page 10

13 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Other Real Estate Owned (OREO) If material, real estate properties acquired in satisfaction of loans are reported in other real estate owned and are recorded at the lower of cost or estimated fair value less estimated selling costs on their acquisition dates and at the lower of such initial amount or estimated fair value less estimated selling costs thereafter. Any write-downs based on the asset s fair value at the date of acquisition are charged to the allowance for loan losses. Subsequent write-downs based on periodic valuations performed by management are recorded as a charge to operations. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to the development of real estate is capitalized. There were no OREO as of. NCUSIF Deposit The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with NCUA regulations, which require the maintenance of a deposit by each insured credit union in an amount equal to one percent of its insured shares. The deposit would be refunded to the Credit Union if its insurance coverage is terminated, it converts to insurance coverage from another source, or the operations of the fund are transferred from the NCUA board. See Note 16 for a description of industry events and impairment matters impacting the NCUSIF deposit. NCUSIF Insurance Premiums The Credit Union is required to pay an annual insurance premium equal to one-twelfth of one percent of total insured shares, unless the payment is waived or reduced by the NCUA Board. The NCUA Board waived the payment of insurance premium in 2012 and Member Shares and Savings Accounts 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 approved by the Credit Union s Board of Directors. Page 11

14 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Members Equity The Credit Union Membership Access Act (CUMAA) requires the National Credit Union Administration to adopt certain capital requirements for credit unions. Under the current NCUA regulatory capital rules, a federally insured credit union can fall into one of five categories, depending on its net worth ratio: well capitalized: net worth ratio of 7% or greater; adequately capitalized: net worth ratio of 6% or more, but less than 7%; undercapitalized: net worth ratio of 4% or more, but less than 6%; significantly undercapitalized: the credit union has a net worth restoration plan; critically undercapitalized: the credit union has a net worth ratio of less than 2%. At, the Credit Union was categorized as well capitalized at 10.70% and 11.23%, respectively. Income Taxes The Credit Union is exempt by statute from federal and state income taxes. 401(k) Plan The Credit Union has established a contributory 401(k) plan for qualified employees. The Credit Union s policy is to fund contributions as accrued. 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. Gains and losses on securities available for sale are reclassified to net income or loss as the gains or losses are realized upon sale of the securities. Other-than-temporary impairment charges are reclassified to net income or loss at the time of the charge. Reclassifications Certain account reclassifications have been made to the prior year s financial statements in order to conform to classifications used in the current year. These reclassifications have no effect on previously reported net income or members' equity. Page 12

15 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Evaluation of Subsequent Events The Credit Union has evaluated events and transactions for potential recognition or disclosure through April 29, 2013, which is the date the financial statements were available to be issued. This space intentionally left blank. Page 13

16 NOTE 3 - INVESTMENTS At, investments consisted of debt securities available for sale, investments held to maturity and other investments. The amortized cost and estimated fair value of securities available-for-sale are as follows: December 31, 2012 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-Sale US government obligations and federal agencies securities $ 35,194,706 $ 236,209 $ (13,868) $ 35,417,047 Mutual funds of U.S. government obligations 5,970, ,970,563 Money market funds 10,014, ,014,099 US government obligations and federal agencies mortgage-backed securities 18,378, ,645-19,094,492 Corporate notes 5,371,102 28,777 (850) 5,399,029 Total available-for-sale securities $ 74,929,317 $ 980,631 $ (14,718) $ 75,895,230 December 31, 2011 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-Sale US government obligations and federal agencies securities $ 39,869,957 $ 328,337 $ (47,949) $ 40,150,345 Mutual funds of U.S. government obligations 7,969, ,969,619 Money market funds 8,006, ,006,861 US government obligations and federal agencies mortgage-backed securities 19,936, ,481-20,755,331 Corporate notes 5,020, ,921 (4,695) 5,268,329 Total available-for-sale securities $ 80,803,390 $ 1,399,739 $ (52,644) $ 82,150,485 Page 14

17 NOTE 3 - INVESTMENTS (Continued) Investments classified as held-to-maturity consist of the following: December 31, 2012 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Held-to-Maturity US government obligations and federal agencies securities $ 6,450,000 $ 32,173 $ - $ 6,482,173 December 31, 2011 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Held-to-Maturity US government obligations and federal agencies securities $ 11,107,200 $ 64,618 $ - $ 11,171,818 Other investments are as follows: Certificates of deposit in banks and savings institutions $ 11,117,000 $ 4,479,000 Federal Home Loan Bank of Atlanta stock 3,115,900 2,247,000 Total other investments $ 14,232,900 $ 6,726,000 The Credit Union views its investment in FHLB of Atlanta stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recoverability of the par value rather than recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability is influenced by factors such as (1) the significance of the decline in net assets of the institution as compared to the investment amount and length of time a decline has persisted, (2) impact of legislative and regulatory changes on the institution, and (3) the liquidity position of the institution. The Credit Union does not believe that its investment in the FHLB of Atlanta stock is impaired as of this date. However, this estimate could change in the near term if (1) significant other-than-temporarily losses are incurred on the FHLB of Atlanta s mortgage-backed securities causing a significant decline in their regulatory capital status, (2) the economic losses resulting from credit deterioration on the FHLB of Atlanta s mortgage-backed securities increases significantly, and (3) capital preservation strategies being utilized by the FHLB of Atlanta becomes ineffective. Page 15

18 NOTE 3 - INVESTMENTS (Continued) While the FHLBs and system were challenged during the economic crisis, the FHLB of Atlanta has reported profits for the years ended, paid stock dividends and remains in compliance with regulatory capital and liquidity requirements. Given these factors, the Credit Union determined that the stock was not impaired at. Information pertaining to securities with gross unrealized losses at December 31, 2012 and 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows: December 31, 2012 Less than 12 months 12 months or longer Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses US government obligations and federal agencies securities $ 4,977,750 $ (13,868) $ - $ - $ 4,977,750 $ (13,868) Corporate notes ,569 (850) 522,569 (850) $ 4,977,750 $ (13,868) $ 522,569 $ (850) $ 5,500,319 $ (14,718) December 31, 2011 Less than 12 months 12 months or longer Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses US government obligations and federal agencies securities $ 17,941,850 $ (47,949) $ - $ - $ 17,941,850 $ (47,949) Corporate notes 517,209 (4,695) ,209 (4,695) $ 18,459,059 $ (52,644) $ - $ - $ 18,459,059 $ (52,644) Page 16

19 NOTE 3 - INVESTMENTS (Continued) The amortized cost and estimated market value of investment securities available-forsale at, and certificates of deposit, by contractual maturity, are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2012 Available-for-Sale Held-to-Maturity Amortized Fair Amortized Fair Cost Value Cost Value Other No contractual maturities $ 15,984,662 $ 15,984,662 $ - $ - $ 3,115,900 Due in one year or less - - 5,450,000 5,478,413 7,926,000 Due in one to five years 40,565,808 40,816,076 1,000,000 1,003,760 3,191,000 Amortizing debt securities 18,378,847 19,094, $ 74,929,317 $ 75,895,230 $ 6,450,000 $ 6,482,173 $ 14,232,900 Available-for-Sale December 31, 2011 Held-to-Maturity Amortized Fair Amortized Fair Cost Value Cost Value Other No contractual maturities $ 15,976,481 $ 15,976,481 $ - $ - $ 2,247,000 Due in one year or less - - 5,657,200 5,670,520 3,782,000 Due in one to five years 44,890,059 45,418,674 5,450,000 5,501, ,000 Amortizing debt securities 19,936,850 20,755, $ 80,803,390 $ 82,150,485 $ 11,107,200 $ 11,171,818 $ 6,726,000 NOTE 4 - LOAN SERVICING Mortgage loans serviced for Federal National Mortgage Association are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans at, were $17,202,653 and $28,640,421, respectively. In December 2011, the Credit Union sold 43 loans totaling $10 million to Fannie Mae for cash. In addition, the Credit Union swapped 53 loans totaling $10.4 million to Fannie Mae for mortgage-backed securities which were placed in the available-for-sale investment portfolio. These loans were added to the servicing portfolio. Page 17

20 NOTE 5 - LOANS TO MEMBERS Total loans outstanding by portfolio segment and class of financing receivable at are summarized as follows: Mortgage loans: Combo $ 120,934,223 $ 121,632,680 Fixed rate 111,272,014 73,086,645 Hybrid 4,287,300 7,501,375 Variable rate 10,803,505 7,098,803 Interest-only, home equity lines of credit 12,113,326 12,209,495 Other real estate, primarily second mortgages and home equity variable rate loans 479, , ,890, ,352,924 Vehicle loans 2,716,439 3,237,295 Educational loans 2,776,319 2,619,957 Credit card loans, unsecured 988, ,131 Other consumer loans, primarily unsecured 11,321,612 11,625, ,693, ,611,364 Net deferred loan origination fees (158,431) (206,483) 277,534, ,404,881 Allowance for loan losses (606,526) (569,066) Net loans to members $ 276,928,231 $ 239,835,815 At, the Bank was the guarantor of other secured loans for supplemental housing in the amount of $1,066,951 and $644,780, respectively, and country office loans in the amount of $1,335,509 and $1,350,499, respectively. The Credit Union offers nontraditional mortgage loans to its members, which include combo mortgages and interest-only home equity lines of credit. Combo mortgages are loans whose interest rates are fixed for an initial period of three, five, seven, or ten years. After this period, the mortgages are converted to variable rate, subject to periodic interest rate caps, which can result in payment shock to the borrower. The interest only home equity lines of credit allow the borrower to pay only interest for a specified number of years during the draw period. Nontraditional mortgage loans may have significantly different credit risk characteristics than traditional fixed and variable rate mortgages. However, the Credit Union believes it has established prudent underwriting standards as well as adequate risk management functions to monitor these additional risks. Page 18

21 NOTE 5 - LOANS TO MEMBERS (Continued) Activity in the allowance for loan losses and recorded investment in loans, by portfolio segment, for the years ended is as follows: Real estate December 31, 2012 Other Vehicle Consumer Total Allowance for loan losses Beginning balance $ 274,480 $ 11,589 $ 282,997 $ 569,066 Charge-offs - - (23,645) (23,645) Recoveries - - 1,105 1,105 Provision ,000 60,000 Ending balance $ 274,480 $ 11,589 $ 320,457 $ 606,526 Ending balance, individually evaluated for impairment $ - $ - $ - $ - Ending balance, collectively evaluated for impairment $ 274,480 $ 11,589 $ 320,457 $ 606,526 Financing receivables Ending balance $ 259,731,668 $ 2,716,439 $ 15,086,650 $ 277,534,757 Ending balance, individually evaluated for impairment $ - $ - $ - $ - Ending balance, collectively evaluated for impairment $ 259,731,668 $ 2,716,439 $ 15,086,650 $ 277,534,757 Real estate December 31, 2011 Vehicle Consumer Secured Total Allowance for loan losses Beginning balance $ 305,111 $ 12,587 $ 236,184 $ 553,882 Charge-offs (29,134) (7,518) (8,164) (44,816) Recoveries Provision (1,497) 6,520 54,977 60,000 Ending balance $ 274,480 $ 11,589 $ 282,997 $ 569,066 Ending balance, individually evaluated for impairment $ - $ - $ - $ - Ending balance, collectively evaluated for impairment $ 274,480 $ 11,589 $ 282,997 $ 569,066 Financing receivables Ending balance $ 222,172,041 $ 3,237,295 $ 14,995,545 $ 240,404,881 Ending balance, individually evaluated for impairment $ - $ - $ - $ - Ending balance, collectively evaluated for impairment $ 222,172,041 $ 3,237,295 $ 14,995,545 $ 240,404,881 Page 19

22 NOTE 5 - LOANS TO MEMBERS (Continued) The allowance for loan losses is considered by the Credit Union as adequate to cover probable losses inherent in the loan portfolio at December 31, 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. A loan is considered impaired, in accordance with the impairment accounting guidance in the Codification, when based on current information and events, it is probable that the Credit Union will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. At, there were no significant impaired loans held by the Credit Union. CREDIT QUALITY INDICATORS The Credit Union has several classes of consumer loans which carry distinct credit risks. FICO credit scores, loan delinquency, and loan-to-value (LTV) ratios for loan classes are common credit quality indicators that financial institutions monitor and utilize in the evaluation of the adequacy of the allowance for loan losses for the consumer portfolio segment. Due to the international nature of the membership, the Credit Union utilizes a number of different criteria in order to render a credit decision. When available, the Credit Union obtains FICO scores for its first mortgage borrowers, but does not track scores on an ongoing basis. The Credit Union does not obtain FICO scores for other loans not secured by real estate. As a general practice, the Credit Union requires borrowers without a FICO score to have a payroll deposit from which an automatic loan payment is deducted. The criteria utilized to render a credit decision include employment history and current salary, other income (if applicable), debt to income ratio, credit history, and collateral value (if applicable). The Credit Union limits the amount of unsecured loans to a percentage of the borrower s income and limits the amount of secured loans to a percentage of the collateral value. In addition, the Credit Union limits the total amount of loans granted to any one member in order to maintain a diversified portfolio. Since most of the loans outstanding are paid automatically in monthly installments from a payroll deposit at the Credit Union, the risk of late payments is very low. Page 20

23 NOTE 5 - LOANS TO MEMBERS (Continued) CREDIT QUALITY INDICATORS FICO SCORE DISTRIBUTION The following table presents each class of loan within the consumer portfolio by recent FICO score. FICO Distribution Unrated nonresident < Total December 31, 2012 First mortgage $ 3,275,351 $ 2,039,951 $ 4,854,646 $ 28,122,970 $ 209,004,124 $ 247,297,042 Junior liens - 931,677 47, ,362 11,434,428 12,593,057 Direct auto loans 2,716, ,716,439 Credit cards 988, ,719 Other consumer 14,097, ,097,931 Total $ 21,078,440 $ 2,971,628 $ 4,902,236 $ 28,302,332 $ 220,438,552 $ 277,693,188 December 31, 2011 First mortgage $ 121,827,432 $ - $ 867,500 $ 7,522,920 $ 79,101,651 $ 209,319,503 Junior liens 13,033, ,033,421 Direct auto loans 3,237, ,237,295 Credit cards 776, ,131 Other consumer 14,245, ,245,014 Total $ 153,119,293 $ - $ 867,500 $ 7,522,920 $ 79,101,651 $ 240,611,364 CREDIT QUALITY INDICATORS PAST DUE STATUS A significant variable in the loss estimation of the consumer allowance for loan losses are delinquency levels. The following table presents the outstanding balances from each class within the consumer portfolio by delinquency status: Days Past Due Current or and Accruing Nonaccrual Total December 31, 2012 First mortgage $ 246,178,818 $ - $ 573,905 $ - $ 544,319 $ 247,297,042 Junior liens 12,593, ,593,057 Direct auto loans 2,712,517 3, ,716,439 Credit cards 987, ,719 Other consumer 14,027,788 13,232 9,984-46,927 14,097,931 Total $ 276,499,785 $ 17,285 $ 584,872 $ - $ 591,246 $ 277,693,188 Page 21

24 NOTE 5 - LOANS TO MEMBERS (Continued) CREDIT QUALITY INDICATORS PAST DUE STATUS (Continued) Days Past Due Current or and Accruing Nonaccrual Total December 31, 2011 First mortgage $ 208,770,543 $ - $ - $ 319,139 $ 229,821 $ 209,319,503 Junior liens 13,033, ,033,421 Direct auto loans 3,217,054 12,996 4,307 2,938-3,237,295 Credit cards 769,527 1, , ,131 Other consumer 14,217,325 6,213-21,476-14,245,014 Total $ 240,007,870 $ 20,370 $ 4,875 $ 348,428 $ 229,821 $ 240,611,364 The interest income that would have been earned on nonaccrual loans during the years ended, had those loans not been placed in nonaccrual status, is immaterial. CREDIT QUALITY INDICATORS LOAN-TO-VALUE RANGES LTV refers to the ratio comparing a loan s unpaid principal balance to the value of the collateral securing repayment of the loan. If the Credit Union is in a junior lien position, then only excess collateral value over the amounts necessary to retire senior lien positions is considered. LTVs are updated quarterly using a cascade approach which first uses values provided by automated valuation models (AVMs) for the property. If an AVM is not available, then the value is estimated using the original appraised value adjusted by the change in Home Price Index (HPI) for the property location. If an HPI is not available, the original appraised value is used. The following table shows the most recent LTV distribution of first mortgage and junior lien loans. In recent years, the residential real estate markets have experienced significant declines in property values. These trends are considered in the way the Credit Union monitors credit risk and establishes the consumer allowance for loan losses. LTV does not necessarily reflect the likelihood of performance of a given loan, but does provide an indication of collateral value. In the event of a default, any loss to the Credit Union should be approximately limited to the portion of the loan amount in excess of the net realizable value of the underlying real estate collateral. December 31, 2012 Loan-to-Value Ranges 0-80% 80-90% % >100% Total First mortgage $ 232,983,823 $ 7,677,998 $ 6,405,400 $ 229,821 $ 247,297,042 Junior liens 11,268,630 1,006, ,000-12,593,057 Total $ 244,252,453 $ 8,684,425 $ 6,723,400 $ 229,821 $ 259,890,099 Page 22

25 NOTE 5 - LOANS TO MEMBERS (Continued) CREDIT QUALITY INDICATORS LOAN-TO-VALUE RANGES (Continued) Loan-to-Value Ranges December 31, % 80-90% % >100% Total First mortgage $ 205,719,174 $ 3,370,508 $ 229,821 $ - $ 209,319,503 Junior liens 13,033, ,033,421 Total $ 218,752,595 $ 3,370,508 $ 229,821 $ - $ 222,352,924 PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: Furniture and equipment $ 1,079,291 $ 1,045,164 Leasehold improvements 308, ,423 1,388,207 1,333,587 Less: accumulated depreciation (1,181,344) (1,064,157) Total $ 206,863 $ 269,430 Depreciation expense was $117,187 and $109,305 for 2012 and 2011, respectively. NOTE 7 - MEMBERS SHARE AND SAVINGS ACCOUNTS Members shares are summarized as follows: Regular shares $ 188,927,224 $ 169,403,516 Share drafts 53,342,560 44,409,940 Share certificates 99,797, ,363,571 $ 342,067,097 $ 316,177,027 The aggregate amount of members share and savings accounts in excess of $250,000 was $56,738,790 and $47,624,265 at, respectively. Page 23

26 NOTE 7 - MEMBERS SHARE AND SAVINGS ACCOUNTS (Continued) The Credit Union offers certificates to its members in various denominations with a $250 minimum. Maturity periods range from 90 days to 84 months with the majority of certificates maturing within one year. Share certificates redeemed prior to maturity are assessed a penalty. At December 31, 2012, scheduled maturities of share and IRA certificates are as follows: Due in one year or less $ 66,333,555 Due in one to two years 10,823,375 Due in two to three years 8,614,641 Due in three to four years 4,779,302 Due in four to five years 4,945,056 Due after five years 4,301,384 $ 99,797,313 NOTE 8 - BORROWED FUNDS The Credit Union offers and retains fixed-rate mortgage loans with repayment terms up to 20 years and adjustable-rate mortgage loans with rates fixed for one to seven years. To reduce its exposure to interest rate risk, the Credit Union partially funded these loans with fixed rate borrowings from the Federal Home Loan Bank of Atlanta (FHLB- Atlanta). Furthermore, the Credit Union has borrowed under various programs in an effort to match the maturity structure of the payments of the loans commensurate with their fixed rate borrowings. Interest rates on the borrowings from FHLB-Atlanta at December 31, 2012, ranged from 0.92 percent to 6.38 percent. The borrowings are secured by the Credit Union s first deed of trust loan portfolio. At December 31, 2012 and 2011, borrowed funds total $55,858,571 and $36,877,857, respectively. As of December 31, 2012, the outstanding balances by maturity dates are as follows: Balance Due in one year or less $ 363,333 Due in two to three years 4,171,428 Due in three to four years 5,590,476 Due in four to five years 7,547,619 Due after five years 38,185,715 $ 55,858,571 Page 24

27 NOTE 9 - OFF-BALANCE SHEET ACTIVITIES The Credit Union is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its members and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest at risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of these instruments reflect the extent of involvement the Credit Union has in particular classes of financial instruments. The Credit Union s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of these instruments. The Credit Union uses the same credit policies in making commitments and conditional obligations as it does for on-balancesheet instruments. The following financial instruments were outstanding whose contract amounts represent credit risk: Contract or Notional Amount Home equity $ 6,624,000 $ 6,131,000 Credit cards 2,129,000 1,654,000 Other consumer unsecured 7,795,000 7,826,000 Other consumer secured 98,000 88,000 $ 16,646,000 $ 15,699,000 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. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Credit Union evaluates each member s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Credit Union upon extension of credit is based on the Credit Union's credit evaluation of the member. Collateral held varies but generally consists of certificates of deposit, share accounts, automobiles and real estate. Unfunded commitments under commercial lines-of-credit, 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 may not be drawn upon to the total extent to which the Credit Union is committed. Page 25

28 NOTE 9 - OFF-BALANCE SHEET ACTIVITIES (Continued) Financial Instruments with Concentration Risk Most of the Credit Union s business activity is with its members who are employed by the Bank or reside in the Washington, DC metropolitan area. The Credit Union may be exposed to credit risk from a regional economic standpoint, since a significant concentration of its borrowers work at the Bank. However, the loan portfolio is welldiversified and 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 Credit Union s policy for repossessing collateral is that when all other collection efforts have been exhausted, the Credit Union enforces its first lienholder status and repossesses the collateral. Repossessed collateral normally consists of vehicles. There was no repossessed collateral at December 31, 2012 and NOTE 10 - LEGAL CONTINGENCIES 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. NOTE 11 - RETIREMENT PLAN The Credit Union has a 401(k) defined contribution plan that allows employees to defer a portion of their salary into the plan and covers substantially all full-time employees. The Credit Union s contributions for the years ended were $243,700 and $239,814, respectively. This space intentionally left blank. Page 26

29 NOTE 12 - 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 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 accounting principles generally accepted in the United States of America. 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, which establishes whether or not the Credit Union will be considered complex under the regulatory framework. The Credit Union s RBNW requirements as of were 6.88 percent and 6.25 percent, respectively. The minimum requirement to be considered complex under the regulatory framework is 6 percent. The Credit Union believes, as of December 31, 2012 and 2011, that it meets all capital adequacy requirements to which it is subject. As of December 31, 2012, the most recent call reporting period, the NCUA categorized the Credit Union as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that date that the Credit Union believes have changed its category. Currently, well-capitalized credit unions are not required by regulation to make statutory transfers to a regular reserve. The regular reserve is appropriated out of undivided earnings and is to be used for absorbing loan losses and such other losses that may be specified in the regulations. This reserve is not related to the amount of losses actually anticipated and the appropriations thereto have not been charged against income. This reserve represents a regulatory restriction of undivided earnings and is not available for the payment of dividends. Page 27