2014 SDFCU Annual Report

SDFCU

MANAGEMENT TEAMBoard of DirectorsMarlene E. Schwartzchairman

Robert B. Petersenvice chairman

Harold W. Geiselsecretary

W. Ron Whitworthtreasurer

Max Aguilardirector

Nellie Clemons-Greendirector

Renee DeVignedirector

Richard L. Greenedirector

James E. Robertsondirector

ExecutivesJan N. Rochepresident/ceo

Floyd Matsudachief information officer

Randy McClintockchief financial officer

William Thorlachief operating officer

Managing DirectorsSharon Camperhuman resources & administration

Donald DiMatteomember experience

Michael Hunterinternal audit

Karen O’Connor-Joynerfunds management

Joan Pendletonoperational support services

DirectorsRobin Alexanderaccounting

Angel Baltimoreestrategy & innovation

Kevin Everettebranch operations

Rifat Ikraminformation technology

Devon Lyoncompliance, bsa & project management

Michael Morrismember engagement

Gladys Perezmarketing

Veronica Trottamortgages & loan administration

Chuck Volpercontroller

ManagersJesse Bellstate branch

Cynthia Chamberlain-Weatherspoonft. mcnair branch

Timothy Comeaucard strategy

Elizabeth Crisostomointernal audit

Jimmie Dobbs Jrarlington branch

Irana Edwardsdeposit & check operations

Deborah Frink-Clantonaccounting

Catharine Gilloglyreal estate lending

Tracy Headenmortgage & lending services

Shalonda Johnsoncollections/member solutions

Ramon Joneslending solutions

Timothy Mihillmember service center

Karen Monahansupport services

Vu Nguyeninformation technology core services

Lawrence Plassmeyerloss prevention

LaFonde Proctor alexandria branch Caroline Shaffermarketing

Kimberly Tylerhuman resources

Ethan Viernesinformation technology service delivery

Daniel Vromanmembership development

Zaneta Whitefederal center branch

Management Team as of December 31, 2014

TABLE OF CONTENTS2 FROM THE CHAIRMAN

5 FROM THE TREASURER6 FROM THE SUPERVISORY COMMITTEE

9 FROM THE INDEPENDENT AUDITORS10 FINANCIALS

FROM THE

CHAIRMANThis was a year of transformation and continued

growth for State Department Federal Credit Union (SDFCU). This year, the organization managed and implemented a new core financial system designed to enhance member servicing and efficiency. At the same time, the organization remained focused on its core goals of building loyalty and driving growth and saw solid loan and membership growth as a result. A keen focus on delighting members enabled SDFCU to maintain stellar member service scores throughout the year, even during the transition to the new core system.

Our organizational focus, and crowning achievement in 2014, was a technology, servicing, and staffing conversion to a new core system. This was a year-long initiative that encompassed all employees at the credit union as we built the new system, transferred data from one system to another, tested, trained and implemented. We are proud to report that the conversion was a success and was conducted with little impact to our members. Members are already benefiting from a system that is allowing SDFCU to operate more efficiently and provide greater servicing.

While working diligently on the core conversion, we also kept our eye on our key organizational goals and achieved positive loan growth overall in 2014. Personal

loans, in particular, stood out with a 29% increase in loan volume achieved over 2013. The SDFCU EMV Credit Card also continued to perform strongly. Our Card for Everyone with a competitive rate, rewards and minimal fees has achieved a compounded growth rate of 8.7% since 2012. In addition, credit card balances grew to an all-time high of almost $72 million. Our card continues to be a highly competitive product in the crowded credit card marketplace; designed to meet the needs of traveling members exceptionally well. It is consistently recognized in media coverage as one of the best EMV cards being issued.

Throughout 2014, we continued to solicit feedback from our members to improve our product and servicing offerings. Through the “You Really Count” surveys, branch focused Member Advisory Committee meetings, and outreach at member events we gathered and delivered your input to the SDFCU management team to help shape future decisions and direction.

Support of our partner organizations and community remained strong in 2014. We were honored to award $67,100 in scholarship money divided amongst 24 SDFCU members. We also were excited to sponsor the Foreign Service Youth Foundation Art Contest and display the art of talented children in the State

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Department Exhibit Hall. We continue to support the Credit Union Cherry Blossom 10-mile race by being a proud sponsor and providing volunteers and teams to run in the race. This year, we also sponsored the “Responders Race to Wellness” at Ft. McNair with the first 50 participants receiving an SDFCU gift and we sponsored and supported the Heroes, Inc. fundraiser.

2015 will bring heightened servicing to our members as SDFCU takes full advantage of the efficiencies enabled with the new core system. In addition, we will be improving our online and mobile product suite to better enable members to conduct business seamlessly and conveniently from their desktop or phone. We are also

continuing to focus on protecting our members by offering more secure payment solutions in the form of an SDFCU EMV Debit Card and participation in Apple Pay. It’s another exciting year at SDFCU and I am grateful that you, our members, are with us for this journey.

Respectfully submitted,

Marlene E. Schwartz, Chairman

STATE DEPARTMENT FEDERAL CREDIT UNION | 2014 ANNUAL REPORT 3

FROM THE

TREASURERState Department Federal Credit Union’s Board

of Directors and management thank you for your continued support and confidence in your credit union. Our focus is providing safe, secure and accessible financial products and services to help members achieve their goals. Financially, our credit union’s net income for the year ended December 31, 2014 was $13.5 million representing a very solid 0.86% return on assets. By comparison, for 2013, our return on assets was 0.66%. The increase in income is primarily attributable to our improved investment income and excellent control over operating expenses. Our provision for loan losses increased from $977,000 to $1.2 million, which is still well below the national average reflecting the outstanding membership that we serve.

Most importantly, our credit union’s net worth ratio improved to 9.45%, an increase of 46 basis points from the December 31, 2013 ratio of 8.99%. This excellent increase in net worth is reflective of our strong 2014 earnings. This ratio is well above the minimum net worth level of 7.00% to be classified as “well capitalized” under the NCUA’s regulatory framework. Total assets increased from $1.531 billion in 2013 to $1.599 billion in 2014 (4.4%).

Members needing loans found credit readily available at State Department Federal Credit Union. We originated $196 million in loans increasing our loan balance to $701 million. Of particular note is our credit card featuring the lowest interest rates, no foreign transaction fees, no annual fee, and a terrific rewards program.

To maintain our financial soundness, SDFCU’s Asset Liability Committee continues to monitor financial activities and results on a monthly basis. The unprecedented low interest rate environment causes unique challenges and increased exposure to rising interest rates. We use an integrated enterprise risk management process, with external and internal models, which enables us to assess risk with respect to return and volatility over various rate cycles. We balance returns and risk based on maximizing giveback to our members in terms of highly competitive rates and improved service.

Our investment portfolio continues to be an industry leader. In this very low interest rate environment we achieved earnings of $10.2 million, a return of 1.44%, well above the national average of 1.28%.

Our control of expenses was outstanding during 2014. Our operating expense to average asset ratio continues to improve decreasing from 2.36% to 2.23% at December 31, 2014. The NCUA peer group average for this ratio is 2.89%.

The future looks very promising for your credit union. We look forward to increased enhancements in our service offerings and further improved convenience and service for our members. The Board and the staff remain committed to continuing our strong financial position and we value your selection of SDFCU as a lifetime partner in achieving your financial goals.


W. Ron Whitworth, Treasurer


FROM THESUPERVISORY COMMITTEEThe Supervisory Committee is charged by law with

the responsibility of overseeing the internal and external audits of State Department Federal Credit Union (SDFCU) and to ensure compliance with governing laws, policies and procedures established by the Board. To accomplish this, the Supervisory Committee: 1) Oversees the activities of the Internal Audit function

of the State Department Federal Credit Union,

2) Contracts with the CPA firm of Orth, Chakler, Murnane and Co. LLP for our external audit services, and

3) Meets with the regulators of the credit union during the annual examination process

The Supervisory Committee approves an Annual Audit Plan which is executed by Internal Audit. Internal Audit conducts various reviews and assessments in order to analyze the Credit Union’s business objectives, risk management processes and internal controls.

Orth, our external auditors, conduct a comprehensive annual financial audit and perform a verification of member accounts every year. The annual audit of the credit union is complete, and we are pleased to announce we once again received an unqualified opinion from our external auditors stating that our financials are presented fairly.

Also, the National Credit Union Administration (NCUA) conducted their annual examination, the results of which further confirmed the safety and soundness of SDFCU.

Additionally, the Chair of the Supervisory Committee regularly attends the monthly Board of Directors’ meetings, attends various related educational conferences and the Credit Union’s planning sessions. The Chair and members of the Committee regularly attend other functions and training programs to help improve the audit function and management controls over all member assets.

The Committee also serves as the Credit Union ombudsman in answering all communications, whether complimentary or critical, to help State Department Federal Credit Union fulfill its mission of providing financial services that is responsive to members’ needs.

After reviewing the results of our annual audit, feedback from members, as well as other reports and financial documents, we can say with complete confidence that State Department Federal Credit Union continues to uphold the highest possible financial standards. This institution is financially sound and well managed with a clear strategic vision, solid leadership and proven operational plans. We as a Committee will remain vigilant in representing members’ interest to ensure the highest level of safety and soundness, and that the Credit Union provides you with outstanding member service.


Gay Mount, Chair Pamela G. Sharpe, Vice Chair Denise Watlington, Secretary Mae Whitehead, Member Larry Harris, Member

Comments and suggestions from members: The Supervisory Committee welcomes comments and suggestions from the membership to improve Credit Union services. These comments are vital for the Committee to meet its responsibilities. If requested, the confidentiality of writers will be protected. If you have a comment or suggestion, please address it to:

SDFCU Supervisory Committee P.O. Box 1741

Alexandria, VA 22313-1741

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FROM THE

INDEPENDENT AUDITORSTo the Supervisory Committee of State Department Federal Credit Union

We have audited the accompanying financial statements of State Department Federal Credit Union, which comprise the statements of financial condition as of December 31, 2014 and 2013, and the related statements of income, comprehensive income, retained earnings, 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.

Auditor’s 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 audits 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 State Department Federal Credit Union as of December 31, 2014 and 2013, 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.

Orth, Chakler, Murnane & Company Certified Public Accountants Miami, FL

March 23, 2015


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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF FINANCIAL CONDITION

The accompanying notes are an integral part of these financial statements.

ASSETS As of December 31,

2014 2013

Cash $13,954,686 $13,800,720 Investments:

Available-for-sale

726,138,883

646,893,395 Other 51,848,489 61,461,271

Loans to members, net of allowance for loan losses 701,188,657 699,161,428

Accrued interest receivable:

Investments 2,152,534 2,138,109 Loans 1,872,307 1,931,703

Other receivables 3,962,900 3,885,793 Prepaid and other assets 62,948,461 68,512,740 Property and equipment 22,985,563 21,904,629 NCUSIF deposit 11,905,541 11,751,914

Total assets $1,598,958,021 $1,531,441,702

LIABILITIES AND RETAINED EARNINGS

As of December 31, 2014 2013

LIABILITIES: Members’ share and savings accounts $1,341,995,403 $1,312,553,406 Borrowed funds 105,000,000 75,000,000 Interest payable 422,913 182,099 Accounts payable and accrued liabilities 11,621,959 11,716,249

Total liabilities 1,459,040,275 1,399,451,754

Commitments and contingent liabilities

RETAINED EARNINGS:

Total liabilities and retained earnings $1,598,958,021 $1,531,441,702

Regular reserve 6,315,918 6,315,918 Undivided earnings 144,805,858 131,296,035 Accumulated other comprehensive loss (5,622,005)

Total retained earnings 139,917,746 131,989,948

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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF INCOME

INTEREST INCOME:

For the years ended December 31,

2014 2013

Loans to members $34,341,922 $33,771,194 Investments 10,187,139 8,355,766

Total interest income 44,529,061 42,126,960

INTEREST EXPENSE:

Net interest income 36,324,374 33,374,895 PROVISION FOR LOAN LOSSES 1,209,261 976,546

Net interest income after provision for loan losses 35,115,113 32,398,349

NON-INTEREST INCOME:

Members’ share and savings accounts 6,667,093 7,705,855 Interest on borrowed funds 1,537,594 1,046,210

Total interest expense 8,204,687 8,752,065

Fees and service charges 10,599,509 9,952,233 Rental income 1,474,583 1,603,102 Other 46,390 991,079 Gain on sale of investments, net 753,189 374,697 Gain on sale of loans, net 481,755 241,121

Total non-interest income 13,355,426 13,162,232

48,470,539 45,560,581 NON-INTEREST EXPENSE:

Compensation and employee benefits 17,341,963 16,991,471 Office operating costs 17,366,197 17,392,566 Other 252,556 1,169,407

Total non-interest expense 34,960,716 35,553,444

Net income $13,509,823 $10,007,137



STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF COMPREHENSIVE INCOME

For the years ended

December 31, 2014 2013

NET INCOME $13,509,823 $10,007,137

OTHER COMPREHENSIVE INCOME: Net pension (losses)/gains (8,686,078) 8,764,098 Unrealized gains/(losses) on investments classified as

available-for-sale during the period 3,857,242 (6,830,052) Reclassification adjustments for investment gains

included in net income (753,189) (374,697) Other comprehensive (loss)/income (5,582,025) 1,559,349

Comprehensive income $7,927,798 $11,566,486

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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF RETAINED EARNINGS

For the years ended December 31, 2014 and 2013

Balance,

Regular Reserve

Undivided Earnings

Accumulated Other

Comprehensive Loss Total

December 31, 2012 $6,315,918 $121,288,898 ($7,181,354) $120,423,462 Net income — 10,007,137 — 10,007,137 Other comprehensive

income — — 1,559,349 1,559,349

Balance, December 31, 2013 6,315,918 131,296,035 (5,622,005) 131,989,948

Net income — 13,509,823 — 13,509,823 Other comprehensive

loss — — (5,582,025) (5,582,025)

Balance, December 31, 2014 $6,315,918 $144,805,858 ($11,204,030) $139,917,746



STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES:


2014 2013

Net income $13,509,823 $10,007,137 Adjustments:

Provision for loan losses 1,209,261 976,546 Depreciation and amortization 1,938,087 1,921,344 Amortization of servicing rights 279,471 195,721 Capitalization of servicing rights (1,359,471) (361,102) Amortization of deferred loan origination fees (803,908) (538,282) Amortization of investment premiums/discounts, net 9,601,085 13,502,695 Gain on sale of investments, net (753,189) (374,697) Loss on sale of loans, net 877,716 119,981 Changes in operating assets and liabilities:

Other receivables (77,107) 15,450,737 Accrued interest receivable 44,971 363,098 Prepaid and other assets (2,041,799) (25,923,258) Interest payable 240,814 (10,859) Accounts payable and accrued liabilities (94,290) (1,410,630)

Net cash provided by operating activities 22,571,464 13,918,431

CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities, sales and repayments

of available-for-sale securities 252,462,478 245,420,487 Purchase of available-for-sale securities (337,451,809) (201,663,101) Net change in other investments 9,612,782 (12,262,602) Proceeds from the sale of loans 71,789,428 18,949,322 Net change in loans, net of charge-offs (76,537,178) (86,699,663) Recoveries on loans charged off 1,437,452 1,721,272 Expenditures for property and equipment (3,019,021) (3,162,809) Change in NCUSIF deposit (153,627) (428,081) Net cash used in investing activities (81,859,495) (38,125,175)

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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF CASH FLOWS

Cash Flows: (continued)

CASH FLOWS FROM FINANCING ACTIVITIES: Net change in members’ share and


2014 2013

savings accounts 29,441,997 8,328,420 New borrowings 60,000,000 30,000,000 Repayment of borrowed funds (30,000,000) (15,000,000) Net cash provided by financing activities 59,441,997 23,328,420

Net change in cash 153,966 (878,324) Cash at beginning of year 13,800,720 14,679,044

Cash at end of year $13,954,686 $13,800,720

SUPPLEMENTAL CASH FLOWS DISCLOSURES: Interest paid $7,963,873 $8,762,924

SCHEDULE OF NON-CASH TRANSACTIONS: Unrealized gains/(losses) on investments

classified as available-for-sale, net of gains included in net income $3,104,053 ($7,204,749)

Net pension (losses)/gains ($8,686,078) $8,764,098

Transfers from loans to members to loans held for sale

$72,667,144 $19,069,303


STATE DEPARTMENT FEDERAL CREDIT UNION NOTES TO THE FINANCIAL STATEMENTS

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NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION State Department Federal Credit Union (the Credit Union) is a cooperative association organized in accordance with the provisions of the Federal Credit Union Act for the purpose of promoting thrift among, and creating a source of credit for, its members. Participation in the Credit Union is limited to those who qualify for membership. The field of membership is defined by the Credit Union’s Charter and Bylaws.

FINANCIAL STATEMENTS/USE OF ESTIMATES The preparation of financial statements in accordance 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 the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses for the periods then ended. Estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses and the fair value of financial instruments. The significant accounting principles and policies used in the preparation of these financial statements, together with certain related information, are summarized below.

CASH Cash consists of cash on hand and amounts due from banks and credit unions. Amounts due from banks and credit unions may, at times, exceed federally insured limits.

INVESTMENTS Investments are classified into categories of available-for-sale and other. Investment securities classified as available-for-sale are measured at fair value as of the statement of financial condition date. Unrealized gains and losses on investment securities classified as available-for-sale are reported as a separate component of equity. Realized gains and losses on disposition, if any, are computed using the specific identification method. Investments are adjusted for the amortization of premiums and accretion of discounts as an adjustment to interest income on investments over the term of the investment by a method which approximates the interest method. Investments classified as other are measured at amortized cost. The Credit Union has elected to classify certain cash equivalents as other investments. This election is available to the Credit Union according to the terms of the Statement of Cash Flows Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).

FEDERAL HOME LOAN BANK (FHLB) STOCK As a member of the FHLB of Atlanta, the Credit Union is required to invest in stock of the FHLB. The Credit Union’s minimum stock investment is based on a formula developed by the FHLB that considers the Credit Union’s total assets and outstanding advances from the FHLB. The FHLB stock is carried at cost within other investments and its disposition is restricted. No ready market exists for the FHLB stock, and it has no quoted market value.

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Note 1: (continued)

LOANS TO MEMBERS AND ALLOWANCE FOR LOAN LOSSES Loans to members are stated at the amount of unpaid principal net of deferred loan origination fees and an allowance for loan losses (ALL). The ALL is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). The ALL is maintained at a level considered adequate to provide for incurred loan losses in the portfolio by applying a historical loan loss rate to loan pools that have similar risk characteristics. Individually significant, non- homogeneous loans are measured for impairment in accordance with the Subsequent Measurement of Receivables Topic of the FASB ASC. These loans are evaluated individually based on an examination of the current financial information of the borrower and an estimate of the value of the collateral, if any. If the carrying value of any of these loans is greater than the estimated net realizable value of the property or of the collateral securing these loans, a reserve is established for the difference. Management’s periodic evaluation of the adequacy of the ALL also considers such factors as changes in the nature and volume of the loan portfolio, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to repay.

Interest on loans to members is recognized over the terms of the loans and is calculated on principal amounts outstanding. The accrual of interest is discontinued when a loan exceeds 90 days delinquent or when management believes that collection of interest is doubtful. Certain loan fees which are charged to members are amortized over the estimated life of the related loan by a method that approximates the interest method. Other loan fees are recognized in income when received and direct loan origination costs on loans to members are recognized in expenses when incurred. Credit card fees are recognized as fee income when assessed. This is not materially different from fees and expenses that would have been recognized under the provisions of the Nonrefundable Fees and Other Costs Topic of the FASB ASC.

ALL METHODOLOGY Management has an established methodology to determine the adequacy of the ALL that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the ALL, the Credit Union has segmented loans in the portfolio by product type. Loans are divided into the following segments: real estate, consumer, and commercial. The Credit Union further disaggregates these segments into classes based on associated risks characteristics. Real estate loans are segregated into two classes: first mortgage and home equity loans. Consumer loans are divided into six classes: credit card, auto, personal, moneyline, student, and share secured. Commercial loans are divided into two classes: real estate and construction. Significant judgment is required to determine risk characteristics of loans for the purpose of segregating the loan portfolio into the segments and underlying classes.

The Credit Union uses an internally developed model in the process of monitoring the ALL. Management must use judgment in establishing additional input metrics for the modeling processes. The models and assumptions used to determine the ALL are periodically reviewed to ensure that their theoretical foundation, assumptions, data integrity, computational processes, reporting practices, and end-user controls are appropriate and properly documented.



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Note 1: (continued)

The following is a summary of the ALL methodology used by management to determine the balance of the ALL for each segment of loans.

REAL ESTATE PORTFOLIO SEGMENT ALL METHODOLOGY For real estate loans not individually evaluated for impairment, the Credit Union determines the ALL on a collective basis utilizing historical and forecasted losses to represent the best estimate of inherent losses existing at the measurement date. Loans are pooled, generally by loan types with similar risk characteristics. As of December 31, 2014 and 2013, the historical loss time frame used for each class was as follows:

First mortgage - 24 months Home equity - 24 months

As appropriate, to achieve greater accuracy, further stratification of a selected portfolio may occur such as by year of origination, geographic location, and other predictive characteristics. The real estate portfolio segment ALL model primarily uses historic delinquencyand default experience, loss severity, home price trends, unemployment trends, and other key economic variables that may influence the frequency and severity of losses for each class of loan within the real estate portfolio segment.

CONSUMER PORTFOLIO SEGMENT ALL METHODOLOGY For consumer loans not individually evaluated for impairment, the Credit Union determines the ALL on a collective basis utilizing historical and forecasted losses to represent the best estimate of inherent losses existing at the measurement date. Loans are pooled, generally by loan types with similar risk characteristics. As of December 31, 2014 and 2013, the historical loss time frame used for each class was as follows:

Credit card - 24 months Auto - 24 months Personal - 24 months Moneyline - 24 months Student - 24 months Share secured - 24 months

As appropriate, to achieve greater accuracy, further stratification of a selected portfolio may occur such as by year of origination, geographic location, and other predictive characteristics. The consumer portfolio segment ALL model primarily uses historic delinquency and default experience, loss severity, unemployment trends, and other key economic variables that may influence the frequency and severity of losses for each class of loan within the consumer portfolio segment.

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Note 1: (continued)

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COMMERCIAL PORTFOLIO SEGMENT ALL METHODOLOGY For commercial loans not identified as impaired, each commercial loan is specifically reviewed internally by management for credit quality. Based on management’s credit risk assessment and analysis of leading predictors of losses existing as of the measurement date, loan losses are estimated. These loss estimates are adjusted as appropriate based on additional analysis of long- term average loss experience compared to previously forecasted losses, external loss data, or other risks identified from current economic conditions and credit quality trends.

LOAN CHARGE-OFF POLICIES The Credit Union’s quality control process includes preparing lists to monitor and track delinquent loans and special mention loans. Tracking the loans on these lists enables management to assess the performance of the loan portfolio and act to mitigate risk therein through necessary changes in policy and procedures. The quality control process also serves as a tool to assist the Credit Union in identifying loans for charge-off on a timely basis. The following is a description of the Credit Union’s loan charge-off policies:

Real estate, consumer, and commercial loans are generally charged-off when the loan is deemed to be uncollectible. Factors considered when assessing collectability include:

• aging of delinquent non-performing loans;

• estimated deficiency in the value of the underlying collateral for non-performing loans determined to be collateral dependent;

• additional collection efforts are expected to be non-productive;

• classification as loss as the result of either the Credit Union’s internal review process or by external examiners.

MORTGAGE SERVICING RIGHTS Mortgage servicing assets are recognized when rights are acquired through the sale of financial assets. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses.

Capitalized servicing rights are reported in other assets and are amortized to non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Service fee income is calculated based on a contractual percentage of the outstanding principal balance of the loans being serviced. The amortization of mortgage servicing rights is netted against loan servicing fee income.



Note 1: (continued)

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PROPERTY AND EQUIPMENT Land is carried at cost. Property and equipment are carried at cost less accumulated depreciation. Buildings, furniture and equipment, and data processing equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The cost of leased assets and building/leasehold improvements is amortized using the straight-line method over the term of the lease, or the estimated life of the asset, whichever is less. The Credit Union reviews property and equipment (long-lived assets) for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

NCUSIF DEPOSIT The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with National Credit Union Administration (NCUA) regulations, which require the maintenance of a deposit by each federally insured credit union in an amount equal to 1% of its insured members’ 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.

MEMBERS’ SHARE AND SAVINGS ACCOUNTS Members’ shares are subordinated to all other liabilities of the Credit Union upon liquidation. Interest on members’ share and savings accounts is based on available earnings at the end of an interest period and is not guaranteed by the Credit Union. Interest rates on members’ share accounts are set by the Board of Directors, based on an evaluation of current and future market conditions.

BORROWED FUNDS The Credit Union maintained borrowed funds outstanding from the FHLB as of December 31, 2014 and 2013. All borrowings are collateralized by certain investment securities owned by the Credit Union.

REGULAR RESERVE The Credit Union is required to maintain a statutory reserve (regular reserve) in accordance with the Federal Credit Union Act. This statutory reserve represents a regulatory restriction and is not available for the payment of interest.

FEDERAL AND STATE TAX EXEMPTION AND STATE TAX EXEMPTION The Credit Union is exempt from most federal, state, and local taxes under the provisions of the Internal Revenue Code and state tax laws. The Income Taxes Topic of the FASB ASC clarifies accounting for uncertainty in income taxes reported in the financial statements. The interpretation provides criteria for assessment of individual tax positions and a process for recognition and measurement of uncertain tax positions. Tax positions are evaluated on whether they meet the “more likely than not” standard for sustainability on examination by tax authorities.

Federal credit unions are tax-exempt under Internal Revenue Code sections 501(c)(1)(a)(I) and 501(c)(14)(a). As such, the Credit Union has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Additionally, no interest or penalties have been recorded in the accompanying financial statements related to uncertain tax positions.

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Note 1: (continued)

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RECLASSIFICATIONS Certain 2013 consolidated financial statement amounts have been reclassified to conform with classifications adopted in 2014. There was no impact on net income as a result of these reclassifications.

SUBSEQUENT EVENTS Management has evaluated subsequent events through March 23, 2015, the date the financial statements were available to be issued. Management has not identified any items requiring recognition or disclosure.

NOTE 2: INVESTMENTS

The amortized cost and estimated fair value of investments are as follows:

As of December 31, 2014

Available-for-sale: Mortgage-backed

Amortized

Cost

Gross Unrealized

Gains

Gross Unrealized

Losses

Fair

Value

securities $674,637,726 $5,627,261 ($4,051,040) $676,213,947 SBA loan pools 40,648,558 204,183 (270,417) 40,582,324 Taxable municipal

bonds

8,974,131

—

(224,574)

8,749,557 Mutual funds 411,085 181,970 — 593,055 $724,671,500 $6,013,414 ($4,546,031) $726,138,883


Gross Gross Available-for-sale: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Mortgage-backed

securities $622,218,893 $5,722,333 ($6,756,264) $621,184,962 SBA loan pools 15,349,550 133,852 (47,800) 15,435,602 Taxable municipal

bonds

10,624,027

—

(830,316)

9,793,711 Mutual funds 337,595 141,525 — 479,120 $648,530,065 $5,997,710 ($7,634,380) $646,893,395

Proceeds from the sales of investments classified as available-for-sale approximated $122,787,000 and $48,872,000 during the years ended December 31, 2014 and 2013, respectively. Gross gains of approximately $1,283,000 and $375,000 were realized from the sales during the year ended December 31, 2014 and 2013, respectively. Gross losses of approximately $530,000 were realized during the year ended December 31, 2014.



Note 2: (continued)

15

Other investments: As of December 31,

2014 2013 Federal funds sold $45,200,653 $41,511,440 FHLB 6,093,500 19,396,457 M&T Bank 554,336 553,374 $51,848,489 $61,461,271

Included in the deposits with the FHLB is restricted stock of approximately $6,094,000 and $5,169,100 as of December 31, 2014 and 2013, respectively.

The amortized cost and estimated fair value of investments by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay certain obligations without call or prepayment penalties.

As of December 31, 2014 Available-for-sale

Amortized Fair Cost Value

Within 5 to 10 years $8,974,131 $8,749,557 Mortgage-backed securities 674,637,726 676,213,947 SBA loan pools 40,648,558 40,582,324 Mutual Funds 411,085 593,055

$724,671,500 $726,138,883

The following tables show the gross unrealized losses and fair value of investments, aggregated by length of time individual securities have been in a continuous unrealized loss position.


Less than 12 Months Gross

12 Months or Longer Gross

Total Gross

Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Mortgage-backed

securities

$186,698,709

$1,174,521

$172,607,693

$2,876,519

$359,306,402

$4,051,040 SBA loan pools 27,534,448 250,739 4,176,037 19,678 31,710,485 270,417 Taxable municipal

bonds — — 8,749,557 224,574 8,749,557 224,574 $214,233,157 $1,425,260 $185,533,287 $3,120,771 $399,766,444 $4,546,031

22


Note 2: (continued)

16


Less than 12 Months Gross

12 Months or Longer Gross

Total Gross

Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Mortgage-backed

securities

$178,049,933

($3,484,722)

$174,518,009

($3,271,542)

$352,567,942

($6,756,264) SBA loan pools Taxable municipal

— — 5,130,564 (47,800) 5,130,564 (47,800)

bonds 5,628,546 (456,872) 4,165,165 (373,444) 9,793,711 (830,316) $183,678,479 ($3,941,594) $183,813,738 ($3,692,786) $367,492,217 ($7,634,380)

Unrealized losses on securities issued by the U.S. Government and its Agencies have not been recognized into income because the principal balances of these securities are guaranteed by the U.S. Government. Additionally, management has the ability and intent to hold these securities through to recovery of fair value, which may be maturity. As of December 31, 2014 and 2013, mortgage- backed securities with a fair value of approximately $122,286,000 and $84,490,000 were pledged as security for the Credit Union’s borrowed funds with the FHLB.


17


NOTE 3: LOANS TO MEMBERS

The composition of loans to members is as follows: Real Estate:

As of December 31,

2014 2013

First mortgage $467,187,580 $477,803,974 Home equity 58,854,631 55,439,925

Total real estate 526,042,211 533,243,899 Consumer:

Credit cards 72,182,340 71,007,726 Auto 47,168,359 44,347,936 Personal 28,564,249 24,517,221 Moneyline 10,622,610 10,754,160 Student 1,072,974 1,377,674 Share secured 1,162,942 1,181,873

Total consumer 160,773,474 153,186,590 Commercial:

Real estate 19,329,397 18,992,317 Construction

Total commercial — — 19,329,397 18,992,317

Total loans 706,145,082 705,422,806 Deferred loan origination fees (1,788,297) (2,273,188)

704,356,785 703,149,618 Less ALL (3,168,128) (3,988,190)

$701,188,657 $699,161,428

A summary of the activity in the ALL by portfolio segment is as follows:

For the years ended December 31, 2014 and 2013 Real Estate Consumer Commercial Total

Balance, December 31, 2012 $1,757,093 $2,013,241 $503,770 $4,274,104

Provision for loan losses 190,768 785,778 — 976,546 Recoveries 235,825 971,374 514,073 1,721,272 Loans charged off (260,737) (2,722,995) — (2,983,732) Balance,

December 31, 2013 1,922,949 1,047,398 1,017,843 3,988,190 Provision for loan losses (619,897) 2,550,963 (721,805-) 1,209,261 Recoveries 312,807 1,120,236 4,409 1,437,452 Loans charged off (591,982) (2,874,793) — (3,466,775) Balance,

December 31, 2014 $1,023,877 $1,843,804 $300,447 $3,168,128

24

18


Note 3: (continued)

As of December 31, 2014 Real Estate Consumer Commercial Total

Ending balance $1,023,877 $1,843,804 $300,447 $3,168,128 Individually evaluated for impairment $— $— $— $— Collectively evaluated for impairment $1,023,877 $1,843,804 $300,447 $3,168,128


Real Estate Consumer Commercial Total Ending balance $1,922,949 $1,047,398 $1,017,843 $3,988,190 Individually evaluated for impairment $— $— $156,686 $156,686 Collectively evaluated for impairment $1,922,949 $1,047,398 $861,157 $3,831,504

A summary of the recorded investment in loans by portfolio segment is as follows: As of December 31, 2014 Real Estate Consumer Commercial Total

Ending balance $524,163,219 $160,864,169 $19,329,397 $704,356,785 Individually evaluated for impairment $— $— $— Collectively evaluated for impairment $524,163,219 $160,864,169 $19,329,397 $704,356,785


Real Estate Consumer Commercial Total

Ending balance $530,970,711 $153,186,590 $18,992,317 $703,149,618 Individually evaluated for impairment $— $— $1,740,950 $1,740,950 Collectively evaluated for impairment $530,970,711 $153,186,590 $17,251,367 $701,408,668

IMPAIRED LOANS

A loan is impaired when it is probable, based on current information and events, that the Credit Union will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management uses the current fair value of the collateral, less selling costs, when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an ALL estimate or a charge-off to the ALL.

The following tables present the recorded investment and unpaid principal balances for loans individually evaluated for impairment with the associated ALL amount, if applicable. Also presented are the average recorded investment and the related amount of interest recognized during the time within the period that the loans were individually evaluated for impairment. Interest is credited to interest income when received, under the cash basis method. The average balances are calculated based on the month-end balances of the loans during the period reported.



19

Note 3: (continued)

Payments received on impaired loans are recorded as a reduction of principal or as interest income depending on management’s assessment of the ultimate collectability of the loan principal. Generally, interest income on an impaired loan is recorded on a cash basis when the outstanding principal is brought current.

The tables below summarize key information for loans individually evaluated for impairment:


For the year ended December 31, 2013

Unpaid Average Interest Recorded Principal Specific Recorded Income

Investment Balance Allowance Investment Recognized With an allowance recorded:

Commercial: Real estate $1,740,950 $1,740,950 $156,686 $1,736,478 $117,212

26


20

Note 3: (continued)

The tables below provide an age analysis of past due loans by class:


Real Estate:

Days Delinquent

30 - 59 60 - 89 90 or more

Total Delinquent Loans

Total Current Loans

Total Loans

First mortgage $3,174,115 $1,473,106 $216,671 $4,863,892 $460,444,696 $465,308,588 Home equity 742,237 96,011 — 838,248 58,016,383 58,854,631

Total 3,916,352 1,569,117 216,671 5,702,140 518,461,079 524,163,219 Consumer:

Credit cards 266,983 60,424 1,646 329,053 71,853,287 72,182,340 Auto 345,718 19,647 66,704 432,069 46,826,986 47,259,055 Personal 212,471 21,615 26,674 260,760 28,303,488 28,564,248 Moneyline 235,378 41,258 — 276,636 10,345,974 10,622,610 Student 6,393 70,151 — 76,544 996,430 1,072,974 Share secured 5,315 — — 5,315 1,157,627 1,162,942

Total 1,072,258 213,095 95,024 1,380,377 159,483,792 160,864,169 Commercial:

Real estate — — — — 19,329,397 19,329,397 Total — — — — 19,329,397 19,329,397

Grand Total $4,988,610 $1,782,212 $311,695 $7,082,517 $697,274,268 $704,356,785

As of December 31, 2013 Total

Total

Real Estate:

Days Delinquent 30 - 59 60 - 89 90 or more

Delinquent Loans

Current Loans

Total Loans

First mortgage $3,555,876 $1,590,194 $1,207,913 $6,353,983 $469,176,803 $475,530,786 Home equity 670,432 108,716 116,576 895,724 54,544,201 55,439,925

Total 4,226,308 1,698,910 1,324,489 7,249,707 523,721,004 530,970,711 Consumer:

Credit cards 407,733 153,751 175,864 737,348 70,270,378 71,007,726 Auto 388,939 110,528 3,241 502,708 43,845,228 44,347,936 Personal 196,102 100,599 — 296,701 24,220,520 24,517,221 Moneyline 159,606 60,718 — 220,324 10,533,836 10,754,160 Student 2,450 — 6,016 8,466 1,369,208 1,377,674 Share secured — 124,077 — 124,077 1,057,796 1,181,873

Total 1,154,830 549,673 185,121 1,889,624 151,296,966 153,186,590 Commercial:

Real estate — — — — 18,992,317 18,992,317 Total — — — — 18,992,317 18,992,317

Grand Total $5,381,138 $2,248,583 $1,509,610 $9,139,331 $694,010,287 $703,149,618



21

Note 3: (continued)

The Credit Union places loans on non-accrual status when the loan reaches 90 days past due or when the collection of interest or principal becomes uncertain. Loans on which the accrual of interest has been discontinued or reduced approximated $816,000 and $1,510,000 as of December 31, 2014 and 2013, respectively. There were no loans 90 days or more past due and still accruing interest as of December 31, 2014 or 2013.

TROUBLED DEBT RESTRUCTURING/MODIFICATIONS The Credit Union’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Credit Union’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

When the Credit Union modifies a loan, management evaluates impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement. Or in certain cases, management uses the current fair value of the collateral, less selling costs. The loan is further analyzed for consideration of the risk of re-default. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized by segment or class of loan, as applicable, through the ALL estimate. Segment and class status is determined by the loan’s classification at origination. There were no TDRs approved by management during the years ended December 31, 2014 or 2013.

REAL ESTATE CREDIT QUALITY INDICATORS The Credit Union generally obtains credit score rating at the time loans are originated and periodic updates as determined necessary. The following tables represent real estate credit exposures by credit score as of December 31, 2014, based on the most recent score obtained. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. Category ratings are reviewed annually, at which time management analyzes the resulting scores, as well as other external statistics and factors, to track loan performance. Loans that trend upward toward higher levels generally have a lower risk factor associated. Whereas, loans that migrate toward lower rating generally will result in a higher risk factor being applied to those related loan balances.

28


22

Note 3: (continued)

The Credit Union’s internal risk ratings are as follows:

• 800 and above - Member poses little to no risk.

• 750 to 799 - Member poses a nominal risk of loss.

• 700 to 749 - Member poses slightly less risk than average member profile.

• 650 to 699 - Member poses slightly more risk than average member profile.

• 600 to 649 - Member is experiencing some degree of financial difficulty.

• 599 and below - Member is showing above average risk.

• No score - Member not assigned risk score due to age of member, member is deceased, other miscellaneous reasons.

The tables below summarize key information for real estate credit quality:

Real Estate Credit Quality Indicators As of December 31, 2014

First mortgage Home equity Total 800 and above $134,260,847 $7,950,600 $142,211,447 750 to 799 185,673,569 20,307,766 205,981,335 700 to 749 80,023,531 13,643,990 93,667,521 650 to 699 38,955,288 8,849,057 47,804,345 600 to 649 12,191,911 3,823,085 16,014,996 599 and below 8,843,352 3,165,721 12,009,073 No score 5,360,090 1,114,412 6,474,502 $465,308,588 $58,854,631 $524,163,219

Real Estate Credit Quality Indicators As of December 31, 2013

First mortgage Home equity Total 800 and above $135,468,742 $7,646,785 $143,115,527 750 to 799 182,577,975 17,306,048 199,884,023 700 to 749 79,114,772 14,186,400 93,301,172 650 to 699 33,678,540 7,970,053 41,648,593 600 to 649 12,592,793 3,720,772 16,313,565 599 and below 9,469,580 3,844,418 13,313,998 No score 22,628,384 765,449 23,393,833 $475,530,786 $55,439,925 $530,970,711



23

Note 3: (continued)

CONSUMER CREDIT QUALITY INDICATORS

The Credit Union generally obtains credit score rating at the time loans are originated and periodic updates as determined necessary. The following tables represent consumer credit exposures by credit score as of December 31, 2014, based on the most recent score obtained. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. Category ratings are reviewed annually, at which time management analyzes the resulting scores, as well as other external statistics and factors, to track loan performance. Loans that trend upward toward higher levels generally have a lower risk factor associated. Whereas, loans that migrate toward lower rating generally will result in a higher risk factor being applied to those related loan balances.

The Credit Union uses the same internal risk ratings for both consumer and real estate loan portfolios.

The tables below summarize key information for consumer credit quality:

Consumer Credit Quality Indicators As of December 31, 2014

Credit cards

Auto

Personal

Moneyline

Student

Share secured

Total

800 and above $6,378,638 $5,171,645 $1,220,707 $277,076 $— $103,940 $13,152,006 750 to 799 20,232,313 13,702,959 7,129,273 1,583,051 — 305,390 42,952,986 700 to 749 20,431,853 11,207,694 9,121,632 2,830,966 — 188,447 43,780,592 650 to 699 14,054,224 9,042,371 7,068,712 2,647,257 — 143,674 32,956,238 600 to 649 5,507,445 4,246,408 2,275,642 1,477,332 — 79,501 13,586,328 599 and below 4,711,896 2,802,929 1,230,584 1,657,953 — 321,873 10,725,235 No score 865,971 1,085,048 517,699 148,975 1,072,974 20,117 3,710,784

$72,182,340 $47,259,054 $28,564,249 $10,622,610 $1,072,974 $1,162,942 $160,864,169

Consumer Credit Quality Indicators


Credit cards

Auto

Personal

Moneyline

Student

Share secured

Total

800 and above $4,416,241 $5,249,578 $1,173,259 $313,594 $— $249,620 $11,402,292 750 to 799 16,476,900 12,820,585 6,019,443 1,473,649 — 270,427 37,061,004 700 to 749 19,865,716 10,030,925 8,156,205 2,862,277 — 107,026 41,022,149 650 to 699 14,792,789 9,152,413 5,758,068 2,560,997 — 188,379 32,452,646 600 to 649 5,944,446 3,315,722 2,160,117 1,548,383 — 193,930 13,162,598 599 and below 8,448,277 1,807,945 1,148,083 1,870,903 — 130,941 13,406,149 No score 1,063,357 1,970,768 102,046 124,357 1,377,674 41,550 4,679,752

$71,007,726 $44,347,936 $24,517,221 $10,754,160 $1,377,674 $1,181,873 $153,186,590

30


24

Note 3: (continued)

COMMERCIAL CREDIT QUALITY INDICATORS The Credit Union categorizes commercial loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends among other factors. These credit quality indicators are used to assign a risk rating to each individual credit. The risk ratings can be grouped into eight major categories, defined as follows:

Category Description

1 Secured loan with no risk. 2 Strongest credit - a strong credit with no existing or known potential weaknesses

deserving management’s close attention. 3 Average credit risk - borrower is a reasonable credit risk and demonstrates the

ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information mayindicate erratic performance, but current trends are positive.

4 Pass but watch - a loan that otherwise meets the definition of a standard or minimum acceptable quality loan, but which requires more than normal attention due to any of the following items: deterioration of borrower financial condition less severe than those warranting more adverse grading, deterioration of repayment ability and/or collateral value, increased leverage, adverse effects from a downturn in the economy, local market or industry, adverse changes in local or regional employer, management changes (including illness, disability, and death), and adverse legal action. Payments are current per the terms of the agreement. If conditions persist or worsen, a more severe risk grade may be warranted.

5 Special mention (weaknesses noted) - a loan that has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Credit Union’s position at some future date. Special mention loans are not adversely classified and do not expose the Credit Union to sufficient risk to warrant adverse classification.

6 Substandard (probable loss) - a loan that is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well- defined weaknesses include a lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or a project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Credit Union will sustain some loss if the deficiencies are not corrected.



25

Note 3: (continued)

Category Description

7 Doubtful - a loan that has all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

8 Loss - Charge-off

The following tables summarize the credit risk profile of the commercial loan portfolio by class:

Commercial Credit Quality Indicators As of December 31, 2014

Credit Grade Description of Credit Grade

Real Estate Construction Total

1 Secured loan with no risk $— $— $— 2 Strongest credit — — — 3 Average credit risk 13,506,510 — 13,506,510 4 Pass, but watch 3,495,946 — 3,495,946 5 Special mention 2,326,941 — 2,326,941 6 Substantial — — — 7 Doubtful — — — 8 Loss — — —

$19,329,397 $— $19,329,397

Credit Grade Description of Credit Grade

Commercial Credit Quality Indicators As of December 31, 2013

Real Estate Construction Total

1 Secured loan with no risk $— $— $— 2 Strongest credit — — — 3 Average credit risk 9,420,209 — 9,420,209 4 Pass, but watch 5,899,935 — 5,899,935 5 Special mention 3,672,173 — 3,672,173 6 Substantial — — — 7 Doubtful — — — 8 Loss — — —

$18,992,317 $— $18,992,317

32


26

NOTE 4: PROPERTY AND EQUIPMENT

A summary of the Credit Union’s property and equipment is as follows:


Land $3,476,686 $3,476,686 Buildings 22,909,116 22,762,268 Furniture and equipment 3,565,946 3,545,116 Data processing equipment 13,656,977 9,598,187 Leasehold improvements 1,407,151 1,393,849 Leased assets 110,340 110,340 Construction in process 29,245 2,075,990

45,155,461 42,962,436 Less accumulated depreciation and amortization (22,169,898) (21,057,807)

$22,985,563 $21,904,629

NOTE 5: MEMBERS’ SHARE AND SAVINGS ACCOUNTS

Members’ share and savings accounts are summarized as follows: As of December 31,

2014 2013

Share drafts $254,351,500 $239,753,958 Shares and escrow accounts 253,753,850 244,798,246 Money market accounts 535,467,296 521,813,022 IRA share accounts 31,785,296 31,565,854 Share and IRA certificates 266,637,461 274,622,326

$1,341,995,403 $1,312,553,406

The aggregate balance of members’ individual time deposit accounts in denominations that meet or exceed $250,000 was approximately $33,513,000 and $33,553,000 as of December 31, 2014 and 2013, respectively. Overdrawn share and share draft accounts reclassified to loans to members were approximately $52,000 and $49,000 as of December 31, 2014 and 2013, respectively.



27

Note 5: (continued) Scheduled maturities of share and IRA certificates are as follows:

Within 1 year


$145,886,781 1 to 2 years 59,541,230 2 to 3 years 32,456,156 3 to 4 years 12,716,512 4 to 5 years 16,036,782

$266,637,461

SHARE INSURANCE Members’ shares and saving accounts are insured by the NCUSIF to a maximum of $250,000 for each member. Individual Retirement Accounts are insured by the NCUSIF for an additional $250,000 coverage.

NOTE 6: BORROWED FUNDS

The Credit Union is a member of the FHLB of Atlanta. As of December 31, 2014 and 2013, the Credit Union had access to a pre-approved secured line of credit with the capacity to borrow up to a certain percentage of the value of its eligible 1-4 family first mortgage loans, as defined in the FHLB Statement of Credit Policy.

The following table represents the FHLB advances outstanding:

Interest Interest Final Payment As of December 31,

Type Rate Maturity Date Description 2014 2013

Fixed 1.890% July 21, 2014 Quarterly $— $15,000,000 Fixed 0.323% July 21, 2014 Quarterly — 15,000,000 Fixed 2.305% July 20, 2015 Quarterly 15,000,000 15,000,000 Fixed 0.520% July 22, 2015 Quarterly 15,000,000 15,000,000 Fixed 2.509% July 15, 2015 Quarterly 30,000,000 — Fixed 2.497% July 21, 2015 Quarterly 30,000,000 — Fixed 1.470% September 9, 2016 Quarterly 15,000,000 15,000,000

$105,000,000 $75,000,000

The outstanding balances by maturity dates are as follows:


Within 1 year $90,000,000 1 to 2 years 15,000,000

$105,000,000

34


28

NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES

LINES OF CREDIT: The Credit Union is a member of the FHLB of Atlanta. As of December 31, 2014, the Credit Union maintained access to a pre-approved secured line of credit with the capacity to borrow up to a certain percentage of the value of its qualified collateral, as defined in the FHLB Statement of Credit Policy. As of December 31, 2014, the unused credit available under this line-of-credit agreement was approximately $211,940,000. In order to access the unused portion of the line-of-credit, the Credit Union would need to pledge additional qualifying collateral in accordance with the terms of the agreement.

As of December 31, 2014, the Credit Union maintained a $15,000,000 unused secure line of credit with M&T Bank. In order to access the unused portion of the line-of credit, the Credit Union would need to pledge additional qualifying collateral in accordance with the terms of the agreement.

As of December 31, 2014, the Credit Union maintained appropriate agreements on file to access liquidity from the Federal Reserve Discount Window. In order to access the borrowings, the Credit Union would need to pledge qualifying collateral in accordance with the terms of the agreement.

MISCELLANEOUS LITIGATION: The Credit Union is a party to various miscellaneous legal actions normally associated with financial institutions, the aggregate effect of which, in management’s opinion, would not be material to the Credit Union’s financial statements.

NOTE 8: OFF-BALANCE-SHEET RISK AND

CONCENTRATIONS OF CREDIT RISK

OFF-BALANCE-SHEET RISK: The Credit Union is a 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-rate risk in excess of the amounts recognized in the statements of financial condition.

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 fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Credit Union evaluates each member’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the member.


29


Note 8: (continued)

Unused lines of credit approximated the following:


Credit card $284,271,000 Home equity 19,164,000 Unsecured 27,635,000

$331,070,000

CONCENTRATIONS OF CREDIT RISK: A significant amount of the Credit Union’s business activity is with members who are employees or former employees of the U.S. Department of State. Additionally, the Credit Union may be exposed to credit risk from a regional economic standpoint, since a significant concentration of its borrowers work or reside in the Washington, D.C. area. The loan portfolio is highly collateralized; however, the Credit Union does have a significant concentration of real estate secured loans of which the value of the collateral can fluctuate due to changes in the real estate market. Other than the concentration in real estate secured loans, the Credit Union does not have any other significant concentration of credit risk, except unsecured loans, which by their nature, increase the risk of loss compared to those loans that are collateralized.

NOTE 9: LOAN SERVICING

Mortgage loans serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans and custodial escrow balances approximated the following:

Mortgage loan portfolio serviced for:


Federal Home Loan Mortgage Corporation (FHLMC) $139,566,000 $80,290,000

Custodial escrow balances $845,000 $540,000

36


30

Note 9: (continued) The components of capitalized mortgage servicing rights, included in prepaid and other assets, were as follows:

Mortgage servicing rights:


2014 2013

Balance, beginning of year $915,342 $749,961 Additions 1,359,471 361,102 Amortization (279,471) (195,721) Balance, end of year $1,995,342 $915,342

Estimated fair value

$1,995,000 $1,488,000

As of December 31, 2014 and 2013, the fair value of servicing rights was determined by an internal valuation model using market value discount rates and prepayment speeds based on the specific characteristics of each pool of loans. Prepayment speeds are not utilized in this model. The following discount rates were used to value the servicing rights:

Loan portfolio serviced for FHLMC:


Discount rate 2.5% - 5.0% 2.5% - 5.0%

NOTE 10: REGULATORY CAPITAL

The Credit Union is subject to various regulatory capital requirements administered by the NCUA. Failure to meet minimum capital requirements can initiate certain mandatoryand 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 regulations and the regulatory framework for prompt corrective action, the Credit Union must meet specific capital regulations that involve quantitative measures of the Credit Union’s assets, liabilities, and certain off-balance-sheet items as calculated under generally accepted accounting principles. The Credit Union’s capital amounts and net worth 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 (as defined in NCUA’s Regulations) to total assets (as defined in NCUA’s Regulations). Credit unions are also required to calculate a Risk-Based Net Worth Requirement (RBNWR) which establishes whether or not the credit union will be considered “complex” under the regulatory framework. The Credit Union’s RBNWR as of December 31, 2014 and 2013 was 5.83% and 5.89%, respectively. The minimum requirement to be considered complex under the regulatory framework is 6.00%. Management believes, as of December 31, 2014 and 2013, that the Credit Union meets all capital adequacy requirements to which it is subject.



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Note 10: (continued)

As of December 31, 2014, the most recent call reporting period, the NCUA categorized the Credit Union as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Credit Union must maintain a minimum net worth ratio of 7.00% of assets. There are no conditions or events since that notification that management believes have changed the Credit Union’s category.

The Credit Union’s actual and required net worth amounts and ratios are as follows:

As of As of December 31, 2014 December 31, 2013

Amount

Ratio/ Requirement Amount

Ratio/ Requirement

Actual net worth

$151,121,776

9.45%

$137,611,953

8.99%

Amount needed to be classified

as “adequately capitalized” $95,937,481 6.00% $91,886,502 6.00%

Amount needed to be classified as “well capitalized”

$111,927,061

7.00%

$107,200,919

7.00%

Because the RBNWR is less than the net worth ratio, the Credit Union retains its original category. Further, in performing its calculation of total assets, the Credit Union used the quarter-end option, as permitted by regulation.

NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS

The Fair Value Measurements and Disclosures Topic of the FASB ASC provides a framework for measuring fair value and 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:

Level 1 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Credit Union has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

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Level 2 Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are inactive; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Level 3 inputs are unobservable inputs for the asset or liability which reflect the Credit Union’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Assumptions about risk include risk inherent in a particular valuation technique used to measure fair value, typically pricing models and/or discounted cash flow methodologies.

The methodologies and associated inputs used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Credit Union believes its valuation methods and associated inputs are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Certain assets and liabilities may be required to be measured at fair value on a non-recurring basis. These non-recurring fair value measurements usually result from the application of lower of cost or market accounting or the write-down of individual assets due to impairment. There were no items required to be measured on a non-recurring basis as of December 31, 2014 or 2013.

RECURRING BASIS AVAILABLE-FOR-SALE SECURITIES The Credit Union receives pricing for available-for-sale securities from a third-party pricing service. These securities are classified as a Level 2 in the fair value hierarchy. The following is a description of the valuation methodologies used for these securities:

Federal Agency Securities - Federal agency securities are valued based on quoted market prices on similar assets in the marketplace and the vintage of the underlying collateral.

SBA Loan Pools - The fair value of SBA loan pools is estimated using the quoted market prices for securities backed by similar loans. These market prices are adjusted for differences in loan characteristics such as the underlying collateral.

Taxable Municipal Bonds - Taxable municipal bonds are valued based on matrix pricing models that include sales of similar securities, the underlying bond characteristics and market conditions.




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Mutual Funds - Mutual funds are valued at the net asset value (NAV) of the shares held at year end.

Collective Trusts - Valued at the net asset value of shares held by the Plan at year end, as determined by Pentegra, the Plan trustee. Pentegra considers the fair value of the underlying fund investments when establishing the value of the funds within the collective trusts.

The following tables set forth by level, within the fair value hierarchy, the Credit Union’s financial instruments at fair value on a recurring basis.

Assets at Fair Value as of December 31, 2014

Level 1 Level 2 Level 3 Total Mortgage-backed securities:

Fixed rate $— $152,570,026 $— $152,570,026 Variable rate — 523,643,921 — 523,643,921

SBA loan pools — 40,582,324 — 40,582,324 Taxable municipal bonds — 8,749,557 — 8,749,557 Mutual funds — 593,055 — 593,055 $— $726,138,883 $— $726,138,883

Assets at Fair Value as of December 31, 2013

Mortgage-backed securities:

Level 1 Level 2 Level 3 Total

Fixed rate $— $109,367,220 $— $109,367,220 Variable rate — 511,817,742 — 511,817,742

SBA loan pools — 15,435,602 — 15,435,602 Taxable municipal bonds — 9,793,711 — 9,793,711 Mutual funds — 479,120 — 479,120 $— $646,893,395 $— $646,893,395

Where practical, the estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of amounts that could be realized in a market exchange. The use of different assumptions and estimation methodologies mayhave a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate fair value of each of the financial instruments for which it was practicable to estimate.

CASH The carrying amount is a reasonable estimation of fair value.

INVESTMENTS Estimated fair values for investments are obtained from quoted market prices where available.

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Note 11: (continued) LOANS TO MEMBERS The estimated fair value for variable-rate loans is the current carrying amount. The fair value of fixed-maturity loans is estimated by discounting the estimated cash flows using the current rate at which similar loans would be issued.

ACCRUED INTEREST RECEIVABLE The carrying amount is a reasonable estimation of fair value.

MORTGAGE SERVICING RIGHTS The estimated fair value of the mortgage servicing rights are based on the present value of the estimated cash flows using the current prepayment rates at which serviced mortgages would be amortized.

MEMBERS’ SHARE AND SAVINGS ACCOUNTS The estimated fair value of demand deposit accounts (share, share draft, money market, etc.) is the carrying amount. The fair value of fixed-rate certificates is estimated by discounting the estimated cash flows using the current rate at which similar certificates would be issued.

BORROWED FUNDS The estimated fair value of borrowed funds is estimated by discounting the estimated cash flows using the current rate at which similar borrowings would be granted.

INTEREST PAYABLE The carrying amount is a reasonable estimation of fair value.

PENSION ASSETS Mutual funds are valued at the net asset value of shares held by the Plan at year end. The carrying amounts for cash equivalents approximates fair value. (See Note 12)

COMMITMENTS TO EXTEND CREDIT The Credit Union’s unused loan commitments to extend credit have no carrying amount and have been estimated to have no realizable fair value. The Credit Union does not charge fees in connection with these commitments and a majority of the unused loan commitments have historically not been drawn upon.



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The carrying value and estimated fair value of the Credit Union’s financial instruments are as follows (for pension assets, see Note 12):

As of December 31, 2014 As of December 31, 2013

Carrying Amount

Fair Value

Carrying Amount

Fair Value

Financial assets: Cash

$13,954,686

$13,954,686

$13,800,720

$13,800,720

Investments: Available-for-sale $726,138,883 $726,138,883 $646,893,395 $646,893,395 Other $51,848,489 $51,848,489 $61,461,271 $61,461,271

Loans to members, net $701,188,657 $696,635,122 $699,161,428 $697,355,505 Accrued interest

receivable: Investments $2,152,534 $2,152,534 $2,138,109 $2,138,109 Loans $1,872,307 $1,872,307 $1,931,703 $1,931,703

Mortgage servicing rights $1,995,342 $1,995,000 $915,342 $1,488,000

Financial liabilities:

Members’ share and savings accounts

$1,341,995,403

$1,344,070,171

$1,312,553,406

$1,315,726,979

Borrowed funds $105,000,000 $105,398,155 $75,000,000 $75,629,801 Interest payable $422,913 $422,913 $182,099 $182,099

NOTE 12: EMPLOYEE BENEFITS

DEFINED BENEFIT PLAN The Credit Union maintained a defined benefit pension plan. Effective August 1, 2006, the plan was amended to freeze benefit accruals. Participants are 100% vested in the frozen benefit accruals.

The following tables sets forth the plan’s funded status and amounts recognized in the Credit Union’s statements of financial condition.

Change in benefit obligation:


Benefit obligation at the beginning of the year $28,014,181 $31,712,171 Interest cost 1,326,012 1,222,883 Actuarial loss/(gain) 10,171,360 4,205,876) Benefits paid and expenses (798,703) (714,997) Settlements (98,167) Benefit obligation at the end of the year $38,614,683 $28,014,181

Accumulated benefit obligation at the end of the year $38,614,683 $28,014,181

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Change in plan assets:


Plan assets at fair value at the beginning of the year $47,704,553 $33,641,158 Actual return on plan assets 4,324,218 5,778,392 Employer contribution — 9,000,000 Benefits paid (798,703) (714,997) Settlements (98,167) — Plan assets at fair value at the end of the year $51,131,901 $47,704,553

Reconciliation of funded status:

Funded status $12,517,218 $19,690,372

Reconciliation of accumulated other comprehensive loss: Unrecognized net actuarial loss $12,671,413 $3,985,335 Unrecognized transition asset — — Unrecognized prior service cost — — Accumulated other comprehensive loss $12,671,413 $3,985,335

Amounts expected to be amortized into the net periodic pension cost next year:


Net actuarial loss $1,009,108 $1,200,168

The net periodic pension (credit)/cost related to this plan was approximately ($1,513,000) and $3,000 for the years ended December 31, 2014 and 2013, respectively. The total pension (gains)/losses in other comprehensive loss approximated $8,686,000 and ($8,764,000) for the years ended December 31, 2014 and 2013, respectively. The total amount recognized in net periodic pension cost and other comprehensive income/(loss) approximated $7,173,000 and ($8,761,000) for the years ended December 31, 2014 and 2013, respectively.

The assumptions used to develop the net periodic pension cost were as follows:


2014 2013

Discount rate 4.80% 3.90% Weighted-average rate of compensation increases Expected long-term rate of return on plan assets Amortization method

n/a - frozen 6.00%

Straight-Line

n/a - frozen 6.00%

Straight-Line




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The assumptions used in the measurement of the Credit Union’s net benefit obligation were as follows:


Discount rate 3.90% 4.80% Rate of compensation increases n/a - frozen n/a - frozen

ASSET ALLOCATIONS BY ASSET CATEGORY:


Common/Collective Trusts - Equity 61.3% 65.7% Common/Collective Trusts - Fixed income 31.2% 26.6% Cash equivalents 7.5% 7.7%

100.0% 100.0%

CASH FLOWS: Expected benefit payments for fiscal year beginning:

2015 $1,003,983 2016 $1,081,459 2017 $1,192,553 2018 $1,339,811 2019 $1,380,903

Five years thereafter $7,997,545

The fair value of the Credit Union’s pension plan assets by asset class are as follows (the three levels of input used to measure fair value are more fully described in Note 11):

Assets at Fair Value as of December 31, 2014 Level 1 Level 2 Level 3 Total

Common/Collective Trusts - Equity

Large-cap growth (a) $— $10,392,696 $— $10,392,696 Large-cap value (b) — 9,675,683 — 9,675,683 Small-cap core (c) — 3,193,013 — 3,193,013 International core (d) — 4,667,650 — 4,667,650 Mid-Cap Core (h) — 3,393,333 — 3,393,333

Common/Collective Trusts -

Fixed Income U.S. Long Term (e) U.S. Long Term (f)

— 8,592,581 — 7,368,508

— 8,592,581 — 7,368,508

Cash equivalents: Money market (g) 3,848,437 — — 3,848,437

Total assets at fair value $3,848,437 $47,283,464 $— $51,131,901

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Common/Collective Trusts - Equity

Assets at Fair Value as of December 31, 2013 Level 1 Level 2 Level 3 Total

Large-cap growth (a) $— $10,010,598 $— $10,010,598 Large-cap value (b) — 9,300,364 — 9,300,364 Small-cap core (c) — 3,314,902 — 3,314,902 International core (d) — 5,344,456 — 5,344,456 Mid-Cap Core (h) — 3,370,229 — 3,370,229

Common/Collective Trusts -

Fixed Income U.S. Long Term (e) U.S. Long Term (f)

— 5,901,951 — 6,766,598

— 5,901,951 — 6,766,598

Cash equivalents: Money market (g) 3,695,455 — — 3,695,455

Total assets at fair value $3,695,455 $44,009,098 $— $47,704,553

Asset category description:

(a) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Long Treasury Bond Index over the long term.

(b) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Treasury Inflation Protected Securities Index over the long term.

(c) The Fund seeks to match as closely as possible the return of the Russell 2000 Index. The fund seeks to match the return of the index by investing in a portfolio in the same proportion as they appear in the index.

(d) The Fund seeks to match as closely as possible the return of the Morgan Stanley Capital International, Europe, Australia, Far East (MSCI EAFE) Index. The fund seeks to match the return of the index by investing in a portfolio in the same proportion as they appear in the index.

(e) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Long Treasury Bond Index (the “Index”) over the long term.

(f) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (the “Index”) over the long term.



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Note 12: (continued) (g) This category consists of a money market fund and is used for liquidity purposes (i.e., cash flows and benefit payments). It seeks to provide investors with current income consistent with stability of principal and liquidity. The fund pursues its objective by investing primarily in a portfolio of short-term, high-quality, fixed-income securities issued by banks, corporations and the U.S. government, and seeks to maintain a stable net asset value (NAV) of $1.00 per share.

(h) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the S&P MidCap 400 Index ™ (the “Index”) over the long term.

BASIS USED TO DETERMINE LONG-TERM RATE OF RETURN ON ASSETS The long-term rate-of-return on assets assumption was set based on historical returns earned by the equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 6% - 8% and 3% - 5%, respectively. When these overall return expectations are applied to the plan’s target allocation, the result is an expected rate of return of 5% to 7%.

DESCRIPTION OF INVESTMENT POLICIES AND STRATEGIES Plan assets are invested in a broadly diversified combination of equity and bond commingled trust index funds, each with its own investment objectives, investment strategy and risks. The Plan Sponsor retains discretion to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the Plan’s Statement of Investment Policy.

The long-term investment objectives are to maintain plan assets at a level that will sufficiently cover long-term obligations and to generate a return on plan assets that will meet or exceed the rate at which long-term obligations will grow. A broadly diversified combination of equity and fixed income portfolios and various risk management techniques are used to help achieve these objectives. In addition, consideration is paid to each Plan’s funding levels and the Plan Sponsor’s risk tolerance when determining the overall asset allocation. Asset rebalancing normally occurs when the equity and fixed income allocations vary by more than 10% from their respective targets.

ESTIMATED FUTURE CONTRIBUTIONS Estimated contributions for the year beginning January 1, 2015 is unknown.

401(K) RETIREMENT PLAN Credit Union employees who are at least 20 years old and have completed at least one month of service at the Credit Union are eligible to join a 401(k) retirement plan the first of the month following satisfaction of eligibility requirements. The Credit Union contributes a 3% safe-harbor contribution as well a matching contribution equal to 100% of employee deferral contribution up to a maximum of 3%. Employees are eligible for employer contributions upon joining the plan. Employees are immediately vested in the Credit Union’s safe-harbor contributions, while the matching contributions vest 20% annually and are fully vested after 5 years of qualifying service. The total expense related to the Credit Union’s 401(k) plan contributions was approximately $771,000 and $752,000 for the years ended December 31, 2014 and 2013, respectively.

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NOTE 13: CHANGES IN ACCUMULATED OTHER

COMPREHENSIVE LOSS

Balance,

For the year ended December 31, 2014

Unrealized Gains/(Losses) on Defined Benefit Available-for-Sale Pension Plan

Securities Items Total

December 31, 2013 ($1,636,670) ($3,985,335) ($5,622,005) Other comprehensive

income/(loss) before reclassifications 3,857,242 (8,686,078) (4,828,836)

Amounts reclassified from other comprehensive income (753,189) — (753,189)

Net other comprehensive income/(loss) 3,104,053 (8,686,078) (5,582,025)

Balance, December 31, 2014 $1,467,383 ($12,671,413) ($11,204,030)

The following table provides the reclassifications out of accumulated other comprehensive income/(loss) by component:

For the Year Ended December 31, 2014

Amount Reclassified Details about Accumulated from Accumulated Affected Line Item in the

Other Comprehensive Income Other Comprehensive Statement Where Net Income Components Income is Presented

Unrealized losses on sale of available-for-sale securities $753,189 Gain on sale of investments, net

Total reclassification $753,189

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1630 King Street | Alexandria, VA 22314-2745 | 703.706.5000 | 800.296.8882 | www.sdfcu.org

Federally insured by NCUA

2014 SDFCU Annual Report

Documents

Transcript of 2014 SDFCU Annual Report