Digital Federal Credit Union and Subsidiaries

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C O N T E N T S

Page

Independent Auditor’s Report ... 1

Consolidated Financial Statements: Statements of Financial Condition ... 2

Statements of Income ... 3

Statements of Comprehensive Income ... 4

Statements of Members’ Equity ... 5

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To the Supervisory Committee

Digital Federal Credit Union and Subsidiaries Marlborough, MA

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Digital Federal Credit Union and Subsidiaries which comprise the consolidated statements of financial condition as of December 31, 2012 and 2011, and the related consolidated statements of income, 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 consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our 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 consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Digital Federal Credit Union and Subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

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2012 2011 ASSETS

Cash and cash equivalents $ 262,283 $ 299,894

Investments:

Available-for-sale 336,399 182,537

Other 108,610 56,908

Loans held-for-sale 40,176 6,922

Loans to members, net 3,868,969 3,554,070

Accrued interest receivable 14,860 13,505

Property and equipment, net 52,394 52,300

National Credit Union Share Insurance Fund deposit 35,236 31,649

Other assets 16,096 33,228

Total assets $ 4,735,023 $ 4,231,013

LIABILITIES AND MEMBERS' EQUITY Liabilities:

Members’ shares $ 3,874,856 $ 3,436,507

Borrowed funds 428,642 437,502

Accrued expenses and other liabilities 35,187 36,550

Total liabilities 4,338,685 3,910,559

Commitments and contingent liabilities Members’ equity:

Retained earnings 399,956 324,947

Accumulated other comprehensive loss (3,618) (4,493)

Total members’ equity 396,338 320,454

Total liabilities and members’ equity $ 4,735,023 $ 4,231,013

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2012 2011 Interest income:

Loans to members $ 178,165 $ 175,152

Investments and cash equivalents 2,666 1,816

Total interest income 180,831 176,968

Interest expense:

Members' shares 24,933 21,437

Borrowed funds 9,356 10,065

Total interest expense 34,289 31,502

Net interest income 146,542 145,466

Provision for loan losses 3,000 23,200

Net interest income after provision for loan losses 143,542 122,266 Noninterest income:

Service charges and other fees 12,637 13,033

Interchange income 21,923 16,252

Net gain on sales of loans 6,694 846

Net loss on foreclosed assets (2,945) (7,620)

Other noninterest income 1,644 2,688

Total noninterest income 39,953 25,199

Noninterest expense:

Salaries and benefits 47,347 43,611

Operations 36,946 28,289

Occupancy 14,181 13,243

Loss on prepayment of borrowed funds 6,665 -

National Credit Union Administration Stabilization Fund assessment 3,347 7,912

Total noninterest expense 108,486 93,055

Net income $ 75,009 $ 54,410

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2012 2011

Net income $ 75,009 $ 54,410

Other comprehensive income (loss):

Net change in defined benefit plan gains or losses, transition

obligation or asset, and prior service cost or credit (337) (1,368) Net change in unrealized gains on available-for-sale investments 1,212

-Net other comprehensive income 875 (1,368)

Comprehensive income $ 75,884 $ 53,042

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Accumulated

Retained Earnings Other Total

Regular Comprehensive Members'

Reserve Unappropriated Total Income (Loss) Equity

Balance, December 31, 2010 $ 100,227 $ 170,310 $ 270,537 $ (3,125) $ 267,412 Net income - 54,410 54,410 - 54,410 Other comprehensive income - - - (1,368) (1,368) Balance, December 31, 2011 100,227 224,720 324,947 (4,493) 320,454

Net income - 75,009 75,009 - 75,009 Other comprehensive income - - - 875 875 Balance, December 31, 2012 $ 100,227 $ 299,729 $ 399,956 $ (3,618) $ 396,338

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2012 2011 Cash flows from operating activities:

Net income $ 75,009 $ 54,410

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of investments, net 441

-Amortization of servicing assets 2,150 1,609

Provision for loan losses 3,000 23,200

Net gain on sales of loans (6,694) (846)

Proceeds from sales of loans 119,398 36,064

Loans committed for sale (147,858) (34,165)

Depreciation and amortization 5,895 5,477

Net change in:

Accrued interest receivable (1,355) 333

Other assets 16,882 7,590

Accrued expenses and other liabilities (1,700) 2,070

Net cash provided by operating activities 65,168 95,742

Cash flows from investing activities:

Purchases of available-for-sale investments (153,091)

Purchases of trading investments - (161,430)

Net change in other investments (51,702) (9,999)

Net change in loans to members (317,899) (409,467)

Increase in the National Credit Union Share Insurance Fund deposit (3,587) (1,507)

Purchases of property and equipment (5,989) (3,175)

Net cash used in investing activities (532,268) (585,578)

Cash flows from financing activities:

Repayment of long-term borrowed funds (203,860) (3,741)

Proceeds from long-term borrowed funds 205,000 100,000

Net change in short-term borrowed funds (10,000) 100,000

Net change in members’ shares 438,349 327,350

Net cash provided by financing activities 429,489 523,609

(Decrease) increase in cash and cash equivalents (37,611) 33,773

Cash and cash equivalents, beginning of year 299,894 266,121

Cash and cash equivalents, end of year $ 262,283 $ 299,894

Supplemental cash flow information:

Foreclosed assets acquired in settlement of loans to members $ 9,118 $ 13,837

Dividends paid on members' shares and interest paid on

borrowed funds $ 34,648 $ 33,280

Transfer of investments from trading to available-for-sale $ - $ 182,537

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1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Digital 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 who qualify for membership as defined in the Credit Union’s Charter and Bylaws.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Credit Union and its subsidiaries, Financial Vision, LLC, organized for the purpose of software development, DCU Insurance, LLC, which provides property and casualty insurance to members and DCU Realty, LLC, which provides brokerage services to members in Massachusetts. The activities in these subsidiaries are insignificant to the Credit Union as a whole. All significant intercompany balances and transactions have been eliminated in consolidation.

Significant Accounting Policies

The Credit Union follows the accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes 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 consolidated financial statements are to The FASB Accounting Standards CodificationTM commonly referred to as the Codification or ASC.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses, the fair value of financial instruments, and post-retirement benefit plans.

Concentrations of Credit Risk

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1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES…continued

Fair Value

The Codification defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurement. Fair value is a market-based measurement, not an entity-specific measurement, and the hierarchy gives the highest priority to quoted prices in active markets. Fair value measurements are disclosed by level within the fair value hierarchy. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Valuation techniques are to be consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

In that regard, the Codification establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 - Significant 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 be used in pricing an asset or liability.

A summary of the Credit Union’s financial instruments, including methodologies and resulting values, is discussed in Note 14 to these consolidated financial statements.

Cash and Cash Equivalents

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Investments

The Credit Union accounts for investment securities in accordance with FASB ASC 320,

Investments – Debt and Equity Securities. Equity securities are classified into one of three

categories: trading securities, securities available-for-sale, or held-to-maturity securities. Securities available for sale include securities which may be sold in response to changes in interest rates, resultant prepayment risk and other related factors, and securities that are intended to be held for indefinite periods of time, but which may not be held to maturity. Investment securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Any investment not classified as available-for-sale or held-to-maturity will be classified as trading. At December 31, 2011 the Credit Union reclassified their trading securities to available-for-sale whereby the securities’ fair value as of December 31, 2011 became their new cost basis. As of December 31, 2012 and 2011 the Credit Union did not have any trading or held-to-maturity securities.

In determining whether other-than-temporary impairment exists for investment securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer; (3) the current liquidity and volatility of the market for each of the individual security categories; (4) the projected cash flows from the specific security type; (5) the financial guarantee and financial rating of the issuer; and (6) the intent and ability of the Credit Union to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value.

For other-than-temporary impairment of debt securities, the Credit Union determines whether it intends to sell or is more likely than not that it will be required to sell a security before recovery of the debt securities’ amortized cost basis less any current-period credit losses. For impairment of debt securities that are considered other-than-temporary, and the Credit Union does not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, the Credit Union separates the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income. For impaired debt securities that the Credit Union intends to sell, or more likely than not will be required to sell, the full amount of depreciation is recognized through earnings.

Other investments are classified separately and are stated at cost. If such investments are deemed to be impaired, the recorded cost is reduced by the amount of impairment.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Federal Home Loan Bank (“FHLB”) Stock

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Derivatives Loan Commitments

The Credit Union enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans to be held for sale are considered to be derivatives. Accordingly, such commitments, on the consolidated statements of financial condition are recorded at fair value, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on the change in estimated fair value of the underlying mortgage loan. The fair value is subject to change primarily due to changes in interest rates.

To hedge the exposure of changes in interest rates impacting the fair value of loans held for sale and related loan commitments, the Credit Union typically enters in to forward sales commitments with its secondary market investors at the time a loan commitment is granted to lock in the ultimate sale and price of the loan. These commitments require the Credit Union to pay a penalty for nonperformance in the event the committed loans are not delivered. As such, these sales commitments are derivative instruments, recorded on the consolidated statements of financial condition at fair value in other assets or liabilities. Changes in fair value are reported in income. Mortgage Loans Held-for-Sale

Mortgage loans held-for-sale are those loans the Credit Union has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or market value. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating cost to servicing rights retained. All sales are made without recourse subject to the customary representations and warranties.

Loans to Members, Net

The Credit Union grants mortgage, commercial and consumer loans. The ability of the borrowers to honor their contracts is dependent upon the real estate and general economic conditions of the lending area.

Loans that the Credit Union has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, less an allowance for loan losses and net deferred origination fees and costs. Interest income on loans is recognized over the term of the loan and is calculated using the simple interest method on principal amounts outstanding.

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Loans to Members, Net…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.

The Credit Union offers nontraditional mortgage loans to its members. These loans include hybrid loans that consist of loans that are fixed for an initial period of three, five, seven or 10 years. After this period, the mortgages are converted to variable rate using the fully indexed rate, which can result in significant payment shock to the borrower. 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. Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred though a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is likely. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s regular review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Credit Union’s allowance for loan losses. When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment. These risk categories and the relevant risk characteristics are as follows:

Commercial

Commercial loans primarily consist of non-owner and owner occupied real estate loans. Commercial loans generally have terms of fifteen years or less with interest rates that float (different adjustment periods by product) in accordance with a designated published index. Repayment is expected from the cash flows of the business. Loans are secured by the underlying collateral. Substantially all commercial loans are secured and backed by the personal guarantees of the owners of the business.

Residential Loans

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Allowance for Loan Losses…continued Consumer Loans

The Credit Union has identified auto loans, credit cards, student loans, and other unsecured loans in homogenous risk categories. Repayment is dependent on the credit quality of the individual borrower.

A loan is impaired when, based on current information and events, it is probable that the Credit Union will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. These concessions may include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

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Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Credit Union, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Credit Union does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Loan Servicing

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. For sales of loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, 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 assets are reported in other assets and are amortized into noninterest 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. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Credit Union later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of servicing assets is netted against loan servicing fee income.

Property and Equipment, Net

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Foreclosed Assets

Assets acquired through foreclosure or other proceedings are initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed by management of the Credit Union and foreclosed assets held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any write-down to fair value at the time of transfer to foreclosed assets is charged to the allowance for loan losses. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded as necessary.

National Credit Union Share Insurance Fund (“NCUSIF”) Deposit and Assessments

The deposit in the NCUSIF is in accordance with National Credit Union Administration (“NCUA”) regulations, which require the maintenance of a deposit by each federally insured credit union in an amount equal to 1 percent of its insured members’ shares. The deposit would be refunded to the Credit Union if its insurance coverage is terminated, if it converts its insurance coverage to another source or if management of the fund is transferred from the NCUA Board.

The Credit Union recognizes NCUSIF premiums and Temporary Corporate Credit Union Stabilization Fund (“TCCUSF”) assessments when approved by the NCUA. During the years ended December 31, 2012 and 2011, there were no NCUSIF premiums due, although a TCCUSF assessment was recognized by the Credit Union of $3,347 and $7,912, respectively.

Members’ Shares

Members’ shares are the savings deposit accounts of the owners of the Credit Union. Share ownership entitles the members to vote in the annual elections of the Board of Directors and on other corporate matters. Irrespective of the amount of shares owned, no member has more than one vote. Members’ shares are subordinated to all other liabilities of the Credit Union upon liquidation. Dividends on members’ shares are based on available earnings at the end of a dividend period and are not guaranteed by the Credit Union. Dividend rates are set by the Credit Union’s Board of Directors.

Income Taxes

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Defined Benefit Plan

The Credit Union has a qualified, noncontributory defined benefit pension plan covering certain employees. The Credit Union’s policy is to fund an amount in excess of the minimum amount required under ERISA.

Defined Contribution 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 the defined benefit plan net costs and losses and net changes in unrealized gains and losses on available-for-sale investments, are reported as a separate component of members’ equity on the consolidated statements of financial condition.

Reclassifications

Certain account reclassifications have been made to the 2012 consolidated financial statements in order to conform to classifications used in the current year with no effect on net income or members’ equity.

Recent Accounting Pronouncements

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, Receivables

(Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The FASB believes the guidance in this ASU will improve financial reporting by

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Recent Accounting Pronouncements…continued

In April 2011, the FASB issued Accounting Standards Update 2011-03, Transfers and Servicing

(Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The amendments

change the effective control assessment by removing the criterion that required the transferor to have the ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. Instead, the amendments focus the assessment of effective control on the transferor's rights and obligations with respect to the transferred financial assets and not whether the transferor has the practical ability to perform in accordance with those rights or obligations. This Update is effective for the Credit Union’s fiscal year ending December 31, 2012. Management has adopted this Update and it has not had a significant impact on the Credit Union’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820). The amendments in this Update generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). This Update is effective for the Credit Union’s fiscal year ending December 31, 2012. Management has adopted this Update and it has not had a significant impact on the Credit Union’s consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05,

Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends

the Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. This is effective for the Credit Union’s fiscal year ending December 31, 2012. Management currently follows this guidance. See the consolidated statements of comprehensive income.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures

about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that

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Recent Accounting Pronouncements…continued

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral

of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In

order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. This is effective for the Credit Union’s fiscal year ending December 31, 2012. This Update did not have a significant impact on the Credit Union’s consolidated financial statements.

Subsequent Events

The Credit Union has evaluated subsequent events through March 1, 2013, the date on which the consolidated financial statements were available to be issued.

2. INVESTMENTS

The Credit Union accounts for its investment securities in accordance with ASC 320, which requires the Credit Union to reassess the classification of its investment securities, periodically, to ensure that the classification remains appropriate given the Credit Union’s current intentions and abilities to hold the securities. At December 31, 2011 the Credit Union determined that its intentions with respect to its outstanding investments was no longer for trading purposes and determined that classification as available-for-sale was the proper classification. Upon reclassification to available-for-sale, the fair value of the investments was $182,537, including approximately $500 of cumulative unrealized gains, which became the new cost basis of the securities.

In accordance with ASC 320, the Credit Union recognized all unrealized gains and losses on its investments recognized as a component of non interest income while the investments were classified as trading securities. Upon reclassification of the securities to available-for-sale all unrealized gains and losses on its investments will be recorded in other comprehensive income. Investments classified as available-for-sale consist of the following:

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

December 31, 2012 Debt Securities:

U.S. government obligations

and federal agencies securities $ 51,128 $ 352 $ - $ 51,480

Equity Securities: Mutual funds of U.S

government securities 284,059 860 - 284,919

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2. INVESTMENTS…continued

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

December 31, 2011

Equity Securities:

Mutual funds of U.S

government securities $ 182,537 $ - $ - $ 182,537

Other investments consist of the following:

December 31,

2012 2011

Certificates of deposit in corporate credit union $ 64,000 $ 10,000

FHLB of Boston stock 41,605 44,218

Paid-in capital account in a corporate credit union 1,575 1,476

Other 1,430 1,214

$ 108,610 $ 56,908

Investments by maturity as of December 31, 2012, are summarized as follows:

Available-for-sale

Amortized Fair

Cost Value Other

December 31, 2012

Less than 1 year maturity $ - $ - $ 52,000

1-5 years maturity 51,128 51,480 12,000

$ 51,128 $ 51,480 $ 64,000

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3. LOANS TO MEMBERS, NET

Loans to members consist of the following:

December 31, 2012 2011 Commercial: Real estate $ 455,678 $ 405,181 Other 19,899 25,330 Residential: First mortgages 1,523,600 1,432,167

Home equities loans/lines 536,498 603,946

Consumer: Credit card 330,714 306,415 Student 104,326 88,823 Auto 907,221 739,839 Other 30,175 20,739 3,908,111 3,622,440

Deferred net loan origination costs 15,677 13,640

Allowance for loan losses (54,819) (82,010)

$ 3,868,969 $ 3,554,070

The following is an aging analysis of the recorded investment of past due loans as of: December 31, 2012:

Total

30-59 Days 60-89 Days 90 Days Loan

Current Past Due Past Due And Greater to Members

Commercial: Real estate $ 449,402 $ - $ 5,025 $ 1,251 $ 455,678 Other 19,811 37 24 27 19,899 Residential: First mortgage 1,502,849 - 5,303 15,448 1,523,600 Home equity loans/lines 527,604 1,871 1,819 5,204 536,498 Consumer: Credit card 323,195 2,528 1,020 3,971 330,714 Auto 891,339 9,945 2,438 3,499 907,221 Other* 131,885 1,373 713 530 134,501 $ 3,846,085 $ 15,754 $ 16,342 $ 29,930 $ 3,908,111

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3. LOANS TO MEMBERS, NET…continued

December 31, 2011:

Total

30-59 Days 60-89 Days 90 Days Loan

Current Past Due Past Due And Greater to Members

Commercial: Real estate $ 395,864 $ 879 $ 1,516 $ 6,922 $ 405,181 Other 25,330 - - - 25,330 Residential: First mortgage 1,402,169 6,744 3,279 19,975 1,432,167 Home equities loans/lines 590,800 4,323 1,429 7,394 603,946 Consumer: Auto 721,407 12,168 1,243 5,021 739,839 Credit card 300,202 2,250 1,114 2,849 306,415 Other* 108,512 651 149 250 109,562 $ 3,544,284 $ 27,015 $ 8,730 $ 42,411 $ 3,622,440

* This category includes student loans

For the years ended December 31, 2012 and 2011, interest collected on impaired loans for the period of impairment was not significant. There were no loans past due more than 90 days for which the accrual of interest continued.

The following table presents the recorded investment in nonaccrual loans by class and the amount of interest not recognized as the loans were on nonaccrual status as of December 31:

2012 2011

Balance Interest Balance Interest Commercial

Real estate $ 1,251 $ 57 $ 8,443 $ 480

Other 27 19 -

-Residential:

First mortgages 15,448 681 19,975 862

Home equities loans/lines 5,204 214 7,394 185

Consumer:

Auto 3,499 124 5,021 16

Credit card 3,971 484 2,849 342

Other, including student loans 530 23 250 178

(23)

As part of the on-going monitoring of the credit quality of the Credit Union’s loan portfolio, management categorizes commercial loans into risk categories based on relevant information about the ability of borrowers to service their debt and comply with various terms of their loan agreements. The Credit Union considers current financial information, historical payment experience, credit documentation, public information and current economic trends. Generally, all credits classified as watched assets receive a financial review no less than annually to monitor and adjust, if necessary, the credit’s risk profile. For substandard, and doubtful credit classifications, the frequency of review is increased to no less than quarterly in order to determine potential impact on credit loss estimates. A pass asset is well protected by the current worth and paying capacity of the obligator (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

The Credit Union categorizes loans as pass, watch, substandard or doubtful, based on the relevant information about the ability of borrowers to service their debt.

The following table presents the risk category of commercial loans evaluated by internal asset classification based on the most recent analysis performed and the contractual aging as of: December 31, 2012

Commercial Credit Exposure

Real Estate Other

Pass – 1 through 6 $ 435,620 $ 19,562 Watch – 7 4,067 - Substandard – 8 5,050 11 Doubtful – 9 10,941 326 $ 455,678 $ 19,899 December 31, 2011:

Commercial Credit Exposure

Real Estate Other

Pass – 1 through 6 $ 374,872 $ 24,927

Watch – 7 7,160 18

Substandard – 8 18,487 103

Doubtful – 9 4,662 282

$ 405,181 $ 25,330

(24)

The following tables present the risk category of loans evaluated by internal asset classification based on the most recent analysis performed and the contractual aging as of:

December 31, 2012

Residential Credit Exposure Credit Risk Profile Based on

Payment Activity First Home Mortgages Equities Performing $ 1,508,152 $ 531,294 Nonperforming 15,448 5,204 $ 1,523,600 $ 536,498

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

Student Credit

Auto Other Loans Card

Performing $ 903,722 $ 29,891 $ 104,080 $ 326,743

Nonperforming 3,499 284 246 3,971

$ 907,221 $ 30,175 $ 104,326 $ 330,714

December 31, 2011

Residential Credit Exposure Credit Risk Profile Based on

Payment Activity First Home Mortgages Equities Performing $ 1,412,192 $ 596,552 Nonperforming 19,975 7,394 $ 1,432,167 $ 603,946

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

Credit Student

Card Other Loans Auto

Performing $ 303,566 $ 20,529 $ 88,783 $ 734,818

Nonperforming 2,849 210 40 5,021

(25)

A loan is considered impaired 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. Impaired loans include loans delinquent more than 90 days, certain loans modified and loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan and payment extensions.

The following table presents detail of impaired loans, segregated by class. The unpaid principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loans. Interest income recognized on impaired loans were insignificant for the years end December 31, 2012 and 2011.

The following is a summary of impaired loans. December 31, 2012

Unpaid Average

Recorded Principal Related Recorded Investment Balance Allowance Investment Impaired loans without an

allowance recorded:

Commercial $ 18,014 $ 18,014 $ - $ 19,165

Consumer 4,849 4,849 - 4,299

Residential real estate 13,757 13,757 - 16,612

$ 36,620 $ 36,620 $ - $ 40,076

Impaired loans with an allowance recorded:

Commercial $ 2,381 $ 2,381 $ 348 $ 6,388

Consumer 6,383 6,383 6,383 4,628

Residential real estate 82,636 82,636 15,152 81,934 $ 91,400 $ 91,400 $ 21,883 $ 92,950

Total:

Commercial $ 20,395 $ 20,395 $ 348 $ 25,553

Consumer 11,232 11,232 6,383 8,927

Residential real estate 96,393 96,393 15,152 98,546

(26)

December 31, 2011

Unpaid Average

Recorded Principal Related Recorded Investment Balance Allowance Investment Impaired loans without an

allowance recorded:

Commercial $ 20,316 $ 20,316 $ - $ 19,780

Consumer 3,749 3,749 - 1,874

Residential real estate 19,467 19,467 - 12,613

$ 43,532 $ 43,532 $ - $ 34,267

Impaired loans with an

allowance recorded:

Commercial $ 10,396 $ 10,396 $ 2,000 $ 12,968

Consumer 2,872 2,872 2,872 3,561

Residential real estate 81,231 81,231 19,344 88,374 $ 94,499 $ 94,499 $ 24,216 $ 104,903

Total:

Commercial $ 30,712 $ 30,712 $ 2,000 $ 32,748

Consumer 6,622 6,622 2,872 5,435

Residential real estate 100,698 100,698 19,344 100,987

$ 138,032 $ 138,032 $ 24,216 $ 139,170

The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the year ended:

December 31, 2012

Commercial Consumer Residential Total

Allowance for loan losses:

Beginning Balance, December 31, 2011 $ 6,266 $ 28,511 $ 47,233 $ 82,010

Charge-offs (4,359) (12,072) (16,511) (32,942)

Recoveries 519 1,317 915 2,751

Provisions 229 1,043 1,728 3,000

Ending balance, December 31, 2012 $ 2,655 $ 18,799 $ 33,365 $ 54,819

Period-end allowance for loan losses allocated to:

Ending balance - individually evaluated for impairment $ 348 $ 6,383 $ 15,152 $ 21,883

Ending balance - collectively evaluated for impairment 2,307 12,416 18,213 32,936

Ending balance $ 2,655 $ 18,799 $ 33,365 $ 54,819

Period-end loans to members allocated to:

Ending balance - individually evaluated for impairment $ 20,395 $ 11,232 $ 96,393 $ 128,020

Ending balance - collectively evaluated for impairment 455,183 1,361,204 1,963,704 3,780,091

(27)

December 31, 2011

Commercial Consumer Residential Total

Allowance for loan losses:

Beginning Balance $ 2,256 $ 34,848 $ 67,845 $ 104,949

Charge-offs (3,557) (21,895) (22,769) (48,221)

Recoveries 96 1,440 546 2,082

Provisions 7,471 14,118 1,611 23,200

Ending balance $ 6,266 $ 28,511 $ 47,233 $ 82,010

Period-end allowance for loan losses allocated to:

Ending balance - collectively evaluated for impairment 4,266 25,639 27,889 57,794

Ending balance $ 6,266 $ 28,511 $ 47,233 $ 82,010

Period-end loans to members allocated to:

Ending balance - collectively evaluated for impairment 399,799 1,149,193 1,935,416 3,484,408

Ending balance $ 430,511 $ 1,155,815 $ 2,036,114 $ 3,622,440

The following table presents troubled debt restructurings and the financial effects of troubled debt restructurings: As of December 31 2012 Post- Modification Outstanding Outstanding Recorded Recorded Investments As Investments Number of of Modification (Loan Balance Contracts Date as of Year End) Troubled debt restructuring:

Commercial 11 $ 13,190 $ 8,625

First mortgages 269 78,060 74,118

Home equities 172 11,481 10,690

Number of Recorded Contracts Investments Troubled debt restructuring that

subsequently defaulted:

Commercial 6 $ 5,801

First mortgages 3 946

(28)

4. LOAN SERVICING

Loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans are summarized as follows:

December 31,

2012 2011

Mortgage loans serviced for Federal

Home Loan Mortgage Corporation $ 655,638 $ 737,629

Mortgage loans serviced for Federal

National Mortgage Association 64,056 19,067

Mortgage loans serviced for other 20,751 531

Auto loans serviced for others 803 2,670

$ 741,248 $ 759,897

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in members’ shares, were approximately $3,321 and $3,337 at December 31, 2012 and 2011, respectively.

A summary of the changes in the balance of servicing assets, classified as other assets, are as follows:

December 31,

2012 2011

Servicing assets:

Balance, beginning of year $ 6,576 $ 7,932

Capitalization of servicing assets 1,899 253

Amortization of servicing assets (2,150) (1,609)

Balance, end of year 6,325 6,576

Valuation allowances:

Balance at beginning of year 2,039 492

Additions 900 1,547

Reductions - -

Write-downs - -

Balance, end of year 2,939 2,039

Servicing assets, net $ 3,386 $ 4,537

Fair value $ 3,547 $ 4,900

(29)

5. PROPERTY AND EQUIPMENT, NET

Property and equipment are summarized as follows:

Estimated

Remaining

Useful December 31,

Lives 2012 2011

Land and improvements - $ 10,036 $ 10,061

Building and improvements 25 years 47,432 51,196

Furniture and equipment 2-5 years 23,692 30,098

and leasehold improvements

Construction in progress 382 773

81,542 92,128

Accumulated depreciation and amortization (29,148) (39,828)

$ 52,394 $ 52,300

The Credit Union leases various branches. The operating leases contain renewal options and provisions requiring the Credit Union to pay property taxes and operating expenses over base period amounts. All rental payments are dependent only upon the lapse of time. Minimum rental payments under operating leases with initial or remaining terms of one year or more at December 31, 2012, are as follows:

2013 $ 2,500 2014 2,372 2015 1,951 2016 1,504 2017 989 Subsequent years 3,366 $ 12,682

Rental expense for the years ended December 31, 2012 and 2011, for all facilities leased under operating leases totaled $2,283 and $2,162, respectively.

6. FORECLOSED ASSETS

Foreclosed assets are presented net of a valuation allowance. During the years ended

(30)

6. FORECLOSED ASSETS…continued

Analysis of the foreclosed assets and valuation allowance are as follows:

December 31,

2012 2011

Foreclosed assets:

Balance, beginning of year $ 17,935 $ 17,400

Acquired foreclosed assets 9,118 13,837

Loss on sale of foreclosed assets, net (4,474) (3,159)

Sales proceeds (13,407) (10,143)

Balance, end of year $ 9,172 $ 17,935

December 31,

2012 2011

Valuation allowance:

Balance, beginning of year $ 4,461 $ -

Additions 4,118 4,461

Reductions (5,647) -

Write-offs - -

Balance, end of year $ 2,932 $ 4,461

Foreclosed assets, net $ 6,240 $ 13,474

7. MEMBERS’ SHARES

Members’ shares are summarized as follows:

December 31,

2012 2011

Regular shares $ 703,274 $ 602,362

Share draft accounts 919,912 778,786

Money market accounts 1,083,297 912,578

Individual retirement accounts 37,576 31,943

Certificates 1,130,797 1,110,838

$ 3,874,856 $ 3,436,507

Shares by maturity as of December 31, 2012, are summarized as follows:

No contractual maturity $ 2,744,060 0-1 year maturity 741,620 1-2 years maturity 104,895 2-3 years maturity 81,494 3-4 years maturity 136,367 4-5 years maturity 66,323

5 or more years maturity 97

(31)

7. MEMBERS’ SHARES…continued

Regular shares, share draft accounts, money market accounts and individual retirement account shares have no contractual maturity. Certificate accounts have maturities of six years or less. The NCUSIF insures members’ shares and certain individual retirement and Keogh accounts. In July 2010, new legislation permanently provided for an increase in the minimum NCUSIF coverage from $100 to $250 on all member share accounts. The new legislation also provided temporary full NCUSIF coverage of “non dividend-bearing transaction accounts”. However, the coverage expired on December 31, 2012.

The aggregate amount of certificates in denominations of $100 or more at December 31, 2012 and 2011, is approximately $412,304 and $362,542, respectively.

8. BORROWED FUNDS

The Credit Union utilizes a demand loan agreement with the FHLB of Boston. The terms of the agreement call for pledging a portion of the Credit Union’s mortgage portfolio, which as of December 31, 2012 and 2011, amounted to approximately $925,398 and $856,415, respectively. The agreement provides for a maximum borrowing amount determined on a continual basis by the Credit Union and the FHLB. At December 31, 2012 and 2011, there were advances of $428,642 and $437,502, respectively, outstanding with interest rates ranging from 3.77 percent to 0.27 percent.

As of December 31, 2012, the outstanding balances by maturity dates are as follows:

Balance

Less than 1 year maturity $ 123,642

1-2 years maturity 100,000 2-3 years maturity - 3-4 years maturity 20,000 4-5 years maturity 50,000 Thereafter 135,000 $ 428,642

The Credit Union utilizes a demand loan agreement with Eascorp a corporate credit union. The terms of this agreement call for the pledging of certain auto loans as security for any and all obligations taken by the Credit Union under this agreement. The agreement provides for a credit limit of $50,000 with interest charged at a rate determined by the lender on a periodic basis. At December 31, 2012 and 2011, there were no borrowings outstanding under this agreement. As of December 31, 2012 interest rates for advances on the credit line were 1.70 percent. The agreement is reviewed for continuation by the lender and the Credit Union annually.

(32)

8. BORROWED FUNDS…continued

During the year ended December 31, 2012, the Credit Union was approved to borrow through the Federal Reserve Bank’s Discount Window. The terms of this agreement call for the pledging of certain investments as security for any and all obligations taken by the Credit Union under this agreement. The agreement provides for a credit limit of $49,900 with interest charged at a rate determined by the lender on a periodic basis. At December 31, 2012, there were no borrowings outstanding under this agreement. As of December 31, 2012 interest rates for advances on the credit line were 0.75 percent. The agreement is reviewed for continuation by the lender and the Credit Union annually.

During the year ended December 31, 2012, the Credit Union determined that certain outstanding borrowings with the FHLB bore interests rates in excess of then market rates and that the long term borrowing costs would exceed expenses that would be incurred should the Credit Union prepay the borrowings. As such, during 2012, the Credit Union prepaid the outstanding borrowings and incurred a $6,665 prepayment penalty in connection with that termination. This amount has been reflected as a loss on prepayment of borrowed funds in the accompanying consolidated statements of income.

9. OFF-BALANCE SHEET ACTIVITIES

The Credit Union is party to conditional commitments to lend funds in the normal course of business to meet the financing needs of its members. These commitments represent financial instruments to extend credit that includes lines of credit, credit cards, student loans, and home equity lines that involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements.

The Credit Union’s exposure to credit loss is represented by the contractual amount of these commitments. The Credit Union follows the same credit policies in making commitments as it does for those loans recorded in the consolidated financial statements.

Outstanding loan commitments at December 31, 2012 and 2011, total approximately $12,629 and $40,727, respectively.

Unfunded loan commitments under lines of credit are summarized as follows:

December 31, 2012 2011 Home equity $ 467,610 $ 476,740 Credit card 1,219,389 1,147,056 Commercial 24,486 20,595 Student loans 67,190 86,946 Other consumer 21,542 21,756 $ 1,800,217 $ 1,753,093

(33)

9. OFF-BALANCE SHEET ACTIVITIES…continued

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.

10. COMMITMENTS AND CONTINGENT LIABILITIES

Loan Funding Commitments

Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Credit Union enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Credit Union to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose the Credit Union to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.

As of December 31, 2012 and 2011, the Credit Union had commitments to fund mortgage loans with agreed-upon rates amounting to $47,566 and $23,373, respectively. The fair value of these commitments was not significant to the Credit Union at December 31, 2012 and 2011.

Forward Sales Commitments

To protect against the price risk inherent in derivative loan commitments, the Credit Union utilizes both “mandatory delivery” and “best efforts” forward cash sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, the Credit Union commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Credit Union fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, the Credit Union commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (for example, on the same day the lender commits to lend funds to a potential borrower).

(34)

10. COMMITMENTS AND CONTINGENT LIABILITIES…continued

Forward Sales Commitments…continued

Commitments to sell loans generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Credit Union may settle the forward sales commitments on a net basis; therefore, the commitments outstanding do not necessarily represent future cash obligations. The Credit Union has $67,000 and $12,250 of forward sales commitments outstanding as of December 31, 2012 and 2011, respectively, which will be settled within 90 days of the individual commitment date. The fair value of these commitments was not significant to the Credit Union at December 31, 2012 and 2011.

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.

11. EMPLOYEE BENEFITS

Defined Benefit Plan

The Credit Union sponsors a defined benefit pension plan (the “Plan”) for the benefit of its employees based on years of service. The Plan calls for benefits to be paid to eligible employees at retirement equal to (a) 1.5 percent of their average five-year compensation up to the integration level (as defined), plus (b) a 0.5 percent of their average five-year compensation in excess of the integration level, (c) multiplied by years of service. The number of years of service for which an employee will receive or be credited in the aforementioned is 20 years. Effective January 31, 2002, the Plan was frozen. Accordingly, the participants ceased to earn additional benefits under the Plan and no additional employees shall become eligible to participate in the Plan.

Information pertaining obligations and funded status, using a measurement date of December 31, is as follows:

2012 2011

Change in benefit obligation:

Benefit obligation at beginning of year $ 7,693 $ 6,545

Service cost - -

Interest cost 342 354

Actuarial loss 675 1,152

Benefits paid (275) (358)

Benefit obligation at end of year 8,435 7,693

Change in plan assets:

Fair value of plan assets at beginning of year 4,450 4,494

Actual return on plan assets 405 (13)

Employer contribution 357 327

Benefits paid (277) (358)

Fair value of plan assets at end of year 4,935 4,450

(35)

11. EMPLOYEE BENEFITS…continued

Defined Benefit Plan…continued

December 31,

2012 2011

Assumptions used to determine benefit obligation:

Discount rate 4.00% 4.50%

Rate of compensation increase NA NA

December 31,

2012 2011

Net pension cost $ 250 $ 175

Employer contribution 357 327

Benefit payments 277 358

December 31,

2012 2011

Assumptions used to determine net pension cost:

Discount rate 4.50% 5.50%

Expected long-term return on Plan assets 7.00% 7.00%

Rate of compensation increase N/A N/A

Average future years of service 16.276 17.3258

Amounts recognized in the consolidated statements of financial condition consist of:

December 31,

2012 2011

Noncurrent assets $ - $ -

Current liabilities - -

Noncurrent liabilities (3,500) (3,243)

Net amount recognized $ (3,500) $ (3,243)

Amounts recognized in accumulated other comprehensive loss consist of:

December 31,

2012 2011

Net loss $ (4,830) $ (4,493)

Prior service cost - -

Transition obligation - -

(36)

Information for accumulated benefit obligation in excess of plan assets consists of:

December 31,

2012 2011

Projected benefit obligation $ 8,435 $ 7,693

Accumulated benefit obligation 8,435 7,693

Fair value of plan assets 4,935 4,450

The components of net periodic pension cost and other amounts recognized in accumulated other comprehensive income consist of:

December 31,

2012 2011

Service cost $ - $ -

Interest cost 342 354

Expected return on plan assets (319) (322)

Amortization of prior service cost - -

Amortization of net loss 227 143

Net periodic benefit cost $ 250 $ 175

The Credit Union’s pension plan weighted-average asset allocations by asset category are as follows:

December 31,

2012 2011

Common stocks 18% 18%

Bonds 12% 17%

Cash/ cash equivalents 3% 2%

Mutual funds 67% 63%

100% 100%

The Plan’s investment policies and strategies are diversified to minimize the risk of large losses, unless under the circumstances it is clearly prudent not do so. The Plan may employ one or more investment managers of varying styles and philosophies to attain the account’s objectives. The Credit Union expects to contribute $528 into the Plan in 2013.

The following pension benefit payments, which reflect expected future service, as appropriate, are anticipated to be paid as follows for the years ending December 31:

(37)

The fair values of the Credit Union’s pension plan assets at December 31, 2012, by asset category are as follows:

Total Level 1 Level 2 Level 3

Cash $ 123 $ 123 $ - $ -

Common stock 886 886 - -

Mutual funds 3,316 3,316 - -

Bonds 610 610 - -

$ 4,935 $ 4,935 $ - $ -

The fair values of the Credit Union’s pension plan assets at December 31, 2011, by asset category are as follows:

Total Level 1 Level 2 Level 3

Cash $ 66 $ 66 $ - $ -

Common stock 810 810 - -

Mutual funds 2,811 2,811 - -

Bonds 763 763 - -

$ 4,450 $ 4,450 $ - $ -

Defined Contribution Plan

The Credit Union has a defined contribution 401(k) plan that allows employees to defer a portion of their salary into the plan. The Credit Union has the option of making a matching and/or a profit sharing contribution. The total 401(k) plan expense for the years ended December 31, 2012 and 2011, was $1,279 and $782, respectively. The 401(k) plan costs are accrued and funded on a current basis.

Deferred Compensation Agreements

(38)

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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Credit Union must meet specific capital guidelines that involve quantitative measures of the Credit Union’s assets, liabilities and certain off-balance sheet items as calculated under GAAP. The Credit Union’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Credit Union to maintain minimum amounts and ratios (set forth in the table below) of net worth to total assets. Further, credit unions over $10,000 in assets are also required to calculate a Risk-Based Net Worth (“RBNW”) requirement that establishes whether or not the Credit Union will be considered “complex” under the regulatory framework. The Credit Union’s RBNW requirements as of December 31, 2012 and 2011, were 4.45 percent and 4.34 percent, respectively. The minimum requirement to be considered “complex” under the regulatory framework is 6.00 percent. Management believes, as of December 31, 2012 and 2011, that the Credit Union meets all capital adequacy requirements to which it is subject.

As of December 31, 2012 and 2011, 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 percent of assets. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Credit Union’s actual capital amounts and ratios are presented in the following table: December 31, 2012 December 31, 2011

Ratio/ Ratio/

Amount Requirement Amount Requirement

Amount needed to be classified

as “adequately capitalized” $ 284,101 6.00% $ 253,861 6.00% Amount needed to be classified

as “well-capitalized” 331,452 7.00% 296,171 7.00%

Actual net worth 399,956 8.45% 324,947 7.68%

Because the RBNW requirement is less than the net worth ratio, the Credit Union retains its original category. Further, in performing its calculation of total assets, the Credit Union used the quarter-end balance option in 2012 and 2011, as permitted by regulation.

13. RELATED-PARTY TRANSACTIONS