TABLE OF CONTENTS. Chairman & President s Report Board of Directors Treasurer s Report Credit Committee Report...

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3 TABLE OF CONTENTS Chairman & President s Report... 4 Board of Directors... 6 Treasurer s Report... 8 Credit Committee Report Supervisory Committee Report Financials Corporate Information... 36

4 CHAIRMAN AND PRESIDENT S REPORT 4 At some point in every story, a page is turned and it is time to begin a new chapter. From the economy to world events, through midterm elections and a new Congress, there was a sense of moving on. For First Carolina 2014 proved not to be so much about moving toward change, but stepping away from the past toward re-focusing and re-energizing efforts to serve our members. Although 2014 didn t seem to start out auspiciously for the U.S. economy, consistent gains throughout the year in key sectors led us to believe that we may actually be seeing a sustained comeback. Record auto sales, improved housing starts and the highest rate of hiring for U.S. workers in 13 years combined to raise overall optimism. While the job outlook was positive it did not yet equate to wage growth, which continued to lag throughout the year proving that we still have a way to go. However, growing U.S. oil exports hit the world markets resulting in large drops in oil prices, which gave consumers relief at the pumps and more money in their pockets. For our credit union members, consumers willingness to open their pocketbooks translated to more loans for automobile purchases or refinancing. As credit unions experienced a resurgence in lending, First Carolina had a corresponding decrease in our assets as more of our members grew their loan portfolios while shrinking their excess cash and investments. ratios. Primarily due to the uptick in credit union lending, year-end assets were down to $1.1 billion compared to $1.4 billion at the previous year-end. On an average basis, assets for all of 2014 were down $59 million compared to Deposits in our Excess Balance Account (EBA) at the Federal Reserve Bank are down to just $130.8 million. Retained earnings at year-end 2014 were $19.8 million, giving First Carolina a retained earnings ratio of 1.41%, putting us well above NCUA s retained earnings requirement that takes effect in October With the support of our members and guidance of our Board, First Carolina has successfully met and surpassed our capital rebuilding goals. That we now move forward as a solid, financially stable corporate is a result of working in collaboration with our members to achieve these goals. It is a relationship that we value and do not take for granted. All of us here at First Carolina moved into 2014 with renewed passion to provide outstanding products and service to our members. It was once again a busy year for projects that enhanced our members experience with all that First Carolina has to offer. Understanding that a change to the extended period of low interest rates is anticipated for 2015, First Carolina introduced a number of floating rate CD specials, which we expect will become a regular offering as we enter a period of rising rates. Although floaters are not instruments credit unions normally purchase, we have been operating within a rate environment that has been anything but normal for the last 6-7 years. Given the focus on interest rate risk by regulators, these investments offer some additional current yield and will move up quickly with increases to market rates. Enhancements to existing services were also a priority in Improvements to our securities safekeeping The start of 2014 marked a milestone for First program brought that service in-house with the next Carolina as we left behind our Capital Restoration step being integrating both our brokerage operation Plan, under which we had been operating since and bond accounting service into the safekeeping INTEGRITY First Carolina s strategy of managing the Corporate s program. Additionally, our ALM Manager program has capital ratios by maintaining a portion of members been upgraded where it will operate off the same highend ALM platform as our ALM Direct program. The deposits off-balance sheet continues, however, First Carolina is no longer dependent on this off-balance ALM department s mission is to help credit unions use sheet management tool to maintain strong capital their ALM modeling capabilities for strategic purposes

5 CHAIRMAN AND PRESIDENT S REPORT continued rather than to just satisfy regulatory requirements. The ongoing development of our ALM staff has made us a key resource for performing ALM model validations for credit unions nationwide. At the end of the year, First Carolina began converting its international wire program to a new, more user-friendly and convenient platform that performs required OFAC checks on each transaction. A focus on Growth and Learning is one of our core organizational values. All of us at First Carolina strongly believe in our function as an educational resource for our membership. In 2014 we continued to expand upon our education and training services by adding new sessions to the Director Training Series that was introduced last year. This series focuses on educating board members about financial management and a range of balance sheet risks that helps them meet NCUA requirements for director training and financial literacy. Additional sessions continue to be developed and added to the library for our members to access. As a complement to the Director Training Series, First Carolina recognized a need for comprehensive investment education that was accessible to all credit union personnel and was offered on a flexible schedule while limiting costs and travel time. In September, our Investment Training Series was launched to provide credit union personnel access to valuable educational information on investing. The series provides online presentations covering a wide variety of investment topics at no cost to credit unions. Training topics include general education subjects such as The Role of the Federal Reserve & the FOMC as well as more investment specific subjects such as the five-part series on Investing in SBA Pool Securities. More sessions and topics will be added over the coming year to help keep credit union investment personnel knowledgeable of current trends and products. Our annual Financial Conference was once again well attended with about 100 credit union representatives from six states gathering to learn about interest rate risk, developing ALM assumptions, using NEV as a management tool, and understanding cybercrime. During our Payments Conference in October we discussed the latest trends in ACH, international payments, and risk management in the payments arena. Most important, First Carolina once again received stellar ratings from its annual membership survey which showed that 97% of the respondents are totally satisfied with their relationship with First Carolina. Our staff service levels received an overall score of 4.84 on a scale of 5, and our Net Promoter score was a 9.85 out of 10. We know that we must work hard each day to continue earning this level of support from our members. As we enter the next chapter of our story, we see a bright future for First Carolina as we stay focused on the core of what we do best help our members to succeed. Thank you for your business, your partnership and the privilege of serving you. Respectfully, Bob Bruns Chairman, Board of Directors David Brehmer President/CEO

6 FIRST CAROLINA BOARD OF DIRECTORS 6 Back row, left to right: Lucile Beckwith, Bob Bruns, Jack Braswell, Jim McDaniel, Steve Smith Front row, left to right: Scott Woods, Lori Thompson, Randy Crawford, Scott Weaver COLLABORATIVE

7 Sharon Conti President/CEO Virginia Educators Credit Union ACH AUDITS Using FCCCU s ACH audit service has had a very positive impact on our staff and operations. Not only do we have the trust in the expertise of FCCCU and know that they are adequately reviewing our ACH processes, but also, when ACH questions or issues arise throughout the year we have our ACH contact at FCCCU as a reliable resource. Our state examiners have been very pleased with this independent review. George Kite CFO Call Federal Credit Union ALM DIRECT Our Credit Union had grown in size and complexity, yet we were still using a model that was originally created to be a management information system not an interest rate risk modeling platform. By using ALM Direct from First Carolina, Call FCU now has better data, to make the right decisions for future growth by spending more time analyzing data than preparing it. It definitely saves us time and frees up our resources for other important and necessary projects; but more importantly it has given us a more detailed understanding of our balance sheet which helps us make more informed decisions with greater confidence, leading to better outcomes and successes.

8 TREASURER S REPORT PASSION FOR SERVICE 8 First Carolina had another strong financial year in 2014, with continued steady growth in retained earnings. As of 2014, First Carolina was no longer operating under its Capital Restoration Plan ( ) having exceeded projections by 33% during the period covered by the plan. As of December 31, 2014, retained earnings were $19.8 million compared to $16.3 million in Under the revised NCUA Regulation, Part 704, corporates are required to meet three different thresholds for retained earnings ratios. The first of those thresholds took effect on October 31, On that date, the minimum required reserves and undivided earnings ratio became 0.45%. First Carolina achieved compliance with this requirement in 2012 with a year-end ratio of 0.88%. Two additional retained earnings ratios become effective October 2016 (1%) and October 2020 (2%). First Carolina has already surpassed the 2016 regulatory capital threshold with a reserves and undivided earnings ratio of 1.41%. Assets ended 2014 at $1.093 billion, compared to $1.377 billion at year-end First Carolina s average assets for the year are down by $59 million from the prior year to $1.406 billion as our member credit unions have taken advantage of the uptick in consumer spending and have increased lending to their members. At year-end, members off-balance sheet deposits were $130.5 million, up from $122.9 million the previous year. When combined, member on and offbalance sheet holdings totaled $1.137 billion as of year-end. Total capital now stands at $88.2 million, excluding unrealized losses on securities and accumulated other comprehensive losses. During 2014, First Carolina paid out all the remaining MCSD on its books. For purposes of capital calculations, NCUA requires First Carolina to reduce total capital by the amount of equity it holds in corporate CUSOs which at year-end totaled $2.1 million. This results in a total net capital of $86.1 million compared to $82.7 million at the end of First Carolina s total capital and leverage (Tier 1) capital ratio is 6.13% based on our 12-month rolling average assets. This exceeds NCUA s regulatory

9 TREASURER S REPORT continued guidelines, which require total capital to be above 4%. Our Tier 1 risk-based capital ratio stands at 22.8% reflecting the high credit quality of today s balance sheet. First Carolina s net income was $3.782 million, with a net contribution to retained earnings of $3.431 million after dividend distributions to PCC accountholders. This figure includes booking of an additional $220,918 in other than temporary impairments (OTTI) from the write down of one of our remaining non-agency mortgage bonds. This write down was offset by positive accounting adjustments of $663,255 on the non-agency mortgage portfolio related to six bonds that have performed better than originally projected. A primary role of First Carolina is to act as a liquidity provider for our member credit unions. First Carolina was easily able to fulfill this function since access to liquidity remained strong throughout Cash reserves were proactively managed and external lines-of-credit were tested to ensure reliability. Our ability to generate liquidity from our balance sheet is reported monthly to the membership. The Board of Directors, management and staff of First Carolina deeply appreciate the confidence and support you have given to your Corporate. We remain committed to doing our best to prove ourselves worthy of that trust every day. Together we look forward to a strong and successful Respectfully submitted, Steve Smith Treasurer

10 CREDIT COMMITTEE REPORT In our efforts to provide our member-owner credit unions with reliable sources of liquidity, First Carolina s Credit Committee remains committed to continually reviewing our lending program to maximize the benefits to members, ensure the safety of our corporate, and make certain that First Carolina is one of our members primary liquidity sources. We look forward to serving our members throughout Respectfully Submitted, Lucile Beckwith Chairperson 10 The Credit Committee is responsible for reviewing and approving credit line requests, and is committed to ensuring that all of First Carolina Corporate Credit Union s lending decisions consider the creditworthiness of borrowers, as well as financial market conditions and credit constraints. The Committee also provides advice and guidance to the First Carolina board and management regarding lending policies and procedures. During 2014, the Credit Committee met quarterly to review requests for credit line changes and evaluate the creditworthiness of borrowers, and on an as-needed basis to address specific member needs. Our work this year also included a semiannual review of the financial condition and performance of each credit union with an approved line of credit from First Carolina. At year-end 2014, First Carolina had $1.11billion in approved lines of credit, an increase of 7% from year-end Outstanding loans at year-end were $13.95 million compared with $4.41 million a year earlier. As in previous years, First Carolina has never suffered a loss on any member loan, and there were no member loan delinquencies in GROWTH AND LEARNING

11 SUPERVISORY COMMITTEE REPORT report that the BRC continues to perform well as a fully capable backup to the main facility. During 2014, the North Carolina Credit Union Division (NCCUD) and the National Credit Union Administration (NCUA) performed a joint examination of First Carolina s operations. As it pertains to internal operating procedures and processes, the Supervisory Committee is satisfied with (1) the Internal Operating Procedures & Controls as independently reviewed and reported by PB Mares, our contracted Internal Auditor; and (2) with adherence to Regulatory Procedures as addressed by the NCUA and the NCCUD during their joint regulatory/insurance examination. The Supervisory Committee at First Carolina Corporate Credit Union selects and retains a certified public accounting firm to periodically review the staff s account reconciliations and internal operating procedures. The Committee also oversees First Carolina s disaster recovery plan and all funds-transfer procedures. Each quarter, a report is provided to the Board of Directors on all actions taken by the committee. This year, the Committee engaged the certified public accounting firm of PB Mares, PLC to perform periodic internal review services; and the certified public accounting firm of Orth, Chakler, Murnane and Company, CPAs, to perform an audit of First Carolina to render an opinion on its annual financial statements. The annual audit was completed in March 2015, and the results are contained in this annual report. First Carolina maintains a fully equipped business recovery center (BRC) in Archdale, N.C. During the month of November, First Carolina conducted a series of disaster recovery tests utilizing the BRC facility. All corporate operations continued as normal with no service interruptions. We are pleased to In summary, the Supervisory Committee concludes that First Carolina s operations are sound and it continues to abide by the laws and regulations that govern it. The corporate exceeds the regulatory capital requirements that became effective in October 2013 and is already above the next regulatory capital hurdle for the retained earnings capital ratio (effective October 2016). On behalf of the Committee, I extend our appreciation to the staff and Board for their work and open communication throughout 2014, and to my fellow committee members for their interest and faithful performance in volunteering service to First Carolina Corporate Credit Union. Respectfully Submitted, Michal B. Parker Chairperson

12 FINANCIALS Independent Auditor s Report Statements of Financial Condition Statements of Income Statements of Comprehensive Income Statements of Members Equity Statements of Cash Flows Notes to the Financial Statements... 21

13 March 18, 2015 Orth, Chakler, Murnane and Company, CPAs A Professional Association th th S. W. 129 Court, Suite 201, Miami, Florida ! Telephone ! Fax Web site: Douglas J. Orth, CPA, CFE, Managing Partner To the Supervisory Committee of First March Carolina 18, Corporate 2015 Credit Union Independent Auditors Report INDEPENDENT AUDITOR S REPORT We To have the audited Supervisory the accompanying Committee financial of statements of First Carolina Corporate Credit Union which comprise the statements of financial condition as of December 31, 2014 and 2013, and the related statements of income, comprehensive First Carolina Corporate Credit Union income, members equity, and cash flows for the years then ended, and the related notes to the financial statements. Management s We have audited Responsibility the accompanying for the Financial financial Statements statements of First Carolina Corporate Credit Union Management which comprise is responsible the statements for the preparation of financial and fair condition presentation as of of December these financial 31, statements 2014 and in 2013, accordance and the with accounting related statements principles generally of income, accepted comprehensive in the United income, States of America; members this equity, includes and the cash design, flows implementation, for the yearsand maintenance then ended, of internal and the control related relevant notes to to the the preparation financial and statements. fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Management s Responsibility Responsibility for the Financial Statements Our responsibility to express an opinion on these financial statements based our audits. We conducted our audits in accordance Management with auditing is responsible standards generally for the preparation accepted in the and United fair States presentation of America. of these Those financial standards require statements that we plan in and accordance perform the with audits accounting to obtain reasonable principles assurance generally about accepted whether in the the financial United statements States of are America; free from material this misstatement. 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 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The to procedures fraud or error. 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 Auditor s the Responsibility 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 Our responsibility internal control. is Accordingly, to express we an express opinion no on such these opinion. financial An audit statements also includes based evaluating on our the audits. appropriateness We of conducted accounting policies our audits used in and accordance the reasonableness with auditing of significant standards accounting generally estimates accepted made by in management, the United as States well as evaluating the overall presentation of the financial statements. We believe that evidence we have obtained is of America. Those standards require that we plan and perform the audits to obtain reasonable sufficient and appropriate to provide a basis for our audit opinion. assurance about whether the financial statements are free from material misstatement. Opinion In our An opinion, audit involves the financial performing statements procedures referred to above to obtain present audit fairly, evidence in all material about respects, the amounts the financial and disclosures position of First Carolina the Corporate financial Credit statements. Union as of The December procedures 31, 2014 selected and 2013, depend and the on results the of auditor s its operations judgment, and cash including flows for the years the then assessment ended in accordance of the risks with of accounting material misstatement principles generally of the accepted financial the statements, United States whether of America. due to fraud Other or error. Matters In making those risk assessments, the auditor considers internal control relevant to the We entity s have also preparation audited, in accordance and fair presentation with the auditing of standards the financial generally statements accepted in in the order United to States design of America, audit First procedures Carolina Corporate that are Credit appropriate Union s assertion in the circumstances, concerning the effectiveness but not for of the Credit purpose Union s of internal expressing control anand procedures over financial reporting as of December 31, 2014, based criteria established Internal Control - Integrated opinion on the effectiveness of the entity s internal control. Accordingly, we express no such Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March opinion. 18, 2015, An expressed audit also an includes unqualified evaluating opinion. 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 Orth, obtained Chakler, is sufficient Murnane and appropriate & Co. to provide a basis for our audit opinion. Orth, Chakler, Murnane & Company Certified Public Accountants Miami, FL James A. Griner, CPA Hugh S. Chakler, CPA, CISA, CITP, CFE Lori J. Carmichael, CPA John J. Murnane, CPA Daniel C. Moulton, CPA OCM&Co A PROFESSIONAL ASSOCIATION CPAS Jack D. Kenney, CPA

14 STATEMENTS OF FINANCIAL CONDITION 14 ASSETS As of December 31, Cash and cash equivalents $100,591 $317,970 Investments: Available-for-sale 813, ,482 Securities purchased under agreement to resell 17,054 19,385 Other 133, ,056 Loans 13,951 4,412 Accrued interest receivable: Investments 1,361 1,627 Loans 5 6 Prepaid and other assets 12,409 6,196 Property and equipment NCUSIF deposit Total assets $1,092,759 $1,376,976 The accompanying notes are an integral part of these financial statements.

15 STATEMENTS OF FINANCIAL CONDITION continued LIABILITIES: LIABILITIES AND MEMBERS EQUITY As of December 31, Members share and savings accounts $988,706 $1,166,257 Membership capital shares 8,781 Borrowed funds 17, ,385 Accrued interest on share accounts Accrued interest on borrowed funds 6 Accounts payable and accrued liabilities Total liabilities 1,006,449 1,295,138 Commitments and contingent liabilities MEMBERS EQUITY: Perpetual contributed capital 68,477 68,334 Accumulated undivided earnings 19,772 16,342 Accumulated other comprehensive loss (1,939) (2,838) Total members equity 86,310 81,838 Total liabilities and members equity $1,092,759 $1,376,976 The accompanying notes are an integral part of these financial statements.

16 STATEMENTS OF INCOME For the years ended December 31, INTEREST INCOME: Investments $8,792 $9,475 Loans Total interest income 8,954 9,616 INTEREST EXPENSE: Members share and savings accounts 2,360 2,660 Borrowed funds Total interest expense 2,606 3, Net interest income 6,348 6,443 NON-INTEREST INCOME: Fees and service charges 3,010 3,113 Gain on investments Federal Reserve Bank - EBA agent fees Total non-interest income 3,986 3,488 NON-INTEREST EXPENSE: Compensation and employee benefits 2,717 2,597 Operating expenses 2,459 2,288 Other 1,155 1,099 Impairment of investment securities Total non-interest expense 6,552 6,073 Net income $3,782 $3,858 The accompanying notes are an integral part of these financial statements.

17 STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, NET INCOME $3,782 $3,858 OTHER ITEMS OF COMPREHENSIVE INCOME/(LOSS): Net unrealized holding gains/(losses) on investments classified as available-for-sale 1,557 (742) Reclassification adjustment for net gains included in net income (658) (184) Other comprehensive income/(loss) 899 (926) Comprehensive income $4,681 $2,932 The accompanying notes are an integral part of these financial statements.

18 STATEMENTS OF MEMBERS EQUITY For the years ended December 31, 2014 and 2013 Accumulated Perpetual Other Contributed Undivided Comprehensive Capital Earnings Loss Total Balance, December 31, 2012 $68,334 $12,749 ($1,912) $79, Net income 3,858 3,858 Dividends paid on perpetual contributed capital (265) (265) Other comprehensive loss (926) (926) Balance, December 31, ,334 16,342 (2,838) 81,838 Contributed capital Net income 3,782 3,782 Dividends paid on perpetual contributed capital (352) (352) Other comprehensive income Balance, December 31, 2014 $68,477 $19,772 ($1,939) $86,310 The accompanying notes are an integral part of these financial statements.

19 STATEMENTS OF CASH FLOWS For the years ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,782 $3,858 Adjustments: Depreciation Dividends paid on perpetual contributed capital (352) (265) Amortization of investment premiums/discounts 3,887 5,593 Impairment of investment securities Gain on investments (879) (273) Changes in operating assets and liabilities: Prepaid and other assets (6,213) (2,902) Accrued interest receivable Accrued interest payable 56 (92) Accounts payable and accrued liabilities (82) (183) Net cash provided by operating activities 875 6,239 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities, repayments and sales of available-for-sale securities 240, ,143 Purchases of available-for-sale securities (245,936) (324,954) Decrease in securities purchased under agreements to resell 2,331 3,545 Net change in other investments 82,838 (41,643) Net change in loans (9,539) (84) Expenditures for property and equipment (216) (118) Change in NCUSIF deposit Net cash provided by/(used in) investing activities 70,266 (34,090) The accompanying notes are an integral part of these financial statements.

20 STATEMENTS OF CASH FLOWS Cash Flows: (continued) For the years ended December 31, CASH FLOWS FROM FINANCING ACTIVITIES: Net change in members share and savings accounts (177,551) (83,068) Refund of membership capital shares put on notice (8,781) (1,580) Net change in short term borrowings (102,331) 96,456 Repayment of long-term borrowings (20,000) Perpetual contributed capital raised 143 Net cash used in financing activities (288,520) (8,192) 20 Net change in cash and cash equivalents (217,379) (36,043) Cash and cash equivalents - beginning of year 317, ,013 Cash and cash equivalents - end of year $100,591 $317,970 SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $2,550 $3,265 SCHEDULE OF NON-CASH TRANSACTIONS: Other comprehensive income/(loss) $899 ($926) The accompanying notes are an integral part of these financial statements.

21 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: SIGNIFICANT ACCOUNTING POLICIES Organization First Carolina Corporate Credit Union (the Credit Union) is a nonprofit financial cooperative organized to serve as a central money facility for investments and correspondent banking activity for its member credit unions through the financial system. The Credit Union provides a wide range of investment, liquidity, and correspondent banking services for its member credit unions and affiliated organizations principally located in North Carolina and South Carolina. Financial Statements/Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates. Estimates that are particularly susceptible to change relate to 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 and Cash Equivalents Cash includes amounts due from the Federal Reserve Bank of Richmond (FRB) and other banks as well as cash in transit. Amounts due from banks may, at times, exceed federally insured limits. Federal Reserve Bank - Excess Balance Account Program The Credit Union, as agent, entered into an Excess Balance Account (EBA) agreement with participating member credit unions and the FRB, whereby the FRB opened EBA accounts for the benefit of the participants at the request of the agent. As such, the balances in the EBA accounts are not reflected in the Credit Union s financial statements. These balances totaled approximately $130,815,000 and $131,191,000 as of December 31, 2014 and 2013, respectively. Neither the participating member credit unions nor the agent may use the EBA for general payments or other activities. The aggregate balance in the EBA represents a deposit liability of the FRB solely to the participants. The agent is solely responsible for calculating and distributing the interest payable to each participant on the participant s excess balance and for damages owed to participants for any inaccuracy in calculating the participant s excess balance and interest. Investments Investments are classified into the following categories: available-for-sale and other. Investment securities classified as availablefor-sale are measured at fair value as of the statement of financial condition date. Unrealized gains and losses for available-for-sale investments are reported as a separate component of members equity as accumulated other comprehensive income/loss. 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 using the interest method. The Credit Union entered into the purchase of securities under agreements to resell the same or substantially identical securities. The amounts advanced under these agreements represent short- term loans. Securities purchased under agreements to resell as of December 31, 2014 and 2013, consisted primarily of agency issued mortgage-backed securities. The amounts advanced under the agreements are reflected as assets in the statements of financial condition. The Credit Union has the right to request additional collateral based on the fair value of the underlying securities. It is the Credit Union s policy to take possession of the securities purchased under agreements to resell. These securities are delivered into a third-party custodian s account that explicitly recognizes the Credit Union s interest in the securities. As of December 31, 2014 and 2013, these agreements matured within 30 days and involved one counter-party. 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 Statement of Cash Flow 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.

22 NOTES TO THE FINANCIAL STATEMENTS Note 1: (continued) Loans Loans are stated at the amount of unpaid principal. Interest on loans is calculated using the simple-interest method on principal amounts outstanding. The accrual of interest is discontinued when management believes that collection of interest is doubtful. ALL Methodology Management assesses the risks inherent in the loan portfolio by segmenting certain loans in the portfolio by product type. Loans are segmented into the following pools: commercial loans and a life insurance loan. Commercial loans are divided into the following four classes: fixed term/fixed rate loans, prime rate lines of credit, settlement loans, and other loans. Each class of loans requires significant judgment to determine the estimation method that fits the credit risk characteristics of its portfolio segment. Management must use judgment in establishing metrics for the modeling processes used to evaluate the loan portfolio. The following methodology is used by management to determine the balance of the ALL for each segment or class of loans. Commercial Portfolio Segment ALL Methodology Commercial loans are evaluated on a loan-by-loan basis. Loan Charge-Off Policies The Credit Union evaluates all lines of credit on an annual basis. Member credit unions that do not meet certain financial criteria are placed on a watch list. 22 Property and Equipment Property and equipment are carried at cost less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are carried at cost less accumulated amortization. The cost of 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 NCUA regulations, which require the maintenance of a deposit by each insured credit union. 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 other than membership capital share deposits and member paid-in capital deposits upon liquidation. Interest rates on members share and savings accounts are set by management based on a daily assessment of available earnings and are not guaranteed by the Credit Union. Membership Capital Shares Membership capital share deposits (MCSD) required a notification term of three years prior to their withdrawal from the Credit Union. Effective November 1, 2011, notice was placed on all MCSD if the member credit union had not already done so and these deposits were returned to the members as of October 31, Borrowed Funds The Credit Union maintained borrowed funds from the FHLB as of December 31, 2014 and Borrowed funds are collateralized by various investment securities held in safekeeping at the FHLB. Perpetual Contributed Capital (PCC) PCC is a secondary capital instrument that is classified as equity in the statement of financial condition. PCC investments are not negotiable or assignable but may be transferred to another eligible member credit union under certain provisions. PCC may not be pledged or used as security for borrowing. PCC dividends are determined based on net earnings and the overall capital needs of the Credit Union. Additionally, PCC dividends are not guaranteed and may be suspended if earnings are negative and/or capital levels fall below regulatory and/or policy minimum levels.

23 NOTES TO THE FINANCIAL STATEMENTS Note 1: (continued) Federal 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 upon examination by tax authorities. The Credit Union is a state-chartered credit union as defined in Internal Revenue Code (IRC) Section 501(c)(14). As such, the Credit Union is exempt from federal taxation of income derived from the performance of activities directly related to its exempt purposes. However, IRC Section 511 imposes a tax on the unrelated business income (UBI) derived by state-chartered credit unions. Beginning in March 2008, the Internal Revenue Service (IRS) released Technical Advice Memorandums (TAMs) to specific state chartered credit unions specifying the revenue sources subject to unrelated business income tax (UBIT). UBI may also be subject to tax in certain states. Management has assessed the Credit Union s activities and any potential federal or state income tax liability. Management has determined that the Credit Union has no income derived from non-exempt sources. Therefore, no liability exists from federal or state taxation of activities deemed to be unrelated to its exempt purpose. As such, the Credit Union has not filed tax returns for reporting UBIT-related income for tax years prior to December 31, Subsequent Events Management has evaluated subsequent events through March 18, 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 Gross Gross Available-for-sale: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Small Business Administration $285,211 $1,005 ($917) $285,299 Asset-backed securities: Non-mortgage 418, (789) 417,567 Mortgage 13,346 7 (1,162) 12,191 Collateralized-mortgage obligations: Non-agency 4,474 (670) 3,804 Agency 91, (34) 91,411 Mortgage-backed securities - agency 2, ,043 $815,254 $1,633 ($3,572) $813,315 As of December 31, 2013 Gross Gross Available-for-sale: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Small Business Administration $288,807 $1,365 ($735) $289,437 Asset-backed securities: Non-mortgage 370, (835) 369,387 Mortgage 24, (2,077) 22,646 Collateralized-mortgage obligations: Non-agency 7, (1,050) 6,758 Agency 118, (268) 118,220 Mortgage-backed securities - agency 3, ,034 $813,320 $2,127 ($4,965) $810,482

24 NOTES TO THE FINANCIAL STATEMENTS Note 2: (continued) The repayment of investment securities is contingent upon the repayment of the underlying assets supporting the securities. The following tables represent concentration limits on investments. As of December 31, 2014 By security type: Fair value Capital based limit Asset based limit Mortgage-backed securities $6,847 $861,837 $546,380 FFELP SLMA $154,976 $861,837 $546,380 Auto loan/lease ABS $59,429 $430,919 $273,190 Credit card ABS $203,163 $430,919 $273,190 Other ABS $12,191 $430,919 $273, As of December 31, 2014 By issuer: Fair value Regulatory limit Government agency securities $3,043 $21,546 Chase Master Trust $41,684 $43,092 Discover Card Master Trust $41,080 $43,092 American Express Credit Account $40,451 $43,092 BB&T Bank $39,790 $43,092 CitiBank Credit Card Issuance Trust $30,689 $43,092 Capital One Master Trust $23,187 $43,092 Ford Dealer Floor Plan Master Trust $20,530 $21,546 Bank of America Credit Card Trust $20,051 $43,092 NC State Education Assistance Fund $18,181 $21,546 GE Dealer Floor Plan Master Trust $18,120 $21,546 Self Help Ventures Fund $17,054 $172,367 PNC Bank $14,781 $43,092 Ally Master Owner Trust $13,025 $21,546 NEF A1 $11,657 $21,546

25 NOTES TO THE FINANCIAL STATEMENTS Note 2: (continued) The following tables show the gross unrealized losses and fair values of investments aggregated by the length of time individual securities have been in a continuous unrealized loss position. As of December 31, 2014 Available-for-sale Less than 12 Months 12 Months or Longer Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Small Business Administration $68,638 ($323) $83,373 ($594) $152,011 ($917) Asset-backed securities: Non-mortgage 146,422 (360) 161,260 (429) 307,682 (789) Mortgage 10,975 (1,162) 10,975 (1,162) Collateralized-mortgage obligations: Non-agency 3,804 (670) 3,804 (670) Agency 24,738 (34) 24,738 (34) $215,060 ($683) $284,150 ($2,889) $499,210 ($3,572) As of December 31, 2013 Available-for-sale Less than 12 Months 12 Months or Longer Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Small Business Administration $69,275 ($319) $49,270 ($416) $118,545 ($735) Asset-backed securities: Non-mortgage 224,975 (726) 35,269 (109) 260,244 (835) Mortgage 19,087 (2,077) 19,087 (2,077) Collateralized-mortgage obligations: Non-agency 4,315 (1,050) 4,315 (1,050) Agency 38,962 (76) 27,972 (192) 66,934 (268) $333,212 ($1,121) $135,913 ($3,844) $469,125 ($4,965) Unrealized losses on securities issued by the U.S. Government and its Agencies have not been recognized into income because of the implicit guarantee of the principal balances of these securities by the U.S. Government. The decline in fair value is primarily due to differences between security yields and market interest rates. The unrealized losses on these securities are expected to be recovered as they approach their maturity dates. Management has the intent and ability to hold these securities to full recovery of fair value, which may be maturity.

26 NOTES TO THE FINANCIAL STATEMENTS Note 2: (continued) Management periodically evaluates investment securities for other-than-temporary impairment and has recorded estimated credit losses of approximately $221,000 and $89,000 during the years ended December 31, 2014 and 2013, respectively. The following table provides a summary of other-than- temporary impairments. Available-for-sale For the years ended December 31, Balance, beginning of year $2,707 $3,937 Add: Increases to the amount related to the credit loss for which an other-than-temporary impairment was previously recognized Less: Realized losses for securities sold or paid down (582) (683) Less: Increases in cash flows expected to be collected that are recognized over the remaining life of the security (663) (636) Balance, end of year $1,683 $2, The remaining loss estimates recorded through accumulated other comprehensive income represent the interest rate differential between the expected yield on securities and the book yields. The expected yield on the asset-backed securities and the non-agency securities is substantially higher than the current book yields due to market expectations for these types of securities. This has caused the discount rate used in valuing these securities to be substantially higher in most cases than the investment yields. Other investments: As of December 31, Money market account $128,399 $202,871 Federal Home Loan Bank: Member stock, restricted 2,007 7,031 Daily account 14 Certificates of deposit 747 4,210 CUSOs 2,065 1,930 $133,218 $216,056 NOTE 3: LOANS The composition of loans is as follows: As of December 31, Commercial: Settlement $12,259 $2,648 Fixed term/fixed rate 1,000 1,000 Prime rate lines of credit Total commercial loans 13,806 4,283 Insurance, secured Total loans 13,951 4,412 Less ALL $13,951 $4,412

27 NOTES TO THE FINANCIAL STATEMENTS Note 3: (continued) 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. There were no impaired loans as of December 31, 2014 or Additionally, none of the loans outstanding as of December 31, 2014 or 2013 were past due or had been modified. The Credit Union places loans on non-accrual status when a loan reaches 90 days past due or when the collection of interest or principal becomes uncertain. Commercial Credit Quality Indicators The Credit Union reviews all lines of credit on an annual basis by reviewing the borrower s financial condition and key ratios. From this analysis, a watch list is created of members that are in a deteriorating financial condition. The following tables summarize the credit risk profile of the member commercial loan portfolio by class: As of December 31, 2014 Fixed term/ Prime rate Credit grade Settlement fixed rate lines of credit Total (in thousands) (in thousands) (in thousands) (in thousands) Non-watch list $11,524 $1,000 $547 $13,071 Watch list $12,259 $1,000 $547 $13,806 As of December 31, 2013 Fixed term/ Prime rate Credit grade Settlement fixed rate lines of credit Total (in thousands) (in thousands) (in thousands) (in thousands) Non-watch list $2,570 $1,000 $635 $4,205 Watch list $2,648 $1,000 $635 $4,283 NOTE 4: PROPERTY AND EQUIPMENT A summary of the Credit Union s property and equipment is as follows: As of December 31, Computer hardware $449 $463 Computer software Furniture and equipment Vehicles Leasehold improvements ,049 1,022 Less accumulated depreciation (582) (583) $467 $439

28 NOTES TO THE FINANCIAL STATEMENTS NOTE 5: MEMBERS SHARE AND SAVINGS ACCOUNTS Members share and savings accounts are summarized as follows: As of December 31, Non-MS daily share accounts $533 $1,194 Daily share accounts 716, ,854 PSA-30 share accounts 7,875 11,887 PSA-90 share accounts 232, ,807 Holiday accumulation account 10,325 9,180 Uncollected deposits - cash letter CIF certificates Certificates 19,990 67,071 $988,706 $1,166,257 The Credit Union s portfolio of share certificates has a greater degree of interest rate sensitivity due to the nature of the accounts. The aggregate balance of members share certificates in denominations that meet or exceed $250,000 was approximately $19,000,000 and $64,650,000 as of December 31, 2014 and 2013, respectively. Scheduled maturities of certificates are as follows: 28 As of December 31, 2014 Within 1 year $19, years 748 $20,240 Share Insurance Members shares are insured by the NCUSIF to a maximum of $250,000 for each member. NOTE 6: BORROWED FUNDS Federal Home Loan Bank As of December 31, 2014, the Credit Union had access to a pre-approved line of credit from the FHLB of Atlanta, secured by FNMA mortgage-backed securities obtained under a repurchase agreement and other qualifying collateral. The following borrowings were outstanding: Interest Interest Final As of Type Rate Maturity Date December 31, 2014 Fixed 0.20% January 29, 2015 $17,054 Interest Interest Final As of Type Rate Maturity Date December 31, 2013 Fixed 0.18% January 17, 2014 $100,000 Fixed 0.15% January 30, ,385 $119,385

29 NOTES TO THE FINANCIAL STATEMENTS NOTE 7: EMPLOYEE BENEFITS 401(k) Plan The Credit Union maintains a 401(k) plan for its employees who are at least 21 years of age. All employees of the Credit Union are eligible for a company match contribution upon the completion of six months of service. Employees may contribute up to the Internal Revenue Service limitations. The Credit Union provides a safe harbor contribution equal to 3% of employees eligible compensation which are immediately 100% vested. Additionally, the Credit Union contributes a matching contribution equal to 100% of the employees elective deferrals, with a limit on the matching contribution determined by the employees length of service up to a maximum match of 6% after ten years of service. The Credit Union s matching contributions vest in equal percentages (20% per year) and become fully vested at the completion of five years of service. The total 401(k) plan expense was approximately $162,000 and $96,000 for the years ended December 31, 2014 and 2013, respectively. Split Dollar Life Insurance The Credit Union has entered into a split dollar insurance agreement which is a collateral assignment arrangement between the Credit Union and the President/CEO. This agreement involves a method of paying for insurance coverage for the President/ CEO by splitting the elements of a life insurance policy. Under the agreement, the President/CEO is the owner of the policy and will make collateral assignments to the Credit Union in return for a loan equal to the amount of premiums paid. At the time of death, the Credit Union will be repaid the loan amount and all accrued interest and any remaining death benefit will be equally divided between the Credit Union and the President/CEO s designated beneficiary. The total loan balance under this agreement was approximately $2,962,000 as of December 31, (f) Plan The Credit Union has entered into a 457(f) deferred compensation agreement with certain members of senior management in which investment assets have been purchased as a method of measuring and paying for supplemental retirement income for the executives. Under the agreement, the Credit Union is the owner of the assets and a liability is established for the intended obligation to the executive based on the amount of the purchased asset and the performance of the asset. In accordance with the agreement, the benefits are subject to forfeiture and are payable to these employees if they remain employed by the Credit Union until the date specified in the agreement. The balance of the asset maintained under this agreement was approximately $5,041,000 as of December 31, The balance of the liability under this agreement was approximately $21,000 as of December 31, NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES LINES OF CREDIT: As of December 31, 2014, the Credit Union maintained a line-of-credit agreement with the FHLB of Atlanta with a borrowing limit of approximately $410,820,000. This line is secured by FNMA mortgage-backed securities obtained through repurchase agreements and other qualifying collateral. As of December 31, 2014, the unused line of credit was approximately $393,766,000. Additionally, as of December 31, 2014, the Credit Union had access to the following unsecured lines-of-credit: Lender Limit Available Collateral PNC Bank $40,000,000 $40,000,000 Unsecured US Bank 35,000,000 35,000,000 Unsecured Sun Trust Bank 35,000,000 35,000,000 Unsecured $110,000,000 $110,000,000 LEASE COMMITMENTS: The Credit Union leases the main office location. The minimum noncancellable lease obligation approximates the following as of December 31, 2014: Year ending December 31, Amount 2015 $102, , ,000 Thereafter $314,000 Rental expense under operating leases was approximately $101,000 and $99,000 for the years ended December 31, 2014 and 2013, respectively.