Digital Federal Credit Union and Subsidiaries

Digital Federal Credit Union and Subsidiaries Consolidated Financial Statements

CONSOLIDATED FINANCIAL STATEMENTS 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 Statements of Cash Flows... 6... 7-39

INDEPENDENT AUDITOR S REPORT To the Supervisory Committee 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 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. March 1, 2013 Boston, MA

Page 2 Consolidated Statements of Financial Condition December 31, 2012 and 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 The accompanying notes are an integral part of these consolidated financial statements.

Page 3 Consolidated Statements of Income 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 The accompanying notes are an integral part of these consolidated financial statements.

Page 4 Consolidated Statements of Comprehensive Income 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 The accompanying notes are an integral part of these consolidated financial statements.

Page 5 Consolidated Statements of Members' Equity 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 The accompanying notes are an integral part of these consolidated financial statements.

Page 6 Consolidated Statements of Cash Flows 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 The accompanying notes are an integral part of these consolidated financial statements.

Page 7 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 Codification TM 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 Most of the Credit Union s business activity is with its members who reside in or are employed in the Northeastern part of the United States of America. The Credit Union may be exposed to credit risk from a regional economic standpoint, since a significant concentration of its borrowers work or reside in the Northeastern part of the United States of America. However, the loan portfolio is well-diversified and the Credit Union does not have any significant concentrations of credit risk except unsecured loans, which by their nature increase the risk of loss compared to those loans that are collateralized. The Credit Union s policy for repossessing collateral is that when all other collection efforts have been exhausted, the Credit Union enforces its lien holder status and repossesses the collateral. Repossessed collateral normally consists of vehicles and real estate.

Page 8 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 For the purpose of the consolidated statements of financial condition and the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from financial institutions, and highly liquid debt instruments classified as cash that were purchased with maturities of three months or less. Amounts due from financial institutions may, at times, exceed federally insured limits.

Page 9 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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-forsale 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 The Credit Union, as a member of the FHLB of Boston, is required to maintain an investment in capital stock of the FHLB of Boston. No ready market exists for the FHLB of Boston stock and it has no quoted market value. The Credit Union reviews for impairment based on the ultimate recoverability of the cost basis in the stock. As of December 31, 2012, no impairment has been recognized. The FHLB Stock held by the Credit Union is included in other investments at December 31, 2012 and 2011.

Page 10 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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. The accrual of interest income on loans is discontinued at the time the loan is 90 days past due. Other personal loans are typically charged off no later than 180 days past due. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if the collection of principal and interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Page 11 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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 Generally these loans are smaller in size and are homogenous because they exhibit similar characteristics. The Credit Union has identified home equity loans and lines of credits, and first mortgages in homogenous risk categories. Repayment is dependent on the credit quality of the individual borrower. Most loans are secured by the underlying collateral.

Page 12 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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. Delinquent home equity, first mortgages, commercial loans and modifications secured by real estate are individually evaluated for impairment once certain conditions have been met. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Credit Union determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses. The general component of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Credit Union over the most recent year to 2 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

Page 13 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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 Land is carried at cost. Land improvements, building and improvements, furniture, and equipment and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Land improvements, building and improvements, furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the terms of the related leases. Construction in progress is carried at cost and will be depreciated using the straight-line method over the estimated useful life of the asset once placed in service.

Page 14 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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 The Credit Union is exempt, by statute, from federal and state income taxes. Since the Credit Union s subsidiaries are organized as Limited Liability Companies, they effectively pay no taxes. The Credit Union follows the Codification guidance on accounting for uncertainty in income taxes for the years ended December 31, 2012 and 2011. Management evaluated the Credit Union s tax positions and concluded that the Credit Union had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. With few exceptions, the Credit Union s subsidiaries are no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years before 2011.

Page 15 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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 creating greater consistency in the way GAAP is applied for various types of debt restructurings. The ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments to FASB ASC Topic 310, Receivables, clarify the guidance on a creditor s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. 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.

Page 16 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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 have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity s financial statements to evaluate the effect or potential effect of netting arrangements on an entity s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU is not expected to have a significant impact on the Credit Union s consolidated financial statements.

Page 17 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES continued 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 $ 335,187 $ 1,212 $ - $ 336,399

Page 18 2. INVESTMENTS continued December 31, 2011 Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity Securities: Mutual funds of U.S government securities $ 182,537 $ - $ - $ 182,537 Other investments consist of the following: December 31, 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 Investments by maturity as of December 31, 2012, are summarized as follows: $ 108,610 $ 56,908 December 31, 2012 Available-for-sale Amortized Fair Cost Value Other Less than 1 year maturity $ - $ - $ 52,000 1-5 years maturity 51,128 51,480 12,000 $ 51,128 $ 51,480 $ 64,000 FHLB of Boston stock, mutual funds, paid-in capital accounts in a corporate credit union and other investment accounts have no contractual maturity.

Page 19 3. LOANS TO MEMBERS, NET Loans to members consist of the following: December 31, 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 * This category includes student loans $ 3,846,085 $ 15,754 $ 16,342 $ 29,930 $ 3,908,111

Page 20 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 * This category includes student loans $ 3,544,284 $ 27,015 $ 8,730 $ 42,411 $ 3,622,440 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: 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 $ 29,930 $ 1,602 $ 43,932 $ 2,063

Page 21 3. LOANS TO MEMBERS, NET continued 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 Residential, consumer and other non-commercial loans are assessed for credit quality based on the contractual aging status of the loan and payment activity. Such assessment is completed at the end of each reporting period and the loans are classified as either performing or nonperforming.

Page 22 3. LOANS TO MEMBERS, NET continued 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 December 31, 2011 $ 907,221 $ 30,175 $ 104,326 $ 330,714 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 $ 306,415 $ 20,739 $ 88,823 $ 739,839

Page 23 3. LOANS TO MEMBERS, NET continued 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 $ 128,020 $ 128,020 $ 21,883 $ 133,026

Page 24 3. LOANS TO MEMBERS, NET continued 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 Ending balance $ 475,578 $ 1,372,436 $ 2,060,097 $ 3,908,111

Page 25 3. LOANS TO MEMBERS, NET continued 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 - individually evaluated for impairment $ 2,000 $ 2,872 $ 19,344 $ 24,216 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 - individually evaluated for impairment $ 30,712 $ 6,622 $ 100,698 $ 138,032 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 Home equities 4 150

Page 26 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, 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, 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 Significant assumptions used in the calculation of fair value of servicing assets include a discount rate of 9.94 percent and 9.56 percent at December 31, 2012 and 2011, respectively, and a weighted average prepayment speed assumption of 412 and 300 at December 31, 2012 and 2011, respectively. The Credit Union estimates fair value of servicing assets and certain other retained interests in securitizations using discounted cash flows models incorporating these assumptions.

Page 27 5. PROPERTY AND EQUIPMENT, NET Property and equipment are summarized as follows: Estimated Remaining Useful December 31, Lives 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 December 31, 2012 and 2011, the Credit Union incurred expenses related to selling foreclosed assets in the amount of $920 and $1,288, respectively.

Page 28 6. FORECLOSED ASSETS continued Analysis of the foreclosed assets and valuation allowance are as follows: December 31, 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, 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, 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 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 $ 3,874,856 $ 3,436,507 $ 3,874,856

Page 29 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. The Credit Union also has access to an Ideal Way line of credit with the FHLB. The agreement provides for a credit limit of $1,000 with interest charged at a rate determined by the lender on a periodic basis. At December 31, 2012 and 2011, there were no borrowings under this agreement. As of December 31, 2012 interest rates for advances on the credit line were 0.53 percent.

Page 30 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, 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 Commitments to extend credit are agreements to lend to a member as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Credit Union evaluates each member s creditworthiness on a case-by-case basis. The amount of collateral obtained to secure borrowing on the lines of credit is based on management s credit evaluation of the member.

Page 31 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). The Credit Union expects that these forward cash sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.

Page 32 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: 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 Funded status at end of year $ (3,500) $ (3,243)

Page 33 11. EMPLOYEE BENEFITS continued Defined Benefit Plan continued December 31, Assumptions used to determine benefit obligation: Discount rate 4.00% 4.50% Rate of compensation increase NA NA December 31, Net pension cost $ 250 $ 175 Employer contribution 357 327 Benefit payments 277 358 December 31, 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, 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, Net loss $ (4,830) $ (4,493) Prior service cost - - Transition obligation - - $ (4,830) $ (4,493)

Page 34 11. EMPLOYEE BENEFITS continued Defined Benefit Plan continued Information for accumulated benefit obligation in excess of plan assets consists of: December 31, 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, 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, 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: 2013 $ 203 2014 216 2015 251 2016 295 2017 320 2018 2022 1,774 $ 3,059

Page 35 11. EMPLOYEE BENEFITS continued Defined Benefit Plan continued 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 - - Defined Contribution Plan $ 4,450 $ 4,450 $ - $ - 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 The Credit Union has deferred compensation agreements with members of the executive management team that provides benefits payable to these employees if they remain employed by the Credit Union for a specified period of time. If these employees become fully disabled as defined in certain agreements, accrued benefits are immediately payable. The benefits are subject to forfeiture if employment is terminated for cause as defined in the agreements. The estimated liability under the agreements is being accrued as defined in the plans over the remaining years of service.

Page 36 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 wellcapitalized, 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 In the normal course of business, the Credit Union extends credit to directors, Supervisory Committee members and executive officers. The aggregate loans to related parties at December 31, 2012 and 2011, are approximately $3,127 and $3,417, respectively. Deposits from related parties at December 31, 2012 and 2011, amounted to approximately $1,801 and $2,377, respectively.

Page 37 14. FAIR VALUE OF FINANCIAL INSTRUMENTS As described in Note 1 to the consolidated financial statements, the following methods and assumptions were used by the Credit Union in estimating fair values of financial instruments as disclosed herein: Cash and Cash Equivalents The carrying amounts of cash and cash equivalents approximate their fair value. Investments The Credit Union utilizes a third-party pricing service (pricing service) to estimate fair value measurements for available-for-sale securities. The pricing service evaluates each asset class based on relevant market information considering observable data. The fair value is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use unobservable inputs due to the limited market activity of the instrument. The fair value prices on such securities are reviewed for reasonableness by management. Also, management assessed the valuation techniques used by the pricing service based on a review of their pricing methodology to ensure proper hierarchy classifications. The carrying amounts of other investments approximate their fair value based on the redemption provisions of the underlying investments. Loans to Members, including Loans Held-for-Sale For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-tofour family residential), credit card loans and other consumer loans are estimated using a discounted cash flow calculation that applies interest rates currently being offered similar loans to a schedule of aggregated expected monthly maturities of these loans. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. For impaired loans, an allowance for loan losses has been calculated based upon the probability the Credit Union is unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Level 3 assets primarily relate to residential and commercial real estate loans. The losses on the Level 3 impaired loans were calculated primarily by models incorporating internally derived discounted cash flow valuations of the collateral. Loan Servicing Servicing assets do not trade in an active, open market with readily observable prices. While sales of servicing assets do occur, the precise terms and conditions typically are not readily available. Accordingly, the Credit Union estimates the fair value of servicing assets and certain other retained interests in securitizations using discounted cash flow models incorporating numerous assumptions from the perspective of market participants including servicing income, servicing costs, market discount rates, prepayment speeds and default rates. Due to the nature of the valuation inputs, servicing assets are classified within Level 3 of the valuation hierarchy.

Page 38 14. FAIR VALUE OF FINANCIAL INSTRUMENTS continued Foreclosed Assets Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis, foreclosed assets are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the foreclosed assets. Accrued Interest Receivable Accrued interest receivable represents interest on loans and investments. The carrying amount of accrued interest receivable approximates fair value. Members Shares The fair values disclosed for regular share, share draft and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of regular share, share draft and money market accounts approximate their fair values at the reporting date. Fair values for share certificates are estimated using a discounted cash flow calculation that applies interest rates currently being offered on share certificates to a schedule of aggregated expected monthly maturities on the Credit Union s current share certificates. Borrowed Funds The fair values of the Credit Union s borrowed funds are estimated using discounted cash flow analyses based on the Credit Union s incremental borrowing rates for similar types of borrowing arrangements. Off-Balance Sheet Credit-Related Instruments Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. The fair value for such financial instruments is nominal. Fair Value on a Recurring Basis The table below presents the balances of assets measured at fair value on a recurring basis. December 31, 2012 Total Level 1 Level 2 Level 3 Investments, availablefor-sale $ 336,399 $ - $ 336,399 $ - December 31, 2011 Total Level 1 Level 2 Level 3 Investments, availablefor-sale $ 182,537 $ - $ 182,537 $ -

Page 39 14. FAIR VALUE OF FINANCIAL INSTRUMENTS continued Fair Value on a Nonrecurring Basis Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the consolidated statements of financial condition by caption and by level within the valuation hierarchy for which a nonrecurring change in fair value has been recorded. Carrying Value at December 31, 2012 Total Level 1 Level 2 Level 3 Loans, impaired $ 106,137 $ - $ - $ 106,137 Foreclosed assets 6,240-6,240 - Servicing assets 3,386 - - 3,386 Carrying Value at December 31, 2011 Total Level 1 Level 2 Level 3 Loans, impaired $ 113,816 $ - $ - $ 113,816 Foreclosed assets 13,474-13,474 - Servicing assets 4,537 - - 4,537 Financial Instruments The estimated fair values of the Credit Union s financial instruments are summarized as follows: December 31, 2012 December 31, 2011 Carrying Fair Carrying Fair Value Value Value Value Financial assets: Cash and cash equivalents $ 262,283 $ 262,283 $ 299,894 $ 299,894 Investments, available-for-sale 336,399 336,399 182,537 182,537 Investments, other 108,610 108,610 56,908 56,908 Loans held-for-sale 40,176 40,176 6,922 6,922 Loans to members, net 3,868,969 3,931,486 3,554,070 3,564,434 Accrued interest receivable 14,860 14,860 13,505 13,505 Financial liabilities: Members shares 3,874,856 3,994,339 3,436,507 3,501,371 Borrowed funds 428,642 428,251 437,502 450,972 Off balance sheet items: Unfunded line of credits - 1,800,217-1,753,093 Forward loan sales 67,000 67,142 12,250 12,022 Derivative loan commitments 47,566 48,604 23,373 24,125 Outstanding loan commitments - 12,629-40,727