2008 Annual Report - Hanscom Federal Credit Union · 2008 Annual Report Be money smarter.™ ... houses such as Lehman Brothers and Bear Stearns, ... annual review cycle starts with

2008 Annual Report

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...they provide superior financial service responsive to our needs.

I’m glad we chose Hanscom FCU because...

Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Message from the Chairman and President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Report of the Supervisory Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

Statement of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2

Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-3

Statements of Members’ Equity and Comprehensive Income . . . . . . . . . . . . . . . A-4

Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5

Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-6

Table of Contents

Dear Member-Owner:

For many people, the year 2008 will be remembered for its steady stream of bleak financial news. Among the factors impacting the economy were rising home foreclosures, the deterioration of Fannie Mae and Freddie Mac, the failure of major investment banking houses such as Lehman Brothers and Bear Stearns, a declining stock market and dwindling consumer demand for goods and services. The overall scope of financial turmoil was global and pervasive. To stabilize financial and credit markets, the federal government put together a financial rescue package of approximately $700 billion in 2008. It is important to note that none of these funds went to assist credit unions. As an industry, we are better able than other financial

institutions to weather the uncertainty because we have a tradition of putting members first. For Hanscom Federal Credit Union, the impact of economic turmoil was mitigated because we continued our focus on our mission: “to provide superior financial service responsive to our members’ needs.”

At a time when other financial institutions had deposit outflows, we experienced growth of $60.4 million, or 12%, in member shares and certificates. When lenders were cutting back on making credit available, we increased our loan portfolio to $549 million during 2008, an improvement of over 17% from the prior year. Member confidence in our conservative approach to financial management helped us end 2008 with assets of nearly $660 million, which represents an increase of 10% for the year.

Our loan to share ratio stood at an impressive 98%, which is well above that of our peers. Even more important, our asset quality remains strong even with our increased delinquent loan and charge-off levels, which remain well below that of our peers.

Through a prudent approach to managing our members’ money and careful expense control, we remained profitable in 2008 and ended the year with a net worth to asset ratio to 10.25%. As such, we continue to be well capitalized according to the standards of the National Credit Union Administration (NCUA). In recognition of our sound financial performance, your Board of Directors authorized a special year end loyalty dividend of 2% on shares and consumer and non-mortgage loans, in an amount of just over $720,000, which was paid on December 31, 2008.

Beyond the numbers, we have acted on a number of key initiatives designed to give our member-owners more convenience, better service and more choices. We are pleased to share with you the following accomplishments completed during 2008:

• Maintained above market rates on savings and certificate accounts and below market rates on loans during the entire year.

• We joined forces with BALANCE Financial Fitness to provide members with free and confidential access to counseling and education about financial matters.

Message from the Chairman and President

Paul J. MarottaChairman of the Board

1i

Income From Loans $31,76778.30%

Investment Income $4,36010.75%

Other Income $4,44310.95%

52.66% OperatingExpenses $21,363

5.55% Reserves & Undivided Earnings

$2,250

41.80% Dividends & Interest $16,957

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Dear Member-Owner:

For many people, the year 2008 will be remembered for its steady stream of bleak financial news. Among the factors impacting the economy were rising home foreclosures, the deterioration of Fannie Mae and Freddie Mac, the failure of major investment banking houses such as Lehman Brothers and Bear Stearns, a declining stock market and dwindling consumer demand for goods and services. The overall scope of financial turmoil was global and pervasive. To stabilize financial and credit markets, the federal government put together a financial rescue package of approximately $700 billion in 2008. It is important to note that none of these funds went to assist credit unions. As an industry, we are better able than other financial

institutions to weather the uncertainty because we have a tradition of putting members first. For Hanscom Federal Credit Union, the impact of economic turmoil was mitigated because we continued our focus on our mission: “to provide superior financial service responsive to our members’ needs.”

At a time when other financial institutions had deposit outflows, we experienced growth of $60.4 million, or 12%, in member shares and certificates. When lenders were cutting back on making credit available, we increased our loan portfolio to $549 million during 2008, an improvement of over 17% from the prior year. Member confidence in our conservative approach to financial management helped us end 2008 with assets of nearly $660 million, which represents an increase of 10% for the year.

Our loan to share ratio stood at an impressive 98%, which is well above that of our peers. Even more important, our asset quality remains strong even with our increased delinquent loan and charge-off levels, which remain well below that of our peers.

Through a prudent approach to managing our members’ money and careful expense control, we remained profitable in 2008 and ended the year with a net worth to asset ratio to 10.25%. As such, we continue to be well capitalized according to the standards of the National Credit Union Administration (NCUA). In recognition of our sound financial performance, your Board of Directors authorized a special year end loyalty dividend of 2% on shares and consumer and non-mortgage loans, in an amount of just over $720,000, which was paid on December 31, 2008.

Beyond the numbers, we have acted on a number of key initiatives designed to give our member-owners more convenience, better service and more choices. We are pleased to share with you the following accomplishments completed during 2008:

• Maintained above market rates on savings and certificate accounts and below market rates on loans during the entire year.

• We joined forces with BALANCE Financial Fitness to provide members with free and confidential access to counseling and education about financial matters.

Message from the Chairman and President

Paul J. MarottaChairman of the Board

1i

Income From Loans $31,76778.30%

Investment Income $4,36010.75%

Other Income $4,44310.95%

52.66% OperatingExpenses $21,363

5.55% Reserves & Undivided Earnings

$2,250

41.80% Dividends & Interest $16,957

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

80

70

60

50

40

30

20

10

0

600

500

400

300

200

100

0

700

600

500

400

300

200

100

0

600

500

400

300

200

100

0

Report of the Supervisory Committee

3

In May of 2008, the Hanscom Federal Credit Union Board of Directors appointed its Supervisory Committee for the upcoming year. The committee members, Lee Dietrich, Robert LaMontagne, James O’Doherty and Ray Phillips, elected fellow member David Pronchick as the Chair.

The Supervisory Committee’s two general goals are to ensure that management’s financial reporting objectives have been met, and that practices and procedures are in place which safeguard and protect the interest of the members in the assets of the Hanscom Federal Credit Union. The independent accounting firm of Nearman, Maynard, Vallez, CPAs and Consultants (hereinafter “Nearman”) was retained by the Supervisory Committee to perform both a certified audit as prescribed by the Credit Union’s governing agencies, as well as various comprehensive audits in the course

of the year. Nearman was selected because they provided the best value to perform these audits for Hanscom Federal Credit Union (HFCU).

The Supervisory Committee has met regularly with management and supports the positive actions taken in implementing the Board of Director’s plans for the Credit Union and in maintaining a high quality of service to its membership. The committee has also met with the Board on a regular basis and held its own separate meetings with Nearman throughout the year to fulfill its fiduciary responsibilities. A plan of work for 2008-9 was established at the initial committee meeting. The annual review cycle starts with the Risk Assessment Summary which assigns relative weightings for all of the substantive areas of risk. With input from the CEO and Supervisory Committee, this becomes the outline for the work plan. The various interests are then studied side by side with a 5-year HFCU Audit Schedule which provides the Supervisory Committee with a view of all the areas studied by one of the oversight entities. This results in the annual audit plan, which is revisited and revised as necessary during the year.

In summary, the audits performed and the periodic reviews accomplished support our opinion that Hanscom Federal Credit Union is being managed, operated, and guided in a financially safe and sound manner. By virtue of our reviews and the results of our independent auditor’s efforts, the Supervisory Committee maintains that Hanscom Federal Credit Union has kept accurate and timely accounting records, as well as effective internal controls.

David Pronchick Chairman of the Supervisory Committee

• We partnered with MassSAVE, a public/private partnership dedicated to helping Massachusetts residents save money through energy conservation, to offer Project HEAT, which allow qualified participants to borrow up to $15,000 at 0% APR for energy-saving home improvements and take up to seven years to repay.

• We continued offering term certificate specials throughout the year with unbeatable rates and terms.

• We introduced the ability to move money online between your Hanscom FCU accounts and accounts you hold at other financial institutions. This free service, known as I2I or Institution to Institution transfers, lets you set the date and amount of transfer through Online Access.

• We enhanced our popular rewards program, MemberPoints, by adding gift cards to popular retailers, gas stations and restaurants as a redemption option.

• We launched a new state-of-the-art service, EasyDeposit, that lets members deposit checks online using a home computer and scanner.

• We began to offer an additional ¼% MPG Discount on vehicle loans for cars and motorcycles that have a rating of at least 30 MPG at www.fueleconomy.gov.

• We conducted member appreciation events throughout the year to thank you for your continued support. • We increased member education efforts by expanding our lunch and learn seminars, featuring

popular subjects such as mortgages and financial planning for retirement. • We continued our commitment to community outreach by raising funds to benefit Children’s

Hospital Boston and the Massachusetts Coalition for the Homeless. • We acted as a major sponsor of Hanscom Heroes Homecoming, helping to honor troops

returning from tours of duty in Iraq and Afghanistan.

As always, we appreciate that you have chosen to be part of the Hanscom Federal Credit Union family. At a time when many financial institutions are caught-up in the current economic turmoil and have chosen a path of self-interest, you can continue to count on us to always serve our member-owners’ best interests.

On behalf of the Board of Directors and the entire staff of Hanscom Federal Credit Union, thank you for your continued membership, loyalty and support. As always, we appreciate that you have chosen to be part of the Hanscom Federal Credit Union family and are extremely grateful for your continued support. Serving all of your financial needs with products and service that represent real value has been and continues to remain our number one priority. We look forward to the future with much enthusiasm in meeting all of your financial needs while remaining true to our founding principle commitment of People Helping People.

Paul J. Marotta David P. Sprague Chairman of the Board President and CEO

David P. SpraguePresident/CEO

David PronchickChairman of the Supervisory Committee

2

Report of the Supervisory Committee

3

In May of 2008, the Hanscom Federal Credit Union Board of Directors appointed its Supervisory Committee for the upcoming year. The committee members, Lee Dietrich, Robert LaMontagne, James O’Doherty and Ray Phillips, elected fellow member David Pronchick as the Chair.

The Supervisory Committee’s two general goals are to ensure that management’s financial reporting objectives have been met, and that practices and procedures are in place which safeguard and protect the interest of the members in the assets of the Hanscom Federal Credit Union. The independent accounting firm of Nearman, Maynard, Vallez, CPAs and Consultants (hereinafter “Nearman”) was retained by the Supervisory Committee to perform both a certified audit as prescribed by the Credit Union’s governing agencies, as well as various comprehensive audits in the course

of the year. Nearman was selected because they provided the best value to perform these audits for Hanscom Federal Credit Union (HFCU).

The Supervisory Committee has met regularly with management and supports the positive actions taken in implementing the Board of Director’s plans for the Credit Union and in maintaining a high quality of service to its membership. The committee has also met with the Board on a regular basis and held its own separate meetings with Nearman throughout the year to fulfill its fiduciary responsibilities. A plan of work for 2008-9 was established at the initial committee meeting. The annual review cycle starts with the Risk Assessment Summary which assigns relative weightings for all of the substantive areas of risk. With input from the CEO and Supervisory Committee, this becomes the outline for the work plan. The various interests are then studied side by side with a 5-year HFCU Audit Schedule which provides the Supervisory Committee with a view of all the areas studied by one of the oversight entities. This results in the annual audit plan, which is revisited and revised as necessary during the year.

In summary, the audits performed and the periodic reviews accomplished support our opinion that Hanscom Federal Credit Union is being managed, operated, and guided in a financially safe and sound manner. By virtue of our reviews and the results of our independent auditor’s efforts, the Supervisory Committee maintains that Hanscom Federal Credit Union has kept accurate and timely accounting records, as well as effective internal controls.

David Pronchick Chairman of the Supervisory Committee

• We partnered with MassSAVE, a public/private partnership dedicated to helping Massachusetts residents save money through energy conservation, to offer Project HEAT, which allow qualified participants to borrow up to $15,000 at 0% APR for energy-saving home improvements and take up to seven years to repay.

• We continued offering term certificate specials throughout the year with unbeatable rates and terms.

• We introduced the ability to move money online between your Hanscom FCU accounts and accounts you hold at other financial institutions. This free service, known as I2I or Institution to Institution transfers, lets you set the date and amount of transfer through Online Access.

• We enhanced our popular rewards program, MemberPoints, by adding gift cards to popular retailers, gas stations and restaurants as a redemption option.

• We launched a new state-of-the-art service, EasyDeposit, that lets members deposit checks online using a home computer and scanner.

• We began to offer an additional ¼% MPG Discount on vehicle loans for cars and motorcycles that have a rating of at least 30 MPG at www.fueleconomy.gov.

• We conducted member appreciation events throughout the year to thank you for your continued support. • We increased member education efforts by expanding our lunch and learn seminars, featuring

popular subjects such as mortgages and financial planning for retirement. • We continued our commitment to community outreach by raising funds to benefit Children’s

Hospital Boston and the Massachusetts Coalition for the Homeless. • We acted as a major sponsor of Hanscom Heroes Homecoming, helping to honor troops

returning from tours of duty in Iraq and Afghanistan.

As always, we appreciate that you have chosen to be part of the Hanscom Federal Credit Union family. At a time when many financial institutions are caught-up in the current economic turmoil and have chosen a path of self-interest, you can continue to count on us to always serve our member-owners’ best interests.

On behalf of the Board of Directors and the entire staff of Hanscom Federal Credit Union, thank you for your continued membership, loyalty and support. As always, we appreciate that you have chosen to be part of the Hanscom Federal Credit Union family and are extremely grateful for your continued support. Serving all of your financial needs with products and service that represent real value has been and continues to remain our number one priority. We look forward to the future with much enthusiasm in meeting all of your financial needs while remaining true to our founding principle commitment of People Helping People.

Paul J. Marotta David P. Sprague Chairman of the Board President and CEO

David P. SpraguePresident/CEO

David PronchickChairman of the Supervisory Committee

2

Statement of Financial Condition

Read the accompanying notes to these financial statements.A-2

2008 2007 Cash and cash equivalents 5,374,044$ 5,837,252$ Investments: Available-for-sale 35,267,464 51,059,225 Held-to-maturity 32,983,590 25,982,665 Other 26,395,243 32,935,774 Federal Home Loan Bank (FHLB) stock 2,652,300 2,114,700 Loans receivable, net of allowance for loan losses 543,921,035 468,217,776 Accrued interest receivable: Loans 1,657,114 1,593,664 Investments 532,039 982,426 Premises and equipment, net 4,096,479 4,445,142 NCUSIF deposit 5,019,902 4,118,497 Other assets 2,079,725 2,759,427 Total assets 659,978,935$ 600,046,548$

2008 2007LIABILITIES:

Members' share and savings accounts 558,552,170$ 498,165,713$ Borrowed funds 30,808,173 33,154,089 Interest payable 122,534 56,128 Accounts payable and other liabilities 3,506,667 2,936,270 Total liabilities 592,989,544 534,312,200

Commitments and contingent liabilities

MEMBERS' EQUITY:

Regular reserve 10,168,683 10,168,683 Undivided earnings 57,512,152 55,261,999 Accumulated other comprehensive (loss)/income (691,444) 303,666 Total members' equity 66,989,391 65,734,348 Total liabilities and members' equity 659,978,935$ 600,046,548$

December 31,

December 31,

LIABILITIES AND MEMBERS' EQUITY

ASSETS



Independent Auditor’s Report

A-1

March 17, 2009

Supervisory Committee Hanscom Federal Credit Union Hanscom AFB, Massachusetts

We have audited the accompanying statement of financial condition of Hanscom Federal Credit Union as of December 31, 2008 and 2007, and the related statements of income, members’ equity, comprehensive income, and cash flow for the year then ended. These financial statements are the responsibility of the Credit Union’s Management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hanscom Federal Credit Union as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

A-1

February 15, 2007


We have audited the accompanying statement of financial condition of Hanscom Federal Credit Union as of December 31, 2006, and the related statement of income, members' equity, comprehensive income, and cash flow for the year then ended. These financial statements are the responsibility of the Credit Union's Management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

The industry audit guide “Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies” issued by the American Institute of Certified Public Accountants indicates that membersʼ shares should be classified as liabilities in order to conform to generally accepted accounting principles. As further described in Note 1, Hanscom Federal Credit Union considers membersʼ shares to be equity as defined in the Federal Credit Union Act and so presented the information. The presentation followed by Hanscom Federal Credit Union has no effect on the total amount or classification of assets or on the determination of income, expenses or net income.

In our opinion, except for the effect of the accounting practices described in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Hanscom Federal Credit Union as of December 31, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Nearman, Maynard, Vallez, CPAs & Consultants, P.A. Nearman, Maynard, Vallez, CPAs & Consultants, P.A.Nearman, Maynard, Vallez, CPAs & Consultants, P.A.



2008 2007 Cash and cash equivalents 5,374,044$ 5,837,252$ Investments: Available-for-sale 35,267,464 51,059,225 Held-to-maturity 32,983,590 25,982,665 Other 26,395,243 32,935,774 Federal Home Loan Bank (FHLB) stock 2,652,300 2,114,700 Loans receivable, net of allowance for loan losses 543,921,035 468,217,776 Accrued interest receivable: Loans 1,657,114 1,593,664 Investments 532,039 982,426 Premises and equipment, net 4,096,479 4,445,142 NCUSIF deposit 5,019,902 4,118,497 Other assets 2,079,725 2,759,427 Total assets 659,978,935$ 600,046,548$

2008 2007LIABILITIES:

Members' share and savings accounts 558,552,170$ 498,165,713$ Borrowed funds 30,808,173 33,154,089 Interest payable 122,534 56,128 Accounts payable and other liabilities 3,506,667 2,936,270 Total liabilities 592,989,544 534,312,200

Commitments and contingent liabilities

MEMBERS' EQUITY:

Regular reserve 10,168,683 10,168,683 Undivided earnings 57,512,152 55,261,999 Accumulated other comprehensive (loss)/income (691,444) 303,666 Total members' equity 66,989,391 65,734,348 Total liabilities and members' equity 659,978,935$ 600,046,548$

December 31,

December 31,

LIABILITIES AND MEMBERS' EQUITY

ASSETS



Independent Auditor’s Report

A-1

March 17, 2009


We have audited the accompanying statement of financial condition of Hanscom Federal Credit Union as of December 31, 2008 and 2007, and the related statements of income, members’ equity, comprehensive income, and cash flow for the year then ended. These financial statements are the responsibility of the Credit Union’s Management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hanscom Federal Credit Union as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

A-1

February 15, 2007


We have audited the accompanying statement of financial condition of Hanscom Federal Credit Union as of December 31, 2006, and the related statement of income, members' equity, comprehensive income, and cash flow for the year then ended. These financial statements are the responsibility of the Credit Union's Management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

The industry audit guide “Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies” issued by the American Institute of Certified Public Accountants indicates that membersʼ shares should be classified as liabilities in order to conform to generally accepted accounting principles. As further described in Note 1, Hanscom Federal Credit Union considers membersʼ shares to be equity as defined in the Federal Credit Union Act and so presented the information. The presentation followed by Hanscom Federal Credit Union has no effect on the total amount or classification of assets or on the determination of income, expenses or net income.

In our opinion, except for the effect of the accounting practices described in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Hanscom Federal Credit Union as of December 31, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Nearman, Maynard, Vallez, CPAs & Consultants, P.A. Nearman, Maynard, Vallez, CPAs & Consultants, P.A.Nearman, Maynard, Vallez, CPAs & Consultants, P.A.

Statements of Members’ Equity and Comprehensive Income


RegularReserve

UndividedEarnings

AccumulatedOther

ComprehensiveIncome (Loss) Total

Balance,December 31, 2006 10,168,683$ 50,718,462$ (85,532)$ 60,801,613$

Net income - 4,543,537 - 4,543,537 Change in unrealized gain/(loss) on securities - - 363,039 363,039 Adjustment to initially apply FASB Statement No. 158 - - 26,159 26,159 Balance,

December 31, 2007 10,168,683 55,261,999 303,666 65,734,348 Net income - 2,250,153 - 2,250,153 Change in unrealized gain/(loss) on securities - - 276,087 276,087 FASB Statement No. 158 adjustment - - (1,271,197) (1,271,197) Balance,

December 31, 2008 10,168,683$ 57,512,152$ (691,444)$ 66,989,391$

2008 2007Net income 2,250,153$ 4,543,537$ Other comprehensive income/(loss): Net unrealized holding (losses)/gains on securities arising during the year 276,087 363,039 Less: reclassification adjustment for net losses/(gains) included in net income - - FASB Statement No. 158 adjustment (1,271,197) 26,159

(995,110) 389,198 1,255,043$ 4,932,735$ Comprehensive income

December 31, 2008 and 2007

December 31,

Other comprehensive income/(loss)

MEMBERS' EQUITY

COMPREHENSIVE INCOME



Statement of Income


2008 2007INTEREST INCOME: Loans 32,171,238$ 29,846,958$ Loans interest refund (403,838) (594,594) Investments 4,359,571 4,119,064 Total interest income 36,126,971 33,371,428

INTEREST EXPENSE: Members' share and savings accounts 15,677,675 15,095,097 Bonus dividend 313,246 451,349 Borrowed funds 966,334 577,276 Total interest expense 16,957,255 16,123,722 Net interest income 19,169,716 17,247,706

PROVISION FOR LOAN LOSSES 5,224,200 1,831,500 Net interest income after provision for loan losses 13,945,516 15,416,206

NON-INTEREST INCOME: Fees and service charges 1,736,732 1,517,630 Interchange income 1,611,728 1,500,117 Overdraft privilege fees 855,699 750,584 Gains on sale of VISA stock 239,212 - Total non-interest income 4,443,371 3,768,331

NON-INTEREST EXPENSE: Compensation and employee benefits 8,495,784 7,813,073 Operation expense 3,068,787 2,955,110 Loan servicing expense 1,614,073 1,312,532 Occupancy expense 820,010 783,294 Depreciation of furniture and equipment 624,120 712,818 Service charges 513,801 300,887 Professional and outside services 489,903 437,405 Education and promotion expense 474,061 325,881 Loss on sale of loans 38,195 - Total non-interest expense 16,138,734 14,641,000 Net income 2,250,153$ 4,543,537$

December 31,

Statement of Income




RegularReserve

UndividedEarnings

AccumulatedOther

ComprehensiveIncome (Loss) Total

Balance,December 31, 2006 10,168,683$ 50,718,462$ (85,532)$ 60,801,613$

Net income - 4,543,537 - 4,543,537 Change in unrealized gain/(loss) on securities - - 363,039 363,039 Adjustment to initially apply FASB Statement No. 158 - - 26,159 26,159 Balance,

December 31, 2007 10,168,683 55,261,999 303,666 65,734,348 Net income - 2,250,153 - 2,250,153 Change in unrealized gain/(loss) on securities - - 276,087 276,087 FASB Statement No. 158 adjustment - - (1,271,197) (1,271,197) Balance,

December 31, 2008 10,168,683$ 57,512,152$ (691,444)$ 66,989,391$

2008 2007Net income 2,250,153$ 4,543,537$ Other comprehensive income/(loss): Net unrealized holding (losses)/gains on securities arising during the year 276,087 363,039 Less: reclassification adjustment for net losses/(gains) included in net income - - FASB Statement No. 158 adjustment (1,271,197) 26,159

(995,110) 389,198 1,255,043$ 4,932,735$ Comprehensive income

December 31, 2008 and 2007

December 31,

Other comprehensive income/(loss)

MEMBERS' EQUITY

COMPREHENSIVE INCOME



Statement of Income


2008 2007INTEREST INCOME: Loans 32,171,238$ 29,846,958$ Loans interest refund (403,838) (594,594) Investments 4,359,571 4,119,064 Total interest income 36,126,971 33,371,428

INTEREST EXPENSE: Members' share and savings accounts 15,677,675 15,095,097 Bonus dividend 313,246 451,349 Borrowed funds 966,334 577,276 Total interest expense 16,957,255 16,123,722 Net interest income 19,169,716 17,247,706

PROVISION FOR LOAN LOSSES 5,224,200 1,831,500 Net interest income after provision for loan losses 13,945,516 15,416,206

NON-INTEREST INCOME: Fees and service charges 1,736,732 1,517,630 Interchange income 1,611,728 1,500,117 Overdraft privilege fees 855,699 750,584 Gains on sale of VISA stock 239,212 - Total non-interest income 4,443,371 3,768,331

NON-INTEREST EXPENSE: Compensation and employee benefits 8,495,784 7,813,073 Operation expense 3,068,787 2,955,110 Loan servicing expense 1,614,073 1,312,532 Occupancy expense 820,010 783,294 Depreciation of furniture and equipment 624,120 712,818 Service charges 513,801 300,887 Professional and outside services 489,903 437,405 Education and promotion expense 474,061 325,881 Loss on sale of loans 38,195 - Total non-interest expense 16,138,734 14,641,000 Net income 2,250,153$ 4,543,537$

December 31,

Statement of Income


Notes to the Financial Statements

A-6

Organization

Use of Estimates

Cash and Cash Equivalents

Investments

Federal Home Loan Bank (FHLB) Stock

Management periodically performs analyses to test for impairment of various assets. A significant impairmentanalysis relates to the other than temporary declines in the value of the securities. Management conducts periodicreviews and evaluations of the securities portfolio to determine if the value of any security has declined below itscarrying value and whether such a decline is other than temporary. If such decline is deemed other thantemporary, Management would adjust the amount of the security by writing it down to fair market value through acharge to current period operations.

For purposes of the statement of financial condition and the statement of cash flows, cash and cash equivalentsincludes cash on hand, amounts due from financial institutions, and highly liquid debt instruments classified ascash which were purchased with maturities of three months or less. Amounts due from financial institutions may,at times, exceed federally insured limits.

The financial statements are prepared in conformity with Generally Accepted Accounting Principles (GAAP)generally accepted in the United States of America. The preparation of financial statements requires the use ofestimates and assumptions by Management. Such estimates and assumptions are based on prior operating historyand industry standards. Actual results could differ from these estimates. The significant accounting principlesand policies used in the preparation of these financial statements, together with certain related information aresummarized below.

The Credit Union's investments are classified and accounted for as follows:

As a member of the FHLB (Bank), the Credit Union is required to purchase stock based in part on asset size andin part on the amount of any outstanding borrowings. The required stock purchase based on asset size is either aspecified percentage of the Credit Union’s total assets on December 31 of the prior year or a specified dollar cap.The required stock purchase based upon outstanding borrowings is equal to the sum of the following three items.The specified percentage of the Credit Union’s advances; A specific percentage of any acquired assets sold by theCredit Union to the Bank under a master commitment; and a specified percentage of any outstanding targeteddebt/equity investments sold by the Credit Union to the Bank.

Held-to-Maturity : Investments which the Credit Union has the positive intent and ability to hold to maturity arereported at cost, adjusted for amortization of premiums and accretion of discounts.

Cost of investments sold are recognized using the specific identification method. The amortization of premiumsand the accretion of discounts are recognized over the term of the related investment by a method thatapproximates the interest method.

Other Investments: Investments in this category do not meet the definition of a debt or equity security underaccounting pronouncements. Other investments may include certain cash equivalents that Management haselected to classify as investments. Other investments are carried at cost which approximates fair value.

Available-for-Sale: Investments are classified available-for-sale when Management anticipates that the securitiescould be sold in response to rate changes, prepayment risk, liquidity, availability of and the yield on alternativeinvestments and other market and economic factors. These securities are reported at fair value. Unrealized gainsand losses on securities available for sale are recognized as direct increases or decreases in members' equity andcomprehensive income. Cost of investments sold are recognized using the specific identification method. Theamortization of premiums and the accretion of discounts are recognized over the term of the related investment bya method that approximates the interest method.

Hanscom Federal Credit Union (the "Credit Union") is a cooperative association organized in accordance with theprovisions of the Federal Credit Union Act for the purposes of promoting thrift among, and creating a source ofcredit for its members. Participation in the Credit Union is limited to those individuals that qualify formembership. The field of membership is defined in the Credit Union's Charter and Bylaws.

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES


A-6

Statement of Cash Flows


2008 2007CASH FLOWS FROM OPERATING ACTIVITIES: Net income 2,250,153$ 4,543,537$ Adjustments: Provision for loan losses 5,224,200 1,831,500 Depreciation and amortization of premises and equipment 926,205 712,818 Gain on sale of VISA stock (239,212) - Loss on sale of loans 38,195 - Amortization of investment premiums/discounts 27,869 (63,210) Changes in operating assets and liabilities: Accrued interest receivable 386,937 (555,010) Other assets 679,702 (219,699) Interest payable 66,406 2,357 Accounts payable and other liabilities 570,397 1,082,415 Net cash provided by operating activities 9,930,852 7,334,708

CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Available-for-sale securities (27,231,688) (46,291,014) Held-to-maturity securities (14,876,963) (14,856,775) FHLB stock (537,600) (389,500) Premises and equipment (577,542) (40,641) Proceeds from: Maturities, paydowns and sales of available-for-sale securities 20,000,000 13,722,218 Maturities and paydowns of held-to-maturity securities 29,876,508 8,163,532 Sale of VISA stock 239,212 - Sale of mortgage loans 1,759,522 - Net change in: Other investments 6,540,531 13,764,823 Loans receivable, net of charge-offs (82,944,933) (30,329,207) NCUSIF deposit (901,405) 70,629 Recoveries on loans charged off 219,757 238,414 Net cash used in investing activities (68,434,601) (55,947,521)

CASH FLOWS FROM FINANCING ACTIVITIES: Net change in members' share and savings accounts 60,386,457 30,252,105 Net change in borrowed funds (2,345,916) 18,132,595 Net cash provided by financing activities 58,040,541 48,384,700 Net change in cash (463,208) (228,113) Cash and cash equivalents at beginning of year 5,837,252 6,065,365 Cash and cash equivalents at end of year 5,374,044$ 5,837,252$

SCHEDULE OF NON-CASH TRANSACTIONS: Change in accumulated other comprehensive loss (income) (995,110)$ 389,198$

SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid 16,890,849$ 16,121,365$

December 31,




A-6

Organization

Use of Estimates

Cash and Cash Equivalents

Investments

Federal Home Loan Bank (FHLB) Stock

Management periodically performs analyses to test for impairment of various assets. A significant impairmentanalysis relates to the other than temporary declines in the value of the securities. Management conducts periodicreviews and evaluations of the securities portfolio to determine if the value of any security has declined below itscarrying value and whether such a decline is other than temporary. If such decline is deemed other thantemporary, Management would adjust the amount of the security by writing it down to fair market value through acharge to current period operations.

For purposes of the statement of financial condition and the statement of cash flows, cash and cash equivalentsincludes cash on hand, amounts due from financial institutions, and highly liquid debt instruments classified ascash which were purchased with maturities of three months or less. Amounts due from financial institutions may,at times, exceed federally insured limits.

The financial statements are prepared in conformity with Generally Accepted Accounting Principles (GAAP)generally accepted in the United States of America. The preparation of financial statements requires the use ofestimates and assumptions by Management. Such estimates and assumptions are based on prior operating historyand industry standards. Actual results could differ from these estimates. The significant accounting principlesand policies used in the preparation of these financial statements, together with certain related information aresummarized below.

The Credit Union's investments are classified and accounted for as follows:

As a member of the FHLB (Bank), the Credit Union is required to purchase stock based in part on asset size andin part on the amount of any outstanding borrowings. The required stock purchase based on asset size is either aspecified percentage of the Credit Union’s total assets on December 31 of the prior year or a specified dollar cap.The required stock purchase based upon outstanding borrowings is equal to the sum of the following three items.The specified percentage of the Credit Union’s advances; A specific percentage of any acquired assets sold by theCredit Union to the Bank under a master commitment; and a specified percentage of any outstanding targeteddebt/equity investments sold by the Credit Union to the Bank.

Held-to-Maturity : Investments which the Credit Union has the positive intent and ability to hold to maturity arereported at cost, adjusted for amortization of premiums and accretion of discounts.

Cost of investments sold are recognized using the specific identification method. The amortization of premiumsand the accretion of discounts are recognized over the term of the related investment by a method thatapproximates the interest method.

Other Investments: Investments in this category do not meet the definition of a debt or equity security underaccounting pronouncements. Other investments may include certain cash equivalents that Management haselected to classify as investments. Other investments are carried at cost which approximates fair value.

Available-for-Sale: Investments are classified available-for-sale when Management anticipates that the securitiescould be sold in response to rate changes, prepayment risk, liquidity, availability of and the yield on alternativeinvestments and other market and economic factors. These securities are reported at fair value. Unrealized gainsand losses on securities available for sale are recognized as direct increases or decreases in members' equity andcomprehensive income. Cost of investments sold are recognized using the specific identification method. Theamortization of premiums and the accretion of discounts are recognized over the term of the related investment bya method that approximates the interest method.

Hanscom Federal Credit Union (the "Credit Union") is a cooperative association organized in accordance with theprovisions of the Federal Credit Union Act for the purposes of promoting thrift among, and creating a source ofcredit for its members. Participation in the Credit Union is limited to those individuals that qualify formembership. The field of membership is defined in the Credit Union's Charter and Bylaws.

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES


A-6



2008 2007CASH FLOWS FROM OPERATING ACTIVITIES: Net income 2,250,153$ 4,543,537$ Adjustments: Provision for loan losses 5,224,200 1,831,500 Depreciation and amortization of premises and equipment 926,205 712,818 Gain on sale of VISA stock (239,212) - Loss on sale of loans 38,195 - Amortization of investment premiums/discounts 27,869 (63,210) Changes in operating assets and liabilities: Accrued interest receivable 386,937 (555,010) Other assets 679,702 (219,699) Interest payable 66,406 2,357 Accounts payable and other liabilities 570,397 1,082,415 Net cash provided by operating activities 9,930,852 7,334,708

CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Available-for-sale securities (27,231,688) (46,291,014) Held-to-maturity securities (14,876,963) (14,856,775) FHLB stock (537,600) (389,500) Premises and equipment (577,542) (40,641) Proceeds from: Maturities, paydowns and sales of available-for-sale securities 20,000,000 13,722,218 Maturities and paydowns of held-to-maturity securities 29,876,508 8,163,532 Sale of VISA stock 239,212 - Sale of mortgage loans 1,759,522 - Net change in: Other investments 6,540,531 13,764,823 Loans receivable, net of charge-offs (82,944,933) (30,329,207) NCUSIF deposit (901,405) 70,629 Recoveries on loans charged off 219,757 238,414 Net cash used in investing activities (68,434,601) (55,947,521)

CASH FLOWS FROM FINANCING ACTIVITIES: Net change in members' share and savings accounts 60,386,457 30,252,105 Net change in borrowed funds (2,345,916) 18,132,595 Net cash provided by financing activities 58,040,541 48,384,700 Net change in cash (463,208) (228,113) Cash and cash equivalents at beginning of year 5,837,252 6,065,365 Cash and cash equivalents at end of year 5,374,044$ 5,837,252$

SCHEDULE OF NON-CASH TRANSACTIONS: Change in accumulated other comprehensive loss (income) (995,110)$ 389,198$

SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid 16,890,849$ 16,121,365$

December 31,




A-8


Loan Servicing

NCUSIF Insurance Premium

Federal and State Tax Exemption

Comprehensive Income

ReclassificationsCertain 2007 financial statement amounts have been reclassified to conform with classifications adopted in thecurrent year.

The Credit Union is exempt from federal and most state and local taxes under the provisions of the Federal CreditUnion Act, the Internal Revenue Code, and state tax laws.

A credit union is required to pay an annual insurance premium equal to one-twelfth of one percent of its totalinsured shares, unless the payment is waived or reduced by the NCUA Board.

Mortgage loans serviced for others are not included in the accompanying statements of financial condition. Thetotal unpaid principal balance of these loans is approximately $15,161,000 and $16,008,000 as of December 31,2008 and 2007, respectively. The total balance of the custodial escrow accounts maintained in connection withthe foregoing loan servicing is approximately $52,000 and $48,000 as of December 31, 2008 and 2007,respectively.

Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in netincome. Certain changes in assets, liabilities, such as unrealized gains and losses on available-for-sale securities,are reported as a separate component of the member equity section of the statements of financial condition.

A-8


A-7


Loans Receivable

Allowance for Loan Losses

Premises and Equipment

NCUSIF Deposit

Members' Share and Savings Accounts

Regular Reserve

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by theprovision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowancebalance required using past loans loss experience, known and inherent risks in the nature and volume of theportfolio, information about specific borrower situations and estimated collateral values, economic conditions, andother factors. Allocations of the allowance may be made for specific loans, but the entire allowance is availablefor any loan that, in Management's judgment, should be charged-off. Loan losses are charged against theallowance for loan losses when Management believes the uncollectibility of a loan balance is confirmed.

The Credit Union is required by regulation to maintain a statutory reserve. This reserve, which represents aregulatory restriction of undivided earnings, is not available for the payment of dividends.

The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with National CreditUnion Administration (NCUA) regulations, which require the maintenance of a deposit by each insured creditunion in an amount equal to one percent of its insurable shares. The deposit would be refunded to the CreditUnion if its insurance coverage is terminated, it converts to insurance coverage from another source, or theoperations of the fund are transferred from the NCUA Board.

Members' shares are subordinated to all other liabilities of the Credit Union upon liquidation. Interest onmembers' share and savings accounts is based on available earnings at the end of an interest period and is notguaranteed by the Credit Union. Interest rates on members' share accounts are set by the Board of Directors,based on an evaluation of current and future market conditions.

The allowance consists of specific and general components. The specific component relates to loans that areindividually classified as impaired or loans otherwise classified as substandard or doubtful. The generalcomponent covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Impairment is generally evaluated intotal for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, butmay be evaluated on an individual loan basis if deemed necessary. If a loan is impaired, a portion of theallowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using theloan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

Loans receivable are stated at unpaid principal balances, less an allowance for loan losses. Interest on loans isrecognized over the term of the loan and is calculated on principal amounts outstanding using the simple-interestmethod for consumer loans and 30/360 amortized calculation for first mortgages.

Visa Inc. StockDuring 2007, the Credit Union received notice of the restructuring of Visa Inc. As part of the restructuring, theCredit Union was issued shares of Class B Common Stock in Visa Inc. The shares represented by this issuanceare fully paid and non-assessable. During the first quarter of 2008, there was a partial redemption of the CreditUnion's Class B Common Stock in Visa Inc. leaving a balance of 8,875 shares as of December 31, 2008.Currently, there is no readily available fair market value of the stock and therefore, the stock is not reflected in theCredit Union’s financial statements. Once a readily available fair market value of the stock is available, the valueof the stock will be reflected in the Credit Union's financial statements.

Building(s), furniture and equipment, and leasehold improvements are carried at cost, less accumulateddepreciation and amortization. Building(s), furniture, and equipment are depreciated using the straight-linemethod over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using thestraight-line method over the terms of the related leases. Maintenance and repairs are expensed, and majorimprovements are capitalized. Management reviews premises and equipment for impairment whenever events orchanges in circumstances indicate that the carrying value may not be recoverable. Gains and losses on disposalsare included in current operations.

A-7


A-8


Loan Servicing

NCUSIF Insurance Premium

Federal and State Tax Exemption

Comprehensive Income

ReclassificationsCertain 2007 financial statement amounts have been reclassified to conform with classifications adopted in thecurrent year.

The Credit Union is exempt from federal and most state and local taxes under the provisions of the Federal CreditUnion Act, the Internal Revenue Code, and state tax laws.

A credit union is required to pay an annual insurance premium equal to one-twelfth of one percent of its totalinsured shares, unless the payment is waived or reduced by the NCUA Board.

Mortgage loans serviced for others are not included in the accompanying statements of financial condition. Thetotal unpaid principal balance of these loans is approximately $15,161,000 and $16,008,000 as of December 31,2008 and 2007, respectively. The total balance of the custodial escrow accounts maintained in connection withthe foregoing loan servicing is approximately $52,000 and $48,000 as of December 31, 2008 and 2007,respectively.

Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in netincome. Certain changes in assets, liabilities, such as unrealized gains and losses on available-for-sale securities,are reported as a separate component of the member equity section of the statements of financial condition.

A-8


A-7


Loans Receivable

Allowance for Loan Losses

Premises and Equipment

NCUSIF Deposit

Members' Share and Savings Accounts

Regular Reserve

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by theprovision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowancebalance required using past loans loss experience, known and inherent risks in the nature and volume of theportfolio, information about specific borrower situations and estimated collateral values, economic conditions, andother factors. Allocations of the allowance may be made for specific loans, but the entire allowance is availablefor any loan that, in Management's judgment, should be charged-off. Loan losses are charged against theallowance for loan losses when Management believes the uncollectibility of a loan balance is confirmed.

The Credit Union is required by regulation to maintain a statutory reserve. This reserve, which represents aregulatory restriction of undivided earnings, is not available for the payment of dividends.

The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with National CreditUnion Administration (NCUA) regulations, which require the maintenance of a deposit by each insured creditunion in an amount equal to one percent of its insurable shares. The deposit would be refunded to the CreditUnion if its insurance coverage is terminated, it converts to insurance coverage from another source, or theoperations of the fund are transferred from the NCUA Board.

Members' shares are subordinated to all other liabilities of the Credit Union upon liquidation. Interest onmembers' share and savings accounts is based on available earnings at the end of an interest period and is notguaranteed by the Credit Union. Interest rates on members' share accounts are set by the Board of Directors,based on an evaluation of current and future market conditions.

The allowance consists of specific and general components. The specific component relates to loans that areindividually classified as impaired or loans otherwise classified as substandard or doubtful. The generalcomponent covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Impairment is generally evaluated intotal for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, butmay be evaluated on an individual loan basis if deemed necessary. If a loan is impaired, a portion of theallowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using theloan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

Loans receivable are stated at unpaid principal balances, less an allowance for loan losses. Interest on loans isrecognized over the term of the loan and is calculated on principal amounts outstanding using the simple-interestmethod for consumer loans and 30/360 amortized calculation for first mortgages.

Visa Inc. StockDuring 2007, the Credit Union received notice of the restructuring of Visa Inc. As part of the restructuring, theCredit Union was issued shares of Class B Common Stock in Visa Inc. The shares represented by this issuanceare fully paid and non-assessable. During the first quarter of 2008, there was a partial redemption of the CreditUnion's Class B Common Stock in Visa Inc. leaving a balance of 8,875 shares as of December 31, 2008.Currently, there is no readily available fair market value of the stock and therefore, the stock is not reflected in theCredit Union’s financial statements. Once a readily available fair market value of the stock is available, the valueof the stock will be reflected in the Credit Union's financial statements.

Building(s), furniture and equipment, and leasehold improvements are carried at cost, less accumulateddepreciation and amortization. Building(s), furniture, and equipment are depreciated using the straight-linemethod over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using thestraight-line method over the terms of the related leases. Maintenance and repairs are expensed, and majorimprovements are capitalized. Management reviews premises and equipment for impairment whenever events orchanges in circumstances indicate that the carrying value may not be recoverable. Gains and losses on disposalsare included in current operations.

A-7


A-10


Gross GrossAmortized Unrealized Unrealized Fair

Cost Gains Losses ValueFederal agency securities 32,486,462$ 518,636$ (46)$ 33,005,052$U.S. Government obligations 497,128 58,822 - 555,950 Total 32,983,590$ 577,458$ (46)$ 33,561,002$


Cost Gains Losses ValueFederal agency securities 25,486,288$ 267,764$ (15,400)$ 25,738,652$U.S. Government obligations 496,377 13,423 - 509,800 Total 25,982,665$ 281,187$ (15,400)$ 26,248,452$

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

Federal agency securities -$ -$ 91,646$ (46)$

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

Federal agency securities -$ -$ 2,765,363$ (15,400)$

Amortized FairCost Value

1 to 5 years 497,128$ 555,950$Mortgage-backed securities 32,486,462 33,005,052 Total 32,983,590$ 33,561,002$

December 31, 2008

The Credit Union has agreed to pledge certain securities to the United States Treasury to secure funds depositedby Federal Agencies in excess of $100,000. The aggregate book value of the pledged securities wasapproximately $497,000 as of December 31, 2008.

December 31, 2007

There are a total of one and eight debt securities with unrealized losses as of December 31, 2008 and 2007,respectively. The unrealized losses associated with these securities are considered temporary as the Credit Unionhas the ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fairvalue.

Less than 12 months

December 31, 2007

12 months or greaterLess than 12 months

Gross unrealized losses and fair value by length of time that the individual securities have been in a continuousunrealized loss position at December 31, 2008 and 2007, are as follows:

12 months or greater

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

December 31, 2008

Investments classified as held-to maturity securities consist of the following:Held-to-Maturity

December 31, 2008

A-10


A-9



Cost Gains Losses ValueFederal agency securities 34,713,871$ 554,862$ (1,269)$ 35,267,464$


Cost Gains Losses ValueFederal agency securities 30,781,718$ 277,507 - $ $ 31,059,225$

000,000,02sdnob lapicinuM - - 20,000,000817,187,05latoT $ 277,507 - $ $ 51,059,225$

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

Federal agency securities 2,009,218$ (1,269)$ -$ -$


501,300,3raey 1 nihtiW $ 3,065,033$242,440,91sraey 5 ot 1 19,294,814

22,047,347 22,359,847325,666,21seitiruces dekcab-egagtroM 12,907,617078,317,43latoT $ 35,267,464$

December 31, 2008


There is one debt security with unrealized losses as of December 31, 2008, respectively. The unrealized lossesassociated with these securities are considered temporary as the Credit Union has the ability to hold thesesecurities for a period of time sufficient to allow for any anticipated recovery in fair value.

December 31, 2008

Investments classified as available-for-sale securities consist of the following:Available-for-Sale

There were no unrealized losses as of December 31, 2007. Gross unrealized losses and fair value by length oftime that the individual securities have been in a continuous unrealized loss position at December 31, 2008, are asfollows:

December 31, 2007

Less than 12 months 12 months or greaterDecember 31, 2008

NOTE 2: INVESTMENTS

A-9


A-10



Cost Gains Losses ValueFederal agency securities 32,486,462$ 518,636$ (46)$ 33,005,052$U.S. Government obligations 497,128 58,822 - 555,950 Total 32,983,590$ 577,458$ (46)$ 33,561,002$


Cost Gains Losses ValueFederal agency securities 25,486,288$ 267,764$ (15,400)$ 25,738,652$U.S. Government obligations 496,377 13,423 - 509,800 Total 25,982,665$ 281,187$ (15,400)$ 26,248,452$

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

Federal agency securities -$ -$ 91,646$ (46)$

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

Federal agency securities -$ -$ 2,765,363$ (15,400)$


1 to 5 years 497,128$ 555,950$Mortgage-backed securities 32,486,462 33,005,052 Total 32,983,590$ 33,561,002$

December 31, 2008

The Credit Union has agreed to pledge certain securities to the United States Treasury to secure funds depositedby Federal Agencies in excess of $100,000. The aggregate book value of the pledged securities wasapproximately $497,000 as of December 31, 2008.

December 31, 2007

There are a total of one and eight debt securities with unrealized losses as of December 31, 2008 and 2007,respectively. The unrealized losses associated with these securities are considered temporary as the Credit Unionhas the ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fairvalue.

Less than 12 months

December 31, 2007

12 months or greaterLess than 12 months

Gross unrealized losses and fair value by length of time that the individual securities have been in a continuousunrealized loss position at December 31, 2008 and 2007, are as follows:

12 months or greater


December 31, 2008

Investments classified as held-to maturity securities consist of the following:Held-to-Maturity

December 31, 2008

A-10


A-9



Cost Gains Losses ValueFederal agency securities 34,713,871$ 554,862$ (1,269)$ 35,267,464$


Cost Gains Losses ValueFederal agency securities 30,781,718$ 277,507 - $ $ 31,059,225$

000,000,02sdnob lapicinuM - - 20,000,000817,187,05latoT $ 277,507 - $ $ 51,059,225$

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

Federal agency securities 2,009,218$ (1,269)$ -$ -$


501,300,3raey 1 nihtiW $ 3,065,033$242,440,91sraey 5 ot 1 19,294,814

22,047,347 22,359,847325,666,21seitiruces dekcab-egagtroM 12,907,617078,317,43latoT $ 35,267,464$

December 31, 2008


There is one debt security with unrealized losses as of December 31, 2008, respectively. The unrealized lossesassociated with these securities are considered temporary as the Credit Union has the ability to hold thesesecurities for a period of time sufficient to allow for any anticipated recovery in fair value.

December 31, 2008

Investments classified as available-for-sale securities consist of the following:Available-for-Sale

There were no unrealized losses as of December 31, 2007. Gross unrealized losses and fair value by length oftime that the individual securities have been in a continuous unrealized loss position at December 31, 2008, are asfollows:

December 31, 2007

Less than 12 months 12 months or greaterDecember 31, 2008

NOTE 2: INVESTMENTS

A-9


A-12


Premises and equipment consist of the following:

2008 2007Building(s) 3,921,323$ 3,921,323$Furniture and equipment 6,277,751 5,866,542Leasehold improvements 1,248,144 1,095,964

11,447,218 10,883,829 Less accumulated depreciation and amortization (7,350,739) (6,438,687) Premises and equipment, net 4,096,479$ 4,445,142$

Members' share and savings accounts consist of the following:

2008 2007Share draft accounts 56,559,235$ 51,086,997$Money market accounts 46,944,270 48,539,371Share accounts 206,957,348 179,876,611Certificate accounts 248,091,317 218,662,734 Total share and savings accounts 558,552,170$ 498,165,713$

2008 20072.57% - 3.00% 23,940,466$ 24,085$3.01% - 4.00% 138,260,212 10,697,7414.01% - 5.00% 63,252,096 96,857,5245.01% - 5.50% 22,638,543 111,083,384

248,091,317$ 218,662,734$

Year ending December 31, Amount2009 191,671,770$2010 32,908,5062011 9,867,7442012 5,740,1472013 7,903,150

248,091,317$

On October 3, 2008, President George W Bush signed into law the “Emergency Economic Stabilization Act of2008”, which temporarily increases federal deposit insurance coverage. The new law amends the share insurancecoverage provided by the National Credit Union Administration (NCUA) through the National Credit Union ShareInsurance Fund (NCUSIF). The new law become effective on October 3, 2008, and will remain in place throughDecember 31, 2009. It provides for an increase in the minimum NCUSIF coverage from $100,000 to $250,000 onmember share accounts. This includes all account types, such as savings, checking, money market, andcertificates of deposit. Individual Retirement Account coverage remains at the previously established level of$250,000.

December 31,

As of December 31, 2008, the aggregate amount of certificate accounts in denominations of $100,000 or morewere approximately $49,475,000.

December 31,

Scheduled rates of certificate accounts are as follows:

BalanceDecember 31,

As of December 31, 2008, scheduled maturities of certificate accounts are as follows:

NOTE 4: PREMISES AND EQUIPMENT

NOTE 5: MEMBERS' SHARE AND SAVINGS ACCOUNTS

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2008 2007Deposits at corporate credit unions 25,810,726$ 26,987,110$Annuity contracts - 4,000,000Certificates of deposit 490,000 1,880,000Other 94,517 68,664 Total 26,395,243$ 32,935,774$

2008 2007 $ 750,000 $ 702,000 500,000 500,000 40,000 40,000

Total $ 1,290,000 $ 1,242,000

Loans receivable consist of the following:

2008 2007Real estate loans: Fixed rate 294,635,936$ 265,452,283$ Variable rate 118,519,948 80,405,978

413,155,884 345,858,261

Vehicle loans 76,380,867 71,099,462Unsecured loans 53,888,181 47,318,813Other consumer loans 5,545,474 6,221,526

548,970,406 470,498,062Allowance for loan losses (5,049,371) (2,280,286) Loans receivable, net 543,921,035$ 468,217,776$

The following summarizes the activity in the allowance for loan losses account:

2008 2007Balance, beginning of year 2,280,286$ 1,594,841$Provision for loan losses 5,224,200 1,831,500Recoveries 219,757 238,414Loans charged off (2,674,872) (1,384,469)Balance, end of year 5,049,371$ 2,280,286$

December 31,

WESCORP Federal Credit UnionEASCORP Federal Credit Union

December 31,

Members United Corporate Federal Credit Union

Other Investments

Other investments consist of the following:

Loans on which the accrual of interest has been discontinued or reduced approximated $2,670,000 and $1,207,000as of December 31, 2008 and 2007, respectively. If interest on these loans had been accrued, such income wouldhave approximated $101,000 and $30,000 as of December 31, 2008 and 2007, respectively.

December 31,

The Credit Union maintains a deposit at Corporate Credit Unions, which exceeds federally insured limits.Included in the deposit at corporate credit unions is a restricted share base that is required for membership. Theseamounts are approximated in the table below:

December 31,

NOTE 3: LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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Premises and equipment consist of the following:

2008 2007Building(s) 3,921,323$ 3,921,323$Furniture and equipment 6,277,751 5,866,542Leasehold improvements 1,248,144 1,095,964

11,447,218 10,883,829 Less accumulated depreciation and amortization (7,350,739) (6,438,687) Premises and equipment, net 4,096,479$ 4,445,142$

Members' share and savings accounts consist of the following:

2008 2007Share draft accounts 56,559,235$ 51,086,997$Money market accounts 46,944,270 48,539,371Share accounts 206,957,348 179,876,611Certificate accounts 248,091,317 218,662,734 Total share and savings accounts 558,552,170$ 498,165,713$

2008 20072.57% - 3.00% 23,940,466$ 24,085$3.01% - 4.00% 138,260,212 10,697,7414.01% - 5.00% 63,252,096 96,857,5245.01% - 5.50% 22,638,543 111,083,384

248,091,317$ 218,662,734$

Year ending December 31, Amount2009 191,671,770$2010 32,908,5062011 9,867,7442012 5,740,1472013 7,903,150

248,091,317$

On October 3, 2008, President George W Bush signed into law the “Emergency Economic Stabilization Act of2008”, which temporarily increases federal deposit insurance coverage. The new law amends the share insurancecoverage provided by the National Credit Union Administration (NCUA) through the National Credit Union ShareInsurance Fund (NCUSIF). The new law become effective on October 3, 2008, and will remain in place throughDecember 31, 2009. It provides for an increase in the minimum NCUSIF coverage from $100,000 to $250,000 onmember share accounts. This includes all account types, such as savings, checking, money market, andcertificates of deposit. Individual Retirement Account coverage remains at the previously established level of$250,000.

December 31,

As of December 31, 2008, the aggregate amount of certificate accounts in denominations of $100,000 or morewere approximately $49,475,000.

December 31,

Scheduled rates of certificate accounts are as follows:

BalanceDecember 31,

As of December 31, 2008, scheduled maturities of certificate accounts are as follows:

NOTE 4: PREMISES AND EQUIPMENT

NOTE 5: MEMBERS' SHARE AND SAVINGS ACCOUNTS

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2008 2007Deposits at corporate credit unions 25,810,726$ 26,987,110$Annuity contracts - 4,000,000Certificates of deposit 490,000 1,880,000Other 94,517 68,664 Total 26,395,243$ 32,935,774$

2008 2007 $ 750,000 $ 702,000 500,000 500,000 40,000 40,000

Total $ 1,290,000 $ 1,242,000

Loans receivable consist of the following:

2008 2007Real estate loans: Fixed rate 294,635,936$ 265,452,283$ Variable rate 118,519,948 80,405,978

413,155,884 345,858,261

Vehicle loans 76,380,867 71,099,462Unsecured loans 53,888,181 47,318,813Other consumer loans 5,545,474 6,221,526

548,970,406 470,498,062Allowance for loan losses (5,049,371) (2,280,286) Loans receivable, net 543,921,035$ 468,217,776$

The following summarizes the activity in the allowance for loan losses account:

2008 2007Balance, beginning of year 2,280,286$ 1,594,841$Provision for loan losses 5,224,200 1,831,500Recoveries 219,757 238,414Loans charged off (2,674,872) (1,384,469)Balance, end of year 5,049,371$ 2,280,286$

December 31,

WESCORP Federal Credit UnionEASCORP Federal Credit Union

December 31,

Members United Corporate Federal Credit Union

Other Investments

Other investments consist of the following:

Loans on which the accrual of interest has been discontinued or reduced approximated $2,670,000 and $1,207,000as of December 31, 2008 and 2007, respectively. If interest on these loans had been accrued, such income wouldhave approximated $101,000 and $30,000 as of December 31, 2008 and 2007, respectively.

December 31,

The Credit Union maintains a deposit at Corporate Credit Unions, which exceeds federally insured limits.Included in the deposit at corporate credit unions is a restricted share base that is required for membership. Theseamounts are approximated in the table below:

December 31,

NOTE 3: LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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Amount $ 319,000 194,000 170,000 223,000 185,000 1,095,000

2,186,000$

BeforeApplication of Statement 158

Adjustments for Audit Period

After Application of Statement 158

Prepaid for retirement benefits (942,019)$ (26,159)$ (968,178)$Total other assets 2,785,586$ (26,159)$ 2,759,427$Accumulated other comprehensive income 303,666$ (26,159)$ 277,507$Total members' equity 65,760,507$ (26,159)$ 65,734,348$

Year endingDecember 31, Amount

2009 237,000$2010 112,0002011 93,0002012 41,0002013 41,000

2014 and after 44,000Total 568,000$

Total rental expenses approximated $245,000 and $222,000 for the years ended December 31, 2008 and 2007,respectively.

As of December 31, 2008, the Credit Union had an unused line-of-credit with Eastern Corporate Federal CreditUnion. The terms of the agreement require the pledging of all present and future loans and equipment as securityfor obligations under this line-of-credit agreement. The interest rate terms under this line-of-credit agreement arevariable. As of December 31, 2008, the total line-of-credit was $14,000,000, of which the Credit Union had noborrowings.

Incremental Effect of Applying FASB Statement No. 158on Individual Line Items in the Statement of Financial Position

December 31, 2007

Future benefit payments and contributions:

The Credit Union has entered into various leasing agreements. The minimum remaining non-cancelable leaseobligations approximate the following as of December 31, 2008:

The Credit Union is a party to various miscellaneous legal actions normally associated with financial institutions,the aggregate of which, in Management's opinion, would not be material to the Credit Union's financial condition.

1/2/20111/1/2012

1/1/2010

1/2/2013

The following benefits payments, which reflect expected future service, as appropriate, are expected to be paid:

Expected benefit payments for period beginning:

five years thereafter

1/1/2009

NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES

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401(k) Plan & Trust

Deferred Compensation Plan

Defined Benefit Pension Plan

December 31, December 31,Funded status: 2008 2007Projected benefit obligation (3,875,854)$ (3,683,053)$Plan assets at fair value 2,907,676 3,915,806 Funded status (968,178)$ 232,753$

December 31, December 31,2008 2007

Other losses (gains) 1,245,038$ (26,159)$1,245,038$ (26,159)$

December 31, December 31,Net periodic pension cost: 2008 2007

218,446$ 235,862$(288,712) (288,877)

Net amortization and deferral - 16,710 Net periodic pension cost (70,266)$ (36,305)$

December 31, December 31,Assumptions: 2008 2007

5.50% 5.75%0.00% 0.00%

Expected long-term rate of return on plan assets 4.50% 7.50%Average future working lifetime 12.1 12.1

The Credit Union has a qualified, contributory 401(k) plan covering substantially all full-time employees.Employees are eligible to participate in the plan after completing three months of credited service and attainingage 21. Employer matching contributions are 50% of participants' contributions up to a maximum employercontribution of 2%. The Credit Union also has the ability to make a discretionary contribution if approved by theBoard of Directors. Participant's pre-tax contributions are limited by the Internal Revenue Code. Participantsbecome 100% vested in employer contributions after six years of credited service. The 401(k) plan expense wasapproximately $542,000 and $489,000 for the years ended December 31, 2008 and 2007, respectively.

The Credit Union has a non-qualified pension plan for a select group of Management. Participants are eligiblebased on approval by the Credit Union's Board of Directors. Two participants are given access to employer fundsto be invested in certain investments vehicles. The benefit is the earnings of those investments above the initialinvestment balance. The other participant's plan is funded by a contractual amount. The liability related to theseplans approximated $258,000 and $217,000 as of December 31, 2008 and 2007, respectively.

Effective March 31, 2007, the Credit Union froze the defined benefit pension plan. Employees hired on or afterApril 1, 2007, are not qualified to become participants in the defined benefit plan. Ultimately, the defined benefitplan will be terminated at which time participants will become 100% vested and funds will be distributed.

The following table sets forth the Pension Plan's funded status and amounts recognized in the Credit Union'sstatement of financial condition as of December 31, 2008 and 2007 using a measurement date of December 31,2008 and 2007:

The investment goal is to achieve investment results that will contribute to the proper funding of the pension planby exceeding the rate of inflation over the long-term. In addition, investment managers for the Trust are expectedto provide above average performance when compared to their peer managers. Performance volatility is alsomonitored. Risk/volatility is further managed by the distinct investment objectives of each of the Trust funds andthe diversification within the fund.

Expected return on plan assets

Assumed rate of future compensation increasesWeighted average discount rate

Interest cost

Other information for the Credit Union's defined benefit pension plan is as follows for the years ended:

Accumulated other comprehensive income

Amount recognized in accumulated other comprehensive income:

NOTE 6: EMPLOYEE BENEFITS

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Amount $ 319,000 194,000 170,000 223,000 185,000 1,095,000

2,186,000$

BeforeApplication of Statement 158

Adjustments for Audit Period

After Application of Statement 158

Prepaid for retirement benefits (942,019)$ (26,159)$ (968,178)$Total other assets 2,785,586$ (26,159)$ 2,759,427$Accumulated other comprehensive income 303,666$ (26,159)$ 277,507$Total members' equity 65,760,507$ (26,159)$ 65,734,348$

Year endingDecember 31, Amount

2009 237,000$2010 112,0002011 93,0002012 41,0002013 41,000

2014 and after 44,000Total 568,000$

Total rental expenses approximated $245,000 and $222,000 for the years ended December 31, 2008 and 2007,respectively.

As of December 31, 2008, the Credit Union had an unused line-of-credit with Eastern Corporate Federal CreditUnion. The terms of the agreement require the pledging of all present and future loans and equipment as securityfor obligations under this line-of-credit agreement. The interest rate terms under this line-of-credit agreement arevariable. As of December 31, 2008, the total line-of-credit was $14,000,000, of which the Credit Union had noborrowings.

Incremental Effect of Applying FASB Statement No. 158on Individual Line Items in the Statement of Financial Position

December 31, 2007

Future benefit payments and contributions:

The Credit Union has entered into various leasing agreements. The minimum remaining non-cancelable leaseobligations approximate the following as of December 31, 2008:

The Credit Union is a party to various miscellaneous legal actions normally associated with financial institutions,the aggregate of which, in Management's opinion, would not be material to the Credit Union's financial condition.

1/2/20111/1/2012

1/1/2010

1/2/2013

The following benefits payments, which reflect expected future service, as appropriate, are expected to be paid:

Expected benefit payments for period beginning:

five years thereafter

1/1/2009

NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES

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401(k) Plan & Trust

Deferred Compensation Plan

Defined Benefit Pension Plan

December 31, December 31,Funded status: 2008 2007Projected benefit obligation (3,875,854)$ (3,683,053)$Plan assets at fair value 2,907,676 3,915,806 Funded status (968,178)$ 232,753$

December 31, December 31,2008 2007

Other losses (gains) 1,245,038$ (26,159)$1,245,038$ (26,159)$

December 31, December 31,Net periodic pension cost: 2008 2007

218,446$ 235,862$(288,712) (288,877)

Net amortization and deferral - 16,710 Net periodic pension cost (70,266)$ (36,305)$

December 31, December 31,Assumptions: 2008 2007

5.50% 5.75%0.00% 0.00%

Expected long-term rate of return on plan assets 4.50% 7.50%Average future working lifetime 12.1 12.1

The Credit Union has a qualified, contributory 401(k) plan covering substantially all full-time employees.Employees are eligible to participate in the plan after completing three months of credited service and attainingage 21. Employer matching contributions are 50% of participants' contributions up to a maximum employercontribution of 2%. The Credit Union also has the ability to make a discretionary contribution if approved by theBoard of Directors. Participant's pre-tax contributions are limited by the Internal Revenue Code. Participantsbecome 100% vested in employer contributions after six years of credited service. The 401(k) plan expense wasapproximately $542,000 and $489,000 for the years ended December 31, 2008 and 2007, respectively.

The Credit Union has a non-qualified pension plan for a select group of Management. Participants are eligiblebased on approval by the Credit Union's Board of Directors. Two participants are given access to employer fundsto be invested in certain investments vehicles. The benefit is the earnings of those investments above the initialinvestment balance. The other participant's plan is funded by a contractual amount. The liability related to theseplans approximated $258,000 and $217,000 as of December 31, 2008 and 2007, respectively.

Effective March 31, 2007, the Credit Union froze the defined benefit pension plan. Employees hired on or afterApril 1, 2007, are not qualified to become participants in the defined benefit plan. Ultimately, the defined benefitplan will be terminated at which time participants will become 100% vested and funds will be distributed.

The following table sets forth the Pension Plan's funded status and amounts recognized in the Credit Union'sstatement of financial condition as of December 31, 2008 and 2007 using a measurement date of December 31,2008 and 2007:

The investment goal is to achieve investment results that will contribute to the proper funding of the pension planby exceeding the rate of inflation over the long-term. In addition, investment managers for the Trust are expectedto provide above average performance when compared to their peer managers. Performance volatility is alsomonitored. Risk/volatility is further managed by the distinct investment objectives of each of the Trust funds andthe diversification within the fund.

Expected return on plan assets

Assumed rate of future compensation increasesWeighted average discount rate

Interest cost

Other information for the Credit Union's defined benefit pension plan is as follows for the years ended:

Accumulated other comprehensive income

Amount recognized in accumulated other comprehensive income:

NOTE 6: EMPLOYEE BENEFITS

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Risk Based Net Worth Ratio

considered complex?

Ratio/ Ratio/Amount Requirement Amount Requirement

Amount needed to beclassified as "well capitalized" 46,198,525$ 7.00% 42,003,258$ 7.00%

Actual net worth 67,680,835$ 10.25% 65,430,682$ 10.90%

6.71% 7.03%December 31, 2008

General Capital RequirementsDecember 31, 2008 December 31, 2007

YesYes

To increase consistency and comparability in fair value measurements and related disclosures, the fair valuehierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fairvalue hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets orliabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used tomeasure fair value might fall in different levels of the fair value hierarchy. The level in the fair value hierarchywithin which the fair value measurement in its entirety falls shall be determined based on the lowest level inputthat is significant to the fair value measurement in its entirety. Assessing the significance of a particular input tothe fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

The availability of inputs relevant to the asset or liability and the relative reliability of the inputs might affect theselection of appropriate valuation techniques. However, the fair value hierarchy prioritizes the inputs to valuationtechniques, not the valuation techniques.

The fair value of financial instruments represents the fair value in terms of the price in an orderly transactionbetween market participants to sell an asset or transfer a liability in the principal (or most advantageous) marketfor the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction atthe measurement date, considered from the perspective of a market participant that holds the asset or owes theliability. Therefore, the objective of a fair value measurement is to determine the price that would be received tosell the asset or paid to transfer the liability at the measurement date (an exit price).

December 31, 2007

Quantitative measures established by regulation to ensure capital adequacy require the Credit Union to maintainminimum amounts and ratios (set forth in the table below) of net worth to total assets. Furthermore, credit unionsover $10,000,000 in assets are also required to determine if they meet the definition of a "complex" credit union asdefined by regulation. The minimum risk based net worth ratio to be considered complex under the regulatoryframework is 6.00%. If the Credit Union falls under the "complex" category, an additional risk-based net worth(RBNW) requirement is imposed that could result in capital requirements in excess of minimum levels establishedfor non-complex credit unions.


Key aspects of the Credit Union's minimum capital amounts and ratios are summarized as follows:

The Credit Union is subject to various regulatory capital requirements administered by the NCUA. Failure to meetminimum capital requirements can initiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on the Credit Union's financial statements. Undercapital adequacy regulations and the regulatory framework for prompt corrective action, the Credit Union mustmeet specific capital regulations that involve quantitative measures of the Credit Union's assets, liabilities, andcertain off-balance-sheet items as calculated under generally accepted accounting practices. The Credit Union'scapital amounts and net worth classification are also subject to qualitative judgments by the regulators aboutcomponents, risk weightings, and other factors.

NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 9: CAPITAL REQUIREMENTS

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Off-Balance-Sheet Risk

Concentrations of Credit Risk

Federal Home Loan Bank Loan Interest Rate AmountLoan No. 1 3.97% $ 5,560,995 Loan No. 2 3.98% 5,644,554 Loan No. 3 4.76% 19,602,625

$ 30,808,174

As a member of the Federal Home Loan Bank (FHLB), and in accordance with an agreement with them, theCredit Union is required to maintain qualified collateral for advances. Qualified collateral, as defined in theFHLB Statement of Credit Policy, is free and clear of liens, pledges, and encumbrances. The Federal Home LoanBank of Boston has established a Credit Availability based on collateral. For purposes of the Credit Availability,total assets is based upon the most recent quarterly financial information submitted by the Credit Union to theirregulatory agency. As of December 31, 2008, the outstanding balances, maturities, and interest rates of theseloan(s) were as follows:

September 4, 2018January 30, 2014

Maturity dateDecember 30, 2013

The Credit Union is party to financial instruments with off-balance-sheet risk in the normal course of business tomeet the financing needs of its members and to reduce its own exposure to fluctuations in interest rates. Thesefinancial instruments include commitments to extend credit. These instruments involve, to varying degrees,elements of credit and interest-rate risk in excess of the amount recognized in the statements of financialcondition.

A significant amount of the Credit Union's business activity is with its members who are employees or formeremployees of the federal government. The Credit Union may be exposed to credit risk from a regional economicstandpoint, since a significant concentration of its borrowers work or reside in the eastern Massachusetts area.However, the loan portfolio is well diversified and the Credit Union does not have any significant concentrationsof credit risk except unsecured loans, which by their nature increase the risk of loss compared to those loans thatare collateralized. The Credit Union's policy for repossessing collateral is that when all other collection effortshave been exhausted, the Credit Union enforces its first lien holder status and repossesses the collateral. TheCredit Union has full and complete access to repossessed collateral. Repossessed collateral normally consists ofvehicles and residential real estate.

Commitments to extend credit are agreements to lend, as long as there is no violation of any condition establishedin the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many ofthe commitments may expire without being fully drawn upon, the total commitment amounts do not necessarilyrepresent future cash requirements. As of December 31, 2008, the members' total lines of credit approximated$252,723,000, of which the Credit Union had unfunded commitments under such lines of credit of approximately$144,770,000. The Credit Union evaluates each member's creditworthiness on a case-by-case basis. The amountof collateral obtained, if deemed necessary by the Credit Union upon extension of credit, is based onManagement's credit evaluation of the member.

The Credit Union's exposure to credit loss in the event of non-performance by the other party to the financialinstrument for commitments to extend credit is represented by the contractual amount of those instruments.

NOTE 8: BORROWINGS

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considered complex?

Ratio/ Ratio/Amount Requirement Amount Requirement

Amount needed to beclassified as "well capitalized" 46,198,525$ 7.00% 42,003,258$ 7.00%

Actual net worth 67,680,835$ 10.25% 65,430,682$ 10.90%

6.71% 7.03%December 31, 2008

General Capital RequirementsDecember 31, 2008 December 31, 2007

YesYes

To increase consistency and comparability in fair value measurements and related disclosures, the fair valuehierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fairvalue hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets orliabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used tomeasure fair value might fall in different levels of the fair value hierarchy. The level in the fair value hierarchywithin which the fair value measurement in its entirety falls shall be determined based on the lowest level inputthat is significant to the fair value measurement in its entirety. Assessing the significance of a particular input tothe fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

The availability of inputs relevant to the asset or liability and the relative reliability of the inputs might affect theselection of appropriate valuation techniques. However, the fair value hierarchy prioritizes the inputs to valuationtechniques, not the valuation techniques.

The fair value of financial instruments represents the fair value in terms of the price in an orderly transactionbetween market participants to sell an asset or transfer a liability in the principal (or most advantageous) marketfor the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction atthe measurement date, considered from the perspective of a market participant that holds the asset or owes theliability. Therefore, the objective of a fair value measurement is to determine the price that would be received tosell the asset or paid to transfer the liability at the measurement date (an exit price).

December 31, 2007

Quantitative measures established by regulation to ensure capital adequacy require the Credit Union to maintainminimum amounts and ratios (set forth in the table below) of net worth to total assets. Furthermore, credit unionsover $10,000,000 in assets are also required to determine if they meet the definition of a "complex" credit union asdefined by regulation. The minimum risk based net worth ratio to be considered complex under the regulatoryframework is 6.00%. If the Credit Union falls under the "complex" category, an additional risk-based net worth(RBNW) requirement is imposed that could result in capital requirements in excess of minimum levels establishedfor non-complex credit unions.


Key aspects of the Credit Union's minimum capital amounts and ratios are summarized as follows:

The Credit Union is subject to various regulatory capital requirements administered by the NCUA. Failure to meetminimum capital requirements can initiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on the Credit Union's financial statements. Undercapital adequacy regulations and the regulatory framework for prompt corrective action, the Credit Union mustmeet specific capital regulations that involve quantitative measures of the Credit Union's assets, liabilities, andcertain off-balance-sheet items as calculated under generally accepted accounting practices. The Credit Union'scapital amounts and net worth classification are also subject to qualitative judgments by the regulators aboutcomponents, risk weightings, and other factors.

NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 9: CAPITAL REQUIREMENTS

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Off-Balance-Sheet Risk

Concentrations of Credit Risk

Federal Home Loan Bank Loan Interest Rate AmountLoan No. 1 3.97% $ 5,560,995 Loan No. 2 3.98% 5,644,554 Loan No. 3 4.76% 19,602,625

$ 30,808,174

As a member of the Federal Home Loan Bank (FHLB), and in accordance with an agreement with them, theCredit Union is required to maintain qualified collateral for advances. Qualified collateral, as defined in theFHLB Statement of Credit Policy, is free and clear of liens, pledges, and encumbrances. The Federal Home LoanBank of Boston has established a Credit Availability based on collateral. For purposes of the Credit Availability,total assets is based upon the most recent quarterly financial information submitted by the Credit Union to theirregulatory agency. As of December 31, 2008, the outstanding balances, maturities, and interest rates of theseloan(s) were as follows:

September 4, 2018January 30, 2014

Maturity dateDecember 30, 2013

The Credit Union is party to financial instruments with off-balance-sheet risk in the normal course of business tomeet the financing needs of its members and to reduce its own exposure to fluctuations in interest rates. Thesefinancial instruments include commitments to extend credit. These instruments involve, to varying degrees,elements of credit and interest-rate risk in excess of the amount recognized in the statements of financialcondition.

A significant amount of the Credit Union's business activity is with its members who are employees or formeremployees of the federal government. The Credit Union may be exposed to credit risk from a regional economicstandpoint, since a significant concentration of its borrowers work or reside in the eastern Massachusetts area.However, the loan portfolio is well diversified and the Credit Union does not have any significant concentrationsof credit risk except unsecured loans, which by their nature increase the risk of loss compared to those loans thatare collateralized. The Credit Union's policy for repossessing collateral is that when all other collection effortshave been exhausted, the Credit Union enforces its first lien holder status and repossesses the collateral. TheCredit Union has full and complete access to repossessed collateral. Repossessed collateral normally consists ofvehicles and residential real estate.

Commitments to extend credit are agreements to lend, as long as there is no violation of any condition establishedin the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many ofthe commitments may expire without being fully drawn upon, the total commitment amounts do not necessarilyrepresent future cash requirements. As of December 31, 2008, the members' total lines of credit approximated$252,723,000, of which the Credit Union had unfunded commitments under such lines of credit of approximately$144,770,000. The Credit Union evaluates each member's creditworthiness on a case-by-case basis. The amountof collateral obtained, if deemed necessary by the Credit Union upon extension of credit, is based onManagement's credit evaluation of the member.

The Credit Union's exposure to credit loss in the event of non-performance by the other party to the financialinstrument for commitments to extend credit is represented by the contractual amount of those instruments.

NOTE 8: BORROWINGS

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LoansReceivable

Members' Share and Savings

Accounts464,555,714$ 499,430,000$

(1,614,778) 3,255,543(38,195) -

75,703,259 60,386,457538,606,000$ 563,072,000$

Loans Receivable


Accounts

(5,315,035)$ 4,519,830$

On March 19, 2009, the NCUA took additional actions to further stabilize the corporate credit union system andbring the credit union community closer to resolution of the issues facing the system.. The NCUA Board placedboth U.S. Central FCU and Western Corporate (WesCorp) FCU into conservatorship. This action has resulted inthe impairment of the membership capital shares accounts maintained at these institutions. Hanscom FederalCredit Union has a membership capital shares account at WesCorp of approximately $750,000 as of December 31,2008. This membership capital shares account became impaired on March 19, 2009, and will be written off in itsentirety in 2009.

Purchases, issuances, and settlements

Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3)

On January 28, 2009, the National Credit Union Administration Board (NCUA) approved a corporate stabilizationeffort designed to enhance and support a corporate credit union system facing unprecedented strains on liquidityand capital due to extraordinary market disruptions and the current economic climate. The stabilization effortincludes the issuance of a $1 billion capital note to U.S. Central Corporate Federal Credit Union and a declarationof a premium assessment to restore the National Credit Union Share Insurance Fund (NCUSIF) equity ratio to1.30 percent, which will be collected from all federally-insured credit unions in 2009. Each federally-insuredcredit union must record a write-down of their NCUSIF deposit as well as the premium assessment applicable totheir institution. As a result of these actions by the NCUA, the Credit Union's NCUSIF deposit is impaired byapproximately 69% of its value. This impairment approximates $3,578,000. The Credit Union's special premiumassessment to restore the NCUSIF equity ratio to 1.30 percent approximates $1,556,000. Both of these amountswill be recorded as expenses of the credit union in 2009.

Total gains or losses (realized/unrealized) Included in earnings (or changes in net assets)

Change in unrealized gains or losses relating to assetsstill held at the reporting date

Ending balance

Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the period (above)are reported in loans receivable and Members' share and savings accounts as follows:

Beginning balance

NOTE 11: SUBSEQUENT EVENTS

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December 31,2008

CarryingAmount

Quoted Prices in Active Markets

for Identical Assets (Level 1)

SignificantOther Observable

Inputs(Level 2)

SignificantUnobservable

Inputs(Level 3)

Financial Assets:Cash and cash equivalents 5,374,044$ 5,374,044$ -$ -$

Investments: Available-for-sale 35,267,464$ 35,267,464$ -$ -$ Held-to-maturity 32,983,590 33,561,002 - - Other 26,395,243 25,105,243 1,290,000 - Total investments 94,646,297$ 93,933,709$ 1,290,000$ -$

FHLB stock 2,652,300$ -$ 2,652,300$ -$

Loans receivable 543,921,035$ -$ -$ 538,606,000$

Financial Liabilities:Members' share and savings accounts 558,552,170$ -$ -$ 563,072,000$

Borrowed funds 30,808,173$ 31,997,173$ -$ -$

Fair Value Measurement at Reporting Date Using

The measurement date for the fair value of the financial instruments below is the current audit date of thesefinancial statements. The following methods and assumptions were used to estimate fair value of each class offinancial instruments for which it is practicable to estimate fair value.

Level 1 Inputs

B. Whether the Credit Union has the ability to access the price in that market for the asset or liability at themeasurement date.

The carrying value and estimated fair value of financial instruments are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the CreditUnion has the ability to access at the measurement date. A Level 1 input will be available for many financialassets and liabilities, some of which might be exchanged in multiple active markets.

Level 3 Inputs

A. The principal market for the asset or liability or, in the absence of a principal market, the mostadvantageous market for the asset or liability, considered from the perspective of the Credit Union; and,

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset orliability, either directly or indirectly through corroboration with observable market data (market-corroboratedinputs). If the asset or liability has a specified (contractual) term, a Level 2 input must be observable forsubstantially the full term of the asset or liability. An adjustment to a level 2 input that is significant to the fairvalue measurement in its entirety might render the measurement a Level 3 measurement, depending on the level inthe fair value hierarchy within which the inputs used to determine the adjustment fall.

Level 2 Inputs

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measurefair value to the extent that observable inputs are not available, thereby allowing for situations in which there islittle, if any, market activity for the asset or liability at the measurement date. Therefore, unobservable inputsshall reflect the reporting Credit Union's own assumptions about the assumptions that market participants woulduse in pricing the asset or liability (including assumptions about risk). Unobservable inputs shall be developedbased on the best information available in the circumstances, which might include the Credit Union's own data.However, the unobservable inputs shall not ignore information about market participant assumptions that isreasonably available without undue cost and effort.

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LoansReceivable


Accounts464,555,714$ 499,430,000$

(1,614,778) 3,255,543(38,195) -

75,703,259 60,386,457538,606,000$ 563,072,000$

Loans Receivable


Accounts

(5,315,035)$ 4,519,830$

On March 19, 2009, the NCUA took additional actions to further stabilize the corporate credit union system andbring the credit union community closer to resolution of the issues facing the system.. The NCUA Board placedboth U.S. Central FCU and Western Corporate (WesCorp) FCU into conservatorship. This action has resulted inthe impairment of the membership capital shares accounts maintained at these institutions. Hanscom FederalCredit Union has a membership capital shares account at WesCorp of approximately $750,000 as of December 31,2008. This membership capital shares account became impaired on March 19, 2009, and will be written off in itsentirety in 2009.

Purchases, issuances, and settlements

Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3)

On January 28, 2009, the National Credit Union Administration Board (NCUA) approved a corporate stabilizationeffort designed to enhance and support a corporate credit union system facing unprecedented strains on liquidityand capital due to extraordinary market disruptions and the current economic climate. The stabilization effortincludes the issuance of a $1 billion capital note to U.S. Central Corporate Federal Credit Union and a declarationof a premium assessment to restore the National Credit Union Share Insurance Fund (NCUSIF) equity ratio to1.30 percent, which will be collected from all federally-insured credit unions in 2009. Each federally-insuredcredit union must record a write-down of their NCUSIF deposit as well as the premium assessment applicable totheir institution. As a result of these actions by the NCUA, the Credit Union's NCUSIF deposit is impaired byapproximately 69% of its value. This impairment approximates $3,578,000. The Credit Union's special premiumassessment to restore the NCUSIF equity ratio to 1.30 percent approximates $1,556,000. Both of these amountswill be recorded as expenses of the credit union in 2009.

Total gains or losses (realized/unrealized) Included in earnings (or changes in net assets)

Change in unrealized gains or losses relating to assetsstill held at the reporting date

Ending balance

Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the period (above)are reported in loans receivable and Members' share and savings accounts as follows:

Beginning balance

NOTE 11: SUBSEQUENT EVENTS

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December 31,2008

CarryingAmount

Quoted Prices in Active Markets

for Identical Assets (Level 1)

SignificantOther Observable

Inputs(Level 2)

SignificantUnobservable

Inputs(Level 3)

Financial Assets:Cash and cash equivalents 5,374,044$ 5,374,044$ -$ -$

Investments: Available-for-sale 35,267,464$ 35,267,464$ -$ -$ Held-to-maturity 32,983,590 33,561,002 - - Other 26,395,243 25,105,243 1,290,000 - Total investments 94,646,297$ 93,933,709$ 1,290,000$ -$

FHLB stock 2,652,300$ -$ 2,652,300$ -$

Loans receivable 543,921,035$ -$ -$ 538,606,000$

Financial Liabilities:Members' share and savings accounts 558,552,170$ -$ -$ 563,072,000$

Borrowed funds 30,808,173$ 31,997,173$ -$ -$

Fair Value Measurement at Reporting Date Using

The measurement date for the fair value of the financial instruments below is the current audit date of thesefinancial statements. The following methods and assumptions were used to estimate fair value of each class offinancial instruments for which it is practicable to estimate fair value.

Level 1 Inputs

B. Whether the Credit Union has the ability to access the price in that market for the asset or liability at themeasurement date.

The carrying value and estimated fair value of financial instruments are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the CreditUnion has the ability to access at the measurement date. A Level 1 input will be available for many financialassets and liabilities, some of which might be exchanged in multiple active markets.

Level 3 Inputs

A. The principal market for the asset or liability or, in the absence of a principal market, the mostadvantageous market for the asset or liability, considered from the perspective of the Credit Union; and,

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset orliability, either directly or indirectly through corroboration with observable market data (market-corroboratedinputs). If the asset or liability has a specified (contractual) term, a Level 2 input must be observable forsubstantially the full term of the asset or liability. An adjustment to a level 2 input that is significant to the fairvalue measurement in its entirety might render the measurement a Level 3 measurement, depending on the level inthe fair value hierarchy within which the inputs used to determine the adjustment fall.

Level 2 Inputs

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measurefair value to the extent that observable inputs are not available, thereby allowing for situations in which there islittle, if any, market activity for the asset or liability at the measurement date. Therefore, unobservable inputsshall reflect the reporting Credit Union's own assumptions about the assumptions that market participants woulduse in pricing the asset or liability (including assumptions about risk). Unobservable inputs shall be developedbased on the best information available in the circumstances, which might include the Credit Union's own data.However, the unobservable inputs shall not ignore information about market participant assumptions that isreasonably available without undue cost and effort.

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Board of DirectorsPaul J. Marotta Chairman

Mark D. Walsh Vice Chairman

Ferdinand L. Fecteau Treasurer

Frederick C. Ryan Secretary

Lawrence S. Rzepecki Director

Teresa S. Conrad Director

Alan M. Hart Director

John A. Delcore Director

Ray T. Phillips Director

Supervisory CommitteeDavid M. Pronchick Chairman

LeRoy P. Dietrich

Robert Lamontange

James C. O’Doherty

Ray T. Phillips

Branch Offices• Bedford, MA: Great Road

Shopping Center

• Bedford, MA: MITRE K Building

• Boston, MA: Barnes Building

JFK Building, Government Center

Thomas P. O’Neill Building

• Burlington, MA: New England

Executive Park

• Concord, MA: Virginia Road

• Devens, MA: Devens Common

• Jamaica Plain, MA: VA Medical Center

• McLean, VA: MITRE 2

• Natick, MA: Natick Labs

• West Roxbury, MA: VA Medical Center

WWW.HFCU.ORG800 -656 -4328

We do business in accordance with the Federal Fair Housing Law and the Equal Credit Opportunity Act.

HeadquartersHanscom AFB, MA: Eglin Street

WWW.HFCU.ORG800 -656 -4328

Documents

2008 Annual Report - Hanscom Federal Credit Union · 2008 Annual Report Be money smarter.™ ... houses such as Lehman Brothers and Bear Stearns, ... annual review cycle starts with