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					Chairman’s Message

Over the past three years, Pentagon Federal Credit Union’s annual rate of growth of loans, shares, and our rate
of return on assets have been world-class — virtually unmatched in the financial industry. The success of any
credit union, however, can’t be based on numbers alone, but on what we do for each individual member. You
buy cars and purchase homes. You use credit cards. You invest your savings and want high rates of return. In
short, you want low loan rates and high share yields. Our new and used car loan rates were as low as 3.49 % APR
last year, and our certificate yields were as high as 5.5% APY. You’d be hard pressed to do better anywhere else.
Our money market rates, while lower than in years past, beat most financial institutions throughout the year.
It’s simple: We want to be your primary financial institution. We want you to look to Pentagon Federal for all your
financial needs, from your checking accounts to your home mortgage. Having a worldwide membership makes
it impossible to have a branch office convenient to each of you. However, with NetTeller, our 24-hour toll-free
phone system, and our revolutionary “Trust in You” immediate credit for mail-in deposits, you can take care of
all your financial needs without fighting traffic or bad weather. I live in Northern Virginia, and even though our
new Kingstowne branch is about seven miles from my home, I have never used it. I refinanced my mortgage over
the phone, and I deposited checks in foreign ATMs that are part of the CU24 network. Arrangements with several
networks make more than 30,000 ATMs free for your use. Pentagon Federal is my primary financial institution
whether I am at home in Northern Virginia, or working in Germany, Korea, or wherever the Army sends me.
The more I learn about Pentagon Federal, the prouder I am of this organization and its people. I have met our
employees in Alexandria, Eugene, and Omaha. I was present at the grand opening of our new branch at Fort Hood
where our growth has been so extraordinary. We have the best staff possible to serve you and do our best every
day to give you world-class service. If we ever do fail you, we do our best to make it right. I have “spoken” to many
of you since becoming Chairman through my e-mail address at I welcome all
your comments, suggestions, and yes, even your complaints. And I can assure you that no staffer answers your
e-mails — I do. I want to know what we are doing right and what we can do better. We need to know where,
when, or how we may have failed you in our support, if that occurs. We can only correct what we know about.
Unlike banks, our directors and supervisory committee members are volunteers. We oversee the running of
your credit union and ensure that we are doing the best we can for our members. You own this credit union.
We do not pay a profit to investors in our company. We return our “profit” to you in the low loan rates and
high share rates we provide you. The Bailey Building and Loan in the movie “It’s a Wonderful Life” served its
members well because they knew each one of them. While we are much larger and now have more than
550,000 members, we want each of you to feel we are there to take care of you — just like George Bailey.
It is my honor to serve on your board and be your Chairman. I joined my first credit union in 1973. I have spent
more than half that time — 18 years — serving on five credit union boards of directors. Every credit union I
have belonged to placed the members’ interests first — it’s what credit unions do. Years ago, I needed a local
financial institution to take care of my financial needs. With improvements in technology and the Internet, that
is no longer necessary. Pentagon Federal is my primary financial institution. I hope it will be yours, also.
It is my pleasure to serve you.

Jim Quinn
Chairman, Board of Directors
President’s Report

At this time, each year, we report to you on the progress of your credit union, and this year I am pleased to report
we are strong, healthy and growing. But first, I would like to take a moment to say thank you to our membership
for your loyalty to America during some troubling times. And secondly, for your loyalty to Pentagon Federal Credit
Union. Without your commitment, your understanding of what we strive to accomplish, and your willingness to
work with us, we would never be as sound as we are today.
2003 marked the third year running in which your credit union grew at an astounding rate; more than 15% in loans
and shares while maintaining our capital position. Cutting expenses and expanding low-cost services has put us in
a unique position to face an expected rising interest rate environment in 2004. Together, we have forged a strong,
safe financial institution that continues to meet the needs of our members around the world.
The majority of our members have chosen to serve our country. Our core field of membership, the men and
women in the military who give of themselves for a greater cause and a greater good, are the people that this
institution was chartered to serve. We remember them this year particularly as many of them are serving their
country in a foreign place, safeguarding our freedoms and bringing those liberties to the oppressed in other
parts of the world. They represent what America is all about — what Pentagon Federal Credit Union is all about
— people helping people.
When we created systems like NetTeller, Electronic Statement Delivery, and our revolutionary “Trust in You”
Home Deposit Service, we did so with the motivation to provide you the fastest, most convenient and flexible
ways to conduct your credit union business, wherever or whenever you need. Your acceptance and by far your
usage of these systems have also enabled us to operate more cost-effectively which decreases our operating
expenses. These cost savings are used for one primary purpose — to consistently offer you some of the best
rates in the nation.
In 2003 we were pleased to welcome the Fort Hood Community into our field of membership. What an honor it is
to serve III Corps with the 4th ID, First Cavalry , and 13th COSCOM — some of the very men and women putting their
lives on the line for their country on a daily basis. We also welcomed the members of the former DCVAMC Federal
Credit Union into our family. Large or small, we appreciate each opportunity to serve those who serve.
Additionally, together, we surpassed $6 billion in assets and welcomed new members to finish the year at more
than 550,000. All of our success is the direct result of an effective and close relationship between the Board,
Management, staff, and members.
On that note, I would like to thank our Board of Directors — your Board of Directors — for their countless hours of
unpaid time — all in an effort to ensure that you are provided with the best possible financial services, the best rates
and the lowest fees. I also want to thank all of our Pentagon Federal Credit Union employees whose dedication,
attention to member service, and very hard work have lead the way to years of sustained superior performance.
Above all we are honored to serve you, the members of the Pentagon Federal Credit Union.

Frank Pollack
Supervisory Committee Report

In accordance with the Federal Credit Union Act, the Supervisory Committee, appointed by your Board of
Directors, is given the responsibility to determine whether the operations of the credit union are carried
out in accordance with the Act and the regulations of the National Credit Union Administration. We meet
regularly with the internal audit staff and our external auditors to monitor and evaluate the internal controls,
and to ensure that your assets are safeguarded.
The Committee also monitors the performance of credit union employees and elected officials, and the
policies established by the Board of Directors to ensure their compliance.
This year, the Committee engaged the services of the certified public accounting firm of Urbach Kahn
& Werlin LLP to perform specialized audits and to render an opinion as to the fair presentation of the
financial condition of the credit union. As noted in this report, Urbach Kahn & Werlin LLP provided its
unqualified opinion as a result of its independent audit. Based on the activity of our internal auditors,
Urbach Kahn & Werlin LLP and our own observations, we can confidently report that Pentagon Federal
Credit Union continues to maintain the highest level of financial safety and soundness while providing
quality member service.
Your Board of Directors is to be commended for its proven volunteer service and leadership, and the staff for
their dedication to our credit union. Pentagon Federal Credit Union continues to be a worldwide financial
cooperative, and an asset to our global credit union community.
All of us on the Supervisory Committee are proud to volunteer our time to serve the members of Pentagon
Federal Credit Union as liaisons between you and your credit union staff. If ever you need assistance, or
experience difficulties which cannot be resolved through normal channels, I encourage you to contact us.
We are always available to answer your questions or review your comments regarding credit union activities.
The Supervisory Committee is here for your benefit. Please do not hesitate to contact us.

James Sommer
Pentagon Federal Credit Union
Financial Highlights 2003

   3,243       3,627 4,270 5,175     6,058             2,408 2,715 3,233 3,856 4,767

    1999 2000 2001 2002 2003                         1999 2000 2001 2002                    2003
   Total Assets                                       Total Loans
   Dollars in Millions                                Dollars in Millions

   Distribution               0.9 % Interest Expense
                                                             14.1% Compensation and
   of Income 26.3 % Net Income on Borrowed Funds                   Employee Benefits
                                                                                   5.0 % Provision for
                                                                                            Loan Loss
                                                                                      11.5% Other

                           42.2 % Interest Expense
                            on Members’ Accounts

      322       368      445   542   618              10.44% 10.69 % 10.88 % 10.89 % 10.56 %

    1999 2000 2001 2002 2003                         1999      2000         2001     2002     2003
   Retained Earnings                                  Capital Ratio
   Dollars in Millions

       DECEMBER 31, 2003
                                                                Pentagon Federal Credit Union


Independent Auditor's Report.......................................................................................... 1

Financial Statements

   Statements of financial condition................................................................................. 2
   Statements of income.................................................................................................. 3
   Statements of retained earnings.................................................................................. 4
   Statements of cash flows............................................................................................. 5
   Notes to financial statements ................................................................................. 6-17

To the Supervisory Committee and Members of
Pentagon Federal Credit Union

We have audited the accompanying statements of financial condition of Pentagon Federal
Credit Union (“the Credit Union”) as of December 31, 2003 and 2002, and the related
statements of income, retained earnings, and cash flows for the years 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 audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 Pentagon Federal Credit Union as of December 31, 2003 and 2002, and
the results of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

Washington, DC
March 15, 2004

                                                       Pentagon Federal Credit Union

                                                        Statements of Financial Condition
                                                             December 31, 2003 and 2002
                                                                               (dollars in thousands)
                                                                        2003               2002
Cas h and cas h equivalents                                        $        46,963   $         60,507
Federal funds s old                                                         85,000            185,000
Inves tm ents :
  Held-to-m aturity (Note 4)                                                     -             14,926
  Available-for-s ale (Note 4)                                           1,047,031            956,692
  Non-m arketable                                                           20,700             16,851
Loans receivable, net (Notes 5 and 14)                                   4,744,722          3,834,249
Accrued interes t receivable                                                25,919             27,164
NCUSIF depos it (Note 6)                                                    47,447             40,100
Property and equipm ent, net (Note 7)                                       32,515             32,143
Other as s ets                                                               7,536              7,689
            Total as s ets                                         $     6,057,833   $      5,175,321
Liabilities and Mem bers’ Equity
Mem bers ’ accounts (Notes 8 and 14)
  Regular s hares                                                  $       666,918   $        455,633
  PenCheck accounts                                                        412,685            347,607
  Money m arket s hares                                                  1,714,978          1,655,481
  Share certificates                                                     1,707,875          1,451,472
  IRA s hares                                                              100,403             78,794
  IRA certificates                                                         707,150            593,242
            Total m em bers ’ accounts                                   5,310,009          4,582,229
Borrowed funds (Note 9)                                                     99,997                  -
Other liabilities (Notes 10 and 13)                                         30,157             51,101
            Total liabilities                                            5,440,163          4,633,330
Com m itm ents and contingencies (Notes 12 and 14)
Retained earnings (Note 2):
  Statutory res erves                                              $        90,900   $         90,900
  Undivided earnings                                                       517,234            425,767
  Accum ulated other com prehens ive incom e                                 9,536             25,324
            Total m em bers ’ equity                                       617,670            541,991
            Total liabilities and m em bers ’ equity               $     6,057,833   $      5,175,321

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

                                                        Pentagon Federal Credit Union

                                                             Statements of Income
                                    For The Years Ended December 31, 2003 and 2002
                                                                               (dollars in thousands)
                                                                            2003             2002
Interest income:
  Interest on loans                                                    $     269,884    $      270,859
  Interest on investments and federal funds sold                              38,507            42,352
           Total interest income                                             308,391           313,211
Interest expense:
  Members' accounts (Note 8)                                                 144,257           157,123
  Borrowed funds (Note 9)                                                      3,112                 -
           Total interest expense                                            147,369           157,123
           Net interest income                                               161,022           156,088
Provision for loan losses (Note 5)                                            17,242            16,909
           Net interest income after provision for loan losses               143,780           139,179
Other operating income:
  Loan servicing fees and charges                                              26,062           22,457
  Insurance commissions                                                         4,570            1,068
  Other                                                                         3,049            7,880
           Total other operating income                                        33,681           31,405
Operating expenses:
  Compensation and benefits (Note 10)                                          48,073           45,739
  Office operations                                                            18,633           17,941
  Loan servicing                                                                8,888            8,612
  Occupancy                                                                     4,093            4,214
  Professional and outside services                                             1,959            2,281
  Education and promotional expense                                             2,717            2,432
  Other                                                                         3,024            2,371
           Total operating expenses                                            87,387           83,590
           Net income                                                  $       90,074   $       86,994

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

                                                      Pentagon Federal Credit Union

                                                 Statements of Retained Earnings
                                 For The Years Ended December 31, 2003 and 2002
                                                                               (dollars in thousands)
                                               Regular Undivided Comprehensive
                                               Reserve  Earnings Income (Loss)   Total
Balance, December 31, 2001                    $ 90,900 $ 338,669   $ 14,937    $ 444,506
Comprehensive income
  Net income                                            -      86,994                 -       86,994
  Other comprehensive income:
    Net change in unrealized gains on
       investments available-for-sale                   -            -          12,023        12,023
    Minimum pension liability adjustment                -            -          (1,636)       (1,636)
Total comprehensive income                                                                    97,381
Business combination (Note 3)                          -          104                -           104
Balance, December 31, 2002                        90,900      425,767           25,324       541,991
Comprehensive income
  Net income                                            -      90,074                 -       90,074
  Other comprehensive income:
    Net change in unrealized gains on
       investments available-for-sale                   -            -          (15,644)     (15,644)
    Minimum pension liability adjustment                -            -             (144)        (144)
Total comprehensive income                                                                    74,286
Business combination (Note 3)                          -     1,393                    -        1,393
Balance, December 31, 2003                    $   90,900 $ 517,234         $      9,536    $ 617,670

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

                                                   Pentagon Federal Credit Union

                                                    Statements of Cash Flows
                              For The Years Ended December 31, 2003 and 2002
                                                                         (dollars in thousands)
                                                                         2003             2002
Cash flows from operating activities:
 Net income                                                         $      90,074     $    86,994
 Adjustments to reconcile net income to net cash provided
    by operating activities:
      Provision for loan losses                                            17,242          16,909
      Depreciation and amortization                                         5,545           5,397
      Net amortization of premiums and accretion of discounts               3,072           1,561
      Loss on disposal of property and equipment                              258             106
      Changes in:
        Accrued interest receivable                                          1,245         (3,168)
        Other assets                                                           153           (363)
        Accrued interest payable and other liabilities                     (19,694)        10,333
          Net cash provided by operating activities                         97,895        117,769
Cash flows from investing activities:
 Proceeds from sales and maturities of investments                        847,629          598,548
 Purchases of investments                                                (945,607)        (760,264)
 Proceeds from sales of loans                                              12,994           49,553
 Loan originations, net of principal collected on loans to
    members                                                               (940,709)       (687,823)
 Purchases of property and equipment, net                                   (6,175)        (11,438)
 Increase in NCUSIF deposit                                                 (7,347)         (6,298)
          Net cash used in investing activities                         (1,039,215)       (817,722)
Cash flows from financing activities:
 Proceeds from borrowings                                                  99,997               -
 Net increase in members’ accounts                                        727,779         795,835
          Net cash provided by financing activities                       827,776         795,835
Net increase (decrease) in cash and cash equivalents                     (113,544)         95,882
Cash and cash equivalents at beginning of year                            245,507         149,625
Cash and cash equivalents at end of year                            $     131,963 $       245,507

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

                                                     Pentagon Federal Credit Union

                                                             Notes to Financial Statements
                                                                        December 31, 2003


       Pentagon Federal Credit Union (“the Credit Union”) is headquartered in Alexandria, Virginia
       and was organized and chartered on March 25, 1935 as a federal credit union under the
       provisions of the Federal Credit Union Act of 1934 for the purpose of promoting thrift among its
       members and creating a source of credit for provident or productive purposes. The principal
       common bond shared by the Credit Union’s members is their affiliation with the United States
       defense sector. Participation in the Credit Union is limited to those individuals who qualify for
       membership as defined in its charter and bylaws.


       Basis of presentation:

       The accounting and financial reporting policies of the Credit Union are in conformity with
       accounting principles generally accepted in the United States of America (US GAAP) and
       general practices within the credit union industry.

       Use of estimates:

       The preparation of the Credit Union’s financial statements in conformity with US GAAP
       requires management to make certain estimates and assumptions that affect the reported
       amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
       of the financial statements and the reported amounts of revenues and expenses during the
       reporting period. Actual results could differ from those estimates.

       Cash and cash equivalents:

       Cash and cash equivalents consist of cash on hand, shares in other credit unions, and demand
       deposits in other financial institutions. For purposes of the statement of cash flows, the Credit
       Union considers cash and federal funds sold to be cash equivalents.


       Debt securities that management has the ability and intent to hold to maturity are classified as
       held-to-maturity and carried at cost, adjusted for amortization of premiums and accretion of
       discounts using the interest method.

       Other marketable securities are classified as available-for-sale and are carried at fair value.
       Unrealized gains and losses on securities available-for-sale are recorded as a separate
       component of members' equity. Gains and losses on dispositions of securities are computed
       using the specific identification method. Interest on investments includes interest on federal
       funds sold. The Credit Union does not maintain a trading portfolio.

       Non-marketable securities consist of Federal Home Loan Bank stock and certificates and
       deposits with other credit unions, which are carried at cost.

                                                        Pentagon Federal Credit Union

                                                                Notes to Financial Statements
                                                                           December 31, 2003


        Loans receivable and allowance for loan losses:

        Loans receivable are stated at the amount of unpaid principal, adjusted by net deferred loan
        origination costs and fees, and reduced by an allowance for loan losses. Interest on loans is
        recognized over the term of the loan and is calculated using the simple-interest method on
        principal amounts outstanding. Loan fees and certain direct loan origination costs are
        deferred, and the net fee or cost is recognized as an adjustment to interest income using the
        straight-line method over the estimated life of the loans. Prepayments on loans are anticipated
        based on the Credit Union’s experience with similar loans and the recognition period for net
        loan origination costs is adjusted accordingly.

        The allowance for loan losses is maintained at a level that, in management's judgment, is
        adequate to absorb potential losses inherent in the loan portfolio. The amount of the allowance
        is based on management's evaluation of the collectibility of the loan portfolio, including the
        nature of the portfolio, credit concentrations, trends in historical loss experience, specific
        impaired loans, and economic conditions. Allowances for impaired loans are generally
        determined based on collateral values or the present value of estimated cash flows. The
        allowance is increased by a provision for loan losses, which is charged to expense and
        reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans
        are charged or credited to the provision for loan losses. Because of uncertainties inherent in
        the estimation process, management's estimate of credit losses inherent in the loan portfolio
        and the related allowance may change in the near term. However, the amount of the change
        that is reasonably possible cannot be estimated. In addition, the Credit Union’s regulators, as
        an integral part of their examination process, periodically review the Credit Union’s allowance
        for losses on loans. Such agencies may require the Credit Union to recognize additions to the
        allowance based on their judgments of information available to them at the time of their

        As a matter of policy, the Credit Union generally places impaired loans on non-accrual status
        and recognizes interest income on such loans only on a cash basis, upon receipt of interest
        payments from the borrower. Accrual of interest is discontinued on a loan when management
        believes, after considering economics, business conditions, and collection efforts, that the
        borrower's financial condition is such that collection of interest is doubtful, or after three months
        of nonpayment, whichever is earlier. Uncollectible interest previously accrued is charged off.
        Income is subsequently recognized only to the extent cash payments are received until, in
        management's judgment, the borrower's ability to make periodic interest and principal
        payments is back to normal, in which case the loan is returned to accrual status.

        Property and equipment, net:

       Property and equipment are stated at cost, including interest capitalized on related borrowings
       during the period of construction, less accumulated depreciation and amortization. Land is
       stated at cost. Expenditures for ordinary maintenance and repairs are charged to operations as
       incurred. Upon the sale or other disposition of property, the cost and related accumulated
       depreciation are eliminated from the accounts. Any resulting gain or loss is reflected in the
       results of operations. Leasehold improvements are amortized over the lesser of the estimated
       economic life of the improvements or the remaining term of the lease.

                                                      Pentagon Federal Credit Union

                                                              Notes to Financial Statements
                                                                         December 31, 2003


        Depreciation and amortization is calculated and recorded using the straight-line method over
        the estimated useful lives of the assets as follows:

                                                      Useful Life
        Buildings and improvements                    5 to 50 years
        Furniture and equipment                       3 to 8 years
        Computer equipment                            3 to 5 years
        Computer software                             3 to 10 years
        Leasehold improvements                        1 to 5 years

        Members' share and savings accounts:

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

        Other assets:

        Other assets are comprised of miscellaneous receivables, miscellaneous prepaid and deferred
        expense items.

        Retained earnings:

        The Credit Union is required by regulation to maintain a statutory reserve (regular reserve),
        which represents a regulatory restriction of retained earnings, and which is not available for the
        payment of interest on share accounts. Other appropriated retained earnings may be
        established or transferred at the discretion of the Board of Directors.

        Income taxes:

        The Credit Union is exempt from federal and state income taxes in accordance with Section
        122 of the Federal Credit Union Act.


        Certain amounts in the 2003 financial statements have been reclassified to conform with the
        2002 presentation.

                                                             Pentagon Federal Credit Union

                                                                    Notes to Financial Statements
                                                                               December 31, 2003


       The Credit Union accounts for mergers using a method similar to a pooling-of-interests under
       Accounting Principles Board Opinion No. 16 (APB 16), "Business Combinations”, and the
       operations of the merged entities are included with the Credit Union as of the effective dates.

       Mergers during 2003 and 2002 are summarized as follows:

                                                                 Effective               Total             Undivided
       Merged Entity                                               Date                  Assets            Earnings
       Fort Shafter Federal Credit Union                       January 1, 2003       $    40 million     $   (343,000)
       Coast Guard Federal Credit Union                        January 1, 2003       $    13 million     $    224,000
       Fort Hood Military Federal Credit Union               September 1, 2003       $    28 million     $ 1,512,000
       West Point Federal Credit Union                         January 1, 2002       $    52 million     $    104,000


       The amortized cost and fair values of investments as of December 31, 2003 are summarized
       as follows (dollars in thousands):

                                                     Am ortize d     [- - - Gross Unre a lize d - - -]         Fa ir
                                                       Cost              Ga ins            Losse s            Va lue
       Inve stm e nts Ava ila ble -for-Sa le
       U.S. Treasury securities                      $    50,387     $        45           $        -     $    50,432
       Federal agency securities                         985,328          11,271                    -         996,599
              Total investments available-for-sale   $ 1,035,715     $    11,316           $        -     $ 1,047,031

       The amortized cost and fair value of the investments as of December 31, 2003 by contractual
       maturity are shown below (dollars in thousands):

                                                    Held-to-Maturity                      Available-for-Sale
                                           Amortized Cost      Fair Value           Amortized Cost Fair Value
       Due in one year or less               $           -   $                  -    $    516,496    $    519,837
       Due after one year through five years             -                      -         519,060         527,028
       Due after more than five years                    -                      -             159             166
                                             $           -   $                  -    $ 1,035,715     $ 1,047,031

                                                               Pentagon Federal Credit Union

                                                                        Notes to Financial Statements
                                                                                   December 31, 2003

NOTE 4. INVESTMENTS, continued

        The amortized cost and fair values of investments as of December 31, 2002 are summarized
        as follows (dollars in thousands):

                                                     Amortized          [- - - Gross Unrealized - - -]         Fair
                                                       Cost                  Gains         Losses             Value
        Investments Held-to-Maturity
        Federal agency securities                    $        14,926     $       19         $       -     $    14,945
             Total investments held-to-maturity      $        14,926     $       19         $       -     $    14,945

                                                         Amortized       [- - - Gross Unrealized - - -]        Fair
                                                           Cost               Gains         Losses            Value
        Investments Available-for-Sale
        U.S. Treasury securities                     $         79,757     $    1,506        $       -     $  81,263
        Federal agency securities                             849,731         25,454                -       875,185
        Common trust investments                                  244              -                -           244
              Total investments available-for-sale   $        929,732     $   26,960        $       -     $ 956,692


        Major classifications of loans to members at December 31, 2003 and 2002 are summarized as
        follows (dollars in thousands):

                                                                                            2003       2002
        First trust mortgages                                                           $ 1,426,710 $ 970,369
        Unsecured consum er loans                                                           249,449    226,650
        Thrifty Credit Services                                                              99,602    112,390
        Vehicle loans                                                                     1,436,641  1,221,448
        Credit card loans                                                                   558,434    529,722
        Term home equity                                                                    476,647    457,763
        Equity lines of credit                                                              430,710    252,459
        Loans secured by m em bers' shares                                                   10,317      9,973
        O ther                                                                               78,001     74,990
                                                                                          4,766,511  3,855,764
        Less allowance for loan losses                                                      (21,789)   (21,515)
             Loans, net                                                                 $ 4,744,722 $3,834,249

        The Credit Union holds deeds of trust/mortgages on underlying real estate to collateralize all
        first trust mortgage, term home equity and equity line of credit loans. Approximately 52% and
        53% of these loans at December 31, 2003 and 2002, respectively, are collateralized by
        residential real estate located in the District of Columbia metropolitan area.

                                                        Pentagon Federal Credit Union

                                                            Notes to Financial Statements
                                                                       December 31, 2003


        Changes in the allowance for loan losses for the years ended December 31, 2003 and 2002
        were as follows (dollars in thousands):

                                                                               2003         2002
        B alanc e, beginning of y ear                                      $    21,515 $     19,944
        P rovis ion for loan los s es                                           17,242       16,909
        Loan los s es c harged to the allowanc e                               (20,312)     (17,694)
        Rec overies c redited to the allowanc e                                  3,344        2,356
        B alanc e, end of y ear                                            $    21,789 $     21,515


        The deposit in the NCUSIF is in accordance with NCUA regulations, which require the
        maintenance of a deposit by each insured credit union in an amount equal to one percent of its
        insured shares. The deposit would be refunded to the Credit Union if its insurance coverage is
        terminated, it converts to insurance coverage from another source, or the operations of the
        fund are transferred from the NCUA Board.


        Property and equipment at December 31, 2003 and 2002 are summarized as follows (dollars in

                                                                               2003         2002
        Land                                                               $     4,228 $      4,160
        B uildings and im provem ents                                           32,689       28,914
        Furniture and fix tures                                                 14,725       13,798
        Com puter equipm ent                                                    16,812       16,597
        Com puter s oftware                                                     24,152       23,558
        Leas ehold im provem ents                                                2,525        4,428
                                                                                95,131       91,455
        Les s ac c um ulated deprec iation                                     (62,616)     (59,312)
               P roperty and equipm ent, net                               $    32,515 $     32,143

        Depreciation and amortization expense (dollars in thousands) for the years ended December
        31, 2003 and 2002, was approximately $5,545 and $5,397, respectively, and is included in
        occupancy and office operations expenses.

                                                        Pentagon Federal Credit Union

                                                            Notes to Financial Statements
                                                                       December 31, 2003


       Members’ accounts at December 31, 2003 and 2002 are summarized as follows (dollars in

                                                                         2003              2002
       N o c o n t ra c t u a l m a t u rit y                         $ 2,894,984       $ 2,537,515
       M a t u rit y w it h in o n e y e a r                              666,392           960,166
       M a t u rit y in o n e t o t w o y e a rs                          616,225           371,551
       M a t u rit y in o ve r t w o y e a rs                           1,132,408           712,997
                                                                      $ 5,310,009       $ 4,582,229

       Interest expense on members’ accounts for the years ended December 31, 2003 and 2002 is
       summarized as follows (dollars in thousands):

                                                                             2003           2002
       R e g u la r s h a re s                                         $        7,817   $        7 ,5 1 9
       P enChec k ac c ounts                                                    1,136            1 ,8 3 1
       M o n e y m a rk e t s h a re s                                         23,507          3 6 ,6 8 4
       S h a re c e rtific a t e s                                             76,619          7 7 ,0 0 7
       IR A s h a re s                                                          1,251            1 ,3 4 9
       IR A c e rtific a t e s                                                 33,927          3 2 ,7 3 3
                                                                       $      144,257   $    1 5 7 ,1 2 3


       The Credit Union borrowed funds from Federal Home Loan Bank of Atlanta (FHLB) secured by
       its investment in FHLB’s Capital Stock and First Trust Mortgage loans. The scheduled
       maturities and applicable interest rate of borrowed funds at December 31, 2003 are as follows
       (dollars in thousands):

       Ye a r Ending De ce m be r 31                           Inte re st Ra te             Am ount
         2005                                                          2.15%                $ 17,862
         2006                                                          2.78%                  17,043
         2007                                                          3.25%                  15,264
         2008                                                          3.55%                  13,714
         2009                                                          3.94%                  12,367
         2010                                                          4.33%                  11,200
         2011                                                          4.52%                  12,547
                                                                                            $ 99,997

                                                         Pentagon Federal Credit Union

                                                                  Notes to Financial Statements
                                                                             December 31, 2003


        The Credit Union has a trusteed, noncontributory, defined-benefit pension plan (the Plan)
        covering substantially all of their employees. Benefits under the Plan are primarily based on
        years of service and the employees’ compensation during the last five years of employment.
        The Credit Union’s policy is to make annual contributions to the Plan equal to the amount
        required to maintain the Plan in sound condition and to satisfy minimum funding requirements.

        The Credit Union sponsors a defined benefit postretirement plan that covers all of its
        employees hired prior to March 31, 2000 and provides medical, life insurance and sick leave
        benefits. The plan is contributory; retiree medical contributions have been established as 20%
        of the capped cost plus any additional increase over the capped premium level. The medical
        costs for future retirees will be capped at a 5% annual increase over the 1995 premium level.
        The 5% cap on the annual increase in medical costs and 20% contribution provision do not
        apply to employees who retired before January 1, 1995. Sick leave accrued before December
        31, 1994 is frozen at current levels and can be cashed out at retirement. The plan is not
        required to be funded.

        Pension and postretirement benefits at December 31, 2003 and 2002 are summarized as
        follows (dollars in thousands):

                                                            Pe ns ion Be ne fits     Pos tre tire m e nt Be ne fits
                                                           2003            2002          2003            2002
        Benefit obligation                             $    28,393 $        22,179 $        5,604 $         4,804
        Fair value of plan as s ets                         20,370          15,574              -               -
        Funded s tatus                                 $     (8,023) $       (6,605) $     (5,604) $       (4,804)
        Net periodic cos t                             $      2,325 $           990 $         581 $           494
        Prepaid (accrued) cos t recognized
          in the s tatem ent of financial condition    $     1,115 $            939 $     (5,836) $         (5,452)
        Em ployer contributions                        $     2,500 $         1,400 $         197 $             151
        Benefits paid                                  $       (623) $         (850) $      (233) $           (174)
        Weighted-average as s um ptions us ed to determ ine benefit obligation
          Dis count rate                                     6.10%           6.80%         6.30%            6.80%
          Expected return on plan as s ets                   8.00%           8.00%            N/A              N/A
          Rate of com pens ation increas e                   4.75%           4.75%            N/A              N/A
        Weighted-average as s um ptions us ed to determ ine net periodic cos t
          Dis count rate                                     6.80%           7.50%         6.30%            6.80%
          Expected return on plan as s ets                   8.00%           9.00%            N/A              N/A
          Rate of com pens ation increas e                   4.75%           4.75%            N/A              N/A

        The measurement dates used for the pension plan and the postretirement benefit plan are
        September 30 and December 31, respectively. For measurement purposes, an 11.0% annual
        rate of increase in the per capita cost of covered health care benefits was assumed for the
        2003 fiscal year. The rate was assumed to decrease gradually to 5.50% over the next 11
        years and remain at that level thereafter.

        The Credit Union has a 401(k) plan that provides for contributions by employees and the
        employers, with the employers’ contributions consisting of a 50% matching of the employees’
        contributions up to the first 6% of the employees’ salaries, subject to federal limitations. The
        Plan is available to substantially all employees of the Credit Union. The expense (dollars in
        thousands) related to this plan was $891 for both 2003 and 2002.

                                                      Pentagon Federal Credit Union

                                                             Notes to Financial Statements
                                                                        December 31, 2003


       Credit unions are subject to regulatory capital requirements prescribed by the NCUA. There
       are five classifications based on the combined result of quarterly net worth and risk-based net
       worth requirements: well capitalized, adequately capitalized, undercapitalized, significantly
       undercapitalized, and critically undercapitalized, although these terms are not used to
       represent overall financial condition. The net worth requirement is based on net worth to total
       assets. The risk-based net worth requirement requires net worth to exceed the sum of various
       asset categories times risk factors for each category, and must be met (if this requirement
       exceeds 6%) to be classified as well or adequately capitalized. If classified as adequately
       capitalized, net worth and the regular reserve account must increase quarterly by .1% of
       assets. If undercapitalized, a net worth restoration plan must also be filed and asset growth
       and business lending are restricted. Additional regulatory actions may be taken at lower capital
       classifications such as restriction on interest, required merger, or liquidation. The Credit Union
       was classified as well-capitalized in 2003, and therefore the Credit Union was not subject to
       regular reserve funding requirements in 2003.

       Actual and required capital amounts (dollars in thousands) and ratios are presented below at

                                                                                          M inim um
                                                                                     Re quire d to be
                                                                  Actua l            W e ll Ca pita liz e d
                                                              Am ount     Ra tio      Am ount Ra tio
        Net worth to total as s ets                          $ 608,135    10.03%      $ 424,048      7.0%
        Ris k -bas ed net worth                              $ 334,392     5.52%
        Net worth to total as s ets                          $ 516,667      9.98%     $ 362,272      7.0%
        Ris k -bas ed net worth                              $ 280,502      5.42%


       Financial instruments with off-balance-sheet risk:

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

       The Credit Union’s exposure to credit loss in the event of nonperformance by the other party to
       the financial instrument for commitments to extend credit is represented by the contractual
       notional amount of those instruments. The Credit Union uses the same credit policies in
       making commitments as it does for on-balance-sheet instruments.

                                                        Pentagon Federal Credit Union

                                                              Notes to Financial Statements
                                                                         December 31, 2003


        A summary of the Credit Union’s commitments (dollars in thousands) at December 31, 2003 is
        as follows:

                                                              Fix e d     V a ria ble   Tota l Contra ct or
                                                               Ra te         Ra te      Notiona l Am ount
        Thrifty Credit S ervice lines of credit           $     368,785           -     $         368,785
        E quity lines of credit                                       -     438,527               438,527
        Credit cards                                          1,317,002           -             1,317,002
        First trust m ortgages                                   82,058      61,340               143,398
                                                          $   1,767,845   $ 499,867     $       2,267,712

        Commitments to extend credit are agreements to lend to a member as long as there is no
        violation of any condition established in the contract. Commitments generally have fixed
        expiration dates or other termination clauses and may require payment of a fee. Since many of
        the commitments are expected to expire without being drawn upon, the total commitment
        amounts do not necessarily represent future cash requirements. The Credit Union evaluates
        each member’s creditworthiness on a case-by-case basis. The amount of collateral obtained if
        deemed necessary by the Credit Union upon extension of credit is based on management’s
        credit evaluation of the counterparty. Collateral held varies but may include real estate and
        other tangible personal property. Generally, the credit cards and Thrifty Credit Service lines of
        credit are unsecured. The nature of the collateral for first trust mortgages and equity lines of
        credit is described in Note 5.


        A summary of the Credit Union’s other liabilities at December 31, 2003 and 2002 are as follows
        (dollars in thousands):

                                                                                2003           2002
        Drafts payable                                                        $     480      $  24,132
        Ac counts payable                                                        12,004          9,157
        Ac crued interest on share ac counts                                      6,091          7,035
        Ac crued expens es and other liabilities                                 11,582         10,777
                                                                              $  30,157      $  51,101

                                                         Pentagon Federal Credit Union

                                                                   Notes to Financial Statements
                                                                              December 31, 2003


       The fair values shown below (dollars in thousands) represent management’s estimates of
       values at which the various types of financial instruments could be exchanged in transactions
       between willing, unrelated parties. They do not necessarily represent amounts that would be
       received or paid in actual trades of specific financial instruments.

                                                         [- - - - - 2003 - - - - -]        [- - - - - 2002 - - - - -]
                                                        Carrying            Fair          Carrying            Fair
                                                        Amount            Value           Amount            Value
        Financial assets:
          Cash and Federal funds sold               $   131,963        $   131,963    $   245,507        $   245,507
          Investments                                 1,067,731          1,067,731        988,469            988,488
          Loans, net                                  4,744,722          4,862,163      3,834,249          3,988,496
                                                    $ 5,944,416        $ 6,061,857    $ 5,068,225        $ 5,222,491
        Financial liabilities:
          Members' accounts                         $ 5,310,009        $ 5,397,726    $ 4,582,229        $ 4,668,604
          Borrowed funds                            $    99,997        $    99,997    $         -        $         -
                                                    $ 5,410,006        $ 5,497,723    $ 4,582,229        $ 4,668,604
        Unrecognized financial instruments:
         Commitments to extend credit               $ 2,267,712        $ 2,267,712    $ 2,515,423        $ 2,515,423

       The specific estimation methods and assumptions used can have a substantial impact on the
       resulting fair values of financial instruments. Following is a brief summary of the significant
       methods and assumptions used in the above table.

       Cash and Federal funds sold:

       The carrying amounts of cash and Federal funds sold in the statement of financial condition
       approximate their fair value.


       For marketable, fixed-maturity securities, fair values are based on quoted market prices or
       dealer quotes. For other securities held, fair value equals quoted market price, if available. If a
       quoted market price is not available, fair values are estimated using quoted market prices for
       similar securities or by discounting expected future cash flows using a current market rate
       applicable to the yield, credit quality, and maturity of the investments.

       Loans receivable, net:

       The fair value of loans is estimated by discounting the future cash flows using the current rates
       at which similar loans would be made to borrowers with similar credit ratings and for similar

       Members’ accounts:

       The fair value of regular shares, IRA shares, money market shares, and PenCheck accounts is
       the amount payable on demand at the reporting date. The fair value of share certificates and
       IRA certificates is estimated by discounting future cash flows using the rates currently offered
       for deposits of similar maturities.

                                                     Pentagon Federal Credit Union

                                                            Notes to Financial Statements
                                                                       December 31, 2003


        Borrowed funds:

        The carrying amounts of borrowed funds approximate their fair values.

        Commitments to extend credit:

        The estimated fair value of unused commitments cannot be reasonably determined due to their
        revolving nature.


        The Credit Union entered into an agreement with DC VA Medical Center Federal Credit Union
        (“DCVAMCFCU”) to merge their operations, effective January 1, 2004. This merger will be
        accounted for using a method similar to pooling-of-interests under APB 16, and the operations
        of DCVAMCFCU will be included with the Credit Union from this effective date. The total
        assets of DCVAMCFCU as of January 1, 2004 were approximately $15 million and undivided
        earnings were approximately $1 million.


Description: Pentagon Federal Credit Union Bad document sample