Chevron Federal Credit Union Financial Statements December 31,2008 and

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Chevron Federal Credit Union Financial Statements December 31,2008 and Powered By Docstoc
					    Chevron Federal Credit Union
    Financial Statements
    December 31, 2008 and 2007




McGladrey & Pullen, LLP is a member firm of RSM International –
an affiliation of separate and independent legal entities.
                                                 TABLE OF CONTENTS


INDEPENDENT AUDITOR’S REPORT.............................................................................................1

STATEMENTS OF FINANCIAL CONDITION....................................................................................2

STATEMENTS OF INCOME .............................................................................................................3

STATEMENTS OF COMPREHENSIVE INCOME .............................................................................4

STATEMENTS OF MEMBERS’ EQUITY ..........................................................................................5

STATEMENTS OF CASH FLOWS ....................................................................................................6

NOTES TO FINANCIAL STATEMENTS............................................................................................7
                                                         INDEPENDENT AUDITOR’S REPORT


Supervisory Committee
Chevron Federal Credit Union
Oakland, California


We have audited the accompanying statements of financial condition of Chevron Federal Credit Union (a federally
chartered credit union) as of December 31, 2008 and 2007 and the related statements of income, comprehensive
income, members’ equity, 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 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 Chevron Federal Credit Union as of December 31, 2008 and 2007 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.




San Francisco, California
March 31, 2009
chevrn.sf.ann.fs.08.se




McGladrey & Pullen, LLP is a member firm of RSM International –
an affiliation of separate and independent legal entities.
                                          CHEVRON FEDERAL CREDIT UNION
                                        STATEMENTS OF FINANCIAL CONDITION
                                            DECEMBER 31, 2008 AND 2007



                                                        ASSETS

                                                                                 2008                 2007
Cash and cash equivalents                                                 $     51,554,564       $    45,588,385
Investments
    Available-for-sale                                                         171,559,878            99,996,774
    Held-to-maturity                                                           230,646,200           140,469,157
    Other                                                                       12,315,068            49,882,321
Loans to members, net                                                          765,314,113           697,032,931
Accrued interest receivable                                                      4,876,634             5,273,850
Property and equipment, net                                                      2,335,301             2,531,916
National Credit Union Share Insurance Fund (NCUSIF) deposit                      7,717,383             6,887,648
Other assets                                                                     7,352,825             7,412,230

                                                                          $ 1,253,671,966        $ 1,055,075,212

                                        LIABILITIES AND MEMBERS’ EQUITY

Liabilities

     Members’ shares                                                      $ 1,087,973,830        $   913,428,581
     Accrued expenses and other liabilities                                     4,402,590              3,065,334
     Accrued indemnification and arbitration liabilities (see Note 14)                  -              8,006,249
     Borrowed funds                                                            15,000,000             25,000,000

          Total liabilities                                                   1,107,376,420          949,500,164

Commitments and contingent liabilities

Members’ Equity

     Retained earnings, substantially restricted                               146,483,238           105,801,723
     Accumulated other comprehensive income                                       (187,692)             (226,675)

          Total members’ equity                                                146,295,546           105,575,048

                                                                          $ 1,253,671,966        $ 1,055,075,212




                              The accompanying notes are an integral part of these statements.                      2
                                    CHEVRON FEDERAL CREDIT UNION
                                        STATEMENTS OF INCOME
                            FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007



                                                                        2008                    2007
INTEREST INCOME
    Interest on loans to members                                    $ 42,245,017            $ 41,146,068
    Interest on investments and cash equivalents                      19,222,419              16,012,650

                                                                       61,467,436               57,158,718

INTEREST EXPENSE
    Dividends on members’ shares                                       30,987,842               30,729,847
    Interest on borrowed funds                                            939,448                1,431,529

                                                                       31,927,290               32,161,376

NET INTEREST INCOME                                                    29,540,146               24,997,342

PROVISION FOR LOAN LOSSES                                               5,038,517                 763,456

NET INTEREST INCOME AFTER PROVISION FOR LOAN
   LOSSES                                                              24,501,629               24,233,886

NON-INTEREST INCOME
   Card interchange income                                              1,445,531                2,696,387
   Service charges and other fees                                       3,057,704                2,912,326
   Other non-interest income                                              828,756                  323,702
   Infrequently occurring gains (losses) (see Note 13)                 31,353,090                3,480,459

                                                                       36,685,081                9,412,874

GENERAL AND ADMINISTRATIVE EXPENSES
   Salaries and benefits                                               13,262,210               11,947,900
   Operations                                                           9,387,297                9,539,035
   Occupancy                                                            1,434,905                1,360,484
   Change in fair value of derivatives                                  4,427,032                        -
   Visa indemnification charges (see Note 14)                          (8,006,249)               8,006,249

                                                                       20,505,195               30,853,668

NET INCOME                                                          $ 40,681,515            $    2,793,092




                         The accompanying notes are an integral part of these statements.                    3
                                     CHEVRON FEDERAL CREDIT UNION
                                 STATEMENTS OF COMPREHENSIVE INCOME
                             FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007



                                                                           2008                 2007
NET INCOME                                                            $   40,681,515         $ 2,793,092

OTHER COMPREHENSIVE INCOME

   Unrealized holding gains on investments classified as
     available-for-sale                                                        67,234            270,088

   Change in fair value of derivatives previously used for cash
     flow hedges                                                              (28,251)          (635,410)

COMPREHENSIVE INCOME                                                  $   40,720,498         $ 2,427,770




                          The accompanying notes are an integral part of these statements.                  4
                                              CHEVRON FEDERAL CREDIT UNION
                                             STATEMENTS OF MEMBERS’ EQUITY
                                      FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007



                                                                                                         Accumulated
                                                           Retained Earnings                                Other
                                         Regular                                                       Comprehensive
                                         Reserve            Unappropriated                Total         Income (Loss)
Balance,
  December 31, 2006                  $ 23,295,023            $    79,713,608          $ 103,008,631    $     269,788

Adoption of hedge accounting
  for existing derivative
  investments (see
  Notes 1 and 9)                                                                                             (131,141)

Net income                                                         2,793,092               2,793,092

Net change in unrealized gains
  (losses) on available-for-sale
  investments                                                                                                270,088

Change in fair value of
  derivatives used for cash flow
  hedges                                                                                                     (635,410)

Balance,
  December 31, 2007                      23,295,023               82,506,700             105,801,723         (226,675)

Net income                                                        40,681,515              40,681,515

Transfer                                 (23,295,023)             23,295,023

Net change in unrealized gains
  (losses) on available-for-sale
  investments                                                                                                 67,235

Change in fair value of
  derivatives previously used
  for cash flow hedges                                                                                        (28,252)

Balance,
  December 31, 2008                  $             -         $   146,483,238          $ 146,483,238    $     (187,692)




                                   The accompanying notes are an integral part of these statements.                      5
                                               CHEVRON FEDERAL CREDIT UNION
                                                 STATEMENTS OF CASH FLOWS
                                       FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007



                                                                                             2008                2007
OPERATING ACTIVITIES
  Net income                                                                           $    40,681,515     $    2,793,092
  Adjustments to reconcile net income to net cash provided by operating activities:
     Amortization (accretion) of securities, net                                                469,627           (32,620)
     Provision for loan losses                                                                5,038,517           763,456
     Impairment loss of Wescorp capital deposits                                              3,054,199                 -
     Depreciation and amortization                                                            1,163,867         1,064,627
     Net change in:
        Accrued interest receivable                                                             397,216         (1,568,541)
        Other assets                                                                             31,154           (541,509)
        Accrued expenses and other liabilities                                               (6,668,993)         7,311,808

   Net cash provided by operating activities                                                44,167,102          9,790,313

INVESTING ACTIVITIES
   Purchases of available-for-sale investments                                             (133,790,399)       (78,954,555)
   Proceeds from maturities of available-for-sale investments                                62,094,878         25,664,268
   Purchases of held-to-maturity investments                                               (194,192,879)       (89,024,305)
   Proceeds from maturities of held-to-maturity investments                                 103,745,860         43,639,324
   Net change in other investments                                                           34,513,054         44,586,945
   Net change in loans to members                                                           (73,319,699)       (32,041,960)
   Increase in the National Credit Union Share Insurance Fund deposit                          (829,735)          (481,333)
   Purchases of property and equipment                                                         (967,252)          (553,095)

   Net cash used in investing activities                                                   (202,746,172)       (87,164,711)

FINANCING ACTIVITIES
   Net increase in members’ shares                                                         174,545,249         87,249,599
   Repayment of borrowed funds                                                             (10,000,000)        (5,000,000)

   Net cash provided by financing activities                                               164,545,249         82,249,599

INCREASE IN CASH AND CASH EQUIVALENTS                                                        5,966,179          4,875,201
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                              45,588,385         40,713,184

CASH AND CASH EQUIVALENTS AT END OF YEAR                                               $    51,554,564     $ 45,588,385

SUPPLEMENTAL CASH FLOW INFORMATION
Dividends paid on members’ shares and interest paid on borrowed funds                  $    34,988,902     $ 32,023,379




                                The accompanying notes are an integral part of these statements.                              6
                                         CHEVRON FEDERAL CREDIT UNION
                                         NOTES TO FINANCIAL STATEMENTS
                                           DECEMBER 31, 2008 AND 2007



1.   SIGNIFICANT ACCOUNTING POLICIES

     Nature of Operations: Chevron Federal Credit Union (the Credit Union) is a cooperative association holding a
     corporate charter under the provisions of the Federal Credit Union Act. Participation in the Credit Union is
     limited to those individuals that qualify for membership, including employees and retirees of Chevron
     Corporation, its wholly-owed subsidiaries, selected affiliated companies of Chevron Corporation and family of
     Credit Union members. The field of membership is defined in the Credit Union’s Charter and Bylaws.

     Use of Estimates: The preparation of financial statements in conformity with accounting principles generally
     accepted in the United States of America requires management to make estimates and assumptions that affect
     the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of income and expenses during the reporting period. Actual
     results could differ from those estimates. A material estimate that is particularly susceptible to significant
     change in the near term relates to the determination of the allowance for loan losses.

     Concentrations of Credit Risk: Most of the Credit Union’s business activity is with its members who are or
     were employed by Chevron Corporation or affiliated companies. The majority of the Credit Union’s loan portfolio
     is comprised of real estate loans. The Credit Union does not originate subprime mortgages and has none in its
     investment portfolio. Additionally, the Credit Union may be exposed to credit risk from a regional economic
     standpoint, since a significant concentration of its borrowers work or reside in California.

     In addition, during the year ended December 31, 2008 and continuing into 2009, the financial deterioration
     resulting from the general economic conditions of the Credit Union’s market area have yielded significant loan
     losses and investment fluctuations for those with whom the Credit Union does business, including other
     financial institutions and corporate credit unions. Management continues to monitor the Credit Union’s
     operations, including the loan and investment portfolios, for potential impairment and other accounting
     consequences.

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

     Investments: Debt securities that management has the positive intent and ability to hold to maturity are
     classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or
     trading, including equity securities with readily determinable fair values, are classified as “available for sale” and
     recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other
     comprehensive income.




                                                                                                                          7
                                    CHEVRON FEDERAL CREDIT UNION
                                    NOTES TO FINANCIAL STATEMENTS
                                      DECEMBER 31, 2008 AND 2007



Purchase premiums and discounts are recognized in interest income using the interest method over the terms
of the securities. Declines in the fair value of individual available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-
than-temporary impairment exists, management considers many factors, including (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Credit Union to retain its investment in the issue for a period of time
sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are
recorded on the trade date and are determined using the specific identification method.

Other investments are classified separately and are stated at cost.

Federal Home Loan Bank Stock: The Credit Union, as a member of the Federal Home Loan Bank (FHLB)
system, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of
1% of a majority of its outstanding mortgage loans and investments or 5% of advances from the FHLB. No
ready market exists for the FHLB stock, and it has no quoted market value.

Loans to Members: The Credit Union grants mortgage and consumer loans to members. The ability of the
members to honor their contracts is dependent upon the real estate and general economic conditions of the
area.

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

The accrual of interest income on loans is discontinued at the time the loan is 90 days past due. Other personal
loans are typically charged off no later than 180 days past due. Past due status is based on the contractual
terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if the collection
of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against
interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.

Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual life of the loans, adjusted for
estimated prepayments based on the Credit Union’s historical prepayment experience.

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




                                                                                                                      8
                                    CHEVRON FEDERAL CREDIT UNION
                                    NOTES TO FINANCIAL STATEMENTS
                                      DECEMBER 31, 2008 AND 2007



The allowance for loan losses is evaluated on a regular basis by management and is based upon
management’s periodic review of the collectibility of the loans in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of
the underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it
requires estimates that are susceptible to significant revision as more information becomes available. In
addition, regulatory agencies, as an integral part of their examination process, periodically review the Credit
Union’s allowance for loan losses, and may require the Credit Union to make additions to the allowance based
on their judgment about information available to them at the time of their examinations.

The Credit Union’s allowance for loan losses is that amount considered adequate to absorb probable losses in
the portfolio based on management’s evaluations of the size and current risk characteristics of the loan
portfolio. Such evaluations consider prior loss experience, the risk rating and the levels of non-performing loans.
Specific allowances for loan losses are established for large impaired loss on an individual basis as required per
SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The specific allowances established for these
loans are based on a thorough analysis of the most probable source of repayment, including the present value
of the loan’s expected future cash flow, the loan’s estimated market value, or the estimated fair value of the
underlying collateral. General allowances are established for loans that can be grouped into pools based on
similar characteristics as described in SFAS No. 5, Accounting for Contingencies. In this process, general
allowance factors are based on an analysis of historical charge-off experience and expected losses given
default derived from the Credit Union’s internal risk rating process. These factors are developed and applied to
the portfolio by loan type. The qualitative factors associated with the allowances are subjective and require a
high degree of management judgment. These factors include the credit quality statistics, recent economic
uncertainty, losses incurred from recent events, and lagging data.

Loan Servicing: Servicing assets are recognized as separate assets when rights are acquired through
purchase or through sale of financial assets. For sales of mortgage loans, a portion of the cost of originating the
loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for
comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that
calculates the present value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as the cost to
service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into net
interest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying financial assets.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics,
such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for
an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the
Credit Union later determines that all or a portion of the impairment no longer exists for a particular tranche, a
reduction of the allowance may be recorded as an increase to income.




                                                                                                                  9
                                    CHEVRON FEDERAL CREDIT UNION
                                    NOTES TO FINANCIAL STATEMENTS
                                      DECEMBER 31, 2008 AND 2007



Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at
the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in operating expenses.

Property and Equipment: Building, leasehold improvements and furniture and equipment are carried at cost,
less accumulated depreciation and amortization. The building and furniture and equipment are depreciated
using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements
is amortized using the straight-line method over the terms of the related leases.

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

Derivative Financial Instruments and Hedging Activities: The Credit Union records all derivatives at fair
value in the statements of financial condition. On the date the derivative contract is entered into, the Credit
Union designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability "cash flow" hedge. Changes in the fair value of a
derivative that is highly effective as - and that is designated and qualifies as - a cash-flow hedge are recorded in
other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic
settlements on a variable-rate asset or liability are recorded in earnings).

The Credit Union formally documents all relationships between hedging instruments and hedged items, as well
as its risk-management objective and strategy for undertaking various hedged transactions. This process
includes linking all derivatives that are designated as cash-flow hedges to specific assets and liabilities on the
balance sheet or forecasted transactions. The Credit Union also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective hedge, the Credit Union discontinues
hedge accounting prospectively, as discussed below.

The Credit Union discontinues hedge accounting prospectively when (a) it is determined that the derivative is
no longer effective in offsetting changes in the cash flows of a hedged item (including forecasted transactions);
(b) the derivative expires or is sold, terminated, or exercised; (c) the derivative is dedesignated as a hedge
instrument, because it is unlikely that a forecasted transaction will occur; or (d) management determines that
designation of the derivative as a hedge instrument is no longer appropriate.

When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the
derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized immediately in earnings. In all other situations
in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet,
with subsequent changes in its fair value recognized in current-period earnings.

                                                                                                                  10
                                   CHEVRON FEDERAL CREDIT UNION
                                   NOTES TO FINANCIAL STATEMENTS
                                     DECEMBER 31, 2008 AND 2007



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

NCUSIF Insurance Premium: The Credit Union is required to pay an annual insurance premium equal to one-
twelfth of one percent of total insured shares, unless the payment is waived or reduced by the NCUA Board.
The NCUA Board waived the 2008 and 2007 insurance premiums; however, as further discussed in Note 12,
the NCUA Board voted on January 28, 2009 to assess an additional assessment in response to the economic
strains on the corporate credit union system.

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

Advertising Costs: Advertising costs are expensed as incurred.

Income Taxes: The Credit Union is exempt, by statute, from federal and state income taxes.

Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains,
and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component of the members’ equity section of
the statements of financial condition. For 2008 and 2007, other comprehensive income includes no
reclassification adjustments.

Reclassifications: Certain account reclassifications have been made to the 2007 financial statements in order
to conform to classifications used in the current year.

Recent Accounting Pronouncements: In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurement. SFAS No. 157 also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority
being quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by level
within that hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis for which delayed application is permitted until fiscal years beginning after
November 15, 2008; SFAS 157 is discussed more fully in Note 2.




                                                                                                                   11
                                        CHEVRON FEDERAL CREDIT UNION
                                        NOTES TO FINANCIAL STATEMENTS
                                          DECEMBER 31, 2008 AND 2007



     In December 2007, FASB issued Statement of Financial Accounting Standards No. 141R, Business
     Combinations. This new standard significantly changes the accounting for business combination transactions
     as the pooling-of-interests accounting method will no longer be an acceptable accounting method. This change
     is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited.

     On March 19, 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and
     Hedging Activities—an Amendment of FASB Statement 133 (“SFAS 161”). SFAS 161 enhances required
     disclosure regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an
     entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under
     FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative
     instruments and related hedged items affect an entity’s financial position, financial performance, and cash
     flows. Specifically SFAS 161 requires:

             Disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk
              and accounting designation;
             Disclosure of the fair values of derivative instruments and their gains and losses in a tabular format;
             Disclosure of information about credit-risk-related contingent features; and
             Cross-reference from the derivative footnote to other footnotes in which derivative-related information
              is disclosed.

     SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Management is
     currently evaluating the provisions of SFAS 161 and its potential effect on its financial statements.

     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The
     new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for
     selecting accounting principles to be used in preparing financial statements that are presented in conformity
     with GAAP for nongovernmental entities. The statement is effective 60 days following the Securities and
     Exchange Commission's approval of the Public Company Accounting Oversight Board Auditing amendments to
     AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.
     SFAS No. 162 is not expected to have a material impact on the Credit Union’s financial position, results of
     operations or cash flows.

2.   FAIR VALUE

     Effective January 1, 2008, the Credit Union adopted SFAS No. 157 (“SFAS 157”), Fair Value Measurements,
     which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair
     value measurements. SFAS 157 applies only to fair value measurements already required or permitted by other
     accounting standards and does not impose requirements for additional fair value measures. SFAS 157 was
     issued to increase consistency and comparability in reporting fair values. In February 2008, the Financial
     Accounting Standards Board issued Staff Position No. FAS 157-2 (“FSP 157-2”), which delays the effective
     date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities (such as other real estate owned
     and other foreclosed assets) to fiscal years beginning after November 15, 2008, and interim periods within
     those fiscal years. The purpose of the delay is to allow additional time to consider the effect of various
     implementation issues that have arisen, or that may arise, from the application of SFAS 157. The Credit Union

                                                                                                                        12
                                    CHEVRON FEDERAL CREDIT UNION
                                    NOTES TO FINANCIAL STATEMENTS
                                      DECEMBER 31, 2008 AND 2007



has elected to apply the deferral provisions in FSP 157-2 and therefore has only partially applied the provisions
of SFAS 157. The Credit Union’s adoption of SFAS 157 did not have a material impact on the Credit Union’s
financial condition or results of operations but did require the Credit Union to include additional disclosures in
the footnotes to the financial statements as further described below.

As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. In determining fair
value, the Credit Union uses various methods including market, income and cost approaches. Based on these
approaches, the Credit Union often utilizes certain assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market corroborated, or generally unobservable. The
Credit Union utilizes valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives
the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy ranks the quality and reliability of the information used to
determine fair values. The fair value hierarchy is as follows:

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

   Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar
   assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can
   be corroborated by observable market data.

   Level 3 — Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
   assumptions that market participants would use in pricing an asset or liability.

The Credit Union uses fair value accounting to report available-for-sale investment securities, derivative
financial instruments and equity-indexed option contracts, and mortgage servicing rights in the statements of
financial condition. The following is a description of the valuation methodologies used for instruments
measured and/or disclosed at fair value on a recurring basis:

   Investment Securities
   The fair value of investment securities is the market value based on quoted market prices, when available,
   or market prices provided by recognized broker dealers. If listed prices or quotes are not available, fair
   value is based upon externally developed models that use unobservable inputs due to the limited market
   activity of the instrument.




                                                                                                                     13
                                     CHEVRON FEDERAL CREDIT UNION
                                     NOTES TO FINANCIAL STATEMENTS
                                       DECEMBER 31, 2008 AND 2007



    Derivative financial instruments and equity-indexed option contracts
    Valuation of derivatives is determined using widely accepted valuation techniques including discounted cash
    flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of
    the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR
    rate curves. Management may also obtain broker-dealer quotes for these derivatives for comparative
    purposes to assess the reasonableness of the model valuations.

    Mortgage Servicing Rights
    Mortgage servicing rights (MSRs) do not trade in an active, open market with readily observable prices.
    While sales of MSRs do occur, the precise terms and conditions typically are not readily available.
    Accordingly, the Credit Union estimates the fair value of MSRs and certain other retained interests in
    securitizations using discounted cash flow models incorporating numerous assumptions from the
    perspective of market participants including servicing income, servicing costs, market discount rates,
    prepayment speeds, and default rates. Due to the nature of the valuation inputs, MSRs are classified within
    Level 3 of the valuation hierarchy.

Fair Value on a Recurring Basis
The table below presents the balances of assets and liabilities measured and presented in the statements of
financial condition at fair value on a recurring basis:
                                                                   December 31, 2008
                                            Total                Level 1             Level 2                Level 3
  Available-for-sale securities       $    171,559,878      $               -       $   171,559,878     $             -
  Derivative financial instruments             567,512                      -               567,512                   -
  Equity-indexed option contracts              512,128                      -               512,128                   -
  Mortgage servicing rights                     16,938                      -                16,938                   -

Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not
measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for
example, when there is evidence of impairment). Loans include loans held for sale that are carried at the lower
of cost or market and loans for which the fair value was below the cost basis. These are Level 3 assets. The
fair value of the Level 3 loans was determined as the value of the underlying collateral. Total balances and fair
values on a nonrecurring basis are immaterial for presentation in the financial statements.

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the fair value of
financial assets and financial liabilities, including those financial assets and financial liabilities that are not
measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for
estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring
or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and
cash equivalents, other investments and accrued interest.




                                                                                                                      14
                                     CHEVRON FEDERAL CREDIT UNION
                                     NOTES TO FINANCIAL STATEMENTS
                                       DECEMBER 31, 2008 AND 2007



The methodologies for other financial assets and financial liabilities are discussed below:

    Loans
    When quoted market prices are not available, the fair value of loans receivable is generally based upon
    observable market prices of loans with similar characteristics. If observable market prices are not available,
    fair value is based upon estimated cash flows adjusted for credit risk which are discounted using an interest
    rate appropriate for the maturity of the applicable loans or the unfunded commitments.

    The inputs for the determination of the fair value of loans are generally classified within Level 2 of the
    valuation hierarchy. However, certain of the Credit Union’s loans, including nonperforming loans are
    classified within Level 3 due to the lack of observable pricing data. The fair value of these Level 3 loans is
    determined based on the value of the underlying collateral.

    Deposits
    The fair value of deposits payable upon demand (savings, checking and money market accounts) is the
    amount payable at the date of the statement of condition. The fair value of fixed maturity accounts
    (Certificates of Deposit) is estimated by discounting the estimated cash flows using interest rates for
    comparable instruments and terms and are classified within Level 2 or Level 3.

    Borrowings
    The fair value of borrowings is estimated by discounting the estimated cash flows using the appropriate
    market rates for the associated maturities. Where the inputs into the valuation are primarily based upon
    readily observable pricing information, borrowings are classified within Level 2 of the valuation hierarchy.
    Where significant inputs are unobservable, borrowings are classified within Level 3 of the valuation
    hierarchy.

In determining the appropriate application of the levels of the valuation hierarchy, the Credit Union performs a
detailed analysis of the assets and liabilities that are subject to SFAS 157. At each reporting period, all assets
and liabilities for which the fair value is based on significant unobservable inputs are classified as Level 3.

Fair Value of Financial Instruments
Fair value represents management’s best estimates based on a range of methodologies and assumptions. The
carrying value of short-term financial instruments (such as cash and cash equivalents) as well as receivables
and payables arising in the ordinary course of business (such as accrued interest) approximates fair value
because of the relatively short period of time between the origination and expected realization. The fair value of
the Credit Union’s off balance sheet commitments are estimated using fees charged to others to enter into
similar agreements taking into account the remaining terms of the agreements and credit standing of the
members. The estimated fair value of these commitments is not significant. The Credit Union’s policies for the
determination of fair value of all other financial instruments are described in the preceding paragraphs.




                                                                                                                     15
                                          CHEVRON FEDERAL CREDIT UNION
                                          NOTES TO FINANCIAL STATEMENTS
                                            DECEMBER 31, 2008 AND 2007



     The estimated fair value of the Credit Union’s financial instruments is summarized as follows:

                                                     December 31, 2008                           December 31, 2007
                                                Carrying             Fair                   Carrying             Fair
                                                Amount              Value                   Amount              Value
      Financial Assets:
        Cash and cash equivalents          $     51,544,564        $    51,545,000      $ 45,588,385           $ 45,588,000
        Investments available-for-sale          171,559,878            171,560,000        99,996,774             99,997,000
        Investments held-to-maturity            230,646,200            230,082,000       140,469,157            141,303,000
        Other investments                        12,315,068             12,315,000        49,882,321             49,882,000
        Loans to members, net                   765,314,113            766,186,000       697,032,931            694,439,000
        Accrued interest receivable               4,876,634              4,877,000         5,273,850              5,274,000
        Cash flow hedging derivatives               567,512                568,000           235,416                235,000
      Equity-indexed option contracts               512,128                512,000         3,594,792              3,595,000
      Financial Liabilities:
        Members’ shares                        1,087,973,830       1,092,514,000         913,428,581            915,247,000
        Borrowed funds                            15,000,000          15,714,000          25,000,000             25,360,000

3.   INVESTMENTS

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

                                                     Amortized             Unrealized       Unrealized             Fair
                 December 31, 2008                     Cost                  Gains           Losses               Value
        U.S. government obligations and
          federal agencies securities            $     5,997,622       $        8,170   $             0    $       6,005,792
        Mortgage-backed securities                   165,026,210              931,181          (403,305)         165,554,086

                                                 $   171,023,832       $      939,351   $      (403,305)   $     171,559,878

                                                     Amortized             Unrealized       Unrealized             Fair
                 December 31, 2007                     Cost                  Gains           Losses               Value
        U.S. government obligations and
          federal agencies securities            $    32,967,307       $      218,590   $             -    $      33,185,897
        Mortgage-backed securities                    66,560,655              412,422          (162,200)          66,810,877

                                                 $    99,527,962       $      631,012   $      (162,200)   $      99,996,774




                                                                                                                          16
                                      CHEVRON FEDERAL CREDIT UNION
                                      NOTES TO FINANCIAL STATEMENTS
                                        DECEMBER 31, 2008 AND 2007



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

                                                 Amortized                Unrealized             Unrealized                 Fair
           December 31, 2008                       Cost                     Gains                 Losses                   Value
  U.S. government obligations and
    federal agencies securities            $       5,000,000          $         68,518       $                -    $       5,068,518
  Mortgage-backed securities                     225,646,200                   415,919               (1,048,461)         225,013,658

                                           $     230,646,200          $        484,437       $       (1,048,461)   $     230,082,176

                                                 Amortized                Unrealized             Unrealized                 Fair
           December 31, 2007                       Cost                     Gains                 Losses                   Value
  U.S. government obligations and
    federal agencies securities            $      54,943,398          $        238,922       $        (125,000)    $      55,057,320
  Mortgage-backed securities                      85,525,759                   796,684                 (76,435)           86,246,008

                                           $     140,469,157          $     1,035,606        $        (201,435)    $     141,303,328

At December, 31, 2008, securities totaling $144,584,061 have been pledged as collateral to secure Federal
Home Loan Bank advances as more fully disclosed in Note 10.

Investments by maturity as of December 31, 2008 are summarized as follows:

                                       Available-for-sale                          Held-to-maturity
                                   Amortized           Fair                    Amortized          Fair
                                     Cost             Value                      Cost           Value                     Other
  No contractual maturity      $             -      $             -        $             -       $             -       $ 7,909,789
  Less than 1 year maturity                  -                    -                      -                     -         4,405,279
  1 – 5 years maturity               5,997,622            6,005,792              5,000,000             5,068,518                 -
  Mortgage-backed securities       165,026,210          165,554,086            225,646,200           225,084,725                 -

                               $ 171,023,832        $ 171,559,878          $ 230,646,200         $ 230,153,243         $ 12,315,068

Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers
may have the right to call or prepay the obligations and are, therefore, classified separately with no specific
maturity date. FHLB stock and member and permanent capital accounts have been classified with no
contractual maturity.

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




                                                                                                                                      17
                                    CHEVRON FEDERAL CREDIT UNION
                                    NOTES TO FINANCIAL STATEMENTS
                                      DECEMBER 31, 2008 AND 2007



                                                                     Continuous Unrealized
           December 31, 2008                                          Losses Existing For:
                                                                  Less Than         More Than        Total Unrealized
            Available-for-sale                Fair Value          12 Months         12 Months            Losses
  Mortgage-backed securities              $    73,963,427     $      (390,511)   $      (12,794)    $       (403,305)

                                                                     Continuous Unrealized
           December 31, 2008                                          Losses Existing For:
                                                                  Less Than         More Than        Total Unrealized
            Held-to-maturity                  Fair Value          12 Months         12 Months            Losses
  Mortgage-backed securities              $   172,100,408     $      (984,894)   $      (63,567)    $     (1,048,461)

                                                                     Continuous Unrealized
           December 31, 2007                                          Losses Existing For:
                                                                  Less Than         More Than        Total Unrealized
            Available-for-sale                Fair Value          12 Months         12 Months            Losses
  Mortgage-backed securities              $    30,225,680     $      (157,072)   $        (5,128)   $       (162,200)

                                                                     Continuous Unrealized
           December 31, 2007                                          Losses Existing For:
                                                                  Less Than         More Than        Total Unrealized
            Held-to-maturity                  Fair Value          12 Months         12 Months            Losses
  Federal agencies securities             $    19,875,000     $             -    $     (125,000)    $       (125,000)
  Mortgage-backed securities                   13,785,286             (55,874)          (20,561)             (76,435)

                                          $    33,660,286     $       (55,874)   $     (145,561)    $       (201,435)

At December 31, 2008, the investment portfolio included 199 securities, 8 of which have current unrealized
losses which have existed for longer than one year. At 2007, the investment portfolio included 187 securities, 7
of which had current unrealized losses which had existed for longer than one year. All of these securities are
considered to be acceptable credit risks. Based upon an evaluation of the available evidence, including recent
changes in market rates, credit rating information and information obtained from regulatory filings, management
believes the decline in fair value for these securities is temporary. In addition, the Credit Union has the intent
and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery.
All of these securities are issued and backed by government sponsored enterprises.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment
will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary
impairment is identified.




                                                                                                                   18
                                    CHEVRON FEDERAL CREDIT UNION
                                    NOTES TO FINANCIAL STATEMENTS
                                      DECEMBER 31, 2008 AND 2007



Other investments consist of the following:

                                                                                      December 31
                                                                               2008                     2007
  Share certificates in a corporate credit union                         $    4,405,279            $ 37,809,798
  Member capital account in a corporate credit union                            214,589               5,080,723
  Permanent capital account in a corporate credit union                               -                 918,300
  Federal Home Loan Bank (FHLB) stock                                         7,695,200               6,073,500

                                                                         $ 12,315,068              $ 49,882,321

Certificates are generally non-negotiable and non-transferable, and may incur substantial penalties for
withdrawal prior to maturity.

Member capital accounts are uninsured equity capital accounts that may be redeemed with a three-year notice.
Permanent capital accounts are uninsured equity capital accounts and are redeemable only if called by the
corporate credit union. The fair value of other investments approximates book value. As noted in Note 12, the
Credit Union wrote-off all of its $3,054,199 capital accounts in Western Corporate Federal Credit Union
(Wescorp) in 2008 based on the March 20, 2009 announcement that the losses at this institution exceed the
capital in the organization.

Federal Home Loan Bank (FHLB) stock represents an equity interest in FHLB. The stock does not have a
readily determinable market value because its ownership is restricted. FHLB stock can be sold back at its par
value only to the FHLB or to another member institution.

The Credit Union views its remaining investments in capital accounts in corporate credit unions and FHLB stock
as long-term investments. Accordingly, when evaluating for impairment, the value is determined based on the
ultimate recoverability of the par value rather than recognizing temporary declines in value. The determination
of whether a decline affects the ultimate recoverability is influenced by factors such as: 1) the significance of the
decline in net assets of the institution as compared to the investment amount and length of time a decline has
persisted; 2) impact of legislative and regulatory changes on the institution and 3) the liquidity position of the
institution.

The FHLB of San Francisco experienced a net loss in the fourth quarter of 2008; consequently, the FHLB did
not pay a dividend for the fourth quarter of 2008 and temporarily discontinued the repurchase of capital
stock. The FHLB noted their primary reason for the net loss related to the impact of other-than-temporary
impairment charges that they were recorded on their non-agency mortgage-backed securities. The Credit Union
does not believe that its investment in the FHLB is impaired as of this date. However, this determination could
change if: 1) significant other-than-temporary losses are incurred on their mortgage-backed securities causing a
significant decline in their regulatory capital status; 2) the economic losses resulting from credit deterioration on
their mortgage-backed securities increases significantly or 3) capital preservation strategies utilized by the
FHLB become ineffective.




                                                                                                                  19
                                        CHEVRON FEDERAL CREDIT UNION
                                        NOTES TO FINANCIAL STATEMENTS
                                          DECEMBER 31, 2008 AND 2007



4.   LOANS TO MEMBERS

     Loans to members consist of the following:

                                                                                   December 31
                                                                           2008                   2007
        Mortgage loans:
           Fixed rate                                                 $ 362,812,544        $ 268,174,096
           Adjustable rate mortgages                                    219,862,294          205,443,441
           Home equity line of credit, variable rate                     45,676,643           42,097,641

                                                                          628,351,481            515,715,178
        Vehicle loans                                                     117,599,614            127,665,131
        Credit card loans, unsecured                                           90,109             36,320,351
        Consumer loans, primarily unsecured                                16,495,144             10,997,991
        Sponsor corporation secured loans                                   7,450,373              7,347,230

                                                                          769,986,721            698,045,881
        Allowance for loan losses                                          (4,700,037)              (939,772)
        Deferred net loan origination (fees) costs                             27,429                (73,178)

                                                                      $ 765,314,113        $ 697,032,931

     The following is an analysis of the allowance for loan losses:

                                                                            Years Ended December 31
                                                                           2008                2007
         Balance, beginning of year                                   $      939,772       $       918,686

         Provision for loan losses                                          5,038,517               763,456
         Recoveries                                                           204,322               194,345
         Loans charged off                                                 (1,482,574)             (936,715)

         Balance, end of year                                         $     4,700,037      $       939,772




                                                                                                                20
                                        CHEVRON FEDERAL CREDIT UNION
                                        NOTES TO FINANCIAL STATEMENTS
                                          DECEMBER 31, 2008 AND 2007



5.   OTHER REAL ESTATE OWNED

     Expenses related to other real estate owned are summarized as follows:

                                                                               Years Ended December 31
                                                                              2008                2007
         Write-downs of carrying value                                  $      137,701          $            -
         Net loss on sales of foreclosed properties                                  -                  47,717
         Operating expenses, net of rental income                                1,690                   1,872

                                                                        $      139,391          $       49,589

     Transfers of loans to other real estate owned for the years ended December 31, 2008 and 2007 totaled
     $344,280 and $156,144, respectively.

6.   LOAN SERVICING

     Mortgage loans serviced for others are not included in the accompanying statements of financial condition. The
     unpaid principal balances of these loans at December 31, 2008 and 2007 are summarized as follows:

                                                                                     December 31
                                                                              2008                    2007
         Mortgage loan portfolios serviced for:
                 FNMA                                                   $ 41,561,678            $ 48,148,840
                 Other investors                                           3,114,921               3,176,716

                                                                        $ 44,676,599            $ 51,325,556

7.   PROPERTY AND EQUIPMENT

     Property and equipment are summarized as follows:

                                                                                     December 31
                                                                              2008                    2007
         Building                                                       $      870,906          $      870,906
         Leasehold improvements                                              1,100,595               1,100,595
         Furniture and equipment                                            10,249,038               9,281,786

                                                                            12,220,539              11,253,287
         Accumulated depreciation and amortization                          (9,885,238)             (8,721,371)

                                                                        $     2,335,301         $    2,531,916



                                                                                                                  21
                                        CHEVRON FEDERAL CREDIT UNION
                                        NOTES TO FINANCIAL STATEMENTS
                                          DECEMBER 31, 2008 AND 2007



     The Credit Union leases several offices. The operating leases contain renewal options and provisions requiring
     the Credit Union to pay property taxes and operating expenses over base period amounts. All rental payments
     are dependent only upon the lapse of time. Minimum rental payments under operating leases with initial or
     remaining terms of one year or more at December 31, 2008 are as follows:

                                       Years Ending December 31
                                                 2009                             $    1,091,258
                                                 2010                                  1,092,778
                                                 2011                                    734,688
                                                 2012                                    296,886
                                           Subsequent years                                    -

                                                                                  $    3,215,610

     Rental expense for the years ended December 31, 2008 and 2007 for all facilities leased under operating
     leases totaled $1,315,286 and $1,234,232, respectively.

8.   MEMBERS’ SHARES

     Members’ shares are summarized as follows:

                                                                                       December 31
                                                                                2008                   2007
        Regular shares                                                     $ 129,321,096           $ 124,421,461
        Share draft accounts                                                 113,645,341             104,706,205
        Money market accounts                                                531,463,748             387,118,282
        Individual retirement accounts                                        10,756,026               6,212,404
        Share certificates                                                   261,925,822             244,366,586
        Equity-indexed certificates                                            5,101,504              11,077,938
        Individual retirement certificates                                    34,659,559              30,669,216
        Equity-indexed Individual retirement certificates                        584,061               1,278,207

                                                                             1,087,457,157            909,850,299
        Dividends payable                                                          516,673              3,578,282

                                                                           $ 1,087,973,830         $ 913,428,581




                                                                                                                 22
                                        CHEVRON FEDERAL CREDIT UNION
                                        NOTES TO FINANCIAL STATEMENTS
                                          DECEMBER 31, 2008 AND 2007



     Shares by maturity as of December 31, 2008 are summarized as follows:

        No contractual maturity                                              $    785,331,130
        0 – 1 year maturity                                                       263,773,187
        1 – 2 years maturity                                                       20,438,476
        2 – 3 years maturity                                                       11,519,661
        3 – 4 years maturity                                                        2,892,582
        4 – 5 years maturity                                                        3,502,121
        Over 5 years maturity                                                               -

                                                                                 1,087,457,157
        Dividends payable                                                              516,673

                                                                             $ 1,087,973,830

     Regular shares, share draft accounts, money market accounts, and individual retirement account shares have
     no contractual maturity. Certificate accounts have maturities of five years or less.

     The National Credit Union Share Insurance Fund (NCUSIF) insures members’ shares and certain individual
     retirement and Keogh accounts. Effective October 3, 2008 and continuing through December 31, 2009, new
     legislation provides for an increase in the minimum NCUSIF coverage from $100,000 to $250,000 on member
     share accounts. This includes all account types, such as regular share, share draft, money market, and
     certificates of deposit. Individual Retirement Account and Keogh account coverage remains at up to $250,000
     separate from other types of accounts owned.

     The aggregate amount of certificates in denominations of $100,000 or more at December 31, 2008 and 2007 is
     approximately $121,977,624 and $95,643,000, respectively.

9.   DERIVATIVE FINANCIAL INSTRUMENTS

     The Credit Union originates and portfolios fixed rate mortgage loans with terms of 30, 20, 15, and 10 years
     along with hybrid adjustable rate mortgages that first reprice in as long as seven years. These are funded by
     deposits with short duration. The duration mismatch poses earnings exposure in rising interest rate
     environments. To mitigate the negative effects of rising interest rates, the Credit Union enters into interest rate
     swaps committing to pay a fixed rate and to receive a variable rate based on a notional amount over a set term.
     The Credit Union also enters into interest rate caps to limit the impact of interest rate increases on its variable
     rate sources of funds. Counterparties have credit ratings of AAA or better. These derivative instruments do not
     meet SFAS No. 133 hedging requirements. These undesignated derivative instruments are recognized on the
     balance sheet at fair value, with changes in fair value recorded in earnings.




                                                                                                                      23
                                        CHEVRON FEDERAL CREDIT UNION
                                        NOTES TO FINANCIAL STATEMENTS
                                          DECEMBER 31, 2008 AND 2007



   Interest Rate Risk Management—Derivative Instruments not Designated as Hedging Instruments

   The outstanding balances of derivative cap and swap instruments as of December 31, 2008 which did not
   qualify as cash flow hedging instruments are as follows:

       Interest Rate         Notional                                                                   Wtd. Avg. Years
        Derivatives          Amount            Market Value           Weighted Average Rate               Remaining
                                                                  Strike rate 3.76% on 3-month
      Caps                $ 120,000,000       $ 1,405,074         LIBOR                                       4.74
                                                                  Pay 3.49%, receive 3-month or
      Swaps                  30,000,000            (837,562)      1-month LIBOR                               1.11

      TOTAL               $ 150,000,000       $     567,512                                                   4.01

   The Credit Union issues Equity-Indexed Share Certificates (EISC) to its membership with final dividend payouts
   tied to the performance of the S&P 500 Index. The Credit Union purchases options tied to the S&P 500 Index
   with similar maturities to the related share and IRA certificates. Counterparties to the options have a credit
   rating of A or better. As of December 31, 2008 and 2007, the Credit Union had issued EISCs with a face value
   of $6,356,141 and $12,356,145, respectively. The options are recorded at fair market value as of December 31,
   2008 and 2007 of $512,128 and $3,594,792, respectively, and classified as Other Assets on the statements of
   financial condition. The option costs are recognized as dividend expense over the life of the certificates. Option
   costs recognized as dividend expense were $326,270 and $468,123 in 2008 and in 2007, respectively.

10. BORROWED FUNDS

   Pursuant to collateral agreements with the Federal Home Loan Bank of San Francisco (FHLB), advances are
   collateralized by certain U.S. government obligations and federal agency, mortgage-backed and collateralized
   mortgage-backed securities safe kept at FHLB.

   Advances at December 31, 2008 have calendar-year maturity dates as follows:

                  Maturity Year Ending
                     December 31                  Interest Rate                Balances
                            2010                   4.2% - 4.6%                $ 15,000,000

   The weighted cost of all borrowings at December 31, 2008 is 4.37%. Remaining borrowing capacity based on
   securities pledged to FHLB is approximately $122,000,000 as of December 31, 2008.




                                                                                                                     24
                                       CHEVRON FEDERAL CREDIT UNION
                                       NOTES TO FINANCIAL STATEMENTS
                                         DECEMBER 31, 2008 AND 2007



11. OFF-BALANCE SHEET ACTIVITIES

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

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

    Outstanding loan commitments at December 31, 2008 and 2007 total approximately $20,989,029 and
    $11,049,000, respectively.

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

                                                                                     December 31
                                                                             2008                      2007
        Home equity                                                     $    44,551,000          $    40,782,000
        Credit card                                                             127,000              133,182,000
        Other consumer                                                       30,207,000               21,277,000

                                                                        $    74,885,000          $ 195,241,000

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

    Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protection
    agreements are commitments for possible future extensions of credit to existing customers. These lines-of-
    credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn
    upon to the total extent to which the Credit Union is committed.




                                                                                                                   25
                                      CHEVRON FEDERAL CREDIT UNION
                                      NOTES TO FINANCIAL STATEMENTS
                                        DECEMBER 31, 2008 AND 2007



12. SUBSEQUENT EVENT

   In January 2009, U.S. Central Corporate Federal Credit Union (U.S. Central) announced that it was taking a
   $1.2 billion charge during the fourth quarter of 2008 as a result of determining that certain of its investment
   securities were other-than-temporarily impaired. On January 28, 2009, the NCUA announced that it was
   injecting $1 billion of capital into U.S. Central from the NCUSIF and offering a temporary guarantee through
   December 31, 2010 of all member shares in corporate credit unions to provide stability and help maintain
   liquidity in the corporate credit union system. All federally-insured credit unions will share the cost of these
   actions proportionately through a partial write-off of the credit unions’ existing 1% NCUSIF deposit and future
   assessments of additional premiums to return the NCUSIF to the normal operating level of 1.3% of insured
   deposits. The impairment of the deposit was estimated at 51% of the December 31, 2008 insured deposits with
   an additional assessment of .3% of insured deposits as of December 31, 2008.

   On March 20, 2009, the NCUA announced that both U.S. Central and WesCorp were taken into
   conservatorship and the original loss reserve estimate had increased by $1.2 billion since the January 2009
   estimate was made. Based on this adjustment of the loss reserve estimate, the impairment of the NCUSIF
   deposit was revised to .69% of the insured deposits as of December 31, 2008. The additional assessment of
   .3% of insured deposits as of December 31, 2008 remained unchanged.

   On March 27, 2009, the NCUA introduced an amendment to the Federal Credit Union Act to Congress that, if
   enacted, could substantially impact the amount of impairment currently estimated. The proposed legislation
   would create the Corporate Credit Union Stabilization Fund to absorb losses associated with the corporate
   credit union stabilization actions and assess federally insured credit unions for associated costs over as much
   as a 7-year period.

   Without the benefit of the current proposed legislation, the credit union could record a charge of approximately
   $8,693,000 in its financial statement for the year ending December 31, 2009. As of the date of this report, the
   impact of the legislation on the financial statements cannot yet be estimated.

   In addition, at December 31, 2008, the Credit Union wrote-off all of its $3,054,199 capital investment in
   WesCorp based on the March 20, 2009 announcement that the losses at this institution exceed their capital in
   the organization.




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                                       CHEVRON FEDERAL CREDIT UNION
                                       NOTES TO FINANCIAL STATEMENTS
                                         DECEMBER 31, 2008 AND 2007



13. INFREQUENTLY OCCURRING GAINS (LOSSES)

   Infrequently occurring gains (losses) consist of the following for the years ended December 31, 2008 and 2007:

                                                                      Gains (losses)
                                                              2008                       2007

            Gain on sale of MasterCard stock            $     6,746,717            $     3,499,731
            Gain on sale of Visa stock                       20,343,801                          -
            Gain on sale of credit card portfolio             7,194,331                          -
            Impairment loss of Wescorp capital
              accounts (see Note 12)                         (3,054,199)                           -

            Other                                               122,440                     (19,272)

                                                        $    31,353,090            $     3,480,459

   MasterCard stock — The Credit Union is a principal member of MasterCard International, which changed its
   charter on May 31, 2006. At that time, the Credit Union’s Class A redeemable shares were converted to non-
   voting Class B shares. MasterCard had its IPO in 2006 and redeemed 59% of outstanding Class B non-voting
   shares resulting in a gain of $819,428. In 2007 and in 2008, MasterCard offered Class B shareholders
   opportunities to sell a certain number of shares. The Credit Union sold the maximum number permitted each
   time. The Credit Union sold 17,000 shares in September 2007 at a gain of $2,388,628, 5,000 shares in
   December 2007 at a gain of $1,111,103 and 21,917 shares in May 2008 at a gain of $6,746,717.

   The Credit Union currently holds 1,814 shares of non-voting Class B shares, which are non-publicly traded and
   have no readily assessable market value. In 2010, these shares will reconvert back to publicly traded Class A
   shares.

   Visa stock — In 2007, the Credit Union, as principal member of Visa U.S.A. Inc. (Visa), received shares of
   restricted stock in Visa as a result of Visa’s restructuring from a member association to a stock-owned
   corporation. The Visa IPO occurred on March 19, 2008. At the time of the Visa IPO in March 2008, Visa made
   an initial partial redemption 475,679 of the Credit Union’s 1.2 million Visa Class B non-voting shares, which
   resulted in a gain of $20,343,801.

   Sale of credit card portfolio — The Credit Union sold its $35 million credit card portfolio in February 2008 to
   Elan Financial Services, a division of U.S. Bank, at a gain of $7,194,331 so as to offer members a credit card
   with more attractive rebates while maintaining low interest rates and eliminating exposure to fraud risk.




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                                      CHEVRON FEDERAL CREDIT UNION
                                      NOTES TO FINANCIAL STATEMENTS
                                        DECEMBER 31, 2008 AND 2007



14. VISA INDEMNIFICATION CHARGES

   In 2007, the Credit Union, as principal member of Visa U.S.A. Inc. (Visa), received shares of restricted stock in
   Visa as a result of Visa’s restructuring from a member association to a stock-owned corporation. The Credit
   Union and other Visa member banks are obligated to share in potential losses resulting from certain indemnified
   litigation involving Visa to be funded from an escrow account to be established with a portion of the proceeds of
   the initial public offering (IPO). There’s no cash obligation for Visa members. Prior to the IPO on November 7,
   2007, Visa announced the settlement of the portion of the litigation that involved American Express. In addition,
   legal reserves were established for the litigation that involves Discover. In consideration of these
   announcements, the Credit Union recorded a liability based on its proportionate membership share of Visa with
   a corresponding charge of $8,006,249, which was outstanding as of December 31, 2007.

   The Visa IPO occurred on March 19, 2008. Proceeds from the IPO funded an escrow account for the benefit of
   all parties subject to the above noted litigation. This event allowed the Credit Union to reverse in 2008 the
   litigation liability recorded in 2007 of $8,006,249.

15. EMPLOYEE BENEFITS

   The Credit Union has a 401(k) pension plan that allows employees to defer a portion of their salary into the
   401(k) plan. The Credit Union matches a portion of employees’ wage reductions. Pension costs are accrued
   and funded on a current basis. The Credit Union contributed $655,079 and $614,633, respectively, to the plan
   for the years ended December 31, 2008 and 2007.

16. MEMBERS’ EQUITY

   The Credit Union is subject to various regulatory capital requirements administered by the NCUA. Failure to
   meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary –
   actions by regulators that, if undertaken, could have a direct material effect on the Credit Union’s financial
   statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
   Credit Union must meet specific capital guidelines that involve quantitative measures of the Credit Union’s
   assets, liabilities, and certain off-balance-sheet items as calculated under generally accepted accounting
   principles. The Credit Union’s capital amounts and classification are also subject to qualitative judgments by the
   regulators about components, risk weightings, and other factors.

    Quantitative measures established by regulation to ensure capital adequacy require the Credit Union to
    maintain minimum amounts and ratios (set forth in the table below) of net worth to total assets. Further, credit
    unions over $10,000,000 in assets are also required to calculate a Risk-Based Net Worth (RBNW) requirement
    which establishes whether or not the Credit Union will be considered “complex” under the regulatory framework.
    The Credit Union’s RBNW requirements as of December 31, 2008 and 2007 were 5.8% and 5.6%, respectively.
    The minimum requirement to be considered “complex” under the regulatory framework is 6%. Therefore, the
    Credit Union is not considered to be “complex” and meets all capital adequacy requirements to which it is
    subject as of December 31, 2008 and 2007.




                                                                                                                   28
                                         CHEVRON FEDERAL CREDIT UNION
                                         NOTES TO FINANCIAL STATEMENTS
                                           DECEMBER 31, 2008 AND 2007



   As of December 31, 2008, the most recent call reporting period, and 2007, the NCUA categorized the Credit
   Union as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as
   “well capitalized,” the Credit Union must maintain a minimum net worth ratio of 7% of assets. There are no
   conditions or events since that notification that management believes have changed the institution’s category.

   The Credit Union’s actual capital amounts and ratios are presented in the following table:

                                                  December 31, 2008                     December 31, 2007
                                             Amount        Ratio/Requirement      Amount        Ratio/Requirement
     Amount needed to be classified
      as “adequately capitalized”          $ 75,403,570          6.0%           $ 63,304,513           6.0%
     Amount needed to be
      classified as “well capitalized”     $ 87,970,832          7.0%           $ 73,855,265           7.0%
     Actual net worth                     $ 146,483,238        11.7%           $ 105,801,723         10.0%

   Because the RBNW requirement is less 6%, the Credit Union retains its original category of not “complex”.
   Further, in performing its calculation of total assets, the Credit Union used the quarter-end balance option, as
   permitted by regulation.

17. RELATED PARTY TRANSACTIONS

   In the normal course of business, the Credit Union extends credit to directors, supervisory committee members
   and executive officers. The aggregate loans to related parties at December 31, 2008 and 2007 are $2,231,138
   and $2,648,869, respectively. Shares from related parties at December 31, 2008 and 2007 amounted to
   $2,948,365 and $2,170,406, respectively.




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