INDEPENDENT AUDITOR S REPORT
Transcript of INDEPENDENT AUDITOR S REPORT
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INDEPENDENT AUDITOR’S REPORT
March 7, 2016
To the Supervisory Committee of SAFE Federal Credit Union
We have audited the accompanying financial statements of SAFE Federal Credit Union, whichcomprise the statement of financial condition as of December 31, 2015, and the related statementsof income, comprehensive income, members’ equity, and cash flows for the year then ended, andthe related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statementsin accordance with accounting principles generally accepted in the United States of America; thisincludes the design, implementation, and maintenance of internal control relevant to the preparationand fair presentation of financial statements that are free from material misstatement, whether dueto fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. Weconducted our audit in accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosuresin the financial statements. The procedures selected depend on the auditor’s judgment, includingthe assessment of the risks of material misstatement of the financial statements, whether due to fraudor error. In making those risk assessments, the auditor considers internal control relevant to theentity’s preparation and fair presentation of the financial statements in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the entity’s internal control. Accordingly, we express no suchopinion. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of significant accounting estimates made by management, as well as evaluating theoverall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basisfor our audit opinion.
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To the Supervisory Committee ofSAFE Federal Credit UnionPage 2
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SAFE Federal Credit Union as of December 31, 2015, and the results of itsoperations and its cash flows for the year then ended in accordance with accounting principlesgenerally accepted in the United States of America.
Prior Period Financial Statements
The financial statements as of December 31, 2014, were audited by Orth, Chakler, Murnane andCompany, whose report dated February 25, 2015, expressed an unmodified opinion on thosestatements.
OCM & Co., CPAs and Advisors
OCM & Co., CPAs and AdvisorsA DoerenMayhew FirmMiami, FL
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SAFE FEDERAL CREDIT UNIONSTATEMENTS OF FINANCIAL CONDITION
ASSETSAs of December 31,
2015 2014Cash $94,402,710 $76,941,970Investments:
Available-for-sale 274,130,937 294,507,592Other 30,085,568 26,583,351
Federal Home Loan Bank stock 812,700 780,900Loans to members, net of allowance for loan losses 536,456,136 475,690,779Accrued interest receivable:
Investments 573,653 422,017Loans 1,037,456 978,819
Prepaid and other assets 1,970,185 1,924,362Other real estate owned (OREO) 201,426 296,961Property and equipment 17,228,300 16,901,604NCUSIF deposit 8,003,765 7,760,593
Total assets $964,902,836 $902,788,948
LIABILITIES AND MEMBERS’ EQUITYAs of December 31,
2015 2014LIABILITIES:
Members’ share and savings accounts $859,456,649 $799,980,316Accounts payable and accrued liabilities 9,128,350 12,196,399
Total liabilities 868,584,999 812,176,715
Commitments and contingent liabilities
MEMBERS’ EQUITY:
Regular reserve 9,361,293 9,361,293Undivided earnings 88,289,456 81,829,941Accumulated other comprehensive loss (1,332,912) (579,001)
Total members’ equity 96,317,837 90,612,233
Total liabilities and members’ equity $964,902,836 $902,788,948
The accompanying notes are an integral part of these financial statements.
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SAFE FEDERAL CREDIT UNIONSTATEMENTS OF INCOME
For the years ended December 31,
2015 2014INTEREST INCOME:
Loans to members $21,444,751 $20,533,794Investments 2,701,016 1,904,498
Total interest income 24,145,767 22,438,292INTEREST EXPENSE:
Total interest expense 4,465,836 4,573,622
Net interest income 19,679,931 17,864,670
PROVISION FOR LOAN LOSSES 1,173,059 2,598,906
Net interest income afterprovision for loan losses 18,506,872 15,265,764
NON-INTEREST INCOME:
Fees, charges and other miscellaneous income 18,245,591 18,231,310
36,752,463 33,497,074NON-INTEREST EXPENSE:
Compensation and employee benefits 15,246,648 14,691,480Office operating and occupancy costs 6,170,872 5,491,449Professional and outside services 3,368,139 3,087,199Loan servicing expense 2,962,264 2,439,178Other expenses 2,545,025 2,592,624
Total non-interest expense 30,292,948 28,301,930
Net income $6,459,515 $5,195,144
The accompanying notes are an integral part of these financial statements.
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SAFE FEDERAL CREDIT UNIONSTATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
2015 2014
NET INCOME $6,459,515 $5,195,144
OTHER ITEMS OF COMPREHENSIVE INCOME:Unrealized losses on investments
classified as available-for-sale (753,911) (510,451)Reclassification adjustments for investment
(gains)/losses included in net income — —Other comprehensive loss (753,911) (510,451)
Comprehensive income $5,705,604 $4,684,693
The accompanying notes are an integral part of these financial statements.
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SAFE FEDERAL CREDIT UNIONSTATEMENTS OF MEMBERS’ EQUITY
For the years endedDecember 31, 2015 and 2014
RegularReserve
UndividedEarnings
AccumulatedOther
ComprehensiveLoss Total
Balance,December 31, 2013 $9,361,293 $76,634,797 ($68,550) $85,927,540
Net income — 5,195,144 — 5,195,144
Other comprehensiveloss — — (510,451) (510,451)
Balance,December 31, 2014 9,361,293 81,829,941 (579,001) 90,612,233
Net income — 6,459,515 — 6,459,515
Other comprehensiveloss — — (753,911) (753,911)
Balance,December 31, 2015 $9,361,293 $88,289,456 ($1,332,912) $96,317,837
The accompanying notes are an integral part of these financial statements.
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SAFE FEDERAL CREDIT UNIONSTATEMENTS OF CASH FLOWS
For the years endedDecember 31,
2015 2014CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,459,515 $5,195,144Adjustments:
Provision for loan losses 1,173,059 2,598,906Depreciation and amortization 1,786,080 1,628,726Amortization/accrection of
investment premiums/discounts 134,993 160,979Amortization of deferred loan origination costs 507,261 419,868
Changes in operating assets and liabilities:Accrued interest receivable (210,273) (63,682)Prepaid and other assets (45,823) (579,966)Accounts payable and accrued liabilities (3,068,049) 3,652,661
Net cash provided by operating activities 6,736,763 13,012,636
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (274,018,605) (255,580,427)Proceeds from maturities, calls, and repayments,
of available-for-sale securities 293,506,356 230,515,576Net change in other investments (3,502,217) (3,056,998)Net change in Federal Home Loan Bank stock (31,800) 209,500Net change in loans, net of charge-offs (63,422,916) (33,481,115)Recoveries on loans charged off 692,845 577,293Proceeds from sale of OREO 379,929 207,780Expenditures for property and equipment (2,112,776) (3,401,146)Change in NCUSIF deposit (243,172) (277,172)
Net cash used in investing activities (48,752,356) (64,286,709)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in members’ share and savings accounts 59,476,333 27,101,369
Net cash provided by financing activities 59,476,333 27,101,369
Net change in cash 17,460,740 (24,172,704)
Cash at beginning of year 76,941,970 101,114,674
Cash at end of year $94,402,710 $76,941,970
The accompanying notes are an integral part of these financial statements.
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SAFE FEDERAL CREDIT UNIONSTATEMENTS OF CASH FLOWS
Cash Flows: (continued)
For the years endedDecember 31,
2015 2014
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $4,465,802 $4,572,906
SCHEDULE OF NON-CASH TRANSACTIONS:
Other comprehensive loss ($753,911) ($510,451)
Transfer from loans to OREO $284,394 $127,770
The accompanying notes are an integral part of these financial statements.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
SAFE Federal Credit Union (the Credit Union), is a cooperative association organized in accordancewith the provisions of the Federal Credit Union Act for the purpose of promoting thrift among, andcreating a source of credit for, its members. Participation in the Credit Union is limited to thoseindividuals that qualify for membership. The field of membership is defined in the Credit Union’sCharter and Bylaws.
FINANCIAL STATEMENTS ESTIMATES/USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles generally acceptedin the United States of America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingent assets and liabilitiesas of the date of the financial statements and the reported amounts of revenues and expenses for theperiods then ended. Actual results could differ from those estimates. Estimates that are particularlysusceptible to change relate to the determination of the allowance for loan losses (ALL) and the fairvalue of financial instruments. The significant accounting principles and policies used in thepreparation of these financial statements, together with certain related information, are summarizedbelow.
CASH
Cash consists of cash on hand and amounts due from banks. Amounts due from banks may, at times,exceed federally insured limits.
INVESTMENTS
Investments are classified into the following categories: available-for-sale and other. Investmentsecurities classified as available-for-sale are measured at fair value as of the statement of financialcondition date. Unrealized gains and losses for available-for-sale investments are reported as aseparate component of members’ equity. Investments classified as other are measured at amortizedcost. The Credit Union has elected to classify certain cash equivalents as other investments inaccordance with the terms of the Statement of Cash Flows Topic of the Financial AccountingStandards Board (FASB) Accounting Standards Codification (ASC). Realized gains and losses ondisposition, if any, are computed using the specific identification method. Investments are adjustedfor the amortization of premiums and accretion of discounts as an adjustment to interest income oninvestments over the term of the investment by a method which approximates the interest method.
FEDERAL HOME LOAN BANK (FHLB) STOCK
As a member of the FHLB, the Credit Union is required to invest in stock of the FHLB. The CreditUnion’s minimum stock investment is based on a formula developed by the FHLB that considersthe Credit Union’s total assets and outstanding advances from the FHLB. The FHLB stock is carriedat cost and its disposition is restricted. No ready market exists for the FHLB stock, and it has noquoted fair value.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 1: (continued)
LOANS TO MEMBERS AND ALLOWANCE FOR LOAN LOSSES
Loans to members are stated at the amount of unpaid principal, net of an ALL and deferred loanorigination fees and costs. The ALL is increased by a provision for loan losses charged to expenseand decreased by charge-offs (net of recoveries). The ALL is maintained at a level consideredadequate to provide for incurred loan losses in the loan portfolio by applying a historical loan lossrate to loan pools which have similar risk characteristics. Management’s periodic evaluation of theadequacy of the ALL also considers such factors as changes in the nature and volume of the loanportfolio, review of specific problem loans, and current economic conditions that may affect theborrower’s ability to repay. Loans are charged against the ALL when management believes thatcollection of the principal is unlikely.
Interest on loans to members is recognized over the terms of the loans and is calculated on principalamounts outstanding. The accrual of interest is discontinued when a loan reaches 90 days delinquentor when management believes that collection of interest is doubtful. Generally, loan fees arerecognized in income when received and direct loan origination costs are recognized as a charge toexpense when incurred; however, fees paid to dealerships in connection with the referral ofautomobile loans are deferred and amortized as an adjustment of loan yield over the estimated lifeof the loan using a method that approximates the interest method. Credit card fees, if any, arerecognized as fee income when assessed. The Credit Union’s accounting for loan origination feesand costs is not materially different from fees and expenses that would have been recognized underthe provisions of the Nonrefundable Fees and Other Cost Topic of the FASB ASC.
ALL METHODOLOGY
Management has an established methodology to determine the adequacy of the ALL that assessesthe risks and losses inherent in the loan portfolio. For purposes of determining the ALL, the CreditUnion has segmented certain loans in the portfolio by product type. Loans are segmented into thefollowing pools: consumer and real estate. The Credit Union further divides these segments intoclasses based on the associated risks within those segments. Consumer loans are divided into fourclasses: new auto, used auto, unsecured, and other secured. Real estate loans are divided into threeclasses: first mortgages, second mortgages, and home equity loans. Each class of loans requiressignificant judgment to determine the estimation method that fits the credit risk characteristics ofits portfolio segment. The Credit Union uses internally developed models in the process. Management must use judgment in establishing additional input metrics for the modeling processes. The models and assumptions used to determine the ALL are independently validated and reviewedto ensure that their theoretical foundation, assumptions, data integrity, computational processes,reporting practices, and end-user controls are appropriate and properly documented. The followingis how management determines the balance of the ALL for each segment or class of loans.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 1: (continued)
CONSUMER PORTFOLIO SEGMENT ALL METHODOLOGY
For consumer loans not identified as impaired, the Credit Union determines the ALL on a collectivebasis utilizing historical and forecasted losses to represent the best estimate of inherent losses at themeasurement date. Loans are pooled, generally by loan types with similar risk characteristics. Asof December 31, 2015 and 2014, the historical loss time frame for all classes was an annualizedrolling six months.
The consumer ALL model primarily uses historic delinquency and default experience, loss severity,unemployment trends, and other key economic variables that may influence the frequency andseverity of losses for each class of loan within the consumer segment. The consumer ALL alsoincludes an amount for the estimated losses on individually evaluated.
REAL ESTATE PORTFOLIO SEGMENT ALL METHODOLOGY
For real estate loans not identified as impaired, the Credit Union determines the ALL on a collectivebasis utilizing historical and forecasted losses to represent the best estimate of inherent losses at themeasurement date. Loans are pooled, generally by loan types with similar risk characteristics. Asof December 31, 2015 and 2014, the historical loss time frame for all classes was an annualizedrolling six months.
The real estate ALL model primarily uses historic delinquency and default experience, loss severity,home price trends, unemployment trends, and other key economic variables that may influence thefrequency and severity of losses for each class of loan within the real estate segment.
LOAN CHARGE-OFF POLICIES
The Credit Union’s quality control process includes preparing lists to monitor and track delinquentloans and special mention loans. Tracking the loans on these lists enables management to assess theperformance of the loan portfolio and act to mitigate risk therein through necessary changes inpolicy and procedures. The quality control process also serves as a tool to assist the Credit Unionin identifying loans for charge off on a timely basis. The following is a description of when a loanwill generally be charged off:
Consumer loans:
� A loan is deemed uncollectible;
� Where additional collection efforts are non-productive, regardless of the number ofdays delinquent;
� A non-performing loan more than 180 days past due;
� Management judges the asset to be uncollectible;
� A “skip” where the Credit Union has had no contact for 90 days;
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 1: (continued)
� An estimated loan loss, where the Credit Union has repossessed, but not yet sold,collateral on hand;
� A loan of a deceased person where the loss is determined;
� The asset has been classified as a loss by either the internal loan review process orexternal examiners.
Real Estate:
� A foreclosed real estate loan upon the determination of the amount of the estimatedloan loss. The loss is estimated by calculating the difference between the loanbalance and a reasonable estimate of the fair market value of the collateral lessliquidation costs.
PROPERTY AND EQUIPMENT
Land is carried at cost. Property and equipment are carried at cost less accumulated depreciation. Buildings, furniture and equipment, and data processing equipment are depreciated using thestraight-line method over the estimated useful lives of the assets. The cost of leaseholdimprovements is generally amortized using the straight-line method over the term of the lease, orthe estimated life of the asset, whichever is less. The Credit Union reviews property and equipment(long-lived assets) for impairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable.
OTHER REAL ESTATE OWNED (OREO)Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value at the dateof foreclosure, establishing a new cost basis. Costs relating to the development and improvementof property are capitalized, whereas costs relating to holding property are charged to expense. Subsequent to foreclose, valuations are periodically performed by management to ensure that thecarrying value of the property does not exceed its fair value less estimated costs to sell.
NCUSIF DEPOSIT
The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance withNational Credit Union Administration (NCUA) regulations, which require the maintenance of adeposit by each insured credit union in an amount equal to one percent of its insured members’shares. The deposit would be refunded to the Credit Union if its insurance coverage is terminated,it converts to insurance coverage from another source, or the operations of the fund are transferredfrom the NCUA Board.
MEMBERS’ SHARE AND SAVINGS ACCOUNTS
Members’ shares are subordinated to all other liabilities of the Credit Union upon liquidation. Interest on members’ share and savings accounts is based on available earnings at the end of an interest period and is not guaranteed by the Credit Union. Interest rates on members’ share accountsare set by the Board of Directors, based on an evaluation of current and future market conditions.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 1: (continued)
REGULAR RESERVE
The Credit Union is required to maintain a statutory reserve (regular reserve) in accordance with theFederal Credit Union Act. This statutory reserve represents a regulatory restriction and is notavailable for the payment of interest.
FEDERAL AND STATE TAX EXEMPTION
The Credit Union is exempt from most federal, state, and local taxes under the provisions of theInternal Revenue Code and state tax laws. The Income Taxes Topic of the FASB ASC clarifiesaccounting for uncertainty in income taxes reported in the financial statements. The interpretationprovides criteria for assessment of individual tax positions and a process for recognition andmeasurement of uncertain tax positions. Tax positions are evaluated on whether they meet the“more likely than not” standard for sustainability on examination by tax authorities. Federal creditunions are tax-exempt under Internal Revenue Code sections 501(c)(14)(a) and 501(c)(1)(a)(I). Assuch, the Credit Union has no uncertain tax positions that qualify for either recognition or disclosurein the financial statements. Additionally, no interest or penalties have been recorded in theaccompanying financial statements related to uncertain tax positions.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 5, 2016, the FASB issued Accounting Standards Update (ASU) 2016-01, FinancialInstruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current GAAP model primarily affects the accounting for equity investments,financial liabilities under the fair value option, and the presentation and disclosure requirements forfinancial instruments. The accounting for other financial instruments, such as loans, investments indebt securities, and financial liabilities is largely unchanged. The classification and measurementguidance will be effective for non-public business entities in fiscal years beginning after December15, 2018, or they may early adopt for periods after December 15, 2017. The Credit Union iscurrently evaluating the impact of the ASU.
Entities that are not public business entities will no longer be required to disclose the fair value offinancial instruments carried at amortized cost. The ASU also eliminates the requirement to disclosethe methods and significant assumptions used to estimate the fair value. Entities that are not publicbusiness entities can early adopt the provision permitting the omission of fair value disclosures forfinancial instruments at amortized cost. Early adoption of these provisions can be elected for allfinancial statements of fiscal years and interim periods that have not yet been made available forissuance. Accordingly, the Credit Union has removed the disclosures related to the fair value ofthose financial instruments.
SUBSEQUENT EVENTS
Management has evaluated subsequent events through March 7, 2016, the date the financialstatements were available to be issued. Management has not identified any items requiringrecognition or disclosure.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
NOTE 2: INVESTMENTS
The amortized cost and estimated fair value of investments are as follows:
As of December 31, 2015Gross Gross
Available-for-sale: Amortized Unrealized Unrealized FairCost Gains Losses Value
Federal agencysecurities $268,770,207 $2,735 ($1,372,674) $267,400,268
U.S Governmentobligations 5,998,641 — (4,110) 5,994,531
Mortgage-backedsecurities 695,001 41,137 — 736,138
$275,463,849 $43,872 ($1,376,784) $274,130,937
As of December 31, 2014Gross Gross
Available-for-sale: Amortized Unrealized Unrealized FairCost Gains Losses Value
Federal agencysecurities $293,943,511 $15,728 ($664,373) $293,294,866
Mortgage-backedsecurities 1,143,082 69,665 (21) 1,212,726
$295,086,593 $85,393 ($664,394) $294,507,592
Other investments: As of December 31,2015 2014
Certificates of deposit $29,822,045 $25,912,965First Carolina Corporate Credit Union 243,840 650,741Credit union service organization 19,683 19,645
$30,085,568 $26,583,351
The Credit Union maintains deposits at First Carolina Corporate Credit Union which normallyexceed federally insured limits. Included in these deposits are uninsured membership capital sharesthat are subject to certain withdrawal restrictions. The Credit Union redeemed the membershipcapital shares during October 2014.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 2: (continued)
The amortized cost and estimated fair value of investments by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to callor prepay certain obligations without call or prepayment penalties.
As of December 31, 2015Available-for-sale
Amortized FairCost Value
Within 1 year $49,038,310 $48,963,0821 to 5 years 225,730,538 224,431,717
274,768,848 273,394,799Mortgage-backed securities 695,001 736,138
$275,463,849 $274,130,937
The following tables show the gross unrealized losses and fair value of investments, aggregated bylength of time individual securities have been in a continuous unrealized loss position.
As of December 31, 2015
Available-for-sale
Less than 12 Months 12 Months or Longer Total
Gross Gross GrossFair Unrealized Fair Unrealized Fair UnrealizedValue Losses Value Losses Value Losses
Federal agencysecurities $261,907,699 $1,372,674 $— $— $261,907,699 $1,372,674
U.S. Governmentobligations 5,994,531 4,110 — — 5,994,531 4,110
$267,902,230 $1,376,784 $— $— $267,902,230 $1,376,784
As of December 31, 2014
Available-for-sale
Less than 12 Months 12 Months or Longer Total
Gross Gross GrossFair Unrealized Fair Unrealized Fair UnrealizedValue Losses Value Losses Value Losses
Federal agencysecurities $216,074,361 $568,947 $26,056,881 $95,426 $242,131,242 $664,373
Mortgage-backedsecurities 571 1 3,562 20 4,133 21
$216,074,932 $568,948 $26,060,443 $95,446 $242,135,375 $664,394
The decline in fair value is primarily due to differences between security yields and market interestrates. Unrealized losses on securities issued by the U.S. Government and its Agencies have not beenrecognized into income because the principal balances of these securities are guaranteed by the U.S.Government. Additionally, the fair values of these securities are expected to be recovered as theyapproach their maturity date and/or market rates decline. Management has the ability and intent tohold these securities through to recovery of fair value, which may be maturity.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
NOTE 3: LOANS TO MEMBERS
The composition of loans to members is as follows:
As of December 31,
2015 2014Consumer:
New auto $78,645,594 $56,059,893Used auto 165,650,225 139,266,852Unsecured 90,709,061 94,624,971Other secured 12,159,063 11,482,879
Total consumer 347,163,943 301,434,595Real Estate:
First mortgage 145,815,959 143,565,197Second mortgage 38,111,044 25,749,322Home equity 6,418,821 6,815,270
Total real estate 190,345,824 176,129,789Total loans 537,509,767 477,564,384
Net deferred loan origination fees/costs 755,628 431,215538,265,395 477,995,599
Less ALL (1,809,259) (2,304,820)$536,456,136 $475,690,779
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 3: (continued)
A summary of the activity in the ALL by portfolio is as follows:
For the years ended
December 31, 2015 and 2014
Consumer Real Estate Total
Balance,
December 31, 2013 $1,819,876 $54,019 $1,873,895
Provision for loan losses 2,144,129\ 454,777 2,598,906
Recoveries 571,385 5,908 577,293
Loans charged off (2,602,439) (142,835) (2,745,274)
Balance,
December 31, 2014 1,932,951 371,869 2,304,820
Provision for loan losses 1,304,097 (131,038) 1,173,059
Recoveries 679,893 12,952 692,845
Loans charged off (2,339,197) (22,268) (2,361,465)
Balance,
December 31, 2015 $1,577,744 $231,515 $1,809,259
As of December 31, 2015
Consumer Real Estate Total
Ending balance $1,577,744 $231,515 $1,809,259
Individually evaluated for impairment $— $— $—
Collectively evaluated for impairment $1,577,744 $231,515 $1,809,259
As of December 31, 2014
Consumer Real Estate Total
Ending balance $1,932,951 $371,869 $2,304,820
Individually evaluated for impairment $49,373 $— $49,373
Collectively evaluated for impairment $1,883,578 $371,869 $2,255,447
A summary of the recorded investment in loans by portfolio segment is as follows:
As of December 31, 2015
Consumer Real Estate Total
Ending balance $347,919,571 $190,345,824 $538,265,395
Individually evaluated for impairment $483,099 $— $483,099
Collectively evaluated for impairment $347,436,472 $190,345,824 $537,782,296
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 3: (continued)
As of December 31, 2014
Consumer Real Estate Total
Ending balance $301,865,810 $176,129,789 $477,995,599
Individually evaluated for impairment $616,164 $— $616,164
Collectively evaluated for impairment $301,249,646 $176,129,789 $477,379,435
IMPAIRED LOANS
Management individually evaluates certain loans within the portfolio for impairment. A loan isimpaired when it is probable, based on current information and events, that the Credit Union willbe unable to collect all contractual principal and interest payments due in accordance with the termsof the loan agreement. When management identifies a loan as impaired, the impairment is measuredbased on the present value of expected future cash flows, discounted at the loan's effective interestrate, except when the sole (remaining) source of repayment for the loan is the operation orliquidation of the collateral. In these cases management uses the current fair value of the collateral,less selling costs when foreclosure is probable, instead of discounted cash flows. If managementdetermines that the value of the impaired loan is less than the recorded investment in the loan (netof previous charge-offs, deferred loan fees or costs and unamortized premium or discount),impairment is recognized through an ALL estimate or a charge-off to the ALL.
The following tables include the recorded investment and unpaid principal balances for loans thatare individually evaluated for impairment with the associated ALL amount, if applicable. Alsopresented are the average recorded investments in these loans and the related amount of interestrecognized during the time within the period that the loans were individually evaluated. The averagebalances are calculated based on the quarter-end balances of the loans for the period presented.
Payments received on impaired loans are recorded as a reduction of principal or as interest incomedepending on management’s assessment of the ultimate collectability of the loan principal.Generally, interest income on an impaired loan is recorded over the terms of the loan and iscalculated on principal amounts outstanding.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 3: (continued)
The tables below summarize key information for impaired loans:
As of December 31, 2015
For the Year Ended December 31, 2015
RecordedInvestment
UnpaidPrincipalBalance
SpecificAllowance
AverageRecorded
Investment
InterestIncome
Recognized
Without an allowance
Consumer:
New auto $1,395 $1,395 $— $6,486 $277
Used auto $347,450 $347,450 $— $413,700 $22,906
Unsecured $70,180 $70,180 $— $72,466 $7,221
Other secured $64,074 $64,074 $— $70,201 $4,647
Totals
Consumer $483,099 $483,099 $— $562,853 $35,051
As of December 31, 2014
For the Year Ended December 31, 2014
RecordedInvestment
UnpaidPrincipalBalance
SpecificAllowance
AverageRecorded
Investment
InterestIncome
Recognized
With an allowance
Consumer:
New auto $9,869 $9,869 $791 $19,372 $779
Used auto $459,655 $459,655 $36,832 $484,294 $25,939
Unsecured $70,663 $70,663 $5,662 $82,247 $5,209
Other secured $75,977 $75,977 $6,088 $80,710 $5,206
Totals
Consumer $616,164 $616,164 $49,373 $666,623 $37,133
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 3: (continued)
The tables below provide an age analysis of past due loans by class:
As of December 31, 2015
TotalDelinquent
LoansTotal Current
LoansTotal Loans
Days Delinquent
30 - 59 60 - 89 90 or more
Consumer:
New auto $178,451 $114,437 $53,355 $346,243 $78,625,464 $78,971,707
Used auto 1,005,580 157,894 183,495 1,346,969 164,732,771 166,079,740
Unsecured 1,967,733 60,309 106,591 2,134,633 88,574,428 90,709,061
Other secured 73,311 — 25,427 98,738 12,060,325 12,159,063
Total 3,225,075 332,640 368,868 3,926,583 343,992,988 347,919,571
Real Estate:
First mortgage 1,698,828 123,611 580,738 2,403,177 143,412,782 145,815,959
Second mortgage 21,379 15,386 20,613 57,378 38,053,666 38,111,044
Home equity 12,736 — 2,703 15,439 6,403,382 6,418,821
Total 1,732,943 138,997 604,054 2,475,994 187,869,830 190,345,824
Grand Total $4,958,018 $471,637 $972,922 $6,402,577 $531,862,818 $538,265,395
As of December 31, 2014
TotalDelinquent
LoansTotal Current
LoansTotal Loans
Days Delinquent
30 - 59 60 - 89 90 or more
Consumer:
New auto $321,699 $48,855 $21,798 $392,352 $55,679,806 $56,072,158
Used auto 896,026 105,683 160,969 1,162,678 138,523,124 139,685,802
Unsecured 1,358,308 175,628 19,903 1,553,839 93,071,132 94,624,971
Other secured 35,281 52 148 35,481 11,447,398 11,482,879
Total 2,611,314 330,218 202,818 3,144,350 298,721,460 301,865,810
Real Estate:
First mortgage 1,960,154 25,826 510,096 2,496,076 141,069,121 143,565,197
Second mortgage 42,682 7,083 43,608 93,373 25,655,949 25,749,322
Home equity — 1,800 20,339 22,139 6,793,131 6,815,270
Total 2,002,836 34,709 574,043 2,611,588 173,518,201 176,129,789
Grand Total $4,614,150 $364,927 $776,861 $5,755,938 $472,239,661 $477,995,599
The Credit Union places loans on nonaccrual status when the loan reaches 90 days past due or whenthe collection of interest or principal becomes uncertain. Loans on which the accrual of interest hasbeen discontinued or reduced approximated $973,000 and $777,000 as of December 31, 2015 and2014, respectively. There were no loans 90 days or more past due and still accruing interest as ofDecember 31, 2015 or 2014.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 3: (continued)
TROUBLED DEBT RESTRUCTURING
The Credit Union’s loan portfolio also includes certain loans that have been modified in a TroubledDebt Restructuring (TDR), where economic concessions have been granted to borrowers who haveexperienced or are expected to experience financial difficulties. These concessions typically resultfrom the Credit Union’s loss mitigation activities and could include reductions in the interest rate,payment extensions, forgiveness of principal, forbearance or other actions.
When the Credit Union modifies a collateral dependent loan, management uses the current fair valueof the collateral, less selling costs, to determine the net realizable value of the collateral. Ifmanagement determines that the value of the modified loan is less than the recorded investment inthe loan, impairment is recognized by segment or class of loan, as applicable, through the ALL.
The following tables include information on TDRs as of December 31, 2015 and 2014. Below isthe recorded investment in TDRs modified within the last year that subsequently defaulted in thecurrent reporting period. The Credit Union defines a TDR as subsequently defaulted when the TDRis 90 days past due, the member fails to complete six consecutive payments, or the member filesbankruptcy.
The following tables present the TDRs approved or subsequently defaulted by class of loans duringthe past 12 months:
For the year ended December 31, 2015
Number
TDRs approvedduring
the period
TDRs whichsubsequently
defaulted
Consumer:New auto 4 $55,781 $—Used auto 25 267,603 —Unsecured 12 59,820 675Other secured 2 9,115 —
Total 43 392,319 675Real estate:
First mortgage 1 85,012 —Total 44 $477,331 675
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 3: (continued)
For the year ended December 31, 2014
Number
TDRs approvedduring
the period
TDRs whichsubsequently
defaulted
Consumer:New auto 2 $51,144 $—Used auto 29 320,083 —Unsecured 19 130,195 —Other secured 3 14,533 —
Total 53 $515,955 $—
CONSUMER AND REAL ESTATE CREDIT QUALITY INDICATORS
The following tables represent consumer and real estate credit exposures by credit score. The useof creditworthiness categories to grade loans permits management to estimate a portion of creditrisk. Category ratings are periodically reviewed, at which time management analyzes the resultingscores, as well as other external statistics and factors, to track loan performance. Loans that trendupward toward higher levels generally have a lower risk factor associated. Whereas, loans thatmigrate toward lower rating generally will result in a higher risk factor being applied to those relatedloan balances.
The Credit Union’s internal risk ratings are as follows:
! 720 and above - Member poses little to no risk.
! 680 to 719 - Member poses a nominal risk of loss.
! 640 to 679 - Composed of the Credit Union’s average member profile.
! 600 to 639 - Member is experiencing some degree of financial difficulty.
! 550 to 599 - Member poses additional risk.
! 549 and below - Member is showing above average risk.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 3: (continued)
The tables below summarize key information for consumer credit quality:
Consumer Credit Quality Indicators
As of December 31, 2015
New Auto Used Auto Unsecured Other Secured Total
720 and above $36,809,432 $66,483,982 $40,220,313 $4,818,695 $148,332,422
680 to 719 15,212,123 34,228,822 19,331,735 1,979,698 70,752,378
640 to 679 14,958,367 32,298,212 12,956,571 2,260,014 62,473,164
600 to 639 6,928,233 16,757,948 6,623,455 1,249,034 31,558,670
550 to 599 2,635,897 8,262,028 3,588,847 860,429 15,347,201
549 and below 1,996,152 6,587,348 1,940,036 867,052 11,390,588
No score 431,503 1,461,400 6,048,104 124,141 8,065,148
$78,971,707 $166,079,740 $90,709,061 $12,159,063 $347,919,571
Consumer Credit Quality Indicators
As of December 31, 2014
New Auto Used Auto Unsecured Other Secured Total
720 and above $24,846,737 $56,569,651 $46,761,605 $4,721,361 $132,899,354
680 to 719 12,321,920 28,099,889 17,478,170 2,266,254 60,166,233
640 to 679 10,392,446 27,239,956 11,506,885 1,732,403 50,871,690
600 to 639 4,608,268 13,606,123 5,838,900 918,802 24,972,093
550 to 599 2,051,800 7,235,412 4,425,125 986,007 14,698,344
549 and below 1,635,226 6,044,907 1,890,505 745,646 10,316,284
No score 215,761 889,864 6,723,781 112,406 7,941,812
$56,072,158 $139,685,802 $94,624,971 $11,482,879 $301,865,810
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 3: (continued)
The tables below summarize key information for real estate credit quality:
Real Estate Credit Quality Indicators
As of December 31, 2015
First Mortgage Second Mortgage Home Equity Total
720 and above $93,912,032 $31,272,872 $3,881,565 $129,066,469
680 to 719 22,008,284 4,466,499 1,049,377 27,524,160
640 to 679 13,891,020 1,552,621 625,522 16,069,163
600 to 639 7,210,270 297,988 381,418 7,889,676
550 to 599 4,770,136 181,429 275,822 5,227,387
549 and below 3,754,021 275,645 205,117 4,234,783
No score 270,196 63,990 — 334,186
$145,815,959 $38,111,044 $6,418,821 $190,345,824
Real Estate Credit Quality Indicators
As of December 31, 2014
First Mortgage Second Mortgage Home Equity Total
720 and above $93,763,739 $21,313,680 $4,095,701 $119,173,120
680 to 719 19,409,046 2,278,052 1,108,247 22,795,345
640 to 679 15,766,113 1,001,519 722,017 17,489,649
600 to 639 5,294,419 378,171 395,047 6,067,637
550 to 599 4,889,271 463,021 227,793 5,580,085
549 and below 4,308,358 259,184 266,465 4,834,007
No score 134,251 55,695 — 189,946
$143,565,197 $25,749,322 $6,815,270 $176,129,789
NOTE 4: PROPERTY AND EQUIPMENT
A summary of the Credit Union’s property and equipment is as follows:
As of December 31,2015 2014
Land $4,908,396 $4,159,949Buildings 13,449,617 13,295,810Furniture and equipment 11,085,740 9,921,615Data processing equipment 2,806,742 2,786,884Leasehold improvements 1,112,587 1,112,587
33,363,082 31,276,845Less accumulated depreciation and amortization (16,134,782) (14,375,241)
$17,228,300 $16,901,604
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
NOTE 5: MEMBERS’ SHARE AND SAVINGS ACCOUNTS
Members’ share and savings accounts are summarized as follows:
As of December 31,
2015 2014Share drafts $126,031,094 $103,582,308Shares 259,641,777 221,558,674Money market 190,403,127 177,699,095IRA share accounts 49,781,358 48,888,615Certificates 233,599,293 248,251,624
$859,456,649 $799,980,316
The aggregate balance of members’ time deposit accounts in denominations that meet or exceed$250,000 was approximately $23,119,000 and $24,046,000 as of December 31, 2015 and 2014,respectively. The aggregate balance of overdraft accounts reclassified to loans to members wasapproximately $1,820,000 and $1,726,000 as of December 31, 2015 and 2014, respectively.
Scheduled maturities of certificates are as follows:
As ofDecember 31, 2015
Within 1 year $140,173,8181 to 2 years 55,168,0802 to 3 years 18,615,8983 to 4 years 13,089,5494 to 5 years 6,551,948
$233,599,293
SHARE INSURANCE
Members’ share and savings accounts are insured by the NCUSIF to a maximum of $250,000 foreach member. Individual Retirement Accounts are separately insured by the NCUSIF up to amaximum of $250,000.
NOTE 6: EMPLOYEE BENEFITS
401(K) RETIREMENT SAVINGS PLAN
The Credit Union employees participate in a 401(k) and profit sharing plan. Employees are eligiblefor match and profit sharing bi-annually after completion of one year of service and when they haveworked at least 1,000 hours. Employee contributions to the plan are subject to certain limitsestablished by the Internal Revenue Service. The Credit Union’s matching contributions are madeat the discretion of the Board of Directors. Benefits vest at the rate of 20% per year and become100% vested after six years of service. The Credit Union’s contributions to the 401(k) and profitsharing plan approximated $925,000 and $875,000 for the years ended December 31, 2015 and2014, respectively.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES
LINES-OF-CREDIT:
As of December 31, 2015, the Credit Union had access to a pre-approved line of credit from theFHLB, secured by eligible 1-4 family first mortgage loans, as defined in the FHLB Statement ofCredit Policy. The aggregate unused line of credit under this agreement was approximately$185,815,000 as of December 31, 2015.
UNFUNDED COMMITMENT:During the year ended December 31, 2015, the Credit Union entered into an agreement to build anew branch. As of December 31, 2015, the unfunded commitment related to this projectapproximated $1,287,000.
LEASE OBLIGATIONS:
The Credit Union leases several branch locations. The minimum noncancellable lease obligationsapproximate the following as of December 31, 2015:
Year endingDecember 31, Amount
2016 $68,0002017 8,000
$76,000
Rental expense under operating leases was approximately $218,000 and $231,000 for the yearsended December 31, 2015 and 2014, respectively.
MISCELLANEOUS LITIGATION:The Credit Union is a party to various miscellaneous legal actions normally associated with financialinstitutions, the aggregate effect of which, in management’s opinion, would not be material to theCredit Union’s financial statements.
NOTE 8: OFF-BALANCE-SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
OFF-BALANCE-SHEET RISK:The Credit Union is a party to financial instruments with off-balance-sheet risk in the normal courseof business to meet the financing needs of its members and to reduce its own exposure tofluctuations in interest rates. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess ofthe amount recognized in the statements of financial condition. The Credit Union’s exposure tocredit loss in the event of non performance by the other party to the financial instrument forcommitments to extend credit is represented by the contractual amount of these instruments.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 8: (continued)
Commitments to extend credit are agreements to lend to a member as long as there is no violationof any condition established in the contract. Commitments generally have fixed expiration dates orother termination clauses. Since many of the commitments may expire without being fully drawnupon, the total commitment amounts do not necessarily represent future cash requirements. TheCredit Union evaluates each member’s creditworthiness on a case-by-case basis. The amount ofcollateral obtained, if any, is based on management’s credit evaluation of the member.
Unused lines of credit approximated the following:
As of December 31, 2015
Credit cards $95,203,000Overdraft protection 34,021,000Other 33,957,000Home equity 10,971,000
$174,152,000
CONCENTRATIONS OF CREDIT RISK:
The Credit Union may be exposed to credit risk from a regional economic standpoint, since asignificant concentration of its borrowers work or reside in the Sumter, South Carolina area. TheCredit Union also has a significant concentration of borrowers who are or have been stationed atShaw Air Force Base. However, the loan portfolio is well diversified and the Credit Union does nothave any significant concentrations of credit risk, except unsecured loans, when by their nature,increase the risk of loss compared to those loans that are collateralized.
NOTE 9: REGULATORY CAPITAL
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 additionaldiscretionary-actions by regulators that, if undertaken, could have a direct material effect on theCredit Union’s financial statements. Under capital adequacy regulations and the regulatoryframework for prompt corrective action, the Credit Union must meet specific capital regulations thatinvolve quantitative measures of the Credit Union’s assets, liabilities, and certain off-balance-sheetitems as calculated under generally accepted accounting practices. The Credit Union’s capitalamounts and net worth classification are also subject to qualitative judgments by the regulators aboutcomponents, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Credit Unionto maintain minimum amounts and ratios (set forth in the table below) of net worth (as defined inNCUA Regulations) to total assets (as defined in NCUA Regulations). Credit unions are alsorequired to calculate a Risk-Based Net Worth Requirement (RBNWR) which establishes whetheror not the Credit Union will be considered “complex” under the regulatory framework. The Credit Union’s RBNWR as of December 31, 2015 and 2014 was 5.43% and 5.38%, respectively. Theminimum requirement to be considered complex under the regulatory framework is 6.00%.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 9: (continued)
Management believes, as of December 31, 2015 and 2014, that the Credit Union meets all capitaladequacy requirements to which it is subject.
As of December 31, 2015, the most recent call reporting period, the NCUA categorized the CreditUnion as “well capitalized” under the regulatory framework for prompt corrective action. To becategorized as “well capitalized” the Credit Union must maintain a minimum net worth ratio of7.00% of assets. There are no conditions or events since that notification that management believeshave changed the Credit Union’s category.
The Credit Union’s actual and required capital amounts and ratios are as follows:
As of As ofDecember 31, 2015 December 31, 2014
AmountRatio/
Requirement AmountRatio/
Requirement
Actual net worth $97,650,749 10.12% $91,191,234 10.10%
Amount needed to be classifiedas “adequately capitalized” $57,894,170 6.00% $54,167,337 6.00%
Amount needed to be classifiedas “well capitalized” $67,543,198 7.00% $63,195,226 7.00%
Because the RBNWR is less than the net worth ratio, the Credit Union retains its original category. Further, in performing its calculation of total assets, the Credit Union used the quarter-end option,as permitted by regulation.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
NOTE 10: CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss during the yearsended December 31, 2015 and 2014:
Unrealized Losses onAvailable-for-Sale
SecuritiesBalance as of December 31, 2013 ($68,550)
Other comprehensive loss before reclassification (510,451)Amounts reclassified from other comprehensive income —Net other comprehensive loss (510,451)
Balance as of December 31, 2014 (579,001)Other comprehensive loss before reclassification (753,911)Amounts reclassified from other comprehensive income —Net other comprehensive loss (753,911)
Balance as of December 31, 2015 ($1,332,912)
NOTE 11: FAIR VALUES OF FINANCIALINSTRUMENTS
The Fair Value Measurements and Disclosures Topic of the FASB ASC provides a framework formeasuring fair value that requires an entity to derive fair value from the price that would be receivedto sell an asset or paid to transfer a liability in an orderly transaction between market participantsat the measurement date within its principal market for the asset or liability, or in the absence of aprincipal market, the most advantageous market for the asset or liability. To increase consistencyand comparability in fair value measurements and related disclosures, a three-level hierarchyprioritizes the inputs to valuation techniques used to measure fair value with the highest priority tounadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowestpriority to unobservable inputs (Level 3) as further described below:
Level 1Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities thatthe Credit Union has the ability to access at the measurement date. An active market for the assetor liability is a market in which transactions for the asset or liability occur with sufficient frequencyand volume to provide pricing information on an ongoing basis.
Level 2Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable forthe asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual)term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices foridentical or similar assets or liabilities in markets that are inactive; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroboratedby observable market data by correlation or other means.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 11: (continued)
Level 3Level 3 inputs are unobservable inputs for the asset or liability which reflect the Credit Union’s ownassumptions about the assumptions that market participants would use in pricing the asset orliability. Assumptions about risk include risk inherent in a particular valuation technique used tomeasure fair value, typically pricing models and/or discounted cash flow methodologies.
The methodologies and associated inputs used may produce a fair value calculation that may not beindicative of net realizable value or reflective of future fair values. While the Credit Union believesits valuation methods and associated inputs are appropriate and consistent with other marketparticipants, the use of different methodologies or assumptions to determine the fair value of certainfinancial instruments could result in a different fair value measurement at the reporting date.
Certain assets and liabilities may be required to be measured at fair value on a non-recurring basis. These non-recurring fair value measurements usually result from the application of lower of cost ormarket accounting or the write-down of individual assets due to impairment.
RECURRING BASIS
AVAILABLE-FOR-SALE SECURITIES
The Credit Union receives pricing for available-for-sale securities from a third-party pricing service. These securities are classified as a Level 2 in the fair value hierarchy. The following is a descriptionof the valuation methodologies used for these securities:
Federal Agency Securities - Federal agency securities are valued based on quoted marketprices on similar assets in the marketplace and the vintage of the underlying collateral.
U.S. Government Obligations - U.S. Government obligations are valued based on quotedmarket prices on similar assets in the marketplace and the vintage of the underlyingcollateral.
Mortgage-backed Securities - Mortgage-backed securities are valued based on quotedmarket prices on similar assets in the marketplace and the vintage of the underlyingcollateral.
Non-Recurring Basis
OTHER REAL ESTATE OWNED (OREO)OREO properties acquired through or in lieu of foreclosure are initially recorded at fair value lessestimated selling costs. The Credit Union utilizes appraisals to estimate the fair market value ofOREO properties. An appraisal considers the value of similar surrounding properties and salestrends in the neighborhood. Estimates are obtained of any of the costs associated with getting the property ready for sale, and/or the cost of any needed repairs. The Credit Union evaluates thereasonableness by obtaining appraisals on OREO properties and also by analyzing significantfluctuations on a period-by-period basis. Fair value less costs to sell is an estimated value based onrelevant recent historical data that are considered unobservable inputs, and as such, OREO isclassified as Level 3 in the fair value hierarchy and valued on a non-recurring basis.
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SAFE FEDERAL CREDIT UNIONNOTES TO THE FINANCIAL STATEMENTS
Note 11: (continued)
During the holding period, appraisals are updated to reflect changes in fair value, and the OREO iscarried at the lower of the amount recorded at acquisition date or estimated fair value less costs tosell. Holding costs such as insurance, maintenance, taxes and utility costs are expensed as incurred.The Credit Union markets the OREO properties for sale to the public and generally does not holdOREO for longer than one year. Valuation adjustments on these assets as well as gains or lossesrealized from disposition of such properties are reflected in “other non-interest expense” on thestatements of income.
The following tables set forth by level, within the fair value hierarchy, the Credit Union’s financialinstruments at fair value on a recurring basis.
Assets at Fair Value as of December 31, 2015Level 1 Level 2 Level 3 Total
Available for sale securities:Federal agency securities $— $267,400,268 $— $267,400,268U.S. Government obligations 5,994,531 — — 5,994,531Mortgage-backed securities — 736,138 — 736,138
$5,994,531 $268,136,406 $— $274,130,937
Assets at Fair Value as of December 31, 2014Level 1 Level 2 Level 3 Total
Available for sale securities:Federal agency securities $13,989,453 $279,305,413 $— $293,294,866Mortgage-backed securities — 1,212,726 — 1,212,726
$13,989,453 $280,518,139 $— $294,507,592
The tables below present the items measured at fair value on the statements of financial conditionon a non-recurring basis when certain assets are measured at the lower of cost of market that wererecognized at fair value below cost at the end of the period.
Assets at Fair Value as of December 31, 2015Level 1 Level 2 Level 3 Total
OREO $— $— $201,426 $201,426
Assets at Fair Value as of December 31, 2014Level 1 Level 2 Level 3 Total
OREO $— $— $296,961 $296,961
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