safe federal credit union...safe federal credit union (the credit union) is a cooperative...

35
SAFE FEDERAL CREDIT UNION FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017 (With Independent Auditor’s Report Thereon)

Upload: others

Post on 09-Jun-2020

12 views

Category:

Documents


0 download

TRANSCRIPT

SAFE FEDERAL CREDIT UNION

FINANCIAL STATEMENTS

DECEMBER 31, 2018 AND 2017 (With Independent Auditor’s Report Thereon)

SAFE FEDERAL CREDIT UNION

TABLE OF CONTENTS

Page

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

FINANCIAL STATEMENTS

Statements of Financial Condition ....................................................................................................... 3

Statements of Income ........................................................................................................................... 4

Statements of Comprehensive Income ................................................................................................. 5

Statements of Members’ Equity ........................................................................................................... 6

Statements of Cash Flows .................................................................................................................... 7

Notes to the Financial Statements ........................................................................................................ 9

12060 S.W. 129th Court, Ste. 201Miami, Florida 33186-4582

305.232.8272doeren.com

Insight. Oversight. Foresight.®

Known Internationally as Moore Stephens Doeren Mayhew, P.C. An Independent Firm Associated With Moore Stephens International Limited.

Independent Auditor’s Report

February 4, 2019

To the Supervisory Committee and Board of Directors of SAFE Federal Credit Union

Report on the Financial Statements

We have audited the accompanying financial statements of SAFE Federal Credit Union, which comprise the statements of financial condition as of December 31, 2018 and 2017, and the related statements of income, comprehensive income, members’ equity and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

DoerenMayhew To the Supervisory Committee and Board of Directors of SAFE Federal Credit Union Page 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, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

Doeren Mayhew

Doeren Mayhew Miami, FL

SAFE FEDERAL CREDIT UNION

STATEMENTS OF FINANCIAL CONDITION AS OF DECEMBER 31, 2018 AND 2017

Assets 2018 2017

Cash and cash equivalents $102,152,724 $83,881,403 Interest bearing deposits 10,102,050 27,511,105 Available-for-sale investments 86,662,984 175,144,723 Loans to members, net of allowance for loan losses 821,999,273 710,700,272 FHLB stock 1,007,100 982,500 Accrued interest receivable 2,307,307 2,380,835 Prepaid and other assets 3,005,298 2,649,300 Property and equipment 16,587,291 16,962,380 NCUSIF deposit 9,038,306 8,912,457

Total assets $1,052,862,333 $1,029,124,975

Liabilities and Members' Equity

Liabilities: Members' shares and savings accounts $915,570,011 $906,413,430 Accrued expenses and other liabilities 16,271,209 13,481,335

Total liabilities 931,841,220 919,894,765

Commitments and contingent liabilities

Members' equity: Regular reserve 9,361,293 9,361,293 Undivided earnings 112,596,553 101,166,122 Accumulated other comprehensive loss (936,733) (1,297,205)

Total members' equity 121,021,113 109,230,210

Total liabilities and members' equity $1,052,862,333 $1,029,124,975

See accompanying notes to the financial statements.

- 3 -

SAFE FEDERAL CREDIT UNION

STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2018 AND 2017

2018 2017 Interest income: Loans to members $29,822,858 $26,305,796 Investments and interest bearing deposits 3,163,573 3,541,633

Total interest income 32,986,431 29,847,429

Interest expense: Total interest expense 4,271,680 3,997,690

Net interest income 28,714,751 25,849,739

Provision for loan losses 3,833,504 3,178,981

Net interest income after provision for loan losses 24,881,247 22,670,758

Non-interest income: Overdraft privilege fees 9,075,659 7,956,507 Interchange income 6,401,054 5,931,939 Other fees and service charges 3,695,593 3,193,748 Other income 2,721,530 2,353,496 Gain on sale of Mastercard stock 1,580,231 —

Total non-interest income 23,474,067 19,435,690

Non-interest expenses: Compensation and benefits 18,120,704 17,874,018 Professional and outside 4,813,983 4,518,701 Office operations 4,633,699 4,913,418 Loan servicing 3,356,942 2,580,220 Other expense 2,641,755 2,056,770 Office occupancy 2,135,374 2,087,650 Advertising costs 1,222,426 1,412,581

Total non-interest expenses 36,924,883 35,443,358

Net income $11,430,431 $6,663,090

See accompanying notes to the financial statements.

- 4 -

SAFE FEDERAL CREDIT UNION

STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2018 AND 2017

2018 2017

Net income $11,430,431 $6,663,090

Other comprehensive income/(loss):

Net unrealized holding gains/(losses) on available-for-sale investments 360,472 (50,120)

Other comprehensive income/(loss) 360,472 (50,120)

Comprehensive income $11,790,903 $6,612,970

See accompanying notes to the financial statements.

- 5 -

SAFE FEDERAL CREDIT UNION

STATEMENTS OF MEMBERS' EQUITY YEARS ENDED DECEMBER 31, 2018 AND 2017

Accumulated Other

Regular Undivided Comprehensive Reserve Earnings Income/(Loss) Total

Balance, December 31, 2016 $9,361,293 $94,503,032 ($1,247,085) $102,617,240

Net income — 6,663,090 — 6,663,090 Other comprehensive loss — — (50,120) (50,120)

Balance, December 31, 2017 9,361,293 101,166,122 (1,297,205) 109,230,210

Net income — 11,430,431 — 11,430,431 Other comprehensive income — — 360,472 360,472

Balance, December 31, 2018 $9,361,293 $112,596,553 ($936,733) $121,021,113

See accompanying notes to the financial statements.

- 6 -

SAFE FEDERAL CREDIT UNION

STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2018 AND 2017

2018 2017 Cash flows from operating activities:

Net income $11,430,431 $6,663,090

Adjustments to reconcile net income to cash flows provided from operating activities: Provision for loan losses 3,833,504 3,178,981 Depreciation and amortization 1,790,132 2,134,019

(Increase) decrease in: Prepaid and other assets (355,998) 738,004 Accrued interest receivable 73,528 (671,819)

Increase in: Accrued expenses and other liabilities 2,789,874 1,217,511

Total adjustments 8,131,040 6,596,696

Net cash provided from operating activities 19,561,471 13,259,786

See accompanying notes to the financial statements.

- 7 -

SAFE FEDERAL CREDIT UNION

STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2018 AND 2017

Cash Flows (Continued)

2018 2017 Cash flows from investing activities: Net change in loans to members (115,132,505) (101,364,791) Purchase of interest bearing deposits — (6,224,000) Proceeds from the maturity of interest bearing deposits 17,409,055 10,147,985 Proceeds from the repayment, call and maturity of available-for-sale investments 88,842,211 55,267,800

Purchase of available-for-sale investments — (17,710,100) Purchase of FHLB stock (24,600) (113,900) Purchase of property and equipment (1,415,043) (844,440) Payment into NCUSIF deposit (125,849) (477,107)

Net cash used in investing activities (10,446,731) (61,318,553)

Cash flows from financing activities: Net change in members' shares and savings accounts 9,156,581 19,505,691

Net cash provided from financing activities 9,156,581 19,505,691

Net change in cash and cash equivalents 18,271,321 (28,553,076)

Cash and cash equivalents - beginning 83,881,403 112,434,479

Cash and cash equivalents - ending $102,152,724 $83,881,403

Supplemental Information

Interest paid $4,271,228 $3,997,794

See accompanying notes to the financial statements.

- 8 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies

Organization

SAFE Federal Credit Union (the Credit Union) is a cooperative association organized in accordance with the provisions of the Federal Credit Union Act for the purpose of promoting thrift among, and creating a source of credit for, its members. Participation in the Credit Union is limited to those individuals who qualify for membership. The field of membership is defined by 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 (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses for the periods then ended. Actual results could differ from those estimates. Estimates that are particularly susceptible to change include the determination of the allowance for loan losses and the fair value of financial instruments. The significant accounting principles and policies used in the preparation of these financial statements, together with certain related information, are summarized below.

Concentrations of Credit Risk

A significant amount of the Credit Union’s business activity is with members who work or reside in the Sumter, South Carolina area. The Credit Union also has a significant concentration of borrowers who are or have been stationed at Shaw Air Force Base. Therefore, the Credit Union may be exposed to credit risk by the economic climate of the overall geographic region in which the borrowers reside.

Comprehensive Income

Accounting principles generally require the recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities are reported in a separate component of comprehensive income/(loss). Other comprehensive income/(loss) is limited to the changes in unrealized gain/(loss) on available-for-sale securities. When available-for-sale securities are sold, the gain or loss realized on the sale is reclassified from accumulated other comprehensive loss in the statements of financial condition to the gain/(loss) on sale of investments reported in the statements of income.

- 9 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and corporate credit unions (including cash items in the process of clearing) and interest-bearing deposits in banks with an original maturity of 90 days or less, including overnight deposits. Amounts due from banks and corporate credit unions may, at times, exceed federally insured limits.

Interest Bearing Deposits

Interest bearing deposits are time deposits with financial institutions with an original maturity in excess of 90 days. These deposits are all 100% insured as no deposit to one individual institution exceeds $250,000.

Available-for-Sale Investments

Federal agency and mortgage-backed securities, issued by the U.S. Government and its Agencies, are classified as available-for-sale when the Credit Union anticipates that the securities could be sold in response to rate changes, prepayment risk, liquidity, availability of and the yield on alternative investments and other market and economic factors. These securities are reported at fair value.

Unrealized gains and losses on available-for-sale investments are recognized as direct increases or decreases in other comprehensive income. 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 available-for-sale investments below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment (OTTI) losses, management considers (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 issuer 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 the costs of securities sold are determined using the specific identification 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 FHLB stock is carried at cost and its disposition is restricted. Based on the restricted nature of this investment, no ready markets exist for this investment.

- 10 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

Loans to Members

Loans that the Credit Union has the intent and ability to hold for the foreseeable future are stated at unpaid principal balances, less an allowance for loan losses and net deferred loan origination fees and costs. Interest on loans to members is recognized over the terms of the loans and is calculated on principal amounts outstanding.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual 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 the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Fees paid to dealerships in connection with the referral of automobile loans are deferred and amortized as an adjustment of loan yield over the estimated life of the loan.

Allowance for Loan Losses

The allowance for loan losses (“allowance”) is an estimate of loan losses inherent in the Credit Union’s loan portfolio. The allowance is established through a provision for loan losses which is charged to expense. Loan losses are charged off against the allowance when the Credit Union determines the loan balance to be uncollectible. Cash received on previously charged-off amounts is recorded as a recovery to the allowance.

The allowance is evaluated on a regular basis by management and is based upon management’s periodic assessment of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any 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.

- 11 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

Management has an established methodology to determine the adequacy of the allowance that assess the risks and losses inherent in the loan portfolio. For purposes of determining the allowance, the Credit Union has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: consumer and real estate. The Credit Union further divides these segments into classes based on the associated risks within those segments. Consumer loans are divided into four classes: new auto, used auto, unsecured, and other secured. Real estate loans are divided into three classes: first mortgages, second mortgages, and home equity line-of-credit loans.

The allowance consists of specific and general components. The specific component covers impaired loans and trouble debt restructurings and the specific allowances are established for these loans based on a thorough analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the loan’s estimated market value, or the estimated fair value of the underlying collateral. The general component covers non-impaired loans and is based on historical losses adjusted for current factors. This actual loss experience is adjusted for economic factors based on the risks present for each portfolio segment or class of loans. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. These factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment. The Credit Union maintains a separate general valuation allowance for each portfolio segment.

Consumer and Real Estate Segment Allowance Methodology

For loans not individually evaluated for impairment, the Credit Union determines the allowance on a collective basis utilizing historical losses adjusted for current factors. Actual loss experience is adjusted for economic factors based on the risks present for each portfolio segment or class of loans. As of December 31, 2018 and 2017, the historical loss time frame was an annualized 6 months for each class.

- 12 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Credit Union will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for certain loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. A loan is collateral dependent if its repayment is expected to be provided solely by the underlying collateral.

Troubled Debt Restructurings

Under certain circumstances, the Credit Union will provide borrowers relief through loan restructurings. A loan restructuring represents a troubled debt restructuring (“TDR”) if for economic or legal reasons related to the borrower's financial difficulties the Credit Union grants a concession to the borrower that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. TDR activity was immaterial for financial statement disclosure for the years ended December 31, 2018 and 2017.

Consumer and Real Estate Credit Quality Indicators

The majority of the Credit Union’s consumer and real estate loan portfolio is comprised of secured loans that are evaluated at origination on a centralized basis against standardized underwriting criteria. The ongoing measurement of credit quality of the consumer and residential loan portfolios is largely done on an exception basis. If payments are made on schedule, as agreed, then no further monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to the Credit Union’s collections department for resolution, which generally occurs fairly rapidly and often through repossession and foreclosure. Credit quality for the entire consumer and residential loan portfolio is measured by the periodic delinquency rate, nonaccrual amounts, and actual losses incurred.

- 13 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

Consumer and Real Estate Credit Quality Indicators (Continued)

The Credit Union evaluates the credit quality of loans in the consumer loan portfolio based primarily on the aging status of the loan and payment activity. Accordingly, nonaccrual loans past due in accordance with the loans’ original contractual terms are considered to be in a nonperforming status for purposes of credit quality evaluation.

Loan Charge-Off Policies

The Credit Union monitors and tracks delinquent loans. Early tracking of delinquent loans helps management assess the overall performance of the entire loan portfolio and assists in the early identification of loans that may be troubled, and may eventually be charged off. All loans will be charged off once deemed uncollectible. The following is an overview of the Credit Union’s loan charge-off policy:

Consumer:

• A loan is deemed uncollectible;

• Where additional collection efforts are non-productive, regardless of the number of days delinquent;

• A non-performing loan more than 180 day past due;

• Management judges the asset to be uncollectible;

• A “skip” where the Credit Union has had no contact for 90 days;

• An estimated loan loss, where the Credit Union has repossessed, but not yet sold, collateral on hand;

• Overdraft accounts are charged-off within 45 days of going negative.

Real Estate:

• A foreclosed real estate loan upon the determination of the amount of the estimated loan loss. The loss is estimated by calculating the difference between the loan balance and a reasonable estimate of the fair market value of the collateral less liquidation costs.

- 14 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

Property and Equipment

Land is carried at cost. Buildings and improvements, furniture and equipment and data processing equipment are carried at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method based upon the useful lives of the related assets. The cost of leasehold improvements is amortized using the straight-line method over the term of the lease, or the 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 the carrying amount may not be recoverable. Maintenance, repairs, and minor alterations are charged to current operations as expenditures occur and major improvements are capitalized.

NCUSIF 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 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 transferred from the NCUA Board. The NCUSIF deposit is required to be periodically reviewed for impairment.

Members’ Shares and Savings Accounts

Members’ shares are the savings deposit accounts of the owners of the Credit Union. Primary share ownership entitles the members to vote in annual elections of the Board of Directors. Irrespective of the amount of shares owned, no member has more than one vote. Members’ primary shares are subordinated to all other liabilities of the Credit Union upon liquidation. Interest on members’ shares and savings accounts is based on available earnings at the end of an interest period and is not guaranteed by the Credit Union. Interest rates on members’ share accounts are set by the Board of Directors, based on an evaluation of current and future market conditions.

Regular Reserve

The Credit Union is required to maintain a statutory reserve (regular reserve) in accordance with the Federal Credit Union Act. This statutory reserve represents a regulatory restriction and is not available for the payment of interest.

Advertising Costs

Advertising costs are expensed as incurred and are included in advertising costs in the statements of income.

- 15 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

Income Taxes

The Credit Union is exempt from most federal, state, and local taxes under the provisions of the Internal Revenue Code and state tax laws. The Income Taxes Topic of the FASB ASC clarifies accounting for uncertainty in income taxes reported in the financial statements. The interpretation provides criteria for assessment of individual tax positions and a process for recognition and measurement 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 credit unions are tax-exempt under Internal Revenue Code sections 501(c)(14)(a) and 501(c)(1)(a)(I). As such, the Credit Union has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Additionally, no interest or penalties have been recorded in the accompanying financial statements related to uncertain tax positions.

Recent Accounting Pronouncements

Accounting for Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses. The FASB’s CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, will be recognized in an allowance for credit losses and adjusted each period for changes in expected credit risk. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized.

The CECL model represents a significant change from existing GAAP, and may result in material changes to the Credit Union’s accounting for loans. The Credit Union has not determined the effect that ASU 2016-13 will have on its financial statements and its related disclosures. The ASU will be effective for the Credit Union on December 31, 2022. Early application is permitted for annual periods beginning January 1, 2019.

Lease Accounting

In February 2016, the FASB issued ASU No. 2016-02, Leases, which is intended to increase transparency and comparability of accounting for lease transactions. The ASU will require lessees to recognize most leases on the balance sheet as lease assets and lease liabilities and will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged. The guidance is effective December 31, 2020 with an option to early adopt. The Credit Union is evaluating whether to early adopt and the effect that ASU 2016-02 will have on its financial statements, regulatory capital and related disclosures.

- 16 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

Subsequent Events

Management has evaluated subsequent events through February 4, 2019, the date the financial statements were available to be issued. No significant such events or transactions were identified.

Note 2 - Available-for-Sale Investments

The following table presents the amortized cost and estimated fair value of investments as of December 31, 2018:

Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value

Available-for-sale:

Federal agency securities $87,449,432 $— ($940,656) $86,508,776 Mortgage-backed securities 150,285 3,923 — 154,208

Total $87,599,717 $3,923 ($940,656) $86,662,984

The following table presents the amortized cost and estimated fair value of investments as of December 31, 2017:

Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value

Available-for-sale:

Federal agency securities $176,175,369 $— ($1,310,344) $174,865,025 Mortgage-backed securities 266,559 13,139 — 279,698

Total $176,441,928 $13,139 ($1,310,344) $175,144,723

- 17 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 2 - Available-for-Sale Investments (Continued)

The amortized cost and estimated fair value of debt securities as of December 31, 2018, by contractual maturity, are shown below. Expected maturities on mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Available-for-sale Amortized Fair Cost Value

Within one year $69,710,360 $69,122,529 1 to 5 years 17,739,072 17,386,247 Mortgage-backed securities 150,285 154,208

Total $87,599,717 $86,662,984

The Credit Union’s federal agency securities and mortgage-backed are issued by the U.S. Government and its Agencies. Therefore, unrealized losses on these securities, if any, have not been recognized into income because the implicit guarantee of the principal balances of these securities by the U.S. Government and its Agencies. The decline in fair value is primarily due to differences between security yields and market interest rates. Additionally, the decline in fair value is expected to be recovered as securities approach their maturity date and/or market rates decline. Management has the ability and intent to hold these securities through to recovery of fair value, which may be maturity.

Information pertaining to investments with gross unrealized losses as of December 31, 2018, aggregated by investment category and length of time that individual investments have been in a continuous loss position follows:

Less than 12 Months 12 Months or Longer Total Gross Gross Gross

Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses

Available-for-sale:

Federal agency securities $— $— $86,508,776 ($940,656) $86,508,776 ($940,656)

- 18 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 2 - Available-for-Sale Investments (Continued)

Information pertaining to investments with gross unrealized losses as of December 31, 2017, aggregated by investment category and length of time that individual investments have been in a continuous loss position follows:

Less than 12 Months 12 Months or Longer Total Gross Gross Gross

Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses

Available-for-sale:

Federal agency securities $48,849,448 ($209,033) $126,015,577 ($1,101,311) $174,865,025 ($1,310,344)

- 19 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 3 - Loans to Members

The composition of loans to members as of December 31, 2018 and 2017 is as follows:

2018 2017 Consumer: New auto $261,190,011 $176,876,333 Used auto 250,954,724 222,108,754 Unsecured 91,183,443 94,275,481 Other secured 13,399,742 13,055,250

616,727,920 506,315,818 Real Estate: First mortgage 197,760,559 197,560,610 Second mortgage 970,619 1,054,007 Home equity line-of-credit (HELOC) 6,604,341 6,618,134

205,335,519 205,232,751 822,063,439 711,548,569

Net deferred fees and costs 2,966,497 2,081,758 825,029,936 713,630,327

Less: Allowance for loan losses (3,030,663) (2,930,055)

Loans to members, net $821,999,273 $710,700,272

- 20 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 3 - Loans to Members (Continued)

Allowance for Loan Losses

The following table presents the activity in the allowance and a summary of the allowance by portfolio segment as of and for the year ended December 31, 2018:

Consumer Real Estate Total Allowance for loan losses: Beginning allowance $2,002,855 $927,200 $2,930,055 Charge-offs* (4,393,416) (19,558) (4,412,974) Recoveries* 680,078 — 680,078 Provision for loan losses 3,266,364 567,140 3,833,504

Ending allowance $1,555,881 $1,474,782 $3,030,663

Ending balance individually evaluated for impairment $362,210 $352,197 $714,407

Ending balance collectively evaluated for impairment 1,193,671 1,122,585 2,316,256

Ending allowance $1,555,881 $1,474,782 $3,030,663

*The Credit Union includes overdrafts of approximately $1,373,000 in the unsecured class of the consumer segment of December 31, 2018. Overdraft charge-offs and recoveries were $1,068,083 and $318,610 respectively, during the year ended December 31, 2018.

The following table presents a summary of the recorded investment in loans by portfolio segment as of December 31, 2018:

Consumer Real Estate Total Loans: Ending balance individually evaluated for impairment $362,210 $352,197 $714,407

Ending balance collectively evaluated for impairment 619,332,207 204,983,322 824,315,529

Total loans $619,694,417 $205,335,519 $825,029,936

- 21 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 3 - Loans to Members (Continued)

Allowance for Loan Losses (Continued)

The following table presents the activity in the allowance and a summary of the allowance by portfolio segment as of and for the year ended December 31, 2017:

Consumer Real Estate Total Allowance for loan losses: Beginning allowance $1,880,796 $358,942 $2,239,738 Charge-offs* (3,116,413) (45,147) (3,161,560) Recoveries* 671,734 1,162 672,896 Provision for loan losses 2,566,738 612,243 3,178,981

Ending allowance $2,002,855 $927,200 $2,930,055

Ending balance individually evaluated for impairment $177,422 $515,846 $693,268

Ending balance collectively evaluated for impairment 1,825,433 411,354 2,236,787

Ending allowance $2,002,855 $927,200 $2,930,055

*The Credit Union includes overdrafts of approximately $1,821,000 in the unsecured class of the consumer segment of December 31, 2017. Overdraft charge-offs and recoveries were $730,903 and $262,984 respectively, during the year ended December 31, 2017.

The following table presents a summary of the recorded investment in loans by portfolio segment as of December 31, 2017:

Consumer Real Estate Total Loans: Ending balance individually evaluated for impairment $177,422 $515,846 $693,268

Ending balance collectively evaluated for impairment 508,220,154 204,716,905 712,937,059

Total loans $508,397,576 $205,232,751 $713,630,327

- 22 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 3 - Loans to Members (Continued)

Impaired Loans

The table below summarizes key information for impaired loans as of and for the year ended December 31, 2018:

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment Recognized

Interest Income

Consumer: New auto Used auto Unsecured Other secured

$92,500 $256,970 $12,740 $—

$92,500 $256,970 $12,740 $—

$92,500 $256,970 $12,740 $—

$50,006 $2,904 $131,553 $10,563 $27,972 $162 $3,878 $—

Real Estate: First mortgage Second mortgage HELOC

$352,197 $— $—

$352,197 $— $—

$352,197 $— $—

$537,592 $5,766 $13,902

$4,776 $— $—

Consumer Real Estate

$362,210 352,197

$362,210 352,197

$362,210 352,197

$213,409 557,260

$13,629 4,776

Total $714,407 $714,407 $714,407 $770,669 $18,405

- 23 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 3 - Loans to Members (Continued)

Impaired Loans (Continued)

The table below summarizes key information for impaired loans as of and for the year ended December 31, 2017:

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment Recognized

Interest Income

Consumer: New auto Used auto Unsecured Other secured

$77,278 $76,224 $15,289 $8,631

$77,278 $76,224 $15,289 $8,631

$77,278 $76,224 $15,289 $8,631

$43,948 $1,486 $36,262 $2,229 $2,995 $— $719 $677

Real Estate: First mortgage Second mortgage HELOC

$489,982 $9,251 $16,613

$489,982 $9,251 $16,613

$489,982 $9,251 $16,613

$387,317 $8,737 $16,318

$9,052 $125 $—

Consumer Real Estate

$177,422 515,846

$177,422 515,846

$177,422 515,846

$83,924 412,372

$4,392 9,177

Total $693,268 $693,268 $693,268 $496,296 $13,569

- 24 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 3 - Loans to Members (Continued)

Age Analysis of Past Due Loans

The following table presents the aging of the recorded investment in past due loans as of December 31, 2018:

90 Days 30-59 Days 60-89 Days Or Greater Total Past Due Past Due Past Due Past Due Current Total Loans

Consumer: New auto $1,742,421 $327,725 $271,127 $2,341,273 $260,630,528 $262,971,801 Used auto 2,225,834 528,370 651,418 3,405,622 248,733,809 252,139,431 Unsecured 1,696,811 262,902 133,865 2,093,578 89,089,865 91,183,443 Other secured 118,799 — 21,372 140,171 13,259,571 13,399,742

5,783,865 1,118,997 1,077,782 7,980,644 611,713,773 619,694,417 Real Estate: First mortgage 2,640,163 485,880 352,197 3,478,240 194,282,319 197,760,559 Second mortgage — — — — 970,619 970,619 HELOC 13,750 16,558 — 30,308 6,574,033 6,604,341

2,653,913 502,438 352,197 3,508,548 201,826,971 205,335,519

Total $8,437,778 $1,621,435 $1,429,979 $11,489,192 $813,540,744 $825,029,936

Loans on which the accrual of interest has been discontinued or reduced approximated $1,430,000 as of December 31, 2018. There were no loans 90 days or more past due and still accruing interest as of December 31, 2018.

- 25 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 3 - Loans to Members (Continued)

Age Analysis of Past Due Loans (Continued)

The following table presents the aging of the recorded investment in past due loans as of December 31, 2017:

90 Days 30-59 Days 60-89 Days Or Greater Total Past Due Past Due Past Due Past Due Current Total Loans

Consumer: New auto $795,972 $167,591 $101,070 $1,064,633 $176,987,387 $178,052,020 Used auto 2,011,036 311,206 153,240 2,475,482 220,539,343 223,014,825 Unsecured 1,893,841 272,660 223,483 2,389,984 91,885,497 94,275,481 Other secured 144,642 23,772 23,618 192,032 12,863,218 13,055,250

4,845,491 775,229 501,411 6,122,131 502,275,445 508,397,576 Real Estate: First mortgage 4,020,034 383,329 481,694 4,885,057 192,675,553 197,560,610 Second mortgage 119,631 — 9,251 128,882 925,125 1,054,007 HELOC 60,318 — 24,900 85,218 6,532,916 6,618,134

4,199,983 383,329 515,845 5,099,157 200,133,594 205,232,751

Total $9,045,474 $1,158,558 $1,017,256 $11,221,288 $702,409,039 $713,630,327

Loans on which the accrual of interest has been discontinued or reduced approximated $1,017,000 as of December 31, 2017. There were no loans 90 days or more past due and still accruing interest as of December 31, 2017.

- 26 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 3 - Loans to Members (Continued)

Consumer and Real Estate Credit Quality

The Credit Union considers the performance of the loan portfolio and its impact on the allowance for loan losses. For real estate and consumer loan classes, the Credit Union evaluates credit quality based on the aging status of the loan and payment activity. Accordingly, non-accrual loans are considered to be in a nonperforming status for purposes of credit quality evaluation.

The following tables present the loan balance based on performance indication as of December 31, 2018 and 2017:

As of December 31, 2018 As of December 31, 2017 Performing Nonperforming Performing Nonperforming Loans Loans Loans Loans

Consumer: New auto $262,700,674 $271,127 $177,950,950 $101,070 Used auto 251,488,013 651,418 222,861,585 153,240 Unsecured 91,049,578 133,865 94,051,998 223,483 Other secured 13,378,370 21,372 13,031,632 23,618

618,616,635 1,077,782 507,896,165 501,411 Real Estate: First mortgage 197,408,362 352,197 197,078,916 481,694 Second mortgage 970,619 — 1,044,756 9,251 HELOC 6,604,341 — 6,593,234 24,900

204,983,322 352,197 204,716,906 515,845

Total $823,599,957 $1,429,979 $712,613,071 $1,017,256

- 27 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 4 - Property and Equipment

Property and equipment is carried at cost, less accumulated depreciation and amortization, and is summarized as of December 31, 2018 and 2017 by major classification as follows:

2018 2017

Land and improvements $5,394,165 $4,512,914 Building and improvements 14,554,322 14,554,322 Furniture and equipment 13,980,663 13,570,175 Data processing equipment 1,932,470 2,437,395 Leasehold Improvements 999,684 999,684

36,861,304 36,074,490 Less accumulated depreciation and amortization (20,274,013) (19,112,110)

$16,587,291 $16,962,380

Depreciation and amortization charged to office occupancy and office operating expense was approximately $1,790,000 and $2,134,000 for the years ended December 31, 2018 and 2017, respectively.

Note 5 - Members’ Shares and Savings Accounts

Members’ shares and savings accounts are summarized as follows as of December 31, 2018 and 2017:

2018 2017

Shares $327,777,359 $309,393,058 Share drafts 149,928,813 136,051,421 Money market 197,338,750 201,184,814 IRA share accounts 56,703,787 55,054,548 Certificates 183,821,302 204,729,589

$915,570,011 $906,413,430

- 28 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 5 - Members’ Shares and Savings Accounts (Continued)

As of December 31, 2018, scheduled maturities of certificates are as follows:

2018

Within one year $106,192,704 1 to 2 years 37,839,698 2 to 3 years 14,398,106 3 to 4 years 10,336,484 4 to 5 years 15,054,310

$183,821,302

The aggregate amount of members’ time deposit accounts in denominations of $250,000 or more as of December 31, 2018 was approximately $21,001,000.

Note 6 - Employee Benefits

401(K) Retirement Savings Plan

The Credit Union employees may participate in a 401(k) and profit sharing plan. The Credit Union employees (excluding: temporary employees, seasonal employees and security guards) are eligible to enter the plan semiannually, once they have completed 1 year of service, and served at least 1,000 hours in the past 12 months. Employee contributions to the plan are subject to certain limits established by the Internal Revenue Service. The Credit Union’s matching contributions and discretionary contributions are made at the discretion of the Board of Directors. Benefits vest at the rate of 20% per year (once the participant works at least 1,000 hours per calendar year). The participant will become fully vested once they have 6 years of at least 1,000 hours of service. The Credit Union’s contribution to the 401(k) and profit sharing plan approximated $1,149,000 and $1,053,000 for the years ended December 31, 2018 and 2017, respectively.

Note 7 - Borrowed Funds

Federal Home Loan Bank (FHLB)

As a member of the FHLB, the Credit Union had access to a pre-approved secured line of credit with the capacity to borrow a percentage of presently owned and later acquired unencumbered assets, as defined in the FHLB Statement of Credit Policy. The Credit Union’s total credit availability was approximately $262,184,000 and $258,098,000, or 25% of total assets, as of December 31, 2018 and 2017, respectively. The Credit Union intends to utilize the line for short-term funding needs and as an additional source of liquidity. Any borrowings would bear interest at a rate equivalent to the current rate offered by FHLB at the time cash is drawn. The Credit Union had no borrowings outstanding under this line of credit as of December 31, 2018 or 2017.

- 29 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 8 - Commitments and Contingent Liabilities

Off Balance-Sheet Risk

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

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. Since many of the commitments may expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Credit Union evaluates each member’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the member.

The unused lines of credit approximated the following:

2018 2017

Credit cards $127,895,000 $129,754,000 Overdraft protection 36,430,000 36,306,000 Other 17,727,000 13,014,000 Home equity 11,799,000 18,047,000

$193,851,000 $197,121,000

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 additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Credit Union’s financial statements. Under capital adequacy regulations and the regulatory framework for prompt corrective action, the Credit Union must meet specific capital regulations that involve quantitative measures of the Credit Union’s assets, liabilities, and certain off-balance-sheet items as calculated under generally accepted accounting practices. The Credit Union’s capital amounts and net worth classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

- 30 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 9 - Regulatory Capital (Continued)

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 (as defined in NCUA Regulations) to total assets (as defined in NCUA Regulations). Credit unions are also required to calculate a Risk-Based Net Worth Requirement (RBNWR) which establishes whether or not the Credit Union will be considered “complex” under the regulatory framework. The Credit Union’s RBNWR as of December 31, 2018 and 2017 was 5.07% and 5.05%, respectively. The minimum requirement to be considered complex under the regulatory framework is 6.00%. Management believes, as of December 31, 2018 and 2017, that the Credit Union meets all capital adequacy requirements to which it is subject.

As of December 31, 2018, the most recent call reporting period, 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 7.00% of assets. There are no conditions or events since that notification that management believes have changed the Credit Union’s category.

The Credit Union’s actual and required net worth amounts and ratios are as follows:

As of December 31, 2018 As of December 31, 2017 Ratio/ Ratio/

Amount Requirement Amount Requirement

Actual net worth $121,957,846 11.58% $110,527,415 10.74%

Amount needed to be classified as “adequately capitalized” $63,171,740 6.00% $61,747,499 6.00%

Amount needed to be classified as “well capitalized” $73,700,363 7.00% $72,038,748 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.

Note 10 - Fair Value Measurements

Accounting standards establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance are described below.

- 31 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 10 - Fair Value Measurements (Continued)

Basis of Fair Value Measurements

Level 1 - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Credit Union has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 - Valuation is based on inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 for substantially the full term of the asset or liability.

Level 3 - Valuation is generated from model-based techniques use at least one significant assumption not observable in the market. Level 3 assets and liabilities include financial instruments whose value is determined by using pricing models, discounted cash flow methodologies, or similar techniques.

Assets Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized as follows:

Assets at Fair Value as of December 31, 2018 Level 1 Level 2 Level 3 Total

Available-for-sale: Federal agency securities $— $86,508,776 $— $86,508,776 Mortgage-backed securities — 154,208 — 154,208

$— $86,662,984 $— $86,662,984

Assets at Fair Value as of December 31, 2017 Level 1 Level 2 Level 3 Total

Available-for-sale: Federal agency securities $— $174,865,025 $— $174,865,025 Mortgage-backed securities — 279,698 — 279,698

$— $175,144,723 $— $175,144,723

- 32 -

SAFE FEDERAL CREDIT UNION

NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

Note 11 - Related Party Transactions

Deposits

Deposits of Credit Union directors and executive officers approximated $1,426,000 and $1,169,000 as of December 31, 2018 and 2017, respectively.

* * * End of Notes * * *

- 33 -