Sdfcu ar2015 webspreads

SDFCU ANNUAL REPORT 2015 a

2 0 1 5 A N N U A L R E P O R T

Board of DirectorsMarlene E. SchwartzChairman

Robert B. PetersenVice Chairman

Harold W. GeiselSecretary

W. Ron WhitworthTreasurer

Max AguilarDirector

Nellie Clemons-GreenDirector

Renee DeVigneDirector

Richard L. GreeneDirector

James E. RobertsonDirector

ExecutivesJan RochePresident/CEO

Floyd MatsudaChief Information Officer

Randy McClintockChief Financial Officer

William ThorlaChief Operating Officer

Managing Directors Sharon CamperManaging Director Human Resources & Administration

Donald DimatteoManaging Director Member Experience

Michael HunterManaging Director Internal Audit

Karen O’Connor-JoynerManaging Director Funds Management

Joan PendletonManaging Director Operational Support Service

DirectorsRobin AlexanderDirector Accounting

Angel BaltimoreDirector of eStrategy & Innovation

Kevin EveretteDirector Branch Operations

Rifat IkramDirector Information Technology

Michael MorrisDirector Membership Development

Gladys PerezDirector of Marketing

Veronica TrottaDirector of Mortgages & Loan Administration

Chuck VolperController

Managers Jesse BellBranch Sales Manager

Cynthia Chamberlain-WeatherspoonBranch Sales Manager

Timothy ComeauManager of Card Strategy

Jimmie Dobbs JrBranch Sales Manager

Irana EdwardsManager Deposit & Check Operations

Deborah Frink-ClantonManager Accounting

Donovan Fox Digital Strategy Content Manager

Catharine GilloglyManager of Real Estate Lending

Tracy HeadenManager Mortgage & Lending Services

Shalonda JohnsonManager Collections/ Member Solutions

Ramon JonesManager Lending Solutions

Timothy MihillManager Member Service Center

Karen MonahanManager Support Services

Vu NguyenInformation Technology Core Service

Ricardo PineresManager Compliance & BSA

Lawrence PlassmeyerManager Loss Prevention

LaFonde ProctorBranch Sales Manager

Caroline ShafferManager Marketing

Rose TisdaleProject Manager

Kimberly TylerManager Human Resources

Ethan ViernesInformation Technology Service Delivery

Daniel VromanManager of Membership Development

Zaneta WhiteBranch Sales Manager

2 FROM THE CHAIRMAN

4 FROM THE TREASURER

6 FROM THE SUPERVISORY COMMITTEE

8 FROM THE INDEPENDENT AUDITORS

10 F INANCIALS

M A N A G E M E N T T E A M

Table of Contents

SDFCU ANNUAL REPORT 2015 1

2 SDFCU ANNUAL REPORT 2015 SDFCU ANNUAL REPORT 2015 3

E X C E L L E N C EOn behalf of the Board of Directors, committee volunteers, and staff of State Department Federal Credit Union (SDFCU), I am pleased to present our 2015 Annual Report and update you on the operations of your credit union. Our organizational focus in 2015 was to build upon the foundation of efficiency and technical capabilities that our new core system provides with an eye toward delighting members with excellent member service and finding new ways to enable members to interact with us seamlessly.

SDFCU continues to develop and implement technology to improve our members’ experience and promote a frictionless financial interaction. This year, we launched our updated SDFCU website. The website is now fully responsive on most devices and promotes the value of credit union membership. In addition, we updated online banking and our mobile app to enhance functionality and improve the member experience. We also converted our debit cards to EMV chip technology. EMV cards are accepted

all over the world and are considered the most secure way to pay by card. We are proud to offer our members the highest level of card security for both credit cards and debit cards.

In addition to our continually striving to provide superior service to our members, we have maintained positive results across our lending portfolio. Home equity loan balances have increased by 24% over 2014. Our credit card continues to perform well as a result of our competitive rates, lucrative rewards program, and minimal fees. Credit card balances grew to almost $74 million and we added over 3,000 new cards. We continue to offer exceptional rates and terms on our mortgage products. We attracted 378 new mortgages which is an increase from 2014. In 2015, our members earned a total of $129,500 in real estate rebates through our HomeAdvantage program. Finally, as a result of our partnership with Langley FCU, we added over $31 million in auto loan balances through our indirect auto lending program.

In addition, our indirect auto lending program has helped us see outstanding member growth in 2015. We added over 8,580 new members last

year. We also added new members by merging with the Greater Baltimore Board of REALTORS® Federal Credit Union (GBBRFCU) and are able to provide expanded financial products and operate an additional location for those members.

SDFCU is committed to educating our members and prospective members on financial literacy. We offer seminars on a variety of financial topics to keep our members informed. We have also expanded our financial literacy through webinars and have had attendees from as far as Russia and Japan join us. In 2015, we hosted 129 financial education sessions in 15 different locations and educated over 1,600 attendees.

Our commitment to serving the community and supporting our partner organizations is stronger than ever. We helped raise $325,000 for Children’s Miracle Network hospitals. We remain committed to helping student members and awarded $65,000 in scholarships in 2015. We also sponsored multiple organizations such as The Special Olympics of Virginia, Alexandria Chamber

of Commerce Professional Women’s Network,

Volunteer Day in Alexandria and many more in

a continuing effort to be a relevant partner in the

communities in which we live and work.

In 2016, we will be implementing innovative

enhancements, products, and services that will

make financial interactions with us and money

management more seamless for our members.

Our focus continues to be on enabling our

members to have an enjoyable and convenient

experience no matter how they interact with us.

We appreciate that you have chosen SDFCU to

serve you. We are dedicated to making sure you

continue to receive significant savings and we

are constantly evolving to improve your credit

union experience.

Respectfully submitted,

Marlene E. Schwartz, Chairman

Chairman’s Report

SDFCU is committed to educating our members and prospective members on financial literacy.

Highlights

• Home equity loan balances have increased by 24% over 2014

• Our members earned a total of $129,500 in real estate rebates through our HomeAdvantage program

• We updated and increased functionality in our online banking and mobile app platforms

• We hosted 129 financial education sessions

• Our focus continues to be on enabling our members to have an enjoyable and convenient experience no matter how they interact with us


S A F E T Y & S O U N D N E S S

State Department Federal Credit Union’s purpose

is to provide you, our member-owners, the

finest financial products and world-class service.

Your support and confidence in us helped

make 2015 an outstanding year both financially

and operationally.

Financially, our credit union achieved net income

of $11.3 million for the year ended December

31, 2015 as opposed to $13.5 million for the

prior year. The decrease in income is primarily

attributable to the extremely low interest rate

environment and correlating decrease in

investment income. Our credit union’s return on

assets continues to be very solid with 0.69% for

2015 compared to 0.86% for the prior year. Total

assets increased from $1.606 billion in 2014 to

$1.702 billion in 2015 (6.0%).

Most importantly, our credit union’s net worth ratio improved to 9.52%, an increase of seven basis points from the December 31, 2014 ratio of 9.45%. The NCUA considers a credit union as “well capitalized” when it has a net worth ratio of over 7.0%.

Members seeking loans found credit readily available at State Department Federal Credit Union. We originated $250 million in loans and increased our loan balance by 6.7% to $752 million. Of particular note, our credit card features low interest rates, no foreign transaction fees, no annual fee, and a terrific rewards program. Net loan charge-offs decreased from 0.29% to 0.16% of average loans during the year ended December 31, 2015. This compares favorably to the industry average of 0.39% for credit unions with similar asset size.

The unprecedented low interest rate environment causes unique challenges and increased exposure to rising interest rates. We use external and internal models to assess risk with respect to return and volatility over various rate cycles. We balance returns and risk based on maximizing giveback to our members in terms of highly competitive rates and improved service. Our Enterprise Risk Management process helps to minimize our interest rate risk as well as other inherent risks as a credit union. The end goal being to ensure our safety and soundness to you, our member-owners.

During 2015 we launched EMV Debit cards for all of our members providing another layer of security. SDFCU has had EMV Credit cards for years and was one of the first financial institutions to market.

Our control of expenses was outstanding during

2015. Our operating expense to average asset

ratio stayed relatively stable at 2.27% compared

to 2.23% at December 31, 2014. The NCUA

peer group average for this ratio is approximately

2.91%.

Our success is measured by our member

service, convenience of membership, aggressive

share and loan rates, and solid financial position.

The Board and the staff value your selection of

SDFCU as a lifetime partner in achieving your

financial goals.


W. Ron Whitworth, Treasurer

Treasurer’s Report

Your support and confidence in us helped make 2015 an outstanding year both financially and operationally.

L E A D E R S H I P

The Board of Directors appoints the Supervisory Committee, whose primary responsibilities to the SDFCU membership are to:

• Ensure that sufficient internal controls are in place to protect the assets of members

• Select an independent CPA firm to review and report on the fair presentation of the financial statements

• Act as a liaison between members and SDFCU management by reviewing, evaluating and resolving member complaints

During 2015, the SDFCU internal audit team reviewed various areas of the credit union’s operations such as loans, business continuity plans, website compliance, vendor management practices, member shares and loan accounts as well as monitoring certain selected accounts. The audit team also performed unannounced cash audits of all SDFCU branches and

confirmed all members accounts as of December 31, 2015. These reviews help us determine the accuracy of selected transactions and compliance with respect to the policies and procedures. Internal audit also participates in cross-functional management team meetings which are an additional way to gain greater insight to credit union operations.

Regulatory oversight measures include an annual credit union examination by the National Credit Union Administration (NCUA). Through their annual examination process they have determined that our credit union is operating under the principle of safety and soundness. They have further supported that principle by approving us to take on another credit union in a merger during the year.

Further, Orth, Chakler, Murnane & Co, our external auditors, conducted a comprehensive financial statement audit and performed a verification of member accounts during the

year. The annual audit of the credit union is complete, and we are pleased to announce we once again received an unqualified opinion from our external auditors stating that our financial statements are presented fairly.

After reviewing the results of our 1) annual regulatory examination, 2) annual financial statement audit results, 3) internal audit program activity, and 4) feedback from members, as well as other reports and financial documents, we can say with complete confidence that State Department Federal Credit Union continues to uphold the highest possible financial standards. This institution is financially sound and well managed with a clear strategic vision, solid leadership, strong risk management practices and proven business operational plans. This Committee will remain vigilant in representing members’ interest to ensure the highest level of safety and soundness, and that the Credit Union provides you with outstanding member service.


Gay Mount, Chair Pamela G. Sharpe, Vice Chair Denise Watlington, Secretary Mae Whitehead, Member Larry Harris, Member Nellie Clemons-Green, Liaison Board Member

Supervisory Committee Report


Comments and suggestions from members: The Supervisory Committee welcomes comments and suggestions from the membership to improve Credit Union services. These comments are vital for the Committee to meet its responsibilities. If requested, the confidentiality of writers will be protected. If you have a comment or suggestion, please address it to:

SDFCU Supervisory Committee P.O. Box 1741 Alexandria, VA 22313-1741

R E S P O N S I B I L I T Y

To the Supervisory Committee of State Department Federal Credit Union

We have audited the accompanying financial statements of State Department Federal Credit Union, which comprise the statement of financial condition as of December 31, 2015, and the related statements of income, comprehensive income, retained earnings, and cash flows for the year 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of State Department Federal Credit Union as of December 31, 2015, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally 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 and Company, whose report dated March 23, 2015, expressed an unmodified opinion on those statements.

OCM & Co., CPAs and Advisors A DoerenMayhew Firm Miami, FL

Independent Auditors


STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF FINANCIAL CONDITION

ASSETS

As of December 31, 2015 2014

Cash $46,954,373 $13,954,686 Investments:

Available-for-sale 760,813,200 726,138,883 Other 10,609,688 51,848,489

Loans to members, net of allowance for loan losses 748,506,272 701,188,657

Accrued interest receivable: Investments 2,293,786 2,152,534 Loans 1,935,648 1,872,307

Other receivables 28,465,628 3,962,900 Prepaid and other assets 69,086,986 62,948,461 Property and equipment 21,419,684 22,985,563 NCUSIF deposit 12,158,163 11,905,541

Total assets $1,702,243,428 $1,598,958,021

LIABILITIES AND RETAINED EARNINGS


LIABILITIES: Members’ share and savings accounts $1,402,114,190 $1,341,995,403 Borrowed funds 145,000,000 105,000,000 Interest payable 363,185 422,913 Accounts payable and accrued liabilities 10,538,989 11,621,959

Total liabilities 1,558,016,364 1,459,040,275

Commitments and contingent liabilities RETAINED EARNINGS:

Regular reserve 6,315,918 6,315,918 Undivided earnings 155,706,841 144,805,858 A c c u m u l ated other comprehensive loss (17,795,695) (11,204,030)

Total retained earnings 144,227,064 139,917,746

Total liabilities and retained earnings $1,702,243,428 $1,598,958,021

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

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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF INCOME

For the years ended

December 31, 2015 2014

INTEREST INCOME: Loans to members $34,927,749 $34,341,922 Investments 8,728,371 10,187,139

Total interest income 43,656,120 44,529,061 INTEREST EXPENSE:

Members’ share and savings accounts 6,391,486 6,667,093 Interest on borrowed funds 2,079,709 1,537,594

Total interest expense 8,471,195 8,204,687

Net interest income 35,184,925 36,324,374 PROVISION FOR LOAN LOSSES 1,087,438 1,209,261

Net interest income after provision for loan losses 34,097,487 35,115,113

NON-INTEREST INCOME: Fees and service charges 10,598,127 10,599,509 Gain on sale of investments, net 2,395,297 753,189 Rental income 1,720,378 1,474,583 Other 47,980 46,390 Gain on sale of loans, net — 481,755

Total non-interest income 14,761,782 13,355,426

48,859,269 48,470,539 NON-INTEREST EXPENSE:

Compensation and employee benefits 17,509,910 17,341,963 Office operating costs 18,924,193 17,366,197 Other 774,700 252,556 Loss on sale of loans, net 333,532 —

Total non-interest expense 37,542,335 34,960,716

Net income $11,316,934 $13,509,823


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ASSETS







Total assets $1,702,243,428 $1,598,958,021










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ASSETS







Total assets $1,702,243,428 $1,598,958,021










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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF COMPREHENSIVE INCOME

For the years ended

December 31, 2015 2014

NET INCOME $11,316,934 $13,509,823 OTHER COMPREHENSIVE INCOME:

Net pension losses — (8,686,078) Unrealized (losses)/gains on investments classified as

available-for-sale during the period (4,196,368) 3,857,242 Reclassification adjustments for investment gains

included in net income (2,395,297) (753,189) Other comprehensive loss (6,591,665) (5,582,025)

Comprehensive income $4,725,269 $7,927,798


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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF RETAINED EARNINGS

For the years ended

December 31, 2015 and 2014 Accumulated

Other Regular Undivided Comprehensive Reserve Earnings Loss Total

Balance, December 31, 2013 $6,315,918 $131,296,035 ($5,622,005) $131,989,948

Net income — 13,509,823 — 13,509,823 Other comprehensive

loss — — (5,582,025) (5,582,025) Balance,

December 31, 2014 6,315,918 144,805,858 (11,204,030) 139,917,746 Net income — 11,316,934 — 11,316,934 Equity acquired in

merger — (415,951) — (415,951) Other comprehensive

loss — — (6,591,665) (6,591,665) Balance,

December 31, 2015 $6,315,918 $155,706,841 ($17,795,695) $144,227,064


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ASSETS







Total assets $1,702,243,428 $1,598,958,021










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ASSETS







Total assets $1,702,243,428 $1,598,958,021










3



ASSETS







Total assets $1,702,243,428 $1,598,958,021










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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF CASH FLOWS

For the years ended

December 31, 2015 2014

CASH FLOWS FROM OPERATING ACTIVITIES: Net income $11,316,934 $13,509,823 Adjustments:

Provision for loan losses 1,087,438 1,209,261 Depreciation and amortization 2,141,787 1,938,087 Amortization of servicing rights 523,019 279,471 Capitalization of servicing rights (912,720) (1,359,471) Amortization of deferred loan origination fees (735,279) (803,908) Amortization of investment premiums/discounts, net 12,029,104 9,601,085 Gain on sale of investments, net (2,395,297) (753,189) Loss on sale of loans, net 1,246,252 877,716 Changes in operating assets and liabilities:

Other receivables (24,502,728) (77,107) Accrued interest receivable (204,593) 44,971 Prepaid and other assets (5,748,824) (2,041,799) Interest payable (59,728) 240,814 Accounts payable and accrued liabilities (1,082,970) (94,290)

Net cash (used in)/provided by operating activities (7,297,605) 22,571,464 CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from maturities, sales and repayments of available-for-sale securities 251,499,099 252,462,478

Purchase of available-for-sale securities (302,398,888) (337,451,809) Net change in other investments 41,238,801 9,612,782 Proceeds from the sale of loans 74,937,274 71,789,428 Net change in loans, net of charge-offs (125,488,327) (76,537,178) Recoveries on loans charged off 1,635,027 1,437,452 Expenditures for property and equipment (575,908) (3,019,021) Change in NCUSIF deposit (252,622) (153,627) Equity acquired in merger (415,951) — Net cash used in investing activities (59,821,495) (81,859,495)


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STATE DEPARTMENT FEDERAL CREDIT UNION STATEMENTS OF CASH FLOWS

Cash Flows: (continued)

For the years ended December 31,

2015 2014

CASH FLOWS FROM FINANCING ACTIVITIES: Net change in members’ share and

savings accounts 60,118,787 29,441,997 New long-term borrowings 140,000,000 60,000,000 Repayment of long-term borrowed funds (100,000,000) (30,000,000) Net cash provided by financing activities 100,118,787 59,441,997

Net change in cash 32,999,687 153,966 Cash at beginning of year 13,954,686 13,800,720

Cash at end of year $46,954,373 $13,954,686

SUPPLEMENTAL CASH FLOWS DISCLOSURES:

Interest paid $8,530,923 $7,963,873

SCHEDULE OF NON-CASH TRANSACTIONS:

Unrealized (losses)/gains on investments classified as available-for-sale, net of gains included in net income ($6,591,665) $3,104,053

Net pension losses — ($8,686,078)

Transfers from loans to members to loans

held for sale $76,183,526 $72,667,144


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ASSETS







Total assets $1,702,243,428 $1,598,958,021










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STATE DEPARTMENT FEDERAL CREDIT UNION NOTES TO THE FINANCIAL STATEMENTS

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION State Department 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 who qualify for membership. The field of membership is defined by the Credit Union’s Charter and Bylaws. FINANCIAL STATEMENTS/USE OF ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Estimates that are particularly susceptible to change relate to 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. CASH Cash consists of cash on hand and amounts due from banks and credit unions. Amounts due from banks and credit unions may, at times, exceed federally insured limits. INVESTMENTS Investments are classified into categories of available-for-sale and other. Investment securities classified as available-for-sale are measured at fair value as of the statement of financial condition date. Unrealized gains and losses on investment securities classified as available-for-sale are reported as a separate component of equity. Realized gains and losses on disposition, if any, are computed using the specific identification method. Investments are adjusted for the amortization of premiums and accretion of discounts as an adjustment to interest income on investments over the term of the investment by a method which approximates the interest method. Investments classified as other are measured at amortized cost. The Credit Union has elected to classify certain cash equivalents as other investments. This election is available to the Credit Union according to the terms of the Statement of Cash Flows Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). FEDERAL HOME LOAN BANK (FHLB) STOCK As a member of the FHLB of Atlanta, the Credit Union is required to invest in stock of the FHLB. The Credit Union’s minimum stock investment is based on a formula developed by the FHLB that considers the Credit Union’s total assets and outstanding advances from the FHLB. The FHLB stock is carried at cost within other investments and its disposition is restricted. No ready market exists for the FHLB stock, and it has no quoted market value.

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Note 1: (continued) LOANS TO MEMBERS AND ALLOWANCE FOR LOAN LOSSES Loans to members are stated at the amount of unpaid principal net of deferred loan origination fees and costs and an allowance for loan losses (ALL). The ALL is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). The ALL is maintained at a level considered adequate to provide for incurred loan losses in the portfolio by applying a historical loan loss rate to loan pools that have similar risk characteristics. Individually significant, non-homogeneous loans are measured for impairment in accordance with the Subsequent Measurement of Receivables Topic of the FASB ASC. These loans are evaluated individually based on an examination of the current financial information of the borrower and an estimate of the value of the collateral, if any. If the carrying value of any of these loans is greater than the estimated net realizable value of the property or of the collateral securing these loans, a reserve is established for the difference. Management’s periodic evaluation of the adequacy of the ALL also considers such factors as changes in the nature and volume of the loan portfolio, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to repay. Interest on loans to members is recognized over the terms of the loans and is calculated on principal amounts outstanding. The accrual of interest is discontinued when a loan exceeds 90 days delinquent or when management believes that collection of interest is doubtful. Certain loan fees which are charged to members are amortized over the estimated life of the related loan by a method that approximates the interest method. Other loan fees are recognized in income when received and direct loan origination costs on loans to members are recognized in expenses when incurred. Credit card fees are recognized as fee income when assessed. This is not materially different from fees and expenses that would have been recognized under the provisions of the Nonrefundable Fees and Other Costs Topic of the FASB ASC. ALL METHODOLOGY Management has an established methodology to determine the adequacy of the ALL that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the ALL, the Credit Union has segmented loans in the portfolio by product type. Loans are divided into the following segments: real estate, consumer, and commercial. The Credit Union further disaggregates these segments into classes based on associated risks characteristics. Real estate loans are segregated into two classes: first mortgage and home equity loans. Consumer loans are divided into six classes: credit cards, auto, personal, Moneyline, student, and share secured. Significant judgment is required to determine risk characteristics of loans for the purpose of segregating the loan portfolio into the segments and underlying classes. The Credit Union uses an internally developed model in the process of monitoring the ALL. Management must use judgment in establishing additional input metrics for the modeling processes. The models and assumptions used to determine the ALL are periodically reviewed to ensure that their theoretical foundation, assumptions, data integrity, computational processes, reporting practices, and end-user controls are appropriate and properly documented.

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Note 1: (continued) The following is a summary of the ALL methodology used by management to determine the balance of the ALL for each segment of loans. REAL ESTATE PORTFOLIO SEGMENT ALL METHODOLOGY For real estate loans not individually evaluated for impairment, the Credit Union determines the ALL on a collective basis utilizing historical and forecasted losses to represent the best estimate of inherent losses existing at the measurement date. Loans are pooled, generally by loan types with similar risk characteristics. As of December 31, 2015 and 2014, the historical loss time frame used for each class was 24 months. As appropriate, to achieve greater accuracy, further stratification of a selected portfolio may occur such as by year of origination, geographic location, and other predictive characteristics. The real estate portfolio segment ALL model primarily uses historic delinquency and default experience, loss severity, home price trends, unemployment trends, and other key economic variables that may influence the frequency and severity of losses for each class of loan within the real estate portfolio segment. CONSUMER PORTFOLIO SEGMENT ALL METHODOLOGY For consumer loans not individually evaluated for impairment, the Credit Union determines the ALL on a collective basis utilizing historical and forecasted losses to represent the best estimate of inherent losses existing at the measurement date. Loans are pooled, generally by loan types with similar risk characteristics. As of December 31, 2015 and 2014, the historical loss time frame used for each class was 24 months. As appropriate, to achieve greater accuracy, further stratification of a selected portfolio may occur such as by year of origination, geographic location, and other predictive characteristics. The consumer portfolio segment ALL model primarily uses historic delinquency and default experience, loss severity, unemployment trends, and other key economic variables that may influence the frequency and severity of losses for each class of loan within the consumer portfolio segment.

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Note 1: (continued) COMMERCIAL PORTFOLIO SEGMENT ALL METHODOLOGY Commercial loans are specifically reviewed by management for impairment. Based on management’s credit quality risk assessment and analysis of leading predictors of losses existing as of the measurement date, loan losses are estimated. These loss estimates are adjusted, as appropriate, based on additional analysis of long-term average loss experience compared to previously forecasted losses, external loss data, or other risks identified from current economic conditions and credit quality trends. For loans where the specific review process resulted in no estimated losses, the credit union utilizes a peer group loss factor to estimate loan losses within the commercial loan portfolio. LOAN CHARGE-OFF POLICIES The Credit Union’s quality control process includes preparing lists to monitor and track delinquent loans and special mention loans. Tracking the loans on these lists enables management to assess the performance of the loan portfolio and act to mitigate risk therein through necessary changes in policy and procedures. The quality control process also serves as a tool to assist the Credit Union in identifying loans for charge-off on a timely basis. The following is a description of the Credit Union’s loan charge-off policies: Real estate, consumer, and commercial loans are generally charged-off when the loan is deemed to be uncollectible. Factors considered when assessing collectability include:

! aging of delinquent non-performing loans;

! estimated deficiency in the value of the underlying collateral for non-performing loans determined to be collateral dependent;

! additional collection efforts are expected to be non-productive;

! classification as loss as the result of either the Credit Union’s internal review process or by external examiners.

MORTGAGE SERVICING RIGHTS Mortgage servicing assets are recognized when rights are acquired through the sale of financial assets. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized to non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Service fee income is calculated based on a contractual percentage of the outstanding principal balance of the loans being serviced. The amortization of mortgage servicing rights is netted against loan servicing fee income.

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Note 1: (continued) OTHER RECEIVABLES Included in other receivables as of December 31, 2015 is approximately $25,000,000 in ACH receivables related to member payroll direct deposits. 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 the straight-line method over the estimated useful lives of the assets. The cost of leased assets and building/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. 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 federally insured credit union in an amount equal to 1% of its insured members’ shares. The deposit would be refunded to the Credit Union if its insurance coverage is terminated, it converts to insurance coverage from another source, or the operations of the fund are transferred from 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 accounts are set by the Board of Directors, based on an evaluation of current and future market conditions. BORROWED FUNDS The Credit Union maintained borrowed funds outstanding from the FHLB as of December 31, 2015 and 2014. All borrowings are collateralized by certain investment securities owned by the Credit Union. 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. FEDERAL AND STATE TAX EXEMPTION AND STATE TAX EXEMPTION 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.

13


Note 1: (continued) Federal credit unions are tax-exempt under Internal Revenue Code sections 501(c)(1)(a)(I) and 501(c)(14)(a). 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 PRONOUNCEMENTSOn January 5, 2016, the FASB issued Accounting Standards Update (ASU) 2016-01, Financial Instruments–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 for financial instruments. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The classification and measurement guidance will be effective for non-public business entities in fiscal years beginning after December 15, 2018, or they may early adopt for periods after December 15, 2017. The Credit Union is currently evaluating the impact of the ASU. Entities that are not public business entities will no longer be required to disclose the fair value of financial instruments carried at amortized cost. The ASU also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value. Entities that are not public business entities can early adopt the provision permitting the omission of fair value disclosures for financial instruments at amortized cost. Early adoption of these provisions can be elected for all financial statements of fiscal years and interim periods that have not yet been made available for issuance. Accordingly, the Credit Union has removed the disclosures related to the fair value of those financial instruments. SUBSEQUENT EVENTS Management has evaluated subsequent events through March 24, 2016, the date the financial statements were available to be issued. Management has not identified any items requiring recognition or disclosure.

NOTE 2: INVESTMENTS The amortized cost and estimated fair value of investments are as follows:

As of December 31, 2015 Gross Gross

Available-for-sale: Amortized Unrealized Unrealized Fair Cost Gains Losses Value

Mortgage-backed securities $673,151,147 $1,894,121 ($6,927,675) $668,117,593

SBA loan pools 46,698,070 234,738 (125,433) 46,807,375 Taxable municipal

bonds 45,597,189 56,837 (432,389) 45,221,637 Mutual funds 491,076 175,519 — 666,595

$765,937,482 $2,361,215 ($7,485,497) $760,813,200



Note 2: (continued)

As of December 31, 2014 Gross Gross

Available-for-sale: Amortized Unrealized Unrealized Fair Cost Gains Losses Value

Mortgage-backed securities $674,637,726 $5,627,261 ($4,051,040) $676,213,947

SBA loan pools 40,648,558 204,183 (270,417) 40,582,324 Taxable municipal

bonds 8,974,131 — (224,574) 8,749,557 Mutual funds 411,085 181,970 — 593,055

$724,671,500 $6,013,414 ($4,546,031) $726,138,883 Proceeds from the sales of investments classified as available-for-sale approximated $114,523,000 and $122,787,000 during the years ended December 31, 2015 and 2014, respectively. Gross gains of approximately $2,473,000 and $1,283,000 were realized from the sales during the year ended December 31, 2015 and 2014, respectively. Gross losses of approximately $78,000 and $530,000 were realized during the year ended December 31, 2015 and 2014, respectively. Other investments: As of December 31,

2015 2014 FHLB stock $7,607,600 $6,093,500 Federal funds sold 2,150,320 45,200,653 M&T Bank 554,880 554,336 Certificate of deposit 250,000 — Deposits at other credit unions 46,888 —

$10,609,688 $51,848,489 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 call or prepay certain obligations without call or prepayment penalties.

As of December 31, 2015 Available-for-sale

Amortized Fair Cost Value

Within 1 to 5 years $18,278,106 $18,205,370 Within 5 to 10 years 27,319,083 27,016,267 Mortgage-backed securities 673,151,147 668,117,593 SBA loan pools 46,698,070 46,807,375 Mutual funds 491,076 666,595

$765,937,482 $760,813,200

15


Note 2: (continued)

The following tables show the gross unrealized losses and fair value of investments, aggregated by length 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 Gross

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

Mortgage-backed securities $384,765,003 $3,985,807 $169,988,962 $2,941,868 $554,753,965 $6,927,675

Taxable municipal bonds 27,745,432 324,191 4,765,793 108,198 32,511,225 432,389

SBA loan pools 18,434,234 25,337 12,662,851 100,096 31,097,085 125,433 $430,944,669 $4,335,335 $187,417,606 $3,150,162 $618,362,275 $7,485,497

As of December 31, 2014

Available-for-sale Less than 12 Months 12 Months or Longer Total

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

Mortgage-backed securities $186,698,709 $1,174,521 $172,607,693 $2,876,519 $359,306,402 $4,051,040

SBA loan pools 27,534,448 250,739 4,176,037 19,678 31,710,485 270,417 Taxable municipal

bonds — — 8,749,557 224,574 8,749,557 224,574 $214,233,157 $1,425,260 $185,533,287 $3,120,771 $399,766,444 $4,546,031

Unrealized losses on securities issued by the U.S. Government and its Agencies have not been recognized into income because the principal balances of these securities are guaranteed by the U.S. Government. Additionally, management has the ability and intent to hold these securities through to recovery of fair value, which may be maturity. As of December 31, 2015 and 2014, mortgage- backed securities with a fair value of approximately $153,373,000 and $122,286,000 were pledged as security for the Credit Union’s borrowed funds with the FHLB.



NOTE 3: LOANS TO MEMBERS

The composition of loans to members is as follows:


Real Estate: First mortgage $466,156,350 $467,187,580 Home equity 66,862,266 58,854,631

Total real estate 533,018,616 526,042,211 Consumer:

Auto 83,750,123 47,168,359 Credit cards 74,111,828 72,182,340 Personal 34,005,593 28,564,249 Moneyline 9,997,002 10,622,610 Share secured 1,137,671 1,162,942 Student 849,178 1,072,974

Total consumer 203,851,395 160,773,474 Commercial:

Real estate 15,348,753 19,329,397 Total commercial 15,348,753 19,329,397

Total loans 752,218,764 706,145,082 Deferred loan origination fees and costs (368,884) (1,788,297)

751,849,880 704,356,785 Less ALL (3,343,608) (3,168,128)

$748,506,272 $701,188,657 A summary of the activity in the ALL by portfolio segment is as follows:

For the years ended December 31, 2015 and 2014

Real Estate Consumer Commercial Total Balance,

December 31, 2013 $1,922,949 $1,047,398 $1,017,843 $3,988,190 Provision for loan losses (619,897) 2,550,963 (721,805) 1,209,261 Recoveries 312,807 1,120,236 4,409 1,437,452 Loans charged off (591,982) (2,874,793) — (3,466,775) Balance,

December 31, 2014 1,023,877 1,843,804 300,447 3,168,128 Provision for loan losses (306,213) 1,285,832 107,819 1,087,438 Allowance acquired in merger — 833,644 — 833,644 Recoveries 484,144 1,142,764 8,119 1,635,027 Loans charged off (177,931) (3,079,462) (123,236) (3,380,629) Balance,

December 31, 2015 $1,023,877 $2,026,582 $293,149 $3,343,608

17


Note 3: (continued)


Real Estate Consumer Commercial Total Ending balance $1,023,877 $2,026,582 $293,149 $3,343,608 Individually evaluated for impairment $— $— $— $— Collectively evaluated for impairment $1,023,877 $2,026,582 $293,149 $3,343,608


Real Estate Consumer Commercial Total Ending balance $1,023,877 $1,843,804 $300,447 $3,168,128 Individually evaluated for impairment $— $— $— $— Collectively evaluated for impairment $1,023,877 $1,843,804 $300,447 $3,168,128

A summary of the recorded investment in loans by portfolio segment is as follows: As of December 31, 2015

Real Estate Consumer Commercial Total Ending balance $531,641,349 $204,859,778 $15,348,753 $751,849,880 Individually evaluated for impairment $— $— $— $— Collectively evaluated for impairment $531,641,349 $204,859,778 $15,348,753 $751,849,880

As of December 31, 2014 Real Estate Consumer Commercial Total

Ending balance $524,163,219 $160,864,169 $19,329,397 $704,356,785 Individually evaluated for impairment $— $— $— $— Collectively evaluated for impairment $524,163,219 $160,864,169 $19,329,397 $704,356,785

IMPAIRED LOANS

Management individually evaluates certain loans within the portfolio for impairment. A loan is impaired when it is probable, based on current information and events, that the Credit Union will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation 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 management determines that the value of the impaired loan is less than the recorded investment in the loan (net of 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. There were no loans evaluated for individual impairment during the years ended December 31, 2015 or 2014.



Note 3: (continued)

The tables below provide an age analysis of past due loans by class:

As of December 31, 2015 Total Total

Current Total Loans Loans

$460,344,707 $464,779,083

65,698,329 66,862,266 526,043,036 531,641,349

83,694,441 84,758,506 73,273,149 74,111,828 33,677,530 34,005,593

9,764,372 9,997,002 1,137,254 1,137,671

759,069 849,178 202,305,815 204,859,778

15,348,753 15,348,753 15,348,753 15,348,753

$743,697,604 $751,849,880


Total Total Delinquent Current Total

Loans Loans Loans

$4,863,892 $460,444,696 $465,308,588

838,248 58,016,383 58,854,631 5,702,140 518,461,079 524,163,219

329,053 71,853,287 72,182,340 432,069 46,826,986 47,259,055 260,760 28,303,488 28,564,248 276,636 10,345,974 10,622,610

5,315 1,157,627 1,162,942 76,544 996,430 1,072,974

1,380,377 159,483,792 160,864,169

— 19,329,397 19,329,397 — 19,329,397 19,329,397

$7,082,517 $697,274,268 $704,356,785

Days Delinquent 60 - 89 90 or more

$278,956 $1,184,052

257,544 249,077 536,500 1,433,129

126,866 158,294 246,255 86,610

30,108 53,990 53,929 70,849

— — 39,860 50,249

497,018 419,992

— — — —

$1,033,518 $1,853,121

Delinquent Loans

$4,434,376

1,163,937 5,598,313

1,064,065

838,679 328,063 232,630

417 90,109

2,553,963

— —

$8,152,276

Real Estate: First mortgage Home equity

Total Consumer:

Auto Credit cards Personal Moneyline Share secured Student

Total Commercial:

Real estate Total

Grand Total

Real Estate:

First mortgage Home equity

Total Consumer:

Credit cards Auto Personal Moneyline Share secured Student

Total Commercial:

Real estate Total

Grand Total

30 - 59 $2,971,368

657,316 3,628,684

778,905 505,814 243,965 107,852

417 —

1,636,953

— —

$5,265,637

30 - 59 $3,174,115

742,237 3,916,352

266,983 345,718 212,471 235,378

5,315 6,393

1,072,258

— —

$4,988,610

Days Delinquent 60 - 89 90 or more

$1,473,106 $216,671

96,011 — 1,569,117 216,671

60,424 1,646 19,647 66,704 21,615 26,674 41,258 —

— — 70,151 —

213,095 95,024

— — — —

$1,782,212 $311,695

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Note 3: (continued) The Credit Union places loans on non-accrual status when the loan reaches 90 days past due or when the collection of interest or principal becomes uncertain. Loans on which the accrual of interest has been discontinued or reduced approximated $1,853,000 and $816,000 as of December 31, 2015 and 2014, respectively. There were no loans 90 days or more past due and still accruing interest as of December 31, 2015 or 2014. TROUBLED DEBT RESTRUCTURING/MODIFICATIONS The Credit Union’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from 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 loan, management evaluates impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement. Or in certain cases, management uses the current fair value of the collateral, less selling costs. The loan is further analyzed for consideration of the risk of re-default. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized by segment or class of loan, as applicable, through the ALL estimate. Segment and class status are determined by the loan’s classification at origination. There were no TDRs approved by management during the years ended December 31, 2015 or 2014. REAL ESTATE CREDIT QUALITY INDICATORS The Credit Union generally obtains credit score rating at the time loans are originated and periodic updates as determined necessary. The following tables represent real estate credit exposures by credit score as of December 31, 2015 and 2014, based on the most recent score obtained. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. Category ratings are reviewed annually, at which time management analyzes the resulting scores, as well as other external statistics and factors, to track loan performance. Loans that trend upward toward higher levels generally have a lower risk factor associated. Whereas, loans that migrate toward lower rating generally will result in a higher risk factor being applied to those related loan balances.



Note 3: (continued) The Credit Union’s internal risk ratings are as follows:

! 800 and above - Member poses little to no risk.

! 750 to 799 - Member poses a nominal risk of loss.

! 700 to 749 - Member poses slightly less risk than average member profile.

! 650 to 699 - Member poses slightly more risk than average member profile.

! 600 to 649 - Member is experiencing some degree of financial difficulty.

! 599 and below - Member is showing above average risk.

! No score - Member not assigned risk score due to age of member, member is deceased, other miscellaneous reasons.

The tables below summarize key information for real estate credit quality:

Real Estate Credit Quality Indicators As of December 31, 2015

First mortgage Home equity Total 800 and above $118,067,912 $8,871,349 $126,939,261 750 to 799 187,349,373 22,661,619 210,010,992 700 to 749 94,124,340 15,947,250 110,071,590 650 to 699 41,022,814 11,393,225 52,416,039 600 to 649 13,966,017 4,409,229 18,375,246 599 and below 10,248,627 2,760,075 13,008,702 No score — 819,519 819,519

$464,779,083 $66,862,266 $531,641,349

Real Estate Credit Quality Indicators As of December 31, 2014

First mortgage Home equity Total 800 and above $134,260,847 $7,950,600 $142,211,447 750 to 799 185,673,569 20,307,766 205,981,335 700 to 749 80,023,531 13,643,990 93,667,521 650 to 699 38,955,288 8,849,057 47,804,345 600 to 649 12,191,911 3,823,085 16,014,996 599 and below 8,843,352 3,165,721 12,009,073 No score 5,360,090 1,114,412 6,474,502

$465,308,588 $58,854,631 $524,163,219

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Note 3: (continued)

CONSUMER CREDIT QUALITY INDICATORS

The Credit Union generally obtains credit score rating at the time loans are originated and periodic updates as determined necessary. The following tables represent consumer credit exposures by credit score as of December 31, 2015 and 2014, based on the most recent score obtained. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. Category ratings are reviewed annually, at which time management analyzes the resulting scores, as well as other external statistics and factors, to track loan performance. Loans that trend upward toward higher levels generally have a lower risk factor associated. Whereas, loans that migrate toward lower rating generally will result in a higher risk factor being applied to those related loan balances.

The Credit Union uses the same internal risk ratings for both consumer and real estate loan portfolios.

The tables below summarize key information for consumer credit quality:

Consumer Credit Quality Indicators As of December 31, 2015

Credit Share Auto cards Personal Moneyline secured Student Total

800 and above $10,346,579 $7,076,750 $1,603,264 $244,507 $132,210 $144,836 $19,548,146 750 to 799 24,349,629 20,879,706 8,473,457 1,460,330 206,249 126,404 55,495,775 700 to 749 22,133,802 20,876,154 11,819,624 2,790,853 259,045 163,552 58,043,030 650 to 699 17,326,211 13,523,595 8,907,656 2,639,359 97,852 126,851 42,621,524 600 to 649 6,264,718 5,287,194 2,069,806 1,383,900 75,943 94,496 15,176,057 599 and below 1,859,033 4,183,290 599,486 1,457,295 182,869 193,039 8,475,012 No score 2,478,534 2,285,139 532,300 20,758 183,503 — 5,500,234

$84,758,506 $74,111,828 $34,005,593 $9,997,002 $1,137,671 $849,178 $204,859,778

Consumer Credit Quality Indicators


Credit Share cards Auto Personal Moneyline secured Student Total

800 and above $6,378,638 $5,171,645 $1,220,707 $277,076 $103,940 $— $13,152,006 750 to 799 20,232,313 13,702,959 7,129,273 1,583,051 305,390 — 42,952,986 700 to 749 20,431,853 11,207,694 9,121,632 2,830,966 188,447 — 43,780,592 650 to 699 14,054,224 9,042,371 7,068,712 2,647,257 143,674 — 32,956,238 600 to 649 5,507,445 4,246,408 2,275,642 1,477,332 79,501 — 13,586,328 599 and below 4,711,896 2,802,929 1,230,584 1,657,953 321,873 — 10,725,235 No score 865,971 1,085,049 517,698 148,975 20,117 1,072,974 3,710,784

$72,182,340 $47,259,055 $28,564,248 $10,622,610 $1,162,942 $1,072,974 $160,864,169



Note 3: (continued) COMMERCIAL CREDIT QUALITY INDICATORS The Credit Union categorizes commercial loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends among other factors. These credit quality indicators are used to assign a risk rating to each individual credit. The risk ratings can be grouped into eight major categories, defined as follows:

Category Description 1 Secured loan with no risk. 2 Strongest credit - a strong credit with no existing or known potential weaknesses

deserving management’s close attention. 3 Average credit risk - borrower is a reasonable credit risk and demonstrates the

ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive.

4 Pass but watch - a loan that otherwise meets the definition of a standard or minimum acceptable quality loan, but which requires more than normal attention due to any of the following items: deterioration of borrower financial condition less severe than those warranting more adverse grading, deterioration of repayment ability and/or collateral value, increased leverage, adverse effects from a downturn in the economy, local market or industry, adverse changes in local or regional employer, management changes (including illness, disability, and death), and adverse legal action. Payments are current per the terms of the agreement. If conditions persist or worsen, a more severe risk grade may be warranted.

5 Special mention (weaknesses noted) - a loan that has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Credit Union’s position at some future date. Special mention loans are not adversely classified and do not expose the Credit Union to sufficient risk to warrant adverse classification.

6 Substandard (probable loss) - a loan that is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well- defined weaknesses include a lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or a project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Credit Union will sustain some loss if the deficiencies are not corrected.

23


Note 3: (continued)

Category Description 7 Doubtful - a loan that has all the weaknesses inherent in those classified as

substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

8 Loss - Charge-off The following tables summarize the credit risk profile of the commercial loan portfolio by class:

Commercial Credit Quality Indicators

As of December 31, 2015 Credit Real Grade Description of Credit Grade Estate

1 Secured loan with no risk $— 2 Strongest credit — 3 Average credit risk 13,353,363 4 Pass, but watch 1,208,428 5 Special mention 786,962 6 Substantial — 7 Doubtful — 8 Loss —

$15,348,753

Commercial Credit Quality Indicators

As of December 31, 2014 Credit Real Grade Description of Credit Grade Estate

1 Secured loan with no risk $— 2 Strongest credit — 3 Average credit risk 13,506,510 4 Pass, but watch 3,495,946 5 Special mention 2,326,941 6 Substantial — 7 Doubtful — 8 Loss —

$19,329,397

24



NOTE 4: PROPERTY AND EQUIPMENT

A summary of the Credit Union’s property and equipment is as follows:


Land $3,476,686 $3,476,686 Buildings 23,011,232 22,909,116 Furniture and equipment 3,334,038 3,565,946 Data processing equipment 12,121,641 13,656,977 Leasehold improvements 1,407,151 1,407,151 Leased assets 110,340 110,340 Construction in process 173,575 29,245

43,634,663 45,155,461 Less accumulated depreciation and amortization (22,214,979) (22,169,898)

$21,419,684 $22,985,563

NOTE 5: MEMBERS’ SHARE AND

SAVINGS ACCOUNTS Members’ share and savings accounts are summarized as follows:


Share drafts $289,922,609 $254,351,500 Shares and escrow accounts 266,063,535 253,753,850 Money market accounts 552,758,344 535,467,296 IRA share accounts 32,791,553 31,785,296 Share and IRA certificates 260,578,149 266,637,461

$1,402,114,190 $1,341,995,403 The aggregate balance of members’ individual time deposit accounts in denominations that meet or exceed $250,000 was approximately $34,471,000 and $33,513,000 as of December 31, 2015 and 2014, respectively. Overdrawn share and share draft accounts reclassified to loans to members were approximately $103,000 and $52,000 as of December 31, 2015 and 2014, respectively.

25


Note 5: (continued) Scheduled maturities of share and IRA certificates are as follows:


Within 1 year $136,683,947 1 to 2 years 65,580,959 2 to 3 years 23,491,690 3 to 4 years 20,037,401 4 to 5 years 14,784,152

$260,578,149 SHARE INSURANCE Members’ shares and saving accounts are insured by the NCUSIF to a maximum of $250,000 for each member. Individual Retirement Accounts are insured by the NCUSIF for an additional $250,000 coverage.

NOTE 6: BORROWED FUNDS

The Credit Union is a member of the FHLB of Atlanta. As of December 31, 2015 and 2014, the Credit Union had access to a pre-approved secured line of credit with the capacity to borrow up to a certain percentage of the value of its eligible 1-4 family first mortgage loans, as defined in the FHLB Statement of Credit Policy. The following table represents the FHLB advances outstanding:

Interest Interest Final Payment As of December 31, Type Rate Maturity Date Description 2015 2014 Fixed 2.305% July 20, 2015 Quarterly $— $15,000,000 Fixed 0.520% July 22, 2015 Quarterly — 15,000,000 Fixed 2.509% July 15, 2016 Quarterly 30,000,000 30,000,000 Fixed 2.497% July 21, 2016 Quarterly 30,000,000 30,000,000 Fixed 1.470% September 9, 2016 Quarterly 15,000,000 15,000,000 Fixed 0.490% September 26, 2016 Monthly 20,000,000 — Fixed 0.370% February 18, 2016 Monthly 20,000,000 — Fixed 0.370% December 14, 2017 Monthly 30,000,000 —

$145,000,000 $105,000,000 The outstanding balances by maturity dates are as follows:


Within 1 year $115,000,000 1 to 2 years 30,000,000

$145,000,000

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NOTE 7: COMMITMENTS AND

CONTINGENT LIABILITIES LINES OF CREDIT: The Credit Union is a member of the FHLB of Atlanta. As of December 31, 2015, the Credit Union maintained access to a pre-approved secured line of credit with the capacity to borrow up to a certain percentage of the value of its qualified collateral, as defined in the FHLB Statement of Credit Policy. As of December 31, 2015, the unused credit available under this line-of-credit agreement was approximately $190,585,000. In order to access the unused portion of the line-of-credit, the Credit Union would need to pledge additional qualifying collateral in accordance with the terms of the agreement. As of December 31, 2015, the Credit Union maintained a $15,000,000 unused secure line of credit with M&T Bank. In order to access the unused portion of the line-of credit, the Credit Union would need to pledge additional qualifying collateral in accordance with the terms of the agreement. As of December 31, 2015, the Credit Union maintained appropriate agreements on file to access liquidity from the Federal Reserve Discount Window. In order to access the borrowings, the Credit Union would need to pledge qualifying collateral in accordance with the terms of the agreement. MISCELLANEOUS LITIGATION: The Credit Union is a party to various miscellaneous legal actions normally associated with financial institutions, the aggregate effect of which, in management’s opinion, would not be material to the Credit 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 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 amounts 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.

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Note 8: (continued) Unused lines of credit approximated the following:


Credit card $285,121,000 Unsecured 28,464,000 Home equity 22,025,000

$335,610,000 CONCENTRATIONS OF CREDIT RISK: A significant amount of the Credit Union’s business activity is with members who are employees or former employees of the U.S. Department of State. Additionally, the Credit Union may be exposed to credit risk from a regional economic standpoint, since a significant concentration of its borrowers work or reside in the Washington, D.C. area. The loan portfolio is highly collateralized; however, the Credit Union does have a significant concentration of real estate secured loans of which the value of the collateral can fluctuate due to changes in the real estate market. Other than the concentration in real estate secured loans, the Credit Union does not have any other significant concentration of credit risk, except unsecured loans, which by their nature, increase the risk of loss compared to those loans that are collateralized.

NOTE 9: LOAN SERVICING

Mortgage loans serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans and custodial escrow balances approximated the following:


Mortgage loan portfolio serviced for: Federal Home Loan Mortgage Corporation (FHLMC) $190,159,000 $139,566,000

Custodial escrow balances $1,161,000 $845,000

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Note 9: (continued) The components of capitalized mortgage servicing rights, included in prepaid and other assets, were as follows:


2015 2014 Mortgage servicing rights:

Balance, beginning of year $1,995,342 $915,342 Additions 912,720 1,359,471 Amortization (523,019) (279,471) Balance, end of year $2,385,043 $1,995,342

Estimated fair value $2,385,000 $1,995,000

As of December 31, 2015 and 2014, the fair value of servicing rights was determined by an internal valuation model using market value discount rates and prepayment speeds based on the specific characteristics of each pool of loans. Prepayment speeds are not utilized in this model. The following discount rates were used to value the servicing rights:


Loan portfolio serviced for FHLMC: Discount rate 2.5% - 5.0% 2.5% - 5.0%

NOTE 10: 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 principles. 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. 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’s Regulations) to total assets (as defined in NCUA’s 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, 2015 and 2014 was 5.67% and 5.83%, respectively. The minimum requirement to be considered complex under the regulatory framework is 6.00%. Management believes, as of December 31, 2015 and 2014, that the Credit Union meets all capital adequacy requirements to which it is subject.

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Note 10: (continued)

As of December 31, 2015, 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 As of December 31, 2015 December 31, 2014

Ratio/ Ratio/ Amount Requirement Amount Requirement

Actual net worth $162,022,759 9.52% $151,121,776 9.45%

Amount needed to be classified as “adequately capitalized” $102,134,606 6.00% $95,937,481 6.00%

Amount needed to be classified as “well capitalized” $119,157,040 7.00% $111,927,061 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 11: FAIR VALUES OF FINANCIAL INSTRUMENTS

The Fair Value Measurements and Disclosures Topic of the FASB ASC provides a framework for measuring fair value and requires an entity to derive fair value from the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date within its principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. To increase consistency and comparability in fair value measurements and related disclosures, a three-level hierarchy prioritizes the inputs to valuation techniques used to measure fair value with the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as further described below:

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.



Note 11: (continued) Level 2 Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the 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. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical 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 corroborated by observable market data by correlation or other means. Level 3 Level 3 inputs are unobservable inputs for the asset or liability which reflect the Credit Union’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Assumptions about risk include risk inherent in a particular valuation technique used to measure 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 be indicative of net realizable value or reflective of future fair values. Furthermore, while the Credit Union believes its valuation methods and associated inputs are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial 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 or market accounting or the write-down of individual assets due to impairment. There were no items required to be measured on a non-recurring basis as of December 31, 2015 or 2014. 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 description of the valuation methodologies used for these securities:

Federal Agency Securities - Federal agency securities are valued based on quoted market prices on similar assets in the marketplace and the vintage of the underlying collateral.

SBA Loan Pools - The fair value of SBA loan pools is estimated using the quoted market prices for securities backed by similar loans. These market prices are adjusted for differences in loan characteristics such as the underlying collateral.

Taxable Municipal Bonds - Taxable municipal bonds are valued based on matrix pricing models that include sales of similar securities, the underlying bond characteristics and market conditions.

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Mutual Funds - Mutual funds are valued at the net asset value (NAV) of the shares held at year end.

Collective Trusts - Valued at the net asset value of shares held by the Plan at year end, as determined by Pentegra, the Plan trustee. Pentegra considers the fair value of the underlying fund investments when establishing the value of the funds within the collective trusts.

The following tables set forth by level, within the fair value hierarchy, the Credit Union’s financial instruments at fair value on a recurring basis.

Assets at Fair Value as of December 31, 2015 Level 1 Level 2 Level 3 Total

Mortgage-backed securities: Fixed rate $— $164,460,787 $— $164,460,787 Variable rate — 503,656,806 — 503,656,806

SBA loan pools — 46,807,375 — 46,807,375 Taxable municipal bonds — 45,221,637 — 45,221,637 Mutual funds — 666,595 — 666,595

$— $760,813,200 $— $760,813,200


Mortgage-backed securities: Fixed rate $— $152,570,026 $— $152,570,026 Variable rate — 523,643,921 — 523,643,921

SBA loan pools — 40,582,324 — 40,582,324 Taxable municipal bonds — 8,749,557 — 8,749,557 Mutual funds — 593,055 — 593,055

$— $726,138,883 $— $726,138,883

Where practical, the estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of amounts that could be realized in a market exchange. The use of different assumptions and estimation methodologies may have a material effect on the estimated fair value amounts.



NOTE 12: EMPLOYEE BENEFITS

DEFINED BENEFIT PLAN The Credit Union maintained a defined benefit pension plan. Effective August 1, 2006, the plan was amended to freeze benefit accruals. Participants are 100% vested in the frozen benefit accruals. The following tables sets forth the plan’s funded status and amounts recognized in the Credit Union’s statements of financial condition.


Change in benefit obligation: Benefit obligation at the beginning of the year $38,614,683 $28,014,181 Interest cost 1,486,396 1,326,012 Actuarial (gain)/loss (3,393,753) 10,171,360 Benefits paid and expenses (892,995) (798,703) Settlements (5,206) (98,167) Benefit obligation at the end of the year $35,809,125 $38,614,683

Accumulated benefit obligation at the end of the year $35,809,125 $38,614,683

As of December 31,

2015 2014 Change in plan assets:

Plan assets at fair value at the beginning of the year $51,131,901 $47,704,553 Actual return on plan assets (532,009) 4,324,218 Employer contribution 4,000,000 — Benefits paid (892,995) (798,703) Settlements (5,206) (98,167) Plan assets at fair value at the end of the year $53,701,691 $51,131,901

Reconciliation of funded status:

Funded status $17,892,566 $12,517,218 Reconciliation of accumulated other comprehensive loss:

Unrecognized net actuarial loss $12,671,413 $12,671,413 Unrecognized transition asset — — Unrecognized prior service cost — — Accumulated other comprehensive loss $12,671,413 $12,671,413

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Amounts expected to be amortized into the net periodic pension cost next year:

Net actuarial loss $887,608 $1,009,108 The net periodic pension credit related to this plan was approximately ($722,000) and ($1,513,000) for the years ended December 31, 2015 and 2014, respectively. The total pension losses in other comprehensive loss approximated $8,686,000 for the year ended December 31, 2014. The total amount recognized in net periodic pension cost and other comprehensive (loss)/income approximated ($722,000) and $7,173,000 for the years ended December 31, 2015 and 2014, respectively. The assumptions used to develop the net periodic pension cost were as follows:


2015 2014 Discount rate 3.90% 4.80% Weighted-average rate of compensation increases n/a - frozen n/a - frozen Expected long-term rate of return on plan assets 6.00% 6.00% Amortization method Straight-Line Straight-Line

The assumptions used in the measurement of the Credit Union’s net benefit obligation were as follows:


Discount rate 4.24% 3.90% Rate of compensation increases n/a - frozen n/a - frozen

As of December 31,

2015 2014 ASSET ALLOCATIONS BY ASSET CATEGORY: Common/Collective Trusts - Equity 54.3% 61.3% Common/Collective Trusts - Fixed income 35.2% 31.2% Cash equivalents 10.5% 7.5%

100.0% 100.0%




CASH FLOWS: Expected benefit payments for fiscal year beginning:

2016 $1,095,927 2017 $1,206,963 2018 $1,330,062 2019 $1,360,844 2020 $1,438,578

Five years thereafter $8,189,228

The fair value of the Credit Union’s pension plan assets by asset class are as follows (the three levels of input used to measure fair value are more fully described in Note 11):


Common/Collective Trusts - Equity Large-cap growth (a) $— $8,911,735 $— $8,911,735 Large-cap value (b) — 8,526,962 — 8,526,962 International core (c) — 7,017,286 — 7,017,286 Small-cap core (d) — 2,335,097 — 2,335,097 Mid-Cap Core (e) — 2,361,323 — 2,361,323

Common/Collective Trusts - Fixed Income U.S. Long Term (f) — 9,663,008 — 9,663,008 U.S. Long Term (g) — 9,271,715 — 9,271,715

Cash equivalents: Money market (h) 5,614,565 — — 5,614,565

Total assets at fair value $5,614,565 $48,087,126 $— $53,701,691

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Assets at Fair Value as of December 31, 2014

Level 1 Level 2 Level 3 Total Common/Collective Trusts - Equity

Large-cap growth (a) $— $10,392,696 $— $10,392,696 Large-cap value (b) — 9,675,683 — 9,675,683 International core (c) — 4,667,650 — 4,667,650 Small-cap core (d) — 3,193,013 — 3,193,013 Mid-Cap Core (e) — 3,393,333 — 3,393,333

Common/Collective Trusts - Fixed Income U.S. Long Term (f) — 8,592,581 — 8,592,581 U.S. Long Term (g) — 7,368,508 — 7,368,508

Cash equivalents: Money market (h) 3,848,437 — — 3,848,437

Total assets at fair value $3,848,437 $47,283,464 $— $51,131,901

Asset category description:

(a) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Russell 1000® Growth Index over the long term.

(b) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Russell 1000® Value Index over the long term.

(c) The Fund seeks to match as closely as possible the return of the Morgan Stanley Capital International, Europe, Australia, Far East (MSCI EAFE) Index. The fund seeks to match the return of the index by investing in a portfolio in the same proportion as they appear in the index.

(d) The Fund seeks to match as closely as possible the return of the Russell 2000 Index. The fund seeks to match the return of the index by investing in a portfolio in the same proportion as they appear in the index.

(e) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the S&P MidCap 400 Index ™ (the “Index”) over the long term.

(f) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Long Treasury Bond Index (the “Index”) over the long term.



Note 12: (continued) (g) The Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (the “Index”) over the long term. (h) This category consists of a money market fund and is used for liquidity purposes (i.e., cash flows and benefit payments). It seeks to provide investors with current income consistent with stability of principal and liquidity. The fund pursues its objective by investing primarily in a portfolio of short-term, high-quality, fixed-income securities issued by banks, corporations and the U.S. government, and seeks to maintain a stable net asset value (NAV) of $1.00 per share. BASIS USED TO DETERMINE LONG-TERM RATE OF RETURN ON ASSETS The long-term rate-of-return on assets assumption was set based on historical returns earned by the equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 6% - 8% and 3% - 5%, respectively. When these overall return expectations are applied to the plan’s target allocation, the result is an expected rate of return of 5% to 7%. DESCRIPTION OF INVESTMENT POLICIES AND STRATEGIES Plan assets are invested in a broadly diversified combination of equity and bond commingled trust index funds, each with its own investment objectives, investment strategy and risks. The Plan Sponsor retains discretion to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the Plan’s Statement of Investment Policy. The long-term investment objectives are to maintain plan assets at a level that will sufficiently cover long-term obligations and to generate a return on plan assets that will meet or exceed the rate at which long-term obligations will grow. A broadly diversified combination of equity and fixed income portfolios and various risk management techniques are used to help achieve these objectives. In addition, consideration is paid to each Plan’s funding levels and the Plan Sponsor’s risk tolerance when determining the overall asset allocation. Asset rebalancing normally occurs when the equity and fixed income allocations vary by more than 10% from their respective targets. ESTIMATED FUTURE CONTRIBUTIONS Estimated contributions for the year beginning January 1, 2016 are unknown. 401(K) RETIREMENT PLAN Credit Union employees who are at least 20 years old and have completed at least one month of service at the Credit Union are eligible to join a 401(k) retirement plan the first of the month following satisfaction of eligibility requirements. The Credit Union contributes a 3% safe-harbor contribution as well a matching contribution equal to 100% of employee deferral contribution up to a maximum of 3%. Employees are eligible for employer contributions upon joining the plan. Employees are immediately vested in the Credit Union’s safe-harbor contributions, while the matching contributions vest 20% annually and are fully vested after 5 years of qualifying service. The total expense related to the Credit Union’s 401(k) plan contributions was approximately $823,000 and $771,000 for the years ended December 31, 2015 and 2014, respectively.

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NOTE 13: CHANGES IN ACCUMULATED OTHER

COMPREHENSIVE LOSS

For the years ended December 31, 2015 and 2014

Unrealized Gains/(Losses) on Defined Benefit Available-for-Sale Pension Plan

Securities Items Total Balance,

December 31, 2013 ($1,636,670) ($3,985,335) ($5,622,005) Other comprehensive

income/(loss) before reclassifications 3,857,242 (8,686,078) (4,828,836)

Amounts reclassified from other comprehensive income (753,189) — (753,189)

Net other comprehensive income/(loss) 3,104,053 (8,686,078) (5,582,025)

Balance, December 31, 2014 1,467,383 (12,671,413) (11,204,030)

Other comprehensive loss before reclassifications (4,196,368) — (4,196,368)

Amounts reclassified from other comprehensive loss (2,395,297) — (2,395,297)

Net other comprehensive loss (6,591,665) — (6,591,665)

Balance, December 31, 2015 ($5,124,282) ($12,671,413) ($17,795,695)

The following tables provide the reclassifications out of accumulated other comprehensive income/(loss) by component:

For the Year Ended December 31, 2015 Amount Reclassified

Details about Accumulated from Accumulated Affected Line Item in the Other Comprehensive Income Other Comprehensive Statement Where Net Income

Components Income is Presented

Unrealized gains on sale of available-for-sale securities $2,395,297 Gain on sale of investments, net

Total reclassification $2,395,297

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For the Year Ended December 31, 2014 Amount Reclassified

Details about Accumulated from Accumulated Affected Line Item in the Other Comprehensive Income Other Comprehensive Statement Where Net Income

Components Income is Presented

Unrealized gains on sale of available-for-sale securities $753,189 Gain on sale of investments, net

Total reclassification $753,189

NOTE 14: MERGER On June 1, 2015, State Department Federal Credit Union merged 100 percent of the assets and liabilities of Greater Baltimore Board of Realtors Federal Credit Union (GBBR). The business combination was a mutual agreement between State Department Federal Credit Union and GBBR in order to better the availability and quality of services for both fields of membership. Therefore, no consideration was exchanged in the business combination. The following table summarizes the approximate adjusted fair value balances of assets received and liabilities assumed at the business combination date.

As of June 1, 2015

Loans to members, net of allowance for loan losses $4,765,000 Cash 1,263,000 NCUSIF deposit 72,000 Prepaid and other assets 34,000

Total assets acquired $6,134,000

As of June 1, 2015

Members’ share and savings accounts $6,470,000 Accounts payable and other liabilities 80,000

Total liabilities acquired $6,550,000

Total entity value ($416,000)

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N O T E S


N O T E S

48 SDFCU ANNUAL REPORT 2015

50 SDFCU ANNUAL REPORT 2015

Federally insured by NCUA

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