CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS UNITED NATIONS FEDERAL CREDIT UNION AND SUBSIDIARIES

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS UNITED NATIONS FEDERAL CREDIT UNION AND SUBSIDIARIES

2 C O N T E N T S Page Report of Independent Certified Public Accountants 3-4 Consolidated Financial Statements Consolidated Statements of Financial Condition 5 Consolidated Statements of Income 6 Consolidated Statements of Comprehensive Income 7 Consolidated Statements of Changes in Members Equity 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements 10-47

3 Grant Thornton LLP 757 Third Avenue, 9th Floor New York, NY T F GrantThornton.com linkd.in/grantthorntonus twitter.com/grantthorntonus REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Supervisory Committee and Members United Nations Federal Credit Union and Subsidiaries We have audited the accompanying consolidated financial statements of United Nations Federal Credit Union and subsidiaries, which comprise the consolidated statements of financial condition as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in 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 consolidated 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 consolidated 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 consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 3

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Nations Federal Credit Union and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. New York, New York April 19,

5 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS Cash and cash equivalents $ 129,528,450 $ 160,090,994 Investments Available-for-sale 939,336, ,508,771 Held-to-maturity 1,174,775,753 1,112,130,738 Other 6,240,885 4,943,208 Loans held for sale Loans receivable, net 6,548,063 2,280,902, ,000 1,943,276,325 Mortgage servicing rights 2,088,706 1,433,199 Accrued interest receivable 12,363,374 10,413,568 Property and equipment, net 108,288, ,865,520 National Credit Union Share Insurance Fund deposit Intangible assets, net of amortization 36,917,642 1,959,302 34,613,812 2,191,986 Goodwill 5,522,886 5,522,886 Other assets 40,728,380 26,679,502 Total assets $ 4,745,200,836 $ 4,357,291,509 LIABILITIES AND MEMBERS EQUITY Liabilities Members shares $ 4,267,868,212 $ 3,900,073,590 Accrued expenses and other liabilities 37,972,221 37,708,978 Total liabilities 4,305,840,433 3,937,782,568 Commitments and contingencies (see Notes 11 and 12) Members equity Retained earnings 469,784, ,767,096 Accumulated other comprehensive loss (30,423,770) (18,258,155) Total members equity 439,360, ,508,941 Total liabilities and members equity $ 4,745,200,836 $ 4,357,291,509 The accompanying notes are an integral part of these consolidated financial statements. 5

6 CONSOLIDATED STATEMENTS OF INCOME Years ended 31 December, Interest income Interest on loans $ 98,292,554 $ 87,794,428 Interest on investments and cash equivalents 29,521,986 27,121,147 Total interest income 127,814, ,915,575 Interest expense Dividends on members shares 14,497,579 12,590,113 Interest on borrowed funds 2, Total interest expense 14,499,646 12,590,227 Net interest income 113,314, ,325,348 Provision for loan losses 9,265,000 9,900,000 Net interest income after provision for loan losses 104,049,894 92,425,348 Non-interest income Service charges and other fees 31,089,651 30,102,507 Loan servicing fees 749, ,256 Gain on sale mortgage loans 376, ,017 Other non-interest income 8,864,229 7,784,372 Total non-interest income 41,079,585 39,173, ,129, ,598,500 Non-interest expense Salaries and benefits 62,383,208 58,562,741 Operations 44,043,632 41,064,636 Occupancy 6,685,562 6,265,434 Total non-interest expense 113,112, ,892,811 Net income $ 32,017,077 $ 25,705,689 The accompanying notes are an integral part of these consolidated financial statements. 6

7 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended 31 December, Net income $ 32,017,077 $ 25,705,689 Other comprehensive (loss) income Change in pension obligation (1,712,785) (6,831,959) Change in unrealized holding (losses) gains on investments classified as available-for-sale (10,719,964) 1,395,746 Adjustment for realized gains (losses) on investment securities included in income 267,134 (258,407) Other comprehensive (loss) income, net of reclassification adjustments (12,165,615) (5,694,620) Comprehensive income $ 19,851,462 $ 20,011,069 The accompanying notes are an integral part of these consolidated financial statements. 7

8 CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY Years ended 31 December, 2016 and 2015 Accumulated Other Total Retained Comprehensive Members Earnings Loss Equity Balance, 31 December 2014 $ 412,061,407 $ (12,563,535) $ 399,497,872 Net income 25,705,689-25,705,689 Other comprehensive loss, net of reclassification adjustments - (5,694,620) (5,694,620) Balance, 31 December ,767,096 (18,258,155) 419,508,941 Net income 32,017,077-32,017,077 Other comprehensive loss, net of reclassification adjustments - (12,165,615) (12,165,615) Balance, 31 December 2016 $ 469,784,173 $ (30,423,770) $ 439,360,403 The accompanying notes are an integral part of these consolidated financial statements. 8

9 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended 31 December, Operating activities: Net income $ 32,017,077 $ 25,705,689 Adjustments to reconcile net income to net cash provided by operating activities Net amortization of premiums and accretion of discounts 6,692,232 6,545,301 Realized gain on disposition of available for sale investments (267,134) (206,614) Net gains on sales of loans held-for-sale (376,102) (570,017) Provision for loan losses 9,265,000 9,900,000 Amortization of deferred loan (fees) costs (284,878) (318,039) Depreciation and amortization 5,985,814 6,958,549 Net change in: Mortgage servicing rights (655,507) (593,420) Accrued interest receivable (1,949,806) (73,896) Other assets (14,048,878) (1,404,099) Accrued expenses and other liabilities (1,449,542) 2,194,476 Net cash provided by operating activities 34,928,276 48,137,930 Investing activities: Purchases of available-for-sale investments (873,622,013) (694,632,111) Proceeds from maturities of available-for-sale investments 150,850,000 84,500,000 Proceeds from prepayments of available-for-sale investments Purchases of held-to-maturity investments 720,719,599 (397,058,906) 755,649,564 (266,583,923) Proceeds from maturities of held-to-maturity investments 47,155,535 47,424,220 Proceeds from prepayments of held-to-maturity investments 280,605, ,442,473 Proceeds from sales of investments - 901,270 Net change in other investments (1,297,677) (1,425,176) Net change in loans held-for-sale (5,927,063) (621,000) Loan principal originations, net of collections Whole loans purchased Participation loans purchased Increase in the National Credit Union Share Insurance Fund deposit 9 (324,738,553) (10,056,977) (11,434,266) (2,303,830) (300,428,873) (13,194,895) (255,957) (1,192,951) Purchases of property and equipment (6,176,444) (6,790,072) Net cash used in investing activities (433,285,442) (171,207,431) Financing activities: Net increase in members shares 367,794, ,940,325 Net cash provided by financing activity 367,794, ,940,325 Increase in cash and cash equivalents (30,562,544) 14,870,824 Cash and cash equivalents at beginning of year 160,090, ,220,170 Cash and cash equivalents at end of year $ 129,528,450 $ 160,090,994 Supplemental cash flow information: Interest paid $ 14,499,646 $ 12,590,172 Loan originations $ 730,540,760 $ 670,214,443 The accompanying notes are an integral part of these consolidated financial statements.

10 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the United Nations Federal Credit Union and its wholly owned subsidiaries, UNFCU Advisors LLC and UNFCU Financial Services LLC (collectively, UNFCU ). The subsidiaries are primarily engaged in investments, insurance products, and financial planning service activities. All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations UNFCU is a cooperative association holding a charter under the provisions of the Federal Credit Union Act. Participation in UNFCU is limited to those individuals who qualify for membership, including but not limited to employees of the United Nations and its affiliated agencies; members of the United Nations Association of the United States of America ( UNA-USA ) as well as their immediate family members. The field of membership is more specifically defined in UNFCU s Charter and Bylaws. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The principal estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, temporary impairment of investment securities, and the fair value of financial instruments. Concentrations of Credit Risk The loan portfolio is well diversified and UNFCU does not have any significant concentrations of credit risk except unsecured loans, which by their nature increase the risk of loss compared to those loans that are collateralized. Cash and Cash Equivalents For the purpose of the statements of financial position and the statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from financial institutions, federal funds sold and 10

11 NOTE 1 (continued) highly liquid debt instruments classified as cash which were purchased with maturities of three months or less. Amounts due from financial institutions may exceed federally insured limits. Investments Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of individual available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of UNFCU to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Federal Home Loan Bank Stock UNFCU is required to hold Federal Home Loan Bank of New York ( FHLB ) stock equal to the sum of 0.2% of mortgage-related assets and 4.5% of outstanding FHLB borrowings. UNFCU has met these requirements for both 2016 and No ready market exists for the FHLB stock, and it has no quoted market value. Therefore, UNFCU s investment in FHLB stock is carried at cost and tested for impairment. At, management did not believe the stock was impaired. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value ( LOCOM ) or fair value under the fair value option accounting guidance for financial instruments. For loans carried at LOCOM, gains and losses on loan sales (sales proceeds minus carrying value) are 11

12 NOTE 1 (continued) recorded in non-interest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in non-interest income upon sale of the loan. Loans Receivable UNFCU has purchased commercial loan participations originated by various other credit unions. All of these loan participations were purchased without recourse. UNFCU grants mortgage and consumer loans to members. The ability of the members to honor their contracts is dependent upon the real estate and general economic conditions of the area in which the property is located. Loans that UNFCU has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, less an allowance for loan losses. Interest income on loans is recognized over the term of the loan and is calculated using the simple interest method on principal amounts outstanding. The accrual of interest income on loans is discontinued at the time the loan is 90 days past due, unless the credit is well secured and in the process of collection. Other personal loans are typically charged off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if the collection of principal and interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income in the period in which the loan goes non-accrual. Interest income on these loans is recognized on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually past due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is likely. Subsequent recoveries, if any, are credited to the allowance. 12

13 NOTE 1 (continued) The allowance for loan losses is evaluated on a regular basis by management and is based upon management s periodic review 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 the underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review UNFCU s allowance for loan losses, and may require UNFCU to make adjustments to the allowance based on their judgment about information available to them at the time of their examinations. Specific allowances for loan losses are established for impaired loans on an individual basis. A loan is considered impaired when, based on current information and events, it is probable that UNFCU will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement or when the loan is classified as a trouble debt restructuring. The specific allowances established for these loans are based on a thorough analysis of the most probable source of repayment, including the present value of the loan s expected future cash flow, the loan s estimated market value, or the estimated fair value of the underlying collateral, if collateral dependent. 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 caseby-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. As of, the total of loans that met the U.S. GAAP impaired loan definition amounted to $24,511,186 and $25,889,899 respectively. Large groups of smaller balance homogeneous loans are collectively evaluated for potential loan loss allowances. Accordingly, UNFCU establishes general allowances for loans that can be grouped into pools based on similar characteristics. In this process, general allowance factors are based on an analysis of historical charge-off experience, and environmental factors. These general allowance factors are developed and applied to the portfolio by loan type. The environmental factors associated with the allowances are subjective and require a high degree of management judgment. These factors include the credit quality statistics, recent economic uncertainty, losses incurred from recent events, and lagging data. UNFCU will repossess collateral when all other collection efforts have been exhausted and UNFCU has full and complete access to repossess the collateral. 13

14 NOTE 1 (continued) Loan Servicing and Mortgage Servicing Rights Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under U.S. GAAP, servicing rights resulting from the sale or securitization of loans originated by UNFCU are initially measured at fair value at the date of transfer. UNFCU subsequently measures each class of servicing asset using either the fair value or the amortization method. UNFCU has elected to initially and subsequently measure the mortgage servicing rights for the consumer mortgage loans using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur. U.S. GAAP requires UNFCU to recognize as a separate asset the right to service mortgage loans for others. An institution that acquires mortgage servicing rights through either the purchase or the origination of mortgage loans and sells those loans with servicing rights retained must allocate a portion of the cost of the loans to the mortgage servicing rights. UNFCU could elect to either amortize the mortgage servicing rights over the life of the loan or carry the mortgage servicing rights at fair value. Under both methodologies, the mortgage servicing rights would be tested for impairment. Management elected to use the fair value method of accounting for mortgage servicing rights. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income. Property and Equipment Land is carried at cost. Leasehold improvements and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Building, furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the terms of the related leases. 14

15 NOTE 1 (continued) Goodwill and Intangible Assets Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Intangible assets with finite useful lives are amortized and goodwill and intangible assets with indefinite lives are not amortized, but rather tested at least annually for impairment. UNFCU tests goodwill for impairment annually and evaluates changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Long-Lived Assets U.S. GAAP requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. UNFCU periodically reevaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of its long-lived assets. The criteria used for these evaluations include management s estimate of the asset s continuing ability to generate income from operations and positive cash flow in future periods as well as the strategic significance of the asset in UNFCU s business objectives. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from UNFCU, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) UNFCU does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. National Credit Union Share Insurance Fund Deposit The deposit in the National Credit Union Share Insurance Fund ( NCUSIF ) is in accordance with National Credit Union Administration ( NCUA ) regulations, which require the maintenance of a deposit by each federally insured credit union in an amount equal to 1% of its insured members shares. The deposit would be refunded to UNFCU if its insurance coverage is terminated, if it converts its insurance coverage to another source, or if management of the fund is transferred from the NCUA Board. 15

16 NOTE 1 (continued) NCUSIF Insurance Premium For 2016 and 2015, both the National Credit Union Share Insurance fund premium ( NCUSIF ) and the Temporary Corporate Credit Union Stabilization Fund ( TCCUSF ) were waived. NCUSIF insurance premiums are included in non-interest expense operations. Members Shares Members shares are the savings deposit accounts of the owners of UNFCU. Share ownership entitles the members to vote in the annual elections of the Board of Directors and on other corporate matters. Irrespective of the amount of shares owned, no member has more than one vote. Members shares are subordinated to all other liabilities of UNFCU upon liquidation. Dividends on members shares are based on available earnings at the end of a dividend period and are not guaranteed by UNFCU. Dividend rates are set by UNFCU s Board of Directors. Non-interest income One form of non-interest income includes commission revenue from insurance brokerage services. Commission revenues are recognized at the latter of the billing or the effective date of the related insurance policies, net of an allowance for estimated policy cancellations. Commission revenues related to installment premiums are recognized periodically as billed. Contingent commissions and commissions on premiums directly billed by insurance carriers are recognized as revenue when the data necessary to reasonably determine such amounts has been obtained. A contingent commission is a commission paid by an insurance carrier that is based on the overall profit and/or volume of the business placed with that insurance carrier. Commissions on premiums billed directly by insurance carriers relate to a large number of small premium transactions, whereby the billing and policy issuance process is controlled entirely by the insurance carrier. Typically, these types of commission revenues cannot be reasonably determined until the cash or the related policy detail is received from the insurance carriers. The income effects of subsequent premium adjustments are recorded when the adjustments become known. Income Taxes UNFCU, as a credit union, is exempt, by statute, from federal and state income taxes and the credit union s wholly owned subsidiaries are single member limited liability companies and, as such, are not subject to income tax. 16

17 NOTE 1 (continued) Marketing Costs Marketing costs are expensed as incurred. The marketing expenses for 2016 and 2015 amounted to $1,306,985 and $1,327,466, respectively. Pension Plan UNFCU has a qualified, noncontributory defined-benefit pension plan covering substantially all of its employees. UNFCU s policy is to fund an amount in excess of the minimum amount required under ERISA. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on availablefor-sale securities and pension related adjustments, are reported as a separate component of the members equity section of the statements of financial condition. For 2016 and 2015, other comprehensive income includes no reclassification adjustments. Recent Accounting Pronouncements In June 2014, the FASB issued ASU , Revenue from Contracts with Customers: Topic 606. This ASU applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, most industry-specific guidance, and some cost guidance included in Subtopic , Revenue Recognition Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To be in alignment with the core principle, an entity must apply a five step process including: identification of the contract(s) with a customer, identification of performance obligations in the contract(s), determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation. Additionally, the existing requirements for the recognition of a gain 17

18 NOTE 1 (continued) or loss on the transfer of nonfinancial assets that are not in a contract with a customer have also been amended to be consistent with the guidance on recognition and measurement. This ASU was amended by ASU which defers the effective date of the new revenue standard until the year ended 31 December Early adoption is permitted for the year ended 31 December UNFCU is currently assessing the impact that ASU will have on its consolidated financial statements. In May 2015, the FASB issued ASU , Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent): Topic 820. This ASU applies to any entity using U.S. GAAP that measures the fair value of an investment using net asset value per share. The core principle of the guidance is to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. The amendments in this ASU are effective for the year ended 31 December Early adoption is permitted. UNFCU is currently assessing the impact that ASU will have on its consolidated financial statements. In February 2016, the FASB issued Accounting Standards Update (ASU) , Leases (Topic 842), effective for annual reporting periods beginning after December 15, Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. The ASU will also require disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements providing additional information about the amounts recorded in the financial statements. UNFCU is currently assessing the impact that ASU will have on its consolidated financial statements. In June 2016, the FASB issued ASU , Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ( ASU ), which includes provisions that require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected and credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses, which requires recognition of an estimate of all current expected credit losses. The guidance is effective for not-for-profit entities for fiscal years beginning after December 15, Early adoption is permitted for fiscal years beginning after December 15, UNFCU is currently assessing the impact that ASU will have on its consolidated financial statements. 18

19 NOTE 2 - INVESTMENTS Investments classified as available-for-sale consist of the following: Amortized Unrealized Unrealized Fair 31 December 2016 Cost Gains Losses Value US government obligations $ 14,995,781 $ - $ (111,381) $ 14,884,400 Agency/GSE debt 938,297, ,728 (14,194,201) 924,362,991 Mortgage-backed securities 88, ,070 $ 953,381,330 $ 260,713 $ (14,305,582) $ 939,336,461 Amortized Unrealized Unrealized Fair 31 December 2015 Cost Gains Losses Value US government obligations $ 65,262,110 $ 1,734 $ (71,094) $ 65,192,750 Agency/GSE debt 885,746, ,992 (4,134,742) 882,223,067 Mortgage-backed securities 91,882 1,072-92,954 Investments classified as held-to-maturity consist of the following: $ 951,100,809 $ 613,798 $ (4,205,836) $ 947,508,771 Amortized Unrealized Unrealized Fair 31 December 2016 Cost Gains Losses Value Bank obligations $ 36,565,538 $ 12,870 $ (6,447) $ 36,571,961 Municipal bonds 306,395, ,541 (2,860,786) 304,512,119 Mortgage-backed securities 663,650,815 5,599,128 (2,913,873) 666,336,070 Small Business Administration 168,164, ,482 (1,913,259) 166,610,259 $ 1,174,775,753 $ 6,949,021 $ (7,694,365) $1,174,030,409 Amortized Unrealized Unrealized Fair 31 December 2015 Cost Gains Losses Value Bank obligations $ 56,568,004 $ 28,119 $ (168,604) $ 56,427,519 Municipal bonds 225,073,971 1,705,987 (484,901) 226,295,057 Mortgage-backed securities 637,460,547 6,109,410 (2,922,891) 640,647,066 Small Business Administration 193,028, ,934 (977,690) 192,945,460 $ 1,112,130,738 $ 8,738,450 $ (4,554,086) $1,116,315,102 19

20 NOTE 2 (continued) Investments by maturity as of 31 December 2016 are summarized as follows: Available-for-Sale Held-to-Maturity Amortized Fair Amortized Fair Cost Value Cost Value Less than 1 year maturity $ 143,343,961 $ 143,539,648 $ 99,054,401 $ 99,081, years maturity 721,771, ,043, ,061, ,377, years maturity 88,177,734 85,663,850 40,845,305 39,624,885 Over 10 years maturity Mortgage-backed securities 88,085 89, ,650, ,336,070 Small Business Administration ,164, ,610,259 $ 953,381,330 $939,336,461 $ 1,174,775,753 $ 1,174,030,409 Investments by maturity as of 31 December 2015 are summarized as follows: Available-for-Sale Held-to-Maturity Amortized Fair Amortized Fair Cost Value Cost Value Less than 1 year maturity $ 151,097,121 $ 151,230,144 $ 67,665,514 $ 67,899, years maturity 777,401, ,848, ,008, ,939, years maturity 16,715,245 16,703,208 4,968,277 4,883,100 Over 10 years maturity 5,795,000 5,633, Mortgage-backed securities 91,882 92, ,460, ,647,066 Small Business Administration ,028, ,945,460 $ 951,100,809 $947,508,771 $ 1,112,130,738 $ 1,116,315,102 Expected maturities of mortgage-backed securities and Small Business Administration may differ from contractual maturities because borrowers may have the right to call or prepay the obligations and are, therefore, classified separately with no specific maturity date. 20

21 NOTE 2 (continued) Gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at are as follows: 31 December, 2016 Available-for-Sale Fair Value Continuous Unrealized Losses Existing for Less than 12 Months 12 Months or Longer Total Unrealized Losses US government obligations $ 14,884,400 $ (111,381) $ - $ (111,381) Federal agencies 765,513,672 (14,194,201) - (14,194,201) Held-to-Maturity $ 780,398,072 $ (14,305,582) $ - $ (14,305,582) Bank obligations $ 7,491,150 $ (6,447) $ - $ (6,447) Municipal bonds 226,739,172 (2,859,242) (1,544) (2,860,786) Mortgage-backed securities 318,967,659 (2,142,696) (771,177) (2,913,873) Small Business Administration 147,074,293 (543,591) (1,369,668) (1,913,259) $ 700,272,274 $ (5,551,976) $ (2,142,389) $ (7,694,365) 31 December, 2015 Available-for-Sale Fair Value Continuous Unrealized Losses Existing for Less than 12 Months 12 Months or Longer Total Unrealized Losses US government obligations $ 50,155,850 $ (71,094) $ - $ (71,094) Federal agencies 695,068,941 (3,749,250) (385,492) (4,134,742) Held-to-Maturity $ 745,224,791 $ (3,820,344) $ (385,492) $ (4,205,836) Bank obligations $ 48,900,069 $ (138,229) $ (30,375) $ (168,604) Municipal bonds 97,279,949 (433,050) (51,851) (484,901) Mortgage-backed securities 326,164,801 (1,672,751) (1,250,141) (2,922,892) Small Business Administration 125,038,905 (273,326) (704,363) (977,689) $ 597,383,724 $ (2,517,356) $ (2,036,730) $ (4,554,086) 21

22 NOTE 2 (continued) At 31 December 2016, there were 322 securities in an unrealized loss position of which 40 have current unrealized losses which have existed for a period longer than 12 months and 282 for 12 months or less. At 31 December 2015, the investment portfolio included 239 securities in an unrealized loss position, 44 of which had current unrealized losses which had existed for a period longer than 12 months and 195 for 12 months or less. All of these securities are considered to be acceptable credit risks. Based upon an evaluation of the available evidence, including recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the decline in fair value for these securities is temporary. In addition, UNFCU has the ability to hold and does not believe it will be required to sell these investment securities for a period of time sufficient to allow for an anticipated recovery or maturity. Other investments consist of the following: 31 December Federal Home Loan Bank Stock $ 5,980,600 $ 4,683,000 Community Money Market Investment Fund-NCB 250, ,000 Certificates of deposit in credit unions 10,285 10,208 $ 6,240,885 $ 4,943,208 Certificates are generally non-negotiable and non-transferable, and may incur substantial penalties for withdrawal prior to maturity. Management evaluated the investment portfolio and determined that there were no other-than-temporary impairment for either 31 December 2016 or

23 NOTE 3 - LOANS Loans consist of the following: 31 December Mortgage loans Fixed rate $ 500,599,961 $ 452,773,776 Variable rate 1,117,843, ,337,297 Hybrid/Balloon 541, ,703 Home equity line of credit, variable rate Loan participations 67,714,920 2,404,836 60,444,638 2,482,152 1,689,104,979 1,382,747,566 Consumer loans Auto loans 5,990,306 6,725,378 Home improvement 29,773,780 33,174,573 Share secured 13,480,749 13,782,533 Government guaranteed student loans 82,343 98,124 Credit card loans, unsecured 154,481, ,930,561 Loan participations 57,112,070 49,166,112 Consumer loans, primarily unsecured 350,857, ,984,864 Loans, gross 2,300,883,482 1,959,609,711 Allowance for loan losses (19,981,382) (16,333,386) Loans, net $ 2,280,902,100 $ 1,943,276,325 UNFCU has purchased auto loans and commercial loan participations originated by various other credit unions. UNFCU also purchased whole mortgages originated by another credit union. All of these loan participations were purchased without recourse. UNFCU offers variable rate mortgages and balloon mortgages to its members. Variable rate mortgages have an initial introductory rate of either 1, 3, 5, 7, or 10 years. After this period the annual percentage rate adjusts to the fully indexed rate (index plus margin). UNFCU variable rate mortgages have annual and lifetime rate caps to minimize payment shock to borrowers. UNFCU also offers balloon loans to members whereby payments are based on a 30 year amortization but the loan balance becomes due and payable at the end of a specified 7, 10 or 15 year period. Variable rate and balloon mortgages may have significantly different credit risk characteristics than traditional fixed rate mortgages. However, UNFCU believes it has established prudent underwriting standards as well as adequate risk management functions to monitor these additional risks. 23

24 NOTE 3 (continued) The following table shows the activity in the allowance for loan losses for the year ended 31 December 2016: Mortgage Consumer Loans Loans Total Balance at beginning of year $ 5,192,928 $ 11,140,458 $ 16,333,386 Provision for loan losses 196,498 9,068,502 9,265,000 Loans charged-off (489,128) (6,268,662) (6,757,790) Recoveries 82,570 1,058,216 1,140,786 Balance at end of year $ 4,982,868 $ 14,998,514 $ 19,981,382 The following table shows the activity in the allowance for loan losses for the year ended 31 December 2015: Mortgage Consumer Loans Loans Total Balance at beginning of year $ 5,290,863 $ 6,804,004 $ 12,094,867 Provision for loan losses 1,089,324 8,810,676 9,900,000 Loans charged-off (1,419,480) (5,349,351) (6,768,831) Recoveries 232, ,130 1,107,350 Balance at end of year $ 5,192,927 $ 11,140,459 $ 16,333,386 24

25 NOTE 3 (continued) The following table shows the ending balance of allowance for loan losses by loan type and the allowance for loan losses based on the impairment method used at 31 December 2016: Allowance for Loan Losses Individually Collectively Evaluated Evaluated For Impairment For Impairment Ending Balance Ending Balance Mortgage loans $ 1,815,893 $ 3,166,975 Consumer loans 2,242,015 12,756,499 $ 4,057,908 $ 15,923,474 The following table shows the ending balance of allowance for loan losses by loan type and the allowance for loan losses based on the impairment method used at 31 December 2015: Allowance for Loan Losses Individually Collectively Evaluated Evaluated For Impairment For Impairment Ending Balance Ending Balance Mortgage loans $ 1,731,352 $ 3,461,577 Consumer loans - 11,140,458 $ 1,731,352 $ 14,602,035 The following table shows an age analysis of loans at 31 December 2016: Greater Days Days than Total Current Past Due Past Due 90 Days Loans Mortgage loans $ 1,653,577,625 $ 28,295,832 $ 1,280,418 $ 5,951,104 $ 1,689,104,979 Consumer loans 599,921,554 5,758,554 1,528,880 4,569, ,778,503 Total $ 2,253,499,179 $ 34,054,386 $ 2,809,298 $ 10,520,619 $ 2,300,883,482 25

26 NOTE 3 (continued) The following table shows an age analysis of loans at 31 December 2015: Greater Days Days than Total Current Past Due Past Due 90 Days Loans Mortgage loans $ 1,357,931,081 $ 16,202,203 $ 2,829,866 $ 6,405,416 $ 1,383,368,566 Consumer loans 566,803,679 6,231,320 1,412,258 2,414, ,862,145 Total $ 1,924,734,760 $ 22,433,523 $ 4,242,124 $ 8,820,304 $ 1,960,230,711 The following table shows the recorded investment, unpaid principal balance, allocated allowance for loan losses and interest income recognized for loans that were considered impaired at 31 December 2016: Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized With no related allowance recorded: Mortgage loans $ 4,885,474 $ 4,741,709 $ - $ 3,450,132 $ 38,900 With an allowance recorded: Mortgage loans 19,841,885 19,769,477 1,815,893 22,128, ,500 Total impaired loans $ 24,727,359 $ 24,511,186 $ 1,815,893 $ 25,578,703 $ 288,400 The following table shows the recorded investment, unpaid principal balance, allocated allowance for loan losses and interest income recognized for loans that were considered impaired at 31 December 2015: Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized With no related allowance recorded: Mortgage loans $ 7,089,267 $ 6,942,811 $ - $ 5,748,402 $ 67,975 With an allowance recorded: Mortgage loans 18,999,504 18,947,088 1,731,352 20,998, ,303 Total impaired loans $ 26,088,771 $ 25,889,899 $ 1,731,352 $ 26,746,582 $ 316,278 26

27 NOTE 3 (continued) The following table shows our loans that are on non-accrual status and 90 days or more past due and still accruing interest as of 31 December: Loans 90 days or more past due and still accruing: Consumer loans $ 767,318 $ 1,137,110 Total 767,318 1,1,37,110 Non-accrual mortgage loans: Mortgage loans 5,951,104 6,405,416 Consumer loans 3,802,197 1,277,778 Total 9,753,301 7,683,194 Total past due loans $ 10,520,619 $ 8,820,304 The following table summarizes the activity related to information on troubled debt restructuring: Modifications as of 31 December 2016 Pre- Post- Modification Modification Outstanding Outstanding No. Recorded Recorded Contracts Investment Investment Troubled Debt Restructuring Residential-prime 8 $ 2,303,257 $ 2,067,939 Consumer-other 25 11,174,102 11,102,965 Modifications as of 31 December 2015 Pre- Post- Modification Modification Outstanding Outstanding No. Recorded Recorded Contracts Investment Investment Troubled Debt Restructuring Residential-prime 9 $ 3,238,818 $ 3,305,409 Consumer-other 11 1,417,751 1,428,962 27

28 NOTE 3 (continued) Consumer mortgage loans secured by residential real estate properties of which formal proceedings are in process for foreclosure for the years ending were $3,982,042 and $4,460,844, respectively. NOTE 4 - LOAN SERVICING Mortgage loans serviced for other institutions are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at 31 December 2016 and 2015 were approximately $174,322,000 and $124,364,000, respectively. UNFCU records Mortgage Servicing Rights ( MSR ) when mortgage loans are sold and UNFCU retains the right to service the loans. Specifically, at year end 2016 and 2015, UNFCU utilized assumptions in conditional prepayment rates of 4.22% and 5.63%, respectively, and also utilized a discount rate of 7.5% and 7.0% for 2016 and 2015, respectively, in determining the fair value of capitalized mortgage servicing rights. UNFCU records MSRs at fair value with changes in fair value recorded in Non-interest income. MSR valuation is sensitive to interest rate and prepayment risk. The changes in fair value of MSRs during 2016 and 2015 were as follows: Balance, beginning of year $ 1,433,199 $ 839,779 Origination of MSRs 668, ,361 Disposals (6,068) - Loss on changes in fair value (7,414) (153,941) Balance, end of year $ 2,088,706 $ 1,433,199 All changes in fair value are as a result of changes to valuation model inputs and assumptions. 28

29 NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment are summarized as follows: 31 December Land $ 12,159,400 $ 12,159,400 Building 98,511,144 98,511,144 Furniture and equipment 72,059,389 68,778,210 Leasehold improvements 9,299,056 8,587,665 Property and equipment, gross 192,028, ,036,419 Accumulated depreciation (83,740,155) (80,170,899) Property and equipment, net $ 108,288,834 $ 107,865,520 The fully depreciated assets removed from property and equipment for 2016 and 2015 amounted to $2,183,874 and $1,156,472, respectively. Assets that have not yet been placed in-service but included in property and equipment for 2016 and 2015 amounted to $2,685,852 and $2,049,517 respectively. For the years ended, the depreciation expense was $5,753,130 and $6,712,178, respectively. Rental expense for the years ended for all facilities leased under operating leases totaled $1,828,000 and $1,801,000 respectively. In addition, UNFCU has rental arrangements with the sponsor organization for New York and overseas locations, the rental expenses for these locations for the years ended totaled $994,000 and $990,000, respectively. Future lease expenses with remaining terms of one year or more at 31 December 2016 are as follows: Year ending 31 December 2017 $ 1,122, , , , ,000 Thereafter 1,284,000 $ 5,668,000 29

30 NOTE 6 - INTANGIBLE ASSETS Intangible assets are comprised of the following at : Useful Life Expirations $ 2,874,329 $ 2,874, years Tradenames 97,832 97,832 Indefinite Intangible assets, gross 2,972,161 2,972,161 Accumulated amortization (1,012,859 (780,175) Intangible assets, net $ 1,959,302 $ 2,191,986 Amortization expense for the years ended was $232,684 and $246,371, respectively. All amortization was recorded in selling, general, and administrative expense in the Consolidated Statements of Income. The annual estimated amortization expense for the UNFCU s acquired intangible assets for the next five years and thereafter is as follows: Year ending 31 December 2017 $ 218, , , , ,247 Thereafter 903,360 $ 1,861,470 NOTE 7 - RENTAL INCOME UNFCU leases office space to third parties. Rental income from these operating leases totaled approximately $4,104,000 for both the years ended, and is included in other noninterest income. 30

31 NOTE 7 (continued) Future minimum rental payments under operating leases with initial or remaining terms of one year or more at 31 December 2016 are as follows: Year ending 31 December 2017 $ 4,854, ,955, , , ,221 Thereafter 3,515,807 $ 12,108,001 NOTE 8 - MEMBERS SHARES Members shares are summarized as follows: 31 December Regular shares $ 2,357,126,033 $ 2,142,606,250 Checking accounts 559,762, ,135,737 Money market 589,313, ,195,248 Individual retirement shares 7,345,750 6,428,734 Individual retirement certificates 5,118,484 4,385,664 Certificates 742,437, ,482,088 Other 6,764,587 5,839,869 $ 4,267,868,212 $ 3,900,073,590 31