Annual Report 2015 VisionMembers financially secure and economically successful and responsible
ImproveMission members’ financial well-being
2 FAIRWINDS Credit Union Values GoodAdvocacy Stewardship Caring Environment Honesty and Integrity Cooperative Principles Community Commitment Exceptional Service and Value
Annual Report 2015 3
“aI’ve member been for over ten years and i always appreciate the friendly service and a big bright smile ” from the associates.Wink
4 FAIRWINDS Credit Union Contents
Chairman’s and President’s Report 6
2015: A Look Back 8
2016: A Look Ahead 12
Treasurer’s Report 14
Audit Committee Report 15
Consolidated Financial Statements 17
Board of Directors 18
Management Team 20
Independent Auditor’s Report 22
Audited Financial Statements 24
Annual Report 2015 5 Chairman’s and President’s Report
Dan McNutt Larry F. Tobin Chairman President/CEO
2015 was an extraordinary year. million in commercial and business loans, the highest performance the business portfolio has experienced It was a year of peak performance, innovation, and to date. Our business members have the confidence transformation. knowing that FAIRWINDS will provide solutions that will help their business grow and thrive. Simply put, it was a year of making an impact. How did we make an impact in 2015? By pruning… Part of making an impact means pruning for future By performing… growth. We realigned two of our branches to merge FAIRWINDS continues to be a leading financial in the with newer locations in Leesburg and Metrowest, Central Florida market, closing the year with a net helping us maintain a strong and active footprint in income of $15.8 million and asset growth of $149.9 our market with the right branches in the right places. million. This growth is balanced with safety and soundness. Net worth climbed to 9.66% while the By transforming… delinquency ratio continued on a downward trend With the goal of bringing modernity, creativity, and decreasing to 1.00%, well below credit union peers in productivity together, we began the transformation the market. of our former Administration headquarters on North Alafaya Trail from just a workplace to an Mortgage rates reached an all-time industry low in enriching collaborative environment for all of our 2015, and a record number of members reached crewmembers. Phase One demolition of the out to FAIRWINDS for home buying and refinancing re-designed East Campus was completed in 2015 and solutions. More than $216 million in mortgage will re-open its doors in 2017. loans were disbursed, helping members to secure affordable financing. By innovating… While many of our members count on our branches We continued to make an impact on the Central for their needs, our network of delivery channels and Florida small business community by disbursing $52 self-service options continued to expand at a rapid
6 FAIRWINDS Credit Union pace. Enhancements to our mobile banking suite, including Touch ID, Apple Pay, and the Apple Watch, give members the power to safely choose how, when, and where they want to access their information.
A complete redesign of our website debuted in 2015, providing a more robust and personalized experience, helping every member to find the right solution, wherever they are in life.
By looking ahead… For more than 65 years, we’ve challenged ourselves every day to make an impact on our members, our community, and our fellow crewmembers. We are excited for the new innovations and transformation that lie ahead in 2016 and beyond, and are even more excited to continue to share the journey with you. We most look forward to continuing to making an impact on you, our loyal members.
Annual Report 2015 7
A Look Back 2015:2015 was a year of making an impact. Here are some of the highlights we experienced in 2015.
8 FAIRWINDS Credit Union 2015: A Look Back
The New FAIRWINDS website was completely providing you with convenient, real-time alerts. redesigned and launched in May. The new site Credit Card e-Alerts can be sent via text, email, or includes responsive design technology, making both, based upon your preference, helping you enjoy it easy to view and access fairwinds.org from any peace of mind. device, wherever you are. Deepening our relationship with the University of As part of the new FAIRWINDS website, a Ratings Central Florida, we partnered with the College of and Review section launched, providing members Business to introduce The Exchange Presented by the opportunity to rate their experience and share FAIRWINDS Credit Union, providing a new space feedback about the products and services they for thought-provoking discussions and business use at FAIRWINDS. Transparency is one of the four relationships. The Exchange is used daily by faculty components of advocacy, and the Ratings and and students and speakers include employers, Reviews section can help members and potential faculty, students, and alumni, and cover a variety of members to make the best choice for their needs, topics. The space also offers continued opportunities based upon direct feedback from those that have for FAIRWINDS crewmembers to present financial accessed or utilized a particular product or service. literacy workshops.
Apple Pay™ debuted in January 2015. Apple Pay FAIRWINDS crewmembers demonstrated their allows you, with a supported Apple device, to generosity by collectively pledging more than add your FAIRWINDS debit and credit cards to $25,000 to the Heart of Florida United Way in less your Passbook App and easily make single touch than two weeks. payments directly from their device. FAIRWINDS mobile access from the Apple Watch soon followed. Members, crewmembers, and our valuable partners worked together to help raise more than $30,000 EMV Chip Card technology was introduced for in donations for the Greater Orlando Children’s personal and business cards. Already established Miracle Network Hospitals. An additional $8,914 in over 130 countries, financial institutions in the was contributed as a result of Shop for Miracles U.S. are making chip cards available to consumers Day, where $0.15 of every purchase made with a because of the extra layer of protection the FAIRWINDS credit or debit card on October 15, 2015 technology provides to cardholders. was donated to CMN.
Mobile banking became even more convenient with We teamed up with the Seminole County Sheriff’s the launch of Touch ID for members with an iPhone Office to collect gifts for the Seminole County 5 or newer. Through Touch ID, you can log in to the Christmas Village. Every year, more than 700 children FAIRWINDS Mobile Banking app using fingerprint and their families are invited to the Christmas Village, identification. where they are treated to rides, games, food and Santa’s Toy Shop. Parents and guardians then select e-Alerts for personal and business credit cards holiday gifts for their children. became available within FAIRWINDS Online,
Annual Report 2015 9 After selling “my home, I had ideas of what I wanted to do, but needed help to make it a reality. FAIRWINDS did it for me. I feel I am in good hands.” TrailTrekker
10 FAIRWINDS Credit Union We recently “refinanced our auto loan. The prompt, professional service was outstanding.” Ceejay
Annual Report 2015 11 2016:A Look Ahead We are excited to make 2016 another year of impact for our members. Here is a snapshot of what you can expect and look forward to this year.
12 FAIRWINDS Credit Union 2016: A Look Ahead
Recognizing the opportunity to provide more rich As part of our ongoing technology enhancements, a and robust credit card solutions to our members new commercial online platform will launch in 2016, looking for a more upscale experience, the new ensuring that our business members will be able to FAIRWINDS Preferred Visa Signature® Credit Card will run their operations seamlessly and more efficiently. launch in February. The card offers around-the-clock concierge services, premium rewards, and enhanced Phase II of the renovation of the Administration and benefits and VIP experiences. Operations building in East Orlando is scheduled to be completed in the spring. Phase III will immediately Enjoy the convenience of on-demand pre-approval follow with an anticipated East Campus re-open date offers available within FAIRWINDS Mobile and Online of early 2017. Banking beginning in February. With the push of a button, choose the right loan solution for your We are honored to be able to help our Central Florida needs, on your time, wherever you are. community and neighbors in need. We look forward to continuing to pledge our support to many worthy The ultimate in self-service, we will provide the organizations, including the Heart of Florida United convenience of online appointment scheduling for Way, the Greater Orlando Children’s Miracle Network your mortgage, consumer loan, business services, Hospitals, and A Gift For Teaching. and retirement planning needs. Meet with our experts on your schedule, not ours. Our partnership with the University of Central Florida as the Official Student Banking Services Provider is Encouraging our members to save is paramount, and growing and thriving. We look forward not only to a redesign of our personal checking solutions will continuing to educate and support current students provide you with more value and savings, helping and faculty, but also working with graduating you in your journey toward achieving financial students to help them successfully transition into the freedom. next financial stages of their lives.
Annual Report 2015 13 Treasurer’s Report
Kelly Leary Treasurer
In a year met with challenges for some financial $216 million in mortgage balances. Consumer loan institutions, FAIRWINDS’ financial performance in demand also hit record numbers with $349 million 2015 was remarkable, resulting in multiple “all-time disbursed to members. highs” for the credit union. Overall member loans outstanding increased by Net Worth, the best measure of the credit union’s 21.6% to $1,192,879,688. At the same time, member ability to meet its commitment to members today loan credit quality improved again in 2015. The and well into the future, grew $15.7 million in 2015 delinquency ratio dropped to 1.00% while the charge reaching $186,092,925 while total assets grew off ratio dropped to .29% demonstrating FAIRWINDS’ $149.7 million to $1,925,920,706. Financial regulation prudent lending. requires institutions to hold net worth equal to 7.00% of total assets to be well capitalized. FAIRWINDS’ net Deposit growth was also healthy as we encouraged worth is a healthy 9.66% of assets. Strong net worth members to #save4something in 2015. Members not only protects the credit union and its members added $118 million to their savings accounts more from economic uncertainty; it allows the credit union than doubling the growth from 2014. Members also to enhance its competitiveness by offering cutting invested through FAIRWINDS’ Retirement Planning edge technology, additional layers of security, division adding $56 million to their investment and a portfolio of products that bring value to the accounts. members. FAIRWINDS’ financial performance in 2015 In 2015, a record number of members looked to demonstrates how the credit union continues their credit union for financial solutions. A favorable to operate as a safe, sound, and secure financial rate environment and a healthy housing market cooperative. We look forward to another successful contributed to member demand for mortgage year serving our members needs and helping them refinance and purchase. FAIRWINDS disbursed on the path to financial freedom in 2016 and beyond.
14 FAIRWINDS Credit Union Audit Committee Report
Lisa Snead Audit Committee Chairman
Each year the Audit Committee for FAIRWINDS Credit to demonstrate its commitment to operate at Union, serving as an independent entity, engages a the highest levels of safety and soundness. Fraud third-party accounting firm to conduct an unbiased prevention and detection controls are a priority issue audit of the credit union’s financial condition. The for the audit committee in order to mitigate risk and audits include the annual financial statement audit, prevent losses. information systems review, and internal controls review. On behalf of the Audit Committee, based upon these independent external audits and ongoing internal Once again, Doeren Mayhew, CPA has issued an audits conducted by our Internal Audit department it unqualified opinion that the financial statements is with confidence that I report that FAIRWINDS Credit fairly, in all material respects, represent the financial Union’s operations remain safe and sound. Members position of the credit union as of September 30, can have peace of mind knowing that their money 2015. and financial information at FAIRWINDS is protected, safe, and secure at all times. Further auditing of the credit union’s information technology confirms that FAIRWINDS continues
Annual Report 2015 15 We have been “members for over 10 years and its like we have our own personal loan and credit
advisor!”longtimemember
16 FAIRWINDS Credit Union Consolidated Financial Statements
Assets 2014 2015 Sources of Income Net Loans to Members $966,629,238 $1,181,821,075 Cash & Due from Banks $91,129,011 $57,427,037 Government & Agency Securities $581,344,499 $542,279,641 Other Investments $7,638,256 $8,149,433 Services Interest Income on Loans Fixed Assets $70,098,230 $72,404,581 All Other Assets $59,206,126 $63,838,939 40% 48% Total Assets $1,776,045,360 $1,925,920,706 Investments Liabilities & Member's Equity 2014 2015 12% Accounts Payable & Liabilities $89,321,822 $104,841,428 Members' Shares & Deposits $1,520,531,281 $1,639,172,946 Reserves & Undivided Earnings $166,192,257 $181,906,332 Sources of Income Total Liabilty and Member's $1,776,045,360 $1,925,920,706 Interest on Loans $46,492,286 Equity Investments $11,146,214 Services Income $38,642,455 Statement of Income 2014 2015 Total $96,280,955 Interest on Loans $42,085,029 $46,492,286 Investment Income $12,292,377 $11,146,214 Other Income $37,128,077 $38,642,455 Distribution of Income Total Income $91,505,483 $96,280,955
Reserves Operating Expenses ($66,931,788) ($72,779,974) 16% Provision for Loan Losses ($1,717,153) ($24,987) Non-Operating Gains ($829,267) ($947,104) Dividends 7% Dividends ($7,282,845) ($6,745,471) Operations Total Expenses ($76,761,054) ($80,497,537) Reserves $14,744,429 $15,783,418 77% Loan Losses Vital Statistics 2014 2015 0% Number of Members 175,455 169,435 Distribution of Income Number of Loans Granted 12,995 15,497 Loan Losses $24,987 $$$ of Loans Granted $523,691,031 $748,868,490 Reserves $15,783,418 Number of Loans Granted Since Organized 1,002,829 1,018,326 Dividends $6,745,471 $$$ of Loans Granted Since $8,222,431,147 $8,971,299,637 Operations $73,727,078 Organized Total $96,280,955
Annual Report 2015 17 Board of Directors
B. Daniel McNutt, Jr. Chairman
Jason Albu Vice Chairman
Carol F. Denton Secretary
Kelly D. Leary Treasurer
Richard Leigh Director
Mack R. Perry Director
Lisa Snead Director
18 FAIRWINDS Credit Union “So happy I switched to FAIRWINDS. The regular checking account makes things easy to understand. It’s all black and white, no surprisesAwanda01.”
Annual Report 2015 19 Management Team
Larry F. Tobin Phillip C. Tischer President/CEO Senior Executive VP/COO
Kathy A. Chonody Senior Executive VP/CFO
James D. Adamczyk Mathy M. Hogan Executive VP - Executive VP - Lending eBusiness
Cathy M. Hertz Executive VP - Charles S. Lai Human Resources Daniel T. Bock III Executive VP/CIO Senior VP - Finance
Dianne K. Owen Derek Drake Executive VP - Marketing Michelle K. Klima Senior VP - Senior VP - Risk Management Controller
Bryan Meizinger James M. Thornberry Senior VP - Senior VP - Jorge Font Retail Lending Branch Services Senior VP - Business Services
20 FAIRWINDS Credit Union This is true “personal
FAIRWINDS banking. Employees build relationships with their members.”CharlesC
Annual Report 2015 21 Independent Auditor’s Report
22 FAIRWINDS Credit Union INDEPENDENT AUDITOR’S REPORT To the Board of Directors and Audit Committee of FAIRWINDS Credit Union and Subsidiaries
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of FAIRWINDS Credit Union and Subsidiaries, which comprise the consolidated statements of financial condition as of September 30, 2015 and 2014, and the related consolidated statements of earnings, comprehensive income, members’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated 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 audits 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.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FAIRWINDS Credit Union and Subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Troy, Michigan January 4, 2016
Annual Report 2015 23 FAIRWINDS Credit Union and Subsidiaries
Consolidated Statements of Financial Condition September 30, 2015 and 2014
2015 2014
Assets Cash and cash equivalents $ 36,116,880 $ 96,978,305 Investment securities (note 2): Trading (note 12) 12,114,225 8,104,395 Available-for-sale 581,988,621 594,167,793 Held-to-maturity 808,682 1,099,843 FHLB stock (note 1) 6,061,000 4,898,900 Loans held-for-sale (note 1) 397,951 - Loans to members, net of allowance for loan losses (note 3) 1,137,804,744 932,127,741 Accrued interest receivable 5,652,611 5,238,233 Property, equipment and leasehold improvements (note 4) 71,256,590 71,374,324 NCUSIF deposit (note 1) 14,795,031 14,254,708 Assets acquired in liquidation of loans (note 1) 12,673,597 14,376,585 Investments in life insurance contracts (note 12) 13,383,236 13,623,136 Other assets (notes 1 and 4) 6,378,562 6,379,535
Total assets $ 1,899,431,730 $ 1,762,623,498
Liabilities and Members’ Equity
Liabilities: Members’ shares and savings accounts (note 6) $ 1,597,016,486 $ 1,515,327,187 Borrowed funds (note 5) 105,000,000 75,000,000 Accounts payable 3,628,622 3,562,427 Other accrued liabilities (notes 1 and 12) 10,481,859 9,506,729
Total liabilities 1,716,126,967 1,603,396,343
Commitments and contingent liabilities (note 9)
Members’ equity - substantially restricted (note 7) 183,304,763 159,227,155
Total liabilities and members’ equity $ 1,899,431,730 $ 1,762,623,498
24 FAIRWINDS Credit Union FAIRWINDS Credit Union and Subsidiaries
Consolidated Statements of Earnings Years ended September 30, 2015 and 2014
2015 2014
Interest income: Loans receivable $ 45,271,382 $ 41,412,171 Investment securities 11,307,499 12,705,44
Total interest income 56,578,881 54,117,612
Interest expense: Interest and dividends on members’ shares and savings accounts 3,907,094 4,432,932 Interest on borrowed funds 2,961,403 2,945,495
Total interest expense 6,868,497 7,378,427
Net interest income 49,710,384 46,739,185
Provision for loan losses 2,222,349 1,033,235
Net interest income after provision for loan losses 47,488,035 45,705,950
Non-interest income: Market value increase on trading securities and investments in life insurance contracts 22,495 937,494 Fees and charges 38,072,271 37,847,972
Total non-interest income 38,094,766 38,785,466
Non-interest expenses: Compensation and benefits 38,613,668 35,271,968 Office operations 14,923,214 13,251,371 Occupancy 8,190,061 6,366,193 Operating expenses 10,061,147 9,687,683 Loss on disposals and write-downs of fixed assets 943,287 - (Gains) losses on sales and write-downs of assets in liquidation (80,567) 1,886,074
Total non-interest expenses 72,650,810 66,463,289
Net earnings $ 12,931,991 $ 18,028,127
Annual Report 2015 25 FAIRWINDS Credit Union and Subsidiaries
Consolidated Statements of Comprehensive Income Years ended September 30, 2015 and 2014
2015 2014
Net earnings $ 12,931,991 $ 18,028,127
Other comprehensive income: Net changes in unrealized holding gains on investments classified as available-for-sale arising during the period 11,145,617 1,178,110
Comprehensive income $ 24,077,608 $ 19,206,237
Consolidated Statements of Members’ Equity Years ended September 30, 2015 and 2014
Non- Accumulated Appropriated Other Undivided Comprehensive Statutory Earnings Income (Loss) Total
Members’ equity - October 1, 2013 $ 14,459,893 $ 136,325,855 $ (10,764,830) $ 140,020,918
Comprehensive income - 18,028,127 1,178,110 19,206,237
Members’ equity - September 30, 2014 14,459,893 154,353,982 (9,586,720) 159,227,155
Comprehensive income - 12,931,991 11,145,617 24,077,608
Members’ equity - September 30, 2015 (note 7) $ 14,459,893 $ 167,285,973 $ 1,558,897 $ 183,304,763
26 FAIRWINDS Credit Union FAIRWINDS Credit Union and Subsidiaries
Consolidated Statements of Cash Flows Years ended September 30, 2015 and 2014
2015 2014
Cash flows from operating activities:
Net earnings $ 12,931,991 $ 18,028,127
Adjustments: Depreciation 5,467,606 3,814,645 Provision for loan losses 2,222,349 1,033,235 Net amortization of premiums on investment securities 1,292,702 292,092 Increase in market values of investments in trading securities and life insurance contracts (22,495) (937,494) (Gains) losses on sales and write-downs of assets in liquidation (80,567) 1,886,074 Loss on disposals and write-downs of fixed assets 943,287 - Recoveries on charged-off loans 1,562,774 1,526,678
Changes in assets and liabilities: (Increase) decrease in accrued interest receivable (414,378) 117,426 (Increase) decrease in other assets (1,992) 1,829,243 Increase (decrease) in accounts payable 66,195 (44,523) Increase in other accrued liabilities 975,130 81,143
Total adjustments 12,010,611 9,598,519
Net cash provided from operating activities 24,942,602 27,626,646
Annual Report 2015 27 FAIRWINDS Credit Union and Subsidiaries
Consolidated Statements of Cash Flows Years ended September 30, 2015 and 2014
2015 2014
Cash flows from investing activities: Increase in loans to members (net) $ (213,331,426) $ (115,968,634) Increase in loans held-for-sale (397,951) - Increase in non-negotiable certificates of deposit - - Proceeds from maturities and sale of investment securities 87,531,163 113,179,520 Purchases of investment securities (68,976,589) (24,795,095) Redemption of investments in life insurance contracts 24,204 551,325 (Purchase) redemption of FHLB stock (1,162,100) 473,700 Acquisition of property and equipment (6,293,159) (2,417,166) Proceeds from sale of assets in liquidation 5,652,855 9,463,842 Increase in NCUSIF deposit (540,323) (326,846)
Net cash used in investing activities (197,493,326) (19,839,354)
Cash flows from financing activities: Increase in members’ shares and savings accounts (net) 81,689,299 44,600,936 Increase in borrowed funds 30,000,000 -
Net cash provided from financing activities 111,689,299 44,600,936
Net (decrease) increase in cash and cash equivalents (60,861,425) 52,388,228
Cash and cash equivalents - beginning 96,978,305 44,590,077
Cash and cash equivalents - ending $ 36,116,880 $ 96,978,305
Supplemental Information
Interest and dividends paid $ 6,868,497 $ 7,378,427
Assets acquired in the settlement of loans $ 3,869,300 $ 6,601,493
28 FAIRWINDS Credit Union FAIRWINDS Credit Union and Subsidiaries
Notes to Consolidated Statements of Cash Flows September 30, 2015 And 2014 Note 1 - Nature of Business and Significant Accounting Policies
Nature of Business FAIRWINDS Credit Union’s (the “Credit Union”) operations are principally related to holding deposits for and making loans to individuals who qualify for membership. The field of membership consists of persons living or working in Lake, Orange, Osceola, Seminole, Volusia, Brevard, or Polk counties in the State of Florida, those who work for one of the Credit Union’s preferred business partners, are active or retired military personnel or dependents receiving military benefits and immedi- ate family members of current members.
FAIRWINDS Financial Services, L.L.C. is a wholly-owned subsidiary of the Credit Union. FAIRWINDS Financial Services, L.L.C.’s operations represent less than 1% of the consolidated totals for 2015 and 2014.
FAIRWINDS Insurance Services, L.L.C. is a wholly-owned subsidiary of FAIRWINDS Credit Union created to provide insurance products for members of the Credit Union. FAIRWINDS Insurance Services, L.L.C.’s operations represent less than 1% of the consolidated totals for 2015 and 2014.
Principles of Consolidation The consolidated financial statements included the accounts of the Credit Union and its wholly-owned subsidiaries, FAIRWINDS Financial Services, L.L.C. and FAIRWINDS Insurance Services, L.L.C. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents The consolidated statements of cash flows classify changes in cash or cash equivalents (short-term, highly liquid investments readily convertible into cash with an original maturity of three months or less) according to operating, investing or financing activities. Financial instruments which potentially subject the Credit Union to concentrations of credit risk consist principally of cash and temporary cash investments. At times, cash balances held at financial institutions were in excess of federally insured limits. The Credit Union places its temporary cash investments with high-credit, quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. The Credit Union believes no significant concentration of credit risk exists with respect to these cash investments.
Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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 mounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Annual Report 2015 29 Note 1 - Nature of Business and Significant Accounting Policies (Continued)
Investment Securities Generally accepted accounting principles requires that management determine the classification of individual investment securities as trading securities, investments available-for-sale or investments held-to-maturity.
The Credit Union’s investments in securities for the years ended September 30, 2015 and 2014 are classified and accounted for as follows:
Trading Securities Trading investments of various mutual funds and are carried at their fair values. Realized and unrealized gains and losses on trading securities are recognized in the consolidated statements of earnings as they occur.
Held-to-Maturity Securities Securities for which the Credit Union has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the straight-line method, which materially approximates the interest method, over the period to maturity.
Available-for-Sale Securities Securities available-for-sale consists of securities not otherwise classified as trading securities or as securities to be held-to-maturity and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are other-than- temporary are reflected as realized losses. In estimating other-than-temporary impairment (OTTI), management considers: (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the intent and ability of the Credit Union to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Property, Equipment and Leasehold Improvements Land is carried at cost. Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are stated at cost, less accumulated amortization. Amortization is computed on the straight-line method over the length of the lease term. Assets classified as construction-in-process are not depreciated until the asset has been completed and placed into service.
NCUSIF Deposit The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with National Credit Union Administration (NCUA) regulations, which require the maintenance of a deposit by each insured credit union in an amount equal to one percent of its insured 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
30 FAIRWINDS Credit Union Note 1 - Nature of Business and Significant Accounting Policies (Continued)
of the fund are transferred from the NCUA Board. The NCUSIF deposit is required to be reviewed for impairment, including consideration of the refundability of the deposit.
Loans to Members Loans the Credit Union has the intent and ability to hold for the foreseeable future are stated at unpaid principal balances, less an allowance for loan losses and net deferred loan origination fees and discounts. Interest 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 on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well- secured and in the process of collection. Credit card loans and other personal loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Certain direct loan origination costs are deferred and recognized as an adjustment to interest income using the straight-line method over the contractual life of the loans. The straight-line method, which is not in accordance with generally accepted accounting principles, is not materially different from the interest method, which is required under generally accepted accounting principles.
The Credit Union may be exposed to credit risk from a regional economic standpoint because a significant concentration of its borrowers work or reside in the Orlando, Florida metropolitan area. The Credit Union continually monitors the Credit Union’s operations, including the loan and investment portfolios, for potential impairment.
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 confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Annual Report 2015 31 Note 1 - Nature of Business and Significant Accounting Policies (Continued)
The Credit Union’s allowance for loan losses is that amount considered adequate to absorb probable losses in the portfolio based on management’s evaluations of the size and current risk characteristics of the loan portfolio. Such evaluations consider prior loss experience, the risk rating distribution of the portfolios, the impact of current internal and external influences on credit loss and the levels of non-performing loans. Specific allowances for loan losses are established for large impaired loans on an individual basis as required by generally accepted accounting principles. The specific allowances established for these loans is based on a thorough analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the loan’s estimated market value, or the estimated fair value of the underlying collateral. General allowances are established for loans that can be grouped into pools based on similar characteristics as described in generally accepted accounting principles. In this process, general allowance factors are based on an analysis of historical charge-off experience and expected losses given default derived from the Credit Union’s internal risk rating process. These factors are developed and applied to the portfolio in terms of loan type. The qualitative factors associated with the allowances are subjective and require a high degree of management judgment. These factors include the credit quality statistics, recent economic uncertainty, losses incurred from recent events and lagging data.
The following loan portfolio segments have been identified: commercial, first mortgages, home equity, secured, and unsecured.
A loan is impaired when full payment under the loan terms is not expected to be received. Real estate loans for which the terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan or management chooses to consider the collateral value of the loan in the evaluation of the allowance, the loan is reported, net, at the fair value of the collateral. Large groups of smaller balance homogenous loans, such as auto, other secured and unsecured loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Loans Held-for-Sale Loans held-for-sale consists of residential real estate loans and is recorded at the lower of cost or market value. Market price is determined on an aggregate basis based on commitments from investors to purchase such loans and prevailing market rates.
Federal Home Loan Bank Participation Stock The Credit Union is a member in the Federal Home Loan Bank of Atlanta (FHLB). At September 30, 2015 and 2014, the Credit Union owned 60,610 and 48,989 shares of non-marketable participation stock for $6,061,000 and $4,898,900, respectively, with quarterly stock and/or cash dividends.
32 FAIRWINDS Credit Union Note 1 - Nature of Business and Significant Accounting Policies (Continued)
Income Taxes The Credit Union and its Subsidiaries are exempt from most federal, state and local income taxes under the provisions of the Internal Revenue Code and state tax laws.
The Credit Union is a state-chartered credit union as described in Internal Revenue Code (“IRC”) Section 501(c)(14). As such, the Credit Union is exempt from federal taxation of income derived from the performance of activities that are in furtherance of its exempt purposes. However, IRC Section 511 imposes a tax on the unrelated business income (as defined in Section 512) derived by state-chartered credit unions. Many states have similar laws. The specific application of Section 512 to the various activities conducted by state-chartered credit unions has been an issue for many years. In 2007, the Internal Revenue Service (“IRS”) issued a series of Technical Advice Memoranda (“TAM”) to a number of state-chartered credit unions located throughout the country. In these TAMs, the IRS ruled certain products and services to be subject to taxation as unrelated business income. In light of the TAMs, the Credit Union has assessed its activities and any potential federal or state income tax liability. In the opinion of management, any liability arising from federal or state taxation of activities deemed to be unrelated to its exempt purpose is not expected to have a material effect on the Credit Union’s financial condition or results of operations. The Credit Union’s income tax filings are subject to audit by various taxing authorities and open tax periods include 2011 - 2015.
Members’ Shares and Savings Accounts Members’ shares are subordinated to all other liabilities of the Credit Union upon liquidation. Interest on members’ shares and savings accounts is based on available earnings at the end of an interest period and is not guaranteed by the Credit Union. Interest rates on members’ shares accounts are set by the Board of Directors, based on an evaluation of current and future market conditions.
Assets Acquired in Liquidation of Loans Assets acquired in liquidation of loans represent collateral used to secure members’ loans that have been acquired by the Credit Union in an effort to settle the members’ loan and are recorded at the lower of cost or market less costs of liquidation.
Upon acquisition, the Credit Union determines fair value of the collateral and any losses are charged-off through the allowance for loan losses. The Credit Union continues to review these properties for subsequent impairment and any subsequent declines in fair value are recorded through current period earnings.
Risks and Uncertainties The Credit Union invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the consolidated statements of financial condition and consolidated statements of earnings.
Annual Report 2015 33 Note 1 - Nature of Business and Significant Accounting Policies (Continued)
Mortgage Servicing Rights The cost of mortgage loans for which there is a definitive plan to sell are allocated to the loan and rights to service mortgage loans based on their relative fair values. The cost of capitalized mortgage servicing rights is amortized proportionately over the period of estimated net servicing revenue. The Credit Union has pooled certain mortgage servicing rights together based on certain risk characteristics and is amortizing these servicing rights over the estimated average life of those loans. As of September 30, 2015, the carrying value approximates the fair market value of the mortgage servicing rights.
For measuring impairment, mortgage servicing rights are stratified based on predominate risk characteristics of the underlying loans. These characteristics include loan type, loan size, interest rate, date of origination, loan term and geographic region. The fair value of mortgage servicing rights used in measuring impairment is based upon quoted market prices. Impairment of capitalized servicing rights is recognized through a valuation allowance for each stratum, as necessary.
Subsequent Events The consolidated financial statements and related disclosures include evaluation of events up through and including January 4, 2016, which is the date the consolidated financial statements were available to be issued.
Reclassification/Presentation Certain information in the 2014 consolidated financial statements has been reclassified to conform to the 2015 presentation.
34 FAIRWINDS Credit Union Note 2 - Investment Securities
The carrying amounts of investment securities as shown in the consolidated statements of financial condition of the Credit Union and their approximate fair values at September 30, 2015 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value Securities available-for-sale:
Federal agency securities $ 262,177,036 $ 1,554,909 $ (675,280) $ 263,056,665 Collateralized mortgage obligations 221,079,569 1,291,179 (1,627,705) 220,743,043 Mortgage-backed securities 42,050,968 768,594 - 42,819,562 Corporate bonds 55,140,576 272,522 (43,747) 55,369,351
Total securities available-for-sale $ 580,448,149 $ 3,887,204 $ (2,346,732) $ 581,988,621
Securities to be held-to-maturity:
Mortgage-backed securities $ 808,682 $ 61,600 $ - $ 870,282
The amortized cost and estimated market value of debt securities, at September 30, 2015, by contractual maturity, are shown below. Securities Securities to be Available-for-Sale Held-to-Maturity Amortized Fair Amortized Fair Cost Value Cost Value
Due in less than one year $ 35,287,766 $ 35,375,050 $ - $ - Due in one year to less than five years 232,057,853 233,662,365 - - Due in five years to ten years - - - - Due in greater than ten years 49,971,993 49,388,601 - - Collateralized mortgage obligations 221,079,569 220,743,043 - - Mortgage-backed securities 42,050,968 42,819,562 808,682 870,282
Total $ 580,448,149 $ 581,988,621 $ 808,682 $ 870,282
Annual Report 2015 35 Note 2 - Investment Securities (Continued)
Trading securities are carried at fair value and consist of mutual funds that have no contractual maturity. The mutual funds had a fair value of $12,114,225 and $8,104,395 as of September 30, 2015 and 2014, respectively.
Unrealized losses as of September 30, 2015 have not been recognized into income because they are not considered to be other-than-temporary. Management considers the unrealized losses to be market driven, rather than credit driven and no loss will be realized unless the securities are sold.
Continuing Unrealized Continuing Unrealized Losses For Less Than Losses For 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses
Federal agency securities $ 9,994,600 $ (5,400) $ 37,330,120 $ (669,880) $ 47,324,720 $ (675,280)
Collateralized mortgage obligations - - 126,181,331 (1,627,705) 126,181,331 (1,627,705)
Mortgage-backed securities ------
Corporate bonds 10,079,950 (13,372) 4,956,850 (30,375) 15,036,800 (43,747)
Total $ 20,074,550 $ (18,772) $ 168,468,301 $ (2,327,960) $ 188,542,851 $ (2,346,732)
The Credit Union routinely conducts periodic reviews to identify and evaluate each investment security to determine whether any OTTI has occurred. Economic models are used to determine whether an OTTI has occurred on these securities. While all securities are considered, the securities primarily impacted by OTTI testing are collateralized mortgage obligations, specifically collateralized mortgage obligations issued by non-governmental agencies. For each private collateralized mortgage obligation in the investment, including but not limited to those whose fair value is less than their amortized cost basis, an extensive, regular review is conducted to determine if an OTTI has occurred. Various inputs to the economic model are used to determine if an unrealized loss is other-than-temporary. The most significant inputs are the default rate and the loss severity rates of the underlying collateral of the securities.
Other inputs may include the actual collateral attributes, which include geographic concentrations, credit ratings and other performance indicators of the underlying assets.
36 FAIRWINDS Credit Union Note 2 - Investment Securities (Continued)
To determine if the unrealized loss of these securities is other-than-temporary, the Credit Union projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the impact on cash flows. If the Credit Union determines that a given position will be subject to a write-down or loss, the Credit Union records the expected credit loss as a charge to earnings while the non-credit portion is recorded to other comprehensive income.
The carrying amounts of investment securities as shown in the consolidated statements of financial condition of the Credit Union and their approximate fair values at September 30, 2014 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value
Securities available-for-sale:
Federal agency securities $ 237,269,373 $ 382,839 $ (5,016,725) $ 232,635,487 Collateralized mortgage obligations 274,034,324 1,208,101 (6,640,822) 268,601,603 Mortgage-backed securities 52,271,927 504,723 (130,697) 52,645,953 Corporate bonds 40,200,279 185,607 (101,136) 40,284,750
Total securities available-for-sale $ 603,775,903 $ 2,281,270 $ (11,889,380) $ 594,167,793
Securities to be held-to-maturity:
Mortgage-backed securities $ 1,099,843 $ 90,103 $ - $ 1,189,946
Annual Report 2015 37 Note 3 - Loans to Members
The composition of loans to members is as follows: 2015 2014
Commercial loans $ 111,906,106 $ 88,308,990 First mortgages 534,433,053 427,992,727 Home equity 80,241,541 97,021,299 Secured 346,576,139 263,189,791 Unsecured 71,830,793 67,080,785 Net deferred loan origination fees/costs 5,332,500 3,453,828
Total 1,150,320,132 947,047,420
Less: allowance for loan losses 12,515,388 14,919,679
Total loans to members $ 1,137,804,744 $ 932,127,741
Impaired Loans Loan impairment is measured by estimating the expected future cash flows or by valuing the underlying collateral. The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2015:
Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized
With no related allowance recorded:
Commercial $ 11,303,389 $ 11,303,389 $ - $ 11,491,361 $ 309,245
First mortgage 8,781,996 10,411,576 - 10,512,438 249,218
Home equity 499,029 771,331 - 494,946 10,688
Total:
Commercial $ 16,461,768 $ 16,461,768 $ 338,407 $ 20,324,816 $ 517,949
First mortgage $ 51,771,039 $ 53,179,545 $ 4,855,661 $ 55,310,978 $ 1,360,033
Home Equity $ 2,061,264 $ 2,333,566 $ 625,785 $ 2,567,123 $ 19,137
38 FAIRWINDS Credit Union Note 3 - Loans to Members (Continued)
Loan impairment is measured by estimating the expected future cash flows or by valuing the underlying collateral. The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2014:
Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized
With no related allowance recorded:
Commercial $ 11,679,333 $ 11,679,333 $ - $ 12,007,298 $ -
First mortgage 10,613,300 10,613,300 - 6,779,546 -
Home equity 218,560 218,560 - 470,376 -
With an allowance recorded:
Commercial $ 12,508,531 $ 12,508,531 $ 1,366,734 $ 11,321,554 $ -
First mortgage 46,829,112 46,829,112 5,877,649 47,792,535 -
Home equity 2,600,120 2,600,120 617,455 3,156,440 -
Total:
Commercial $ 24,187, 86 4 $ 24,187, 86 4 $ 1,366,734 $ 23,328,852 $ -
First mortgage $ 57,442,412 $ 57,442,412 $ 5, 877,6 49 $ 54,572,081 $ -
Home Equity $ 2,818,680 $ 2,818,680 $ 617,455 $ 3,626,816 $ -
Credit Quality Indicators The Credit Union categorizes commercial loans into risk categories based on relevant information about the ability of the borrower to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Credit Union analyzes commercial loans individually by classifying the loans as to credit risk. The Credit Union uses the following definitions for classified risk rating:
Special Mention - The loan has potential weaknesses, such as negative financial trends, a limited financial history, a serious documentation flaw, or inadequate control on the part of the Credit Union. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset. However, a loan rated “special mention” is considered fully collectible.
Annual Report 2015 39 Note 3 - Loans to Members (Continued)
Substandard - A loan is “substandard” if there is the potential for loss. Such loans have well-defined weaknesses and are not fully protected either by the paying capacity of the borrower or the value of the secondary source of repayment. These loans are characterized by the distinct possibility that the Credit Union could sustain some loss if the deficiencies are not corrected.
Doubtful and Loss - The lowest risk ratings of “doubtful” and “loss” indicate increased loss potential. Such loans should have already been recognized and, more than likely, charged-off.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be prime or pass rated loans. At September 30, 2015 and 2014 and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
September 30, 2015 Special Pass Mention Substandard Doubtful Loss Total Commercial $ 99,291,171 $ 4,708,238 $ 5,303,214 $ 2,805,434 $ - $ 112,108,057
September 30, 2014 Special Pass Mention Substandard Doubtful Loss Total Commercial $ 72,146,453 $ 8,342,076 $ 4,906,378 $ 3,121,417 $ - $ 88,516,324
The Credit Union considers the performance of the loan portfolio and its impact on the allowance for loan losses. The following tables present the recorded investment in residential real estate and consumer loans based on payment activity as of September 30, 2015 and 2014:
September 30, 2015 First Mortgages Home Equity Secured Unsecured Totals
Performing $ 530,0095,597 $ 80,518,568 $ 350,121,226 $ 72,242,260 $1,032,977,651 Non-Performing 7,238,446 541,463 168,097 542,170 8,490,176 Total $ 537,334,043 $ 81,060,031 $ 350,289,323 $ 72,784,430 $1,041,467,827
September 30, 2014 First Mortgages Home Equity Secured Unsecured Totals
Performing $ 420,048,727 $ 97,306,625 $ 265,151,183 $ 67,546,738 $ 850,053,273 Non-Performing 10,403,706 357,206 95,004 598,549 11,454,465 Total $ 430,452,433 $ 97,663,831 $ 265,246,187 $ 68,145,287 $ 861,507,738
40 FAIRWINDS Credit Union Note 3 - Loans to Members (Continued)
Age Analysis of Past Due Loans The following table presents the aging of the recorded investment in past due loans at September 30, 2015:
September 30, 2015 Recorded Total Investment 30-59 Days 60-89 Days Greater Than Total Financing >90 Days and Past Due Past Due 90 Days Past Due Current Receivable Accruing
Unsecured $ 635,001 $ 261,717 $ 542,170 $ 1,438,888 $ 71,345,542 $ 72,784,430 $ - Secured 2,065,918 307,212 168,097 2,541,227 347,748,096 350,289,323 - Home equity 739,426 220,865 541,463 1,501,754 79,558,277 81,060,031 - First mortgages 85,670 989,584 7,238,446 8,313,700 529,020,343 537,334,043 - Commercial 365,247 22,463 472,000 859,710 111,248,347 112,108,057 -
Total $3,891,262 $ 1,801,841 $ 8,962,176 $ 14,655,279 $ 1,138,920,605 $ 1,153,575,884 $ -
The following table presents the aging of the recorded investment in past due loans at September 30, 2014:
September 30, 2014 Recorded Total Investment 30-59 Days 60-89 Days Greater Than Total Financing >90 Days and Past Due Past Due 90 Days Past Due Current Receivable Accruing
Unsecured $ 671,777 $ 510,071 $ 598,549 $ 1,780,397 $ 66,364,890 $ 68,145,287 $ - Secured 1,520,818 170,436 95,004 1,786,258 263,459,929 265,246,187 - Home equity 730,929 477,359 357,206 1,565,494 96,098,337 97,663,831 - First mortgages 306,875 1,791,151 10,403,706 12,501,732 417,950,701 430,452,433 - Commercial 56,718 30,358 1,167,721 1,254,797 87,261,527 88,516,324 -
Total $3,287,117 $ 2,979,375 $12,622,186 $ 18,888,678 $ 931,135,384 $ 950,024,062 $ -
Annual Report 2015 41 Note 3 - Loans to Members (Continued)
Troubled Debt Restructurings The following table presents loans by class which were modified as troubled debt restructurings during the year ended September 30, 2015:
Pre- Post- Modification Modification Outstanding Outstanding Number of Recorded Recorded Contracts Investment Investmest
Troubled debt restructurings: First mortgages 18 $ 2,585,446 $ 2,549,445 Home equity 4 219,845 $ 215,235 Vehicle 4 42,791 42,428
The following table presents loans which were modified and subsequently defaulted on modified terms during the year ended September 30, 2015:
Pre- Post- Modification Modification Outstanding Outstanding Number of Recorded Recorded Contracts Investment Investmest
Troubled debt restructurings that subsequently defaulted: First mortgages 9 $ 1,742,391 $ 404,661 Commercial 1 1,178,163 695,721 Home equity 1 51,104 $ 47,088 Vehicle 1 6,274 2,899
42 FAIRWINDS Credit Union Note 3 - Loans to Members (Continued)
The following table presents loans by class which were modified as troubled debt restructurings during the year ended September 30, 2014:
Pre- Post- Modification Modification Outstanding Outstanding Number of Recorded Recorded Contracts Investment Investmest
Troubled debt restructurings: First mortgages 39 $ 6,592,156 $ 6,318,737 Home equity 12 380,551 $ 358,363 Vehicle 8 73,573 67,581
The following table presents loans which were modified and subsequently defaulted on modified terms during the year ended September 30, 2014:
Pre- Modification Outstanding Number of Recorded Losses Contracts Investment Recorded
Troubled debt restructurings that subsequently defaulted: First mortgages 22 $ 3,378,389 $ 907,801 Home equity 6 215,947 $ 190,099 Vehicle 9 155,487 65,588
Annual Report 2015 43 Note 4 - Property, Equipment and Leasehold Improvements
The principal categories of property, equipment and leasehold improvements may be summarized as follows:
2015 2014
Land and improvements $ 22,572,565 $ 23,072,565 Building and improvements 49,727,550 49,701,014 Furniture and equipment 32,164,178 33,361,509 Leasehold improvements 9,820,758 10,194,013 Construction-in-process 2,834,368 334,598
Total cost 117,119,419 116,663,699
Less accumulated depreciation 45,862,829 45,289,375
Undepreciated cost $ 71,256,590 $ 71,374,324
Construction-in-process amounts relate to a renovation project at one of the Credit Union’s branches. As of the date of the audit report, a contract has not been finalized and there are no further commitments.
44 FAIRWINDS Credit Union Note 5 - Borrowed Funds
The Credit Union has outstanding borrowed funds and these notes mature and carry interest rates as follows:
2015 2014
Fixed Rate Note with the Federal Home Loan Bank of Atlanta bearing interest of 0.31000%, interest is payable monthly and principal is payable with a single payment on January 22, 2016 $ 15,000,000 $ -
Fixed Rate Note with the Federal Home Loan Bank of Atlanta bearing interest of 0.32000%, interest is payable monthly and principal is payable with a single payment on November 12, 2015 15,000,000 -
Fixed Rate Note with the Federal Home Loan Bank of Atlanta bearing interest of 4.386%, interest is payable monthly and principal is payable with a single payment on August 28, 2017 25,000,000 25,000,000
Fixed Rate Note with the Federal Home Loan Bank of Atlanta bearing interest of 4.530%, interest is payable monthly and principal is payable with a single payment on August 29, 2017 25,000,000 25,000,000
Fixed Rate Note with the Federal Home Loan Bank of Atlanta bearing interest of 2.702%, interest is payable monthly and principal is payable with a single payment on January 30, 2018 25,000,000 25,000,000 Total borrowed funds $ 105,000,000 $ 75,000,000
The Credit Union maintains a line-of-credit with Corporate One Federal Credit Union at a variable rate of interest, guaranteed by all assets, maximum credit available of $100,000,000 at September 30, 2015 and 2014. There were no outstanding advances as of September 30, 2015 and 2014.
The Credit Union maintains a credit agreement with the Federal Home Loan Bank of Atlanta, maximum credit available of $273,097,213 at September 30, 2015. At September 30, 2015 and 2014, the Credit Union had advanced $105,000,000 and $75,000,000, respectively, against this line-of-credit agreement in the form of term notes. Interest rates on advances from the FHLB are determined at the time of the advances and collateral in the form of mortgage securities are pledged at the time of the advance.
As of September 30, 2015, the Credit Union has pledged $273,097,213 in first mortgage loans as collateral against the term loans held with the Federal Home Loan Bank of Atlanta.
Annual Report 2015 45 Note 5 - Borrowed Funds (Continued)
The Credit Union is authorized to borrow from the Federal Reserve discount window. The Credit Union may borrow funds up to amounts collateralized by Credit Union assets including investment securities. The Credit Union has no outstanding borrowings at September 30, 2015.
46 FAIRWINDS Credit Union Note 6 - Members’ Shares and Savings Accounts
2015 2014
Share draft accounts $ 113,974,786 $ 104,994,338 Shares and equivalents 656,503,260 562,749,020 Money market accounts 539,774,910 530,324,042 Individual retirement accounts 46,533,767 42,907,625 Certificates of deposit and IRA certificates 240,229,763 274,352,162
Total members’ shares and savings accounts $ 1,597,016,486 $ 1,515,327,187
At September 30, 2015, scheduled maturities of certificates of deposit and IRA certificates are as follows:
Year Ending September 30:
2016 $ 171,657,015 2017 39,931,805 2018 17,482,228 2019 4,930,735 2020 6,227,980
Total $ 240,229,763
The aggregate amount of time deposit accounts in denominations of $250,000 or more at September 30, 2015 were $11,901,715.
Annual Report 2015 47 Note 7 - Members’ Equity
Regulatory Capital The Credit Union is subject to various regulatory capital requirements administered by its primary federal regulator, the NCUA. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Credit Union’s consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Credit Union must meet specific capital regulations that involve quantitative measures of the Credit Union’s assets, liabilities, and certain off-balance sheet items as calculated under generally accepted accounting practices. The Credit Union’s capital amounts and net worth classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Credit Union to maintain minimum amounts and ratios of net worth to total assets. 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 ratio as of September 30, 2015 and 2014 was 6.7% and 6.8%, respectively. The minimum ratio to be considered complex under the regulatory framework is 6.0%. Management believes as of September 30, 2015 and 2014, that the Credit Union meets all capital adequacy requirements to which it is subject.
As of September 30, 2015 and 2014, the Credit Union was categorized 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 as follows: To Be Well Capitalized Under the Prompt Corrective Action Actual Provision Amount Ratio Amount Ratio
September 30, 2015 Net worth $ 181,745,866 9.57% $ 132,960,221 7.00%
September 30, 2014 Net worth $ 168,813,875 9.58% $ 123,383,645 7.00%
48 FAIRWINDS Credit Union Note 8 - Related Party Transactions
The majority of employees and all members of the Board of Directors have member accounts at the Credit Union, including share, deposit and loan accounts. The terms of transactions involving these accounts (i.e., rates charged and paid) are comparable to other members.
Included in loans receivable at September 30, 2015 and 2014 are loans of $5,193,225 and $5,087,851, respectively, to directors and officers of the Credit Union. Such loans are made in the ordinary course of business at normal credit terms including interest rates and collateralization.
Annual Report 2015 49 Note 9 - Commitments and Contingent Liabilities
The principal commitments of the Credit Union are as follows:
Lease Commitments At September 30, 2015 and 2014, the Credit Union had outstanding commitments under noncancellable operating leases for office space for several branch locations. Net rent expenses under the operating leases, included in expenses, were $2,681,137 and $2,443,924 for the years ended September 30, 2015 and 2014, respectively.
The projected minimum rental payments under the terms of the leases at September 30, 2015 are as follows:
Year Ending September 30:
2016 $ 2,274,556 2017 927,889 2018 449,414 2019 322,310 2020 and thereafter 285,358
Total $ 4,259,527
Loan Commitments At September 30, 2015, the Credit Union had outstanding commitments for unused lines-of-credit that are not reflected in the accompanying consolidated financial statements, as follows:
Home equity $ 51,891,709 Lines-of-credit 21,446,713 Credit cards 196,167,031 Overdraft privilege program 49,976,469 Commercial 21,220,186 Construction 3,134,163 Mortgage 2,463,916
Total $ 346,300,187
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. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional
50 FAIRWINDS Credit Union Note 9 - Commitments and Contigent Liabilities (Continued) amounts of those instruments reflect the extent of involvement the Credit Union has in particular classes of financial instruments.
The Credit Union’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual notional amount of those instruments. The Credit Union uses the same credit policies in making commitments as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, generally unsecured $ 270,724,376 Commitments to extend credit, home-equity secured 54,355,625 Commitments to extend credit, commercial lending 21,220,186
Total $ 346,300,187
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 termination clauses or fixed expiration dates. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Credit Union evaluates each member’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Credit Union upon extension of credit, is based on management’s credit evaluation of the member and classification of loan.
Annual Report 2015 51 Note 10 - Fair Values of Financial Instruments
The Credit Union uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Credit Union’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement on the instrument.
The definition of fair value focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions, other than in a forced liquidation or distressed sale. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in the valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy The Credit Union groups its financial assets and financial liabilities generally measured at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three levels of the fair value hierarchy are described below:
Basis of Fair Value Measurements
Level 1 - Valuation is based on quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuation is based on inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined by using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
52 FAIRWINDS Credit Union Note 10 - Fair Values of Financial Instruments (Continued)
A financial instrument’s categorization with the valuation hierarchy is based on the lowest level of input that is significant to their fair value measurement.
The following methods and assumptions were used by the Credit Union in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents The carrying amount approximates fair value due to the short-term nature of these instruments.
Investment Securities Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans Receivable Fair value is based on the discounted value of future cash flows expected to be received for a loan or group of loans using current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. This method considers interest rate changes and credit risk changes within the discount rate chosen. A single discount rate is applied to homogeneous categories of loans such as credit cards and automobile loans.
Members’ Savings Accounts The fair value disclosed for shares, share draft and money market accounts are, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate share certificates are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on shares and certificates.
Borrowed Funds The fair value of fixed maturity borrowings is estimated using the rates currently offered for borrowings with similar remaining maturities.
Investments in Life Insurance Contracts Fair values are based on amounts that could be realized at the consolidated statement of financial condition date.
Commitments to Extend Credit The estimated fair value of the commitments to extend credit represents the Credit Union’s potentially unfunded commitments under such lines-of-credit.
Annual Report 2015 53 Note 10 - Fair Values of Financial Instruments (Continued)
Assets Measured at Fair Value on a Recurring Basis Assets measured at fair value on a recurring basis at September 30, 2015 and 2014 are summarized as follows: Fair Value Measurements at September 30, 2015, Using
Quoted Prices in Other Active Market Significant Significant for Identical Observable Unobservable Total Assets Inputs Inputs Carrying (Level 1) (Level 2) (Level 3) Value
Trading securities $ - $ 12,114,225 $ - $ 12,114,225
Available-for-sale securities $ - $ 581,988,621 $ - $ 581,988,621
Investments in life insurance contracts $ - $ 13,383,236 $ - $ 13,383,236
Fair Value Measurements at September 30, 2014, Using
Quoted Prices in Other Active Market Significant Significant for Identical Observable Unobservable Total Assets Inputs Inputs Carrying (Level 1) (Level 2) (Level 3) Value
Trading securities $ - $ 8,104,395 $ - $ 8,104,395
Available-for-sale securities $ - $ 594,167,793 $ - $ 594,167,793
Investments in life insurance contracts $ - $ 13,623,136 $ - $ 13,623,136
54 FAIRWINDS Credit Union Note 10 - Fair Values of Financial Instruments (Continued)
Assets Measured at Fair Value on a Non-Recurring Basis Assets measured at fair value on a non-recurring basis at September 30, 2015 and 2014 are summarized as follows:
Fair Value Measurements at September 30, 2015, Using Quoted Prices in Other Active Market Significant Significant for Identical Observable Unobservable Total Assets Inputs Inputs Carrying (Level 1) (Level 2) (Level 3) Value
Other real estate owned $ - $ 12,673,597 $ - $ 12,673,597
Impaired loans $ - $ 5,564,970 $ 16,123,361 $ 21,688,331
Fair Value Measurements at September 30, 2014, Using
Quoted Prices in Other Active Market Significant Significant for Identical Observable Unobservable Total Assets Inputs Inputs Carrying (Level 1) (Level 2) (Level 3) Value
Other real estate owned $ - $ 14,114,266 $ - $ 14,114,266
Impaired loans $ - $ 7,694,937 $ 22,821,130 $ 30,516,067
Annual Report 2015 55 Note 10 - Fair Values of Financial Instruments (Continued)
The carrying amounts and estimated fair values of the Credit Union’s financial instruments at September 30, 2015 and 2014 are as follows: 2015 2014 Carrying Fair Carrying Fair Amounts Value Amounts Value Financial assets: Cash and cash equivalents $ 36,116,880 $ 36,116,880 $ 96,978,305 $ 96,978,305 Investment securities 594,911,528 594,973,128 603,372,031 603,462,134 Investment in life insurance contracts 13,383,236 13,383,236 13,623,136 13,623,136 Loans receivable, net of allowance for loan losses 1,137,804,744 1,143,132,000 932,127,741 951,856,000
Financial liabilities: Members’ shares and savings accounts $ 1,597,016,486 $ 1,534,633,840 $ 1,515,327,187 $ 1,460,949,486 Borrowed funds 105,000,000 111,616,400 75,000,000 81,713,000
Unrecognized financial instruments: Commitments to extend credit $ - $ 346,300,187 $ - $ 307,422,374
56 FAIRWINDS Credit Union Note 11 - 401(k) Profit Sharing Plan
The Credit Union has a 401(k) profit sharing plan that covers substantially all employees. Contributions by the Credit Union included in the determination of net earnings for the years ended September 30, 2015 and 2014 amounted to approximately $1,098,000 and $956,000, respectively.
Annual Report 2015 57 Note 12 - Deferred Compensation Plan
The Credit Union has a deferred compensation plan covering certain management employees which will be payable upon the employees retirement or termination. The liability at September 30, 2015 and 2014 was approximately $146,600 and $178,200, respectively and is included in other accrued liabilities on the consolidated statements of financial condition.
The Credit Union has three Supplemental Executive Retirement Plans (SERPs) that guarantee specific payments be made to key executives once eligibility requirements are met. As of September 30, 2015 and 2014, the obligation to the executives was $4,357,737 and $3,460,629, respectively. The SERPs were established to provide periodic benefit payments for each executive to be paid when they reach certain ages. The amounts are paid as a lump-sum, with the final payment to be made at age 65 determined based on the 5 highest years of compensation paid to the executive between the date the agreements were signed and retirement age.
The Credit Union anticipates payments under the terms of the SERPs to be as follows:
Year Ending September 30:
2016 $ 500,000 2017 500,000 2018 - 2019 - 2020 - 5 years thereafter 3,911,755
$ 4,911,755
The Credit Union has invested in assets, which consist of mutual funds, life insurance and annuity contracts, to informally fund the deferred compensation plans. As of September 30, 2015 and 2014, the Credit Union had assets valued at $25,497,461 and $21,727,531, respectively, related to these plans. The assets would be available to general creditors in the event of liquidation of the Credit Union’s assets.
58 FAIRWINDS Credit Union Note 13 - Servicing Portfolio
The Credit Union was servicing $139,070,771 and $146,859,140 of unpaid FNMA mortgage balances at September 30, 2015 and 2014, respectively.
Servicing fee income related to these portfolios was approximately $361,000 and $390,000 for the years ended September 30, 2015 and 2014, respectively. These amounts are included in fees and charges on the consolidated statements of earnings.
Custodial funds in escrow represent member payments for principal and interest, as well as for taxes and insurance. These amounts are held in escrow, with a corresponding liability recorded until the date that such funds are released by the Credit Union for their intended purpose. The total amount of escrow funds at September 30, 2015 and 2014 was $2,099,195 and $2,028,776, respectively.
Annual Report 2015 59 Note 14 - Mortgage Servicing Rights
The following is an analysis of the change in capitalized originated mortgage servicing rights:
2015 2014
Balance - beginning $ 1,023,873 $ 1,136,427 Capitalized servicing rights 385,020 202,757 Amortization expense (144,373) (315,311) Balance - ending $ 1,264,520 $ 1,023,873
At September 30, 2015 and 2014, the fair value of the mortgage servicing rights approximated its book value. Mortgage servicing rights are included in other assets in the consolidated statements of financial condition at September 30, 2015 and 2014.
60 FAIRWINDS Credit Union Annual Report 2015 61