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PROGRAM 1. Registration

7:30 am - 11:30 am

2. Business Agenda

9:00 am - 11:30 am

a. Call to Order b. Ascertain Quorum c. Presentation of Head Table and Special Guests d. Invocation by Eric Cordero e. USA and PR Anthems f. Administrative Announcement by Víctor L. Rosario g. Approval of Annual Meeting Rules h. Approval of the minutes of the last meeting i. President’s Report by Juan M. Masini j. Treasurer’s Report by Ramón A. Negrón k. Credit Committee Report by Juan M. Masini l. Supervisory Committee Report by José I. Marrero m. BAIA’s Special Presentation by Emilio M. Colón n. Nominations Committee Report by Juan O. Rodríguez o. Elections p. Old Business q. New Business r. Adjournment

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3. Lunch

11:30 am - 1:00 pm

4. Social Agenda

12:00 noon - 6:00 pm

CARIBEFEDERAL CREDIT UNION


WELCOME TO THE SIXTY-FIFTH ANNUAL MEETING OF CARIBE FEDERAL CREDIT UNION HELD THIS 25th DAY OF JUNE 2017 AT THE WYNDHAM GRAND RÍO MAR HOTEL RIO GRANDE, PUERTO RICO

It is a pleasure to welcome you to our 65th annual meeting. During the annual meeting, we the Board of Directors, in compliance with our fiduciary responsibility as required by federal law and regulation, will present the financial situation of our credit union, as well as other accomplishments for the previous year. Paramount among the membership’s responsibilities is the election of members to the Board of Directors, whose terms expire. The meeting will also provide an excellent opportunity to share in comradery with other members and old friends of the Caribe Federal Credit Union family. Your Credit Union is growing in size, services and technology. We must keep up with the times while striving to offer our members, the best possible service in the most favorable terms. Thank you for joining us in celebrating Caribe Federal Credit Union’s 66th Anniversary.

Board of Directors Caribe Federal Credit Union

2016 ANNUAL REPORT

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SERVICES OFFERED BY CFCU Regular Share Account Share Certificate Share Draft/Checking Account Christmas Club Account Cari Kid Share Saving’s Account I-Save Share Saving’s Account Commercial Account Personal Unsecured Loans Personal Fully Secured Loan Line of Credit Business Loans New Auto Loan Used Auto Loan Auto Transfer Loan Auto Balloon Boat Loan Motorcycle Loan Emergency Loan IRA Loan MasterCard Student MasterCard Conventional Mortgage Loan VA, Rural and FHA Mortgage Loans Personal Mortgage Loan Reverse Mortgage Loan Land Loan Photovoltaic Equipment Loan Check Cashing Money Orders Traveler’s Checks Marbetes Occasion Checks Teller Station Auto Bank Direct Deposit Wire Transfers Telecaribe Caribe Online Caribe Bill Pay-e

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Shared Branching Caribe Mobile International ATM Card Free ATM withdrawals with Coop24 and ShareNet

SUPPLEMENTARY PLANS Offered through Business Alliance Insurance Agency, Inc. (BAIA) • Auto Insurance Products • Personal and Commercial Insurance Products • Life Insurance Plan • Dental Insurance Plan • Members Financial Assistance • College Fund • IRA’s

MISSION To satisfy our members financial needs.

VISION Be the best option in financial products and services.

CARIBEFEDERAL CREDIT UNION


KNOW YOUR OFFICIALS Board of Directors Mr. Juan M. Masini Mr. Porfirio Ríos Mr. Heriberto J. Martínez Mr Ramón A. Negrón Mr. Rafael A. Martínez Mr. Emilio M. Colón Mr. Iván O. Puig Mrs. Celia A. Ruiz Mr. Alexis E. Agostini Mrs. Nidza Hernández Mr. Juan O. Rodríguez

President First Vice President Second Vice President Treasurer Secretary Member at Large Member at Large Member at Large Member at Large Member at Large Member at Large

Lawyer Retired, US Trustee Retired, Farm Services Agency Ex-BOD Member ICPR Retired, ATF Retired, USACE Retired, USPS Retired, USDE Retired, USDA–APHIS PPQ Engineer HUD

Supervisory Committee Mr. José I. Marrero Mr. Joseph R. Marrero Mr. Raúl Maldonado Jr. Mr. Roberto Comas Mr. Carlos E. O’Neill

Chairperson Member Member Member Member

CPA and Lawyer Lawyer CPA Lawyer Retired EPA

Credit Committee Mr. Juan M. Masini Chairperson Lawyer Mrs. Celia A. Ruiz Member Retired, USDE Mrs. Melanie P. Rodríguez Member Lawyer Mr. Juan O. Rodríguez Alternate Member HUD

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KNOW OUR STAFF

Hato Rey Staff

Guaynabo Staff

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CARIBEFEDERAL CREDIT UNION


Annual Meeting June 12, 2016 Page 1 of 9

MINUTES OF THE SIXTY-FOURTH ANNUAL MEETING JUNE 12, 2016 The 64th Annual Meeting of Caribe Federal Credit Union (CFCU) was held at the Wyndham Grand Resort Beach & Spa located in Río Grande, PR, on Sunday, June 12, 2016. QUORUM DETERMINATION AND CALL TO ORDER Secretary Alexis E. Agostini certified that quorum was established with more than 200 members present. Chairman Rafael A. Martinez called the meeting to order at 9:00 A.M. Chairman of the Board, Rafael A. Martinez, welcomed everyone and expressed his appreciation to all the members present at the annual meeting. He wished everyone a pleasant experience at the 64th annual meeting and the celebration of CFCU’s 65th Anniversary. The Chairman initiated the meeting by presenting the members of the Board of Directors, the Chairman of the Supervisory Committee, the General Manager, the Parliamentary consultant and the special guests. Member Jorge Darío Ortíz delivered the invocation and the dedication of the 64th Annual Meeting. The Anthems of the Commonwealth of Puerto Rico and the United States of America were played. A minute of silence was observed in memory of all the members that passed away since our last annual meeting. ADMINISTRATIVE ANNOUNCEMENTS Activities Committee Chairperson, Minerva Pérez presented the administrative announcements concerning the annual meeting and the social activity to all the members present, followed by a raffle for the “early bird” attendees. ANNUAL MEETING RULES Chairman Martínez presented the proposed assembly parliamentary rules for consideration and approval by the membership. Member Leonides Alverio presented a motion to approve the rules as presented since they were distributed earlier during registration. The motion was seconded and approved.

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Annual Meeting June 12, 2016 Page 2 of 9

MINUTES The Chairman of the Board presented the June 14, 2015 Annual Meeting Minutes for consideration by the members and they were unanimously approved as presented. CHAIRMAN’S REPORT The Chairman began his presentation by expressing, that as the President of the Board of Directors of CFCU, it was his honor and privilege to present a general overview of CFCU’s situation. Martínez indicated that his presentation would include a summary of some the projects worked on during 2015, accomplishments obtained during the same period as well as some of the projects still in progress. The Chairman briefly addressed the economic and financial situation of Puerto Rico to put into perspective the accomplishments of CFCU during 2015, so that the achievements could be better appreciated given the difficult fiscal and economic situation of our island. During the past ten (10) years, Puerto Rico has been submerged in a deep recession and Martinez stated that the current financial and economic situation of Puerto Rico continues to be uncertain. During 2015, the financial and economic situation of the island continued to deteriorate to the point that the government lost its ability to access the credit market thereby incrementally impacting the public debt of approximately 70 billion dollars. Because of the current financial situation, the government of PR opted to increase taxes and add new taxes hoping to raise revenue; thereby making it more expensive to live in Puerto Rico. Because of the Puerto Rico’s economic situation, people continue to leave the island seeking better opportunities in the continental United States. This exodus has worsened the fiscal and economic situation when we consider that many of the people leaving the island are the young, professionals and productive citizens. The reduction in our population has negatively impacted the demand for goods and services. The financial industry sustained losses; between years 2014 to 2015, the banks lost 6.74% of their assets and the local credit unions lost .06%. However, the federal credit unions, organized in Puerto Rico, grew their assets by 5.80%, while Caribe Federal had the highest asset growth with 7.91%. Caribe continued to be the federal credit union, organized in PR, with the most assets, totally over $316 million as of December 2015. During 2015, Caribe’s assets grew by over 23 million dollars. Today Caribe’s assets surpass 326 million dollars. The Chairman mentioned that at the closing of year 2015, the assets of Caribe did not contain any PR issued bonds. Martinez further stated that in Caribe, to effectively deal with the challenges of the economic crisis of the island, the Board of Directors and Management continued to make the necessary decisions and adjustments to strengthen and move the Caribe Federal forward to better serve

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CARIBEFEDERAL CREDIT UNION


June Meeting 12, 2016 Annual Page of 9 June 12,32016 Page 3 of 9

our members by providing the best products and services. Currently Caribe continues to be the federal credit union, organized Puerto Rico,and withservices. the largest membership 28,000). our members by providing the in best products Currently Caribe(over continues to be the federal credit union, organized in Puerto Rico, with the largest membership (over 28,000). As part of the Chairman’s presentation, he made mention of the 2013-2015 Strategic Plan and the part 2015 of Business Plan that presentation, were favorably He then described, in Strategic general terms, the As the Chairman’s he completed. made mention of the 2013-2015 Plan and recently Strategic Plan favorably for 2016-2018, which contained the following principal goals: the 2015 developed Business Plan that were completed. He then described, in general terms, the recently developed Strategic Plan for 2016-2018, which contained the following principal goals: - Maintain CFCU’s solid financial condition - Improve and services Maintain products CFCU’s solid financial condition - Improve the flexibility the loan requirements and processes products and of services - Maintain delinquencies collections Improve the flexibility oflow theand loanincrease requirements and processes Improve marketing and low communications - Maintain delinquencies and increase collections - Maintain employeesand wellcommunications trained Improve marketing - Maintain low operational expenses employees well trained - Maintain low operational expenses Chairman Martínez, using a power point presentation, provided specific information on CFCU’s performance and accomplishments 2015. provided He stated specific that 2015 had been on an Chairman Martínez, using a power point during presentation, information excellent performance year for CFCU Puerto Rico’s fiscal 2015. and economic problems. Martínez stated CFCU’s anddespite accomplishments during He stated that 2015 had been an that CFCUyear has for enjoyed a trajectory of consistent growth during its 65 problems. years of existence. excellent CFCU despite Puerto Rico’s fiscal and economic Martínez stated that CFCU has enjoyed a trajectory of consistent growth during its 65 years of existence. Finally, Chairman Martínez expressed his appreciation to the members of the Board of Directors for theirChairman work and Martínez commitment to Caribe for their support to him as Board; Finally, expressed his and appreciation to the members ofPresident the Boardofofthe Directors he also thanked the General Manager, Jorge Vadell, his staff and all the employees of CFCU for for their work and commitment to Caribe and for their support to him as President of the Board; their excellent work. he also thanked the General Manager, Jorge Vadell, his staff and all the employees of CFCU for their excellent work. Martínez stated that this would be the last year that he will address the membership as President the BOD his term expires after the meeting. further stated that Martínez of stated that because this would be the last year thatannual he will addressHethe membership as he was concluding his because mandatehis with a sense of satisfaction and mission accomplished. President of the BOD term expires after the annual meeting. He further stated that he was concluding his mandate with aexpressing sense of satisfaction and mission The Chairman concluded his report his appreciation to allaccomplished. the members for their allegiance to Caribe, for attending the expressing annual meeting and for their to attentiveness. The Chairman concluded his report his appreciation all the members for their allegiance to Caribe, for attending the annual meeting and for their attentiveness. TREASURER’S REPORT Treasurer Porfirio Ríos welcomed everyone present and began his presentation with CFCU’s TREASURER’S REPORT 2015 financial statements and comparing to the 2014 financial Treasurer Porfirio Ríos welcomed everyoneit present and began his statements. presentation The with financial CFCU’s statements werestatements consolidated CFCU’s subsidiary Business Consortium Alliance and 2015 financial andwith comparing it to the 2014 financial statements. The(BCA) financial its affiliate Business Alliance Insurance Agency (BAIA). The Audited Financial statements statements were consolidated with CFCU’s subsidiary Business Consortium Alliance (BCA)were and prepared Zayas, Morazzani & Co., Caribe’s its affiliatebyBusiness Alliance Insurance Agencyexternal (BAIA).CPA The firm. Audited Financial statements were prepared by Zayas, Morazzani & Co., Caribe’s external CPA firm. The Treasurer indicated that the financial statements were available to members for their review sinceTreasurer May 12, 2016. He informed that 2015statements was a verywere difficult year with a continuous period of The indicated that the financial available to members for their review a serious recession andthat no 2015 doubt, of the most year difficult affecting every since Mayeconomic 12, 2016. He informed wasone a very difficult withperiods a continuous period of Puerto Rico anddoubt, the United States; However, CFCU was able to beat the afinancial serious institution economic in recession and no one of the most difficult periods affecting every odds as reflected in the financial report. financial institution in Puerto Rico and the United States; However, CFCU was able to beat the odds as reflected in the financial report.

2016 ANNUAL REPORT

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Annual Meeting June 12, 2016 Page 4 of 9

The Federal Reserve maintained low interest rates during the year except for December 2015 which for the first time in the past 10 years, they decided to increase the interest rate by .25 bases points. Bankruptcies at CFCU decreased to approximately 19% of the previous year and the delinquency was maintained to less than 1%. We have continued to use strategies and initiatives to grow our assets and reduce losses by increasing our collection efforts. The Treasurer informed on CFCU’s financial condition for year ending on December 31, 2015, as follows: CFCU MEMBERSHIP CFCU’s membership for 2015 was 28,370, an increase of 2,294 members when compared to 2014. TOTAL ASSETS CFCU’s total assets were $316 million, an increase of $23 million when compared to 2014. ASSET COMPOSITION The total assets consist of Cash and Cash Equivalents of $87 million. CFCU had a total of $213 million on net loans which show an increase of $15 million when compared to the previous year. The total Liabilities and Member savings amounted to $274 million, showing an increase of $21 million when compared to last year. The equity or reserve on capital reflects the amount of $42.5 million, an increase of $2 million in capital. The dividends paid on regular shares and shares certificates amounted to $2.1 million which is more than what most of our competitors were currently paying. The operational expenses amounted to $7.2 million in year 2015. The increase was mainly due to the depreciation of the building located in Guaynabo and the promotional and professional services expenses. The Treasurer presented the income distribution as follows: 17% paid in dividends, 59% spent in operational expenses, 10% set aside as provision for loan losses and 14% for net income. CFCU’s total net income for year 2015 was $1.6 million. He concluded his report expressing that despite the economic crisis that affects our island and citizens, CFCU continues to be a solid financial institution, thanks to all the members that use our products and services as well as the commitment and effort of our Board of Directors, ALCO Committee, Management and employees. CREDIT COMMITTEE REPORT President of the Credit Committee, Juan M. Masini-Soler, greeted and welcomed all the members present in the Annual Meeting. He introduced each of the members of the Credit Committee and the Loan Division and recognized their outstanding performance throughout the year. Thereafter, he presented the statistics on the loans approved and rejected during 2015. A total of 7,266 loan applications were considered during the year of which 5,052 were

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CARIBEFEDERAL CREDIT UNION


Annual Meeting June 12, 2016 Page 5 of 9

favorably approved, representing a 70%. The breakdown of the loan portfolio for 2015 was as follows: secured loans $5,946,788, partially secured loans $1,182,050, unsecured loans $21,100,146, Master Card $2,854,100, auto loans $46,183,242, motorcycle and boat loans $130,927, commercial loans $3,114,894 and mortgage loans $3,448,889, for a total of $83,961,035 in approved loans. As of December 31, 2015, our loan portfolio had a net income of $215,635,975 representing $15 million more when compared to 2014. Director Juan M. Masini-Soler indicated that the Credit Committee and Management are constantly monitoring the changes in the market in order to provide members with the best products at the lowest cost. He encouraged all the members to take advantage of CFCU’s excellent loan offers. Masini-Soler, commented that CFCU’s main source of revenue is generated from loan interests. Therefore, when a member applies for a loan, they are not only contributing to CFCU’s income growth but they also receive excellent treatment by CFCU’s staff as well as obtaining an excellent product at a competitive rate. Moreover, these benefits are not offered by other banks or competing credit unions. As everyone knows, 2015 continued to be a year of great challenges due to Puerto Rico’s economic crisis where CFCU had to make multiple adjustments to maintain the credit union viable, genuinely competitive and financially solid. Notwithstanding the 2015 fiscal crisis of PR, CFCU experienced an increase in the amount of loan applications and loans approvals. All these efforts were possible thanks to our Board of Directors and Management. It is important to point out that other financial institutions have endured the same economic crisis of the island, however some of them are in serious financial problems and others have had to shut down operations. CFCU has maintained its firm financial course and as a good sailor would say “we have successfully endured the storm” with enthusiasm, professionalism and above all we have served our members with warmth. Masini-Soler expressed with immense pride that members of the Credit Committee and all the employees have contributed tremendously to making CFCU the best and most successful federal credit union established in Puerto Rico. CFCU has earned a position of prestige and honor for many years, also recognized by the National Credit Union Administration. He expressed his appreciation to CFCU’s membership for their support and quoted “remember that a good credit rating opens the door to a world of opportunities and that CFCU is 100% committed to offering the best products and services”. He also expressed to the members that if for any reason anyone confronts an economic situation, to not hesitate to explain their problems to the Credit Committee who will, in the best spirit, try to help as reasonably as possible. He concluded his report wishing everyone a wonderful day during the social activity and that CFCU is everyone’s grand house (casa grande) and that the best is yet to come.

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June 12, 2016 Page 6 of 9

SUPERVISORY COMMITTEE REPORT Interim Chairman of the Supervisory Committee, José Ferrer introduced each member of the committee. He informed on the main duties of the Supervisory Committee which are the following: 1. Ensure the compliance of NCUA’s rules and regulations. 2. Safeguard the financial objectives of the credit union. 3. Protect member’s assets. He also mentioned that Zayas Morazzani & Co. was the CPA firm who performed the external audit and examined CFCU’s operations for the year ending in December 31, 2014 and year 2015 and that it was their opinion that the financial statements present fairly, in all material respects, the financial position of CFCU and the results of the operations and its cash flows were in conformity with generally accepted accounting principles (GAAP) of the United States of America. He also informed that the committee had contracted the services of Internal Auditor William Torres to provide internal audit services as required by the Board of Directors and the regulations of NCUA. In addition, CFCU’s Compliance Officer assures the compliance of the laws and regulations. He concluded his report mentioning the list of tasks performed by the internal auditors and the future work plan to be executed by the Supervisory Committee. BUSINESS ALLIANCE INSURANCE AGENCY Business Alliance Insurance Agency’s (BAIA), Chairman Emilio M. Colón presented BAIA’s BOD members and initiated his presentation expressing that BAIA was a great source to obtain insurance products and financial planning. He mentioned that financial planning was a very critical subject especially in these difficult times and that BAIA was offering personal financial consultation by specialized experienced personnel. He also shared information on retirement planning products and insurance products. He concluded his report encouraging members to visit BAIA’s kiosk or to obtain more information in any of CFCU’s branches. NOMINATIONS COMMITTEE REPORT President of the Nominations Committee, Nidza Hernández introduced the members of the committee. She then informed on the election process as follows: Option A2 - In-person elections; nominating committee and nominations by petition. The new election process states that the nominating committee files its nominations with the secretary of the credit union at least 90 days prior to the annual meeting, and the secretary notifies in writing all members eligible to vote at least 75 days prior to the annual meeting; nominations for vacancies may also be made by petition, said document should be accompanied with the signature of 1% of the active members with a minimum of 20 and a maximum of 500. The written notice must indicate that the election will not be conducted by ballot and there will be no nominations from the floor when there is only one nominee for each position to be filled. A brief statement of qualifications and biographical data in a form approved by the board of directors will be included for each

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CARIBEFEDERAL CREDIT UNION


Annual Meeting June 12, 2016 Page 7 of 9

nominee submitted by the nominating committee with the written notice to all eligible members. Each nominee by petition must submit a similar statement of qualifications and biographical data with the petition. The written notice must state the closing date for receiving nominations by petition. In all cases, the period for receiving nominations by petition must extend at least 30 days from the date that the petition requirement and the list of nominating committee's nominees are mailed to all members. To be effective, a signed certificate must accompany such nominations from the nominee or nominees stating that they are agreeable to nomination and will serve if elected to office. Such nominations must be filed with the secretary of the Board of Directors at least 40 days prior to the annual meeting and the secretary will ensure that nominations by petition along with those of the nominating committee are posted in a conspicuous place in each credit union office at least 35 days prior to the annual meeting. Director Hernández presented the candidates for the Board of Directors: Mr. Emilio M. Colón, Mr. Alexis E. Agostini and Mr. Juan O. Rodríguez all of whom were duly approved by the Nominations Committee. She also informed that the Nominations Committee had also received 3 new nominations however, one candidate withdrew her nomination and the 2 others were disqualified due to non-compliance with CFCU regulation. DECLARATION OF NOMINEES There being no additional candidates to the Board of Directors and no requirement for a voting process, Director Hernández stated that the following candidates were re-elected to serve as members of the Board of Directors for years 2016 to 2019: Mr. Emilio M. Colón, Mr. Alexis E. Agostini and Mr. Juan O. Rodríguez. SESSION OF MEMBER’S QUESTIONS RELATED TO THE REPORTS Member Leonides Alverio asked about the interest rate on CFCU’s MasterCard. Director Juan M. Masini explained that the interest rate starts at 8.99% depending on the member’s credit score, with a maximum credit line of $25,000. Member Israel Benítez congratulated management and the Board of Directors for the excellent job and the positive financial statements. Member Luis Morales asked if CFCU had an Identity Theft Policy. General Manager Jorge M. Vadell informed that CFCU has an Identity Theft Policy and a Compliance Department as well. Thereafter, Morales congratulated management and the Board for the excellent job at CFCU. Member Sandra García requested more information on Regulation D. General Manager Vadell explained that it was a federal regulation intended to motivate savings and not use this account for daily transactions. He also encouraged members to open a checking account for recurrent transactions. Member Teresa Suarez indicated that she did not have a computer and that she was being charged $1.00 every month to receive the paper statement. Vadell explained that unfortunately the charge was to cover the expenses related to paper statements and postage fees. She also

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requested the option to receive quarterly statements, not monthly. The BOD agreed to study the recommendation. Member Teresa Suarez expressed that she had other credit cards that offered rewards and that CFCU should also do the same. General Manager Vadell explained that CFCU currently has a reward program where a member can get $50 rebate for every 5,000 points accumulated. Member Teresa Suarez expressed that CFCU had excellent employees however; it was very difficult to communicate with a person when calling the credit union. Management took note of the observation to improve telephone service. Member Angel Nieves expressed his satisfaction in the service received by CFCU when he called to the Mastercard Department to inform that he was going to travel to Israel. OLD BUSINESS General Manager Jorge M. Vadell gave a presentation on the status of the recommendations that were presented in last year’s annual meeting. He informed on the recommendations that were implemented and the recommendations that were not viable. NEW BUSINESS Member Israel Benítez expressed that the Credit Committee Chairman had recently stated in his report that CFCU was one of the most successful credit unions established in PR and that CFCU was a home to all its members however, he does not understand why CFCU cannot cover the share branching service fees. He suggested that CFCU cover at least 3 transactions per month. Chairman Rafael A. Martínez explained that the fee was to cover the expenses incurred in using the share branching services at other credit unions. In addition, that the committee had studied the possibility to cover this fee to all members and agreed that it was not viable. Nonetheless, the recommendation to consider that CFCU cover at least 3 share branching transactions per month shall be considered by the committee. Member Jonatán Benítez indicated that he had been the one to propose that credit union movement education be offered at schools and that he was proud to inform that the recommendation is currently being implemented at his school located in Humacao and in a private school in Guaynabo. He expressed his satisfaction on this action that benefits young members and requested applause. Member Melanie Rodríguez expressed that CFCU is part of the ATH Móvil program where you can download the application to your cell phone and transfer money to other accounts or individuals without any cost of fees.

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CARIBEFEDERAL CREDIT UNION


Annual Meeting June 12, 2016 Page 9 of 9

Member Eric Rodríguez expressed his frustration trying to use the Caribe Online services. He tries to use the application and finds it difficult to sign in. Chairman Martínez encouraged members to visit any branches to receive assistance. Member Israel Benítez expressed that the recommendation previously presented by another member to consider using ATH Móvil was not useful to him because there is a limit of $500 per day and share branching does not have this limitation. Member Israel Benítez recommended that CFCU consider opening a branch in the east side of the island because there are many members who do not have access to all the products and services offered by a credit union as successful as CFCU. The Chairman informed that CFCU has recently invested in opening the Guaynabo branch and that the economic crisis is another challenge that many financial institutions are enduring at this time. Moreover, that the current trend in the financial institution industry is to encourage members to use more electronic transactions. However, the recommendation shall be studied and considered to see its viability. ADJOURNMENT There being no further business discuss, the meeting was adjourned by the Chairman of the BOD at 11:38 AM. Raffles, lunch and a social activity followed.

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Caribe Federal Credit Union CONSOLIDATED AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION

For the years ended December 31, 2016 and 2015

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CARIBEFEDERAL CREDIT UNION


INDEPENDENT AUDITORS’ REPORT The Board of Directors Caribe Federal Credit Union San Juan, Puerto Rico REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS We have audited the accompanying consolidated financial statements of the Caribe Federal Credit Union (“the credit union”) which comprise the consolidated statements of financial condition as of December 31, 2016 and 2015, and the related statements of income and expenses, changes in members’ equity, comprehensive net income, and cash flows for the years then ended, and the corresponding 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 the 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of 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 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.

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1


INDEPENDENT AUDITORS’ REPORT (CONTINUED) OPINION ON ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Caribe Federal Credit Union, as of December 31, 2016 and 2015, and the results of its operations, changes in member’s equity, comprehensive net income and cash flows for the years then ended, in accordance with generally accepted accounting principles in the United States of America. SUPPLEMENTAL INFORMATION Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information in pages 37, 38 and 39 is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. Such supplemental information is the responsibility of management and was derived from and relates directly to, the underlying accounting and other records used to prepare the consolidated financial statements. The supplemental information has been subject to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplemental information is fairly stated in all material respects in relation to the consolidated financial statements taken as whole. OTHER MATTERS The consolidated financial statements of Caribe Federal Credit Union as of and for the year ended December 31, 2015, were audited by other auditors whose report dated April 27, 2016, expressed an unqualified opinion on those consolidated financial statements.

San Juan, Puerto Rico April 7, 2017

Stamp No. E-239168 was affixed to the original.

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LLAVONA - CASAS, CPA PSC License Number 226 Expires on December 1, 2018

CARIBEFEDERAL CREDIT UNION

2


Caribe Federal Credit Union CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2016 and 2015 Assets

2016

Cash and cash equivalents (Notes 2 and 3) Certificates of deposits (Notes 2 and 4) Investment securities (Notes 2 and 5) Loans to members, net (Notes 2, 6, 7 and 15) Accrued interest receivable (Notes 2 and 7) Insurance claim receivable Accounts receivable, net Prepaid expenses Property and equipment, net (Notes 2 and 8) NCUSIF deposit (Notes 2) Art Collections (Note 2) Other assets (Notes 2 and 9) Total assets

2015

$

7,142,296 24,161,200 60,306,309 228,163,203 640,787 367,584 131,457 11,827,632 2,686,175 77,619 750,848

$

56,649,346 7,751,130 22,474,765 212,911,448 641,835 64,358 27,221 129,770 12,533,780 2,478,875 77,619 718,953

$

336,255,110

$ 316,459,100

286,973,339 1,792,539 3,011,240

269,590,206 1,914,207 2,459,391

291,777,118

273,963,804

Liabilities and Members' Equity Members' shares and savings accounts (Notes 2 and 10) Accounts payable and accrued liabilities (Notes 2 and 11) Accounts payable to auto dealers (Notes 6 and 15) Total liabilities Members' Equity Appropriated regular reserve (Note 2 and 17) Unappropriated earnings Accumulated other comprehensive income (Note 2) Total members' equity Total liabilities and members' equity

$

3,811,746 40,713,114 (46,868)

3,811,746 38,706,187 (22,637)

44,477,992

42,495,296

336,255,110

$ 316,459,100

3 The accompanying notes are an integral part of the consolidated financial statements.

2016 ANNUAL REPORT

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Caribe Federal Credit Union CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES For the years ended December 31, 2016 and 2015 2016 Interest Income: Interest and fees on loans Interest on investments

$

Total interest income

2015

10,817,571 797,793

$ 10,355,541 809,796

11,615,364

11,165,337

1,951,646

2,086,968

9,663,718

9,078,369

(1,147,454)

(1,173,272)

8,516,264

7,905,097

771,902

935,915

3,406,786 2,093,305 1,781,148

3,150,638 2,208,446 1,843,630

7,281,239

7,202,714

Interest expense: Dividends on members' shares accounts (Note 10) Net interest income Provision for loan losses (Notes 2 and 6) Net interest income after provision for loan losses Service fee and non-interest income (Note 12) Non-Interest expenses (Notes 2, 13 and 14): Compensation and benefits Occupancy and related Other Total non-interest expenses Net Income

$

2,006,927

$

1,638,298

The accompanying notes are an integral part of the consolidated financial statements.

20

CARIBEFEDERAL CREDIT UNION

4


44,477,992

1,982,696

(46,868)

$

$

42,495,296

1,968,316

40,526,980 $

$

(24,231)

Interest expense:

(22,637)

Total interest income

330,018

Accumulated Other Comprehensive Income/loss

Interest Income: Interest and fees on loans Interest on investments

(352,655)

Total

Caribe Federal Credit Union CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES For the years ended December 31, 2016 and 2015

$ 40,713,114

Net interest income after provision for loan losses

2,006,927

38,706,187

Unappropriated Earnings

Caribe Federal Credit Union CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY For the years ended on December 31, 2016 and 2015

Provision for loan losses (Notes 2 and 6)

1,638,298

37,067,889

Net interest income

$

Dividends on members' shares accounts (Note 10)

3,811,746

-

3,811,746

-

3,811,746

Appropriated Regular Reserve

Non-Interest expenses (Notes 2, 13 and 14): Compensation and benefits Occupancy and related Other Total non-interest expenses

$

10,817,571 797,793

$ 10,355,541 809,796

11,615,364

11,165,337

1,951,646

2,086,968

9,663,718

9,078,369

(1,147,454)

(1,173,272)

8,516,264

7,905,097

771,902

935,915

3,406,786 2,093,305 1,781,148

3,150,638 2,208,446 1,843,630

7,281,239

7,202,714

2,006,927

$

1,638,298

Balance, December 31, 2016

Comprehensive income

Balance, December 31, 2015

Comprehensive income

$

$ Balance, December 31, 2014

Net Income

2015

$

$

Service fee and non-interest income (Note 12)

2016

4 The accompanying notes are an integral part of the consolidated financial statements.

2016 ANNUAL REPORT

21


Caribe Caribe Federal Federal Credit Credit Union Union CONSOLIDATED AND EXPENSES CONSOLIDATED STATEMENTS STATEMENTS OF OF INCOME COMPREHENSIVE INCOME For 31, 31, 2016 andand 2015 For the the years years ended ended December on December 2016 2015 2016 Interest Income: Interest and fees on loans Interest on investments Net Income Total interest income Changes in unrealized gain (loss) on investment securities available for sale Interest expense:

$

$ 10,355,541 2015 809,796 $ 1,638,298 11,165,337

(24,231)

DividendsTotal on members' shares accounts comprehensive income (Note 10)

$ 1,951,646 1,982,696

Net interest income Provision for loan losses (Notes 2 and 6) Net interest income after provision for loan losses Service fee and non-interest income (Note 12) Non-Interest expenses (Notes 2, 13 and 14): Compensation and benefits Occupancy and related Other Total non-interest expenses Net Income

10,817,571 2016 797,793 $ 2,006,927 11,615,364

2015

$

330,018

2,086,968 $ 1,968,316

9,663,718

9,078,369

(1,147,454)

(1,173,272)

8,516,264

7,905,097

771,902

935,915

3,406,786 2,093,305 1,781,148

3,150,638 2,208,446 1,843,630

7,281,239

7,202,714

2,006,927

$

1,638,298

The The accompanying accompanying notes notes are are an an integral integral part part of of the the consolidated consolidated financial financial statements. statements.

22

CARIBEFEDERAL CREDIT UNION

46


Caribe Federal Federal Credit Credit Union Union CONSOLIDATED STATEMENTSOF OFCASH INCOME AND EXPENSES CONSOLIDATED STATEMENTS FLOWS For the years years ended ended on December 31,31, 2016 and 2015 December 2016 and 2015 2016 2016 Interest Income: Cash flows from operating Interest and fees on loansactivities: Net income Interest on investments

$

Adjustments to reconcile net income to net Total interest income cash provided by operating activities: Depreciation and amortization Interest expense: Loss (gain) on disposition of repossessed assets Capitalized interest on certificate of deposit Dividends on members' shares accounts (Note 10) Provision for possible loan losses Dividends credited on members' shares accounts Net interest income Premium amortization and discount accretion, net Recoveries on charged-off loans Provision for loan lossesin(Notes (Increase)/decrease assets:2 and 6) Accrued interest receivable Net interest incomeclaim after receivable provision for loan losses Insurance Accounts receivable, net Service fee and non-interest Prepaid expenses income (Note 12) Other assets Non-Interest expenses (Notes 2, 13 and 14): (Decrease) increase in assets: Compensation Accruedand andbenefits other liabilities Occupancy and related Accounts payable to auto dealers

Other

20152015

10,817,571 $ 10,355,541 $ 797,793 2,006,927 $ 809,796 1,638,298 11,615,364

11,165,337

900,624 (233) (70) 1,951,646 1,147,454 1,959,462 9,663,7184,225 298,494

(1,147,454)

1,048

8,516,264 64,358

Total adjustments

Net cash provided by operating activities

Net Income

(28,796)

7,905,097 (5,659)

(340,363)

784

935,915 41,828

(31,662)

(443,418)

3,406,786 (121,668) 2,093,305 551,849 1,781,148

3,150,638 (23,440) 2,208,446 (806,846) 1,843,630

7,281,239

7,202,714

6,438,758

$

(1,173,272)

771,902(1,687)

4,431,831

Total non-interest expenses

887,630 1,767 (70) 2,086,968 1,173,272 2,092,685 9,078,369 61,255 329,429

2,006,927

$

3,280,421

4,918,719

1,638,298

7 The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements.

2016 ANNUAL REPORT

23

4


Caribe Federal Credit Union Caribe Federal Credit Union CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the years ended December 31, 2016 and 2015 For the years ended on December 31, 2016 and 2015 2016 Interest Income: Interest and fees on loans Interest on investments

$

Cash flows from investing activities: Total interest income Cash proceeds from maturities, disposition and return on principal over investments Interest expense: Adquisition of certificates of deposit Adquisition of investment for sale Dividends on members' sharessecurities accountsavailable (Note 10) Net increases in loans to members Acquisitions of property and equipment Net interest income Deposit in NCUSIF cash provided by 2investing Provision forNet loan losses (Notes and 6) activities Cash flows from financing activities:

Net interest income after provision Net increase in shares accounts for loan losses

10,817,571 2016 797,793

$ 10,355,541 2015 809,796

11,615,364

11,165,337

18,500,000 (16,410,000) (56,360,000) 1,951,646 (16,697,703) (194,476) 9,663,718 (207,300)

28,900,000 (7,241,000) (36,000,000) 2,086,968 (16,222,374) (568,974) 9,078,369 (224,161)

(71,369,479) (1,147,454)

(31,356,509) (1,173,272)

8,516,264 15,423,671

7,905,097 19,969,634

15,423,671 771,902

19,969,634 935,915

Net cash provided by financing activities Service fee and non-interest income (Note 12)

Non-Interest expenses (Notes 2, 13 and 14): Net decrease in cash and cash equivalents Compensation and benefits Cash and cashand equivalents Occupancy related at beginning of year Other Cash and cash equivalents at end of year

Total non-interest expenses

2015

(49,507,050)

3,406,786 56,649,346 2,093,305 1,781,148

$

7,142,296

7,281,239

(6,468,156)

3,150,638 63,117,502 2,208,446 1,843,630

$ 56,649,346

7,202,714

Supplemental Disclosures of Cash Flow Information Net Income $ 2,006,927 $ 1,638,298 Interest and dividend paid for the years ended December 31, 2016 and 2015 was $1,959,462 and $2,092,685, respectively. Also, during the years ended December 31, 2016 and 2015, unrealized gain (loss) on securities available for sale were recognized for ($24,231) and $330,018, respectively, representing a noncash item. Those charges are not reported as part of the net income for those years since they represent other comprehensive income.

The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements.

24

CARIBEFEDERAL CREDIT UNION

4 8


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 1.

ORGANIZATION Caribe Federal Credit Union (“Credit Union”) is a nonprofit organization established in 1951 organized and chartered under the Federal Credit Union Act. The Credit Union serves federal employees in Puerto Rico and the U.S. Virgin Islands, members of the Liga de Estudiantes de Arte de San Juan, select employee groups in Puerto Rico and immediate family members. Its purpose is to promote thrift among its members by affording them an opportunity to accumulate their savings and create for them a source of credit for productive purposes. Business Consortium Alliance, Inc. (BCA) is a wholly-owned subsidiary of Caribe Federal Credit Union (Parent Company). It is a credit union service organization (“CUSO”) under the United States Credit Union Act. It was engaged in the development of its lines of business and in providing services to the Credit Union. During the year ended December 31, 2008, Business Alliance Insurance Agency (BAIA) was incorporated and began operations in 2009. The Company was created to conduct and operate a general insurance agency business for insurance companies organized or admitted to do business in the Commonwealth of Puerto Rico. It is a subsidiary of BCA.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The most significant accounting policies followed the Credit Union are in conformity he accounting principles generally accepted in the United States of America. The most significant policies are as follows: Principles of Consolidation The consolidated financial statements include the accounts of Caribe Federal Credit Union and its wholly-owned subsidiary Business Consortium Alliance, Inc. (BCA), which was consolidated with Business Alliance Agency (BAIA). All significant intercompany balances and transactions between the Credit Union and the subsidiary have been eliminated in the preparation of the consolidated financial statements. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain 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 revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. 9

2016 ANNUAL REPORT

25


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reclassifications In the accompanying financial statements, certain 2015 figures were reclassified to conform to the 2016 presentation. Concentrations of Credit Risk Financial instruments that potentially subject the Credit Union to credit risk include cash balances and certificate of deposits with several financial institutions located in Puerto Rico and the United States; which were insured for up to $250,000 by the U.S. Federal Deposit Insurance Corporation (FDIC). The balances may exceed amounts insured by the FDIC. Credit risk for loans receivable and share accounts are also concentrated since most of the Credit Union’s members are located in the Puerto Rico geographical area. Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Association (NCUA) up to $250,000 per institution. The bank balance of deposits in commercial banks amounting to approximately $5,877,000 exceeded the amounts covered by federal depository insurance limits. There was no bank balance of deposits exceeding the NCUA depository insurance limits at December 31, 2016 and the balance of deposits in Banco Cooperativo amounting to approximately $2,265,000 were uninsured at that date. Cash and Cash Equivalents For purposes of the statements of cash flows, the Credit Union consider all highly liquid investment securities acquired with an original or remaining maturity of three months or less to be cash equivalents. Investment Securities Investment securities consist mainly of obligations issued by the Government of the United States and its political subdivisions. The Credit Union records the investments in securities in accordance with Accounting for Certain Investments in Debts and Equity Securities. The Credit Union classifies investments in debt instruments as securities available for sale and held to maturity.

10

26

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments are made in accordance with the Credit Union’s policies, which incorporate the regulations of National Credit Union Administration (NCUA), hence they are principally in federally sponsored and guaranteed instruments. Gains or losses on disposition are based on the net proceeds and the adjustment carrying amount of the securities sold, using the specific identification method. Interest income is recorded on an accrual basis. Securities held-to-maturity Securities held-to-maturity are those which the management has the intent to hold to maturity. These investments are reported at cost, adjusted for amortization of premiums or accretion of discounts, which are recognized in investment interest income using the effective interest method over the period of maturity. Securities available-for-sale Securities available-for-sale are presented at fair market value. Unrealized gains and losses on securities available for sale are excluded form earnings and recognized as a direct or decrease in other comprehensive income. Investment securities in this classification could be sold any time in response to economic and strategic factors. Other than temporary decline in the fair market value 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, management considers: (1) the credit union intent to sell the debt security prior to recovery and, (2) whether it is more likely than not that it will not have to sell the debt prior to recovery, the security would not be considered other than temporarily impaired unless there is a credit loss. When the Credit union does not intend to sell a security, and its more likely than not, the Credit Union will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other than temporary impairment of a debt security in earnings and the remaining portion in accumulated other comprehensive income (loss).

11

2016 ANNUAL REPORT

27


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Loans to Members and Allowance for Loan Losses Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and net origination fees. Interest on loans is recognized over the term of the loan and is calculated using the simple-interest method on principal amounts outstanding. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Accrual of interest is discontinued on a loan when management believes, after considering economics, business conditions and collection efforts that the borrowers’ financial condition is such that collection of interest is doubtful. Regularly, this is applied to loans with the delinquency greater than 89 days. The revenue for such interests not accrued is recognized when collected. Loan Origination Fees Loan origination fees are deferred and recognized over the life of the loan as an adjustment of yield. The unamortized balance of the net origination fees is reported as part of the loan balance to which it relates. The periodic amortization is reported on the income statement as interest income. Accounts Receivable Accounts receivable are stated at their net realizable value. Property and Equipment 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. Assets classified as construction in process are not depreciated until the asset has been completed and placed into service.

12

28

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of Long Lived Assets The Credit Union periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No indications of impairment are evident at December 31, 2016 and 2015. Art Collection Art collections are capitalized at their cost at the date of purchase or, if the items were contributed, at their fair or appraised value at the contribution date. NCUSIF Deposit The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is 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 (1%) of its insured shares. The deposit is refunded to the credit union if its insurance coverage is terminated, it obtains its insurance coverage from another source, or the operations of the fund are transferred from the NCUA Board. 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 sale. 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 the properties for subsequent impairment and any subsequent declines in fair value are recorded through current period earnings. Members’ Shares Accounts The dividend rates are set by the Board of Directors based on an evaluation of current and future market conditions. Dividends on members’ shares accounts are based on available earnings at the end of the corresponding period and are not guaranteed by the Credit Union. Dividends are credited to the members’ share accounts on the last day of the month for which dividends are declared. Members share accounts are subordinated to all other liabilities of the Credit Union upon liquidation.

13

2016 ANNUAL REPORT

29


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Members’ Equity Caribe Federal Credit Union is required by regulation to maintain a statutory reserve. This reserve, which represents a regulatory restriction of retained earnings, is not available for the payment of dividends. The statutory reserve consists of $3,811,746 for 2016 and 2015. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available for sale securities. Advertising and Promotional Costs Advertising and promotional costs are expended as incurred. Federal and State Income Taxes The Credit Unions is exempt, by statute, from federal and state income taxes. 3.

CASH AND CASH EQUIVALENTS As of December 31, 2016 and 2015, the balance of cash and cash equivalents consisted of the following:

2016 Cash in banks Petty cash Change Fund Total cash and cash equivalents

2015

$

6,116,705 200 1,025,391

$ 55,907,493 200 741,653

$

7,142,296

$ 56,649,346

14

30

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 4.

CERTIFICATES OF DEPOSITS As of December 31, 2016 and 2015, the Credit Union maintains certificates of deposits mostly in denominations of $250,000 and $100,000. The schedules maturities are as follows: 2016 Due in one year or less Due after one year through three years Total certificates of deposits

5.

2015

$

6,741,000

$

510,130

$

17,420,200 24,161,200

$

7,241,000 7,751,130

INVESTMENT SECURITIES At December 31, 2016 and 2015 the investment securities were as follows: 2016 Investment securities: Available for Sale Held to maturity Total investment securities

2015

$

10,203,133 50,103,176

$ 22,474,765 -

$

60,306,309

$ 22,474,765

As of December 31, 2016 and 2015, the amortized cost and the estimate fair market value of investment securities available for sale and held to maturity are as follows: 2016 Available for sale:

Unrealized

Type of Investment Federal Home Loan Bank (FHLB) Federal Home Loan Mortgage Corporation (FHLMC) Federal National Mortgage Association (FNMA) Federal Farm Credit Bank (FFCB)

Total

Federal Home Loan Bank (FHLB)

Total

Loss

Market Value

$

1,000,000 4,000,000 3,250,000 2,000,000

$

520 -

$

(1,190) (20,710) (24,048) (1,440)

$

998,810 3,979,290 3,226,473 1,998,560

$

10,250,000

$

520

$

(47,388)

$

10,203,133

Held to maturity: Type of Investment

Unrealized

Gain

Amortized Cost

Unrealized

Unrealized

Gain

Amortized Cost

Loss

Market Value

$

50,103,176

$

2,760

$

-

$

50,105,936

$

50,103,176

$

2,760

$

-

$

50,105,936

15

2016 ANNUAL REPORT

31


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 5. INVESTMENT SECURITIES (CONTINUED) 2015 Available for sale:

Amortized

Unrealized

Unrealized

Cost

Gain

Loss

Type of Investment $

Federal Home Loan Bank (FHLB) Federal Home Loan Mortgage Corporation (FHLMC) Federal Farm Credit Bank (FFCB) Federal National Mortgage Association (FNMA)

Total

Market Value

6,499,622 8,998,428 3,000,000 3,999,351

$

5,763 -

$

(16,568) (3,730) (8,101)

$

6,505,385 8,981,860 2,996,270 3,991,250

$ 22,497,401

$

5,763

$

(28,399)

$ 22,474,765

The amortized cost and estimated fair value of investment securities, at December 31, 2016 and 2015, by contractual maturity, are shown below. Investment expected maturities may differ from original contractual maturities because of borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost

Due Date Due in one year or less

2016 Market Value

$ 50,103,176

Due after one year through five years Total

Amortized Cost

$ 50,105,936

$

2015 Market Value

499,621

$

510,515

10,250,000

10,203,133

21,997,780

21,964,250

$ 60,353,176

$ 60,309,069

$ 22,497,401

$ 22,474,765

Unrealized losses as of December 31, 2016 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. As of December 31, 2016 Continuing Unrealized Losses for Less Than 12 months Description of Securities

Federal Home Loan Bank (FHLB)

Fair Value

$

Federal Home Loan Mortgage Corporation (FHLMC) Federal National Mortgage Association (FNMA) Federal Farm Credit Bank (FFCB) Total

$

Continuing Unrealized Losses for 12 months or More

Unrealized Losses

-

-

Fair Value

$

(20,710)

2,225,953

(24,048)

-

1,998,560

(1,440)

-

8,203,803

$

(46,198)

Unrealized Losses

998,810

3,979,290

(1,190)

-

$

998,810

Total

$

-

$

Unrealized Losses

Fair Value

998,810

$

(1,190)

3,979,290

(20,710)

-

2,225,953

(24,048)

-

1,998,560

(1,190)

$

9,202,613

(1,440) $

(47,388)

16

32

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 6.

LOANS TO MEMBERS As of December 31, 2016 and 2015, the portfolio of loans to members of the Credit Union by type is as follows: 2016

Commercial: Corporations and individuals Total commercial Consumer: Unsecured Mortgage Auto Share secured loans Credit cards Lines of credit Total consumer Total loans

$

$

Less: Allowance for loan losses Plus: Net unamortized deferred origination fees Total loans to members, net

19,257,185 19,257,185 47,158,674 27,738,872 115,168,752 7,310,254 13,839,901 581,767 211,798,220 231,055,405

2015 $

$

(2,304,679) $

(587,523) 228,163,203

19,050,160 19,050,160 41,937,980 24,978,322 107,373,071 7,562,996 14,133,986 599,460 196,585,815 215,635,975 (2,150,621)

$

(573,906) 212,911,448

Allowance for loan Losses The allowance for loan losses reflects management judgement of probable loan losses inherent in the portfolio at balance sheet date. The Credit Union uses a disciplined methodology to establish the allowance for loan losses each quarter. A minimum of 1% of the outstanding loans portfolio is required by policy. To determine the total allowance for loan losses, management estimates the provision needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a collectively basis. The allowance for loan losses consists of amounts applicable to: (1) consumer loans (personal auto, mortgage, line of credit and credit card) and (2) commercial loans portfolios. The establishment of the allowance for loan relies on a consistent process that requires multiple layers of management review and judgment and responds to changes in economic conditions, member behavior, and collateral value, among other influences. From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts to or release balances from the allowance for loan losses. 17

2016 ANNUAL REPORT

33


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 6. LOANS TO MEMBERS (CONTINUED) The Credit Union’s allowance for loan losses is sensitive to individually evaluated loans, economic conditions and delinquency trends. Individually loans are evaluated based on each situation by experienced collection officers and reviewed by management. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged (“charge -off”) against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. Loan Charge-Offs Loans recommended for charge-off must meet at least one of the following standards: •

The borrower, including any co-maker or cosigner on the loan, has filed for bankruptcy protection.

On the death of the debtor, there appears to be little hope that there are sufficient assets available from the estate of from insurance to recover the debt.

On liquidation of the collateral, a deficiency balance exists and the borrower(s) has indicated that no further payments are forthcoming.

The debt has been assigned to third-party collector and no payments have been made within the past three months.

The loan is 180 or 360 days delinquent and no monthly payments are being made.

Reliable information has been received that the loan is uncollectible.

The member has disappeared and, despite the best efforts of the collections department, the Credit Union has been unable to make contact with the debtor for 180 days.

When a loan meeting of the above criteria is not recommended for charge-off, the collections department will report that fact to the board of directors in a separate written report. The report will include an explanation as to why the loan should be kept open and not assigned to nonperforming asset status (e.g., the debtor agreed to and is making regular periodic payments).

18

34

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 6. LOANS TO MEMBERS (CONTINUED) A summary of the changes in the allowance for loan losses, by portfolio segment, is as follows:

Beginning balance Provision during the year Recoveries of loans previously reserved Loans charge-offs Ending balance Evaluation of Allowance: Allowance evaluated individually Allowance evaluated collectively Total Loan Ending Balance: Evaluated individually for impairment Evaluated collectively for impairment Total

Beginning balance Provision during the year Recoveries of loans previously reserved Loans charge-offs Ending balance Evaluation of Allowance: Allowance evaluated individually Allowance evaluated collectively Total Loan Ending Balance: Evaluated individually for impairment Evaluated collectively for impairment Total

2016 Commercial $ 318,318 7,796 (75,098) $ 251,016

$ $ $

112,099 138,917 251,016

1,425,738 17,831,447 $ 19,257,185

$

Consumer 1,832,303 1,139,658 298,494 (1,216,792) 2,053,663

$ $ $

$

$

$

2015 Commercial $ 288,326 254,406 (224,414) $ 318,318

$ $ $

104,434 213,884 318,318

1,359,137 17,691,023 $ 19,050,160

$

Total 2,150,621 1,147,454 298,494 (1,291,890) 2,304,679

388,916 1,664,747 2,053,663

$ $ $

501,015 1,803,664 2,304,679

1,554,305 210,243,915 211,798,220

$

2,980,043 228,075,362 231,055,405

$

Consumer 1,713,611 918,866 329,429 (1,129,603) 1,832,303

$ $ $

$

$

$

$

$

$

Total 2,001,937 1,173,272 329,429 (1,354,017) 2,150,621

403,914 1,428,389 1,832,303

$ $ $

508,348 1,642,273 2,150,621

1,590,753 194,995,062 196,585,815

$

2,949,890 212,686,085 215,635,975

$

$

19

2016 ANNUAL REPORT

35


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 6. LOANS TO MEMBERS (CONTINUED) Non-Accruing Loans The Credit Union generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, part of the principal becomes uncertain, part of the principal balance has been charged off and no restructuring has occurred or the loans reach over 89 days past due. Loans to members in which the accrual of interest has been discontinued or reduced amounted to $1,235,391and $986,055 at December 31, 2016 and 2015, respectively. If interest on those had been accrued, such income would have approximately $96,075 and $111,403, respectively. The following table summarizes the aging of the loans to members’ receivable portfolio:

December 31, 2016 Personal Mortgage Auto Secured Credit cards Lines of credit Total consumer loans

Age Analysis of Loan to members Receivables by Category as of December 31, 2016 Current or 0-59 60-89 Over 89 47,084,110 $ 41,198 $ 33,366 $ 26,882,749 856,123 115,079,334 22,753 66,665 7,300,971 9,283 13,790,412 21,548 27,941 566,773 14,994 $ 210,704,349 $ 94,782 $ 999,089 $

Commercial Total loans to members

December 31, 2015 Personal Mortgage Auto Secured Credit cards Lines of credit Total consumer loans

19,020,883 $

229,725,232

$

94,782

236,302 $

1,235,391

$

Over 89 Non Accruing $ 33,366 856,123 66,665 27,941 14,994 $ 999,089

19,257,185

236,302

231,055,405

Age Analysis of Loan to members Receivables by Category as of December 31, 2015 Current or 0-59 60-89 Over 89 Total $ 41,854,198 $ 39,479 $ 44,303 $ 41,937,980 24,159,589 101,325 717,408 24,978,322 107,340,595 15,940 16,536 107,373,071 7,562,996 7,562,996 14,089,555 43,779 652 14,133,986 595,483 3,977 599,460 $ 195,602,416 $ 204,500 $ 778,899 $ 196,585,815

Commercial Total loans to members

-

Total 47,158,674 27,738,872 115,168,752 7,310,254 13,839,901 581,767 211,798,220

18,843,004 $

214,445,420

$

204,500

$

207,156

19,050,160

986,055

$ 215,635,975

$

1,235,391

Over 89 Non Accruing $ 44,303 717,408 16,536 652 $ 778,899 207,156 $

986,055

20

36

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 6. LOANS TO MEMBERS (CONTINUED) Credit Quality Information Consumer Loans - The use of risk classifications in consumer loans allows management to estimate their exposure to different types of risk. The Credit Union has established policies to evaluate application for loans using FICO credit scores, among other information, provided by major credit reporting agencies. A FICO score is a credit score developed by a third party that take information and analyze it to predict consumer behavior, such as how likely someone is to pay their bills on time or not, or whether they are able to handle a larger credit line. Generally, the FICO score range is 300 to 850, with the higher number representing less risk to the lender. Credit Quality Levels, Credit Score and Loans to Members’ Risk Exposure

The different levels of risk of loss established internally by the Credit Union according to the FICO credit scores are as follows: Upper Level - 700 or more, member has little or no additional risk. Middle Level - 660 to 699, member represents a nominal risk of loss. Lower Level - 659 or less, member is experiencing some degree of financial difficulty,

and represents a potential risk of loss. These levels are reviewed periodically, as well as other statistics and external factors, to monitor the performance of the portfolio. The following table represents the recorded investment in consumer loans based on different levels of risk of loss for the years ended December 31, 2016 and 2015. December 31, 2016 Loans Balance %

Credit Quality Levels Upper Level

$

Middle Level Lower Level

93%

10,828,526

5%

4,581,609

2%

$

214,322,841

100%

$

231,055,405

Credit score not available Total Consumer loans

198,912,706

December 31, 2015 Loans Balance % $

160,808,412

93%

8,230,289

5%

2,952,728

2%

$

171,991,429

100%

$

215,635,975

16,732,564

43,644,546

21

2016 ANNUAL REPORT

37


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 6. LOANS TO MEMBERS (CONTINUED) Commercial Loans - The Credit Union categorizes member business 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 member business loans individually by classifying the loans as to credit risk. This analysis is limited to member business loans. The Credit Union uses the following definitions for classified risk rating: Pass - The debtor has adequate capital and the ability to repay the debt in the normal course of operations. Special Mention - The loan has the potential weakness, such as negative financial trends, a limited financial history, a serious documentation flaws, or inadequate control on the part of the financial institution. 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. Substandard - A loan is “substandard” if there is the potential for loss. Such loans have well-defined weakness 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 your financial institution 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 been already been recognized and, more than likely, charged off. At December 31, 2016 and based on the most recent analysis performed, the risk category of loans is as follows: December 31, 2016 Special Mention

Pass Commercial Total commercial

Substandard

Doubtful or Loss

Total

$ 16,849,265

$

2,407,920

$

-

$

-

$

19,257,185

$ 16,849,265

$

2,407,920

$

-

$

-

$

19,257,185

22

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CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 6. LOANS TO MEMBERS (CONTINUED) Impaired Loans The following table includes the recorded investment and unpaid principal for impaired loans receivables with associated allowance amount. The Credit Union determined the specific allowance based on the net charge-off experience for the last two years, the specific losses estimated on an individual basis, the present net value of future cash flows, discontinued at the loan’s effective rate for troubled debt restructuring (TDR) and in cases of collateral depended loans, the fair value of the collateral less selling costs. Impaired Loans by Category for the year ended December 31, 2016

Impaired Loans by Category for the year ended December 31, 2015

Specific Unpaid Principal

Associated

Specific Unpaid Principal

Associated

of Impaired

Allowance for the

of Impaired

Allowance for the

Loans (cases)

Impaired Loan (Cases)

Loans (cases)

Impaired Loan (Cases)

Consumer: Personal Mortgage Auto Credit cards Lines of credit

Total consumer

$

182,003 1,177,391 111,313 68,605 14,993

$

65,095 225,696 45,880 37,251 14,994

$

279,362 1,149,608 59,630 98,176 3,977

$

100,038 231,267 14,969 56,646 994

$

1,554,305

$

388,916

$

1,590,753

$

403,914

Commercial Total

1,425,738 $

2,980,043

112,099 $

501,015

1,359,137 $

2,949,890

104,434 $

508,348

Loans to members secured by collateral consist of $168,955,411 and $158,431,592 for 2016 and 2015, respectively. The remaining balance represents loans partially secured and unsecured. The collections from the majority of the members’ loans are by direct deposit through payroll deduction. Troubled Debt Restructuring (TDR) In situations where, for economic or legal reasons related to a member’s financial difficulties, the Credit Union grants a concession for the other than an insignificant period of time to the member that the Credit Union would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Credit Union strives to identify members in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. In cases where the Credit Union grants to the member new terms that provide for a reduction of either interest or principal (on noncollateral dependent loans) measures any impairment based on the present value of expected future cash flows at the loan effective interest rate. 23

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Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 6. LOANS TO MEMBERS (CONTINUED) The following table presents the restructured loans by category:

Loans Count Consumer: Master card Personal Mortgage Auto

1 10 2 3

Total consumer loans

Total consumer loans

$

234 7,538 29,036 7,878

-

$ 1

1

9,902 22,753

428,777

44,686

2

32,655

1,266,250

68,667

1

159,487

113,353

3

22

-

$

1,695,027

$

104,494 330,876 14,144

21 5 26

$

$

192,142

$

2,476 5,688 8,164 -

$

8,164

For the year ended December 31, 2015 Restructured Loans Delinquent Loans Assigned Loans Principal Assigned Principal Balance Allowance Count Balance Allowance

18 2 1

Commercial Total

2,338 60,525 321,267 44,647

6

Loans Count Consumer: Master card Personal Mortgage Auto

$

16

Commercial Total

For the year ended December 31, 2016 Restructured Loans Delinquent Loans Assigned Loans Principal Assigned Allowance Count Balance Allowance Principal Balance

$

10,449 1,667 1,414

-

449,514

13,530

-

-

-

1,151,981

35,105

-

-

-

48,635

-

1,601,495

$

$

$

$

-

-

$

$

-

-

Loans to Related Parties Certain officers, directors, and employees of the Credit union, had loans with the credit Union during 2016 and 2015. Such loans were in the ordinary course of business at normal credit terms including interest rates and collateralization and do not represent more than a normal risk of collection. Total loans outstanding to these related parties at December 31, 2016 and 2015, amounted to $1,689,200 and $1,212,445, respectively. Certain employees, officers and directors of the Credit Union also have share accounts. Such accounts were at the ordinary course of business at normal interest rates. Shares accounts from related parties at December 31, 2016 and 2015 amounted to $4,168,075 and $3,900,307, respectively. 24

40

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 7.

ACCRUED INTEREST RECEIVABLE At December 31, 2016 and 2015, the following are the components of accrued interest receivable: 2016 Accrued interests on loans Accrued interests on investments Total accrued interest receivable

8.

$

2015

583,105 57,682 640,787

$

$ $

554,208 87,627 641,835

PROPERTY AND EQUIPMENT As of December 31, 2016 and 2015, the property and equipment was composed of the following:

Useful Life (in Years) 40 1-5

Buildings Furniture and fixtures Office equipment, principally Information systems

1-5

Less accumulated depreciation and amortization Land Total property and equipment

2016 $ 10,831,222 1,006,525

2015 $ 10,831,222 990,772

3,079,301 14,917,048 (5,475,911) 9,441,137 2,386,495 $ 11,827,632

2,902,082 14,724,076 (4,576,791) 10,147,285 2,386,495 $ 12,533,780

25

2016 ANNUAL REPORT

41


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 9.

OTHER ASSETS As of December 31, 2016 and 2015, the other assets were composed of the following: 2016

Acquired on liquidation of loans - real estate Acquired on liquidation of loans - auto Deposits for the acquisition of property and equipment Deposits in Banco Cooperativo Investment in FHLB NY Deposits for annual meeting Others Total other assets

10.

2015

$

468,950 25,126 108,099 64,500 40,000 44,173

$

484,610 34,582 6,881 104,726 46,948 41,206

$

750,848

$

718,953

MEMBERS’ SHARES ACCOUNTS Members’ shares accounts are summarized as follows: Weighted-Average Dividend Rate at December 31, Shares drafts Regular shares (excluding escrow shares)

0.16%

Share certificates: 0.00% - 2.00% 2.01% - 3.00% 3.01% - 4.00%

1.16%

2016 $

0.59%

Total members shares accounts

$

14,727,064

2015 $

12,385,786

207,538,582

190,622,950

61,215,024 3,492,669 64,707,693

59,627,106 6,912,364 42,000 66,581,470

286,973,339

$

269,590,206

As of December 31, 2016 and 2015, the NCUA/National Credit Union Share Insurance Fund (NCUSIF) insured Credit Union shares members’ accounts up to $250,000.

26

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CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 10. MEMBERS’ SHARES ACCOUNT (CONTINUED) The composition of insured and uninsured members’ shares balances follows: Type

2016

Uninsured member shares Insured member shares Insured escrow

2015

14,498,343

15,181,895

272,821,269

254,715,429

(346,273)

Total share and share certificates accounts

$

286,973,339

(307,118) $ 269,590,206

At December 31, 2016, scheduled maturities of share certificates are as follows: Year ending December 31,

Amount

2017 2018 2019 2020 2021

$

41,391,154 7,398,629 5,599,725 4,716,409 5,601,776

$

64,707,693

Dividends expense on members’ shares accounts is summarized as follows: Type Regular shares

2016 $

Share drafts

$

23,665

Share certificates Total dividends expense

1,165,106

2015

24,391

762,875 $

1,951,646

1,165,870 896,707

$

2,086,968

27

2016 ANNUAL REPORT

43


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 11.

ACCRUALS AND OTHER LIABILITIES As of December 31, 2016 and 2015 the composition of accruals and other liabilities is as follows: 2016 Dividends payable Accrued payroll and related Annual members' meeting Accounts payable - trade Accounts payable - ATM Escrow accounts Other accruals

$

Total accruals and other liabilities

12.

35,916 214,698 100,000 75,342 248,039 346,273 772,271

$ 1,792,539

2015 $

43,732 196,737 100,000 203,135 47,951 307,118 1,015,534

$ 1,914,207

SERVICE FEE AND NON INTEREST INCOME Service fee and non-interest income for the years ended December 31, 2016 and 2015 are as follows: 2016 ATM card fees and charges, net Master card fees and charges, net Other fees, charges and expenses Sponsorships other Annual meeting

$

156,124 (142,058) 488,091 53,620 11,585

$

162,801 63,876 472,139 53,969 12,155

$

567,362

$

764,940

Non-interest income from BCA Total service fee and non-interest income

2015

204,540 $

771,902

170,975 $

935,915

28

44

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 13.

NON-INTEREST EXPENSES The detail of non-interest expenses for the years ended December 31, 2016 and 2015 are as follows: Compensation and benefits Occupancy and related: Depreciation and amortization Occupancy and utilities Communications Insurance Rent Repairs and maintenance Security Other operating expenses: Professional services and contracted services Education and promotional Loan servicing and collection Annual meeting Monthly statements Bank service charges Federal operating Office supplies Commission and fees Travel and conferences Employees activities Loss (gain) on disposition of assets Dues and subscriptions Other miscellaneous Total other operating expenses Total non-interest expenses

14.

2016

2015

$ 3,406,786

$ 3,150,638

900,624 293,167 263,830 232,898 15,399 266,000 121,387 2,093,305

887,630 323,110 226,391 245,391 16,545 373,873 135,506 2,208,446

525,568 401,695 72,306 158,437 138,716 84,830 57,583 57,530 65,745 88,248 22,165 16,930 10,344 81,051

467,234 340,234 167,035 156,842 113,372 88,127 53,614 74,267 45,766 104,387 17,911 1,767 9,686 203,388

1,781,148

1,843,630

$ 7,281,239

$ 7,202,714

DEFERRED COMPENSATION PLAN The employees of Caribe Federal Credit Union participate in a group deferred compensation plan through contributions to a life annuity accumulation contract administered by an insurance company. The plan was effective on October 1, 1993. Caribe Federal Credit Union matches the participant’s contribution up to a 5% of the employee compensation. All participants contribute at least 3% of their total gross compensation. In no event will the participants’ annual deposit exceed 10% of the total gross compensation. In no event will the participants’ annual deposit exceed 10% of the gross compensation or $15,000. 29

2016 ANNUAL REPORT

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Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 14. DEFERRED COMPENSATION PLAN (CONTINUED) Employees are eligible to enter the plan if they have attained eighteen (18) years old and completed twelve months of service. The normal retirement date is the first day of the month after the participants 62nd birthday and after completing twenty (20) years of service. The plan also provides for early retirement. A participant may elect to retire at any time after attaining fifty-five (55) years old and completing seven (7) years of service. Vesting is accumulated after the second year on the plan for a period of five years at 20% per year. At termination of employment, the vested portion of a participant’s account will be paid following the next annual benefit payment date. During the years ended December 31, 2016 and 2015, Caribe Federal Credit Union contributed $91,051 and $87,805, respectively, to the pension plan. 15.

UNCERTAINTIES, COMMITMENTS AND CONTINGENCIES Economic Conditions The Commonwealth of Puerto Rico and its instrumentalities (Commonwealth) is currently experiencing a severe fiscal, economic and liquidity crisis. On June 30, 2016, the President of the United States signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Consequently, there no assurance that the federally appointed oversight board of PROMESA will be successful in achieving budgetary and fiscal balance through a debt restructuring and a multi-year fiscal plan. The Credit Union has taken steps to mitigate the situation by not having investments in Puerto Rico bonds and ensuring that all our investments are held with U.S. agencies, U.S. government sponsored entities and certificates of deposits guaranteed by NCUA or FDIC. Litigation The Credit Union maintains several claims against third parties, mainly demands payment of money and repossessions of assets, as part of its ordinary operations as a financial institution. Based upon counsel and management’s opinion the outcome of such matters is not expected to have a material adverse effect on the Credit Union’s financial condition.

30

46

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 15. UNCERTAINTIES, COMMITMENTS AND CONTINGENCIES (CONTINUED) Loan Commitments At December 31, 2016 and 2015, Caribe Federal Credit Union had outstanding the following commitments to extended credit with its members: Lines of Credit Commercial Consumer Credit Cards

Amount $

$

2,480,349 1,147,238 18,604,132 22,231,719

In addition, the Credit Union had pending to deliver certain payments to auto dealers subject to the presentation of required documents. As of December 31, 2016 and 2015, payments amounted to $3,011,240 and $2,459,391, respectively, and are recorded as accounts payable to dealers in the accompanying financial statements. Caribe Federal Credit Union is a party to financial statements with off- balance sheet risk in the normal course of business to meet the financing needs of its members. These financial statements include commitments to extend credit and involve, to varying degrees, elements of credit and interest risk in excess of the amount recognized in the statement of financial position. The contractual notional amounts of those instruments reflect the extent of involvement Caribe Federal Credit Union has in particular classes of financial instruments. Caribe Federal Credit Union’s exposure to credit loss in the event of nonperformance by the other party to the financial statements for commitments to extend credit is represented by the contractual notional amount of those instruments. Caribe Federal Credit Union uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Unless noted otherwise, Caribe Federal Credit Union does not require collateral or other security to support financial instruments with credit risk. Commitments to extend credit are agreements to lend to a member as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Caribe Federal Credit Union evaluates each member’s credit worthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by Caribe Federal Credit Union upon extension of credit, is based on management’s credit evaluation of the counterpart. 31

2016 ANNUAL REPORT

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Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 15. UNCERTAINTIES, COMMITMENTS AND CONTINGENCIES (CONTINUED) Line of Credit Caribe Federal Credit Union has a line of credit facility with a financial institution. As of December 31, 2016 and 2015 there are not outstanding balances in the subject line of credit. With certain exceptions, substantially all assets of the Credit Union serve as collateral for the line of credit facility. The renewed unused amount was $5,000,000 as of December 31, 2016, reduced from $15,000,000 at December 31, 2015. Interest is charged when applicable based on the advance term, usually below prime rate. Lease Commitments BAIA operates on leased premises under a two years rental agreement with an entity related with a director, at a monthly charge of $1,000. The contract was originated in October 16, 2015 and matures in October 31, 2017. Future lease payments (2017) amount to $10,000. During the years ended December 31, 2016 and 2015, the total rent expenses amounted to $15,399 and $16,545, respectively. 16.

FAIR VALUE OF FINANCIAL INSTRUMENTS FASB ASC 820 Fair Value Measurements provides a framework for measuring fair value that requires an entity to determine fair value based on exit price in the principal market for the asset or liability being measured. Fair Value is defined as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants. The guidance also establishes a three level fair value hierarchy that describes the inputs that are used to measure assets and liabilities. • •

Level 1 asset and liability fair values are based on quoted prices in active markets for identical assets and liabilities. Level 2 asset and liability fair values are based on observable inputs that include: quoted market prices for similar assets or liabilities; quoted market prices that are not in an active market; or other inputs that are observable in the market and can be corroborated by observable in the market and can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 assets and liabilities are financial instruments whose value is calculated by the use of pricing models and or discounted cash flow methodologies, as well as financial instruments for which the determination of fair value requires significant management judgment or estimation. 32

48

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the Credit Union’s financial statements, none of which are held for trading purposes, are as follows: December 31, 2016 Carrying Fair Amount Value

December 31, 2015 Carrying Fair Amount Value

Financial Assets: Cash and cash equivalents Certificates of deposits Investment securities Loans receivable (net of unamortized deferred origination fees and allowance for loan losses) Accrued interest receivable Assets acquired in liquidation of loans

$

7,142,296 24,161,200 60,306,309

$

228,163,203 640,787 494,076 320,413,795

$

286,973,339

$

22,231,719

$

$

7,142,296 24,161,200 60,309,069

$

56,649,346 7,751,130 22,497,402

203,427,104 640,787 494,076 296,174,532

$

212,911,448 641,835 519,192 300,970,353

286,973,339

$

269,590,206

22,231,719

$

21,296,665

$

$

56,649,346 7,751,130 22,474,765 212,911,448 641,835 519,192 300,947,716

Financial Liabilities Members' shares accounts Off- Balance Sheet Financial: Commitments to extend credit

$

269,590,206

$

21,296,665

The carrying amounts in the preceding table that is included in the statement of financial condition under the applicable captions. The Credit Union has no financial instruments that are held or issued for trading purposes. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: •

Cash and cash equivalents- The carrying amount approximates fair value due to the short-term nature of these instruments.

Certificates of Deposit- For long-term certificates of deposit, fair value has been determined discounting the principal and interest to be received at rates currently offered by other financial institutions for certificates with similar terms and characteristics.

Investment securities - Fair values have been determined using quoted market prices for all investment securities.

Accrued Interest Receivable - The fair value of the accrued interest receivable approximates the carrying amount in the financial statements. 33

2016 ANNUAL REPORT

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Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) •

Members’ shares accounts: (a) Regular shares and share drafts accounts - The fair value of members’ regular shares and share drafts having no fixed maturity is the amount payable on demand at the reporting date. (b) Share certificates - The fair value of fixed maturity members’ share certificates is estimated using the rates currently offered for deposits with similar remaining maturities.

Commitments to extend credit - The estimated fair value of the commitments to extend credit represents the Credit Union are potentially unfunded under such lines of credit.

Fair Value of Financial Instruments Measured on a Recurring Basis The fair values of assets and liabilities measured on a recurring basis at December 31, 2016 and 2015 are as follows:

Asset Class

Fair Value Measurement At Reporting Date Using: Level 1 Level 2 Level 3

Fair Value

December 31, 2016 Available for sale securities Held-to-maturity securities Assets acquired in liquidation of loans

$ $ $

10,203,133 50,105,936 494,076

$ $

Available for sale securities

$

22,474,765

$

Assets acquired in liquidation of loans

$

519,192

10,203,133 50,105,936 -

-

$

494,076

$

519,192

December 31, 2015

17.

22,474,765 -

-

-

REGULATORY CAPITAL As of December 31, 2016 and 2015, the Credit Union’s net worth to total assets ratio is categorized as “well capitalized” as per the most recent call report. To be categorized as “well capitalized”, the Credit Union must maintain a minimum net worth ratio of 7% as defined under the regulatory framework provisions of Section 38 of the FCU Act. Credit Unions whose net worth ratio falls below 7% will be subject to Prompt Corrective Actions requirements.

34

50

CARIBEFEDERAL CREDIT UNION


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 17.

REGULATORY CAPITAL (CONTINUED) The Credit Union net worth ratio at December 31, 2016 and 2015 follows:

Net Worth Amount

Period

CFCU Actual Net Worth to Total Assets Ratio (1)

CFCU Category (2)

2016

$

44,524,860

13.24%

Well Capitalized

2015

$

42,517,933

13.43%

Well Capitalized

(1) In performing its calculation of total assets, the credit union used the monthly average over the quarter option, as permitted by regulation. (2) There are no conditions or events since the most recent Call Report that management believes have changed the Credit Union’s category.

Under capital adequacy regulations and the regulatory framework for Prompt Corrective Action, the Credit Union must meet specific capital regulations that involve quantitative measures of the Credit Union’s assets, liabilities, and certain off-balance sheet items as calculated under generally accepted accounting principles. The Credit Union’s capital amounts and net worth classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Risk Based Net Worth (RBNW) Ratio The RBNW requirement only applies to complex Credit Unions (CU) as defined by the National Credit Administration (NCUA). A complex CU is one with more than $50 million in assets and with a risk based net worth requirement of more than 6%. The RBNW is based on risk weighting formulas on specific assets, liabilities, and off-balance sheet items which qualify under the regulations. The Credit Union RBNW ratio for 2016 and 2015 is 4.74% and 4.80%, respectively, based on most recent CALL Report.

35

2016 ANNUAL REPORT

51


Caribe Federal Credit Union NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended on December 31, 2016 and 2015 18.

SUBSEQUENT EVENTS The consolidated financial statements and related disclosures include evaluation of events up through and including April 7, 2017, which is the date the consolidated financial statements were available to be issued.

36

52

CARIBEFEDERAL CREDIT UNION


2016 ANNUAL REPORT

53

Total liabilities and members' equity

Total members' equity

Capital stock - authorized 10,000 shares with a par value of $100, issued and outstanding 5,000 shares Additional paid-in capital Appropriated regular reserve Unappropriated earnings Accumulated deficit Accumulated other comprehensive income

Members' Equity

Total liabilities

Members' shares accounts Accruals and other liabilities Accounts payable to auto dealers

Liabilities and Members' Equity

$

$

$

336,222,027

44,477,992

3,811,746 40,713,114 (46,868)

291,744,035

286,973,339 1,759,456 3,011,240

336,222,027

6,968,054 24,151,000 60,306,309 228,163,203 640,787 339,121 129,798 11,825,719 2,686,175 77,619 183,394 750,848

Total assets

CFCU

Cash and cash equivalents Certificates of deposits Investment securities Loans to members, net Accrued interest receivable Accounts receivable, net Prepaid expenses Property and equipment, net NCUSIF deposit Art Collections Investment in unconsolidated subsidiary, net Other assets

$

Assets

Caribe Federal Credit Union CONSOLIDATING STATEMENT OF FINANCIAL CONDITION At December 31, 2016

$

$

$

$

216,477

183,394

500,000 1,000,000 (1,316,606) -

33,083

33,083 -

216,477

174,242 10,200 28,463 1,659 1,913 -

BCA

$

$

$

(183,394)

(183,394)

(500,000) (1,000,000) 1,316,606 -

-

-

(183,394)

(183,394) -

Eliminations $

$

$

$

$

336,255,110

44,477,992

3,811,746 40,713,114 (46,868)

291,777,118

286,973,339 1,792,539 3,011,240

336,255,110

7,142,296 24,161,200 60,306,309 228,163,203 640,787 367,584 131,457 11,827,632 2,686,175 77,619 750,848

2016


54

CARIBEFEDERAL CREDIT UNION

Net Income

Participation in profit of unconsolidated subsidiary

Income/(loss) before participation in losses of unconsolidated subsidiary and regulatory charges

Total non-interest expenses

Compensation and benefits Occupancy and related Other

2,006,927

36,198

1,970,729

7,112,897

3,405,586 2,072,961 1,634,350

567,362

8,516,264

Net interest income after provision for loan losses

Service fee and non-interest income

(1,147,454)

Provision for loan losses

1,951,646

11,615,364

10,817,571 797,793

9,663,718

$

$

CFCU

Net interest income

Dividends on members' shares accounts

Interest expense:

Total interest income

Interest Income: Interest and fees on loans Interest on investments

Caribe Federal Credit Union CONSOLIDATING STATEMENT OF INCOME AND EXPENSES For the year ended on December 31, 2016

$

-

-

-

-

-

-

36,198

-

36,198

168,342

1,200 20,344 146,798

204,540

BCA $

(36,198)

(36,198)

-

-

-

-

-

-

-

-

-

-

Eliminations

$

$

2,006,927

-

2,006,927

7,281,239

3,406,786 2,093,305 1,781,148

771,902

8,516,264

(1,147,454)

9,663,718

1,951,646

11,615,364

10,817,571 797,793

2016


2016 ANNUAL REPORT

55

1,634,350 7,112,897

Total other operating expenses

Total non-interest expenses

898,799 291,882 261,000 230,494 3,399 266,000 121,387 2,072,961

3,405,586

CFCU

470,668 400,281 72,306 158,437 138,716 84,235 57,583 55,919 88,248 22,165 16,930 10,344 58,518

$

$

Other operating expenses: Professional services and contracted services Education and promotional Loan servicing and collection Annual meeting Monthly statements Bank service charges Federal operating Office supplies Commission and fees Travel and conferences Employees activities Loss (gain) on disposition of assets Dues and subscriptions Other miscellaneous

Occupancy and related: Depreciation and amortization Occupancy and utilities Communications Insurance Rent Repairs and maintenance Security

Compensation and benefits

$

$

1,200

168,342

146,798

54,900 1,414 595 1,611 65,745 22,533

1,825 1,285 2,830 2,404 12,000 20,344

BCA

Caribe Federal Credit Union CONSOLIDATING SCHEDULE OF NON INTEREST EXPENSES For the year ended on December 31, 2016

$

$

-

-

-

-

-

Eliminations

$

$

7,281,239

1,781,148

525,568 401,695 72,306 158,437 138,716 84,830 57,583 57,530 65,745 88,248 22,165 16,930 10,344 81,051

900,624 293,167 263,830 232,898 15,399 266,000 121,387 2,093,305

3,406,786

2016


Profile for CaribeFCU

Annualreport 2016  

Annualreport 2016  

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