2005 Annual Report
You belong.
Membership matters.
Library Nearly 200 million Americans belong to their local library, gaining access to 2.5 billion volumes in print and on disc.
Source: The American Library Association
Health Club In 2005, 41.3 million people in the U.S. took part in the fitness craze by belonging to a gym, health club or workout facility.
Source: International Health and Sportsclub Association
Super Store Retail establishments have embraced the membership trend with the introduction of frequent buyer cards and clubs.
Source: The National Retail Federation
Corporate More than 90 percent of the nation’s 9,062 credit unions use a corporate credit union. Many use the services of two or more different corporates.
Source: Association of Corporate Credit Unions
Corporate One
A membership society These days, it’s all about belonging. People join together to form groups for a variety of reasons. From the country club to the local pharmacy, being a member matters. Members are rewarded for their loyalty with benefits ranging from exclusive access to materials to discounts on products and services. So whether you’re a frequent flier or frequent buyer, it pays to belong. At Corporate One Federal Credit Union, our members know something about the benefits of membership.
Membership in Corporate One gives credit unions access to innovative and affordable financial solutions. What’s more, our members get a financial partner who shares their sense of purpose and responsibility. Combine that with personal attention, education and training, and access to our expert staff, and it’s easy to see why Corporate One remains one of the largest and most progressive corporate credit unions in America. Corporate One – it’s where you belong.
Where you belong.
Table of contents Great People and Great Products.......................... 08 DESCO FCU.......................................................... 09 Transmission Builders FCU.................................... 10 Peace of Mind...................................................... 11 Foresight and Innovation...................................... 12 La-Porter FCU....................................................... 13 Bayer Employees FCU........................................... 14 Customized, Affordable Solutions......................... 15 A Shared Purpose................................................. 16 Kentucky Employees CU....................................... 17 GE Evendale Employees FCU................................. 18
A Responsible Partner........................................... 19 From the Chairman and the President................... 20 Board of Directors................................................ 21 Senior Management............................................. 22 Management’s Discussion and Analysis of Financial Condition and Results of Operations...... 24 Report from the Supervisory Committee............... 32 Independent Auditors’ Report............................... 33 Financial Statements............................................. 34 Notes to Financial Statements............................... 38 You Belong........................................................... 46
08/09
Member Benefit:
Great people and great products The credit unions that belong to Corporate One depend on us for critical financial products and services. While those solutions are important to our members’ success, they’re only half of the story. Our knowledgeable and accredited people are what make Corporate One more than just another vendor. Credit unions count on us to help them serve their members each and every day. For many of our members, we’re practically a part of their back-office staff. Our experienced and licensed investments staff members understand the regulations and strategies involved in credit union investing. Likewise, our accredited
operations staff members have extensive experience serving credit unions and pride themselves on superior member service. While our people make it easy to do business with us, it’s our customized, affordable solutions that make it hard to do business without us. As a full-service corporate, we offer a wide range of correspondent and investment solutions designed to meet the needs of all of our members – no matter how far reaching or specific their needs might be. With something for everyone, it’s easy to see why so many credit unions belong to Corporate One.
Correspondent Services ACH Intercept ACH Origination Access Daily Deposit Service (ADDS) Alliance One selective-surcharge ATM group ATM/debit card programs Automated Capture & Exchange (ACE) Business checking Fraud prevention tools Securities safekeeping Settlement services Share draft imaging Investment Solutions Callable and step-up certificates Community Investment Fund Customized certificates Fed Funds Plus Fixed- and variable-rate term certificates Liquidity options including Charlie Mac, lines of credit, SimpliCD issuance, and security sales Money Market Maximizer Overnight certificates SimpliCD Treasury and agency securities
Lee and DESCO belong.
R. Lee Powell, CEO DESCO Federal Credit Union Portsmouth, Ohio Assets: $181MM
Cindy and Transmission Builders belong.
Cindy Brock, CEO, Transmission Builders Federal Credit Union, Kokomo, Indiana Assets: $66MM
10/11
Member Benefit:
Peace of mind In a quickly changing world, our members deserve a measure of certainty when it comes to their financial partner. If the importance of business continuity and disaster recovery planning wasn’t already clear to the credit union movement, its importance is certainly clear after last year’s hurricane season. In addition to our annual disaster recovery exercises, in 2005, Corporate One began a comprehensive business continuity initiative to help maintain critical business processes at acceptable levels in the event of a minor disruption or even a disaster. Last year, we also built on our track record of safety and soundness by expanding our dedicated risk management department. Employing
a philosophy of enterprise-wide risk management, Corporate One is determined to enhance its existing controls to mitigate risk across our entire business – people, policies, procedures, systems and facilities. In addition to being regulated by the National Credit Union Administration, Corporate One employs internal and external auditors to ensure our safety and soundness. Our Board’s Asset/ Liability Committee (ALCO) and our risk management department design and carry out controls to help mitigate our exposure to credit, liquidity, interest rate and operational risk. Corporate One continued to be profitable in 2005, with a return on assets (ROA) of 27 basis points. Last year, our capital reserves grew nearly
6 percent to $196 million at year’s end, of which nearly $86 million was held in reserves & undivided earnings (RUDE). With earnings retention and capital shares from new members, our capital ratio remained well above regulatory limits at 7 percent. In fact, in reaffirming our P-1 commercial paper rating – its highest possible rating – Moody’s noted Corporate One’s “excellent liquidity, high quality investment portfolio and adequate profitability and riskadjusted capitalization.” Our members belong with an organization that will manage their money safely and sensibly. That peace of mind is an important benefit to belonging with Corporate One.
12/13
Member Benefit:
Foresight and innovation At Corporate One, we’re not just serving our members’ immediate needs. We’re committed to helping them be successful today and tomorrow. That’s why we continue to invest in innovative correspondent services that can help our members remain competitive now and in the future. Last year, in response to demand from our members for a low-risk turnkey solution for Check 21, we rolled out Automated Capture & Exchange (ACE), a back-counter branch capture system that allows our members to manage check deposits more easily and efficiently by taking advantage of Check 21 technology.
During months of talking with our members and conducting research, analysis and testing, we determined that shouldering the related risks and costs of entering into this new era of deposit processing was the right thing to do. As a result, we’re offering our Partner members the necessary hardware, software, services, and support – valued at more than $5,000 per branch – at no cost. The service is also available to Associate members for a nominal fee. Plus, credit unions can even “test drive” ACE for 60 days without any monthly fees.
This leadership and emphasis on innovation is already paying dividends for our members. At the end of 2005, we had installed ACE at more than 100 credit union branches and we expect hundreds more installations by the middle of 2006. At the end of 2005, our members had archived nearly 1 million items using ACE. As we continue to sign agreements with clearinghouses and other financial institutions, we’re positioning our members to realize the efficiencies and cost savings of electronic deposit automation. It clearly pays to belong to Corporate One.
Ron and La-Porter belong.
Ronald Budzinski, CEO, La-Porter Federal Credit Union, Michigan City, Indiana Assets: $53MM
Bob and Bayer Employees belong.
Robert Burrow, CEO Bayer Employees Federal Credit Union, Proctor, West Virginia Assets: $167MM
14/15
Member Benefit:
Customized, affordable solutions For many Americans, belonging to a
Our members also benefit from
no matter their size, to better serve
credit union means access to great
affordable correspondent solutions
their own members.
rates on loans and savings accounts,
that allow them to offer low- or no-
financial education, and a chance to
cost financial services to their own
Credit unions that belong to Corporate
control the direction of their financial
members. For example, belonging to
One also benefit from dozens of
institution. In much the same way,
Alliance One, our selective-surcharge
education and training opportunities
belonging to Corporate One gives our
ATM group, allows credit unions to
throughout the year. Events like our
members access to affordable financial
give their cardholders convenient
ATM Users Conference, Economic
solutions, education and training,
surcharge-free access to more than
Forum and Asset/Liability Management
and the chance to strengthen their
3,600 ATMs across America, for only
Conference give members the chance
relationships with their members.
$250 a year – that’s less than 7 cents
to gain insights from nationally
per ATM.
recognized industry experts. Plus, our
One way that our members see
live online webinars give busy members
tangible benefits of membership is
And for as little as $100 per month,
a chance to stay informed and remain
in the competitive investment rates
our members can offer share draft
productive without having to leave
and affordable back-office solutions
services, helping to cement their
their credit union for training.
we offer. Last year, we worked hard
relationships with their members. Plus,
to continue to pay competitive rates
our fraud prevention tools help credit
It’s solutions like these that make
on our investments in a rising rate
unions better know their members
belonging to Corporate One a good
environment with a flattened
and protect their assets. These
choice for our members.
yield curve.
solutions help each of our members,
16/17
Member Benefit:
A shared purpose More and more credit unions are realizing the importance of belonging with Corporate One. In 2005, we added 68 new members, bringing our total membership to 788. Yet, each one of those 788 credit unions is unique. Whether large or small, state or federally chartered, with one SEG or one hundred, each member shares a common interest in their corporate. Together, they make us one of the leading corporate credit unions in the nation. Last year, this shared sense of purpose continued to help us attract members
nationwide. Corporate One now has relationships with credit unions in 39 states and the District of Columbia. New and existing members continued to partner with us for correspondent and investment solutions in 2005, with our members signing more than 400 implementation agreements for new Corporate One products and services in their branches. This continued growth gives us the resources to offer solutions that are better, faster, more efficient and more robust. Likewise, growth in capital makes us stronger and helps protect our members’ investments with us. When we grow, all of our members benefit.
Even with liquidity remaining tight and credit unions’ investable dollars shrinking in 2005, membership in Corporate One continued to appeal to credit unions. Our commitment to paying extremely competitive rates on our investments, our focus on superior service and a national marketing effort helped us to grow share balances in 2005. At the end of 2005, we remained the sixth largest corporate credit union in America, with more than $3.02 billion in assets.
John and Kentucky Employees belong.
John Graham, CEO Kentucky Employees Credit Union Frankfort, Kentucky Assets: $42MM
Pat and GE Evendale Employees belong.
Patrick Taylor, CEO General Electric Evendale Employees Federal Credit Union, Cincinnati, Ohio Assets: $623MM
18/19
Member Benefit:
A responsible partner Corporate One is proud to belong to the credit union movement – whether we’re helping out across the globe or just across town. Last year, through our continuing partnership with the World Council of Credit Unions and the Ohio Credit Union League, Corporate One signed an agreement giving WOCCU ownership of the software system that we developed, tested and installed in Bolivia in 2004. The system is now being used as a shared-branching system by credit unions in remote locations throughout Bolivia. Estimates indicate that this system, created by Corporate One at no cost to the project, will serve approximately 500,000 people – almost 6 percent of Bolivia’s entire population – by the end of 2006.
Closer to home, 2005 saw the worst hurricane season in decades. For credit unions, these tragedies served as a powerful reminder that we all belong to the same movement. In response to the devastation, our staff, management and Board of Directors raised more than $14,000 to donate to the National Credit Union Foundation’s National Disaster Relief Fund via the Ohio Credit Union Foundation. At the end of 2005, we had invested $7 million in the Community Investment Fund, resulting in a contribution of $115,000 split between the National Credit Union Foundation and the Ohio Credit Union Foundation.We also supported our members in Indiana by helping to raise $5,000 for the Indiana Credit Union Foundation through a members-only auction and reception.
With responsibility came recognition. We’re proud to have been named one of the best places to work in Central Ohio in 2005 by Columbus Business First. Employees at more than 100 companies gauged their workplace in terms of people practices, work engagement, feeling valued, manager effectiveness and alignment with goals – and our staff gave Corporate One high marks. Additionally, Corporate One was asked to participate in a panel discussion on the future of Check 21 on World Business Review with General Alexander Haig and CUES president Fred Johnson. The segment aired on CNBC and Bravo! in November 2005. It’s easy to see why our members feel like they’re part of something special.
20/21
From the Chairman and the President
A letter to our members There are many reasons why people join together. Perhaps we share common interests or goals. Maybe we join simply to gain access to a commodity. Sometimes, it’s as simple as feeling a sense of belonging. Belonging can provide all of these things and more. Throughout this year’s annual report, we’ve highlighted some of the benefits of belonging to Corporate One. Belonging to Corporate One means owning and supporting one of the nation’s leading corporate credit unions. Belonging gives our members access to many of the financial solutions they need to run their credit union – including Automated Capture & Exchange, our revolutionary solution for Check 21. Belonging also means
access to dozens of training and education sessions each year that keep our members informed. Most importantly, belonging gives credit unions easy ways to enhance their relationships with their members, whether it’s providing share draft images online, offering access to selective-surcharge ATMs or protecting assets from fraud. Belonging to Corporate One also has an important intangible benefit: a partnership with an organization that shares your sense of responsibility to your members. Belonging to Corporate One means being part of something special. We’d like to thank the Board of Directors, management team and staff of Corporate One. As a result of their remarkable dedication and
effort, Corporate One continues to be a great place to belong. Most importantly, we’d like to thank the credit unions across America who are members of Corporate One. As a result of their support, Corporate One is able to offer innovative, easyto-use financial solutions delivered by great people.
Stephen F. Halas, Chairman CEO, Ohio Catholic FCU
Lee C. Butke, President/CEO
Corporate One Board of Directors Front Row (from left to right): Stephen F. Halas, Ohio Catholic FCU (Chairman)
Jerome R. Valco, The Ohio Educational CU (Vice Chairman)
Phillip R. Buell, Superior FCU
James A. Depue, CES CU
Gerald D. Guy, Kemba Financial CU (Secretary)
Janice L. Thomas, PSE CU
Back Row (from left to right): Charles F. Plassenthal, Dayton Firefighters FCU
John J. Shirilla, Best Employees FCU (Treasurer)
Lee C. Butke, President/CEO (left) Stephen F. Halas, Chairman CEO, Ohio Catholic FCU
John C. Wagner, Emery FCU
Corporate One Senior Management Front Row (from left to right):
Back Row (from left to right):
Not Pictured:
Tammy Cantrell, SVP, Asset/Liability Management
Joseph Ghammashi, VP, Risk Management
Melissa Ashley, VP and Chief Financial Officer
CherĂ Couture, VP, Human Resources and Administration
Lee Butke, President/CEO
Kurt Lykins, VP and Chief Technology Officer
Robert Coyan, SVP, Marketing and Operations
22/23
Financial Review
24/25
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2005 In Review The changing interest rate environment and tight liquidity within the credit union network continued to present challenges in 2005. However, Corporate One remained focused on providing value to its members through competitive investment rates and innovative correspondent services. In 2005, the value of these services helped us to add 68 new members, with combined assets of $25.2 billion. And as a result of deposits from these new members, average balances increased slightly, despite national trends of tight liquidity at credit unions. Accordingly, net interest income was $12.5 million in 2005, up slightly from 2004. In 2005, we sold securities resulting in a net gain of $1.1 million, which approximated gains recognized in 2004. We sold these securities to help us manage the flow of member deposits. Proceeds from these sales provided needed liquidity during periods of low share balances or were reinvested in securities that better positioned our portfolios. It is important to offer a variety of investment products to our members because as the interest rate environment changes, certain products are more attractive than others. In 2005, our on-balance-sheet term deposits grew, however SimpliCD sales were down significantly relative to 2004 due to tight liquidity and a relatively flat yield curve. As a result, brokerage income was down in 2005, compared to 2004, and was the single largest factor in the decline in net settlement income over the same period. The success of this product in 2006 is largely dependant upon the interest rate environment and liquidity in the credit union network. Nonetheless,
SimpliCD continues to be a valuable product to round out our full array of investment offerings. Beyond great rates, we continued to offer our members a complete package of correspondent solutions including ATM/debit card programs, share draft processing and imaging, and depository and electronic payment services. These services are designed to meet the changing needs of our members and enable them, regardless of size, to offer a complete line of financial services to their members. The newest addition to these correspondent services is Automated Capture & Exchange (ACE), our Check 21 solution. We spent a significant amount of time and money in both 2004 and 2005 developing this solution because of its benefits for credit unions, which include reductions in handling costs, faster clearing and return times, reduced float, and reduced opportunities for fraud. In late 2005, we began offering Phase I of ACE, which is an image archive service. This service allows credit unions to replace their current microfilming efforts by electronically imaging and archiving their deposit items. The items can then be easily and quickly retrieved via MemberViewÂŽ. Not only is Phase I of ACE a valuable new service for our members, it is a critical step in preparing for the electronic settlement of deposit items. In the long term, our solution will be cost-effective to both our members and to Corporate One. While our investment in the development of this product contributed to an increase in operating expenses in 2005 compared to 2004, we believe our members are worth the investment. New accounting guidance related to investments in limited liability
companies became effective in 2005, which required us to account for our investment in Primary Financial Company LLC (Primary Financial) using the equity method. Our adoption of the equity method resulted in a cumulative effect of change in accounting of $0.4 million. Additionally, Corporate One will recognize its proportionate share of Primary Financial’s income or loss going forward. Net income was $7.5 million for the year ended December 31, 2005, a $1.5 million decrease from the same period in 2004. This decrease was primarily due to tight liquidity and a challenging rate environment for our off-balancesheet investment products, and our significant investment in ACE. Capital Position Our members and prospective members review our capital as part of their evaluation of our safety and soundness. Since December 31, 2004, our total capital, which includes reserves and undivided earnings (RUDE), membership capital and paid-in capital, increased almost $11.0 million, or 6 percent. This increase was primarily due to strong earnings and increased membership capital from new members. Total capital was approximately $196.5 million as of December 31, 2005. Because our average asset levels have held steady, this increase in our total capital has resulted in an increase in our capital ratio. As of December 31, 2005, our regulatory capital ratio was 7 percent, which is more than adequate based on our operations and the risks involved in our business and is well above the minimum regulatory level of 5 percent. Net Interest Income In 2005, liquidity was tight within
Financial Review
the credit union network. According to statistics from the Credit Union National Association, this year ranked one of the strongest for growth in loans and weakest for growth in savings for credit unions nationwide, resulting in a reduction in total available dollars credit unions had to invest. Yet, despite these conditions, by continuing our national calling strategy, we were successful in adding 68 new members. In fact, at the end of 2005, we had investment relationships with 19 of the 100 largest credit unions in the nation. Deposits from these new members helped to increase our overall share balances slightly when most of our peers experienced lower share balances in 2005 compared to 2004. Our goal is to provide credit unions with competitive investment products
and our ability to attract deposits in 2005 is proof that we are achieving this goal. The increase in balances in 2005 added to our net interest income in 2005—accordingly, net interest income was $12.5 million for the year ended December 31, 2005, compared to $12.1 million for the same period in 2004. Our Fed Funds Plus account continues to be popular with our members, as we strive to pay a competitive spread to fed funds; however, tight liquidity in 2005 resulted in an overall decrease in our overnight shares. Yet, we continued to experience growth in our term deposits, as many of our members saw value in extending out slightly on the interest rate curve, with demand for term products shifting to shorter-term certificates in 2005 compared to 2004.
Selected Financial Information (Dollar amounts are in thousands) NET INTEREST INCOME
As of and for the year ended December 31,
2005 $
In addition to tight liquidity, the interest rate environment was challenging in 2005. The Federal Reserve continued to push short-term rates up, increasing the fed funds target rate eight times in 2005. Additionally, global demand for structured and corporate debt securities of U.S. issuers resulted in spreads tightening to historic levels on many of the assets in which we invest. When managing our investment portfolio, we continually challenge ourselves to find value in the marketplace so we can pay competitive rates and ensure Corporate One remains financially strong. In 2005, we continued to utilize our Part I expanded investment authority granted by the NCUA in 2004. Part I authority allows us to invest in asset-backed securities rated AA and A. Over the last year, we increased our investment in these types of securities resulting
12,507
2004 $
12,106
2003 $
12,663
2002 $
11,809
2001 $
12,039
NET SETTLEMENT INCOME
7,577
8,228
10,109
8,599
8,145
NET GAIN ON SALES OF SECURITIES
1,092
1,012
675
970
6
TOTAL OPERATING EXPENSES
14,079
12,343
12,565
14,965
12,278
INCOME BEFORE OTHER ITEMS
7,097
9,003
10,882
6,413
7,912
6,413
7,912
OTHER ITEMS*
402 7,499
$
9,003
$
6,880
NET INCOME
$
17,762
$
$
Average Assets
$ 2,789,173
$ 2,705,184
$ 2,576,720
$ 2,476,925
$ 1,885,673
Total Capital
$ 196,504
$ 185,451
$ 171,037
$ 145,268
$ 132,700
Return on Assets
0.27%
0.33%
0.69%
0.26%
0.42%
Regulatory Capital Ratio
7.05%
6.86%
6.64%
5.86%
7.15%
* Other items include the cumulative effect of a change in accounting in 2005 as disclosed in note 2 and the net gain on the sale of Primary Financial in 2003.
Financial Review
in increased interest income with minimal additional credit risk. This, in turn, helped us to provide members with great rates. We also rotated our investments out of sectors where the spreads had tightened and invested in sectors where the spreads were wider. Additionally, we saw increased value in the products offered by U.S. Central, particularly in structured callable term offerings. As a result of this repositioning of our portfolios, we were able to continue to pay great rates. However, because of pressures on the spreads we earn, our net interest margin decreased slightly in 2005 compared to 2004.
In addition to offering competitive investment products, we further differentiate ourselves by assigning our member credit unions to a specific Corporate One investment representative. Our investment representatives are licensed and able to understand the investment needs of our members. We also arm our investment representatives with a variety of products. In addition to our on-balance-sheet products, Corporate One is a co-broker of Primary Financial, enabling us to offer SimpliCD. SimpliCD allows credit unions to easily invest substantial funds in federally insured certificates of deposit. SimpliCD searches for the best rates and offers single transaction settlement. Credit unions
Table One:
Components of Net Interest Income (Dollar amounts are in thousands)
Average Balance
2005 Interest or Dividends
Interest-earning assets: Time deposits $ 15,436 $ Asset-backed securities 547,918 Mortgage-related securities 491,091 Other investments (primarily U.S. Central) 1,658,603 Loans to members 43,037
can also issue certificates of deposit through Primary Financial, providing them with a source of liquidity. Corporate One also has a branch of CU Investment Solutions, Inc. (ISI), a National Association of Securities Dealers (NASD) registered broker/ dealer, housed within our office. Through ISI, our members have access to the inventories of multiple broker/dealers’ institutional trading desks and receive very competitive pricing on the securities they buy and sell. Since SimpliCD and securities are both off-balance sheet products, they contribute to fee income instead of net interest income. However,
Average Rate
Average Balance
2004 Interest or Dividends
Average Rate
459 19,156 18,298 52,237 1,667
2.97% $ 36,382 $ 881 3.50% 631,321 10,934 3.73% 485,585 10,990 3.15% 1,483,433 32,066 3.87% 21,692 485
2.42% 1.73% 2.26% 2.16% 2.24%
Total interest-earning assets 2,756,085 91,817
3.33% 2,658,413 55,356
2.08%
Interest- and dividendbearing liabilities and members’ share accounts: Overnight shares 1,090,730 Term shares 1,141,418 Membership capital shares 83,172 Other borrowings 334,997
2.89% 1,259,365 15,127 3.03% 967,723 23,660 2.69% 76,677 651 3.29% 258,811 3,812
1.20% 2.44% 0.85% 1.47%
2.99%
1.69%
Total interest- and dividendbearing liabilities and members’ share accounts
31,523 34,545 2,235 11,006
$ 2,650,317 79,309
Net Interest Income
$ 2,562,576 43,250
$ 12,508 $ 12,106
Net Interest Margin
0.45%
0.46%
26/27
it is important to mention them in the context of net interest income because these are valuable investment alternatives for credit unions and more examples of the investment solutions and value we provide to our members.
multiplied by prior year’s rate), interest and dividend rates (changes in rates multiplied by the prior year’s volume) and the combined impact of dollar volume and interest and dividend rates (changes in volume multiplied by changes in rate).
Table One provides more information on the composition of interestearning assets, interest- and dividendbearing liabilities and members’ share accounts and their weighted average rates. The resulting net interest margin of Corporate One for 2005 and 2004 is presented for comparison purposes. Table Two provides a rate and volume analysis, which further illustrates changes between 2005 and 2004 in the components of net interest income attributable to dollar volume (changes in volume
Settlement Fees In addition to providing a wide range of competitive investment products to meet our members’ needs, Corporate One also provides a complete line of correspondent services. Net settlement income generated from our fee-based services was $7.6 million for the year ended December 31, 2005. This represents an 8 percent decrease from 2004, which is mostly due to a decrease in fee income from brokerage services.
Table Two: Volume and Rate Variance Analysis (Dollar amounts are in thousands)
2005 versus 2004
Volume
Interest-earning assets: Time deposits $ (507) Asset-backed securities (1,443) Mortgage-related securities 124 Other investments (primarily U.S. Central) 3,784 Loans to members 478 Total interest-earning assets
Usage of our Access Daily Deposit Services (ADDS) and ACH services by new members, as well as increased usage among existing members, resulted in an increase in net settlement income from these products. Because ADDS users were the first members to benefit from our Check 21 solution and because they will continue to be the first to benefit as we roll out Phase II of ACE, we saw a significant increase in members joining our ADDS program in 2005 and late 2004. In the future, we expect that revenue from ADDS will decrease and be replaced by revenue from ACE, and net revenue from ACH will continue to increase as more consumers use electronic payment methods.
Rate
$
200 11,174 7,138 14,686 354
Volume and Rate
$
(115) (1,509) 46 1,701 350
Total
$
2,436
33,552
Interest- and dividend-bearing liabilities and members’ share accounts: Overnight shares Term shares Membership capital shares Other borrowings
(2,024) 4,238 55 1,120
21,283 5,710 1,411 4,710
(2,863) 937 118 1,364
16,396 10,885 1,584 7,194
Total interest- and dividend-bearing liabilities and members’ share accounts
3,389
33,114
(444)
36,059
Increase (decrease) in Net Interest Income
$
(953)
$
438
473
(422) 8,222 7,308 20,171 1,182
$
917
36,461
$
402
28/29
In late 2005, we began rolling out ACE. As of the end of 2005, we had installed ACE at more than 100 credit union branches. We are offering incentives to our members to allow them to try the product without fees for a period of time. The timing of the roll out and the incentive pricing resulted in minimal revenue from this product in 2005, but we expect revenue from ACE to increase in the future. Corporate One partners with First Data to offer the STAR network to our members. Transaction volume in our ATM programs continues to grow, as debit card usage continues to increase. This increase in volume has also resulted in an increase in ATM net settlement income. Although we saw increases in revenue from ADDS, ACH, ATM and ACE, it was not enough to offset the decrease in net settlement income from brokerage services and share drafts. Tighter liquidity at our member credit unions and an interest rate environment less favorable to SimpliCD certificate sales were the primary reasons for the decrease in income from brokerage services. Additionally, reductions in consumer usage of share drafts contributed to the decrease in income from share drafts. This trend is expected to continue as more consumers shift to electronic payment methods. Table Three summarizes net settlement income for 2005 and 2004. Operating Expenses Total operating expenses were $14.1 million in 2005, an increase of $1.7 million relative to 2004. Our investment in the development of ACE contributed to this increase. In developing ACE, we are focused on the long-term benefits for our members. The efficiencies and
savings our members enjoy as a result of ACE will never be reflected in Corporate One’s earnings. However, as a memberowned organization, we understand that creating innovative and valuable products for our members is our job. In 2005, we incurred consulting and other technology-related expenses in developing this solution, resulting in increased office operations and occupancy expenses in 2005 compared to 2004. ACE will remain a high priority in 2006 and we will likely continue to see higher operating expenses related to it. Ultimately, we believe that our solution will not only benefit our members, but will be cost-effective for Corporate One as well. Corporate One is committed to managing the risks associated with our business activities and has had a formal risk management department for many years. Additionally, in 2005, we embarked on an initiative to employ enterprise risk management throughout our entire organization. Enterprise risk management is critical not only to managing our risks, but to maximizing the value of Corporate One for our members. Accordingly, in 2005, we
Table Three: Net Settlement Income (Dollar amounts are in thousands) ATM
added personnel and resources to our risk management department. This contributed to the increase in salaries and benefits and office operations and occupancy expense in 2005 compared to 2004. Liquidity Risk Management Liquidity was very tight throughout the credit union network in 2005. One of the benefits of membership with Corporate One is that members may access liquidity from us when they need it, and do so at a very reasonable rate. In 2005, we saw credit unions take advantage of this benefit, with average loans to members increasing 98 percent over 2004. Throughout this period of tightened liquidity, we were able to fulfill every member’s request for funds, whether through a withdrawal of their deposits with us or by borrowing against their Corporate One advised line of credit. Because liquidity needs can change rapidly, we have to be prepared at all times for members’ demand for the shares they hold with us and for loans. We constantly monitor our members’ liquidity needs and evaluate
2005
2004
Percentage Change
$ 3,247
$ 3,136
3.5%
Brokerage
1,579
2,305
-31.5%
Share Drafts
1,466
1,696
-13.6%
Settlement
537
543
-1.1%
ACH
541
465
16.3%
ADDS
197
83
137.3%
$ 7,577 $ 8,228
-7.9%
ACE Total NET Settlement Income
10
Financial Review
the adequacy of our liquidity sources. To meet day-to-day member liquidity requirements, we keep a portion of our assets very liquid. In addition, we buy securities with readily determined market values that can be sold or borrowed against to generate liquidity. In fact, throughout 2005 and 2004, we sold securities to fund our members’ requests for deposits and to reposition our portfolios, proving that the securities we buy do have a ready market. We also match our members’ term certificates against assets with similar cash flows and maturities. What that means is when a term certificate matures, there is also an asset maturing at about the same time, producing the necessary liquidity to meet our members’ needs. We are able to do this because members have historically held term certificates to maturity, and term certificates are not as prone to sudden liquidity demands as our overnight balances. In 2005, we continued to maintain a variety of liquidity sources. We keep a $750 million advised line of credit with U.S. Central, as well as committed lines of credit with three financial institutions outside of the credit union network totaling $135 million. We also continue to maintain fed funds lines with various financial institutions. Fed funds lines do not require collateral for overnight borrowings and therefore give us increased flexibility should we need liquidity to meet member needs. We have the ability to issue commercial paper in the national capital markets up to $175 million. We maintain the highest possible ratings from Moody’s and Standard and Poor’s, a P-1 and A-1+ rating, respectively, enabling us to access this market in the most costefficient manner. As a member of the Federal Home Loan Bank of Cincinnati,
we also have access to its many credit facilities. However, liquidity does not come without costs. As a member-owned organization, we are focused on reducing those costs. We strive to keep ourselves fully invested to earn the best possible return for our members, while ensuring we can meet our members’ liquidity needs. We also have diversified our sources of liquidity so we can take advantage of the most competitive rates in the market. Market/Interest Rate Risk Management When members deposit funds with us, we can choose to invest those funds in a variety of securities that closely match the duration and repricing characteristics of the underlying deposit, resulting in minimal mismatch. For our overnight liabilities that reprice daily, we generally invest such deposits in investments that reprice every month or sooner. We generally match fixed-rate liabilities that mature in excess of one month with fixed-rate securities that have
the same or approximately the same maturity. As a result of the way we manage our balance sheet, when interest rates move, the value of our floating-rate assets and liabilities does not fluctuate significantly. Movements in interest rates do affect our fixedrate securities; however, there also is a corresponding change in the value of the deposit liabilities matched against those fixed-rate securities. Our primary method of measuring interest-rate risk is a Net Economic Value (NEV) calculation. NEV is defined as the fair value of assets less the fair value of liabilities and members’ accounts. The purpose of the NEV test is to determine whether Corporate One has sufficient capital to absorb potential changes to the market value of our assets and liabilities given sudden changes in interest rates. As expected, given our strategy for managing our balance sheet, our stress tests indicate little overall NEV volatility should interest rates move up or down. Figure One illustrates how closely matched our balance sheet is as a result of our strategy. This graph
Figure One: Repricing Sensitivity - December 31, 2005 (Dollar amounts are in millions) ASSETS
$2,000
Liabilities
$1,500 $1,000 $500 0-30 days
31-90 days
91-180 days
181-365 days
1-3 years
3+ years
Financial Review
also illustrates that the majority of our assets and liabilities have effective durations (or the period of time until the instrument reprices) of less than 30 days. This relatively short-term duration also helps reduce our interest rate risk. NEV scenarios are performed monthly, testing for a sudden and sustained increase or decrease in interest rates of 100, 200 and 300 basis points. A summary of Corporate One’s NEV calculation as of December 31, 2005 and 2004 is shown in Table Four. At December 31, 2005 and throughout 2005, we maintained well below the 28 percent change-from-base limit imposed by our Board and the NCUA to maintain our Part I expanded authority. Also, our NEV ratio at December 31, 2005 and throughout 2005 in all scenarios was considerably greater than the minimum regulatory ratio of 2 percent. These results are expected, given our strategy for minimizing interest rate risk. To assess the effectiveness of our interest-rate-risk monitoring procedures, we engage an independent asset/liability management consultant to analyze our interest rate risk on a quarterly
basis and report the results of its independent analysis directly to our Asset/Liability Committee (ALCO) and Board of Directors. Credit Risk Management Protecting our members’ investments is our number one objective. Therefore, when we add assets to our balance sheet we take credit risk management very seriously. We have been granted Part I expanded investment authority from the NCUA and this authority allows Corporate One to manage its balance sheet more effectively and take on certain additional credit risk. We believe that the nominal amount of additional credit risk is worth the value we are finding in securities rated AA and A. Our ability to invest in securities with slightly more credit risk and greater returns helps us continue to provide great rates to our members. However, even with the expanded investment authority, we maintain a low credit risk profile because of the strategies we have in place to minimize this risk. These strategies include having policies and procedures in place to ensure that our portfolio is properly diversified and collateralized.
Table Four: Net Economic Value Calculation (Dollar amounts are in thousands)
Net Economic NEV Value Ratio
Actual Actual Dollar Percentage Change Change from Base from Base
As of December 31, 2005 300 b.p. rise in rates Base scenario 300 b.p. decline in rates
$174,567 $195,883 $213,508
5.85% 6.57% 7.16%
-$21,316
-10.88%
$17,625
9.00%
As of December 31, 2004 300 b.p. rise in rates Base scenario 200 b.p. decline in rates
$171,480 $187,491 $191,263
6.06% 6.63% 6.76%
-$16,011
-8.54%
$3,772
2.01%
These exposure guidelines are established by our risk management department, independent of the investing function within Corporate One and affirmed by our ALCO. These policies and procedures require high quality, investment-grade ratings for all investments we purchase. We perform an individual analysis of our investments both before and after we purchase them. The analysis is not only performed by the investment department, but also by our risk management department. The analysis includes an evaluation of the strength and integrity of the parties, and we invest only with the most creditworthy obligors. Risk management also monitors the performance of the underlying collateral in each of these investments for as long as we own the security. Additionally, we primarily invest in securities with credit enhancements such as excess spread, subordination, or financial guarantees by a third party guarantor, which reduce the likelihood that Corporate One will incur credit losses. Based on the dollars invested, more than 40 percent of our investments are asset-backed securities. The collateral backing the majority of these are either auto loans, credit card receivables, student loans, mortgages or home equity loans. Our analysis of asset- or mortgagebacked securities also includes an assessment of the creditworthiness of the collateral backing these securities. However, because this collateral is consumer debt, factors such as a weakened economy can affect the loss experience of the collateral. Should actual loss experience of the collateral exceed expectations,
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(see Figure Two). The level of credit risk we take is low, as indicated by the lack of credit losses we have experienced.
the credit quality of such securities may deteriorate. We use this same methodology when we lend money. We evaluate the credit applicant’s ability to repay loans from us by analyzing their financial strength. Also during the review, we consider the quality and liquidity of the collateral that the applicant pledges to Corporate One to secure borrowings. As a result of our strategy for minimizing credit risk, we have a well-diversified balance sheet. All of our investments are issued by agencies of the U.S. government or have some of the highest credit ratings that Moody’s and Standard and Poor’s assigns; or are issued by U.S. Central, a AAA-rated financial institution, or other regulated depository institutions
Operational Risk Management Corporate One provides a variety of products and services to our members and is reliant on the ability of our employees and systems to process a large number of transactions. Accordingly, Corporate One is exposed to a variety of operational risks including errors and omissions, business interruptions, improper procedures, and vendors that do not perform in accordance with outsourcing arrangements. These risks are less direct than credit and interest rate risk, but managing them is critical, particularly in a rapidly changing environment with
Figure Two: Portfolio Diversification (Based on dollars invested at December 31, 2005)
By Investment Type
U.S. Central
50.14%
By Credit Rating
U.S. Central
50.14%
Asset-Backed Floating 25.68%
AAA Rated
24.63%
Mortgage-Related
11.07%
Agency
14.16%
Asset-Backed Fixed
5.54%
Other
4.48%
Other
4.48%
AA Rated
3.61%
Agency
3.09%
A Rated
2.98%
increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper procedures, we could suffer financial loss and other damage, including harm to our reputation. To mitigate and control operational risk, Corporate One has comprehensive policies and procedures designed to provide a sound and well-controlled operational environment. All vendor relationships are reviewed on an annual basis and a financial analysis of our major business partners is completed. Corporate One also engages an independent accounting firm to perform periodic internal audit procedures on the internal controls of Corporate One. This firm reports monthly on such procedures to Corporate One’s Supervisory Committee and Board of Directors. Additionally, business continuity plans exist and are tested for critical systems, and redundancies are built into the systems as deemed appropriate.
Financial Review
Supervisory Committee
Report from the Supervisory Committee From left to right: Michael P. Cooper, AurGroup Financial CU James A. Depue, CES CU (Board Liaison) Sonja J. Hann, Midwest Community FCU (Chairman) Not pictured: Edward J. Enyedy, School Employees Lorain County CU
Corporate One’s 2005 financial statements, prepared by management, were audited in accordance with auditing standards generally accepted in the United States of America by KPMG LLP, Independent Certified Public Accountants. KPMG LLP’s report on Corporate One’s financial statements is included within this annual report. In addition to the annual audit, Condit and Associates, Independent Certified Public Accountants, performs periodic
internal audit procedures on the financial statements and internal controls of Corporate One, and reports monthly on such procedures to Corporate One’s Supervisory Committee and Board of Directors. Based on the annual audit and internal audit procedures, the Supervisory Committee is confident that Corporate One is subjected to a thorough and professional examination process.
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Independent Auditors’ Report
The Board of Directors Corporate One Federal Credit Union We have audited the accompanying balance sheets of Corporate One Federal Credit Union (Corporate One), as of December 31, 2005 and 2004, and the related statements of income, changes in members’ equity, and cash flows for the years then ended. These financial statements are the responsibility of Corporate One’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Corporate One’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Corporate One has reported share accounts as equity in the balance sheets and statements of changes in members’ equity that, in our opinion, should be reported as liabilities in order to conform with accounting principles generally accepted in the United States of America. If these share accounts were properly reported, liabilities would
increase and members’ equity would decrease by $2,534,993,350 and $2,508,358,948 as of December 31, 2005 and 2004, respectively. In our opinion, except for the effects on the balance sheets and statements of changes in members’ equity of reporting share accounts as members’ equity, as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Corporate One as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Columbus, Ohio March 13, 2006
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Balance Sheets
December 31, 2005
Assets Cash and cash equivalents Investments in financial institutions Securities available for sale, at fair value Loans to members Deferred deposits Other assets
TOTAL ASSETS
Liabilities and members’ equity Liabilities: Commercial paper and other borrowings Dividends and interest payable Accounts payable and other liabilities TOTAL LIABILITIES
$
90,303,958 1,462,161,597 1,260,723,253 61,703,313 122,033,886 23,748,401
$
$
3,020,674,408
$ 2,856,720,575
$
363,500,000 9,062,692 2,887,816
Members’ equity: Share accounts Paid-in capital Reserves and undivided earnings Accumulated other comprehensive loss TOTAL MEMBERS’ EQUITY
TOTAL LIABILITIES AND MEMBERS’ EQUITY
See accompanying notes to financial statements.
2004
$
$
109,996,541 1,254,451,277 1,332,764,591 28,098,309 110,765,673 20,644,184
233,460,000 6,639,884 3,301,590
375,450,508
243,401,474
2,534,993,350 25,681,996 85,800,284 (1,251,730)
2,508,358,948 25,681,996 79,376,015 (97,858)
2,645,223,900
2,613,319,101
3,020,674,408
$ 2,856,720,575
Financial Review
Statements of Income Interest income: Investments and securities Loans to members
Year ended December 31, 2005
2004
$ 90,149,925 1,667,092
$ 54,871,237 484,629
TOTAL INTEREST INCOME
91,817,017
55,355,866
Dividend and interest expense: Share accounts Other borrowings Commercial paper
68,303,833 9,514,661 1,490,864
39,438,053 3,190,121 621,414
TOTAL DIVIDEND AND INTEREST EXPENSE
79,309,358
43,249,588
NET INTEREST INCOME
12,507,659
12,106,278
17,093,299 9,516,518
18,061,991 9,834,339
Settlement income: Settlement fees Settlement expense
NET SETTLEMENT INCOME
7,576,781
8,227,652
Net gain on sales of securities
1,091,914
1,012,114
7,717,833 5,111,327 1,249,511
6,899,855 4,415,973 1,026,869
14,078,671
12,342,697
7,097,683
9,003,347
Operating expenses: Salaries and employee benefits Office operations and occupancy expense Other operating expenses
TOTAL OPERATING EXPENSES
Income before cumulative effect of change in accounting
Cumulative effect of change in accounting
NET INCOME See accompanying notes to financial statements.
401,712 $ 7,499,395
$ 9,003,347
Financial FinancialReview Review
Statements of Changes in Members’ Equity
Balance at January 1, 2004
Share Accounts
Paid-In Capital
Reserves and Undivided Earnings
$ 2,172,785,714
$ 25,681,996
$ 70,974,790
Accumulated Other Comprehensive Income (Loss) $ 2,862,633
Total Members’ Equity $ 2,272,305,133
Comprehensive income: Net income 9,003,347 Other comprehensive income unrealized loss on securities available for sale, net of realized gains (2,960,491)
(2,960,491)
Comprehensive income
6,042,856
Net change in share accounts
335,573,234
Dividends on paid-in capital Balance at December 31, 2004
2,508,358,948
25,681,996
(602,122) 79,376,015
(97,858)
9,003,347
335,573,234 (602,122) 2,613,319,101
Comprehensive income: Net income 7,499,395 Other comprehensive income unrealized loss on securities available for sale, net of realized gains (1,153,872)
(1,153,872)
Comprehensive income
6,345,523
Net change in share accounts
26,634,402
Dividends on paid-in capital Balance at December 31, 2005
$ 2,534,993,350
See accompanying notes to financial statements.
$ 25,681,996
(1,075,126) $ 85,800,284
7,499,395
26,634,402 (1,075,126)
$ (1,251,730) $ 2,645,223,900
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Statements of Cash Flows
Year ended December 31, 2005
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting Depreciation, amortization and accretion Net gain on sales of securities Net change in dividends and interest payable Other, net
$
NET CASH PROVIDED BY OPERATING ACTIVITIES Cash flows from investing activities: Net change in investments in financial institutions Purchases of securities available for sale Proceeds from maturities and principal paydowns of securities available for sale Proceeds from sales of securities available for sale Net change in deferred deposits Net change in loans to members Net change in NCUA share insurance deposit Purchase of property and equipment
7,499,395
2004 $
9,003,347
(401,712) 2,435,211 (1,091,914) 2,422,808 (3,043,822)
6,173,916 (1,012,114) 2,065,247 (4,907,589)
7,819,966
11,322,807
(207,494,320) (878,234,893)
(368,255,623) (787,323,520)
620,275,528 329,579,848 (11,268,213) (33,605,004) 14,254 (2,379,025)
603,742,730 253,484,571 (30,349,948) (16,785,209) 8,457 (846,084)
(183,111,825)
(346,324,626)
Cash flows from financing activities: Net change in commercial paper and other borrowings Net change in share accounts Dividends on paid-in capital
130,040,000 26,634,402 (1,075,126)
34,302,314 335,573,234 (602,122)
NET CASH PROVIDED BY FINANCING ACTIVITIES
155,599,276
369,273,426
Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year
(19,692,583) 109,996,541
34,271,607 75,724,934
NET CASH USED IN INVESTING ACTIVITIES
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
90,303,958
$ 109,996,541
Supplemental disclosure: Dividends on share accounts and interest paid
$
76,886,550
$ 41,184,341
See accompanying notes to financial statements.
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Notes to Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The purpose of Corporate One Federal Credit Union (Corporate One) is to foster and promote the economic well-being, growth and development of our membership base through effective funds management, along with loan, investment and correspondent services for the ultimate benefit of our credit union members. Corporate One has a national field of membership and operates primarily in the midwest part of the United States. Corporate One is subject to risks in the normal course of business. These include market/interest rate, credit, liquidity and operational risks.
reporting period. Actual results could differ from those estimates.
Corporate One provides credit unions access to the securities market through a branch of CU Investment Solutions, Inc. (ISI), a National Association of Securities Dealers (NASD) registered broker/dealer, housed within its office. As a co-broker of Primary Financial Company LLC (Primary Financial), Corporate One also provides credit unions access to Primary Financial’s SimpliCD program for convenient, nationwide access to competitive rates on federally insured certificates of deposit.
(b) Investments in Financial Institutions Investments in financial institutions consist of interest-bearing deposits primarily in U.S. Central and other federally insured depository institutions, and Federal Home Loan Bank (FHLB) of Cincinnati stock.
The accounting and reporting policies of Corporate One conform with accounting principles generally accepted in the United States of America (GAAP) and prevailing practices within the financial services industry, except as discussed in note 1(h). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the
The following is a description of the more significant accounting policies Corporate One follows in preparing and presenting our financial statements. (a) Cash and Cash Equivalents Cash and cash equivalents include cash and amounts due from depository institutions. Corporate One is required to maintain cash or deposits with the Federal Reserve Bank. The required amount at December 31, 2005 was approximately $3.0 million.
(c) Securities Securities not classified as held to maturity or trading are classified as available for sale, and are carried at fair value. Unrealized gains and losses on these securities are excluded from earnings, and are reported as a separate component of members’ equity. Such securities include those that may be sold in response to changes in interest rates, changes in prepayment risk or other factors. Amortization of premiums and accretion of discounts are recorded as adjustments to interest income from securities using the interest method. Realized gains and losses on the sale of securities available for sale are credited or charged to earnings when realized based on the specificidentification method.
Available for sale and held to maturity securities are evaluated individually to determine if a decline in fair value below the amortized cost is other than temporary. To determine whether the impairment is other than temporary, Corporate One considers whether it has the ability and intent to hold the investment until a price recovery. Corporate One also considers the reasons for the impairment and the severity and duration of the impairment. If the impairment was determined to be other than temporary, the cost basis of the security would be written down to fair value as a new cost basis and the amount of the write down would be included in earnings. (d) Loans to Members Loans to members consist of settlement loans, demand loans, certificate secured loans and term loans. Loans are stated at the current principal amount outstanding. Interest income is accrued on the daily balance outstanding at the borrowing rate. Corporate One evaluates each member’s creditworthiness on a case-by-case basis. Loans are generally collateralized by member credit union share accounts and other member assets. An allowance for loan losses was not considered necessary at December 31, 2005 and 2004 based on management’s continuing review and evaluation of the loan portfolio and its judgment as to the effect of economic conditions on the portfolio. The evaluation by management includes consideration of past loan loss experience, changes in the composition of the loan portfolio, the current financial condition of the borrower, quality of the collateral and the amount of loans outstanding.
Notes to Financial Statements
Corporate One incurred no loan losses in either 2005 or 2004 and considers no loans impaired as of December 31, 2005.
deposits from the general public and usually are not democratically controlled by their members.
(e) Deferred Deposits Deferred deposits represent deposits for which Corporate One has received notification from the Federal Reserve Bank but has not received credit. The Federal Reserve Bank generally credits deferred deposits within one to three days of notification.
If members’ shares had been presented as liabilities, total liabilities would have been $2.53 billion and $2.51 billion greater and members’ equity would have been less by like amounts at December 31, 2005 and 2004, respectively.
(f) Property and Equipment Property and equipment, included in other assets on the balance sheets, are stated at cost net of accumulated depreciation. Depreciation is computed using the straight-line method and is based on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. (g) Income Taxes Corporate One is exempt from federal and state income tax pursuant to Section 501(c)(1) of the Internal Revenue Code and Section 122 of the Federal Credit Union Act, respectively. (h) Members’ Share Accounts Members’ share accounts are classified as equity to denote the ownership interest of the members. This classification conforms to the regulatory requirements of the National Credit Union Administration (NCUA). Corporate One believes that the American Institute of Certified Public Accountants, in publishing a guide opining that credit unions’ savings accounts should be classified as liabilities “consistent with the prevailing practice of mutually owned savings and loan associations and savings banks” erred in not understanding that credit unions are fundamentally dissimilar to such institutions which, for example, accept
Credit unions transacting business with Corporate One are required to be a Partner member or an Associate member. Membership capital shares (MCS) are required for Partner membership in Corporate One. Partner members enjoy Corporate One’s most favorable rates on their investments and enjoy the lowest fees on settlement services. MCS do not have a stated maturity. These shares are not subject to share insurance coverage by the National Credit Union Share Insurance Fund (NCUSIF) and, in the event of liquidation of Corporate One, are payable only after satisfaction of all other claims. Notice of intent to decapitalize is required and once notification is given, the deposit will be redeemed in three years. At December 31, 2005, there were $33,000 shares on notice. Corporate One also offers an Associate membership. Associate members are required to maintain a $5 deposit. They earn lower rates than Partner members on their investments with Corporate One and pay rates on settlement services with Corporate One according to the Associate member rate and fee schedules. (i) Paid-in Capital Paid-in Capital (PIC) shares are investments by member credit unions and denote their ownership interest in Corporate One. PIC has no stated maturity date, requires
a 20-year notice of intent to withdraw, earns dividends that are non-cumulative, and is classified as equity in the financial statements. PIC is not subject to share insurance coverage by the NCUSIF and, in the event of liquidation of Corporate One, is payable only after satisfaction of all other claims and the repayment of MCS. At December 31, 2005, there were $375,000 shares on notice. (j) Reserves and Undivided Earnings Reserves and undivided earnings represent earnings not distributed as dividends to members. Portions of earnings are set aside as reserves in accordance with Corporate One’s policy and the NCUA’s rules and regulations. (k) Settlement Fees Settlement fees are earned on various settlement services provided to credit unions and their affiliates. These services consist of ACH and ATM programs, depository services, share draft processing, and certificate of deposit and securities brokering. (l) Reclassifications Certain reclassifications have been made in the prior year’s financial statements to conform to the presentation for the year ended December 31, 2005. These reclassifications had no impact on net income. 2) Investment in Primary Financial Company LLC In 2003, Corporate One sold the majority of its wholly owned subsidiary Primary Financial to Corporate Exchange, LLC (Corporate Exchange) for cash, a note receivable, and shares of Corporate Exchange. Such shares were approximately 7 percent of the outstanding shares at the date of the acquisition and valued at $9,000. In
Notes to Financial Statements
accordance with applicable accounting guidance at that time, Corporate One’s investment in Primary Financial was accounted for at cost. In March 2004, the Emerging Issues Task Force (EITF) issued EITF No. 0316, Accounting for Investments in Limited Liability Companies (LLC). This EITF indicates that LLC investments should be accounted for using the equity method if the LLC meets criteria similar to that of a partnership. The equity method requires an investor to record an investment at its fair value at the date of acquisition and adjust its carrying amount to recognize the investor’s share of the earnings or losses
of the investee after the date of acquisition.
as a component of settlement fees in the accompanying statements of income.
Corporate One has determined that Primary Financial meets the criteria outlined in EITF No. 03-16 and should be accounted for using the equity method, and as such Corporate One adopted EITF No. 03-16 effective January 1, 2005. Our adoption of EITF No. 03-16 in 2005 resulted in a cumulative effect of change in accounting of $402,000, which represents Corporate One’s share of the net assets of Primary Financial at January 1, 2005. Corporate One also recognized income of $59,000 related to its share of Primary Financial’s earnings in 2005
Corporate One is a co-broker of Primary Financial and, as such, earns a spread on each certificate placed by Corporate One. The original co-broker agreement that was in place prior to the sale r emains in effect, and the terms are similar to the terms of the agreements with other co-brokers. In addition to the consideration received at the time of the sale, for 12 years, Corporate One will receive additional spread on the certificates it places under the co-broker agreement discussed above. Corporate One, for five years, will also
2005 Table One Gross Gross (Dollar amounts are in thousands) Amortized Cost Unrealized Gains Unrealized Losses Securities available for sale: Collateralized mortgage obligations: Fixed-rate Variable-rate Agency and whole loan mortgagebacked and asset-backed securities: Fixed-rate Variable-rate TOTAL SECURITIES AVAILABLE FOR SALE
$
1,061 99,532
144
3 36
247,059 914,323
15 1,572
2,256 688
244,818 915,207
$ 1,261,975
$ 1,731
$ 2,983
$ 1,260,723
Gross Unrealized Losses
Fair Value
Amortized Cost Securities available for sale: Collateralized mortgage obligations: Fixed-rate Variable-rate Agency and whole loan mortgagebacked and asset-backed securities: Fixed-rate Variable-rate TOTAL SECURITIES AVAILABLE FOR SALE
$
14,329 58,744
$
$
Fair Value
$
1,058 99,640
2004 Gross Unrealized Gains
$
8 146
$
12 4
$
14,325 58,886
329,639 930,151
303 1,488
1,372 655
328,570 930,984
$ 1,332,863
$ 1,945
$ 2,043
$ 1,332,765
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receive a portion of the spread on all certificates placed by certain co-brokers that were placing certificates at the time of the sale. Further, for 12 years, Corporate One will receive a royalty on all other co-broker placements of certificates of deposit through Primary Financial. Corporate One recognized income of $551,000 in 2005 and $854,000 in 2004 related to these additional spread and royalty arrangements. Simultaneous with the sale of Primary Financial, Corporate One entered into a management contract with Primary Financial. For a period of two years beginning September 1, 2003,
(3) SECURITIES The amortized cost and fair value of securities at December 31 are summarized in Table One.
Corporate One agreed to provide Primary Financial with executive management services, including executive oversight, event planning and marketing services. For a period of three years beginning September 1, 2003, with the option to renew annually, Corporate One agreed to provide Primary Financial with certain support services including accounting, payroll and benefits administration, technical support and certain treasury functions. Corporate One recognized $475,000 in 2005 and $524,000 in 2004 related to this management contract as a component of settlement fees in the accompanying statements of income.
Table Two (Dollar amounts are in thousands)
Corporate One does not believe any securities in the investment portfolio at December 31, 2005 and 2004 were other than temporarily impaired. The unrealized losses in the portfolio resulted primarily from increases in market interest rates and not from deterioration in the creditworthiness of the issuer. The unrealized losses on securities that have been in loss positions less than 12 months and greater than 12 months at December 31 are summarized in Table Two.
2005
Less Than 12 Months
12 Months or Longer
Fair Value
Fair Value
Unrealized Losses
Unrealized Losses
Total Fair Value
Unrealized Losses
Collateralized mortgage obligations: Fixed-rate $ 1,058 $ (3) $ 1,058 $ (3) Variable-rate $ 56,674 $ (35) 523 (1) 57,197 (36) Agency and whole loan mortgagebacked and asset-backed securities: Fixed-rate 154,115 (838) 81,479 (1,418) 235,594 (2,256) Variable-rate 202,463 (496) 24,214 (192) 226,677 (688) Total Temporarily Impaired Securities $ 413,252 $ (1,369) $ 107,274 $ (1,614) $ 520,526 $ (2,983)
2004
Less Than 12 Months
12 Months or Longer
Fair Value
Fair Value
Collateralized mortgage obligations: Fixed-rate Variable-rate Agency and whole loan mortgagebacked and asset-backed securities: Fixed-rate Variable-rate Total Temporarily Impaired Securities
$
Unrealized Losses
1,256 $ (2) 1,224
$
Unrealized Losses
7,285 5,374
$ (10) $ (4) (227) (28)
228,119 185,114
(1,145) (627)
35,393 22,470
$ 415,713
$ (1,774)
$ 70,522
Total Fair Value 8,541 6,598
Unrealized Losses $
(12) (4)
263,512 207,584
(1,372) (655)
$ (269) $486,235
$ (2,043)
42/43
The expected distributions of securities available for sale at December 31, 2005 are reflected in Table Three. Expected distributions may differ from contractual final maturities because of scheduled principal paydowns and because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The majority of the variable-rate securities are amortizing securities and the entire principal amount outstanding is included in the maturity category that corresponds with the final return of principal. At December 31, 2005, approximately 80 percent of the dollar amount of Corporate One’s securities were variable-rate securities, the majority of which had interest rates that reset monthly, predominantly based upon LIBOR. Of these variable-rate securities, 20 percent of the dollar amount of such securities had interest rate caps that are fixed at the time of issuance and the caps range from approximately 5 percent to 18 percent. Less than 2 percent of the dollar amount of variable-rate securities had interest rate caps that fluctuate depending on the resetting of the interest rate on the underlying collateral of the security. Table Four provides a summary of securities’ gain (loss) activity and the net represents other comprehensive loss. (4) OTHER ASSETS Included in other assets is a deposit with the NCUA for share insurance, accrued interest receivable, accounts receivable and net property and equipment. Members’ shares are insured by the NCUA up to $100,000. For such insurance coverage to be in place, Corporate One must maintain a
non-interest-earning NCUA share insurance deposit in an amount equal to 1 percent of Corporate One’s total insured shares. At December 31, 2005 and 2004, the deposit was $649,099 and $634,846, respectively. Property and equipment, valued at cost less accumulated depreciation, at December 31 are summarized in Table Five. (5) COMMERCIAL PAPER, LINES OF CREDIT AND OTHER BORROWINGS Corporate One had no outstanding
Table
commercial paper at December 31, 2005 and 2004. Commercial paper outstanding averaged approximately $47.0 million and $44.7 million during 2005 and 2004, respectively, and the maximum amount outstanding at any month-end during 2005 and 2004 was $175.0 million and $85.0 million, respectively. Corporate One sells securities under agreements to repurchase the same or “substantially the same” security at a specified future date and price. The securities underlying the agreements are delivered to broker/dealers who
Three
(Dollar amounts are in thousands) Fixed-rate: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years
Maturity Distribution Amortized Cost $
TOTAL FIXED-RATE SECURITIES AVAILABLE FOR SALE Variable-rate: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years
$
Less: Net realized gain from sales of securities available for sale OTHER COMPREHENSIVE LOSS
127,396 110,958 590 6,932
99,304 361,098 334,436 219,017
245,876 $
99,376 361,461 334,951 219,059
1,013,855
1,014,847
$ 1,261,975
$ 1,260,723
Four Table (Dollar amounts are in thousands) Net unrealized loss on securities available for sale arising during the period
$
248,120
TOTAL VARIABLE-RATE SECURITIES AVAILABLE FOR SALE TOTAL SECURITIES AVAILABLE FOR SALE
128,141 112,441 605 6,933
Fair Value
2005
$
(62) 1,092
$ (1,154)
2004
$
(1,948) 1,012
$ (2,960)
Notes to Financial Statements
arrange the transaction. The broker/ dealers may have sold, loaned or otherwise disposed of such securities in the normal course of their operations and have agreed to resell to Corporate One the same or “substantially the same” security at the maturity of the agreement. At December 31, 2005 and 2004, Corporate One had no agreements to repurchase securities. Corporate One did not sell any securities under agreements to repurchase during 2005. During 2004, Corporate One sold securities under agreements to repurchase that averaged approximately $12.5 million and the maximum outstanding at any month-end was $113.0 million. Corporate One has received commitments from several financial institutions enabling Corporate One to borrow funds under revolving lines of credit through October 2006. At December 31, 2005 these commitments totaled $135.0 million and no amounts were outstanding on these lines of credit. The interest rates on these lines are indexed off of money market rates, primarily LIBOR, plus a margin of up to 50 basis points. As collateral for these lines of credit, Corporate One has pledged securities to these financial institutions that have a fair value of approximately $153.1 million. In addition, Corporate One has an uncommitted line of credit with U.S. Central that, by its nature, may be withdrawn by U.S. Central. Corporate One may take advances on this line of credit up to $750.0 million based on the amount of eligible collateral available to support such advances. Eligible collateral consists of all shares and certificates with U.S. Central. As such, all of Corporate One’s shares and certificates
with U.S. Central have been pledged under this line of credit agreement. The interest rate on this line is variable and is established by U.S. Central on a daily basis. At December 31, 2005 and 2004, Corporate One had $29.0 million and $13.5 million outstanding, respectively, on this line of credit. As a member of the FHLB of Cincinnati, Corporate One is eligible to take advantage of the FHLB’s numerous credit products and advances. Advances and borrowings from the FHLB are required to be collateralized by securities held in safekeeping by the FHLB. At December 31, 2005 and 2004, Corporate One had securities held in safekeeping at the FHLB with fair values of approximately $385.7 million and $339.0 million, respectively,
which provided a borrowing capacity of $334.5 million and $302.0 million, respectively. At December 31, 2005 and 2004, borrowings of $334.5 million and $220.0 million were outstanding at interest rates of 4.12 percent and 2.20 percent, respectively. These borrowings matured in January 2006 and January 2005, respectively. (6) SHARE ACCOUNTS AND PAID-IN CAPITAL Balances and weighted average rates of share accounts and PIC at December 31 are summarized in Table Six. Settlement and regular share accounts are available to members on demand and pay dividends either
Table Five
2005
2004
$ 4,287 11,044
$ 4,249 8,765
15,331
13,014
8,703
7,349
$ 6,628
$ 5,665
(Dollar amounts are in thousands) Buildings and improvements Equipment Less: Accumulated depreciation NET PROPERTY AND EQUIPMENT
Table Six
2005
(Dollar amounts are in thousands) Settlement and regular shares
Balance
Rate
Balance
Rate
$ 1,217,184
3.33%
$ 1,307,854
1.78%
1,232,788
3.71%
1,120,113
2.58%
85,021
3.75%
80,392
1.75%
2,534,993
25,682
5.25%
Share certificates MCS TOTAL SHARE ACCOUNTS PIC
2004
$
$ 2,508,359 $
25,682
3.25%
Notes to Financial Statements
daily or monthly. Share certificate accounts have specific maturities and dividend rates. Dividend payments on share certificate accounts vary according to the type of share certificate issued and the length of maturity. Total share certificate accounts by maturity at December 31, 2005 are summarized in Table Seven.
established in the contract. Advances on these commitments generally require repayment within one year of the advance. Since a portion of the commitments are expected to terminate without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
(7) COMMITMENTS AND CONTINGENCIES Corporate One is a party to various financial instruments with off-balancesheet risk that are used in the normal course of business to meet the financing needs of our members and to manage our exposure to market risks. These financial instruments involve, to varying degrees, elements of credit risk that are not recognized in the balance sheets.
(8) RETIREMENT PLAN Corporate One is a party with Primary Financial to two defined contribution plans which cover substantially all of their employees. One of the plans is a contributory plan, to which employees can contribute a portion of their compensation on a pre-tax basis. In 2005 and 2004, for each eligible participant, Corporate One contributed a total of 11.5 percent of the participant’s eligible compensation to the participant’s accounts in the plans. Retirement expense was approximately $640,000 in 2005 and $474,000 in 2004.
These financial instruments include commitments to extend credit. The contractual amounts of these instruments represent the extent of Corporate One’s exposure to credit loss. Corporate One uses the same credit policies in making these commitments and obligations as it does for onbalance-sheet instruments. In extending commitments, Corporate One evaluates each member’s creditworthiness on a case-by-case basis. All outstanding commitments are subject to collateral agreements and have termination clauses. At December 31, 2005 and 2004, these financial instruments included outstanding commitments to extend credit totaling approximately $874.0 million and $700.0 million, respectively. Commitments to extend credit to members remain effective as long as there is no violation of any condition
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by Corporate One using available market information and appropriate valuation methodologies. Due to their short-term nature, the fair values of cash and cash equivalents, deferred deposits, NCUSIF deposit, and dividends and interest
payable approximate carrying values. The fair values of loan commitments are determined based on the fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the present creditworthiness of the counterparty. Neither the fees earned during the year on these instruments nor their fair value at year’s end are material to the financial statements. The fair values of Corporate One’s remaining financial instruments were based on the following methods and assumptions: • Investments in financial institutions are based on discounted cash flow analyses using current market rates. • Securities available for sale are based on quoted market prices. • The fair value of loans to members is estimated using discounted cash flow analyses, using interest rates currently offered for loans with similar terms to members of similar credit quality. • The fair value of commercial paper and other borrowings is based on discounted cash flow analyses using current market rates. • The fair values approximate carrying values for share accounts payable on demand at the balance sheet date. The fair value of fixed-maturity share accounts is
2005
Table Seven (Dollar amounts are in thousands) Due in 90 days or less
$
233,180
Due after 90 days through one year
577,110
Due after one year through five years
417,276
Due after five years TOTAL SHARE CERTIFICATES
5,222 $ 1,232,788
44/45
estimated by discounting the future cash flows using the rates currently offered for share certificates of similar remaining maturities. The fair values of Corporate One’s financial instruments at December 31 are summarized in Table Eight. (10) REGULATORY REQUIREMENTS The NCUA periodically examines Corporate One’s operations as part of its legally prescribed oversight of credit unions. Based on its examination, the NCUA can direct Corporate One to change operations and management, adjust historical financial statements, and make other changes in accordance with their findings. Additionally, the NCUA requires that corporate credit unions maintain a minimum capital ratio (capital divided by 12 month rolling daily average net assets (DANA)) based upon the corporate’s investment authority as authorized
by the NCUA. There are a number of remedies available to a corporate credit union should its capital ratio fall below the required minimum ratio. However, despite such remedies, the NCUA could restrict the corporate’s ability to, among other things, accept additional deposits, open new accounts, make loans or pay dividends. Throughout 2005 and 2004, Corporate One’s capital ratio exceeded the required minimum regulatory ratio of 5 percent. The NCUA defines capital as reserves and undivided earnings, PIC and MCS. At December 31, 2005 and 2004, Corporate One maintained a regulatory capital ratio of 7.05 percent and 6.93 percent, on total regulatory capital of $196.5 million and $185.5 million, respectively. The NCUA also requires a corporate credit union to retain earnings of up to 15 basis points of DANA if its retained earnings ratio (reserves and undivided earnings divided by 12 month
2005
Table Eight
(Dollar amounts are in thousands) Assets: Cash and cash equivalents Investments in financial institutions Securities available for sale Loans to members Deferred deposits NCUSIF deposit Liabilities and members’ equity: Commercial paper and other borrowings Dividends and interest payable Share accounts
rolling DANA) falls below 2 percent. Throughout 2005 and 2004, Corporate One’s retained earnings ratio exceeded 2 percent. At December 31, 2005 and 2004, Corporate One’s retained earnings ratio was 3.08 percent and 2.97 percent, respectively, on total reserves and undivided earnings of $86.0 million and $79.0 million. As of March 13, 2006, Corporate One was in compliance with all of the above capital regulatory requirements.
Carrying Value
2004 Fair Value
$
90,304 1,462,162 1,260,723 61,703 122,034 649
$
90,304 1,454,847 1,260,723 61,579 122,034 649
$
363,500 9,063 2,534,993
$
363,464 9,063 2,534,993
Carrying Value
$
109,997 1,254,451 1,332,765 28,098 110,766 635
$
233,460 6,640 2,508,359
Fair Value
$
109,997 1,251,171 1,332,765 28,079 110,766 635
$
233,440 6,640 2,508,359
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