STR E N GTH and STRATE GY
2007 ANNUAL REPORT
TAB LE O F C O NTE NTS
02 06 10 14 16 18 22 34 35 36 40
Strength: Products Strength: Position Strength: People Strength: People - Board of Directors Strategy: Philosophy Strategy: Senior Management Management’s Discussion and Analysis of Financial Condition and Results of Operations Report from the Supervisory Committee Report of Independent Auditors Financial Statements Notes to Financial Statements
STR E N GTH
STRATE GY
Corporate One Federal Credit Union’s core strengths, products, position and people, enable us to formulate effective strategies for creating value and helping our members succeed.
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STR E N GTH
F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
P R O D U CTS
Corporate One offers a full array of products that are turnkey, innovative and designed to let credit unions do what they do best – serve their members. • ACH Origination and Intercept • Alliance One • Automated Capture & Exchange (ACE) • ATM/Check Card programs • Business Checking • CARPooL • Charlie Mac • CU Risk Manager • CU Student H.E.L.P. • DEPOSIT CHEK® Reader • Government and agency securities • Investments • JumboExpress • Securities Safekeeping • Share Draft Processing Services • SimpliCD • Settlement and Wire Transfer Services
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STR E N GTH
P R O D U CTS
A history of innovative solutions Over the years, Corporate One has developed a host of products and services that help credit unions reduce costs, improve efficiencies and better serve their members. The development and delivery of four Last year, our members collected nearly 23 million deposit items valued at $17.5 billion through ACE and imaged nearly 29 million documents in our searchable database.
solutions in particular illustrate Corporate One’s forward-thinking vision. ACE is a turnkey solution that allows any credit union to make the leap to electronic deposit automation. At the end of 2007, we had performed 669 ACE installations, giving our members a powerful deposit automation solution that creates efficiencies and saves them money. Plus, with a turnkey integration with Diebold and NCR, credit unions can now pass items directly from their image-enabled ATMs to their network for processing by ACE – effectively reducing the cost of entry for end-to-end ATM deposit automation. ACE is truly the #1 branch deposit capture and image database solution for credit unions – period. Alliance One, our national selective-surcharge ATM group, allows credit unions to offer their cardholders surcharge-free ATM access at more than 4,500 ATMs nationwide while driving more traffic – and interchange income – to credit unions that own ATMs. Plus, through a partnership with Affiliated Computer Services, Inc., Alliance One gives surcharge-free ATM access to residents in five states who receive state-issued benefits and payments via debit cards. Through this arrangement, Alliance One also promotes the advantages
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of credit union membership to state benefits cardholders. In addition, the partnership gives ATM access to federal benefits recipients nationwide. Our track record of innovation spans asset/liability management as well. In 1996, Corporate One founded Primary Financial Company LLC (Primary Financial) and developed SimpliCD, a turnkey certificate of deposit program that lets credit unions easily invest in federally insured certificates of deposit, helping them diversify their portfolio and increase their yield. Today, Primary Financial is owned by the corporate credit union network and is one of the most successful corporate credit union service organizations (CUSOs) in America. We continue to innovate. As the discipline of enterprise-wide risk management (EWRM) continues to grow throughout our movement and in corporations worldwide, Corporate One is on the forefront of this trend. In 2005, we began to transform our internal culture to adopt EWRM. Today, through our CU Risk Manager solution, we’re leading the way to help our members understand and adopt EWRM. CU Risk Manager provides credit unions with the tools and expertise to develop an EWRM program, a comprehensive business plan, attainable success metrics and detailed process accountability. Our history of developing original and unique solutions for credit unions speaks for itself. At Corporate One, innovation is one of our strengths.
In 2007, Alliance One added nearly 600 ATMs, including 330 ATMs in Sheetz convenience stores in six states.
STR E N GTH
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P O S ITI O N
As a financial cooperative, Corporate One uses aggregation as a model to realize efficiencies and create value for the nearly 800 credit unions we serve. Our cooperative structure, our emphasis on safe and sound management and our reputation as a leader are important assets in our business.
Jim Riederer President/CEO CME FCU Columbus, OH
STR E N GTH
P O S ITI O N
A position of stability and strength 2007 will be remembered as a year of challenges. Dislocations in the credit markets, the bursting of the housing bubble, questionable lending practices and other issues led to much uncertainty and instability in the marketplace. However, because Corporate One employs conservative investment strategies and is structured to ensure adequate controls of responsibilities, Selected Financials (as of 12/31/07) Regulatory capital – $228 million
we were able to rise to those challenges. Corporate One was not totally unaffected by these dislocated markets, as reflected in the unrealized loss on our securities available for sale. But because we have always focused
Capital ratio – 5.99%
on maintaining a high quality, diversified investment portfolio, our investment
Return on assets – 41 basis points
and risk management strategies enabled us to weather the uncertainty and experience one of our best years ever. At Corporate One, we adhere to a conservative approach to portfolio management. Our primary strategy is to invest in securities that maximize the investment returns for our members while preserving capital and maintaining liquidity and diversification. Additionally, one of the stabilizing forces of our organization is that, as a full service corporate, we generate much of our net income from service fees. Our correspondent solutions serve as alternate income streams that are reliable and less subject to market fluctuations.
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Like our financial position, our reputation in the marketplace remains strong. Corporate One is a leader in the credit union network and in the financial and payments industries. Our board and management are valued experts, many of whom sit on advisory groups and boards for other leading organizations. All of these strengths helped us achieve much success in 2007, including net income that was $15.7 million, a $10 million increase over 2006. Also, as a result of our strong earnings, our Reserves and Undivided Earnings (RUDE) broke the $100 million mark last year. Contributing to this record year was net interest income of $21.5 million, a $7.9 million increase over 2006 and the highest ever earned in our history. Corporate One remains well positioned for the future and we continue to focus on providing value to members through a cooperative model.
Corporate One maintains the highest possible commercial paper ratings available from Moody’s and Standard & Poor’s (P-1 and A-1+, respectively).
STR E N GTH
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P E O P LE
It sounds clichÊ, but the people really do make all the difference. While Corporate One is a leading wholesale financial services provider with more than $4.2 billion in assets under management, we’re built on the expertise and cooperative spirit of our people.
Steve Behler President/CEO Kemba CU Cincinnati, OH
STR E N GTH
P E O P LE
Bob Ellwood President/CEO Industrial FCU Lafayette, IN
We the people… At Corporate One, our members, board, management and staff are valuable assets in our success and in the success of the credit union movement. As a member-owned organization, Corporate One’s decision-making is guided by our volunteer board of directors. They serve as the sounding board against which we measure our perspective and their vision helps us see the future of the credit union movement and formulate strategies for success. Corporate One knows credit unions.
Those strategies are put into place by our skilled management team. Their
In fact, our staff has worked at more
expertise in asset/liability management, risk management, accounting,
than 20 credit unions, corporates, leagues and associations – and our
operations, marketing, information technology, human resources and facilities management help to make Corporate One a leader in our industry.
CEO is a former natural person credit union CEO.
Most importantly, our members share a common sense of belonging to an organization that focuses on their needs and helps them better serve their members. In 2007, more and more credit unions saw the value in Corporate One membership. Forty-five new members joined Corporate One last year, bringing our total to 793 members at the end of the year. Our diverse membership includes 25 of the 100 largest credit unions in America†, as well as more than 400 credit unions with less than $25 million in assets. No matter what size or shape, credit unions belong with Corporate One. Many of those new members joined Corporate One via Processing Alliance,
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LLC, our CUSO co-owned with CU*Answers. This strategic partnership has
been instrumental in introducing us to many new credit unions and has helped us create many new relationships. Corporate One continues to be a leader in supporting the credit union movement around the neighborhood and around the globe. We continue to partner with the World Council of Credit Unions to help credit unions and their members in countries like Bolivia and China. Nationally, Corporate One is a platinum sponsor of the National Credit Union Foundation and we recently increased our investment in the Community Investment Fund to $10 million. On a regional scale, in 2007, our staff raised more than $6,000 for the Ohio Credit Union League Political Action Committee and we donated $5,000 to the Indiana Credit Union Foundation. Locally, our management and staff held a blood drive for the American Red Cross and donated more than $1,000 and 3,100 pounds of food to the Mid-Ohio Food Bank. Taken together, our people help make us a respected leader and one of the most progressive corporate credit unions in America. As of September 2007, Callahan & Associates
â€
Cathy Dahlbeck CEO Credit Union Plus Bay City, MI
STR E N GTH
P E O P LE
Corporate One Board of Directors From the Chairman and the President A letter to our members For our credit union movement and for Corporate One, 2007 was a remarkable year in many ways. In some respects, it was Corporate One’s best year ever. We set new records in net interest income, average assets, reserves and
TH E P R E S I D E NT AN D C HAI R MAN (pictured left to right)
undivided earnings and membership capital shares. Plus, with the exception of 2003, when we sold Primary Financial to the corporate credit union network, Corporate One has never had higher annual net income than it did in 2007.
Lee C. Butke, President/CEO
The synergy between our innovative products, our financial position and our exceptional people has allowed us to put winning strategies in place for our members. ACE is tangible evidence of
Jerome R. Valco, Chariman CEO, The Ohio Educational CU
that fact. Back in 2003, our board and senior management saw an opportunity to put credit unions on the cutting edge of the electronic deposit processing environment by shouldering much of the risk and cost of entry. By the end of 2007, member credit unions were processing an average of 2.5 million items a month – totaling an average of $1 billion each month – using ACE.
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When innovation and collaboration intersect, great things can be
B OAR D M E M B E R S (pictured left to right)
accomplished. Most of all, we’re proud to say that we were able to accomplish all of this during one of the toughest years in recent memory for the markets. Our conservative approach to portfolio management served us well once again in 2007, making it a banner year for Corporate One. We would like to thank our board of directors, management team and staff. Our people are truly our most valuable asset, as they formulate our vision and help to put our strategies into place.
R. Lee Powell, DESCO FCU Phillip R. Buell (Secretary), Superior FCU John J. Shirilla (Treasurer), Best Employees FCU Janice L. Thomas, PSE CU
Finally, thank you to our nearly 800 credit union members nationwide. Your trust and support are the most important factors in Corporate One’s success.
Gerald D. Guy (Vice Chairman), Kemba Financial CU James A. Depue, CES CU Stephen F. Halas, retired
Jerome R. Valco, Chairman
Lee C. Butke, President/CEO
Charles F. Plassenthal, Dayton Firefighters FCU
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STRATE GY
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F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
P H I LO S O P HY
At Corporate One, we create value for our members by focusing on three key fundamentals: service quality, service value and safety and soundness. These core principles drive everything we do. Most importantly, they help us to formulate strategies that result in success for our members.
Rick Heldebrant CEO Star One CU Sunnyvale, CA
STRATE GY
P H I LO S O P HY
Corporate One Senior Management As we’ve outlined in this year’s report, Corporate One’s strengths – innovation, safety and soundness, and our people – set the stage for our success. But what separates us from our peers is our ability to combine our strengths with our unique vision for the future of the credit union movement. To thrive as a progressive corporate, we will keep listening to our members and considering their needs, both today and in the future. We will continue to re-invest in new opportunities for all our members – opportunities like some of the solutions we’ve highlighted throughout this report. The true test of how well we’re doing really rests in our members’ ability to help their own members. As such, we also believe in supporting political action committees that advance the causes of credit unions. We also understand
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and internationally to clearly demonstrate our movement’s
SENIOR MANAG E M E NT
cooperative ideals in word and in action.
(pictured left to right)
that we need to be good corporate citizens locally, nationally,
Furthermore, we view honesty and full disclosure as critical in building and keeping a high level of trust by and between our board, management, staff, regulators and members. Finally, we believe that member value is created when Corporate One operates in a safe and sound manner and provides high quality and competitive solutions delivered by friendly, supportive, and knowledgeable people. Strength and strategy: that synergy is what drives our business and makes Corporate One the successful organization we are today.
Cheri Couture, VP, Human Resources and Administration Kurt Lykins, VP and Chief Technology Officer Melissa Ashley, VP and Chief Financial Officer Robert Coyan, SVP, Marketing and Operations Tammy Cantrell, SVP, Asset/Liability Management Joe Ghammashi, VP and Chief Risk Officer
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F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
F I NAN C IAL R EVI EW
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MANAG E M E NT’S D I S C U S S I O N AN D ANALYS I S O F F I NAN C IAL O N D ITI O N AN D R E S U LTS O F O P E RATI O N S FinancialCReview
2007 in Review 2007 was a record year for Corporate One. Net income for 2007 was $15.7 million, a $10 million increase over 2006. This was the most we’ve ever earned in one year, excluding 2003 when we sold Primary Financial Company LLC (Primary Financial) and recognized a one-time gain. As a result of our strong earnings, our Reserves and Undivided Earnings (RUDE) broke the $100 million mark in 2007. Contributing to this record year was net interest income of $21.5 million, a $7.9 million increase over 2006 and the highest ever earned in our history. Throughout 2007 we offered competitive rates on our investments and great service. As a result, we were able to add 45 new members with combined assets of $6.4 billion. Deposits from these new members and increased deposits from our existing members boosted our average assets to $3.8 billion, the highest level in our history. This increase in average assets contributed to the increase in net interest income. We also implemented yield-enhancing strategies in 2007 to take advantage of the dislocation in the credit markets. These strategies boosted our net interest margins, which contributed greatly to the increase in net interest income. As we employed our yield-enhancing strategies, we redeemed certificates with U.S Central and sold securities, which resulted in a net gain of $549,000, compared to $215,000 in 2006. We did this to reposition our portfolios. Also, because our Partner members enjoy some of the best rates that we offer, we had 22 new Partner members capitalize with us in 2007. These new Partners invested $13.9 million in Membership Capital Shares (MCS), which drove our total MCS to its highest level ever. In addition to our competitive investment offerings, Corporate One is also focused on providing its members with valuable correspondent services that keep pace with emerging technology. We offer our members a complete package of correspondent solutions including ATM/check card programs, share draft processing and imaging, Automated Capture & Exchange (ACE) 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. ACE continues to be the number one turnkey ATM/branch deposit capture and image database solution for credit unions. Corporate One invested considerable amounts of time and money over the past several years developing a solution that would truly meet the needs of credit unions. We considered the obvious advantages to our members such as reduced handling costs, faster clearing and return times, reduced float and reduced opportunities for fraud. However, we also developed a solution that would provide our members with increased reporting capabilities and a researchable database of images. Our members see the value in this service and at the end of 2007, we had completed 669 ACE installations. This was a 45% increase over 2006. As a result, net service fee income from ACE in 2007 increased 360.3% over 2006. Revenue from this product was the primary contributor to a $2.5 million increase in net service fee income over 2006. This increase boosted our total net service fee income to $10.5 million in 2007, the highest in our history. Total operating expenses were $16.8 million in 2007, a 4.3% increase over 2006. This increase was fairly modest relative to our growth in revenue and was significantly less than the increases over the past several years. Since 2005, we have invested in the development and deployment of ACE, which involved establishing an infrastructure of people and technology capable of supporting this new product for the long term. Many of these infrastructure costs are fixed expenses, so now that we have completed the initial rollout period, we have reached a point where our revenue from this product is growing faster than our expenses. In a typical year, other comprehensive income, which represents the change in the fair value of our securities available for sale, would not even be worth discussing. Rarely do the fair values of our securities ever vary in any meaningful way. However, 2007 will be remembered as a year of unprecedented widening of credit spreads, which resulted in unrealized losses on many of our securities available for sale. What started as unsettled conditions in the mortgage markets, quickly turned to concerns about liquidity, causing all credit-related securities to experience deterioration
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in spreads and, hence, in fair values. Because of these conditions, we ended 2007 with an accumulated other comprehensive loss of $74 million. We take the responsibility of investing our members’ money very seriously. As a result, we are careful to invest in securities of very high credit quality. Given the strong credit quality of our securities and our ability and intent to hold these securities until the anticipated recovery, these fair-value adjustments are expected to reverse as the credit markets stabilize or the securities approach their maturity date. Capital Position Our members and prospective members review our capital as part of their evaluation of our safety and soundness. Since December 31, 2006, our total capital, which includes RUDE, MCS and paidin capital (PIC), increased approximately $26.5 million, or 13.1% to $228.2 million at December 31, 2007. This increase was due to strong earnings, which boosted RUDE to over $100 million in 2007 for the first time in Corporate One’s history. Additionally, we received membership capital from 22 new Partner members in 2007. This commitment by so many credit unions to capitalize with us demonstrates that credit unions find value in their partnership with Corporate One. We understand the importance of adequate capital; however, we also believe it is important to effectively utilize our capital for the benefit of our members. Accordingly, we have a strategy to grow our balance sheet, within certain regulatory parameters, whether it is through funding provided by increased member deposits or increased use of borrowings. In 2007, we continued to be successful in this effort and our average assets increased $436.2 million or 12.9% over 2006. The benefit of this strategy is the opportunity to earn income on these additional assets, which in turn allows us to continue to grow and pay competitive rates. We continue to use our asset/liability strategy to maximize our return on equity, while adhering to our own risk constraints and regulatory limits. As of December 31, 2007, our regulatory capital ratio was 5.99%, 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%. Selected Financial Information
A s of and for the year ended December 31,
(Dollar amounts are in thousands) Net Interest Income
2007 $
Net Service Fee Income
21,490
2006 $
10,499
2005
13,607
$
7,989
12,507
2004 $
12,106
2003 $
12,663
7,577
8,228
10,109
Net Gain on Disposals of Assets
25
Net Gain on Investments
549
215
22 1,092
1,012
675
Total Operating Expenses
16,819
16,122
14,079
12,343
12,565
INCOME BEFORE OTHER ITEMS
15,744
5,711
7,097
9,003
10,882
OTHER ITEMS*
402
6,880
NET INCOME
$
15,744
$
5,711
$
7,499
$
9,003
$
17,762
RUDE
$ 104,171
$
89,981
$
85,800
$
79,376
$
70,975
PIC
25,682
25,682
25,682
25,682
25,682
MCS
98,388
86,057
85,022
80,393
74,380
Total Capital
$ 228,241
$
201,720
$ 196,504
$ 185,451
$ 171,037
Average Assets
$ 3,809,373
$ 3,373,127
$ 2,789,173
$ 2,705,184
$ 2,576,720
Return on Assets
0.41%
0.17%
0.27%
0.33%
0.69%
Regulatory Capital Ratio
5.99%
5.98%
7.05%
6.86%
6.64%
* Other items include the cumulative effect of a change in accounting in 2005 and the net gain on the sale of Primary Financial in 2003.
Net Interest Income We are highly focused on providing credit unions with competitive investment products and great member service. In 2007, our focus paid off, with 45 new members joining Corporate One. We now have investment relationships with 25 of the 100 largest credit unions in the nation. Deposits from these new members, as well as increased balances from our existing members, resulted in an increase in average interest-earning assets of $431.5 million, a 13.0% increase over 2006. This increase in average assets contributed to the increase in net interest income in 2007. In order to attract and maintain share balances, our deposit products have to be competitive, but we 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. They are proactive in calling both members and prospective members to discuss their needs, and communicate those needs to our product development team. Our product development team then works to arm our investment representatives with a variety of products to serve our member credit unions. 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 can also issue share certificates through Primary Financial, providing them a source of liquidity. In addition to SimpliCD, our members have access to securities through a branch of CU Investment Solutions, Inc. (ISI)* housed within Corporate One’s 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. Beyond the competitive pricing, we differentiate ourselves when it comes to selling securities by listening to credit unions and trying to find securities that fit their needs. Because we are also a credit union, we are keenly aware of the importance of complying with the investment stipulations set forth in the National Credit Union Administration (NCUA) regulations. Therefore, we don’t just try to sell securities; we strive to find securities that meet the needs of our members. Since SimpliCD and securities are both off-balance sheet products, they contribute to net service fee income instead of net interest income. However, it is important to mention them in the context of net interest income because these are examples of the investment alternatives we provide our members. We believe that it is critical to offer a variety of investment products. As we focus on providing credit unions with competitive investment products, we must also ensure that Corporate One remains financially strong. Over the past several years, this balance has been particularly challenging given the flat to inverted yield curve. Additionally, in 2005 and 2006, 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. However, in 2007, the unprecedented widening of credit spreads and resulting global liquidity crisis actually helped boost our net interest margins and our net interest income in 2007 to record levels. During the summer of 2007, we employed several strategies that allowed us to take advantage of certain dislocations in the markets. First, to free up our liquidity sources, we redeemed U.S. Central certificates and sold securities, resulting in approximately $770 million in proceeds. As our balance sheet continued to grow, we were more flush with cash and able to invest in securities at exceptionally wide spreads. These were very solid securities that just a few months earlier were trading at historically tight spreads. In addition, this repositioning of our investment portfolio shifted our exposure toward one- and three-month LIBOR, while our liabilities continued to be priced off of federal funds. Typically there is a positive, but fairly tight spread between federal funds and LIBOR. However, despite the Federal Reserve Bank’s action to lower the federal funds rate, the reliance on LIBOR
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* ISI CRD number 43753, Lenexa, Kansas. Member FINRA-SIPC. Marketable securities are subject to market risk and are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund.
funding by most financial institutions, which is not controlled by the Federal Reserve Bank, rose due to the market’s repricing of credit risk. This caused unprecedented spread widening between the two indices and caused a greater return on a larger percentage of our assets. Accordingly, our overall net interest margin was 57 basis points in 2007 compared to 41 basis points in 2006. During this time, we never wavered in our commitment to pay competitive rates and the significant increase in member deposits is proof that we accomplished this. The combined increases in our margin and our average assets resulted in an increase in net interest income. Net interest income was $21.5 million for the year ended December 31, 2007, compared to $13.6 million for the same period in 2006. Table One provides more information on the composition of interest-earning assets, interestand dividend-bearing liabilities and members’ share accounts, and their weighted average rates. The resulting net interest margin of Corporate One for 2007 and 2006 is presented for comparison purposes. Table One: Components of Net Interest Income (Dollar amounts are in thousands)
2007 Average Balance
Interest or Dividends
2006 Average Rate
Average Balance
Interest or Dividends
Average Rate
Interest-Earning Assets: Time deposits $ 3,475 $ 162 Asset-backed securities 779,423 43,844 Mortgage-related securities 1,044,617 58,531 Other investments (primarily U.S. Central) 1,908,285 100,428 Loans to members 17,270 925
4.66% $ 7,830 $ 292 5.63% 616,058 33,006 5.60% 830,152 43,257 5.26% 1,837,837 85,782 5.36% 29,659 1,543
3.73% 5.36% 5.21% 4.67% 5.20%
Total Interest-Earning Assets 3,753,070 203,890
5.43% 3,321,536 163,880
4.93%
Interest- and DividendBearing Liabilities and Members’ Share Accounts: Overnight shares 1,685,458 81,759 Term shares 1,647,225 85,649 Membership capital shares 92,689 4,209 Other borrowings 212,241 10,783
4.85% 1,345,082 63,115 5.20% 1,309,069 59,107 4.54% 86,554 3,859 5.08% 472,424 24,192
4.69% 4.52% 4.46% 5.12%
Total Interest- and DividendBearing Liabilities and Members’ Share Accounts
5.01% $ 3,213,129 150,273
4.68%
$ 3,637,613 182,400
Net Interest Income
$ 21,490
Net Interest Margin
$ 13,607
0.57%
0.41%
Financial Review
Table Two provides a rate and volume analysis that further illustrates changes between 2007 and 2006 in the components of net interest income attributable to dollar volume (changes in volume 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 Two: Volume and Rate Variance Analysis (Dollar amounts are in thousands) Volume
2007 versus 2006 Rate
Volume and Rate
Interest-Earning Assets: Time deposits $ Asset-backed securities Mortgage-related securities Other investments (primarily U.S. Central) Loans to members
(162) $ 73 $ 8,754 1,647 11,175 3,257 3,287 10,939 (645) 46
Total Interest-Earning Assets
22,409
15,962
Interest- and Dividend-Bearing Liabilities and Members’ Share Accounts: Overnight shares 15,971 Term shares 15,268 Membership capital shares 274 Other borrowings (13,324)
2,133 8,959 71 (190)
Total Interest- and Dividend-Bearing Liabilities and Members’ Share Accounts Increase (decrease) in Net Interest Income
$
18,189 4,220
$
10,973 4,989
Total
(41) $ (130) 437 10,838 842 15,274 420 14,646 (19) (618) 1,639
40,010
540 18,644 2,315 26,542 5 350 105 (13,409)
2,965
$ (1,326)
$
32,127 7,883
Service 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 service fee income generated from our fee-based services was $10.5 million for the year ended December 31, 2007, a 31.4% increase from 2006. With a $1.8 million increase over 2006, ACE was the most significant contributor to the overall increase in service fee income in 2007. At the end of 2006, we had more than 460 ACE installations. By the end of 2007, that number had grown to 669. We now have more than 48 million images stored in our researchable image database on behalf of our members. This significant increase in ACE installations resulted in higher volumes and revenue. We expect ACE revenue to continue to increase as we offer this valuable solution to credit unions across the country. Because members using our Access Daily Deposit Service (ADDS) were the first to benefit from our new ACE services, we have continued to see a decrease in gross fee income related to ADDS. However, this is somewhat deceiving on a net basis, because overall net service fee income for ADDS during 2007 was greater than 2006. Certain low margin business was converted away from the ADDS service and into the ACE product in 2007, resulting in a shift in the margins of the remaining ADDS business.
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During 2007, we saw an increase in net service fee income related to our brokerage services. Increased liquidity at credit unions combined with the favorable interest rate environment for these products resulted in a significant increase in the volume of SimpliCD certificate and securities sales in 2007 compared to 2006. This was the primary reason for the increase in income from brokerage services. Additionally, during 2007 we were successful in opening SimpliCD and securities accounts for new members. Activity from these new accounts also contributed to the increase in net service fee income from these products. Over the last few years, traditional payment mechanisms have shifted toward electronic methods; 2007 was no different. As a result, net service fee income from ACH, settlement and ATM services increased in 2007 compared to 2006. Reductions in consumer usage of share drafts resulted in shrinking volumes among our existing share draft members in 2007. As a result, we experienced a decrease in net service fee income related to our share draft product during 2007. Table Three below summarizes net service fee income for 2007 and 2006. Table Three: Net Service Fee Income (Dollar amounts are in thousands) ATM
2007 $ 3,522
2006
Percentage Change
$ 3,256
8.2%
ACE
2,329
506
360.3%
Brokerage
1,661
1,325
25.4%
Share Drafts
1,428
1,511
-5.5%
711
685
3.8%
Settlement
662
633
4.6%
ADDS
186
73
154.8%
$ 10,499
$ 7,989
31.4%
ACH
Total NET SeRVICE FEE Income
Operating Expenses Total operating expenses were $16.8 million in 2007, an increase of $0.7 million relative to 2006. This increase was entirely due to increased expenses related to salaries and benefits. Salaries and benefits increased due to normal cost-of-living increases and merit raises. Also, during 2007, we had additional expense related to new staff hired as we continue to expand our enterprise-wide risk management (EWRM) department. Throughout the year, we were constantly monitoring our office operations and occupancy and other operating expenses to determine areas of cost savings. This is evident in the decrease in expenses as compared to 2006. After evaluations of major expenses, we were able to create certain efficiencies that allowed us to drive down expenses. Office operations and occupancy expenses in 2007 were $261,000 less than 2006 and other operating expenses were $41,000 less in 2007 compared to 2006.
Financial Review
Enterprise Wide Risk Management Corporate One is committed to managing the risks associated with our business activities and has maintained a formal risk management department for many years. In the last three years, we embarked on an initiative to deploy enterprise wide risk management (EWRM) throughout our entire organization. We believe that EWRM is critical not only to managing our risks, but to maximizing our value to our members. To that end, Corporate One has adopted the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework for EWRM as the framework for the governance of risk. Corporate One utilizes a core process risk assessment methodology to identify, categorize and mitigate its risk. We have established an EWRM Committee comprised of members of our Board of Directors, our Supervisory Committee, and our senior management team. The EWRM Committee is responsible for reviewing completed risk assessments and coordinating, in conjunction with the Supervisory Committee, the testing of controls over critical processes. The EWRM Committee is also responsible for reporting the residual risks of Corporate One’s activities to the Board of Directors. The risks an organization takes should be balanced by the rewards. The Board of Directors ultimately uses the information from the EWRM Committee to determine if those residual risks are balanced by rewards or if the risks are too great and should be mitigated. Liquidity Risk Management We believe that liquidity risk is one of the most important risks that we manage. With every deposit we accept, we understand that we need to appropriately manage our liquidity to ensure our members have access to those funds when needed. Accordingly, we have certain daily liquidity management strategies that we employ, as well as more long-term, overarching liquidity strategies. We constantly monitor our members’ liquidity needs by reviewing estimates of cash inflows and outflows over the short run. Based on these estimates, we allocate excess funds accordingly. We keep a portion of these excess funds very liquid to meet day-to-day liquidity requirements. In addition, we monitor our top depositors and we have limits on the maximum any one credit union can deposit with us. By striving to diversify our shares and member base, we shield ourselves from the risk of sudden withdrawals by large depositors. We also generally match our members’ term certificates against assets with similar cash flows and maturities. As a result, 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. The composition of our share accounts has, in fact, shifted so that a greater percentage of our accounts are term certificates as compared to overnight. As of December 31, 2007, 57% of our share accounts are term certificates compared to only 44% at December 31, 2006. This shift makes managing our liquidity position somewhat easier, as term certificates are not as prone to sudden liquidity demands as overnight shares. Corporate One also purchases securities that can be sold or borrowed against to generate liquidity. Additionally, when we employ yield-enhancing strategies, we consider liquidity risk in our analysis of the strategy. In fact, we specifically give up yield in some instances to ensure that our portfolio is adequately balanced when it comes to liquidity management. For example, at the end of 2005 and into the beginning 2006, even though mortgage-backed securities were some of the highest yielding securities we could buy, we continued to buy certain lower yielding assets that were more liquid.
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Should we need to borrow to generate liquidity, we have diversified sources of funds and we test these sources periodically to ensure availability. Corporate One’s borrowing capacity (total existing lines less borrowings outstanding) at December 31, 2007 was approximately $1.7 billion. This borrowing capacity includes Corporate One’s advised line of credit from U.S. Central of $1 billion, which is supported by Corporate One’s investments in U.S. Central. On March 7, 2008, U.S. Central notified Corporate One that its advised line of credit was reduced to $750 million. U.S. Central indicated that the reduction of the line was not due to any credit concerns with Corporate One, but instead to the methodology used to determine the line of credit amount, which applies to all member corporates and is based on the certificate balances a corporate maintains at U.S. Central. In addition, we maintain a line of credit with the Federal Home Loan Bank of Cincinnati (FHLB), which is secured by certain investments held in safekeeping at the FHLB. Based on our collateral, Corporate One’s borrowing capacity at the FHLB was approximately $403.5 million at December 31, 2007. Corporate One also has the ability to issue commercial paper in the national capital markets up to $350 million. Corporate One maintains the highest commercial paper ratings available from Moody’s and Standard & Poor’s (P-1 and A1+, respectively). The ratings are based on criteria such as Corporate One’s asset quality, liquidity sources, capital strength and risk management practices. In addition, we maintain $135 million of committed lines of credit as well as federal funds lines with various financial institutions. The committed lines of credit are secured by certain investments, however the federal fund lines do not require collateral for overnight borrowing. Although Corporate One’s on-balance sheet loan portfolio is small, we had additional outstanding advised line of credit and letter of credit commitments to members of approximately $1.2 billion at December 31, 2007. All outstanding line of credit commitments are collateralized by specific or general pledges by members. Commitments to extend credit to members remain effective as long as there is no violation of any condition established in the agreement. Advances on these commitments generally require repayment within one year of the advance. Since a portion of the commitments is expected to terminate without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. 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 one to three months 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 fixed-rate securities; however, there is typically a corresponding change in the value of the deposits matched against those fixed-rate securities. Our primary interest rate risk-measurement tool 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 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. Figure One: Repricing Sensitivity Graph - December 31, 2007 (Dollar amounts are in millions) $2,500 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
NEV scenarios are performed monthly, testing for sudden and sustained increases or decreases in interest rates of 100, 200 and 300 basis points. A summary of Corporate One’s NEV calculation as of December 31, 2007 and 2006 is shown in Table Four. At December 31, 2007 and throughout 2007, we have maintained well below the 28.0% change from base limit imposed by our Board and regulatory body to maintain our Part I expanded authority. Also, our NEV ratio at December 31, 2007 and throughout 2007 in all scenarios is greater than the minimum regulatory ratio of 2.0%. These results are expected, given our strategy for minimizing interest rate risk. Table Four: Net Economic Net Value Calculation
(Dollar amounts are in thousands)
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Economic Value
NEV Ratio
Actual Actual Dollar Percentage Change Change from Base from Base
As of December 31, 2007 300 b.p. rise in rates Base scenario 300 b.p. decline in rates
$142,822 $166,676 $167,027
3.43% 4.00% 4.01%
-$23,854
-14.31%
$351
0.21%
As of December 31, 2006 300 b.p. rise in rates Base scenario 300 b.p. decline in rates
$173,015 $204,176 $205,974
4.42% 5.21% 5.26%
-$31,161
-15.26%
$1,798
0.88%
Because we invest in securities, we are also exposed to market risk due to liquidity and credit spreads. The severe dislocation in the global credit markets is causing all credit-related securities to experience deterioration in spreads and, hence, in fair values. As disclosed in note 4 of our audited financial statements, half of our unrealized losses at the end of 2007 were in mortgagerelated securities. However, the remaining half of our unrealized losses were related to asset classes outside of the mortgage sector. Although contagion continues to be feared in other consumer-related sectors due to the importance of the mortgage sector to the overall economy, the other asset classes purchased by Corporate One are performing well within our expectations, with some of the subordinate tranches of our senior holdings upgraded by the rating agencies. Given the strong credit quality of our securities and our ability and intent to hold these securities until the anticipated recovery, these fair value adjustments are expected to reverse as the credit markets stabilize or the securities approach their maturity date. Regardless, the declines in fair values have reduced our NEV at the end of 2007 and resulted in a lower NEV ratio in all scenarios compared to 2006. With the markets continuing to demand exceptionally wide spreads on even high quality credit-related securities, the fair values of our securities have experienced further declines in the first part of 2008. This decline in the fair values of our securities has continued to put significant downward pressure on our NEV and NEV ratio. As of the date of this writing, we have not finalized the calculation of our NEV and NEV ratio for March 31, 2008. However, based on the continued market turmoil that occurred in March, including the rescue of Bear Stearns by JPMorgan Chase and the downgrades of certain bond issuers, we anticipate that we will not meet the minimum NEV ratio requirements and will follow the appropriate NCUA regulations as necessary. Because the NEV incorporates the unrealized losses on securities available for sale, it is losing some of its value as a tool to measure interest rate risk. Currently, the NEV and NEV ratio are more reflective of liquidity risk. During this time of deterioration in our NEV, the fundamentals of how we manage interest-rate risk have not changed. Credit Risk Management What has turned into a global liquidity crisis originally stemmed from the billions of dollars of mortgage-related securities that were downgraded in the summer of 2007. An estimated $300 billion of securities were downgraded in 2007, the worst year on record for structured finance. Ninety-five percent of the downgrade activity was related to subprime mortgages and collateralized debt obligations (CDOs) backed by subprime mortgages. Although Corporate One does have some exposure to mortgage-related securities, we have always focused on maintaining a high quality, diversified investment portfolio. Accordingly, our investments have some of the highest credit ratings that Moody’s and Standard and Poor’s assign or are issued by agencies of the U.S. government, or by U.S. Central, a “AA+” rated financial institution, or by other regulated depository institutions. In fact, as of December 31, 2007, approximately 85% of our total investments in financial institutions and securities were rated “AAA” or were issued by agencies of the U.S. government or U.S. Central. Additionally, mortgage-related securities represent less than 27.6% of our total investments in financial institutions and securities. It is also important to note that Corporate One does not have any investments in structured investment vehicles (SIVs), CDOs or commercial mortgage-backed securities.
Financial Review
Our investment portfolio diversification as of December 31, 2007 is shown in Table Five. Table Five: Investment Portfolio Diversification (Dollar amounts are
in thousands)
Agency
AAA
AA
A
Other
Total
U.S. Central $ 957,016 $ 957,016 Federal Home Loan Bank - Cincinnati $ 15,090 15,090 Certificates of deposit 4,688 4,688 Mortgage-backed securities $ 224,506 $ 717,343 8,512 950,361 Asset-backed securities: Government-sponsored enterprises 24,516 24,516 Student loan 417,898 236,452 $ 45,831 700,181 Credit card 252,269 4,853 104,318 361,440 Auto 270,734 4,961 275,695 Corporate debt 49,250 86,362 13,904 149,516 TOTAL INVESTMENTS IN FINANCIAL INSTITUTIONS AND SECURITIES $ 249,022 $ 1,707,494 $ 1,293,195 $ 169,014 $ 19,778 $ 3,438,503
Corporate One’s investment in mortgage-related securities is approximately $950 million at December 31, 2007. Of Corporate One’s total investment in mortgage-related securities, 99% of these securities are issued by agencies of the U.S. government or are rated “AAA.” Subprime mortgages only comprise 4% of our total investments in financial institutions and securities and 94% of those are “AAA.” Table Six details Corporate One’s investment in residential mortgagebacked and home-equity asset-backed securities at December 31, 2007. Table Six: MortgageRelated Securities (Dollar amounts are
Agency
AAA
AA
Total
in thousands)
Prime collateral $ 68,515 $ Near-prime collateral* 295,406 Sub-prime collateral** 143,782 $ 8,512 Agency $ 224,506 Insured 209,640 TOTAL MORTGAGE RELATED SECURITIES $ 224,506 $ 717,343 $ 8,512 $
68,515 295,406 152,294 224,506 209,640
950,361
* Based on the definition used in offering circulars ** Based on 660 or lower FICO scores
It is not happenstance that we have a high quality, well-diversified investment portfolio. Protecting our members’ investments is our number one objective when we add assets to our balance sheet. Therefore, we take credit risk management very seriously. We have Part I expanded investment authority from the NCUA, which allows us to manage our balance sheet more effectively. Part I
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allows us to invest in securities rated “A-” or better. However, even with the expanded investment authority, we maintain a low credit risk profile because of our strategies to minimize this risk. These strategies include having policies and procedures in place to ensure that our portfolio is properly diversified and collateralized. Exposure guidelines are established by our risk management department, independent of the investing function within Corporate One, and affirmed by the Asset/Liability Committee (ALCO). These policies and procedures require high quality, investmentgrade 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 issuers and servicers, 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 reduces the likelihood that Corporate One will incur credit losses. We use this same methodology when we lend money. We evaluate the credit applicant’s ability to repay loans 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. On March 31, 2008, Corporate One had certain securities downgraded. These downgrades were primarily related to the downgrade of the third-party guarantor of the securities. However, in addition to the third-party guarantee, the majority of the securities have additional credit enhancements such as excess spread, overcollateralization and/or subordination. These downgrades resulted in twenty securities with ratings from two rating agencies below “A-” and therefore below what we are permitted to hold with Part I expanded authority. We are following the appropriate NCUA regulations to request permission to hold these securities. The total par value and fair value of these twenty securities at March 31, 2008 was $102.7 million and $73.8 million, respectively. Currently, we do not believe it is probable that we will be unable to collect our principal on these securities. However, continued deterioration in the market fundamentals and/or the ability of the financial guarantor to meet its insured obligations could change this view in the future.
Operational Risk Management Corporate One provides a variety of products and services to our members and is reliant upon 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 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 on such procedures to Corporate One’s Supervisory and EWRM Committees 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.
E P O RT FinancialRReview
F R O M TH E S U P E RVI S O RY C O M M ITTE E
S U P E RVI S O RY C O M M ITTE E (pictured left to right)
Fritz Comes, Toledo Area Community CU Sonja Delaney, Midwest Community FCU R. Lee Powell (Board Liaison), DESCO FCU Jeff Meyer (Chairman), Three Rivers FCU
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Corporate One’s 2007 financial statements, prepared by management, were audited in accordance with auditing standards generally accepted in the United States of America by Crowe Chizek and Company LLC, independent auditors. Crowe Chizek’s report on Corporate One’s financial statements is included within this annual report. In addition to the annual audit, Schneider Downs & Co, Inc., a Public Accounting Firm, has been contracted by the Supervisory Committee to perform internal audits of select processes, controls and systems of Corporate One, and report quarterly on such procedures to the Supervisory Committee. 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.
R E P O RT O F I N D E P E N D E NT AU D ITO R S
Supervisory Committee and Board of Directors Corporate One Federal Credit Union Columbus, Ohio We have audited the accompanying balance sheets of Corporate One Federal Credit Union as of December 31, 2007 and 2006, 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 the credit union’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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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. As more fully described in note 2(h) to the financial statements, 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. In our opinion, except for the effects on the balance sheet and statement 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 Federal Credit Union as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Columbus, Ohio March 14, 2008
Crowe Chizek and Company LLC
BALAN C E S H E ETS
December 31,
2007
2006
Assets
Cash and cash equivalents
$
420,552,726
Investments in financial institutions
976,794,257
1,842,454,250
Securities available for sale, at fair value
2,461,708,734
1,601,770,425
Loans to members
27,859,232
Accrued interest receivable
21,313,844
20,573,470
Other assets
11,832,299
13,216,045
TOTAL ASSETS
$
666,664,431
14,823,137
$
4,166,172,797
$
3,913,390,053
$
341,404,000
$
347,000,000
23,895,458
19,128,563
Liabilities and Members’ Equity
Liabilities:
Commercial paper and other borrowings
Dividends and interest payable
Accounts payable and other liabilities TOTAL LIABILITIES
3,169,322
4,065,063
368,468,780
370,193,626
Members’ equity:
Share accounts
3,741,988,116
Paid-in capital
25,681,996
25,681,996
Reserves and undivided earnings
Accumulated other comprehensive loss
104,171,179
89,981,575
(74,137,274)
(230,737)
TOTAL MEMBERS’ EQUITY
3,797,704,017
3,543,196,427
4,166,172,797
3,913,390,053
TOTAL LIABILITIES AND MEMBERS’ EQUITY
See accompanying notes to financial statements.
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3,427,763,593
$
$
STATE M E NTS O F I N C O M E
Year ended December 31, 2007
2006
Interest income:
Investments and securities
Loans to members
TOTAL INTEREST INCOME
$ 202,965,135
$ 162,336,880
925,114
1,543,304
203,890,249
163,880,184
Dividend and interest expense:
Share accounts
171,617,558
126,081,345
Other borrowings
10,452,485
19,612,761
Commercial paper
330,206
4,578,968
TOTAL DIVIDEND AND INTEREST EXPENSE
182,400,249
150,273,074
NET INTEREST INCOME
21,490,000
13,607,110
10,498,781
7,988,880
24,959
21,394
548,895
215,375
11,072,635
8,225,649
Non-interest income:
Service fee income, net
Gain on disposals of assets
Gain on sales of securities
and redemptions of investments, net total non-interest income
Operating expenses:
Salaries and employee benefits
9,544,715
8,545,686
Office operations and occupancy expense
5,869,043
6,130,385
Other operating expenses
1,404,984
1,445,581
TOTAL OPERATING EXPENSES
16,818,742
16,121,652
$ 15,743,893
$ 5,711,107
NET INCOME See accompanying notes to financial statements.
M E NTS FinancialSTATE Review
O F C HAN G E S I N M E M B E R S’ E Q U ITY
Balance at January 1, 2006
Share Accounts
Paid-In Capital
Reserves and Undivided Earnings
$ 2,534,993,350
$ 25,681,996
$ 85,800,284
Accumulated Other Comprehensive Income (Loss)
$ (1,251,730) $ 2,645,223,900
Total Members’ Equity
Comprehensive income (loss):
Net income
Other comprehensive income:
5,711,107
5,711,107
Change in unrealized gain on securities available for sale
1,236,368
1,236,368
Reclassification adjustment for realized gain from sales of securities
(215,375)
(215,375)
Comprehensive income
6,732,100
Net change in share accounts
892,770,243
Dividends on paid-in capital Balance at December 31, 2006
3,427,763,593
25,681,996
(1,529,816) 89,981,575
892,770,243 (1,529,816)
(230,737)
3,543,196,427
15,743,893
15,743,893
Comprehensive income (loss):
Net income
Other comprehensive loss:
Change in net unrealized loss on securities available for sale
(74,425,442)
(74,425,442)
Reclassification adjustment for net realized loss from sales of securities
518,905
518,905
Comprehensive LOSS
(58,162,644)
Net change in share accounts
314,224,523
314,224,523
Dividends on paid-in capital Balance at December 31, 2007
(1,554,289)
$ 3,741,988,116 $ 25,681,996 $ 104,171,179 $ (74,137,274) $ 3,797,704,017
See accompanying notes to financial statements.
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(1,554,289)
STATE M E NTS O F CAS H F LOWS
Year ended December 31,
2007
Cash flows from operating activities: Net income $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Net accretion Net gain on sales of securities and redemptions of investments Net gain on disposals of assets Net change in accrued interest receivable 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 loans to members Net change in NCUA share insurance deposit Net purchase of property and equipment Proceeds from sale of property and equipment
15,743,893
2006
$
5,711,107
2,509,295 (717,466)
1,683,443 (442,009)
(548,895) (24,959) (740,374) 4,766,895 (1,387,603)
(215,375) (21,394) (7,750,547) 10,065,871 963,719
19,600,786
9,994,815
866,727,795 (1,400,691,160)
(529,094,637) (930,793,506)
363,911,218 103,510,307 (13,036,095) (15,299) (995,040) 24,959
493,578,337 97,556,654 46,880,176 (10,333) (3,460,428) 21,394
NET CASH USED IN INVESTING ACTIVITIES
(80,563,315)
(825,322,343)
Cash flows from financing activities: Net change in commercial paper and other borrowings Net change in share accounts Dividends on paid-in capital
(5,596,000) 314,224,523 (1,554,289)
(16,500,000) 892,770,243 (1,529,816)
NET CASH PROVIDED BY FINANCING ACTIVITIES Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year
307,074,234
874,740,427
246,111,705 420,552,726
59,412,899 361,139,827
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
666,664,431
$
420,552,726
Supplemental disclosure: Dividends on share accounts and interest paid
$
179,187,643
$
141,737,019
See accompanying notes to financial statements.
OTE S TO FinancialNReview
F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
(1) Organization 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’s national field of membership includes state- and federally chartered credit unions and other credit union organizations primarily in the Midwestern part of the United States. Corporate One’s Board of Directors is composed of executive management from Corporate One’s member credit unions. (2) Summary of Significant Accounting Policies The following is a description of the more significant accounting policies Corporate One follows in preparing and presenting our financial statements. (a) Use of Estimates 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 2(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 reporting period. Specifically, management has made assumptions in estimating the fair value of financial instruments, the assessment of other than temporary impairment and the amortization/accretion of premiums/discounts on investments subject to prepayment. Actual results could differ from those estimates. (b) Cash and Cash Equivalents Cash and cash equivalents include cash, amounts due from depository institutions, overnight amounts at U.S. Central, federal funds sold, and 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. As of December 31, 2007 and 2006, deferred deposits totaled $158.6 million and $165.2 million, respectively. Net cash flows are reported on the accompanying statements of cash flows for loans, shares and certain other items. Corporate One is required to maintain cash or deposits with the Federal Reserve Bank. The required amount at December 31, 2007 and 2006 was approximately $3.0 million. (c) Investments in Financial Institutions Investments in financial institutions are carried at cost. These investments consist of interestbearing term deposits primarily in U.S. Central and other federally insured depository institutions, and Federal Home Loan Bank (FHLB) of Cincinnati stock. (d) Securities At origination, 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 specific-identification method.
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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, we consider whether we have 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. (e) 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, 2007 and 2006 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. Corporate One incurred no loan losses in either 2007 or 2006 and considers no loans impaired as of, or during the years ended December 31, 2007 and 2006. (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). Generally accepted accounting principles require savings accounts to be classified as liabilities. The American Institute of Certified Public Accountants published a guide opining that credit unions’ savings accounts should be classified as liabilities, which is “consistent with the prevailing practice of mutually owned savings and loan associations and savings banks.” We believe that credit unions are fundamentally dissimilar to mutually owned savings and loan associations and savings banks, which, for example, accept deposits from the general public and usually are not democratically controlled by their members. If members’ shares had been presented as liabilities, total liabilities would increase and members’ equity would decrease by $3.74 billion and $3.43 billion as of December 31, 2007 and 2006, respectively. If Corporate One had classified members’ share accounts as liabilities, in accordance with GAAP, members’ equity as of December 31, 2007 and 2006 would have been $55.7 million and $115.4 million, respectively. Credit unions transacting business with Corporate One are required to be a Partner member or an Associate member.
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F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
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, 2007 and 2006, there were $12,000 and $9,000 of shares on notice, respectively. Corporate One also offers an Associate membership. Associate members are required to maintain a $5 deposit. They may 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 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, 2007 and 2006, there were $375,000 of 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) Comprehensive Income (Loss) Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale. (l) Service Fees Service fees are earned on various 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. Gross service fee income for the years ending December 31, 2007 and 2006 was $19.2 million and $17.2 million, respectively. Revenues on the accompanying statements of income are reduced by third-party costs incurred to provide these services. (m) Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. (n) Reclassifications Certain reclassifications have been made in the prior year’s financial statements to conform to the presentation for the year ended December 31, 2007. These reclassifications had no impact on total assets, total liabilities and members’ equity or net income. (o) New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, which is effective for fiscal
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years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. The new standard provides a consistent definition of fair value, which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entityspecific inputs. The standard also establishes a three-level hierarchy for fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. Corporate One does not expect the adoption of this statement to have a material impact on its financial position or results of operation. In February 2007, the FASB issued SFAS 159, Fair Value Option for Financial Assets and Financial Liabilities, which is effective for fiscal years beginning after November 15, 2007. SFAS 159 provides an option for companies to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments and written loan commitments. Under SFAS 159, fair value would be used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in value recognized in earnings. Corporate One does not expect the adoption of this statement to have a material impact on its financial position or results of operation. (3) Investments in Financial Institutions Investments in financial institutions at December 31 are summarized as follows:
U.S. Central: Share certificates $ Membership capital shares Membership paid-in capital shares Other shares Federal Home Loan Bank stock Certificates of deposit TOTAL INVESTMENTS IN FINANCIAL INSTITUTIONS
$
2007
2006
850,971 $ 93,592 1,900 10,553 15,090 4,688 976,794
$
1,740,751 70,064 1,900 9,343 15,010 5,386 1,842,454
U.S. Central share certificates are stated at cost and are redeemable prior to maturity at fair value as determined by U.S. Central. As of December 31, 2007, U.S. Central share certificates have specific maturities of $222.9 million due in one year or less, $257.4 million due after one year through five years, and $370.7 million due after five years through ten years. Realized gains and losses on redemptions of certificates with U.S. Central are included in non-interest income in the accompanying statements of income. Proceeds from certificate redemptions in 2007 were $686.1 million, resulting in gross gains of $1.12 million and gross losses of $52,000. There were no redemptions of certificates during 2006. Investment in membership capital shares is a requirement of membership in U.S. Central. Membership capital shares are subordinate to all other shares, share certificates and liabilities of U.S. Central except for paid-in capital shares. Membership capital shares can be withdrawn after the expiration of a three-year notice. Investment in paid-in capital shares is optional for U.S. Central members. Paid-in capital shares are subordinate to all other shares and share certificates, including membership capital shares and liabilities of U.S. Central. Paid-in capital shares can only be redeemed at the option of U.S. Central.
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F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
Other shares consist of an account in which U.S. Central directs the associated dividends to the National Credit Union Foundation Community Investment Fund (CIF). Funds can be withdrawn from this account after a 90-day notice period. Corporate One also maintains overnight accounts at U.S. Central, which are classified as cash and cash equivalents. At December 31, 2007 and 2006, overnight amounts totaled $410.6 million and $95.9 million, respectively. All shares and certificates with U.S. Central are pledged under our uncommitted line of credit agreement as further discussed in note 7. As a member of the FHLB of Cincinnati, Corporate One is required to own a certain amount of stock based on its level of borrowings and other factors, and may invest in additional amounts. FHLB stock is classified as a restricted security and is carried at cost since there is no readily available market. (4) Securities The amortized costs and fair values of securities at December 31 are summarized as follows:
Securities available for sale: Government-sponsored enterprises $ Corporate debt securities Mortgage-related securities Asset-backed securities TOTAL SECURITIES AVAILABLE FOR SALE $
2007
Amortized Cost
Gross Gross Unrealized Unrealized Fair Gains Losses Value
24,545 $ 21 $ 154,142 987,959 1,409 1,369,200 737
(50) $ (4,626) (39,007) (32,621)
24,516 149,516 950,361 1,337,316
2,535,846
(76,304)
2,461,709
$
2,167
$
$
2006 Amortized Cost Securities available for sale: Government-sponsored enterprises $ Mortgage-related securities Asset-backed securities TOTAL SECURITIES AVAILABLE FOR SALE $
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Gross Unrealized Gains
Gross Unrealized Losses
24,545 $ 982,672 $ 864 594,784 1,947
1,602,001
$
2,811
$
Fair Value
(380) $ (2,241) (421)
(3,042)
$
24,165 981,295 596,310
1,601,770
Mortgage-related securities consist primarily of securities collateralized by private label mortgage issuers, government agencies such as Fannie Mae or Freddie Mac and asset-backed home-equity securities. Asset-backed securities consist primarily of securitized credit card, student loan and automobile receivables. Corporate One invests only in bonds rated single A or higher. The unrealized losses in the portfolio resulted primarily from market dislocations in the asset classes in which we invest. Corporate One does not believe any securities in the investment portfolio at December 31, 2007 and 2006 were other than temporarily impaired and management has the intent and ability to hold these securities until the anticipated recovery. The fair value is expected to recover as the securities approach their maturity date or as the credit markets stabilize. 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 as follows:
Less Than 12 Months Fair Value
Unrealized Losses
2007 12 Months or Longer Fair Value
Unrealized Losses
Total Fair Value
Unrealized Losses
Government-sponsored enterprises $ 19,950 $ (50) $ 19,950 $ (50) Corporate debt securities $ 149,516 $ (4,626) 149,516 (4,626) Mortgage-related securities 621,244 (32,752) 136,676 (6,255) 757,920 (39,007) Asset-backed securities 1,009,702 (28,942) 80,905 (3,679) 1,090,607 (32,621) Total Temporarily Impaired Securities $ 1,780,462 $ (66,320) $ 237,531 $ (9,984) $ 2,017,993 $ (76,304)
2006
Less Than 12 Months
12 Months or Longer
Fair Value
Fair Value
Unrealized Losses
Unrealized Losses
Total Fair Value
Unrealized Losses
Government-sponsored enterprises $ 24,165 $ (380) $ 24,165 $ (380) Mortgage-related securities $ 494,487 $ (1,331) 108,880 (910) 603,367 (2,241) Asset-backed securities 97,832 (355) 48,448 (66) 146,280 (421) Total Temporarily Impaired Securities $ 592,319 $ (1,686) $ 181,493 $ (1,356) $ 773,812 $ (3,042)
Realized gains and losses on sales of available for sale securities are included in non-interest income in the accompanying statements of income. Proceeds from the sale of available for sale securities were $103.5 million and $97.6 million in 2007 and 2006, respectively. Gross gains of $193,000 and $215,400 and gross losses of $712,000 and $0 were recorded on securities during the years ended December 31, 2007 and 2006, respectively. The expected distributions of securities available for sale at December 31, 2007 are reflected in the following table. 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 variable-rate securities
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F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
are amortizing securities and the entire principal amount outstanding is included in the maturity category that corresponds with the final return of principal. Maturity Distribution
Amortized Cost Due in one year or less $ 316,916 $ Due after one year through five years 1,153,604 Due after five years through ten years 542,284 Due after ten years 523,042 TOTAL SECURITIES AVAILABLE FOR SALE
$
2,535,846
Fair Value 314,788 1,128,994 523,737 494,190
$
2,461,709
At December 31, 2007, approximately 73% 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, 22% of the dollar amount of such securities had interest rate caps that were fixed at the time of issuance and the caps range from 7% to 18%. Less than 1% 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. (5) Equity Investments Investments in non-marketable equity securities, which are included in other assets in the accompanying balance sheets, at December 31 are summarized as follows:
2007
2006
Primary Financial Company LLC $ Processing Alliance LLC
455 $ 96
465 100
TOTAL EQUITY INVESTMENTS
551
565
$
$
Corporate One has a 6.72% investment in Primary Financial Company LLC (Primary Financial). This investment meets the criteria outlined by the Emerging Issues Task Force (EITF) in EITF No. 03-16, Accounting for Investments in Limited Liability Companies (LLC), and is accounted for using the equity method. Corporate One’s portion of Primary Financial’s current period net loss, recognized as a component of service fee income in the accompanying statements of income, was a loss of $10,000 and $4,000 in 2007 and 2006, respectively. Corporate One is a co-broker of Primary Financial and, as such, earns a spread on certificates placed by Corporate One. Corporate One also earns additional spreads on certificates it places, as well as royalties on certificates placed by other co-brokers. These additional spreads and royalties represent additional consideration related to Corporate One’s sale of Primary Financial in 2003. Corporate One recognized income of $567,000 in 2007 and $308,000 in 2006 on the certificates placed by Corporate One. In addition, Corporate One received $643,000 in 2007 and $404,000 in 2006, related to the additional spreads on certificates it places and royalties on certificates placed by other co-brokers. These additional spreads and royalties continue through 2015 and are included as a component of net service fee income in the accompanying statements of income.
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Corporate One performs accounting and marketing services for Primary Financial under a support services contract. The contract is a one-year contract with provisions for automatic annual renewals. Prior to 2007, the contract included additional services such as information technology management, payroll and benefits administration and rental of office and hot site space. Corporate One recognized, as a component of net service fee income in the accompanying statements of income, $165,000 in 2007 and $476,800 in 2006 related to this agreement. Corporate One owns 50% of Processing Alliance LLC (Processing Alliance). Corporate One does not have a majority voting interest and does not maintain a controlling interest in Processing Alliance. This investment, therefore, is accounted for using the equity method. This company was formed in December 2006 to provide forward cash collection services as well as other services to credit unions. Corporate One’s portion of Processing Alliance’s current period net loss, recognized as a component of service fee income in the accompanying statements of income, was a loss of $4,000 at December 31, 2007. There was no income or loss recognized during 2006. (6) Other Assets Included in other assets is a deposit with the NCUA for share insurance, 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% of Corporate One’s total insured shares. The deposit would be refunded to Corporate One if its insurance coverage is terminated, if it converts to insurance coverage from another source, or if the operations of the fund are transferred from the NCUA Board. At December 31, 2007 and 2006, the deposit was $623,467 and $638,766, respectively. Property and equipment, valued at cost less accumulated depreciation, at December 31 are summarized as follows:
2007
Buildings and improvements $ Equipment Total property and equipment Less: Accumulated depreciation NET PROPERTY AND EQUIPMENT
$
2006
4,461 $ 14,936
4,379 14,413
19,397 12,506
18,792 10,387
6,891
$
8,405
(7) Commercial Paper, Lines of Credit and Other Borrowings Corporate One had no outstanding commercial paper at December 31, 2007 and 2006. Commercial paper outstanding averaged approximately $6.0 million and $87.0 million during 2007 and 2006, respectively. There was no amount outstanding at any month-end during 2007 and the maximum amount outstanding at any month-end during 2006 was $330.0 million. Corporate One has received commitments from several financial institutions enabling Corporate One to borrow funds under revolving lines of credit through October 2008. At December 31, 2007, 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 $164.9 million.
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F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
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 $1.0 billion 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. For overnight borrowings on this line, the interest rate is variable and is established by U.S. Central on a daily basis. Fixed-rate term borrowings are also available under this line of credit. On March 7, 2008, U.S. Central notified Corporate One that its uncommitted line of credit was reduced to $750 million. U.S. Central indicated that the reduction of the line was not due to any credit concerns with Corporate One, but instead to the methodology U.S. Central uses for determining the advised line of credit amount, which applies to all member corporates and is based on the certificate balances a corporate maintains at U.S. Central. 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, 2007 and 2006, Corporate One had securities held in safekeeping at the FHLB with fair values of approximately $493.8 million and $593.4 million, respectively, which provided a borrowing capacity of $403.5 million and $489.0 million, respectively. The following table provides a summary of our borrowings at December 31.
2007 Balance
2006 Rate
Balance
FHLB: Due in one year or less $ 30,000 3.99-4.39% Due after one year through five years U.S. Central: Due in one year or less Due after one year through five years TOTAL BORROWINGS
Rate
$ 313,500 10,000
5.18-5.23% 4.39% 3.30% 3.60-5.10%
309,904 1,500
3.14-4.78% 4.22-4.27%
1,000 22,500
$ 341,404
$ 347,000
(8) Share Accounts and Paid-in Capital (PIC) Balances and weighted average rates of share accounts and PIC at December 31 are summarized as follows:
Settlement and regular shares
2007 Balance
Rate
Balance
Rate
$ 1,516,201
3.41%
$ 1,830,517
4.43%
2,127,399
5.06%
1,511,190
5.08%
98,388
3.75%
86,057
4.75%
Share certificates MCS
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2006
TOTAL SHARE ACCOUNTS
$ 3,741,988
PIC
$
25,682
5.25%
$ 3,427,764 $
25,682
6.25%
Settlement and regular share accounts are available to members on demand and pay dividends either 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. Share certificates can be redeemed by members prior to maturity at fair value, as determined by Corporate One. Most share certificates are in amounts greater than $100,000. Total share certificate accounts by maturity at December 31, 2007 are summarized as follows: Year of Maturity: 2008 2009 2010 2011 2012 TOTAL SHARE CERTIFICATES
$
1,438,705 303,649 145,112 109,430 130,503
$ 2,127,399
(9) Commitments and Contingencies Corporate One is a party to various financial instruments with off-balance-sheet 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. 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, 2007 and 2006, these financial instruments included outstanding commitments to extend credit totaling approximately $1.2 billion and $911.0 million, respectively. Commitments to extend credit to members remain effective as long as there is no violation of any condition established in the agreement. 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. (10) Retirement Plan Prior to January 1, 2007, Corporate One was a sponsor of two defined contribution plans. On December 31, 2006, the plans were merged and net assets of the merged plan were transferred into the surviving plan. Both the surviving contribution plan and the prior contribution plan cover substantially all employees. In 2007 and 2006, for each eligible participant, Corporate One contributed a total of 11.5% of the participant’s eligible compensation to the participant’s accounts in the plans. A portion of this percentage is discretionary. Employees also have the option to contribute a portion of their compensation on a pre- or post-tax basis. Retirement expense was approximately $785,000 in 2007 and $759,000 in 2006.
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F I NAN C IAL STATE M E NTS (table dollar amounts in thousands)
(11) 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 shortterm nature, the fair values of cash and cash equivalents, accrued interest receivable, 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: H Investments in financial institutions are based on discounted cash flow analyses using current market rates, except FHLB stock. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. H Securities available for sale are based on quoted market prices. H The majority of our loans to members are overnight loans so fair value approximates carrying value. H The fair value of commercial paper and other borrowings is based on discounted cash flow analyses using current market rates. H 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 estimated by discounting the future cash flows using the rates currently offered for share accounts of similar remaining maturities. The fair values of Corporate One’s financial instruments at December 31 are summarized as follows:
2007
2006
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
Assets: Cash and cash equivalents Investments in financial institutions Securities available for sale
$
666,664
$
666,664
$
420,553
$
420,553
976,794
982,950
1,842,454
1,873,642
2,461,709
2,461,709
1,601,770
1,601,770
Loans to members
27,859
27,859
14,823
14,823
Accrued interest receivable
21,314
21,314
20,573
20,573
623
623
639
639
$ 341,404
$ 344,294
$ 347,000
$ 346,528
23,895
23,895
19,129
19,129
3,741,988
3,733,228
3,427,764
3,424,091
NCUSIF deposit Liabilities and members’ equity: Commercial paper and other borrowings Dividends and interest payable Share accounts
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(12) 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. The NCUA defines capital as reserves and undivided earnings, PIC and MCS. 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. The NCUA also requires a corporate credit union to retain certain earnings levels if its retained earnings ratio (reserves and undivided earnings divided by 12 month rolling DANA) falls below the required percentage. Corporate One’s actual reserves and undivided earnings, capital and regulatory ratios at December 31 are presented in the following table: 2007 2006 Capital Capital ratio Reserves and undivided earnings Retained earnings ratio
$ 228,242 5.99% $ 104,171 2.73%
Regulatory Limits
$ 201,720 5.98% 5.00% $ 89,982 2.67% 2.00%
(13) Subsequent Event (Unaudited) Due to significant declines in the bond market, we are supplying the following information. Corporate One’s securities available for sale at February 29, 2008 are as follows: Fair Value
Gross Unrealized Gains
Gross Unrealized Losses
Government-sponsored enterprises $ Corporate debt securities Mortgage-related securities Asset-backed securities
4,605 $ 184,260 911,208 1,740,057
60 61 $ 2,485 3,323
Total securities available for sale
2,840,130
5,929
$
$
Members’ equity at February 29, 2008 is as follows: Share accounts $ Paid-in capital Reserves and undivided earnings Accumulated other comprehensive loss
4,256,811 25,682 108,484 (134,388)
Total Members’ equity
4,256,589
$
$
(7,418) (68,789) (64,110)
(140,317)
M E NTS FinancialSTATE Review
O F C HAN G E S I N M E M B E R S’ E Q U ITY
Since accumulated other comprehensive loss is not a component of regulatory capital, Corporate One at February 29, 2008 remained well capitalized for regulatory purposes and had a capital ratio of 6.13% on total regulatory capital of $235.4 million. Had Corporate One classified members’ share accounts as liabilities in accordance with GAAP, members’ equity at February 29, 2008 would have been a deficit of $222 thousand. Under NCUA regulations, using a net economic value (NEV) calculation, Corporate One is required to measure and comply with certain limitations related to interest rate risk. At December 31, 2007 and February 29, 2008, Corporate One was in compliance with all NEV requirements. These regulatory limitations may not be met in future periods depending on changes in the market environment or changes to Corporate One’s balance sheet. Corporate One’s selected balance sheet amounts at February 29, 2008 are as follows: Total assets $ Cash and cash equivalents Securities purchased under agreements to resell Securities available for sale Investments in financial institutions Total liabilities Commercial paper and other borrowings
4,583,600 536,386 300,000 2,840,130 862,596 327,010 302,500
Corporate One invests only in bonds rated single A or higher. The unrealized losses in the portfolio resulted primarily from the continued market dislocations in the asset classes we invest. Corporate One does not believe any securities in the investment portfolio at February 29, 2008 were other than temporarily impaired and management has the intent and ability to hold these securities until the anticipated recovery. The fair value is expected to recover as the securities approach their maturity date or as the credit markets stabilize. There have been no sales of securities from January 1, 2008 through February 29, 2008.
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8700 Orion Place Columbus, Ohio 43240-2078
P.O. Box 2770 Columbus, Ohio 43216-2770
866/MyCorp1 www.corporateone.coop