INTERNAL CONTROLS
FINANCIAL STATEMENTS
FINANCIAL ANALYSIS
Mission OUR
To serve as the primary financial partner with credit unions in providing superior products, services and support.
Table
OF CONTENTS
Financial Analysis Regulatory Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Regulatory Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Retained Earnings and Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Net Economic Value Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Assets and Member Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Liquidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Financial Statements Independent Auditors’ Report on the Financial Statements . . . . . . . . . 13 Financial Statements: Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . 17 Statements of Changes in Members’ Equity . . . . . . . . . . . . . . . . . 18 Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Internal Controls Independent Auditors’ Report on Internal Control over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Management’s Assessment of Internal Control over Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
REGULATORY CONSIDERATIONS An integral part of a credit union’s investment policies, procedures and practices is the analysis of all institutions in which it has invested its surplus funds—including corporate credit unions. Part 703 of the National Credit Union Administration’s (NCUA) Rules and Regulations states: “A Federal credit union must conduct and document a credit analysis on an investment and the issuing entity before purchasing it, except for investments issued or fully guaranteed as to principal and interest by the U.S. government or its agencies, enterprises, or corporations or fully insured (including accumulated interest) by the National Credit Union Administration or the Federal Deposit Insurance Corporation. A Federal credit union must update this analysis at least annually for as long as it holds the investment.”
Assets December 31,
(in thousands)
2018
2017
2016
2015
$ 500,608
$ 338,626
$ 439,703
$ 419,342
$ 372,377
248
355
248
1,719
1,988
801,953
816,501
863,171
899,459
937,869
Federal Home Loan Bank Stock
9,722
11,315
9,680
9,680
9,680
CUSO Investments
2,706
2,525
2,697
2,861
2,887
Total Investments
$ 814,629
$ 830,696
$ 875,796
$ 913,719
$ 952,424
Cash and Uncollected Cash Items
2019
Certificates of Deposit and balances with other financial institutions Marketable Securities
Unrealized Gains and Losses on AFS
(581)
(2,528)
(834)
(1,634)
(2,324)
$ 814,048
$ 828,168
$ 874,962
$ 912,085
$ 950,100
Demand Loans
5,531
32,237
6,205
8,749
3,159
Premises and Equipment
3,506
3,572
3,413
3,124
3,289
659
669
684
682
709
All Other Assets
15,553
9,660
8,139
2,438
2,188
TOTAL ASSETS
$1,339,905
$1,212,932
$1,333,106
$1,346,420
$1,331,822
Net Investments
NCUSIF Capitalization Deposit
1
REGULATORY CONSIDERATIONS In an Investment Guidance Paper, the NCUA further clarified its position on the analysis of corporate credit unions: “NCUA recognizes that a small credit union may be unable to perform a detailed credit analysis. For a small credit union, investing funds in corporate credit unions may be an appropriate risk management alternative to investing in securities. However, NCUA expects a larger credit union to perform a credit analysis whenever there is credit risk. The uninsured portion of an investment in any insured institution presents such risk. NCUA supervision of corporate credit unions does not serve as a guarantee of the investment products offered by corporates, and does not ensure against potential loss. A credit union should review an institution’s income, capital, and financial trends. In addition, for corporate credit unions, a credit union should review the corporate’s operating level according to Section 704.8 and be aware of its exposure to a 300 basis point shift in interest rates.” Though NCUA’s investment regulation specifically exempts state-chartered credit unions, most are using the regulation as a guideline in their investment policies, procedures, and practices. Recognizing that the analysis of a corporate credit union can be burdensome and that some information may not be readily available, we are providing you with this comprehensive analysis of Volunteer Corporate Credit Union.
Liabilities & Equity December 31, Deposits in Collection
2019 $
Accrued expenses and other liabilities
2018
80,988
$
205
Federal Home Loan Bank Notes Payable
(in thousands)
87,488
2017 $
3,964
82,816
2016 $
1,385
72,080
2015 $
1,244
70,033 1,077
-
190,000
94,251
72,620
81,193
$ 281,452
$ 178,452
$ 145,944
Daily Shares
1,154,141
832,485
1,054,229
1,104,601
1,148,701
Term Shares
233
2,183
7,666
8,725
12,757
$ 1,154,374
$ 834,668
$ 1,061,895
$ 1,113,326
$ 1,161,458
-
-
69,242
69,242
69,242
69,242
69,242
863
863
863
863
863
34,814
29,235
23,488
18,679
14,004
(581)
(2,528)
(834)
(1,634)
(2,324)
Total Liabilities
Total Shares
$
Member Capital Shares Perpetual Contributed Capital Equity acquired in merger Reserves and Undivided Earnings Unrealized Gains and Losses on AFS Total Capital
$ 104,338
$
TOTAL LIABILITIES AND EQUITY
$1,339,905
$1,212,932
2
96,812
$
92,759
$1,333,106
$
87,150
$1,346,420
17,469 $
$
88,579
81,785
$1,331,822
REGULATORY TOPICS Capital Requirements of NCUA’s Rules and Regulations 704
Dec. 2019
Dec. 2018
Dec. 2017
3
Dec. 2016
Dec. 2015
“(1) A corporate credit union must maintain at all times: (i) A leverage ratio of 4.0 percent or greater; (ii) A Tier 1 risk-based capital ratio of 4.0 percent or greater; and (iii) A total risk-based capital ratio of 8.0 percent or greater. (2) To ensure it meets its capital requirements, a corporate credit union must develop and ensure Total Capital implementation of written short- and long-term ($Thous) capital goals, objectives, and strategies which provide 120,000 for the building of capital consistent with regulatory requirements, the maintenance of sufficient capital to 100,000 support the risk exposures that may arise from 80,000 current and projected activities, and the periodic review and reassessment of the capital position of the 60,000 corporate credit union. 40,000 (3) Beginning with the first call report submitted on or after October 21, 2013, a corporate credit union must 20,000 calculate and report to NCUA the ratio of its retained 0 earnings to its moving daily average net assets. If this ratio is less than 0.45 percent, the corporate credit union must, within 30 days, submit a retained earnings accumulation plan to the NCUA for NCUA's approval. The plan must contain a detailed explanation of how the corporate credit union will accumulate earnings sufficient to meet all its future minimum leverage ratio requirements, including specific semiannual milestones for accumulating retained earnings. In the case of a state-chartered corporate credit union, the NCUA will consult with the appropriate state supervisory authority (SSA) before making a determination to approve or disapprove the plan and will provide the SSA a copy of the completed plan. If the corporate credit union fails to submit a plan acceptable to NCUA or fails to comply with any element of a plan approved by NCUA, the corporate will immediately be classified as significantly undercapitalized or, if already significantly undercapitalized, as critically undercapitalized for purposes of prompt corrective actions. The corporate credit union will be subject to all the associated actions under §704.4.”
REGULATORY TOPICS Definitions Under Part 704 of NCUA’s Rules and Regulations Leverage ratio means the ratio of Tier 1 capital to moving daily average net assets. Retained earnings means undivided earnings, regular reserve, reserve for contingencies, supplemental reserves, reserve for losses, GAAP equity acquired in a merger, and other appropriations from undivided earnings as designated by management or the NCUA. Total capital means the sum of Tier 1 capital and Tier 2 capital, less the corporate credit union’s equity investments not otherwise deducted when calculating Tier 1 capital. Tier 1 capital means the sum of paragraphs (1) and (2) of this definition from which items in paragraphs (3) through (6) are deducted:
Dec. 2019
Dec. 2018
Dec. 2017
4
Dec. 2016
Dec. 2015
Retained Earnings Ratio (1) Retained earnings; (2) Perpetual contributed capital; (3) Deduct the amount of the corporate credit 3.00% union’s intangible assets that exceed one half percent of its moving daily average net assets 2.50% (however, the NCUA may direct the corporate credit union to add back some of these assets 2.00% on the NCUA’s own initiative, or the NCUA’s approval of petition from the applicable state 1.50% regulator or application from the corporate credit union); 1.00% (4) Deduct investments, both equity and debt, in unconsolidated CUSOs; 0.50% (5) Deduct an amount equal to any PCC or NCA that the corporate credit union maintains at 0% another corporate credit union; (6) Deduct any amount of PCC received from federally insured credit unions that causes PCC minus retained earnings, all divided by moving daily average net assets, to exceed two percent when a corporate credit union’s retained earnings ratio is less than two and a half percent.
REGULATORY TOPICS Definitions Under Part 704 of NCUA’s Rules and Regulations (Continued) Tier 1 risk-based capital ratio means the ratio of Tier 1 capital to the moving monthly average net riskweighted assets. Tier 2 capital means the sum of paragraphs (1) through (4) of this definition: (1) Nonperpetual capital accounts, as amortized under §704.3(b)(3); (2) Allowance for loan and lease losses calculated under GAAP to a maximum of 1.25 percent of risk-weighted assets; (3) Any PCC deducted from Tier 1 capital; and (4) Forty-five percent of unrealized gains on available-for-sale equity securities with readily determinable fair values. Unrealized gains are unrealized holding gains, net of unrealized holding losses, calculated as the amount, if any, by which fair value exceeds historical cost. NCUA may disallow such inclusion in the calculation of Tier 2 capital if NCUA determines that the securities are not prudently valued. Total risk-based capital ratio means the ratio of total capital to moving monthly average net riskweighted assets. Any amounts deducted from the numerator of the above ratios are also deducted from the denominator.
5
RETAINED EARNINGS AND CAPITAL Corporate credit union balance sheets reflect the liquidity needs and cash flows of its members. Therefore, it is not unusual for a corporate credit union to experience asset fluctuations of 25 percent or more, not only from month-to-month, but also within periods of less than 30 days. In addition, corporate credit unions’ month-end assets are often significantly inflated due to routine payrolls that 2019 Retained Earnings flow into their member credit unions. As a result, it can be misleading to analyze a corporate credit ($Thous) union’s retained earnings and capital ratios using 40,000 month-end data. The NCUA recognized the 35,000 distortion such fluctuations can cause, and, in its corporate credit union regulations, adopted the 30,000 concept of using the corporates’ moving daily average net assets (DANA) when calculating the 25,000 retained earnings and capital ratios. For the year 20,000 ending December 31, 2019, Volunteer Corporate’s moving DANA stood at $1.26 billion compared with 15,000 $1.24 billion for 2018. 10,000
After another successful year of business operations, retained earnings ended at $35.7 million resulting in a retained earnings ratio of 2.84 percent at December 31, 2019, as compared to 2.43 percent at December 31, 2018.
5,000 0
Dec. 2019
Dec. 2018
Dec. 2017
Dec. 2016
Dec. 2015
Corporate credit unions are required to deduct a portion of perpetual contributed capital (PCC) when calculating their Tier 1 capital ratio until attaining a 2.50 percent retained earnings ratio. VolCorp surpassed this retained earnings benchmark during 2019. At year-end 2019, VolCorp’s Tier 1 Capital ratio was 8.12 percent. This ratio sits well above the required 4.0 percent requirement, and is an increase of 139 basis points from 2018’s ratio of 6.73 percent.
Tier 1 Capital Ratio ($Thous) 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0
Dec. 2019
Dec. 2018
Dec. 2017
Dec. 2016
Dec. 2015
6
NET ECONOMIC VALUE ANA LYSIS
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
7
Feb
Jan
NEV is the net present value of a corporate’s assets and the value of the assets’ embedded options, minus the net present value of the corporate’s shares and liabilities and the value of the shares’ and liabilities’ embedded options. A corporate’s NEV Ratio is computed by dividing the NEV by the mark-tomarket value of assets. NEV and the NEV Ratio are used to measure the inherent risk in a financial institution’s balance sheet and as a proxy assessment of the liquidation value of the financial institution under certain interest rate environments. Under part 704.8(d)(ii) of its 2019 Moving Average Assets Rules and Regulations, the NCUA Board set a minimum base NEV ($Thous) Ratio of 2 percent for all corporate $1,300,000 credit unions. In addition, the Board set a minimum NEV Ratio 1,200,000 and maximum permissible downward NEV shifts under 1,100,00 industry standard +/- 100, 200, and 300 basis point rate shocks. 1,000,000 Shocking a corporate’s balance sheet means determining the impact on the NEV and the NEV 9,000,000 Ratio of an immediate, parallel, and sustained upward and downward 800,000 shift in market interest rates. The NEV shift is the percent increase and percent decrease of current capital. Current capital is the difference between the mark-to-market value of assets and liabilities at current interest rates. The permissible, downward NEV shift is dependent, in part, upon the level of authority granted each corporate by the NCUA Board. As a starting point, all corporate credit unions have the authority to operate at Base level. At this level, the permissible negative shift in the corporates’ NEV Ratio is 15 percent under +/- 100, 200, and 300 basis point rate shocks. Each corporate credit union may petition the NCUA Board to operate under expanded authority. To obtain such authority, the corporate credit union must meet all the requirements of Part 704 of the NCUA’s Rules and Regulations and fulfill additional capital, management, infrastructure, and asset liability requirements.
NET ECONOMIC VALUE ANALYSIS In September 1997, Volunteer Corporate’s Board of Directors requested authority to operate at the expanded level termed Base Plus. In November 1997, Volunteer Corporate became the first corporate credit union to receive authority by the NCUA Board to operate above Base level. At Base Plus, the Corporate’s permissible negative NEV shift increased from 15 percent to 20 percent. As of December 31, 2019, the cumulative change in Volunteer Corporate’s NEV is a decrease of $9.9 million in an immediate upward 300 basis point scenario. This equates to an NEV shift of negative 9.42 percent – well below the maximum 20 percent negative shift permitted by Federal law. Given the level of interest rates with an effective Fed Funds rate of 155 basis points at year-end, a downward 300 basis point shock scenario is non-applicable. The following illustrates the impact on Volunteer Corporate’s Net Economic Value of the various interest rate scenarios:
NEV (thous.) NEV (from Base, thous.) %
Base
+100bp
+200bp
+300bp
$104,887
$101,955
$98,621
$ 95,003
$
0
$ (2,931)
$(6,266)
$(9,884)
0.00%
(2.79)%
(5.97)%
(9.42)%
NEV (from Base)
NET Economic Value ($Thous) $106,000
104,000
NEV Shift
102,000
+300 bp
+200 bp
+100 bp
Base
100,000
0.00% 98,000 (2.00)% 96,000
(4.00)% (6.00)%
94,000
(8.00)% 92,000 (10.00)% 90,000
88,000
+300 bp
+200 bp
+100 bp
Base
8
ASSETS AND MEMBER LOANS Assets The quality of a financial institution’s assets is one of the most important factors contributing to its financial soundness. As of December 31, 2019, 99 percent of VolCorp’s assets consisted of cash and uncollected cash items, loans to member credit unions, and high-quality, low credit-risk investments. Furthermore, as of December 31, 2019, 99 percent of VolCorp’s marketable securities holdings were rated AA or AAA by S&P, and 60 percent were issue or guaranteed by U.S. Government Agencies. Volunteer Corporate monitors the quality of its assets through extensive monthly credit analyses and portfolio modeling. As of December 31, 2019, the continued quality of VolCorp’s investments was illustrated in that VolCorp had a marketable securities portfolio totaling $802 million with a total net unrealized loss of $581 thousand, well under 1 percent of the total portfolio. VolCorp also continues to help members manage their earnings with total offbalance sheet investments under Asset Distribution management totaling $2.5 billion (December 31, 2019) Loans at year-end. Cash and Uncollected Items 37.36%
0.41%
Member Loans
The Corporate has a responsibility to meet the liquidity needs of its membership, while protecting the deposits of its member credit unions. In response to this need, Volunteer Corporate has extended approved 267 lines of credit to member credit unions totaling $1.4 billion. As of December 31, 2019, outstanding loans and lines of Other Assets credit to members equaled $5.5 1.47% million, or less than 1 percent of total assets. The quality of the loan portfolio is governed by the loan policies established by Investments the Board of Directors and by 60.76% the procedures followed by management in implementing these policies. All lines are reviewed at least semi-annually and detailed financial analyses are performed. From this review, it is determined which credit unions will be monitored on a more frequent basis and which credit unions may need additional attention. Moreover, each line of credit is secured by a general pledge of the borrowing credit union’s assets. No loans at Volunteer Corporate are currently delinquent and delinquency is extremely rare. Since its charter, Volunteer Corporate has never charged off a loan to a member credit union.
9
INVESTMENTS When making investment decisions, Volunteer Corporate has always kept a close eye on safety, liquidity, and yield. In order to minimize credit risk, Volunteer Corporate’s policies allow funds to be placed only in limited federally sponsored enterprises, the Federal Reserve Bank of Atlanta, U.S. Government securities, federal agency securities or in other highly rated securities and top-rated banks and domestically chartered corporations. These policies further limit investments in banks, corporations and securities individually and in aggregate, and require extensive analysis and monitoring. The Corporate’s approvedinstitution analysis considers size, capital adequacy, asset quality, management, earnings performance, and liquidity.
Investment Distribution (December 31, 2019) FHLB & other Financial Institutions 1.22%
CUSO’s 0.33%
U.S. Government-guaranteed Agency Securities 32.87%
Asset-backed Securities 40.28%
U.S. Government-sponsored Agency Securities 25.30%
10
EARNINGS Like all credit unions, Volunteer Corporate is a not-for-profit financial cooperative, existing solely for the benefit of its members. The corporate’s policy is to help members increase their net income by providing cost-effective services and attractive investment yields. Since profits come at the expense of its member owners, Volunteer Corporate does not strive to earn the maximum net income possible. It is also not the policy of the corporate to increase earnings by sacrificing the safety of the members’ shares through high risk investments or investment practices. Even so, the corporate must maintain a stable earnings position in order to pay dividends, cover budgeted expenses, provide service excellence, develop new services, maintain capital adequacy, and meet statutory reserve requirements. Volunteer Corporate operates on an extremely thin operating margin and therefore must focus on maximizing efficiencies and controlling expenses. Financial strength is heavily reliant on careful balance sheet management, including monitoring the performance of each of VolCorp’s securities and making the appropriate strategic decisions as dictated by economic conditions. VolCorp held no impaired or non-compliant securities during the year and did not experience write-downs on any securities in its portfolio. Net income for 2019 equaled $6.9 million, resulting in a 50 basis point return on assets. Fee income remained strong during the year, along with efficiencies gained through strong balance sheet management and diligent expense controls.
COMPARATIVE INCOME Year ended December 31, Interest Income Cash and FI balances Investment Securities Loans Total Interest Income Interest Expense Dividends on Shares Interest on Borrowed Funds Total Interest Expense Net Interest Income Non-Interest Income Item Processing Gain on Securities Other Total Non-Interest Income Non-Interest Expenses Salaries and Benefits Other Total Non-Interest Expenses Net Contribution to Retained Earnings
2019
(in thousands)
2018
2017
2016
$ 11,208 20,513 529 32,250
$ 6,097 19,416 576 26,089
$ 3,554 12,493 176 16,223
$ 2,372 8,232 66 10,670
$ 1,467 5,228 41 6,736
20,723 730 21,453 10,797
13,543 2.932 16,475 9,614
7,003 992 7,995 8,228
2,776 322 3,098 7,572
1,260 235 1,495 5,241
3,078 5,193 8,271
3,063 5 5,131 8,199
3,060 15 4,713 7,788
3,094 4 4,351 7,449
3,181 16 4,302 7,499
6,286 5,905 12,191
5,722 5,391 11,113
5,353 5,023 10,376
5,025 4,782 9,807
5,214 4,816 10,030
$6,877
$6,700
$5,640
$5,214
$2,710
11
2015
LIQUIDITY Volunteer Corporate is the primary depository institution and source of liquidity for the majority of its member credit unions. As such, the corporate has the responsibility of protecting the safety of its members’ deposits while providing sufficient liquidity to meet their cash flow needs. To meet this responsibility, Volunteer Corporate maintains sufficient cash and overnight investments to provide for reasonable cash flow demands. Management understands and anticipates daily variances and adjusts for seasonal trends. The Corporate’s liquidity position is monitored daily and adjusted, as necessary, for anticipated fluctuations in our members’ liquidity needs.
12
INDEPENDENT AUDITORS’ REPORT Carr, Riggs & Ingram, LLC 3011 Armory Drive Suite 190 Nashville, TN 37204 615.665.1811 615.665.1829 (fax) CRIcpa.com
Independent Auditors’ Report To the Board of Directors and Supervisory Committee of Volunteer Corporate Credit Union
We have audited the accompanying nancial statements of Volunteer Corporate Credit Union, which comprise the balance sheets as of December 31, 2019 and 2018, and the related statements of income, comprehensive income, changes in members’ equity, and cash ows for the years then ended, and the related notes to the nancial statements.
Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these nancial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of nancial statements that are free from material misstatement, whether due to fraud or error.
Auditors’Responsibility Our responsibility is to express an opinion on these nancial 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 nancial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the nancial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the nancial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of signi cant accounting estimates made by management, as well as evaluating the overall presentation of the nancial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
13
INDEPENDENT AUDITORS’ REPORT (Continued)
Opinion In our opinion, the nancial statements referred to above present fairly, in all material respects, the nancial position of Volunteer Corporate Credit Union as of December 31, 2019 and 2018, and the results of its operations and its cash ows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Other Matter We have also audited, in accordance with auditing standards generally accepted in the United States of America, Volunteer Corporate Credit Union’s internal control over nancial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), and our report dated May 12, 2020, expressed an unmodi ed opinion.
Nashville,Tennessee May 12, 2020
14
BALANCE SHEETS Volunteer Corporate Credit Union (In Thousands)
December 31,
2019
2018
Assets Cash
$ 416,460
$ 254,143
84,148
84,483
500,608
338,626
248
355
9,722
11,315
801,372
813,973
Investment in Credit Union Service Organizations
2,706
2,525
Loans to members and member affiliates
5,531
32,237
15,553
9,660
3,506
3,572
659
669
$ 1,339,905
$ 1,212,932
$ 1,154,374
$ 834,668
80,988
87,488
Accrued expenses and other liabilities
205
3,964
Federal Home Loan Bank note payable
-
190,000
1,235,567
1,116,120
69,242
69,242
863
863
34,814
29,235
(581)
(2,528)
104,338
96,812
$1,339,905
$1,212,932
Uncollected cash items Cash and cash equivalents Certificates of deposit Federal Home Loan Bank stock Securities available for sale, at fair value
Accrued interest receivable and other assets Premises and equipment, net National Credit Union Share Insurance Fund deposit Total assets Liabilities and members’ equity Liabilities Members’depository accounts Deposits in collection
Total liabilities Members’ equity Perpetual contributed capital Equity acquired in merger Retained earnings Accumulated other comprehensive loss Total members’ equity Total liabilities and members’ equity
See the accompanying notes to financial statements.
15
STATEMENTS OF INCOME Volunteer Corporate Credit Union (In Thousands)
For the Years Ended December 31,
2019
2018
Interest and dividend income Cash
$11,208
$6,097
20,513
19,416
529
576
32,250
26,089
20,723
13,543
730
2,932
Total interest expense
21,453
16,475
Net interest income
10,797
9,614
3,078
3,063
-
5
181
(52)
1,818
1,624
65
647
3,129
2,912
8,271
8,199
Salaries and benefits
6,286
5,722
Office operations and occupancy
4,146
3,979
Professional and outside services
794
555
Travel and conferences
232
251
Other
733
606
Total non-interest expense
12,191
11,113
Net income
$6,877
$6,700
Investments Loans to members and member affiliates Total interest and dividend income Interest expense Members’ depository and share accounts Borrowings
Non-interest income Item processing Gain on sale of securities Income (loss) from investment in Credit Union Service Organizations Currency services Sale of software Other Total non-interest income Non-interest expense
See the accompanying notes to financial statements.
16
STATEMENTS OF COMPREHENSIVE INCOME Volunteer Corporate Credit Union (In Thousands)
For the Years Ended December 31,
2019
2018
Net income
$ 6,877
$ 6,700
1,947
(1,689)
-
(5)
1,947
(1,694)
$8,824
$5,006
Other comprehensive income (loss): Unrealized gain (loss) on available for sale securities Reclassification adjustment for realized gains included in net income Other comprehensive income (loss) Total comprehensive income See the accompanying notes to financial statements.
17
STATEMENTS OF CHANGES IN MEMBERS’ EQUITY Volunteer Corporate Credit Union (In Thousands)
Perpetual Contributed Capital Balance at January 1, 2018
Equity Acquired in Merger
Retained Earnings
Accumulated Other Comprehensive Loss
Total
$69,242
$863
$23,488
$(834)
$ 92,759
Perpetual contributed capital dividends
-
-
(953)
-
(953)
Net income
-
-
6 ,700
-
6,700
Unrealized losses on securities available for sale
-
-
-
(1,694)
(1,694)
69,242
863
29,235
(2,528)
96,812
Perpetual contributed capital dividends
-
-
(1,298)
-
(1,298)
Net income
-
-
6 ,877
-
6,877
Unrealized gains on securities available for sale
-
-
-
1,947
1,947
$69,242
$863
$34,814
$(581)
$104,338
Balance at December 31, 2018
Balance at December 31, 2019
See the accompanying notes to financial statements.
18
STATEMENTS OF CASH FLOWS Volunteer Corporate Credit Union (In Thousands)
For the Years Ended December 31,
2019
2018
$ 6,877
$ 6,700
612 (333) 14 (181) (5,893) (3,759)
553 (208) 33 (5) 52 (1,521) 2,579
(2,663)
8,183
107 1,593 26,706 10 (422,174) 437,055 (569) 9
(107) (1,635) (26,032) 15 (278,533) 312,413 13,003 120 (776) 31
42,737
18,499
319,706 (6,500) (190,000) (1,298)
(227,227) 4,672 95,749 (953)
Net cash from (used in) financing activities
121,908
(127,759)
Net change in cash and cash equivalents
161,982
(101,077)
Cash and cash equivalents, beginning of year
338,626
439,703
$500,608
$338,626
Operating Activities Net income Adjustments to reconcile net income to net cash (used in) from operating activities: Depreciation and amortization Accretion on securities available for sale, net Loss on sale of premises and equipment Gain on sale of securities (Income) loss from investment in Credit Union Service Organizations Change in accrued interest receivable and other assets Change in accrued expenses and other liabilities Net cash (used in) from operating activities Investing activities Net change in certificates of deposit with other financial institutions Net change in Federal Home Loan Bank stock Net change in loans to members and member affiliates Net change in National Credit Union Share Insurance Fund deposit Purchases of securities Maturities, prepayments, and calls of securities Proceeds from sale of securities Return of investment from Credit Union Service Organization Purchases of premises and equipment Proceeds from sale of premises and equipment Net cash from investing activities Financing activities Net change in members’depository accounts Net change in deposits in collection (Repayments of) proceeds from Federal Home Loan Bank advances, net Payment of perpetual contributed capital dividends
Cash and cash equivalents, end of year
See the accompanying notes to financial statements.
19
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 1: Nature of Business and Summary of Significant Accounting Policies The accounting policies of Volunteer Corporate Credit Union (VolCorp) conform to accounting principles generally accepted in the United States of America and to general practices within the credit union industry. The following represent the more significant of those policies and practices: Nature of Business VolCorp was created in April 1981 by the general assembly of the State of Tennessee to function as a credit union support system to credit unions in Tennessee to facilitate mergers, joint ventures, and cooperative efforts and to provide credit unions with investment, liquidity, and payment system services. VolCorp is regulated by the Tennessee Department of Financial Institutions’ Credit Union Division and the National Credit Union Administration (NCUA). Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period based on available information. Specifically, management has made assumptions in estimating the fair value of financial instruments and the status of contingencies. Actual results could differ from estimates made based on management assumptions. Financial Instruments and Concentrations of Credit Risk In the normal course of business, VolCorp invests in highly rated domestic corporations and uses nationally recognized broker/dealers in the execution of trades for financial instruments. Exposure to individual counterparties may be significant. In providing financial services solely to the credit union industry, VolCorp is dependent upon the viability of that industry. At December 31, 2019, VolCorp had $42,625 in deposits held at other financial institutions that were in excess of Federal Deposit Insurance Corporation coverage limits. Cash and Cash Equivalents Cash and cash equivalents includes cash, deposits held at other financial institutions, and uncollected cash items. Uncollected Cash Items and Deposits in Collection These accounts represent deposits made by VolCorp’s members that have not cleared the Federal Reserve Bank (Federal Reserve). Such amounts generally become available for investment or withdrawal by members within one to three days. The uncollected cash items represent the amounts due from the Federal Reserve, and the deposits in collection represent the amount due to the members when they become available. These amounts are not interest bearing. Certificates of Deposit These items are certificates of deposit in various institutions.
20
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 1: Nature of Business and Summary of Significant Accounting Policies (Continued) Restricted Stock, at Cost Restricted stock, such as Federal Home Loan Bank (FHLB) capital stock, can only be sold at par or a value as determined by the issuing institution and only to the respective institution or to another member institution. These securities are recorded at cost and evaluated annually for possible impairment. Securities VolCorp has adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320 Debt and Equity Securities which requires all investments in debt securities and all investments in equity securities that have readily determinable fair values to be classified into three categories as follows: Trading Securities Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value with unrealized gains and losses included in earnings. No securities have been classified as trading securities Securities Held to Maturity Debt securities that VolCorp has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost using a method that does not differ materially from the level interest yield method. Securities Available for Sale Securities not classified as either held to maturity debt securities or trading securities are classified as available for sale securities and reported at estimated fair value with unrealized gains and losses excluded from earnings and reported as other comprehensive income (loss) within members’equity. If quoted market prices are not available, fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Declines in the fair value of securities below their cost that are related to credit losses and are other-than-temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the financial condition and near-term prospects of the underlying collateral with loan level due diligence performed by an outside third party and (4) whether VolCorp does not have the intent to sell the security and it is more likely than not that it will be able to retain the security until recovery of the cost basis. Declines in the fair value of available for sale securities below their cost that are deemed to be other-than-temporarily impaired are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. Premiums and discounts are recognized in interest income using the interest method over the period until maturity or the expected maturity date based on prepayments. Gains and losses on investment dispositions are recognized using the specific identification method for determining the cost of securities sold.
21
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 1: Nature of Business and Summary of Significant Accounting Policies (Continued) Investment in Credit Union Service Organizations Investments in Credit Union Service Organizations (CUSOs) are recorded using the equity method of accounting for investments in entities in which it has an ownership interest, but does not exercise a controlling interest in the operating and financial policies of an investee. Under this method, an investment is carried at the acquisition cost, plus the CUSO's equity in undistributed earnings or losses since acquisition. VolCorp periodically tests its investments for potential impairment whenever events and circumstances indicate a loss in the fair value of the investments may be other than temporary. The equity method is considered appropriate due to either VolCorp’s percentage of ownership or the ability to exert influence over the CUSOs. Loans to Members and Member Affiliates Loans are stated at unpaid principal balances. No allowance for loan losses has been established as all outstanding loans are secured by a general or specific pledge of the member credit unions’assets, and there have been no historical losses. Interest on loans is recognized over the terms of the loans and is calculated on principal amounts outstanding. Premises and Equipment Land is carried at cost. Premises and equipment are carried at cost, net of accumulated depreciation. Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets which primarily range from 2 to 50 years. Long-Term Assets Premises and equipment and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Income Taxes VolCorp is exempt by statute, from federal and state taxes on income related to its exempt purposes. However, VolCorp is subject to unrelated business income tax as discussed below. Accordingly, no provision for income taxes is included in the accompanying statements of income. The (IRS) and certain state taxing authorities are currently revisiting what, if any, products and services provided by state chartered credit unions are subject to unrelated business income tax (UBIT). There is little guidance in the IRS regulation on what activities should be subject to UBIT. The IRS issued guidance in the form of technical advice memorandums. As a result, there is uncertainty regarding whether state chartered credit unions should pay income tax on certain types of net taxable income from activities that may be considered by taxing authorities as unrelated to the purpose for which VolCorp was granted non-taxable status. In the opinion of management, any liability resulting from taxing authorities imposing income taxes on the net taxable income from activities deemed unrelated to VolCorp’s non-taxable status is not expected to have a material effect on VolCorp’s financial position or results of operations. VolCorp has adopted FASB ASC 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FASB ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Management evaluates the tax positions taken on tax filings and consults with outside professionals in evaluating the likelihood of unfavorable results from any such tax positions. The tax years from 2016 and forward remain open to tax audits.
22
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 1: Nature of Business and Summary of Significant Accounting Policies (Continued) National Credit Union Share Insurance Fund Deposit and Insurance Premiums The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with NCUA regulations, which require the maintenance of a deposit by each insured credit union in an amount equal to one percent of its insured shares. The deposit will be refunded to VolCorp if its insurance coverage is terminated, it converts to insurance coverage from another source, or the operations of the fund are transferred from the NCUA Board. VolCorp is required to pay a percentage of total insured shares as insurance premiums to the NCUSIF unless the NCUA Board waives the payment. No payments were made during 2019 and 2018. Perpetual Contributed Capital (PCC) PCC is a permanent, non-voting, non-cumulative equity investment. Payment of dividends is based on available earnings and is not guaranteed. PCC, in the event of liquidation, is subordinate to all other liabilities of VolCorp. Dividends declared on PCC are determined by management and approved by the Board of Directors based on an evaluation of current and future market conditions. 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, which are also recognized as a separate component of members’equity. 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 are currently such matters that will have a material effect on the financial statements. Restrictions on Cash There were no restrictions or requirements related to cash at December 31, 2019 and 2018. Fair Value of Financial Instruments VolCorp has an established process for determining fair values. Fair value is based upon quoted market prices, when available. If listed prices or quotes are not available, fair value is based upon pricing by an independent outsourced firm which uses proprietary models including market data, interest rate yield curves, option volatilities and other third party information. Management reviews the methodology and results of the pricing by the independent outsourced firm. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. Furthermore, while VolCorp believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Generally accepted accounting principles have a three-level valuation hierarchy for fair value measurements. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are explained as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever possible.
23
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 1: Nature of Business and Summary of Significant Accounting Policies (Continued) Fair Value of Financial Instruments (Continued) Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for valuations in situations in which there is little, if any, market activity for the asset or liability at the measurement.
Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. In 2018, VolCorp elected to early adopt ASU 2016‐01, Financial Instruments‐Overall (Subtopic 825‐10): Recognition and Measurement of Financial Assets and Financial Liabilities. The adoption of ASU 2016‐01 did not have a material impact on the financial statements of VolCorp. Advertising Costs Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2019 and 2018 was $107 and $66, respectively. Off Balance Sheet Financial Instruments In the ordinary course of business, VolCorp enters into commitments to extend credit. Such financial instruments are recorded when they are funded. Reclassifications Certain items in prior financial statements have been reclassified to conform to the current presentation. The reclassifications had no impact on net income or members’equity. Effect of Newly Adopted Accounting Standards On January 1, 2019, VolCorp adopted ASU 2014-09,“Revenue from Contracts with Customers (Topic 606).”The standard creates a single framework for recognizing revenue from contracts with customers that fall within its scope and revises when it is appropriate to recognize a gain (loss) from the transfer of non-financial assets. The majority of VolCorp’s revenues come from interest income and other sources that are outside the scope of Topic 606. VolCorp’s services that fall within the scope of Topic 606 are presented within noninterest income and are recognized as revenue as VolCorp satisfies its obligation to the member. Services within the scope of Topic 606 include item processing, currency services, and various other member services, included in noninterest income on the statement of income. Topic 606 focuses on revenues from contracts earned over time but nearly all of these in-scope noninterest income revenue streams are governed by agreements that do not have an enforceable, contractual term. Given the cancellable-at-will structure, Topic 606 views these contracts as agreements-at-will without a defined term, the revenues of which are immediately recognized. The revenue recognition timing is identical with previous revenue recognition standards. VolCorp concluded that the non-cancellable revenue streams are immaterial to VolCorp’s financial statements. VolCorp determined that the adoption of ASU 2014-09 did not impact the financial statements.
24
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 2: Certificates of Deposit At December 31, 2019 and 2018, certificates of deposit are classified as held to maturity and are carried at cost less any impairment, as fair market value in not readily determinable, of $248 and $355, respectively. The certificates of deposit outstanding at December 31, 2019, are to mature during the year ending December 31, 2022.
NOTE 3: Securities Available for Sale The amortized cost and approximate estimated fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at December 31, 2019 and 2018 were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses
Estimated Fair Value
December 31, 2019 U.S. Government agency securities Asset�backed securities
$ 484,871
$ 776
$ (1,289)
$ 484,358
317,082
298
(366)
317,014
$801,953
$1,074
$(1,655)
$801,372
$452,322
$ 183
$(1,889)
$ 450,616
364,179
91
(913)
363,357
$816,501
$ 274
$(2,802)
$813,973
December 31, 2018 U.S. Government agency securities Asset�backed securities
U.S. Government agency securities consist of mortgage-backed securities and debentures. Asset-backed securities consist primarily of securitized credit card, student loan, mortgage, automobile dealer floor plan receivables and other assets. VolCorp sold no securities during the year ended December 31, 2019. VolCorp sold $13,003 of securities available for sale resulting in gross gains of $5 for the year ended December 31, 2018. No securities available for sale were sold for a loss for the year ended December 31, 2018. The amortized cost and estimated fair value of securities available for sale at December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
25
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 3: Securities Available for Sale (Continued) Amortized Cost
Estimated Fair Value
December 31, 2019 Due in less than one year
$ 155,509
$ 155,608
Due after one year through five years
203,243
203,242
Due after five years through ten years
130,126
129,661
Due after ten years
313,075
312,861
$801,953
$801,372
Information pertaining to securities with gross unrealized losses at December 31, 2019 and 2018 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Less Than 12 Months Fair Unrealized Value Losses
12 Months or More Fair Unrealized Value Losses
Total Fair Unrealized Value Losses
December 31, 2019 U.S. Government agency securities $ 208,816 Asset-backed securities Total
$ 634
$ 126,438
$ 655
$ 335,254
$ 1,289
37,305
45
41,163
321
78,468
366
$246,121
$679
$167,601
$976
$413,722
$1,655
Less Than 12 Months Fair Unrealized Value Losses
12 Months or More Fair Unrealized Value Losses
Total Fair Unrealized Value Losses
December 31, 2018 U.S. Government agency securities Asset�backed securities Total
$ 192,535
$ 690
$ 193,851
$ 1,199
$ 386,386
$ 1,889
214,296
687
23,271
226
237,567
913
$406,831
$1,377
$217,122
$1,425
$623,953
$2,802
26
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 3: Securities Available for Sale (Continued) At December 31, 2019 and 2018, VolCorp had 58 and 72 securities in a loss position, respectively. The unrealized losses associated with these investments are primarily driven by changes in interest rates and are not related to the credit quality of the securities. VolCorp does not intend to sell these securities, and it is not likely they will be required to sell the securities before the amortized cost basis is recovered, which may be at maturity. Management does not consider these securities to be other-than-temporarily impaired at December 31, 2019 and 2018.
NOTE 4: Investment in Credit Union Service Organizations VolCorp’s investment in CUSOs at December 31, 2019 and 2018 is as follows:
Percentage of Ownership
Recorded Value
December 31, 2019 Name Credit Union Business Group, LLC
4.41%
$ 128
Primary Financial Company, LLC
10.67
2,217
CU Investment Solutions, LLC
25.00
361 $2,706
December 31, 2018 Name Credit Union Business Group, LLC
4.41%
$ 114
Primary Financial Company, LLC
10.67
2,159
CU Investment Solutions, LLC
25.00
252 $2,525
Investments in CUSOs are accounted for under the equity method based on VolCorp’s percentage of ownership or the ability to exert significant influence over the CUSOs.
27
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 5: Fair Value Measurements The following table presents the assets carried at fair value subject to measurement on a recurring basis. Assets are presented as of December 31, 2019 and 2018, by their nature and by FASB ASC 820, Fair Value Measurements and Disclosures, valuation hierarchy:
Total Value
Value Level 1
Value Level 2
Value Level 3
December 31, 2019 U.S. Government agency security
$484,358
$-
$484,358
$-
Asset-backed securities
317,014
-
317,014
-
Total assets at fair value
$801,372
$-
$801,372
$-
$450,616
$-
$450,616
$-
Asset‐backed securities
363,357
-
363,357
-
Total assets at fair value
$813,973
$-
$813,973
$-
December 31, 2018 U.S. Government agency security
There were no liabilities carried at fair value for 2019 and 2018. The following valuation method was used for assets carried at fair value as of December 31, 2019 and 2018:
U.S. Government agency securities and asset-backed securities – fair values are estimated using pricing models that use observable inputs or quoted prices of securities with similar characteristics. These securities are classified within Level 2 of the valuation hierarchy.
28
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 6: Premises and Equipment Premises and equipment at December 31, 2019 and 2018, respectively were as follows:
December 31,
2019
2018
Land
$ 427
$ 427
Building
2,429
2,413
Furniture, fixtures, and equipment
5,342
5,060
8,198
7,900
4,692
4,328
$3,506
$3,572
Total Less accumulated depreciation and amortization Total
Depreciation expense was $612 and $553 for the years ended December 31, 2019 and 2018, respectively.
NOTE 7: Members’ Depository Accounts At December 31, 2019 and 2018, the balances of the various types of members’depository accounts are as follows:
December 31, Daily shares Share certificates Total
2019
2018
$1,154,141
$ 832,485
233
2,183
$1,154,374
$ 834,668
Share certificates as of December 31, 2019 are scheduled to mature within one year. At December 31, 2019 and 2018, there were no depository accounts exceeding 10% of total members’depository accounts. The aggregate amount of members’depository accounts over $250 as of December 31, 2019 and 2018 was approximately $1,089,287 and $769,603, respectively.
29
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 8: Borrowings VolCorp, as a member of the FHLB of Cincinnati, is eligible for advances from this bank pursuant to the terms of various borrowing agreements. VolCorp has pledged 96 securities, with a carrying value of $470,462 as collateral under the borrowing agreement with the FHLB of Cincinnati as of December 31, 2019. At December 31, 2018, VolCorp had 96 securities pledged with a carrying value of $448,197 as collateral under the borrowing agreement with the FHLB of Cincinnati. At December 31, 2019 there was no amount outstanding on this line of credit. At December 31, 2018, the amount outstanding under this line of credit was $190,000 with an interest rate of 2.45%. The maturity is overnight for this line of credit. At December 31, 2019, VolCorp had $389,040 in additional borrowing availability with the FHLB of Cincinnati. VolCorp maintains a federal funds line of credit with one regional bank. Securities with a carrying value of $103,870 and $103,879 were pledged as collateral with this bank at December 31, 2019 and 2018, respectively. No amounts were outstanding under this line of credit at December 31, 2019 or 2018, and borrowing availability totaled $70,000. This agreement may be cancelled at the discretion of either party. Effective June 30, 2019, VolCorp renewed an unsecured federal funds facility from another regional bank with a borrowing availability of $15,000. This agreement expires on June 30, 2020 unless otherwise extended or terminated. No amounts were outstanding under this line of credit at December 31, 2019 or 2018.
NOTE 9: Regulatory Capital Requirements VolCorp is subject to various regulatory capital requirements administered by the NCUA. Failure to meet minimum capital requirements can initiate certain additional actions by regulators that, if undertaken, could have a direct material effect on VolCorp’s financial statements. Failure to meet minimum capital requirements would require VolCorp to submit a plan of action to correct the shortfall. Additionally, the NCUA could require an increase in capital to specific levels, reduction of interest, and ceasing or limiting VolCorp’s ability to accept deposits. Beginning October 2016, a portion of PCC is excluded from Tier 1 capital as defined by the NCUA. The portion of PCC also reduces daily average net assets and monthly moving average net risk-weighted assets for the applicable ratio calculations. NCUA Regulations as of December 22, 2017 were modified to include all PCC received from federally insured credit unions when the corporate credit union’s retained earnings ratio is greater than 2.50%. During 2019, VolCorp achieved 2.50% retained earnings ratio and began including all PCC in their capital ratio calculations.
30
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 9: Regulatory Capital Requirements (Continued) At December 31, 2019 and 2018, VolCorp’s capital ratios were as follows:
Regulatory Capital Amount Ratio
Required Capitalization under NCUA Regulation 704 Under Adequately Well Capitalized Capitalized Capitalized
2019 Leverage
(1)
Tier 1 Risk Based Capital Total Risk Based Capital
(2)
(2)
$102,213
8.12%
< 4.00%
4.00%
5.00%
$102,213
66.15%
< 4.00%
4.00%
6.00%
$102,213
66.15%
< 8.00%
8.00%
10.00%
$82,464
6.73%
< 4.00%
4.00%
5.00%
$82,464
48.18%
< 4.00%
4.00%
6.00%
$96,815
56.57%
< 8.00%
8.00%
10.00%
2018 Leverage
(1)
Tier 1 Risk Based Capital Total Risk Based Capital
(2)
(2)
(1) to rolling daily average net assets (2) to moving monthly average net risk-weighted assets
The retained earnings ratio is key in maintaining capital adequacy in compliance with NCUA regulations. Beginning in October 2013, NCUA regulation 704.3 requires corporate credit unions to calculate and report a retained earnings ratio of at least 0.45%. VolCorpâ&#x20AC;&#x2122;s retained earnings ratio at December 31, 2019 and 2018 was 2.84% and 2.43%, respectively.
31
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 10: Related Party Transactions Each of the directors of VolCorp is affiliated with credit unions that, in the ordinary course of business, may engage in financial transactions with VolCorp. Outstanding balances of membersâ&#x20AC;&#x2122;share accounts with these related parties were $170,276 and $114,355 at December 31, 2019 and 2018, respectively. There were no loans with an outstanding balance with related parties as of December 31, 2019. Outstanding balance of loans with related parties as of December 31, 2018 was $27,217.
NOTE 11: Employee Benefits VolCorp maintains two defined contribution plans. Under the 401(k) employee savings plan, all full-time employees who have been employed at least one year are required to contribute 5% of their gross annual salary to the plan. Contributions are fully vested when made. VolCorp makes no contributions to the employee savings plan. Under the retirement savings plan, VolCorp contributes an amount equal to 10% of each participantâ&#x20AC;&#x2122;s salary to the plan. Employees who have been employed at least one year become participants in the plan. Benefits are fully vested after five years. VolCorp made contributions to the retirement savings plan of $417 and $361 during the years ended December 31, 2019 and 2018, respectively. The Credit Union has two collateral assignment split dollar agreements between the Credit Union and a key employee. The agreements involve a method of paying for insurance coverage by splitting the elements of a life insurance policy. Under the agreements, the employee is the owner of the policies and made collateral assignments to the Credit Union in return for loans equal to the amount of premiums to be paid on behalf of the employee plus accrued interest at the applicable long-term federal rate when placed into effect in 2017 plus an additional 19 basis points. At the time of death of the key employee, the Credit Union will be paid the loan amounts plus accrued interest and the balance of the insurance benefits will be paid to the designated beneficiaries. As of December 31, 2019 and 2018, the balance of the loan approximated $5,733 and $5,566, respectively, and is included in accrued interest receivable and other assets on the balance sheets.
NOTE 12: Commitments, Contingencies and Off Balance Sheet Activities In the normal course of business, there may be various outstanding legal proceedings or potential claims. In the opinion of management, after consultation with legal counsel, the financial position of VolCorp will not be affected materially by the outcome of any such legal proceedings or potential claims.
32
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 12: Commitments, Contingencies and Off Balance Sheet Activities (Continued) Some financial instruments, such as loan commitments, irrevocable letters of credit, and lines of credit, are issued to meet member-financing needs. These are agreements to provide credit or to support the credit of others as long as conditions established in the contract are met and usually have expiration dates. Commitments may expire without being used. These instruments contain, to varying degrees, elements of credit and market risk in excess of the amounts recognized in the balance sheets. The credit risk relates to the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract. The market risk relates to the possibility that future changes in market prices may make a financial instrument less valuable or more onerous. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral upon exercise of the commitment. The contractual amount of financial instruments with off balance sheet risk at December 31, 2019 and 2018 were as follows:
December 31,
2019
Loan commitments (remaining un‐advanced loan prinicipal)
$ 1,431,900
$ 1,269,167
556
492
$1,432,456
$1,269,659
Letter of credit Total
2018
NOTE 13: Supplementary Cash Flow Information Additional cash flow disclosures for the years ended December 31, 2019 and 2018 are as follows:
December 31,
2019
2018
Interest paid
$21,466
$ 16,473
$ 1,947
$(1,694)
Non‐cash item ‐ Unrealized gain (loss) on available for sale securities
33
NOTES TO THE FINANCIAL STATEMENTS Volunteer Corporate Credit Union (Dollar Amounts In Thousands)
NOTE 14: Subsequent Events Management has evaluated subsequent events through May 12, 2020, the date on which the financial statements were available to be issued. In March 2020, the World Health Organization made the assessment that the outbreak of a novel coronavirus (COVID-19) can be characterized as a pandemic. As a result, uncertainties have arisen that may have a significant negative impact on the operating activities and results of the Credit Union. The occurrence and extent of such an impact will depend on future developments, including (i) the duration and spread of the virus, (ii) government quarantine measures, (iii) voluntary and precautionary restrictions on travel or meetings, (iv) the effects on the financial markets, and (v) the effects on the economy overall, all of which are uncertain.
34
INTERNAL CONTROLS Carr, Riggs & Ingram, LLC 3011 Armory Drive Suite 190 Nashville, TN 37204 615.665.1811 615.665.1829 (fax) CRIcpa.com
Independent Auditors’ Report on Internal Control over Financial Reporting To the Board of Directors and Supervisory Committee of Volunteer Corporate Credit Union We have audited Volunteer Corporate Credit Union’s (VolCorp) internal control over nancial reporting, including controls over the preparation of regulatory nancial statements in accordance with the instructions for the National Credit Union Administration (NCUA) 5310 – Corporate Credit Union Call Report, as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).
Management’s Responsibility for Internal Control over Financial Reporting Management is responsible for designing, implementing and maintaining effective internal control over nancial reporting, and for its assessment about the effectiveness of internal control over nancial reporting included in the accompanying Management Report Regarding Statement of Management’s Responsibilities, Compliance with Designated Laws and Regulations, and Management’s Assessment of Internal Control over Financial Reporting.
Auditors’ Responsibility Our responsibility is to express an opinion on VolCorp’s internal control over nancial reporting based on our audit.We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over nancial reporting was maintained in all material respects. An audit of internal control over nancial reporting involves performing procedures to obtain audit evidence about whether a material weakness exists. The procedures selected depend on the auditor’s judgment; including the assessment of the risks that a material weakness exists. An audit includes obtaining an understanding of the internal control over nancial reporting and testing and evaluating the design and operating effectiveness of internal control over nancial reporting based on the assessed risk. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
35
INTERNAL CONTROLS De nition and Inherent Limitations of Internal Control over Financial Reporting An institution’s internal control over nancial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable nancial statements in accordance with accounting principles generally accepted in the United States of America. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 704.15 of the NCUA Regulations, our audit of VolCorp’s internal control over nancial reporting included controls over the preparation of nancial statements in accordance with accounting principles generally accepted in the United States of America and with the NCUA 5310 Call Report instructions. An institution’s internal control over nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly re ect the transactions and dispositions of assets of the institution; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of nancial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the institution are being made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the institution’s assets that could have a material effect on the nancial statements. Because of its inherent limitation, internal control over nancial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Opinion In our opinion, Volunteer Corporate Credit Union maintained, in all material respects, effective internal control over nancial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Report on Financial Statements We also have audited, in accordance with auditing standards generally accepted in the United States of America, the balance sheet and related statements of income, comprehensive income, changes in members’ equity, and cash ows of Volunteer Corporate Credit Union and our report dated May 12, 2020, expressed an unmodi ed opinion.
Nashville, Tennessee May 12, 2020
36
INTERNAL CONTROLS Management Report Regarding Statement of Management’s Responsibilities, Compliance with Designated Laws and Regulations, and Management’s Assessment of Internal Control over Financial Reporting Statement of Management’s Responsibilities The Management of Volunteer Corporate Credit Union (the “Corporate”) is responsible for preparing the Corporate’s annual nancial statements in accordance with generally accepted accounting principles; for designing, implementing, and maintaining an adequate internal control structure and procedures for nancial reporting, including controls over the preparation of regulatory nancial statements in accordance with the instructions for the NCUA 5310 – Corporate Credit Union Call Report; and for complying with Federal and, as applicable, State laws and regulations pertaining to affiliate transactions, legal lending limits, loans to insiders, restrictions on capital and share dividends and regulatory reporting that meets full and fair disclosure.
Management’s Assessment of Compliance with Designated Laws and Regulations The management of the Corporate has assessed the Corporate’s compliance with Federal and State laws and regulations pertaining to affiliate transactions, legal lending limits, loans to insiders, restrictions on capital and share dividends and regulatory reporting that meets full and fair disclosure during the scal year that ended on December 31, 2019. Based upon its assessment, management has concluded that the Corporate complied with the Federal and State laws and regulations pertaining to affiliate transactions, legal lending limits, loans to insiders, restrictions on capital and share dividends and regulatory reporting that meets full and fair disclosure during the scal year that ended on December 31, 2019.
Management’s Assessment of Internal Control over Financial Reporting The Corporate’s internal control over nancial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the reliability of nancial reporting and the preparation of reliable nancial statements in accordance with accounting principles generally accepted in the United States of America and nancial statements for regulatory reporting purposes, i.e., NCUA 5310 – Corporate Credit Union Call Report. The Corporate's internal control over nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly re ect the transactions and dispositions of the assets of the Corporate; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of nancial statements in accordance with accounting principles generally accepted in the United States of America and nancial statements for regulatory reporting purposes, and that receipts and expenditures of the Corporate are being made only in accordance with authorizations of management and directors of the Corporate; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the Corporate's assets that could have a material effect on the nancial statements.
37
INTERNAL CONTROLS Internal control over nancial reporting has inherent limitations. Internal control over nancial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over nancial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over nancial reporting may not prevent, or detect and correct, misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Management assessed the effectiveness of the Corporate's internal control over nancial reporting, including controls over the preparation of regulatory nancial statements in accordance with the instructions for the NCUA 5310 – Corporate Credit Union Call Report, as of December 31, 2019, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based upon its assessment, management has concluded that, as of December 31, 2019, the Corporate's internal control over nancial reporting, including controls over the preparation of regulatory nancial statements in accordance with the instructions for the NCUA 5310 – Corporate Credit Union Call Report, is effective based on the criteria established in Internal Control—Integrated Framework (2013). The Corporate’s internal control over nancial reporting, including controls over the preparation of regulatory nancial statements in accordance with the instructions for the NCUA 5310 – Corporate Credit Union Call Report, as of December 31, 2019, has been audited by Carr, Riggs & Ingram, LLC, an independent public accounting rm, as stated in their report dated May 12, 2020.
Volunteer Corporate Credit Union
05/12/2020 Jeffrey W. Merry, President and Chief Executive Officer
Date
05/12/2020 Susan Stack, SVP and Chief Financial Officer
Date
38
Address 2460 Atrium Way Nashville, TN 37214 Online volcorp.org vportfolio.volcorp.org v-portfolio.org volcorpdesign.org Numbers (615) 232-7900 (800) 470-3444 After Hours: (615) 232-7977 Operations Fax: (615) 232-7979 Extensions 1 - Member Services/Operations/Item Processing/ACH 2 - Investment Sales 3 - Marketing and Business Development 4 - Administration and Presidentâ&#x20AC;&#x2122;s OďŹ&#x192;ce 0 - Operator Hours Monday, Tuesday, Wednesday and Friday: 7:30 a.m. to 4:30 p.m. (Central time). Thursday: 8:30 a.m. to 4:30 p.m. (Central time). Our Member Services Department closes at 4:15 p.m. (Central time) each day. Office closings are coordinated with the Federal Reserve Bank holiday schedule.
Your savings federally insured to at least $250,000 and backed by the full faith and credit of the United States Government
Savings Federally Insured to at least $250,000. NCUA, a U.S. Government Agency.