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.Part703of the NationalCreditUnionAdministration’s(NCUA)Rules andRegulations states:
“AFederal 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 theU.S. government or its agencies, enterprises, or corporations or fully insured(including accumulated interest)by theNationalCreditUnionAdministration or theFederalDepositInsuranceCorporation.A Federal credit union must update this analysis at least annually for as long as it holds the investment.”
ThoughNCUA’s investment regulation specifically exempts state-chartered credit unions, many are using the regulation as a guideline in their investment policies, procedures, and practices.Recognizing the analysis of a corporate credit union can be burdensome, we are providing you with this summary analysis ofVolunteer CorporateCreditUnion.
“(1)A corporate credit union must maintain at all times:
(i)A leverage ratio of 4.0 percent or greater;
(ii)ATier 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 implementation of written short- and long-term capital goals, objectives, and strategies which provide for the building of capital consistent with regulatory requirements, the maintenance of sufficient capital to support the risk exposures that may arise from current and projected activities, and the periodic review and reassessment of the capital position of the corporate credit union.
(3) Beginning with the first call report submitted on or after October 21, 2013, a corporate credit union must calculate and report to NCUA the ratio of its retained 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.”
Leverage ratio means the ratio ofTier 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 ofTier 1 capital andTier 2 capital, less the corporate credit union’s equity investments not otherwise deducted when calculatingTier 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:
(1) Retained earnings;
(2) Perpetual contributed capital;
(3) Deduct the amount of the corporate credit union’s intangible assets that exceed one half percent of its moving daily average net assets (however, the NCUA may direct the corporate credit union to add back some of these assets on the NCUA’s own initiative, or the NCUA’s approval of petition from the applicable state regulator or application from the corporate credit union);
(4) Deduct investments, both equity and debt, in unconsolidated CUSOs;
(5) Deduct an amount equal to any PCC or NCA that the corporate credit union maintains at 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.
Tier 1 risk-based capital ratio means the ratio ofTier 1 capital to the moving monthly average net risk-weighted 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 fromTier 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 ofTier 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.
Acorporate credit union’s balance sheet reflects the liquidity needs and cash flows of its member credit unions. Therefore, it is not unusual for a corporate credit union to experience asset fluctuations of25percent or more, not only from month-to-month, but at times within periods of less than30days.In addition, corporate credit union month-end assets are often significantly inflated due to routine payrolls that flow into their member credit unions.In recognition of the distortion such fluctuations can cause,NCUAcorporate credit union regulations call for the use of the corporates’moving daily average net assets(MDANA) when calculating key financial ratios.
Even with an expectation of cyclical flows throughout any given year, macroeconomic events can disrupt historical trends.After two years of elevation from economic stimulus, deposits and assets began to subside to more normal levels during 2022, particularly during the latter half of the year.This resulted in a31% year over year decline inMDANA from $2.6billion atDecember31, 2021to $1.8 billion atDecember31, 2022.
While the decline inMDANAwas additive to increases in regulatory capital ratios, both a successful year of business operations and additional claim payments from theU.S.CentralAsset ManagementEstate enabled significant retained earnings and capital growth, ending 2022at $83.5 and $150.1million respectively which represents increases of $26million from their respective 2021 ending balances.This resulted in a retained earnings ratio of4.60percent atDecember31, 2022, as compared to2.21percent atDecember31, 2021. At year-end2022,VolCorp’severage ratio was l “well capitalized”at8.26percent, an increase from4.72percent atDecember31, 2021.
TheNEVof a corporate credit union is defined as the difference between the book value of regulatory total capital and the mark-to-market value of assets and liabilities at current interest rates.SuchNEVis computed as the sum of the present values of a time series of cash flows from assets(including the value of embedded options)minus the sum of the present values of a time series of cash flows from liabilities(including the value of embedded options).NEVis a point-in-time measurement based on a given balance sheet date, and is measured in terms of aBase scenario(i.e., the existing market interest rate environment on said balance sheet date)and certain rate shock scenarios keyed off suchBase scenario in intervals of +/-100,200and 300basis points(collectively, the industry-standard rate shock scenarios).Acorporate’sBaseNEVRatio is computed by dividing the residualBaseNEVby the mark-to-market value of theBase total assets.NEVis a measure of, and theNEVRatio is an indicator of, the inherent interest rate risk embedded in the balance sheet structure of a financial institution.BaseNEVserves as a proxy assessment of the residual post-liquidation value of the financial institution under certain interest rate environments.UnderPart704.8(d)(1)(ii)of its Rules andRegulations for all corporate credit unions, those corporates operating underBasePlus authority as granted by theNCUABoard ofDirectors(see below)must maintain a minimumBaseNEVRatio of2.00% and a maximum permissible downwardNEVshift of negative20.00% fromBaseNEV.In addition, theNCUA Board set identical minimumNEVRatio limits and maximum permissible downwardNEVshift limits for the aforementioned industry-standard rate shock scenarios.By definition, shocking a corporate’s balance sheet means determining/measuring the impact onBaseNEVand theBaseNEVRatio of an instantaneous, parallel, and sustained upward and/or downward shift of market interest rates.TheNEVshift represents the percentage increase and/or decrease ofNEVunder any or all of the industry-standard rate shock scenarios.
The permissible downwardNEVshift is dependent, in part, upon the level of authority granted each corporate credit union by theNCUABoard.As a starting point, all corporate credit unions have the authority to operate atBase level.At this level, the permissible shift in the corporates’NEVRatio is negative15.00% under the industry-standard rate shock scenarios.Each corporate credit union may petition theNCUABoard to operate under expanded authority.To obtain such expanded authority, the corporate credit union must meet all the requirements ofPart704of theNCUA’sRules andRegulations and fulfill additional capital, management, infrastructure, and asset liability requirements.InSeptember1997,VolCorp’sBoard ofDirectors requested authority to operate at the expanded level referred to asBasePlus.InNovember1997,VolCorp became the first corporate credit union to receive authority by theNCUABoard to operate aboveBase level atBasePlus authority level.At suchBasePlus level,VolCorp’s permissible negativeNEVshift expanded downward to negative20.00% from negative15.00% underBase authority.
As ofDecember31, 2022,VolCorp’s BaseNEVtotaled $133.9million, theBaseNEVRatio was8.66%, and theNEVshift showed a decrease of $13.5million/-10.09% under the regulatory +300basis point rate shock scenario.These results were well within theNEVrisk limits as defined and stipulated by the aforementioned NCUAregulation.The following tabulation provides full disclosure of the impact of theNCUAregulatory interest rate shock scenarios onVolCorp’sBaseNEVandBaseNEVRatio as ofDecember31, 2022:
The quality of a financial institution’s assets is one of the most important factors contributing to its financial soundness.As ofDecember31,2022,99percent ofVolCorp’s assets consisted of cash and uncollected cash items, loans to member credit unions, and high-quality, low credit-risk investments.Cash holdings are concentrated in theFederalReserveBank.
Furthermore, as ofDecember31,2022,99percent ofVolCorp’s marketable securities holdings were ratedAAA orAAbyS&P, and91percent were issued or guaranteed byU.S.GovernmentAgencies.VolCorp monitors the quality of its assets through extensive monthly credit analyses and portfolio modeling.As ofDecember31, 2022, the continued quality and structure ofVolCorp’s portfolio was illustrated in thatVolCorp had a marketable securities portfolio totaling $906million with a net unrealized loss of $19million.Due to the short-term nature ofVolCorp’s investment holdings and the425-basis point upward movement in theFederalReserveBank’s FederalFundsTargetRange over the course of2022, the mere2% net unrealized loss on marketable securities at year-end reflects the heavy concentration in floating rate instruments.
When making investment decisions, VolCorp has always prioritized safety, liquidity, and yield.In order to minimize credit risk,VolCorp’s policies allow funds to be placed only in limited government-sponsored enterprises and agencies, theFederalReserve Bank, 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.VolCorp’s approved-institution analysis considers size, capital adequacy, asset quality, management, earnings performance, and liquidity.The quality of assets held is ultimately reflected in theTier1risk-based capital ratio of 71.92% atDecember31,2022, which is much greater than its respective “well capitalized”threshold of6.00%.
VolCorp has the responsibility of serving as the primary source of cash liquidity to meet the needs of its membership, while also protecting the deposits of its individual member credit unions.In response to these needs, as ofDecember31, 2022,VolCorp had extended255lines of credit to member credit unions totaling over $1.8billion of funding commitments.Further as of that date, outstanding loans and lines of credit to members totaled $54.7million, or3.5% of total assets, with all loans showing as current without exception. 4
The quality of the loan portfolio is governed by the loan policy established by theBoard ofDirectors and by the procedures established by management to effect full implementation of said policies to include strict adherence to consistent underwriting practices.Each line of credit is collateralized and secured byVolCorp filing a UCC1FinancingStatement to establish and perfect a first priority security interest in designated assets of the borrowing credit union.Aproactive credit review of all lines is performed quarterly by way of detailed tracking of select financial health ratios.Based on this review, it is determined which credit unions require monitoring on a more frequent basis and which credit unions may benefit fromVolCorp reaching out to offer additional assistance.Since its charter,VolCorp has never charged off a loan to a member credit union and has a perfect record of zero credit losses.
Like all credit unions,VolCorp is a not-for-profit financial cooperative, existing solely for the benefit of its members.VolCorp strives to help members improve their financial position by providing superb yet costeffective services and attractive investment yields.VolCorp does not maximize earnings at the expense of its member owners.It is also not the policy ofVolCorp to increase earnings by jeopardizing the safety of the membership’s shares and capital through high risk investments or investment practices.Even so,VolCorp must maintain a stable earnings position in order to pay dividends, cover budgeted expenses, innovate, maintain capital adequacy, and meet statutory reserve requirements.
VolCorp’s earnings and member share rates both benefited during 2022 with the relatively rapid increases in overnight rates, resulting in 2022’s net interest income of $9.9million.U.S.Central distributions and growth in service-driven revenue bolstered non-interest operating income to $31.9million.After operating expenses of $14.9million and net non-operating expense of $234thousand, 2022’s net income rested at $26.6million for a 146-basis point return onMDANA.
Year ended December31,
VolCorp balances the responsibilities of providing competitive returns with the need to maintain sufficient liquidity to meet members’cash flow needs.VolCorp holds adequate cash and overnight investments to provide for reasonable cash flow demands while managing an investment portfolio predominantly comprised of floating rate instruments which are, in general, less sensitive to unfavorable valuations in an upward interest rate environment relative to comparable fixed rate investments.Management understands and anticipates daily and seasonal variances, but also plans for unexpected outflows and member needs.VolCorp’s liquidity position is monitored daily and adjusted as necessary.
As ofDecember31, 2022, the cash and cash equivalents balance of $549million represented35% of assets, highlighting a balance sheet structured to provide for routine member liquidity.However,VolCorp also has access to multiple lines of credit.VolCorp maintains credit arrangements with theFederalHomeLoanBank of Cincinnati and holds federal funds lines of credit with regional banks.At year-end 2022 these arrangements represented total contractual amounts of $732and $85million respectively, of which $638million was available net of an outstanding FHLBovernight advance.
VolCorp also acts as an agent in theFederalReserveBank’sExcessBalanceAccount(EBA)program for a subset of its membership.TheEBAallows excess member deposits to reside on balance sheet with theFederal ReserveBank, providingVolCorp the flexibility to manage its balance sheet with access to additional member funding if necessary.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
Volunteer Corporate Credit Union and Subsidiary
We have audited the accompanying consolidated financial statements of Volunteer Corporate Credit Union and Subsidiary, which comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income (loss), changes in members’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Volunteer Corporate Credit Union and Subsidiary as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
We also have audited Volunteer Corporate Credit Union and Subsidiary’s internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the National Credit Union Administration (NCUA) 5310 –Corporate Credit Union Call Report, as of December 31, 2022, based on criteria established in Internal Control ‐ Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, Volunteer Corporate Credit Union and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control ‐ Integrated Framework (2013) issued by COSO.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audits of the Financial Statements and Internal Control Over Financial Reporting section of our report. We are required to be independent of Volunteer Corporate Credit Union and Subsidiary and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of effective internal control over financial reporting relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for its assessment about the effectiveness of internal control over financial reporting, included in the accompanying Management's Report Regarding Statement of Management's Responsibilities, Compliance with Designated Laws and Regulations, and Management's Assessment of Internal Control over Financial Reporting.
In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Volunteer Corporate Credit Union and Subsidiary’s ability to continue as a going concern within one year after the date that the consolidated financial statements are available to be issued.
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and about whether effective internal control over financial reporting was maintained in all material respects, and to issue an auditors’ report that includes our opinions.
Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit of financial statements or an audit of internal control over financial reporting conducted in accordance with GAAS will always detect a material misstatement or a material weakness when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit of the consolidated financial statements and an audit of internal control over financial reporting in accordance with generally accepted auditing standards, we:
Exercise professional judgment and maintain professional skepticism throughout the audits.
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.
Obtain an understanding of internal control relevant to the consolidated financial statement audit in order to design audit procedures that are appropriate in the circumstances.
Obtain an understanding of internal control over financial reporting relevant to the audit of internal control over financial reporting, assess the risks that a material weakness exists, and test and evaluate the design and operating effectiveness of internal control over financial reporting based on the assessed risk.
Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.
Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Volunteer Corporate Credit Union and Subsidiary’s ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the consolidated financial statement audit.
An institution’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable consolidated financial 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 Volunteer Corporate Credit Union and Subsidiary’s internal control over financial reporting included controls over the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and controls over the preparation of schedules equivalent to basic financial statements in accordance with the instructions for the National Credit Union Administration NCUA 5310 –Corporate Credit Union Call Report. An institution’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the institution; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial 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 consolidated financial statements.
Because of its inherent limitations, internal control over financial 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.
Nashville, Tennessee
June 6, 2023
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Volunteer Corporate Credit Union and Subsidiary (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).
The accounting policies of 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:
The accompanying consolidated financial statements include the accounts of VolCorp and its wholly‐owned subsidiary, Symphony, LLC. Symphony, LLC was formed in November 2020. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The Financial Accounting Standards Board (FASB) provides authoritative guidance regarding U.S. GAAP through the Accounting Standards Codification (ASC) and related Accounting Standards Updates (ASUs).
The preparation of U.S. GAAP consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near term are related to estimating the fair value of financial instruments and the status of contingencies.
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, 2022, VolCorp had $42,578 in deposits held at other financial institutions that were in excess of Federal Deposit Insurance Corporation coverage limits.
Cash and cash equivalents includes cash, deposits held at other financial institutions, and uncollected cash items with original maturities fewer than 90 days.
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.
VolCorp acts as an agent in facilitating overnight investment transactions between participating member credit unions and the Federal Reserve. Transactions with the Federal Reserve are facilitated via the Excess Balance Account (EBA) pursuant to Regulation D. VolCorp acts as intermediary for these transactions but is not otherwise obligated by the transaction. VolCorp's consolidated financial statements do not reflect these transactions except for the fees earned. At December 31, 2022 and 2021, VolCorp was agent for participating member credit unions on EBA funds totaling $827,845 and $1,712,500, respectively.
These items are certificates of deposit in various institutions.
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 based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Central Liquidity Facility (CLF) membership stock, can only be sold at par or a value as determined by the CLF and only to the CLF. These securities are recorded at cost and evaluated annually for possible impairment. VolCorp became a member of the CLF as an agent on behalf of a subset of its member credit unions to provide those credit unions access to extensions of credit from the CLF based on liquidity needs. VolCorp does not have access to extensions of credit through the CLF. Volcorp redeemed this stock in 2022 and was not a member as an agent as of December 31, 2022.
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
Debt 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.
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 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.
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.
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.
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 consolidated 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.
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 2019 and forward remain open to tax audits; however, there are currently no audits for any tax periods in progress.
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 2022 and 2021.
PCC is a permanent, 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) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on debt securities available for sale, which are also recognized as a separate component of members’ equity.
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 consolidated financial statements.
There were no restrictions or requirements related to cash at December 31, 2022 and 2021.
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2022 and 2021 was $99 and $95, respectively.
In the ordinary course of business, VolCorp enters into commitments to extend credit. Such financial instruments are recorded when they are funded.
VolCorp evaluated all events or transactions that occurred after December 31, 2022, through June 6, 2023, the date these consolidated financial statements were available to be issued.
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.
Certificates of deposit are classified as held to maturity and are carried at cost less any impairment, as fair market value is not readily determinable. As of December 31, 2021 certificates of deposits totaled $308. No certificates of deposits were outstanding as of December 31, 2022.
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, 2022 and 2021 were as follows:
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 years ended December 31, 2022 and 2021.
The amortized cost and estimated fair value of securities available for sale at December 31, 2022, 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.
Information pertaining to securities with gross unrealized losses at December 31, 2022 and 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Note 4: SECURITIES AVAILABLE FOR SALE (Continued)
At December 31, 2022 and 2021, VolCorp had 96 and 32 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, 2022 and 2021.
VolCorp’s investment in CUSOs at December 31, 2022 and 2021 were as follows:
31, 2022
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.
The following table presents the assets carried at fair value subject to measurement on a recurring basis. Assets are presented as of December 31, 2022 and 2021, by their nature and by FASB ASC 820, Fair Value Measurements and Disclosures, valuation hierarchy:
There were no liabilities carried at fair value for 2022 and 2021.
The following valuation method was used for assets carried at fair value as of December 31, 2022 and 2021:
U.S. Government agency securities, asset‐backed securities, mortgage‐backed securities, and SBA‐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.
Premises and equipment at December 31, 2022 and 2021, respectively were as follows:
Depreciation expense was $661 and $553 for the years ended December 31, 2022 and 2021, respectively.
At December 31, 2022 and 2021, the balances of the various types of members’ depository accounts are as follows:
Share certificates as of December 31, 2022 are scheduled to mature within one year.
At December 31, 2022, two members’ deposit accounts totaled $181,648 and represented 15.83% of total member depository accounts. At December 31, 2021, two members’ deposit accounts totaled $267,162 and represented 11.98% of total member depository accounts. The aggregate amount of members’ depository accounts over $250 as of December 31, 2022 and 2021 was approximately $1,082,655 and $2,161,181, respectively.
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 104 securities, with a carrying value of $775,584 as collateral under the borrowing agreement with the FHLB of Cincinnati as of December 31, 2022. At December 31, 2021, VolCorp had 103 securities pledged with a carrying value of $861,767 as collateral under the borrowing agreement with the FHLB of Cincinnati.
At December 31, 2022, there was $178,757 of overnight borrowings outstanding on this line of credit with a fixed rate of interest of 4.33% and a maturity date of January 3, 2023. There were no amounts outstanding at December 31, 2021. Based on related collateral and VolCorp’s holdings of FHLB stock, Volcorp is eligible to borrow $553,101 of additional funds from the FHLB of Cincinnati as of December 31, 2022.
VolCorp maintains a federal funds line of credit with one regional bank. Securities with a carrying value of $98,046 and $103,895 were pledged as collateral with this bank at December 31, 2022 and 2021, respectively. No amounts were outstanding under this line of credit at December 31, 2022 or 2021, and borrowing availability totaled $70,000. This agreement may be cancelled at the discretion of either party. Effective June 30, 2021, VolCorp renewed an unsecured federal funds facility from another regional bank with a borrowing availability of $15,000. This agreement expires on June 30, 2023 unless otherwise extended or terminated. No amounts were outstanding under this line of credit at December 31, 2022 or 2021.
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 consolidated 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%.
At December 31, 2022 and 2021, VolCorp’s capital ratios were as follows:
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%. VolCorp’s retained earnings ratio at December 31, 2022 and 2021 was 4.60% and 2.21%, respectively.
On October 5, 2010, VolCorp was issued recovery claim certificates of approximately $59,500 for membership capital accounts at U.S. Central Federal Credit Union previously depleted through the recognition of losses. U.S. Central Federal Credit Union was placed into liquidation on October 1, 2010. During 2022 and 2021, VolCorp recognized $23,924 and $32,672 of corporate credit union liquidation distributions related to the recovery claim certificates upon receipt of the distributions. During 2021, VolCorp paid $11,336 of non‐pro rata capital dividends to member natural person credit unions that recognized losses as a result of U.S. Central Federal Credit Union’s liquidation. During 2021, VolCorp also paid $3,698 of non‐pro rata interest distributions to association member natural person credit unions that recognized losses as a result of U. S. Central Federal Credit Union’s liquidation. No capital dividends related to member natural person credit unions that recognized losses as a result of U.S. Central Federal Credit Union’s liquidation were paid during 2022.
Based on NCUA projections, the remaining recovery claim certificates will be satisfied by distributions during future periods. VolCorp recognizes income from corporate credit union liquidation distributions during the period distributed funds are received.
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 members’ share accounts with these related parties were $166,822 and $308,610 at December 31, 2022 and 2021, respectively. Outstanding loan balances with these related parties were $15,000 at December 31, 2022. There were no loan balances with these related parties outstanding as of December 31, 2021.
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 participant’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 $483 and $430 during the years ended December 31, 2022 and 2021, 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, 2022 and 2021, the balance of the loan approximated $5,985 and $5,911, respectively, and is included in accrued interest receivable and other assets on the balance sheets.
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.
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, 2022 and 2021 were as follows:
The management of Volunteer Corporate Credit Union and Subsidiary (the ìCorporateî) is responsible for preparing the Corporateís annual consolidated financial statements in accordance with generally accepted accounting principles; for designing, implementing, and maintaining an adequate internal control structure and procedures for financial reporting, including controls over the preparation of regulatory financial 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.
The management of the Corporate has assessed the Corporateís 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 fiscal year that ended on December 31, 2022. 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 fiscal year that ended on December 31, 2022.
The Corporateís internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and financial statements for regulatory reporting purposes, i.e., NCUA 5310 Corporate Credit Union Call Report. The Corporate's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporate; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and financial 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 consolidated financial statements.
Internal control over financial reporting has inherent limitations. Internal control over financial 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 financial reporting also can be circumvented by collusion or improper management override.
Because of its inherent limitations, internal control over financial 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 financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the NCUA 5310 Corporate Credit Union Call Report, as of December 31, 2022, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal ControlóIntegrated Framework (2013) Based upon its assessment, management has concluded that, as of December 31, 2022, the Corporate's internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the NCUA 5310 Corporate Credit Union Call Report, is effective based on the criteria established in Internal ControlóIntegrated Framework (2013)
The Corporateís internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the NCUA 5310 Corporate Credit Union Call Report, as of December 31, 2022, has been audited by Carr, Riggs & Ingram, LLC, an independent public accounting firm, as stated in their report dated June 6, 2023.
Volunteer Corporate Credit Union:
Jeffrey W. Merry, President and Chief Executive OfficerJustin
Holt, Chief Financial Officer
Monday,Tuesday,Wednesday and Friday: 7:30 a.m. to 4:30 p.m. (Central time).
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.
Savings Federally Insured to at least $250,000. NCUA, a U.S. GovernmentAgency.
