volunteer corporate credit union 2016 f ainancial nalysis · december 31, 2016 2015 2014 2013 2012...

2016 F AINANCIAL NALYSIS

Volunteer Corporate Credit Union

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Table of Contents

Intro

CapitalRegulatory Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Retained Earnings and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Net Economic Value (NEV) Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Assets

Earnings

Member Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Liquidity

Office

December 31, 2016 2015 2014 2013 2012

Assets (in thousands)

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.”

Cash and Uncollected Cash Items $ 419,342 $ 372,377 $ 287,293 $ 228,434 $ 333,645

Certificates of Deposit and balances

with other financial institutions 1,719 1,988 3,072 1,101 2,335

U.S. Government-guaranteed

agency security 3,137

U.S. Government-sponsored

agency securities 450,886 444,683 436,533 365,223 539,073

Asset-backed Securities 445,436 493,186 468,826 407,579 282,130

Federal Home Loan Bank Stock 9,680 9,680 9,680 9,819 9,819

CUSO Investments 2,861 2,887 3,003 1,409 1,204

Total Investments $ 913,719 $ 952,424 $ 921,114 $ 785,131 $ 834,561

Unrealized Gains and Losses on AFS (1,634) (2,324) (120) (1,916) (183)

Net Investments $ 912,085 $ 950,100 $ 920,994 $ 783,215 $ 834,378

Demand Loans 8,749 3,159 6,409 4,999 4,656

Premises and Equipment 3,124 3,289 3,541 3,561 3,690

NCUSIF Capitalization Deposit 682 709 747 613 646

All Other Assets 2,438 2,188 1,852 1,500 2,910

TOTAL ASSETS $1,346,420 $1,331,822 $1,220,836 $1,022,322 $1,179,925

12016 Financial Analysis Volunteer Corporate

Intro

December 31, 2016 2015 2014 2013 2012

Deposits in Collection $ 72,080 $ 70,033 $ 51,777 $ 46,734 $ 67,353

Accrued expenses and other liabilities 1,244 1,077 1,432 902 1,654

Federal Home Loan Bank Notes Payable 72,620 17,469 238,288 71,256 -

Total Liabilities $ 145,944 $ 88,579 $ 291,497 $ 118,892 $ 69,007

Daily Shares 1,104,601 1,148,701 824,353 785,240 992,927

Term Shares 8,725 12,757 23,361 42,164 41,586

Total Shares $ 1,113,326 $1,161,458 $ 847,714 $ 827,404 $1,034,513

Member Capital Shares - - - 6,363 6,489

Perpetual Contributed Capital 69,242 69,242 69,242 60,780 60,780

Equity acquired in merger 863 863 863 - -

Reserves and Undivided Earnings 18,679 14,004 11,640 10,799 9,319

Unrealized Gains and Losses on AFS (1,634) (2,324) (120) (1,916) (183)

Total Capital $ 87,150 $ 81,785 $ 81,625 $ 76,026 $ 76,405

TOTAL LIABILITIES AND EQUITY $1,346,420 $1,331,822 $1,220,836 $1,022,322 $1,179,925

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 creditunion, investing funds in corporate credit unions may be an appropriate risk management alternative to investingin 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 ofcorporate credit unions does not serve as a guarantee of the investment products offered by corporates, and doesnot ensure against potential loss. A credit union should review an institution’s income, capital, and financialtrends. In addition, for corporate credit unions, a credit union should review the corporate’s operating levelaccording 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 regula-tion as a guideline in their investment policies, procedures, and practices. Recognizing that the analysis of a corporatecredit union can be burdensome and that some information may not be readily available, we are providing you with thiscomprehensive analysis of Volunteer Corporate Credit Union.

Liabilities & Equity (in thousands)


Intro

REGULATORY ISSUES

Capital requirements of NCUA’s Rules and Regulations 704:

“(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 implementationof written short- and long-term capital goals, objectives, and strategies which provide for the building of capitalconsistent with regulatory requirements, the maintenance of sufficient capital to support the risk exposures thatmay arise from current and projected activities, and the periodic review and reassessment of the capital positionof the corporate credit union.

(3) Beginning with the first call reportsubmitted on or after October 21, 2013, acorporate credit union must calculate andreport to NCUA the ratio of its retainedearnings to its moving daily average netassets. If this ratio is less than 0.45 percent,the corporate credit union must, within 30days, submit a retained earnings accumula-tion plan to the NCUA for NCUA’s approval. Theplan must contain a detailed explanation ofhow the corporate credit union will accumu-late earnings sufficient to meet all its futureminimum leverage ratio requirements,including specific semiannual milestones foraccumulating retained earnings. In the case ofa state-chartered corporate credit union, theNCUA will consult with the appropriate statesupervisory authority (SSA) before making adetermination to approve or disapprove theplan, and will provide the SSA a copy of thecompleted plan. If the corporate credit union fails to submit a plan acceptable to NCUA, or fails to comply with anyelement of a plan approved by NCUA, the corporate will immediately be classified as significantly undercapitalizedor, if already significantly undercapitalized, as critically undercapitalized for purposes of prompt correctiveactions. The corporate credit union will be subject to all the associated actions under §704.4.”

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.

Total capital means the sum of Tier 1 capital and Tier 2 capital, less the corporate credit union’s equity investmentsnot otherwise deducted when calculating Tier 1 capital.

continued...


Capital

De

c. 20

16

De

c. 20

15

De

c. 20

14

De

c. 20

13

De

c. 20

12

Capital Ratio7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

REGULATORY ISSUES (continued)

Tier 1 capital means the sum of paragraphs(1) through (4) of this definition from whichparagraphs (5) through (9) of this definitionare deducted:

(1) Retained earnings;

(2) Perpetual contributed capital;

(3) The retained earnings of any acquired creditunion, or of an integrated set of activitiesand assets, calculated at the point ofacquisition, if the acquisition was a mutualcombination;

(4) Minority interests in the equity accounts ofCUSOs that are fully consolidated;

(5) Deduct the amount of the corporate creditunion's intangible assets that exceed onehalf percent of its moving daily average net assets (however, NCUA may direct the corporate credit union to addback some of these assets on NCUA’s own initiative, by petition from the applicable state regulator, or uponapplication from the corporate credit union);

(6) Deduct investments, both equity and debt, in unconsolidated CUSOs;

(7) Deduct an amount equal to any PCC or NCA that the corporate credit union maintains at another corporatecredit union;

(8) Beginning on October 20, 2016, and ending on October 20, 2020, deduct any amount of PCC that causes PCCminus retained earnings, all divided by moving daily net average assets, to exceed two percent; and

(9) Beginning after October 20, 2020, deduct any amount of PCC that causes PCC to exceed retained earnings.

Tier 1 risk-based capital ratio means the ratio of Tier 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 from Tier 1 capital; and

(4) Forty-five percent of unrealized gains on available-for-sale equity securities with readily determinable fairvalues. Unrealized gains are unrealized holding gains, net of unrealized holding losses, calculated as theamount, if any, by which fair value exceeds historical cost. NCUA may disallow such inclusion in the calculationof 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 risk-weighted assets.

Any amounts deducted from the numerator of the above ratios are also deducted from the denominator.


Capital

De

c. 20

16

De

c. 20

15

De

c. 20

14

De

c. 20

13

De

c. 20

12

Retained Earnings Ratio1.60%

1.40%

1.20%

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%

RETAINED EARNINGS AND CAPITAL

Corporate credit union balance sheets reflect theliquidity needs and cash flows of its members.Therefore, it is not unusual for a corporate credit unionto experience asset fluctuations of 25 percent or more,not only from month-to-month, but also withinperiods of less than 30 days. In addition, corporatecredit unions’ month-end assets are often significantlyinflated due to routine payrolls that flow into theirmember credit unions. As a result, it can be misleadingto analyze a corporate credit union’s retained earningsand capital ratios using month-end data. The NCUArecognized the distortion such fluctuations can cause,and, in its corporate credit union regulations, adoptedthe concept of using the corporates’ moving dailyaverage net assets (DANA) when calculating theretained earnings and capital ratios. For the yearending December 31, 2016, Volunteer Corporate’smoving DANA rose to $1.29 billion compared with$1.27 billion for 2015. This slow but steady growth isindicative of national credit union trends during 2016, as displayed in NCUA’s annual industry review. VolCorp alsocontinues to hold a large volume of off-balance sheet assets, helping members manage investments in SimpliCDproducts, marketable securities, and the Federal Reserve’s Excess Balances Account. After another successful year ofbusiness operations, retained earnings ended at $18.7 million resulting in a retained earnings ratio of 1.51 percent atDecember 31, 2016, as compared to 1.17 percent at December 31, 2015.

As noted above, NCUA regulation 704 incorporates anew Tier 1 capital ratio in 2016. Beginning on October20, 2016 corporate credit unions must deduct aportion of perpetual contributed capital (PCC) whencalculating the new ratios. At year-end 2016, VolCorp’sTier 1 Capital ratio was 4.83%. This ratio sits wellabove the required 4.0% requirement. The declinefrom 2015’s year-end Leverage Ratio of 6.42% is dueto these regulatory changes rather than a decline incapital, as risk based capital actually rose to $85,923as of December 31, 2016 from $81,222 as ofDecember 31, 2015.


Capital

De

c. 20

16

De

c. 20

15

De

c. 20

14

De

c. 20

13

De

c. 20

12

Retained Earnings($Thous)

20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

De

c. 20

16

De

c. 20

15

De

c. 20

14

De

c. 20

13

De

c. 20

12

Risk Based Capital($Thous)

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

NET ECONOMIC VALUE NEV ANALYSIS( )

NEV is the net present value of a corporate’s assets and the value of the assets’ embedded options, minus the netpresent 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-to-market value of assets. NEV and the NEV Ratioare used to measure the inherent risk in a financial institution’s balance sheet and as a proxy assessment of theliquidation value of the financialinstitution under certain interest rateenvironments. Under part 704.8(d)(ii)of its Rules and Regulations, theNCUA Board set a minimum base NEVRatio of 2 percent for all corporatecredit unions. In addition, the Boardset a minimum NEV Ratio andmaximum permissible downwardNEV shifts under industry standard+/- 100, 200, and 300 basis pointrate shocks. Shocking a corporate’sbalance sheet means determiningthe impact on the NEV and the NEVRatio of an immediate, parallel, andsustained upward and downward shiftin market interest rates. The NEV shiftis the percent increase and percentdecrease of current capital. Currentcapital is the difference between themark-to-market value of assets andliabilities at current interest rates. The permissible, downward NEV shift is dependent, in part, upon the level ofauthority granted each corporate by the NCUA Board. As a starting point, all corporate credit unions have the authorityto 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 obtainsuch authority, the corporate creditunion must meet all the requirementsof Part 704 of the NCUA’s Rules andRegulations and fulfill additionalcapital, management, infrastructure,and asset liability requirements.

2016 Month-End Assets

$1,500,000

1,400,000

1,300,000

1,200,000

1,100,000

1,000,000

900,000

($Thous)

De

c

No

v

Oct

Se

p

Au

g

Jul

Jun

Ma

y

Ap

r

Ma

r

Fe

b

Jan

2016 Moving Average Assets($Thous)

$1,300,000

1,200,000

1,100,000

1,000,000

900,000

800,000

continued...

De

c

No

v

Oct

Se

p

Au

g

Jul

Jun

Ma

y

Ap

r

Ma

r

Fe

b

Jan


Capital

NET ECONOMIC VALUE NEV ANALYSIS( ) (continued)

In September 1997, Volunteer Corporate’s Board of Directors requested authority to operate at the expanded leveltermed Base Plus. In November 1997, Volunteer Corporate became the first corporate credit union to receiveauthority by the NCUA Board to operate above Base level. At Base Plus, the Corporate’s permissible negative NEVshift increased from 15 percent to 20 percent. As of December 31, 2016, the cumulative change in VolunteerCorporate’s NEV is a decrease of $12 million in an immediate up 300-basis point scenario. This equates to an NEVshift of negative 13.78 percent – well below the maximum 20 percent negative shift permitted by Federal law. Giventhe level of interest rates with the Fed Funds Target rate of 50-75 basis points at year-end, a downward shockscenario is non-applicable.

The following illustrates the impact on Volunteer Corporate’s Net Economic Value of the various interest rate scenarios:

+3

00

bp

+2

00

bp

+1

00

bp

Ba

se

Net Economic Value

$88,000

86,000

84,000

82,000

80,000

78,000

76,000

74,000

72,000

70,000

68,000

66,000

64,000

62,000

60,000

0.00%

(2.00)%

(4.00)%

(6.00)%

(8.00)%

(10.00)%

(12.00)%

(14.00)%

(16.00)%

NEV (thous.)

NEV (from Base, thous.)

% (from Base)NEV

Base +100bp +200bp +300bp

$87,172 $83,476 $79,496 $ 75,155

$ 0 $(3,696) $(7,676) $(12,016)

0.00% (4.24)% (8.81)% (13.78)%

NEV Shift

+3

00

bp

+2

00

bp

+1

00

bp

Ba

se

($Thous)


Capital

The quality of a financial institution’s assets is one of the most important factors contributing to its financialsoundness. In its 1997 study of the credit union movement, the Treasury addressed the quality of the corporate creditunions’ assets in general when it stated, “Corporate credit unions invest in high-quality assets and thus have limitedexposure to credit risk. In general, corporate credit unions’ investment portfolios are of very high credit quality.”VolCorp can still be described as such and could proudly claim the same throughout the collapse of the mortgagemarket and the resulting turmoil in both the securities markets and the securities portfolios of many financialinstitutions in 2007 - 2009. As of December 31, 2016, 99.5 percent of VolCorp’s assets consisted of cash anduncollected cash items, loans to member credit unions, and high-quality, low credit-risk investments. Furthermore,as of December 31, 2016, 100% of VolCorp’s marketable security holdings were rated AA or AAA and 54% were issuedor guaranteed by U.S. Government Agencies. Volunteer Corporate monitors the quality of its assets through extensivemonthly credit analysesand portfolio modeling.As of December 31,2016, the continuedquality of VolCorp’sinvestments wasillustrated in thatVolCorp had a market-able securities portfoliototaling $898 millionwith a total netunrealized loss of $1.6million, less than onequarter of one percentof the total portfolio.

MEMBER LOANS

The Corporate has aresponsibility to meetthe liquidity needs of itsmembership, whileprotecting the depositsof its member creditunions. In response tothis need, VolunteerCorporate has extendedapproved advised linesof credit to 280 membercredit unions totaling $1.04 billion. As of December 31, 2016, total outstanding loans and lines of credit to membersequaled $8.75 million, well below one percent of total assets. The quality of the loan portfolio is governed by theloan policies established by the Board of Directors and by the procedures followed by management in implementingthese policies. All lines are reviewed at least semi-annually and detailed financial analyses are performed. From thisreview, it is determined which credit unions will be monitored on a more frequent basis and which credit unions mayneed additional attention. Moreover, each line of credit is secured by a general pledge of the borrowing credit union’sassets. 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.


Assets

Cash and

Uncollected Items

31.15%

December 31, 2016 Asset DistributionOther Assets

0.46%

Investments

67.74%

Loans

0.65%

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 Federal Home LoanBank of Cincinnati, Federal Reserve Bank of Atlanta, U.S. Government securities, federal agency securities or in otherhighly rated securities and top-rated banks and domestically chartered corporations. These policies further limitinvestments in banks, corporations and securities individually and in aggregate, and require extensive analysis andmonitoring. The Corporate’s approved-institution analysis considers size, capital adequacy, asset quality, manage-ment, earnings performance, and liquidity.

CUSO’s

0.31%

Asset-backed

Securities

48.83%

FHLB & other

Financial Institutions

1.25%

U.S. Government-sponsored

Agency Securities

49.27%

December 31, 2016 Investment Distribution


Assets

U.S. Government-guaranteed

Agency Securities

0.34%

Like all credit unions, Volunteer Corporate is a not-for-profit financial cooperative, existing solely for the benefit of itsmembers. The corporate’s policy is to help members increase their net income by providing cost-effective servicesand attractive investment yields. Since profits come at the expense of its member owners, Volunteer Corporate doesnot strive to earn the maximum net income possible. It is also not the policy of the corporate to increase earnings bysacrificing the safety of the members’ shares through high risk investments or investment practices. Even so, thecorporate must maintain a stable earnings position in order to pay dividends, cover budgeted expenses, provideservice 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 maximizingefficiencies and controlling expenses. The economic turmoil from the recession of 2007 - 2009, along with theensuing regulatory reform have caused earnings to become all the more paramount for VolCorp as we work toincrease our retained earnings and continue to provide services at competitive prices and investments at competitiveyields. To this end, management has repositioned the balance sheet in order to increase holdings in variable ratesecurities. This shift has enabled VolCorp to benefit from even minute upticks in rates. Maintaining profitability isheavily reliant on careful balance sheet management, including monitoring the performance of each of VolCorp’ssecurities and making the appropriate strategic decisions as dictated by the then current economic environment.VolCorp held no impaired or non-compliant securities during the year, and did not experience write-downs on anysecurities in its portfolio. Net income for 2016 equaled $5.2 million, resulting in a 41 basis point return on assets.Service fees to our members remained principally unchanged in 2016. Notwithstanding, fee income remained strongduring the year, with efficiencies gained through strong balance sheet management and diligent expense controls.

Years Ended December 31, 2016 2015 2014 2013 2012

Comparative Income and Expenses (in thousands)

Interest Income

Cash $ 1,948 $1,007 $ 763 $ 650 $ 565

Investments 8,656 5,688 4,610 4,499 6,447

Loans 66 41 51 29 17

Total Interest Income 10,670 6,736 5,424 5,178 7,029

Interest Expense

Dividends on Shares 2,776 1,260 1,010 1,028 1,839

Interest on Borrowed Funds 322 235 179 76 119

3,098 1,495 1,189 1,104 1,958Total Interest Expense

Net Interest Income 7,572 5,241 4,235 4,074 5,071

Non-Interest Income

Item Processing 3,094 3,181 2,999 2,984 3,057

Gain on Securities 4 16 28 95 183

Other 4,351 4,302 3,821 3,618 3,774

7,449 7,499 6,848 6,697 7,014Total Non-Interest Income

Non-Interest Expenses

Salaries and Benefits 5,025 5,214 5,084 4,653 4,802

Other 4,782 4,816 4,508 4,030 5,153

Total Non-Interest Expenses 9,807 10,030 9,592 8,683 9,955

Net Contribution to Retained Earnings $5,214 $2,710 $1,491 $2,088 $2,130


Earnings

Volunteer Corporate is the primary depository institution and source of liquidity for the majority of its membercredit unions. As such, the corporate has the responsibility of protecting the safety of its members’ deposits whileproviding sufficient liquidity to meet their cash flow needs. To meet this responsibility, Volunteer Corporatemaintains sufficient cash and overnight investments to provide for reasonable cash flow demands. The Corporate’sliquidity position is monitored daily and adjusted, as necessary, for seasonal and anticipated fluctuations in ourmembers’ liquidity needs.


Liquidity


Office

Online:

volcorp.org

vportfolio.volcorp.org

volcorpdesign.org

Numbers:

(615) 232-7900 or (800) 470-3444

After Hours: (615) 232-7977

Main Fax: (615) 232-7999

Operations Fax: (615) 232-7979

Direct-Dial Extensions:

Member Services/Operations/

Item Processing/ . . . 1ACH

Investment Sales . . . 2

Marketing and Business Development . . . 3

Administration and President’s Office . . . 4

. . .Dial-by-Name Directory 6

Operator . . . 0

Office Hours:

VolCorp is open Monday, Tuesday, Wednesday and Friday from 7:30 a.m. to 4:30

p.m. (Central time). Thursday hours are from 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.

Address:

2460 Atrium Way

Nashville, TN 37214

Numbers:

(615) 232-7900

(800) 470-3444

After Hours: (615) 232-7977

Main Fax: (615) 232-7999

Operations Fax: (615) 232-7979

Websites:

volcorp.org

vportfolio.volcorp.org

volcorpdesign.org

Savings Federally Insured to at least $250,000.

NCUA, a U.S. Government Agency.

Your savings federally insured to at least $250,000and backed by the full faith and credit of the United States Government

volunteer corporate credit union 2016 f ainancial nalysis · december 31, 2016 2015 2014 2013 2012...

Documents