American Airlines Federal Credit Union. Annual Report

Transcription

1 Annual Report 2006

2 American Airlines Federal Credit Union was founded in 1936 and today serves the present and retired employees of American Airlines, their family members, and others who work in the air transportation industry. In the Credit Union s first year, 642 employees joined, 547 loans were made, and assets were approximately $42,266. After 70 years, AA Credit Union has more than 209,000 members and assets in excess of $4.1 billion. As a cooperative financial services institution, the Credit Union s goal is to provide the best possible benefits and services for its member-owners.

3 Contents President s Letter Report of Independent Auditors Supervisory Committee Report financials Statements of Financial Condition Statements of Income Statements of Members Equity Statements of Cash Flows Notes to Financial Statements Board of Directors Management Staff Audit of Financial Statements For the Years Ended December 31, 2006 and 2005

4 2006 Certificate Rates President s Letter Back in 1936, a small group of American Airlines employees gathered together to create a credit union to encourage and support habits of thrift, and to provide a means of securing reasonable cost loans for provident purposes. The world has evolved. The goals from the past are just as important today as ever. We celebrated our 70th anniversary last year by reaffirming and continuing to fulfill the mission envisioned by the founders of AA Credit Union to encourage and reward savings and to provide members an option of competitively priced loans for cars, homes, education, and other needs. As we close this year, we are proud of our legacy and commitment to member-owners. The true beauty of a financial cooperative is the ability of friends, coworkers, and family members to pool their resources to help others meet their financial needs. AA Credit Union s history is a celebration of cooperation a tribute to what working together can achieve. S H A R E I N T H E S U C C E S S Thanks to the support and participation of our member-owners, AA Credit Union has been successful in providing an ever-expanding selection of valuable financial products and services. Best yet, the profits belong to you, our memberowners. When everyone works together, everyone reaps the benefits was an exceptional year with total dividends earned by AA Credit Union member-owners at a record of over $160 million. One portion of the $160 million was the distribution to member-owners of the highest bonus dividend payout in the Credit Union s 70-year history. Member-owners who were in good standing on December 29, 2006, were credited with their share of the nearly $8 million bonus dividend. This beat 2005 s Extraordinary Dividend by nearly $3 million. This bonus dividend was based on dividends earned and/or interest paid on qualifying Credit Union accounts during As more member-owners participated in AA Credit Union programs, the bonus dividend he or she earned was higher. And last year, to recognize our most participating members, we also added a Superbonus incentive, which rewarded active Credit Union participation. Those members who maintained three or more account categories, in addition to their primary share and IRA accounts, received an additional $25 in their bonus dividend. The Superbonus categories were defined as: 1. A checking account * 2. A credit card * 3. Any vehicle loan on which an interest payment was made** 4. Any mortgage or home equity loan on which an interest payment was made** 5. Any personal or other loan on which an interest payment was made ** 6. A non-ira Share Certificate on which a dividend was earned between January 1 and December 1, 2006 Source: AA Credit Union certificate rates based on the average rate offered in Bank data supplied by Datatrac Corporation. Earlier in 2006, to celebrate our 70th anniversary, AA Credit Union offered a special, limited-time offer of 7.19% Annual Percentage Yield (APY) for a seven-month Share Certificate. Members responded enthusiastically. In addition to providing Share Certificates at extremely favorable rates for amounts deposited for 12 months or longer, we also offered the unique Dream Plan Share Certificate, which allowed member-owners to start saving for their dreams without having to invest a large amount of money at one time. *Qualifying checking and credit card accounts must have been opened as of December 1, ** Qualifying vehicle, mortgage, home equity, personal or other loans must have paid interest between January 1 and December 1, <<

5 >> 4 O U R M E M B E R S, O U R O W N E R S You re not just a member at AA Credit Union, you re an owner of a cooperative financial institution Checking and Savings Rates Eligible members include: >> Active or retired employees of American Airlines, Inc. and American Eagle Airlines. >> Active or retired employees who work in the Air Transportation Industry. >> Families: When you re an AA Credit Union member, you can also share the benefits of membership with your spouse, children, parents, siblings, grandparents, grandchildren, and permanent household members. There s sure to be an account right for every person in your family. The Credit Union welcomed a record number of new members into our family this past year. In addition to new members from American Airlines and American Eagle, 7,400 new Air Transportation Industry (TIP) and/or family members are now enjoying the benefits of membership. M E M B E R E D U C A T I O N We know navigating the world of finances can be difficult, so in 2006 we offered a number of seminars, events, and online tools to help you make sense 2006 Auto Lending Rates 2006 Mortgage Rates AA Credit Union checking rate based on average flagship checking rates for AA Credit Union savings rates based on the average rate paid in 2006 on regular savings. Bank data supplied by Datatrac Corporation AA Credit Union Auto Lending rates based on the average 48-month used car rates and 60-month new car rates offered in 2006 with 10% down payment. Bank data supplied by Datatrac Corportation. AA Credit Union mortgage rates based on the average rate offered in Bank data supplied by Datatrac Corportation.

6 of it all. Free classes were conducted on topics like building credit, home equity, and understanding credit scores. We also provided Credit Education representatives, who worked with memberowners to reduce debt. All meetings are private and confidential, and help members learn to evaluate spending patterns, create a realistic budget, and ultimately achieve their goal of financial independence. Those who were looking to save a million dollars, compare pension options, or figure out how long it would take to pay off a loan had more than 50 online calculators at their disposal for all their financial-planning needs. I T A L L M A K E S c e n t $ Recently, we debuted a new quarterly financial education publication, cent$, in an effort to provide member-owners with even more relevant information and helpful tips. The title says it all everything begins with the penny and grows from there. In each issue, the magazine will feature articles on topics such as buying a car, teaching kids about money, and planning for retirement. Some of the best financial writers in the industry contribute their expertise, so you can be sure you re getting accurate, practical, and up-to-date information on money matters. Look for a brand-new issue of cent$ every three months. C H A R I T Y As a not-for-profit financial organization, AA Credit Union understands the value of the dollar and how helping others to achieve their goals is one of the most rewarding and fulfilling accomplishments one can experience. That s why AA Credit Union continues its long tradition of community involvement. Our efforts include supporting these and other organizations: >> American Airlines and American Eagle Family Fund - A public, nonprofit charitable organization committed to providing emergency assistance to current or former employees and their families. >> Children s Miracle Network / Credit Union s for Kids - A nonprofit organization dedicated to saving and improving the lives of children by raising funds for children s hospitals across North America. The Credit Union for Kids program is endorsed by nearly 5,000 credit unions nationwide. >> Habitat for Humanity - Through volunteer labor and donations of money and materials, Habitat builds and rehabilitates simple, decent houses with the help of the homeowner s families. Habitat houses are sold to families at no profit, financed with affordable, no-interest loans. >> Make-A-Wish Foundation of North Texas - Grants the wishes of children with life-threatening medical conditions, in order to enrich the human experience with hope, strength and joy. Every fulfilled wish represents a unique collaboration between Wish families, medical professionals, volunteers and donors. >> Something maagic Foundation, Inc. - Run entirely by volunteers to help fulfill wishes for children with lifethreatening medical conditions. A C C E S S I B I L I T Y The past 70 years have necessitated change and innovation. Accessibility to AA Credit Union s services, and the speed at which they are delivered, have increased to meet members changing needs. >> With 42 branch locations from San Juan, Puerto Rico, to Honolulu, 5 << cent$ is a registered trademark of AA Credit Union

7 >> Home Equity Line of Credit 80% Loan to Value (LTV) AA Credit Union Home Equity Line of Credit rates based on the average rate paid by borrowers with a top tier credit standing. Bank data supplied by Datatrac Corportation. Hawaii, we offer a broad range of financial services and products at locations convenient to you. >> In 2006, AA Credit Union celebrated the grand opening of a beautiful new branch facility at Luis Munoz Marin International Airport in San Juan, Puerto Rico. The new facility, located in Terminal D, Check Point 1, was expanded to twice the size of the previous branch in order to better meet the growing needs of the member-owners in the region. >> New Credit Union branches were also opened in Hurst, Texas, and Seattle, Washington. >> A majority of our account transactions are conducted electronically, including online via CUAcce$$, through the CALL-24 automated voice response system, and with ATM or Visa CheckCards at merchants and at any of the 25,000 CO-OP Network ATMs nationwide. >> In 2006, AA Credit Union and partner sponsors hosted the 10th Annual AA Credit Union Golf Tournament. The tournament took place on June 9 at Texas Star Golf Club in Euless, Texas, and raised $50,000 for the Tarrant County United Way. T r u s t a n d D e p e n d a b i l i t y Members place their trust in us to protect and grow their savings. The Credit Union is committed to providing superior service while remaining well capitalized. Net worth in 2006 increased to $407 million. L O O K I N G T O W A R D S T H E F U T U R E For 70 years, AA Credit Union has worked towards perfecting our goals and serving our member-owners. As we look towards the future, AA Credit Union will continue to draw from and expand upon our vision : For every member-owner of American Airlines Federal Credit Union to realize his or her life and financial welfare are enriched as a result of their Credit Union participation. John M. Tippets President and CEO Net Worth (In Thousands)

8 Independent Auditor s Report The Supervisory Committee Statements of Financial Condition F I N A N C I A L S We have audited the accompanying statements of financial condition of American Airlines Federal Credit Union (a federally chartered credit union) as of December 31, 2006 and 2005 and the related statements of income, members equity, and cash flows for the years then ended. These financial statements are the responsibility of the Credit Union s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Airlines Federal Credit Union as of December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Dallas, Texas April 30, 2007 McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation of seperate and independent legal entities. Supervisory Committee Report Year Ended December 31, 2006 The following activities of the Supervisory Committee are hereby reported: 1. At the conclusion of the December 31, 2006 audit, the committee met with the McGladrey & Pullen, LLP partner and manager responsible for the Credit Union audit to discuss the audit and other matters of significance. The Supervisory Committee is not aware of anything that would be considered a material weakness in internal control. 2. The committee met with the National Credit Union Administration examiner who conducted an examination of the Credit Union. The examiner assigned our Credit Union a rating that indicates the Credit Union is above average, properly operated, financially sound, and not in violation of any of the laws or regulations which govern its operations. Robert D. Bagley Chairman Kathryn Koorenny Jack J. Kunkel Ana Clark Carolyn Gibson DECEMBER 31 ASSETS Cash and cash equivalents Cash $42,931 $49,607 Cash equivalents 35,900 41,849 Total cash and cash equivalents 78,831 91,456 Loans, net of allowance for loan losses 2,264,298 2,230,985 Investments Available-for-sale 1,704,045 1,540,839 Other 25,111 78,997 Accrued interest receivable 19,828 15,472 Share insurance fund deposit 26,858 28,570 Property and equipment, net of accumulated depreciation 22,142 22,784 Other assets 1,485 2,761 Total assets $4,142,598 $4,011,864 LIABILITIES AND MEMBERS EQUITY Liabilities Members shares $3,687,777 $3,576,970 Dividends payable 15,164 10,718 Accrued expenses and other liabilities 32,059 32,544 Total liabilities 3,735,000 3,620,232 Commitments and contingent liabilities (Note 8) Members equity 407, ,632 Total liabilities and members equity $4,142,598 $4,011,864 7 << The accompanying notes are an integral part of these statements.

9 F I N A N C I A L S Statements of Income Statements of Members Equity DECEMBER 31 INTEREST INCOME Loans $133,163 $120,310 Investments and cash equivalents 87,108 58,787 TOTAL INTEREST INCOME 220, ,097 INTEREST EXPENSE Dividends on members shares 161, ,917 Interest on borrowed funds 1 4 TOTAL INTEREST EXPENSE 161, ,921 NET INTEREST INCOME 58,795 72,176 PROVISION FOR LOAN LOSSES 5,950 14,000 Balance at December 31, 2004 $61,769 $304,926 $(1,186) $365,509 Comprehensive Income: Regular Reserve Undivided Earnings Accumulated Other Comprehensive Income (Loss) Total >> 8 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 52,845 58,176 NON-INTEREST INCOME Fee income 20,710 18,762 Other operating income 2,834 2,450 Gain on sale of investments Gain (loss) on disposition of assets 61 (67) TOTAL NON-INTEREST INCOME 23,793 21,398 INCOME BEFORE OPERATING EXPENSES 76,638 79,574 Net Income 24,711 24,711 Net change in unrealized gains on available-for-sale investments 1,665 1,665 Less reclassification adjustment for realized gains included in net income (253) (253) Total comprehensive income 26,123 Balance at December 31, , , ,632 OPERATING EXPENSES Employee compensation and benefits 28,192 25,092 Travel and conference Office occupancy 5,105 4,628 Office operations 19,568 18,383 Education and promotional 3,439 2,273 Loan servicing Professional and outside services 1,970 2,043 Miscellaneous operating 1,079 1,011 TOTAL OPERATING EXPENSES 61,036 54,863 NET INCOME $15,602 $24,711 Comprehensive Income: Net Income 15,602 15,602 Net change in unrealized gains on available-for-sale investments Less reclassification adjustment for realized gains included in net income (188) (188) Total comprehensive income 15,966 Balance at December 31, 2006 $61,769 $345,239 $590 $407,598 The accompanying notes are an integral part of these statements.

10 F I N A N C I A L S Statements of Cash Flows Notes to Financial Statements DECEMBER 31 OPERATING ACTIVITIES Net income $15,602 $24,711 Adjustments to reconcile net income to net cash provided by operating activities: Gain (loss) on sale of property and equipment (61) 0 Amortization of net premium on investments, net of discount 55 1,536 Provision for loan losses 5,950 14,000 Depreciation and amortization 3,977 2,985 Gain on sale of investments (188) (186) Increase in accrued interest receivable (4,356) (2,646) Decrease (increase) in other assets 1,276 (1,302) Increase in accrued expenses and other liabilities 3,961 7,805 Net cash provided by operating activities 26,216 46,903 INVESTING ACTIVITIES Purchases of available-for-sale investments (1,287,024) (1,408,660) Proceeds from maturities of available-for-sale investments 554, ,648 Proceeds from sales of available-for-sale investments 569, ,038 Net decrease in other investments 53,886 1,185 Net increase in loans (39,263) (152,097) Decrease in the share insurance fund deposit 1, Proceeds from sale of property and equipment 73 0 Purchases of property and equipment (3,347) (2,545) Net cash used in investing activities (149,648) (50,970) FINANCING ACTIVITIES Net increase (decrease) in members shares 110,807 (14,990) Net cash provided by (used in) financing activities 110,807 (14,990) DECREASE IN CASH AND CASH EQUIVALENTS (12,625) (19,057) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 91, ,513 CASH AND CASH EQUIVALENTS AT END OF YEAR $78,831 $91,456 SUPPLEMENTAL CASH FLOW INFORMATIOn Dividends paid on members shares and interest paid on borrowed funds $157,030 $103, SIGNIFICANT ACCOUNTING POLICIES Organization: (the Credit Union) is a cooperative association holding a corporate charter under the provisions of the Federal Credit Union Act. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 income and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Cash, Cash Equivalents and Cash Flows: Cash and cash equivalents consist of cash on hand and non-term share deposits in a corporate credit union. Loans, other investments, and members shares are reported net on the statements of cash flows. Investments: Investments that the Credit Union intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on investments classified as available-for-sale have been accounted for as accumulated other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity. Declines in the fair value of individual available-for-sale securities below their costs, that are other than temporary, result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that management would not have the intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. Other investments are classified separately and are stated at cost. Loans and Allowance for Loan Losses: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and deferred net loan origination fees. Interest on loans is recognized over the terms of the loans and is calculated on principal amounts outstanding. Loan fees and certain direct loan origination costs are deferred, and the net fee is recognized as an adjustment to interest income over the expected lives of the related loans. The Credit Union determines a loan to be delinquent when payments have not been made according to contractual terms, typically evidenced by non-payment of a monthly installment by the due date. Large groups of smaller-balance homogenous loans are collectively evaluated for impairment. Accordingly, the Credit Union does not separately identify individual consumer and residential loans for impairment disclosures. 9 << The accompanying notes are an integral part of these statements.

11 F I N A N C I A L S Notes to Financial Statements (continued) >> 10 The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is an amount management believes will be adequate to absorb estimated losses on existing loans. Management s periodic evaluation of the adequacy of the allowance is based on the Credit Union s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower s ability to repay, estimated value of any underlying collateral, and current economic conditions. While management uses the best information available to make its evaluations, further adjustments to the allowance may be necessary if there are significant changes in economic conditions. Transfers and Servicing of Financial Assets: The Credit Union accounts for transfers and servicing of financial assets in accordance with SFAS No. 140, Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities. SFAS No. 140 requires application of a financial component s approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The statement also distinguishes transfers of financial assets that are sales from transfers of financial assets that are secured borrowings. The Credit Union retains the right to service mortgage loans sold to others. The cost allocated to the mortgage servicing rights retained has been recognized as a separate asset and is being amortized in proportion to, and over the period of, the estimated life of the related loans. Mortgage servicing rights are periodically evaluated for impairment based on the fair value of those rights. Accrued Interest on Loans: Accrual of interest on loans is discontinued when management believes that, after considering economics, business conditions, and collection efforts, the borrower s financial condition is such that collection of interest is doubtful. The Credit Union s policy is to stop accruing interest income when the loan becomes 90 days delinquent. Income is subsequently recognized on a cash basis until the loan s delinquency status is less than 90 days. All interest accrued, but not collected, for loans that are subsequently charged off, is reversed against interest income. Property and Equipment: Land is carried at cost. Building, leasehold improvements, and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings, furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the lesser of 5 years or the terms of the related leases. National Credit Union Share Insurance Fund Deposit: The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with National Credit Union Administration (NCUA) regulations, which require the maintenance of a deposit by each federally insured Credit Union in an amount equal to one percent of its insured members shares. The deposit would be refunded to the Credit Union if its insurance coverage is terminated, if it converts its insurance coverage to another source, or if management of the fund is transferred from the NCUA Board. NCUSIF Insurance Premium: The Credit Union is required to pay an annual insurance premium equal to one-twelfth of one percent of total insured shares, unless the payment is waived or reduced by the NCUA Board. The NCUA Board waived the 2006 and 2005 insurance premiums. Members Shares: Members shares are the savings deposit accounts of the owners of the Credit Union. Share ownership entitles the members to vote in the annual elections of the Board of Directors. Irrespective of the amount of shares owned, no member has more than one vote. Members shares in excess of the insured limit are subordinated to all other liabilities of the Credit Union upon liquidation. Dividends on members shares are based on prospective earnings at the beginning of a dividend period and are not guaranteed by the Credit Union. Dividend rates are set by the Credit Union s Board of Directors. Income Taxes: The Credit Union is exempt by statute from federal and state income taxes. Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-forsale securities, are reported as a separate component of the members equity section of the statements of financial condition. Recent Accounting Pronouncements: In March 2006, the Financial Accounting Standards Board issued SFAS No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No Among other matters, this Statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract under certain situations. This Statement permits an entity to determine the method of measuring the servicing asset or liability by choosing either the amortization method or the fair value measurement method. The new standard is effective for fiscal years beginning after September 15, Management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

12 F I N A N C I A L S Notes to Financial Statements (continued) There are a total of 11 and 26 investments with unrealized losses as of December 31, 2006 and 2005, respectively. The unrealized losses associated with these investments are considered temporary as the Credit Union has the ability and intent to hold these investments for a period of time sufficient to allow for any anticipated recovery in fair value. 2. INVESTMENTS Investments classified as available-for-sale consist of the following : Other investments consist of the following : DECEMBER 31 December 31, 2006 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Negotiable certificates $1,691,637 $660 $(6) $1,692,291 Mortgage-backed securities 11, (75) 11,754 Share certificates in other credit unions $500 $500 Share certificates in corporate credit unions 13,318 72,497 Member capital accounts in corporate credit unions 6,000 6,000 CU system MBL fund 5,293 0 $25,111 $78,997 December 31, 2005 $1,703,455 $671 $(81) $1,704,045 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Negotiable certificates $1,367,243 $387 $(76) $1,367,554 Mortgage-backed securities 173, (213) 173,285 $1,540,613 $515 $(289) $1,540,839 Certificates are generally non-negotiable and non-transferable, and may incur substantial penalties for withdrawal prior to maturity. Member capital accounts are uninsured equity capital accounts that may be redeemed with a three-year notice. Member capital accounts have been classified with no contractual maturity. The fair value of other investments approximates book value. Gross realized gains and losses on sales of investments available-for-sale were approximately $208,000 and $21,000 in 2006 and $585,000 and $332,000 in 2005, respectively. Investments by maturity as of December 31, 2006 are summarized as follows : 11 << Gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2006 and 2005 are as follows : A available-for-sale Amortized Cost Fair Value Other December 31, 2006 Available-for-sale Continuous Unrealized Losses Existing For: Fair Value Less Than 12 Months More Than 12 Months Total Unealized Losses No contractual maturity $0 $0 $11,293 Less than 1 year maturity 1,355,390 1,355,822 9, years maturity 336, ,469 3,943 Mortgage-backed securities 11,818 11,754 0 $1,703,455 $1,704,045 $25,111 All securities $98,739 $7 $74 $81 December 31, 2005 Available-for-sale Continuous Unrealized Losses Existing For: Fair Value Less Than 12 Months More Than 12 Months Total Unealized Losses All securities $338,168 $121 $168 $289 Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations and are, therefore, classified separately with no specific maturity date. The member capital accounts and CU system MBL fund have been classified with no contractual maturity. As of December 31, 2006, short-term securities of approximately $9,200,000 were loaned out under securities lending agreements. In return, collateral in the amount of approximately $9,400,000, or 102% of the loaned securities value, was received to secure the transactions. Under the agreements, the Credit Union retains all ownership rights to the loaned securities.

13 F I N A N C I A L S Notes to Financial Statements (continued) Commitments for home equity and unsecured lines of credit are summarized as follows: DECEMBER 31 >> LOANS Loans consist of the following: DECEMBER 31 Mortgage loans: Fixed rate $833,728 $706,476 Variable rate 261, ,355 Home equity line of credit, variable rate 67,326 47,639 Home equity line of credit, fixed rate 145, ,832 1,308,280 1,204,302 Vehicle loans 458, ,563 Purchased loans 267, ,792 Government guaranteed student loans 1, Credit card loans, unsecured 42,681 31,768 Other consumer loans, primarily unsecured 208, ,267 2,286,861 2,256,517 Deferred net loan origination fees (2,017) (1,954) Allowance for loan losses (20,546) (23,578) $2,264,298 $2,230,985 Home equity $55,069 $40,172 Credit card 92,722 64,957 Other consumer 314, ,542 $462,199 $413,671 Commitments for home equity and unsecured lines of credit may expire without being drawn upon. Therefore, the total commitment amount does not necessarily represent future cash requirements of the Credit Union. These commitments are not reflected in the financial statements. 4. LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans at December 31, 2006 and 2005 are summarized as follows: DECEMBER 31 Mortgage loan portfolios serviced for FNMA $33,757 $39,280 The following is an analysis of the allowance for loan losses: YEARS ENDING DECEMBER 31 Balance, beginning of year $23,578 $21,332 Provision for loan losses 5,950 14,000 Recoveries 1,530 1,301 Loans charged off (10,512) (13,055) Balance, end of year $20,546 $23,578 Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits, were approximately $138,000 and $16,000 at December 31, 2006 and 2005, respectively. A summary of the changes in the balance of mortgage servicing rights in 2006 and 2005 were as follows: YEARS ENDING DECEMBER 31 Balance, beginning of year $264 $291 Servicing assets recognized during the year 0 68 Amortization of servicing assets (61) (95) Outstanding mortgage loan commitments at December 31, 2006 and 2005 total approximately $50,588,000 and $27,311,000, respectively. Balance, end of year $203 $264 Fair value of mortgage servicing rights $203 $264

14 F I N A N C I A L S Notes to Financial Statements (continued) 5. PROPERTY AND EQUIPMENT Property and equipment are summarized as follows: 6. MEMBERS SHARES Members shares are summarized as follows: DECEMBER 31 Land $1,711 $1,711 Building 17,982 17,982 Leasehold improvements 6,561 6,208 Furniture and equipment 18,540 20,045 Construction in process Capital lease 1,070 1,031 46,092 47,217 DECEMBER 31 Regular shares $2,280,589 $2,240,807 Share draft accounts 124, , K shares 934, ,232 Individual retirement accounts 244, ,949 Certificates 103,400 57,596 $3,687,777 $3,576,970 Accumulated depreciation and amortization (23,950) (24,433) $22,142 $22,784 The Credit Union leases multiple offices. The operating leases contain renewal options and provisions requiring the Credit Union to pay property taxes and operating expenses over base period amounts. All rental payments are dependent only upon the lapse of time. Minimum rental payments under operating leases with initial or remaining terms of one year or more at December 31, 2006 are as follows : Certificates by maturity as of December 31, 2006 are summarized as follows : 0 1 year maturity 53, years maturity 14, years maturity 12, years maturity 12, years maturity 10,390 $103, << YEARS ENDING DECEMBER 31 Regular, share draft, 401(k), and individual retirement account shares have no contractual maturity. Certificate accounts have maturities of five years or less $ Subsequent years 0 $1,362 The National Credit Union Share Insurance Fund insures members shares up to $100,000, and certain individual retirement and Keogh accounts up to $250,000. Included in 401(k) shares are non-member 401(k) shares that are uninsured at December 31, 2006 and 2005 in the amount of approximately $109,692,000 and $114,080,000, respectively. The aggregate amount of certificates in denominations of $100,000 or more at December 31, 2006 and 2005 is approximately $22,366,000 and $13,695,000, respectively. Rental expense for the years ended December 31, 2006 and 2005 for all facilities leased under operating leases totaled $797,000 and $845,000, respectively.

15 F I N A N C I A L S Notes to Financial Statements (continued) 7. CONCENTRATIONS OF CREDIT RISK Participation in the Credit Union is limited to those individuals who qualify for membership. The field of membership is defined in the Credit Union s bylaws. A large percentage of the Credit Union s members are employed by AMR, Inc. Further, a significant concentration of members resides in Texas. Although the Credit Union has a diversified loan portfolio, borrowers ability to repay loans may be affected by the economic climate of either the air transportation industry or the overall geographic region in which borrowers reside. 8. COMMITMENTS AND CONTINGENT LIABILITIES The Credit Union has a $149,522,000 revolving line of credit with Southwest Corporate Credit Union secured by the general assets of the Credit Union with variable interest rates, which depend on market interest rates. The expiration date of this line of credit is December 31, As of December 31, 2006, there were no amounts outstanding under this line of credit, although $478,000 was pledged as a guarantee of payment for the Credit Union s ATM operations in Los Angeles and Boston. Union members. The aggregate loans to related parties at December 31, 2006 and 2005 are approximately $3,150,000 and $2,413,000, respectively. Deposits from related parties at December 31, 2006 and 2005 amounted to approximately $2,527,000 and $1,787,000, respectively. 10. MEMBERS EQUITY The Credit Union is subject to various regulatory capital requirements administered by the NCUA. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Credit Union s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Credit Union must meet specific capital guidelines that involve quantitative measures of the Credit Union s assets, liabilities, and certain off-balance-sheet items as calculated under generally accepted accounting principles. The Credit Union s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. >> 14 The Credit Union also has available a line of credit with WesCorp secured by the general assets of the Credit Union. The terms of the agreement provide for borrowing up to $50,000 with variable interest rates, which depend on market interest rates. As of December 31, 2006, there were no amounts outstanding under this line of credit. There is no expiration on this line of credit. The Credit Union is a party to various legal actions normally associated with collections of loans and other business activities of financial institutions, the aggregate effect of which, in management s opinion, would not have a material adverse effect on the financial condition or results of operations of the Credit Union. Quantitative measures established by regulation to ensure capital adequacy require the Credit Union to maintain minimum amounts and ratios (set forth in the table below) of net worth to total assets. Further, credit unions over $10,000,000 in assets are also required to calculate a Risk-Based Net Worth (RBNW) requirement which establishes whether or not the Credit Union will be considered complex under the regulatory framework. The Credit Union s RBNW requirements as of December 31, 2006 and 2005 were 4.15% and 4.11%, respectively. The minimum ratio to be considered complex under the regulatory framework is 6%. Management believes, as of December 31, 2006 and 2005, that the Credit Union meets all capital adequacy requirements to which it is subject. The Credit Union has no outstanding commitments to sell loans or investments at December 31, EMPLOYEE BENEFITS AND RELATED PARTY TRANSACTIONS Compensation and benefits of approximately $28,192,000 and $25,092,000 in 2006 and 2005, respectively, represent costs of payroll, benefit plans, employee health and life insurance, and postretirement health benefits that are paid by American Airlines and reimbursed by the Credit Union. In addition, American Airlines provides facilities at its headquarters and at various airports for the Credit Union and provides other services to the Credit Union. Reimbursement to American Airlines for such items was approximately $2,053,000 and $2,156,000 in 2006 and 2005, respectively. American Beacon Advisors, Inc., a subsidiary of AMR Corporation, manages certain investments for the Credit Union. Fees paid to American Beacon Advisors, Inc. totaled approximately $588,000 and $589,000 in 2006 and 2005, respectively. In the normal course of business, the Credit Union extends credit to directors, supervisory committee members, and executive officers on the same terms and conditions as to other Credit Key aspects of the Credit Union s minimum capital amounts and ratios are summarized as follows : December 31, 2006 December 31, 2005 General Capital Requirements: Amount Ratio Amount Ratio Amount needed to be classified as adequately capitalized $248, % $240, % Amount needed to be classified as well capitalized $289, % $280, % Actual net worth $407, % $391, % As of December 31, 2006, the most recent regulatory reporting period, and 2005, the NCUA categorized the Credit Union as well capitalized under the regulatory framework for prompt

16 F I N A N C I A L S Notes to Financial Statements (continued) corrective action. To be categorized as well capitalized, the Credit Union must maintain a minimum net worth ratio of 7% of assets. There are no conditions or events since that designation that management believes have changed the institution s categorization. Because the RBNW requirement is less than the net worth ratio, the Credit Union retains its original category. Further, in performing its calculation of total assets, the Credit Union used the quarter-end balance option, as permitted by regulation. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by the Credit Union using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Credit Union could realize in a market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate fair value: Investments Estimated fair values for investments are obtained from quoted market prices where available. Where quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments. interest receivable. The carrying value of each of these financial instruments is a reasonable estimation of fair value. Off-Balance-Sheet Financial Instruments The fair values for the Credit Union s off-balance-sheet commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the members. The estimated fair value of these commitments is not significant. The estimated fair value of the Credit Union s financial instruments is summarized as follows : December 31, 2006 December 31, 2005 General Capital Requirements: Carrying Amount Fair Value Carrying Amount Fair Value Financial Assets: Cash and cash equivalents $78,831 $78,831 $91,456 $91,456 Investments available-for-sale 1,704,045 1,704,045 1,540,839 1,540,839 Other investments 25,111 25,111 78,997 78,997 Loans to members, net 2,264,298 2,215,813 2,230,985 2,140,048 Financial Liabilities: Members shares 3,687,777 3,688,268 3,576,970 3,577, << Loans The estimated fair value for all fixed rate loans is determined by discounting the estimated cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and maturities. The estimated fair value for variable rate loans is the carrying amount. Credit card loans are variable rate loans since interest rates may be changed by the Credit Union. The impact of delinquent loans on the estimation of the fair values described above is not considered to have a material effect and, accordingly, delinquent loans have been disregarded in the valuation methodologies employed. Members Shares The estimated fair value of demand deposit accounts (regular shares, share drafts, 401K, and individual retirement accounts) is the carrying amount. The fair value of fixed-maturity certificates is estimated by discounting the estimated cash flows using the current rate at which similar certificates would be issued. Other On-Balance-Sheet Financial Instruments Other on-balance-sheet financial instruments include cash and cash equivalents and accrued

17 BOARD OF DIRECTORS M ANA G E M E N T S T AFF O fficers D irectors Douglas G. Herring Robert A. Britton Chairman of the Board David Campbell William F. Quinn Terry C. Cecil Vice Chairman Nancy Adams Chapman Patrick C. Hancock, Jr. Bruce T. Chemel Secretary Thomas P. Donahue Thomas J. Kiernan Treasurer John M. Tippets Faith L. Anderson President and Chief Executive Officer Vice President and General Counsel John D. Boyd Carol C. Brown General Auditor Audits and Fraud Senior Vice President Technology and Innovation Beverly K. Goulet Maya Leibman Denise Lynn Franco Tedeschi Milton W. Whitehurst S upervisory Committee >> 16 Robert D. Bagley Chairman Kathryn Koorenny Jack J. Kunkel Ana Clark Carolyn Gibson Gail K. Enda Senior Vice President Lending and Product Management Eli Vazquez Senior Vice President Chief Financial Officer Lori W. Hall Senior Vice President Marketing and Operations

18 For more than 70 years, American Airlines Federal Credit Union (AA Credit Union) has been committed to providing you with the tools and education to reach your financial goals through favorable prices and a wide range of products and services. That commitment holds true today and can be seen in everything we do. We strive to enable our members to become financially self-sufficient and successful, and we do so with honesty, respect, integrity, and professionalism. After all, you are not only a member of AA Credit Union, but a shared owner in our success. MD 21oo P.O. Box DFW Airport, Texas For the branch nearest you, call our Member Contact Center (800) or visit our Web site at AACreditUnion.org. Boston Chicago Dallas/Fort Worth Fort Lauderdale Hartford Honolulu Kansas City Los Angeles Miami Nashville Newark New York Orange County Raleigh/Durham Seattle St. Louis San Francisco San Jose San Juan Tucson Tulsa Washington, D.C. Web site addresses AACreditUnion.org AACreditUnionYouth.org HomeLoAAns.org AA Credit Union is a registered trademark of American Airlines, Inc.