AUDITED CONSOLIDATED FINANCIAL STATEMENTS Years ended and 2007
CONTENTS REPORT OF INDEPENDENT AUDITORS 2 FINANCIAL STATEMENTS Consolidated balance sheets 3 Consolidated statements of income 4 Consolidated statements of members' equity 5 Consolidated statements of cash flows 6 Notes to consolidated financial statements 7-22
REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND MEMBERS SEVEN SEVENTEEN CREDIT UNION, INC. WARREN, OHIO Chase Tower 6 Federal Plaza Central Suite 1000 Youngstown, Ohio 44503-1513 330-744-4277 1-800-943-4278 Fax: 330-744-1734 www.packerthomas.com We have audited the accompanying consolidated balance sheets of Seven Seventeen Credit Union, Inc. and subsidiary, as of and 2007, and the related consolidated statements of income, changes in members' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Credit Union's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Seven Seventeen Credit Union, Inc. and subsidiary as of and 2007, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Youngstown, Ohio June 8, 2009-2-
Consolidated Balance Sheets Seven Seventeen Credit Union, Inc. and Subsidiary December 31, 2008 2007 ASSETS Cash and Cash Equivalents $ 111,217,829 $ 103,049,303 Investment Securities: Available For Sale 61,420,065 53,519,150 Held to Maturity 3,556,000 125,000 64,976,065 53,644,150 Loans: Installment 274,349,672 268,147,311 Mortgage 222,162,308 212,058,736 Commercial 28,378,861 19,947,838 Loans Held For Sale 611,500 882,300 525,502,341 501,036,185 Less: Allowance For Loan Losses (6,495,391) (5,027,842) 519,006,950 496,008,343 Premises and Equipment -- Net 12,401,405 13,421,440 Restricted Assets 5,720,212 9,451,780 Other Assets 8,707,059 10,366,900 $ 722,029,520 $ 685,941,916 LIABILITIES AND MEMBERS' EQUITY Members' Accounts: Share $ 123,814,021 $ 114,220,826 Share Draft 62,977,219 59,173,695 Money Market 121,165,978 120,494,850 Share Certificate 280,968,055 263,188,824 Individual Retirement 65,892,001 52,478,331 Total Members' Accounts 654,817,274 609,556,526 Accounts Payable and Accrued Expenses 14,821,566 11,288,233 Total Liabilities 669,638,840 620,844,759 Members' Equity, Substantially Restricted 52,390,680 65,097,157 $ 722,029,520 $ 685,941,916 The accompanying notes are an integral part of these financial statements. -3-
Consolidated Statements of Income Seven Seventeen Credit Union, Inc. and Subsidiary Years ended December 31, 2008 2007 INTEREST INCOME Interest and Fees on Loans $ 40,496,704 $ 41,060,021 Investments 5,641,641 7,666,522 46,138,345 48,726,543 INTEREST EXPENSE Members' Accounts 17,719,657 18,283,753 Borrowed Funds 5,912 486,981 17,725,569 18,770,734 Net Interest Income 28,412,776 29,955,809 Provision for Loan Losses (5,569,380) (3,196,285) Net Interest Income After Provision for Loan Losses 22,843,396 26,759,524 NON-INTEREST (INCOME) EXPENSE Services and Other Member Charges (4,444,167) (5,858,594) Wages and Employee Benefits 14,747,203 14,846,204 Occupancy Expenses 6,015,679 5,657,741 Other Operating Expenses 2,320,635 3,495,114 Advertising 1,187,210 1,082,317 Legal and Professional Services 643,632 496,375 Travel, Education and Conferences 200,450 191,248 Gain on Sale of Fixed Assets (13,145) (893) Impairment of NCUSIF Deposit 4,100,000 - Investment Security Losses - Net 343,998 185,000 25,101,495 20,094,512 Net (Loss) Income $ (2,258,099) $ 6,665,012 The accompanying notes are an integral part of these financial statements. - 4 -
Consolidated Statements of Members' Equity Seven Seventeen Credit Union, Inc. and Subsidiary Accumulated Other Statutory Comprehensive Reserve Unappropriated Income Total Balance at January 1, 2007 $ 11,249,294 $ 50,190,538 $ (445,089) $ 60,994,743 Comprehensive Income: Net Income - 6,665,012-6,665,012 Unrealized Gains on Available for Sale Securities, Net of Reclassification Adjustment - - 361,718 361,718 Total Comprehensive Income 7,026,730 Adjustment to adopt SFAS No. 158 See Note 8 - - (2,924,316) - Balance at December 31, 2007 $ 11,249,294 $ 56,855,550 $ (3,007,687) $ 68,021,473 Comprehensive Income: Net Loss - (2,258,099) - (2,258,099) Unrealized Losses on Available for Sale Securities, Net of Reclassification Adjustment - - (3,137,813) (3,137,813) Change in Actuarial Loss on Pension Benefits - - (7,310,565) (7,310,565) Total Comprehensive Loss (12,706,477) Balance at $ 11,249,294 $ 54,597,451 $ (13,456,065) $ 55,314,996 The accompanying notes are an integral part of these financial statements. - 5 -
Consolidated Statements of Cash Flows Seven Seventeen Credit Union, Inc. and Subsidiary Years ended December 31, 2008 2007 OPERATING ACTIVITIES Net Income $ (2,258,099) $ 6,665,012 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Provision For Loan Losses 5,569,380 3,196,285 Impairment - NCUSIF Deposit 4,100,000 - Provision For Depreciation 1,538,710 1,601,496 Gain on Sale of Property and Equipment (13,145) (893) Amortization of Net Loan Origination Costs 1,707,333 1,302,247 Loans Originated for Sale (6,600,400) (8,739,150) Proceeds from Sale of Loans Originated For Sale 6,871,200 8,488,550 Investment Security Losses 344,615 185,000 Net Amortization of Investment Security Premiums and Discounts 3,857 (11,755) Decrease in Other Assets 1,659,842 93,448 (Decrease)/Increase in Accounts Payable and Other Accrued Expenses (3,777,230) 374,131 Net Cash Provided By Operating Activities 9,146,063 13,154,371 INVESTING ACTIVITIES Net (Increase)/Decrease in Loans to Members (30,546,119) 12,699,885 Investments Redeemed (Available For Sale) 14,555,564 11,127,226 Investments Purchased (Available For Sale) (29,489,866) (26,649,861) Net (Increase) Decrease in Deposits Placed With Financial Institutions - (50,000) Net Purchase of Premises and Equipment (518,677) (385,012) Proceeds from the Sale of Fixed Assets 13,145 893 Proceeds from the Sale of Securities-Available for Sale 116,101 - (Increase) in Restricted Deposits (368,433) (535,427) Net Cash (Used) Provided By Investing Activities (46,238,285) (3,792,296) FINANCING ACTIVITIES Net Increase/(Decrease) in Members' Accounts Share 9,593,195 (6,511,971) Share Draft 3,803,524 (4,239,964) Money Market 671,128 902,315 Share Certificate 17,779,231 34,593,283 Individual Retirement 13,413,670 6,788,745 Net (Decrease) in Borrowings - (20,000,000) Net Cash Provided By Financing Activities 45,260,748 11,532,408 Increase in Cash and Cash Equivalents 8,168,526 20,894,483 Cash and Cash Equivalents at Beginning of Year 103,049,303 82,154,820 Cash and Cash Equivalents at End of Year $ 111,217,829 $ 103,049,303 The accompanying notes are an integral part of these financial statements. -6-
NOTE 1 ACCOUNTING POLICIES Consolidation The accounts of the Credit Union and its wholly owned subsidiary, Sound Financial Services, Inc., are included in the consolidated financial statements. All inter-company accounts and transactions have been eliminated. Nature of Business The Credit Union is a full service state chartered financial institution providing financial services to its members. Most of its groups, as well as most of its members, are located in Northeastern Ohio and Western Pennsylvania. The Credit Union possesses several different community charters. Currently, anyone who lives, works, worships or attends school in Trumbull, Mahoning, Columbiana, Portage counties, the cities of Canton, North Canton, Louisville, or the townships of Canton, Lake, Plain, Jackson or Nimishillen are eligible for membership. The Credit Union s subsidiary, Sound Financial Services, Inc. (SFS), is a corporation which engages in two primary business activities. SFS provides insurance products to Credit Union members and maintenance services to both the Credit Union and other local financial institutions. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include allowance for loan loss, fair value of financial instruments, and useful lives of premises and equipment. Cash Equivalents Cash and cash equivalents include cash on hand, amounts due from banks and overnight certificates of deposit. Overnight certificates are purchased and sold for a one day period. The balance in overnight certificates at and 2007 was $99,460,211 and $90,207,661, respectively. Investment Securities Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as Available for Sale. Assets included in this category are those assets that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related thereto. Securities available for sale are recorded at their estimated fair value with unrealized gains and losses reported as a separate component of member s equity. Gains and losses on the sale of securities are determined by the specific identification method. If a security has a decline in fair value that is other than temporary, the security will be written down to its fair value by recording a loss in the consolidated statements of income. Securities that management has the intent and the ability, at the time of purchase or origination, to hold until maturity are classified as Held to Maturity. Securities in this category are carried at amortized cost adjusted for accretion of discounts and amortization of premiums using the interest method over the estimated life of the securities. If a security has a decline in fair value below its amortized cost that is other than temporary, the security will be written down to its new cost basis by recording a loss in the consolidated statements of income. - 7 -
NOTE 1 ACCOUNTING POLICIES (continued) In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Credit Union to retain its investments in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Credit Union does not maintain a trading portfolio. Mortgage-Backed Securities and Collateralized Mortgage Obligations Mortgage-backed securities and collateralized mortgage obligations represent participating interest in pools of first mortgage loans originated and serviced by the issuers of the securities. Classification of these securities is determined by management at the time of purchase in accordance with the same policy as investment securities. The amortized cost of these securities is the current unpaid principal balances adjusted for amortization of premiums and accretion of discounts, using the interest method. Loans to Members and Allowance for Loan Losses Loans are stated at the amount of unpaid principal plus net deferred origination costs of $1,191,013 and $775,505 at and 2007, respectively. The allowance for loan losses is established through a provision for loan losses charged to expense and is an amount that management believes will be adequate to absorb potential losses within the loan portfolio. Loans which are deemed uncollectible are deducted from the allowance. Recoveries on loans previously charged off and the provision for loan losses are added to the allowance. Interest is accrued based on principal outstanding. Interest on loans with three or more payments delinquent is not accrued. Loan fees and certain direct origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Credit Union s historical prepayment experience. Loans held for Sale The Credit Union originates certain residential mortgage loans for sale in the secondary market. For the majority of loan sales, the Credit Union sells the rights to service the related loans. In addition, the Credit Union may periodically identify other loans which may be sold. These loans are classified as loans held for sale, and carried, in the aggregate, at the lower of cost or estimated market value based on secondary market prices. Premise and Equipment Premise and equipment are stated at cost. Provisions for depreciation have been computed by use of the straight-line method based on estimated useful lives. Differences between amounts received and net carrying values of assets retired or sold are charged or credited to income. Other Real Estate Owned Real estate properties acquired through or in lieu of foreclosure are initially recorded at the lower of the Credit Union s carrying amount or fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations. - 8 -
NOTE 1 ACCOUNTING POLICIES (continued) Members Accounts Members shares are subordinated to all other liabilities of the Credit Union upon liquidation. Dividends on members accounts are based upon available earnings at the end of an interest period and are not guaranteed by the Credit Union. Dividend rates on members accounts are set by the Board of Directors based on an evaluation of current and future market conditions. Members Equity The Credit Union is required by regulation to maintain a statutory reserve. This reserve, which represents a regulatory restriction of members equity, is not available for the payment of dividends. Fair Value Measurements On January 1, 2008, the Credit Union adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This Statement is effective for fiscal years beginning after November 15, 2007. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The adoption of this statement had no significant impact on the Credit Union. Income Taxes The Credit Union is exempt from federal income taxes under Section 501(c)(14)(A) of the Internal Revenue Code and from Ohio Corporation Franchise taxes under Section 1733.43 of the Ohio Revised Code. The subsidiary is subject to federal income taxes. Federal income tax provision for the subsidiary totaled $100,323 and $61,422 for 2008 and 2007, respectively. Federal income tax paid by the subsidiary totaled $73,222 and $57,567 for 2008 and 2007, respectively. In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective beginning in 2009 for nonpublic companies. The Credit Union will follow the requirements of SFAS No. 5, Accounting for Contingencies, until it adopts FIN 48. The Credit Union is in the process of evaluating the impact, if any, the adoption of FIN 48 will have on its consolidated financial statements. Off-Balance-Sheet Credit Related Financial Instruments In the ordinary course of business, the Credit Union has entered into commitments to extend credit. Such financial instruments are recorded when they are funded. Advertising Costs Advertising expenditures directly related to the origination of loans are deferred and amortized over the period during which the benefits are expected. The expected benefit period is 36 months. All other advertising costs are expensed as incurred. Advertising costs charged to expense were $1,187,210 and $1,082,317 for the years ended and 2007, respectively. Reclassification Certain items in the financial statements for 2007 have been reclassified to conform to the 2008 presentation. Such reclassifications have no material impact on the financial statements. - 9 -
NOTE 2 INVESTMENTS The amortized cost and estimated fair values of investment securities at December 31 were: Available for Sale Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Collateralized Mortgage Obligations $ 42,575,087 $ 158,496 $ 1,866,750 $ 40,866,833 Bonds/Debentures 4,869,190 39,000 284,864 4,623,326 Total Debt Securities 47,444,277 197,496 2,151,614 45,490,159 Marketable Equity securities 17,196,976 113,564 1,380,634 15,929,906 Total $ 64,641,253 $ 311,060 $ 3,532,248 $ 61,420,065 Held to Maturity Certificates of Deposit $ 3,556,000 $ - $ - $ 3,556,000 Total $ 3,556,000 $ - $ - $ 3,556,000 Available for Sale December 31, 2007 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Collateralized Mortgage Obligations $ 26,280,417 $ 97,323 $ 223,865 $ 26,153,875 Bonds/Debentures 10,008,326 13,485 7,635 10,014,176 Total Debt Securities 36,288,743 110,808 231,500 36,168,051 Marketable Equity securities 17,313,778 38,903 1,582 17,351,099 Total $ 53,602,521 $ 149,711 $ 233,082 $ 53,519,150 Held to Maturity Certificates of Deposit $ 125,000 $ - $ - $ 125,000 Total $ 125,000 $ - $ - $ 125,000 The amortized cost and estimated fair value of debt securities at 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 prepayment penalties. - 10 -
NOTE 2 INVESTMENTS (continued) Amortized Cost Estimated Fair Value Available for Sale Due in one year or less $ 3,315,410 $ 3,298,435 Due after one year through five years 28,104,610 27,578,710 Due after five years 16,024,257 14,613,014 Total $ 47,444,277 $ 45,490,159 Held to Maturity Due in one year or less $ 1,966,000 $ 1,966,000 Due after one year through five years 1,590,000 1,590,000 Total $ 3,556,000 $ 3,556,000 Investment securities with a carrying value of approximately $34,637,616 at and $22,843,782 at December 31, 2007 were pledged to secure a line of credit with the Corporate One Credit Union. The following table presents the age of gross unrealized losses and fair value by investment category: Less than 12 months 12 months or more Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Available for Sale Collateralized Mortgage Obligations $ 15,905,131 $(1,612,209) $ 7,346,690 $ (254,543) $23,251,821 $(1,866,748) Bonds/Debentures 584,326 (284,864) - - 584,326 (284,864) Total Debt Securities 16,489,457 (1,897,071) 7,346,690 (254,541) 25,897,289 (2,151,612) Marketable Equity Securities - - 5,413,966 (1,380,634) 5,413,966 (1,380,634) Total $ 16,489,457 $(1,897,073) $12,760,656 $(1,635,176) $31,311,254 $(3,532,248) Available for Sale December 31, 2007 Less than 12 months 12 months or more Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Collateralized Mortgage Obligations $ 8,943,265 $ (166,750) $ 3,680,884 $ (57,115) $12,624,149 $ (223,865) Bonds/Debentures - - 2,991,940 (7,635) 2,991,940 (7,635) Total Debt Securities 8,943,265 (166,750) 6,672,824 (64,751) 15,616,089 (231,500) Marketable Equity Securities - - 6,983,046 (1,582) 6,983,046 (1,582) Total $ 8,943,265 $ (166,750) $13,655,870 $ (66,333) $22,599,135 $ (233,082) - 11 -
NOTE 2 INVESTMENTS (continued) There were no unrealized losses on Held to Maturity securities at and 2007. During 2008 and 2007, the Credit Union recognized losses totaling $344,615 and $185,000, respectively on marketable equity securities due to impairments that were determined by management to be other than temporary. Management does not believe that any other individual unrealized losses as of represent other than temporary impairment. The unrealized losses on the remaining securities have not been recognized because the issues are of high credit quality, management has the ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to market conditions. Management expects the fair value to fluctuate and recover over time. NOTE 3 ALLOWANCE FOR LOAN LOSSES A summary of the changes in the allowance for loan losses is as follows: Years Ended December 31 2008 2007 Balance at January 1 $ 5,027,842 $ 4,772,000 Provision charged to operations 5,569,380 3,196,285 Loans charged off (4,923,208) (3,809,908) Recoveries 821,377 869,465 Balance at December 31 $ 6,495,391 $ 5,027,842 NOTE 4 PREMISES AND EQUIPMENT Premises and equipment consist of the following: December 31 2008 2007 Land $ 1,506,962 $ 1,506,962 Buildings and improvements 18,056,346 17,986,576 Furniture and equipment 8,962,801 8,732,909 28,526,109 28,226,447 Less: Allowances for accumulated depreciation (16,124,703) (14,805,007) $ 12,401,405 $ 13,421,440 Depreciation expense amounted to $1,538,710 and $1,601,496 in 2008 and 2007, respectively. - 12 -
NOTE 5 RESTRICTED ASSETS The National Credit Union Administration (NCUA) requires credit unions to maintain on deposit with the National Credit Union Share Insurance Fund (NCUSIF) an amount equal to 1% of insured shares as a requirement for federal insurance. Payment of share insurance premiums is waived as long as the fund is profitable, and profitability is dependent on the performance of investments and the financial soundness of insured credit unions. The NCUA did not assess premiums in fiscal years 2008 or 2007; however, in January 2009 the NCUA announced that it was injecting $1 billion of capital into U.S. Central Corporate Credit Union from the NCUSIF to provide stability and help maintain liquidity in the corporate credit union system. All federally insured credit unions will share the cost of these actions proportionately through a partial write-off of the credit unions existing 1% NCUSIF deposit and future assessments of additional premiums to return the NCUSIF to the normal operating level of 1.3% of insured deposits. In March 2009, the NCUA revised their estimate to $1.2 billion thus increasing the impairment estimate from.51% to.69% of insured deposits as of. The underlying causes of the impairment are events considered to have occurred before 2009 and were probable but not estimable as of. Because the amounts became estimable with the NCUA Board actions in 2009 prior to the issuance of the audited financial statements, the Credit Union recognized the.69% impairment loss as of. As a result of these actions, the Credit Union recorded an impairment charge of $4,100,000 in its financial statements for 2008. The Credit Union had $1,824,412 net of charge for impairment, and $6,051,180 on deposit with NCUSIF at and 2007, respectively. With regard to future assessments, Congress recently enacted the Corporate Credit Union Stabilization Plan which will allow credit unions a period of seven years to repay the future assessments. The Credit Union is a member of the Ohio League Corporate Credit Union (OLCCU) which provides financial services to credit unions. As a requirement of membership, OLCCU requires a deposit of 1% of the beginning of year total assets, not to exceed $900,000 in 2008 and 2007. The Credit Union s required deposit was $900,000 at and 2007. The Credit Union purchases excess share insurance coverage of $250,000 per account from American Share Insurance (ASI). ASI requires participating credit unions to maintain a deposit of 1% of its maximum insurance liability. The Credit Union had $550,000 and $150,000 on deposit with ASI at and 2007, respectively. The Credit Union is a member of the Federal Home Loan Bank (FHLB) of Cincinnati. As a requirement of membership, FHLB members are required to own a certain amount of stock based on the level of borrowings and other factors, and may purchase additional shares of stock. The Credit Union owned FHLB stock with a cost/par value amount of $2,445,800 and $2,350,600 at and 2007, respectively. While there is no active market for the FHLB stock, ultimate recovery of the par value is dependent upon the financial strength of the FHLB. The Credit Union does not believe its investment in the FHLB is impaired. Both cash and stock dividend are reported as income. All restricted assets are recorded as part of other assets. - 13 -
NOTE 6 MEMBERS ACCOUNTS Members share and share savings accounts are summarized as follows: Rate at Balance at December 31, December 31, 2008 2007 2008 2007 Share Savings 0.50% 0.50% $ 123,814,021 $ 114,220,826 Share Draft Accounts 0.30% 0.30% 62,977,219 59,173,695 Money Market 0.50% 0.80% 121,165,978 120,494,850 307,957,218 293,889,371 Share Certificate Accounts and IRA Certificates 2.50% or less 15,032,751 4,546,205 2.51% - 3.50% 57,252,788 1,182,200 3.51% - 4.50% 144,306,609 35,867,965 4.51% and greater 130,267,908 274,070,785 346,860,056 315,667,155 $ 654,817,274 $ 609,556,526 The aggregate amounts of members share and savings accounts over $100,000 were approximately $266,714,687 and $233,657,139 at and 2007, respectively. A summary of members accounts by maturity is as follows: December 31 2008 2007 No contractual maturity $ 312,293,344 $ 297,289,196 Maturing within one year 169,525,241 231,226,740 One to two years 105,268,657 43,179,043 Two to three years 16,934,760 23,465,199 Three to four years 7,434,157 12,303,706 Over four years 43,361,116 2,092,642 $ 654,817,274 $ 609,556,526 The Credit Union paid $18,127,714 and $17,790,857 in interest on shares in 2008 and 2007, respectively. NOTE 7 FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWING Federal Home Loan Bank (FHLB) advances are collateralized by the FHLB stock owned by the Credit Union, which had a carrying value of $2,445,800 and $2,350,600 at and 2007, and a blanket lien against the Credit Union s qualified mortgage loan portfolio. Maximum borrowing capacity from the FHLB totaled $70,690,900 and $67,441,625 at and 2007, respectively. The Credit Union paid $0 and $486,981 in interest on borrowed funds in 2008 and 2007, respectively. There were no FHLB advances or borrowings at and 2007. - 14 -
NOTE 8 PENSION PLAN AND OTHER BENEFIT PLANS Pension Plan The Credit Union has a noncontributory defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employees compensation during the last five years of employment. The plan is sponsored with ING Retirement Services and is funded through an insurance contract. The Credit Union uses a December 31 measurement date for its defined benefit plan. Summarized information for the Credit Union s plan is as follows: December 31, 2008 2007 Change in benefit obligation: Benefit obligation - beginning of year $ 13,368,524 $ 11,792,794 Service Cost 1,006,436 1,062,440 Interest Cost 844,579 787,457 Actuarial loss 2,250,448 483,575 Benefits paid (715,338) (757,742) Benefit obligation end of year $ 16,754,649 $ 13,368,524 Change in plan assets: Fair value of plan assets beginning of year $ 11,535,043 $ 9,936,800 Actual return on plan assets (4,216,078) 587,985 Employer contributions 2,894,587 1,768,000 Benefits paid (715,338) (757,742) Fair value of plan assets end of year $ 9,498,214 $ 11,535,043 As of and 2007, amounts recognized in the Statements of Financial Position as a non-current liability were $7,256,435 and $1,833,481, respectively. Amounts recognized in Accumulated other Comprehensive income as a net actuarial loss was $10,209,725 and 2,924,316, respectively. At and 2007, the funded status of the defined benefit plan was as follows: 2008 2007 Funded Status $ (7,256,435) $ (1,833,481) Unrecognized Net Actuarial Loss 10,209,725 2,924,316 Unrecognized Prior Service Cost - - Net Amount Recognized $ 2,953,290 $ 1,090,835 At and 2007, the following amounts were components of net periodic benefit cost: 2008 2007 Service Cost $ 1,006,436 $ 1,062,440 Interest Cost 844,579 787,457 Expected return on plan assets (960,803) (824,944) Amortization of Actuarial loss 116,764 122,325 Net periodic benefit cost $ 1,006,976 $ 1,147,278 The estimated net loss for the defined benefit plan that is expected to be amortized from accumulated other comprehensive income into net periodic benefit cost is $670,405 for the year ended December 31, 2009. - 15 -
NOTE 8 PENSION PLAN AND OTHER BENEFIT PLANS (continued) Assumptions Weighted-average assumptions used to determine benefit obligations and net periodic benefit cost for 2008 and 2007 were: 2008 2007 Discount rate 6.50% 6.50% Rate of increase in future compensation levels 5.50% 5.50% Expected long-term rate of return on plan assets 8.00% 8.00% The Expected Rate of Return on plan assets (EROR) assumption is used to determine the Expected Return on Assets (EROA) component of the Net Periodic Benefit Cost. The Expected Rate of Return assumption is based on the composition of the plan s assets (equities, fixed income, etc.) and should reflect the period of time during which benefits are expected to be paid. Since the benefits are paid as an annuity over the lifetime of the participant, the duration of the underlying liabilities is quite long; hence, the long-term of investing pension assets. The EROR assumption is chosen from a range of anticipated long-term returns based on individual anticipated returns for each asset class in the portfolio. The expected return of each asset class is comprised of an inflation component, a risk-free component, and a risk premium component. These asset class returns are then weighted based on the anticipated future portfolio. The EROR assumption is chosen based on these and other factors such as the size of the portfolio, stability of the investment policy and investment volatility. Plan Assets The Credit Union s pension plan assets are held in pooled separate accounts with ING at and 2007. The Credit Union determines the short and long run financial needs of the plan, giving regard to the objectives of the plan and such other factors as it deems appropriate. The Credit Union may make or obtain such analysis, evaluations, advice or opinions, may obtain such information and may retain such consultants, counsel, advisors, and other persons, including persons employed by the Credit Union or any other party in interest (as defined in Section 3(14) of ERISA), as it may deem necessary or advisable in order to determine the financial needs in accordance with the objectives of the plan. - 16 -
NOTE 8 PENSION PLAN AND OTHER BENEFIT PLANS(continued) Cash Flows Contributions The Credit Union expects to contribute $2,280,000 to its pension plan in 2009. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the pension plan to participants expected to retire subsequent to : 2009 $ 144,838 2010 34,477 2011 444,444 2012 380,793 2013 1,148,976 2014 to 2018 9,574,579 Supplemental Executive Retirement Plan The Credit Union maintains supplemental executive retirement plans (SERP s) for the benefit of certain officers of the Credit Union. The plans are designed to provide post-retirement benefits to supplement other sources of retirement income. The benefits will be paid as a lump sum at normal retirement age. The Credit Union has set aside a lump sum investment in annuity contracts whose earnings are intended to fund the SERP benefits, and the Credit Union retains ownership of such contracts. The Credit Union currently maintains three types of SERP s with the following determination of benefits: Type 1 - The amount of each officer s benefit is determined as of the time distribution commences and is based solely on the accumulated earnings of the underlying investment. Type 2 The amount of each officer s benefit is determined as of the time distribution commences and is based on the accumulated earnings of the underlying investment which shall be no less than the growth in value resulting from an assumed return of (4) percent per annum, compounded annually, on the amount of the underlying investment. Type 3 - The deferred compensation agreement for the Chief Executive Officer (CEO) provides a benefit of the greater of the accumulated earning of the underlying investment, growth in value resulting from an assumed return of (4) percent per annum, compounded annually, on the amount of the underlying investment, or a minimum guaranteed benefit of $1,500,000 upon retirement, death, or disability. The Credit Union holds a life insurance contract on the CEO, for which the underlying value of the contract is intended to be used as an additional funding source for the CEO portion of the supplemental retirement plan. The Credit Union accrues the cost of this post-retirement benefit over the working careers of the officers. At and 2007, the cumulative expense accrued for these benefits totaled $796,044 and $1,471,773, respectively. - 17 -
NOTE 8 PENSION PLAN AND OTHER BENEFIT PLANS(continued) Defined Contribution Benefit Plan The Credit Union sponsors a 401(k) retirement plan. The plan covers substantially all of its employees. The plan is funded solely by the employees. The Credit Union has not made a contribution to the plan. The Credit Union incurred administrative costs of $1,225 and $3,000 for the years ended and 2007, respectively. NOTE 9 RELATED PARTY TRANSACTIONS In the ordinary course of business, the Credit Union executes loan, deposit and other transactions with its management, directors and employees. All of the loans and other transactions follow the same terms as those prevailing at the time for comparable transactions with unrelated parties. The aggregate dollar amount of related party loans was $9,086,379 and $9,004,672 at and 2007, respectively. The aggregate dollar amount of related party deposits was $3,624,154 and $2,876.978 for 2008 and 2007, respectively. NOTE 10 SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Seven Seventeen Credit Union grants loans to members of 891 business partners. Although the Credit Union has a diversified loan portfolio, loans to current and retired employees of Delphi Automotive Systems comprise approximately 11% or $57,292,421 and $57,034,910 of total loans at and 2007, respectively. Approximately 85% of the loans are collateralized by shares, personal property or real estate at December 31, 2008 and 2007. The amount and type of collateral obtained upon the extension of credit is based upon the loan type and credit evaluation of the member. The Credit Union s hourly employees (representing approximately 70% of the Credit Union s employees) are members of the Office & Professional Employees International Union Local No. 1794. The Credit Union s contract with the union is subject to renegotiation during 2009. The Credit Union s other employees are not represented by a union. NOTE 11 LINE OF CREDIT The Credit Union maintains a line of credit with the Corporate One Credit Union at a rate to be determined by the lender when funds are borrowed. At and 2007, the Credit Union had no outstanding balance on the line of credit but could borrow up to $10,000,000. The line is collateralized by substantially all of the Credit Union s assets held by Corporate One Credit Union. - 18 -
NOTE 12 COMMITMENTS The Credit Union occupies office facilities under operating leases extending to 2011. Most of these leases contain an option to renew for periods of three and/or five years. These options enable the Credit Union to retain use of facilities in desirable operating areas. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. Rent expense was approximately $86,688 and $84,813 for the years ended and 2007, respectively. The following is a summary of remaining future minimum lease payments under current noncancelable operating leases for office facilities: 2009 $ 98,013 2010 95,613 2011 79,710 2012 4,800 2013 2,200 $ 280,336 NOTE 13 OFF-BALANCE SHEET ACTIVITIES The Credit Union is a party to conditional commitments to lend funds in the normal course of business to meet the financing needs of its members. These commitments represent financial instruments to extend credit which includes lines of credit, credit cards and home equity lines that involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Credit Union s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amounts of those instruments. The Credit Union uses the same credit policy in making commitments as it does for loans recorded in the financial statements. The following financial instruments were outstanding whose contract amounts represent credit risk: December 31, 2008 2007 Unfunded commitments under lines of credit $141,192,977 $142,885,535 Commitments to extend credit are arrangements to lend to a member as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Credit Union evaluates each member s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Credit Union upon extension of credit, is based on management s credit evaluation of the counterparty. Collateral held generally consists of certificates of deposit, share accounts, automobiles and real estate. - 19 -
NOTE 13 OFF-BALANCE SHEET ACTIVITIES (continued) Unfunded commitments under commercial lines-of-credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing members. These lines-of-credits are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Credit Union is committed. The Credit Union has not incurred any losses on its commitments in either 2008 or 2007. NOTE 14 FAIR VALUES OF FINANCIAL INSTRUMENTS As discussed in Note 1, the Credit Union adopted SFAS No. 157 on January 1, 2008. SFAS No. 157 provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. The standard applies when accounting principles generally accepted in the United States of America require or allow assets or liabilities to be measured at fair value. SFAS No. 157 defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a fair value hierarchy for disclosures and measurements. The hierarchy defines levels based on component inputs as follows: Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date. Additionally, the entity must have the ability to access the active market, and the quoted prices cannot be adjusted by the entity. Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets or liabilities. Level 3 - Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management's best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation. Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized. Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs of those models, and significant assumptions utilized. Available for Sale Investments Available for sale investments are carried at fair value, which are primarily based on observable market prices. Level 2 investment securities include U.S. Government and agency mortgage-backed securities and corporate debt securities. The Credit Union does not currently hold any Level 1 or Level 3 investment securities. Loans Held for Sale The Credit Union accounts for the loans held for sale portfolio at the lower of cost or fair value. The carrying amount approximates fair value. There were no loans valued below cost at year end. - 20 -
NOTE 14 FAIR VALUES OF FINANCIAL INSTRUMENTS (continued) Recurring Fair Value Measurements Assets and liabilities measured at fair value on a recurring basis are summarized as follows: Recurring Fair Value Measures Level 1 Level 2 Level 3 Total Assets Investment Securities Available for sale securities $ - $ 61,420,065 $ - $ 61,420,065 Total Assets $ - $ 61,420,065 $ - $ 61,420,065 There are no assets or liabilities measured on a non-recurring basis. The estimated fair value of the Credit Union s financial instruments, as of and 2007, is as follows: December 31, 2007 Carrying Value Fair Value Carrying Value Fair Value Assets: (in thousands) Cash and cash equivalents $ 111,218 $ 111,218 $ 103,049 $ 103,049 Investments Held to Maturity 3,556 3,556 125 125 Available for Sale 61,420 61,420 53,519 53,519 Loans: Installment 274,350 274,274 268,147 268,693 Home Equity Fixed Rate 54,755 54,095 47,747 47,772 Variable Rate 21,531 21,799 20,716 20,709 Residential Mortgages Fixed Rate 90,660 95,431 83,128 84,328 Variable Rate 55,196 55,244 60,159 60,452 Home Improvement - - 309 309 Commercial 28,379 28,512 19,948 19,932 Loans Held for Sale 612 612 882 882 Liabilities: (in thousands) Members Accounts: Share 123,814 123,814 114,221 114,221 Share Draft 62,977 62,977 59,174 59,174 Money Market 121,166 121,166 120,495 120,495 Share Certificate 280,968 282,534 263,189 263,745 Individual Retirement 65,892 65,690 52,478 52,540 The following methods and assumptions were used by the Credit Union in estimating fair value disclosures for financial instruments: Cash and Cash Equivalents: The carrying amounts reported in the balance sheets for cash approximate fair value. Investments: Fair values for investments are based primarily on observable marked prices in accordance with SFAS No. 157. - 21 -
NOTE 14 FAIR VALUES OF FINANCIAL INSTRUMENTS (continued) Loans: The fair values of loans are estimated using discounted cash flow analysis for loans with similar credit quality. The carrying amount of accrued interest approximates fair value. Deposit Liabilities: The fair values for demand deposits (e.g., share, share draft and money market accounts) are, by definition, equal to their carrying amounts. Fair values for share certificates and IRA accounts are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar accounts to a schedule of aggregated expected monthly maturities on time deposits. NOTE 15 REGULATORY CAPITAL The Credit Union is subject to regulatory net worth ratio requirements administered by the NCUA. In addition, the NCUA has also established Risked Based Net Worth (RBNW) requirements for complex credit unions. Complex credit unions are those that qualify based on risk-weighted formulas on specific assets, liabilities, and off-balance sheet items. Failure to meet minimum net worth or RBNW 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. Quantitative measures established by regulation to ensure capital adequacy require the Credit Union to maintain minimum ratios (set forth in the table below) of net worth (as defined in the regulations) to assets (as defined) and RBNW ratios (as defined). Management believes, as of, that the Credit Union meets all capital adequacy requirements to which it is subject and no events have occurred since the calculation date, which would change the institution s category. The Credit Union s RBNW ratio is below the 6% minimum requirement to be considered a complex credit union. As of and 2007, the Credit Union s RBNW requirements are 4.66% and 4.89%, respectively. As of and 2007, the Credit Union s net worth is categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Credit Union must maintain a minimum net worth ratio of 7%. To be Well Capitalized under the Prompt For Capital Corrective Action Adequacy Purposes Provisions RBNW Ratio Amount Ratio Amount Ratio $65,846,745 9.10% $43,385,075 6.00% $50,615,921 7.00% December 31, 2007 $68,104,844 9.91% $41,208,545 6.00% $48,076,636 7.00% - 22 -
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