Corporate One Annual Report 2009

One Movement

One Purpose

One Future

2009 ANNUAL REPORT

TAB LE O F C O NTE NTS

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02

06

16

20

24

One Purpose

One Vision President/ Chairman Letter Board of Directors Senior Management

One Movement

One Success Story

One Future

As a financial cooperative, Corporate One is dedicated to carrying out the common purpose that unites all credit unions together — serving our members successfully. For Corporate One, the power of our diverse credit union movement is embodied in the collaboration and teamwork that sets us apart from other financial institutions. Together, we work as one to ensure the credit union philosophy of making a difference in the lives of members continues.

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44

45

46

50

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Report from the Supervisory Committee

Report of Independent Auditors

Financials

Notes to Financial Statements

1

We are united in one purpose — to improve people’s lives through financial freedom. Each of us contributes to this in our own way. As a corporate, we strive to provide the solutions credit unions need to reduce costs, grow earnings, improve efficiencies and better serve members.

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One Purpose

3

one purpose As a trusted partner in the credit union movement, Corporate One continues to provide innovative products and quality services so credit unions may stay efficient and members remain well served. We offer a full array of proven correspondent services, including a comprehensive ACH solution, state-of-the-art share draft services and electronic depositing through Automated Capture & Exchange (ACE), all of which continue to add value to our member credit unions. In 2009, we also expanded our offerings to include a comprehensive, singlesource solution for credit cards and ATM/debit processing. And, with Alliance One, one of the nation’s largest selective-surcharge ATM groups, credit unions continue to leverage their collective strength for the benefit of their members.

ACH n Proving that there is no greater trend in our industry than electronic payments, Corporate One processed more ACH transactions in 2009 than in any previous year. As more member credit unions realized the business potential of ACH Origination, Corporate One saw a 17 percent jump in its product offering. ACH Receipt, which historically has strong member participation, also grew consistently. In total, Corporate One exchanged nearly 45 million ACH transactions in 2009.

A key upgrade in 2009 to Corporate One’s ACH services included streamlining both ACH Origination and Receipt into a bundled offering using a single provider, allowing us to become

Regina Geels C E O/ MANAG E R

26/27 04/05

R IVE R B E N D C redit U nion S O UTH B E N D, I N D IANA

CORPORATE ONE

ACE Corporate One collected more than 38 million deposit items through ACE on behalf of our members, imaging more than 41 million items in our searchable database in 2009.

ACH Corporate One exchanged more than 45 million ACH transactions in 2009.

Card solutions n A strategic partnership with PSCU Financial Services allowed Corporate One to upgrade our ATM/debit program and expand into credit cards for a comprehensive cards solution for credit unions. With this relationship, we are able to aggregate volumes to receive collaborative pricing advantages that are passed on to our members. Credit unions with low to moderate volumes now have access to the same high-quality programs usually only available to much larger institutions, plus they also receive the same pricing leverage. Our solution is best in class for debit and credit, including benefits such as joint rewards, state-of-the-art fraud mitigation, strategic counseling to ensure card program growth and 24/7/365 award-winning member care.

better equipped to help our members serve their own members. A hallmark of our upgraded ACH program provides credit unions benefits with EPCOR, the region’s payments trade association, that includes full membership or complimentary educational resources.

Share drafts n With the continued popularity of electronic payment processing, the use of paper items continues to diminish while the expenses associated with these items increases.

Recognizing the need to take advantage of technology to maintain an efficient, low cost share draft product for our members, Corporate One has converted entirely to electronic share draft processing. As a result, we significantly lowered our expenses by eliminating the rising costs associated with receiving paper items from the Fed, and have been able to maintain low costs for our members on this key product offering. Best of all, without the limitations of moving paper items, Corporate One can extend its share draft services to any credit union in the country.

Alliance One n Teaming up with our members, Corporate One had the foresight to establish Alliance One, one of the nation’s largest selective-surcharge ATM groups, boasting nearly 4,900 ATMs in the alliance. Alliance One offers consumers fewer hidden fees and greater access to their money, while generating more support and income for the credit union movement. Through a partnership with Affiliated Computer Services (ACS), Alliance One has provided surchargefree debit card access to more than one million residents across the country receiving state and governmental benefits, such as unemployment insurance or child support.

ACE n Corporate One’s turnkey electronic deposit solution, ACE, continues to be the Check 21 solution of choice for credit unions.

In 2009, more than 850 ACE units were deployed, with more than 41 million images archived and nearly 38 million items processed for collection. Additionally, more credit unions harnessed the power of ACE to eliminate empty envelope fraud and reduce ATM deposit processing costs through Corporate One’s ATM deposit automation solution, which combines the efficiencies of image-enabled ATMs and electronic forward collection.

At Corporate One, we have a history of providing the solutions credit unions need to succeed. Our progressive thinking and critical eye for trends benefits our members through cutting-edge products and continued expert-level service.

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One Vision

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Credit unions share one vision. Our cooperative spirit, which focuses on people over profits, unites us in the pursuit to create opportunities for our members that position them for future success.

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one vision Key to Corporate One’s success is our people. The experience and foresight of Corporate One’s board, senior management and staff allows us to take advantage of opportunities while remaining focused on being a consistent, dependable partner for our credit unions. At Corporate One, seizing opportunities is all about having the vision to build relationships and create synergies of expertise for the benefit of our members.

Integral to the solutions we develop are the partnerships we forge to make them possible.

We have several notable affiliations that bear fruit for Corporate One and our members, including: Primary Financial Company LLC (Primary Financial), Processing Alliance, LLC, eDOC Innovations, Inc., Multi-Bank Securities, Inc. (MBS), and PSCU Financial Services, as highlighted in the previous section.

More than 10 years ago, Corporate One established Primary Financial because we saw how the collaboration and aggregation of a brokered certificates of deposit business could benefit credit unions. Primary Financial is now one of the most successful credit union service organizations (CUSOs) in the country and is jointly owned by the corporate credit union network. Primary Financial manages SimpliCD, a turnkey certificate of deposit program that allows credit unions to diversify their portfolios and earn competitive yield by placing funds in federally insured CDs.

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Primary Financial had a banner year in 2009, with nearly 3,000 credit unions earning more than $230 million, in total, as a result of their investments. As a co-broker and owner, the success of the SimpliCD program supplemented our service fee income by $2.8 million from the spread earned on certificates placed, as well as on royalties on certificates placed by other co-brokers.

As a consistent source of fuel for our Check 21 solution, Processing Alliance has been a trusted Corporate One partner. As a coowner of Processing Alliance, along with the CUSO CU*Answers, Corporate One continues to benefit from this investment in new members and additional revenue from ACE deployments. In fact, 13% of new ACE deployments and 17% of items collected via ACE in 2009 were through Processing Alliance.

Corporate One also co-owns eDOC Innovations, Inc., the nation’s leading CUSO for e-document strategies, electronic document management and electronic image and forward collection services. With this partnership, Corporate One has the ability to help credit unions develop a comprehensive document imaging strategy, enabling credit unions to maximize efficiency, maintain costs and better serve members.

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CORPORATE ONE

In late 2009, Corporate One forged a new relationship with MBS to provide investment products and other securities-related services to credit unions. As a result, our members have access to investment tools and security offerings, which now include negotiable certificates of deposit, as well as fixed-income accounting and free portfolio analysis through MBS. As valuable investment solutions are critical to our members’ continued growth, this new affiliation with MBS creates a powerful alliance that was designed to ensure member success.

Thanks to the visionary leadership of our board, senior team and staff, Corporate One continues to remain focused on creating successful opportunities for our members and credit unions across the U.S.

Tony Coniglio C E O/ MANAG E R C E NTU RY F E D E RAL C redit U nion C LEVE LAN D, O hio

one vision

Lee Butke

(L)

P R E S I D enT/C E O

Gerald Guy 26/27

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(R)

C HAI R MAN C E O, K E M BA F inancial C U

CORPORATE ONE

A letter to our members from the President and Chairman

While the economic crisis that began in 2007 continues to cause a major disruption throughout the U.S. and its financial institutions, a combination of strong core earnings and strong member support allowed Corporate One to keep 100 percent of our members’ capital intact. At the end of 2009, the corporate had a total regulatory capital position of $167.7 million, with Reserves and Undivided Earnings (RUDE) of $23.6 million, paid-in-capital (PIC) of $25.7 million and membership capital shares (MCS) of $118.4 million. This positive position, especially in relation to our RUDE, has allowed us to protect the capital investments our members have placed with us.

Yet, in spite of our conservative investment strategies and strong member support, we did experience losses from our capital investment with U.S. Central, as well as some other-than-temporary impairment (OTTI) charges on our portfolio (see Financial Review section for details). However, there is no doubt that Corporate One remains well positioned to continue helping credit unions better serve their own members, now and in the future.

The events of the last year have compelled our industry to reflect on the possible causes of the corporate credit union crisis in an effort to prevent such events from happening again, and we believe that is proper. At Corporate One, we believe passionately in our fundamental business model. And, by leveraging the lessons from the most recent financial crisis, we are certain that our business model will be successful in the future. As one current and one former president/CEO of natural person credit unions, we know that credit unions are challenged to adapt and evolve when regulatory changes require us to do so. It’s our history and our future. Corporate One remains confident that we can continue to serve the credit union industry with effective, competitive and innovative solutions. We are confident we will adapt to the new regulatory environment and continue to provide members the value they deserve.

However, we would not be as successful as we are if it weren’t for the thoughtful guidance of our volunteer Board of Directors and Supervisory Committee, the expert leadership of our senior management and the dedicated efforts of our knowledgeable staff at Corporate One. We thank them for their insight, hard work and personal sacrifices of the last year.

Most importantly, we thank our members for their continued support, without which we would not be the corporate we are today. We’re proud to remain your partner and we look forward to many more years of service.

one vision

Robert D. Burrow, Bayer Heritage FCU

John J. Shirilla Best Reward CU

Charles F. Plassenthal, Dayton Firefighters FCU

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James A. Depue, CES CU

CORPORATE ONE

Corporate One Board of Directors

Janice L. Thomas, PSE CU

R. Lee Powell, DESCO FCU

Phillip R. Buell Superior FCU

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Ronald Budzinski, First Trust CU

one vision

Tammy Cantrell, SVP, Asset/Liability Management

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Kurt Lykins, VP and Chief Technology Officer

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Melissa Ashley, VP and Chief Financial Officer

CORPORATE ONE

Corporate One Senior Management

Robert Coyan, SVP, Marketing and Operations

Joe Ghammashi, VP and Chief Risk Officer

15

Cheri Couture, VP, Human Resources and Administration

We are one movement. As different as we are from one another, be it asset size, fields of membership or charter, we are bound by the common philosophy that people helping people can make a difference.

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One Movement

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one movement During 2009, we recognized the credit union centennial in the U.S. — an amazing milestone for our movement, being celebrated during some of the most challenging financial times in recent history. Over the last 100 years, credit unions have faced many challenges and celebrated many victories together, and there is no doubt that when we look back at this last year, we’ll marvel at the strength, fortitude and resilience of the credit union movement.

Milestones such as last year’s centennial celebration provide an opportunity for reflection, allowing us to embrace our heritage and appreciate what makes us different from other financial institutions ­— as it is those very differences that make us valuable to the lives we touch. As cooperatives, we provide our members a stake in their financial destiny and believe that through financial freedom lives can be improved. The credit union commitment to improving lives doesn’t stop at the branch doors; it extends to the farthest reaches of the globe. We are a movement because we are more than financial institutions — we also are a social force.

Corporate One is proud to be a part of the credit union movement. We are fortunate to partner with more than 750 credit unions across the country (some of which you’ll see highlighted throughout this report) helping people realize their dreams. While we are a leading provider of products and services

to credit unions across the nation, we also are a proud supporter of those foundations and organizations that make a difference within the credit union network and our local communities. Despite facing a challenging economy, Corporate One remained steadfast to contributing to those who needed our assistance when and where we could during 2009.

On a global level, there is no greater force pushing the cooperative cause than the World Council of Credit Unions (WOCCU). As a long-time partner of WOCCU, Corporate One was able to provide in-kind service hours from senior management during 2009 for developments of the global credit union movement. We continue to provide leadership and security training for WOCCU’s project in Bolivia, helping strengthen and expand the cooperative movement in that country.

On the national level, Corporate One was able to maintain a $10 million investment in the National Credit Union Foundation’s (NCUF) Community Investment Fund (CIF), an endowment fund that distributes a portion of its dividends to state foundations, while also supporting national initiatives. Year-end reports show that nearly $30,000 in dividends will be returned to state foundations this year as a result of Corporate One’s investment.

Additionally, Corporate One was pleased to continue our support of the Indiana Credit Union Foundation with a $5,000 donation.

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CORPORATE ONE

CIF Investment Credit unions across the country will benefit from the approximately $30,000 in dividends earned as a result of Corporate One’s investment in the National Credit Union Foundation’s Community Investment Fund.

And, Corporate One employees pitched in their time and talent to make a difference on a local level, donating dollars, food and even their own blood to local charities. Nearly $10,000 in staff donations were contributed to the Ohio Credit Union League Political Action Committee, and a company-wide food drive resulted in nearly 1,600 pounds of food being donated to the MidOhio Food Bank. In one of the most inspiring events of the year, Corporate One staff came together to help local children and families in Central Ohio have a merrier holiday season by participating in the Salvation Army Angel Tree Program and making donations to the Homeless Families Foundation. The response to the donation requests was overwhelming, with Corporate One staff donating more than three times the amount of our commitments to these organizations.

Corporate One, our people and our culture, continue to proudly embody the credit union spirit of people helping people.

Joe Lind CEO E M E RY F E D E RAL C redit U nion C I N C I N NATI, O hio

One One Success Success Story

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We share one success. In the last 100 years, the credit union industry has grown from one credit union into a system built upon shared values and cooperative support. We work together to help members achieve their financial goals.

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one success story The economy has changed dramatically over the last two years, creating conditions that continue to impact Corporate One’s financial position. The conservatorship of U.S. Central Federal Credit Union (U.S. Central) and Western Corporate Federal Credit Union at the start of 2009 dealt a blow to our industry, while the economy continued to struggle. Corporate One had a significant capital investment in U.S. Central, which resulted in considerable losses, and continued instability in the markets led to additional OTTI charges on our portfolio. We are disappointed in these financial losses. Yet we know brighter days are ahead.

As the economy recovers, there are many reasons for us to be confident about our future. First, our capital exposure to future losses in U.S. Central was eliminated with the write-down of our remaining capital in the corporate in the latter part of 2009. Second, by the close of 2009, our accumulated other comprehensive loss has decreased by nearly half since 2008. While our unrealized losses remain significant, we have the ability and intent to hold these securities until their anticipated recovery.

Third, Corporate One’s dedication to providing competitive correspondent services, conservative spending, trusted investment solutions and

Gary Moritz C E O, S U N F E D E RAL

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C redit U nion TO LE D O, O hio

CORPORATE ONE

Financial Highlights Section highlights: Core earnings: $15.3 million CIF Investment Regulatory capital position: $167.7 million Credit unions across the$4.8 billion Assets under management: country will benefit from the approximately $145,000 in dividends earned as a result of Corporate One’s $10 million investment in the National Credit Union Foundation’s Community Investment Fund

effective member services have contributed significantly to overall strong core earnings in 2009. A multi-million dollar reduction in operating expenses, which included expense reductions in travel, marketing, training, and employee salaries and benefits, also contributed to Corporate One’s ability to maintain one of the industry’s strongest efficiency ratio averages of 85 percent. With such an efficiency ratio, we are able to cover most expenses through fee income. Further, our assets under management reached nearly $5 billion at year-end, thanks to the continued support of our members. And, capital from 19 new members and increased capital from existing members helped us retain $167.7 million in total regulatory capital.

Finally, and best of all, we have been able to insulate our member’s capital with us from any write-downs. Like all cooperatives, our first priority is protecting our members’ capital. Despite the current economy, Corporate One remains unique in that our members’ capital accounts have not been depleted due to our positive RUDE position of $23.6 million at the close of 2009. In the face of one of the worst economic downturns since the Great Depression, we are extremely proud of this fact.

At the start of 2010, we feel optimistic about the road before us. We understand there is hard work ahead, but we are well positioned and fully able to continue providing the products and services our members use to better serve their own members well into the future.

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Corporate One Membership Corporate One added 19 members in 2009, for a total membership of more than 750 credit unions, including: Charles St. Community FCU (IN) Community Choice CU (MI) Consumers Choice CU (MI) Credit Union of the Rockies (CO) Credit Union Outreach Solutions, Inc. (OH) CU Student Choice FCU (DC) Dearborn County Hospital CU (IN) Fulton County FCU (NY) KUE FCU (KY) L.C. School Employees FCU (IN) Lakeside FCU (IN) Maroon Financial FCU (IL) Members United FCU (IN) Provident FCU (CA) Staley CU (IL) Wayne Teachers FCU (IN) Western Districts Members FCU (MI) Whitewater Regional CU (IN) Worcester Police Department FCU (MA)

Credit unions are building bright futures. We are helping members start new businesses, send children to college, realize the goal of home ownership and retire with confidence.

Together, we are helping people achieve their dreams.

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One One Success Future

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one future

Bill Lawry (L) CEO M I DW E ST CAR P E NTE R S AN D M I LLWR I G HTS F E D E RAL C R E D IT U N I O N H O BART, I N D IANA

Paul Aimone (R) C FO M I DW E ST CAR P E NTE R S AN D M I LLWR I G HTS

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F E D E RAL C R E D IT U N I O N

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H O BART, I N D IANA

CORPORATE ONE

As a result of being member-owned, credit unions are unique financial institutions.

Historically, we’ve made good decisions on our members’ behalf, always relying on our cooperative spirit to thrive. We have a strong history of being self-reliant and innovative, which will serve us well as the economy recovers and as we work toward a better tomorrow.

Corporate One is positioned to deliver what our credit unions require to succeed well into the future. We are not just another vendor to our members, but a dedicated partner in their successes. And, our commitment to the credit union movement is steadfast.

As we look ahead to 2010, Corporate One has many exciting products and partnerships on the horizon that will allow credit unions to succeed in keeping long-standing members satisfied, while competing effectively for new ones. Advances in electronic payments continue to create opportunities for us to provide products and services that credit unions can use to better serve their own members. And, collaboration and partnership with key players will allow us to expand our universe of solutions.

Corporate One is well positioned to continue serving our members with superior products and services. We know we have a strong business model that will continue to provide value to credit unions. As a full-service corporate focused on providing safe, sound payment systems, we have a proven history of strong earnings delivered with a high degree of efficiency. Our successful correspondent services complement our talented, licensed asset-liability management team who effectively provide liquidity and investment services to create valuable on-balance-sheet products for credit unions, while also offering a best-in-class brokerage operation through MBS. This is all coupled with an existing infrastructure in place to model, weigh and manage risk. We focus both on our members’ best interests and the continued stability of our industry.

As one movement, the credit union industry shares a treasured and distinct purpose that when put into practice with the right vision, results in success. Corporate One is proud to be a partner in this success, with our sights on the future­—for credit unions and their members.

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Financial Review

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Financials and Footnotes

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Review

Executive Summary The difficult global economic conditions we have faced for over two years continue to impact our financial position. However, diversified investing, fee income from a strong suite of brokerage and correspondent services and conscientious spending have allowed us to weather these tough times. We have withstood a 100 percent write-down of our capital investment in U.S. Central Federal Credit Union (U.S. Central), National Credit Union Share Insurance Fund (NCUSIF) Stabilization fees and write-downs on our own securities, and as of December 31, 2009, we remain in a positive Reserves and Undivided Earnings (RUDE) position of $23.6 million. Our members’ capital shares and paid-in capital remain intact.

Corporate One’s net loss of $42.3 million for the year ended December 31, 2009, is the result of other-thantemporary impairment (OTTI) charges related to our securities and our capital investment in U.S. Central. As of December 31, 2009, we no longer have any capital exposure to U.S. Central. In other words, we have written off 100 percent of our U.S. Central capital investment. Therefore, future losses at U.S. Central will no longer impact our earnings or RUDE. Although we are disappointed by the OTTI charges on our securities and our U.S. Central capital investment, we remain focused on running an efficient core business. To that end, our core earnings prior to our net loss on financial instruments were $15.3 million in 2009. As shown in Table One, this represents our second strongest year of core earnings over the last five years. Net interest income of $17.7 million was down from the last few years due to the historically low interest rate environment. Additionally, during 2009 we held a significant amount of liquidity on our balance sheet in the form of cash and cash equivalents, which reduced our net interest margin.

However, service fee income in 2009 of $12.8 million was a record high as more members than ever utilized our brokerage and correspondent services. We accomplished this while driving operating expenses to the lowest level since 2005.

Our accumulated other comprehensive loss improved significantly in 2009. Prior to 2007, the fair values of our available-for-sale securities rarely varied in any meaningful way. However, unsettled conditions in the mortgage markets, beginning in 2007 quickly turned to concerns about liquidity, causing all credit-related securities to experience deterioration in spreads and hence, in fair values. Between 2007 and the end of 2008, overall market deterioration intensified as the slump in the U.S. housing market worsened, resulting in lower business and consumer confidence, and then later, the slow down in the global economy. With the failure of several large financial firms in 2008, investors’ fears worsened and by late 2008 the capital markets were virtually frozen. During this time, spreads were at historically wide levels. Subsequently, the Federal Reserve and the U.S. Treasury created massive programs to renew confidence and restart lending among financial institutions. These programs have stabilized the economy and helped lead the U.S. out of a recession. Accordingly, spreads have tightened significantly for many of the securities that we own. As a result, our accumulated other comprehensive loss has decreased from $504.2 million at the end of 2008 to $255.7 million at December 31, 2009. Although these unrealized losses are still significant, we have the ability and intent to hold these securities until the anticipated recovery. Therefore, these fair value adjustments are expected to reverse as the credit markets stabilize or the securities approach their maturity date.

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Table One: Selected Financial Information (Dollar amounts are in thousands) As of and for the year ended December 31, 2009 Net Interest Income

$

17,671

2008 $

28,029

2007 $

21,490

2006 $

13,607

2005 $

12,507

Net Service Fee Income

12,817

12,596

10,524

8,011

7,577

Total Operating Expenses

15,143

19,125

16,819

16,122

14,079

CORE EARNINGS BEFORE NET (LOSS) GAIN ON INVESTMENTS AND OTHER ITEMS

15,345

21,500

15,195

5,496

6,005

(57,692)

(94,056)

549

215

1,092

Net (Loss) Gain on Investments Other Items*

402

NET (LOSS) INCOME

$

(42,347)

$

(72,556 )

$

15,744

$

5,711

$

7,499

RUDE

$

23,648

$

30,818

$

104,171

$

89,981

$

85,800

PIC MCS

25,682

25,682

25,682

25,682

25,682

118,365

115,912

98,388

86,057

85,022

TOTAL REGULATORY CAPITAL

$

167,695

$

172,412

$

228,241

$

201,720

$

196,504

Average Assets

$ 3,852,818

$ 3,965,896

$ 3,809,373

$ 3,373,127

$ 2,789,173

$

$ (504,247 )

$

$

$

Accumulated Other Comprehensive Loss

(255,743)

(74,137)

(231 )

(1,252)

Return on Assets

-1.10%

-1.83%

0.41%

0.17%

0.27%

Regulatory Capital Ratio

4.35%

4.35%

5.99%

5.98%

7.05%

 

*Other items include the cumulative effect of a change in accounting in 2005.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Review

Regulatory Capital Position Our total regulatory capital of $167.7 million, which includes RUDE of $23.6 million, Membership Capital Shares (MCS) of $118.4 million and Paid-In Capital (PIC) of $25.7 million, decreased approximately $4.7 million, or 2.7 percent since December 31, 2008. The decrease in overall capital was primarily due to OTTI charges totaling $42.6 million related to our securities, as well as $15.1 million in charges taken related to our remaining U.S. Central capital investment. We also had $321,000 in dividends on PIC, which reduced our RUDE. Reductions to our RUDE were partially offset by strong core earnings of approximately $15.3 million. Also, accounting guidance related to the recognition and presentation of OTTI changed in 2009. Prior to 2009, if a security was other than temporarily impaired, it was written down to its fair value. In 2009, the guidance was changed so that only the portion of the loss related to the expected credit loss is charged to earnings. The accounting guidance requires an entity to recognize the cumulative effect of initially applying this guidance, which resulted in an increase to our RUDE of approximately $35.5 million in 2009. This cumulative effect adjustment represents the non-credit losses that were previously recognized as OTTI. In addition, since December 31, 2008, MCS has increased $2.5 million due to capital from new members and increased capital from existing members.

Our regulatory capital ratio of 4.35 percent at December 31, 2009, does not meet the regulatory required minimum capital level of 5 percent. However, in April 2009, the National Credit Union Administration (NCUA) issued an order, under its authority in Part 704.1(b), permitting an alternative capital level for all corporate credit unions for purposes of regulatory compliance, outlined in Part 704. The order will remain in effect until modified or rescinded by the NCUA Board or until the effective date of the final rulemaking for Part 704, which is currently in the proposed-rule stage. Corporate One’s capital ratio, calculated in accordance with this order is 6.87 percent at December 31, 2009.

Net Interest Income We are highly focused on providing credit unions with competitive investment products and great member service. Our focus continues to pay off, with19 new members joining Corporate One in 2009 and 41 new members in 2008. Deposits from these new members, as well as increased balances from our existing members, resulted in record levels of average assets over the last two years.

While our average assets remained at record high levels in 2008 and 2009, our net interest margin decreased from 68 basis points in 2008 to 43 basis points in 2009. There were several reasons for this decrease in margin. First, in 2008, despite the Federal Reserve Bank’s action to lower the federal funds rate, the reliance on LIBOR funding by most financial institutions, which is not controlled by the Federal Reserve Bank, rose due to the market’s re-pricing of credit risk. This caused unprecedented spread widening between the two indices and caused a greater return on a larger percentage of our assets in 2008. In 2009, as the financial markets stabilized, the spread between LIBOR and the federal funds rate returned to more historical levels, and during certain periods was even tighter than it had been historically. Second, the overall lower interest rate environment in 2009 contributed to a tightening of our net interest margin. With interest rates at historically low levels, our assets continued to re-price lower; however, the rate we paid on our settlement shares and our membership capital accounts in particular, barely moved, squeezing our margins. Third, due to the unfolding crisis within the corporate network, we held significant amounts of liquidity on our balance sheet. As purchases of new securities were suspended after January 2009, all share inflows went to cash and cash equivalents. Additionally, all maturities and paydowns of existing securities moved into cash and cash equivalents. We strongly believe that maintaining high levels of liquidity was paramount during this crisis; with the acknowledgment that keeping a significant portion of our assets in cash and cash equivalents would contribute to a lower net interest margin.

Due to the lower net interest margin, our net interest income for 2009 was $17.7 million, a $10.4 million decrease from 2008.

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Table Two provides more information on the composition of interest-earning assets, interest- and dividendbearing liabilities and members’ share accounts and their weighted average rates. The resulting net interest margin of Corporate One for 2009 and 2008 is presented for comparison purposes.

Table Two: Components of Net Interest Income (Dollar amounts are in thousands)

Average Balance

2009 Interest or Dividends

Average Rate

84

2.68%

Average Balance

2008 Interest or Dividends

Average Rate

266

4.59%

Interest-Earning Assets: Time deposits

$

3,129

$

$

5,795

$

Asset-backed securities

1,631,826

35,720

2.19%

1,814,665

71,316

3.93%

Government-sponsored enterprises

47,388

1,601

3.38%

14,748

572

3.88%

716,341

19,357

2.70%

906,437

38,025

4.19%

1,675,495

19,683

1.17%

1,351,225

48,572

3.59%

16,890

494

2.92%

28,477

1,004

3.53%

$ 4,091,069

76,939

1.88%

$ 4,121,347

159,755

3.88%

Overnight shares

1,990,382

6,116

0.31%

1,595,760

35,317

2.21%

Term shares

1,699,373

46,191

2.72%

1,852,854

77,654

4.19%

Membership capital shares

116,868

359

0.31%

104,870

1,702

1.62%

Other borrowings

189,993

6,602

3.47%

433,269

17,053

3.94%

$ 3,996,616

59,268

1.48%

$ 3,986,753

131,726

3.30%

Mortgage-related securities Other investments (primarily U.S. Central) Loans to members

Total Interest-Earning Assets

Interest- and DividendBearing Liabilities and Members' Share Accounts:

Total Interest- and DividendBearing Liabilities and Members' Share Accounts

NET INTEREST INCOME

$

17,671

$

NET INTEREST MARGIN

0.43%

 

33

28,029 0.68%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Review

Table Three provides a rate and volume analysis that further illustrates changes between 2009 and 2008 in the components of net interest income attributable to dollar volume (changes in volume multiplied by prior year’s rate), interest and dividend rates (changes in rates multiplied by the prior year’s volume) and the combined impact of dollar volume and interest and dividend rates (changes in volume multiplied by changes in rate).

Table Three: Volume and Rate Variance Analysis (Dollar amounts are in thousands) 2009 versus 2008 Volume and Volume

Rate

Rate

Total

Interest-Earning Assets: Time deposits

$

Asset-backed securities

(122 )

$

(7,186 )

Government-sponsored enterprises

(110)

$

(31,594)

1,266

51

$

3,183

(181) (35,597)

(74)

(163)

1,029

Mortgage-related securities

(7,975 )

(13,531)

2,838

(18,668)

Other investments (primarily U.S. Central)

11,656

Loans to members Total Interest-Earning Assets

(32,699)

(7,847)

(28,890)

(409 )

(171)

70

(510)

(2,770 )

(78,179)

(1,868)

(82,817)

8,734

(30,414)

(7,521)

(29,201)

(6,433 )

(27,292)

2,261

(31,464)

(1,380)

(158)

(1,343)

(9,575 )

(1,997)

1,122

(10,450)

(7,079 )

(61,083)

(4,296)

(72,458)

Interest- and Dividend-Bearing Liabilities and Members' Share Accounts: Overnight shares Term shares Membership capital shares

195

Other borrowing Total Interest- and DividendBearing Liabilities and Members' Share Accounts INCREASE (DECREASE) IN NET INTEREST INCOME

$

4,309

$

(17,096)

$

2,428

$

(10,359)

In order to attract and maintain share balances, our deposit products have to be competitive, and we differentiate

ourselves by assigning our member credit unions to a specific Corporate One investment representative. Our investment representatives are licensed and able to understand the investment needs of our members. They are proactive in calling both members and prospective members to discuss their needs and communicate those needs to our product development team. Our product development team then works to arm our investment representatives with a variety of products to serve our member credit unions. In addition to our on-balance-sheet products, Corporate One is a co-broker of Primary Financial Company LLC (Primary Financial), enabling us to offer SimpliCD. SimpliCD allows credit unions to easily invest substantial amounts of funds in federally insured

34

certificates of deposit. SimpliCD searches for the best rates and offers single transaction settlement. Credit unions may also issue share certificates through Primary Financial, providing them a source of liquidity.

In addition to SimpliCD, our members have access to securities through a branch of Multi-Bank Securities, Inc., (MBS)* housed within Corporate One’s office. Through MBS, our member have access to the inventories of multiple broker/dealers’ institutional trading desks and receive very competitive pricing on the securities they buy and sell.

Corporate One differentiates itself when it come to selling investments by listening to credit unions and trying to find investments that fit their needs. Because we also are a credit union, we are keenly aware of the importance of complying with the investment stipulations set forth in the NCUA regulations. Therefore, we don’t just sell investments, we strive to find suitable investments that comply with NCUA regulations while meeting the needs of our members.

Since SimpliCD and securities are both off-balance-sheet products, they contribute to service fee income instead of net interest income. However, it is important to mention them in the context of net interest income because these are examples of the investment alternatives we provide our members. We believe it is critical to offer a variety of investment products, enabling our member credit unions to diversify their portfolio and earnings potential.

Service Fees In addition to providing a wide range of competitive investment products to meet our members’ needs, Corporate One also offers a complete line of correspondent and brokerage services. While providing competitively priced products, net service fee income generated from our fee-based services was a record $12.8 million for the year ended December 31, 2009, a 1.8 percent increase from 2008.

Table Four below summarizes net service fee income for 2009 and 2008.

Table Four: Net Service Fee Income (Dollar amounts are in thousands) 2009 Brokerage

3,735

8.1%

ATM/Debit

3,056

3,207

-4.7%

ACE

2,849

2,810

1.4%

Share Drafts

1,307

1,285

1.7%

Settlement

835

744

12.2%

ACH

667

682

-2.2%

Other

65

133

-51.1%

TOTAL NET SERVICE FEE INCOME

$

Percentage Change

2008

$

4,038

12,817

$

$

12,596

1.8%

Service fee income related to our brokerage services continues to be a significant contributor to our net service fee income. Increased liquidity at credit unions combined with the favorable interest rate environment for these products resulted in an increase in the volume of SimpliCD certificate and securities sales in 2009 compared to 2008. This income from brokerage services was the primary reason for the increase in net service fee income

*All securities are offered through Multi-Bank Securities, Inc. (MBS). The home office of MBS is located at 24280 Woodward Ave, Pleasant Ridge, MI 48069. MBS is registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934. Member of FINRA and SIPC. Securities offered by MBS are not insured by the FDIC or NCUSIF and may lose value.

35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Review

from 2008 to 2009. Additionally, during 2008 and 2009 we were successful in opening SimpliCD and securities accounts for new members. Activity from these new accounts also contributed to the increase in brokerage income.

Our ATM/Debit service also continues to be an important service for our member credit unions and a significant contributor to our net service fee income. Net revenue from this product decreased due to lower volumes in 2009 compared to 2008. In 2009, we announced an exciting new partnership with the premier credit union service provider for ATM/Debit and credit card solutions, PSCU Financial Services (PSCU). With PSCU, we can now offer our members a stronger ATM/Debit program, as well as a comprehensive suite of card solutions, including credit cards. We expect growth in this product line in future years due to this new partnership.

Over the last two years we continued to use our members’ aggregated ACE volumes to negotiate even lower clearing costs. We passed these savings along to our members in the form of a price break to our members in 2008. Even with the price cut, our net revenue from this product actually increased because we continued to grow volume by adding new members to the service.

Net revenue from our share draft services increased year over year; however, there is more to this story than the modest increase in net revenue. As consumers move toward alternative payment methods, the number of checks being written continues to decrease each year. Accordingly, our actual gross revenue from this product decreased 10.4 percent from 2008 to 2009. In an effort to mitigate these changes within the payment system, we converted to 100 percent electronic processing at the beginning of 2009, which allowed us to reduce our direct costs of processing share drafts by 37.4 percent. The reduction in direct expenses more than offset the reduction in gross revenue, resulting in the increase in net income from this product. With declining volumes, we understand that it is more important than ever to focus on the most efficient way to provide this necessary service to our members.

Additionally, the conversion to 100 percent electronic processing of share drafts allows Corporate One to provide services to any credit union in the country, significantly expanding our opportunity to generate additional business with this foundational service.

Settlement services include domestic and international wires, national settlement and Federal Reserve passthrough charges. The increased volumes in our brokerage services and on-balance-sheet deposit levels also translate into greater income in our settlement services, as those services support the brokerage services.

With the trend in payments processing moving toward electronic payments, the volume of ACH activity we process continues to increase. Accordingly, year-over-year gross revenue from our ACH services increased. In 2009, we converted to a third-party processor to provide our members a streamlined ACH origination and receipt platform.

Historically, we provided our ACH services utilizing an in-house solution where the expenses were classified as operating expenses. Once we moved to the third party, the direct expenses were netted with the service fee income. This change in expense structure actually resulted in overall lower costs; however, because the expenses are reflected in net service fee income instead of operating expenses, net service fee income from ACH services decreased slightly in 2009.

Operating Expenses Total operating expenses were $15.1 million in 2009, a decrease of $4.0 million or 20.8 percent relative to 2008. We are focused on providing our products and services with a high degree of efficiency. Additionally, we are focused on the preservation of capital to help absorb the losses stemming from U.S. Central and our own mortgage securities. To that end, salaries were frozen and bonuses to employees were cancelled for 2009.

Additionally, the Board of Directors suspended the discretionary contributions to our 401(k) plan in 2009. We also reduced staffing levels through attrition and by our conversion to electronic share draft processing in late 2008 and early 2009. These efforts contributed to lower salaries and benefits expense. We also focused on reducing travel, marketing, training and outside consulting expenses. Further, we canceled our commercial paper program because it was not a reliable source of liquidity during the crisis and these programs are expensive to maintain.

Through these efforts, we were able to reduce our operating expenses to the lowest level since 2005.

36

Enterprise Wide Risk Management Corporate One is committed to managing the risks associated with our business activities and has maintained a formal risk management department for many years. We feel so strongly about managing risk that over five years ago we embarked on an initiative to deploy enterprise wide risk management (EWRM) throughout our entire organization.

We believe that EWRM is critical not only to managing our risks, but to maximizing our value to our members. To that end, Corporate One has adopted the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework for EWRM as the framework for the governance of risk. Corporate One utilizes a core process risk assessment methodology to identify, categorize and mitigate its risk.

We have established an EWRM Committee comprised of members of our Board of Directors, our Supervisory Committee and our senior management team. The EWRM Committee is responsible for reviewing completed risk assessments and coordinating, in conjunction with the Supervisory Committee, the testing of controls over critical processes. The EWRM Committee is also responsible for reporting the residual risks of Corporate One’s activities to the Board of Directors. The risks an organization takes should be balanced by the rewards. The Board of Directors ultimately uses the information from the EWRM Committee to determine if those residual risks are balanced by rewards or if the risks are too great and should be mitigated.

Liquidity Risk Management Liquidity risk is one of the most important risks that we manage. With every deposit we accept, we understand that we need to appropriately manage our liquidity to ensure our members have access to those funds when needed.

Accordingly, we have certain daily liquidity management strategies that we employ, as well as more long-term, overarching liquidity strategies.

We constantly monitor our members’ demands on our liquidity and evaluate the adequacy of our liquidity sources. To meet day-to-day member liquidity requirements, we keep a portion of our assets very liquid. In fact, as of December 31, 2009, we had approximately $664.0 million in cash and cash equivalents. This is significant given our total balance sheet of $3.3 billion and settlement and regular shares of just $2.0 billion. A summary of our cash and cash equivalents balances in relation to our settlement and regular share balances is shown on a quarter-end basis in Figure One. Figure One: Trended Data for Cash and Cash Equivalents compared to Settlement and Regular Shares (Dollar amounts are in millions) $2,500 $2,000 $1,500 $1,000

Settlement and Regular Shares

$1,500

Cash and Cash Equivalents

9

9

4/ 0 Q

9

3/ 0 Q

9

2/ 0 Q

8

1/ 0 Q

8

4/ 0 Q

8

3/ 0 Q

2/ 0 Q

Q

1/ 0

8

$1,500

Additionally, we generally match our members’ term certificates against assets with similar cash flows and maturities.

As a result, when a term certificate matures, there is also an asset maturing at about the same time, producing the necessary liquidity to meet our members’ needs. We are able to do this because members have historically held term certificates to maturity.

37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Review

We also mitigate our liquidity risk by monitoring our top depositors. We have limits on the maximum any one credit union may deposit with us. By striving to diversify our shares and member base, we shield ourselves from the risk of sudden withdrawals by large depositors. In fact, as of December 31, 2009, our single largest depositor represented only 5 percent of our total member shares. Additionally, average shares for the month of December 2009 were $3.5 billion compared to $3.3 billion during December 2008, a 5 percent increase. This increase in shares is clearly a strong show of support from our member credit unions since the announcement of the NCUA’s Corporate Credit Union Stabilization Plan and the guarantee of member shares under the Temporary Corporate Credit Union Share Guarantee Program (TCCUSGP).

We also strive to buy securities with readily determined market values that may be sold or borrowed against to generate liquidity. Should we need to borrow to generate liquidity, we have diversified sources of funds and we test these sources often to ensure availability. Additionally, in December 2008, to further diversity our liquidity options, we elected to voluntarily hold Reg D reserves in order to gain access to the Federal Reserve Discount Window, the ultimate backstop for liquidity.

Corporate One’s borrowing sources and remaining capacity at December 31, 2009 and 2008 are summarized in Table Five below.

Table Five: Borrowing Sources (Dollar amounts are in thousands) December 31, 2009 Source of Liquidity U.S. Central advised line of credit

Total Available $ 650,000

Federal Home Loan Bank of Cincinnati

142,300

Reverse repurchase agreements with various counterparties

Amount Outstanding $

20,000

December 31, 2008 Remaining Available $

650,000

$

22,000

$

628,000

553,900

553,900

795,200

795,200

Committed lines of credit

75,000

75,000

140,000

140,000

Federal funds lines

40,000

40,000

130,000

130,000

130,000

130,000

130,000

130,000

-

50,000

50,000

-

$ 2,224,100

$ 527,000

$ 1,697,100

TOTAL BORROWING SOURCES

$1,591,200

$

50,000

$ 1,541,200

325,000

Remaining Available

328,900

Commercial paper

$

Amount Outstanding

112,300

Temporary Corporate Credit Union Liquidity Guarantee Program

30,000

630,000

Total Available

3,900

Although Corporate One’s on-balance-sheet loan portfolio is small, we have total outstanding advised lines, committed lines and letter of credit commitments to members of approximately $1.2 billion at December 31, 2009.

All outstanding line of credit commitments are collateralized by specific or general pledges of assets by members.

Commitments to extend credit to members remain effective as long as there is no violation of any condition established in the agreement. Advances on these commitments generally require repayment within one year of the advance. Since a portion of the commitments is expected to terminate without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

38

Credit Risk Management Another material risk that we manage is credit risk. One way we mitigate credit risk is by actively managing our balance sheet to ensure that it is well diversified. We purchase investments based on high credit ratings, as assigned by Nationally Recognized Statistical Rating Organizations (NRSROs), or issued by agencies of the U.S. government or by other regulated depository institutions. Corporate One’s portfolio diversification as of December 31, 2009 is shown in Table Six by rating.

Table Six: Investment Portfolio Diversification (Dollar amounts are in thousands)

Agency

AAA

AA

A

U.S. Central Term Deposits

Below A

U.S. Central*

Cash and cash Total Book equivalents Value

Other

$611,298

Deposits with other financial Institutions Loans to members

$

Certificates of deposit

$-

Mortgage-related securities $143,917) Governmentsponsored enterprises Asset-backed securities: Student loan Credit card Auto

$100,985)

$20,489)

15,826)

-

Corporate debt

$16,642) $306,296)

$920,859)

$ 920,859

354,411

354,411)

354,411

6,865)

6,865

15,702

$-

15,702)

15,702

1,499

$-

1,499)

1,499

-

588,329) $(138,782)

-

449,547

15,826)

684)

16,510

431,298) 502,336) 59,974)

270,856) 94,215) -

45,897) 2,101) -

6,186) 24,000)

748,051) 604,838) 83,974)

(115,775) 2,811) (1,024)

632,276 607,649 82,950

-

87,505)

104,851)

-

192,356)

(3,657)

188,699

TOTAL BOOK VALUE

159,743)

1,094,593)

473,065)

169,491)

336,482)

Net unrealized losses

(2,162)

(44,479)

(74,125)

(25,177)

(109,800)

TOTAL

Total

$309,561

$6,865

Federal Home Loan BankCincinnati

Net Unrealized Gains (Losses)

611,298

$157,581) $1,050,114) $398,940) $144,314) $226,682) $611,298

24,066

663,972

3,532,710) $(255,743) $3,276,967 (255,743)

$24,066 $663,972 $3,276,967)

  *Amounts held at U.S. Central are 100 percent guaranteed by the NCUA through June 30, 2012.

39

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Review

As shown in Table Six, our portfolio remains well diversified with no one sector concentration greater than 26 percent of the book value of our total portfolio at December 31, 2009. Additionally, 90 percent of the book value of our portfolio at the end of 2009 is in cash and cash equivalents, agencies, securities rated A or higher and U.S. Central term deposits. Corporate One does not have any investments in structured investment vehicles (SIVs), collateralized debt obligations (CDOs) or commercial mortgage-backed securities.

Corporate One’s mortgage-related securities have a book value of approximately $588.3 million at December 31, 2009, which represents only 17 percent of the book value of our total investable portfolio. Of Corporate One’s mortgage-related securities, 42 percent of these securities are issued by agencies of the U.S. government or are rated AAA by at least one rating agency. The book value of our subprime mortgages comprises only 2.7 percent of the book value of our total investable portfolio and 45 percent of the subprime mortages are AAA. Table Seven details the book value of Corporate One’s investment in residential mortgage-backed and home equity asset-backed securities as of December 31, 2009.

Table Seven: Mortgage-Related Securities (Dollar amounts are in thousands) Agency

AAA

AA

A

Total

Prime collateral

$-

$ 1,130

-

2,672

$ 20,375

$ 24,177

Near-prime collateral*

$-

46,308

$ 1,253

13,804

108,587

169,952

Sub-prime collateral**

$-

43,760

10,785

-

42,007

96,552

Agency

$ 143,917

-

-

-

-

143,917

Insured

$-

9,787

8,451

166

135,327

153,731

306,296 (106,829 )

588,329 (138,782 )

TOTAL BOOK VALUE Unrealized losses TOTAL

143,917 (2,846 ) $ 141,071

100,985 (19,461 ) $ 81,524

20,489 (5,558 ) $ 14,931

$

Below A

16,642 (4,088 ) $ 12,554

$ 199,467

$ 449,547

*Based on the definition used in offering circulars **Based on 660 or lower FICO scores

Corporate One adheres to the strict requirements of NCUA Rules and Regulations Part 704.10 for any investment that fails the minimum credit rating for a corporate with Part I expanded authority. As of December 31, 2009, approximately 440 security positions are owned by Corporate One and 74 percent of those securities are rated A- or higher.

For securities rated below A- by two rating agencies, which we held as of December 31, 2009, their total amortized costs and their total fair values were $336.5 million and $226.7 million, respectively. Through December 31, 2009, we have had principal shortfalls of approximately $1.43 million. We had already anticipated these principal shortfalls and previously taken OTTI charges on these securities.

Market/Interest Rate Risk Management When members deposit funds with us, we can invest those funds in a variety of securities that closely match the duration and re-pricing characteristics of the underlying deposit, resulting in minimal mismatch. For our overnight liabilities that re-price daily, we generally invest such deposits in investments that re-price every one to three months or sooner. We generally match fixed-rate liabilities that mature in excess of one month with fixed-rate securities that have the same or approximately the same maturity. As a result of the way we manage our balance sheet, when interest rates move, the value of our floating-rate assets and liabilities does not fluctuate significantly. Movements in interest rates do affect our fixed-rate securities; however, there is typically a corresponding change in the value of the deposits matched against those fixed-rate securities.

40

Our primary interest-rate risk-measurement tool is a net economic value (NEV) test. NEV is defined as the fair value of assets less the fair value of liabilities and members’ accounts. The purpose of the NEV test is to determine whether Corporate One has sufficient capital to absorb potential changes to the market value of our assets and liabilities given sudden changes in interest rates.

Due to the spreading of the credit crisis into a liquidity crisis, the fair values of many of our securities have experienced declines. This negative trend has put significant downward pressure on our NEV and NEV ratio.

Deflated market values continue to negatively impact our NEV and NEV ratio. Beginning with the April 30, 2008 balance sheet date and continuing through the December 31, 2009 balance sheet date, we have not met the minimum NEV ratio requirements and are currently following the appropriate NCUA regulations as necessary.

Because the NEV incorporates the unrealized losses on our securities available for sale, it is losing some of its value as a tool to measure interest rate risk. Currently, the NEV and NEV ratio are more reflective of market/ spread risk. During this time of deterioration in our NEV, the fundamentals of how we manage interest-rate risk have not changed.

NEV scenarios are performed monthly, testing for sudden and sustained increases or decreases in interest rates of 100, 200 and 300 basis points. A summary of Corporate One’s NEV calculation as of December 31, 2009 and 2008 is shown in Table Eight.

Table Eight: Net Economic Value Calculation (Dollar amounts are in thousands) Net Economic Value

NEV Ratio

Actual Dollar Change from Base

As of December 31, 2009 * 300 b.p. rise in rates Base scenario

$(114,934) $ (98,684)

-3.51% -2.98%

$(16,250)

As of December 31, 2008 * 300 b.p. rise in rates Base scenario

$(353,004) $(331,469)

-10.24% -9.42%

$(21,535)

*300, 200 and 100 b.p. decline did not apply in the interest rate environment present on December 31, 2009 and 2008.

Because we invest in securities, we are also exposed to market risk due to liquidity and credit spreads. The severe dislocation in the global credit markets is causing all credit-related securities to experience deterioration in spreads and, hence, in fair values. Approximately 54 percent of Corporate One’s mark-to-market adjustment in our available-for-sale portfolio at December 31, 2009 is related to residential mortgage-backed and home equity asset-backed securities. However, the remaining amount of our unrealized losses is related to asset classes outside of the mortgage sector, primarily student loan asset-backed securities. Every student loan position we hold is graded an A or better by two NRSROs. We hold Federal Family Education Loan Program (FFELP)-backed student loan securities as well as private-issue student loans securities. We believe the unrealized losses in this sector are related to illiquidity and are not due to a lack of creditworthiness. Contagion continues to be feared in other consumer-related sectors due to the importance of the mortgage sector to the overall economy; however, these asset classes purchased by Corporate One are performing well within our expectations, with some of the subordinate tranches of our senior holdings upgraded by the rating agencies. Given the strong credit quality of our securities and our ability and intent to hold these securities until the anticipated recovery, these fair value adjustments are expected to reverse as the credit markets stabilize or the securities approach their maturity date.

To further demonstrate that market/spread risk is causing all credit-related securities to experience deterioration in fair values, we have included Table Nine which summarizes Corporate One’s net unrealized losses by credit

41

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Review

rating. As reflected in Table Nine, 18 percent of the unrealized losses are attributable to securities that are issued by agencies of the U.S. government or are rated AAA. Table Nine: Net Unrealized Losses by Credit Rating as of December 31, 2009 (Dollar amounts are in thousands) Rating

Net Unrealized Losses

Agency AAA AA A Below A-

$

(2,162) (44,479) (74,125) (25,177) (109,800)

NET UNREALIZED LOSSES ON SECURITIES

$ (255,743)

With the massive government programs instituted over the last several years, we did see liquidity beginning to return to the market in 2009. Accordingly, fair values have improved in all of our portfolios. The reduction in the net unrealized losses in our mortgage-related portfolio is also due to the recognition of losses through OTTI charges. Table Ten summarizes our net unrealized gains (losses) on securities by asset class.

Table Ten: Net Unrealized Gains (Losses) by Asset Class (Dollar amounts are in thousands) Unrealized Gains (Losses) on Available-For-Sale Securities Asset Class Mortgage-related

December 31, 2009 $

(138,782)

Student loans

December 31, 2008 $

(165,242)

(115,775)

(175,856)

2,811

(116,678)

Auto

(1,024)

(16,104)

Corporate debt

(3,657)

(31,189)

Credit cards

Government-sponsored enterprises NET UNREALIZED GAINS (LOSSES) ON AVAILABLE-FOR-SALE SECURITIES

684

$

(255,743)

42

822

$

(504,247)

Operational Risk Management Corporate One provides a variety of products and services to our members and is reliant upon the ability of our employees and systems to process a large number of transactions. Accordingly, Corporate One is exposed to a variety of operational risks, including errors and omissions, business interruptions, improper procedures, and vendors that do not perform in accordance with outsourcing arrangements. These risks are less direct than credit and interest rate risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper procedures, we could suffer financial loss and other damage, including harm to our reputation.

To mitigate and control operational risk, Corporate One developed comprehensive policies and procedures designed to provide a sound and well-controlled operational environment. All critical vendor relationships are reviewed on an annual basis and a financial analysis of our major business partners is completed. Corporate One also engages an accounting firm to perform periodic internal audit procedures on the internal controls of Corporate One. This firm reports on such procedures to Corporate One’s Supervisory and EWRM Committees and Board of Directors. Additionally, business continuity plans exist and are tested for critical systems, and redundancies are built into the systems as deemed appropriate.

43

REPORT FROM THE SUPERVISORY COMMITTEE Financial Review

S U P E RVI S O RY C O M M ITTE E (pictured left to right) Fritz Comes, Directions CU Sonja Delaney, Midwest Community FCU R. Lee Powell (Board Liaison), DESCO FCU Jeff Meyer (Chairman), Three Rivers FCU

Corporate One’s 2009 financial statements, prepared by management, were audited in accordance with auditing standards generally accepted in the United States of America by Crowe Horwath LLP, independent auditors. Crowe Horwath’s report on Corporate One’s financial statements is included within this annual report.

In addition to the annual audit, Schneider Downs & Co., a Public Accounting Firm, has been contracted by the Supervisory Committee to perform internal audits of select processes, controls and systems of Corporate One, and report quarterly on such procedures to the Supervisory Committee.

Based on the annual audit and internal audit procedures, the Supervisory Committee is confident that Corporate One is subjected to a thorough and professional examination process.

44

REPORT OF INDEPENDENT AUDITORS

Supervisory Committee and Board of Directors Corporate One Federal Credit Union Columbus, Ohio We have audited the accompanying balance sheets of Corporate One Federal Credit Union (Corporate One) as of December 31, 2009 and 2008, and the related statements of operations, changes in members’ equity and cash flows for the years then ended. These financial statements are the responsibility of Corporate One’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.

As more fully described in Note 2(k) to the financial statements, Corporate One has reported share accounts as equity in the balance sheets and statements of changes in members’ equity that, in our opinion, should be reported as liabilities in order to conform with accounting principles generally accepted in the United States of America. If these share accounts had been presented as liabilities, total liabilities would increase and members’ equity would decrease by $3.4 billion as of December 31, 2009 and 2008.

In our opinion, except for the effects on the balance sheet and statement of changes in members’ equity of reporting share accounts as members’ equity, as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Corporate One Federal Credit Union as of December 31, 2009 and 2008, 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.

As disclosed in Note 2(r) to the financial statements, during 2009 Corporate One changed its method of accounting for other-than-temporary impairments to comply with new accounting guidance.

As a result of Corporate One’s net losses during 2009 and 2008, primarily due to impairment losses related to its investments in U.S. Central and securities, and the resulting decline in members’ equity at December 31, 2009 and 2008, Corporate One has not met certain regulatory requirements as described in Note 14 to the financial statements. Corporate One has reported these matters to its regulator, the National Credit Union Administration (NCUA), and has received regulatory forbearance. Corporate One’s management has also initiated various action steps, which have been accepted by the NCUA. However, the NCUA could impose further requirements on Corporate One.

Crowe Horwath LLP

Columbus, Ohio April 2, 2010

45

BALAN CE S H E ETS Financial Review

December 31, Assets

2009

Cash and cash equivalents

$

Investments in financial institutions Available-for-sale securities, at fair value Held-to-maturity securities (fair value 2009 $2,445,133; 2008 - $4,042,433) Loans to members Accrued interest receivable Other assets TOTAL ASSETS

663,971,651

2008 $

510,718,922

628,498,536

632,411,323

1,975,497,702

2,306,087,701

2,133,516

5,704,593

6,865,127

33,874,817

5,701,886

13,372,284

16,463,973

17,618,163

$

3,299,132,391

$

3,519,787,803

$

50,000,000

$

527,000,000

Liabilities and Members' Equity Liabilities: Borrowed funds Dividends and interest payable

7,430,782

18,371,387

Accounts payable and other liabilities

2,480,895

3,614,606

59,911,677

548,985,993

Settlement and regular shares

2,010,842,686

1,285,448,587

Share certificates

1,314,800,500

2,016,822,484

119,989,791

116,277,742

25,681,996

25,681,996

TOTAL LIABILITIES

Members' equity:

Member capital shares Paid-in capital Reserves and undivided earnings

23,648,496

Accumulated other comprehensive loss TOTAL MEMBERS' EQUITY

TOTAL LIABILITIES AND MEMBERS' EQUITY

30,818,302

(255,742,755 )

(504,247,301

3,239,220,714

$

See accompanying notes to financial statements.

 

46

3,299,132,391

2,970,801,810

$

3,519,787,803

S TATE M E NTS OF OPE RATI ON S

Year ended December 31, 2009

2008

Interest income: Investments and securities

$

Loans to members

76,445,906

$

158,751,880

493,883

1,004,011

76,939,789

159,755,891

52,665,867

114,673,579

6,602,486

17,052,879

TOTAL DIVIDEND AND INTEREST EXPENSE

59,268,353

131,726,458

NET INTEREST INCOME

17,671,436

28,029,433

12,816,772

12,595,384

(160,131,041 )

(43,383,435 )

TOTAL INTEREST INCOME Dividend and interest expense: Share accounts Other borrowings

Service fee income, net Net loss on investments: Total other-than-temporary impairment losses Portion of loss recognized in other comprehensive income

117,576,080

Net impairment losses recognized in earnings

(42,554,961 )

(43,383,435 )

Impairment of capital investment in U.S. Central

(15,102,775 )

(55,717,204 )

Net (loss) gain on early certificate redemptions

(34,537 )

TOTAL NET LOSS ON INVESTMENTS

5,044,422

(57,692,273 )

(94,056,217 )

Salaries and employee benefits

9,194,234

10,062,010

Office operations and occupancy expense

5,610,638

6,617,124

338,133

2,445,673

15,143,005

19,124,807

Operating expenses:

Other operating expenses TOTAL OPERATING EXPENSES

NET LOSS

$

See accompanying notes to financial statements.

 

47

(42,347,070 )

$

(72,556,207 )

STATE M E NTS OF CHAN G E S I N M E M B E R S’ E QU ITY

Balance at January 1, 2008

Total Share Accounts

Paid-In Capital

Reserves and Undivided Earnings

$ 3,583,370,497

$ 25,681,996

$ 104,171,179

Accumulated Other Comprehensive Loss $

Total Members' Equity

(74,137,274 ) $ 3,639,086,398

Comprehensive income (loss): Net loss Other comprehensive loss: Change in net unrealized loss on available-for-sale securities

(72,556,207 )

Reclassification adjustment recognized in earnings for other-than-temporary declines in values of securities

(72,556,207 )

(473,493,462 )

(473,493,462 )

43,383,435

43,383,435

Comprehensive loss Net change in total share accounts

(502,666,234 )

(164,821,684 )

(164,821,684 )

Dividends on paid-in capital Balance at December 31, 2008

(796,670 ) 3,418,548,813

25,681,996

30,818,302

(504,247,301 )

2,970,801,810

3,418,548,813

25,681,996

35,498,289 66,316,591

(35,498,289 ) (539,745,590 )

2,970,801,810

Adjustment to initially apply Accounting Standard Codification (ASC) 320-10-65-1 Balance at January 1, 2009

(796,670 )

Comprehensive income (loss): Net loss Other comprehensive income: Change in net unrealized loss on available-for-sale securities

(42,347,070 )

Reclassification adjustment recognized in earnings for other-thantemporary declines in values of securities Comprehensive income Net change in total share accounts

241,447,874

241,447,874

42,554,961

42,554,961 241,655,765

27,084,164

27,084,164

Dividends on paid-in capital Balance at December 31, 2009

(42,347,070 )

(321,025 ) $ 3,445,632,977

$ 25,681,996

See accompanying notes to financial statements.

  48

$ 23,648,496

(321,025 ) $ (255,742,755 ) $ 3,239,220,714

STATE M E NTS OF CAS H FLOWS

Year ended December 31, 2009 2008 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation Net accretion Loss on U.S. Central capital investment Net loss on financial instruments Net loss (gain) on early certificate redemptions Net gain on disposals of assets Net change in accrued interest receivable Net change in dividends and interest payable Other, net NET CASH PROVIDED BY OPERATING ACTIVITIES

$

(42,347,070)

$

(72,556,207)

1,555,339) (8,286,369) 15,102,775) 42,554,961) 34,537) (5,815) 7,670,398) (10,940,605) (2,256,594) 3,081,557)

2,131,675) (2,787,115) 55,717,204) 43,383,435) (5,044,422) (2,645) 7,941,560) (5,524,071) (3,506,044) 19,753,370)

(11,189,988)

288,665,730)

678,061,696) (94,671,071)

694,205,623) (1,015,128,054)

666,072)

27,009,690) 1,174,801) (614,445) 5,815) 600,442,570)

101,912) (2,000,000) 80,000) (6,015,585) (26,784) (1,993,452) 7,282) (42,103,328)

(477,000,000) 27,049,627) (321,025) (450,271,398)

185,596,000) (159,777,262) (796,670) 25,022,068)

$

2,672,110) 508,046,812) 510,718,922)

$

138,047,199)

Securities transferred from Available-for-Sale to Held-to-Maturity

$

5,704,593)

Conversion of U.S. Central Membership Capital Shares to Paid-in Capital II

$

27,448,677)

Cash flows from investing activities: Net change in investments in financial institutions Available-for-sale securities: Maturities and principal paydowns Purchases Held-to-maturity securities: Maturities and principal paydowns Investment in credit union service organizations (CUSOs) Dividends received from investments in CUSOs Net change in loans to members Net change in NCUA share insurance deposit Net purchase of property and equipment Proceeds from sale of property and equipment NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Cash flows from financing activities: Net change in borrowed funds Change in shares and deposits Dividends on paid-in capital NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES Net increase in cash and cash equivalents CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR

$

153,252,729) 510,718,922) 663,971,651)

Supplemental disclosure: Dividends on share accounts and interest paid

$

70,529,983)

See accompanying notes to financial statements.

 

49

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

(1) Organization The purpose of Corporate One Federal Credit Union (Corporate One) is to foster and promote the economic well-being, growth and development of our membership base through fiscally responsible and effective funds management, along with loan, investment, and correspondent services for the ultimate benefit of our credit union members. Corporate One’s national field of membership includes state- and federally chartered credit unions and other credit union organizations primarily in the Midwestern part of the United States. Corporate One’s Board of Directors is composed of executive management from Corporate One’s member credit unions.

(2) Summary of Significant Accounting Policies The following is a description of the more significant accounting policies Corporate One follows in preparing and presenting our financial statements. (a) Use of Estimates The accounting and reporting policies of Corporate One conform with accounting principles generally accepted in the United States of America (GAAP) and prevailing practices within the financial services industry, except as discussed in Note 2(k). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Specifically, management has made assumptions in estimating the fair value of financial instruments, the assessment of other-than-temporary impairment and the amortization/ accretion of premiums/discounts on investments subject to prepayment. Actual results could differ from those estimates. (b) Cash and Cash Equivalents Cash and cash equivalents include cash, amounts due from depository institutions, overnight amounts at U.S. Central and federal funds sold. Net cash flows are reported on the accompanying statements of cash flows for loans, shares and certain other items.

Corporate One is required to maintain cash or deposits with the Federal Reserve Bank. The required amount at December 31, 2009 and 2008 was $72.3 million and $3.0 million, respectively. In December 2008, to further diversify our liquidity options, we elected to voluntarily hold Reg D reserves in order to gain access to the Federal Reserve Discount Window. Therefore in 2009, we were required to maintain cash or deposits in amounts greater than in prior years. (c) Securities Purchased Under Agreements to Resell Corporate One purchases certain securities under agreements to resell the same securities at a later date.

Corporate One uses a custodian to hold the securities in this type of arrangement and signs a tri-party agreement with the custodian and seller as agreed upon. The fair values of the securities purchased are monitored and additional collateral is obtained for these transactions if the fair values of the securities decline. (d) Investments in Financial Institutions Investments in financial institutions are carried at cost and reviewed for impairment. These investments consist of interest-bearing term deposits primarily in U.S. Central and other federally insured depository institutions, and Federal Home Loan Bank (FHLB) of Cincinnati stock. (e) Securities Debt securities are classified as held to maturity and carried on the balance sheet at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Available-for-sale securities are carried on the balance sheet at fair value. Unrealized gains and losses on available-for-sale securities are excluded from earnings, and are reported as a separate component of members’ equity. Such securities may be sold in response to changes in interest rates, changes in prepayment risk or other factors.

50

Amortization of premiums and accretion of discounts are recorded as adjustments to interest income from securities using the interest method. Realized gains and losses on the sale of available-for-sale securities are credited or charged to earnings when realized based on the specific-identification method.

Available-for-sale and held-to-maturity securities are evaluated individually to determine if a decline in fair value below the amortized cost is other than temporary. To determine whether the impairment is other than temporary, we consider whether we have the intent to sell any of the securities or if it is more likely than not that we will be required to sell any of our securities before their anticipated recovery. Corporate One also considers the reasons for the impairment and the severity and duration of the impairment. If the impairment was determined to be other than temporary, the cost basis of the security would be written down to fair value as a new cost basis and the amount of the write-down would be included in earnings.

In 2009, accounting guidance changed regarding the recognition and presentation of other-than-temporary impairment. This guidance modified existing requirements for determining when an other-than-temporary impairment exists in debt securities, and how such other-than-temporary impairments are measured and reported. In 2009, the amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount of the total impairment related to all other factors is recognized in other comprehensive income (loss). The total other-than-temporary impairment is presented in the accompanying statements of operations with an offset for the amount of total other-than-temporary impairment that is recognized in other comprehensive income (loss). In 2008, other-than-temporary impairment charges recognized in earnings reflected the difference between the amortized cost of the security and its fair value, thereby recognizing not only the credit losses but losses related to other factors as well. See Note 2 (r) for further discussion regarding this change in accounting. (f) Loans to Members Loans to members consist of settlement loans, demand loans, certificate-secured loans and term loans.

Loans are stated at the current principal amount outstanding. Interest income is accrued on the daily balance outstanding at the borrowing rate. Corporate One evaluates each member’s creditworthiness on a case-by-case basis. Loans are generally collateralized by member’s share accounts and other member assets.

An allowance for loan losses was not considered necessary at December 31, 2009 and 2008 based on management’s continuing review and evaluation of the loan portfolio and its judgment as to the effect of economic conditions on the portfolio. The evaluation by management includes consideration of past loan loss experience, changes in the composition of the loan portfolio, the current financial condition of the borrower, quality of the collateral and the amount of loans outstanding.

Corporate One incurred no loan losses in either 2009 or 2008 and considers no loans impaired as of, or during the years ended December 31, 2009 and 2008. (g) Property and Equipment Property and equipment, included in other assets on the balance sheets, are stated at cost net of accumulated depreciation. Depreciation is computed using the straight-line method and is based on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. (h) Income Taxes Corporate One is exempt from federal and state income tax pursuant to Section 501(c)(1) of the Internal Revenue Code and Section 122 of the Federal Credit Union Act, respectively. (i) Securities Sold Under Agreements to Repurchase Corporate One sells certain of its securities under agreements to repurchase the same securities and pledges assets as collateral under these borrowings.

51

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

(j) Financial Instruments and Concentrations of Credit Risk Financial instruments that potentially subject Corporate One to concentrations of credit risk consist of federal funds sold, securities purchased under agreements to resell (repurchase), deposits and capital investments at U.S. Central and investment securities. Corporate One invests in and borrows from highly rated domestic banks, and uses nationally recognized broker/dealers in the execution of trades for financial instruments. Exposure to individual counterparties or asset classes may be significant. Corporate One’s exposure to U.S. Central is discussed in Note 3 and investment securities in Note 5. Additionally, in providing financial services solely to the credit union industry, Corporate One is dependent upon the viability of that industry and the industry’s support of corporate credit unions.

Corporate One mitigates risks related to these concentrations through thorough evaluation of credit quality of the assets it purchases and the creditworthiness of its business partners. Counterparty risk is managed by ensuring that market counterparties are institutions of high credit quality and appropriate levels of collateral are maintained, if necessary. (k) Members’ Share Accounts Members’ share accounts are classified as equity to denote the ownership interest of the members. This classification conforms to the regulatory requirements of the National Credit Union Administration (NCUA).

GAAP requires savings accounts to be classified as liabilities. The American Institute of Certified Public Accountants published a guide opining that credit unions’ savings accounts should be classified as liabilities, which is “consistent with the prevailing practice of mutually owned savings and loan associations and savings banks.” We believe that credit unions are fundamentally dissimilar to mutually owned savings and loan associations and savings banks, which, for example, accept deposits from the general public and usually are not democratically controlled by their members.

If members’ shares had been presented as liabilities, total liabilities would increase and members’ equity would decrease by $3.4 billion as of December 31, 2009 and 2008. If Corporate One had classified members’ share accounts as liabilities, in accordance with GAAP, members’ equity as of December 31, 2009 and 2008 would have been $(206.4) million and $(447.7) million, respectively.

The following table summarizes GAAP capital (accumulated deficit) balances.

2009 Reserves and undivided earnings

$

Paid-in capital Accumulated other comprehensive loss Total GAAP accumulated deficit

$

2008 23,648)

$

30,818)

25,682)

25,682)

(255,743)

(504,247)

(206,413)

$

(447,747)

Credit unions transacting business with Corporate One are required to be a Partner member or an Associate member.

Membership capital shares (MCS) are required for Partner membership in Corporate One. Partner members enjoy Corporate One’s most favorable rates on their investments and enjoy the lowest fees on settlement services. MCS do not have a stated maturity. Notice of intent to decapitalize by the Partner member is required and once notification is given, the shares will be redeemed in three years. These shares are not subject to share insurance coverage by the National Credit Union Share Insurance Fund (NCUSIF) and, in the event of liquidation of Corporate One, are payable only after satisfaction of all other claims. At December 31, 2009 and 2008, there were $5.3 million and $1.1 million of shares on notice, respectively. Of those totals, approximately $1.0 million at both December 31, 2009 and 2008 represents capital of members merging into other credit unions.

52

Corporate One also offers an Associate membership. Associate members are required to maintain a $5 deposit.

They may earn lower rates than Partner members on their investments with Corporate One and pay fees on settlement services with Corporate One according to the Associate member fee schedules. (l) Paid-In Capital Paid-In Capital (PIC) shares are investments by member credit unions and denote their ownership interest in Corporate One. PIC has no stated maturity date. Notice of intent to decapitalize by the Partner member is required and once notification is given, the shares are redeemed in 20 years. PIC earns dividends that are non-cumulative, is not subject to share insurance coverage by the NCUSIF and, in the event of liquidation of Corporate One, is payable only after satisfaction of all other claims and the repayment of MCS. PIC is classified as equity in the financial statements. At December 31, 2009 and 2008, there were $375,000 of shares on notice. (m) Reserves and Undivided Earnings Reserves and undivided earnings represent earnings not distributed as dividends to members. Portions of earnings are set aside as reserves in accordance with Corporate One’s policy and the NCUA’s rules and regulations. (n) Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on available-for-sale securities. Effective January 1, 2009, comprehensive income (loss) also includes non-credit losses on available-for-sale and heldto-maturity securities in accordance with new accounting guidance related to other-than-temporary impairment discussed in Note 2(r). (o) Service Fees Service fees are earned on various services provided to credit unions and their affiliates. These services include ACH and ATM/Debit programs, depository services, share draft processing, and certificate of deposit and securities brokering. Revenue is recognized in the period in which services are rendered. Gross service fee income for the years ending December 31, 2009 and 2008 was $20.2 million and $21.1 million, respectively.

Revenues on the accompanying statements of operations are reduced by third-party costs incurred to provide these services. These third-party costs were $7.4 million and $8.5 million for the years ended December 31, 2009 and 2008, respectively. (p) Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there currently are such matters that will have a material effect on the financial statements. (q) Reclassifications Certain reclassifications have been made in the prior year’s financial statements to conform to the presentation for the year ended December 31, 2009. These reclassifications had no impact on total assets, total liabilities and members’ equity or net loss. (r) Recent Accounting Pronouncements In April 2009, the Financial Accounting Standards Board (FASB) amended existing guidance for determining when an other-than-temporary impairment exists, and how such other-than-temporary impairments are measured and reported for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria,

53

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. As a result of adopting this new guidance, effective January 1, 2009, Corporate One reclassified $35.5 million of non-credit losses included in previous OTTI charges from reserves and undivided earnings to accumulated other comprehensive income (loss).

In April 2009, the FASB issued guidance that emphasizes that the objective of a fair value measurement does not change even when market activity for the asset or liability has decreased significantly. Fair value is the price that would be received for an asset sold or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When observable transactions or quoted prices are not considered orderly, then little, if any, weight should be assigned to the indication of the asset’s or liability’s fair value. Adjustments to those transactions or prices should be applied to determine the appropriate fair value. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, and must be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. Corporate One adopted this new guidance effective January 1, 2009.

The adoption of this new guidance did not have a material effect on Corporate One’s financial statements.

In May 2009, the FASB issued guidance that requires the effects of events that occur subsequent to the balance-sheet date be evaluated through the date the financial statements are either issued or available to be issued. Companies should disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. Companies are required to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance-sheet date (recognized subsequent events).

Companies are also prohibited from reflecting in their financial statements the effects of subsequent events that provide evidence about conditions that arose after the balance-sheet date (non-recognized subsequent events), but requires information about those events to be disclosed if the financial statements would otherwise be misleading. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, and must be applied prospectively. Management has performed an analysis of activities and transactions subsequent to December 31, 2009 to determine the need for any adjustments to and/or disclosures within the audited financial statements for the year ended December 31, 2009. Management has performed such analysis through April 2, 2010 and determined that no adjustments were necessary.

In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards CodificationTM (The Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for financial statements issued for periods ending after September 15, 2009.

References to GAAP in these notes to the financial statements are provided under the Codification structure where applicable. (s) Regulatory Pronouncements In January 2009, the NCUA issued an Advance Notice of Proposed Rulemaking (ANPR) which seeks to solicit comments and input from credit unions as to the future role of corporate credit unions in the credit union system.

Specifically, the NCUA requested comments from credit unions in the areas of payments systems, liquidity and liquidity management, field of membership, expanded investment authority, two-tiered corporate credit union structure, capitalization, permissible investments, credit risk management, asset/liability management and corporate governance.

54

In January 2009, the NCUA announced the Corporate Credit Union Stabilization Fund Legislation Proposal.

The proposed legislation creates a stabilization fund by providing the NCUA Board a wide range of options in making assessments over a period of years to restore the NCUSIF to at least a 1.3 percent equity level. The NCUA has publicly announced that the losses related to the NCUA’s efforts to stabilize the corporate credit union system exceed the insurance fund’s retained earnings and are expected to impair, by 69 percent, the NCUSIF deposit insured credit unions hold as an asset on their books. Accordingly, Corporate One recognized the 69 percent impairment of its NCUSIF deposit as of December 31, 2008. The impairment charge of $427,000 is included in other operating expenses in the accompanying statements of operations for the year ended December 31, 2008.

In June 2009, the NCUA distributed Letter No: 09-CU-14, outlining the benefits and requirements of new legislation, Helping Families Save Their Homes Act of 2009 (Helping Families Act), related to the credit union network. The letter describes the actions taken to implement the legislation and summarizes the impact of the actions on the NCUSIF capitalization deposit and premium assessment. Credit unions’ NCUSIF deposits were restored to their original value; and the method to calculate the premium assessment changed to 15 basis points (bps) on members’ accounts up to $250,000. The net recovery of $411,000 is included in other operating expenses in the accompanying statements of operations for the year ended December 31, 2009.

In November 2009, the NCUA distributed proposed revisions to NCUA Regulations Part 704; the rule governing corporate credit unions. The major revisions involve corporate credit union capital, investments, asset/liability management, governance and credit union service organization (CUSO) activities. The revisions would establish a new capital scheme including risk-based capital requirements; impose new prompt corrective action requirements; place various new limits on corporate investments; impose new asset/liability management controls; amend some corporate governance provisions; and limit a corporate CUSO to categories of services pre-approved by the NCUA. More specifically, the proposed regulation sets forth three main capital requirements. It requires a 4 percent or greater leverage ratio, a 4 percent or greater Tier 1 risk-based capital ratio and an 8 percent or greater total risk-based capital ratio. The proposed regulation requires these ratios to be met one year after the publication of the final rule. With a current capital ratio of 4.35 percent, Corporate One could achieve the three main capital requirements in the proposed regulation if the member credit unions supported a conversion of existing capital instruments to a qualifying capital instrument under the proposed regulation. In addition, 36 months after the final rule is published, a corporate credit union also would be required to report its ratio of retained earnings to its moving daily average net assets (DANA). If this ratio is less than 0.45 percent, the corporate credit union must submit a retained earnings accumulation plan to the NCUA for approval. As of December 31, 2009, Corporate One meets this requirement, as our ratio of retained earnings to DANA is 0.61 percent.

The NCUA has received a considerable number of comments on the proposed revisions to the regulation.

Additionally, the NCUA has reported that they intend to issue a proposed solution for the legacy assets held by the corporate credit union network. They also have indicated that they may re-publish the proposed revisions to the regulation for comment based on feedback from the legacy asset proposal. Therefore, it is still too early to predict what impact changes resulting from the proposed revisions might have on Corporate One or the corporate credit union system.

55

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

(3) Investments in Financial Institutions Investments in financial institutions at December 31 are summarized as follows: 2009

2008

U.S. Central: Share certificates

$

599,020

$

Membership capital shares

15,103

Other shares Federal Home Loan Bank stock Certificates of deposit TOTAL INVESTMENTS IN FINANCIAL INSTITUTIONS

586,872

$

12,278

12,238

15,702

15,702

1,499

2,496

628,499

$

632,411

On January 28, 2009, U.S. Central received a $1.0 billion capital note from the NCUSIF to be treated as paidin-capital for regulatory purposes. This capital note has priority over any other capital accounts at U.S. Central.

On January 29, 2009, the NCUA Board approved the Temporary Corporate Credit Union Share Guarantee Program (TCCUSGP), under which the NCUSIF guaranteed U.S. Central’s member shares in excess of the $250,000 share insurance already provided. On March 20, 2009, in accordance with the Federal Credit Union Act, the NCUA placed U.S. Central into conservatorship and appointed itself as conservator. On April 21, 2009, the NCUA approved revisions to the TCCUSGP. The revised TCCUSGP extended the share guarantee and allows the NCUA the option for quarterly extensions, as deemed necessary. Certificates issued under the revised TCCUSGP are guaranteed only if they have a maturity of two years or less. Existing certificates issued under the original TCCUSGP guarantee are covered under the original guarantee until the guarantee expires, or the maturity of the certificate, whichever occurs first. During 2010, the revised TCCUSGP was extended by the NCUA to June 30, 2012. Pursuant to a Congressional amendment of the Federal Credit Union Act that established the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) – a separate fund under the control of the NCUA – in June 2009, the NCUA legally transferred the obligation to pay claims under the TCCUSGP to the TCCUSF. Under the definitions of MCS and PIC in Part 704.2 of Rules and Regulations of the NCUA (Part 704.2); capital is available to cover losses that exceed retained earnings. In May 2009, the NCUA published Letter to Credit Unions 09-CU-10, reinforcing the regulatory requirement in Part 704.2 that PIC and MCS are available to cover losses that exceed retained earnings and stated that when there is an accumulated deficit (retained earnings deficit) at a corporate credit union, PIC and MCS must be depleted to the extent necessary to eliminate the accumulated deficit. Prior to December 31, 2009, Corporate One maintained U.S. Central paid-in-capital, paid-in-capital II and membership capital shares (USC Capital Shares). On June 30, 2009, in order to cover their accumulated deficit; U.S. Central depleted a portion of USC Capital Shares. Corporate One recorded a corresponding impairment of $55.7 million effective December 31, 2008. As of December 31, 2008, Corporate One maintained a balance of USC Capital Shares of $15.1 million. As of December 31, 2009, although U.S. Central had not fully depleted our remaining USC Capital Shares, we made a determination that our remaining investment was impaired. Accordingly, in 2009, we recorded impairment charges of $15.1 million representing the remaining balance of our USC Capital Shares.

56

U.S. Central certificates by maturity at December 31, 2009 are summarized as follows: Year of Maturity: 2010

$

307,729

2011

191,265

2012

42,025

2013

58,001

TOTAL SHARE CERTIFICATES

$

599,020

  All U.S. Central share certificates held as of December 31, 2009 are guaranteed by the NCUA and therefore not considered impaired. Other shares consist of an account in which U.S. Central directs the associated dividends to the National Credit Union Foundation Community Investment Fund. Funds can be withdrawn from this account after a 90-day notice period.

Corporate One also maintains overnight and federal funds accounts at U.S. Central, which are classified as cash and cash equivalents in the accompanying balance sheets. At December 31, 2009 and 2008, overnight and federal funds at U.S. Central totaled $309.6 million and $423.0 million, respectively.

All shares and certificates with U.S. Central, except USC Capital Shares, are pledged under our advised line of credit agreement as further discussed in Note 8.

As a member of the FHLB of Cincinnati, Corporate One is required to own a certain amount of stock based on its level of borrowings and other factors. Corporate One views its investment in the FHLB as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value. Based on our review of the financial condition of the FHLB of Cincinnati, Corporate One does not believe that its investment in the FHLB was impaired as of or for the year ended December 31, 2009.

Certificates of deposit are with various domestic banks and credit unions and are all within the insurance limits as set forth by the Federal Deposit Insurance Corporate (FDIC) and/or the NCUA. As of December 31, 2009, these certificates have specific maturities of $1.3 million due in one year or less and $200,000 due after one year through three years.

(4) Securities Purchased Under Agreements to Resell Corporate One had no securities purchased under agreements to resell during 2009. The average balance of securities purchased under agreements to resell was $11.5 million for the year ended December 31, 2008. The highest month-end balance during 2008 was $300.0 million.

57

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

(5) securities The amortized costs and fair values of securities at December 31 are summarized as follows: 2009 Amortized Cost Available-for-sale securities: Government-sponsored enterprises Corporate debt securities

$

Mortgage-related securities Asset-backed securities TOTAL AVAILABLE-FOR-SALE SECURITIES

15,826 192,356

Gross Unrealized Gains $

Gross Unrealized Losses

684

Fair Value $

$

16,510 188,699

(3,657)

582,337

728

(135,651)

447,414

1,436,863

12,460

(126,448)

1,322,875

13,872

$ (265,756)

$ 1,975,498

$2,227,382

Amortized Cost

$

Gross Unrecognized Gains

Gross Unrecognized Losses

Fair Value

Held-to-maturity securities: Mortgage-related securities

$

2,134

$

311

$

2,445

TOTAL HELD-TO-MATURITY SECURITIES

$

2,134

$

311

$

2,445

2008 Amortized Cost Available-for-sale securities: Government-sponsored enterprises

$

76,113

Corporate debt securities Mortgage-related securities Asset-backed securities TOTAL AVAILABLE-FOR-SALE SECURITIES

Gross Unrealized Gains $

Gross Unrealized Losses

822

Fair Value $

191,954 776,160

555

(31,189) (165,797)

160,765 610,918

1,766,108

51

(308,689)

1,457,470

1,428

$ (505,675)

$ 2,306,088

$ 2,810,335

Amortized Cost

$

76,935

$

Gross Unrecognized Gains

Gross Unrecognized Losses

Fair Value

Held-to-maturity securities: Mortgage-related securities

TOTAL HELD-TO-MATURITY SECURITIES

$

5,705

$

(1,663)

$

4,042

$

5,705

$

(1,663)

$

4,042

 

58

Mortgage-related securities consist of: private-label mortgage-backed securities, mortgage-backed securities issued by Fannie Mae or Freddie Mac and asset-backed home-equity securities. Asset-backed securities consist primarily of securitized credit card, student loan and automobile receivables.

The expected distributions of securities at December 31, 2009 are reflected in the following table. Because the actual lives of mortgage-related securities, certain asset-backed securities, and investments in governmentsponsored enterprises can differ from contractual maturities due to call or prepayment features, these items are presented separately. As of December 31, 2009, mortgage-related securities, asset-backed securities, and investments in government-sponsored enterprises have weighted-average expected lives of approximately 3.8 years, 5.3 years, and 1.3 years, respectively.

Available-for-Sale Fair Value Due after one year through five years Due after five years through 10 years Due after 10 years

$

Held-to-Maturity Amortized Cost

Fair Value

340,549 385,119 70,681

Residential mortgage-backed securities: Agency Non-Agency Asset-backed securities Government-sponsored enterprises

141,070 306,344 715,225

$

2,134

$

2,445

$

2,134

$

2,445

16,510 $ 1,975,498

 

At December 31, 2009, approximately 83 percent of the par value amount, or $1.9 billion, of Corporate One’s securities were variable-rate securities, the majority of which had interest rates that reset monthly or quarterly, predominantly based upon LIBOR. Of these variable-rate securities, 14 percent of the dollar amount, or $259.1 million of such securities had interest rate caps that were fixed at the time of issuance and the caps range from 7 percent to 18 percent. Less than 0.4 percent of the dollar amount of variable-rate securities had interest rate caps that fluctuate depending on the resetting of the interest rate on the underlying collateral of the security.

59

NOTES TO FINANCIAL STATEMENTS   Financial Review

(table dollar amounts in thousands)

The gross unrealized losses on investment securities that have been in loss positions less than 12 months and longer than 12 months at December 31 are summarized as follows: 2009 Less Than 12 Months Fair Value

Unrealized Losses

Available-for-sale: Corporate debt securities Mortgage-related securities Asset-backed securities

12 Months or Longer Fair Value

Total

Unrealized Losses

$ 188,699 $

(3,657)

Fair Value $

Unrealized Losses

188,699 $

(3,657)

414,754 981,770

(135,651) (125,288)

414,754 1,052,157

(135,651) (126,448)

1,585,223

(264,596)

1,655,610

(265,756)

Held-to-maturity: Mortgage-related securities

2,134

(3,859)

2,134

(3,859)

TOTAL HELD-TO-MATURITY

2,134

(3,859)

2,134

(3,859)

TOTAL AVAILABLE-FOR-SALE

TOTAL TEMPORARILY IMPAIRED SECURITIES

$ 70,387 $ (1,160) 70,387

(1,160)

$ 70,387 $ (1,160)

$ 1,587,357 $ (268,455)

$ 1,657,744 $ (269,615)

2008 Less Than 12 Months Fair Value Available-for-sale: Corporate debt securities Mortgage-related securities Asset-backed securities TOTAL TEMPORARILY IMPAIRED SECURITIES

Unrealized Losses

$ 35,837 $ (1,808)

12 Months or Longer Fair Value

Unrealized Losses

$ 124,928

$ (29,381)

(19,648) (70,973)

368,019 716,730

(146,149) (237,716)

$ 936,487 $ (92,429)

$1,209,677

$ (413,246)

165,718 734,932

Total Fair Value $

Unrealized Losses

160,765 $ 533,737 1,451,662

(31,189) (165,797) (308,689)

$ 2,146,164 $ (505,675)

Corporate One believes the decline in fair values of our corporate debt and asset-backed securities are primarily attributable to the deterioration of liquidity and larger risk premiums in the market consistent with the broader credit markets and are not a result of the performance of the underlying collateral or credit quality supporting the securities. Management believes the unrealized losses on the mortgage-related securities are the result of historically high defaults, delinquencies and loss severities on mortgages underlying the mortgage-related securities, as well as the deterioration of liquidity due to an imbalance between the supply and demand for these securities. We expect the fair value to recover as the securities approach their maturity date or as the credit markets stabilize. Corporate One does not intend to sell nor is it more likely than not that we will be required to sell these securities prior to a price recovery or maturity. Accordingly, Corporate One determined that there was no additional other-than-temporary impairment of its securities at December 31, 2009 above the $42.6 million recorded in the accompanying statement of operations.

Under the NCUA expanded authorities granted to Corporate One in accordance with NCUA Rules and

60

Regulations Part 704, long-term credit ratings for security purchases must be A or higher by Nationally Recognized Statistical Rating Organizations (NRSROs). As of December 31, 2009, Corporate One owned 89 securities, with a total amortized cost of $336.5 million, that had been downgraded below the NCUA minimumrating requirement. As a result of these credit rating downgrades, Corporate One filed the necessary Investment Action Plans (IAP) with the NCUA in accordance with Part 704.10 and requested permission to continue to hold the downgraded securities. Corporate One has received permission from the NCUA to continue to hold all of our downgraded securities, except for a few recently filed IAPs. We anticipate that permission will be granted for these recent filings.

At December 31, 2009, 1.4 percent of our gross unrealized losses is related to corporate debt securities. Our corporate debt holdings represent eight securities, four of which were rated AA and four rated A by NRSROs. Unrealized losses on asset-backed securities represent 47.6 percent of our gross unrealized losses at December 31, 2009. None of these securities were rated below BB at December 31, 2009. The amortized costs, fair values and credit grades of asset-backed securities at December 31, 2009 are summarized as follows: Amortized Cost Student loans Credit cards

$

 

$

Gross Unrealized Loss

Highest* Credit Grade

Lowest* Credit Grade

752 9,931

$ (116,527) (7,121)

AAA AAA

A BB

AAA

BBB

748,049 604,839

$ 632,274 607,649

83,975

82,952

1,777

(2,800)

$ 1,436,863

$1,322,875

$ 12,460

$ (126,448)

Automobiles ASSET-BACKED SECURITIES

Fair Value

Gross Unrealized Gain

*Credit grades are as of December 31, 2009 and are provided by the same NRSROs used at the time of purchase.

Three asset-backed securities that were rated below A, one is securitized by automobile receivables, is guaranteed by a monoline insurer and rated BBB. The other two securities have credit grades of BB and are securitized with credit card receivables. We continue to receive principal payments on these securities and they currently have a weighted average life of less than two years.

The remaining 51 percent of the gross unrealized losses on available-for-sale securities at December 31, 2009 is related to residential mortgage-backed securities and home-equity asset-backed securities. The amortized costs, fair values and credit grades of mortgage-related securities at December 31, 2009 are summarized as follows:

Prime collateral

Amortized Cost

Fair Value

$

$

24,179

Gross Unrealized Gain

23,470

Gross Unrealized Loss $

(709)

AAA

CCC

(46,978) (30,371)

AAA AAA

CC C

AAA

D

166,868 96,551

119,899 66,180

Agency

143,917

141,071

557

(3,403)

Insured

150,822

96,794

162

(54,190)

$ 582,337

$ 447,414

728

$ (135,651)

$

9

Lowest* Credit Grade

Near-prime collateral** Sub-prime collateral***

MORTGAGE-RELATED SECURITIES

$

Highest* Credit Grade

*Credit grades are as of December 31, 2009 and are provided by the same NRSROs used at the time of purchase. *Credit grades are as of December 31, 2009 and are provided by the same NRSROs used at the time of purchase. **Based on the definition used on offering circulars **Based on on the660 definition used on offering *** Based or lower FICO score circulars *** Based on 660 or lower FICO score

61

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

At December 31, 2009, of the approximately 190 mortgage-related available-for-sale securities we own, six were rated D by at least one NRSRO. Financial Guaranty Insurance Company (FGIC) is the monoline insurer for these six securities. In addition to these six securities, we determined another 42 available-for-sale mortgagerelated securities to be other-than-temporarily impaired. Nineteen of those bonds are dual rated CCC or below.

The remaining 23 had at least one rating of B- or above.

A portion of Corporate One’s residential mortgage-related securities have insurance coverage to further support the senior classes in the event of deteriorating collateral performance. The insurance coverage provided by the monoline insurers increases the existing credit enhancement provided to the senior class owned by Corporate One. Syncora Guarantee Inc. (SGI) and FGIC stopped paying claims in April 2009 and November 2009, respectively. As a result, Corporate One has recorded other-than-temporary impairment charges on all securities which were dependent upon SGI and FGIC for the payment of future principal and interest claims.

Corporate One has placed reliance on Ambac Assurance Corporation (Ambac), Financial Security Assurance Inc. (FSA), and MBIA, Inc. (MBIA). While these insurers are currently paying principal and interest claims timely and management believes they will continue to pay future claims, Ambac has experienced credit downgrades in 2009. Further deterioration of these monoline insurers could result in additional other-than-temporary impairment charges.

On March 24, 2010, the Ambac Financial Group, Inc.’s Board of Directors voted to create a segregated account and consented to rehabilitation of that account by the Wisconsin Office of the Commissioner of Insurance (OCI), Ambac’s primary regulator. Under Wisconsin law, the segregated account is treated as a separate insurer from Ambac. Among other policies allocated to the segregated account, Ambac’s residential mortgage-backed securities obligations have been allocated to the segregated account. OCI has implemented a temporary moratorium on claims payments to segregated account policyholders to provide a measured transition into rehabilitation and to conserve claims-paying resources while the plan of rehabilitation is finalized. OCI expects that it will take approximately six months for the plan of rehabilitation to be approved. Once approved, segregated account policies shall receive a combination of cash and interest-bearing surplus notes in consideration for claims made.

Corporate One has 16 debt securities insured by Ambac. One is a student loan asset-backed security and 15 are residential mortgage-backed securities. Our student loan position is rated A by two NRSROs and we do not believe that it requires the support of Ambac for full re-payment. Additionally, our student loan position has not been allocated to the segregated account; however, all of our residential mortgage-backed securities have been allocated to the segregated account and are subject to the plan of rehabilitation. Based on our analysis, nine of our mortgage-backed securities require support from Ambac for full re-payment. Based on our analysis of the plan of rehabilitation, we continue to place reliance on Ambac for full re-payment. However, the realization of surplus note proceeds is subject to many factors including a minimum capital requirement, which in turn is a function of the ultimate performance of Ambac’s insured exposures.

The following table details our exposure to each monoline insurer for non-agency residential mortgage-backed securities at December 31, 2009: Insurer Rating Monoline Insurer FGIC

Par Value $

89,122

Amortized Cost $

72,841

Fair Value $

S&P

Moody's

52,067

MBIA

33,534

33,534

16,809

BB+

B3

AMBAC SGI

34,037 7,437

34,037 6,983

20,627 4,031

CC R

Caa2 Ca

3,427

3,427

3,260

AAA

Aa3

FSA Total

$

167,557

$

150,822

$

96,794

62

In order to determine if the declines in fair value below amortized cost represented OTTI, management considered various impairment indicators such as: securities on our internal watchlist, securities that have had ratings downgrades, securities that have been underwater for greater than 12 months and securities that have severe unrealized losses. We also utilize outside services to assist management in performing detailed cash flow analyses to determine if all principal and interest cash flows will be received. The analyses performed required assumptions about the collateral underlying the securities, including default rates, loss severities on defaulted loans and prepayments. It is possible that the underlying loan collateral of these securities may perform at a level worse than our expectations, which may result in adverse changes in cash flows for these securities and potential OTTI write-downs in the future.

For the securities where we believe not all principal and interest will be received, OTTI charges were recorded.

As of December 31, 2009, we had 50 mortgage-related securities (48 available-for-sale and two held-tomaturity securities) that were considered other-than-temporarily impaired. These securities had a total par value of approximately $247.5 million at December 31, 2009. The estimated credit losses of $42.6 million, recognized in the accompanying statements of operations, are a calculation of the difference between the discounted cashflows of the securities with OTTI and their current book value.

The following table details losses, both net impairment losses recognized in earnings and accumulated other comprehensive loss, as of and for the year ended December 31, 2009.

Available-for-sale securities:

Net impairment losses recognized in earnings for the year ended December 31, 2009

Corporate debt securities Government-sponsored enterprises Mortgage-related securities – other-than-temporarily impaired Mortgage-related securities – temporarily impaired

Accumulated Other Comprehensive income (loss) as of December 31, 2009 $

(3,657) 684

$ 40,610

(60,689) (74,234)

Asset-backed securities

(113,988)

TOTAL AVAILABLE-FOR-SALE SECURITIES

40,610

(251,884)

Mortgage-related securities – other-than-temporarily impaired

1,945

(3,859)

TOTAL HELD-TO-MATURITY SECURITIES

1,945

(3,859)

$ 42,555

$ (255,743)

Held-to-maturity securities:

TOTAL

In 2008, we had 17 mortgage-related securities that were considered other-than-temporarily impaired. These securities had a par value at December 31, 2008 of $94.0 million. OTTI charges equal to the difference between the amortized costs of these securities and their fair values, totaled approximately $43.4 million.

On January 1, 2009, Corporate One early adopted new accounting guidance that changed how OTTI charges are recorded. Additional discussion of this guidance is provided in Note 2(r), Recent Accounting Pronouncements.

Under the new guidance, if an entity does not intend to sell a security and it is more likely than not that the entity will not be required to sell the security, only the portion of the other-than-temporary charge determined to represent a credit loss is recorded in earnings. All other components of the unrealized loss are recognized in other comprehensive income. This guidance also requires that entities recognize the cumulative effect of initially applying this guidance as an adjustment to the opening balance of retained earnings with a corresponding

63

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

adjustment to accumulated other comprehensive income. Of the $43.4 million recorded as other-than-temporary impairment charges in 2008, only $7.9 million represented credit losses. Accordingly, upon adoption of this guidance on January 1, 2009, Corporate One reclassified $35.5 million of non-credit losses, increasing reserves and undivided earnings and reducing accumulated other comprehensive income by like amounts.

Through December 31, 2009, we have had total principal shortfalls of approximately $1.4 million on 11 securities. Of these 11 securities, five are uninsured securities and six are insured by FGIC. We had anticipated these principal shortfalls and had taken OTTI charges on these securities previously. Through December 31, 2008, we had no principal shortfalls.

The following table details cumulative credit loss on other-than-temporarily impaired debt securities through December 31, 2009.

Credit Losses on Debt Securities Other-than-temporary declines in the value of debt securities as of December 31, 2008

$

(43,383 )

Non-credit losses recognized in accumulated other comprehensive income

35,498

Credit losses on debt securities recognized in earnings through January 1, 2009

(7,885 )

Credit losses recognized in earnings on debt securities not previously determined to be other-than-temporarily impaired

(30,156 )

Additional credit losses recognized in earnings on debt securities previously determined to be other-than-temporarily impaired

(12,399 )

Reduction due to increases in expected cash flows

98

CREDIT LOSSES ON DEBT SECURITIES RECOGNIZED IN EARNINGS THROUGH DECEMBER 31, 2009

$

(50,342 )

(6) Equity Investments Investments in non-marketable equity securities, which are included in other assets in the accompanying balance sheets, at December 31 are summarized as follows: 2009 Primary Financial Company LLC

$

Processing Alliance LLC eDoc Innovations, Inc. TOTAL EQUITY INVESTMENTS

$

2008 1,230

$

620

88

93

2,069

2,015

3,387

$

2,728

Corporate One has a 6.72 percent investment in Primary Financial Company LLC (Primary Financial). This investment meets the criteria outlined in FASB Codification 272-10-05-05-3, Limited Liability Entities, and is accounted for using the equity method. Corporate One’s portion of Primary Financial’s current period net income or loss, recognized as a component of net service fee income in the accompanying statements of operations, was $610,000 and $245,000 in 2009 and 2008, respectively. In December 2008, Primary Financial paid a dividend of $10,000 per share, resulting in a total dividend of $80,000 to Corporate One.

64

Corporate One is a co-broker of Primary Financial and, as such, earns a spread on certificates placed by Corporate One. Corporate One also earns additional spreads on certificates it places, as well as royalties on certificates placed by other co-brokers. These additional spreads and royalties represent additional consideration related to Corporate One’s sale of Primary Financial in 2003. Corporate One recognized income of $1.3 million in both 2009 and 2008 on the certificates placed by Corporate One. In addition, Corporate One recognized $1.5 million in 2009 and $1.7 million in 2008, related to the additional spreads on certificates it places and royalties on certificates placed by other co-brokers. The additional spread on certificates continues through 2015 and is included as a component of net service fee income in the accompanying statements of operations.

Corporate One performs accounting and marketing services for Primary Financial under a support services contract. The contract is a one-year contract with provisions for automatic annual renewals. Corporate One recognized, as a component of net service fee income in the accompanying statements of operations, $178,500 in 2009 and $171,600 in 2008 related to this agreement.

Corporate One owns 50 percent of Processing Alliance LLC (Processing Alliance). Corporate One does not have a majority voting interest and does not maintain a controlling interest in Processing Alliance. This investment, therefore, is accounted for using the equity method. This company was formed in December 2006 to provide forward cash collection services as well as other services to credit unions. Corporate One’s portion of Processing Alliance’s current period net loss, recognized as a component of net service fee income in the accompanying statements of operations, was a loss of $4,700 and $3,600 in 2009 and 2008, respectively.

In October 2008, Corporate One invested $2.0 million in eDoc Innovations, Inc. (eDoc). This investment represents approximately 28 percent ownership interest. Corporate One does not have a majority voting interest and does not maintain a controlling interest in eDoc. This investment, therefore, is accounted for using the equity method. eDoc is a leading provider of electronic document management technology. Corporate One’s portion of eDoc’s current period net income, recognized as a component of net service fee income in the accompanying statements of operations, was $53,200 in 2009 and $15,500 in 2008.

(7) Other Assets Included in other assets is a deposit with the NCUA for share insurance (see Note 2(s)), accounts receivable, prepaid accounts and net property and equipment. Equity investments are also included in other assets and are discussed in Note 6.

Property and equipment, valued at cost less accumulated depreciation, at December 31 are summarized as follows: 2009 Buildings and improvements

$

Equipment

Less: Accumulated depreciation NET PROPERTY AND EQUIPMENT

$

4,482

2008 $

4,468

14,206

16,906

18,688

21,374

12,877

14,622

5,811

$

6,752

(8) Borrowed Funds During March 2009, Corporate One cancelled its commercial paper program; therefore, there was no outstanding commercial paper at December 31, 2009. Corporate One had $50.0 million in outstanding commercial paper at December 31, 2008. Commercial paper outstanding averaged $1.7 million in 2009 prior to the program being cancelled. In 2008, commercial paper outstanding averaged $2.5 million. There was no amount outstanding at any month-end during 2009. The maximum amount outstanding at any month-end during 2008 was $50.0 million.

65

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

Throughout 2009, Corporate One had commitments from several financial institutions enabling Corporate One to borrow funds under revolving lines of credit. At December 31, 2009, Corporate One had a committed line totaling $75.0 million and no amount was outstanding on this line of credit. The interest rate on this line is indexed off of money market rates, primarily LIBOR, plus a margin of up to 150 bps. As collateral for this line of credit, Corporate One has pledged securities to this financial institution that have a fair value of approximately $89.1 million.

During 2008, Corporate One was granted the ability to issue up to $130.0 million of senior unsecured debt obligations guaranteed under the NCUA’s Temporary Corporate Credit Union Liquidity Guarantee Program. At December 31, 2009, no amount was outstanding under this program. As of December 31, 2009, the fee to participate varied based on the maturity of the debt guaranteed ranging from 10 to 35 bps per annum assessed on the outstanding balance.

In addition, Corporate One has an advised line of credit with U.S. Central that, by its nature, may be withdrawn by U.S. Central. Corporate One may take advances on this line of credit up to $650.0 million based on the amount of eligible collateral available to support such advances. Eligible collateral consists of all shares and certificates with U.S. Central. As such, all of Corporate One’s shares and certificates with U.S. Central have been pledged under this line of credit agreement. For overnight borrowings on this line, the interest rate is variable and is established by U.S. Central on a daily basis. Fixed-rate term borrowings are also available under this line of credit.

Corporate One also maintains reverse repurchase agreements with certain parties allowing for additional liquidity of approximately $553.9 million. These agreements use some of our asset-backed securities as collateral.

Corporate One had no outstanding reverse repurchase agreements at December 31, 2009. Average borrowings under reverse repurchase agreements were approximately $6.0 million during 2009 and $24.6 million during 2008. The highest month-end balance during 2009 was $31.7 million. There was no amount outstanding at any month-end during 2008.

As a member of the FHLB of Cincinnati, Corporate One is eligible to take advantage of the FHLB’s numerous credit products and advances. Advances and borrowings from the FHLB are required to be collateralized by securities held in safekeeping by the FHLB. At December 31, 2009 and 2008, Corporate One had securities held in safekeeping at the FHLB with fair values of approximately $170.2 million and $387.5 million, respectively, which provided a borrowing capacity of $142.3 million and $328.9 million, respectively.

The following table provides a summary of our outstanding borrowings at December 31.

2009 Balance

2008 Rate

FHLB: Due in one year or less Due after one year through five years

$

30,000

3.99-4.39%

U.S. Central: Due in one year or less Due after one year through five years

20,000

4.45-4.99%

Federal funds borrowed Commercial paper: Due in one year or less TOTAL BORROWED FUNDS

$

50,000

Balance

$ 295,000

2.98-3.22%

30,000

3.99-4.39%

2,000

0.50-4.27%

20,000

4.45-4.99%

130,000

0.50%

50,000

0.20%

$ 527,000

66

Rate

(9) Share Accounts and Paid-in Capital (PIC) Balances and weighted average rates of share accounts and PIC at December 31 are summarized as follows: 2009 Balance Settlement and regular shares

Rate

Balance

Rate

$ 2,010,843

0.21%

$ 1,285,449

0.40%

1,314,800

2.20%

2,016,822

3.55%

119,990

0.31%

116,278

0.30%

Share certificates MCS

2008

TOTAL SHARE ACCOUNTS

$ 3,445,633

PIC

$

25,682

$ 3,418,549

1.25%

$

25,682

1.25%

Settlement and regular share accounts are available to members on demand and pay dividends either daily or monthly. Share certificate accounts have specific maturities and dividend rates. Dividend payments on share certificate accounts vary according to the type of share certificate issued and the length of maturity. Share certificates can be redeemed by members prior to maturity at fair value, as determined by Corporate One. In 2009 and 2008, certain member credit unions requested to redeem Corporate One certificates prior to their contractual maturity. The total value of the certificates redeemed in 2009 was approximately $6.0 million. We redeemed the certificates at fair value, resulting in gross losses of $34,500. During 2008, the total value of certificates redeemed was approximately $195.0 million, resulting in gross gains of $5.1 million and gross losses of $80,000.

Total share certificate accounts by maturity at December 31, 2009 are summarized as follows: Year of Maturity: 2010

$

1,038,457

2011

207,472

2012

40,597

2013

28,274

TOTAL SHARE CERTIFICATES

$

1,314,800

Eligible accounts of members are insured by the NCUSIF up to $250,000 per member. As of December 31, 2009, insured member accounts totaled $132,175,298.

On January 29, 2009, the NCUA Board approved the TCCUSGP under which the NCUSIF guaranteed Corporate One’s member shares in excess of the $250,000 share insurance already provided. Pursuant to a Congressional amendment of the Federal Credit Union Act that established the TCCUSF – a separate fund under the control of the NCUA – in June 2009, the NCUA legally transferred the obligation to pay claims under the TCCUSGP to the TCCUSF. During 2010, the TCCUSGP was extended by the NCUA to June 30, 2012. The maximum maturity for shares subject to the guarantee is two years.

(10) Commitments and Contingencies Corporate One is a party to various financial instruments with off-balance-sheet risk that are used in the normal course of business to meet the financing needs of our members and to manage our exposure to market risks. These financial instruments involve, to varying degrees, elements of credit risk that are not recognized in the balance sheets.

67

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

These financial instruments include committed and advised lines of credit. The contractual amounts of these instruments represent the extent of Corporate One’s exposure to credit loss. Corporate One uses the same credit policies in making these commitments and obligations as it does for on-balance-sheet instruments. In extending commitments, Corporate One evaluates each member’s creditworthiness on a case-by-case basis. All outstanding commitments are subject to collateral agreements and have termination clauses. At December 31, 2009 and 2008, these financial instruments included outstanding advised lines of credit of approximately $1.1 billion and $1.0 billion, respectively. Outstanding committed lines of credit at December 31, 2009 and 2008 were approximately $16.0 million.

Commitments to extend credit to members remain effective as long as there is no violation of any condition established in the agreement. Advances on these commitments generally require repayment within one year of the advance. Since a portion of the commitments are expected to terminate without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

(11) Retirement Plan Corporate One sponsors a defined-contribution plan (Plan) established under Section 401(k) of the Internal Revenue Code which covers substantially all employees. The Plan allows employees to contribute up to the Internal Revenue Service maximum allowable percentage of their compensation. Employees also have the option to contribute a portion of their compensation on a pre- or post-tax basis. Corporate One matches 150 percent of the first 3 percent employee contribution and 75 percent on the next 2 percent employee contribution. In addition, Corporate One may elect to make discretionary contributions to the Plan. This election requires approval by the Board of Directors. During 2008 and the first quarter of 2009, Corporate One made such discretionary contributions. Beginning in the second quarter of 2009, the Board of Directors suspended all discretionary contributions. Retirement expense, which includes both the employee match contributions and discretionary contributions, was approximately $451,000 in 2009 and $810,000 in 2008.

(12) Fair Value of Financial Instruments The estimated fair values of financial instruments have been determined by Corporate One using available market information and appropriate valuation methodologies. Due to their short-term nature, the fair values of cash and cash equivalents, accrued interest receivable, and dividends and interest payable approximate carrying values. The fair value of the NCUSIF deposit approximates the carrying value because, if redeemed, it would be redeemed at cost. The fair values of loan commitments are determined based on the fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the present creditworthiness of the counterparty. Neither the fees earned during the year on these instruments nor their fair value at year end are material to the financial statements.

The assumptions used by Corporate One in estimating fair-value disclosures for its remaining financial instruments are described below.

•

• • • •

Investments in financial institutions are based on discounted cash flow analyses using current market rates, except FHLB stock. It was not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

The fair values for securities are generally determined by discounting the future cash flows using rates currently available for similar securities, or based on quoted market prices or dealer quotations, if available.

The estimated fair value of loans is determined by discounting future cash flows using interest rates currently being offered to members for loans with similar terms.

The fair value of borrowed funds is based on discounted cash flow analyses using current market rates.

The fair values approximate carrying values for share accounts payable on demand at the balance sheet date.

The fair value of fixed-maturity share accounts is estimated by discounting the future cash flows using the rates currently offered for share accounts of similar remaining maturities.

68

The fair values of Corporate One’s financial instruments at December 31 are summarized as follows: 2009

2008

Carrying Value Assets: Cash and cash equivalents

$

Fair Value

510,719

$ 510,719

632,411 2,306,088

638,776 2,306,088

Held-to-maturity securities Loans to members Accrued interest receivable

2,134 6,865 5,702

2,445 6,865 5,702

5,705 33,875 13,372

4,042 34,522 13,372

NCUSIF deposit

1,345

1,345

170

170

527,000 18,371

$ 534,887 18,371

3,418,549

3,408,071

Share accounts

$

50,000 7,431

$

3,445,633

663,972

$

632,318 1,975,498

Liabilities and members’ equity: Borrowed funds Dividends and interest payable

$

Fair Value

628,499 1,975,498

Investments in financial institutions Available-for-sale securities

663,972

Carrying Value

53,319 7,431 3,458,108

$

Accounting guidance defines fair value as the 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. A fair value hierarchy exists in this guidance, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that Corporate One has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect Corporate One’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The guidance requires that the highest level of valuation available be used. This statement describes inactive markets as characterized by few transactions for the asset, prices that are not current, prices that vary substantially, or some combination thereof, and while an entity should not assume a market is inactive; it should also not assume the prices available are from active markets. The determination of market participation requires a significant amount of judgment by management.

The fair value of available-for-sale securities other than residential mortgage-backed or home equity asset-backed securities are determined by obtaining quoted prices from brokers or pricing services, or market listings as of the last day of the year. For securities where there is limited trading due to current market conditions, we believe the pricing services likely utilized matrix pricing to determine the price. Matrix pricing is a mathematical technique used widely in the industry to value debt securities without relying on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. We have classified the pricing for such securities as Level 3.

Corporate One engages an independent third-party expert to value our residential mortgage-backed and home equity asset-backed securities. The third-party expert uses their internal models for pricing these securities. Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, cash flow projections, and liquidity and credit premiums required by a market participant, are utilized in determining individual security valuations. For residential mortgage-backed and home equity asset-backed securities where we see

69

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

limited trading due to current market conditions, we classify the pricing for such securities as Level 3. For these securities, the fair value is highly sensitive to assumption changes and market volatility.

Assets measured at fair value on a recurring basis are summarized below as of December 31, 2009.

Fair Value Using

Total Fair Value Available-for-sale securities: Corporate debt securities

$

Government-sponsored enterprises Mortgage-related securities Asset-backed securities

Quoted Prices in Active Markets for Identical Assets (Level 1)

188,699

Significant Unobservable Inputs (Level 3)

$ 188,699

16,510 447,414 1,322,875

TOTAL AVAILABLE-FOR-SALE SECURITIES

Significant Other Observable Inputs (Level 2)

$

$ 1,975,498

$ 188,699

16,510 194,923 1,165,691

$

252,491 157,184

$ 1,377,124

$

409,675

Assets measured at fair value on a recurring basis are summarized below as of December 31, 2008.

Fair Value Using

Total Fair Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Available-for-sale securities: Corporate debt securities Government-sponsored enterprises Mortgage-related securities

$

Asset-backed securities

160,765 76,935 610,918

$ 160,765 $

1,457,470

TOTAL AVAILABLE-FOR-SALE SECURITIES

76,935 610,918 1,457,470

$ 2,306,088

$ 160,765

$ 2,145,323

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2009.

Total Fair Value of Available-for-Sale Securities priced using Significant Unobservable Inputs (Level 3) Beginning balance, January 1, 2009 Transfers into Level 3 Ending balance December 31, 2009

$

409,675

$

409,675

70

Continued illiquidity throughout 2009 of certain securities resulted in our determination that the price obtained from our third-party pricing services included significant unobservable inputs. Accordingly, we transferred the fair value of these securities into Level 3.

(13) Regulatory Capital and Net Economic Value Requirements The NCUA periodically examines Corporate One’s operations as part of its legally prescribed oversight of credit unions. Based on its examination, the NCUA can direct Corporate One to change operations and management, adjust historical financial statements and make other changes in accordance with their findings. Additionally, the NCUA requires that corporate credit unions maintain a minimum capital ratio (capital divided by 12 month rolling DANA) based upon the corporate’s investment authority as authorized by the NCUA. The NCUA defines capital as reserves and undivided earnings, PIC and MCS less the amortized portion of PIC and MCS on notice.

The NCUA also requires a corporate credit union to retain certain earnings levels if its retained earnings ratio (reserves and undivided earnings divided by 12 month rolling DANA) falls below the required percentage.

The following table outlines the components of regulatory capital at December 31.

2009 Retained earnings

$

PIC MCS TOTAL Less: amortized PIC and MCS on notice REGULATORY CAPITAL

2008

23,648)

$

30,818)

25,682) 119,990)

25,682) 116,278)

169,320) (1,625)

172,778) (366)

$ 167,695)

$ 172,412)

Corporate One’s actual reserves and undivided earnings, capital and regulatory ratios at December 31 are presented in the following table: 2009

2008

Regulatory capital Regulatory capital ratio

$ 167,695 4.35%

$ 172,412 4.35 %

Reserves and undivided earnings Retained earnings ratio

$

$

23,648 0.61%

30,818 0.78 %

Regulatory Minimum

5.00% 2.00%

s of December 31, 2009 and 2008, Corporate One did not meet the minimum regulatory required capital or A retained earnings ratio. This is primarily due to impairment losses related to Corporate One’s investment in U.S. Central (see additional discussion in Note 3) and investment securities (see additional discussion in Note 5).

There are a number of remedies available to a corporate credit union should its regulatory ratios fall below the required minimum. However, despite such remedies, the NCUA could restrict the corporate’s ability to, among other things, accept additional deposits, open new accounts, make loans or pay dividends. In April 2009, the NCUA issued an order, under its authority in Part 704.1(b), permitting an alternative capital level for purposes of regulatory compliance outlined in Part 704. The order will remain in effect until modified or rescinded by the NCUA Board or until the effective date of the final rulemaking for Part 704 that is currently in the pre-rule stage.

As a result of the order, Corporate One is allowed to use capital levels reported in its November 2008 call report, for purposes of determining regulatory compliance with its capital ratio requirement and earnings retention

71

NOTES TO FINANCIAL STATEMENTS Financial Review

(table dollar amounts in thousands)

requirement. At November 30, 2008, regulatory capital totaled $264.8 million which, when divided by 12-month DANA as of December 31, 2009, resulted in a capital ratio of 6.87 percent compared to the regulatory minimum of 5 percent. Reserves and undivided earnings totaled $123.1 million at November 30, 2008, which, when divided by 12-month DANA as of December 31, 2009 resulted in a retained earnings ratio of 3.20 percent compared to the regulatory minimum of 2.00 percent.

Corporate One’s net economic value (NEV) sensitivity is limited by Part 704 of NCUA Rules and Regulations to a 28 percent change from base and an NEV ratio greater than the minimum regulatory ratio of 2.0 percent. If Corporate One fails to meet its NEV requirements for 30 calendar days, a detailed, written action plan that sets forth the time needed and means by which it intends to correct the violation must be submitted to the NCUA. In addition, discretionary actions by the NCUA are possible that could have a material effect on Corporate One’s financial position and operations.

Due to the effects of the declines in fair values of our available-for-sale securities (see additional discussion in Note 5), Corporate One’s NEV became negative in April 2008 and remained negative as of December 31, 2009.

As a result, Corporate One did not comply with the NEV sensitivity requirement or the NEV ratio requirement during all of 2009. Corporate One submitted the required plan to the NCUA and the plan was approved by the NCUA. In November 2009, the NCUA distributed proposed revisions to NCUA Rules and Regulations Part 704; the rule governing corporate credit unions. The major revisions involve corporate credit union capital, investments, asset/ liability management, governance and CUSO activities. The revisions would establish a new capital scheme including risk-based capital requirements; impose new prompt corrective action requirements; place various new limits on corporate investments; impose new asset/liability management controls; amend some corporate governance provisions; and limit a corporate CUSO to categories of services pre-approved by the NCUA. More specifically, the proposed regulation sets forth three main capital requirements. It requires a 4 percent or greater leverage ratio, a 4 percent or greater Tier 1 risk-based capital ratio and an 8 percent or greater total risk-based capital ratio. The proposed regulation requires these ratios to be met one year after the publication of the final rule. With a current capital ratio of 4.35 percent, Corporate One could achieve the three main capital requirements in the proposed regulation if the member credit unions supported a conversion of existing capital instruments to a qualifying capital instrument under the proposed regulation. In addition, 36 months after the final rule is published, a corporate credit union also would be required to report its ratio of retained earnings to its DANA. If this ratio is less than 0.45 percent, the corporate credit union must submit a retained earnings accumulation plan to the NCUA for approval. As of December 31, 2009, Corporate One meets this requirement, as our ratio of retained earnings to DANA is 0.61 percent.

The NCUA has received a considerable number of comments on the proposed revisions to the regulation.

Additionally, the NCUA has reported that they intend to issue a proposed solution for the legacy assets held by the corporate credit union network. They also have indicated that they may re-publish the proposed revisions to the regulation for comment based on feedback from the legacy asset proposal. Therefore, it is still too early to predict what impact changes resulting from the proposed revisions might have on Corporate One or the corporate credit union system.

72

8700 Orion Place Columbus, Ohip 43240-2078

P.O. Box 2770 Columbus, Ohio 43216-2770

866/MyCorp1 www.corporateone.coop