Corporate One Annual Report 2006 by Prosper

2006 Annual Report

Uncommon Bonds

Community-Chartered Credit Unions • Defense Credit Unions • Education Credi Unions • Fortune 500 Credit Unions • Police and Fire Department Credit Unions

Uncommon Bonds No two credit unions are exactly alike. Some credit

with their peers – credit unions cooperate with one

unions serve one select employer group (SEG),

another all the time for the good of their members

while others serve entire communities or industries.

and their communities.

Some are chartered by their state, while others hold federal charters. Some have branches and ATMs all

The nearly 800 credit unions across America

over the country, while others have one branch in the

who belong to Corporate One also share another

neighborhood. Ultimately, each credit union in America

uncommon bond: they’re all owners of one of the

faces a unique combination of opportunities and

largest and most progressive corporate credit

challenges as they serve their members.

unions in America – an organization that shares their commitment to serving credit union members.

But every credit union – no matter what shape or

This year’s annual report highlights just a few of

size – has a field of membership with a common

the different types of credit unions that rely on

bond. Those common bonds among members are the

Corporate One to help them better serve their

foundation for credit unions. But there are important

members.

“uncommon bonds,” too. At Corporate One, we’re proud to share an Credit unions have uncommon bonds with their

“uncommon bond” with our diverse national

members – a special relationship built on service and

membership. No matter what type of credit union

trust. Credit unions also maintain uncommon bonds

you are, Corporate One is where you belong.

Table of Contents Defense Credit Unions . . . . . . . . . . . . . . . . . . . . . . 2

From the Chairman and the President. . . . . . . . 12

Wright-Patt CU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . 13

Community-Chartered Credit Unions. . . . . . . . . 4

Senior Management. . . . . . . . . . . . . . . . . . . . . . . . 14

Kent County CU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Management’s Discussion and

Fortune 500 Credit Unions. . . . . . . . . . . . . . . . . . 6

Analysis of Financial Condition and

Kemba Indianapolis CU . . . . . . . . . . . . . . . . . . . . . 7

Results of Operations . . . . . . . . . . . . . . . . . . . . . . 16

Education Credit Unions. . . . . . . . . . . . . . . . . . . . . 8

Report from the Supervisory Committee. . . . . 26

University of Kentucky FCU. . . . . . . . . . . . . . . . . . 9

Report of Independent Auditors . . . . . . . . . . . . . 27

Police and Fire Credit Unions. . . . . . . . . . . . . . . . 10

Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 28

Akron Firefighters CU. . . . . . . . . . . . . . . . . . . . . . 11

Notes to Financial Statements. . . . . . . . . . . . . . 32

Defense Credit Unions

ABNB Federal Credit Union • Arkansas Federal Credit Union • Fort Knox Federal Credit Un Credit Union • Navy Federal Credit Union • North Island Credit Union • Randolph-Brooks F

The servicemembers of the U.S. Armed

servicemembers manage their finances

These extra efforts aren’t lost on

Forces serve our country with amazing

more easily. Many defense credit unions

defense credit union members. Each

valor and resolve. In addition to the

literally embed themselves into the

day, military servicemembers put their

challenges they face during active duty,

base communities they serve, helping

lives in the hands of other people as

many of them face challenges away

servicemembers keep their finances

they defend America, so they recognize

from the base. Moving from place to

in order before, during and after

loyalty when they see it.

place can be a common occurrence, and

deployment. These credit unions often

many families eventually deal with one

spearhead educational programs, such

Corporate One practices these

or both spouses being deployed during

as first-time homebuyers’ seminars and

principles, as well. We’re proud to be an

wartime. This can make managing family

“welcome to the community” gatherings.

active, loyal supporter of our members

finances especially stressful.

Some also work hard to combat

and our community. In 2006, we raised

payday-lending practices near bases,

$6,200 for the Ohio Credit Union

Credit unions that serve our armed

often developing special loans for

Legislative Political Action Committee

forces are instrumental in helping

enlistees with little or no credit histories.

and $3,000 for the Children’s Miracle

nion • Fort Snelling Federal Credit Union • Langley Federal Credit Union • Mission Federal Federal Credit Union • Verity Credit Union • VyStar Credit Union • West AirComm Federal Network. Our staff donated 23 pints of blood to the American Red Cross and 3,000 pounds of food to the Mid-

Doug Fecher, CEO Wright-Patt CU Dayton, Ohio

Ohio Food Bank. We also helped build a house through Habitat for Humanity and raised more than $10,000 for survivors of Hurricane Katrina. Like defense credit unions and the members they serve, we understand the importance of loyalty.

Community-Chartered Credit Unions

Alpena Community CU • Communitywide FCU • Eagle Community CU • GNC Co munity FCU • OnPoint Community CU • Priority Community CU • Solidarity Com Community-chartered credit unions enjoy

unions get to know their members is

and help reduce losses associated with

unique opportunities and face unique

through our suite of affordable, easy-to-

bad and fraudulent checks.

challenges.

use fraud prevention solutions designed to verify identities, prevent check fraud

Both of these solutions, offered

In addition to ramping up their marketing

and maintain Know Your Customer and

through our partnership with Early

efforts so their community can get to

OFAC compliance. Our IDENTITY CHEK

Warning Services, help community-

know them, these credit unions must

Web Service helps front-line staff make

chartered credit unions get to know

also get to know their members. This

informed decisions when opening new

their communities, show proof of due

concept is even more important when a

accounts by conducting as many as

diligence and maintain compliance.

community-chartered credit union expands

60 tests on each new identity, looking

its membership base, which may further

for unusual, inconsistent and invalid

Plus, our proven Check 21 branch

expose the credit union to fraud.

information. Plus, our DEPOSIT RISK

deposit capture solution, Automated

SERVICE Check Readers give credit

Capture & Exchange (ACE) – now

unions advance notice of potential returns

used in more than 500 credit union

One way Corporate One helps credit

ommunity FCU • Hawaii Community FCU • LorMet Community FCU • Midwest Co munity FCU • Toledo Area Community CU • Utah Community CU • Virginia CU locations – features several enhancements designed to prevent fraud. ACE performs a routing and transit check-digit routine

Ray Ward, CEO Kent County Credit Union Grand Rapids, Michigan

analysis on each deposited item and also includes MICR ink detection. Additionally, with a searchable online image database containing 365 days’ worth of images, credit unions have access to the information they need when trying to research kiting schemes or identify potential returns. When it’s important to “know your members,” it’s important to know Corporate One.

Fortune 500 Credit Unions

Addison Avenue FCU • Alliant CU • Ashland ECU • Baxter CU • Cleveland C Lilly FCU • GE Evendale Employees FCU • Glass City FCU • Goodyear ECU A typical Fortune 500 company might

products and a personal relationship

share draft and deposit processing

employ thousands of people who work

manager, while others value flexible

services that feature digital imaging,

in jobs as varied as manufacturing,

loan terms, access to their accounts at

customized ATM/check card programs,

distribution, retail and administration.

millions of retailers, online banking and

ACH programs, and cutting-edge fraud

Some work in the store on the corner

fraud prevention. Clearly, the employees

prevention tools.

and some work in the corner office.

of these sophisticated companies need sophisticated financial partners.

Each of these people has unique

In addition, through our partnerships with CU Investment Solutions, Inc. and

financial needs. And the credit unions

For our members serving Fortune 500

Primary Financial, we can offer credit

that serve these large companies

companies, Corporate One is the driving

unions every investment instrument

sometimes have to be everything

force behind many of their advanced

permissible under Reg. 703, including

to everyone. Some high net worth

financial solutions. We offer a full array

agencies, discount agency notes,

members require sophisticated financial

of correspondent services including

mortgage-backed securities, treasury

Coca Cola Bottling ECU • Deere Employees CU • Delta Community CU • Eli • Kemba Financial CU • SeaComm FCU • Powerco CU • Target Corporation bills, notes and bonds. Plus, our investment and lending staff can tailor solutions to fit any credit union’s daily

Karla Salisbury, CEO Kemba Indianapolis CU Indianapolis, Indiana

operations and asset/liability needs. Taken together, these solutions allow Fortune 500 credit unions to offer their diverse membership an entire range of superior financial products. Corporate One helps credit unions compete with other large financial institutions and meet the demands of discerning members.

Education Credit Unions

Central Indiana School EFCU • Miami University Community FCU • Mid-State Ohio University CU • Suncoast Schools FCU • The Ohio Educational CU • U

Educational communities across

Giving these students convenient

When it comes to serving faculty and

America have long been served by

access to their accounts can go a long

staff, many education credit unions

credit unions.

way to keeping their business. Through

experience a tightening in liquidity

Corporate One’s selective-surcharge ATM

during the summer months. When

For many of these credit unions, serving

group, Alliance One, students have access

credit unions need liquidity quickly,

a dynamic field of membership can be

to their accounts at more than 3,900

Corporate One is a convenient and

both an opportunity and a challenge.

ATMs while they’re away from campus.

competitively priced source of funds.

With turnover in college students each

In addition, Corporate One’s check card

Our investment and liquidity

year, there is both a challenge to keep

programs, offered through the STAR®

professionals can tailor a liquidity

members’ business after graduation

Network, give ever-mobile students

solution to meet specific needs. We offer

and a constant opportunity for new

access to more than 1.9 million ATM and

a mix of liquidity solutions designed to

business from incoming students.

retail locations from coast to coast.

generate funds quickly and easily.

e Educators CU • Northern Kentucky Educators FCU • Notre Dame FCU • University of Illinois ECU • University of Nebraska FCU • University of Utah CU Most importantly, teachers and students value growth. They need a financial institution that can grow with them

Greg Baker, Interim CEO University of Kentucky FCU Lexington, Kentucky

as their needs change. That’s why so many education credit unions turn to Corporate One. As a leader in wholesale financial services for credit unions, we keep an eye on the issues our members face and we continue to offer innovative, scalable financial solutions that allow credit unions to remain competitive and sound as they grow.

Police & Fire Credit Unions

Canton Police & Firemens CU • Cleveland Police CU • Dayton Firefighters FCU • Evan FCU • Fresno Fire Department CU • Pittsburgh Firefighters FCU • South Bend Firefigh Police officers and firefighters risk their

one aspect of their lives that’s easy and

all over America, including dozens of

lives each day to protect the quality of

stress-free.

police and fire credit unions. With turnkey

life we enjoy in America. Their jobs are grueling and the stress can be severe.

solutions like SimpliCD, ACE, and our At Corporate One, we understand how

Associate ATM program, credit unions

important it is for police and fire credit

with limited time and resources can offer

Fortunately, police officers and

unions to make their members’ lives

all of the products and services their

firefighters all across the U.S. rely on

a little bit easier. We do the same for

members demand without all the stress of

their credit union as a financial safe-

our members. Corporate One provides

managing multiple vendor relationships.

haven. After all, finances should be

back-office support for credit unions

We do it for them.

nsville Firefighters FCU • Firefighters Community CU • Firefighters CU • Fire Police City hters FCU • Toledo Fire Fighters FCU • Toledo Police FCU • Youngstown Firefighters C Corporate One is also proud to support America’s law enforcement and public safety agencies – and the credit unions

Linda Williams, CEO Akron Firefighters Credit Union Akron, Ohio

that serve them. Since its inception in 2003, Corporate One has sponsored the Police Officers’ Credit Union Conference, which brings together police credit unions for education, networking and partnerships.

From the Chairman and the President A letter to our members

One of the things that makes America

union. We offer sophisticated investment

Our continued ability to offer innovative

great is its diversity. America’s credit

solutions, a cutting-edge deposit

solutions to our members is contingent

unions are no different. They come in

automation suite, industry-standard

upon support from our Board of

all shapes and sizes. From the single-

fraud prevention tools, and one of the

Directors, management and staff.

SEG, local hometown credit union to

nation’s largest credit union-owned

We’d like to recognize our volunteer

the large trade-industry-profession-

selective-surcharge ATM groups. We

Board for their continued guidance and

chartered credit union with touchpoints

can also serve as your back office,

vision. We’d also like to acknowledge

all over the country, credit unions are a

providing all of the basic services you

the management and staff of

diverse bunch.

need to serve your members, from share

Corporate One for their dedication and

draft processing services and coin and

commitment to service.

But they share one common goal: to

currency solutions to lines of credit, ACH

provide affordable financial solutions to

services and ATM/check cards.

their members.

Finally, to our nearly 800 member credit unions across 37 states and the District

In addition to our existing offerings,

of Columbia – thank you for your

As we’ve shown throughout this year’s

we’re always looking for new ways

membership and your business. We’re

report, the credit unions across America

to help our members with the issues

proud to serve you.

who belong to Corporate One serve

they face – both today and in the

many different groups and segments

future. As corporate governance

Corporate One – it’s where credit

of our economy. They face unique

continues to be pondered by regulators

unions belong.

challenges as they strive to compete

and legislators, Corporate One has

for their members’ business. But they

developed an enterprise wide risk

all share one thing in common: they all

management solution for credit unions.

look to Corporate One to help them

This offering includes enterprise

fulfill their missions.

wide risk management consulting

Jerome R. Valco, Chairman

services delivered by Corporate One

At Corporate One, we pride ourselves

professionals, along with a software

on developing a full array of solutions

application that allows credit unions to

to meet the needs of almost any credit

assess risks on any of their processes.

Lee C. Butke, President/CEO

Jerome R. Valco, Chairman, CEO, The Ohio Educational CU (left) Lee C. Butke, President/CEO

Corporate One Board of Directors

Phillip R. Buell, Superior FCU

James A. Depue, CES CU

Gerald D. Guy, Kemba Financial CU

Stephen F. Halas, Ohio Catholic FCU

Charles F. Plassenthal, Dayton Firefighters FCU

R. Lee Powell, DESCO FCU

John J. Shirilla, Best Employees FCU

Janice L. Thomas, PSE CU

Corporate One Senior Management

Melissa Ashley, VP and Chief Financial Officer

Tammy Cantrell, SVP, Asset/Liability Management

Cheri Couture, VP, Human Resources and Administration

Robert Coyan, SVP, Marketing and Operations

Joe Ghammashi, VP and Chief Risk Officer

Kurt Lykins, VP and Chief Technology Officer

Financial Review

Managementâ&#x20AC;&#x2122;s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Throughout 2006, Corporate One remained focused on providing value to our members through competitive investment solutions and innovative correspondent services. The interest rate environment and tight liquidity within the credit union network presented challenges in 2006. However, because we continue to offer extremely competitive rates on our investments and great service, we were able to add 50 new members, with combined assets of $16.3 billion in 2006. In addition to deposits from these new members, a trend by credit unions to increase their investments in corporate credit unions resulted in an increase in average balances over 2005. Accordingly, net interest income was $13.6 million in 2006, an increase of $1.1 million over 2005. With the strong growth in share balances and our increased use of borrowings to manage the flow of member deposits, we had less of a need to sell securities in 2006. As a result, we recognized approximately $215,000 in gains on sales of securities in 2006 compared to $1.1 million in 2005. In addition to our competitive investment offerings, Corporate One is also focused on providing its members valuable correspondent services that keep pace with emerging technology. By belonging to Corporate One, our members have access to a complete package of correspondent solutions including ATM/debit card programs, share draft processing and imaging, Automated Capture & Exchange (ACE) and electronic payment services. These services are designed to meet the changing needs of our members and enable them, regardless of size, to offer a complete line of financial services to their members. ACE, the newest addition to our correspondent services, allows our members to take advantage of Check 21 legislation. Corporate One invested considerable amounts of time and money over the past several years developing a solution that would truly meet the needs of credit unions. We considered the obvious advantages to our members such as reduced handling costs, faster clearing and return times, reduced float, and reduced opportunities for fraud. However, we also developed a solution that would provide our members with increased reporting capabilities and a researchable database of images. In late 2005, we began offering the image database portion of ACE, and during 2006 we added forward cash collection services. These services allow credit unions to replace their current microfilming efforts by electronically imaging and archiving their deposit items and exchanging those images for collection with the Federal Reserve, clearinghouses, and other financial institutions. Revenue from this new product was the primary contributor to a $412,000 increase in net service fee income over 2005. Our continued investment in the development and deployment of ACE contributed to the increase in operating expenses in 2006. We established an infrastructure of people and technology capable of supporting this new product for the long term. Many of these infrastructure costs are fixed expenses, so while we were extremely successful in deploying ACE to our existing members, the expenses grew faster than the related revenue during this initial rollout period. As we continue to aggressively deploy ACE, increased volume will make our solution cost effective to both our members and to Corporate One. In summary, net income was $5.7 million for the year ended December 31, 2006, a $1.8 million decrease from the same period in 2005. Increases in net interest income and service fee income were primarily offset by expenses related to our investment in ACE, as well as lower gains on the sale of investments. Additionally, 2005 benefited from the cumulative effect of a change in accounting related

to our investment in Primary Financial Company LLC (Primary Financial), which resulted in additional income of $402,000. Capital Position Our members and prospective members review our capital as part of their evaluation of our safety and soundness. Since December 31, 2005 our total capital, which includes reserves and undivided earnings (RUDE), membership capital and paid-in capital (PIC), increased approximately $5.2 million, or 2.7% to $202.0 million at December 31, 2006. This increase was due to strong earnings and increased membership capital from new members. We understand the importance of adequate capital; however, we also believe it is important to effectively utilize our capital for the benefit of our members. Accordingly, we have a strategy to grow our balance sheet, within certain regulatory parameters, whether it be through funding provided by increased member deposits or increased use of borrowings. In 2006, we were extremely successful in this effort and our increase in capital was outpaced by our increase in average assets, resulting in a decrease in our capital ratio. The benefit of this strategy is the opportunity to earn income on these additional assets, which in turn allows us to continue to grow and pay competitive rates. We continue to use our asset/liability strategy to maximize our Net Economic Value (NEV) and net income, while adhering to our own risk constraints and regulatory limits. As of December 31, 2006, our regulatory capital ratio was 5.98%, which is more than adequate based on our operations and the risks involved in our business and is well above the minimum regulatory level of 5%.

Selected Financial Information (Dollar amounts are in thousands) NET INTEREST INCOME

2006 $

NET SERVICE FEE INCOME Net gain on disposal of assets

As of and for the year ended December 31, 2005

13,607

7,989

12,507

2004 $

12,106

2003 $

12,663

2002 $

11,809

7,577

8,228

10,109

8,599

NET GAIN ON SALES OF SECURITIES

215

1,092

1,012

675

970

TOTAL OPERATING EXPENSES

16,122

14,079

12,343

12,565

14,965

INCOME BEFORE OTHER ITEMS

5,711

7,097

9,003

10,882

6,413

OTHER ITEMS* 5,711

7,499

Average Assets

$ 3,373,127

$ 2,789,173

$ 2,705,184

$ 2,576,720

$ 2,476,925

Total Capital

$ 171,037

196,504

9,003

185,451

6,880

NET INCOME

201,720

402

17,762

6,413

132,700

Return on Assets

0.17%

0.27%

0.33%

0.69%

0.42%

Regulatory Capital Ratio

5.98%

7.05%

6.86%

6.64%

7.15%

* Other items include the cumulative effect of a change in accounting in 2005 and the net gain on the sale of Primary Financial in 2003.

Net Interest Income This year proved to be another year of tight liquidity within the credit union network. According to statistics from the Credit Union National Association, the loan-to-savings ratio of credit unions stood at 82.3% at the end of 2006. This was its highest year-end level since the 1970s. Higher loan-to-savings ratios result in a reduction in total available dollars credit unions have to invest. Yet, despite these conditions, we were one of the fastest growing corporates in terms of share growth. We are highly focused on providing credit unions with competitive investment products and great member service. In 2006, our focus paid off, with 50 new members joining Corporate One. We now have investment relationships with 22 of the 100 largest credit unions in the nation. Deposits from these new members, as well as increased balances from our existing members, resulted in an increase in average interest-earning assets of $565.5 million, a 20.5% increase over 2005. Increased borrowing also contributed to the increase in average interest-earning assets, as we effectively managed our capital and seasonal run-off with leverage. These increased balances in 2006 were the primary reason for our increase in net interest income over 2005. Accordingly, net interest income was $13.6 million for the year ended December 31, 2006, compared to $12.5 million for the same period in 2005. In order to attract and maintain share balances, our deposit products have to be competitive, but 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. We then 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 also a co-broker of Primary Financial, enabling us to offer SimpliCD. SimpliCD allows credit unions to easily invest funds in federally insured certificates of deposit. SimpliCD searches for the best rates and offers single transaction settlement. Credit unions can also issue share certificates through Primary Financial, providing them a source of liquidity. Corporate One also has a branch of CU Investment Solutions, Inc. (ISI)* housed within its office. Through ISI, our members have access to the inventories of multiple broker/ dealersâ&#x20AC;&#x2122; institutional trading desks and receive very competitive pricing on the securities they buy and sell. Since SimpliCD and securities are both off-balance sheet products, they contribute to net 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 that it is critical to offer a variety of investment products because, as the interest rate environment changes, certain products are more attractive than others. In 2006, our on-balance sheet term products were more attractive compared to SimpliCD. Accordingly, our average on-balance sheet term deposits grew 14.7% over 2005, whereas brokerage income from SimpliCD sales was down compared to 2005. Although the interest rate environment was not as favorable for SimpliCD in 2006, it continues to be a valuable product to round out our full array of investment offerings. With a flat to inverted yield curve in 2006, the interest rate environment also made short-term investments more attractive. During 2006, we continued to pay competitive rates on our overnight accounts. In fact, on certain account types, we paid an even greater spread to fed funds in 2006 compared to 2005. As a result, we experienced a 23.3% increase in average overnight shares in 2006 compared

*ISI CRD number 43753, Lenexa, Kansas. Member NASD-SIPC. Marketable securities are subject to market risk and are not insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF).

to 2005. However, this increased return to our members also contributed to an overall decrease in our net interest margin. As we focus on providing credit unions with competitive investment products, we must also ensure that Corporate One remains financially strong. This balance has been particularly challenging given the flat to inverted yield curve. Additionally, global demand for structured and corporate debt securities of U.S. issuers resulted in spreads tightening to historic levels on many of the assets in which we invest. When managing our investment portfolio, we continually challenge ourselves to find value in the marketplace. We continued to utilize our Part I expanded investment authority granted by the National Credit Union Administration (NCUA) in 2004. Part I authority allows us to invest in asset-backed securities rated AA and A. Over the last year, we increased our investment in these types of securities resulting in increased interest income with minimal additional credit risk. We also rotated our investments out of sectors where the spreads had tightened and invested in sectors where the spreads were wider. Additionally, we saw increased value in the products offered by U.S. Central. As a result of this repositioning of our portfolios, we were able to continue to pay great rates. However, pressures on the spreads we earned also contributed to a lower net interest margin in 2006 compared to 2005. Table One provides more information on the composition of interest-earning assets, interest- and dividend-bearing liabilities and membersâ&#x20AC;&#x2122; share accounts, and their weighted average rates. The resulting net interest margin of Corporate One for 2006 and 2005 is presented for comparison purposes.

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

2006

2005

Average Interest or Average Average Interest or Average Balance Dividends Rate Balance Dividends Rate

Interest-Earning Assets: Time deposits $ 7,830 $ Asset-backed securities 930,598 Mortgage-related securities 271,043 Other investments (primarily U.S. Central) 2,082,406 Loans to members 29,659

3.73% $ 15,436 $ 459 5.35% 877,651 31,379 5.53% 161,359 6,075 4.67% 1,658,603 52,237 5.20% 43,037 1,667

2.97% 3.58% 3.76% 3.15% 3.87%

Total Interest-Earning Assets 3,321,536 163,880

4.93% 2,756,086

91,817

3.33%

Interest- and DividendBearing Liabilities and Membersâ&#x20AC;&#x2122; Share Accounts: Overnight shares 1,345,082 Term shares 1,309,069 Membership capital shares 86,554 Other borrowings 472,424

4.69% 1,090,730 31,523 4.52% 1,141,418 34,545 4.46% 83,172 2,235 5.12% 334,997 11,006

2.89% 3.03% 2.69% 3.29%

4.68%

2.99%

Total Interest- and DividendBearing Liabilities and Membersâ&#x20AC;&#x2122; Share Accounts

292 49,822 14,995 97,228 1,543

63,115 59,107 3,859 24,192

$ 3,213,129 150,273

Net Interest Income

$ 2,650,317

13,607

Net Interest Margin

79,309 12,508

0.41%

0.45%

Table Two provides a rate and volume analysis that further illustrates changes between 2006 and 2005 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 Two: Volume and Rate Variance Analysis Volume (Dollar amounts are in thousands) Interest-Earning Assets: Time deposits $ (226) Asset-backed securities 1,893 Mortgage-related securities 4,129 Other investments (primarily U.S. Central) 13,347 Loans to members (518) Total Interest-Earning Assets

2006 versus 2005 Rate

Volume and Rate

117 15,608 2,852 25,204 572

(58) 942 1,939 6,440 (178)

Total

(167) 18,443 8,920 44,991 (124)

18,625

44,353

9,085

72,063

Interest- and Dividend-Bearing Liabilities and Members’ Share Accounts: Overnight shares Term shares Membership capital shares Other borrowings

7,351 5,074 91 4,515

19,657 16,992 1,473 6,149

4,584 2,496 60 2,522

31,592 24,562 1,624 13,186

Total Interest- and Dividend-Bearing Liabilities and Members’ Share Accounts

17,031

44,271

9,662

70,964

Increase (decrease) in Net Interest Income

$ 1,594

(577)

1,099

Service Fees In addition to providing a wide range of competitive investment products to meet our members’ needs, Corporate One also provides a complete line of correspondent services. Net service fee income generated from our fee-based services was $8.0 million for the year ended December 31, 2006, a 5.4% increase from 2005. With a $496,000 increase over 2005, ACE was the most significant contributor to the overall increase in net service fee income in 2006. At the end of 2005, we had a little over 100 credit union branches using the image database portion of ACE. By the end of 2006, we had more than 460 credit union branches on the image database portion of ACE, 268 of those on our electronic forward cash collection service, and more than 16.6 million check images within our searchable database. This significant increase in ACE installations resulted in higher volumes and revenue. Because members using our Access Daily Deposit Service (ADDS) were the first to benefit from our new ACE services, we saw a decrease in fees related to ADDS. This trend is expected to continue as we transition all of our ADDS users to ACE. We expect ACE revenue to continue to increase as we roll out this valuable solution to credit unions across the country. Over the last few years, we have seen a trend toward electronic payment methods; 2006 was no different. As a result, net service fee income from ACH, settlement and ATM services increased in 2006 compared to 2005.

Reductions in consumer usage of share drafts resulted in shrinking volumes among our existing share draft members in 2006. However, we were successful in adding new members to this service to replace some of the decrease in volume. We were also aggressive in reducing our costs to provide this product. The combination of these efforts resulted in a slight increase in net service fee income from share drafts in 2006 compared to 2005. We continued to see a decrease in net service fee income related to our brokerage services. Tighter liquidity at our member credit unions and an interest rate environment less favorable to SimpliCD certificate sales were the primary reasons for the decrease in income from brokerage services. Table Three below summarizes net service fee income for 2006 and 2005. Table Three: Net Service Fee Income (Dollar amounts are in thousands) ATM

2006

2005

Percentage Change

$ 3,256

$ 3,247

0.3%

Share Drafts

1,511

1,466

3.1%

Brokerage

1,325

1,579

-16.1%

ACH

685

541

26.6%

Settlement

633

537

17.9%

ACE

506

4960.0%

197

-62.9%

$ 7,989

$ 7,577

5.4%

ADDS Total NET SeRVICE FEE Income

Operating Expenses Total operating expenses were $16.1 million in 2006, an increase of $2.0 million relative to 2005. Salaries and benefits increased due to normal cost-of-living increases and merit raises. Additionally, 2006 included a full year of expense related to additional staff hired mid-year in 2005 to expand our risk management department. In 2006, we also increased staff levels to support ACE. Corporate One has made a significant investment in technology to provide our credit union members a cutting edge Check 21 solution. Depreciation and amortization related to this investment contributed to increased office operations and occupancy expenses in 2006 compared to 2005. Depreciation of the ACE equipment deployed at our member credit union branches also contributed to the increase. In developing ACE, we are focused on the long-term benefits for our members while shouldering both the upfront costs and risks associated with entry into this new technology. The efficiencies and savings our member credit unions enjoy as a result of our ACE solution will never be reflected in Corporate Oneâ&#x20AC;&#x2122;s earnings. But as a member-owned organization, we understand that creating innovative and valuable products for our members is our job. Ultimately, we firmly believe that ACE will not only benefit our members, but will be cost effective for Corporate One as well.

Enterprise Wide Risk Management Corporate One is committed to managing the risks associated with our business activities and has had a formal risk management department for many years. In the last two years, we embarked on an initiative to deploy enterprise wide risk management throughout our entire organization. We believe that enterprise wide risk management 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 enterprise wide risk management, as the framework for the governance of risk. Corporate One utilizes a core process risk assessment methodology to identify, categorize and mitigate its risk. In 2006, we established an Enterprise Wide Risk Management (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 Although liquidity was very tight throughout the credit union network in 2006, Corporate One actually experienced record levels of share balances. The increase in share balances was due to deposits from new members, as well as increased deposits from existing members. With every new deposit we accept, we understand that we need to appropriately manage our liquidity to ensure our members have access to those funds when needed. We constantly monitor our members’ liquidity needs 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 addition, we buy securities with readily determined market values that can be sold or borrowed against to generate liquidity. In fact, over the years, we have sold securities to fund our members’ requests for deposits and to reposition our portfolios, proving that the securities we buy do have a ready market. We also 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, and term certificates are not as prone to sudden liquidity demands as our overnight shares. In 2006, we were proactive in evaluating our liquidity sources in light of the growth in member deposits. We increased our advised line of credit with U.S. Central from $750 million to $1.0 billion. We also increased our ability to issue commercial paper in the national capital markets from $175 million to $350 million. We maintain the highest possible ratings from Moody’s and Standard and Poor’s, a P-1 and A-1+ rating, respectively, enabling us to access this market in the most cost efficient manner. Furthermore, we increased our borrowing capacity at the Federal Home Loan Bank (FHLB) of Cincinnati from $334.5 million at the end of 2005 to $489.0 million at the end of 2006. We also maintain committed lines of credit with three financial institutions outside the credit union network totaling $135 million. Additionally, we continue to

maintain fed funds lines with various financial institutions. Fed funds lines do not require collateral for overnight borrowings and therefore give us increased flexibility should we need liquidity to meet member needs. Liquidity does not come without costs. As a member-owned organization, we are focused on reducing those costs. We strive to keep ourselves fully invested to earn the best possible return for our members, while ensuring we can meet our membersâ&#x20AC;&#x2122; liquidity needs. We also have diversified our sources of liquidity, so we can take advantage of the most competitive rates in the market. Market/Interest Rate Risk Management When members deposit funds with us, we can choose to invest those funds in a variety of securities that closely match the duration and repricing characteristics of the underlying deposit, resulting in minimal mismatch. For our overnight liabilities that reprice daily, we generally invest such deposits in investments that reprice every month 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. Our primary interest-rate risk-measurement tool is a NEV calculation. NEV is defined as the fair value of assets less the fair value of liabilities and membersâ&#x20AC;&#x2122; 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. As expected, given our strategy for managing our balance sheet, our stress tests indicate little overall NEV volatility should interest rates move up or down. Figure One illustrates how closely matched our balance sheet is as a result of our strategy. This graph also illustrates that the majority of our assets and liabilities have effective durations (or the period of time until the instrument reprices) of less than 30 days. This relatively short-term duration also helps reduce our interest rate risk. Figure One: Repricing Sensitivity Graph - December 31, 2006 (Dollar amounts are in millions)

$2,500 ASSETS

$2,000

Liabilities

$1,500 $1,000 $500 0-30 days

31-90 days

91-180 days

181-365 days

1-3 years

3+ years

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 Oneâ&#x20AC;&#x2122;s NEV calculation as of December 31, 2006 and 2005 is shown in Table Four. At December 31, 2006 and throughout 2006, we have maintained well below the 28% change from base limit imposed by our Board and regulatory body to maintain our Part I expanded authority. Also, our NEV ratio at December 31, 2006 and throughout 2006 in all scenarios is considerably greater than the minimum regulatory ratio of 2%. These results are expected, given our strategy for minimizing interest rate risk. Actual Actual Table Four: Net Economic Net Dollar Percentage Value Calculation (Dollar amounts are in thousands)

Economic Value

NEV Ratio

Change from Base

As of December 31, 2006 300 b.p. rise in rates Base scenario 300 b.p. decline in rates

$173,015 $204,176 $205,974

4.42% 5.21% 5.26%

-$31,161

-15.26%

$1,798

0.88%

As of December 31, 2005 300 b.p. rise in rates Base scenario 300 b.p. decline in rates

$174,567 $195,883 $213,508

5.85% 6.57% 7.16%

-$21,316

-10.88%

$17,625

9.00%

Credit Risk Management Protecting our membersâ&#x20AC;&#x2122; investments is our number one objective when we add assets to our balance sheet. Therefore, we take credit risk management very seriously. We have Part I expanded investment authority from the NCUA and this authority allows Corporate One to manage its balance sheet more effectively and take on certain additional credit risk. We believe that the nominal amount of additional credit risk is worth the value we are finding in AA- and A-rated securities. Our ability to invest in securities with slightly more credit risk and greater returns helps us continue to provide great rates to our members. However, even with the expanded investment authority, we maintain a low credit risk profile because of our strategies to minimize this risk. These strategies include having policies and procedures in place to ensure that our portfolio is properly diversified and collateralized. Exposure guidelines are established by our risk management department, independent of the investing function within Corporate One, and affirmed by the Asset/Liability Committee (ALCO). These policies and procedures require high quality, investment-grade ratings for all investments we purchase. We perform an individual analysis of our investments both before and after we purchase them. The analysis is not only performed by the investment department, but also by our risk management department. The analysis includes an evaluation of the strength and integrity of the parties, and we invest only with the most creditworthy obligors. Risk management also monitors the performance of the underlying collateral in each of these investments for as long as we own the security. Additionally, we primarily invest in securities with credit enhancements such as excess spread, subordination, or financial guarantees by a third-party guarantor, which reduces the likelihood that Corporate One will incur credit losses.

Based on the dollars invested, more than 40% of our investments are assetbacked securities. The collateral backing the majority of these securities are either auto loans, credit card receivables, student loans, mortgages or home equity loans. Our analysis of asset- or mortgage-backed securities also includes an assessment of the creditworthiness of the collateral backing these securities. However, because this collateral is consumer debt, factors such as a weakened economy can affect the loss experience of the collateral. Should actual loss experience of the collateral exceed expectations, the credit quality of such securities may deteriorate.

Figure Two: Portfolio Diversification (Based on dollars invested at December 31, 2006) By Investment Type

We use this same methodology when we lend money. We evaluate the credit applicant’s ability to repay loans by analyzing their financial strength. Also during the review, we consider the quality and liquidity of the collateral that the applicant pledges to Corporate One to secure borrowings. As a result of our strategy for minimizing credit risk, we have a welldiversified balance sheet. All of our investments have some of the highest credit ratings that Moody’s and Standard and Poor’s assign or are issued by agencies of the U.S. government, or by U.S. Central, a AAA-rated financial institution, or by other regulated depository institutions (see Figure Two). The level of credit risk we take is low, as indicated by the lack of credit losses we have experienced. 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 has comprehensive policies and procedures designed to provide a sound and well-controlled operational environment. All vendor relationships are reviewed on an annual basis and a financial analysis of our major business partners is completed. Corporate One also engages an independent 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.

U.S. Central

54.18%

Asset-Backed Floating 22.67% Mortgage-Related Asset-Backed Fixed

15.53% 5.30%

Agency

1.74%

Other

0.58%

By Credit Rating

U.S. Central

54.18%

AAA Rated

20.18%

Agency

17.27%

AA Rated

4.52%

A Rated

3.27%

Other

0.58%

Report from the Supervisory Committee Corporate One’s 2006 financial statements, prepared by management, were audited in accordance with auditing standards generally accepted in the United States of America by Crowe Chizek and Company LLC, independent auditors. Crowe Chizek’s report on Corporate One’s financial statements is included within this annual report. In addition to the annual audit, Condit and Associates, Independent Certified Public Accountants, performed periodic internal audit procedures on the financial statements and internal controls of Corporate One, and reported monthly on such procedures to Corporate One’s Supervisory Committee and Board of Directors.

Fritz Comes, Toledo Area Community CU

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.

Sonja Hann (Chairman), Midwest Community FCU

Jeff Meyer, Three Rivers FCU

R. Lee Powell (Board Liaison), DESCO FCU

Report of Independent Auditors Supervisory Committee and Board of Directors Corporate One Federal Credit Union Columbus, Ohio

We have audited the accompanying balance sheet of Corporate One Federal Credit Union as of December 31, 2006, and the related statements of income, changes in members’ equity and cash flows for the year then ended. These financial statements are the responsibility of the credit union’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Corporate One Federal Credit Union as of and for the year ended December 31, 2005, were audited by other auditors whose report dated March 13, 2006, on those statements was qualified because of the departure from accounting principles generally accepted in the United States of America described in the third paragraph of this report. We conducted our audit 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 audit provides a reasonable basis for our opinion. As more fully described in note 2 (h) 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. 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, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Columbus, Ohio March 9, 2007

Crowe Chizek and Company LLC

Balance Sheets

December 31, 2006

2005

Assets

Cash and cash equivalents

Investments in financial institutions

1,938,340,658

324,666,319

1,387,986,552

286,512,889

Securities available for sale, at fair value

1,601,770,425

1,260,723,253

Loans to members

14,823,137

61,703,313

Accrued interest receivable

20,573,470

12,822,923

Other assets

13,216,044

10,925,478

TOTAL ASSETS

3,913,390,053

3,020,674,408

347,000,000

363,500,000

Liabilities and members’ equity

Liabilities:

Commercial paper and other borrowings

Dividends and interest payable

19,128,563

9,062,692

4,065,063

2,887,816

370,193,626

375,450,508

3,427,763,593

2,534,993,350

Paid-in capital

25,681,996

89,981,575

85,800,284

Accounts payable and other liabilities TOTAL LIABILITIES

Members’ equity:

Share accounts Reserves and undivided earnings

Accumulated other comprehensive loss TOTAL MEMBERS’ EQUITY

TOTAL LIABILITIES AND MEMBERS’ EQUITY

See accompanying notes to financial statements.

(230,737)

(1,251,730)

3,543,196,427 $

3,913,390,053

2,645,223,900 $

3,020,674,408

Statements of Income

Year ended December 31, 2006

2005

Interest income: Investments and securities

Loans to members

TOTAL INTEREST INCOME

$ 162,336,880

$ 90,149,925

1,543,304

1,667,092

163,880,184

91,817,017

Dividend and interest expense:

Share accounts

126,081,345

68,303,833

Other borrowings

19,612,761

9,514,661

Commercial paper

4,578,968

1,490,864

TOTAL DIVIDEND AND INTEREST EXPENSE

150,273,074

79,309,358

NET INTEREST INCOME

13,607,110

12,507,659

7,988,880

7,576,781

Non-interest income:

Service fee income, net

Gain on disposal of assets

Gain on sales of securities

total non-interest income

21,394 215,375

1,091,914

8,225,649

8,668,695

Operating expenses:

Salaries and employee benefits

8,545,686

7,717,833

Office operations and occupancy expense

6,130,385

5,111,327

Other operating expenses

1,445,581

1,249,511

TOTAL OPERATING EXPENSES

16,121,652

14,078,671

5,711,107

7,097,683

Cumulative effect of change in accounting

401,712

Income before cumulative effect of change in accounting

NET INCOME

$ 5,711,107

$ 7,499,395

See accompanying notes to financial statements.

Financial Review

Statements of Changes in Membersâ&#x20AC;&#x2122; Equity

Balance at January 1, 2005

Share Accounts

Paid-In Capital

Reserves and Undivided Earnings

$ 2,508,358,948

$ 25,681,996

$ 79,376,015

Accumulated Other Comprehensive Income (Loss) $ (97,858)

$ 2,613,319,101

Comprehensive income: Net income 7,499,395 Other comprehensive income (loss) unrealized loss on securities available for sale, net of realized gains (1,153,872)

(1,153,872)

Comprehensive income

6,345,523

Net change in share accounts

26,634,402

Dividends on paid-in capital Balance at December 31, 2005

2,534,993,350

25,681,996

(1,075,126) 85,800,284

(1,251,730)

Comprehensive income: Net income 5,711,107 Other comprehensive income (loss) unrealized gain on securities available for sale, net of realized gains 1,020,993 Comprehensive income Net change in share accounts

892,770,243

Dividends on paid-in capital Balance at December 31, 2006

$ 3,427,763,593

See accompanying notes to financial statements.

Total Membersâ&#x20AC;&#x2122; Equity

$ 25,681,996

(1,529,816) $ 89,981,575

$ (230,737)

7,499,395

26,634,402 (1,075,126) 2,645,223,900

5,711,107

1,020,993 6,732,100 892,770,243 (1,529,816) $ 3,543,196,427

Statements of Cash Flows

Year ended December 31,

2006

2005

Cash flows from operating activities: Net income $ 5,711,107 $ Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting Depreciation 1,683,443 Net amortization (accretion) (442,009) Net gain on sales of securities (215,375) Net gain on disposal of assets (21,394) Net change in accrued interest receivable (7,750,547) Net change in dividends and interest payable 10,065,871 Other, net 963,719 NET CASH PROVIDED BY OPERATING ACTIVITIES 9,994,815 Cash flows from investing activities: Net change in investments in financial institutions Purchases of securities available for sale Proceeds from maturities and principal paydowns of securities available for sale Proceeds from sales of securities available for sale 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 USED IN INVESTING ACTIVITIES Cash flows from financing activities: Net change in commercial paper and other borrowings Net change in share accounts Dividends on paid-in capital

7,499,395

(401,712) 1,415,921 1,019,290 (1,091,914) (3,882,407) 2,422,808 838,585 7,819,966

(550,354,106) (930,793,506)

(135,272,639) (878,234,893)

493,578,337 97,556,654 46,880,176 (10,333) (3,460,428) 21,394

620,275,528 329,579,848 (33,605,004) 14,254 (2,379,025)

(846,581,812)

(99,621,931)

(16,500,000) 892,770,243 (1,529,816)

130,040,000 26,634,402 (1,075,126)

NET CASH PROVIDED BY FINANCING ACTIVITIES Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year

874,740,427

155,599,276

38,153,430 286,512,889

63,797,311 222,715,578

CASH AND CASH EQUIVALENTS AT END OF YEAR

324,666,319

286,512,889

Supplemental disclosure: Dividends on share accounts and interest paid

138,677,387

76,886,550

See accompanying notes to financial statements.

Notes to Financial Statements (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 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 stateand 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(h). 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 and in 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, federal funds sold, and deferred deposits. Deferred deposits represent deposits for which Corporate One has received notification from the Federal Reserve Bank but has not received credit. The Federal Reserve Bank generally credits deferred deposits within one to three days of notification. As of December 31, 2006 and 2005, deferred deposits totaled $165.2 million and $122.0 million, respectively. 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, 2006 and 2005 was approximately $3.0 million. (c) Investments in Financial Institutions Investments in financial institutions are carried at cost. These investments consist of interest-bearing deposits primarily in U.S. Central and other federally insured depository institutions, and Federal Home Loan Bank (FHLB) of Cincinnati stock. (d) Securities At origination, securities not classified as held to maturity or trading are classified as available for sale, and are carried at fair value. Unrealized gains and losses on these securities are excluded from earnings, and are reported as a separate component of members’ equity. Such securities include those that

may be sold in response to changes in interest rates, changes in prepayment risk or other factors. 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 securities available for sale 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, Corporate One considers whether it has the ability and intent to hold the investment until a price 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. (e) 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 credit union share accounts and other member assets. An allowance for loan losses was not considered necessary at December 31, 2006 and 2005 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 2006 or 2005 and considers no loans impaired as of, or during the years ended December 31, 2006 and 2005. (f) 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. (g) 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. (h) Members’ Share Accounts Members’ share accounts are classified as equity to denote the ownership interest of the members. This classification conforms to the regulatory

Notes to Financial Statements (table dollar amounts in thousands) requirements of the National Credit Union Administration (NCUA). Generally accepted accounting principles require 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 $3.43 billion and $2.53 billion as of December 31, 2006 and 2005, respectively. 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. 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. Notice of intent to decapitalize is required and once notification is given, the deposit will be redeemed in three years. At December 31, 2006 and 2005, there were $9,000 and $33,000 shares on notice, respectively. 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 rates on settlement services with Corporate One according to the Associate member fee schedules. (i) 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, requires a 20-year notice of intent to withdraw, earns dividends that are non-cumulative, and is classified as equity in the financial statements. PIC 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. At December 31, 2006 and 2005, there were $375,000 shares on notice. (j) 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. (k) Comprehensive Income Comprehensive income consists of net income and accumulated other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale.

(l) Service Fees Service fees are earned on various services provided to credit unions and their affiliates. These services consist of ACH and ATM programs, depository services, share draft processing, and certificate of deposit and securities brokering. Gross service fee income for the years ending December 31, 2006 and 2005 was $17.2 million and $17.1 million, respectively. Revenues on the accompanying statements of income are reduced by third-party costs incurred to provide these services. (m) Reclassifications Certain reclassifications have been made in the prior yearâ&#x20AC;&#x2122;s financial statements to conform to the presentation for the year ended December 31, 2006. These reclassifications had no impact on net income. (3) Investments in Financial Institutions Investments in financial institutions at December 31 are summarized as follows: 2006 2005 U.S. Central: Share certificates $ 1,845,981 $ 1,306,624 Membership capital shares 70,064 56,747 Paid-in capital shares 1,900 1,900 Federal Home Loan Bank stock

15,010

12,340

Certificates of deposit

5,386

10,376

TOTAL INVESTMENTS IN FINANCIAL INSTITUTIONS

$ 1,938,341

$ 1,387,987

U.S. Central share certificates are stated at cost and are redeemable prior to maturity at fair value as determined by U.S. Central. As of December 31, 2006, U.S. Central share certificates have specific maturities of $587.6 million due in one year or less, $869.9 million due after one year through five years, and $388.5 million due after five years through ten years. Investment in membership capital shares is a requirement of membership in U.S. Central. Membership capital shares are subordinate to all other shares, share certificates, and liabilities of U.S. Central except for paid-in capital shares. Membership capital shares can be withdrawn after the expiration of a three-year notice. Investment in paid-in capital shares is optional for U.S. Central members. Paid-in capital shares are subordinate to all other shares and share certificates, including membership capital shares, and liabilities of U.S. Central. Paid-in capital shares can only be redeemed at the option of U.S. Central. 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, and may invest in additional amounts. FHLB stock is classified as a restricted security and is carried at cost since there is no readily available market.

Notes to Financial Statements (table dollar amounts in thousands)

(4) Securities The amortized cost and fair value of securities at DecemberÂ 31 are summarized as follows: 2006

Amortized Gross Gross Cost Unrealized Gains Unrealized Losses

Securities available for sale: U.S. government and federal agency securities $ Mortgage-backed securities Asset-backed securities TOTAL SECURITIES AVAILABLE FOR SALE $

Securities available for sale: U.S. government and federal agency securities $ Corporate debt securities Mortgage-backed securities Asset-backed securities TOTAL SECURITIES AVAILABLE FOR SALE $

335,022 $ 672,195 594,784 1,602,001

Fair Value

286 $ 578 1,947

(1,131) $ (1,490) (421)

2,811

(3,042)

334,177 671,283 596,310

$ 1,601,770

2005 Amortized Cost

Gross Gross Unrealized Gains Unrealized Losses

269,993 $ 25,000 403,795 563,187 1,261,975

Fair Value

249 $ (1,690) $ 26 381 (854) 1,075 (439) 1,731

(2,983)

268,552 25,026 403,322 563,823

$ 1,260,723

Mortgage-backed securities consist primarily of securities collateralized by private label mortgage issuers or government agencies such as Fannie Mae or Freddie Mac. Asset-backed securities consist primarily of securitized credit card, student loan, home-equity and automobile receivables. Corporate One invests only in bonds rated single A or higher. The unrealized losses in the portfolio resulted primarily from increases in market interest rates and not from deterioration in the creditworthiness of the issuer. Corporate One does not believe any securities in the investment portfolio at December 31, 2006 and 2005 were other than temporarily impaired and management has the intent and ability to hold these securities for the foreseeable future.

The unrealized losses on securities that have been in loss positions less than 12 months and greater than 12 months at December 31 are summarized as follows:

2006

Less Than 12 Months

12 Months or Longer

Fair Unrealized Value Losses

U.S. government and federal agencies securities $ 143,053 $ Mortgage-backed securities 351,434 Asset-backed securities 97,832 Total Temporarily Impaired Securities $ 592,319 $

(190) $ (1,141) (355) (1,686)

87,814 $ 45,231 48,448

$ 181,493

Total Fair Unrealized Value Losses

(941) $ 230,867 $ (1,131) (349) 396,665 (1,490) (66) 146,280 (421)

$ (1,356) $ 773,812 $ (3,042)

2005

Less Than 12 Months

12 Months or Longer

Fair Unrealized Value Losses

U.S. government and federal agencies securities $ 94,265 $ Mortgage-backed securities 176,446 Asset-backed securities 142,541 Total Temporarily Impaired Securities $ 413,252 $

(386) $ (597) (386) (1,369)

Total Fair Unrealized Value Losses

73,837 $ (1,304) $ 168,102 $ (1,690) 28,293 (257) 204,739 (854) 5,144 (53) 147,685 (439)

$ 107,274

$ (1,614) $ 520,526 $ (2,983)

The expected distributions of securities available for sale at DecemberÂ 31, 2006 are reflected in the following table. Expected distributions may differ from contractual final maturities because of scheduled principal paydowns and because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The majority of variable-rate securities are amortizing securities and the entire principal amount outstanding is included in the maturity category that corresponds with the final return of principal. Maturity Distribution

Amortized Cost Fair Value Due in one year or less $ 122,200 $ 121,698 Due after one year through five years 665,080 664,504 Due after five years through ten years 366,889 367,574 Due after ten years 447,832 447,994 TOTAL SECURITIES AVAILABLE FOR SALE

1,602,001

$ 1,601,770

Notes to Financial Statements (table dollar amounts in thousands)

At December 31, 2006, approximately 79% of the dollar amount of Corporate One’s securities were variable-rate securities, the majority of which had interest rates that reset monthly, predominantly based upon LIBOR. Of these variable-rate securities, 39% of the dollar amount of such securities had interest rate caps that were fixed at the time of issuance and the caps range from 7% to 18%. Less than 2% 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. The following table provides a summary of securities gain (loss) activity and the net represents other comprehensive income (loss).

Unrealized gain (loss) on securities available for sale arising during the period

2006

1,236

Less: Net realized gain from sales of securities available for sale OTHER COMPREHENSIVE INCOME (LOSS)

2005

215

1,021

(62) 1,092 (1,154)

(5) 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:

2006

2005

Primary Financial Company LLC $ Processing Alliance LLC

465 $ 100

469

TOTAL EQUITY INVESTMENTS

565

469

Corporate One has a 6.72% investment in Primary Financial Company LLC (Primary Financial). This investment meets the criteria outlined by the Emerging Issues Task Force (EITF) in EITF No. 03-16, Accounting for Investments in Limited Liability Companies (LLC), and is accounted for using the equity method. Corporate One adopted EITF No. 03-16 effective January 1, 2005, and therefore recognized a cumulative effect of change in accounting of $402,000 in 2005. This amount represents Corporate One’s share of the net assets of Primary Financial at January 1, 2005. Corporate One’s portion of Primary Financial’s current period net (loss) income, recognized as a component of service fee income in the accompanying statements of income, was $(4,000) and $59,000 in 2006 and 2005, respectively. 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 $404,000 in 2006 and $551,000 in 2005, related to these additional spreads and royalties. These additional spreads and royalties continue through 2015 and are included as a component of net service fee income in the accompanying statements of income. Corporate One performs various support services for Primary Financial, including accounting, technical support and certain treasury and marketing functions. Corporate One recognized, as a component of net service fee income in the accompanying statements of income, $483,000 in 2006 and $475,000 in 2005 related to this agreement. Corporate One owns 50% of Processing Alliance LLC. This company was formed in December 2006 to provide forward cash collection services as well as share draft processing services to credit unions. (6) Other Assets Included in other assets is a deposit with the NCUA for share insurance, accounts receivable and net property and equipment. Members’ shares are insured by the NCUA up to $100,000. For such insurance coverage to be in place, Corporate One must maintain a non-interest-earning NCUA share insurance deposit in an amount equal to 1% of Corporate One’s total insured shares. The deposit would be refunded to Corporate One if its insurance coverage is terminated, if it converts to insurance coverage from another source, or if the operations of the fund are transferred from the NCUA Board. At December 31, 2006 and 2005, the deposit was $638,766 and $649,099, respectively. Property and equipment, valued at cost less accumulated depreciation, at December 31 are summarized as follows:

2006

Buildings and improvements $ Equipment Total property and equipment Less: Accumulated depreciation NET PROPERTY AND EQUIPMENT

2005

4,379 $ 14,413

4,287 11,044

18,792 10,387

15,331 8,703

8,405

6,628

(7) Commercial Paper, Lines of Credit and Other Borrowings Corporate One had no outstanding commercial paper at December 31, 2006 and 2005. Commercial paper outstanding averaged approximately $87.0 million and $47.0 million during 2006 and 2005, respectively, and the maximum amount outstanding at any month-end during 2006 and 2005 was $330.0 million and $175.0 million, respectively. Corporate One has received commitments from several financial institutions enabling Corporate One to borrow funds under revolving lines of credit through October 2007. At December 31, 2006, these commitments totaled $135.0 million

Notes to Financial Statements (table dollar amounts in thousands) and no amounts were outstanding on these lines of credit. The interest rates on these lines are indexed off of money market rates, primarily LIBOR, plus a margin of up to 50 basis points. As collateral for these lines of credit, Corporate One has pledged securities to these financial institutions that have a fair value of approximately $150.5 million. In addition, Corporate One has an uncommitted 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 $1.0 billion 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 Oneâ&#x20AC;&#x2122;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. As a member of the FHLB of Cincinnati, Corporate One is eligible to take advantage of the FHLBâ&#x20AC;&#x2122;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, 2006 and 2005, Corporate One had securities held in safekeeping at the FHLB with fair values of approximately $593.4 million and $385.7 million, respectively, which provided a borrowing capacity of $489.0 million and $334.5 million, respectively. The following table provides a summary of our borrowings at December 31.

2006 Balance

Rate

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

$ 313,500 10,000

5.18-5.23% 4.39%

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

1,000 22,500 $ 347,000

TOTAL BORROWINGS

2005

Balance

Rate

334,500

4.12%

3.30% 3.60-5.10%

500 28,500

2.81% 3.30-4.27%

$ 363,500

(8) Share Accounts and Paid-in Capital (PIC) Balances and weighted average rates of share accounts and PIC at December 31 are summarized as follows:

Settlement and regular shares

2006 Balance

2005 Rate

Balance

Rate

$ 1,830,517

4.43%

$ 1,217,184

3.33%

1,511,190

5.08%

1,232,788

3.71%

86,057

4.75%

85,021

3.75%

Share certificates MCS TOTAL SHARE ACCOUNTS

$ 3,427,764

$ 2,534,993

PIC

25,682

6.25%

25,682

5.25%

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. Most share certificates are in amounts greater than $100,000. Total share certificate accounts by maturity at December 31, 2006 are summarized as follows: Year of Maturity: 2007 2008 2009 2010 2011

955,100 229,178 180,020 40,433 106,459

TOTAL SHARE CERTIFICATES

$ 1,511,190

(9) 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. These financial instruments include commitments to extend 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

Notes to Financial Statements (table dollar amounts in thousands) 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, 2006 and 2005, these financial instruments included outstanding commitments to extend credit totaling approximately $911.0 million and $874.0 million, respectively. 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. Corporate One is a party to various legal actions normally associated with financial institutions, the aggregate effect of which, in management’s opinion, would not be material. (10) Retirement Plan Corporate One is a sponsor of two defined contribution plans which cover substantially all of its employees. In 2006 and 2005, for each eligible participant, Corporate One contributed a total of 11.5% of the participant’s eligible compensation to the participant’s accounts in the plans. Employees also have the option to contribute a portion of their compensation on a pre-tax basis. Retirement expense was approximately $759,000 in 2006 and $640,000 in 2005. (11) 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, NCUSIF deposit, and dividends and interest payable approximate carrying values. 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’s end are material to the financial statements. The fair values of Corporate One’s remaining financial instruments were based on the following methods and assumptions:

• • • • •

Investments in financial institutions are based on discounted cash flow analyses using current market rates, except FHLB stock, for which fair value approximates cost. Securities available for sale are based on quoted market prices. The fair value of loans to members is estimated using discounted cash flow analyses, using interest rates currently offered for loans with similar terms to members of similar credit quality. The fair value of commercial paper and other borrowings 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.

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

2006

2005

Carrying

Fair

Carrying

Fair

Value

Assets: Cash and cash equivalents

324,666

286,513

Investments in financial institutions

1,938,341

1,935,477

1,387,987

1,380,671

Securities available for sale

1,601,770

1,260,723

Loans to members

14,823

61,703

61,579

Accrued interest receivable

20,573

12,823

639

649

NCUSIF deposit Liabilities and members’ equity: Commercial paper and other borrowings Dividends and interest payable Share accounts

347,000

346,528

363,500

363,464

19,129

9,063

3,427,764

3,424,091

2,534,993

(12) Regulatory 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 daily average net assets (DANA)) based upon the corporate’s investment authority as authorized by the NCUA. There are a number of remedies available to a corporate credit union should its capital ratio fall below the required minimum ratio. 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. Throughout 2006 and 2005, Corporate One’s capital ratio exceeded the required minimum regulatory ratio of 5%. The NCUA defines capital as reserves and undivided earnings, PIC and MCS. At December 31, 2006 and 2005, Corporate One was in compliance with regulatory capital requirements, maintaining a regulatory capital ratio of 5.98% and 7.05%, on total regulatory capital of $201.7 million and $196.5 million, respectively. 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 2%. Throughout 2006 and 2005, Corporate One’s retained earnings ratio exceeded 2%. At December 31, 2006 and 2005, Corporate One’s retained earnings ratio was 2.67% and 3.08%, respectively, on total reserves and undivided earnings of $90.0 million and $85.8 million.

8700 Orion Place Columbus, Ohio 43240-2078 P.O. Box 2770 Columbus, Ohio 43216-2770 866/MyCorp1 www.corporateone.coop