w e r e h e r e f o r y o u annual report

Transcription

1 w e r e h e r e f o r y o u annual report

2 vision To be the best in the communities we serve. mission We are a member-owned credit union dedicated to understanding and meeting the financial and related needs of our members with quality products and services. We have excellent employees who are committed to developing enduring, mutually beneficial relationships with our members and our communities. We share the success of our credit union with our members and our communities. values Integrity - We believe in rigorously telling the truth at all times. Responsibility - We take personal responsibility for our actions. We believe in accountability. Respect - We respect our members and each other. Excellence - We strive for excellence through continuous improvement. Workplace - We value a workplace that is diverse, stimulating and rewarding.

3 table of contents 2 Chair s Report 3 CEO s Report 4 Corporate Overview 5 Member Service 7 Workplace Success 7 Community 8 Board of Directors / Senior Management The Numbers - See Insert - 1

4 chair s report As Board Chair, I am proud to announce another successful year for Interior Savings. With most of our communities adapting to their local economic pressures, it isn t surprising that Interior Savings managed to turn out another successful year. However, the beginning of 2009 was unpredictable and even throughout the year there were uncertain times. Elmer Epp, Chair Budgets were looked at more carefully and staff even voted to cancel the annual employee recognition event. Looking back now, the cost of the event would not have had a significant impact on year-end results, but I admire the staff and management for making tough decisions throughout 2009, always keeping the value of the Credit Union in mind. It is a benefit to all members. Another benefit to members in 2009 was the introduction of the new Member Rewards program. While Interior Savings has been giving profits back to members in the form of cash since 2002, it was time to change the program to more closely correlate the reward amount to members loyalty. Because in the end, a loyal member enriches the Credit Union for all members was the first year of our second, three-year Balanced Scorecard (BSC). The purpose of our BSC is to plot the strategic direction of the Credit Union, which then holds the Board and management accountable to the goals set within. In 2009, Interior Savings definitely kept pace with the constantly evolving financial industry. With the introduction of services like Mobile Banking, online RSP/TFSA contributions, and E-statements, Interior Savings continues to adapt to current and future demands, while not losing sight of the importance of old fashioned smiles and handshakes. In 2009, we saw the re-election of incumbent directors, Wendy Caban and Pauline Fleming in the Central/North Okanagan Region. In the Thompson/South Okanagan Region, Jeff Holm was re-elected and William McNiece was elected to replace Ron Edward, who retired from the Board after 23 years of dedicated service. Director knowledge, education, and experience are imperative to maintaining the Board s ongoing effectiveness. Consequently, the Board Governance Committee initiated the development of a board-level succession plan. This will be implemented in the coming year. The Board has also published its annual governance report, which is available on our website. As we look back at the successes and growth in 2009, it is easy to see what a group of goaloriented individuals can accomplish through teamwork. I would like to take this opportunity to thank all Interior Savings employees, management, and Board members for their unwavering commitment and enthusiasm in Of course, the success of the Credit Union is dependent on the loyalty of its members. I would like to thank you, our members, for thinking of Interior Savings as your financial partner. Elmer Epp, Chair 2 -

5 ceo s report The end of 2008 had many economists and consumers worried about what 2009 would bring. Here at Interior Savings, we were definitely cognizant of what was going on in our local and global economies. That awareness allowed us to make informed decisions that resulted in one of our most successful years in recent history. Interior Savings continues to be one of the top performing Credit Unions in Canada. Barry Meckler, President & CEO In 2009, as in years past, we shared our profits with members in the form of Member Rewards. We introduced a new Member Rewards program early in 2009, and I am proud to say that we returned over $4 million to members in December. Since 2002, we have given nearly $33 million back to our members through the Member Rewards program. Our financial performance aside, we made great strides in our product and service offering. Credit Unions were the first financial institutions in Canada to introduce Mobile Banking; Interior Savings was one of them. And the advancements didn t stop there. We introduced several other electronic channel services, including our savesomething.ca website for young adults, our online currency exchange, and money transfers, to name a few. In 2009, we made further commitments to your banking security. We installed skim protection devices on all of our ATMs and introduced chipped MasterCards. Chipped MemberCards are coming in To provide increased security as well as an overall more enjoyable branch experience, we relocated our Valleyview branch and completed extensive renovations on the Rutland, Tranquille, Vernon, and Merritt branches. Even though 2009 was a success for Interior Savings, there were some tense moments throughout the year. For the first time since 2003, we had entire communities evacuated because of wildfires. We were forced to shut down our Lillooet and West Kelowna branches. It was a stressful time for those communities and of course for many of our members and employees. However, I think we all witnessed what communities can do when they pull together. It s no secret that Interior Savings carried out some significant enhancements in In the current marketplace, it s imperative that we be competitive, offer what our current members want, and anticipate what future members will demand. Interior Savings is committed to continuously advancing in our dynamic economy while still providing the same level of service you have grown accustomed to. Providing that service, of course, is our employees. I am proud to be a part of the enthusiastic team at Interior Savings. I would like to thank each one of them for their hard work and positive attitudes throughout I would also like to thank our Board of Directors for their ongoing contribution to the leadership of the Credit Union. Above all, I want to thank you, our members, for making Interior Savings your financial partner. As we move forward into 2010, we will continue to provide exceptional products and services, as well as adapt to market needs to fulfill our vision of being the best in the communities we serve. Barry Meckler, President & CEO - 3

6 w e r e h e r e f o r y o u. corporate overview Interior Savings continues to be the largest Credit Union headquartered in the Interior of British Columbia. The Credit Union has $2.25 billion in total assets under administration; a network of 21 branches and 15 insurance offices located throughout British Columbia s Interior; and two specialized Commercial Services Centres, in Kamloops and Kelowna. Interior Savings also offers services through its subsidiaries, including Interior Savings Insurance Services, and Interior Savings Estate Planning. Interior Savings Credit Union At Interior Savings, we offer a comprehensive range of financial products and services designed to meet our members needs at every stage of life. From routine banking, to lending and wealth management, we have it all, including a wide range of business services and advice, with the benefit of local knowledge and decision making. Whether your financial services needs are large or small, Interior Savings is here to help you succeed. Interior Savings Insurance Services Through our insurance partners, we offer a wide range of competitive insurance products and services to meet every need. We have 15 insurance offices staffed with professionals who can help you understand the benefits and intricacies of insurance policies. Whether you require personal, auto, travel, recreational or commercial insurance, we have the products to meet your needs. Interior Savings Estate Planning Interior Savings Estate Planning Inc. is our life insurance subsidiary. Our professional life agents help our members plan for the unexpected, and also give them access to a variety of tax sheltered investments. 4 -

7 member service commitment Interior Savings has always been dedicated to excellence through continuous improvement. In 2009, we introduced an unprecedented number of improvements. From new banking channels to enhanced security, you saw us demonstrate that we truly do strive to be the best in the communities we serve. convenience You want to bank on your own terms. And we re okay with that. If you want to check your account balance on your phone while you re shopping, you can. And the next time you re online, log into MemberDirect banking and feel free to contribute to your RRSP, deposit funds into your TFSA, or exchange some Canadian funds to American. While you re banking, you ll notice the new AccountPlus feature, which allows you to see all of your Interior Savings accounts and investments on one page. Before you logout, make sure you opt-out of paper statements. And if you need to find a branch, use the new branch and ATM locator. upgrading online for your convenience We added new functions to interiorsavings.com including money transfer, online currency exchange, online RSP and TFSA contributions and a branch & ATM locator. security You expect that your money is safe when it s deposited at Interior Savings. You might even be aware that the Credit Union Deposit Insurance Corporation of British Columbia (CUDIC) insures 100% of the money you have deposited at Interior Savings*. While your deposits are guaranteed, there are still people out there trying to separate you from your money. That s why we took many precautions in 2009 to protect you from fraud. We installed anti-skimming devices on all of our ATMs; we launched Secure Login on MemberDirect; we introduced chipped MasterCards; we made great progress on getting chipped MemberCards ready for a 2010 launch; and we hosted seminars to help business owners recognize currency counterfeit and prevent debit card fraud. taking steps to improve your security We re committed to keeping your money safe, so last year we introduced MasterCard chip credit cards that require a PIN to approve purchases. * The Credit Union Deposit Insurance Corportion of Brtish Columbia (CUDIC), a government corporation, guarantees all deposits and non-equity shares of B.C.credit unions, as provided by the Financial Institutions Act. Visit cudicbc.ca to learn more. - 5

8 growth In order to meet the needs of our current and future members, we must constantly adapt and often anticipate what they want. moving ahead by staying young In 2009 we launched savesomething.ca, a financial website for our 18 to 24 year-old members, as well as our Save Something Contest encouraging them to tell us about a local cause they were passionate about. The website has been a huge success and we will continue to develop and build on it as a way of interacting with our younger members, as well as growing membership for Interior Savings in the 18 to 24 year-old demographic. In 2009, we introduced several new products. The Health- Plus and SecurePlus Index Linked Term Deposits offer the potential returns of the stock market while minimizing risk. The RRSP Escalator Term Deposit offers you even more flexibility. We also launched several new accounts: a US Investment Account that lets you park your US currency and ride out exchange fluctuations; a Self-Serve Unlimited Pack that doesn t restrict the number of transactions you can conduct; and the MyChequing Account, designed specifically to meet the needs of year-old members. Realizing that the year-olds are the future of the Credit Union, we didn t just create a unique account for them, we also launched a website specifically for them. Savesomething.ca is an online financial resource for young adults that features tips, advice, and calculators to help them become more savvy about banking, planning, saving, investing, and more. gratitude You may have heard and noticed that the Member Rewards program was revised in In fact, we completely re-designed the program. We wanted to reward members based more closely on their loyalty to Interior Savings. To do that, we simplified the program to reward based on two criteria: Funds Under Administration (FUA), which is the sum of a member s loans, deposits, and mutual funds; and number of unique services. Essentially, the more business you conduct at Interior Savings the higher your potential reward. In 2009, we gave back over $4 million of our profits to over 29,000 members. That s an average payment of $146, just for doing everyday banking! 6 -

9 community At Interior Savings, we realize that we can only be as strong as the communities we serve. So giving back to our communities is an integral part of our success. going mobile to keep you informed We introduced Mobile Banking, so members can check account balances and recent transactions from their cell phone, no matter where they are. workplace success At Interior Savings we value the efforts of our staff and strive to reciprocate by creating a workplace culture conducive to success as well as providing opportunities for development and advancement. Our members, our employees, and our communities benefit from our continued investment in our people, which is why we strive to offer a dynamic and rewarding workplace. For the sixth consecutive year, we conducted an employee survey to measure our ongoing effectiveness as an employer. Our staff responded very positively again this year, recognizing that Interior Savings values the opinions of staff and is always looking for ways to improve the workplace. In 2009, we partnered with the UBC Okanagan Learning Exchange s Senior s Isolation Project, which gives seniors free access to the Internet in several retirement homes in our region. We also piloted the Laptops for Learning program at UBCO. The program allows students to checkout a laptop, just like a library book and it has been very popular at the university. We donated $15,000 to the second annual Kamfest in Kamloops. The one day event raises funds for the Canadian Mental Health Association, which advocates the importance of mental wellness. We also continued our involvement with Success By 6. The program is a unique partnership between the United Way, the BC Government, and the Credit Unions of BC. The program is prevention-focused, researchinformed, and community-based. Success By 6 s vision is to ensure children are ready to thrive at school before they even start. We contributed $12,500 to the Merritt Curling Club. The donation will allow the Club to gain access to federal funding, which can be used to upgrade their facility. We also provided a $10,000 grant to the Royal Astronomical Society of Canada s new Okanagan Observatory to expand its programs. The observatory will be an invaluable education tool for students of all ages. Even though the predominant outlook in our communities seems to be getting more optimistic, there are still many individuals and families who cannot afford the necessities, like food. That s why we donated $14,000 to food banks throughout our region. - 7

10 board of directors The Board of Directors is responsible for overseeing the strategic direction of the Credit Union. In practice, the Board of Directors delegates responsibility for the management of the Credit Union to the President and Chief Executive Officer while retaining oversight responsibility. The Board of Directors is expected to act in a manner that protects and enhances the value of the Credit Union in the interest of all members. Members of the Board of Directors are expected to exercise independent judgment with utmost honesty and integrity while adhering to the Credit Union s policies and procedures, and statutory and regulatory requirements. Back row, top-to-bottom: Pauline Fleming, Doug Findlater, Brad Fossett, Jeff Holm, Rolli Cacchioni. Front row, left-to-right: Don Grant, Gordon Matthews, Wendy Caban, Bill McNiece, Elmer Epp, Ross Parkin, Bianca Iafrancesco. senior management Our senior management team works with the Board of Directors to position the Credit Union s strategic direction and development of the annual and long term strategic plans. They monitor every aspect of the plan to ensure progress is being maintained and the organization is on track. They are responsible for a team of managers, and are committed to ongoing personal and professional development and involvement in their communities. Barry Meckler, President and Chief Executive Officer Kathy Stevenson, Senior Vice President and Chief Financial Officer Domenic Vinci, Senior Vice President and Chief Operations Officer Gene Creelman, Vice-President, Marketing and Communications Dave Cronquist, Vice President, Systems and Strategy Bob Peressini, Vice President, Credit Ted Schisler, Vice President, Human Resources 8 -

11 the numbers 4 The Numbers 5 Financial Statements: Management s Responsibility for Financial Review 5 Financial Statements: Auditor s Report 6 Consolidated Balance Sheet 7 Consolidated Statement of Operations 8 Consolidated Statement of Comprehensive Income 8 Consolidated Statement of Members Equity 9 Consolidated Statement of Cash Flows Summary of Significant Accounting Policies to Consolidated Financial Statements Notes to Consolidated Financial Statements Return to Table of Contents Interior Savings - 3

12 the numbers In 2009, consolidated earnings from operations were $18.4 million, up $2.3 million or 14.3% from the previous year. Year-end assets rose $110 million to $1.894 billion, ranking Interior Savings as the 5th largest credit union in the province. Through a tough economic year, we continued to grow both our loan and deposit portfolios. Loan growth was close to 7%, bringing total loan balances to $1.666 billion. Deposits increased by $96 million to $1.710 billion, growing 5.9% over the year. Given both the economic and interest rate climate, there was a strong preference for availableon-demand deposit types. Interior Savings, together with our financial partners, manages a significant amount of member investments such as mutual funds, which are not shown on our balance sheet. As of December 31, 2009 these funds under administration totaled $252 million, up 22% from Income before expenses rose 6.6% to $68.9 million in 2009, while operating expenses remained relatively stable rising only 4.1% to $50.4 million. Our expenses as a percentage of average assets was 2.7%, down from 2.8% in 2008, highlighting our prudent expense management given the uncertain economic environment. Interior Savings provides a yearly allowance, charged to our earnings, to cover potential credit losses from our growing loans portfolio. In 2009, the charge to earnings for credit losses was $1.4 million. At year-end, the total allowance for impaired loans was $8.7 million. We did see actual loan write-offs increase in 2009, however the total was still low relative to the overall portfolio size. With net income totaling nearly $12.3 million, our retained earnings increased to $109.7 million, up 12.6% from $97.4 million at the end of This, combined with the year-end capital ratio of 15.8% position us well to move forward into five-year financial review $2,000,000 Assets $120,000 Retained Earnings Income From Operations 600 # insurance employees # CU employees 461 $1,500,000 $1,000,000 $1,451,742 $1,555,171 $1,617,547 $1,783,986 $1,894,209 $100,000 $80,000 $60,000 $65,522 $74,934 $86,082 $97,452 $109, $40, $500, $20, $13, $15, $17, $16, $18, Selected Statistical Data Average Assets (000s) $1,342,145 $1,503,457 $1,586,359 $1,700,767 $1,839,097 ROA Income from Operations 0.99% 1.05% 1.13% 0.95% 1.00% ROA Net Income 0.62% 0.63% 0.70% 0.67% 0.67% Capital Adequacy * 11.0% 11.6% 12.8% 13.8% 15.8% Member Rewards $4,318,000 $4,417,000 $4,481,000 $4,013,000 $4,386,000 Return on Average Assets * The Financial Institutions Act of B.C. requires credit unions to have a minimum capital adequacy level of 8%. 4 - Interior Savings Return to Table of Contents

13 management s responsibilty for financial review These Consolidated Financial Statements have been prepared by the management of Interior Savings Credit Union, who are responsible for their reliability, completeness and integrity. They were developed in accordance with requirements of the Financial Institutions Act of British Columbia and conform in all material respects with generally accepted accounting principles. Systems of internal control and reporting procedures are designed to provide reasonable assurance that financial records are complete and accurate so as to safeguard the assets of the organization. These systems include establishment and communication of standards of business conduct throughout all levels of the organization to provide assurance that all transactions are authorized and proper records maintained. Internal audit provides management with the ability to assess the adequacy of these controls. Further, they are reviewed by Interior Savings external auditors. The Board of Directors has approved the Consolidated Financial Statements. The Audit Committee of the Board, comprised of 4 directors, has reviewed the complete Consolidated Financial Statements with the external auditors, in detail. The Audit Committee has also received regular reports on internal control findings. BDO Canada LLP, the external independent auditors appointed by the membership, examined the financial statements of Interior Savings in accordance with generally accepted auditing standards. Barry Meckler, President, and Chief Executive Officer Kathy Stevenson, Senior Vice President, and Chief Financial Officer auditor s report to the members of interior savings credit union We have audited the consolidated balance sheet of Interior Savings Credit Union as at December 31, 2009 and the consolidated statements of operations, comprehensive income, members equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Credit Union s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Credit Union as at December 31, 2009 and the results of its operations and cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. As required by the Financial Institutions Act of British Columbia, we report that, in our opinion, these principles have been applied on a basis consistent with that of the preceding year. BDO Canada LLP Chartered Accountants Kelowna, British Columbia February 9, 2010 Return to Table of Contents Interior Savings - 5

14 consolidated balance sheet December 31 ($ in thousands) Assets Cash $ 32,855 $ 27,714 Deposits with financial institutions 148, ,246 Members loans (Notes 2 & 3) 1,665,947 1,558,251 Investments (Note 4) 7,984 7,140 Property, plant and equipment (Note 5) 18,746 17,493 Other assets 20,547 15,141 Liabilities and Members Equity $ 1,894,209 $ 1,783,985 Liabilities Members deposits (Note 6) $ 1,710,264 $ 1,614,376 Equity shares (Note 7) 8,757 9,150 Borrowings (Note 8) 47,500 44,924 Accounts payable and other liabilities 13,908 11,372 1,780,429 1,679,822 Members equity Retained earnings 109,744 97,452 Accumulated other comprehensive income 4,036 6,711 Approved on behalf of the Board: 113, ,163 $ 1,894,209 $ 1,783,985 Elmer Epp, Director Ross Parkin, Director The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 6 - Interior Savings Return to Table of Contents

15 consolidated statement of operations For the year ended December 31 ($ in thousands) Interest income Members loans $ 78,083 $ 86,963 Cash resources and investments 5,717 5,611 Other 3, ,740 92,767 Interest expense Members deposits 33,074 41,189 Other 543 1,936 33,617 43,125 Net interest income 54,123 49,642 Provision for impaired loans (1,400 ) (1,200 ) Other income (Note 10) 16,167 16,166 68,890 64,608 Operating expenses Salaries and employee benefits 29,309 27,396 Amortization 2,957 2,620 Data processing 2,609 2,526 Occupancy and equipment 4,075 3,878 General (Note 11) 11,483 12,037 50,433 48,457 Income from operations 18,457 16,151 Other items Distributions to members (Note 12) 4,386 4,013 Gain on sale of property - (1,122) 4,386 2,891 Income before income taxes 14,071 13,260 Income taxes (Note 13) Current 2,939 1,839 Future (recovery) (1,160) 52 1,779 1,891 Net income $ 12,292 $ 11,369 The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. Return to Table of Contents Interior Savings - 7

16 consolidated statement of comprehensive income For the year ended December 31 ($ in thousands) Net income $ 12,292 $ 11,369 Other comprehensive income (loss), net of taxes (Note 13) Change in fair value of available for sale securities (268) 659 Change in fair value of cash flow hedges 1,668 6,735 Reclassification to earnings of realized gains and losses on cash flow hedges (4,075) (193) Total other comprehensive income (loss) (2,675 ) 7,201 Comprehensive income $ 9,617 $ 18,570 consolidated statement of members equity For the year ended December 31 ($ in thousands) Retained earnings, beginning of year $ 97,452 $ 86,083 Net income 12,292 11,369 Retained earnings, end of year $ 109,744 $ 97,452 Accumulated other comprehensive income (loss), beginning of year $ 6,711 $ (490) Other comprehensive income (loss) (2,675) 7,201 Accumulated other comprehensive income, end of year $ 4,036 $ 6,711 Total members equity, end of year $ 113,780 $ 104,163 The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 8 - Interior Savings Return to Table of Contents

17 consolidated statement of cash flows For the year ended December 31 ($ in thousands) Cash flows from operating activities Interest received from members loans $ 78,157 $ 87,172 Interest paid on members deposits (39,214) (40,909) Cash paid to suppliers and employees (45,805) (48,081) Patronage distributions paid to members (3,946) (3,562) Income taxes paid (8,690) (2,712) Interest received on investments and derivatives 9,551 6,789 Other income received 15,967 17,305 6,020 16,002 Cash flows from investing activities Increase in members loans (109,170) (116,399) Purchase of plant and equipment (4,208) (4,044) Sale (purchase) of investments (845) 460 Proceeds from sale of property and plant - 1,650 (114,223 ) (118,333 ) Cash flows from financing activities Increase in members deposits 101, ,802 Proceeds from (repayment of) borrowings 2,576 (1,628) Dividends paid on equity shares (440) (470) Repayment of equity shares (394) (615) 103, ,089 Net increase in cash and cash equivalents (4,975 ) 45,758 Cash and cash equivalents, beginning of year 185, ,202 Cash and cash equivalents, end of year $ 180,985 $ 185,960 Represented by: Cash $ 32,855 $ 27,714 Deposits with financial institutions 148, ,246 $ 180,985 $ 185,960 The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. Return to Table of Contents Interior Savings - 9

18 summary of significant accounting policies to consolidated financial statements December 31, 2009 Governing Legislation and Operations Interior Savings Credit Union is incorporated under the Credit Union Incorporation Act of British Columbia and its operations are subject to the Financial Institutions Act of British Columbia. The Credit Union is approved to operate throughout the Province of British Columbia and currently serves members in the Thompson Valley and Okanagan areas of the province. The Credit Union is an integrated financial institution that provides a wide range of financial products and services that comprise one business operating segment. Principles of Consolidation The consolidated financial statements include, in addition to the accounts of the Credit Union, the accounts of its wholly owned subsidiaries, Interior Savings Estate Planning Inc., Interior Savings Investment Management Inc. and Thompson General Insurance Inc ( TGI ). All intercompany balances and transactions have been eliminated. The financial statements also include TGI s 50% interest in Interior Savings Insurance Services Inc. which is recorded on an equity basis of accounting. Allowance for Impaired Loans The Credit Union defines impaired loans as those which, in managements opinion, there is no longer reasonable assurance of timely collection of the full amount of principal and interest or when interest is 90 days or greater past due (see Note 2 Members Loans). The Credit Union provides an allowance for all loans that can be specifically identified to be uncollectible. In addition, a general allowance is provided for possible losses on existing loans that cannot specifically be identified as uncollectible or doubtful. The allowance is recorded as a reduction of the outstanding loan value on the balance sheet and results in an annual charge or credit to operations depending upon the change in the allowance from one year to the next. The allowance is determined by management based upon a combination of historical loan loss experience and an evaluation of current factors. Investments Investments which meet the definition of financial instrument are measured and recorded on a basis consistent with the appropriate financial instrument designation. Investments under significant influence are recorded on the equity basis as described in Principles of Consolidation. Foreclosed properties held for resale acquired in settlement of mortgages or loans are valued at the lower of the recorded investment in the loan foreclosed and the estimated net proceeds from the sale of the property. The recorded investment in the loan includes principal and accrued interest to date of impairment. Property and buildings held for resale are valued at the lower of cost and net realizable value Interior Savings Return to Table of Contents

19 summary of significant accounting policies to consolidated financial statements December 31, 2009 Property, Plant and Equipment Land is carried at cost. Buildings, furniture, equipment and leasehold improvements are carried at cost less accumulated amortization. Amortization is provided for on the straight line basis over the useful lives of the assets, as follows: Buildings Computer equipment Furniture, fixtures and other equipment Leasehold improvements Amortization is provided for at one half of the above rates in the year of acquisition. Financial Instruments 20 or 40 years 3 years 5 years Life of lease or 10 years The Credit Union recognizes and measures financial assets and financial liabilities on the consolidated balance sheet when it becomes a party to the contractual provisions of a financial instrument. All financial instruments are measured at fair value on initial recognition. Measurement in subsequent periods depends on whether the financial instrument has been classified as held for trading, loans and receivables, held to maturity, available for sale or other financial liabilities. Management determines the classification of financial assets and liabilities at initial recognition. Held for Trading Financial instruments are classified under this category if they are: (i) acquired principally for the purpose of selling or repurchasing in the near term; (ii) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit taking; (iii) a derivative, except for a derivative that is a financial guarantee contract or a designated effective hedging instrument; or (iv) designated at fair value using the fair value option ( FVO ) Financial instruments cannot be transferred into or out of the Held for Trading category after inception. For designation at fair value using the FVO selection, reliable fair values must be readily available. Financial instruments included in this category are recognized initially at fair value and transactions costs are taken directly to the consolidated statement of operations. They are subsequently measured at fair value and gains and losses arising from changes in fair value of these instruments are recorded in the consolidated statement of operations. Loans and Receivables Loans and receivables are non derivative financial assets with fixed or determinable repayment dates, usually with interest, that are not debt securities or instruments classified as held for trading on initial recognition. Members loans, other receivables and retained interests have been classified as loans and receivables. These instruments are initially recognized at fair value including direct costs. They are subsequently valued at amortized cost using the effective interest method less any provision for impairment. Return to Table of Contents Interior Savings - 11

20 summary of significant accounting policies to consolidated financial statements December 31, 2009 Financial Instruments (continued) Held to Maturity Held to maturity investments include financial assets with fixed or determinable payments that the Credit Union s management has the intention and ability to hold to maturity. Certain deposits held with Central 1 Credit Union have been classified as held to maturity. They are initially recognized at fair value including direct costs. They are subsequently valued at amortized cost using the effective interest method less any provision for impairment. Available for Sale Available for sale assets are non derivative financial assets that are designated as available for sale or are not categorized into any of the other categories described above. Bid deposits and investments in equity instruments and other investments have been classified as available for sale. They are initially recognized at fair value including direct transaction costs. They are subsequently recorded on the balance sheet at fair value with changes in fair value recorded in other comprehensive income in the consolidated statement of comprehensive income when they have a quoted market price in an active market or can be valued using other valuation techniques. Where a decline in the fair value is determined to be other than temporary, the amount of the loss is removed from other comprehensive income and recognized in the consolidated statement of operations. Investments in equity instruments classified as available for sale that do not have a quoted market price in an active market are measured at cost less any provision for impairment. Other Financial Liabilities Other financial liabilities are non derivative financial liabilities and include members deposits, equity shares, borrowings and accounts payable. These instruments are initially recognized at fair value including direct costs. They are subsequently measured at amortized cost using the effective interest method. Measuring Fair Value The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm s length transaction between knowledgeable, willing parties who are under no compulsion to act. Fair values are determined by reference to quoted bid or asking prices as appropriate, in the most advantageous active market for that instrument to which the credit union has immediate access. Fair values determined using valuation models require the use of assumptions concerning the amount and timing of estimated future cash flows and discounted rates. In determining those assumptions, external readily observable market inputs including interest rate yield curves, currency rates and price and rate volatilities are considered, as applicable Interior Savings Return to Table of Contents

21 summary of significant accounting policies to consolidated financial statements December 31, 2009 Revenue Recognition Interest income on loans is recorded on the accrual method using effective interest rates. Loan negotiation fees are recognized using the effective interest rate method and income recorded on prepayment or renegotiation of fixed term loans are recognized when received. Investment income for other than available for sale investments quoted in an active market is recorded under the accrual method using the effective interest rate. Commissions and service charges are recognized as income when the related service is provided or entitlement to receive income has occurred. Income Taxes The Credit Union uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. Net future income tax assets and liabilities are included in other assets or accounts payable and accrued liabilities, as appropriate. Distributions to Members Patronage distributions and dividends to members are charged to earnings in the year that they are declared. Transfer of Loans The Credit Union periodically securitizes loans by selling them to independent special purpose entities. These transactions are accounted for as sales when control over the transferred loans has been surrendered and consideration other than beneficial interests in the transferred loans has been exchanged. The transferred loans are removed from the consolidated balance sheet. Gains and losses on these transactions are recognized in other interest income or other interest expenses as appropriate and are based on the carrying value of the loans transferred, allocated between the loans sold and the retained interest in proportion to their fair values at the date of the transfer. The fair value of the transferred loans and retained interests are determined based on the net present value of expected future cash flows using managements best estimates of key assumptions such as prepayment, expected losses and discount rates, commensurate with the risks involved. Where the Credit Union continues to service the mortgages sold, a servicing liability is recognized and amortized over the servicing period as servicing fees. Return to Table of Contents Interior Savings - 13

22 summary of significant accounting policies to consolidated financial statements December 31, 2009 Derivative Financial Instruments Derivative financial instruments are utilized to manage financial risks such as changes in interest rates or other financial indices. All derivative financial instruments are recognized in other assets or accounts payable and other liabilities at fair value, including those derivatives embedded in financial or other contracts that are not closely related to the host contract. For each derivative financial instrument, it is determined whether hedge accounting can be applied. Where hedge accounting can be applied, a hedging relationship is designated and documented at inception as a fair value hedge or a cash flow hedge based on the risk management objective, the item being hedged, the type of hedging instrument and how effectiveness will be assessed. The hedging instrument must be highly effective at inception and throughout the life of the hedge. Fair value hedges modify exposure to changes in a fixed rate instrument s fair value caused by changes in interest rates. Changes in the fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging derivative. No fair value hedges have been entered into at this time. Cash flow hedges modify exposure to variability in cash flows related to a variable rate asset or liability or forecasted transaction. Interest rate swaps that have been designated as hedges, are all cash flow hedges. The gains and losses resulting from changes in the fair value of the effective portion of the cash flow hedge are recorded in other comprehensive income. Changes in the fair value related to the ineffective portion of the hedge are immediately recognized in the consolidated statement of operations as net interest income. Changes in fair value recognized in other comprehensive income are reclassified in the consolidated statement of operations under net interest income in the period during which the cash flows constituting the hedged item affect income. When the derivative instrument no longer qualifies as an effective hedge, or when the hedging instrument is sold or terminated prior to maturity, hedge accounting is discontinued prospectively. Amounts previously recognized in other comprehensive income are reclassified to net interest income in the periods during which the cash flows constituting the hedged item affect income. Gains and losses on the derivative are reclassified immediately to net interest income when the hedged item is sold or terminated early. Translation of Foreign Currencies Cash resources and deposits denominated in foreign currencies are translated into Canadian dollars at the rates prevailing on the balance sheet date. Realized gains and losses are recorded at the rates prevailing at the time of the transaction. Unrealized gains and losses are recorded at the rates prevailing on the balance sheet date. Use of Estimates The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts or revenues and expenses during the reporting period. Actual results could differ from management s best estimates as additional information becomes available in the future. Impairment of Assets The carrying value of all assets are reviewed for indicators of impairment at each reporting date. If an indicator of impairment exists, the asset s recoverable amount is estimated. Any amount by which the asset s carrying amount exceeds the recoverable amount is recorded as an impairment loss. The asset s recoverable amount is determined as the higher of the asset s fair value less costs to sell and depreciated replacement cost. An impairment loss is recognised immediately in the consolidated statement of operations Interior Savings Return to Table of Contents

23 notes to consolidated financial statements December 31, 2009 ($ in thousands) 1. Current and Future Accounting Policy Changes Accounting Standard Changes Adopted Goodwill and Intangible Assets Effective January 1, 2009, the Credit Union adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064 Goodwill and Intangible Assets. This section replaces Section 3062 Goodwill and Other Intangible Assets, and Section 3450 Research and Development Costs and clarifies the guidance on the criteria that must be satisfied in order for an intangible asset to be recognized, including internally developed intangible assets. The new standard did not have a material effect on the consolidated financial position or earnings of the Credit Union. Credit risk and the Fair Value of Financial Assets and Financial Liabilities Effective January 1, 2009, the Credit Union adopted the Emerging Issues Committee abstract 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. The abstract requires an entity to take into account its own credit risk and the credit risk of the counterparty in determining the fair value of a financial asset or financial liability, including derivative instruments. The new guidance did not have a material effect on the consolidated financial position or earnings of the Credit Union. Financial Instruments Recognition and Measurement In June and August 2009, the CICA amended Handbook Section 3855 Financial Instruments Recognition and Measurement to 1) clarify the application of the effective interest method, 2) clarify when an embedded prepayment option is separated from its host, 3) add guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held for trading category, 4) change the categories into which a debt instrument is required or permitted to be classified, 5) change the impairment model for held to maturity investments to the incurred credit loss model of Section 3025 Impaired Loans and 6) require reversal of previously recognized impairment losses on available for sale financial assets in specified circumstances. The amendments did not have a material effect on the consolidated financial position of earnings of the Credit Union. Financial Instrument Disclosures In June 2009, the CICA amended Handbook Section 3862 Financial Instruments Disclosures to enhance fair value and liquidity risk disclosures. The amendment to fair value disclosures requires that all financial instruments measured at fair value be categorized into one of three hierarchy levels based upon the significance of the inputs used to measure the fair value. The additional disclosure is contained in Note 18. The amendment to liquidity risk disclosure includes additional information regarding contractual maturities and is contained in Note 19. Future Accounting Standard Changes International Financial Reporting Standards The CICA is adopting International Financial Reporting Standards (IFRS) as Canadian GAAP for publicly accountable enterprises over a transition period to end in The Credit Union will prepare its consolidated financial statements in accordance with IFRS for the year commencing January 1, 2011, including the restatement of comparative period financial statements on the same basis. The Credit Union has developed a project plan and assembled a project team to manage the transition. The impact of the transition to IFRS on the Credit Union s financial statements has yet to be determined. Return to Table of Contents Interior Savings - 15

24 notes to consolidated financial statements December 31, 2009 ($ in thousands) 2. Members Loans Residential mortgages $ 1,167,348 $ 1,065,822 Personal loans 84, ,952 Commercial loans and mortgages 418, ,287 1,670,207 1,562,061 Accrued interest 4,436 4,510 1,674,643 1,566,571 Allowance for impaired loans (8,696) (8,320) $ 1,665,947 $ 1,558,251 Allowance for impaired loans Balance, beginning of year $ 8,320 $ 7,482 Provision charged to operations 1,400 1,200 Loans written off, net of recoveries (1,062) (362) Balance, end of year $ 8,696 $ 8, Impaired loans $ 25,394 $ 12,147 Less: amounts where loss is not expected (23,573) (9,876) Specific provision 1,821 2,271 General provision 6,875 6,049 Allowance for impaired loans $ 8,696 $ 8,320 A loan is considered past due when a payment is not made by the contractual due date. The following table presents the carrying value of loans that are past due but not classified as impaired because they are less than 90 days past due days days Total Residential mortgages $ 9,978 $ 4,744 $ 14,722 Personal loans Commercial loans and mortgages 738 1,917 2,655 $ 11,197 $ 6,818 $ 18, Interior Savings Return to Table of Contents

25 notes to consolidated financial statements December 31, 2009 ($ in thousands) 2. Members Loans (continued) The following table presents the carrying value of loans that are past due at December 31, 2008 but not classified as impaired days days Total Residential mortgages $ 12,402 $ 4,703 $ 17,105 Personal loans 1, ,743 Commercial loans and mortgages 1,250 1,061 2,311 $ 15,045 $ 6,114 $ 21, Transfers of Loans There were no securitization activities during the current or prior year. The outstanding balance of residential mortgages sold in prior years, and removed from the consolidated balance sheet at December 31, 2009 was $105,589 (2008 $154,022). Servicing liabilities amortized to income during the year totaled $568 (2008 $959). 4. Investments Central 1 Credit Union shares $ 4,448 $ 4,320 Non controlling interest in subsidiaries 1,737 1,819 Other investments 1,799 1,001 $ 7,984 $ 7,140 Central 1 Credit Union is the central financial association for the British Columbia and Ontario Credit Union systems. Investment in shares of Central 1 Credit Union is required by governing legislation and as a condition of membership in Central 1 Credit Union. These shares are recorded at cost as no active market for these shares exists. Return to Table of Contents Interior Savings - 17