2009 Annual Report C R E D I T U N I O N

Transcription

1 2009 Annual Report CREDIT UNION

2 TABLE OF CONTENTS Dedicated to our members... 2 Message from Board of Directors President and CEO... 3 Board of Directors... 5 Management discussion and analysis... 6 Management of risk Management s responsibility Auditors report Consolidated financial statements Notes to the consolidated financial statements Credit Union Deposit Guarantee Corporation Officers and branch locations

3 DEDICATED TO OUR MEMBERS Our mission TCU Financial Group is passionate about providing outstanding service to our current and future members as we work together to meet their financial life needs and goals. Our objectives To serve all residents of Saskatchewan, with emphasis on the communities of Saskatoon and Regina. To obtain and utilize capital, and manage revenue and expenses to maximize benefits for members while building and maintaining financial stability. To develop and maintain a high standard of services and facilities that will meet and exceed the financial life needs and goals of members. Our commitment to our membership, Board of Directors, and staff We shall: Have high quality outstanding service that will help our members to achieve their financial life needs and goals Maintain the security and stability of the organization over growth and expansion Continually expand and grow our membership base Carefully deliberate undertakings that might jeopardize the financial position of the credit union Serve our members more efficiently and achieve greater member retention and loyalty Commit to offer a full line of services and products which will make our organization a full service financial institution Maintain our image as a sound, professional place to do business Have office facilities which are open and inviting to our members and provide pleasant, comfortable surroundings for our staff Ensure that TCU Financial Group is a great place to work Maintain office hours that are suitable to meet the needs of our members Be committed to leading by example and using our resources and expertise to affect positive change in our communities Provide leadership to the credit union system 2

4 MESSAGE FROM THE PRESIDENT, BOARD OF DIRECTORS AND FROM THE CHIEF EXECUTIVE OFFICER It is our privilege to present TCU Financial Group Credit Union s 2009 Annual Report on behalf of your Board of Directors. Delivering in challenging times In what was clearly a challenging global economic environment, TCU delivered solid results in We remained keenly focused on our members and their needs, generating value for them while positioning TCU for the future. The past year was clearly an extraordinary time for businesses not only in Saskatchewan, but around the world, a year of incredible challenge and change. Virtually every company and industry was affected, and some have been altered forever. While TCU was not immune to the effects of the global economy, our disciplined management and staff enabled us to deliver comparatively strong profitability in Positioning for the future Throughout the year, we stayed close to our members, adapting to their changing needs in areas such as operational management and member retention. In 2009 we took steps to position TCU in important ways for the future by enhancing our core business and investing in new and emerging growth areas. In our core business, we revitalized offerings and made great strides to align ourselves for growth opportunities. TCU introduced new products, which include Mobile Banking, Centsible Savings Plan, and the Tax-Free Savings Account. Members are the heart of our business. TCU will continue to improve offerings and continue to find ways to differentiate TCU in the market. Investing in our people and our communities To ensure that our people have the necessary skills to serve members at the highest level, as well as to advance in their own careers, we invest in their training and professional development. TCU s greatest strength is its people and they are the foundation of our success story. Another fundamental aspect of TCU is our commitment to the communities in which we live and work. TCU invested $262,000 back into our communities by way of sponsorship or donation. In 2009, we took our community involvement to a new level. Our Rochdale branch now houses the office of Junior Achievement in Regina. TCU is excited about the partnership and looks forward to the future. 3

5 2010 and beyond As we move into 2010, we remain intently focused on our members so we can continue to generate value for them while ensuring that we are well-positioned to take advantage of growth opportunities. We want to thank the Board, Management, and Staff of TCU for their hard work and dedication throughout We are extremely proud of what we achieved and even more excited about the opportunities that lie ahead. Respectfully, Lyle Hislop President Morris Smysnuik Chief Executive Officer 4

6 BOARD OF DIRECTORS In 2009, TCU s Board of Directors consisted of ten members three from Regina and seven from Saskatoon. Five regular Board meetings, one strategic planning meeting and 35 various board committee meetings were held. Our Board of Directors is committed to maintaining focus on the members, the communities we serve and the financial sustainability of TCU Financial Group Credit Union. Lyle Hislop President Saskatoon Term Expires: 2011 Dwight Kaytor Vice-President Regina Term Expires: 2010 Kerry Bachiu Regina Term Expires: 2011 Tad Cherkewich Saskatoon Term Expires: 2010 Derwyn Crozier-Smith Saskatoon Term Expires: 2010 Tony Linner Saskatoon Term Expires: 2012 Darcy McLean Saskatoon Term Expires: 2011 Helen Sukovieff Regina Term Expires: 2010 Earl Warwick Saskatoon Term Expires: 2012 Joanne Weninger Saskatoon Term Expires:

7 MANAGEMENT DISCUSSION & ANALYSIS Corporate profile TCU Financial Group Credit Union (TCU) is a Saskatchewan Credit Union regulated by The Credit Union Act (1998) and The Credit Union Regulations (1999). TCU must also comply with the Credit Union Deposit Guarantee Corporation s (CUDGC) Standards of Sound Business Practices, and with our own articles, bylaws and policies. The Board of Directors is ultimately responsible for ensuring that TCU is managed and operated in a sound and prudent manner. TCU s management is responsible for managing, monitoring and controlling credit union operations in accordance with legislation, the standards and board policy. TCU s mandate is to provide our members with a full range of financial products and services, which includes banking and wealth management services. These products and services will be delivered through one of the following segments of the credit union. TCU provides the traditional retail banking services and products such as personal, consumer and commercial loans, personal and commercial deposit account products, ATM, TeleService and Internet banking facilities. TCU Wealth Management Inc. is a wholly-owned subsidiary of TCU and provides the wealth management services such as mutual funds, securities brokerage, estate and financial planning. TCU Holdings Inc. is also a wholly-owned subsidiary of TCU, and holds and manages all the TCU buildings and land. TCU is one of the top ten credit unions in Saskatchewan, and has assets of $412,250,000. In addition, TCU has assets under administration of $44,257,000 in syndicated loans. TCU Wealth Management Inc. has assets under administration in excess of $83,611,000. TCU serves 18,327 members through four retail branch locations in Regina and Saskatoon. Head office is located in Saskatoon. Financial performance review Growth Balance sheet assets at December 31, 2009 were at $412,250,000 as compared to $391,960,000 at the end of 2008 representing 5.18% growth. Assets under administration on the TCU Wealth Management Inc. side at December 31, 2009 were at $83,611,000 as compared to $67,145,000 at the end of 2008, representing an increase of 24.52%. It is worthy to note that 12% of this increase is related to the financial market adjustment. Total balance sheet member loans at December 31, 2009 were at $298,810,000 as compared to $305,545,000 at the end of 2008, representing a negative growth of 2.20%. The reasons for the negative growth were that the lending activity in 2009 was somewhat slowed, and TCU sold 6

8 $16,000,000 of mortgage loans into the Canada Mortgage Bond program through Concentra Financial. The sale of the mortgages into the Canada Mortgage Bond program was completed in order to mitigate interest rate risk that TCU was not prepared to take on these mortgages. Syndicated Loans under administration (TCU member loans sold to other credit unions) at December 31, 2009 were at $44,257,000, as compared to $40,090,000 at end of As indicated above, included in the syndicated loans total was the sale of TCU mortgages in the amount of $16,000,000 into the Canada Mortgage Bond program. TCU s loan portfolio is weighted predominantly towards stable, lower risk personal and mortgage loans. Mortgage loans and mortgage secured line of credit loans account for 74% of our loan portfolio. Our commercial loans portfolio accounts for 17% of our total loan portfolio, of which 86% are mortgage secured loans. The following graph will provide a breakdown of our balance sheet loans portfolio. The commentary in brackets behind each category identifies the risk rating for this group of loans. 6% 3% 17% 20% % Mortgage Loans (low) Mortgage Loans - LCL (low) Regular LCL - (low to medium) All Other Personal Loans (low to medium) Commercial & Agriculture (med to high) 7% 3% 18% 18% % Mortgage Loans (low) Mortgage Loans - LCL (low) Regular LCL - (low to medium) All Other Personal Loans (low to medium) Commercial & Agriculture (med to high) Total balance sheet member deposits at December 31, 2009 were at $381,814,000, as compared to $354,532,000 at the end of 2008, representing 7.70% growth. Most of TCU s member deposits are concentrated in the higher rate investment type accounts. More growth was experienced in the demand type deposits, or accounts that have more liquidity as members fled from the markets into more secure deposits. The following graph provides the breakdown of our member deposits in the various demand and investment products. 7

9 % 1% 21% 28% 26% 38% 13% 41% 12% Demand Deposits Investment Savings Account Term Deposits/GICs Registered Plans TFSAs Demand Deposits Investment Savings Account Term Deposits/GICs Registered Plans TCU Wealth Management Inc. s assets under administration are broken down into two categories mutual funds administered through Credential Asset Management Inc., and securities investments administered through Credential Securities Inc. There was significant growth in both the Credential Securities and Credential Asset Management books as members started to take advantage of the increase in the financial market adjustment. The breakdown between the two categories is presented below % 56% 46% 54% Credential Securities Inc. Credential Asset Management Inc. Credential Securities Inc. Credential Asset Management Inc. Liquidity TCU s loan to asset ratio as at December 31, 2009 was at 72.48%, which compared to 77.95% at the end of This is well below our liquidity risk management policy range of 79% to 81%. 8

10 During 2009, our loan demand was steady but did not compare to the high demand in 2008, as was anticipated. Our participation in the Canada Mortgage Bond program resulted in a lower loan to asset ratio. Acquiring deposits from our members continues to be a high priority for TCU. TCU had good growth in 2009 predominantly as a result of members seeking refuge from the financial markets. We expect that as financial markets improve, some of these deposits will flow back into the market, which will put some pressure on our liquidity. Looking into 2010, we expect our loan portfolio diversification to be similar, however, we expect the lending activity to be somewhat improved over TCU is budgeting for a 10% growth in member loans for TCU, along with all other Saskatchewan Credit Unions, is required to maintain 10% of their liabilities on deposit with SaskCentral as the manager of the provincial liquidity program. These liquidity investments provide a safety net of liquid funds to satisfy payment obligations and to also protect against unforeseen liquidity events. In addition to these statutory liquidity investments, TCU also maintains an investment portfolio of other liquid investments to meet daily liquidity requirements. Profitability Net profit in 2009 was just over $2,900,000, as compared to just over $2,340,000 in New financial statement reporting standards require us to report comprehensive income which includes unrealized gains/losses on investments and derivatives. In 2009, the unrealized gain on investments and derivatives was $905,742, as compared to $773,249 in In addition, TCU realized a net gain of $825,000 on the sale of our Scarth Street building. TCU s total annualized return on assets (ROA) for 2009 was.70% on comprehensive income, and.28% on operating income, as compared to.60% on comprehensive income and.40% on operating income in Net interest margin is the total revenue received from loan and investment interest less total interest expense paid on member deposits and provision for credit and investment losses. For 2009, TCU s net interest margin was at 2.463% at December 31, 2009, as compared to 2.442% at the end of However, it is interesting to note that the average interest margin throughout 2009 was 2.298%. The major reason for the continued decrease in net interest margin was the drop in the bank prime rate from 3.50% at the end of 2008 to 2.25% at the end of From the end of 2007 to the end of 2009, the prime interest rate fell from 6.00% to 2.25%. Non-interest revenue includes revenue from sources like commissions and charges, service fees, administration fees on syndicated loans and fixed asset income. TCU s non-interest revenue for 2009 was at $5,263,000, as compared to $3,727,000 in This growth in non-interest revenue is primarily due to a number of factors which included a gain on the sale of our Scarth building. 9

11 Non-interest expenses include operating expenses such as personnel, occupancy, member security, general business and governance costs. Non-interest expenses for 2009 were at $11,458,000, as compared to $11,275,000 in 2008, or an increase of 1.62%. TCU was very successful in its concerted effort in 2009 to control operating expenses. Personnel and Occupancy costs were actually lower in 2009 than they were in The largest increase in operating expenses came in Member Security, where Credit Union Deposit Guarantee Corporation, our Regulator, increased the Deposit Insurance Premium by $89,000, and Organizational Expenses, where SaskCentral increased Dues by $44,000. Operating expenses as a percentage of Assets decreased in 2009 to 2.78% as compared to 2.88% in TCU s operating expense ratio is one of the lowest for a multi-branch credit union in Saskatchewan. However, one of TCU s primary focus in 2010 and future years is to continue to work towards decreasing our operating expenses as a percentage of assets. In other words, we continue to grow our assets without a corresponding increase in operating expenses. The following graph presents a breakdown of TCU s operating expenses. 3% % % 3% 58% 9% 2% 9% 27% 59% Personnel Occupancy Expense Member Security General Business Organization Personnel Occupancy Expense Member Security General Business Organization Efficiency Ratio is a calculation that determines the cost of raising $1.00 of revenue. In 2009, TCU s Efficiency Ratio was at 73.35%, as compared to 79.84% in In other words, it costs TCU $ to raise $1.00 of revenue in The primary reason for the difference between 2009 and 2008 was the significant increase in non-interest revenue. Member equity & capital Member equity and capital are the primary measurements of a credit union s financial strength. TCU s capital management policy is that TCU will at all times remain adequately capitalized, maintaining a prudent cushion of retained earnings and equity to protect TCUs economic survival and to finance new opportunities. There are two measurements that TCU uses in regards to capital and member equity: 10

12 1) Total capital as a percentage of risk-weighted assets TCU s risk weighted ratio at the end of 2009 stood at 14.08%, as compared to 12.40% in The standard as set by our regulator is that a credit union must maintain a minimum of 8.00% of total capital as a percentage of risk weighted assets. TCU s internal capital management policy is for the risk weighted capital ratio to be within the range of 10% to 12%. 2) Total capital as a percentage of total assets TCU s capital to asset ratio at the end of 2009 stood at 6.69%, as compared to 6.29% in The standard as set by our regulator is that a credit union must maintain a minimum of 5.0% of total capital as a percentage of total assets. TCU s Member Equity position as at December 31, 2009 was at $27,447,000 as compared to $24,542,000 at the end of Future considerations For 2010, our expectations are that our asset growth will be slightly higher than in We also expect that prime rate won t increase until the latter part of 2010, which makes for a compressed interest rate margin for most of Profitability will be less in 2010 because we won t incur the extra-ordinary revenue items that occurred in However, we still expect that TCU will have another good year in terms of profitability and growth. Our 2010 business plan contemplates an increase in spending on technology, particularly in added functionality for on-line access, and also a re-engineering of our internal processes as we work towards becoming more efficient and more cost effective. 11

13 MANAGEMENT OF RISK Overview As TCU Financial Group (TCU) is exposed to various risks within the financial industry, it is prudent to employ various risk management strategies. TCU employs an enterprise wide risk management framework (ERM) in order to enhance the management of these risks. Based on this framework, TCU uses six categories to help define the risk exposure. These categories are: Credit risk Liquidity risk Market (interest rate) risk Strategic risk Operational risk Legal & regulatory risk TCU s risk management framework includes: Risk identification and classification Risk mitigation review and assessment Policy and procedure reviews and amendments Compliance and audit reviews Reporting Senior Management is responsible for establishing the framework which will identify and classify the risks, as well as establishing effective policies and processes to manage the risks. The Board of Directors, directly or through a board committee structure, reviews and approves key policies and reporting to ensure proper oversight to the risk management process. The Board of Directors is responsible to approve the overall business plan including any recommendations from various board committees. The Board also receives reporting from the various board committees as it relates to approvals of policies made by those committees. The Audit & Risk Management Committee receives direct reporting from Senior Management and is responsible for the monitoring of the risk management framework and any recommendations to the Board of Directors as to acceptable risk levels or risk tolerance. This committee is also responsible to provide oversight on the external and internal audit process and the adequacy of internal controls. Executive and Senior Management are responsible for the implementation of strategies and polices approved by the Board of Directors, as well as reporting to the Board or specific committees to ensure proper oversight is maintained. The ALCO (Asset and Liability Management) committee consists of Executive Management and the Manager of Internal Audit & Risk Management. The committee is responsible for the monitoring of liquidity and interest rate risk as well as overall credit exposure. This committee provides regular reporting to the Board related to liquidity, market risk and capital management activities undertaken by management. 12

14 TCU has also established an independent internal audit/quality assurance framework. Reporting from this framework is presented to Senior Management, with a summary provided to the Audit & Risk Management Committee on a quarterly basis to assist in the oversight of TCU internal controls. Credit risk Credit risk analysis includes a review of TCU loan portfolio diversity, loan policy and the ability to recover our loans by way of member payments or the realization of security. TCU employs loan underwriting policies and procedures based on recommended industry requirements and standards. Loan delinquency and loan write offs continue to be maintained below industry standards and are monitored and reported to the Board of Directors on a regular basis. Loan portfolio concentrations are also reported to the Board of Directors. The largest percentage of our loan book remains in consumer and residential loan products, with some diversification into commercial and syndicated loans. Liquidity risk Liquidity risk analysis includes a review of strategies around member deposit acquisition and other loan funding sources. Competition for deposit dollars has increased in part due to the current market conditions, which have had an impact on the availability of other traditional funding sources. TCU has established liquidity, capital and ALM polices approved by the Board of Directors which provide direction in managing the associated risks. TCU continued to employ syndicated loan relationships in 2009 as one strategy to mitigate liquidity pressures. Existing borrowing facilities with SaskCentral (Concentra) also form part of the liquidity management strategy. Senior Management develops strategies designed to attract deposit assets as well as non-interest revenue streams. The ALCO committee is responsible to manage liquidity risk based on the approved policy and to provide reporting to the Board of Directors for their oversight. Market (interest rate) risk Market risk analysis includes a review of market conditions, asset/liability matching and interest margin challenges. In addition to the ALCO committee, TCU has employed the services of an outside consultant to assist with our balance sheet management and to review possible scenarios necessary for long term planning. In an effort to remain competitive with the residential mortgage market in early 2009, and at the same time mitigate the risk of a low rate, long term mortgage product, TCU utilized the Canada Mortgage Bond program as a strategy to manage margin pressure and price competition. Senior management conducts ongoing reviews of product offerings, product delivery and product pricing to help ensure profitability. Reporting is provided to the Board to ensure oversight. 13

15 Strategic risk Strategic risk analysis includes a review of TCU s brand, strategic direction, competition for new members and employees, as well as TCU s role in the communities it serves. TCU has a formal planning process and operates from a Balanced Scorecard approach reflecting 5 strategic categories which includes: Corporate Culture; Members; Growth & Innovation; Finance; and Risk Management. Our strategic direction is set by the Board of Directors and reviewed at least annually. In addition, TCU has set certain benchmark metrics, which if not achieved, initiates a high level review of our strategic direction to ensure future success and sustainability of the credit union. Annual planning meetings with Executive Management and Board of Directors set the direction for TCU. Executive and Senior Management are responsible to develop initiatives, objectives and action plans. The Board is responsible to review and approve the Balanced Scorecard annually. TCU actively participates in the community both from a corporate perspective and by individual employees. Operational risk Operational risk analysis includes a review primarily of human resources and information systems, as well as internal controls. Operational risk occurs when TCU is not able to develop or deliver products and services to its members due to human error, inadequate or failed technical issues, inadequate internal controls or lack of trained or qualified staff or other resources. TCU has established policies and procedures, internal controls and compliance activities, and conducts regular reviews of these controls. Among many other initiatives, attracting and retaining highly skilled and competent staff remains a priority. In addition, dedicating resources and initiatives to technology and information systems has become a priority for TCU. Outsourced experts are engaged where needed to ensure a high level of knowledge and support for key initiatives. TCU has adopted a Code of Conduct for employees and directors. TCU also requests and receives audit reports from key suppliers to ensure that these organizations are able to remain viable partners for our organization. Legal and regulatory risk Legal and regulatory risk analysis includes a review of fraud and fiduciary risk exposure as well as the cost to implement regulatory or compliance regimes, and the possible effect of non compliance with laws, rules, regulations or ethical standards. TCU has policies, procedures and internal controls in place to mitigate our exposure to these risks, as well to assist TCU in complying with laws and regulations. TCU has a designated Compliance Officer to oversee the compliance regime. In addition, the internal audit/quality assurance framework provides an independent assessment of the compliance regime on an annual basis. Internal audit/quality assurance also provides ongoing assessment of internal controls. Reporting is provided to Senior Management on an ongoing basis, and to the Audit & Risk Management Committee on a quarterly basis to ensure the Board s oversight of the compliance and control processes. 14

16 MANAGEMENT S RESPONSIBILITY To the members of TCU Financial Group Management has responsibility for preparing the accompanying consolidated financial statements and ensuring that all information in the annual report is consistent with the consolidated financial statements. This responsibility includes selecting appropriate accounting principles and making objective judgments and estimates in accordance with Canadian generally accepted accounting principles. In discharging its responsibilities for the integrity and fairness of the consolidated financial statements and for the accounting systems from which they are derived, management maintains the necessary system of internal controls designed to provide assurance that transactions are authorized, assets are safeguarded and proper records maintained. Ultimate responsibility for consolidated financial statements to members lies with the Board of Directors. An Audit Committee of Directors is appointed by the Board to review financial statements in detail with management and to report to the Board of Directors prior to their approval of the consolidated financial statements for publication. Independent auditors appointed by the members audit the consolidated financial statements and meet separately with both the Audit Committee and management to review their findings. The independent auditors report directly to the members and their report follows. The independent auditors have full and free access to the Audit Committee to discuss their audit and their findings as to the integrity of the credit union s financial reporting and the adequacy of the system of internal controls. Morris Smysnuik Chief Executive Officer Greg Peacock Executive Manager Finance & Accounting 15

17 AUDITORS REPORT To the members of TCU Financial Group We have audited the consolidated statement of financial position of TCU Financial Group as at December 31, 2009, and the consolidated statements of income, comprehensive income, 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. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. February 17, 2010 Saskatoon, Saskatchewan Chartered Accountants 16

18 CONSOLIDATED STATEMENT of financial position As at December ASSETS (Note 15) Cash $7,609,576 $6,735,666 Investments (Note 4) 91,935,912 64,780,923 Loans receivable (Note 5) 298,809, ,544,828 Other assets (Note 6) 1,695,711 1,850,320 Property and equipment (Note 7) 12,198,726 13,048,233 $412,249,902 $391,959,970 LIABILITIES (Note 15) Deposits $381,814,456 $354,531,705 Loans payable (Note 8) 0 9,970,400 Other liabilities (Note 9) 2,863,982 2,788,427 Membership shares (Note 10) 124, ,640 $384,802,568 $367,418,172 EQUITY Retained earnings 27,447,334 24,541,798 Accumulated other comprehensive income 0 0 $412,249,902 $391,959,970 APPROVED BY THE BOARD: DIRECTOR DIRECTOR 17

19 CONSOLIDATED STATEMENT of income For the year ended December INTEREST INCOME Loans $14,633,658 $17,094,130 Investments 2,670,982 2,818,905 17,304,640 19,913,035 INTEREST EXPENSE Borrowed money 56, ,001 Member deposits 7,832,792 9,113,563 7,889,715 9,494,564 NET INTEREST 9,414,925 10,418,471 Provision for (Recovery of) credit losses 138, ,398 NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) CREDIT LOSSES 9,276,565 10,233,073 OTHER INCOME 5,262,887 3,727,288 OPERATING EXPENSES Personnel 6,608,736 6,609,331 Security 333, ,711 Organizational 321, ,824 Occupancy 1,034,453 1,050,223 General Business 3,159,465 3,040,288 11,458,086 11,275,377 Income before income tax 3,081,366 2,684,984 Income tax provision 175, ,189 Net income $2,905,536 $2,343,795 18

20 CONSOLIDATED STATEMENT of comprehensive income For the year ended December COMPREHENSIVE INCOME Net income $2,905,536 $2,343,795 Other comprehensive income 0 0 Comprehensive income $2,905,536 $2,343,795 19

21 CONSOLIDATED STATEMENT of equity For the year ended December RETAINED EARNINGS Retained earnings beginning of year $24,541,798 $22,198,003 Net income for the year 2,905,536 2,343,795 Retained earnings end of year $27,447,334 $24,541,798 ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income, beginning of year $0 $0 Other comprehensive income 0 0 Accumulated other comprehensive income, end of year $0 $0 20

22 CONSOLIDATED STATEMENT of cash flows For the year ended December CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income $2,905,536 $2,343,795 Items not involving cash: Amortization 73, ,949 Charge for credit impairment 138, ,398 Changes in other assets and other liabilities 477,842 (209,326) Cash flows from (used in) operating activities 3,595,653 3,068,816 CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Deposits, shares 27,279,241 26,724,684 Loans payable (9,970,400) 9,970,400 Cash flows from (used in) financing activities 17,308,841 36,695,084 CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Investments (27,402,667) (6,888,937) Loans 6,596,491 (30,099,417) Property and equipment 775,592 (1,786,009) Cash flows from (used in) investing activities (20,030,584) (38,774,363) Net increase (decrease) in cash resources 873, ,537 Balance beginning of year 6,735,666 5,746,129 Balance end of year $7,609,576 $6,735,666 Cash position consists of cash on hand, deposits with SaskCentral with maturities less than ninety days and cheques in transit (net). Total interest paid in the year was $8,086,710 ( $9,318,258). Total income taxes paid in the year was $490,080 ( $490,800). 21

23 NOTES to the consolidated financial statements At December 31, INCORPORATION AND GOVERNING LEGISLATION The Credit Union was continued pursuant to The Credit Union Act, 1998 of the Province of Saskatchewan, and operates four credit union branches. The credit union serves members and non-members in Regina, Saskatoon and surrounding area. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates, and as adjustments become necessary, they are reported in earnings in the period in which they become known. The significant accounting policies adopted by the Credit Union include: Basis of consolidation These consolidated financial statements include the accounts of TCU Financial Group Credit Union and its wholly owned subsidiaries, TCU Wealth Management Inc. and TCU Holdings Inc. Financial instruments recognition and measurement Financial assets and financial liabilities are recorded on the statement of financial position when the Credit Union becomes party to the contractual provisions of the financial instrument. Financial instruments are classified according to their characteristics, management objectives or the choice of category in certain circumstances. All financial assets must be classified as held for trading, held to maturity, loans and receivables or available for sale. Financial liabilities must be classified as held for trading or other liabilities. Any financial asset or financial liability may be designated as held for trading upon initial recognition. Credit Union Deposit Guarantee Corporation, the industry regulator, has restricted credit unions from using the held for trading classification on loans receivable unless specific criteria are met and approval is obtained. Under this standard, all financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods is dependent on the instrument s classification. Transaction costs are capitalized on initial recognition, except for financial instruments designated as held for trading. In those cases, the transaction costs are expensed. Financial assets and financial liabilities held for trading are measured at fair value, with changes in those fair values recognized in new income. Financial assets classified as held to maturity, loans and receivables and other financial liabilities are measured at amortized cost using the 22

24 effective interest rate method. Available for sale financial assets are measured at fair value, with unrealized gains and losses recognized in other comprehensive income. If fair value is not reliably determinable, available for sale financial assets are measured at cost. Investments Investments classified as held for trading are recorded at fair value. Fair value is determined using quoted market prices, generally the bid price. Investments classified as held to maturity are those which the credit union has the intent and ability to hold until maturity. These investments are recorded at amortized cost using the effective interest rate method. Where there has been a decline in value which is not temporary, these investments are recorded at net realizable value. Investments classified as available for sale are recorded at fair value. If the investment is an equity instrument with no quoted market price or if fair value cannot reliably be determined, the investment is recorded at cost. Loans receivable Loans to members are classified as loans and receivable and are recorded at outstanding principal plus accrued interest. Reported amounts represent amortized cost determined using the effective interest rate method. Foreclosed assets held for sale are initially recorded at the amount of the investment in the foreclosed loan. The initial recorded amount is adjusted for revenues and expenses incurred subsequent to foreclosure. Foreclosed assets held for sale are subsequently valued at the lower of carrying amount or fair value less disposal costs. An allowance for impaired (doubtful) loans is maintained to reduce the carrying value of loans to their estimated net realizable value and foreclosed assets held for sale to their fair value less costs to sell. A loan is classified as impaired (doubtful) when there is no longer reasonable assurance that the principal and interest will be collected in full. Foreclosed assets are considered to be assets held in the course of realization of impaired loans. The allowance is comprised of two components specific allowances and collective or general allowances, calculated as follows: (i) (ii) The Credit Union records specific allowances based on management s regular review of individual loans. The estimated realizable amount represents management s best estimate of the value of future payments it will receive on each loan, discounted at the loan s effective contractual interest rate. When management cannot reasonably determine the loan s future cash flows, it bases its estimates on the current market value of the loan s security net of expected selling costs. The Credit Union records collective or general allowances for certain groups of loans with similar characteristics, which are exposed to common impairment factors. A general allowance is determined based upon management s judgment considering business and economic conditions, portfolio composition, historical credit performance and other relevant indicators. 23

25 Management believes its estimates of allowances to be reasonable and appropriate; however, actual results could differ significantly from amounts estimated. The change in the net realizable value of these assets is recorded as a charge or credit for loan impairment. Property and equipment Property and equipment are recorded at cost less accumulated amortization. Property and equipment are amortized over their estimated useful lives using the following rates and methods: Buildings Furnishings, equipment Computer and communications equipment and software 40 years 10 years 4-8 years Loan interest revenue Loan interest revenue is recognized on the accrual basis using the effective interest rate method. Loan interest revenue is not recognized with respect to an impaired loan. Investment interest revenue Investment interest revenue is recognized on the accrual basis. Purchase premiums and discounts are amortized using the effective interest method over the term to maturity of the applicable investment. For held for trading investments, increases and decreases in fair value are recognized immediately in net income. For held to maturity investments, gains and losses are only recognized when an investment is sold. For available for sale investments, increases and decreases in fair value are recognized in other comprehensive income. Realized gains and losses on available for sale investments are recognized in net income upon disposition of the instrument. Swap interest revenue and expenses Swap interest revenue and expenses are calculated on an accrual basis on fair value and the result netted for reporting purposes. Other income Other revenue is recognized in the fiscal period in which the related service is provided. 24

26 Managing financial risk utilizing derivatives Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, equity, commodity instrument or index. In the ordinary course of business, the credit union enters into derivative transactions generally for asset/liability management and for trading. Derivative financial contracts are used to manage the credit union s interest rate, credit and currency exposure related to its recorded assets and liabilities. Embedded derivatives are components of a financial instrument or contract that meet the definition of a derivative. These instruments are considered to be a hybrid instrument, with a host contract and an embedded derivative that must be accounted for separately. Derivative contracts, including embedded derivatives required to be separately reported, are reported on the statement of financial position and are measured at fair value using quoted market prices. Increases and decreases in fair value are reported immediately in net income. Derivatives may include contracts which are designated as and effective as hedges, and/or contracts which reposition the Credit Union s overall interest rate risk, credit risk and foreign exchange risk profile. The credit union does not use hedge accounting for derivatives. Future income tax Future income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts and their tax bases. These amounts are measured using enacted tax rates and re-measured annually for rate changes. Future income tax assets are recognized for the benefit of deductions available to be carried forward to future periods for tax purposes that are likely to be realized. Future income tax assets are re-assessed each year to determine if a valuation allowance is required. Any effect of the re-measurement or re-assessment is recognized in the period of change. The Credit Union is taxed at an effective rate of 15.5% on taxable earnings eligible for the small business rate and the balance at 32%. Sale by securitization of mortgage loan pools on a serviced basis with retained interest To assist in the management of capital, the Credit Union transfers ownership of groups of loans through Concentra Financial under the Canada Mortgage Bond Program. Such transactions are recognized as a sale and the assets are removed from the Consolidated Statement of Financial Position when the Credit Union has surrendered control over the assets and has received, in exchange, consideration other than beneficial interests in the transferred assets. The Credit Union generally retains an interest in the assets such as servicing rights, and various forms of recourse. Any over-collateralization and cash reserve components of the Credit Unions retained interest are classified as Available for Sale financial assets on the Consolidated Statement of Financial Position and recorded at cost the most appropriate measure as fair values cannot be reliably measured for these instruments. 25

27 Recognized gains and losses on retained interest are recorded in non-interest income on the date of the transaction. Gains and losses are recorded at fair value as determined by estimating the present value of future expected cash flows including key assumptions on credit losses, prepayment rates, discount rates, and cost of funds. Changes in estimates are recorded in noninterest income. All loans sold by the Credit Union have been on a fully serviced basis. 3. ACCOUNTING POLICY CHANGE On January 1, 2008, the Credit Union adopted new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA): Section 1535 Capital Disclosures, Section 3862 Financial Instruments Disclosures and 3863 Financial Instruments Presentation. Section 1535 requires the disclosure of the Credit Union s objectives, policies and processes for managing capital, description of what it regards as capital, compliance with any capital requirement and related consequences of any non compliance with capital requirements. Section 3862 and 3853 replace the disclosure requirements of Section 3861 Financial Instruments Disclosure and Presentation. Section 3862 places increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the Credit Union manages those risks. Section 3863 carries forward previous presentation requirements. Adopting international financial reporting standards The Canadian Accounting Standards Board will require all publicly accountable companies to adopt International Financial Reporting Standards ( IFRS ) for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, including the restatement of comparative period financial statements on the same basis. The transition from Canadian GAAP to IFRS will be applicable to the Credit Union for the year-ended December 31, The Credit Union is implementing a changeover plan in 2010 to adopt IFRS on January 1, INVESTMENTS INVESTMENTS CLASSIFIED AS LOANS AND RECEIVABLES: Accrued interest $919,480 $813, , ,528 INVESTMENTS CLASSIFIED AS HELD FOR TRADING Concentra Bid Deposit 8,000,000 0 SaskCentral demand deposit 11,200,000 7,000,000 Provincial and corporate bonds 25,973,535 13,356,194 Derivative asset 1,246,218 2,090,585 46,419,753 22,446,779 26

28 INVESTMENTS CLASSIFIED AS HELD TO MATURITY: SaskCentral liquidity deposits 37,828,500 36,103,500 37,828,500 36,103,500 INVESTMENTS CLASSIFIED AS AVAILABLE FOR SALE: SaskCentral debenture 1,940,000 1,940,000 SaskCentral shares 3,919,700 2,717,534 Other investments 908, ,582 6,768,179 5,417,116 $91,935,912 $64,780,923 At December 31, 2009, the market value of investments classified as held to maturity is $38,324,758 ( $36,991,317). Credit unions must include 10% of their total liabilities in specified liquidity deposits in SaskCentral, in addition to liquidity required to meet their normal cash flow requirements as set out in regulation (18-1). As of December 31, 2009, the Credit Union met the requirement. 5. LOANS RECEIVABLE CURRENT IMPAIRED ALLOWANCE LOANS LOANS SPECIFIC COLLECTIVE 2009 NET 2008 NET Guaranteed* $54,297,845 $0 $0 $0 $54,297,845 $52,397,271 Conventional mortgages: Residential and farm 171,846, , , , ,870, ,472,282 Personal loans 26,731,119 57,651 36, ,924 26,644,925 29,396,072 Non-personal loans 45,610,023 6, ,913 45,346,520 53,517,623 Lines of credit, overdrafts 178,792 7,531 7,788 1, , ,474 Accrued interest 472, , ,106 Net realizable value $299,136,786 $498,579 $155,387 $670,000 $298,809,977 $305,544,828 At December 31, 2009, loans outstanding where payments overdue were greater than 30 days, totaled $512,623 ( $915,275). *Government guaranteed loans include loans which are guaranteed or insured under programs administered by federal and provincial governments, their agents or private loan insurance companies. Allowance for impaired (doubtful) loans and foreclosed assets: Balance beginning of the year $846,229 $1,013,596 Charge for credit impairment Specific 161,466 73,787 General 0 134,000 Loans written-off (182,308) (375,154) Balance end of the year $825,387 $846,229 27

29 6. OTHER ASSETS Accounts receivable $508,557 $778,321 Prepaid accounts 987,317 1,112,125 Items in transit (47,842) (40,126) Foreclosed property 247,679 0 $1,695,711 $1,850, PROPERTY AND EQUIPMENT Cost Accumulated 2009 Net 2008 Net Depreciation Land $2,479,018 $0 $2,479,018 $2,537,333 Buildings 10,381,200 1,694,196 8,687,004 9,139,826 Furnishings and equipment 5,046,642 4,013,938 1,032,704 1,371,074 Net $17,906,860 $5,708,134 $12,198,726 $13,048, LOANS PAYABLE The Credit Union has an authorized line of credit with SaskCentral in the amount of $8,000,000 Canadian and $100,000 US. The line of credit is secured by an assignment of book debts and funds on deposit with an interest rate structure based on the SaskCentral prime rate. At year end, the amount outstanding was $0 ( $0) on the Canadian line of credit and $0 US ( $0) on the US line of credit. The Credit Union through a commercial paper funding agreement with SaskCentral can borrow up to $15,000,000. The loan bears interest at a rate equal to the RIL Commercial Paper Market Term Rate as established from time to time plus 37.5 basis points per annum. At the end of the year the amount outstanding was $0 ( $9,970,400). 9. OTHER LIABILITIES Accounts payable $2,832,029 $2,311,414 Deferred income 43,907 88,071 Future income tax liability (asset) (28,063) 375,677 Unclaimed balances 16,109 13,265 $2,863,982 $2,788,427 28

30 10. MEMBERSHIP SHARES The authorized share capital is unlimited in amount and consists of shares with a par value of $5 per share. These accounts are not guaranteed by Credit Union Deposit Guarantee Corporation (CUDGC). 11. CAPITAL MANAGEMENT Credit Union Deposit Guarantee Corporation, regulator of Saskatchewan credit unions, prescribes capital adequacy measures and minimum capital requirements. Effective July 1, 2008, CUDGC adopted a new capital management framework, which is based on the recently introduced Basel II framework. The Credit Union is required to measure capital adequacy using a risk weighted asset calculation for credit and operational risk, including off balance sheet commitments. Based on the prescribed risk of each type of asset, a weighting of 0% to 150% is assigned. The ratio of regulatory capital to risk weighted assets is calculated and compared to the standard outlined by CUDGC. Regulatory standards require credit unions to maintain a minimum ratio of 8.00% for total eligible capital to risk-weighted assets, a minimum tier 1 capital to total assets of 5.00% and tier 2 to tier 1 capital ratio of less than %. Tier 1 capital is defined as a Credit Union s primary capital and comprises the highest quality of capital elements. Tier 2 is secondary capital and falls short of meeting the tier 1 requirement for permanence or freedom from mandatory charge. Tier 1 capital includes retained earnings, membership shares and member equity/patronage accounts. The Credit Union has adopted a capital plan that conforms to the new capital framework and is regularly reviewed and approved by the Board of Directors. The following table compares CUDGC regulatory standards to the Credit Union s board policy for 2009: Regulatory Standards Board Minimum Standards Total eligible capital to risk-weighted assets 8.00% 8.00% Tier 1 capital to total assets 5.00% 5.00% Tier 1 capital to tier 1 capital Less than 100% Less than 100% During the year, the Credit Union complied with all internal and external capital requirements. The following table summarizes key capital information: Eligible capital: Total tier 1 capital $27,571,464 $24,669,438 Total tier 2 capital $670,000 $670,000 Total eligible capital $28,241,464 $25,339,438 Risk-weighted assets $200,626,305 $204,343,081 29