Third Quarter Report 2010

Transcription

1 Third Quarter Report REPORT TO MEMBERS CENTRAL 1 REPORTS STRONG RESULTS FOR THIRD QUARTER OF Thirdquarter highlights compared to the same period last year: Central s Net income of $18.2 million, compared to $35.5 million Central s return on equity of 12.8%, compared to 26.3% Central s assets of $10.0 billion, down 2.9% from $10.3 billion B.C. system (1) Net operating income (2) of $102.8 million, versus $126.0 million B.C. system assets of $48.7 billion, up 4.5% from $46.6 billion Ontario system (3) Net operating income (2) of $27.2 million, versus $25.3 million Ontario system assets of $22.7 billion, up 7.1% from $21.2 billion. Central recorded Net financial income of $25.7 million and Net income of $18.2 million during the third quarter, compared to $46.8 million and $35.5 million respectively, during the same period last year. Central s Other income decreased by $0.1 million over the same period last year, while Operating expenses of $26.9 million were down $0.6 million during the same period. Assets at $10.0 billion, decreased 2.9% from $10.3 billion as at,. Global financial markets remained volatile over the third quarter. While the results of the European bank stress tests mitigated some investor concerns, economic data released out of the United States were less encouraging. Housing activity slowed as the effects of government stimulus measures wore off and unemployment remained stubbornly high. In the United States, continued doubts about the strength of the economic recovery and the prospect of further monetary easing led to a bond market rally towards the end of the third quarter as the Federal Reserve indicated that additional stimulus in the form of quantitative easing (QE2) would be implemented. Canada s economy is also growing at a slower pace with job growth in the just completed quarter the weakest since the recession ended in mid. The Bank of

2 2 Canada raised its overnight lending rate by 25 basis points at each of its July and meetings, bringing it to 1.00% but is expected to delay further increases for some time. These international and domestic economic events resulted in the government yield curve continuing to flatten during the third quarter, as long term rates decreased even while the Bank of Canada raised short term rates. Meanwhile, credit spreads on provincial and corporate bonds narrowed. This resulted in marktomarket losses on Central s derivative book and gains on its held for trading securities. For the quarter, realized and unrealized gains on financial instruments totaled $9.6 million compared to gains of $25.9 million over the same period last year. The economic slowdown in the U.S. and the global economy spread to B.C. and Ontario. The slowdown is most evident in the key labour market data released during the quarter. Consumer spending activity slowed except in housing where higher sales were reported in August and. The HST came into effect on July 1 and some spending may have been brought forward at the expense of later months. The housing market is at the early stages of turning higher on account of improved buyer affordability. Housing prices look to decline at a slower pace until year end, before posting gains in The B.C. system earned $102.8 million before taxes, dividends and patronage refunds in the third quarter of, down 18.4% from the $126.0 million earned during the same period in. Combined assets of the B.C. system in the same period rose 4.5%, yearoveryear, to reach $48.7 billion at quarterend. Demand for loans has returned to average historical levels, with total B.C. system net loans increasing by 6.3% yearoveryear to reach $41.3 billion while deposits grew by 2.9%. Commercial loan growth accelerated to 12.9%, while personal loan growth fell 2.3%. B.C. system loan delinquencies over 90 days decreased to 0.71% of total loans compared to 0.72% a year ago. The Ontario system earned $27.2 million before taxes, dividends and patronage refunds in the third quarter, up from the $25.3 million during the same period in. Combined assets of the Ontario system in the same period rose 7.1%, yearoveryear, to reach $22.7 billion at quarterend. Demand for loans was slower than deposit growth, as total Ontario system loans increased by 7.2% yearoveryear to reach $18.9 billion and deposits grew by 7.5% to $20.3 billion. Commercial loans secured by real estate grew by 7.7% while personal loan growth fell by 3.6%, yearoveryear, respectively. Ontario system

3 3 loan delinquencies over 90 days dropped to 0.84% of total loans compared to 0.96% a year ago. (1) These documents include statements about the credit union system in British Columbia, referred to as the B.C. system. B.C. system financial information has been provided by the Financial Institutions Commission of British Columbia (FICOM), which makes available reports on information provided by British Columbia credit unions. Central has no means of verifying the accuracy of information provided by credit unions to FICOM or FICOM s subsequent compilation of that information. Reference to system information should be interpreted in this context. (2) System Net operating income is equivalent to income from recurring operations and does not include extraordinary items, patronage dividends or income taxes. (3) These documents include statements about Central's member credit unions in Ontario, collectively referred to as the Ontario system. Ontario system financial information has been provided by the Deposit Insurance Corporation of Ontario (DICO), which makes available reports on information provided by Ontario credit unions. Central has no means of verifying the accuracy of information provided by credit unions to DICO or DICO s subsequent compilation of that information. Reference to system information should be interpreted in this context.

4 4 Management s Discussion and Analysis as at, This portion of the Report to Members updates Central s Management s Discussion and Analysis for the year ended,, and provides a discussion and analysis of Central s financial condition and results of operations for the nine month period ended, and the three month period ended,, compared to the corresponding period in the preceding fiscal year. Additional information on Central, including its Annual Information Form, may be found on SEDAR at The results reported in this Management s Discussion and Analysis and in the financial statements that follow are reported in Canadian dollars and are based on the significant accounting policies reported in Note 2 of the consolidated financial statements which may be found at ForwardLooking Statements There are numerous factors, many beyond Central s control, which could cause results to differ from expectations. These factors, which include industry factors, Central and system specific factors, economic factors and financial market conditions, are described in Central s Management s Discussion and Analysis for the year ended,. Central s performance is also subject to a number of risks, including credit, liquidity, market and operational risk. There has not been a substantial change in Central s risk profile or in its management of risk as described in Central s Management s Discussion and Analysis for the year ended,. In addition, this discussion may include forwardlooking statements which, by their nature, involve some risk with regard to accuracy. Where forwardlooking comments appear, they should be interpreted in the context of this uncertainty. Overall Performance and Interim Financial Condition Central posted Net income of $30.9 million or 19.0 cents per share for the first nine months of the year, compared to $88.7 million or 54.5 cents per share for the same period last year. Net financial income was $50.0 million compared to $ million in. Central experienced an exceptional year in, benefiting from a highly unusual combination of events in financial markets, including declining interest rates and contracting bond spreads with the result that, Central recorded very strong marktomarket gains that generated record net income. It was Central s Management s expectation that net income would revert back closer to historical levels in as financial market conditions normalized.

5 5 During the third quarter of, Central recorded Net income of $18.2 million or 11.2 cents per share, compared to $35.5 million or 21.9 cents per share last year. Net financial income was $25.7 million compared with $46.8 million posted in the third quarter of. Bond credit spreads narrowed in the third quarter primarily due to increased demand from international investors. This had a negative effect on Interest margin, but led to mark to market gains on held for trading securities relative to interest rate swaps. However, swap spreads declined in the quarter and together with the flattening of the yield curve, led to mark to market losses on the derivatives portfolio and also Central s securitization derivatives. Other income of $22.0 million for the quarter was 0.5% lower than the $22.1 million earned in the third quarter of. Included in the third quarter results for was $0.7 million which represents Central s interest in the financial results of the CUMIS Group Limited (CUMIS) which was acquired on,. Quarterly Operating expenses were $26.9 million, compared to $27.5 million incurred last year. Central's financial condition remained sound in the third quarter and capital ratios remain well within statutory limits. Central s borrowing multiple decreased from 18.3:1 at, to 15.8:1 at quarterend, reflecting a reduction in deposits from members and repayment of borrowings under the Purchase and Resale Agreements (PRA) facility, since yearend. At the quarterend, Central s riskweighted capital ratio was 38.7% compared to 34.5% at,. B.C. System B.C. system net operating income for the quarter was $102.8 million, compared to $126.0 million for the third quarter of. Nonfinancial income decreased 33.0% from the same period last year, while nonfinancial expense increased 8.9%. B.C. system financial margin increased 11.5% yearoveryear, as gross spread widened 15 basis points while assets grew 4.4%.The B.C. system's regulatory riskweighted capital was 14.5% at the end of the third quarter, up from 13.7% one year earlier. Loan delinquencies over 90 days decreased to 0.71% of total loans compared to 0.72% a year ago. System provisions for credit losses as a percentage of average loans was 0.56% as of,, little changed from 0.57% one year earlier. Overall liquidity within the B.C. system, including that held by Central, was 12.3% of deposit and debt liabilities, down from 13.3% a year ago. Deposits with credit unions grew yearoveryear by 2.9%, well below loan growth of 6.3%. Holdings of liquid assets

6 6 decreased by 5.1% yearoveryear, while borrowings from Central and other lenders increased by 51.6%. Ontario System Ontario system net operating income for the quarter was $27.2 million, compared to $25.3 million for the third quarter of. Nonfinancial income decreased by 17.4% from the same period last year, and nonfinancial expense increased by 5.1%. Ontario system financial margin increased by 12.4% yearoveryear as historically low interest rates reduced deposit yields. The Ontario system's regulatory riskweighted capital was 13.2%. Credit quality of loan portfolios has improved over the past year as loan delinquencies over 90 days have decreased from 0.96% as at, to 0.84% at the end of the third quarter. System provisions for credit losses as a percentage of loans have increased during the past year, 0.68% versus 0.65%. Overall liquidity within the Ontario system, including that held by Central, was 15.0% of assets as of,, compared to 14.5% a year ago. Deposits with Ontario system credit unions grew yearoveryear by 7.5%, while loan growth was 7.2%. Holdings of liquid assets remained fairly stable yearoveryear while borrowings from Central and other lenders decreased by 12.0%.

7 7 Figure 1 Selected Financial Information For the Three Months Ended Difference Earnings Net Financial Income ($ millions) $ 25.7 $ 46.8 $ (21.1) Net Financial and Other Income ($ millions) (21.6) Net Income ($ millions) (17.3) Weighted Average Shares Outstanding ($ millions) Earnings per share (cents) Basic (10.7) Fully Diluted (10.7) Return on Average Assets 0.7% 1.4% (0.7%) Average Equity 12.8% 26.3% (13.5%) Balance Sheet Data ($ billions) Total Assets $ 10.0 $ 10.3 $ (0.3) Average Assets Long Term Financial Liabilities Regulatory Capital Ratios Tier 1 Capital Ratio (0.3) Total Capital Ratio Borrowing multiple (times) (2.3) Share Information Outstanding $1 par value Shares ($ thousands) Class A Credit Unions 162, ,536 (5) Class B Cooperatives 5 5 Class C Others 7 7 Outstanding $0.01 par value Shares with redemption value of $100 ($ thousands) Class E Credit Unions Dividends per share (cents) Class "A", "B" and "C" Class "E"

8 8 Total Revenues Net Financial Income Central earned Net financial income of $25.7 million for the quarter, compared with $46.8 million for the same period last year. Interest margin, at $16.1 million, decreased from $20.9 million in the third quarter of last year. During, Central s Interest margin benefited from a combination of abnormally wide credit spreads on its investment portfolio and a relatively low cost of funds. As a result, Central s Interest margin as a percentage of average assets hit record levels in, peaking in the third quarter. As a percentage of average assets, Interest margin declined from 85 basis points in the third quarter of to 64 basis points in the third quarter of. The decrease in Interest margin reflects significantly better pricing to credit unions through increased rates on their deposits with Central but also the cumulative narrowing of credit spreads in financial markets which began in mid. During the quarter, Central recorded net unrealized losses of $7.7 million compared to a net gain of $19.0 million during the same period last year. However, realized gains on the sale of financial instruments increased during the period, from $6.9 million in, to $17.3 million for the period ended,. Taken together, Central recorded an overall gain of $9.6 million on its trading assets and liabilities compared to $25.9 million in the third quarter of. Overall, credit quality in the portfolio remains very strong as Central's investment portfolio mainly consists of debt issued by Canadian federal, provincial and municipal governments, senior deposit notes issued by major Canadian financial institutions and some highly rated debt issued by corporations. As spreads narrowed on provincial, bank and corporate bonds, the market value of Central trading assets increased relative to the market value of interest rate swaps during the quarter. This coupled with sharply lower interest rates resulted in marktomarket gains on held for trading securities. Swap spreads declined as Canadian banks unwound positions previously put on to hedge mortgage commitment risk as anticipated higher mortgage demand failed to materialize. The flattening of the yield curve together with the drop in swap spreads in the third quarter led to mark to market losses on the derivatives portfolio and also Central s securitization derivatives. The increase in the short end of the yield curve also resulted in marktomarket gains on trading deposits over the quarter. Other Income

9 9 Other income of $22.0 million for the quarter was 0.5% lower than the $22.1 million earned in the third quarter of. Central acquired a 27% interest in the CUMIS Group Limited (CUMIS) on, and from that date Central has recognized its proportionate share of the Net income of CUMIS under the equity method of accounting, which amounted to $0.7 million in the third quarter of. Income earned in Central s other operating areas declined slightly from $22.1 million in to $21.3 million for the three months ended,. Operating Expense Operating expenses for the quarter decreased to $26.9 million from $27.5 million last year. The decrease is primarily attributable to lower direct costs which is consistent with the lower non financial income earned for the quarter. Income Taxes Note 16 to the Interim Consolidated Financial Statements summarizes the components of Central s income tax expense. Central s effective tax rate for the quarter was 10.6% compared to 14.4% for the same quarter in. The decrease in Central s effective tax rate reflects Central s equity interest in CUMIS which is subject to a lower effective tax rate than its other earnings. Balance Sheet Cash and Securities At the end of the third quarter, Central had $8.3 billion in cash and securities representing over 83.0% of Central s assets. This remains relatively stable compared to 84.2% at the same time last year. The investment activity in Central s liquidity pool over the past 12 months continued to be conservative with investments made primarily in government debt (federal and provincial) and in senior bank debt. Loans Loans, which are almost entirely secured loans to member credit unions, increased to $1.2 billion from $1.1 billion at the same time last year. The total amount advanced under Central s noncredit union loan facilities as at, was $137.2 million, down from $169.3 million in. These loans represented 11.3% of Central s total loan portfolio at quarterend, down from 15.1% a year ago.

10 10 Borrowings Figure 2 below summarizes Central s Total borrowings as at the end of the third quarter together with comparative numbers for. Total notes as at, were $0.7 billion, up $0.3 billion from a year ago. Of the total amount outstanding as at,, $225 million was borrowed under Central s Mid Term Note facility and the remainder was borrowed through Central s Commercial Paper and Overdraft facilities. Since the beginning of, Central has repaid $175 million borrowed under its Mid Term Note facility and on April 19, Central issued $225.0 million principal amount of 3.379% Series 7 Notes due Deposits from Central s member credit unions at $7.5 billion as at, remained unchanged from a year ago. Credit union statutory deposits grew by $0.3 billion over the year, to reach $4.9 billion at,, reflecting the growth of both the B.C. and the Ontario credit union systems during the same period. Nonstatutory deposits from credit unions decreased by $0.3 billion over the past year. The level of deposits during the period reduced Central s reliance on other sources of funding as deposits represented 89.6% of total borrowings at,, up from 84.7% a year ago. Obligations related to assets sold under repurchase agreements were lower from a year ago at $0.2 billion compared to $1.1 billion at. During the third quarter Central repaid its remaining obligations under the Bank of Canada s PRA facility. Figure 2 Borrowings ($billions) For the Three Months Ended Difference Notes Deposits Deposits From Class A Members Statutory Other (0.32) Other Deposits Obligations related to assets sold under (0.85) repurchase agreements Total borrowings (0.49)

11 11 Off Balance Sheet Arrangements As a rated entity in the credit union system and in the normal course of business, Central is periodically involved in loan securitizations on behalf of member credit unions. Member credit unions have securitized these loans either indirectly through Central via assetbacked commercial paper conduits (ABCP Conduits) sponsored by major Canadian bankowned dealers or directly through Central by creating Government of Canada National Housing Authority (NHA) Mortgage Backed Securities (MBS). For indirect securitizations, Central provides guarantees or acts as a swap counterparty to member credit unions but does not acquire legal title to the underlying mortgage assets while, for direct securitizations, Central purchases the underlying mortgages from member credit unions. Central may retain the NHA MBS created in direct securitization transactions or sell them to either Canada Housing Trust (CHT) under the Canada Mortgage Bond program or to Canada Mortgage and Housing Corporation (CMHC) under the Insured Mortgage Purchase Program. The cumulative assets securitized by the system directly or indirectly through Central outstanding at were as follows: Figure 3 Assets Securitized Through Central ($millions) For the Three Months Ended Indirect ABCP Conduits NHA MBS (new) Direct NHA MBS securitized remaining on balance sheet NHA MBS securitized transferred to CHT or CMHC 1, , , ,674.3 Total 2, ,335.1 Summary of Quarterly Results Central s financial results for each of the last eight most recently completed quarters are summarized in the accompanying table (Figure 4). In general, Central s Net interest income has no discernable seasonal trend, and reflects the condition of prevailing financial markets. Noninterest income and noninterest expenses are also generally consistent from quarter to quarter, although revenue from the technology and payments areas has a slight seasonal pattern, with fourth quarter revenue being approximately 5%

12 12 10% higher than that of the first quarter. Gains and losses on disposal of financial instruments and changes in fair value of financial instruments may also have a significant impact on quarterly Net income, but their timing and magnitude are not predictable. Figure 4 QUARTERLY EARNINGS (Thousands of $, except as indicated) / /2008 Period Ended Period Ended 31Dec09 31Mar10 30Jun10 30Sep10 31Dec08 31Mar09 30Jun09 30Sep09 Total Interest income $ 51,203 $ 47,992 $ 50,160 $ 52,177 $ 72,239 $ 55,333 $ 48,869 $ 51,720 Total Interest expense 32,001 30,270 32,459 36,082 57,000 41,953 32,382 30,807 Interest margin 19,202 17,722 17,701 16,095 15,239 13,380 16,487 20,913 Gain on disposal of financial instruments 4,029 7,032 5,008 17,346 11,416 (1,343) 8,487 6,948 Changes in fair value of financial (2,168) (6,468) (16,694) (7,702) (3,176) 6,777 28,894 18,956 instruments Recovery (provision) for credit losses (1,308) (303) (823) (89) (117) 54 Other income 23,062 21,450 22,745 22,008 23,524 20,799 21,614 22,126 Operating expense (29,719) (26,083) (29,989) (26,891) (28,353) (25,547) (26,895) (27,479) Income taxes (1,894) (1,885) 2,040 (2,378) (2,751) (2,273) (7,009) (5,986) Net income $ 11,204 $ 11,861 $ 831 $ 18,175 $ 15,076 $ 11,704 $ 41,461 $ 35,532 Weighted average shares outstanding (millions) Earnings per share from continuing operations Basic (cents) Diluted (cents) Earnings per share Basic (cents) Diluted (cents) * Earnings per share calculated for a central credit union must be taken in the context that member shares may not be traded or transferred. Capital Resources The combination of solid earnings during the third quarter and the repayment of amounts borrowed under the PRA resulted in an improvement in Central s regulatory capital for both federal and provincial purposes. Central s borrowing multiple for federal capital adequacy purposes was 15.8:1, down from 16.8:1 at June 30, while its percentage of regulatory capital to risk weighted assets for provincial capital adequacy purposes improved from 35.1% to 38.7% during the same period. As of,, Central s Tier 1 Capital was $537.3 million and total capital before deductions, which includes Central s subordinated debt, was $737.3 million, compared to $517.3 million and $567.3 million, respectively, a year earlier. The increase in the total capital before deductions over the past year reflects growth in retained earnings of $20.0 million and the issuance of $150.0 million principal amount of Series 2 Subordinated Notes on October 9,.

13 13 Central s regulatory capital levels are determined according to both federal guidelines and provincial regulations. Central s federal capital adequacy borrowing multiple met regulatory requirements, as well as internal operating targets at,. Central s provincial riskweighted total capital ratio, at 38.7%, remains well in excess of both Central s target and provincial requirements, reflecting the high quality of Central s balance sheet and, hence, low risk weighting of securities in Central s liquidity portfolio. Target Regulatory Requirement Borrowing Multiple 15.8:1 18.1:1 16:1 18:1 20:1 Riskweighted Ratios 38.7% 28.2% 11 14% 10 % Central's Accounting Policies and Estimates Central's Consolidated Interim Financial Statements, included in this Report to Members, have been prepared in accordance with GAAP as described in Note 1 of the Interim Consolidated Financial Statements. Future Adoption of International Financial Reporting Standards This update to Central s IFRS conversion process should be read in conjunction with the discussion on pages 62 and 63 in the Annual Report. In February 2008, the Canadian Institute of Chartered Accountants (CICA) announced that Canadian generally accepted accounting principles (GAAP) for publicly accountable enterprises will be replaced by IFRS for fiscal years beginning on or after January 1, The conversion from GAAP to IFRS will be applicable to Central s reporting for the first quarter of 2011, for which the current and comparative information will be prepared under IFRS. Central has completed an assessment of the scope and complexity of the transition to IFRS and steps are being taken to modify policies, processes, and systems across the organization to enable consolidated financial reporting under IFRS for 2011, with comparatives for. Central will follow the specific transitional provisions found in IFRS 1, First Time Adoption of IFRS, which provides the framework for the first time adoption of IFRS and specifies that, in general, an entity shall apply the principles under IFRS retrospectively but with certain exemptions from retrospective application in areas where it would be operationally impracticable. Key items identified to date as impacting Central s processes and information systems include the need to track IFRS adjustments for the comparative year and creation or modification of certain reports to assist in preparing incremental note disclosures required by IFRS. The impact on internal control over financial reporting is currently being assessed in light of changes in both

14 14 transactionlevel accounting policies and changes in financial reporting disclosure requirements. The areas that are expected to have the greatest financial and capital impacts include balance sheet derecognition and consolidation; property, plant and equipment; investment property; measurement of investments and employee benefits differences. Of these areas of focus, derecognition and consolidation have proven to be the most complex. Under IFRS, the approach to derecognition of financial assets is significantly different from the approach under Canadian GAAP. IFRS requires consideration of the risks and rewards of ownership with a secondary focus on control over transferred assets. Under Canadian GAAP, a legal form focused on the ability to shield assets from bankruptcy is applied. Management s preliminary conclusion is that total assets on Central s balance sheet will increase, primarily due to its participation in mortgage sales though the Canadian Mortgage Bond Program and Canada National Housing Act MBS Auction Program. Under IFRS, consolidation of an entity is based solely on applying the principle of control as opposed to voting control or variable interests. This change in policy will result in certain entities that were not consolidated under Canadian GAAP being consolidated under IFRS, due to Central s legal or contractual rights to control the entity, as defined by IFRS. Management has completed its initial assessment of existing structures and continue to monitor these structures for changes in business activities as well as evaluate consolidation impacts for any new structures. Central s IFRS Team continues to facilitate internal working sessions designed to support the personnel involved in the conversion process and those with ongoing financial reporting responsibilities. Additionally, Central s IFRS transition initiative includes frequent communication with the Audit Committee of the Board of Directors, which encompasses a review of the conversion progress, discussion of potential transition and ongoing business impacts, and an overview of developments in accounting and regulatory guidance related to IFRS. Central expects to complete its analysis of the impact of the adoption of IFRS on its opening balance sheet in and report the consolidated opening balance sheet prepared under IFRS at the date of transition (January 1, ) during the first interim reporting period of Draft financial statements and disclosure information will be prepared for each quarter in (to be used for comparative purposes in 2011) and reporting under IFRS will commence for interim and annual periods in Critical Accounting Estimates The critical accounting estimates remain unchanged from those disclosed in Central's Annual Report.

15 15 Controls and Procedures Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported on a timely basis to senior management so that appropriate decisions can be made regarding public disclosure. As at the end of the period covered by this Management's Discussion and Analysis, management evaluated Central's disclosure controls and procedures as required by Canadian securities laws. Based on that evaluation, management has concluded that the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in Central's interim filings, as such term is defined under National Instrument Certification of Disclosure in Issuers' Annual and Interim Filings, is recorded, processed, summarized and reported within the time periods specified by those laws, and that material information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. Internal Controls and Procedures Central evaluated the design of its internal controls and procedures over financial reporting as defined under National Instrument for the year ended,, and for the quarters ended March 31, June 30 and,, for operations in B.C. For its operations in Ontario, the evaluation covered the six month period ending, and the quarters ended March 31, June 30, and,. There has been no change in Central's design of internal controls and procedures over financial reporting that has materially affected Central's internal control over financial reporting during the period covered by this Management's Discussion and Analysis.

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17 Interim Consolidated Statements of Income Notes For the three months ended For the nine months ended Interest Income Securities $ 46,259 $ 46,706 $ 134,239 $ 135,634 Amounts on deposit with regulated financial ,011 institutions Loans 5,544 4,547 15,233 18,277 52,177 51, , ,922 Interest Expense Notes 3,477 2,010 7,735 6,470 Deposits 30,540 28,279 84,906 97,127 Subordinated debt 2, ,170 1,545 36,082 30,807 98, ,142 Interest Margin 16,095 20,913 51,518 50,780 Gain on disposal of financial instruments 17,346 6,948 29,386 14,092 Changes in fair value of financial instruments 14 (7,702) 18,956 (30,864) 54,627 Net financial income 25,739 46,817 50, ,499 Provision for credit losses (54) ,436 46,871 49, ,347 Other income 15 22,008 22,126 66,203 64,539 Net financial and other income 47,444 68, , ,886 Operating Expenses Salaries and employee benefits 12,666 12,589 40,663 36,670 Premises and equipment 1,901 1,841 5,357 5,337 Other administrative expenses 12,324 13,049 36,943 37,914 26,891 27,479 82,963 79,921 Income before income taxes 20,553 41,518 33, ,965 Income taxes 16 2,378 5,986 2,223 15,268 Net Income $ 18,175 $ 35,532 $ 30,867 $ 88,697 See accompanying notes to the interim consolidated financial statements

18 Interim Consolidated Statements of Comprehensive Income For the three months ended For the nine months ended Net Income $ 18,175 $ 35,532 $ 30,867 $ 88,697 Other comprehensive income (net of tax) Net unrealized gains (losses) on availableforsale 14,466 16,715 20,698 52,543 assets 1 Reclassification of losses (gains) on (6,450) 5,187 (15,567) (3,313) availableforsale assets to net income 2 8,016 21,902 5,131 49,230 Net losses on derivative instruments designated as cash flow hedges 3 (72) (175) (72) (175) Other comprehensive income (loss) 8,016 21,830 5,131 49,055 Comprehensive income (loss) $ 26,191 $ 57,362 $ 35,998 $ 137,752 Income taxes (recoveries) deducted from the above items 1 Net unrealized gains (losses) on availableforsale assets $ 2,301 $ 2,835 $ 3,251 $ 8,968 2 Reclassification of losses (gains) on availableforsale assets to net income $ (1,076) $ 879 $ (2,597) $ (562) 3 Net losses on derivative instruments designated as cash flow hedges $ $ (14) $ $ (31) See accompanying notes to the interim consolidated financial statements

19 Interim Consolidated Statements of Changes in Members' Equity Notes For the three months ended For the nine months ended Share Capital Balance at beginning of period $ 162,576 $ 162,583 $ 162,580 $ 162,580 Net shares (redeemed) issued during the period 13 (1) (3) (5) Balance at end of period $ 162,575 $ 162,580 $ 162,575 $ 162,580 Contributed Surplus Balance at beginning and end of period $ 87,901 $ 87,901 $ 87,901 $ 87,901 Retained Earnings Balance at beginning of period $ 270,670 $ 233,350 $ 262,056 $ 188,060 Impact of change in accounting policies (3,814) Net Income 18,175 35,532 30,867 88,697 Dividends (2,416) (2,419) (7,173) (7,168) Related tax savings ,024 1,039 Balance at end of period $ 286,774 $ 266,814 $ 286,774 $ 266,814 Accumulated Other Comprehensive Income (Loss) (net of tax) Balance at beginning of period $ 35,931 $ 23,281 $ 38,816 $ (3,944) Other comprehensive income (loss) 8,016 21,830 5,131 49,055 Balance at end of period $ 43,947 $ 45,111 $ 43,947 $ 45,111 Members' Equity at end of period $ 581,197 $ 562,406 $ 581,197 $ 562,406 See accompanying notes to the interim consolidated financial statements

20 Interim Consolidated Statements of Cash Flows Notes For the three months ended For the nine months ended Cash flows from operating activities Net Income $ 18,175 $ 35,532 $ 30,867 $ 88,697 Adjustments for: Depreciation ,131 1,427 Realized gains and holding gains 2,396 (23,740) 1,478 (68,719) Net change in accrued interest (9,435) (17,307) (1,153) (51,165) Provision for credit losses (54) Other items, net (28,772) 56,546 (2,371) 1,591 (16,956) 51,378 30,142 (28,017) Cash flows from financing activities Dividends net of income taxes (2,045) (4,357) (22,404) (10,859) Net change settlementsintransit (30,310) (40,773) (3,359) (4,265) Net change notes 94,644 (370,327) 253,780 (145,464) Net change deposits (174,653) 684,093 (912,470) 1,042,889 Net change securities sold (292,965) 486,095 (540,179) 858,572 under repurchase agreements (405,329) 754,731 (1,224,632) 1,740,873 Cash flows from investing activities Net change securities 375,453 (423,698) 180,694 (3,206,919) Net change amounts on deposit 9,781 9,659 (79,031) 55,912 with regulated financial institutions Net change loans (10,881) (359,866) 953,063 1,303,053 Net changes loans available for sale 14,082 12,466 25,588 6,307 Capital asset acquisitions (1,297) (426) (2,766) (2,922) 387,138 (761,865) 1,077,548 (1,844,569) Increase (decrease) in cash resources (35,147) 44,244 (116,942) (131,713) Cash resources beginning of period 120,796 52, , ,378 Cash resources end of period $ 85,649 $ 96,665 $ 85,649 $ 96,665 Supplemental Information Interest received $ 39,993 $ 41,121 $ 144,270 $ 131,652 Interest paid $ 37,471 $ 37,742 $ 95,058 $ 132,408 See accompanying notes to the interim consolidated financial statements

21 Notes to the, Interim Consolidated Financial Statements Central 1 Credit Union (Central) is governed by the Credit Union Incorporation Act (British Columbia) and is subject to the provisions of the Financial Institutions Act (British Columbia) and the Cooperative Credit Associations Act (Canada). Central is the primary financial facility and trade association for credit unions in British Columbia and its member credit unions in Ontario. The performances of the British Columbia and Ontario credit union systems play an integral part in determining the results of Central s operations and its financial position. These interim consolidated financial statements do not contain the complete disclosure of the annual financial statements. Accordingly these financial statements should be read in conjunction with the Consolidated Financial Statements for the year ended,. 1. Basis of presentation The interim consolidated financial statements include the accounts of Central and its subsidiaries, B.C. Ltd., Central Financial Corporation (1989) Ltd., C.U. Financial Services Ltd., Central Data Systems Ltd., Central Risk and Insurance Management Services Ltd., Inovera Solutions Inc., and Landmark Credit Limited, all of which are wholly owned. These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), using the same accounting policies as set out in Central s Consolidated Financial Statements for the year ended,. Under GAAP, additional disclosures are required in the annual financial statements and accordingly, these interim consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements for the year ended, and the accompanying notes. Certain comparative amounts have been reclassified to conform to the current year s presentation. 2. Changes in Accounting Policies The CICA has announced that Canadian GAAP for publicly accountable enterprises will be replaced by International Financial Reporting Standards (IFRS), effective for Central s 2011 fiscal year. The areas which are expected to have the most significant impact include balance sheet derecognition of securitizations, financial instruments, consolidation and business combinations. Management is currently in the process of identifying the specific quantitative impact of changes to Central s financial statements as a result of implementing IFRS. 3. Fair value of financial instruments Certain financial instruments are recognized in the interim consolidated balance sheet at fair value. These include securities, other than equity shares with no quoted market value, amounts on deposit with regulated financial institutions, derivative instruments and deposits designated as trading. 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. The best evidence of fair value is a quoted bid price for financial assets held or an offer price for financial liabilities from an active market. Where independent quoted market prices do not exist, Central uses the quoted market prices for similar securities, other third party evidence or valuation techniques. Financial instruments are recorded at fair value upon initial recognition, which is normally equal to the fair value of the consideration given or received to obtain the instrument. Where financial instruments are measured at fair value subsequent to initial recognition, fair value is determined as described above.

22 Notes to the, Interim Consolidated Financial Statements The use of valuation techniques to determine the fair value of a financial instrument requires management to make assumptions such as the amount and timing of future cash flows and discount rates. Financial instruments whose book values approximate fair value Fair value is assumed to be equal to carrying value for cash, demand loans classified as loans and receivable and demand deposits classified as other liabilities because of their shortterm nature. Equity securities classified as availableforsale, for which fair value is not determinable through observable market information, are held at cost. Financial instruments for which fair value is determined using valuation techniques The fair value of fixed rate performing loans is determined by discounting contractual cash flows at market interest rates. For both loans to and deposits with members, Central discounts the expected cash flows using interest rates currently being offered on instruments with similar terms. The fair values of notes and subordinated debt is determined by discounting remaining cash flows by reference to current market yields on similar instruments. 4. Securities Securities classified as held to maturity are as follows: Amortized cost $ 27,834 $ 59,702 $ 37,287 Fair value $ 27,747 $ 59,120 $ 36,873 Securities designated as trading are as follows: Amortized cost $ 4,594,898 $ 4,128,497 $ 4,368,639 Fair value $ 4,816,790 $ 4,222,837 $ 4,443,858 Securities classified as availableforsale are as follows: Amortized cost $ 3,362,609 $ 4,325,005 $ 3,728,001 Fair value $ 3,412,006 $ 4,378,438 $ 3,773,038

23 Notes to the, Interim Consolidated Financial Statements Total securities recorded in the Interim Consolidated Balance Sheets are as follows: $ 8,256,630 $ 8,660,977 $ 8,254,183 The composition of Central s securities portfolio is as follows: (Millions of dollars) Government & guarantees $ 4,705.4 $ 4,725.7 $ 5,143.0 Corporate & major financial Institutions R1(Mid) or greater 3, , ,956.6 Other $ 8,256.6 $ 8,661.0 $ 8,254.2 At the periodend, securities having a par value of $308.7 million (, $331.3 million;, $290.3 million) were lodged or pledged with the Bank of Canada and the Canadian Depository for Securities as collateral for the transfer and receipt of payments. Effective January 19,, Central received Master Asset Vehicle (MAV) II and III notes in exchange for its holdings of third party asset backed commercial paper. As at, Central held (MAV) II and III notes with a par value of $27.5 million. These notes have been designated as Trading and are measured at fair value on Central s Interim Consolidated Balance Sheet. At periodend, Central estimated the fair value of its remaining holdings of MAV II and III notes by discounting the expected future cash flows on these notes. In forecasting the expected future cash flows, Central has made assumptions as to the timing and amount of cash flows expected to be received on as well as market yield expectations on those instruments. As at,, the estimated fair value of these notes was $18.3 million.

24 Notes to the, Interim Consolidated Financial Statements 5. Amounts on deposit with regulated financial institutions Amounts on deposit with regulated financial institutions classified as loans and receivables are as follows: Amortized cost $ 8,034 $ 38,906 $ 27,032 Fair value $ 8,366 $ 40,088 $ 27,614 Amounts on deposit with regulated financial institutions classified as availableforsale are as follows: Amortized cost $ 125,540 $ 27,526 $ 27,524 Fair value $ 125,623 $ 27,760 $ 27,721 Total amounts on deposit with regulated financial institutions recorded in the Interim Consolidated Balance Sheets are as follows: $ 133,657 $ 66,666 $ 54,753

25 Notes to the, Interim Consolidated Financial Statements 6. Loans Due on demand Credit unions $ 67,615 $ 25,808 $ 36,660 Cooperatives and others 11,421 8,469 2,692 79,036 34,277 39,352 Securities under reverse repurchase agreements 8,340 8,362 Term Loans Credit unions 994, ,010 1,965,818 Cooperatives and other 125, , ,956 Officers and employees 16,974 19,776 17,374 1,136,763 1,090,454 2,129,510 1,215,799 1,124,731 2,168,862 Accrued interest 2,823 1,857 3,588 1,218,622 1,126,588 2,172,450 Allowance for losses 5,485 5,184 6,492 Officer and employee loans bear interest at rates varying from 1.53% to 4.80%. Impaired loans are as follows: Gross Impaired Specific Provision $ 1,213,137 $ 1,121,404 $ 2,165,958 General Provision Net Impaired Credit unions $ $ $ $ $ $ Cooperatives & other 6,652 (4,675) (810) 1,167 3,153 3,073 Total $ 6,652 $ (4,675) $ (810) $ 1,167 $ 3,153 $ 3,073

26 Notes to the, Interim Consolidated Financial Statements The activity in the allowance for credit losses during and the resulting periodend balances are as follows: Specific Provision General Provision Three months ended Nine months ended Three months ended Nine months ended 30, 30, 30, 30, Balance at beginning of period $ 4,386 $ 796 $ 5,182 $ 6,492 $ 5,238 $ 5,032 Net write offs (1,197) Net provision (recovery) of credit losses (54) 152 Total $ 4,675 $ 810 $ 5,485 $ 5,485 $ 5,184 $ 5, Other assets Market revaluation of trading derivatives $ 48,078 $ 198,854 $ 128,435 Assets available for sale designated as trading 4,689 10,997 9,470 Assets available for sale at amortized cost 41,074 80,957 62,517 Accounts receivable and other 27,581 7,606 21,277 Prepaid expenses 3,169 3,380 2,788 Future income taxes (Note 16) 4,909 5,980 5,815 Investment in affiliates 128,805 14, ,018 $ 258,305 $ 322,751 $ 360,320 At periodend, the amortized cost of the assets available for sale designated as trading was $4.7 million (, $10.6 million;, $9.1 million). 8. Loan Securitizations Central did not securitize any mortgages with Canada Mortgage Housing Corporation (CMHC) or Canada Housing Trust (the Trust) during the nine months ended,. During the nine months ended,, Central securitized mortgages with CMHC and the Trust with a book value of $449.5 million (year ended, $545.3 million) which had been acquired from member credit unions. The fair value of derivative contracts acquired as a result of these transactions, together with proceeds received from CMHC and the Trust, totalled $447.9 million for the nine months, (year ended, $545.2 million) which resulted in a loss on these transactions of $1.6 million

27 Notes to the, Interim Consolidated Financial Statements during the nine months ended, (year ended, gain $0.1 million) which was recorded in Gain on disposal of financial instruments. As part of its securitization transactions with CMHC and the Trust, Central has the obligation to repay amounts advanced under these programs of $3,143.5 million (, $3,047.4 million;, $3,143.5 million). The total principal amount of loans securitized by Central outstanding at, was $1,303.2 million (, $2,674.3 million;, $1,839.2 million). The difference between Central s obligations under these programs and the remaining principal amount of loans securitized represents reinvestment assets acquired from receipts of mortgage payments. 9. Notes Operating lines with Credit Union Central of Canada $ 71,801 $ $ Notes due within three months 422, , ,953 due after three months and within one year 274,991 99,992 due after one year and less than five years 224, , , , , , ,945 Accrued interest 3, $ 722,152 $ 379,118 $ 465,289 Notes are recognized in the Interim Consolidated Financial Statements at amortized cost. Central has established $291.1 million of unsecured credit facilities with various financial institutions. These unsecured credit facilities rank equally with the outstanding notes and deposits. At,, $71.8 million was drawn against these facilities (, $nil million;, $nil million). Central is authorized to issue up to $1.5 billion in short term commercial paper and up to $1.5 billion in other borrowings which includes Central s mid term note facility. At,, $422.6 million was borrowed under the short term commercial paper facility (, $103.8 million;

28 Notes to the, Interim Consolidated Financial Statements, $190.0 million) and $225.0 million was borrowed under the mid term note facility (, $275.0 million;, $275.0 million). 10. Deposits Deposits designated as trading are as follows: Amortized cost $ 1,649,311 $ 1,292,955 $ 1,789,465 Fair value $ 1,660,973 $ 1,313,011 $ 1,808,022 Deposits classified as other liabilities are as follows: Due on demand $ 878,364 $ 700,349 $ 940,595 Due within three months 1,734,319 2,686,409 2,756,384 Due after three months and within one year 1,727,011 1,353,399 1,392,533 Due after one year and less than five years 1,924,520 1,856,235 1,942,878 Due after five years and less than six years 1,103 1, ,265,317 6,598,042 7,032,640 Accrued interest 34,961 34,951 39,315 $ 6,300,278 $ 6,632,993 $ 7,071,955 Total deposits recorded in the Interim Consolidated Balance Sheets are as follows: $ 7,961,251 $ 7,946,004 $ 8,879,977

29 Notes to the, Interim Consolidated Financial Statements 11. Other liabilities Market revaluation of trading derivatives $ 168,006 $ 169,624 $ 65,936 Settlementsintransit 79,204 66,332 82,563 Dividends payable 2,414 2,460 18,669 Future income taxes (Note 16) 1,359 2,761 2,818 Accrued vacation and sick benefits 1,624 1,423 1,446 Employee future benefits 19,420 19,085 18,588 Trade amounts and other 20,972 32,462 19, Subordinated Debt $ 292,999 $ 294,147 $ 209,826 On December 21, 2006, Central issued a $50 million note due December 21, The note bears interest at a fixed rate of 4.52% until December 21, 2011, and thereafter at a floating rate based on 90day Banker s Acceptance plus 1.00%. Central has the option to redeem the note on December 21, 2011, subject to regulatory approval. On October 9,, Central issued $150 million principal amount of 4.00% Series 2 Subordinated Notes due October 9, The notes bear interest at a fixed rate of 4.00% until, but excluding, October 9, 2014, and thereafter at a floating rate based on 90day Bankers Acceptance plus 2.40%. Central has the option to redeem the note on October 9, 2014, subject to regulatory approval. These notes are recognized in the Interim Consolidated Financial Statements at amortized cost. 13. Shares Central may issue an unlimited number of class A, B, C and E shares and may, at its option and on the approval of the directors, redeem its shares. There are no restrictions on the number of shares that may be held by a member shareholder. The class A, B and C shares have a par value of $1 per share, and the class E shares have a par value of $.01 per share and a redemption value of $100 per share. In the event of liquidation, dissolution or windingup, any surplus, profits or assets of Central shall be distributed proportionately among all members. The allocation of Class A shares is based on the assets of each credit union in proportion to the combined assets of the B.C. credit union system and the assets of Central s member credit unions in Ontario. This allocation is adjusted periodically to reflect changes in credit union assets. On matters concerning Central s role as a trade association, Class A members are entitled to one vote for every 100 members of their members. Each class B and C shareholder has one vote on certain issues.