It begins here ANNUAL REPORT. It begins here.

Transcription

1 It begins here. I 2011 ANNUAL REPORT It begins here.

2 II Interior Savings 2011 Annual Report It begins here. 1 Vision Mission To be the best in the communities we serve. We are a member-owned credit union dedicated to understanding and meeting the financial and related needs of our members with quality products and services. We re all about you. We have excellent employees who are committed to developing enduring, mutually beneficial relationships with our members and our communities. We share the success of our credit union with our members and our communities. Values Integrity Being fair, honest and trustworthy. Responsibility Being accountable to members, employees, colleagues and our communities; making good business decisions and conducting operations in a fiscally responsible manner. Respect Encouraging openness, mutual respect and individual development. Excellence Striving for excellence in innovative work practices, products and relationships. Workplace Creating a workplace environment that is diverse, stimulating and rewarding while recognizing and celebrating individual, work group and organizational success. Contents Chair s Report 2 CEO s Report 3 Corporate Overview 4 Product & Service Highlights 6 Workplace Culture 9 Community Spirit 10 Board of Directors & Senior Management 12 Appendix: The Numbers

3 2 Interior Savings 2011 Annual Report It begins here. 3 Chair s Report CEO s Report As Board Chair it is my privilege to report another solid year for Interior Savings. And I m proud to say that Interior Savings continues to be a true partner to its members, as 2011 s financial performance allowed us to once again share a significant amount of profits with members through the Member Rewards program. The end of 2011 brought to a close our second three-year Balanced Scorecard (BSC). The purpose of the BSC is to set the strategic direction of the Credit Union, which then holds the Board and management accountable to that plan. Since 2006 the BSC has allowed the Credit Union to stay focused and I m happy to say that we have implemented our third three-year BSC that will direct Interior Savings through The Board of Directors continues to practice good governance by conducting an assessment of Board and Committee operations and by creating development plans for each Director. The Board is committed to continuous learning and also to being aligned with employee development practices. In the 2011 Board of Directors election, we saw the re-election of incumbent directors Rolli Cacchioni and Doug Findlater in the Central/North Okanagan voting region. In the Thompson/South Okanagan voting region, Brad Fossett and I were re-elected by acclamation. It s always exciting to see a colleague start a new journey, but sometimes it comes with mixed emotions. After 34 years of leadership in the credit union system, Interior Savings CEO has chosen to retire. Barry s passion for Interior Savings, his dedication and his integrity will leave a lasting legacy and he will be missed by staff, his Board, and the members he has had the privilege to serve. On behalf of the Board, staff, and members, I would like to thank Barry for his years of service and wish him all the best in his retirement. After a thorough evaluation of internal and external candidates, the Board of Directors chose Kathy Conway, Interior Savings Chief Financial Officer to be the new President and Chief Executive Officer. Throughout Kathy s career she has demonstrated unwavering integrity and commitment to excellence; I look forward to Kathy s continued leadership in her new role. The success of any business is due in large part to its people. From our staff on the front lines to our management team and my fellow board members, I thank you all for your unwavering commitment to the success of our credit union and the communities it serves was another successful year for Interior Savings. We once again showed our commitment to our members by returning over $4 million of profits in the form of Member Rewards. Since 2002 we have given back over $40 million to our members. As in previous years, we introduced many new products and services aimed at meeting the needs of ever-evolving banking consumers. We all seem to be busier than we once were, and mobile banking allows you to conduct many banking functions whenever you want, wherever you want via your mobile or smart phone. If you forget to buy your travel insurance before that big trip, don t worry, you can purchase travel insurance online while you re in the departure gate if necessary. If you accidentally lock yourself out of online banking while on vacation, you can now easily unlock yourself by answering some security questions. Prior to 2011, Interior Savings Insurance Services (ISIS) was owned jointly by Interior Savings Credit Union and the CUMIS Group. On January 1, 2011, we were happy to announce that we had purchased ISIS to become sole owner of our own insurance division. Along with the change in ownership came a new Assistant Vice President and General Manager for ISIS, Mike Brousseau. Previously, Mike was a managing partner with the CUMIS Group. In 2011 we made great progress on our corporate-wide analysis of how we interact with members now, and how we will evolve in the future. There are many exciting projects on the go right now and one of the first major changes members will see is the implementation of a Member Service Centre in mid The Centre will provide members with access to employees via telephone or through . This is just one of the steps we will be taking in our quest to make banking easier for members. I would like to thank all of the employees and the Board of Directors for all their commitment and dedication over the past year. And as I head into retirement I would like to wish the best of luck to everyone at Interior Savings. It truly is a great organization and I anticipate great successes in the future. It is true that it s the employees who make a business successful, but the success of any credit union is also dependent on loyal members like you. I thank you for your business in 2011 and wish you prosperity in the future. Barry Meckler, President & CEO Above all, I would like to thank you, our members, for placing confidence in your credit union and for considering Interior Savings your financial partner. Elmer Epp, Chair

4 4 Interior Savings 2011 Annual Report It begins here. 5 Corporate Overview Interior Savings continues to be the largest credit union headquartered in the Interior of British Columbia. The Credit Union has $2.05 billion in total assets; a network of 21 branches and 15 insurance offices located throughout British Columbia s Interior; and two specialized Commercial Services Centres, in Kamloops and Kelowna. Interior Savings is comprised of several subsidiaries including Interior Savings Insurance Services, and Interior Savings Estate Planning. Interior Savings Credit Union Interior Savings offers a comprehensive range of financial products designed to meet our members needs at every stage of life. From day-to-day banking to lending and wealth management, we have it all, with the added benefit of local knowledge and decision making. Whether your financial services needs are large or small, Interior Savings wants to be your financial partner. Interior Savings Insurance Services On January 1, Interior Savings Credit Union became the 100% owner of Interior Savings Insurance Services. Prior to that, the insurance division had been jointly owned by Interior Savings and the CUMIS Group. Through our insurance division, we offer a wide range of competitive insurance products and services to meet every need. We have 15 insurance offices staffed with professionals who can help you understand the benefits and intricacies of insurance policies. Whether you require personal, auto, travel, recreational or commercial insurance, we have the products to meet your needs. Interior Savings Estate Planning Interior Savings Estate Planning Inc. is our life insurance subsidiary. Our professional life agents help our members plan for the unexpected, and also give them access to a variety of tax sheltered investments.

5 6 Interior Savings 2011 Annual Report It begins here. 7 It begins with hello. Personal and professional member service continues to be the hallmark of Interior Savings. It s what distinguishes us from other financial institutions. Staying committed to improving service means listening and responding to member needs, and continuing to build on a strong foundation of service. In 2011, we launched several new products and services and made improvements to some familiar ones. Here are some of the highlights. Mobile Mortgage Service Buying a home can be hectic at the best of times. That s why we launched our mobile mortgage service. It gives members the freedom to meet with one of our mortgage specialists in the comfort of their home to discuss the full range of mortgage options. Sign up for Online Banking Online! There are many benefits to online banking it s free, safe, and convenient. New online security measures that we introduced in 2011 allowed us to let members sign-up for online banking without having to visit a branch. MyComplete Home Insurance We proudly offer the best and broadest home insurance policy on the market. MyComplete Home Insurance is ideal for home and condo owners, renters, or those with vacation homes. There are many discounts available to reduce your premium, including discounts for mature homeowners, newer homes, homes with security systems, and more. MyComplete also offers the flexibility to pay monthly through direct debit or credit card. Change your PIN Almost Anywhere in Canada It s a good idea to periodically change the PIN on your debit card. And now, Interior Savings members can change their PIN at any Canadian credit union ATM displaying an Acculink logo. Online Account Comparison and Selector Tools Toggling between screens to compare different accounts is tedious and frustrating. With the online Account Comparison Tool, you can select up to four accounts and compare features to determine which is best for you. And if you re not sure which chequing or savings account will meet your needs, we offer a simple tool that will help identify the best choice and possibly provide a second option. Forgot Your Online Banking Password? With all the advantages of online banking, it can be pretty frustrating to forget your password. Our new PAC Refresh function allows you to reset your PAC (Personal Access Code) and security questions online so you can get back into your online banking immediately.

6 8 Interior Savings 2011 Annual Report It begins here. 9 Interac e-transfer Transferring money electronically is now easier than ever. Previously called Interac Money Transfer (EMT), the improved e-transfer allows members to send money directly from one mobile phone number to another. Sending funds to an address is still an option. Chip Cards Traditional magnetic stripe debit cards are vulnerable to skimming. Debit cards with chip technology are much safer. In late 2010 we distributed new chip cards to all members, and in June 2011 we deactivated all non-chip cards. Mobile Banking Mobile banking lets members access account information anytime, anywhere all via mobile phone or smart phone. Members can check balances, pay bills, transfer funds, find ATMs and branches, and so much more. Small Business Online Banking Launched in April, Small Business Online Banking offers features that meet the needs of small business owners. The account holder can choose to have a bookkeeper or other colleague have restricted functionality or set them up as read-only; Multiple signature requirements can be added for enhanced security; personal and business accounts can be seen with a single log-in; and more. Online Travel Insurance Purchasing travel insurance is now easier and more convenient. We have introduced an online tool that allows you to get a quote and purchase a policy without having to visit a branch. Member Rewards Once again we paid a cash reward to members in December. The total payout for 2011 was $4.4 million and the average qualifying member received $152, just for doing their banking at Interior Savings. A healthy workplace. At Interior Savings we value the efforts of our staff and strive to reciprocate by creating a workplace culture conducive to success as well as providing opportunities for development and advancement. Our members, our employees, and our communities benefit from our continued investment in our people, which is why we strive to offer a dynamic and rewarding workplace. For the eighth consecutive year, we conducted an employee survey to measure our ongoing effectiveness as an employer. Our staff responded very positively again this year, recognizing that Interior Savings values the opinions of staff and is always looking for ways to improve the workplace.

7 10 Interior Savings 2011 Annual Report It begins here. 11 A passion for community. At Interior Savings we care about our members, employees, and the communities where we live and work. We realize that we can only be as strong as the communities we serve. In 2011, we invested over $600,000 in our communities in the areas of youth, health, and economic development. These contributions included donations, corporate sponsorships, bursaries, allocations through the Community Investment Fund, and use of equipment such as our community tents. Our employees share the same passion for our communities; in 2011, they volunteered over 2,000 hours to various community events and helped raise over $50,000. Of the hundreds of projects we were involved with in 2011, here are a few. Basic Dental Care Dental Care is something that not everyone can afford. In 2011, we helped fund two great projects that focus on dental care. In Vernon, we donated to the Community Access Dental Centre, which provides restorative and preventative oral health care services to low-income people of the North Okanagan. In Kelowna, we contributed to the Kelowna Gospel Mission Dental Clinic, which allowed them to purchase a digital x-ray machine. Food Bank Initiative With the help of our members, we donated $30,000 to 15 area food banks in December. The Spread the Joy campaign, which also ran successfully in 2010, encourages members to sign up for online banking and also make bill payments online. For each member who signed up for online banking, we donated $50 and for each bill payment we donated $0.25. Moonlight Movie Tour Our annual Moonlight Movie Tour featured 18 stops in parks across all 14 of our communities. This tour has proven to be a fantastic opportunity for families to get outside and enjoy a movie in the crisp outdoor air, while raising money and awareness for youth programs and services in our communities. Over 12,000 people attended the events and we raised over $28,000. In Our Communities We sponsored many other events and programs in Here is a list of some of them: Across the Lake Swim (Kelowna) North Thompson Fall Fair & Rodeo (Barriere) JDRF Walk to Cure Diabetes (Kamloops, Kelowna) Cherry Fiesta (Osoyoos) Junction Literacy Centre (Vernon) Central Okanagan Youth Soccer Association (West Kelowna) Big Brothers and Big Sisters (Kamloops) YMCA-YWCA Healthy Kids Day (Kamloops, Kelowna) United Way Drive Thru Breakfast (Kelowna) Wild West Fest (OK Falls) Canadian Mental Health Association (Kamloops) Western Canada Basketball Tournament (Kelowna) Fat Cat Children s Festival (Kelowna) Chase Cornstock (Chase) Central Okanagan Sports Hall of Fame (Kelowna) United Way Youth Initiatives Grant Program (all communities) UBC-O Laptop Lending Program (Kelowna)

8 12 Interior Savings 2011 Annual Report Standing: Don Grant, Peachland; Gordon Matthews, Ashcroft; Bianca Iafrancesco, Kelowna; Brad Fossett, Oliver; Jeff Holm, Kamloops; Wendy Caban, Lake Country; William McNiece, Kamloops; Doug Findlater, West Kelowna Seated: Stephanie Teare, Clearwater; Rolli Cacchioni, Vice-Chair, Kelowna; Elmer Epp, Chair, Kamloops; Pauline Fleming, Kelowna The right people. Board of Directors The Board of Directors is responsible for overseeing the strategic direction of the Credit Union. In practice, the Board of Directors delegates responsibility for the management of the Credit Union to the President and Chief Executive Officer while retaining oversight responsibility. The Board of Directors is expected to act in a manner that protects and enhances the value of the Credit Union in the interest of all members. Members of the Board of Directors are expected to exercise independent judgement with utmost honesty and integrity while adhering to the Credit Union s policies and procedures, and statutory and regulatory requirements. Senior Management Our senior management team works with the Board of Directors to position the Credit Union s strategic direction and develop the annual strategic plan. They monitor every aspect of the plan to ensure progress is being maintained and the organization is on track. They are responsible for a team of managers, and are committed to ongoing personal and professional development and to involvement in their communities. Barry Meckler, President and Chief Executive Officer (Retired March 2012) Kathy Conway, Senior Vice President and Chief Financial Officer (Appointed to President and CEO, March 2012) Domenic Vinci, Senior Vice President and Chief Operations Officer Gene Creelman, Vice-President, Marketing and Communications Dave Cronquist, Vice President, Systems and Strategy Bob Peressini, Vice President, Credit Ted Schisler, Vice President, Human Resources

9 Interior Savings Credit Union Consolidated Financial Statements For the year ended December 31, 2011 Contents The Numbers 5 Five-Year Financial Review 5 Independent Auditor s Report 6 Financial Statements Consolidated Balance Sheet 7 Consolidated Statement of Comprehensive Income 8 Consolidated Statement of Changes in Members Equity 9 Consolidated Statement of Cash Flows

10 The Numbers 3 The Numbers During 2011, total assets of Interior Savings reached another milestone, surpassing the $2 billion mark and ending the year at $2.053 billion. This represents asset growth of $85.9 million for the year. Loan growth in 2011 was down from that of 2010 and reflected a slower level of housing and construction activity within our operating regions. The loan portfolio increased $53.0 million or 3.1% to a total of $1.787 billion. Loan write-offs amounted to $1.5 million and a provision of $2.7 million remains for potential future write-offs. Other asset growth is attributable to the acquisition of the remaining 50% of Interior Savings Insurance Services at the beginning of 2011; therefore, for the current year, 100% of the Insurance subsidiary s operations have been included. Deposit balances grew $78.7 million or 4.5% in 2011 to end the year at $1.827 billion. Member preference was for demand deposits with much of the increase occurring in investment savings, including tax-free accounts. Consolidated earnings from operations in 2011 totaled $19.4 million, a decrease of $2.8 million from Narrower interest rate spreads, related to the low interest rate environment combined with a competitive marketplace, resulted in the financial margin being $2.0 million lower than the previous year. Other Income and operating expenses are higher due to the full amount of Interior Savings Insurance income and expenses being included this year as noted above, as well as a 3.3 % increase in the Credit Union s total expenses. Our Member Rewards program paid out $4.4 million in Combined with taxes of $3.5 million and a one-time gain on the insurance subsidiary acquisition of $9.7 million, net income for the year was $21.2 million, slightly higher than operating earnings. Five-Year Financial Review Assets (000s) Retained earnings Income from operations Number of employees Number of full-time equivalent employees 2,500, , ,000,000 1,500,000 $1,617,547 $1,783,985 $1,898,393 $1,967,409 $2,053, ,000 90,000 $86,082 $97,452 $114,340 $125,749 $146, ,000,000 60, ,000 30,000 $17,897 $16,151 $18,457 $22,234 $19, Selected Statistical Data Average Assets (000s) $1,586,359 $1,700,767 $1,841,189 1 $1,930,809 1 $2,010,358 ROA* Income From Operations 1.13% 0.95% 1.00% 1.15% 0.96% ROA* Net Income 0.70% 0.67% 0.67% 0.59% 1.05% Capital Adequacy** 12.8% 13.8% 15.8% 16.1% 18.5% Member Rewards $4,481,000 $4,013,000 $4,386,000 $5,443,000 $4,383,000 * Return on Average Assets ** The Financial Institutions Act of BC requires credit unions to have a minimum capital adequacy of 8% 1 Restated due to first-time adoption of International Financial Reporting Standards

11 4 Interior Savings 2011 Annual Report The Numbers 5 Independent Auditor s Report Consolidated Balance Sheet To the Members of Interior Savings Credit Union We have audited the accompanying consolidated balance sheet of Interior Savings Credit Union as at December 31, 2011 and the consolidated statements of comprehensive income, changes in members equity and cash flows for the year then ended. Management s Responsibility for the Financial Statements The Credit Union s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Credit Union s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Credit Union s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Interior Savings Credit Union as at December 31, 2011 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. December 31 ( $ in thousands) January 1, 2010 Assets Cash $27,861 $41,731 $32,855 Investments (Note 3) 170, , ,114 Derivative financial instruments (Note 4) 12,121 5,944 5,503 Loans to members (Note 5), (Note 6) 1,787,215 1,734,228 1,671,820 Property, plant, and equipment (Note 7) 18,412 17,890 18,525 Intangible assets (Note 8) 23,762 1,652 1,167 Deferred income tax asset (Note 9) 2,487 1, Other assets (Note 10) 11,363 4,187 11,870 $2,053,307 $1,967,409 $1,898,393 Liabilities Member deposits (Note 11) 1,826,754 1,748,070 1,710,265 Borrowings (Note 12) 40,000 67,000 47,500 Other liabilities 24,145 15,382 13,964 Members shares (Note 16) 7,452 7,691 8,020 Total liabilities 1,898,351 1,838,143 1,779,749 Members Equity Members shares (Note 16) Retained earnings 146, , ,340 Accumulated other comprehensive income 7,454 2,799 3,567 Total members equity 154, , ,644 Signed on behalf of the Board of Directors by: Elmer Epp Director Bianca Iafrancesco Director $2,053,307 $1,967,409 $1,898,393 BDO Canada LLP Chartered Accountants Kelowna, British Columbia March 2, 2012

12 6 Interior Savings 2011 Annual Report The Numbers 7 Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Members Equity For the year ended December 31 ( $ in thousands) Interest revenue Interest on member loans $76,773 $77,023 Other interest revenue 8,970 9,889 85,743 86,912 Interest and loan related expenses Interest on member deposits 26,635 26,344 Other interest expense 1, ,897 27,057 Financial margin 57,846 59,855 Impairment losses on member loans (Note 6) (1,422) (1,308) Other income (Note 14) 24,770 16,199 81,194 74,746 Operating Expenses Data processing 3,057 2,728 Depreciation and amortization 3,873 3,386 Employee salaries and benefits 37,403 30,033 General operating and administrative (Note 15) 12,427 11,843 Occupancy and equipment 5,064 4,522 Total operating expenses 61,824 52,512 Operating income 19,370 22,234 Other Items Distributions to members (Note 16) (4,383) (5,443) Gain on business combination (Note 24) 9,764 - For the year ended December 31 ( $ in thousands) Accumulated Other Comprehensive Income Members Shares Retained Earnings Total Balance at January 1, 2010 $3,567 $737 $114,340 $118,644 Net income ,414 11,414 Redemption of members shares - (19) - (19) Change in unrealized gains (losses) on available for sale investments (168) - - (168) Change in unrealized gains (losses) on cash flow hedges 3, ,279 Reclassification of realized gains (losses) on cash flow hedges (3,879) - - (3,879) Balance on December 31, 2010 $2,799 $718 $125,754 $129,271 Net income ,208 21,208 Redemption of members shares - (178) - (178) Change in unrealized gains (losses) on available for sale investments Change in unrealized gains (losses) on cash flow hedges 7, ,432 Reclassification of realized gains (losses) on cash flow hedges (2,788) - - (2,788) Balance on December 31, 2011 $7,454 $540 $146,962 $154,956 5,381 (5,443) Income before income taxes 24,751 16,791 Provision (recovery) for income taxes (Note 8) Current income tax 4,386 6,611 Deferred income tax recovery (843) (1,234) 3,543 5,377 Net income for the year $21,208 $11,414 Other comprehensive income (net of tax) Change in unrealized gains (losses) on available for $11 $(168) sale investments Change in unrealized gains on cash flow hedges 7,432 3,279 Reclassification of realized losses on cash flow hedges (2,788) (3,879) Total other comprehensive income (loss) for the year 4,655 (768) Total comprehensive income for the year $25,863 $10,646

13 8 Interior Savings 2011 Annual Report The Numbers 9 Consolidated Statement of Cash Flows For the year ended December 31 ( $ in thousands) Cash flows from operating activities Interest received from members loans $77,061 $76,946 Other income received 16,301 17,502 Interest paid on members deposits (28,369) (28,493) Cash paid to suppliers and employees (48,493) (49,460) Interest received on investments and derivatives 12,199 10,543 Patronage distributions paid to members (4,383) (5,017) Income taxes paid (6,250) (363) 18,066 21,658 Cash flows from investing activities Increase in members loans (54,300) (63,638) Purchase of plant and equipment (3,746) (3,233) Purchase of investments (15,983) - Sale of investments - 38 Increase in deposits with financial institutions (9,341) (3,928) (83,370) (70,761) Cash flows from financing activities Increase in members deposits 79,157 39,241 Repayments on borrowings (27,000) - Proceeds from borrowings - 19,500 Dividends paid on equity and non-equity shares (307) (414) Reduction of equity shares (417) (348) 51,433 57,979 Net increase (decrease) in cash (13,871) 8,876 Cash, beginning of year 41,732 32,855 Cash, end of year $27,861 $41, Nature of Operations and Summary of Significant Accounting Policies Reporting Entity Interior Savings Credit Union (the Credit Union ) is incorporated under the Credit Union Incorporation Act of British Columbia and is a member of Central 1 Credit Union Limited ( Central 1 ). The Credit Union s operations are subject to the Financial Institutions Act of British Columbia. The Credit Union is approved to operate throughout the Province of British Columbia and currently serves members in the Thompson Valley and Okanagan areas of the province. The Credit Union is an integrated financial institution that provides a wide range of financial products and services that comprise one business operating segment. The Credit Union head office is located at 678 Bernard Avenue, Kelowna, British Columbia. These consolidated financial statements have been authorized for issue by the Board of Directors on March 2, Basis of Presentation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). This is the first time that the Credit Union has prepared its financial statements in accordance with IFRS, having previously prepared its financial statements in accordance with prechangeover Canadian Generally Accepted Accounting Principles (pre-changeover Canadian GAAP). Details of how the transition from pre-changeover Canadian GAAP to IFRS has affected the financial position and financial performance are disclosed in Note 22. These financial statements were prepared under the historical cost convention, as modified by the revaluation of available for sale financial assets and derivative financial instruments measured at fair value. The Credit Union s functional and presentation currency is the Canadian dollar. The financial statements are presented in thousands of Canadian dollars. The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Credit Union s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2. Principles of Consolidation The consolidated financial statements include, in addition to the accounts of the Credit Union, the accounts of its wholly owned subsidiaries, Interior Savings Estate Planning Inc., Interior Savings Investment Management Inc. and Thompson General Insurance Inc ( TGI ). All intercompany balances and transactions have been eliminated. As of January 1, 2011, the consolidated financial statements also include the accounts of TGI s wholly owned subsidiary Interior Savings Insurance Services Inc. (ISIS). Prior to January 1, 2011 TGI owned a 50% interest in ISIS which was recorded on an equity basis of accounting. Refer to Note 23 for further details of TGI s January 1, 2011 acquisition of the remaining 50% interest. Significant Accounting Policies Cash Cash includes cash on hand, operating deposits with financial institutions, and for the purpose of the statement of cash flows, bank overdrafts that are repayable on demand. Investments Central 1 Deposits Central 1 liquidity deposit instruments are classified as held to maturity and are initially measured at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at amortized cost, which approximates fair value. Central 1 bid deposit instruments are classified as available for sale and are initially measured fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at fair value with unrealized gains and losses recorded in other comprehensive income. Equity Instruments These instruments are classified as available for sale and are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at fair value, unless they do not have a quoted market price in an active market and fair value is not reliably determinable in which case they are carried at cost. Changes in fair value, except for those arising from interest calculated using the effective interest rate, are recognized as a separate component of other comprehensive income. Where there is a significant or prolonged decline in the fair value of an equity instrument (which constitutes objective evidence of impairment), the full amount of the impairment, including any amount previously recognized in other comprehensive income, is recognized in net income.

14 10 Interior Savings 2011 Annual Report The Numbers Nature of Operations and Summary of Significant Accounting Policies, cont. 1. Nature of Operations and Summary of Significant Accounting Policies, cont. Purchases and sales of equity instruments are recognized on settlement date with any change in fair value between trade date and settlement date being recognized in accumulated other comprehensive income. On sale, the amount held in accumulated other comprehensive income associated with that instrument is removed from equity and recognized in net income. Derivative Financial Instruments and Hedging The Credit Union, in accordance with its risk management strategies, manages interest rate risk through interest rate swaps. These derivatives are carried at fair value and are reported as assets where they have a positive fair value and as liabilities where they have a negative fair value, in both cases shown on the balance sheet. Hedge accounting is applied to financial assets and financial liabilities only where all of the following criteria are met: At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Credit Union s risk management objective and strategy for undertaking the hedge; For cash flow hedges, the hedged item in a forecast transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect profit or loss; The effectiveness of the hedge can be reliably measured; and The hedge is expected to be highly effective at inception and remains highly effective on each date it is tested. The Credit Union tests the effectiveness of its hedges on an annual basis. The swap contracts can be designated as fair value hedge instruments or cash flow hedge instruments. The Credit Union has not entered into any fair value hedges at this time. Cash flow hedges modify exposure to variability in cash flows for variable rate interest bearing instruments or the forecasted assurance of fixed rate liabilities. The Credit Union s cash flow hedges include hedges of floating rate loans, embedded derivatives and other derivatives related to index-linked deposits. For cash flow hedges that meet the hedging documentation criteria, gains and losses resulting from changes in the fair value of the effective portion of the derivative instrument are recorded in other comprehensive income until the hedged item is recognized in income, at which time such change is recognized as interest income. The ineffective portion is recognized immediately in income as other interest revenue/expense. If the Credit Union closes out its hedge position early, the cumulative gains and losses recognized in other comprehensive income are frozen and reclassified from the cash flow hedge reserve to profit or loss using the effective interest method. The ineffective portion of gains and losses on derivatives used to manage cash flow interest rate risk are recognized in net income within interest expense or interest revenue. Member Loans All member loans are non derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been classified as loans and receivables. Member loans are initially measured at fair value, net of loan origination fees and inclusive of transaction costs incurred. Member loans are subsequently measured at amortized cost, using the effective interest rate method, less any impairment losses. Loans to members are reported at their recoverable amount representing the aggregate amount of principal, less any allowance or provision for impaired loans plus accrued interest. Interest is accounted for on the accrual basis for all loans. If there is objective evidence that an impairment loss on member loans carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the loans carrying amount and the present value of expected cash flows discounted at the loans original effective interest rate, short term balances are not discounted. The Credit Union first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The expected future cash outflows for a group of financial assets with similar credit risk characteristics are estimated based on historical loss experience. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in net income. Member Loan Losses Bad debts are written off from time to time as determined by management and approved by the Board of Directors when it is reasonable to expect that the recovery of the debt is unlikely. Bad debts are written off against the provisions for impairment, if a provision for impairment had previously been recognized. If no provision had been recognized, the write-offs are recognized as expenses in net income. Transfer of Loans For securitization transactions initiated prior to the date of transition to IFRS, in accordance with pre-changeover Canadian GAAP, loan securitizations were treated as a sale, provided that control over the transferred loans has been surrendered and consideration other than beneficial interests in the transferred loans has been received in exchange. Gains on these transactions were reported as other income. The amount of these gains are based on the present value of expected future cash flows using management s best estimates and key assumptions such as prepayment rates, excess spread, credit losses and discount rates. The Credit Union has a contractual obligation to service the loans on behalf of the transferee. There have been no securitization transactions initiated since the date of transition to IFRS. Property, Plant and Equipment Property, plant and equipment is initially recorded at cost and subsequently measured at cost less accumulated depreciation and any accumulated impairment losses, with the exception of land which is not depreciated. Depreciation is recognized in net income and is provided on a straightline basis over the estimated useful life of the assets as follows: Buildings or 40 years Computer equipment...3 years Furniture, fixtures and other...5 or 10 years Leasehold improvements... Lease term or 10 years Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. Intangible Assets Intangible assets consist of Insurance Corporation of British Columbia (ICBC) licenses which are determined to have an indefinite useful life and are not being amortized. Any impairment in the value of the intangible asset is written off against earnings. The customer lists determined to have a definite useful life are amortized based on the estimated useful life of 10 years, straight-line basis. Any impairment in the value of the intangible asset is written off against earnings. Goodwill, being the excess of cost over assigned values of net assets acquired, is stated at cost less any writedown for impairment in value. The fair value of goodwill is regularly evaluated by reviewing the returns of the related business, taking into account the risk associated with the investment. Any impairment in the value of the goodwill is written off against earnings in the year in which impairment is determined. Other intangible assets consist of computer software which are not integral to the computer hardware owned by the Credit Union. Software is initially recorded at cost and subsequently measured at cost less accumulated amortization and any accumulated impairment losses. Software is amortized on a straight-line basis over its estimated useful life of three years. Impairment of Non-financial Assets Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset s cash generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows. Impairment charges are included in net income, except to the extent they reverse gains previously recognized in other comprehensive income. Income Taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year end date.

15 12 Interior Savings 2011 Annual Report The Numbers Nature of Operations and Summary of Significant Accounting Policies, cont. 1. Nature of Operations and Summary of Significant Accounting Policies, cont. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred tax asset to be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year end date and are expected to apply when the liabilities/assets are settled/recovered. Member Deposits All member deposits are initially measured at fair value, net of any transaction costs directly attributable to the issuance of the instrument and are subsequently measured at amortized cost, using the effective interest rate method. Pension Plan The Credit Union has both defined contribution and defined benefit pension plans, including participation in a multiemployer defined benefit plan. In defined contribution plans, the Credit Union pays contributions to separate legal entities, and the risk of a change in value rests with the employee. Thus, the Credit Union has no further obligations once the contributions are paid. Premiums for defined contribution plans are expensed when an employee has rendered his/her services. In the defined benefit plan, a liability is recognized as the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, adjusted for any actuarial gains or losses and past service costs. Actuarial gains and losses have been recognized in other comprehensive income in the period in which they occur. Past service costs are recognized immediately in profit or loss. Contributions are recognized as employee benefit expense when they are due. Excess / shortfall of contribution payments over the contribution due for service, is recorded as an asset / liability. The multi-employer defined benefit pension plan is accounted for using defined contribution accounting as sufficient information is not available to apply defined benefit accounting. Accounts Payable and Other Payables Liabilities for trade creditors and other payables are classified as other financial liabilities and initially measured at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method. Provisions Provisions are recognized for liabilities of uncertain timing or amount that have arisen as a result of past transactions, including legal or constructive obligations. The provision is measured at the best estimate of the expenditure required to settle the obligation at the reporting date. Members Shares Members shares issued by the Credit Union are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. Shares that contain redemption features are accounted for using the partial treatment requirements of IFRS Interpretations Committee ( IFRIC ) 2 Members Shares in Co operative Entities and Similar Instruments. Distributions to Members Patronage distributions and dividends to members are recognized in net income in the year that they are declared and payable. Revenue Recognition Revenue from the provision of services to members is recognized when earned, specifically when amounts are fixed or can be determined and the ability to collect is reasonably assured. Interest income on loans is recorded on the accrual method using effective interest rates. Loan negotiation fees are recognized using the effective interest rate method. Income recorded on prepayment or renegotiation of fixed term loans is recognized when received. Investment income for other than available for sale investments quoted in an active market is recorded under the accrual method using the effective interest rate. Commissions and service charges are recognized as income when the related service is provided or entitlement to receive income has occurred. Leased Assets Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Credit Union (a finance lease ), the asset is treated as if it had been purchased outright. The amount initially recognized as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analyzed between capital and interest. The interest element is charged to the statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor. Where substantially all of the risks and rewards incidental to ownership are not transferred to the Credit Union (an operating lease ), the total rentals payable under the lease are charged to the statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognized as a reduction of the rental expense over the lease term on a straight-line basis. Foreign Currency Translation At the transaction date, each asset, liability, revenue and expense denominated in a foreign currency is translated into Canadian dollars by the use of the exchange rate in effect at that date. At the year end date, unsettled monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at the year end date and the related translation differences are recognized in net income. Exchange gains and losses arising on the retranslation of monetary available for sale financial assets are treated as a separate component of the change in fair value and recognized in net income. Exchange gains and losses on non-monetary available for sale financial assets form part of the overall gain or loss recognized in respect of that financial instrument. Standards, Amendments and Interpretations Not Yet Effective Certain new standards, amendments and interpretations have been published that are mandatory for the Credit Union s accounting periods beginning on or after January 1, 2012 or later periods. The standards, amendments and interpretations that will be relevant to the Credit Union are: Not Yet Adopted i. IFRS - 9 Financial Instruments is part of the IASB s wider project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS - 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets, amortized cost and fair value. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. The standard is effective for annual periods beginning on or after January 1, The Credit Union is in the process of evaluating the impact of the new standard. ii. IFRS - 10 Condensed interim consolidated financial statements was issued in May 2011 and will supersede the consolidation requirements in SIC 12 Consolidation Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements effective for annual periods beginning on or after January 1, 2013, with early application permitted. IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the condensed interim consolidated financial statements of the parent company. The standard also provides additional guidance to assist in the determination of control where this is difficult to assess. The Credit Union is in the process of evaluating the impact of the new standard. iii. IFRS - 11 Joint Arrangements was issued in May 2011 and will supersede existing IAS 31, Joint Ventures effective for annual period beginning on or after January 1, 2013, with early application permitted. IFRS 11 provides for the accounting of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard also eliminates the option to account for jointly controlled entities using the proportionate consolidation method. The Credit Union is in the process of evaluating the impact of the new standard. iv. IFRS - 12 Disclosure of Interests in Other Entities was issued in May 2011 and is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted. The Credit Union is in the process of evaluating the impact of the new standard. v. IAS - 1 Presentation of financial statements ( IAS - 1 ) was amended by the IASB in June 2011 in other to align the presentation of items in other comprehensive income with US GAAP standards. Items in other comprehensive income will be required to be presented in two categories: items that will be reclassified into