annu

al re

port

We’ll help you get there

2010

C R E D I T U N I O N

1

TABLE OF CONTENTS

Dedicated to our member .............................................................................................................................. 2

Message from Board of Directors’ President and CEO .................................................................................. 3

Board of Directors .......................................................................................................................................... 5

Management discussion and analysis ........................................................................................................... 6

Management of risk ..................................................................................................................................... 15

Management’s responsibility ....................................................................................................................... 18

Independent auditors’ report ........................................................................................................................ 19

Consolidated financial statements ............................................................................................................... 20

Notes to the consolidated financial statements ............................................................................................ 25

Credit Union Deposit Guarantee Corporation .............................................................................................. 39

Officers and branch locations ...................................................................................................................... 40

2

DEDICATED TO OUR MEMBERS

Our mission

TCU Financial Group is passionate about providing outstanding service to our current and future

members as we work together to meet their financial life needs and goals.

Our objectives

To serve all residents of Saskatchewan, with emphasis on the communities of Saskatoon and Regina.

To obtain and utilize capital, and manage revenue and expenses to maximize benefits for members

while building and maintaining financial stability.

To develop and maintain a high standard of services and facilities that will meet and exceed the

financial life needs and goals of members.

Our commitment to our membership, Board of Directors, and staff

We shall:

Have high quality outstanding service that will help our members to achieve their financial

life needs and goals

Maintain the security and stability of the organization over growth and expansion

Continually expand and grow our membership base

Carefully deliberate undertakings that might jeopardize the financial position of the credit

union

Serve our members more efficiently and achieve greater member retention and loyalty

Commit to offer a full line of services and products which will make our organization a “full

service” financial institution

Maintain our image as a sound, professional place to do business

Have office facilities which are open and inviting to our members and provide pleasant,

comfortable surroundings for our staff

Ensure that TCU Financial Group is a great place to work

Maintain office hours that are suitable to meet the needs of our members

Be committed to leading by example and using our resources and expertise to affect positive

change in our communities

Provide leadership to the credit union system

3

MESSAGE FROM THE PRESIDENT, BOARD OF DIRECTORS AND FROM THE CHIEF

EXECUTIVE OFFICER

It is our privilege to present TCU Financial Group Credit Union’s 2010 Annual Report on behalf of

your Board of Directors.

TCU continues to demonstrate its passion and commitment to our members

In the current environment of extreme complexity, TCU’s corporate strategy remains intact and

viably strong. TCU is positioned to meet the key challenges and social demands of today and

tomorrow.

TCU made positive strides in 2010; we are serving our members better, which started with further

strengthening relationships and communication with current members. Relationships start with

listening to what our members have to say and adjusting so that we can serve them better. We

started on an exceptional path and will continue improvements and enhancement in 2011 and

beyond.

TCU had solid financial growth in 2010; we continue to make great strides operationally and will

continue to focus on the importance that our entire organization creates more efficiency. We need

to stay focused; our members need to see that we are reliable and consistent with our efforts and

results.

While financial sustainability continues to be of paramount importance, 2010 also gave TCU a

number of opportunities to celebrate success:

TCU successfully launched a new website; which features increased functionality, enhanced

security, faster page loading, easier navigation, more information and a variety of helpful

features. This new website has positioned TCU for many more user-friendly features and

enhancements.

TCU continues to invest in our communities by way of sponsorship, donation, or in-kind

involvement. In 2010, TCU invested $250,000 back into community events and projects.

TCU Wealth Management Inc., operating as a separate entity, now has its own distinct

Board of Directors - allowing for a more focused direction, separate from TCU Financial

Group.

TCU Wealth Management successfully made the move to Qtrade Financial Group as a

managing partner for our client’s wealth management needs.

The Board of Directors approved a set of guiding principles that will focus on continuing to

provide outstanding member service, competitive pricing, value added member service and

sustainability into the long term future through profitability and growth.

4

Keys to success

The key to success is continual improvement and constant innovation to take advantage of

current and new technologies. The same holds true for our business – we believe that having the

right systems in place over time will help achieve our goals. That’s why we see tremendous success

in the programs and future online enhancements that TCU has in place.

Another key to our success is our culture and staff. TCU has made a commitment to ensuring it is

a great place to work. In 2010, TCU implemented a Volunteer Day program as well as Flexible

Employment Options program. TCU continues to ensure our staff has the training, professional

development, and resources available to remain focused on providing outstanding service and

expertise to enable our members to achieve their financial life goals.

Our future

We are fortunate to have great people at TCU, and we would like to take this opportunity to thank

the Board of Directors and the Staff of TCU for their commitment and enthusiasm in 2010. TCU

will continue along the path of profitable growth and a corporate strategy that will benefit future

generations.

Respectfully,

Lyle Hislop Morris Smysnuik President Chief Executive Officer

5

BOARD OF DIRECTORS

In 2010, TCU’s Board of Directors consisted of ten members – four from Regina and six from

Saskatoon. The Board held five regular Board meetings, one strategic planning meeting and 44

various Board committee meetings. Our Board of Directors is committed to maintaining focus on

the members, the communities we serve and the financial sustainability of TCU Financial Group

Credit Union.

Back row (left to right):

Derwyn Crozier-Smith (2013), Earl Warwick (2012), Tony Linner (2012), Darcy McLean (2011),

Lyle Hislop (2011) (President)

Front row (left to right): Jennifer Evancio (2013), Kerry Bachiu (2011), Joanne Weninger (2012), Helen

Sukovieff (2013), Dwight Kaytor (2013) (Vice-President)

(Term expiry in brackets behind name)

6

MANAGEMENT DISCUSSION & ANALYSIS

Corporate profile

TCU Financial Group Credit Union (TCU) is a Saskatchewan Credit Union regulated by The Credit

Union Act (1998) and The Credit Union Regulations (1999). TCU must also comply with the Credit

Union Deposit Guarantee Corporation’s (CUDGC) Standards of Sound Business Practices, and

with our own articles, bylaws and policies. The Board of Directors is ultimately responsible for

ensuring that TCU is managed and operated in a sound and prudent manner. TCU’s management is

responsible for managing, monitoring and controlling credit union operations in accordance with

legislation, the standards and board policy.

TCU’s mandate is to provide our members with a full range of financial products and services,

which includes banking and wealth management services. These products and services will be

delivered through one of the following business units of the credit union.

TCU provides the traditional retail banking services and products such as personal, consumer

and business loans, personal and business deposit account products, ATM, and Internet banking

facilities.

TCU Wealth Management Inc. is a wholly-owned subsidiary of TCU and provides wealth

management services such as mutual funds, securities brokerage, estate and financial planning.

TCU Holdings Inc. is also a wholly-owned subsidiary of TCU, and holds and manages all the

TCU buildings and land.

TCU is one of the top ten credit unions in Saskatchewan, and has assets just under $421,721,000. In

addition, TCU has assets under administration of $35,767,000 in syndicated loans. TCU Wealth

Management Inc. has assets under administration of $95,000,000.

TCU and TCU Wealth Management Inc. serves 18,357 members through four retail branch

locations in Regina and Saskatoon. Head office is located in Saskatoon.

Financial performance review

TCU Financial Group

Balance sheet assets at December 31, 2010 were at $421,721,000 as compared to $412,250,000 at the

end of 2009 representing 2.30% growth.

Total balance sheet member loans at December 31, 2010 were at $327,348,000 as compared to

$298,810,000 at the end of 2009, representing 9.55% growth.

Syndicated Loans under administration (TCU member loans sold to other credit unions and the

Canada Mortgage Bond Program) at December 31, 2010 were at $35,767,000, as compared to

$44,257,000 at end of 2009. The decrease is representative of loan payments being made against the

syndicated loans. In addition, TCU did not syndicate any loans in 2010. In 2009, TCU securitized a

7

number of mortgage loans through the Canada Mortgage & Housing Corporation’s Canada

Mortgage Bond Program administered through Concentra Financial. The balance outstanding at

December 31, 2010 was $13,648,080.

TCU’s loan portfolio is weighted predominantly towards stable, lower risk personal and mortgage

loans. Mortgage loans and mortgage secured line of credit loans account for 74% of our loan

portfolio. Our commercial loans portfolio accounts for 18% of our total loan portfolio, of which

86% are mortgage secured loans. The following graph will provide a breakdown of our balance sheet

loans portfolio. The commentary in brackets behind each category identifies the risk rating for this

group of loans.

Total balance sheet member deposits at December 31, 2010 were at $387,171,000, as compared to

$381,814,000 at the end of 2009, representing 1.40% growth.

Most of TCU’s member deposits are concentrated in the higher rate investment type accounts. The

following graph provides the breakdown of our member deposits in the various demand and

investment products.

57%

17%

2%6%

18%

2010

Mortgage Loans (low)

Mortgage Loans - LCL (low)

Regular LCL - (low to med)

All Other Personal Loans (low to med)

Business Loans (med to high)

54%

20%

3%6%

17%

2009

Mortgage Loans (low)

Mortgage Loans - LCL (low)

Regular LCL - (low to med)

All Other Personal Loans (low to med)

Business Loans (med to high)

8

Liquidity

TCU’s loan to asset ratio as at December 31, 2010 was at 77.62%, as compared to 72.48% at the end

of 2009. This is below our liquidity risk management policy range of 79% to 81%.

During 2010, our loan demand was steady and resulted in an increase in our loans receivable balance

of 9.55%. We anticipate the same kind of loan activity for 2011 and are budgeting for an 11%

growth in member loans for 2011.

Acquiring deposits from our members continues to be a high priority, and will be even more so for

2011. We will need to grow our member deposits in order to meet the anticipated loan demand.

TCU may also resort to other liquidity management strategies such as syndicating some of our loan

portfolio.

TCU, along with all other Saskatchewan Credit Unions, is required to maintain 10% of their

liabilities on deposit with SaskCentral, as the manager of the provincial liquidity program. These

liquidity investments provide a safety net of liquid funds to satisfy payment obligations and to also

protect against unforeseen liquidity events. In addition to these statutory liquidity investments, TCU

also maintains an investment portfolio of other liquid investments to meet daily liquidity

requirements.

Profitability

Net profit in 2010 was just under $2,695,000, as compared to just under $2,906,000 in 2009. The net

operating income in 2010 was at $2,788,000 as compared to $1,174,000 in 2009. Financial statement

reporting standards require us to report “comprehensive income” which includes unrealized

gains/losses on investments and derivatives. In 2010, the unrealized gains/losses on investments

27%

13%

37%

20%3%

2010

Demand Deposits

Investment Savings Account

Term Deposits/GICs

Registered Plans

TFSAs

28%

13%38%

20%1%

2009

Demand Deposits

Investment Savings Account

Term Deposits/GICs

Registered Plans

TFSAs

9

and derivatives calculated to a loss of $93,000 as compared to a gain of $906,000 in 2009. The

comprehensive income in 2009 also included proceeds (gain) from the sale of our Scarth Street

building in the amount of $826,000.

TCU’s total annualized return on assets (ROA) for 2010 was .64% on comprehensive income, and

.66% on operating income, as compared to .70% on comprehensive income and .28% on operating

income in 2009.

Net interest margin is the total revenue received from loan and investment interest less total interest

expense paid on member deposits and provision for credit and investment losses. For 2010, TCU’s

net interest margin was at 2.940% at December 31, 2010, as compared to 2.463% at the end of 2009.

There are two major reasons for the improved net interest margin. Member investment deposits

which expired during 2010 were re-priced at a lower interest rate than the original interest rate. In

addition, the prime interest rate increased by 75bps in 2010, when our budget anticipated an increase

of only 25bps. In addition, we also received dividend payments from SaskCentral in the amount of

$618,000, which we did not anticipate receiving.

Non-interest revenue includes revenue from sources like commissions and charges, service fees,

administration fees on syndicated loans and fixed asset income. TCU’s non-interest revenue for

2010 was at $3,421,000 as compared to $5,263,000 in 2009. In 2009, the non-interest revenue was

primarily due to a number of factors which included the gain realized from the sale of our Scarth

Street building, and a significant increase in mortgage prepayment penalties as members re-financed

their mortgage loans in an effort to take advantage of the low interest rates. These events did not

occur again in 2010 and so resulted in less non-interest revenue.

Non-interest expenses include operating expenses such as personnel, occupancy, member security,

general business and governance costs. Non-interest expenses for 2010 were at $12,446,000, as

compared to $11,458,000 in 2009, or an increase of 8.62%. This increase in operating expenses came

predominately in two areas: 1) Personnel expenses – TCU needed to establish a number of

personnel related allowances. This expense was over and above our regular personnel expenses. 2)

Member Security expenses increased by 17%. The largest expense in this category is the Credit

Union Deposit Guarantee Corporation assessment which increased our Deposit Insurance Premium

by $25,000. Operating expenses as a percentage of balance sheet assets increased in 2010 to 2.95%

as compared to 2.78% in 2009. TCU still maintains one of the lowest operating expense ratios for a

multi-branch credit union in Saskatchewan. In addition to growing member deposits, one of TCU’s

primary focus in 2011 and future years is to continue to work towards decreasing our operating

expenses as a percentage of assets. In other words, we want to continue to grow our assets without a

corresponding increase in operating expenses. The following graph presents a breakdown of TCU’s

operating expenses.

10

Efficiency Ratio is a calculation that determines the cost of raising $1.00 of revenue. In 2010, TCU’s

Efficiency Ratio was at 77.90%, as compared to 73.35% in 2009. In other words, it costs TCU $0.7790

to raise $1.00 of revenue in 2010. The primary reason for the difference between 2010 and 2009 was

that our operating expenses as a percentage of assets were higher in 2010 than they were in 2009. In

addition, our investment income in 2009 was significantly higher than in 2010. Our goal is to improve

our Efficiency Ratio to below 70% by 2014.

Member Equity & Capital

Member equity and capital are the primary measurements of a credit union’s financial strength.

TCU’s capital management policy is that we will at all times remain adequately capitalized,

maintaining a prudent cushion of retained earnings and equity to protect its economic survival and

to finance new opportunities.

There are two measurements that we use in regards to capital and member equity:

1) Total capital as a percentage of risk-weighted assets – TCU’s risk weighted ratio at the end of

2010 stood at 14.84%, as compared to 14.08% in 2009. The standard as set by our regulator is

that a credit union must maintain a minimum of 8.00% of total capital as a percentage of risk

weighted assets. TCU’s internal capital management policy is for the risk weighted capital ratio

to be within the range of 10% to 12%.

2) Total capital as a percentage of total assets – TCU’s tier 1 capital to asset ratio at the end of 2010

stood at 7.18%, as compared to 6.69% in 2009. The standard as set by our regulator is that a

credit union must maintain a minimum of 5.00% of total capital as a percentage of total assets.

TCU’s Member Equity position as at December 31, 2010 was at $30,142,000 as compared to

$27,447,000 at the end of 2009.

60%

8%3%

26%

3%

2010

Personnel

Occupancy Expense

Member Security

General Business

Organization

58%

9%

3%

27%

3%

2009

Personnel

Occupancy Expense

Member Security

General Business

Organization

11

Adoption of International Financial Reporting Standards in 2011

As a publicly accountable entity, we are required to adopt International Financial Reporting

Standards (“IFRS”) commencing January 1, 2011. The December 31, 2011 year-end financial

statements will be prepared in accordance with IFRS, including the 2010 comparative figures.

To facilitate this transition, TCU Financial Group has been participating in the National IFRS

Readiness Project for Credit Unions sponsored by Credit Union Central of Canada. We have

established an IFRS conversion plan to assess the impact of transition to IFRS and determine the

implementation approach. The IFRS conversion plan has been executed and we are currently

working on the final implementation and review phase of the plan. We will continue to monitor

changes in IFRS and the impact on our Credit Union as significant changes to IFRS accounting

standards are expected to be issued by the International Accounting Standards Board (“IASB”)

throughout 2011 and 2012.

In 2011, the implementation of IFRS will require that loans securitized through the Canada

Mortgage Bond Program be included in our loan to asset ratio calculation. As of December 31,

2010, these particular loans are not included in the ratio. Under IFRS standards, the 2010 year end

ratio would increase the loan to asset ratio to 78.32%, which is still within our liquidity risk

management policy range.

IFRS are premised on a conceptual framework similar to Canadian GAAP, however, significant

differences exist in certain matters of recognition, measurement, presentation and disclosure. Set out

below are the key areas where changes in accounting policies as a result of adopting IFRS are

expected to impact the Credit Union’s financial statements. This should not be regarded as a

complete list of changes that will ultimately result from transition to IFRS. The actual impact on

transition will ultimately be dependent on the status of IASB amendment activities and the specific

circumstances surrounding our assets, liabilities and activities at that date. Our analysis of changes

and policy decisions have been made based on our expectations regarding the accounting standards

that we anticipate will be in effect at the time of our transition. At this stage, we are not able to

reliably quantify the impacts expected on our financial statements of these differences.

IFRS 1 - First-time Adoption of International Financial Reporting Standards

Our adoption of IFRS will require the application of IFRS 1 First-time Adoption of International

Financial Reporting Standards (“IFRS 1”), which provides guidance for an entity’s initial adoption of

IFRS. IFRS 1 generally requires that an entity apply all IFRS in effect at the end of its first IFRS

reporting period on a retrospective basis.

IFRS 1 also provides certain mandatory and optional elections to facilitate practical application of

IFRS standards for the first time. We have completed our analysis of the optional exemptions and

have tentatively concluded that we will apply the following exemptions in preparing our opening

IFRS balance sheet:

12

Business Combinations

Current Canadian GAAP allows cooperatives to use the

pooling of interests method for amalgamations, while IFRS

requires the purchase method to be used. We expect to elect

January 1, 2010 as the starting date for applying purchase

accounting.

IAS 39 – Financial Instruments: Securitization

Derecognition of securitized assets will generally be more difficult to achieve under IFRS than under

current Canadian GAAP. IFRS introduces a more complex series of requirements which focus on

risk and rewards, control and the nature of the asset transferred. The Credit Union currently

maintains its securitized assets off balance sheet. We expect these assets will be added back to the

balance sheet, resulting in an increase in loans and borrowing balances on the balance sheet. As at

December 31, 2010 this increase in loans and borrowings would amount to $13,503,884. The

regulatory capital implications of this change in accounting treatment are expected to be

insignificant.

IAS 39 – Financial Instruments: Loan Loss Provisioning

Similar to Canadian GAAP, IFRS adopts an “incurred loss” model for loan loss provisioning;

however, IAS 39 provides more explicit guidance with respect to the methodology to be followed in

assessing and measuring loan impairment. Provisions can only be recorded where there is objective

evidence that a loss event has occurred and that loss event is expected to change the timing and or

amount of the expected cashflows on the underlying loan(s) based on past experience. Loan losses

can be assessed on an individual loan or collective basis. Unallocated general provisions are not

permitted under IFRS. Upon analysis of the new standards and our current $670,000 general

allowance, it is expected that most if not all of this allowance will not be supportable under IFRS.

The unsupportable amounts would be brought into income through an adjustment to opening

retained earnings at the transition date.

IAS 16 - Property, Plant and Equipment

Under IAS 16, own-use property plant and equipment assets can be measured at amortized cost

using the Cost Model or at fair value using the Revaluation Model with changes in fair value

recorded in other comprehensive income. We have made a tentative decision to continue applying

the cost model to property, plant & equipment assets.

Under IAS 40 investment property can be measured at cost using the IAS 16 Cost Model or at fair

value with changes in fair value recorded through income. We have made a tentative decision to

apply the fair value model to investment property assets.

13

TCU Wealth Management Inc.

There were some significant changes occurring at TCU Wealth Management Inc. in 2010.

1) TCU Wealth Management Inc. changed dealers, switching from Credential Financial Inc. to

Qtrade Financial Group. The main reason for the switch was the sense that utilizing the services

provided by Qtrade would give us a better opportunity to grow our assets under administration.

2) There was also a change in the organizational structure for the wealth management subsidiary.

TCU Financial Group Credit Union Board of Directors approved a change in the organizational

structure for the wealth management subsidiary, which includes the appointment of a new Board

of Directors and management staff. The new structure for the wealth management Board of

Directors consists of four categories: a) CEO of the parent company; b) Representative of the

parent company Board of Directors; c) two board members representing clients; and d) two

board members representing the financial industry. As a result, the Board of Directors of TCU

Wealth Management Inc. is as follows:

Morris Smysnuik – CEO, TCU Financial Group Credit Union

Helen Sukovieff – Representative of the TCU Financial Group Credit Union Board of

Directors

Derwyn Crozier-Smith – Client Representative

Modest Kowal – Client Representative

Orest Bodnarchuk – Industry Representative

Linda Jijian – Industry Representative

Management of TCU Wealth Management Inc. is as follows:

Celeste Labrecque – General Manager

Jill Norrish – Senior Manager

The new structure was implemented to give the wealth management company more focused

direction and oversight. The primary focus for 2011 of the Board of Directors and management of

TCU Wealth Management Inc. is to continue to grow the assets under administration and to ensure

the profitability of the company.

TCU Wealth Management Inc.’s assets under administration are broken down into two categories –

mutual funds administered through Qtrade Asset Management Inc. and securities investments

administered through Qtrade Securities Inc. Total assets under administration at December 31, 2010

were at $94,808,000 as compared to $83,611,000 at the end of 2009, representing an overall increase

of 13.39%. Qtrade Asset Management Inc. assets under administration at December 31, 2010 were

at $39,338,000 as compared to $36,899,000 at the end of 2009, or a 6.61% increase. Qtrade

Securities Inc. assets under administration at December 31, 2010 were at $55,470,000, as compared

to $46,712,000 at the end of 2009, or an 18.75% increase.

The breakdown between the two categories is presented below.

14

Future Considerations

While the economic environment in 2010 did not achieve the results as expected, it is anticipated

that significant growth will resume in 2011, and Saskatchewan is expected to be one of Canada’s

strongest economic performers in both 2011 and 2012.

For 2011 at TCU, we will dedicate our resources and efforts towards our primary goal of growing

our member deposit base on the credit union side, and assets under management on the wealth

management company side. In 2010, the Board of Directors approved a set of guiding principles

which will ensure that TCU will exceed expectations in regards to providing outstanding service

levels to our members/clients; will be very price competitive, if not the best price; will provide value

added service to our members/clients and, of course, will maintain a level of profitability and

growth that will sustain our credit union into a long term future.

In order to accomplish the direction conveyed by these guiding principles, TCU will be challenged

to use both our human resource element and technology to efficiently and effectively deliver

financial products and services to our members/clients through delivery channels that our members

want and expect. Just as we will be challenged to be more innovative in terms of effectively

delivering financial services to our members/clients, our members/clients will also be challenged to

be more accepting of innovative and newer technologies. What this means is that 2011 will not only

be a challenging year but a very exciting year as we work together to build a strong, viable and

sustainable credit union for the benefit of you, our members/clients.

59%

41%

2010

Qtrade Securities Inc.

Qtrade Asset Management Inc.

56%

44%

2009

Credential Securities Inc.

Credential Asset Management Inc.

15

MANAGEMENT OF RISK

Overview

As TCU is exposed to various risks within the financial industry it is prudent to employ various risk

management strategies. TCU employs a risk management framework enterprise wide (ERM) in

order to enhance the management of these risks. Based on this framework, TCU uses six categories

to help define the risk exposure. These categories are:

Credit Risk Liquidity Risk Market (Interest rate) Risk

Strategic Risk Operational Risk Legal and Regulatory Risk

TCU’s risk management framework includes:

risk identification and classification

risk mitigation review and assessment

policy and procedure reviews and amendments

compliance and audit reviews

reporting

Senior Management is responsible in establishing the framework which will identify and classify the

risks, as well as establishing effective policies and processes to manage the risks. The Board of

Directors, both directly or via board committees, reviews and approves key policies and reporting to

ensure proper oversight to the risk management process.

The Board of Directors is responsible to approve the overall business plan including any

recommendations from various board committees. The Board also receives reporting from the

various committees as it relates to approvals made by those committees.

The Audit & Risk Management Committee receives direct reporting from Senior Management and

is responsible for the monitoring of the risk management framework and any recommendations to

the Board as to acceptable risk levels. The committee is also responsible to provide oversight of the

external and internal audit process and the adequacy of internal controls.

Executive and Senior Management are responsible for the implementation of strategies and polices

approved by the Board as well as reporting to the Board or specific committees to ensure proper

oversight is maintained.

The ALCO (Asset and Liability Management) committee consists of Executive Management and the

Senior Manager of Internal Audit & Risk Management. The committee is responsible for the

monitoring of liquidity and interest rate risk as well as overall credit exposure. This committee

provides regular reporting to the Board related to liquidity and market risk activities and capital

management activities undertaken by management.

16

TCU has also established an independent internal audit/quality assurance framework. Reporting

from this framework is delivered to Senior Management with a summary provided to the Audit &

Risk Management Committee on a quarterly basis to assist in the oversight of TCU internal controls.

Credit Risk

Credit Risk analysis includes a review of TCU loan portfolio diversity, loan policy, and the ability to

recover our loans by way of member payments or the realization of security. TCU employs loan

underwriting policies and procedures based on recommended industry requirements and standards.

Loan delinquency and “write offs” continue to be maintained below industry standards and are

monitored and reported to the Board on a regular basis. Loan portfolio concentrations are also

reported to the Board. The largest percentage of our loan book remains in consumer and residential

mortgage loan products with some diversification into commercial and syndicated loans.

Liquidity Risk

Liquidity Risk analysis includes a review of strategies around member deposit acquisition and other

loan funding sources. TCU has established liquidity, capital and Asset/Liability Management (ALM)

policies approved by the Board of Directors which provide direction in managing the associated

risks. Loan syndication continues to be one strategy employed to mitigate liquidity pressures,

however, acquiring member deposits remains a key focus. Competition for member deposit dollars

continues to accelerate. Existing borrowing facilities with SaskCentral (Concentra) also form part of

the liquidity management strategy. Senior Management develops strategies designed to attract

deposit assets as well as non-interest revenue streams. The ALCO committee is responsible to

manage liquidity risk based on the approved policy and to provide reporting to the Board for their

oversight.

Market (Interest Rate) Risk

Market Risk analysis includes a review of market conditions, asset/liability matching and interest

margin challenges. In addition to the ALCO committee, TCU has employed the services of an

outside consultant to assist with our balance sheet management and to review possible scenarios

necessary for long term planning. Senior management conducts ongoing reviews of product

offerings, product delivery and product pricing to help ensure profitability. Reporting is provided to

the Board to ensure oversight.

Strategic Risk

Strategic Risk analysis includes a review of TCU’s brand, strategic direction, competition for

members and staffing as well as TCU’s role in the communities in which we serve. TCU has a

formal planning process and operates from a Balanced Scorecard approach reflecting 5 strategic

categories including - Corporate Culture, Members, Growth and Innovation, Finance, and Risk

Management. Our strategic direction is set by the Board and reviewed at least annually. In addition,

TCU has set certain benchmark metrics that if not achieved, initiates a high level review of our

17

strategic direction to ensure future success of the Credit Union. Annual planning meetings with

Executive Management and Directors set the direction for the Credit Union. Executive and Senior

Management are responsible to develop objectives and action plans around the strategic plan. The

Board is responsible to review and approve the Balanced Scorecard annually. Management reports

the progress made in achieving the goals and objectives of the strategic and business plan to the

Board on a regular basis. TCU actively participates in the community both from a corporate

perspective and by individual employees.

Operational Risk

Operational Risk analysis includes a review primarily of human resources and information systems

as well as internal controls. Operational risk occurs when TCU is not able to develop or deliver

products and services to its’ members due to human error, inadequate or failed technical issues,

inadequate internal controls, lack of trained or qualified staff or other resources etc. TCU has

established policies and procedures, internal controls and compliance activities and conducts regular

reviews of these controls. Among other initiatives, attracting and retaining highly skilled and

competent staff remains a priority. In addition, dedicating resources and initiatives to technology

and information systems has become a priority to TCU. Outsourced experts are engaged where

needed to ensure a high level of knowledge and support for key initiatives. TCU has adopted a Code

of Conduct for employees and directors. TCU also requests and receives audit reports from key

suppliers to ensure that these organizations are able to remain viable partners for our organization.

Legal and Regulatory Risk

Legal and Regulatory Risk analysis includes a review of fraud and fiduciary risk exposure as well as

the cost to implement regulatory or compliance regimes and the possible effect of non compliance

with laws, rules, regulations or ethical standards. TCU has policies, procedures and internal controls

in place to mitigate our exposure to these risks as well assist TCU in complying with laws and

regulations. TCU has a designated Compliance Officer to oversee the compliance regime. In

addition, the internal audit/quality assurance framework provides an independent assessment of the

compliance regime on an annual basis. Internal audit/quality assurance also provides ongoing

assessment of internal controls. Reporting is provided to Senior Management on an ongoing basis

and to the Audit & Risk Management Committee quarterly to ensure the Board’s oversight of the

compliance and control processes.

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

Morris Smysnuik Greg Peacock Chief Executive Officer Executive Manager – Finance & Accounting

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INDEPENDENT AUDITORS’ REPORT

To the Members,

TCU Financial Group We have audited the accompanying consolidated financial statements of TCU Financial Group which comprise the consolidated statement of financial position as at December 31, 2010 and the consolidated statements of income and comprehensive income, members' equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles 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.

Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those assessments, the auditor considers internal control relevant to the Credit Union's preparation and fair presentation 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 accounting estimates made by management, as well as evaluating the overall presentation of the 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 financial statements present fairly, in all material respects, the financial position of the Credit Union as at December 31, 2010 and its financial performance and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. March 1, 2011 Saskatoon, Saskatchewan Chartered Accountants

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CONSOLIDATED STATEMENT of financial position As at December 31

2010 2009

ASSETS (Note 15)

Cash $3,918,879 $7,609,576 Investments (Note 4) 77,577,879 91,935,912 Loans receivable (Note 5) 327,348,267 298,809,977 Other assets (Note 6) 1,053,018 1,695,711 Property and equipment (Note 7) 11,822,486 12,198,726

$421,720,529 $412,249,902

LIABILITIES (Note 15) Deposits $387,170,526 $381,814,456 Loans payable (Note 8) 0 0 Other liabilities (Note 9) 4,288,714 2,863,982 Membership shares (Note 10) 119,175 124,130

$391,578,415 $384,802,568

EQUITY Retained earnings 30,142,114 27,447,334 Accumulated other comprehensive income 0 0 $421,720,529 $412,249,902

APPROVED BY THE BOARD:

________________________

DIRECTOR

________________________

DIRECTOR

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CONSOLIDATED STATEMENT of income For the year ended December 31

2010 2009

INTEREST INCOME

Loan $14,683,066 $14,633,658 Investments 4,193,286 2,670,982

18,876,352 17,304,640

INTEREST EXPENSE

Borrowed money 15,380 56,923 Member deposits 6,259,800 7,832,792

6,275,180 7,889,715

NET INTEREST 12,601,172 9,414,925

Provision for (Recovery of) credit losses 62,112 138,360

NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) CREDIT LOSSES

12,539,060 9,276,565

OTHER INCOME 3,420,807 5,262,887

OPERATING EXPENSES

Personnel 7,461,363 6,608,736 Security 390,074 333,785 Organizational 313,281 321,647 Occupancy 1,026,182 1,034,453 General Business 3,255,097 3,159,465

12,445,997 11,458,086

Income before income tax 3,513,870 3,081,366 Income tax provision 819,090 175,830

Net income $2,694,780 $2,905,536

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CONSOLIDATED STATEMENT of comprehensive income For the year ended December 31

2010 2009

COMPREHENSIVE INCOME

Net income $2,694,780 $2,905,536 Other comprehensive income 0 0

Comprehensive income $2,694,780 $2,905,536

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CONSOLIDATED STATEMENT of equity For the year ended December 31 2010 2009

RETAINED EARNINGS

Retained earnings – beginning of year $27,447,334 $24,541,798 Net income for the year 2,694,780 2,905,536

Retained earnings – end of year $30,142,114 $27,447,334

2010 2009

ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income, beginning of year

$0 $0

Other comprehensive income 0 0

Accumulated other comprehensive income, end of year $0 $0

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CONSOLIDATED STATEMENT of cash flows For the year ended December 31

2010 2009

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

Net income $2,694,780 $2,905,536 Items not involving cash: Amortization 701,452 73,915 Charge for credit impairment 62,112 138,360 Changes in other assets and other liabilities 2,067,425 477,842

Cash flows from (used in) operating activities 5,525,769 3,595,653

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES

Deposits, shares 5,351,115 27,279,241 Loans payable 0 (9,970,400)

Cash flows from (used in) financing activities 5,351,115 17,308,841

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES

Investments 14,358,033 (27,402,667) Loans (28,600,402) 6,596,491 Property and equipment (325,212) 775,592

Cash flows from (used in) investing activities (14,567,581) (20,030,584)

Net increase (decrease) in cash resources (3,690,697) 873,910 Cash Balance – beginning of year 7,609,576 6,735,666

Cash Balance – end of year $3,918,879 $7,609,576

Cash position consists of cash on hand, deposits with SaskCentral with maturities less than ninety

days and cheques in transit (net).

Total interest paid in the year was $6,575,661 (2009 - $8,086,710). Total income taxes paid in the

year was $492,684 (2009 - $490,080).

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NOTES to the consolidated financial statements At December 31, 2010

1. INCORPORATION AND GOVERNING LEGISLATION The Credit Union was continued pursuant to The Credit Union Act, 1998 of the Province of Saskatchewan, and operates four credit union branches. The credit union serves members and non-members in Regina, Saskatoon and surrounding area.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates, and as adjustments become necessary, they are reported in earnings in the period in which they become known. The significant accounting policies adopted by the Credit Union include:

Basis of consolidation These consolidated financial statements include the accounts of TCU Financial Group Credit Union and its wholly owned subsidiaries, TCU Wealth Management Inc. and TCU Holdings Inc.

Financial instruments – recognition and measurement Financial assets and financial liabilities are recorded on the statement of financial position when the Credit Union becomes party to the contractual provisions of the financial instrument. Financial instruments are classified according to their characteristics, management objectives or the choice of category in certain circumstances.

All financial assets must be classified as held for trading, held to maturity, loans and receivables or available for sale. Financial liabilities must be classified as held for trading or other liabilities. Any financial asset or financial liability may be designated as held for trading upon initial recognition. Credit Union Deposit Guarantee Corporation, the industry regulator, has restricted credit unions from using the held for trading classification on loans receivable unless specific criteria are met and approval is obtained.

Under this standard, all financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods is dependent on the instrument’s classification. Transaction costs are capitalized on initial recognition, except for financial instruments designated as held for trading. In those cases, transaction costs are expensed.

Financial assets and financial liabilities held for trading are measured at fair value, with changes in those fair values recognized in net income. Financial assets classified as held to maturity, loans and receivables and other financial liabilities are measured at amortized cost using the effective interest rate method. Available for sale financial assets are measured at fair value, with unrealized

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gains and losses recognized in other comprehensive income. If fair value is not reliably determinable, available for sale financial assets are measured at cost.

Fair value of financial instruments

The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. Fair values are determined by reference to quoted bid or asking prices in an active market. In the absence of an active market, the Credit Union determines fair value based on internal or external valuation models, such as discounted cash flow analysis or using observable market based inputs (bid and ask price) for instruments with similar characteristics and risk profiles. The Credit Union classifies fair value measurement recognized in the statement of financial position using a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Quoted prices (unadjusted) are available in active markets for identical assets or liabilities, Level 2: Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require the Credit Union to develop its own assumptions.

Fair value measurements are classified in the fair value hierarchy based on the lowest level input that is significant to that fair value measurement. This assessment requires judgment, considering factors specific to an asset or a liability and may affect placement within the fair value hierarchy.

Financial asset impairment

The Credit Union assesses impairment of all its financial assets, except those classified as held for trading. Management considers many criteria in determining whether objective evidence of impairment exists. Impairment is measured as the difference between the asset's carrying value and its fair value. Any impairment, which is not considered temporary, is included in current year earnings. The Credit Union reverses impairment losses on debt instruments classified as available for sale when an increase in fair value can be objectively related to an event occurring after the impairment loss was previously recognized.

Investments

Investments classified as held for trading are recorded at fair value. Fair value is determined using quoted market prices, generally the bid price.

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Investments classified as held to maturity are those which the credit union has the intent and ability to hold until maturity. These investments are recorded at amortized cost using the effective interest rate method. Where there has been a decline in value which is not temporary, these investments are recorded at net realizable value.

Investments classified as available for sale are recorded at fair value. If the investment is an equity instrument with no quoted market price or if fair value cannot reliably be determined, the investment is recorded at cost.

Loans receivable

Loans to members are classified as loans and receivable and are recorded at outstanding principal plus accrued interest. Reported amounts represent amortized cost determined using the effective interest rate method.

Foreclosed assets held for sale are initially recorded at the amount of the investment in the foreclosed loan. The initial recorded amount is adjusted for revenues and expenses incurred subsequent to foreclosure. Foreclosed assets held for sale are subsequently valued at the lower of carrying amount or fair value less disposal costs.

An allowance for impaired (doubtful) loans is maintained to reduce the carrying value of loans to their estimated net realizable value and foreclosed assets held for sale to their fair value less costs to sell. A loan is classified as impaired (doubtful) when there is no longer reasonable assurance that the principal and interest will be collected in full. Foreclosed assets are considered to be assets held in the course of realization of impaired loans. The allowance is comprised of two components – specific allowances and collective or general allowances, calculated as follows:

(i) The Credit Union records specific allowances based on management’s regular review

of individual loans. The estimated realizable amount represents management’s best estimate of the value of future payments it will receive on each loan, discounted at the loan’s effective contractual interest rate. When management cannot reasonably determine the loan’s future cash flows, it bases its estimates on the current market value of the loan’s security net of expected selling costs.

(ii) The Credit Union records collective or general allowances for certain groups of loans with similar characteristics, which are exposed to common impairment factors. A general allowance is determined based upon management’s judgment considering business and economic conditions, portfolio composition, historical credit performance and other relevant indicators.

Management believes its estimates of allowances to be reasonable and appropriate; however, actual results could differ significantly from amounts estimated.

The change in the net realizable value of these assets is recorded as a charge or credit for loan impairment.

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Property and equipment

Property and equipment are recorded at cost less accumulated amortization. Property and equipment are amortized over their estimated useful lives with the following rates using the straight line method:

Buildings 40 years Furnishings, equipment 10 years Computer and communications equipment and software 4-8 years

Loan interest revenue Loan and lease interest revenue is recognized on the accrual basis using the effective interest rate method for all loans not classified as impaired. A loan is classified as impaired when there is reasonable doubt as to collect ability or payments of interest or principal are past due greater than ninety days. When a loan becomes impaired, recognition of interest income ceases when the carrying amount of the loan (including accrued interest) exceeds the estimated realizable amount of the underlying security. The amount of initial impairment and any subsequent changes are recorded through the provision for doubtful loans as an adjustment of the specific allowance. Fees relating to loan origination, including commitment, restructuring and renegotiation fees, and syndication are recognized as non-interest revenue. Incremental direct costs for originating or acquiring a loan are netted against origination fees.

Investment interest revenue

Investment interest revenue is recognized on the accrual basis. Purchase premiums and discounts are amortized using the effective interest method over the term to maturity of the applicable investment.

For held for trading investments, increases and decreases in fair value are recognized immediately in net income. For held to maturity investments, gains and losses are only recognized when an investment is sold. For available for sale investments, increases and decreases in fair value are recognized in other comprehensive income. Realized gains and losses on available for sale investments are recognized in net income upon disposition of the instrument.

Swap interest revenue and expenses

Swap interest revenue and expenses are calculated on an accrual basis on fair value and the result netted for reporting purposes.

Other income

Other revenue is recognized in the fiscal period in which the related service is provided.

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Membership shares

Shares are classified as liabilities or member equity in accordance with their terms. Shares redeemable at the option of the member, either on demand or on withdrawal from membership, are classified as liabilities. Shares redeemable at the discretion of the Credit Union Board of Directors are classified as equity.

Embedded derivatives

Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, equity, commodity instrument or index. In the ordinary course of business, the credit union enters into derivative transactions generally for asset/liability management and for trading. Derivative financial contracts are used to manage the credit union’s interest rate, credit and currency exposure related to its recorded assets and liabilities.

Embedded derivatives are components of a financial instrument or contract that meet the definition of a derivative. These instruments are considered to be a hybrid instrument, with a host contract and an embedded derivative that must be accounted for separately.

Derivative contracts, including embedded derivatives required to be separately reported, are reported on the statement of financial position and are measured at fair value using quoted market prices. Increases and decreases in fair value are reported immediately in net income.

Derivatives may include contracts which are designated as and effective as hedges, and/or contracts which reposition the Credit Union’s overall interest rate risk, credit risk and foreign exchange risk profile. The credit union does not use hedge accounting for derivatives.

Future income tax Future income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts and their tax bases. These amounts are measured using enacted tax rates and re-measured annually for rate changes. Future income tax assets are recognized for the benefit of deductions available to be carried forward to future periods for tax purposes that are likely to be realized. Future income tax assets are re-assessed each year to determine if a valuation allowance is required. Any effect of the re-measurement or re-assessment is recognized in the period of change. The Credit Union is taxed at an effective rate of 15.5% on taxable earnings eligible for the small business rate and the balance at 32%.

Sale by securitization of mortgage loan pools on a serviced basis with retained interest

To assist in the management of capital, the Credit Union transfers ownership of groups of loans through Concentra Financial under the Canada Mortgage Bond Program. Such transactions are recognized as a sale and the assets are removed from the Consolidated Statement of Financial Position when the Credit Union has surrendered control over the assets and has received, in exchange, consideration other than beneficial interests in the transferred assets. The Credit Union generally retains an interest in the assets such as servicing rights, and various forms of

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recourse. Any over-collateralization and cash reserve components of the Credit Union’s retained interest are classified as Available for Sale financial assets on the Consolidated Statement of Financial Position and recorded at cost – the most appropriate measure as fair values cannot be reliably measured for these instruments. Recognized gains and losses on retained interest are recorded in non-interest income on the date of the transaction. Gains and losses are recorded at fair value as determined by estimating the present value of future expected cash flows including key assumptions on credit losses, prepayment rates, discount rates, and cost of funds. Changes in estimates are recorded in non-interest income. All loans sold by the Credit Union have been on a fully serviced basis.

3. ACCOUNTING POLICY CHANGES The Credit Union has not adopted any new significant accounting policies effective for its fiscal year ended December 31, 2010.

Adoption of International Financial Reporting Standards The Canadian Accounting Standards Board requires all publicly accountable companies to adopt International Financial Reporting Standards (“IFRS”) for interim and annual financial statement relating to fiscal years beginning on or after January 1, 2011, including the restatement of comparative period financial statements on the same basis. The transition from Canadian GAAP to IFRS will be applicable to the Credit Union for the year-ended December 31, 2011. The Credit Union is implementing a changeover plan in 2010 to adopt IFRS on January 1, 2011.

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4. INVESTMENTS 2010 2009

INVESTMENTS CLASSIFIED AS LOANS AND RECEIVABLES Accrued interest $781,298 $919,480

781,298 919,480

INVESTMENTS CLASSIFIED AS HELD FOR TRADING Central 1 Bid Deposit 1,161,479 0 Concentra Bid Deposit 0 8,000,000 SaskCentral demand deposit 0 11,200,000 Provincial and corporate bonds 28,509,782 25,973,535 Derivative assets 789,351 1,246,218

30,460,612 46,419,753

INVESTMENTS CLASSIFIED AS HELD TO MATURITY SaskCentral liquidity deposits 39,528,500 37,828,500

39,528,500 37,828,500

INVESTMENTS CLASSIFIED AS AVAILABLE FOR SALE SaskCentral debenture 1,940,000 1,940,000 SaskCentral shares 3,919,710 3,919,700 Other investments 947,759 908,479

6,807,469 6,768,179

$77,577,879 $91,935,912

At December 31, 2010, the market value of investments classified as held to maturity is $39,683,590 (2009 - $38,324,758).

Credit unions must include 10% of their total liabilities in specified liquidity deposits in SaskCentral, in addition to liquidity required to meet their normal cash flow requirements as set out in regulation (18-1). As of December 31, 2010, the Credit Union met the requirement.

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5. LOANS RECEIVABLE

CURRENT IMPAIRED ALLOWANCE LOANS LOANS SPECIFIC COLLECTIVE 2010 NET 2009 NET

Guaranteed* $71,031,926 $ 0 $0 $0 $71,031,926 $54,297,845 Conventional mortgages: Residential and farm 175,425,917 674,020 45,000 303,197 175,751,740 171,870,621 Personal loans 30,200,081 46,132 66,092 121,667 30,058,454 26,644,925 Non-personal loans 50,023,548 4,434 4,444 243,137 9,780,401 45,346,520 Lines of credit, overdrafts 199,924 7,463 7,553 1,999 197,835 176,747 Accrued interest 526,805 1,105 0 0 527,911 473,318

Net realizable value $ 327,408,201 $733,155 $123,089 $670,000 $327,348,267 $298,809,977

At December 31, 2010, loans outstanding where payments overdue were greater than 30 days, totaled $795,203 (2009 - $512,623).

*Government guaranteed loans include loans which are guaranteed or insured under programs administered by federal and provincial governments, their agents or private loan insurance companies.

2010 2009

ALLOWANCE FOR IMPAIRED (DOUBTFUL) LOANS AND FORECLOSED ASSETS Balance – beginning of the year $825,387 $846,229 Charge for credit impairment

Specific 62,112 161,466 General 0 0

Loans written-off (94,410) (182,308)

Balance – end of the year $793,089 $825,387

6. OTHER ASSETS

2010 2009

Accounts receivable $291,332 $508,557 Prepaid accounts 828,928 987,317 Items in transit Foreclosed property

(67,242) 0

(47,842) 247,679

$1,053,018 $1,695,711

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7. PROPERTY AND EQUIPMENT

Cost Accumulated Depreciation

2010 Net 2009 Net

Land $2,479,018 $0 $2,479,018 $2,479,018 Buildings 10,402,151 2,000,591 8,401,560 8,687,004 Furnishings and equipment

5,276,015

4,334,107

941,908

1,032,704

Net $18,157,184 $6,334,698 $11,822,486 $12,198,726

8. LOANS PAYABLE

The Credit Union has an authorized line of credit with SaskCentral in the amount of $8,000,000 Canadian and $ 100,000 US. The line of credit is secured by an assignment of book debts and funds on deposit with a interest rate structure based on the SaskCentral prime rate. At year end, the amount outstanding was $0 (2009 - $0) on the Canadian line of credit and $0 US (2009 - $0) on the US line of credit.

The Credit Union through a commercial paper funding agreement with SaskCentral can borrow up to $15,000,000. The loan bears interest at a rate equal to the RIL Commercial Paper Market Term Rate as established from time to time plus 37.5 basis points per annum. At the end of the year the amount outstanding was $0 (2009 - $0).

9. OTHER LIABILITIES

2010 2009

Accounts payable $3,922,783 $2,832,029 Deferred income 376,557 43,907 Future income tax liability (28,063) (28,063) Unclaimed balances 17,437 16,109

$4,288,714 $2,863,982

10. RECONCILIATION OF INCOME TAX RATES

The Company's reported effective tax rate on accounting income differs from statutory rates as follows:

2010 2009

Earnings before income taxes $3,513,870 $3,081,366 Effective federal and provincial tax rate 15.50% 15.50%

Accounting income tax provision at statutory income tax rate 544,650 477,612 Other credit union additions and deductions 0 (46,469) Non-deductible expenses 1,034 1,313 Non-taxable income 0 (3,621) Other differences 273,406 (253,005)

Income taxes $819,090 $175,830

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11. MEMBERSHIP SHARES

The authorized share capital is unlimited in amount and consists of shares with a par value of $5 per share. These accounts are not guaranteed by Credit Union Deposit Guarantee Corporation (CUDGC).

12. CAPITAL MANAGEMENT

Credit Union Deposit Guarantee Corporation, regulator of Saskatchewan credit unions, prescribes capital adequacy measures and minimum capital requirements. Effective July 1, 2008, CUDGC adopted a new capital management framework, which is based on the Basel II framework.

The Credit Union is required to measure capital adequacy using a risk weighted asset calculation for credit and operational risk, including off balance sheet commitments. Based on the prescribed risk of each type of asset, a weighting of 0% to 150% is assigned. The ratio of regulatory capital to risk weighted assets is calculated and compared to the standard outlined by CUDGC. Regulatory standards require credit unions to maintain a minimum ratio of 8.00% for total eligible capital to risk-weighted assets, a minimum tier 1 capital to total assets of 5.00% and tier 2 to tier 1 capital ratio of less than 100.00%.

Tier 1 capital is defined as a Credit Union’s primary capital and comprises the highest quality of capital elements. Tier 1 capital includes retained earnings, membership shares and member equity/patronage accounts. Tier 2 is secondary capital and falls short of meeting the tier 1 requirement for permanence or freedom from mandatory charge.

The Credit Union has adopted a capital plan that conforms to the Basel II capital framework and is regularly reviewed and approved by the Board of Directors. The following table compares CUDGC regulatory standards to the Credit Union’s board policy for 2010:

Regulatory Board Minimum

Standards Standards

Total eligible capital to risk-weighted assets 8.00% 8.00% Tier 1 capital to total assets 5.00% 5.00% Tier 2 capital to tier 1 capital Less than 100% Less than 100%

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During the year, the Credit Union complied with all internal and external capital requirements. The following table summarizes key capital information:

2010 2009

Eligible capital: Total tier 1 capital $30,261,289 $27,571,464 Total tier 2 capital $670,000 $670,000

Total eligible capital $30,931,289 $28,241,464

Risk-weighted assets $208,401,588 $200,626,305 Total eligible capital to risk-weighted assets 14.84% 14.08% Tier 1 capital to total assets 7.18% 6.69% Tier 2 capital to tier 1 capital 2.21% 2.43%

13. RELATED PARTY TRANSACTIONS

Loans receivable At December 31, 2010, certain directors and management were indebted to the Credit Union for amounts totaling $1,337,933 (2009 - $1,574,247). These loans were granted under the same lending policies applicable to other members, and are included in loans receivable on the statement of financial position.

Deposit accounts

Deposit accounts are held by directors and management. These accounts are maintained under the same terms and conditions applicable to other members, and are included in member deposits on the statement of financial position.

14. SEGMENTED INFORMATION

The Credit Union provides banking services to a variety of members within consumer, agricultural and commercial markets. The various business activities of the Credit Union have common characteristics with respect to the nature of products and services offered, methods to provide products and services, type of member served and the nature of the regulatory environment. Therefore, segmented information is not reported.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value represents an estimate of the consideration that would be agreed to between knowledgeable and willing arm’s length parties with no compulsion to act. Fair values are estimated at year end based on subjective assumptions and may contain significant uncertainty. Potential income taxes or other expenses that may be incurred on actual dispositions have not been reflected in the fair values reported.

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Fair values have been determined as follows:

The stated value of short-term financial instruments including cash, other assets, other liabilities, accrued income and expense approximate their fair value. The fair value of investments is estimated based on discounted cash flow calculations using quoted market rates. For variable interest rate loans that re-price frequently, stated values are fair values. Fair values of other loans are estimated using discounted cash flow calculations at market interest rates for groups of loans with similar terms and credit risk. The stated value of deposits and loans payable without specified maturity terms approximates fair value. Fair value for other deposits and loans payable is estimated using discounted cash flow calculations at market interest rates for deposits with similar terms, and is not materially different than the stated value. The fair value of derivative financial instruments is estimated by reference to the appropriate current market yields with matching terms of maturity. The fair values reflect the estimated amount that the Credit Union would receive or pay to terminate the contracts at the reporting date.

The total interest income, fee income, and fee expense for financial assets not classified as held for trading is $17,485,091, $1,153,657, and $176,666 respectively for the year. Total interest expense, fee expenses, and fee revenue for financial liabilities not classified as held for trading is $6,275,181, $1,136,399, and $1,459,464 respectively for the year.

16. FINANCIAL INSTRUMENT RISK MANAGEMENT

The nature of financial instruments exposes the Credit Union to credit, market and liquidity risk.

These risks are managed in accordance with policies and procedures established by the Board of

Directors. In addition, CUDGC establishes standards with which the Credit Union must

comply.

Credit risk

Credit risk is the risk of financial loss resulting from a borrower or counterparty failing to meet its obligations in accordance with agreed terms. Credit risk arises primarily from lending activities, but also, to a lesser extent, through investment securities, derivatives and commitments to extend credit. Due to the nature of investments as reported in Note 4, the associated credit risk is not considered significant. The Credit Union’s estimate of its exposure to credit risk with respect to loans receivable is reported in Note 5. The Credit Union has established lending policies and procedures which outline the minimum standards and criteria for granting credit to borrowers. Certain types of lending are subject to an annual review process to ensure that standards continue to be met.

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Accounts which are deemed to be of higher than average risk are monitored more frequently. Policy and procedures also specify the type of assets which may be taken as collateral and the techniques are valuation. The Credit Union has established credit limits for individual borrowers to manage overall credit risk of the portfolio and establish parameters for credit diversification. The maximum aggregate credit per member is limited to 25% of capital and the maximum unsecured lending limited is $50,000. The established portfolio mix limits are: Board Objectives Actual

Consumer 83% 82% Agriculture 0% 0% Commercial 17% 18% At December 31, 2010, the Credit Union had outstanding commitments relating to letters of credit and undrawn lines of credit and undisbursed loans in the amount of $86,869,999 (2009 - $74,462,950). The credit union participates in a credit derivative loan pool. The unfunded balance at December 31, 2010 is $0 (2009 - $39,868); the credit union is required to fund on demand their proportionate share of the pool.

Market risk Market risk is the risk of loss that may arise from changes in market factors, notably interest rates, foreign exchange rates and market volatility. The primary market risk for the Credit Union is interest rate risk, specifically from timing differences in the repricing of assets and liabilities. Changes in interest rates on floating rate financial assets and financial liabilities have a direct impact on earnings (income). The Credit Union’s exposure to interest rate earnings risk is not considered significant due to the match position of short-term assets and liabilities as shown in the following table: Assets Liabilities 2010

Differential 2009

Differential

Interest sensitive- maturity terms Short term: Demand $159,641,690 $105,623,248 $54,018,442 $47,551,044 Within one year 58,379,357 94,123,056 (35,743,699) (53,407,147) Long term: One-five years 62,452,582 127,428,269 35,024,313 49,288,020 Over five years 22,124,025 30,000,000 (7,875,975) (7,930,341)

Subtotal 402,597,654 357,174,573 45,423,081 35,501,576

Non-interest bearing items 19,122,875 34,403,842 (15,280,967) (8,011,242) Equity 0 30,142,114 (30,142,114) (27,490,334)

Totals $421,720,529 $421,720,529 $0 $0

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Liquidity risk

Liquidity risk is the risk of financial loss in the event that the Credit Union will not be able to fund withdrawals of deposits or drawings on approved member loans and lines of credits in the normal course of business. Liquidity risk is managed through a three tiered structure: individual credit union level, Saskatchewan provincial credit union level and the Canadian national credit union level. All three levels have policies to ensure minimum amounts of liquidity are maintained.

Liquidity risk is not considered significant due to the positive liquidity position reflected in the table above and the available line of credit reported in Note 8.

Other legal and regulatory risk

Legal and regulatory risk is the risk that the Credit Union has not complied with requirements set out in terms of compliance with standards of sound business practice, anti-money laundering legislation or their codes of conduct or conflict of interest requirements. In seeking to manage these risks, the Credit Union has established policies and procedures and monitors to ensure ongoing compliance.

17. COMMITMENTS

The credit union has entered into agreements expiring on various dates to the year of 2015. These agreements are for clearing services, data processing services, and sponsorship. Management believes that these obligations are part of ongoing operations and are not unduly significant to the financial results of the credit union.

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Credit Union Deposit Guarantee Corporation

Deposits Fully Guaranteed Credit Union Deposit Guarantee Corporation is the primary regulator for Saskatchewan credit unions. The Corporation is given its mandate through provincial legislation, The Credit Union Act, 1998 for the main purpose of guaranteeing the full repayment of deposits held in Saskatchewan credit unions. Since 1953, the Corporation has successfully met its obligations. By guaranteeing deposits and promoting responsible governance, the Corporation contributes to confidence in Saskatchewan credit unions. Credit unions operate within a comprehensive regulatory framework to ensure depositors’ funds are fully guaranteed and completely safe. We establish standards of sound business practice that are credible within the industry, and monitor credit unions to ensure they are operating according to those standards. By monitoring risk in credit unions, we can identify potential issues early and credit unions can take corrective action. We invest in preventive programs that contribute to the strength of credit union decision makers and the ability of credit unions to actively manage risk and prevent loss. Saskatchewan credit unions are successfully meeting the challenges of the rapidly changing financial services industry and increasing regulatory requirements. They have enhanced governance practices, strengthened enterprise risk management processes, and employed comprehensive audit and compliance functions. Saskatchewan credit unions are financially strong and stable. With their strong capital base, they are well positioned to meet increasing global capital standards. Operating within a thriving provincial economy, credit unions are able to pursue opportunities for further growth and development and effectively manage strategic and operational impacts. In 2010 the Corporation launched a campaign to increase awareness and understanding of the Corporation and the deposit guarantee among credit union employees, depositors and the general public. For more information about deposit protection, talk to a representative at the credit union or visit our web site at www.cudgc.sk.ca.

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OFFICERS AND BRANCH LOCATIONS

Officers Celeste Labrecque – Executive Manager – Retail Banking & Saskatoon General Manager, TCU Wealth Management Inc.

Greg Peacock – Executive Manager – Finance & Accounting Saskatoon

Nadene Schmaltz – Executive Manager – Corporate Services Saskatoon

Dale Smith – Executive Manager – Business Strategy & Innovation Saskatoon

Morris Smysnuik – Chief Executive Officer Saskatoon

Branch locations

Regina Quance Branch 2615 E Quance Street Regina, SK S4V 3B7

Regina Rochdale Branch 4500 Rochdale Boulevard Regina, SK S4X 4N9

Saskatoon Arlington Branch 2311 Arlington Avenue Saskatoon, SK S7J 2H8

Saskatoon Ludlow Branch 307 Ludlow Street Saskatoon, SK S7S 1N6

MemberLine (Contact Centre) Regina 306-546-7800 Saskatoon 306-651-6500

Mailing Address PO Box 5050 Saskatoon, SK S7K 4E3

C R E D I T U N I O N