ANNUAL REPORT 2012
Hald-Nor at a glance CORPORATE PROFILE Hald-Nor Community Credit Union is one of Ontario's regional credit unions with four Branches and 6 ATMs serving the South Coast and Upper Hamilton region, $122 million in assets under administration, 5,300 Members and 40 Employees.
Our Vision
PRODUCTS AND SERVICES
We value members and communities in everything we do to enhance their economic wellbeing.
Personal Banking
Our Mission
students, online, mobile and telephone banking, e-Transfers, personal
We provide innovative financial solutions so that our
loans, lines of credit, mortgages, MasterCard credit cards, safety deposit
members can develop their full economic potential to
boxes, foreign currency, term deposits and TFSA's.
– Savings and chequing accounts, high-interest
savings, US dollar accounts, special accounts for seniors, youth and
be responsible valued contributors to their community.
Business Banking
– Business savings and chequing account
packages, cash management services, lines of credit, letters of credit,
Our Core Values
business and commercial loans, real estate, construction and development financing, business credit cards, payroll outsourcing,
Integrity - Whether as a person or team, we will act with courage,
merchant MasterCard, foreign exchange services and night deposits.
consistency, respect, honesty, fairness, and trustworthiness toward everyone. We will also use the resources entrusted to us exclusively for
Wealth Management – Term deposits, TFSA's, RRSP's, RESP's,
the benefit of Hald-Nor.
LIF's, RRIF's, GIC's, mutual funds*, stocks** and bonds**.
Accountable - We are responsible to our members, communities,
Insurance***
peers and regulators for the process of how we reached our decisions and
recreational, life, health and employment.
actions and the resulting outcomes.
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Innovation - We anticipate and respond to challenges and changing needs with creativity, enthusiasm and determination.
– Home and property, automobile, business,
Message from the Chair On behalf of the Board of Directors of Hald-Nor Community Credit Union (Hald-Nor), I am pleased to share reports on the performance of HaldNor for the year ended June 2012. Hald-Nor maintained its assets as a respected credit union in its 58th year of its existence. Last year's challenges continued, resulting from extremely low interest rates and the very narrow spread between deposit and loan rates. The economic challenges resulting from the historically low interest rates over the past two years are expected to last well into 2014. Although we had budgeted for low profitability, we were able to improve the balance between deposits and loans. As a result of this improved balancing and the ability to recoup some investment losses that we were required to book in prior years, I am pleased to report that the Credit Union achieved respectable financial results, despite the interest rate challenges which continue. The economic realities mean that we need to continue to be vigilant and agile which places additional burdens on your Board, Management and our valued Staff. Despite the economic pressures, we are very pleased that you, the Member-Owners, have continued to be supportive of HaldNor. We are equally confident that you will be pleased with the improved strength of our balance sheet. The regulatory and financial reporting environment continues to change for the credit union sector. We continue to address these issues to ensure that your Credit Union's future remains strong and secure. As a result of increased regulatory activity, two of the most significant changes facing the Board are: Board competency (training and assessment) and Enterprise Risk Management. Your Directors continue to perform their jobs to the high standards expected by our regulators in continuing to take training courses, adapting to the changing economic landscape and identifying internal and environmental risks to be managed. They are committed to working in the best interests of Members and the community; working with Management to provide direction in revising and updating our long term strategic mission, vision and core values; and submitting ourselves to external evaluation of our individual and group performance. We continue to work on creating better access to Hald-Nor's services for our Members in Upper Hamilton. To that end, we have nearly completed the development of the property in Upper Hamilton so that we will be able to open a micro-branch there this fall. It is anticipated that a micro-branch will also be established on the Port Dover property over the next few years. The Hamilton micro-branch should help increase our lending portfolio, while the Port Dover micro-branch is expected to be a source of deposits.
Dick Kranendonk Chair, Board of Directors
“The economic realities mean that we need to continue to be vigilant and agile.�
I extend my respect and sincere appreciation to the contributions of my fellow Directors. The Directors are impressively diverse and diligent – as a group they work very well together. On behalf of your Board of Directors, I express my sincere appreciation for the cheerful efforts of the Staff and Management Team who continue to work hard in your best interests. They are proud to be helpful, personal and responsive to you, our valued Members. Thank you also to CEO Ralph Luimes for his continued exemplary leadership to the Credit Union, the community and beyond. Dick Kranendonk Chair, Board of Directors
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Report from the President & CEO. Beyond day-to-day member service, this year was more about implementing prudent risk management practices and sound business practices than growth, as has been the opportunity in past years. This focus started a number of years ago when at an international meeting held in Basel, Switzerland, financial leaders discussed the question of how to respond to the events since 2007. While there was no universal view on how best to proceed, it is generally understood that sound day-to-day practices, a healthy foundation of risk capital, functional accountability and knowing your client made an excellent foundation for negotiating a weak global economy which seems stuck in low gear. Recent changes to Canadian mortgage rules are not just evidence of more regulatory change, but also set the stage for a gradual correction in Canada, where we have pockets of our geography which are both overpriced and overbuilt. While this is not an issue in the South Coast region, it does shift us all toward a bit more restraint, fosters a soft landing in the medium term for those who lose jobs and encourages Canadians to adopt more prudent home-buying practices to help them pay less interest and build equity more quickly. While communities in our area are not immune from economic strain, Hald-Nor loan losses continue to remain low as people remain agile and adjust their own habits.
Ralph Luimes President and CEO.
“Hald-Nor had a profitable year with a strong focus on sound business practices."
Over the last year, Staff has made excellent progress on our key objectives to review our commercial service practices, advance our regime in response to Anti-Money Laundering rules, strengthen our risk capital position, start on our enterprise risk management model and switch from GAAP to IFRS reporting standards required of financial institutions. We have witnessed Staff and Member dissatisfaction with incessant regulatory change, and we do not see any relief in the immediate future. Staff have worked impressively to help Members through these regulatory changes, and I am very confident they will they will continue to maintain a strong Member service front. As CEO, I am proud of Staff efforts and am confident of their continued commitment. We continue to see value in our business model and opportunity in our regional marketplace for the benefit of our Members. To deliver on this model will require the HNCCU talent pool to not only lean into the fabric of the community, but be agile collaborators with other Staff in response to opportunities to help. Summarizing this as growing relationships, it must be done while adapting to risk management and compliance requirements. HNCCU is well-positioned to succeed in this evolving environment, as regulatory change seems to be the order of the day. Given our commercial business continues to grow faster than our retail business, we are monitoring our investments by sector and risk more closely (see charts provided). We remain true to plan, but have started to selectively increase diversity by not only geography, but also age, as is the interest of the Board. While very aware of our elevated exchange rate and some softened commodity markets, Board and Management feel it is essential that we carefully invest for our future, specifically with attention to new graduates, niche market exports, business start ups and immigrants ready to establish themselves in the area. Change necessitates continual investment in training our people, Directors and Staff, as well as in growth initiatives. In recent months, your Board of Directors is taking steps to demand more of themselves by completing self-assessment processes, training to gaps. In addition, they are communicating through the Nominating Committee process that the same is expected of incoming Directors. Your Board is to be commended on their unwavering initiative and leadership by example. While they stand firm on functional accountability, they also provide strong support for training. This shows as HNCCU Staff and Board continue to grow in capacity and as an organization. On your behalf, a sincere thank you to all Staff for their aspiring spirit and their team orientation—they should encourage members because they certainly encourage me!
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Our position of strength Globally, national leaders and their respective Countries are at various points in managing the affairs of their state. Ahead of many Countries, Canada has shifted out of the ramped-up spending mindsets which were common during the recession and in recovery. We find ourselves psychologically somewhat fatigued, yet needing to show continued restraint as household and government debt demands our attention. Because of our principles-based financial system, Canada's debt bill may not be as extravagant as South of the border, whether at the personal or business level. It is very important that not only our spending is in line with our income, but we can also service the debt that we incur even if the interest rate were to rise two percent. As stated before, while HNCCU does not operate internationally, Members and their businesses are affected by the gloomy global context which is expected to persist for some time yet. As a result, Account Managers continue to help some members adjust to their environment and they appreciate assistance when they begin to see the gains they make and feel burdens are lifting. This is largely expressed by our growing relationships and ability to strengthen Member equity. As you will see in this report, HNCCU has assigned all 2012 profitability to further strengthen risk capital, and plans are to continue to do the same in 2013. New this coming year is a plan to provide Members with a minimum return of two percent on membership shares held for the same period. We noticed this has incented some to increase their membership holdings beyond the basic bylaw requirement. Part of HNCCU capital consists of Investment Shares for which a return of 4.3% was paid as additional shares. Capital, in addition to providing a cushion in uncertain times, allows us to pursue our growth strategy which includes the upgrade of technology.
Financial performance Elsewhere in this booklet, five-year trend charts illustrate year-over-year change in key benchmark measures. While reviewing our commercial book, the focus was not on growth but improving profitability through a reduction of liquidity. Revenue was also bolstered by mark to market gains experienced on asset-backed commercial paper assigned to HNCCU when Ontario and British Columbia Credit Union Centrals were merged some years ago. Member equity grew from $5.6 to $5.9 million, loans grew from $97.7 to $102.9 million and deposits declined by approximately $2 million to $111.7, while overall assets also declined slightly to $122.7 million. HNCCU does expect modest loan growth in the coming year and also reduced profitability, due to some restructuring. Planned business restructuring initiatives include a change of year end from June to December, as guided by some new segments within the Credit Union Act of Ontario; adoption of an enterprise risk management model with the assistance of BDO; improved risk management practices for our banking system; and a review of our branch risk management model.
Changes in our business In the interest of efficiency and expense control, we continue to eliminate a number of paper-based processes, while simultaneously introducing online or electronic forms and methods of moving funds, and striving for functional accountability. Member use of E-Statements and online transactions continues to increase. With the landing of more immigrants, we hope to also review international payments systems. We also await decisions by the Canadian Payments Association concerning check imaging processes.
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Our commitment to personal and business service at the local Branch continues. Underwriting of commercial loans and handling of residential mortgages is done centrally, while relationships remain branch centric to assure ease of access and support by Account Managers. Reselling of homes and properties continues as usual. Upgrades and renovations continue to be the order of the day, particularly in Haldimand, as building permits continue to remain low. Fundamentally, the region suffers from aged infrastructure, as well as being distant to a major transportation corridor. Therefore, we do see significant efforts on the part of municipalities to work on these issues. The volume of our commercial loans as well as our service and advice to small businesses is a core segment of our business. Both business owners and youth have found value in our mobile banking and e-Transfer services. There have been some notable expectations by the IRS (USA) concerning USD accounts in Canada. FATCA is one such new requirement which is expected to involve significant administration time, and as a result financial institutions will charge fees. On a case by case basis, this is expected to cause some Members and businesses to rationalize their interests.
Our priorities and commitments Assuming Members support the proposal to change our year end to December, the stub year will be six months comprising a period of re-organization with associated inefficiencies. Future Annual General Meetings will be held in April beginning in 2013 for the stub year. The near term economic forecast is expected to be relatively soft, so recent and active changes already underway will work toward upgrading the important framework required for moving forward, though the strategic priorities have been in place for some time. From a purely business perspective, the project is all about relationships and functional accountability in response to sound business or regulatory practices—every day. The goal is to achieve sustainable and profitable revenue growth to serve as the key priority from which to deliver products and services to Members for their well-being. Below are four other priorities critical to supporting the primary object interest. We build our measure and reports on them as we train to it and plan for success: · prudent risk management and appetite; · efficient one-touch processes; · expense control; and · leadership. At the Planning Meeting held in January, we acknowledged HNCCU's greatest strengths are its Members and employees as a talent pool. As Members, you expect us to work as a team in whatever place we work to achieve the plan approved by your elected Board. As Staff, we know we need to lean into the community to make contact and through relationships have an impact. We want to work to not only inspire confidence but also demonstrate integrity. This means we cannot just work independently as silos, but as teams of individuals having strong communication skills, working collaboratively because business lines and job descriptions are interdependent. It is “resilience” which we are building—to advance Member well-being and that of our community. “I am pleased to lead a group of very good people who can lean into the community, be innovative and get the job done!”
Ralph Luimes President and CEO.
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08
09
10
11
12
$ 500 $ 400 $ 300 $ 200 $100
10
11
12
$86 08
09
10
11
$102
$97
$93
$91
CGAAP CGAAP
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Profitability (Net Income) IFRS
CGAAP CGAAP
CGAAP
10
11
CGAAP
$544
09
CGAAP CGAAP
$414
$122
$ 85
MILLIONS
$124
$113
$ 90
IFRS
$539
$ 80
CGAAP
IFRS
$ 100
Loans
$222
$ 90
CGAAP
$ 105 $ 95
$ 600 CGAAP
CGAAP
IFRS
$427
$ 100
Deposits $111
$ 110
08
$114
$ 120
12
$104
11
$95
10
CGAAP CGAAP
CGAAP
THOUSANDS
$ 80
CGAAP
$106
$ 90
Asset Base
$100
$ 100
MILLIONS
$ 110
$87
09
$ 120
MILLIONS
08
$4766
CGAAP
$5237
CGAAP CGAAP
$5616
CGAAP
IFRS
$5921
Member Equity
$4438
$ 6000 $ 5500 $ 5000 $ 4500 $ 4000 $ 3500
THOUSANDS
Financial performance at a glance
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09
12
CGAAP = former Canadian Generally Accepted Accounting Principles IFRS = International Financial Reporting Standards
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Report on Management Responsibility The accompanying summarized financial statements and the complete financial statements have been prepared by management of Hald-Nor Community Credit Union Limited (HNCCU), which is responsible for their reliability, completeness and integrity. As required of financial institutions, we have converted from GAAP to IFRS reporting. Therefore information for the prior two years has been restated. The financial information presented in this annual report booklet is consistent with the financial statements and has been approved by the Board of Directors. A system of internal controls and reporting procedures are designed to provide reasonable assurance that the financial records are complete and accurate so as to safeguard the assets of the organization. These systems allow informed judgments and estimates of the expected effects of current activities and transactions. Included are the establishment and communication of standards of business conduct throughout all levels of the organization to prevent conflicts of interest and unauthorized disclosure, and to provide assurance that all transactions are authorized and proper records are maintained. When alternative accounting methods exist, management and the Audit Committee choose those deemed most appropriate given the circumstances. Further, they are reviewed by the Credit Union's External Auditors and the Credit Union is subject to periodic examination by the Deposit Insurer of Ontario in cooperation with the Financial Securities Commission of Ontario. Millard, Rouse & Rosebrugh LLP (MRR)—the External Auditors—have examined the complete financial statements in accordance with Canadian generally accepted auditing standards. MRR have full and unrestricted access to the Audit Committee to discuss their audit and related findings. Ralph Luimes, President & CEO Connie Wighton, CFO
Governance Report The Governance Committee reports to the Board making recommendations as deemed necessary. It is made up of Directors who meet no less than a minimum of four times each year. They oversee the work of the CEO, receive the CEO's Human Resource report to ensure the competency, experience and depth in the talent pool, provide leadership concerning the Strategic Planning process, annually executes a Board self effectiveness process, ensures the Nominating Committee is organized as required and reviews Director remuneration as required. Again in 2012, regulations have changed and considerably more emphasis is being placed on director qualification, Board composition, self-assessment of Directors, Director training, and policy for same. This new responsibility follows from Ontario's Credit Union Act and the Sound Business Practices as recommended by the deposit insurer, DICO. As a result, Members are advised that the Nominating forms and process for Directors have therefore been expanded to provide better information and allow more time as the responsibilities are significant and material.
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Gary Beemer Dick Kranendonk Greg Schmidt (Chair) Katrina Schmitz
Commercial Loans by Segment - June 2012 Agriculture - 7%
Accommodation Arts/Recreation
Construction - 19%
Health Care Education Business Support Holding Companies
Manufacturing - 7% Other Agriculture Services
Retail - 11% Construction
Transportation - 6% Real Estate - 25%
Manufacturing
Holding Companies - 4% Business Support - 1%
Real Estate Retail Transportation
Education-Schools - 1% Health Care - 3% Arts - Recreation - 3% Accommodation - 3% Other Services - 8%
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Audit Committee Report The Audit Committee is an integral part of the overall framework of corporate governance. Together with senior management, internal and external auditors, it provides oversight that fosters an environment where risks are adequately mitigated; reporting is accurate, timely and relevant; assets and member interest are safeguarded; positive ethics are upheld; and compliances is assured. During 2011-2012 the Committee met five times with Management and External Auditors. The Committee performed the following activities: 路 Oversight and review of financial reporting; 路 Oversight of risk management and controls; 路 Oversight of audit activities; and 路 Oversight of compliance activities. Throughout the year the Committee has conducted its affairs in accordance with the Credit Union Act and regulations. The Committee has not noted any instances of the Credit Union's management failing to implement or complete any recommendations from the Committee. The Committee reports its findings to the Board of Directors for consideration. The Committee notes members are being asked to change year-end to December and extend Directors' term on a one time basis for 6 months to compensate. Millard, Rouse & Rosebrugh LLP (MRR) External Auditors have examined the complete financial statements in accordance with Canadian Auditing Standards. MRR have full and unrestricted access to the Committee to discuss their audit and related findings. Sherry Osinga Chris Smith Jonathan van der Heiden, Chair
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Independent Auditor’s Report To the members of Hald-Nor Community Credit Union Limited The accompanying summary financial statements, which comprise the summary statement of financial position as at June 30, 2012, the summary statement of comprehensive income, summary statement of changes in members' equity, and summary statement of cash flows for the year then ended, are derived from the audited financial statements of Hald-Nor Community Credit Union Limited for the year ended June 30, 2012. We expressed an unmodified audit opinion on those financial statements in our report dated August 30, 2012. Those financial statements, and the summary financial statements, do not reflect the effects of events that occurred subsequent to the date of our report on those financial statements. The summary financial statements do not contain all the disclosures required by International Financial Reporting Standards. Reading the summary financial statements, therefore, is not a substitute for reading the audited financial statements of Hald-Nor Community Credit Union Limited.
Management's Responsibility for the Summary Financial Statements Management is responsible for the preparation of a summary of the audited financial statements in accordance with its criteria to highlight the major areas of credit union activity, investments, member loans, member deposits and members' equity.
Auditors' Responsibility Our responsibility is to express an opinion on the summary financial statements based on our procedures, which were conducted in accordance with Canadian Auditing Standards (CAS) 810, "Engagements to Report on Summary Financial Statements."
Opinion In our opinion, the summary financial statements derived from the audited financial statements of Hald-Nor Community Credit Union Limited for the year ended June 30, 2012 are a fair summary of those financial statements, in accordance with management's criteria.
CHARTERED ACCOUNTANTS Licensed Public Accountants September 10, 2012
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Financial Statements Summary Statement of Financial Position As at June 30 Assets Cash and Bank Loans to members Investments Property, Plant and equipment Intangibles Other assets Deferred income taxes
Liabilities Members' deposits and Share Capital Current Liabilities
Members Equity Reserve for Financial Stability Accumulated Other Comprehensive Income
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2012
2011
2,611,876 102,887,307 14,060,975 2,085,385 20,380 915,347 140,098 122,721,368
7,805,729 97,754,298 16,040,989 1,307,760 64,756 1,313,548 80,660 124,367,740
115,309,163 1,491,008 116,800,171
117,261,456 1,489,550 118,751,006
6,168,632 -247,435 5,921,197 $122,721,368
5,624,283 -7,549 5,616,734 $124,367,740
Summary Statement of Comprehensive Income For the year ended June 30 Interest Revenue Interest Expense Interest Margin Other income Income before Operating Expenses Operating Expenses: Salaries and Benefits Other Operating Expenses Operating Income Dividend on investment shares Current and future income taxes Net Income Other Comprehensive Income (Loss) Change in unrealized gains / (losses) on derivative instruments designated as cash flow hedges Tax effect on change in unrealized gains on cash flow hedges Other comprehesive income (loss) for the year Comprehensive income for the year
2012
2011
5,256,671 1,626,034 3,630,637 944,951 4,575,588
5,380,107 2,011,639 3,368,468 955,006 4,323,474
2,105,475 1,666,589 3,772,064 803,524 126,152 133,023 544,349
1,990,275 1,721,426 3,711,701 611,773 118,851 78,917 414,005
-285,578 45,692 -239,886 304,463
-39,447 4,746 -34,701 379,304
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Financial Statements Summary Statement of Changes in Members' Equity Accumulated Other Comprehensive Income Cash Flow Hedges Balance at July 1, 2010 Net Income Transfer to reserves Change in unrealized gains/(losses) on cash flow hedges Balance at June 30, 2011
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Reserve for financial stability
Undivided Earnings
Total
27,152 0 0
5,210,278 0 414,005
0 414,005 -414,005
5,237,430 414,005 0
-34,701 -7,549
0 5,624,283
0 0
-34,701 5,616,734
Net Income Transfer to reserves Change in unrealized gains/ (losses) on cash flow hedges
0 0
0 544,349
544,349 -544,349
544,349 0
-239,886
0
0
-239,886
Balance at June 30, 2012
-247,435
6,168,632
0
5,921,197
Summary Statement of Cash Flows As at June 30
2012
2011
Cash flows from operating activities Cash flows from financing activities Cash flows from investing activities
814,601 -1,808,915 -4,199,539
789,103 9,768,072 -10,956,326
Net decrease in cash and cash equivalents Opening cash and cash equivalents
-5,193,853 7,805,729
-399,151 8,204,880
2,611,876
7,805,729
Closing cash and cash equivalents
*Mutual funds are offered through Qtrade Asset Management Inc., member MFDA. Commission, trailing commissions, management fees and expenses all may be associated with mutual fund investments. please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance . may not be repeated. **Online brokerage services are offered through Qtrade Investor, a division of Qtrade Securities Inc., member of the Canadian Investor Protection Fund. ***Insurance products and services provided by the CUMIS Group Limited.
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