AUTO WORKERS COMMUNITY CREDIT UNION LIMITED

Transcription

1 Financial statements of AUTO WORKERS COMMUNITY CREDIT UNION LIMITED

2 INDEPENDENT AUDITORS' REPORT To the Members of AUTO WORKERS COMMUNITY CREDIT UNION LIMITED We have audited the accompanying financial statements of Auto Workers Community Credit Union Limited, which comprise the statement of financial position as at and the statements of comprehensive income, members' equity and cash flows for the year ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. 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 assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. 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 Auto Workers Community Credit Union Limited as at, and the results of its operations and its cash flows for the year ended in accordance with International Financial Reporting Standards. TORONTO, Ontario January 31, 2014 Licensed Public Accountants

3 Statement of Financial Position As at December (note 3) Assets Cash and cash equivalents (note 5) $ 13,379,242 $ 7,708,502 Investments (note 6) 44,431,489 56,510,064 Accrued interest receivable - member loans 248, ,082 - investments 204, ,750 Receivables and prepaid expenses 244, ,737 Income taxes receivable - 57,211 Member loans receivable (note 8) 208,060, ,114,885 Deferred pension costs (note 11) 66,500 - Deferred income tax asset (note 18) 1,306,849 2,973,259 Derivative financial instruments (note 7) 38,163 24,040 Capital assets (note 10) 4,544,550 4,990,916 Liabilities, Member Entitlements and Members' Equity $ 272,524,693 $ 281,120,446 Liabilities Accounts payable and other liabilities $ 967,680 $ 796,537 Income taxes payable 281,026 - Future pension obligation (note 11) - 2,835,300 Obligation for post-employment benefits other than pensions (note 12) 4,160,000 6,283,900 Derivative financial instruments (note 7) 38,163 24,040 5,446,869 9,939,777 Member entitlements Members' accounts and deposits (note 13) 247,282, ,438,259 Members' share capital (note 14) 5,105,625 5,521,633 Accrued member interest, dividends and patronage return 1,395,631 1,659, ,784, ,619, ,230, ,558,982 Members' equity Members' share capital (note 14) 6,163,294 6,545,935 Retained earnings 7,649,593 5,292,545 Accumulated other comprehensive income (519,140) (3,277,016) Commitments (note 16) 13,293,747 8,561,464 $ 272,524,693 $ 281,120,446 See accompanying notes to financial statements. On behalf of the Board: Director Director 2

4 Statement of Comprehensive Income Year ended December Interest income Residential mortgage loan interest $ 6,084,262 $ 6,656,035 Personal loan interest 1,099,509 1,386,046 Commercial loan interest 1,314,548 1,602,070 Investment interest and dividends 752, ,611 9,251,077 10,396,762 Interest on members' accounts and deposits (note 13) 2,118,557 2,718,532 Financial margin 7,132,520 7,678,230 Other income (note 19) 1,849,696 2,076,680 8,982,216 9,754,910 Expenses Currency costs and bank charges 337, ,730 Data processing and networking 578, ,923 Depreciation 452, ,838 D.I.C.O. insurance and F.S.C.O. assessment 323, ,643 Insurance 87, ,892 Marketing and development 214, ,313 Member services 1,195,113 1,417,613 Occupancy costs 466, ,479 Office 70,109 99,726 Provision for (recovery of) impairment losses on member loans (815,665) 279,201 Salaries and employee benefits 2,572,584 3,968,211 5,482,454 8,529,569 Net income before other items 3,499,762 1,225,341 Deduct: Dividends and patronage return (note 14) 124, ,018 Net income before provision for income taxes 3,375,504 1,097,323 Provision for current income taxes 296,883 59,850 Provision for deferred income taxes 631, ,921 Net income for the year $ 2,446,905 $ 686,552 Other comprehensive income (loss), net of tax Unrealized gains on available-for-sale investments $ 205,570 $ 270,215 Actuarial gains (losses) on future benefits 2,552,306 (968,440) Total other comprehensive income (loss) 2,757,876 (698,225) Net comprehensive income (loss) for the year $ 5,204,781 $ (11,673) See accompanying notes to financial statements. 3

5 Statement of Members' Equity Accumulated Available other for-sale Employee comprehensive Members' Retained investments future benefits income shares earnings Total (note 3) Balance on December 31, 2011 $ - $ (2,578,791) $ (2,578,791) $ 8,021,245 $ 4,688,669 $ 10,131,123 Net income , ,552 Distributions to members (82,676) (82,676) Net change in members' shares (1,475,310) - (1,475,310) Change in unrealized gains on available-for-sale investments 270, , ,215 Income (loss) from employee future benefits (968,440) (968,440) - - (968,440) Balance on December 31, 2012 $ 270,215 $ (3,547,231) $ (3,277,016) $ 6,545,935 $ 5,292,545 $ 8,561,464 Net income ,446,905 2,446,905 Distributions to members (89,857) (89,857) Net change in members' shares (382,641) - (382,641) Change in unrealized gains on available-for-sale investments 205, , ,570 Income from employee future benefits 2,552,306 2,552, ,552,306 Balance on $ 475,785 $ (994,925) $ (519,140) $ 6,163,294 $ 7,649,593 $ 13,293,747 See accompanying notes to financial statements. 4

6 Statement of Cash Flows Year ended December Cash provided (used) by operating activities: Net comprehensive income for the year $ 5,204,781 $ (11,673) Adjustments for: Interest revenue (9,251,077) (10,396,762) Interest expense 2,242,815 2,846,550 Depreciation and amortization 452, ,838 Provision for income taxes 1,979, ,990 Post-retirement benefits (3,580,961) 1,949,800 Provision for losses on loans (815,665) 279,201 Unrealized gain on available-for-sale investments (1,240,264) (380,584) (5,009,137) (5,153,640) Net change in non-cash working capital balances: Receivables and prepaid expenses (24,338) 46,103 Accounts payable and other liabilities 171,143 (360,587) Post retirement benefits paid (1,438,300) (1,039,500) (1,291,495) (1,353,984) Cash flows related to interest, dividends and income taxes Interest received on member loans 8,508,501 9,662,347 Interest received on investments 811, ,585 Interest paid on member deposits (2,596,354) (3,804,874) Income taxes paid - (138,569) 6,723,264 6,398,489 Net cash provided (used) by operating activities 422,632 (109,135) Cash provided (used) by investing activities: Residential mortgage loans (3,248,841) 1,419,730 Personal loans 4,232,260 3,832,425 Commercial loans (146,674) 10,554,324 Loans recovered 52,331 58,336 (Purchase) of investments (net) 13,318,839 (28,051,536) (Purchase) of capital assets (5,718) (181,222) Net cash provided (used) by investing activities 14,202,197 (12,367,943) Cash provided (used) by financing activities: Members' accounts and deposits (8,155,438) 1,481,868 Members' share capital (798,651) (793,225) Net cash provided (used) by financing activities (8,954,089) 688,643 Increase (decrease) in cash 5,670,740 (11,788,435) Cash and cash equivalents, January 1 7,708,502 19,496,937 Cash and cash equivalents, December 31 $ 13,379,242 $ 7,708,502 See accompanying notes to financial statements. 5

7 Notes to Financial statements 1 Nature of business Auto Workers Community Credit Union (the "Credit Union") is incorporated under the Credit Unions and Caisses Populaires Act, 1994 (the "Act") of Ontario and is a member of Central 1 Credit Union Limited (Central 1). The Credit Union operates as one operating segment in the loans and deposit taking industry in Ontario. Products and services offered to its members include mortgages, personal and commercial loans, chequing and savings accounts, term deposits, RRSPs, RRIFs, mutual funds, automated banking machines ("ABMs"), debit cards, Internet banking and telephone banking. The Credit Union head office is located at 322 King Street West, Oshawa, Ontario. In accordance with the Deposit Insurance Corporation of Ontario Bylaw No. 5, the Credit Union is a Class 2 credit union. These financial statements have been authorized for issue by the Board of Directors on January 30, Significant accounting policies Basis of presentation These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and the International Financial Reporting Interpretations Committee ("IFRIC") interpretations as issued by the International Accounting Standards Board ("the IASB") and legislation for Ontario's Credit Unions and Caisse Populaires. These financial statements were prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and derivative financial instruments measured at fair value. The Credit Union's functional and presentation currency is the Canadian dollar. The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Credit Union's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed below. Regulations to the Act specify that certain items are required to be disclosed in the financial statements which are presented at annual meetings of members. This information has been integrated into the basic financial statements and notes and it is management's opinion that the disclosures in the financial statements and notes comply, in all material respects, with the requirements of the legislation. Where necessary, reasonable estimates and interpretations have been made in presenting this information. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits with banks, other short-term highly liquid investments with maturities of three months or less; and for the purpose of the statement of cash flows, bank overdrafts that are repayable on demand. Cash is classified as held for trading and is carried at fair value. Investments (a) Central 1 deposits These deposit instruments are classified as loans and receivables and are initially measured at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at amortized cost, which approximates fair value. 6

8 2 Significant accounting policies (continued) Investments (continued) (b) Equity instruments These instruments are classified as available-for-sale and are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at fair value, unless they do not have a quoted market price in an active market and fair value is not reliably determinable in which case they are carried at cost. Changes in fair value, except for those arising from interest calculated using the effective interest rate, are recognized as a separate component of other comprehensive income. Where there is a significant or prolonged decline in the fair value of an equity instrument (which constitutes objective evidence of impairment), the full amount of the impairment, including any amount previously recognized in other comprehensive income, is recognized in net income. Purchases and sales of equity instruments are recognized on settlement date with any change in fair value between trade date and settlement date being recognized in accumulated other comprehensive income. On sale, the amount held in accumulated other comprehensive income associated with that instrument is removed from equity and recognized in net income. Derivative financial instruments and hedging (a) Hedges The Credit Union, in accordance with its risk management strategies, enters into various derivative financial instruments to protect itself against the risk of fluctuations in interest rates. The Credit Union manages interest rate risk through interest rate swaps. These derivatives are carried at fair value and are reported as assets where they have a positive fair value and as liabilities where they have a negative fair value, in both cases shown on the statement of financial position. Hedge accounting is applied to financial assets and financial liabilities only where all of the following criteria are met: (i) (ii) (iii) At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Credit Union's risk management objective and strategy for undertaking the hedge; For cash flow hedges, the hedged item in a forecast transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect profit or loss; The effectiveness of the hedge can be reliably measured; and (iv) The hedge is expected to be highly effective at inception and remains highly effective at each date it is tested. The Credit Union has chosen to test the effectiveness of its hedges on a quarterly basis. The swap contracts can be designated as fair value hedge instruments or cash flow hedge instruments. The Credit Union has not entered into any fair value or cash flow hedges at this time. Cash flow hedges modify exposure to variability in cash flows for variable rate interest bearing instruments or the forecasted assurance of fixed rate liabilities. The Credit Union's cash flow hedges are primarily hedges of floating rate deposits as well as commercial and personal loans. For cash flow hedges that meet the hedging documentation criteria, gains and losses resulting from changes in the fair value of the effective portion of the derivative instrument are recorded in other comprehensive income until the hedged item is recognized in income, at which time such change is recognized as interest income. The ineffective portion is recognized immediately in income as other income. If the Credit Union closes out its hedge position early, the cumulative gains and losses recognized in other comprehensive income are frozen and reclassified from the cash flow hedge reserve to profit or loss using the effective interest method. The ineffective portion of gains and losses on derivatives used to manage cash flow interest rate risk are recognized in net income within interest expense or interest revenue. 7

9 2 Significant accounting policies (continued) Derivative financial instruments and hedging (continued) (b) Other non-hedge derivatives The Credit Union designates certain financial assets upon initial recognition as at fair value through profit or loss (fair value option). Financial instruments included in this category are the embedded derivatives and derivatives related to index linked term deposits and interest rate swaps not designated as hedging instruments. These instruments are measured at fair value, both initially and subsequently. The related transaction costs are expensed. Gains and losses arising from changes in fair value of these instruments are recorded in net income. Member loans All member loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been classified as loans and receivables. Member loans are initially measured at fair value, net of loan origination fees and inclusion of transaction costs incurred. Member loans are subsequently measured at amortized cost, using the effective interest rate method, less any impairment losses. Loans to members are reported at their recoverable amount representing the aggregate amount of principal, less any allowance or provision for impaired loans plus accrued interest. Interest is accounted for on the accrual basis for all loans. If there is objective evidence that an impairment loss on member loans carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the loan's carrying amount and the present value of expected cash flows discounted at the loan's original effective interest rate. Short-term balances are not discounted. The Credit Union first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment for impairment. The expected future cash outflows for a group of financial assets with similar credit risk characteristics are estimated based on historical loss experience. If, in a subsequent period, the amount of the impairment loss decreased and the decrease can be related objectively to an event occurring after the impairment is recognized, the previously recognized impairment is reversed. Any subsequent reversal of an impairment loss is recognized in net income. Loans written off Loans are written off from time to time as determined by management and approved by the Board of Directors when it is reasonable to expect that the recovery of the debt is unlikely. Loans are written off against the provisions for impairment, if a provision for impairment had previously been recognized. If no provision had been recognized, the write offs are recognized as expenses in net income. Capital assets Capital assets are initially recorded at cost and subsequently measured at cost less accumulated depreciation and any accumulated impairment losses, with the exception of land which is not depreciated. Depreciation is recognized in net income and is provided on a straight-line basis over the estimated useful life of assets as follows: Building years Equipment 2-10 years Parking area 20 years Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. 8

10 2 Significant accounting policies (continued) Impairment of non-financial assets Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment is carried out on the asset's cash generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows. The Credit Union has one cash-generating unit, the land and building, for which impairment testing is performed. Impairment charges are included in net income, except to the extent they reverse gains previously recognized in other comprehensive income. Income taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the yearend date. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit or loss. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred tax asset to be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date and are expected to apply when the assets / liabilities are settled. Post-employment future benefits The Credit Union sponsors a defined benefit pension plan and other post-employment benefits to retired employees and their spouses. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation. The benefits include medical services, life insurance and extended health care benefits. The benefit plans are further described in notes 11 and 12. This non-pension post-employment benefit plan is not funded. The Credit Union accrues its obligations under a defined benefit employee pension plan and the related costs, net of plan assets. The cost of the defined benefit pension and the other post-employment benefits that relate to employees' current service is charged to income annually. The cost is computed at each reporting date by an independent actuary using the projected unit credit cost method prorated on services and management's best estimate of salary escalation, retirement ages of employees and expected health care costs. For the purpose of calculating the expected return on plan assets, the assets are valued at fair market value. The discount rate used to measure the interest cost on the accrued future employee benefit obligation is set with reference to market interest rates on high-quality debt instruments. The excess of the net cumulative actuarial gain or loss over 10% of the greater of the accrued benefit obligation and the fair value of the benefit assets, and adjustments resulting from benefit amendments are amortized over the average remaining service life of active employees. 9

11 2 Significant accounting policies (continued) Pension Plans The Credit Union is the sponsor of a contributory, registered pension plan that covers substantially all of its employees and provides benefits on a defined benefit basis based on length of service and rates of pay. The Credit Union makes contributions to the fund, based on periodic valuation reports prepared by an independent actuary, in accordance with regulatory requirements. Members' accounts and deposits All member deposits are initially measured at fair value, net of any transaction costs directly attributable to the issuance of the instrument. Member deposits are subsequently measured at amortized costs, using the effective interest rate method. Members' share capital Members' shares issued by the Credit Union are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. Shares that contain redemption features at the option of the holder subject to the Credit Union maintaining adequate regulatory capital are accounted for using the partial treatment requirements of IFRIC 2, Members' Shares in Co-operative Entities and Similar Instruments. Members' dividends Dividends to members are recognized in net income when circumstances indicate the Credit Union has a constructive obligation it has little discretion to avoid, and it can make a reasonable estimate of the amount required to settle the obligation. Revenue recognition Interest on loans is recognized on an accrual basis except when interest is ninety days past due or earlier when, in the opinion of management, there is doubt as to the collectibility of principal or interest. Revenue from investment income is recognized in the period it is earned. Commissions, fees, and related revenues are recognized when the specific transactions are completed. Foreign currency translation Foreign currency accounts are translated into Canadian dollars as follows: At the transaction date, each asset, liability, revenue and expense denominated in a foreign currency is translated into Canadian dollars by the use of the exchange rate in effect at that date. At the year-end date, unsettled monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at the year-end date and the related translation differences are recognized in net income. Exchange gains and losses arising on the re-translation of monetary available-for-sale financial assets are treated as a separate component of the change in fair value and recognized in net income. 3 Change in accounting policy - pension and post-employment benefits Revised International Accounting Standard (IAS) 19 eliminates the option to defer recognition of actuarial gains and losses by requiring their recognition directly in other comprehensive income when they arise. This standard became effective January 1, 2013 and accordingly has been adopted by the Credit Union. Previous accounting treatment allowed the Credit Union to adopt the "corridor" approach which permitted the Credit Union to leave some actuarial gains and losses unrecognized. Revised IAS 19 no longer permits the use of the corridor approach. At the date of transition, the cumulative effect of this change is to reduce total assets and total liabilities by $2,165,713 and $90,951, respectively. The corresponding effect on the equity of the Credit Union as at January 1, 2013 is $2,256,664 and has been recorded through accumulated other comprehensive income. 10

12 4 Critical accounting estimates and judgments The Credit Union makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the period of the change, if the change affects that period only; or in the period of the change and future periods, if the change affects both. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Fair value of financial instruments The Credit Union determines the fair value of financial instruments that are not quoted in an active market, using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realized immediately. The methods and assumptions applied, and the valuation techniques used, for financial instruments that are not quoted in an active market are disclosed in note 6. Member loan loss provision In determining whether an impairment loss should be recorded in the statement of comprehensive income, the Credit Union makes judgments on whether objective evidence of impairment exists individually for financial assets that are individually significant. Where this does not exist the Credit Union uses its judgment to group member loans with similar credit risk characteristics to allow a collective assessment of the group to determine any impairment loss. In determining the collective loan loss provision, management uses estimates based on historical loss experience for assets with similar credit risk characteristics and objective evidence for impairment. Further details on the estimates used to determine the allowance for impaired loans collective provision are provided in note 9. Post-employment future benefits Defined benefit pension plan costs, assets and obligations depend on factors that are determined using an actuarial estimate based on numerous assumptions, including the discount rate, the rate of return on plan assets, wage escalation, inflation rates, health care costs and demographic factors such as retirement age, mortality and employee turnover. Any change in these assumptions will have an impact on the costs, assets and/or obligations relating to these plans, but the discount rate and the return on assets have the greatest impact and are subject to greater volatility. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. Further information regarding employee future benefits is presented in notes 11 and 12. The Credit Union establishes the discount rate as at each reporting date. This rate is used to determine the present value of future cash flows related to the defined benefit obligation. To determine this rate, the Credit Union uses the interest rate of corporate bonds with a maturity similar to that of the benefit obligation and market conditions. A decrease of 1% in the discount rate as at the end of the period would have an impact of a $2,737,700 increase on the present value of the defined benefit obligation. 11

13 4 Critical accounting estimates and judgments (continued) Income taxes The Credit Union periodically assesses its liabilities and contingencies related to income taxes for all years open to audit based on the latest information available. For matters where it is probable that an adjustment will be made, the Credit Union records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters. Any differences will be accounted for in the year of settlement. Deferred income tax assets are recognized in respect of unused tax losses or deductible temporary differences to the extent that it is probable that taxable income will be available against which the losses can be utilized. Judgment is required to determine the amount of deferred income tax assets that can be recognized, based on the likely timing and level of future taxable profits, together with future tax planning strategies. 5 Cash Cash consists of cash on hand and cash in current accounts held with Central 1. The average yield on cash for the year ended was 1.03% ( %). 6 Investments The following tables provide information on the investments by type of security and issuer. The maximum exposure to credit risk would be the fair value as detailed below: Central 1 deposits As at December Central 1 deposits Discount deposit liquidity reserve $ 16,909,330 $ 16,906,585 Discount deposits 23,500,000 33,200,000 U.S. term deposits - 1,994,600 $ 40,409,330 $ 52,101,185 Equity instruments Central 1 Credit Union shares - Class A $ 980,647 $ 991,722 Central 1 Credit Union shares - Class E 1,378,600 1,378,600 Concentra Trust Company, shares 6,714 6,714 The Co-operators Group Limited, 6.00% Class C, series B preference shares 150, ,000 CUCO Co-op Class B investment shares 1,256,198 1,631,843 $ 3,772,159 $ 4,158,879 Other investments Credential Securities Inc. promissory note 250, ,000 Total investments $ 44,431,489 $ 56,510,064 12

14 6 Investments (continued) As at December Discount deposit liquidity reserve Yield 1.22% 1.66% Interest 1.00% to 2.33% 1.04% to 2.33% Maturity dates from Jan 17, 2014 Jan 24, 2013 to Feb 27, 2015 Feb 27, 2015 Discount deposits Yield 1.41% 1.34% Interest 1.06% to 1.89% 1.10% to 1.60% Maturity date from Jan 3, 2014 Jan 4, 2013 to Dec 16, 2014 Feb 11, 2013 U.S. term deposit Yield 0.21% Interest 0.17% to 0.34% Maturity dates from Jan 4, 2013 to Mar 7, 2014 Central 1 deposits - liquidity reserve The Credit Union is required to maintain a liquidity reserve deposit with Central 1 equal to 6% of the Credit Union's total assets at December 31 each year. The deposits can be withdrawn only if there is a sufficient reduction in the Credit Union's assets or upon withdrawal of membership from Central 1. At maturity, these deposits are reinvested at market rates for various terms. The carrying value of the liquidity reserve in Central 1 approximates its fair value. Equity investments - Central 1 Credit Union shares The shares in Central 1 are required as a condition of membership and are redeemable upon withdrawal of membership or at the discretion of the Board of Directors of Central 1. The Credit Union's share of Central 1 capital requirements is based on asset size relative to other Class A members. Central 1 rebalances the investment annually. Dividends are at the discretion of Central 1. Dividends received on these shares in 2013 amounted to $12,883 ( $58,794). The shares in Central 1 are carried at cost as they do not have quoted market prices in an active market and fair value is not reasonably determinable. The Credit Union is not intending to dispose of any Central 1 shares as the services supplied by Central 1 are relevant to the day to day activities of the Credit Union. CUCO Co-op Class B investment shares On September 2, 2011, the Credit Union received 502,471,006 CUCO Co-op Class B investment shares in exchange for its proportionate interest in the ABCP LP. The shares are redeemable for an amount equal to the fair market value at the time of redemption only upon approval of the board of CUCO Co-op. The shares are transferable only upon approval of the board of CUCO Co-op. The shares are non-voting, non-par value, nonretractable and non-convertible. The shares have a discretionary dividend entitlement but no fixed dividend rights. At a valuation was completed by CUCO Co-op on the underlying investments of the CUCO Co-op utilizing valuation techniques based on discounting the future cash flows. The valuation was based on conditions existing at the balance sheet date and is unaudited. As a result of this valuation, the carrying value of the investment in the CUCO Co-op shares on the Credit Union's balance sheet was increased to $1,256,198 ( $1,631,843). During the year the Credit Union received $581,215 from the CUCO Co-op which has been recorded as a return of the initial capital. No amounts received were recorded as interest income. In addition, as these investments are classified as available-for-sale, a fair value adjustment of $205,570 ( $380,584) has been recorded as a separate component of other comprehensive income. 13

15 7 Derivatives The Credit Union has outstanding $496,417 ( $432,461) in index linked products to its members. The Index linked products are three and five year deposits that pay interest at the end of the term, based on the performance of a variety of indices. The embedded derivative associated with these deposits are presented in liabilities and have a fair value of $38,163 ( $24,040). 8 Member loans receivable As at 2012 Residential mortgage loans $ 167,102,737 $ 163,853,896 Personal loans 16,806,304 21,038,564 Commercial loans 25,727,755 25,717, ,636, ,610,315 Allowance for impaired loans (note 9) (1,576,262) (2,495,430) Terms and conditions $ 208,060,534 $ 208,114,885 Personal loans bear interest at fixed and variable annual rates and are repayable in monthly blended principal and interest installments over a maximum period of five years. Residential and commercial mortgage loans bear interest at fixed (not in advance) and variable annual rates and are repayable in monthly blended principal and interest installments over a maximum period of five years based on a maximum amortization of twenty-five years. Line of credit loans bear interest at variable rates and are repayable at a minimum of interest only, not in advance, subject to annual review. Commercial and personal loans, including line of credit loans, are repayable to the Credit Union in monthly blended principal and interest installments over a maximum of five years, except for line of credit loans which are repayable on a revolving credit basis and require minimum monthly payments. All loans are open and, at the option of the borrower, may be repaid at any time without notice or penalty, with the exception of commercial and residential loans and mortgages with a term exceeding one year. Average yields to maturity Member loans bear interest at both variable and fixed rates with the following average yields at December 31: 2013 Principal Yield Variable rate $ 63,745, % Fixed rate due less than one year 30,170, % Fixed rate due between one and five years 115,720, % $ 209,636, Variable rate $ 63,329, % Fixed rate due less than one year 27,323, % Fixed rate due between one and five years 119,957, % $ 210,610,315 Credit quality of loans It is not practical to value all collateral as at the balance sheet date due to the variety of assets and conditions. A breakdown of the security held on a portfolio basis is as follows: As at December Unsecured loans $ 18,616,820 $ 17,625,314 Residential mortgages insured - other 22,377,919 22,360,072 Residential mortgages insured by government 20,061,713 21,644,991 $ 61,056,452 $ 61,630,377 14

16 8 Member loans receivable (continued) Fair value The fair value of member loans at was $212,705,000 (December 31, $218,970,000). The estimated fair value of the variable rate loans is assumed to be equal to book value as the interest rates on these loans re-price to market on a periodic basis. The estimated fair value of fixed rate loans is determined by discounting the expected future cash flows at current market rates for products with similar terms and credit risks. Concentration of risk The Credit Union has an exposure to groupings of individual loans which concentrate risk and create exposure to particular segments. Individual or related groups of member loans which exceed 10% of members' equity are as follows: As at December Commercial loans $ 2,866,360 $ 5,638,264 9 Allowance for impaired loans The total allowance for impaired loans comprises the following: As at December Collective provision $ 365,330 $ 555,180 Individual specific provision 1,210,932 1,940,250 The activity in the individual specific allowance for impairment is as follows: $ 1,576,262 $ 2,495, Mortgage Commercial Personal Loans Loans Loans Total Balance at January 1, 2013 $ 192,004 $ 1,504,587 $ 243,659 $ 1,940,250 Recoveries on loans previously written off - 1,127 51,204 52,331 Provision charged to net income (116,600) (601,764) 92,549 (625,815) 75, , ,412 1,366,766 Loans written off (19,060) - (136,774) (155,834) Balance at $ 56,344 $ 903,950 $ 250,638 $ 1,210,932 Total impaired loans $ 1,917,711 $ 1,028,339 $ 317,690 $ 3,263,740 15

17 9 Allowance for impaired loans (continued) 2012 Mortgage Commercial Personal Loans Loans Loans Total Balance at January 1, 2012 $ 1,362 $ 1,576,173 $ 139,933 $ 1,717,468 Recoveries on loans previously written off - 6,581 51,755 58,336 Provision charged to net income 190, , , , ,004 1,899, ,952 2,478,403 Loans written off - (394,860) (143,293) (538,153) Balance at December 31, 2012 $ 192,004 $ 1,504,587 $ 243,659 $ 1,940,250 Total impaired loans $ 2,538,108 $ 1,743,228 $ 243,659 $ 4,524,995 Analysis of individual loans that are impaired or potentially impaired based on age of repayments outstanding are as follows: As at December Individual Individual Carrying specific Carrying specific value provision value provision Period of delinquency: Less than 30 days $ 3,322,317 $ - $ 1,156,199 $ - 30 to 90 days 99,310 9, , ,759 Over 90 days 799, ,161 2,434, ,675 Total loans in arrears 4,221, ,964 4,119, ,434 Total loans not in arrears 205,415, , ,490, ,816 Total loans $209,636,796 $ 1,210,932 $210,610,315 $ 1,940,250 Key assumptions in determining the allowance for impaired loans collective provision The Credit Union has determined the likely impairment for loss on loans which have not maintained the loan repayments in accordance with the loan contract, or where there is other evidence of potential impairment such as industrial restructuring, job losses or economic circumstances. In identifying the impairment likely from these events, the Credit Union estimates the potential impairment using the loan type, industry, geographical location, type of loan security, the length of time the loans are past due and the historical loss experience. The circumstances may vary for each loan over time, resulting in higher or lower impairment losses. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Credit Union to reduce any differences between loss estimates and actual loss experience. For purposes of the collective provision, loans are classified into separate groups with similar risk characteristics, based on the type of product and type of security. The allowance for impaired loans is calculated on specific accounts in accordance with the Deposit Insurance Corporation of Ontario directives. It is reasonably possible that changes in future conditions in the near term could require a material change in the recognized amount of the allowance for impaired loans. 16

18 10 Capital assets Cost Equipment and Parking Land Building leaseholds area Total Balance at January 1, 2012 $ 266,132 $ 6,891,626 $ 3,778,640 $ 120,797 $ 11,057,195 Additions - 15, , ,221 Balance on December 31, ,132 6,907,290 3,944, ,797 11,238,416 Additions - - 5,718-5,718 Balance on $ 266,132 $ 6,907,290 $ 3,949,915 $ 120,797 $ 11,244,134 Accumulated depreciation Balance at January 1, 2012 $ - $ 2,453,858 $ 3,224,007 $ 120,797 $ 5,798,662 Depreciation expense - 251, , ,838 Balance on December 31, ,705,499 3,421, ,797 6,247,500 Depreciation expense - 252, , ,084 Balance on $ - $ 2,958,325 $ 3,620,462 $ 120,797 $ 6,699,584 Net book value December 31, 2012 $ 266,132 $ 4,201,791 $ 522,993 $ - $ 4,990, ,132 3,948, ,453-4,544,550 17

19 11 Employee pension plan The Credit Union is the sponsor of a contributory, registered pension plan that covers substantially all of its employees and provides benefits on a defined benefit basis based on length of service and rates of pay. The Credit Union, as the legal administrator of the Plan and has retained the services of CUMIS as a third party administrator. Assets of the pension fund are held by CUMIS and invested in a Deposit Administration Fund, operated by CUMIS, and in a balanced fund operated by McLean Budden and Philips Hagar North. The Credit Union makes contributions to the fund, based on periodic valuation reports prepared by an independent actuary, in accordance with regulatory requirements. An actuarial valuation was performed as at March 1, The changes in the defined benefit plan during the year are as follows: (a) Elements of the defined benefit pension expense recognized in the year: Current service cost $ 474,800 $ 388,500 Expected return on assets (490,700) (801,000) Interest cost on accrued pension obligations 612, ,300 Past service cost (credit) (note 11(f)) (61,600) - $ 535,200 $ 232,800 (b) Plan assets: Fair value, beginning of the year $ 12,627,000 $ 12,213,600 Employer contributions 522, ,800 Benefits paid (1,239,100) (632,400) Expected return on assets 490, ,000 Actuarial gain (loss) 641,300 (607,000) Fair value, end of the year $ 13,041,900 $ 12,627,000 The fair value of plan assets as at December 31 is categorized by type of asset as follows: Equities 34.71% 33.05% Fixed term 61.88% 61.99% Short term 3.41% 4.96% (c) Accrued pension obligations: Obligation, beginning of year $ 15,462,300 $ 14,268,300 Current service cost 474, ,500 Interest cost on plan obligation 612, ,300 Benefits paid (1,239,100) (632,400) Actuarial (gain) loss (2,273,700) 792,600 Reduction in liabilities due to plan amendment (note 11(f)) (61,600) - Obligation, end of year $ 12,975,400 $ 15,462,300 18

20 11 Employee pension plan (continued) (d) Reconciliation of funded status to the amount recorded in the statement of financial position: Fair value of plan assets $ 13,041,900 $ 12,627,000 Accrued pension obligation (12,975,400) (15,462,300) Plan surplus (deficit) $ 66,500 $ (2,835,300) (e) Actuarial assumptions: Significant actuarial adjustments adopted in measuring the Credit Union's accrued benefit obligation are as follows: Discount rate 4.90% 4.00% Expected return on plan assets 4.00% 6.50% Expected rate of compensation increases 2.00% 2.00% (f) Plan amendment On August 29, 2013, the Credit Union negotiated certain plan amendments in accordance with an Offer of Settlement between the Credit Union and its employees. Plan amendments consist of certain changes to benefits received by retirees prior to their normal retirement date. These plan amendments have resulted in a reduction in liabilities associated with the plan which total $61,600 as at. This reduction has been reflected as a past service credit and has been recognized immediately as a pension income item in accordance with IAS Post-employment benefits - non-pension The changes in the defined benefit plan during the year are as follows: (a) Elements of the post-retirement non-pension expense recognized in the year: Current service cost $ 132,100 $ 96,400 Interest cost on accrued obligations 252, ,600 Past service cost (credit) (note 12(d)) (1,637,500) - $ (1,252,700) $ 353,000 (b) Accrued benefit obligations: Obligation, beginning of year $ 6,283,900 $ 5,700,500 Current service cost 132,100 96,400 Interest cost on plan obligation 252, ,600 Benefits paid (199,200) (187,700) Actuarial (gain) loss (672,000) 418,100 Reduction in liabilities due to plan amendment (note 12(d)) (1,637,500) - Obligation, end of year $ 4,160,000 $ 6,283,900 19

21 12 Post-employment benefits - non-pension (continued) (c) Actuarial assumptions: Significant actuarial adjustments adopted in measuring the Credit Union's accrued benefit obligation are as follows: Discount rate 4.90% 4.00% (d) Plan amendment On August 29, 2013, the Credit Union negotiated certain plan amendments in accordance with an Offer of Settlement between the Credit Union and its employees. Plan amendments consist of the implementation of certain limitations of benefits as well as the age of eligibility for future retirees to qualify to receive benefits. These plan amendments have resulted in a reduction in liabilities associated with the plan which total $1,637,500 as at. This reduction has been reflected as a past service credit and has been recognized immediately as a pension income item in accordance with IAS Members' accounts and deposits As at December Chequing accounts $ 17,089,956 $ 16,497,355 Demand deposits 84,540,332 82,483,100 Term deposits 47,161,203 52,725,581 Registered savings plans 59,992,854 66,267,270 Registered income funds 23,981,675 25,247,767 Tax free savings accounts 14,516,801 12,217,186 Interest expense on members' accounts and deposits can be broken down as follows: $ 247,282,821 $ 255,438,259 For the year ending December Chequing accounts $ 21,363 $ 18,599 Demand deposits 168, ,077 Term deposits 632, ,594 Registered savings plans 811,350 1,092,341 Registered income funds 335, ,337 Tax free savings accounts 148, ,584 Terms and conditions $ 2,118,557 $ 2,718,532 Chequing accounts and demand savings accounts are due on demand and bear interest at variable rates which depend upon the type of account and the balance maintained. Term deposits bear fixed rates of interest for terms up to five years. Interest can be paid monthly, annually or at maturity. Registered plans and tax free savings accounts consist of fixed rated deposits and variable rate deposits. 20