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3 MISSION: Creston & District Credit Union is and will continue to be a sound, profitable, independent, progressive, service-oriented financial institution. We are democratic and member owned, dedicated to servicing our members needs and committed to contributing to the wellbeing of our community.

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5 TABLE OF CONTENTS FINANCIAL REPORTS President s Report 01 CEO S Report 03 Auditors Report 06 Financial Highlights FINANCIAL POSITION 09 Statements of Income 10 CHANGES IN MEMBERS EQUITY 11 Cash Flow 12 Notes on Consolidated Statements Notes Staff & Faculty Staff 43

6 PRESIDENT S REPORT Rand Archibald President Financially, we had a good year despite a continuing slow economy. At the time of writing this report, our profit, after taxes and patronage payments to members, is about $870 thousand dollars. As in previous years, the members received 7% dividend on equity shares, 4% rebate on interest paid on loans, 4% premium on interest earned and 10% rebate on service charges paid. This type of patronage payments over the last few years supports our business model and, while the economy in our area isn t predicted to improve much, we are budgeting for a similar net profit for this year. Our 60th Anniversary celebration was a tremendous success. We kicked it off with announcing that $10,000. in prizes would be given out to members over the four months of June, July, August and September. Prizes included laptop computers, IPad2s, IPods, La-z-Boy chair, family membership to the Community Complex, TV and home theatre system. On July 29th (actual anniversary day was July 31, 1951) coffee and cake was served to all members coming to the branch that morning. The gala street party was on Sept. 24. This included free pancake breakfast, free lunch, give-aways and the awarding of two $25,000 Legacy Awards. The awards were presented to the West Creston Fire Society and Creston Hospice Society. This was truly a team effort with the staff, management and board members all being involved and I thank them again for their contribution to the event.

7 PRESIDENT S REPORT Faced with the current economic downturn, we realize that procuring tenants for Creston Place will take more time than any of us anticipated. We can report that leasing inquiries have been coming in from retail and professional businesses, both local and beyond. From the outset, we felt this would be a long term investment in our community by an organization that cares deeply about its local roots. That philosophy has not changed. Growth Financial (50% owned by CDCU) continues to increase its presence in the province. In addition to our insurance offices in Creston, Castlegar, Trail and two in Kelowna, a contract has been signed for us to partner with the Nuu-chah-nulth Economic Development Corporation (NEDC) on Vancouver Island. Everyone requires insurance these days said Ida Mills, President of NEDC. To expand into an industry that complements our current services fits into the NEDC Vision. NEDC was fortunate to partner with Growth Financial and Whitlock Insurance Services who are innovative experts in the insurance market. Nootka Insurance Agency will provide a competitive option that benefits the First Nations community. Similar First Nation partnerships are in development in other regions of the province. Governance is without a doubt the most important role of the board of directors. What is the definition of governance in the credit union world? The recent Task Force on Credit Union Governance defines it as: Governance is the framework of responsibility and accountability through which a credit union is directed and controlled, manages its business practices, makes effective decisions and reports to members and other stakeholders. We anticipate changes in governance coming from this Task Force for credit unions and their boards in the near future. Based on this, your board will conduct a comprehensive review of many of the issues surrounding governance, including specific education programs, current board policies, recommending new policies and committees, along with any changes coming from the Financial Institutions Commission. This process will likely take several months to complete with the anticipated result being policies and procedures for CDCU that contain higher requirements and standards than the regulated minimum. We are pleased to have board members Carole Materi, Dr. Michelle Mayer and Don Tarrant returned by acclamation for three year terms. To me, this shows confidence in the work our Board is doing on behalf of our members, and we will continue to be cognizant that our decisions must be made with your best interests in mind. Respectfully submitted Rand Archibald President, Board Of Directors 02

8 CEO S REPORT Jim Miller CEO Your credit union has reached another milestone in our history, having completed our 60th year of providing financial services to the Creston Valley. From an operational perspective, 2011 proved to be a busy but challenging year. Interest rates showed no movement during the year, maintaining the low interest rate environment of the previous year. Despite having access to some of the lowest rates in history, consumer demand for loans was extremely low. Accordingly, we processed only 283 loans with a total of $9.7 million in new monies disbursed. With a reduction in the usage of lines of credit, normal loan pay down and some loan and mortgage payouts, we did not generate sufficient funds to garner growth in our portfolio. The result was a reduction in overall loans of 3.4%. The deposit side of our business faced similar challenges. Deposit rates are simply not attractive in this environment. Despite this, most of our investors have remained steadfast with their deposits did not allow us to achieve any growth in our member deposits, nor did we lose any significant deposits. Our total member deposits remained stable throughout the year.

9 CEO S REPORT A strong financial margin is a key component to the strength of our income statement, offering us the ability to continue to operate effectively. The current economic and competitive environment in our community is beginning to challenge our ability to maintain a strong financial margin, albeit slightly so far. We strive to keep interest rates on both sides of our business competitive within our local marketplace. We make interest rate decisions based on finding a balance between our local market, and what is best for our credit union on a long term basis. We are consistent is this regard. We are almost always competitive and maintain our members business. Sometimes however, we choose to not be competitive to abnormal rates. This can cause us to lose some business in the short term. However, these decisions are in keeping with our long term strategic plan guidelines, and are made with the best interest of our credit union s future in mind. As a result, our financial margin remains stronger than most credit unions of our size. new member interactive features. Late in the year we completed all the internal work necessary to replace our telephone banking system. The system was old, had become obsolete, and was no longer going to be supported by our provider. A new telephone banking platform was launched in January of this year. In closing I thank the Board of Directors for their continued confidence in our Credit Union s management team and their commitment to our continued success. Thank you to our staff for their dedication to providing friendly and professional service; and thank you to our members for your ongoing support. Together we will maintain our Credit Union s presence as a major contributor to our community. A strong earnings base allows our Board of Directors to deliver dividends and patronage credits to our members on a consistent basis every year. In addition, it allows us to remain current with respect to new technology and product offerings in the financial industry. We were very busy this past year implementing many changes in an effort to provide our members with enhancements and increased security. Some of these were banking support changes and will not be noticed by our members. In November we launched a new web site, with enhanced security and many Jim Miller CEO 04

10 AUDITOR S REPORT

11 AUDITOR S REPORT To the Directors of Creston & District Credit Union We have audited the accompanying consolidated financial statements of Creston & District Credit Union, and its subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, and the consolidated statements of comprehensive income, changes in members equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and the related notes, which comprise 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 consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatements, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Creston & District Credit Union and its subsidiaries as at December 31, 2011, December 31, 2010 and January 1, 2010, and their financial performance and their cash flows for the years ended December 31, 2011 and December 31, 2010, in accordance with International Financial Reporting Standards. CHARTERED ACCOUNTANTS Creston, B. C. March 15,

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13 Financial Highlights

14 FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, January 1, 2010 ASSETS CASH AND CASH EQUIVALENTS, note 3 $ 37,689,496 $ 35,439,334 $ 26,420,896 OTHER, note 9 50,379 42,160 47,349 INCOME TAXES RECEIVABLE 72,710 48,119 - INVESTMENTS, note 4 6,472,287 6,309,230 6,229,226 LOANS TO MEMBERS, note 5 63,799,323 66,047,141 63,387,097 PROPERTY, PLANT AND EQUIPMENT, note 7 1,243,607 1,159,634 1,226,688 INVESTMENT PROPERTY, note 8 3,256,328 2,078, ,633 $ 112,584,130 $ 111,123,760 $ 97,798,889 LIABILITIES AND MEMBERS EQUITY MEMBERS DEPOSITS, note 10 $ 95,967,926 $ 95,357,075 $ 83,768,515 ACCOUNTS PAYABLE AND OTHER LIABILITIES 764,513 1,686, ,351 INCOME TAXES PAYABLE ,489 DISTRIBUTION TO MEMBERS PAYABLE 465, , ,094 DEFERRED INCOME TAXES 50,164 37,556 45,910 EQUITY SHARES, note 13 3,923,262 3,843,078 3,795,360 RETAINED EARNINGS 10,612,737 9,742,197 8,817,631 ACCUMULATED OTHER COMPREHENSIVE INCOME ,539 NON-CONTROLLING INTEREST IN SUBSIDIARY 800, $ 112,584,130 $ 111,123,761 $ 97,798,889 See accompanying notes to the consolidated financial statements. APPROVED ON BEHALF OF THE BOARD OF DIRECTORS: Director Director Director 09

15 STATEMENT OF INCOME CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, INTEREST INCOME Interest on loans to members $ 3,437,802 $ 3,530,445 Investment income 609, ,003 4,047,462 4,120,448 INTEREST EXPENSE Interest on members deposits 1,219,625 1,301,411 Interest on borrowed money ,476 1,219,877 1,366,887 OPERATING MARGIN 2,827,585 2,753,561 OTHER INCOME, note , ,513 3,644,418 3,692,074 OPERATING EXPENSES Administrative and General, note 15 2,390,394 2,400,973 Occupancy, note , ,295 2,561,022 2,542,268 INCOME BEFORE DISTRIBUTION TO MEMBERS 1,083,396 1,149,806 DISTRIBUTION TO MEMBERS 465, ,151 INCOME BEFORE INCOME FROM EQUITY INVESTMENT 617, ,655 INCOME FROM EQUITY INVESTMENTS 374, ,217 INCOME BEFORE INCOME TAXES 992,192 1,052,872 INCOME TAXES, note 12 Current 109, ,093 Deferred 12,608 (5,788) 121, ,305 NET INCOME FOR THE YEAR 870, ,567 OTHER COMPREHENSIVE INCOME (LOSS) Change in unrealized gains and losses on available for sale financial assets (net of deferred income taxes of $0, $0) - (14,539) TOTAL COMPREHENSIVE INCOME $ 870,541 $ 910,028 See accompanying notes to the consolidated financial statements. 10

16 CHANGES IN MEMBER S EQUITY CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS EQUITY FOR THE YEAR ENDED DECEMBER 31, 2011 Accumulated Other Comprehensive Members Retained Income Shares Earnings Total January 1, 2010 $ 14,539 $ 3,795,360 $ 8,817,631 $12,627, Net income - - 1,381,717 1,381,717 Distributions to members - - (457,151) (457,151) Issue of members shares - 47,717-47,717 Change in unrealized gains/losses (14,539) - - (14,539) December 31, 2010 $ - $ 3,843,077 $ 9,742,197 $13,585, Net income - - 1,336,068 1,336,068 Distribution to members - - (465,528) (465,528) Issue of members shares - 80,185-80,185 December 31, 2011 $ - $ 3,923,262 $10,612,737 $14,535,999 See accompanying notes to the consolidated financial statements. 11

17 STATEMENT OF CASH FLOW CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, CASH FLOW FROM OPERATING ACTIVITIES Total Comprehensive Income $ 870,541 $ 910,028 Amortization of property, plant and equipment 76, ,527 Income on equity investment (374,324) (360,217) Decrease (increase) in other assets (8,220) 5,190 Increase (decrease) in accounts payable and accrued liabilities (922,191) 855,351 Increase (decrease) in deferred income taxes 12,608 (8,354) Increase (decrease) in income taxes payable (24,591) (97,608) Increase (decrease) in distributions to members payable 8,376 (18,943) Increase in non-controlling interest 800, ,817 1,385,974 CASH FLOW FROM INVESTING ACTIVITIES Net increase (decrease) in loans to members 2,247,817 (2,660,043) Decrease (increase) in investments 76,268 (126,286) Purchase of property, plant and equipment (1,338,777) (1,623,983) Dividend received from equity investment 135, ,500 1,120,308 (4,003,812) CASH FLOW FROM FINANCING ACTIVITIES Net increase (decrease) in members deposits 610,852 11,588,559 Increase in equity shares 80,185 47, ,037 11,636,276 NET INCREASE IN CASH 2,250,162 9,018,438 Cash, beginning of year 35,439,334 26,420,896 CASH, END OF YEAR $ 37,689,496 $ 35,439,334 Operational cash flows from interest and income taxes: Interest paid $ 1,219,877 $ 1,366,887 Interest received $ 4,040,891 $ 4,107,180 Income taxes paid $ 84,452 $ 182,212 See accompanying notes to the consolidated financial statements. 12

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19 Notes To Consolidated Financial Statements

20 NOTES TO DECEMBER 31, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REPORTING ENTITY The Credit Union is incorporated under the laws of British Columbia and is regulated under the Financial Institutions Act of B.C. Its primary business activities include providing financial services to its members and the general public in the Creston Valley from its Creston branch and to a wider group of clients through its jointly owned insurance offices in various locations. Products and services offered to its members include mortgages, personal and commercial loans, chequing and savings accounts, term deposits, RRSP s, RRIF s, mutual funds, automated banking machines, debit and credit cards and internet banking. The Credit Union head office is located at th Avenue North, Creston, British Columbia. The consolidated financial statements for the year ended December 31, 2011 were authorized for issue in accordance with a resolution of the directors. The Board has the authority to amend the financial statements after issue. BASIS OF PRESENTATION These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). This is the first time that the Credit Union has prepared its financial statements in accordance with this basis of accounting, having previously prepared its financial statements in accordance with pre-changeover Canadian Generally Accepted Accounting Principles (GAAP). Details of how the transition from prechangeover Canadian GAAP to IFRS has affected the financial position, financial performance and cash flows are disclosed in Note 21. The Credit Union s functional and presentation currency is the Canadian dollar. The preparation of financial statements using this basis of accounting requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Credit Union s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2. SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits with banks, other short term highly liquid investments; and for the purpose of the statement of cash flows, bank overdrafts that are repayable on demand. Central 1 Deposits These deposit instruments are included in cash and cash equivalents due to their highly liquid nature 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. 15

21 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REPORTING ENTITY, continued Consolidation The consolidated financial statements include the assets, liabilities and the results of operations and cash flows of the Credit Union and its subsidiaries. The subsidiaries included are B4D Investments Ltd., Growth Financial Corp., Acumen Financial Planning Inc. and Creston Place Holdings Ltd. Equity Instruments These instruments are classified as available for sale and are initially recognized at fair value plus transactions 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 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, 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. Non-controlling interest The non-controlling interest value is contingent upon the money invested by the shareholders and the carrying value of the investment property. Member Loans All member loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been classified as loans and receivables. Member loans are initially measured at fair value, net of loan origination fees and inclusive of transaction costs incurred. Member loans are subsequently measured at amortized cost, using the effective interest method, less any impairment. Loans to members are reported at their recoverable amount, representing the aggregate amount of principal, less any allowance or provision for impaired loans plus accrued interest. Interest is accounted for on the accrual basis for all loans. If there is objective evidence that an impairment loss on member loans carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the loans carrying amount and the present value of expected cash flows discounted at the loans original effective interest rate, short-term balances are not discounted. 16

22 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REPORTING ENTITY, continued The Credit Union first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The expected future cash outflows for a group of financial assets with similar credit risk characteristics are estimated based on historical loss experience. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in net income. Bad Debts Written Off Bad debts are written off from time to time as determined by management and approved by the Board of Directors when it is reasonable to expect that the recovery of the debt is unlikely. Bad debts are written off against the provisions for impairment, if a provision for impairment had previously been recognized. If no provision had been recognized, the write offs are recognized as expenses in net income. Loan Securitization For securitization transactions initiated prior to the date of transition to IFRS, in accordance with prechangeover Canadian GAAP, loan securitizations were treated as a sale, provided that control over the transferred loans has been surrendered and consideration other than beneficial interests in the transferred loans has been received in exchange. Gains on these transactions were reported as other income. The amount of these gains are based on the present value of expected future cash flows using management s best estimates and key assumptions such as prepayment rates, excess spread, credit (losses) and discount rates. The Credit Union has a contractual obligation to service the loans on behalf of the transferee. For securitization transactions initiated after the date of transition to IFRS, loans are derecognized only when the contractual rights to receive the cash flows from these assets have ceased to exist or substantially all the risks and rewards of the loans have been transferred. If the criteria for derecognition has not been met, the securitization is reflected as a financing transaction and the related liability is initially recorded at fair value and subsequently measured at amortized costs, using the effective interest method. 17

23 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REPORTING ENTITY, continued Property, Plant and Equipment Property, plant and equipment is initially recorded at cost and subsequently measured at cost less accumulated depreciation and any accumulated impairment (losses), with the exception of land which is not depreciated. Depreciation is recognized in net income and is provided on a straightline basis over the estimated useful life of the assets as follows: Building - 50 years Furniture and equipment - 5, 10 and 20 years Paving - 10 years Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. Investment Property The Credit Union s investment property consists of land and building held to earn rental income. Investment property is initially recorded at cost and subsequently measured at cost less accumulated depreciation and accumulated impairment (losses). Land is not depreciated. Buildings are depreciated on a straight-line basis over their estimated useful life of 50 years. Income Taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date. 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 liabilities / (assets) are settled / (recovered). 18

24 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REPORTING ENTITY, continued Member 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 cost, using the effective interest method. Accounts Payable and Other Payables Liabilities for trade creditors and other payables are classified as other financial liabilities and initially measured at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest method. Provisions Provisions are recognized for liabilities of uncertain timing or amount that have arisen as a result of past transactions, including legal or constructive obligations. The provision is measured at the best estimate of the expenditure required to settle the obligation at the reporting date. Members Shares Members shares issued by the Credit Union are classified as equity only to the extent that they do not meet the definition of a financial liability. Shares that contain redemption features subject to the Credit Union maintaining adequate regulatory capital are accounted for using the partial treatment requirements of IFRIC 2 Members Shares in Cooperative Entities and Similar Instruments. Patronage Distributions Patronage distributions are recognized in net income when circumstances indicate the Credit Union has a constructive obligation it has little or no discretion to avoid, and it can make a reasonable estimate of the amount required to settle the obligation. Revenue Recognition Revenue from the provision of services to members is recognized when earned, specifically when amounts are fixed or can be determined and the ability to collect is reasonably assured. 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 retranslation of monetary available-for-sale financial assets are treated as a separate component of the change in fair value and recognized in net income. Exchange gains and (losses) on non-monetary available-forsale financial assets form part of the overall gain or loss recognized in respect of that financial instrument. 19

25 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REPORTING ENTITY, continued Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars by using the exchange rate in effect at the date of the initial transaction and are not subsequently restated. Non-monetary assets and liabilities that are measured at fair value or a revalued amount are translated into Canadian dollars by using the exchange rate in effect at the date the value is determined and the related translation differences are recognized in net income or other comprehensive income consistent with where the gain or loss on the underlying nonmonetary asset or liability has been recognized. Standards, Amendments and Interpretations Not Yet Effective Certain new standards, amendments and interpretations have been published that are mandatory for the Credit Union s accounting periods beginning on or after January 1, 2012 or later periods that the Credit Union has decided not to early adopt. The standards, amendments and interpretations that will be relevant to the Credit Union are: i. IFRS 9 Financial Instruments is part of the IASB s wider project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets, amortized cost and fair value. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. The standard is effective for annual periods beginning on or after January 1, The Credit Union is in the process of evaluating the impact of the new standard. ii. IFRS 13 Fair Value Measurement defines fair value, provides guidance on the measurement of fair value, and requires disclosures about fair value measurements. IFRS 13 does not determine when an asset, a liability or an entity s own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value (with limited exceptions). The standard is effective for annual periods beginning on or after January 1, The Credit Union is in the process of evaluating the impact of the new standard. iii. IFRS 10 Consolidated Financial Statements establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces the consolidation requirements in SIC-12 Consolidation Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements and is effective for annual periods beginning on or after 1 January IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Credit Union is in the process of evaluating the impact of the new standard. 20

26 2. 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 18. 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 of impairment. Further details on the estimates used to determine the allowance for impaired loans collective provision are provided in Note 6. 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; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities. 21

27 3. CASH AND CASH EQUIVALENTS December 31 December 31 January 1, Liquidity reserve deposit $ 6,011,000 $ 6,881,000 $ 5,756,000 Term deposit 24,320,000 24,000,000 8,251,000 Discount deposits- Canadian 3,165,493 1,240,840 12,173,926 Discount deposits - US 322, ,191 (2,028,630) Total Central 1 Deposits 33,819,294 32,931,031 24,152,296 Concentra financial 2,000, Cash 1,870,202 2,508,303 2,268,600 $ 37,689,496 $ 35,439,334 $ 26,420,896 The Credit Union must maintain liquidity reserves with Central 1 Credit Union (Central 1) at 8% of total assets at December 31 each year. The deposits can be withdrawn only if there is a sufficient reduction in the Credit Union s total assets or upon withdrawal of membership from Central 1. At maturity these deposits are reinvested at market rates for various terms. The carrying amounts for deposits at Central 1 approximate fair value due to having similar characteristics as cash and cash equivalents. The Credit Union s cash and current accounts are held with Central 1. The average yield on the accounts at December 31, 2011 is 1.4% ( %). 4. 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. Equity Instruments Percent December 31 December 31 January 1, Ownership Central 1 Credit Union (shares) $ 417,743 $ 230,972 $ 242,282 CUISA MGA (shares) 10,000 10,000 10,000 CUPP (shares) 42,039 40,078 40,078 Herchmer Insurance Agencies Ltd. (shares) 45% 504, , ,497 Herchmer share in equity 162, ,824 99,706 Stabilization Central Credit Union (shares) Growth Financial Corp. (shares) 3,837 3,837 3,837 Growth Financial Corp. (shareholder loan) 50% 5,379,041 5,644,041 5,506,444 Growth share in (loss) (47,953) (263,123) (177,722) $ 6,472,287 $ 6,309,230 $ 6,229,226 22

28 4. INVESTMENTS, continued 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. In addition, the member credit unions are subject to additional capital calls at the discretion of the Board of Directors of Central 1. Class A Central 1 shares are subject to an annual rebalancing mechanism and are issued and redeemable at par value. There is no separately quoted market value for these shares however, fair value is determined to be equivalent to the par value due to the fact transactions occur at par value on a regular and recurring basis. Class E Central 1 shares are issued with a par value however are redeemable at par at the option of Central 1. There is no separately quoted market value for these shares and the fair value could not be measured reliably. Fair value cannot be measured reliably as the timing of redemption of these shares cannot be determined, therefore, the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably assessed. Therefore, they are recorded at cost. 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. Dividends on these shares are at the discretion of the Board of Directors of Central LOANS TO MEMBERS December 31 December 31 January Residential mortgages $ 42,998,572 $ 44,012,834 $ 43,821,551 Personal loans 6,282,774 7,171,295 7,141,179 Commercial loans 14,660,762 14,991,655 12,524,135 63,942,108 66,175,784 63,486,865 Accrued interest receivable 97, , ,484 64,039,287 66,282,430 63,611,349 Impaired loan allowance, note 6 (239,964) (235,289) (224,252) $ 63,799,323 $ 66,047,141 $ 63,387,097 23

29 5. LOANS TO MEMBERS, continued Terms and Conditions Member loans can have either a variable or fixed rate of interest and they mature within five years. Variable rate loans are based on a prime rate formula, ranging from prime plus 0% to prime plus 5%. The rate is determined by the type of security offered and the members credit worthiness. The Credit Union s prime rate at December 31, 2011 was 3%. The interest rate offered on fixed rate loans being advanced at December 31, 2011 ranges from 3% to 8%. The rate offered to a member varies with the type of security offered and the member s credit worthiness. Residential mortgages are loans and lines of credit secured by residential property and are generally repayable monthly with either blended payments of principal and interest or interest only. Personal loans consist of term loans and lines of credit that are non real estate secured and, as such, have various repayment terms. Some of the personal loans are secured by wage assignments and personal property or investments, and others are secured by wage assignments only. Commercial loans consist of term loans, operating lines of credit and mortgages to individuals, partnerships and corporations, and have various repayment terms. They are secured by various types of collateral, including mortgages on real property, general security agreements, charges on specific equipment, investments, and personal guarantees. Average Yields to Maturity Loans bear interest at both variable and fixed rates with the following averages yields at: Principal 2011 Yield Principal 2010 Yield Variable rate $ 26,601, % $ 22,754, % Fixed, less than 1 year 21,072, % 22,626, % Fixed, 1 to 5 years 63,914, % 63,763, % $ 111,588, % $ 109,144, % 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: Unsecured loans $ 7,227,574 $ 5,318,000 Loans secured by cash, member deposits 305, ,414 Residential mortgages insured by government 3,305,815 3,844,612 $ 10,838,611 $ 9,531,026 24

30 5. LOANS TO MEMBERS, continued Fair Value The fair value of member loans at December 31, 2011 was $ 64,239,451 (December 31, $ 66,487,268, January 1, $ 63,285,313 ). 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 as follows: There are no individual or related groups of members loans which exceed 10% of members equity. All member loans are with members located in and around Creston, BC. 6. ALLOWANCE FOR IMPAIRED LOANS December 31 December 31 January Collective provision $ 75,000 $ - $ - Individual specific provision 164, , ,252 Total provision $ 239,964 $ 235,289 $ 224,252 Movement in individual specific provision and collective provision for impairment: 2011 Personal Commercial Total Balance at January 1, 2011 $ 160,289 $ 75,000 $ 235,289 Recoveries of loans previously written off 4,070-4,070 Provision charged to net income 24,000-24,000 Loans written off (23,395) - (23,395) Balance as at December 31, 2011 $ 164,964 $ 75,000 $ 239,964 25

31 6. ALLOWANCE FOR IMPAIRED LOANS, continued 2010 Personal Commercial Total Balance at January 1, 2010 $ 224,252 $ - $ 224,252 Recoveries of loans previously written off Provision charged to net income (51,000) 75,000 24,000 Loans written off (12,963) - (12,963) Balance as at December 31, 2010 $ 160,289 $ 75,000 $ 235,289 Key Assumptions in Determining the Allowance for Impaired Loans Collective Provision The Credit Union has determined the likely impairment 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. An estimate of the collective provision is based on the portion of repayments that are past due. 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. 26

32 7. PROPERTY, PLANT AND EQUIPMENT Furniture Land Building and equipment Paving Cost Balance Jan 1, 2010 $ 119,652 $ 1,546,074 $ 1,021,566 $ 11,824 Additions - 3,569 12,367 - Disposals Balance Dec 31, 2010 $ 119,652 $ 1,549,643 $ 1,033,933 $ 11,824 Additions - 82,477 33,154 26,864 Disposals Balance Dec 31, 2011 $ 119,652 $ 1,632,120 $ 1,067,087 $ 38,688 Accumulated amortization Balance Jan 1, 2010 $ - $ 501,658 $ 958,946 $ 11,824 Amortization - 31,473 51,517 - Disposals Balance Dec 31, 2010 $ - $ 533,131 $ 1,010,463 $ 11,824 Amortization - 32,334 24,845 1,343 Disposals Balance Dec 31, 2011 $ - $ 565,465 $ 1,035,308 $ 13,167 Net book value January 1, 2010 $ 119,652 $ 1,044,416 $ 62,620 $ - December 31, 2010 $ 119,652 $ 1,016,512 $ 23,470 $ - December 31, 2011 $ 119,652 $ 1,066,655 $ 31,779 $ 25,521 Property plant and equipment net book value totals January 1, 2010 $ 1,226,688 December 31, 2010 $ 1,159,634 December 31, 2011 $ 1,243,607 27

33 8. INVESTMENT PROPERTY B4D Investments Ltd. Land Building Cost Balance Jan 1, 2010 $ 82,018 $ 635,711 Additions - - Disposals - - Balance Dec 31, , ,711 Additions - 54,500 Disposals - - Balance Dec 31, 2011 $ 82,018 $ 690,211 Accumulated amortization Balance Jan 1, 2010 $ - $ 230,096 Amortization - 17,537 Disposals - - Balance Dec 31, ,633 Amortization - 18,096 Disposals - - Balance Dec 31, 2011 $ - $ 265,729 Net book value January 1, 2010 $ 82,018 $ 405,615 December 31, 2010 $ 82,018 $ 388,078 December 31, 2011 $ 82,018 $ 424,482 Rental Income from investment property $ 73,850 $ 81,420 Direct operating costs of investment property: Generating rental income $ 21,112 $ 20,876 28

34 8. INVESTMENT PROPERTY, continued Creston Place Holdings Ltd. Land Building Cost Balance Jan 1, 2010 $ - $ - Additions 360,000 1,248,047 Disposals - - Balance Dec 31, ,000 1,248,047 Additions - 1,141,781 Disposals - - Balance Dec 31, 2011 $ 360,000 $ 2,389,828 Net book value January 1, 2010 $ - $ - December 31, 2010 $ 360,000 $ 1,248,047 December 31, 2011 $ 360,000 $ 2,389,828 Creston Place Holdings is not completely finished as at year end, and as such has not had any expenses or revenues to date. Total Investment Property NBV December 31, December 31, January 1, B4D Investments Ltd $ 506,500 $ 470,096 $ 487,633 Creston Place Holdings Ltd 2,749,828 1,608,047 - $ 3,256,328 $ 2,078,143 $ 487, OTHER ASSETS December 31 December 31 January 1, Prepaid expenses $ 24,927 $ 24,905 $ 332 Other accounts receivable 25,452 17,255 47,017 $ 50,379 $ 42,160 $ 47,349 29

35 10. MEMBERS DEPOSITS December 31 December 31 January 1, Chequing $ 32,588,680 $ 30,795,865 $ 29,162,169 Demand 15,124,315 14,756,486 13,442,101 Term 34,533,056 37,378,483 30,707,471 Registered savings plans 9,537,175 9,512,535 9,133,771 Tax-free savings accounts 3,426,775 2,121, ,202 Accrued interest 719, , ,878 Non-equity shares 37,951 40,330 40,923 $95,967,926 $95,357,075 $83,768,515 Terms and Conditions Chequing deposits are due on demand and do not bear interest. Demand deposits are due on demand and bear interest at a variable rate up to 0.25% axt December 31, Interest is calculated daily and paid on the accounts monthly. Term deposits bear fixed rates of interest for terms of up to five years. Interest can be paid annually, semi-annually, monthly or upon maturity. The interest rates offered on term deposits issued on December 31, 2011 range from 0.25% to 1.50%. The registered retirement savings plans (RRSP) accounts can be fixed or variable rate. The fixed rate RRSPs have terms and rates similar to the term deposit accounts described above. The variable rate RRSPs bear interest at rates up to 1.00% at December 31, Registered retirement income funds (RRIFs) consist of both fixed and variable rate products with terms and conditions similar to those of the RRSPs described above. Members may make withdrawals from a RRIF account on a monthly, semiannual, or annual basis. The regular withdrawal amounts vary according to individual needs and statutory requirements. The tax-free savings accounts can be fixed or variable rate with terms and conditions similar to those of the RRSPs described above. Included in chequing deposits is an amount of $2,271,235 denominated in US dollars. Fair Value The fair value of member deposits at December 31, 2011 was $95,913,262 (December 31, $95,302,411, January 1, $84,113,970 ). 30

36 10. MEMBERS DEPOSITS, continued The estimated fair value of the demand deposits and variable rate deposits are assumed to be equal to book value as the interest rates on these loans and deposits re-price to market on a periodic basis. The estimated fair value of fixed rate deposits is determined by discounting the expected future cash flows of these deposits at current market rates for products with similar terms and credit risks. Average Yields to Maturity Members deposits bear interest at both variable and fixed rates with the following average yields at: Principal 2011 Yield Principal 2010 Yield Variable rate $ 67,586, % $ 62,891, % Fixed, less than 1 year 23,824, % 17,683, % Fixed, 1 to 5 years 20,177, % 28,570, % $ 111,588, % $ 109,144, % 11. PENSION PLAN The Credit Union participates in a defined contribution pension plan. Employees are eligible to enrol in the pension plan after one year of full time employment. Employee contributions are based on a percentage of salary and matched by the Credit Union. The pension expense is therefore limited to the amount of the Credit Union s annual contributions. 31

37 12. INCOME TAXES The significant components of tax expense included in net income are composed of: Current tax expense Based on current year taxable income $ 109,043 $ 134,093 Deferred tax expense Origination and reversal of temporary differences 12,608 (5,788) Total income tax expense $ 121,651 $ 128,305 Reasons for the difference between tax expense for the year and the expected income taxes based on the statutory tax rate of 31% ( %) are as follows: Income before income from equity investment for the year $ 617,868 $ 692,655 Expected taxes based on the statutory rate of 31% 191, ,723 Reduction due to small business deduction (85,000) (85,000) Capital cost allowance in excess of depreciation (24,543) 10,764 Other non deductible portion of expenses 11,295 10,900 Change in tax rates 28,360 (23,082) Total income tax expense $ 121,651 $ 128,305 Changes to the federal and provincial tax rates were announced in 2010 which resulted in an adjustment to the opening carrying value of temporary differences. The reduction in deferred income tax payable is reflected in deferred income taxes. 32

38 12. INCOME TAXES, continued The movement in 2011 deferred tax liabilities and assets are:: Deferred tax liabilities Balance Recognize Recognize Closing Jan 1, 2011 in Net Directly in Balance Income AOCI Dec 31, 2011 Property, plant and equipment $ 37,556 $ 12,608 $ - $ 50,164 The movement in 2010 deferred tax liabilities and assets are: Deferred tax liabilities Balance Recognize Recognize Closing Jan 1, 2010 in Net Directly in Balance Income AOCI Dec 31, 2010 Property, plant and equipment $ 43,344 $ (5,788) $ - $ 37,556 Investment related adjustments 2,566 - (2,566) - Deferred tax liability $ 45,910 $ (5,788) $ (2,566) $ 37, EQUITY SHARES December 31 December 31 January 1, Class A Membership Equity Shares Under the Credit Union rules, members are required to hold at least 25 membership equity shares with a par value of $1 per equity share. $ 158,660 $ 158,802 $ 157,030 Class C Voluntary Equity Shares Voluntary equity shares pay dividends in the form of additional shares of the same class. These shares are redeemable, subject to the discretion of the board of directors with a par value of $1 per equity share. 3,764,602 3,684,276 3,638,330 $ 3,923,262 $ 3,843,078 $ 3,795,360 Patronage or Investment shares are recognized as a liability, equity or compound instrument based on the terms and in accordance with IAS 32, Financial Instrument Presentation and IFRIC 2 Members Shares in Cooperative Entities and Similar Instruments. If they are classified as equity, they are recognized at cost. If they are recognized as liability, they are initially recognized at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method. 33

39 13. EQUITY SHARES, continued Terms and Conditions Membership Shares As a condition of membership, which is required to use the services of the Credit Union, each member is required to hold $25 in membership shares. These membership shares are redeemable at par only when a membership is withdrawn. Dividends are at the discretion of the Board of Directors. Funds invested by members in member shares are not insured by CUDIC. The withdrawal of member shares is subject to the Credit Union maintaining adequate regulatory capital (see Note 18), as is the payment of any dividends on these shares. Membership shares that are available for redemption are classified as a liability. Any difference between the total membership shares and the liability amount are classified as equity. 14. OTHER INCOME Rental income $ 73,850 $ 81,420 Commissions and fees 495, ,737 Gains on investments - 3,717 Mortgage penalties 80,065 44,530 Miscellaneous 8,484 4,042 Foreign exchange gain 158, ,067 $ 816,833 $ 938,513 34

40 15. ADMINISTRATIVE AND GENERAL Amortization $ 24,845 $ 51,517 Audit and legal 32,161 39,635 Chequing and service charges 69,349 80,966 Courier service 35,515 29,323 Data processing 206, ,289 Defined contribution pension plan 59,320 55,973 Deposit and share insurance 913 1,092 Directors and committees 77,969 85,505 Dues, fees and licences 104,838 85,760 Insurance 13,321 10,327 Office and telephone 107, ,434 Promotion and advertising 69, ,922 Provision for losses on loans 19,807 21,215 Rental equipment and maintenance 15,208 22,208 Salaries and benefits 1,406,090 1,423,798 Sundry 131,575 89,357 Staff travel and education 15,047 10, OCCUPANCY $ 2,390,394 $ 2,400, Amortization $ 51,773 $ 49,010 Insurance 12,035 5,799 Maintenance 55,640 34,165 Property taxes 34,740 36,509 Utilities 16,440 15,812 $ 170,628 $ 141,295 35

41 17. RELATED PARTY TRANSACTIONS The Credit Union entered into the following transactions with key management personnel, which are defined by IAS 24, Related Party Disclosures, as those persons having authority and responsibility for planning, directing and controlling the activities of the Credit Union, including directors and management Compensation Salaries and other short-term employee benefits $ 415,413 $ 446,944 Total pension and other post-employment benefits 25,979 30,216 $ 441,392 $ 477, Loans to key management personnel Aggregate value of loans advanced $ 703,621 $ 786,155 Interest received on loans advanced $ 39,948 $ 42,181 Total value of lines of credit advanced $ 104,167 $ 83,982 Interest received on lines of credit advanced $ 2,183 $ 2,592 Unused values of lines of credit $ 119,873 $ 140,057 The Credit Union s policy for lending to key management personnel is that the loans are approved and deposits accepted on the same terms and conditions which apply to Members for each class of loan or deposit Deposits from key management personnel Aggregate value of term and savings deposits $ 604,230 $ 548,529 Total interest paid on term and savings deposits $ 1,280 $ 1,739 The Credit Union s policy for receiving deposits from key management personnel is that all transactions are approved and deposits accepted on the same terms and conditions which apply to Members for each type of deposit. There are no benefits or concessional terms and conditions applicable to key management personnel or close family members. 36

42 18. FINANCIAL INSTRUMENT RISK MANAGEMENT, continued For the current year, the amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated is nil. A sizeable portfolio of the loan book is secured by residential property in Creston, BC. Therefore, the Credit Union is exposed to the risks in reduction of the loan to valuation ratio (LVR) cover should the property market be subject to a decline. The risk of (losses) from loans undertaken is primarily reduced by the nature and quality of the security taken. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Liquidity Risk Liquidity risk is the risk that the Credit Union will not be able to meet all cash outflow obligations as they come due. The Credit Union mitigates this risk by monitoring cash activities and expected outflows so as to meet all cash outflow obligations as they fall due. Risk Measurement The assessment of the Credit Union s liquidity position reflects management s estimates, assumptions and judgments pertaining to current and prospective firm specific and market conditions and the related behaviour of its members and counterparties. Objectives, Policies and Procedures The Credit Union s liquidity management framework is designed to ensure that adequate sources of reliable and cost effective cash or its equivalents are continually available to satisfy its current and prospective financial commitments under normal and contemplated stress conditions. Provisions of the Financial Institutions Act require the Credit Union to maintain a prudent amount of liquid assets in order to meet member withdrawals. The credit union has set a minimum liquidity ratio of 12%. The Credit Union manages liquidity risk by: Continuously monitoring actual daily cash flows and longer term forecasted cash flows; Monitoring the maturity profiles of financial assets and liabilities; Maintaining adequate reserves, liquidity support facilities and reserve borrowing facilities; and Monitoring the liquidity ratios monthly. The Board of Directors receives monthly liquidity reports as well as information regarding cash balances in order for it to monitor the Credit Union s liquidity framework. The Credit Union was in compliance with the liquidity requirements throughout the fiscal year. As at December 31, 2011, the position of the Credit Union is as follows: Maximum Exposure Qualifying liquid assets on hand Cash $ 4,558,442 Discount deposits and term deposits 32,456,000 37,014,442 Total liquidity requirement 6,011,000 Excess liquidity requirement $ 31,003,442 37

43 18. FINANCIAL INSTRUMENT RISK MANAGEMENT, continued The maturities of liabilities are shown below under market risk. The Credit Union has no material commitments for capital expenditures and there is no need for such expenditures in the normal course of business. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of market factors. Market factors include three types of risk: interest rate risk, currency risk, and equity risk. Interest Rate Risk Interest rate risk is the potential for financial loss caused by fluctuations in fair value or future cash flows of financial instruments because of changes in market interest rates. The Credit Union is exposed to this risk through traditional banking activities, such as deposit taking and lending. The Credit Union s goal is to manage the interest rate risk of the statement of financial position to a target level. The Credit Union continually monitors the effectiveness of its interest rate mitigation activities. Risk Measurement The Credit Union s position is measured monthly. Measurement of risk is based on rates charged to clients as well as funds transfer pricing rates. Objectives, Policies and Procedures The Credit Union s major source of income is financial margin, the difference between interest earned on investments and members loans and interest paid on member deposits. The objective of asset / liability management is to match interest sensitive assets with interest sensitive liabilities as to amount and as to term to their interest rate repricing dates, thus minimizing fluctuations of income during periods of changing interest rates. Schedules of matching and interest rate vulnerability are regularly prepared and monitored by Credit Union management and reported to the Financial Institutions Commission in accordance with the Credit Union s policy. This policy has been approved by the Board of Directors and filed with the Financial Institutions Commission as required by Credit Union regulations. For the year-ended 2011, the Credit Union was in compliance with this policy. 38

44 18. FINANCIAL INSTRUMENT RISK MANAGEMENT, continued The following schedule shows the Credit Union s sensitivity to interest rate changes. Amounts with floating rates or due or payable on demand are classified as maturing within three months, regardless of maturity. A significant amount of loans and deposits can be settled before maturity on payment of a penalty, but no adjustment has been made for repayments that may occur prior to maturity. Amounts that are not interest sensitive have been grouped together, regardless of maturity. PERIOD TO MATURITY Not Within 4 months Over 1 Interest (All figures in 000 s) 3 months to 1 year to 5 years Sensitive Total Assets Cash resources and loans $ 1,760 $ 19,313 $ 63,915 $ 16,500 $101,488 Investments and other ,626 9,626 Premises and equipment ,244 1,244 1,760 19,313 63,915 27, ,358 Liabilities and equity Deposits 6,227 17,598 20,178 51,828 95,831 Other liabilities ,042 2,042 Members equity ,485 14,485 6,227 17,598 20,178 68, ,358 Interest sensitivity position $ (4,467) $ 1,715 $ 43,737 $ (40,985) $ - Interest sensitivity position $ (1,997) $ 6,941 $ 35,193 $ (40,137) $ - Interest sensitive assets and liabilities cannot normally be perfectly matched by amount and term to maturity. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Currency Risk Currency risk relates to the Credit Union operating in different currencies and converting non Canadian dollar earnings at different points in time at different foreign exchange levels when adverse changes in foreign currency exchange rates occur. The Credit Union s foreign exchange risk is related to United States dollar deposits and loans denominated in United States dollars. Foreign currency changes are continually monitored by the investment committee for effectiveness of its foreign exchange mitigation activities and holdings are adjusted when offside of the investment policy. 39

45 18. FINANCIAL INSTRUMENT RISK MANAGEMENT, continued Risk Measurement The Credit Union s position is measured weekly. Measurement of risk is based on rates charged to clients as well as currency purchase costs. Objectives, Policies and Procedures The Credit Union s exposure to changes in currency exchange rates shall be controlled by limiting the unhedged foreign currency exposure to $400,000 in U.S. funds. For the year-ended December 31, 2011, the Credit Union s exposure to foreign exchange risk is within policy. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Equity Risk Equity risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. The Credit Union is exposed to this risk through its equity holdings. Equities are monitored by the Board of Directors and holdings are adjusted following each quarter when the investments are offside of the investment policy. 19. CAPITAL MANAGEMENT The Credit Union s objectives with respect to capital management are to maintain a capital base that is structured to exceed regulatory requirements and to best utilize capital allocations. Regulations to the Financial Institutions Act ( The Act ) require that the Credit Union establish and maintain a level of capital that meets or exceeds the following: Capital calculated in accordance with the Act shall not be less than 8% of the risk weighted value of its assets. The Credit Union considers its capital to include members equity shares (patronage shares, investment shares), and undivided earnings. There have been no changes in what the Credit Union considers to be capital since the previous period. The Credit Union establishes the risk weighted value of its assets in accordance with the Regulations of Financial Institutions Act which establishes the applicable percentage for each class of assets. The Credit Union s risk weighted value of its assets as at December 31, 2011 was $37,930,045. As at December 31, 2011, the Credit Union met the capital requirements of the Act with a calculated capital adequacy ratio of 41.45%. Regulatory capital consists of the following: Tier 1 Capital Members equity $ 4,388,790 $ 4,300,228 Retained earnings 10,612,737 9,742,197 Deferred income taxes 50,164 37,556 15,051,691 14,079,981 Tier 2 Redeemable portion of other member shares 698, ,295 Total regulatory capital $ 15,749,724 $ 14,798,276 40

46 20. COMMITMENTS Credit Facilities The Credit Union has authorized lines of credit with Central 1 totaling $3,000,000. This credit facility is secured by a registered assignment of book debts and a general security agreement covering all assets of the Credit Union. Member Loans The Credit Union has the following commitments to its members at the year-end date on account of loans, unused lines of credit and letters of credit: Unadvanced loans $ 966,243 Unused lines of credit $ 6,644,666 Letters of credit $ 68,500 Contractual Obligations The Credit Union has an agreement with CDSL Canada Limited which provides the Credit Union with data processing services and access to various automated banking machines and electronic funds transfer at point of sale networks. The agreement expires December 31, Creston Place Holdings Ltd. has entered into a stipulated price contract with T.A. Rendek & Associates Ltd for the construction of Creston Place located at 1230 Canyon Street, Creston, B.C. for the amount of $2,062,361. The outstanding contract balance as of December 31, 2011 is $60,190. T.A. Rendek & Associates Ltd. is owned by an immediate family member of a Creston Place Holdings Ltd. shareholder. 21. FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS IFRS 1, First Time Adoption of International Financial Reporting Standards, requires that comparative financial information be provided. As a result, the first date at which the Credit Union has applied IFRS was January 1, 2010 (the Transition Date ). IFRS 1 requires first-time adopters to retrospectively apply all effective IFRS standards as of the reporting date, which for the Credit Union will be December 31, Therefore, the financial statements for the year-ended December 31, 2011, the comparative information presented in these financial statements for the year-ended December 31, 2010 and the opening IFRS statement of financial position at January 1, 2010 are prepared in accordance with IFRS standards effective at the reporting date. There were no adjustments from the pre-changeover Canadian GAAP to IFRS. 41

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48 STAFF & FACULTY board of directors MANAGEMENT & STAFF 43

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52 140 11th Ave. N Creston, BC V0B 1G0