The Police Credit Union Limited

Transcription

1 Financial Statements For the year ended December 31, 2015

2 Financial Statements For the year ended December 31, 2015 Contents Independent Auditor's Report 2 Financial Statements Balance Sheet 3 Statement of Changes in Members' Equity 4 Statement of Operations 5 Statement of Comprehensive Income 6 Statement of Cash Flows 7 8

3 Independent Auditor's Report To the Members of We have audited the accompanying financial statements of, which comprise the balance sheet as at December 31, 2015 and the statements of changes in members equity, operations, comprehensive income and cash flows for the year then 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 is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control 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 purposes 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 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, the financial statements present fairly in all material respects, the financial position of The Police Credit Union Limited as at December 31, 2015 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Jones & O'Connell LLP Chartered Professional Accountants Licensed Public Accountants February 22, 2016 St. Catharines, Ontario 2

4 Balance Sheet December 31 Assets Cash Investments (Note 4) Loans to members (Note 5) Other assets (Note 6) Property and equipment (Note 7) 2,118,915 22,775, ,408,948 1,493,823 2,079, ,876,916 $ 3,532,9O8 21,130, ,355, ,216 1,442,776 $ 248,136,297 Liabilities and Members Equity Members deposits (Note 8) Borrowings (Note 9) Other current liabilities Provisions (Note 10) Membership shares qualifying as liabilities (Note 11) 240,228,040 5,000,000 1,144, ,100 1,220, ,878,588 $ 230,126,991 5,181, , ,100 1,214, ,497,031 Members Equity Undivided earnings Accumulated other comprehensive income 10,623, ,794 10,998, ,876,916 10,298, ,717 10,639,266 $ 248,136,297 On behalf of the Board: Director Director The accompanying notes are an integral part of these financial statements 3

5 Statement of Changes in Members' Equity Undivided earnings Accumulated Other Comprehensive Income Members' Equity Balance, December 31, 2013 $ 10,049,271 $ 296,675 $ 10,345,946 Comprehensive income 249,278 44, ,320 Balance, December 31, ,298, ,717 10,639,266 Comprehensive income 324,985 34, ,062 Balance, December 31, 2015 $ 10,623,534 $ 374,794 $ 10,998,328 The accompanying notes are an integral part of these financial statements 4

6 Statement of Operations For the year ended December 31 Operating Revenue Interest on loans (Note 5) $ 7,743,390 $ 7,874,916 Investment income 349, ,901 8,092,751 8,217,817 Interest Expense Interest on members' deposits (Note 8) 2,794,504 2,741,095 Member rebates 33,041 34,168 Other interest expense 54,112 86,320 2,881,657 2,861,583 Financial Margin 5,211,094 5,356,234 Other Operating Items Provision for losses on loans (Note 5) (79,219) (69,228) Foreign exchange loss (254,178) (58,166) Other income 1,361,603 1,335,556 Operating Margin 6,239,300 6,564,396 Operating Expenses Administrative 2,410,843 2,440,330 Amortization of property and equipment 308, ,533 DICO insurance 176, ,060 Salaries and benefits 2,993,173 3,156,512 5,889,343 6,278,435 Income Before Income Tax Expense 349, ,961 Income Tax Expense (Note 12) Current (24,972) (36,683) Net Income for the Year $ 324,985 $ 249,278 The accompanying notes are an integral part of these financial statements 5

7 Statement of Comprehensive Income For the year ended December 31 Net Income for the Year $ 324,985 $ 249,278 Other Comprehensive Income Unrealized gain on investment classified as available for sale 34,077 44,042 Comprehensive Income for the Year $ 359,062 $ 293,320 The accompanying notes are an integral part of these financial statements 6

8 Statement of Cash Flows For the year ended December 31 Cash Provided By (Used In) Operating Activities Net income for the year $ 324,985 $ 249,278 Adjustments for: Operating revenue (8,092,751) (8,217,817) Interest expense 2,881,657 2,861,583 Provision for losses on loans 79,219 69,228 Amortization of property and equipment 308, ,533 Current income tax expense 24,972 36,683 (4,473,568) (4,561,512) Change in other assets, other current liabilities and provision (388,116) (134,912) Increase in loans to members (9,167,521) (7,198,688) Increase in members' deposits 10,231,899 7,463,825 1,064, ,137 Interest received on loans to members 7,778,679 7,867,474 Interest paid on members' deposits and member rebates (2,958,395) (2,690,152) Income taxes received - - 4,820,284 5,177,322 Cash provided by operating activities 1,022, ,035 Investing Activities (Increase) decrease in investments (1,620,891) 2,322,316 Interest received on investments 359, ,278 Purchase of property and equipment (945,034) (120,529) Net cash provided by (used in) investing activities (2,206,904) 2,549,065 Financing Activities Decrease in borrowings (181,783) (2,318,217) Interest paid on borrowings (54,112) (86,320) Increase in membership shares 5,828 7,438 Net cash used in financing activities (230,067) (2,397,099) Increase (Decrease) in Cash (1,413,993) 898,001 Cash, beginning of year 3,532,908 2,634,907 Cash, end of year $ 2,118,915 $ 3,532,908 The accompanying notes are an integral part of these financial statements 7

9 1. Nature of Operations The credit union is incorporated under the Credit Unions and Caisses Populaires Act, 1994 ("The Act") and is a member of Central 1 Credit Union ("Central"). 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 loans, chequing and savings accounts, term deposits, RRSPs, RRIFs, TFSAs, mutual funds, automated banking machines ("ABMs"), debit and credit cards and internet banking. The head office of the credit union is 105 Gordon Baker Road, Suite 222, Toronto, Ontario, M2H 3P8. 2. Basis of Presentation The credit union's financial statements have been prepared in accordance with and using accounting policies in full compliance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ). The financial statements for the year ended December 31, 2015 have been approved for issue by the Board of Directors on February 22, The credit union s financial statements have been prepared on the historical cost convention, except for certain financial instruments, which are measured at fair value, as explained in the significant accounting policies set out in Note 3. The financial statements are presented in Canadian dollars, which is the credit union's functional and presentation currency. 3. Significant Accounting Policies Financial Instruments Financial instruments are initially recognized at their fair value on a trade date basis when the credit union becomes a party to the contractual provisions of the financial instrument or nonfinancial derivative contract, plus related transactions costs and/or associated revenues, for items not held at fair value through profit and loss. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent measurement of financial instruments is based on the category as follows. 8

10 3. Significant Accounting Policies (Continued) Financial Instruments (Continued) a) Fair Value through Profit and Loss Liquid investments other than liquidity reserve investments have been designated as financial assets at fair value through profit and loss and recorded on the balance sheet at fair value, with any changes in fair value being recorded in investment income. The fair value of liquid investments other than liquidity reserve investments is calculated using a discounted cash flow approach, with the discount rate being the market rate, at or near year end, for an investment with a similar maturity. The cost of financial assets designated at fair value through profit and loss can be found in Note 16. b) Held to Maturity Liquid investments held as liquidity reserves are classified as held to maturity and are recorded on the balance sheet at amortized cost, with interest being recorded in net income using the effective interest method. Liquid investments held as liquidity reserves are only written down for significant declines in market value that are considered to be other than temporary in nature. The fair value of liquid investments held as liquidity reserves is calculated using a discounted cash flow approach, with the discount rate being the market rate, at or near year end, for an investment with a similar maturity. The fair value of held to maturity financial assets can be found in Note 16. c) Loans and Receivables Loans to members and accounts receivable are classified as loans and receivables and recorded on the balance sheet at amortized cost, with interest being recorded in net income using the effective interest method. The fair value of variable rate loans approximate their recorded values given that they are linked to the prime rate, which is the benchmark on which the market prices loans. The fair value of fixed rate mortgages is calculated using a discounted present value cash flow approach on each fixed rate mortgage, based on individual maturity date, payment terms, with no early repayments and no credit losses. The discount rate is the interest rate of each individual fixed rate mortgage plus the difference between the average bond rate as of the funding or renewal date of the loan and the average bond rate at the end of the reporting period. The average bond rate used at period end is based on the remaining loan maturity. The fair value of fixed rate loans is calculated using a discounted cash flow approach on each fixed rate loan, based on individual maturity date, payment terms, with no early repayments and no credit losses. The discount rate is the interest rate of each individual fixed rate loan plus the difference between the prime rate as of the fund/renewal date and the prime rate at the end of the reporting period. The fair value of accounts receivable approximates its cost given its short-term maturity as it is expected to be recovered in one year. The fair value of loans and receivables can be found in Note 16. 9

11 3. Significant Accounting Policies (Continued) Financial Instruments (Continued) d) Available for Sale Class A Shares - Central, Class E Shares - Central, CUCO Co-operative Association Class B Investment Shares and Co-operators Group Limited preference shares have been classified as available for sale financial assets, as they do not have a quoted price in active market. Any changes in fair value are recorded in other comprehensive income unless fair value is not reliably determinable, in which case the investments are carried at cost, which is meant to represent market. Where there is a significant or prolonged decline in the fair value of these instruments (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. The fair value of Class A Shares - Central, Class E Shares - Central and Co-operators Group Limited preference shares cannot be reliably determined and as such are carried at cost, which approximates market. The fair value of CUCO Cooperative Association Class B Investment Shares are calculated using the net asset value per share as provided by the board of directors of the association, which is calculated using a valuation method based on anticipated future cash flows of the underlying investments held by the association. The cost of financial assets classified as available for sale can be found in Note 16. Cash has been designated as an available for sale financial asset, with any changes in fair value recorded in other comprehensive income. The fair value of cash approximates its cost given its short-term maturity as it is expected to be recovered in one year. The cost of financial assets designated as available for sale can be found in Note 16. e) Other Financial Liabilities Members' deposits, borrowings, other current liabilities and membership shares qualifying as liabilities are classified as other financial liabilities and are recorded on the balance sheet at amortized cost, with interest being recorded in net income using the effective interest method. The fair value of demand deposits approximates their recorded values as they can be withdrawn at any time without penalty or notice. The fair value of each individual fixed maturity deposit is calculated using a discounted cash flow approach, with the discount rate applied being the highest market rate noted being offered, at or near year end, for a deposit with a similar maturity date, by other financial institutions. The fair value of borrowings is calculated using a discounted cash flow approach, with the discount rate being the market rate, at or near year end, for borrowings with a similar maturity. The fair value of other current liabilities approximates their cost due to their short-term maturities. The fair value of membership shares qualifying as liabilities approximates their recorded values as they can be withdrawn at any time without penalty or notice. The fair value of other financial liabilities can be found in Note

12 3. Significant Accounting Policies (Continued) Allowance for Impaired Loans Loans to members are recorded at their recoverable amount, net of any allowance for impaired loans. If there is objective evidence that an impairment loss on loans to members carried at amortized cost has been incurred, the amount of the loss is measured at the difference between the loan's carrying amount and the present value of the expected cash flows discounted at the ordinal effective interest rate. Short-term balances are not discounted. The credit union first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The expected future cash outflows for a group of financial assets with similar credit risk characteristics are estimated based on historical loss experience. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in net income. Loans to members are written off as determined by management and approved by the board of directors when it is reasonable to expect that the recovery of the loan is unlikely. Loans to members are written off against the allowance for impaired loans if a provision for impairment has been previously recognized. If no provision had been recognized, the write off is recognized in net income. Membership Shares Membership shares are accounted for using the partial treatment requirements of IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments. 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. In accordance with IFRIC 2, dividends to holders of equity instruments are recognized directly in equity, net of income tax benefits. Interest, dividends and other returns relating to financial instruments classified as financial liabilities are expenses, regardless of whether those amounts paid are legally characterized as dividends, interest or otherwise. 11

13 3. Significant Accounting Policies (Continued) Property and Equipment The credit union provides amortization on its property and equipment using the straight line method at the rates set out below, designed to amortize costs over the expected useful life of the respective assets. Annual amortization on additions is prorated based on the month of addition. Amortization is not taken on items not in use. Building and improvements 5% Leasehold and capital improvements 8% to 10% Furniture and equipment 10% to 30% Computer, telephone and ATM equipment 20% to 33% Plan 24 Life Savings Provision A provision for Plan 24 savings life insurance program is for those eligible members that maintain a minimum required balance. The provision is based on current eligible members, discount rate and a weighting of all possible outcomes against their associated probabilities. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. Revenue Recognition Interest on loans and investments is recognized as earned at the end of each month and when ultimate collection is reasonably assured. Investment income relating to dividends on shares is recognized when declared by the related company and when ultimate collection is reasonably assured. Foreign Exchange Translation Assets and liabilities denominated in foreign currencies, primarily US dollars, are translated into Canadian dollars at rates prevailing at the year end date. Income and expenses are translated at the exchange rates in effect on the date of the transaction. Exchange gains and losses arising on the translation of monetary items are reported under other operating items for the year. Income Tax The credit union follows the liability method of income tax allocation. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. 12

14 3. Significant Accounting Policies (Continued) 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. Estimates and assumptions that have a significant risk of causing material adjustment to the carrying value of assets and liabilities within the next financial year are discussed below: Allowance for Impaired Loans In determining whether an impairment loss should be recorded, 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 impairment loss. In determining the collective allowance, management uses estimates based on historical loss experience for assets with similar credit risk characteristics and objective evidence of impairment. Plan 24 Life Savings Insurance Provision The credit union determines its provision for Plan 24 Life Savings Insurance program through the application of actuarial techniques, which are significantly affected by assumptions used, including discount rates and estimates of members' mortality and maintenance of eligibility in the program. The derived provision amount may not necessarily be indicative of what the true cost of the program will be in the long-term and may vary by a material amount. 13

15 December 31, Investments Carrying Value Effective Rate Carrying Value Effective Rate Maturing within one year Liquidity reserve - discount deposits - Central $ 4,318, % $ 7,111, % Term deposits - Central 3,000, % 2,000, % Maturing at various dates beyond one year Liquidity reserve- discount deposits - Central 11,349, % 8,001, % Total liquid investments 18,667, % 17,112, % Accrued interest receivable 159, ,823 Non-liquid investments Class A Shares - Central 945, ,680 Class E Shares - Central 929, ,900 CUCO Co-operative Association Class B investment shares 568, ,568 Co-operators Group Limited preference shares 1,500, % 1,500, % Credential securities 5,000 5,000 $ 22,775,770 $ 21,130,462 Accrued interest receivable is expected to be recovered within one year. All of the non-liquid investments are expected to be recovered at dates beyond one year. As a condition of membership in Central, a liquidity reserve deposit with Central must be maintained at 6% of the credit union's total assets revised each calendar quarter. The deposit can be withdrawn only if there is a sufficient reduction in the credit union's own member shares and deposits or upon withdrawal of membership from Central. At maturity, these deposits are re-invested at market rates for various terms as determined by management. Central rebalances the shareholdings of its Class A members quarterly based on the proportion of each credit union's assets to the total assets of all of Central's Class A members as reported in their most recent audited financial statements. Dividends on these shares are at the discretion of the Board of Directors of Central. Class E shares have a redemption value of $100 per share. Dividends on these shares are at the discretion of the Board of Directors of Central. 14

16 5. Loans to Members Residential mortgages $ 211,847,290 $ 202,619,999 Personal loans 18,547,984 18,707, ,395, ,327,607 Accrued interest receivable 108, ,936 Allowance for impaired loans (94,973) (115,608) Net loans to members $ 230,408,948 $ 221,355,935 Accrued interest receivable is expected to be recovered within one year. Member loans can have either a variable or fixed rate of interest and have terms up to ten years. Variable rate loans are based on a "prime rate plus" formula with the rate above prime being determined by the size of the loan, the type of security offered, the purpose of the loan and the member's credit worthiness. The credit union's prime rate at December 31, 2015 is 2.70%. Interest rates offered on fixed rate loans vary depending on the size of the loan, the type of security offered, the purpose of the loan, the member's credit worthiness and the loan term. The credit union accepts security on member loans in the form of registered mortgage charges on real property, registered assignments of personal property and member deposits with the credit union. Residential mortgage loans are secured by residential property and have various repayment terms. Included under residential mortgage loans are $82,134,384 of loans insured by the Canadian Mortgage and Housing Insurance Corporation, Canada Guaranty First Mortgage and Genworth First Mortgage. ($87,331,503 in 2014). The term to maturity and yield ranges of the loan portfolio are as follows: Principal Yield Principal Yield Variable rate due less than one year $ 48,081, % $ 32,578, % Variable rate due more than one year 10,152, % 23,636, % Fixed rate due less than one year 16,838, % 18,775, % Fixed rate due more than one year 155,322, % 146,336, % $ 230,395,274 $ 221,327,607 15

17 December 31, Loans to Members (Continued) Interest on loans to members Residential mortgages $ 6,565,711 $ 6,690,768 Personal loans 1,177,679 1,184,148 $ 7,743,390 $ 7,874,916 Allowance for Impaired Loans 2015 Residential Mortgages Personal Loans Total Opening balance $ - $ 115,608 $ 115,608 Recoveries on loans previously written off - 14,640 14,640 Provision charged to operations - 79,219 79,219 Loans written off - (114,494) (114,494) Ending balance $ - $ 94,973 $ 94,973 Gross principal balance of impaired loans $ 1,229,282 $ 47,372 $ 1,276, Residential Mortgages Personal Loans Total Opening balance $ - $ 125,682 $ 125,682 Recoveries on loans previously written off - 18,622 18,622 Provision charged to operations - 69,228 69,228 Loans written off - (97,924) (97,924) Ending balance $ - $ 115,608 $ 115,608 Gross principal balance of impaired loans $ 398,972 $ 104,909 $ 503, Other Assets Accounts receivable $ 872,309 $ 188,871 Prepaid expenses 323, ,825 Deferred income taxes recoverable (Note 12) 297, ,520 $ 1,493,823 $ 674,216 Accounts receivable and prepaid expenses are expected to be recovered within the next year. Deferred income taxes recoverable are expected be recovered at dates greater than one year. 16

18 7. Property and Equipment Land Building and Improvements Leasehold and Capital improvements Furniture and Equipment Computer, Telephone and ATM Equipment Total Cost Balance as at December 31, 2013 $ 671,335 $ 1,199,483 $ 1,296,227 $ 1,080,563 $ 2,328,554 $ 6,576,162 Additions ,082 8,266 78, ,529 Disposal (207,232) (383,940) (591,172) Balance as at December 31, ,335 1,199,483 1,330, ,597 2,022,795 6,105,519 Additions , ,329 78, ,034 Balance as at December 31, 2015 $ 671,335 $ 1,199,483 $ 2,085,353 $ 992,926 $ 2,101,456 $ 7,050,553 Accumulated Amortization Balance as at December 31, 2013 $ - $ 1,107,186 $ 873,671 $ 966,120 $ 1,867,405 $ 4,814,382 Amortization - 56,842 96,065 29, , ,533 Disposal (207,232) (383,940) (591,172) Balance as at December 31, ,164, , ,055 1,740,924 4,662,743 Amortization - 35,455 95,724 30, , ,350 Balance as at December 31, 2015 $ - $ 1,199,483 $ 1,065,460 $ 818,400 $ 1,887,750 $ 4,971,093 Net Book Value Balance as at December 31, 2014 $ 671,335 $ 35,455 $ 360,573 $ 93,542 $ 281,871 $ 1,442,776 Balance as at December 31, 2015 $ 671,335 $ - $ 1,019,893 $ 174,526 $ 213,706 $ 2,079,460 No amortization has been taken on $759,762 of additions included in leasehold and capital improvements related to the Toronto branch and corporate office that were under construction at the end of the year. Property and equipment are expected be recovered at dates greater than one year. 17

19 8. Members' Deposits Chequing $ 37,441,728 $ 32,793,356 Demand 41,096,954 39,944,538 Term 79,915,527 78,582,530 Registered retirement savings plans 48,715,025 48,621,382 Registered retirement income funds 14,657,820 15,150,070 Tax free savings account 17,015,707 13,518, ,842, ,610,862 Accrued interest payable 1,385,279 1,516,129 $ 240,228,040 $ 230,126,991 Accrued interest payable is expected to be settled within one year. The term to maturity and yield ranges of the members's deposits are as follows: Principal Yield Principal Yield Variable rate due less than one year $ 90,886, % $ 82,269, % Fixed rate due less than one year 59,841, % 72,262, % Fixed rate due more than one year 88,114, % 74,079, % $238,842,761 $228,610,862 Interest on Members' Deposits Chequing and demand $ 67,150 $ 56,656 Term 1,408,574 1,359,661 Registered retirement savings plans 811, ,739 Registered retirement income funds 272, ,355 Tax free savings 234, ,684 $ 2,794,504 $ 2,741,095 18

20 9. Borrowings Central term loan, interest at 1.27%, payable by January 7, 2016, security as described in Note 14. $ 5,000,000 $ - Central operating line of credit, bearing interest at 1.75%, security as described in Note 14, includes outstanding cheques and clearings of $992, ,181,783 Central term loan, interest at 2.18%, payable by January 30, 2015, security as described in Note ,000,000 $ 5,000,000 $ 5,181,783 Borrowings are expected to be settled within one year. 10. Provisions Plan 24 Savings Insurance Program Balance as at December 31, 2013 $ 344,100 Provision made during the year (10,500) Provision used during the year (32,000) Effect of change in discount rate 10,500 Balance as at December 31, ,100 Provision made during the year (7,100) Provision used during the year (27,000) Effect of change in discount rate 7,100 Balance as at December 31, 2015 $ 285,100 The provision for the Plan 24 savings life insurance program consists of two plans and are paid out based on the following criteria: Plan A The face value of the insurance policy is $5,000. Members in this program must maintain a minimum of $5,000 in their plan 24 savings account to qualify for the insurance. Members who fall below the minimum savings balance of $5,000 are eligible to be included in Plan B as noted below. Plan B The face value of the insurance policy is $2,000. Those members in this program must maintain a minimum of $2,000 in their plan 24 savings account to qualify for the insurance. Under both plans, members who fail to maintain the minimum $2,000 balance are removed from the program. The credit union expects to settle most of the liability in more than one year. The obligations are discounted based on projected payments made in the future. 19

21 11. Membership Shares Qualifying as Liabilities Authorized Membership shares -As a condition of membership, each member is required to hold twenty membership shares with an issue price of $5 each. The withdrawal of membership shares are subject to certain restrictions as provided by the credit union's bylaws and by the credit union maintaining adequate regulatory capital (see Note 13), as is the payment of any dividends on these shares. Funds invested by members in shares are not insured by DICO. Membership shares are expected to be settled at dates greater than one year. Issued Membership shares qualifying as liabilities $ 1,220,509 $ 1,214, Income Taxes Opening Balance at December 31, 2014 Recognize d in Net Income Recognized in Other Comprehensive Income Closing Balance at December 31, 2015 Deferred Tax Assets (Liabilities) Allowance on impaired loans $ 13,320 $ 788 $ - $ 14,108 Depreciable property and equipment 215,260 19, ,067 Obligation for employee future benefits 7, ,800 Obligation for plan 24 savings insurance program 49,310 (3,141) - 46,169 Non-deductible reserves 12,530 (12,530) - - Total deferred tax assets $ 297,520 $ 5,624 $ - $ 303,144 Deferred tax liabilities Non-deductible reserves $ - $ 5,624 $ - $ 5,624 Total Net Deferred Tax Assets $ 297,520 $ - $ - $ 297,520 20

22 12. Income Taxes (Continued) Opening Balance at December 31, 2013 Recognized in Net Income Recognized in Other Comprehensive Income Closing Balance at December 31, 2014 Deferred Tax Assets Allowances on impaired loans $ 12,930 $ 390 $ - $ 13,320 Depreciable property and equipment 197,020 18, ,260 Obligation for employee future benefits 4,510 2,590-7,100 Obligation for plan 24 savings insurance program 46,540 2,770-49,310 Non-deductible reserves 36,520 (23,990) - 12,530 Total Deferred Tax Assets $ 297,520 $ - $ - $ 297,520 Net Deferred Tax Assets To be recovered within 12 months $ 29,296 $ 25,850 To be recovered after 12 months 268, ,670 Net Deferred Tax Assets $ 297,520 $ 297,520 The following is an explanation of the relationship between income tax expense and accounting income. Accounting Income before income tax expense $ 384,034 $ 330,003 Income tax expense on accounting income at applicable statuary rate ( % %) $ 59,525 $ 52,140 Effect of expenses that relate to permanent differences 13,080 13,464 Effect of expenses that relate to temporary differences (47,633) (28,921) Income tax expense $ 24,972 $ 36,683 Income tax expense consists of: Current $ 24,972 $ 36,683 21

23 13. Regulatory Capital The credit union's objective is to maintain the appropriate quantity, quality and composition of capital needed to: reflect the inherent risks of the credit union, support current and planned operations and support the distribution of dividends and redemption of membership shares. The credit union's capital is derived from Tier I and Tier II capital. Tier I capital is derived from 10% equity in the form of minimum share requirements or other share proceeds as allowed by the credit union's by-laws, as described in Note 11, and 90% of undivided earnings including unencumbered reserves as well as any accumulated other comprehensive loss. Tier II capital is derived from accumulated other comprehensive income and the collective allowance for impaired loans. The credit union will maintain a minimum percentage for Tier 1 capital in comparison to total capital of 70%. This minimum will never fall below 50% in accordance with the Superintendents Guide of Capital Adequacy. The credit union's policy is to maintain regulatory capital at 4.25% of total assets and 8.25% of risk weighted assets. The Act requires credit unions to maintain regulatory capital at 4% of total assets and 8% of risk weighted assets. The credit union calculates and reports its regulatory capital to the board of directors on a monthly basis to ensure both the requirements of the credit union's policies and the requirements of the Act are met. The credit union is in compliance with its policies and the Act regarding regulatory capital as at December 31, 2015 as outlined in the table below. Membership shares qualifying as liabilities $ 1,220,509 $ 1,214,681 Undivided earnings 10,623,534 10,298,549 Total Tier 1 Capital 11,844,043 11,513,230 Accumulated other comprehensive income 374, ,717 Collective allowance for impaired loans 79,980 80,839 Total Tier 2 Capital 454, ,556 Total Regulatory Capital $ 12,298,817 $ 11,934,786 As at December 31, 2015, the credit union met the capital requirements of the Act with a calculated members' capital ratio of 4.75% and a risk weighted asset ratio of 13.11%. 22

24 14. Commitments Credit Facilities The credit union has authorized credit facilities with Central totaling $12,600,000. These credit facilities would be interest bearing at the market rates in place at the time of usage of such facilities and would have varying payment terms and maturities as negotiated between the credit union and Central. These credit facilities are secured by a registered assignment of book debts with a carrying amount of $230,408,948 and a general security agreement covering all assets of the credit union, which includes a further $24,894,685 of financial assets. The balance outstanding on these credit facilities as of December 31, 2015 was $5,000,000 ( $4,189,602). Contractual Obligations The credit union is under contract for its banking system until December 31, Future minimum payments, as calculated at December 31, 2015, per year is $410,000. Operating Leases The credit union is committed to annual base rental payments with respect to operating leases of premises as follows: $136,658; $210,174; $189,975; $174,438; and The credit union is also committed to the additional payment of common area maintenance charges on these leased premises which is determined each year by the related landlord based on the actual expense incurred in the previous year. Loans to Members The credit union has the following commitments outstanding at year end: Personal loans $ 10,000 Residential mortgages 4,354,488 Unused personal lines of credit 19,887,001 Unused meritline lines of credit 29,974, Related Party Transactions The credit union entered into the following transactions with key management personnel, which are 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 $ 646,665 $ 611,512 Remunerations to directors 42,300 42,300 Total pension and other post-employment benefits 42,041 40,635 Expenses of the board 48,555 48,993 $ 779,561 $ 743,440 23

25 15. Related Party Transactions (Continued) The Act requires credit unions to disclose remuneration paid during the year to officers and employees of the credit union whose total remuneration for the year exceeded $150,000. Andy Doak, the chief executive officer was paid $168,038 in salary, $4,801 in bonuses and $30,861 in benefits for the fiscal year ended December 31, There were no other officers or employees of the credit union who had remuneration greater than $150,000 during the year. Loans to key management personnel Aggregate value of loans advanced $ 721,594 $ 492,698 Interest received on loans advanced 17,753 13,764 Aggregate value of unadvanced loans 675, ,902 All loans were made in the normal course of business in accordance with the provisions of the Act. The allowance for impairment of these loans at December 31, 2015 was $nil. 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. Deposits from key management personnel Aggregate value of deposits and membership shares $ 1,438,638 $ 1,581,464 Total interest and dividends paid on deposits and membership shares 19,369 17, Financial Instruments Fair Values Cost Fair Value Cost Fair Value Financial assets designated as fair value through profit and loss $ 3,000,039 $ 3,000,296 $ 2,000,058 $ 2,000,315 Financial assets classified as held to maturity 15,765,942 15,919,205 15,198,722 15,219,134 Financial assets classified as available for sale 3,580,316 4,009,531 3,536,287 3,931,425 Financial assets designated as available for sale 2,118,915 2,118,915 3,532,908 3,532,908 Loans and receivables 230,408, ,534, ,355, ,172,308 Other financial liabilities measured at amortized cost 247,593, ,031, ,184, ,380,660 24

26 December 31, Financial Instruments (Continued) Fair Value Hierarchy A fair value hierarchy establishes three levels to classify valuation techniques used to measure fair value. Level 1 items are quoted prices in active markets for identical assets or liabilities. Level 2 items are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets or quoted prices that are derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable and supported by little or no market activity. The fair value hierarchy gives the highest priority to Level 1 items and the lowest priority to Level 3 items Level One Level Two Level Three Total Financial Assets Cash $ 2,118,915 $ - $ - $ 2,118,915 Liquid investments other than liquidity reserve - 3,000,296-3,000,296 Class A Shares - Central , ,391 Class E Shares - Central , ,900 CUCO Co-operative Association Class B investment shares , ,645 Co-operators Group Limited preference shares - - 1,500,000 1,500,000 Credential securities - - 5,000 5,000 Other ,302 23,302 $ 2,118,915 $ 3,000,296 $ 3,972,238 $ 9,091, Level One Level Two Level Three Total Financial Assets Cash $ 3,532,908 $ - $ - $ 3,532,908 Liquid investments other than liquidity reserve - 2,000,315-2,000,315 Class A Shares - Central , ,680 Class E Shares - Central , ,900 CUCO Co-operative Association Class B investment shares , ,568 Co-operators Group Limited preference shares - - 1,500,000 1,500,000 Credential securities - - 5,000 5,000 Other ,302 23,302 $ 3,532,908 $ 2,000,315 $ 3,872,450 $ 9,405,673 25

27 16. Financial Instruments (Continued) Fair Value Hierarchy (Continued) The following table presents a reconciliation of each level of the fair value hierarchy: Level One Level Two Level Three Level One Level Two Level Three Balance, beginning of the year $ 3,532,908 $ 2,000,315 $ 3,872,450 $ 2,634,907 $ 4,636,723 $ 4,102,400 Gain recognized in other comprehensive income , ,042 Purchase - 1,000,000 65, ,001-80,748 Redemption (1,413,993) (19) - - (2,636,408) (354,740) Balance, end of the year $ 2,118,915 $ 3,000,296 $ 3,972,238 $ 3,532,908 $ 2,000,315 $ 3,872,450 Financial Risks General Objectives, Policies and Processes The Board of Directors has overall responsibility for the determination of the credit union's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure effective implementation of the objectives and policies to the credit union's finance function. The Board of Directors receives monthly reports from the Credit Union's Chief Executive Officer through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. Credit Risk The business of the credit union necessitates the management of credit risk. Credit risk is the risk of financial loss to the credit union if a counterparty to a financial instrument fails to make payments of interest and principal when due. The credit union is exposed to credit risk from claims against a debtor or indirectly from claims against a guarantor of credit obligations. Credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner. To assess credit risk, the credit union takes into consideration the member's character, ability to pay, and value of collateral available to secure the loan. 26

28 16. Financial Instruments (Continued) Financial Risks (Continued) Credit Risk (Continued) The credit union's objective is to provide creditworthy members with appropriate borrowing opportunities using appropriate and prudent lending policies. It is the policy of the credit union to keep the exposure to credit risk within the limits set by the Board of Directors and the Act, through its detailed credit granting policies and procedures. The credit union's credit risk policies set out the minimum requirements for management of credit risk in a variety of transactional and portfolio management contexts. Its credit risk policies comprise the following: General loan policy statements including approval of lending policies, eligibility for loans, exceptions to policy, policy violations, liquidity, and loan administration; Loan lending limits including Board of Director limits, schedule of assigned limits and exemptions from aggregate indebtedness; Loan collateral security classifications which set loan classifications, advance ratios and amortization periods; Procedures outlining loan overdrafts, release or substitution of collateral, temporary suspension of payments and loan renegotiations; Loan delinquency controls regarding procedures followed for loans in arrears; With respect to credit risk, the Board of Directors receives monthly reports summarizing new loans, delinquent loans and overdraft utilization. The following table presents loans with repayments past due but not regarded as individually impaired as at December 31, 2015: Personal loans $ 901 Residential mortgages 1,664,612 A sizeable portfolio of the loan book is secured by properties in the Greater Toronto Area, Peel Region, York Region and Durham Region. Therefore, the credit union is exposed to the risks in reduction of the loan to valuation ratio (LVR) coverage 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 has been no change to this risk exposure or the objectives, policies and procedures used to manage this exposure from the prior year. 27

29 16. Financial Instruments (Continued) Financial Risks (Continued) Liquidity Risk The business of the credit union necessitates the management of liquidity risk. Liquidity risk is the risk of being unable to meet anticipated daily financial obligations, including member needs with respect to the funding of member loans or withdrawal of member deposits. The credit union's objective is to ensure that it faces limited risk exposure in this area through requirements placed on the sources, quality and amount of liquid assets that are required to be maintained to meet normal operational requirements, significant deposit withdrawals, loan campaign plans and regulatory requirements. The credit union achieves these objectives through the diversification of its liquid investment portfolio with reputable financial institutions, the placement of withdrawal restrictions on large deposits held by individual members or connected groups of members and the matching of the maturities of members' deposits to the maturities of liquid investments and loans to members. A summary of the maturities of members' deposits can be found in Note 8. The related maturities of liquid investments and loans to members are found in Notes 4 and 5. The Credit Unions and Caisses Populaires Act, 1994 and related Section 21 of Ontario Regulation 237/09 require a class 2 credit union to establish and maintain prudent levels and forms of liquidity that are sufficient to meet cash flow needs, including depositor withdrawals and all other obligations as they come due. 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; Monitoring the liquidity ratios monthly; Maintaining a minimum liquidity of 8% of member deposits and borrowings. 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, 2015, the liquidity position of the credit union as a percentage of member deposits and borrowings was 8.52%. As at December 31, 2015, the liquidity position of the credit union is as follows: 2015 Qualifying Liquid Assets on Hand Cash $ 2,118,915 Liquid investments 18,667,671 Total Assets Eligible for Liquidity 20,786,586 There has been no change to this risk exposure or the objectives, policies and procedures used to manage this exposure from the prior year. 28

30 16. Financial Instruments (Continued) Financial Risks (Continued) Interest Rate Risk The business of the credit union necessitates the management of interest rate risk. Interest rate risk refers to the potential impact of changes in interest rates on the credit union's earnings when financial liabilities are not properly matched with financial assets with respect to maturities and interest rate variability. The credit union's objective is ensure that the credit union faces limited exposure in this area and manages its risk as required by the Act. The Credit Unions and Caisses Populaires Act, 1994 and related Section 71 of Ontario Regulation 237/09 require a class 2 credit union to establish and maintain a prudent interest rate risk management policy. It is the policy of the credit union to keep the exposure to interest rate risk within the limits set by the Board of Directors through its detailed structural risk management policies and procedures. The credit union assesses and reports its interest rate risk to the board of directors on a monthly basis through the use of a sophisticated income simulation model. Through this model, the credit union runs various scenarios based upon expected interest rate levels and the credit union manages a risk tolerance level based upon a pre-determined shock to those rates. The process and procedures surrounding this are governed by the Act and Board of Directors. The credit union's policy is to have no more than maximum reduction of $200,000 of earnings on a upward or downward rate shock. The prudent shock test was 1% upward, 1% downward. In the prior year, the prudent shock test was 1% upward and 0.50% downward. As of December 31, 2015, the credit union has a negative impact on income of $156,000 for a 1% decrease in interest rates and a positive impact from a 1% increase in interest rates, both in compliance with policy. Currency Risk Currency risk refers to the potential impact of changes in foreign exchange rates on the credit union's earnings where US dollar denominated financial liabilities are not matched with US dollar denominated financial assets with respect to maturities. The credit union's objective is to ensure that the credit union faces limited exposure in this area and manages its risk as required by the Act. The credit union's policy is to have a maximum unhedged US currency of 2% of the total assets to a maximum of $1,000,000. There has been no change to this risk exposure or the objectives, policies and procedures used to manage this exposure from the prior year. As of December 31, 2015, total unhedged US currency is 0.64% of total assets or $1,656,731, which is in excess of the credit union's policy limit with respect to unhedged US currency. A $0.05 change in the US foreign exchange rate, keeping the unhedged US liability position constant at the amount as of December 31, 2015 noted above, would have an inverse proportional effect on the credit union's net income of $82,837. Subsequent to year end, the credit union purchased $1,500,000 of US cash from Central to bring the unhedged US currency position to below the policy limit. 29