ALDERGROVE CREDIT UNION

Transcription

1 Consolidated Financial Statements of ALDERGROVE CREDIT UNION

2 KPMG LLP Telephone (604) Chartered Accountants Fax (604) Simon Avenue Internet Abbotsford BC V2T 4W6 Canada INDEPENDENT AUDITORS' REPORT To the Members of Aldergrove Credit Union We have audited the accompanying consolidated financial statements of Aldergrove Credit Union, which comprise the consolidated balance sheet as at December 31, 2014, the consolidated statements of income and comprehensive income, changes in members' equity and cash flows for the year then ended, and notes, comprising 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, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated 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 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 our 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, we consider 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 consolidated financial position of Aldergrove Credit Union as at December 31, 2014 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Chartered Accountants February 25, 2015 Abbotsford, British Columbia KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.

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4 Consolidated Statement of Income and Comprehensive Income, with comparative information for 2013 Financial income: Loans $ 18,162,314 $ 17,592,002 Cash resources and investments 910,492 1,143,374 19,072,806 18,735,376 Financial expense - deposits and borrowed funds 7,799,147 7,358,159 Financial margin 11,273,659 11,377,217 Loan impairment expense (note 7) (180,564) (266,258) Other income (note 14) 4,336,463 4,174,467 Net financial and other income 15,429,558 15,285,426 Operating expenses (note 15) 13,295,419 13,333,128 Income from operations 2,134,139 1,952,298 Patronage rebates (415,377) (679,335) Dividends on membership equity shares (17,896) (20,913) (433,273) (700,248) Net income before income taxes 1,700,866 1,252,050 Income taxes (note 11): Current 292, ,937 Deferred (68,767) (37,440) 224, ,497 Net income 1,476,842 1,079,553 Other comprehensive income (loss), net of tax recovery: Items that were or may be reclassified to net income Net change in unrealized losses on available for sale assets (10,533) (87,788) Net change in unrealized gains (losses) on derivative hedging instruments, including amounts reclassified to net income 6,025 (14,622) Total other comprehensive loss (4,508) (102,410) Total comprehensive income $ 1,472,334 $ 977,143 The accompanying notes form an integral part of these consolidated financial statements. 2

5 Consolidated Statement of Changes in Members' Equity, with comparative information for 2013 Investment equity shares: Balance, beginning of year $ 11,955,080 $ 11,341,663 Shares issued in the year: For cash, net of redemptions 478, ,546 Reinvested dividends 505, ,871 Balance, end of year $ 12,939,082 $ 11,955,080 Retained earnings: Balance, beginning of year $ 34,245,829 $ 33,572,288 Net income 1,476,842 1,079,553 Dividends on investment equity shares, net of tax (426,633) (406,012) Balance, end of year $ 35,296,038 $ 34,245,829 Accumulated other comprehensive income, net of tax: Unrealized gains (losses) on available for sale assets Balance, beginning of year $ 9,341 $ 97,129 Net change in unrealized losses (10,533) (87,788) Balance, end of year (1,192) 9,341 Unrealized gains (losses) on derivative hedging instruments Balance, beginning of year 56,770 71,392 Net change in unrealized gains (losses), including amounts reclassified to net income 6,025 (14,622) Balance, end of year 62,795 56,770 Balance, end of year $ 61,603 $ 66,111 The accompanying notes form an integral part of these consolidated financial statements. 3

6 Consolidated Statement of Cash Flows, with comparative information for 2013 Cash resources provided by (used in): Operating activities: Net income $ 1,476,842 $ 1,079,553 Adjustments: Depreciation 983, ,847 Loan impairment expense 180, ,258 Net interest income (11,273,659) (11,377,217) Gain on sale of premises and equipment (64,371) - Provision for income taxes - current 292, ,937 Recovery on income taxes - deferred (68,767) (37,440) Change in derivatives, net (40,808) (247,941) (8,514,386) (9,112,003) Change in non-cash operating working capital 430, ,518 Interest received from: Loans 18,109,489 17,556,199 Cash resources and investments 910,492 1,143,374 Interest paid on deposits and borrowed funds (7,692,169) (6,403,041) Income taxes paid (1,874) (220,197) 3,242,342 3,550,850 Investing activities: Net decrease in investments 1,787,414 20,228,678 Net (increase) decrease in loans (22,707,088) (45,053,780) Purchase of premises and equipment (330,619) (4,573,115) Proceeds on sale of premises and equipment 272,749 - (20,977,544) (29,398,217) Financing activities: Net increase in deposits 8,526,561 28,771,941 Net increase in membership and investment equity shares 189, ,818 Dividends paid on investment equity shares (505,695) (473,871) 8,209,916 28,744,888 Increase (decrease) in cash and cash equivalents (9,525,286) 2,897,521 Cash and cash equivalents, beginning of year 21,585,591 18,688,070 Cash and cash equivalents, end of year (note 5) $ 12,060,305 $ 21,585,591 The accompanying notes form an integral part of these consolidated financial statements. 4

7 Notes to Consolidated Financial Statements 1. General information: Aldergrove Credit Union (the "Credit Union") is incorporated under the Credit Union Incorporation Act of British Columbia and the operation of the Credit Union is subject to the Financial Institutions Act of British Columbia. The Credit Union is a member of Central 1 Credit Union (Central 1). The consolidated financial statements of the Credit Union as at and for the year ended December 31, 2014 comprise the Credit Union and its subsidiary, Aldergrove Insurance Services Ltd. (hereinafter together referred to as the "Credit Union" and individually as "Credit Union entities"). The Credit Union operates in the Fraser Valley and the surrounding area. Products and services offered to its members include mortgages, personal and commercial loans, chequing and savings accounts, term deposits, RRSPs, RRIFs, automated banking machines, debit cards, internet banking and insurance services. The Credit Union head office is located at Street, Aldergrove, British Columbia. The consolidated financial statements have been authorized for issue by the Board of Directors on February 25, Basis of presentation: (a) Statement of compliance: The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). (b) Basis of measurement: The consolidated financial statements have been prepared on the historical cost basis, except for available-for-sale financial assets and derivative financial instruments, which are measured at fair value. (c) Functional and presentation currency: These consolidated financial statements are presented in Canadian dollars, which is also the Credit Union s functional currency. 5

8 2. Basis of presentation (continued): (d) Use of estimates and judgments: The preparation of the consolidated financial statements in conformity with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Credit Union's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note Summary of significant accounting policies: (a) Basis of consolidation: The consolidated financial statements include the assets, liabilities and the results of operations and cash flows of Aldergrove Credit Union and its wholly-owned subsidiary, Aldergrove Insurance Services Ltd. Intra-entity balances, and income and expenses arising from intra-entity transactions, are eliminated in preparing the consolidated financial statements. The integration of the subsidiary into the consolidated financial statements is based on consistent accounting and valuation methods for similar transactions and other occurrences under similar circumstances. (b) Foreign currency translation: Transactions in foreign currencies are translated to the functional currency of the Credit Union at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. Foreign currency differences arising on translation are recognized in the consolidated statement of operations, except for differences arising on the translation of available for sale equity instruments and qualifying cash flow hedges, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. 6

9 3. Summary of significant accounting policies (continued): (c) Cash and cash equivalents: Cash and cash equivalents includes cash on hand, deposits with banks, other short-term highly liquid investments with maturities of three months or less from the original date of issuance, and for the purposes of the statement of cash flows, bank overdrafts that are repayable on demand. Cash and cash equivalents are classified as loans and receivables and are carried at amortized cost which is equivalent to fair value due to their short-term nature. (d) Investments: (i) Term deposits: Certain term deposit instruments are classified as held to maturity and are initially recognized at fair value including direct and incremental transaction costs. They are subsequently valued at amortized cost, using the effective interest method. Other term deposits (bid deposits) are classified as available for sale and are recognized at fair value. Unrealized gains and losses arising from changes in fair value of bid deposits are recognized directly in other comprehensive income. (ii) Shares: These instruments are classified as available-for-sale and are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at fair value, unless they do not have a quoted market price in an active market and fair value is not reliably determinable in which case they are carried at cost. Changes in fair value, except for those arising from interest calculated using the effective interest rate, are recognized as a separate component of other comprehensive income. When there is objective evidence of impairment, the full amount of the impairment, including any amount previously recognized in other comprehensive income, is recognized in net income. Purchases and sales of shares 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 members equity and recognized in net income. 7

10 3. Summary of significant accounting policies (continued): (e) Members' shares: Member shares are classified as liabilities or as members' equity according to their terms. Where member shares are redeemable at the option of the member, either on demand or on withdrawal from membership, the member shares are classified as liabilities. Where member shares are redeemable at the discretion of the Credit Union's Board of Directors, the member shares are classified as equity. (f) Derivatives and hedge accounting: Derivative instruments are financial contracts whose value changes in response to a change in a specified interest rate, exchange rate or other variable, provided in the case of a nonfinancial variable, the variable is not specific to a party to the contract. Derivative contracts usually have no initial net investment, or a net investment which would be smaller than a non-derivative contract, and are settled at a future date. Derivatives are initially recognized at fair value on the date which a derivative contract is entered into. They are subsequently re-measured at their fair value and reported as assets where they have a positive fair value or as liabilities where they have a negative fair value. Derivatives may also be embedded in other financial instruments and are treated as separate derivatives when i) their economic characteristics and risks are not closely related to those of the host contract; ii) a separate instrument with the same terms would meet the definition of a derivative instrument; and iii) the host contract is not designated as fair value through profit or loss ("FVTPL") or classified as FVTPL. Changes in fair value on derivative instruments not qualifying for hedge accounting are recognized in other income or expense as appropriate in the consolidated statement of operations. The Credit Union designates derivatives as either hedges of highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flow hedge), or FVTPL derivatives in instances where the derivative does not qualify or has not been designated as a hedge in a hedge accounting relationship. (g) Cash flow hedges: The Credit Union uses hedge accounting for derivatives designated as cash flow hedges provided certain criteria are met. The Credit Union documents, at the inception of the relationship, the relationship between hedged items and hedging instruments, as well as identifying the risk being hedged and its risk management objective and strategy for undertaking various hedge transactions. The Credit Union also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values of the cash flows of the hedged items that are attributable to the risk being hedged. 8

11 3. Summary of significant accounting policies (continued): (g) Cash flow hedges (continued): The effective portion of changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in net income. Amounts accumulated in accumulated other comprehensive income are reclassified to net income in the periods when the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, hedge accounting ceases and any cumulative gain or loss existing in accumulated other comprehensive income at the time remains in accumulated other comprehensive income and is recognized when the hedged forecast transaction is ultimately recognized in net income. However, when a forecast transaction is no longer expected to occur, or when the hedged item expires or is sold, the cumulative gain or loss that was deferred in accumulated other comprehensive income is immediately transferred to net income. (h) Loans: All 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. Loans are initially measured at fair value, net of loan origination fees and inclusive of transaction costs incurred. Loans are subsequently measured at amortized cost, using the effective interest rate method, less any impairment losses. At each reporting date, the Credit Union assesses whether there is objective evidence that a loan or group of loans is impaired. If there is objective evidence that an impairment loss on loans has been incurred, the amount of the loss is measured as the difference between the loans carrying amount and the present value of estimated future cash flows discounted at the loans original effective interest rate. The carrying amount of loans is reduced through use of an allowance for credit losses account. The Credit Union first assesses whether objective evidence of impairment exists individually for loans that are individually significant, and any related impairment is recorded in the specific allowance for credit losses account. 9

12 3. Summary of significant accounting policies (continued): (h) Loans (continued): If it is determined that no objective evidence of impairment exists for an individually assessed loan, whether significant or not, the loan is included in a group of loans with similar credit risk characteristics and that group of loans is collectively assessed for impairment. Loans 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 loans with similar credit risk characteristics are estimated based on historical loss experience. The Credit Union maintains a collective allowance account to record credit losses that management estimates have accrued at the reporting date for which specific allowances cannot yet be determined. 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 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 loan is unlikely. Loans are written off against the allowance for impairment account, if an allowance for impairment had previously been recognized. If no allowance had been recognized, the write offs are recognized as a change to the provision for credit losses and expensed in net income. (i) Deposits: All deposits are classified as other financial liabilities and are initially measured at fair value, net of any transaction costs directly attributable to the issuance of the instrument. Deposits are subsequently measured at amortized cost, using the effective interest rate method. (j) Accounts payable: Liabilities for trade creditors and other payables are classified as other financial liabilities and initially measured at fair value and subsequently carried at amortized cost. Their carrying value is a reasonable estimate of fair value due to their short-term nature. 10

13 3. Summary of significant accounting policies (continued): (k) Derecognition of financial instruments: Financial assets are derecognized when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred. If the Credit Union has neither transferred nor retained substantially all the risks and rewards of the transferred financial asset, it assesses whether it has retained control over the transferred asset. If control has been retained, the Credit Union recognizes the transferred asset to the extent of its continuing involvement. If control has not been retained, the Credit Union derecognizes the transferred asset. Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. (l) Interest income and expenses: Interest income and expense for all interest-bearing financial instruments is recognized within interest income and interest expense in the consolidated statement of income using the effective interest method. The effective interest method is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Credit Union estimates future cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation using the effective interest method includes all fees and costs paid or received between parties to the contract that are an integral part of the effective interest rate. Mortgage prepayment fees are recognized in interest income over the expected remaining term of the original mortgage using the effective interest method. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 11

14 3. Summary of significant accounting policies (continued): (m) Premises and equipment: (i) Recognition and measurement: All premises and equipment used by the Credit Union is measured at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that are directly attributable to the acquisition of the items. (ii) Subsequent costs: Subsequent expenditures are included in the asset s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Credit Union and the cost of the item can be measured reliably. All other repair and maintenance costs are charged to operating expenses during the financial period in which they are incurred. (iii) Depreciation: Land is carried at cost and is not depreciated. Asset classes are further categorized for depreciation where significant differences in the estimated useful life of the various components of individually significant assets are identified. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings Leasehold improvements Furniture and equipment Computer equipment 20 years Lease term 2-10 years 5 years The residual values and useful lives of premises and equipment are reviewed, and adjusted if appropriate, at each consolidated balance sheet date. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in other income or operating expenses in the consolidated statement of income. 12

15 3. Summary of significant accounting policies (continued): (n) Leased assets: Leases for which the Credit Union assumes or relinquishes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Operating leases are not recognized in the Credit Union s consolidated balance sheet when the Credit Union is the lessee. (o) Income tax: Income tax expense comprises current and deferred income tax. Current and deferred taxes are recognized in the consolidated statement of income except to the extent that it relates to items recognized directly in members equity or in other comprehensive income. (i) Current income tax: Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. (ii) Deferred income tax: Deferred tax is recognized in respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities against current tax assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can 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. 13

16 3. Summary of significant accounting policies (continued): (p) Employee benefits: The Credit Union provides defined retirement benefits to certain employees through a multiemployer plan administered by Central 1. Each member credit union is exposed to the actuarial risks of the other employers with the result that, in the Credit Union s opinion, there is no reasonable way to allocate any defined benefit obligations. The Plan has informed the Credit Union that they are unable to provide defined benefit information on a discrete employer basis as the investment records are not tracked by individual employer and each employer is exposed to the actuarial risks of the Plan as a whole. Accordingly, the Credit Union s participation in the Plan is accounted for as a defined contribution plan with contributions recorded on an accrual basis. The Credit Union has provided additional disclosure on the overall funding status of the multi-employer plan and future contribution levels in note 10. (q) 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. (r) Distribution to members: Patronage rebates and dividends on membership equity shares are recorded when declared in the consolidated statement of income. Dividends on investment equity shares are recorded when declared in the consolidated statement of changes in members' equity. 14

17 3. Summary of significant accounting policies (continued): (s) Standards and interpretations issued but not yet effective: At December 31, 2014, a number of standards and interpretations, and amendments thereto, had been issued by the IASB, which are not effective for these consolidated financial statements. Those which are expected to have a significant effect on the Credit Union s consolidated financial statements are discussed below. (i) IFRS 9 Financial Instruments: The IASB has issued IFRS 9 Financial Instruments ( IFRS 9 ), which is part of the IASB s comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement ( IAS 39 ). The mandatory effective date is for annual periods beginning on or after January 1, 2018, but it may be adopted early. IFRS 9 replaces the guidance in IAS 39 on the classification and measurement of financial assets. The standard eliminates the existing IAS 39 categories of held-tomaturity, available-for-sale and loans and receivable. Financial assets will be classified into one of two categories on initial recognition: financial assets measured at amortized cost; or financial assets measured at fair value. Gains and losses on remeasurement of financial assets measured at fair value will be recognized in net income, except that for an investment in an equity instrument which is not held-for-trading. For financial liabilities measured at fair value under the fair value option, changes in fair value attributable to changes in credit risk will be recognized in other comprehensive income ( OCI ), with the remainder of the changes recognized in net income. IFRS 9 provides, on initial recognition, an irrevocable election to present all fair value changes from the investment in OCI. The election is available on an individual share-by-share basis. Amounts presented in OCI will not be reclassified to net income at a later date. IFRS 9 has introduced a new expected credit loss model for calculating impairment that will require more timely recognition of expected credit losses. Specifically, it requires entities to account for expected credit losses from when financial instruments are first recognized and it lowers the threshold for recognition of full lifetime expected losses. IFRS 9 also includes a substantially-reformed model for hedge accounting with enhanced disclosures about risk management activity. 15

18 3. Summary of significant accounting policies (continued): (s) Standards and interpretations issued but not yet effective (continued): (i) IFRS 9 Financial Instruments (continued): The Credit Union intends to adopt IFRS 9 in its financial statements on the mandatorily effective date. IFRS 9 is required to be applied retrospectively when initially applied, with the exception of the revised hedge accounting requirements which are applied prospectively. However, the extent of the impact of adoption of IFRS 9 has not yet been determined. 4. Use of estimates and judgments: The preparation of these consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Credit Union s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. The principal areas involving a higher degree of judgment and/or areas which require significant estimates are described below: (a) Impairment losses on loans and advances: The Credit Union regularly reviews its loan portfolio to assess for impairment. In determining whether an impairment loss should be recorded in the consolidated statement of income, the Credit Union makes judgments as to whether there is any observable data indicating an impairment trigger followed by a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of members in a group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. (b) Fair value of financial instruments: The fair values of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using specific valuation techniques. In these cases, the fair values are estimated from observable data in respect of similar financial instruments or by using models. Where market observable inputs are not available, they are estimated based on appropriate assumptions. Where valuation techniques are used to determine fair values, they are validated and periodically reviewed by management. To the extent practical, models use only market observable data; however, areas such as credit risk (both the Credit Union s credit risk and counterparty risk) and correlations require management to make estimates. 16

19 4. Use of estimates and judgments (continued): (c) Income taxes: The Credit Union computes an effective tax rate which includes an evaluation of the small business rate eligible to credit unions under the Canadian Income Tax Act. An estimate of deposit, share and income growth based on the modelling of the the Credit Union business plan inclusive of economic indicators provides the basis in determining the small business rate. This rate forms the effective tax rate used in computing the income tax provision. However, the actual amounts of income tax expense do not become final until the filing and acceptance of the income tax return by the relevant tax authorities, which occurs subsequent to the issuance of the consolidated financial statements. To the extent that estimates differ from the final tax returns, net income would be affected in the subsequent year. 5. Cash resources and investments: (a) Cash and cash equivalents: Cash and current accounts $ 5,260,305 $ 14,908,967 Term deposits - callable or maturing in 90 days or less 6,800,000 6,676,624 Cash and cash equivalents 12,060,305 21,585,591 17

20 5. Cash resources and investments (continued): (b) Investments: Bid deposits $ 2,022,905 $ 3,442,038 Term deposits - maturing after 90 days 33,991,704 34,630,798 Central 1 shares 2,047,638 1,776,825 38,062,247 39,849,661 The Credit Union must maintain liquidity reserves with Central 1 of at least 8% of total deposits and non-equity shares, which include amounts recorded in cash and cash equivalents and investments. 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 a par value of one dollar per share. There is no separately quoted market value for these shares; however, fair value is determined to be equivalent to the par value given that transactions occur at par value on a regular and recurring basis. Class E Central 1 shares are issued with a par value of $0.01 per share; however, they are redeemable at $100 per share at the option of Central 1. There is no separately quoted market value for these shares. Fair value cannot be measured reliably as the timing of redemption of these shares cannot be determined, the range of reasonable fair value estimates is significant, and the probabilities of the various estimates cannot be reasonably assessed. Accordingly, the Class E Central 1 shares are carried in the financial statements 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 1. The Credit Union has a borrowing facility with Central 1 that may be drawn upon up to $21,000,000. The Central 1 borrowing facility is secured by all present and future property of the Credit Union in excess of property maintained to meet regulated liquidity requirements under the Financial Institutions Act of British Columbia. Draws on the facility at December 31, 2014 were $nil ( $nil). 18

21 6. Derivative instruments: Notional Amounts Fair Values Within 1 year 1 to 5 years Derivatives used to manage interest rate risk Receive fixed/pay floating rate swaps $ 22,000,000 $ 18,000,000 $ 40,000,000 $ 50,000,000 $ 66,172 $ 59,075 Interest rate swaps are transactions in which two parties exchange interest flows on a specified notional amount for a predetermined period, based on agreed upon fixed and floating rates. Notional amounts are not exchanged. The Credit Union hedges a portion of the interest rate risk that arises on variable interest cash flows on prime rate mortgages through interest rate derivatives and applies hedge accounting. Unrealized gains or losses on hedges are reported in other comprehensive income. The credit risk related to these derivatives, is the current replacement cost of all outstanding over the counter derivative contracts in a gain position which totaled $68,821 as at December 31, 2014 ( $118,464). The Credit Union manages this credit risk by dealing with creditworthy counterparties and setting specific limits for investments with those counterparties, which are reviewed on a monthly basis. During 2014 net gains of $6,025 ( net losses of $14,622) relating to the effective portion of cash flow hedges were recognized in other comprehensive income. The fair value of derivatives designated as cash flow hedges are as follows: Interest rate swaps: Assets $ 68,821 $ 118,464 Liabilities (2,649) (59,389) $ 66,172 $ 59,075 19

22 6. Derivative instruments (continued): The time periods in which the hedged cash flows are expected to occur and affect net income are as follows: Within 1 year 1-5 years 2014 Cash inflows $ 434,923 $ 165,756 Cash outflows $ 358,828 $ 133, Cash inflows $ 659,155 $ 1,213,699 Cash outflows $ 546,180 $ 1,001, Loans and advances to members: The following table provides information on loans by type. The maximum exposure to credit risk would be the carrying values as detailed below: Residential mortgages $ 323,344,595 $ 308,271,936 Commercial mortgages 133,996, ,918,396 Consumer loans 40,362,691 40,219,500 Commercial loans 15,174,947 13,761, ,878, ,171,344 Accrued interest 657, , ,535, ,775,521 Allowance for credit losses: Specific 66,635 57,285 Collective 1,287,455 1,199,587 1,354,090 1,256,872 $ 512,181,344 $ 489,518,649 At December 31, 2014, $346,239,314 ( $337,971,668) of loans are expected to be settled more than 12 months after the reporting date. 20

23 7. Loans and advances to members (continued): A breakdown of the security held on a gross portfolio basis, excluding accrued interest, is as follows: Loans - insured $ 80,731,044 $ 70,422,538 Loans - real estate secured 417,047, ,396,769 Loans - otherwise secured 6,638,723 11,465,592 Loans - unsecured 8,461,131 8,886,445 $ 512,878,432 $ 490,171,344 (a) Allowance for credit losses: 2014 Beginning Ending balance Provision Write-offs balance Residential mortgages $ 587,628 $ 106,420 $ (34,925) $ 659,123 Commercial mortgages 277,312 62,944 (7,455) 332,801 Consumer loans 338,890 5,684 (37,383) 307,191 Commercial loans 53,042 5,516 (3,583) 54,975 $1,256,872 $ 180,564 $ (83,346) $1,354, Beginning Ending balance Provision Write-offs balance Residential mortgages $ 519,078 $ 129,544 $ (60,994) $ 587,628 Commercial mortgages 254,569 59,291 (36,548) 277,312 Consumer loans 252,097 93,810 (7,017) 338,890 Commercial loans 84,024 (16,387) (14,595) 53,042 $1,109,768 $ 266,258 $ (119,154) $1,256,872 21

24 7. Loans and advances to members (continued): (b) Impaired loans and related allowances: Loan Specific Carrying Carrying balances Allowances amount amount Residential mortgages $ - $ - $ - $ - Commercial mortgages 536,121 30, , ,118 Consumer loans 205,726 36, , ,577 Commercial loans $ 741,847 $ 66,635 $ 675,212 $ 433,695 (c) Key assumptions in determining the specific and collective allowance for credit losses: The Credit Union has estimated the specific allowance by determining 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. For purposes of the collective allowance, loans are classified into separate groups with similar risk characteristics, based on the type of product and type of security. 22

25 7. Loans and advances to members (continued): (d) Credit quality of loans (i) Loans neither past due nor impaired: As at December 31, 2014, the balance of loans neither past due nor impaired is $510,694,003 ( $487,894,804). (ii) Loans past due but not impaired: A loan is considered past due when a payment has not been received by the contractual due date. The following table presents the carrying value of loans that are past due but not classified as impaired because they are either (i) less than 90 days past due unless there is information to the contrary that an impairment event has occurred, or (ii) fully secured and collection efforts are reasonably expected to result in repayment. Past due 30 to 59 days $ 512,144 $ 126,150 Past due 60 to 89 days - - Past due 90 days or over 1,100,364 1,031,540 $ 1,612,508 $ 1,157,690 (iii) Impaired loans: When a loan becomes impaired and losses occur, the carrying amount of loans is reduced through the use of an allowance account with a charge to income. The aging analysis below includes past due loans on which identifiable impairment exist and specific impairment allowances have been assessed. Past due 30 to 59 days $ - $ - Past due 60 to 89 days - - Past due 90 days or over 514, ,695 $ 514,621 $ 433,695 23

26 8. Premises and equipment The movement of premises and equipment during the year ended is as follows: Cost Leasehold Furniture and Computer Land Buildings improvements equipment equipment Total Balance on January 1, 2014 $ 2,928,672 $ 12,953,566 $ 283,797 $ 4,478,220 $ 389,192 $ 21,033,447 Additions - 141,250 4,683 94,772 89, ,619 Disposals (208,378) (208,378) Balance on December 31, 2014 $ 2,720,294 $ 13,094,816 $ 288,480 $ 4,572,992 $ 479,106 $ 21,155,688 Accumulated depreciation Balance on January 1, 2014 $ - $ 5,109,688 $ 265,313 $ 3,223,857 $ 314,781 $ 8,913,639 Depreciation - 600,994 8, ,575 51, ,022 Disposals Balance on December 31, 2014 $ - $ 5,710,682 $ 273,904 $ 3,545,432 $ 366,643 $ 9,896,661 Net book value December 31, 2013 $ 2,928,672 $ 7,843,878 $ 18,484 $ 1,254,363 $ 74,411 $ 12,119,808 December 31, 2014 $ 2,720,294 $ 7,384,134 $ 14,576 $ 1,027,560 $ 112,463 $ 11,259, Other Assets Prepaid expenses $ 236,623 $ 196,253 Other accounts receivable 212, ,663 Current income tax receivable 152, , Employee benefits $ 601,691 $ 1,011,531 The Credit Union participates in a multi-employer pension plan for certain eligible employees which is administered by a Board of Trustees of the BC Credit Union Employees' Benefits Trust (the "Plan") where Central 1 Credit Union acts as third party administrator. An actuarial valuation of the overall Plan was carried out as at December 31, It was determined that the overall Plan had an actuarial deficit of $32.3 million under going concern valuation and $93.6 million under solvency valuation. As a result of the valuation, the contribution rates were determined to be 14.8% per annum for employer contributions based on the pensionable earnings of the respective participating employees and, dependent on age, 2.5% to 9% per annum for employee contributions for the period January 1, 2014 to December 31,

27 11. Income taxes (a) Income tax expense: Current tax expense: Current year $ 292,791 $ 209,937 Deferred tax expense: Current year (68,767) (37,440) Total income tax expense $ 224,024 $ 172,497 (b) Reconciliation of effective tax rate: The effective tax rate of 13.2% ( %) differed from the combined federal and provincial statutory income tax rate for the following reasons: Combined federal and provincial statutory income tax rate 26.0 % 25.8 % Credit union rate reduction (10.9)% (12.1)% Non-deductible and other items (1.4)% (0.3)% Change in estimate of tax rates (0.5)% 0.4 % Effective income tax rate 13.2 % 13.8 % 25

28 11. Income taxes (continued): (c) Deferred tax assets and liabilities: The components of the net deferred income tax asset are as follows: Other post-retirement benefits $ 27,794 27,967 Allowances for credit losses 261, ,144 Deferred revenue 60,489 61,125 Premises and equipment 334, ,262 Other - (36,950) $ 684, ,548 Deferred tax that is expected to reverse has been measured using the effective rate that will apply for the period of 20.17% ( %). 12. Member deposits: Demand $149,258,360 $138,198,218 Term 276,523, ,835,398 Registered savings plans 93,798,749 86,020,482 Accrued interest 3,866,421 3,759,443 $523,447,080 $514,813,541 Demand deposits include $241,080 ( $242,642) in non-equity savings shares. Under agreements with the trustee of the registered savings plans, members' contributions to the plans are deposited with the Credit Union at rates of interest determined by the Credit Union. At December 31, 2014, $113,915,983 (December 31, $218,436,707) of member deposits are expected to be settled more than 12 months after the reporting date. 26

29 13. Equity shares: Capital of the Credit Union is divided into an unlimited number of $1 par value equity shares designated as follows: Class A mandatory equity ("membership equity") shares: Voting shares, 5 shares required as a condition of membership (with exception of junior accounts) and a maximum of 1,000 shares issued per member; redeemable on withdrawal of membership. These shares are recognized as a liability based on their terms. Class B voluntary equity ("investment equity") shares: Investment shares, available for subscription by members, redeemable only at the discretion of the Board of Directors of the Credit Union. These shares are recognized as equity based on their terms. The Credit Union is authorized to issue an unlimited number of non-transferable, voting Class A membership equity shares. Investment equity shares, are not guaranteed by the Credit Union Deposit Insurance Corporation of British Columbia. Equity shares issued: 2,229,185 Class A membership equity shares (2013-2,500,546) $ 2,229,185 $ 2,500,546 12,939,082 Class B investment equity shares ( ,955,080) $ 12,939,082 $ 11,955, Other income: Insurance commissions and fees $ 1,923,880 $ 1,745,075 Account service fees 941, ,410 Mortgage prepayment and other fees 618, ,488 Other 576, ,409 Foreign exchange 275, ,085 $ 4,336,463 $ 4,174,467 27

30 15. Operating expenses: Salaries and employee benefits (note 10) $ 7,357,375 $ 7,385,961 Data processing 1,146,454 1,190,516 Building occupancy 999, ,965 Depreciation 983, ,847 Office 360, ,832 Bank charges 288, ,682 Advertising and promotion 264, ,469 Professional and consulting 246, ,623 Dues and assessments 94,584 95,806 Other 1,554,947 1,628,427 $ 13,295,419 $ 13,333, Related party transactions: Key management personnel, which are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Credit Union, include the Credit Union's Executive Management Team, Board of Directors, and close family members of key management personnel and entities which are controlled, jointly controlled or significantly influenced by key management personnel or their close family members. A number of transactions were entered into with key management personnel in the normal course of business as follows: (a) Loans and deposits: The Credit Union provides banking services to key management personnel and persons connected to them. Balances outstanding at December 31, 2014 were loans of $4,291,172 ( $4,046,233) and deposits of $2,325,190 ( $1,977,026). No individual allowances for credit losses have been recognized with respect to these loans ( $nil). (b) Key management compensation: Salaries and other short-term employee benefits $1,016, ,845 In addition to their salaries, the Credit Union also provides non-cash benefits to directors and executive officers. 28