Financial Statements
Financial Statements Contents Independent Auditor's Report 2 Financial Statements Balance Sheet 3 Statement of Comprehensive Income 4 Statement of Changes in Members' Equity 5 Statement of Cash Flows 6 1. Nature of Operations and Summary of Significant Accounting Policies 7 2. Critical Accounting Estimates and Judgments 14 3. Funds on Hand and on Deposit 15 4. Other Assets 15 5. Investments 16 6. Loans to Members 17 7. Allowance for Impaired Loans 19 8. Property, Plant and Equipment 22 9. Intangible Assets 23 10. Borrowings 23 11. Other Liabilities 23 12. Members' Deposits 24 13. Pension Plan 24 14. Income Taxes 25 15. Members' Shares 26 16. Other Income 28 17. Personnel Expenses 28 18. Administrative Expenses 28 19. Related Party Transactions 28 20. Financial Instrument Classification 30 21. Fair Value Measurement 30 22. Financial Instrument Risk Management 33 23. Capital Management 39 24. Commitments 40
Statement of Comprehensive Income For the year ended December 31 Revenue Interest on loans to members Lines of credit $ 788,372 $ 904,633 Term loans 1,775,148 1,835,813 Real estate 8,819,709 8,768,085 Investment income Liquidity deposits 404,099 418,228 CUCM shares 38,850 37,717 Debenture 40,346 40,461 11,866,524 12,004,937 Cost of Funds Interest paid to members 6,436,491 6,254,557 Interest on borrowings 54,080 124,950 6,490,571 6,379,507 Gross financial margin 5,375,953 5,625,430 Operating Expenses Personnel (Note 17) 2,507,901 2,577,593 Administrative (Note 18) 1,877,762 1,831,010 Occupancy 1,100,137 1,066,172 Members' security 303,810 323,981 Organizational 245,344 219,646 Distributions to members (Note 15) 6,377 3,871 Gross operating expenses 6,041,331 6,022,273 Less other income (Note 16) 2,737,488 2,670,770 3,303,843 3,351,503 Gross operating income 2,072,110 2,273,927 Provision for impaired loans (Note 7) 34,038 80,043 Income before income taxes 2,038,072 2,193,884 Provision for income taxes (Note 14) 288,333 300,545 Net and total comprehensive income for the year $ 1,749,739 $ 1,893,339 The accompanying notes are an integral part of these financial statements. 4
Statement of Changes in Members' Equity Members' Shares Retained Earnings Total Balance on December 31, 2013 $ 3,204,633 $ 15,204,044 $ 18,408,677 Net income for the year - 1,893,339 1,893,339 Distributions to members (Note 15) - (130,129) (130,129) Issue of members' shares 1,051,693-1,051,693 Redemption of members' shares (273,461) - (273,461) Transfer from liabilities (55,632) - (55,632) Balance on December 31, 2014 3,927,233 16,967,254 20,894,487 Net income for the year - 1,749,739 1,749,739 Distributions to members (Note 15) - (113,723) (113,723) Issue of members' shares 268,583-268,583 Redemption of members' shares (149,882) - (149,882) Transfer to liabilities (56,218) - (56,218) Balance on December 31, 2015 $ 3,989,716 $ 18,603,270 $ 22,592,986 The accompanying notes are an integral part of these financial statements. 5
Statement of Cash Flows For the year ended December 31 Cash Flows from Operating Activities Net income for the year $ 1,749,739 $ 1,893,339 Adjustments for Interest and investment revenue (11,866,524) (12,004,937) Interest expense 6,490,571 6,379,507 Depreciation expense 403,270 399,595 Provision for impaired loans 34,038 80,043 Gain on disposal of property, plant and equipment - (252) Deferred taxes (4,000) (9,000) (3,192,906) (3,261,705) Change in other assets and liabilities (79,751) 61,560 Change in income taxes payable 293,313 308,295 213,562 369,855 Changes in member activities (net) Change in loans to members (14,205,809) (9,918,594) Change in members' deposits 14,925,435 17,226,312 719,626 7,307,718 Cash flows related to interest, dividends, and income taxes Interest received on loans to members 11,404,180 11,508,723 Interest received on investments 493,226 477,322 Interest paid on members' deposits (6,465,535) (6,090,301) Interest paid on borrowings (54,080) (124,950) Income taxes paid (330,622) (430,717) 5,047,169 5,340,077 Total cash flows from operating activities 2,787,451 9,755,945 Cash Flows from Investing Activities Redemption of investments (583,415) 18,915 Net purchase of property, plant and equipment (261,592) (94,427) Purchase of intangible assets (199,493) (210,647) Proceeds on disposal of property, plant and equipment - 252 Total cash flows from investing activities (1,044,500) (285,907) Cash Flows from Financing Activities Issue of common, surplus and preference shares 268,583 1,051,693 Redemption of common and surplus shares (149,882) (273,461) Dividends on shares (113,723) (130,129) Total cash flows from financing activities 4,978 648,103 Net increase in cash and cash equivalents 1,747,929 10,118,141 Cash and cash equivalents, beginning of year 25,900,454 15,782,313 Cash and cash equivalents, end of year $ 27,648,383 $ 25,900,454 Comprised of the following: Funds on hand and on deposit $ 2,796,867 $ 3,738,861 Credit Union Central of Manitoba liquidity deposits 26,500,000 25,000,000 Credit Union Central of Manitoba borrowings (1,648,484) (2,838,407) $ 27,648,383 $ 25,900,454 The accompanying notes are an integral part of these financial statements. 6
1. Nature of Operations and Summary of Significant Accounting Policies Reporting Entity Casera Credit Union Limited (the "Credit Union") is incorporated under The Credit Unions and Caisses Populaires Act of the Province of Manitoba ("The Act") and is a member of Credit Union Central of Manitoba ("CUCM"). The Credit Union operates as one operating segment in the loans and deposit taking industry in Manitoba. Products and services offered to its members include consumer and commercial loans and mortgages, chequing and savings accounts, term deposits, registered deposits, automated teller machines ("ATMs"), debit and credit cards, Internet banking and the sale of mutual funds. The Credit Union has three branches located in Winnipeg. The Credit Union's head office is located at 1300 Plessis Road, Winnipeg, Manitoba. These financial statements have been authorized for issue by the Board of Directors on March 28, 2016. Basis of Presentation These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (the "IASB"). These financial statements were prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and derivative financial instruments measured at fair value. The Credit Union s functional and presentation currency is the Canadian dollar. The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Credit Union s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2. Significant Accounting Policies Cash and Cash Equivalents For the purpose of the statement of cash flows, cash and cash equivalents includes cash on hand and current accounts with CUCM and term deposits held with CUCM for liquidity purposes less borrowings 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. 7
1. Nature of Operations and Summary of Significant Accounting Policies (continued) Other Assets Accounts receivable are classified as loans and receivables and are initially measured at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method, less any impairment losses, which approximates fair value. Investments CUCM - Liquidity Deposits These deposit instruments are classified as loans and receivables and are initially measured at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at amortized cost, which approximates fair value. 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. Where there is a significant or prolonged decline in the fair value of an equity instrument, which constitutes objective evidence of impairment, the full amount of the impairment, including any amount previously recognized in other comprehensive income, is recognized in net income. Purchases and sales of equity instruments are recognized on settlement date with any change in fair value between trade date and settlement date being recognized in accumulated other comprehensive income. On sale, the amount held in accumulated other comprehensive income associated with that instrument is removed from equity and recognized in net income. Other These investments are classified as held to maturity as they are considered non-derivative financial assets with fixed or determinable payments and fixed maturities that the Credit Union's management has the positive intention and ability to hold to maturity. These instruments are initially measured at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at amortized cost, using the effective interest rate method. 8
1. Nature of Operations and Summary of Significant Accounting Policies (continued) Loans to Members All loans to members 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 to members are initially measured at fair value, net of loan origination fees and inclusive of transaction costs incurred. Loans to members are subsequently measured at amortized cost, using the effective interest rate method, less any impairment losses. Loans to members are reported at their recoverable amount representing the aggregate amount of principal, less any allowance or provision for impaired loans plus accrued interest. Interest is accounted for on the accrual basis for all loans. If there is objective evidence that an impairment loss on loans to members carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the loans carrying amount and the present value of expected cash flows discounted at the loans original effective interest rate. Short-term balances are not discounted. The Credit Union first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The expected future cash outflows for a group of financial assets with similar credit risk characteristics are estimated based on historical loss experience. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in net income. Bad Debts Written Off Bad debts are written off from time to time as determined by management and approved by the Board of Directors when it is reasonable to expect that the recovery of the debt is unlikely. Bad debts are written off against the provisions for impairment, if a provision for impairment had previously been recognized. If no provision had been recognized, the write offs are recognized as expenses against the current year net income. 9
1. Nature of Operations and Summary of Significant Accounting Policies (continued) Loan Securitization Loans are derecognized only when the contractual rights to receive the cash flows from these assets have ceased to exist or substantially all the risks and rewards of the loans have been transferred. Property, Plant and Equipment Property, plant and equipment is initially recorded at cost and subsequently measured at cost less accumulated depreciation and any accumulated impairment losses, with the exception of land which is not depreciated. Depreciation is recognized in net income and is provided on a straight-line basis over the estimated useful life of the assets as follows: Buildings Furniture and equipment Computer equipment Security equipment Signage Leasehold improvements 40 years Up to 10 years 5 years Up to 40 years 10 years 15 years Leasehold improvements are amortized over the remaining life of the lease. Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. Intangible Assets Intangible assets consist of computer software which are not integral to the computer hardware owned by the Credit Union. Software is initially recorded at cost and subsequently measured at cost less accumulated amortization and any accumulated impairment losses. Software is amortized on a straight-line basis over its estimated useful life up to 10 years. Impairment of Non-Financial Assets Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's cash-generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows. Impairment charges are included in net income, except to the extent they reverse gains previously recognized in other comprehensive income. 10
1. Nature of Operations and Summary of Significant Accounting Policies (continued) Income Taxes Income tax expense comprises current and deferred income tax. Current and deferred income taxes are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year end date. Deferred income tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base. Recognition of deferred income tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred income tax asset to be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The amount of the deferred income tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year end date and are expected to apply when the liabilities / assets are settled / recovered. Members' Deposits All members' deposits are initially measured at fair value, net of any transaction costs directly attributable to the issuance of the instrument. Members' deposits are subsequently measured at amortized cost, using the effective interest rate method and have been classified as other liabilities. Pension Plan The Credit Union participates in a defined contribution pension plan recognizing contributions as an expense in the year to which they relate as disclosed in Note 13. Other Liabilities Liabilities for trade creditors and other payables are classified as other financial liabilities and initially measured at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method, which approximates fair value. 11
1. Nature of Operations and Summary of Significant Accounting Policies (continued) Provisions Provisions are recognized for liabilities of uncertain timing or amount that have arisen as a result of past transactions, including legal or constructive obligations. The provision is measured at the best estimate of the expenditure required to settle the obligation at the reporting date. Members Shares Members shares issued by the Credit Union are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. Shares that contain redemption features subject to the Credit Union maintaining adequate regulatory capital are accounted for using the partial treatment requirements of the International Financial Reporting Interpretations Committee ("IFRIC") 2 - Members' Shares in Co-operative Entities and Similar Instruments. Revenue Recognition Interest on loans is recorded using the effective interest method except for loans which are considered impaired. When a loan becomes impaired, recognition of interest income ceases when the carrying amount of the loan (including accrued interest) exceeds the estimated realizable amount of the underlying security. The amount of initial impairment and any subsequent changes are recorded through the provision for impaired loans as an adjustment to the specific allowance. Investment income is recorded using the effective interest method, except as it relates to adjustments in the rates received from CUCM, these are recorded when payment is received. Commissions, service charges and other income are recognized as income when the related service is provided or entitlement to receive income is earned. Leased Assets Where substantially all of the risks and rewards incidental to ownership are not transferred to the Credit Union (an "operating lease"), the total rentals payable under the lease are charged to the statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognized as a reduction of the rental expense over the lease term on a straight-line basis. Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Credit Union (a "finance lease"), the asset is treated as if it had been purchased outright. 12
1. Nature of Operations and Summary of Significant Accounting Policies (continued) Foreign Currency Translation Foreign currency accounts are translated into Canadian dollars as follows: At the transaction date, each asset, liability, revenue and expense denominated in a foreign currency is translated into Canadian dollars by the use of the exchange rate in effect at that date. At the year end date, unsettled monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at the year end date and the related translation differences are recognized in net income. Exchange gains and losses arising on the translation of monetary available-for-sale financial assets are treated as a separate component of the change in fair value and recognized in net income. Exchange gains and losses on non-monetary available-for-sale financial assets form part of the overall gain or loss recognized in respect of that financial instrument. Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars by using the exchange rate in effect at the date of the initial transaction and are not subsequently restated. Non-monetary assets and liabilities that are measured at fair value or a revalued amount are translated into Canadian dollars by using the exchange rate in effect at the date the value is determined and the related translation differences are recognized in net income or other comprehensive income consistent with where the gain or loss on the underlying non-monetary asset or liability has been recognized. Standards, Amendments and Interpretations Not Yet Effective Accounting standards that have been issued but are not yet effective are listed below. The Credit Union has not yet assessed the impact of these standards and amendments or determined whether it will early adopt them. i. Amendments to IAS 1 Presentation of Financial Statements The amendments to IAS 1 are a part of a major initiative to improve disclosure requirements in IFRS financial statements. The amendments clarify the application of materiality to note disclosure and the presentation of line items in the primary statements provide options on the ordering of financial statements and additional guidance on the presentation of other comprehensive income related to equity accounted investments. The effective date for these amendments is January 1, 2016, with earlier application permitted. The Credit Union is in the process of evaluating the impact of the new standard. ii. IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement IFRS 9 amends the requirements for classification and measurement of financial assets, impairment, and hedge accounting. IFRS 9 introduces an expected loss model of impairment and retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through profit or loss, and fair value through other comprehensive income. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Entities are required to apply IFRS 9 for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Credit Union is in the process of evaluating the impact of the new standard. 13
1. Nature of Operations and Summary of Significant Accounting Policies (continued) Standards, Amendments and Interpretations Not Yet Effective (continued) iii. Amendments to IFRS 7 Financial Instruments: Disclosures This amendment aligns with the deferral of the effective date of IFRS 9. Instead of requiring restatement of comparative financial statements, entities are either permitted or required to provide modified disclosures on transition from IAS 39 to IFRS 9 on the basis of the entity's date of adoption and if the entity chooses to restate prior periods. The amendment is effective for annual periods beginning on or after January 1, 2016. The Credit Union is in the process of evaluating the impact of the new standard. iv. IFRS 15 Revenue from Contracts with Customers IFRS 15 is based on the core principle to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 focuses on the transfer of control. IFRS 15 replaces all of the revenue guidance that previously existed in IFRSs. Entities are required to apply IFRS 15 for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Credit Union is in the process of evaluating the impact of the new standard. 2. Critical Accounting Estimates and Judgments The Credit Union makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the period of the change, if the change affects that period only; or in the period of the change and future periods, if the change affects both. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Fair Value of Financial Instruments The Credit Union determines the fair value of financial instruments that are not quoted in an active market, using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realized immediately. The methods and assumptions applied, and the valuation techniques used, are disclosed in Note 21. 14
2. Critical Accounting Estimates and Judgments (continued) Provision for Impaired Loans In determining whether an impairment loss should be recorded in the statement of comprehensive income the Credit Union makes judgment 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 loans to members with similar credit risk characteristics to allow a collective assessment of the group to determine any impairment loss. In determining the collective loan loss provision, management uses estimates based on historical loss experience over a 5 year period for assets with similar credit risk characteristics and objective evidence of impairment. Further details on the estimates used to determine the allowance for impaired loans collective provision are provided in Note 7. Income Taxes The Credit Union periodically assesses its liabilities and contingencies related to income taxes for all years open to audit based on the latest information available. For matters where it is probable that an adjustment will be made, the Credit Union records its best estimate of the income tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities. Property, Plant and Equipment The estimated useful life, residual value and depreciation method chosen are the Credit Union s best estimate of such and are based on industry norms, historical experience of management and other estimates. These estimates also consider the period and distribution of future cash inflows. Readers are cautioned that this list is not exhaustive and other items may also be affected by estimates and judgments. 3. Funds on Hand and on Deposit The Credit Union's cash and current accounts are held with CUCM. The average yield on the accounts at December 31, 2015 is 0.74% (2014-1.10%). Included in funds on hand and on deposit is cash in CUCM of $1,673,214 (2014 - $2,005,134) denominated in US dollars. 4. Other Assets Accounts receivable $ 745,410 $ 244,938 Prepaid expenses 744,201 932,411 $ 1,489,611 $ 1,177,349 15
5. Investments Credit Union Central of Manitoba Liquidity Deposits Contract deposits $ 26,500,000 $ 25,000,000 Accrued interest receivable 13,120 19,833 $ 26,513,120 $ 25,019,833 The term deposits with CUCM bear interest at rates ranging from 0.74% to 0.81% (2014-1.17% to 1.21%) and have original maturity dates of 120 days or less. Shares CUCM - Class 1 shares $ 1,845,665 $ 1,189,175 CUCM - Class 2 shares 42,500 115,575 Concentra Financial Services Association - Class D shares 1,000,000 - Other investments 20 20 CUCM $ 2,888,185 $ 1,304,770 The shares in CUCM are required as a condition of membership and are redeemable upon withdrawal of membership or at the discretion of the Board of Directors of CUCM. In addition, the member credit unions are subject to additional capital calls at the discretion of the Board of Directors of CUCM. Class 1 and 2 CUCM shares are subject to a rebalancing mechanism at least annually and are issued and redeemable at par value. There is no separately quoted market value for these shares. However, fair value is determined to be equivalent to par value due to the fact that transactions occur at par value on a regular and recurring basis. The Credit Union is not intending to dispose of any CUCM shares as the services supplied by CUCM 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 CUCM. Concentra Financial During the year, the Credit Union purchased 40,000 Class D shares. Dividends on these shares are at the discretion of the Board of Directors of Concentra Financial. 16
5. Investments (continued) Debenture Concentra Financial Debenture Interest at 4.05% payable quarterly, due November 15, 2022 $ - $ 1,000,000 Accrued interest receivable - 3,218 $ - $ 1,003,218 6. Loans to Members Consumer Term loans $ 25,445,820 $ 27,871,086 Real estate 263,361,508 245,689,129 Lines of credit 16,923,610 20,169,307 Commercial Term loans 5,447,205 5,150,414 Real estate 12,897,541 11,045,808 324,075,684 309,925,744 Accrued interest receivable 383,914 404,865 324,459,598 310,330,609 Allowance for impaired loans 160,580 182,411 Net loans to members $ 324,299,018 $ 310,148,198 Consumer real estate loans are loans secured by residential property and are generally repayable monthly with either blended payments of principal and interest or interest only. Consumer term loans consist of loans that are non real estate secured and, as such, have various repayment terms. They are secured by various types of collateral, including charges on specific equipment or personal property, investments and supported by personal guarantees. Commercial loans consist of term loans, operating lines of credit and mortgages to individuals, partnerships and corporations, and have various repayment terms. They are secured by various types of collateral, including mortgages on real property, general security agreements, charges on specific equipment, investments, and supported by personal guarantees. 17
6. Loans to Members (continued) Credit Quality of Loans It is not practical to value all collateral as at the balance sheet date due to the variety of assets and conditions. A breakdown of the loans by security held is shown as follows: Unsecured loans $ 23,626,288 $ 25,678,013 Loans secured by cash or members' deposits 466,295 614,379 Loans secured by real property 196,210,400 191,668,587 Loans secured by chattels 11,555,152 12,506,376 Commercial loans insured by government 452,546 432,010 Residential mortgages insured by government and other 91,765,003 79,026,379 Concentration of Risk $ 324,075,684 $ 309,925,744 The Credit Union has an exposure to groupings of individual loans which concentrate risk and create exposure to particular segments as noted below. Individual or related groups of loans to members which exceed 10% of members' equity as at December 31, 2015 or December 31, 2014: Commercial loans $ 2,274,855 $ 2,193,333 As at December 31, 2015, the Credit Union held $12,759,647 (2014 - $9,405,328) in outstanding commercial loans relating to the real estate, rental, and leasing industry and $2,338,272 (2014 - $4,813,690) relating to the retail trade industry. The Credit Union also held $2,039,274 (2014 - $3,271,814) in commercial loans relating to residential building construction. Various other categories make up the remainder of $3,688,300. The majority of loans to members are with members located in and around Winnipeg, Manitoba. A sizeable portion of the Credit Union's loan portfolio is secured by residential property in Winnipeg, Manitoba. Therefore, the Credit Union is exposed to the risks in reduction of the loan to valuation ratio 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. 18
6. Loans to Members (continued) Securitizations During December 2013, the Credit Union transferred financial assets in their entirety, but has continuing involvement in those financial assets. Continuing involvement largely arises from processing, administering, servicing and holding loans secured by real property in trust. The carrying amount of the loan portfolio derecognized is $11,597,548 (2014 - $18,591,310), which would be required to be paid should the Credit Union decide to repurchase the derecognized financial assets. The fair market value of the loan portfolio derecognized is $11,692,130 at December 31, 2015 (2014 - $18,728,823). In the current year, the Credit Union recognized income of $89,701 (2014 - $124,835) and a notional expense of $50,583 (2014 - $86,306) from the administration of the loan portfolio. Since inception, the Credit Union recognized, in aggregate, income of $221,093 and expense of $176,515. The Credit Union is not exposed to significant loss as a result of the transfer of the financial assets. 7. Allowance for Impaired Loans Total allowance for impaired loans is comprised of: Collective allowance $ 62,413 $ 76,794 Specific allowance 98,167 105,617 Total allowance $ 160,580 $ 182,411 During the year ended December 31, 2015, the Credit Union acquired one property in respect of non-performing loans. Movement in individual specific and collective allowance for impairment is as follows: Consumer Commercial 2015 Total Balance at January 1, 2015 $ 136,688 $ 45,723 $ 182,411 Provision for impaired loans (recovery) 53,182 (19,144) 34,038 189,870 26,579 216,449 Loans written off (55,869) - (55,869) Balance at December 31, 2015 $ 134,001 $ 26,579 $ 160,580 Gross principal balance of individually impaired loans $ 628,636 $ - $ 628,636 19
7. Allowance for Impaired Loans (continued) 2014 Consumer Commercial Total Balance at January 1, 2014 $ 81,419 $ 53,448 $ 134,867 Provision for impaired loans (recovery) 87,768 (7,725) 80,043 169,187 45,723 214,910 Loans written off (32,499) - (32,499) Balance at December 31, 2014 $ 136,688 $ 45,723 $ 182,411 Gross principal balance of individually impaired loans $ 438,269 $ - $ 438,269 An analysis of individual loans that are impaired or potentially impaired based on period of delinquency is as follows: Carrying Value Specific Carrying Specific Allowance Value Allowance Period of delinquency Less than 30 days $ 22,398 $ 7,430 $ 288,508 $ 43,836 31 to 90 days 166,141 20,674 34,928 28,085 Greater than 90 days 440,097 70,063 114,833 33,696 Total impaired loans in arrears 628,636 98,167 438,269 105,617 Total impaired loans not in arrears - - - - Total impaired loans $ 628,636 $ 98,167 $ 438,269 $ 105,617 Key Assumptions in Determining the Allowance for Impaired Loans Collective Allowance The Credit Union has determined the likely impairment loss on loans which have not maintained the loan repayments in accordance with the loan contract, or where there is other evidence of potential impairment such as industrial restructuring, job losses or economic circumstances. In identifying the impairment likely from these events the Credit Union estimates the potential impairment using the loan type, industry, geographical location, type of loan security, the length of time the loans are past due and the historical loss experience. The circumstances may vary for each loan over time, resulting in higher or lower impairment losses. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Credit Union to reduce any differences between loss estimates and actual loss experience. An estimate of the collective allowance is based on the period of repayments that are past due and historical write-offs over a 5 year period. 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. 20
7. Allowance for Impaired Loans (continued) Loans with repayments past due but not regarded as individually impaired and considered in determining the collective allowance are as follows: 2015 Consumer Commercial Total 1 to 30 days $ 4,362,944 $ 515,700 $ 4,878,644 31 to 90 days 836,727-836,727 Greater than 90 days - - - Balance at December 31, 2015 $ 5,199,671 $ 515,700 $ 5,715,371 2014 Consumer Commercial Total 1 to 30 days $ 6,382,627 $ 277,143 $ 6,659,770 31 to 90 days 570,833-570,833 Greater than 90 days - - - Balance at December 31, 2014 $ 6,953,460 $ 277,143 $ 7,230,603 21
8. Property, Plant and Equipment Cost Land Buildings Furniture and Equipment Computer Equipment Security Equipment Signage Leasehold Improvements Projects in process Balance on January 1, 2014 $ 40,724 $ 1,616,801 $ 1,295,217 $ 299,022 $ 339,330 $ 296,886 $ 1,032,501 $ 148,075 $ 5,068,556 Additions - 35,757-4,146 1,882 - - 200,717 242,502 Disposals / Transfers - - - - - - - (148,075) (148,075) Balance on December 31, 2014 40,724 1,652,558 1,295,217 303,168 341,212 296,886 1,032,501 200,717 5,162,983 Additions - - 46,079 184,410 - - - 202,793 433,282 Disposals / Transfers - - - - - - - (171,690) (171,690) Balance on December 31, 2015 $ 40,724 $ 1,652,558 $ 1,341,296 $ 487,578 $ 341,212 $ 296,886 $ 1,032,501 $ 231,820 $ 5,424,575 Accumulated Depreciation Balance on January 1, 2014 $ - $ 1,210,004 $ 808,245 $ 268,716 $ 194,518 $ 212,078 $ 614,418 $ - $ 3,307,979 Depreciation expense - 59,954 83,591 17,610 11,069 29,467 59,261-260,952 Balance on December 31, 2014-1,269,958 891,836 286,326 205,587 241,545 673,679-3,568,931 Depreciation expense - 62,368 73,088 12,844 10,741 29,467 59,261-247,769 Balance on December 31, 2015 $ - $ 1,332,326 $ 964,924 $ 299,170 $ 216,328 $ 271,012 $ 732,940 $ - $ 3,816,700 Net Book Value December 31, 2014 $ 40,724 $ 382,600 $ 403,381 $ 16,842 $ 135,625 $ 55,341 $ 358,822 $ 200,717 $ 1,594,052 December 31, 2015 $ 40,724 $ 320,232 $ 376,372 $ 188,408 $ 124,884 $ 25,874 $ 299,561 $ 231,820 $ 1,607,875 Total 22
9. Intangible Assets Computer Software Cost Balance on January 1, 2014 $ 1,161,833 Additions 210,647 Balance on December 31, 2014 1,372,480 Additions 199,493 Balance on December 31, 2015 $ 1,571,973 Accumulated Depreciation Balance on January 1, 2014 $ 490,935 Depreciation expense 138,643 Balance on December 31, 2014 629,578 Depreciation expense 155,501 Balance on December 31, 2015 $ 785,079 Net Book Value December 31, 2014 $ 742,902 December 31, 2015 $ 786,894 10. Borrowings The Credit Union has approved lines of credit with CUCM equal to 10% of its members' deposits that bear interest at prime with effective rate of 2.70% at December 31, 2015. For the current year, this amounts to $33.5 million. These accommodations are secured by an assignment of shares and deposits in CUCM and a general assignment of loans receivable from members. 11. Other Liabilities Trade accounts and accrued expenses $ 851,224 $ 624,109 Certified cheques, money orders and travellers' cheques outstanding 7,085 1,689 $ 858,309 $ 625,798 23
12. Members' Deposits Chequing accounts $ 31,137,618 $ 32,650,997 Savings accounts 81,099,867 70,534,937 Term deposits 113,401,949 114,965,189 Registered retirement savings plans 50,739,622 50,049,062 Registered retirement income funds 27,211,832 26,486,735 Tax free savings account 28,369,026 22,347,559 331,959,914 317,034,479 Accrued interest payable 2,665,202 2,694,246 $ 334,625,116 $ 319,728,725 Included in chequing deposits is an amount of $1,887,887 to be settled in US dollars at December 31, 2015 (2014 - $2,115,171). Concentration of Risk The Credit Union has an exposure to groupings of individual deposits which concentrate risk and create exposure to particular segments. There were no individual or related groups of members' deposits which exceed 2% of members' deposits as at December 31, 2015 or December 31, 2014. The majority of members' deposits are with members located in and around Winnipeg, Manitoba. 13. Pension Plan The Credit Union has a defined contribution pension plan for full-time employees. The contributions are held in trust by the Cooperative Superannuation Society Limited and are not recorded in these financial statements. The Credit Union matches employee contributions at a rate of 6% of the employee salary. The expense for the year ended December 31, 2015 was $102,761 (2014 - $109,380). As a defined contribution pension plan, the Credit Union has no further liability or obligation for future contributions to fund benefits earned in 2015 for plan members. 24
14. Income Taxes The significant components of income tax expense included in net income are composed of: Current income tax expense Based on current year taxable income $ 292,333 $ 309,545 Deferred income tax expense Origination and reversal of temporary differences (4,000) (9,000) Total income tax expense $ 288,333 $ 300,545 The total provision for income taxes in the statement of comprehensive income is at a rate less than the combined federal and provincial statutory income tax rates for the following reasons: % % Combined federal and provincial statutory income tax rates 27.0 27.0 Credit Union rate reduction (14.2) (14.7) Provincial Profits tax 0.8 0.8 Tax savings on distribution (0.8) (0.8) Non-deductible and other items 1.3 1.4 14.1 13.7 The tax effects of temporary differences which give rise to the net future income tax liability is related to the amortization of property, plant and equipment, mortgage cash back program and the allowance for impaired loans. The movement in deferred income tax liabilities and assets are as follows: Balance at December 31 2014 Recognize in Net Income Reclassify from Equity to Net Income 2015 Balance at December 31 2015 Deferred income tax liabilities Property, plant and equipment $ 267,477 $ 32,246 $ - $ 299,723 Mortgage cash back program 115,915 (35,197) 80,718 Other 15,533 (1,638) - 13,895 398,925 (4,589) - 394,336 Deferred income tax assets Allowance for impaired loans 4,925 (589) - 4,336 Net deferred income tax liability $ 394,000 $ (4,000) $ - $ 390,000 25
14. Income Taxes (continued) Balance at January 1 2014 Recognize in Net Income Reclassify from Equity to Net Income 2014 Balance at December 31 2014 Deferred income tax liabilities Property, plant and equipment $ 231,747 $ 35,730 $ - $ 267,477 Mortgage cash back program 158,441 (42,526) - 115,915 Other 16,454 (921) - 15,533 406,642 (7,717) - 398,925 Deferred income tax assets Allowance for impaired loans 3,642 1,283-4,925 Net deferred income tax liability $ 403,000 $ (9,000) $ - $ 394,000 Deferred income tax liabilities Deferred income tax liabilities to be settled within 12 months $ 36,000 $ 79,000 Deferred income tax liabilities to be settled after more than 12 months 358,000 320,000 394,000 399,000 Deferred income tax assets Deferred income tax assets to be recovered within 12 months 4,000 5,000 Net deferred income tax liability $ 390,000 $ 394,000 15. Members' Shares Shares Authorized Issued Equity Liability Equity Liability Common Unlimited 388,043 $ 1,922,599 $ 17,615 $ 1,886,945 $ 35,654 Surplus Unlimited 887,261 800,584 86,677 777,868 88,307 Class "A" preference shares 1,000,000 139,837 1,266,533 131,837 1,262,420 55,950 $ 3,989,716 $ 236,129 $ 3,927,233 $ 179,911 26
15. Members' Shares (continued) Terms and Conditions Each member must purchase one common share. No member may hold more than 10% of the issued and outstanding shares of any class. Each member of the Credit Union has one vote, regardless of the number of shares that a member holds. Authorized shares Common shares Authorized common share capital consists of an unlimited number of common shares, issued and redeemable at $5 each. The total amount of common shares purchased or redeemed by the Credit Union in a fiscal year shall not exceed the total amount of common shares issued in that year if the Credit Union s equity is, or would by such purchase or redemption be, less than the level of capital as prescribed by the Act. Surplus Shares Authorized surplus share capital consists of an unlimited number of surplus shares, issued and redeemable at $1 each. The total amount of surplus shares purchased or redeemed by the Credit Union in a fiscal year shall not exceed 10% of the amount of surplus shares issued and outstanding at the last fiscal year-end of the Credit Union if the Credit Union s equity is, or would by such purchase or redemption be, less than the level of capital as prescribed by the Act. Class "A" Preference Shares Authorized Class A preference share capital consists of 1,000,000 non-voting Class A preference shares, having a non-cumulative dividend rate, when declared, of not less than the first year rate of the latest issue of Canada Savings Bonds, issued and redeemable at $10 each. Dividends are payable at the discretion of the Board. The total amount of Class A preference shares purchased or redeemed by the Credit Union in a fiscal year shall not exceed 10% of the amount of Class A preference shares issued and outstanding at the last fiscal year-end of the Credit Union if the Credit Union s equity is, or by such purchase or redemption would be, less than the level of capital as prescribed by the Act. Class A preference shares are redeemable at the discretion of the Board. Distributions to Members The Board of Directors have declared dividends on common and Class "A" preference shares of $121,100 ($134,000 in 2014) of which $6,377 ($3,871 in 2014) has been presented as operating expenses on the statement of comprehensive income and $113,723 ($130,129 in 2014) has been presented as a reduction of equity on the statement of changes in members' equity. Tax savings of $16,397 ($17,532 in 2014) have been applied to reduce current income tax expense on the statement of comprehensive income. 27
16. Other Income Commissions $ 799,482 $ 768,202 Foreign exchange 54,997 101,496 Prepayment penalty 140,273 143,848 Rent (net) 35,440 36,028 Service charges 1,095,367 1,131,048 Other 611,929 490,148 $ 2,737,488 $ 2,670,770 17. Personnel Expenses Salaries and wages $ 2,121,113 $ 2,143,850 Employee benefits 354,237 355,200 Other 32,551 78,543 $ 2,507,901 $ 2,577,593 18. Administrative Expenses Advertising and promotion $ 132,553 $ 131,840 Chattel registration and mortgage expense 135,382 143,731 Data processing fees, clearing and service charges 953,887 902,555 Repairs and maintenance 70,808 55,376 Printing, postage, supplies and stationery 168,354 156,962 Professional fees 119,414 117,101 Telephone 71,544 77,029 Travel 12,575 11,292 Other 213,245 235,124 $ 1,877,762 $ 1,831,010 19. Related Party Transactions Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Credit Union, directly or indirectly. Key management personnel have been taken to comprise the directors and members of management responsible for the day to day financial and operational management of the Credit Union. 28
19. Related Party Transactions (continued) The aggregate compensation of key management personnel during the year was as follows: Compensation Salaries, and other short-term employee benefits $ 602,098 $ 608,412 Total pension and other post-employment benefits 31,808 32,321 $ 633,906 $ 640,733 Included in compensation above are the following payments to the directors and officers of the Credit Union for expenses associated with the performance of their duties: Honouraria and per diems $ 46,650 $ 42,108 Training and conference costs 10,637 20,745 $ 57,287 $ 62,853 Details of loans to key management personnel are as follows: Loans to key management personnel Aggregate value of loans outstanding $ 1,264,105 $ 1,445,110 Interest received on loans advanced 27,973 36,956 Total value of lines of credit advanced 602,300 626,800 Interest received on lines of credit advanced 6,243 6,343 Unused value of lines of credit 269,331 299,278 The Credit Union s policy for lending to key management personnel is that the loans are approved with a slightly preferential term than those applied to members for each class of loan. Deposits from key management personnel are as follows: Deposits from key management personnel Aggregate value of term and savings accounts $ 2,446,225 $ 2,342,376 Interest paid on term and savings accounts 56,703 56,402 The Credit Union s policy for receiving deposits from key management personnel is that all transactions are approved and deposits accepted with a slightly preferential term than those applied to members for each type of deposit. 29
20. Financial Instrument Classification The carrying amount of the Credit Union's financial instruments by classification is as follows: Available-for- Sale Held to Maturity Loans and Receivables Other Financial Liabilities Total (in thousands) December 31, 2015 Funds on hand and on deposit $ - $ - $ 2,797 $ - $ 2,797 Accounts receivable - - 745-745 Investments (Note 5) 2,888-26,513-29,401 Loans to members - - 324,299-324,299 Borrowings - - - (1,648) (1,648) Other liabilities - - - (858) (858) Members' deposits - - - (334,625) (334,625) Members' shares - - - (236) (236) $ 2,888 $ - $ 354,354 $ (337,367)$ 19,875 December 31, 2014 Funds on hand and on deposit $ - $ - $ 3,739 $ - $ 3,739 Accounts receivable - - 245-245 Investments (Note 5) 1,305 1,003 25,020-27,328 Loans to members - - 310,148-310,148 Borrowings - - - (2,838) (2,838) Other liabilities - - - (626) (626) Members' deposits - - - (319,729) (319,729) Members' shares - - - (180) (180) $ 1,305 $ 1,003 $ 339,152 $ (323,373)$ 18,087 21. Fair Value Measurement Assets and liabilities that are measured at fair value in the balance sheet are grouped into three levels of a fair value hierarchy. Following is an analysis of assets and liabilities that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable: Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities using the last bid price. There are no assets or liabilities measured at fair value classified as Level 1. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Assets measured at fair value and classified as Level 2 include investment in shares. Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). There are no assets or liabilities measured at fair value classified as Level 3. 30