Consolidated Financial Statements For the year ended December 31, 2016
Consolidated Financial Statements For the year ended December 31, 2016 Contents Independent Auditor's Report 2 Consolidated Financial Statements Consolidated Balance Sheet 3 Consolidated Statement of Comprehensive Income 4 Consolidated Statement of Changes in Members' Equity 5 Consolidated Statement of Cash Flows 6 1. Corporation Information 7 2. Basis of Presentation 7 3. Loans to Members 8 4. Members' Deposits 13 5. Members' Shares 15 6. Capital Management 16 7. Cash and Cash Equivalents 16 8. Funds on Hand and on Deposit 17 9. Financial Margin and Interest 17 10. Investments 18 11. Foreign Exchange Risk 20 12. Commitments 21 13. Income Taxes 22 14. Pension Plan 23 15. Property, Plant and Equipment, Intangible Assets & Investment Property 23 16. Securitized Borrowings 25 17. Related Party Transactions 26 18. Personnel Expenses 27 19. Investments in Associates 27 20. Contingencies 28 21. Standards, Amendments and Interpretations Net Yet Effective 28
Consolidated Statement of Comprehensive Income For the year ended December 31 Revenue Interest on loans to members $ 64,045,259 $ 62,678,849 Investment income Profit from associates 816,078 762,201 Liquidity deposits 3,637,995 2,928,850 Shares and debentures 893,200 831,339 69,392,532 67,201,239 Cost of funds 34,087,094 31,608,121 Gross financial margin 35,305,438 35,593,118 Operating Expenses Personnel (Note 18) 17,216,184 17,038,131 Administrative 7,602,132 7,055,033 Occupancy 3,005,830 2,894,589 Members' security 1,874,421 1,755,475 Organizational 1,092,361 947,924 Gross operating expenses 30,790,928 29,691,152 Less other income 10,176,481 9,079,164 20,614,447 20,611,988 Gross operating income 14,690,991 14,981,130 Provision for impaired loans 275,508 42,930 Income before income taxes 14,415,483 14,938,200 Provision for Income Taxes (Note 13) Current 2,119,237 2,025,176 Deferred (148,000) 29,476 1,971,237 2,054,652 Net income for the year 12,444,246 12,883,548 Change in unrealized losses on available-for-sale investments net of tax (90,190) (52,552) Total comprehensive income for the year $ 12,354,056 $ 12,830,996 The accompanying notes are an integral part of these consolidated financial statements. 4
For the year ended December 31 Consolidated Statement of Changes in Members' Equity Accumulated Other Comprehensive Income Members' Shares Retained Earnings Total Balance at December 31, 2014 $ 230,582 $ 9,276,898 $ 121,225,285 $ 130,732,765 Net income for the year - - 12,883,548 12,883,548 Issue of members' shares - 12,425-12,425 Redemption of members' shares - (4,544,072) - (4,544,072) Change in unrealized losses on available-for-sale investments (52,552) - - (52,552) Balance at December 31, 2015 178,030 4,745,251 134,108,833 139,032,114 Net income for the year - - 12,444,246 12,444,246 Issue of members' shares - 13,805-13,805 Redemption of members' shares - (4,504,471) - (4,504,471) Change in unrealized losses on available-for-sale investments (90,190) - - (90,190) Balance at December 31, 2016 $ 87,840 $ 254,585 $ 146,553,079 $ 146,895,504 The accompanying notes are an integral part of these consolidated financial statements. 5
Consolidated Statement of Cash Flows For the year ended December 31 Cash Flows from Operating Activities Net income for the year $ 12,444,246 $ 12,883,548 Adjustments for Interest and investment revenue (69,392,532) (67,201,239) Interest expense 34,087,094 31,608,121 Depreciation expense 1,326,746 1,222,620 Provision for impaired loans 275,508 42,930 Loss on disposal of property, plant and equipment 16,103 39,920 Deferred income taxes (148,000) 55,000 (21,390,835) (21,349,100) Change in other assets and liabilities (2,998,291) (755,917) Change in income taxes payable 679,135 (1,057,884) (2,319,156) (1,813,801) Changes in member activities (net) Change in loans to members (127,639,495) (110,446,054) Change in members' deposits 178,350,399 144,389,286 50,710,904 33,943,232 Cash flows related to interest, dividends, and income taxes Interest received on loans to members 63,947,527 62,682,597 Interest received on investments 4,502,296 3,798,494 Dividends received on investments in associates 633,000 672,000 Interest paid on members' deposits (35,426,722) (31,198,776) 33,656,101 35,954,315 Total cash flows from operating activities 60,657,014 46,734,646 Cash Flows from Investing Activities Purchase of investment property (131,664) (6,311) Redemption of investments 1,641,544 6,653,664 Purchase of property, plant and equipment (686,774) (899,787) Purchase of intangibles (190,570) (68,840) Purchase of investments (1,696,660) (7,721,285) Total cash flows from investing activities (1,064,124) (2,042,559) Cash Flows from Financing Activities Proceeds from securitized borrowings 15,293,151 - Issue of common and surplus shares 13,805 12,425 Redemption of common and surplus shares (4,504,471) (4,544,072) Total cash flows from financing activities 10,802,485 (4,531,647) Net increase in cash and cash equivalents 70,395,375 40,160,440 Cash and cash equivalents, beginning of year 185,977,592 145,817,152 Cash and cash equivalents, end of year $ 256,372,967 $ 185,977,592 Comprised of the following Funds on hand and on deposit $ 32,922,967 $ 39,051,342 Credit Union Central of Manitoba term deposits 223,450,000 146,926,250 $ 256,372,967 $ 185,977,592 The accompanying notes are an integral part of these consolidated financial statements. 6
1. Corporation Information Reporting Entity Access 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, commercial, agricultural loans and mortgages, chequing and savings accounts, term deposits, registered deposits, mutual funds, automated banking machines ("ABMs"), debit and credit cards and internet banking. The Credit Union has seventeen branches located throughout Southern Manitoba. The Credit Union's head office is located at Stanley Business Centre unit #2-23111 PTH #14, Winkler, Manitoba. These financial statements have been authorized for issue by the Board of Directors on February 22, 2017. 2. Basis of Presentation (a) (b) Statement of Compliance These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (the "IASB"). Basis of Measurement 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. (c) Judgement and Estimates 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 critical judgements and estimates in applying accounting policies that have the most significant risk of causing material adjustment to the carrying amounts of assets and liabilities recognized in the financial statements with the next financial year are: In determining whether an impairment loss should be recorded relating to loans to members in the statement of comprehensive income (Note 3). The Credit Union determines the fair value of certain financial instruments using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows (Notes 3, 4 and 10). In addition, in preparing the financial statements, the notes to the financial statements were ordered such that the most relevant information was presented earlier in the notes and the disclosures that management deemed to be immaterial were excluded from the notes to the financial statements. The determination of the relevance and materiality of disclosures involved significant judgement. 7
2. Basis of Presentation (continued) Basis of Consolidation These financial statements include the accounts of the Credit Union and its wholly-owned subsidiaries, 5033179 Manitoba Ltd. and 6009655 Manitoba Ltd. 3. 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. 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. Bad debts are written off from time to time as determined by management and approved by the Board of Directors when it is reasonable to expect that the recovery of the debt is unlikely. Bad debts are written off against the provisions for impairment, if a provision for impairment had previously been recognized. If no provision had been recognized, the write offs are recognized as expenses in net income. Property held for resale is valued at the lower of cost and fair market value. 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 non-real estate loans consist of term loans and lines of credit 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 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 personal guarantees. 8
3. Loans to Members (continued) Agricultural loans consist of term loans, operating lines of credit and mortgages to individuals, partnerships, and corporations for agricultural purposes 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, assignments of crops and livestock, investments, and personal guarantees. Consumer Non-real estate $ 106,669,295 $ 101,692,406 Real estate 858,034,456 779,298,076 Commercial Non-real estate 161,584,779 161,501,775 Real estate 433,288,951 415,136,111 Agricultural Non-real estate 159,249,319 157,536,260 Real estate 234,975,029 211,112,250 1,953,801,829 1,826,276,878 Accrued interest receivable 3,771,052 3,673,320 1,957,572,881 1,829,950,198 Allowance for impaired loans (4,164,687) (4,003,723) Net loans to members $ 1,953,408,194 $ 1,825,946,475 Credit Risk Management Credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner. To assess credit risk, the Credit Union takes into consideration the member's character, ability to pay, and value of collateral available to secure the loan. The Credit Union's credit risk management principles are guided by its overall risk management principles. The Board of Directors ensures that management has a framework, and policies, processes and procedures in place to manage credit risk and that the overall credit risk policies are complied with at the business and transaction level. The Credit Union's credit risk policies set out the minimum requirements for management of credit risk in a variety of transactional and portfolio management contexts. Its credit risk policies comprise the following: General loan policy statements including approval of lending policies, eligibility for loans, exceptions to policy, policy violations, liquidity, loan administration, credit concentration limits, and risk rating; Loan lending limits including Board of Directors limits, schedule of assigned limits and exemptions from aggregate indebtedness; 9
3. Loans to Members (continued) Credit Risk Management (continued) Loan collateral security classifications which set loan classifications, advance ratios and depreciation periods; Procedures outlining loan overdrafts, release or substitution of collateral, temporary suspension of payments and loan renegotiations; Loan delinquency controls regarding procedures followed for loans in arrears; and Audit procedures and processes are in existence for the Credit Union's lending activities. With respect to credit risk, the Board of Directors receives monthly reports summarizing new loans, delinquent loans and overdraft utilization. The Board of Directors also receives an analysis of bad debts and allowance for impaired loans quarterly. The amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated is $1,039,413 (December 31, 2015 - $346,290). There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Concentration of Risk The Credit Union has an exposure to groupings of individual loans which concentrate risk and create exposure to particular segments as follows: No individual or related groups of loans to members exceed 5% of members' deposits and capital as at December 31, 2016. As at December 31, 2016, the Credit Union held $275,520,696 (2015 - $286,795,731) in outstanding agricultural loans relating to the crop farming industry and $56,821,865 (2015 - $47,258,580) relating to the livestock farming industry, $78,348,016 (2015 - $72,142,007) in outstanding commercial loans relating to the construction industry, $174,240,249 (2015 - $154,927,294) relating to the real estate, rental and leasing industry, $65,468,169 (2015 - $54,296,039) relating to the health care and social assistance industry and $45,610,719 (2015 - $46,882,897) relating to the accommodation and food services industry. The majority of loans to members are with members located in southern Manitoba. A sizeable portfolio of the Credit Union's loan portfolio is secured by residential property in southern 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. Allowance for Impaired Loans If there is objective evidence that an impairment loss on loans to members carried at amortized cost has 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 loan's original effective interest rate. Short-term balances are not discounted. 10
3. Loans to Members (continued) Allowance for Impaired Loans (continued) The Credit Union first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The expected future cash outflows for a group of financial assets with similar credit risk characteristics are estimated based on historical loss experience. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in net income. Total allowance for impaired loans is comprised of: Collective allowance $ 2,985,597 $ 3,032,123 Individual specific allowance 1,179,090 971,600 Total allowance $ 4,164,687 $ 4,003,723 During the year ended December 31, 2016, the Credit Union acquired $1,244,825 (December 31, 2015 - $307,000) of assets in respect of problem loans. Movement in individual specific and collective allowance for impairment is as follows: 2016 Consumer Agricultural Commercial Total Balance at December 31, 2015 $ 826,346 $ 1,023,859 $ 2,153,518 $ 4,003,723 Provision for impaired loans (recovery) 632,414 116,462 (473,368) 275,508 1,458,760 1,140,321 1,680,150 4,279,231 Loans written off (net) (84,147) - (30,397) (114,544) Balance at December 31, 2016 $ 1,374,613 $ 1,140,321 $ 1,649,753 $ 4,164,687 Gross principal balance of individually impaired loans $ 5,937,894 $ 1,916,549 $ 6,086,369 $ 13,940,812 2015 Consumer Agricultural Commercial Total Balance at December 31, 2014 $ 808,407 $ 1,001,440 $ 2,358,798 $ 4,168,645 Provision for impaired loans (recovery) 207,857 22,419 (187,346) 42,930 1,016,264 1,023,859 2,171,452 4,211,575 Loans written off (net) (189,918) - (17,934) (207,852) Balance at December 31, 2015 $ 826,346 $ 1,023,859 $ 2,153,518 $ 4,003,723 Gross principal balance of individually impaired loans $ 4,473,722 $ 1,465,218 $ 3,396,478 $ 9,335,418 11
3. Loans to Members (continued) An analysis of individual loans that are impaired or potentially impaired based on period of delinquency is as follows: Carrying Value Individual Specific Allowance Carrying Value Individual Specific Allowance Period of delinquency Less than 30 days $ 17,508 $ 17,508 $ 1,194,880 $ 1,527 31 to 90 days 743,277 11,126 887,088 62,720 Greater than 90 days 4,084,136 964,679 2,548,813 374,419 Total impaired loans in arrears 4,844,921 993,313 4,630,781 438,666 Total impaired loans not in arrears 9,095,891 185,777 4,704,637 532,934 Total impaired loans $ 13,940,812 $ 1,179,090 $ 9,335,418 $ 971,600 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, historical write-offs, and losses that have occurred in the agriculture and manufacturing sectors. 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. Loans with repayments past due but not regarded as individually impaired and considered in determining the collective allowance are as follows: 2016 Consumer Agricultural Commercial Total 1 to 30 days $ 11,839,845 $ 798,119 $ 6,451,254 $ 19,089,218 31 to 90 days 1,618,928 548,096 601,910 2,768,934 Balance at December 31, 2016 $ 13,458,773 $ 1,346,215 $ 7,053,164 $ 21,858,152 2015 Consumer Agricultural Commercial Total 1 to 30 days $ 7,947,607 $ 2,077,454 $ 4,072,774 $ 14,097,835 31 to 90 days 1,161,489 226,071 730,606 2,118,166 Balance at December 31, 2015 $ 9,109,096 $ 2,303,525 $ 4,803,380 $ 16,216,001 12
For the year ended December 31, 2016 3. 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 security held on a portfolio basis is as follows: Unsecured loans $ 65,681,203 $ 95,937,041 Loans secured by assignment of members' deposits 13,492,790 13,120,062 Loans secured by real property 1,609,992,771 1,454,566,944 Loans secured by chattels 268,406,117 266,326,151 $ 1,957,572,881 $ 1,829,950,198 No individual or related groups of loans to members exceed 5% of members' deposits and capital as at December 31, 2016. Fair Value The fair value of the loans to members at December 31, 2016 was $1,966,763,782 (2015 - $1,839,408,680). The fair market value of loans to members is calculated based on the present value of future cash flows. To determine present value, future cash flows are discounted by the current rate curve by which the asset or liability is originally priced. Discount spot rates vary from 2.39% to 3.49% based on maturity date and type of deposit. 4. 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. Members deposits are broken down as follows: Chequing $ 400,625,239 $ 365,326,832 Savings 648,889,306 486,789,634 Term deposits 614,459,818 652,588,645 Registered plans 415,338,424 396,250,649 Unclaimed and inactive accounts 28,579 35,207 2,079,341,366 1,900,990,967 Accrued interest payable 11,915,682 13,255,310 $ 2,091,257,048 $ 1,914,246,277 Included in chequing deposits is an amount of $25,647,080 to be settled in US dollars (2015 - $24,485,406). 13
4. Members' Deposits (continued) Concentration of Risk The Credit Union has an exposure to groupings of individual deposits which concentrate risk and create exposure to particular segments. No individual or related groups of members' deposits exceed 5% of members' deposits and capital as at December 31, 2016. The majority of members' deposits are with members located in and around southern Manitoba. Liquidity Risk Liquidity risk is the risk that the Credit Union will not be able to meet all cash outflow obligations as they come due. The Credit Union mitigates this risk by monitoring cash activities and expected outflows so as to meet all cash outflow obligations as they fall due. The Credit Union's liquidity management framework is designed to ensure that adequate sources of reliable and cost effective cash or its equivalents are continually available to satisfy its current and prospective financial commitments under normal and contemplated stress conditions. Provisions of the Act require the Credit Union to maintain liquid assets of at least 8% of members' deposits and borrowings in order to meet member withdrawals. The Credit Union manages liquidity risk by: Continuously monitoring actual daily cash flows and longer term forecasted cash flows; Monitoring the maturity profiles of financial assets and liabilities; Maintaining adequate reserves, liquidity support facilities and reserve borrowing facilities; and Monitoring the liquidity ratios monthly. The Board of Directors receives monthly liquidity reports as well as information regarding cash balances in order for it to monitor the Credit Union's liquidity framework. The Credit Union was in compliance with the liquidity requirements throughout the fiscal year. As at December 31, 2016, the position of the Credit Union is as follows: Qualifying liquid assets on hand $ 256,372,967 Total liquidity requirement 167,300,564 Excess liquidity $ 89,072,403 The maturities of liabilities are shown in Note 9. The Credit Union has no material commitments for capital expenditures and there is no need for such expenditures in the normal course of business. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. 14
4. Members' Deposits (continued) Fair Value The fair value of members' deposits at December 31, 2016 was $2,095,830,400 (2015 - $1,923,327,870). The fair market value of members' deposits is calculated based on the present value of future cash flows. To determine present value, future cash flows are discounted by the current rate curve by which the asset or liability is originally priced. Discount spot rates vary from 0.70% to 2.35% based on renewal date of the deposit. 5. 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. Common $ 254,585 $ 240,780 Surplus - 4,504,471 Terms and Conditions $ 254,585 $ 4,745,251 Each member must purchase one common share. No member may hold more than 10% of the issued shares of any class. Each member of the Credit Union has one vote, regardless of the number of shares that a member holds. Funds invested by members in members' shares are not insured by Deposit Guarantee Corporation of Manitoba. 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 year shall not exceed 5% of the amount of surplus shares outstanding at the last yearend 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. The withdrawal is also subject to terms of the Credit Union's VIP program which restrict redemption to certain situations: member is deceased, member ceases to reside inside the Credit Union's trading area, wind-up or dissolution of a business or corporation, bankruptcies, legal claim, hardship, member reaching the age of 65. All such payouts are at the discretion of the Board of Directors. During the year, the Credit Union redeemed all its surplus shares. 15
6. Capital Management The Credit Union s objectives with respect to capital management are to maintain a capital base that is structured to exceed regulatory requirements and to best utilize capital allocations. Regulations to the Act require that the Credit Union establish and maintain a level of capital that meets or exceeds the following: Total members' capital as shown on the balance sheet shall not be less than 5% of the book value of all assets; Retained earnings shall not be less than 3% of the book value of assets; and Capital calculated in accordance with the Act shall not be less than 8% of the risk weighted value of its assets. The Credit Union considers its capital to include members' shares (common shares and surplus shares), and retained earnings. There have been no changes in what the Credit Union considers to be its capital since the previous period. The Credit Union establishes the risk weighted value of its assets in accordance with the Regulations of the Act which establishes the applicable percentage for each class of assets. The Credit Union's risk weighted value of its assets as at December 31, 2016 - $1,216,748,876 (2015 - $1,152,553,720). As at December 31, 2016, the Credit Union met the capital requirements of The Act with a calculated members' capital ratio of 6.50% (2015-6.74%), a retained surplus ratio of 6.49% (2015-6.51%) and a risk weighted asset ratio of 11.92% (2015-11.92%). Regulatory Capital consists of the following: Tier I Capital Members' shares $ 254,585 $ 4,745,251 Retained earnings 146,553,079 134,108,833 Deferred income tax liability 247,000 395,000 Intangible assets (1,224,416) (1,309,680) Collective allowance 2,985,597 3,032,123 148,815,845 140,971,527 Tier II Capital Redeemable portion of other member shares 254,585 4,745,251 Total regulatory capital $ 149,070,430 $ 145,716,778 7. 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. 16
8. 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, 2016 is 0.50% (2015-0.50%). Included in the balance of funds on hand and on deposit is $12,449,532 (2015 - $23,168,987) denominated in US dollars. The carrying amount of the funds on hand and on deposit approximates their fair value. 9. Financial Margin and Interest The Credit Union's major source of income is financial margin, the difference between interest earned on investments and loans to members and interest paid on members' deposits. The objective of asset/liability management is to match interest sensitive assets with interest sensitive liabilities as to amount and as to term to their interest rate repricing dates, thus minimizing fluctuations of income during periods of changing interest rates. Schedules of matching and interest rate vulnerability are regularly prepared and monitored by Credit Union management and reported to the Deposit Guarantee Corporation of Manitoba in accordance with the Credit Union's structural interest rate risk management policy. This policy has been approved by the Board of Directors as required by Regulations to the Act. For the year ended December 31, 2016 the Credit Union was in compliance with this policy. The following schedule shows the Credit Union's sensitivity to interest rate changes. A significant amount of loans and deposits can be settled before maturity on payment of a penalty, but no adjustment has been made for repayments that may occur prior to maturity. Maturity Dates Assets Asset/ Liabilities Liability Gap (in thousands) Interest sensitive Variable $ 951,484 $ 797,602 $ 153,882 0-6 months 287,214 216,495 70,719 7-12 months 98,688 263,697 (165,009) 1-2 years 201,705 181,591 20,114 2-3 years 180,719 172,598 8,121 3-4 years 195,955 98,094 97,861 4-5 years 261,011 61,336 199,675 Greater than 5 years 49,024 473 48,551 Interest sensitive 2,225,800 1,791,886 433,914 Non-interest sensitive 33,797 467,711 (433,914) Total $ 2,259,597 $ 2,259,597 $ - As at December 31, 2016, the weighted average rate for interest bearing assets is 3.07% and interest bearing liabilities is 1.65%. Interest sensitive assets and liabilities cannot normally be perfectly matched by amount and term to maturity. One of the roles of a credit union is to intermediate between the expectations of borrowers and depositors. 17
9. Financial Margin and Interest (continued) An analysis of the Credit Union's risk due to changes in interest rates was calculated using financial modelling software and determined that an increase in interest rates of 1% could result in an increase to net income of $4,495,010 while a decrease in interest rates of 1% could result in a decrease to net income of $3,224,110. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. 10. Investments 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. CUCM Contract and daily interest deposits $ 223,450,000 $ 146,926,250 Accrued interest receivable 296,718 264,496 $ 223,746,718 $ 147,190,746 The term deposits with CUCM bear interest at rates ranging from 0.60% to 2.91% and have original maturity date from 3 months to 6 months. Included in the balance of liquidity deposits is $13,462,935 (2015 - $1,534,402) denominated in US dollars. The fair value of the liquidity deposits at December 31, 2016 was $224,175,910 (2015 - $147,800,070). The fair market value of liquidity deposits is calculated based on the present value of future cash flows. To determine present value, future cash flows are discounted by the current rate curve by which the asset or liability is originally priced. Discount spot rates vary from 1.55% to 3.33% based on maturity date and type of deposit. 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. 18
10. Investments (continued) 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. The following tables provide information on the investments by type of security and issuer. The maximum exposure to credit risk would be the fair value as detailed below: CUCM - Class 1 shares $ 10,070,155 $ 10,262,200 CUCM - Class 2 shares 2,240,350 351,645 Concentra Financial Services Association - Class A shares 62,568 62,568 Concentra Financial Services Association - Class D shares 6,000,000 6,000,000 $ 18,373,073 $ 16,676,413 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 the 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. The Class A shares of Concentra Financial Services Association are required as a condition of membership and are redeemable upon withdrawal of membership subject to the approval of the Board of Directors of the Association. Concentra shares are held at their carrying amount which is deemed to approximate fair value. Bonds and Debentures These investment instruments are classified as available-for-sale and are initially measured at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at fair value. 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. On sale, the amount held in accumulated other comprehensive income associated with that instrument is removed from equity and recognized in net income. 19
10. Investments (continued) Bonds and Debentures (continued) Concentra Financial Services Debenture (5.82% due December 31, 2016) $ - $ 1,051,559 Co-operators subordinated notes (1.60% due November 30, 2017) 250,000 250,000 Municipal debentures (various 4.20% to 6.87% due April 1, 2017 to December 1, 2024) 4,786,497 5,466,673 5,036,497 6,768,232 Accrued interest receivable 108,228 111,551 $ 5,144,725 $ 6,879,783 Bonds and debentures are valued using the discounted cash flow model using observable inputs for a market rate of 4.25%. Fair Value of Investments The following provides an analysis of investments that are measured subsequently to initial recognition at fair value, grouped into Levels 1 to 3 based on 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 and liabilities measured at fair value and classified as Level 2 include investments in shares, bonds and debentures. 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. The level in the fair value hierarchy within which the financial asset or financial liability is categorized is determined on the basis of the lowest level of input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of three levels. There were no transfers between levels for the year ended December 31, 2016. 11. Foreign Exchange Risk The Credit Union s foreign exchange risk is related to US dollar deposits denominated in US dollars. Foreign currency changes are continually monitored by the investment committee for effectiveness of its foreign exchange mitigation activities and holdings are adjusted when offside of the investment policy. 20
11. Foreign Exchange Risk (continued) The Credit Union's exposure to changes in currency exchange rates shall be controlled by limiting the unhedged foreign currency exposure to $350,000 in US funds. For the year ended December 31, 2016, the Credit Union's exposure to currency risk is within policy. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. 12. Commitments Credit Facilities The Credit Union has approved lines of credit with CUCM equal to 10% of its members' deposits and bears interest at 2% above the variable current account rate (effective rate of 2.50% at December 31, 2016). For the current year, this amounts to $209.1 million. These accommodations are secured by an assignment of shares and deposits in CUCM and a general assignment of loans receivable from members. The balance outstanding at December 31, 2016 was $Nil (2015 - $Nil). Loans to Members The Credit Union has the following commitments to its members at the year end date on account of loans, unused lines of credit and letters of credit: Unadvanced loans $ 85,000,897 Unused lines of credit 167,814,126 Letters of credit 3,246,738 Contractual Obligations Credit Union Central of Manitoba The Credit Union is a member of CUCM, which provides banking and other services to Credit Unions in Manitoba. By nature of membership in CUCM, the Credit Union is obligated to pay affiliation dues which are based on membership and assets. Deposit Guarantee Corporation of Manitoba The Deposit Guarantee Corporation of Manitoba (DGCM) is a deposit insurance corporation. By legal obligation under the Act, DGCM guarantees the deposits of all members of Manitoba credit unions/caisse. By legislation, the credit union/caisse pays a quarterly levy to DGCM based on a percentage of members deposits. 21
12. Commitments (continued) Contractual Obligations (continued) Celero Solutions The Credit Union has entered into an agreement with Celero Solutions to provide the delivery of some banking system services and the maintenance of the infrastructure needed to ensure uninterrupted delivery of such services. Celero Solutions is a company formed as a joint venture by the Credit Union Centrals of Alberta, Saskatchewan and Manitoba along with Concentra Financial and Credit Union Electronic Transaction Services. The agreement expires December 31, 2022. 13. 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. The significant components of income tax expense included in net income are composed of: Current Tax Expense Based on current year taxable income $ 2,119,237 $ 2,025,176 Deferred Tax Expense(Recovery) Origination and reversal of temporary differences (148,000) 29,476 Total income tax expense $ 1,971,237 $ 2,054,652 The tax effect of the amount recognized in other comprehensive income is the change in unrealized losses on available-for-sale investment. The total provision for income taxes in the consolidated 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 (12.9) (13.0) Non taxable earnings from associates (0.8) (0.7) Change in tax rate applied to deferred tax components (1.1) - Provincial profits tax 0.9 - Non-deductible and other items 0.6 0.5 13.7 13.8 22
13. Income Taxes (continued) The components of deferred income tax liabilities and assets are as follows: Deferred income tax liabilities Property, plant and equipment $ 351,000 $ 625,000 Investment property 61,000 37,000 Fair value adjustment on debentures 24,000 66,000 436,000 728,000 Deferred income tax assets Goodwill 29,000 54,000 Non-deductible pension expense 93,000 171,000 Allowance for impaired loans 67,000 108,000 189,000 333,000 Net deferred income tax liability $ 247,000 $ 395,000 14. Pension Plan The Credit Union participates in a multi-employer defined contribution pension plan recognizing contributions as an expense in the year to which they relate. The Credit Union has a multi-employer 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 an average rate of 6% of the employee salary. The expense and payments for the year ended December 31, 2016 were $798,269 (2015 - $763,527). As a defined contribution pension plan, the Credit Union has no further liability or obligation for future contributions to fund future benefits to plan members. 15. Property, Plant and Equipment 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 Automated teller machines Parking lots Leasehold improvements Vehicles 35-40 years 5-20 years 5 years 10 years 10-23 years 15 years 5-7 years 23
15. Property, Plant and Equipment (continued) Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. 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. Accumulated Net Book Net Book Cost Depreciation Value Value Land $ 1,676,290 $ - $ 1,676,290 $ 1,676,290 Buildings 18,880,921 7,692,526 11,188,395 11,604,855 Furniture and equipment 5,343,254 3,804,525 1,538,729 1,514,384 Computer equipment 1,434,133 917,612 516,521 415,712 Automated teller machines 974,712 501,192 473,520 489,681 Parking lots 345,113 278,823 66,290 70,685 Leasehold improvements 466,116 408,712 57,404 71,550 Vehicles 98,983 80,459 18,524 19,948 $ 29,219,522 $ 13,683,849 $ 15,535,673 $ 15,863,105 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 of 10 years. Accumulated Net Book Net Book Cost Depreciation Value Value Computer software $ 3,195,576 $ 1,971,160 $ 1,224,416 $ 1,309,680 24
15. Property, Plant and Equipment (continued) Investment Property The Credit Union's investment property consists of land and building held to earn rental income. Investment property is initially recorded at cost and subsequently measured at cost less accumulated depreciation and accumulated impairment (losses). Land is not depreciated. Buildings are depreciated on a straight-line basis over their estimated useful life of 40 years. Rent receivable is recognized in net income and is spread on a straight-line basis over the period of the lease. Where an incentive, such as a rent free period is given to a tenant, the carrying value of the investment property excludes any amount reported as a separate asset as a result of recognizing rental income on this basis. Accumulated Net Book Net Book Cost Depreciation Value Value Land $ 237,338 $ - $ 237,338 $ 105,674 Building 2,112,314 263,523 1,848,791 1,901,599 $ 2,349,652 $ 263,523 $ 2,086,129 $ 2,007,273 The fair value of the investment property is $2,370,000. Investment properties were subject to external valuation on March 10, 2016, performed by, Colliers International, qualified professional valuers adhering to the generally accepted Standards of Professional Practice (CUSPAP) and the Code of Ethics of the Appraisal Institute of Canada. The fair value of investment property is determined by discounting the expected cash flows of the properties based upon internal plans and assumptions and comparable market transactions. There are no indicators that would create a difference in fair value of the investment property from the date of its valuation. During the year, the Credit Union earned revenue of $262,609 through the lease of the Investment Property. Investment Property held by the Credit Union is leased out under operating leases. The future minimum lease payments under non-cancelable leases are as follows: Less than 1 year $ 156,444 Between 1 and 5 years 625,779 More than 5 years 273,778 $ 1,056,001 16. Securitized Borrowings As a complement to its existing capital, liquidity and interest rate risk management strategies, the Credit Union periodically enters into asset transfer agreements with third parities, which include securitization of insured residential mortgages through its participation in the National Housing Act Mortgage-Backed Securities (NHA MBS) program. 25
16. Securitized Borrowings (continued) The Credit Union has determined the funds raised from securitization transactions during the year should be accounted for as securitized borrowings as the Credit Union did not transfer substantially all of the risks and regards of ownership, including principal prepayments, interest rate and credit risk of the mortgages in the securitization transaction. As at December 31, 2016, the carrying amount of the associated residential mortgages held as security and the related liability are as follows: Securitized consumer mortgages $ 15,293,151 $ - Securitized borrowings 15,293,151 - Net position $ - $ - Securitized borrowings represent the funding secured by insured mortgages assigned under the NHA MBS program. As the securitization of mortgages does not lead to derecognition of the mortgages under accounting standards, proceeds received through securitization of these mortgages are recorded as securitized borrowings on the consolidated balance sheet. The breakdown of the securitized borrowings is as follows: Current $ 425,687 $ - Non-current 14,867,464 - $ 15,293,151 $ - NHA MBS mortgage pools consists of two mortgage pools bearing interest rates from 1.538% to 1.544% (2015 - Nil). Mortgage pool maturities range from November 1, 2020 to December 1, 2020. 17. 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. The aggregate compensation of key management personnel during the year was as follows: Compensation Salaries, and other short-term employee benefits $ 1,734,768 $ 1,599,868 Total pension and other post-employment benefits 168,750 158,018 $ 1,903,518 $ 1,757,886 26