FINANCIAL STATEMENTS FOR THE YEAR ENDED
FINANCIAL STATEMENTS For the Year Ended December 31, 2015 CONTENTS PAGE Independent Auditors' Report 2 Statement of Financial Position 3 Statement of Comprehensive Income 4 Statement of Changes in Members' Equity 5 Statement of Cash Flows 6 Notes to the Financial Statements 7-39
Tel: 902 543 7373 Fax: 902 543 9941 www.bdo.ca BDO Canada LLP 215 Dominion Street, Suite 102 Bridgewater, Nova Scotia B4V 2K7 INDEPENDENT AUDITOR'S REPORT To the Members of East Coast Credit Union Limited We have audited the accompanying financial statements of East Coast Credit Union Limited, which comprise the statement of financial position as at December 31, 2015, and the statements of comprehensive income, changes in members' equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of East Coast Credit Union Limited as at December 31, 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. CHARTERED ACCOUNTANTS Bridgewater, Nova Scotia March 23, 2016 BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. 2
STATEMENT OF FINANCIAL POSITION Assets $ $ Cash and cash equivalents (Note 3) 10,303,404 8,634,918 Liquidity deposits (Note 4) 24,853,080 22,582,123 Other assets (Note 12) 2,592,524 2,117,316 Members' loans (Note 5) 338,064,442 305,740,884 Investments (Note 4) 11,955,077 15,163,553 Property, plant and equipment (Note 8) 16,684,357 17,437,614 Intangible asset (Note 9) 1,675,376 1,982,041 Goodwill (Note 10) 1,061,480 1,061,480 Liabilities and Members' Equity 407,189,740 374,719,929 Liabilities Accounts payable and accrued liabilities $ 1,750,498 $ 1,586,744 Income taxes payable 182,878 2,723 Members' deposits (Note 13) 370,478,888 339,446,161 Term debt (Note 14) 2,850,000 2,850,000 Deferred income taxes (Note 7) 902,428 945,710 Members' shares (Note 15) 146,948 149,729 Total Liabilities 376,311,640 344,981,067 Members' Equity Restricted Surplus (Note 16) 489,978 489,978 Contributed Surplus 9,366,220 9,366,220 Surplus Shares (Note 17) 806,948 842,805 Retained Earnings 20,214,954 19,039,859 Total Members' Equity 30,878,100 29,738,862 Approved by the Board: 407,189,740 374,719,929 Director Director The accompanying notes are an integral part of these financial statements 3
STATEMENT OF COMPREHENSIVE INCOME $ $ Financial income Interest on members' loans 13,017,886 13,048,710 Interest on investments 559,920 756,315 Dividend income 91,583 102,623 Other 324,308 221,540 13,993,697 14,129,188 Financial expense Interest on members' deposits 2,396,114 2,351,156 Loan impairment expense (Note 6) 566,984 883,820 Other 9,696 2,043 2,972,794 3,237,019 Financial margin 11,020,903 10,892,169 Other income Fee and commission income (Note 26) 5,613,930 5,212,787 Gross margin 16,634,833 16,104,956 Operating expenses Salaries and employee benefits 6,626,094 6,865,995 General and administrative expenses (Note 27) 5,582,546 5,504,848 Occupancy costs (Note 27) 1,916,472 1,885,466 Members' security (Note 27) 508,073 477,202 Amortization of intangible assets 306,665 304,604 14,939,850 15,038,115 Income before income taxes 1,694,983 1,066,841 Provision for income taxes (Note 7) 519,888 325,719 Net comprehensive income 1,175,095 741,122 The accompanying notes are an integral part of these financial statements 4
STATEMENT OF CHANGES IN MEMBERS' EQUITY Retained Earnings Restricted Surplus Contributed Surplus Surplus Shares Total Equity Balance on January 1, 2014 18,298,737 489,978 9,366,220 892,005 29,046,940 Net comprehensive income for the year 741,122 - - - 741,122 Issue of surplus shares - - - 17,565 17,565 Redemption of surplus shares - - - (66,765) (66,765) Balance on December 31, 2014 19,039,859 489,978 9,366,220 842,805 29,738,862 Net comprehensive income for the year 1,175,095 - - - 1,175,095 Issue of surplus shares - - - 16,437 16,437 Redemption of surplus shares - - - (52,294) (52,294) Balance on December 31, 2015 20,214,954 489,978 9,366,220 806,948 30,878,100 The accompanying notes are an integral part of these financial statements 5
STATEMENT OF CASH FLOWS Operating activities $ $ Net comprehensive income 1,175,095 741,122 Adjustments for: Depreciation of property, plant and equipment 1,029,359 1,021,963 Amortization of intangible asset 306,665 304,604 Provision for deferred income taxes (43,282) (40,017) Provision for impairment losses on loans 566,984 883,820 3,034,821 2,911,492 Changes in operating assets and liabilities: Change in other assets (475,208) (460,308) Change in accounts payable and accrued liabilities 163,754 274,383 Change in income taxes payable 180,155 (137,608) 2,903,522 2,587,959 Changes in member activities (net) Increase in members' deposits 30,977,527 9,091,007 Increase in loans to members (32,134,852) (22,047,819) Loans written-off during the year, net of recoveries (743,483) (614,528) Interest accrued on members' loans (12,207) (471) Interest accrued on members' deposits 55,200 (611) Total cash outflows from operating activities 1,045,707 (10,984,463) Financing Activities Proceeds from issuance of members' shares 28,925 53,140 Redemptions of members' shares (67,563) (101,115) Net change in line of credit - (179,442) Net change in term debt - (300,000) Total cash outflows from financing activities (38,638) (527,417) Investing Activities Proceeds from sale of investments 3,208,476 7,206,604 Purchase of investments (2,270,957) - Proceeds from sale of property, plant and equipment 159,111 229,870 Purchase of property, plant, and equipment (435,213) (3,462,477) Total cash inflows from investing activities 661,417 3,973,997 Net increase (decrease) in cash and cash equivalents 1,668,486 (7,537,883) Cash and cash equivalents, beginning of year 8,634,918 16,172,801 Cash and cash equivalents, end of year 10,303,404 8,634,918 The accompanying notes are an integral part of these financial statements 6
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Reporting Entity East Coast Credit Union Limited (the "Credit Union") is incorporated under the Companies Act of Nova Scotia and its operations are subject to the Credit Union Act of Nova Scotia. The Credit Union provides a full range of banking services to its customer-owners in 17 branches throughout Nova Scotia. The Credit Union operates as one operating segment in the loans and deposit taking industry in Nova Scotia. The Credit Union's head office is located at 155 Ochterloney Street, Dartmouth, Nova Scotia Canada. These financial statements have been authorized for issue by the Board of Directors on March 23, 2016. b) Basis of Presentation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The principal accounting policies applied in the preparation of these financial statements are set out below. These financial statements were prepared under the historical cost convention, as modified by the revaluation of financial assets classified as available-for-sale and fair value through profit and loss. 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. c) Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, deposits with banks, other short-term highly liquid investments with original maturities of three months or less; and for the purpose of the statement of cash flows, bank overdrafts that are repayable on demand. Cash and cash equivalents are classified as loans and receivables and are carried at amortized cost, which is equivalent to fair value. d) Interest-bearing 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. e) Investments Debentures The subordinated debentures are held-to-maturity investments, which are initially measured at fair value. Subsequently they are carried at amortized cost. 7
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) e) Investments (continued) Term Deposits The term deposits are held-to-maturity investments, which are initially measured at fair value. Subsequently they are carried at amortized cost. Securities available-for-sale. The securities available-for-sale currently comprise member shares in Atlantic Central Credit Union, Concentra Financial, League Savings and Mortgage Company, League Data Limited, and various private co-operatives. These shares 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 fair value is not reliably determinable in which case they are carried at cost. f) Member Loans All member loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been classified as loans and receivables. Member loans are initially measured at fair value, net of loan origination fees and inclusive of transaction costs incurred. Impairment losses are recognized in net income. Member loans 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 member loans carried at amortized cost has been incurred, the amount of 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. 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. 8
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) g) 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 first written off against any related provisions for impairment previously recognized. If no provision has been recognized, the write offs are recognized as expenses in net income. h) Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated deprecation. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent expenditures are included in the asset's carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefit associated with the item will flow to the Credit Union and the cost can be measured reliably. Repairs and maintenance costs are charged to other operating expenses during the financial period in which they are incurred. Land is not depreciated. Depreciation is calculated at the following rates and methods: Land improvements Buildings Furniture and equipment Paving Leasehold improvements 10% declining balance 4% declining balance 20% - 30% declining balance 10% declining balance Straight line term of lease plus 1 renewal The Credit Union allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and depreciates each part separately. The useful lives of property, plant and equipment are reviewed and adjusted if appropriate, at each balance sheet date. Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds to the net book value of the asset and are presented as a gain or loss on disposal in net income. i) Intangible Assets Intangible assets consist of the value of the core deposits acquired in a business combination, which represent a low-cost source of financing as compared to obtaining funds from the market, is carried at its cost, net of accumulated amortization. Amortization is provided over its estimated useful life of 10 years on a straight-line basis. 9
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) j) Goodwill The Credit Union recognizes goodwill arising in a business combination as an asset at the date it acquires control (the acquisition-date ). It measures goodwill as the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Goodwill is capitalized with any impairment in carrying value being charged to net income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to net income on the acquisition date. k) Impairment of Non-Financial Assets Goodwill Goodwill recognized separately as an intangible asset is tested for impairment annually and whenever there is indication that the goodwill may be impaired. For the purpose of impairment testing of goodwill, goodwill is allocated to each of the Credit Union s cash-generating-units ( CGU ) expected to benefit from synergies arising from the business combination. An impairment loss is recognised when the carrying amount of a CGU, including the goodwill, exceeds the recoverable amount of the CGU. The recoverable amount of a CGU is the higher of the CGU s fair value less cost to sell and value-in-use. The total impairment loss of a CGU is allocated first to reduce the carrying amount of goodwill allocated to the CGU and then to the other assets of the CGU pro-rata on the basis of the carrying amount of each asset in the CGU. An impairment loss on goodwill is recognised as an expense and is not reversed in a subsequent period. Property, plant and equipment, Intangible Assets Intangible assets, and property, plant and equipment are tested for impairment whenever there is any objective evidence or indication that these assets may be impaired. For the purpose of impairment testing, the recoverable amount is determined on an individual asset basis. If the recoverable amount of the asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. The difference between the carrying amount and recoverable amount is recognised as an impairment loss in comprehensive income. An impairment loss for an asset other than goodwill is reversed if, and only if, there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. The carrying amount of this asset is increased to its revised recoverable amount, provided that this amount does not exceed the carrying amount that would have been determined (net of any accumulated amortization or depreciation) had no impairment loss been recognised for the asset in prior years. A reversal of impairment loss for an asset other than goodwill is recognised in comprehensive income, unless the asset is carried at revalued amount, in which case, such reversal is treated as a revaluation increase. However, to the extent that an impairment loss on the same revalued asset was previously recognised as an expense, a reversal of that impairment is also credited to comprehensive income. 10
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) l) Accounts Payable and Accrued 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. m) Income Taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable comprehensive income. Recognition of deferred tax assets for tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred tax asset to be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date and are expected to apply when the liabilities / (assets) are settled / (recovered). n) Member Deposits All member deposits are initially measured at fair value, net of any transaction costs directly attributable to the issuance of the instrument. Member deposits are subsequently measured at amortized cost, using the effective interest rate method. 11
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) o) 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 IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments. p) Revenue Recognition Interest income is recognized in net income using the effective interest method. The effective interest rate is the rate that discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to its fair value at inception. The effective interest rate is established on initial recognition of the financial asset or liability and is not revised subsequently. The calculation of the effective interest rate includes transaction costs and discounts or premiums that are an integral part of the effective interest rate. Revenue from the provision of services to members is recognized when earned, specifically when amounts are fixed or can be determined and the ability to collect is reasonably assured. Rental income from operating leases (net of any incentives given to the lessees) is recognised on a straight-line basis over the lease term. Dividend income resulting from share dividends issued by Atlantic Central to rebalance ownership is recognized when the right to receive payment is established. q) Foreign Currency Translation Foreign currency accounts are translated into Canadian dollars as follows: At the transaction date, each asset, liability, revenue and expense denominated in a foreign currency is translated into Canadian dollars by the use of the exchange rate in effect at that date. At the year-end date, unsettled monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at the year-end date and the related translation differences are recognized in net income. Exchange gains and losses arising on the retranslation of monetary available-for-sale financial assets are treated as a separate component of the change in fair value and recognized in net income. Exchange gains and losses on non-monetary assets form part of the overall gain or loss recognized in respect of that asset. All of the Credit Union's non-monetary assets and liabilities are denominated in Canadian dollars. 12
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) r) Distributions to Members Distribution to members for patronage are recognized in net income when circumstances indicate the Credit Union has a constructive obligation, it has little or no discretion to avoid and it can make a reasonable estimate of the amount required to settle the obligation or when the distribution is not tied to an equity holding. Distributions are recognized in equity when they are subject to board approval and are tied to an equity holding. s) Standards, Amendments and Interpretations Effective from January 1, 2015 In the year ended December 31, 2015, the Credit Union has not adopted any new standards, amendment and interpretations. t) Standards, Amendments and Interpretations Not Yet Effective At the date of authorization of these financial statements, certain new standards, amendments and interpretations to existing standards have been published by the IASB but are not yet effective, and have not been early adopted by the Credit Union. Information on new standards, amendments and interpretations that are expected to be relevant to the Credit Union s financial statements is provided below. Certain other new standards, amendments, and interpretations have been issued but are not expected to have a material impact on the Credit Union s financial statements. 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. The effective date for IFRS 9 is January 1, 2018. The Credit Union is in the process of evaluating the impact of the new standard. 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 IFRS. The effective date for IFRS 15 is January 1, 2018. 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 (CONT'D) t) Standards, Amendments and Interpretations Not Yet Effective (continued) IFRS 16, Leases IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. It eliminates the distinction between operating and finance leases from the perspective of the lessee. All contracts that meet the definition of a lease will be recorded in the statement of financial position with a right of use asset and a corresponding liability. The asset is subsequently accounted for as property, plant and equipment or investment property and the liability is unwound using the interest rate inherent in the lease. The accounting requirements from the perspective of the lessor remains largely in line with previous IAS 17 requirements. The effective date for IFRS 16 is January 1, 2019. The Credit Union is in the process of evaluating the impact of the new standard. 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. The Credit Union is in the process of evaluating the impact of these amendments. 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 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. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realized immediately. The methods and assumptions applied, and the valuation techniques used, for financial instruments that are not quoted in an active market are disclosed in Note 20. 14
2. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONT'D) Member Loan Loss Provision 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 member loans with similar credit risk characteristics to allow a collective assessment of the group to determine any impairment loss. In determining the collective loan loss provision management uses estimates based on historical loss experience for assets with similar credit risk characteristics and objective evidence of impairment. Further details on the estimates used to determine the allowance for impaired loans collective provision are provided in Note 6. Estimated Useful Lives of Property and Equipment Management estimates the useful lives of property and equipment based on the period during which the assets are expected to be available for use. The amounts and timing of recorded depreciation expense of property and equipment for any period are affected by these estimated useful lives. The estimates are reviewed at least annually and are updated if expectations change as a result of physical wear and tear and legal or other limits to use. It is possible that changes in these factors may cause changes in the estimated useful lives of the Credit Union's property and equipment in the future. Estimated Useful Life of Intangible Assets Management estimates the useful life of intangible assets based on the historical run-off or life of the core deposits acquired from Heritage Credit Union. The amounts and timing of recorded depreciation expense of intangible assets for any period are affected by the estimated useful life. The estimate is reviewed at least annually and is updated if expectations change as a result of significant loss of core deposits. It is possible that changes in these factors may cause changes in the estimated useful life of the Credit Union's intangible assets in the future. Impairment of Long Lived Assets The Credit Union tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 1(k). The Credit Union uses judgment in determining the grouping of assets to identify its cash generating units ("CGU") for purposes of testing for impairment of goodwill and intangible assets. An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset's value in use and its fair value less cost to sell. Management estimates expected future cash flows from each CGU based on expected future events and circumstances and discounts these cash flows to determine the value in use. Significant assumptions and estimates are involved in determining the expected future cash flows and the various risk components which comprise the discount rates. Actual results will vary from those estimated. Income Taxes Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of transacting business for which the ultimate tax determination is uncertain. The Credit Union recognizes liabilities for anticipated tax audit issues based on the Credit Union's current understanding of the tax law. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which such determination is made. 15
3. CASH AND CASH EQUIVALENTS Cash on hand $ 4,567,036 $ 4,746,746 Cash held at Atlantic Central and other cash items 5,736,368 3,888,172 Cash and cash equivalents $ 10,303,404 $ 8,634,918 The Credit Union's cash and current accounts are held with Atlantic Central. The current accounts have a yield of 0.62% (2014-1.0%). 4. INVESTMENTS Liquidity Deposits The Credit Union must maintain liquidity reserves with Atlantic Central Credit Union equal to or greater than 6% of total assets at December 31 each year. The deposits can be withdrawn only if there is a sufficient reduction in the Credit Union's total assets or upon withdrawal of membership from Atlantic Central. The liquidity deposits are short-term and come due within one year. They bear interest at rates of 0.62%. The carrying amounts approximate fair value due to having similar characteristics as cash and cash equivalents. Investments Subordinated debenture of: League Savings and Mortgage Company $ 1,009,000 $ 1,009,000 Concentra Financial 3,500,000 5,000,000 Term Deposits held with: Atlantic Central Credit Union - 3,130,386 Securities held with: Atlantic Central Credit Union 3,443,720 3,521,810 Atlantic Central Credit Union - NS common shares 1,005,000 1,005,000 Concentra Financial Class D, Series 1 Shares 1,500,000 - League Savings and Mortgage Company 1,333,207 1,333,207 League Data Limited 162,640 162,640 Other investments 1,510 1,510 $ 11,955,077 $ 15,163,553 16
4. INVESTMENTS (CONT'D) Subordinated Debentures The subordinated debentures are held-to-maturity investments, which are carried at amortized cost. The League Savings and Mortgage Company debenture for $1,009,000 has a maturity date of December 31, 2024 at a variable interest rate of 3.45% annually. The Concentra Financial debenture for $1,250,000 has a maturity date of November 15, 2022 at a fixed interest rate of 4.05%. The Concentra Financial debenture for $2,250,000 has a maturity date of November 30, 2022 at a fixed interest rate of 4.03%. The fair value of the Concentra subordinated debentures, at a rate of 3.71%, is $3,600,876. Securities: The securities held in Atlantic Central Credit Union, Concentra Financial, League Savings and Mortgage Company, and League Data Limited and various co-operatives are member shares that are classified as available-for-sale. The Atlantic Central Credit Union shares are subject to an annual rebalancing mechanism and are issued and redeemable at par value. There is no separately quoted market value for these shares; however, fair value is determined to be equivalent to the par value due to the fact that transactions occur at par value on a regular and recurring basis. There are no separately quoted market value for the remaining shares and a fair value cannot be measured reliably as the timing of redemption of these shares cannot be determined, the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably determined. Therefore, these shares are recorded at cost. Fair value for investments classified as available-for-sale are measured using Level 2 fair value measurements, as fair value is derived from observable inputs other than quoted prices. 5. MEMBER LOANS Residential mortgages $ 190,788,746 $ 166,874,483 Personal loans 86,431,078 86,843,594 Commercial loans 36,293,664 34,513,078 Concentra Financial Mortgage Pools 20,692,455 12,679,582 Credit Union Atlantic Mortgage Pool 3,021,353 3,529,717 League Savings & Mortgage Pool 1,746,589 2,398,579 $ 338,973,885 $ 306,839,033 Accrued interest receivable 444,190 431,983 Allowance for impaired loans (Note 6) (1,353,633) (1,530,132) Net loans to members $ 338,064,442 $ 305,740,884 17
5. MEMBER LOANS (CONT'D) Terms and Conditions Member loans can have either a variable or fixed rate of interest and they mature within five years. Variable rate loans are based on a "prime rate" formula, ranging from prime plus 0.25% to prime plus 18.30%. The rate is determined by the type of security offered and the members' credit worthiness. The Credit Union's prime rate at December 31, 2015 was 2.70% (2014-3.0%). The interest rate offered on fixed rate loans being advanced at December 31, 2015 ranges from 1.50% to 14.00%. The rate offered to a particular member varies with the type of security offered and the member's credit worthiness. Residential mortgages are loans and lines of credit secured by residential property and are generally repayable monthly with either blended payments of principal and interest or interest only. Personal loans consist of term loans and lines of credit that are non real estate secured and, as such, have various repayment terms. Some of the personal loans are secured by wage assignments and personal property or investments, and others are secured by wage assignments only. Commercial loans consist of term loans, operating lines of credit and mortgages to individuals, partnerships and corporations, and have various repayment terms. They are secured by various types of collateral, including mortgages on real property, general security agreements, investments, and personal guarantees. The Credit Union was assigned purchased interests in individual mortgage loans by way of investment in mortgage pools administered by Concentra Financial, Credit Union Atlantic and League Savings and Mortgages. The investments of the Credit Union represent 15% to 80% of each mortgage pool. The Credit Union receives monthly payments of principal and interest, less an administration fee. The yields on these financial instruments to December 31, 2015 were 2.04% to 4.15%. Management estimates that the fair value of these financial instruments approximate their carrying values. Average Yields to Maturity Loans bear interest at both variable and fixed rates with the following average yields at: Principal 2015 Yield (%) Principal 2014 Yield (%) Variable Rate $ 93,978,000 5.54 $ 91,834,000 5.78 Fixed rate due less than one year 71,055,000 3.60 62,613,000 4.08 Fixed rate due between one and five years 173,941,000 3.54 152,392,000 4.10 $ 338,974,000 $ 306,839,000 18
5. MEMBER LOANS (CONT'D) 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 $ 73,284,220 $ 73,811,902 Loans secured by cash, member deposits 24,851,191 24,776,819 Loans secured by real property 16,087,173 14,756,193 Loans secured by provincial guarantee 9,444,858 7,139,489 Residential mortgages insured by government 215,306,443 186,354,630 $ 338,973,885 $ 306,839,033 Concentration of Risk The Credit Union has an exposure to groupings of individual loans with concentration risk and create exposure to particular segments as follows: Individual or related groups of member loans which exceed $1,000,000: Residential mortgages $ - $ - Personal loans - - Commercial loans 10,328,672 15,474,402 $ 10,328,672 $ 15,474,402 All member loans, except certain amounts invested in mortgage pools, are with members located in and around Nova Scotia and surrounding areas. A sizeable portion of the loan portfolio is secured by residential and commercial property in Nova Scotia. The Credit Union is exposed to risks should the property market decline. The risk of losses from loans undertaken is primarily reduced by the nature and quality of the security taken. 19
6. ALLOWANCE FOR IMPAIRED LOANS Continuity of allowance for impaired loans Specific Collective Total Balance at January 1, 2015 $ 1,018,147 $ 511,985 $ 1,530,132 Increase in allowance 515,878 51,106 566,984 Amounts written-off during the year (804,261) - (804,261) Recoveries of loans previously written off 60,778-60,778 Balance at December 31, 2015 $ 790,542 $ 563,091 $ 1,353,633 Specific Collective Total Balance at January 1, 2014 $ 744,127 $ 516,713 $ 1,260,840 Increase (decrease) in allowance 888,548 (4,728) 883,820 Amounts written-off during the year (645,775) - (645,775) Recoveries of loans previously written off 31,247-31,247 Balance at December 31, 2014 $ 1,018,147 $ 511,985 $ 1,530,132 Specific allowance on members' loans by loan type Mortgages $ 46,082 $ 19,896 Personal loans 677,540 603,035 Commercial loans and mortgages 66,920 395,217 Allowance for impairment $ 790,542 $ 1,018,148 20
6. ALLOWANCE FOR IMPAIRED LOANS (CONT'D) Loans that are impaired or potentially impaired based on age of repayments outstanding: A loan is considered past due when a counterparty has not made a payment by the contractual due date. The following table presents the carrying value of loans that are past due. Period of delinquency 31 to 60 days $ 2,110,074 $ 1,108,004 61 to 90 Days 1,229,656 611,669 Over 90 Days 1,961,741 2,491,740 Total loans in arrears 5,301,471 4,211,413 Total loans not in arrears 333,672,414 302,627,620 Total loans $ 338,973,885 $ 306,839,033 Foreclosed Collateral There were $565,544 (2014 - $240,486) foreclosed loans during the year ended December 31, 2015. Foreclosed properties are sold as soon as is practicable and when in management's opinion it is the most advantageous time to mitigate the risk of additional losses. At December 31, 2015, the Credit Union had $359,038 (2014 - $220,590) in foreclosed properties held for resale which are included in members' loans on the balance sheet. Key Assumptions in Determining the Allowance for Impaired Loans Collective Provision The Credit Union has determined the likely impairment loss on loans which have not maintained the loan repayments in accordance with the loan contract, or where there is other evidence of potential impairment such as industrial restructuring, job losses or economic circumstances. In identifying the impairment likely from these events the Credit Union estimates the potential impairment using the loan type, industry, geographical location, type of loan security, the length of time the loans are past due and the historical loss experience. The circumstances may vary for each loan over time, resulting in higher or lower impairment losses. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Credit Committee to reduce any differences between loss estimates and actual loss experience. An estimate of the collective provision is based on the period of repayments that are past due. 21
7. INCOME TAXES The significant components of tax expense included in comprehensive income are composed of: Current income tax provision $ 563,170 $ 365,736 Deferred tax provision (43,282) (40,017) Total income tax expense $ 519,888 $ 325,719 The provision for income taxes differs from the result which would be obtained by applying the combined Canadian Federal and Provincial Statutory income tax rates to income before income taxes. This difference results from the following items: Income before income taxes $ 1,694,983 $ 1,066,841 Statutory income tax rate 31.00 % 31.00 % Expected income tax expense 525,445 330,724 Increase(decrease) in taxes resulting from: Available credit union small business deduction (54,854) (67,000) Non deductible portion of allowance for impaired loans 24,507 6,950 Differences between CCA and amortization (47,791) (11,423) Other timing differences 37,963 35,547 Non-deductible expenses and other reconciling items 34,618 30,921 Total income tax expense $ 519,888 $ 325,719 The change in the components of the 2015 deferred tax assets are as follows: Balance as at December 31, 2014 Recognized in Net Income Balance as at December 31, 2015 Allowance for impaired loans $ 190,202 $ 8,243 $ 198,445 Property, plant and equipment (216,695) (56,728) (273,423) Intangible assets (614,433) 95,063 (519,370) Atlantic Central shares (311,550) - (311,550) Fair value increase (decrease) on members' loans 11,715 (6,250) 5,465 Fair value increase (decrease) on members' deposits (4,949) 2,954 (1,995) $ (945,710)$ 43,282 $ (902,428) 22
8. PROPERTY AND EQUIPMENT Land and Improvements Buildings Furniture and Equipment Paving Leasehold Improvements Total Year ended December 31, 2014 Opening net book value $ 1,687,123 $ 11,607,970 $ 1,224,609 $ 177,310 $ 529,958 $ 15,226,970 Additions 12,026 767,953 548,342 84,697 2,049,459 3,462,477 Disposals (1,500) (206,742) (15,683) - (5,945) (229,870) Depreciation (3,184) (500,339) (334,812) (21,124) (162,504) (1,021,963) Closing net book value $ 1,694,465 $ 11,668,842 $ 1,422,456 $ 240,883 $ 2,410,968 $ 17,437,614 At December 31, 2014 Cost 1,793,425 14,597,388 5,902,098 434,417 2,751,884 25,479,212 Accumulated depreciation (97,041) (2,914,637) (4,477,261) (193,534) (359,125) (8,041,598) Net book value $ 1,696,384 $ 11,682,751 $ 1,424,837 $ 240,883 $ 2,392,759 $ 17,437,614 Year ended December 31, 2015 Opening net book value $ 1,696,384 $ 11,682,751 $ 1,424,837 $ 240,883 $ 2,392,759 $ 17,437,614 Additions - 75,607 260,682 29,179 69,745 435,213 Disposals - (72,035) - - (87,076) (159,111) Depreciation (1,240) (519,973) (347,437) (25,463) (135,246) (1,029,359) Closing net book value $ 1,695,144 $ 11,166,350 $ 1,338,082 $ 244,599 $ 2,240,182 $ 16,684,357 At December 31, 2015 Cost 1,793,425 14,600,960 6,162,780 463,596 2,734,553 25,755,314 Accumulated depreciation (98,281) (3,434,610) (4,824,698) (218,997) (494,371) (9,070,957) Net book value $ 1,695,144 $11,166,350 $ 1,338,082 $ 244,599 $ 2,240,182 $16,684,357 23
9. INTANGIBLE ASSET On July 1, 2011, the Credit Union acquired all the assets of Heritage Credit Union Limited. The intangible asset acquired represents the value of the core deposits, a low-cost source of financing as compared to obtaining funds from the market. This intangible asset is amortized on a straight-line basis over its estimated economic life of 10 years. Opening net book value - January 1 $ 1,982,041 $ 2,286,645 Amortization for the period (306,665) (304,604) Closing net book value - December 31 1,675,376 1,982,041 Cost 3,046,138 3,046,138 Accumulated Amortization (1,370,762) (1,064,097) Net book value - December 31 1,675,376 1,982,041 10. GOODWILL Goodwill, representing less than one percent of the Credit Union's total assets, is allocated to the entire business as a cash generating unit ("CGU"). The goodwill of $1,061,480 (2014 - $1,061,480), which arose from the acquisition of Heritage Credit Union Limited, is attributable to the synergies and advances gained by an increase in market share and a reduction in total overhead costs needed to manage the consolidated Credit Union. Based on the results of management's annual goodwill impairment test, the Credit Union determined the recoverable amount of the cash generating unit is more than its carrying value. No impairment has been recorded in the year ended December 31, 2015. The Credit Union s impairment analysis involves the use of an income approach that relies on estimating the net future cash flows and applying the appropriate discount rate to those future cash flows. This approach employs the following assumptions: projected revenue growth, market expectations, financial margin, operating and administrative expenses, working capital requirements, future capital expenditure requirements, income tax rates, regulatory capital management requirements, as well as an appropriate discount rate. The analysis also includes an allowance for the excess capital which hypothetically could be removed from the Credit Union without infringing on the minimum required equity level. If future growth and results of the CGU differs significantly from management s current best estimates, it is reasonably possible that this could have an adverse impact on the estimate recoverable amounts of the CGU, including the amounts allocated to goodwill. Management's annual goodwill impairment analysis applied a before tax discount rate of 18% (2014-17%) to estimated net future cash flows to determine the recoverable amount of the CGU. 24
11. ASSETS PLEDGED AS SECURITY The Credit Union has pledged all of its assets as security for a $9,000,000 line of credit with Atlantic Central Credit Union. As at December 31, 2015, $9,000,000 (2014 - $9,000,000) was available under the line of credit. When utilized, the line of credit bears interest at the Credit Union's prime rate. 12. OTHER ASSETS Prepaid expenses $ 1,195,460 $ 879,647 Accrued interest receivable 25,266 120,968 Rebates and other receivables 1,339,334 937,478 Other assets 32,464 179,223 $ 2,592,524 $ 2,117,316 13. MEMBER DEPOSITS Demand accounts $ 275,403,506 $ 249,572,730 Term deposits 42,944,366 42,545,707 Registered retirement savings plans 32,656,860 31,019,550 Registered retirement income funds 7,947,925 7,402,979 Tax free savings accounts 10,710,400 8,144,564 369,663,057 338,685,530 Accrued interest payable 815,831 760,631 Terms and Conditions $ 370,478,888 $ 339,446,161 Demand accounts are due on demand and bear interest at a variable rate up to 0.45% at December 31, 2015. Interest is calculated daily and paid on the accounts monthly. Term deposits bear fixed rates of interest for terms of up to five years. Interest can be paid annually, semi-annually, monthly or upon maturity. The interest rates offered on term deposits issued as at December 31, 2015 range from 0.40% to 3.10%. The registered retirement savings plans (RRSP) accounts can be fixed or variable rate. The fixed rate RRSPs have terms and rates similar to the term deposit accounts described above. The variable rate RRSPs bear interest at rates up to 0.25% at December 31, 2015. Registered retirement income funds (RRIFs) consist of both fixed and variable rate products with terms and conditions similar to those of the RRSPs described above. Members may make withdrawals from a RRIF account on a monthly, semi-annual, or annual basis. The regular withdrawal amounts vary according to individual needs and statutory requirements. 25