Management Discussion and Analysis

Economic Overview 27

Financial Highlights 28

Operating Summary

Financial Position Summary 30

33

Capital and Liquidity Management 36

Outlook 38

Risk Management 39

Economic Overview

Following a year of lockdowns in 2020 and the largest economic contraction since post WWII, 2021 was anticipated to be a year of rebound and recovery, with forecasted global growth of 6%. The strength of this revival, however, faced challenges posed by unequal access to effective COVID-19 vaccines, creating an uneven recovery between economies, such as China and India and their G7 counterparts. In North America, optimism was fuelled by the priority the Biden administration placed on fiscal stimulus and the Canadian government’s relief programs. Easing lockdowns in the early part of the year contributed to a labour market recovery and supported growth in consumer spending. Prospects in many sectors of the economy looked bright, but as the year wound down, the evolution of the pandemic gave rise to new variants that weakened the momentum of the economic recovery in all parts of the world.

The pandemic and associated international restrictions introduced a rise in energy, fertilizer and fuel prices as global supply chains were squeezed. Supply constraints and challenging weather in North America served to generate higher food prices for consumers. Durable goods prices were also impacted, with manufacturers sometimes waiting months to receive inputs to produce final products. Households with fixed or limited disposable income were compelled to re-balance available spending. For others, the price changes had limited impact. Due to the lockdowns and other restrictions, spending in many households contracted, leading to a sharp increase in collective savings. As these savings climbed, spending on durable goods started to improve, specifically in the categories of entertainment and recreation. Increased demand coupled with supply chain issues fuelled additional price hikes, all of which began to curtail consumption as the year progressed.

In Canada, the Consumer Price Index rose to finish the year at nearly 5%. At this level, inflation was among the highest we’ve seen since the early 1990’s. It was primarily driven by rising housing costs, supply chain disruptions, unfavorable weather conditions and rising energy prices. Unfortunately, wage growth hasn’t kept pace and resulted in reduced consumer purchasing power, even here in Saskatchewan, where the rate of inflation was low relative to the rest of the country.

Despite reduced purchasing power, many Saskatchewan households were in better shape financially than they were pre-pandemic. Fewer spending opportunities enabled households to strengthen their financial resilience by increasing savings and paying down debt. For businesses, government support programs helped minimize closures and job losses, at least in the short term. As such, Saskatchewan continued as a national leader in job growth and export volumes.

One sector that did particularly well in 2021 was housing. New homebuyers entering the market, combined with more employees working from home, strong household balance sheets and historically low mortgage rates created an ideal environment for growth in the housing market. In Saskatchewan, home sales saw strong gains which created a sellers’ market and drove prices higher.

Two sectors that didn’t fare as well were hospitality and agriculture. Demand for hospitality services continued to struggle amid restrictions and historically low levels of business and personal travel. Agriculture, on the other hand, was impacted by severe weather and supply chain disruptions. Locally, the prolonged lack of precipitation and high temperatures significantly reduced crop output. The drought also affected livestock producers by limiting the supply of feed, as well as water quality and quantity. These conditions pushed forward the timeline for bringing livestock to market.

A topic that has grown more popular during the pandemic has been the environmental, social and governance (ESG) practices of companies. The severe drought on the prairies during the summer and flooding on the west coast in the fall made climate change a particularly popular

focus. Consumers were demanding that the industry develop more sustainable business practices and companies were taking note. The announcement in late 2021 that one of the province’s largest refineries had plans to construct a renewable diesel plant with the objective to achieve net zero emissions by 2050 was a strong example. Of course, this trend aligned perfectly to Affinity’s values and has led to the prioritization of a variety of ESG related initiatives, many of which are detailed within the annual report under the Global Reporting Initiative (GRI).

Although 2021 presented economic challenges, Affinity achieved some notable outcomes. We were proud to continue offering marketcompetitive pricing while also improving our margin and equity position. A large portion of members improved their financial wellness with higher savings balances, leading to deposit growth that surpassed target two years in a row and provided the liquidity to fund loan growth targets. Further, the financial health of the membership base led to lower-than-expected loan losses. Overall, Affinity generated strong financial results in 2021, which ultimately benefit our members by allowing us to continually enhance the value we deliver to them.

Financial Highlights

A structured approach is adopted by Affinity in planning, budgeting and executing on the strategic objectives prioritized for the fiscal year. The year 2021 was the last of the Board’s three-year strategic plan that commenced in 2019, ambitiously designed to leverage our member-owned financial co-operative values to position Affinity as a competitive and sustainable differentiator within the financial services sector. The strategies outlined in the plan informed the annual plan objectives and were supported by a refreshed capital plan.

The capital plan emphasized the need for strong financial performance to maintain our capital stability and build resilience to weather the uncertainty in economic recovery arising from the COVID-19 pandemic. The financial performance targets outlined within the capital plan formed the basis for the 2021 annual plan in the areas of growth, return on equity (ROE) and efficiency.

The 2021 annual plan extended across the Credit Union’s operational reach in financial, wealth and insurance and focused on priorities that ranged from member service excellence, to innovative digital product solutions, and disciplined balance sheet growth targets within the Board’s established Risk Appetite Framework. Measurements for success were defined within specific, quantifiable metrics that were communicated across the organization to establish clear lines of sight to strategic execution.

Buoyed by the strength of a talented Advisory team, complemented with market competitive rates and technological improvements, asset growth for 2021 was set at a target of 4.01% to achieve a total assets goal of $6.77 billion, fully cognizant that this could be a stretch goal given an economy that was predicted to underperform as the world slowly emerged from the pandemic. This level of growth however, would bolster Affinity’s ability to maintain market share without weakening our capital position.

Assets ($ billions)

$7.2

$6.7

$6.51 $6.80

$6.2

$5.7 $5.96

2019 2020 2021

Affinity finished the year slightly ahead of budget, reporting assets of $6.8 billion. Recognition for this level of performance effort, which yielded year-over-year asset growth of $293 million, came in the form of Affinity emerging as the largest credit union in Saskatchewan based on asset size, as well as earning the distinction of being the 10th largest credit union in Canada. In addition, Affinity was named on the Forbes list of ‘World’s Best Banks’ for the second year in a row.

Affinity’s return on equity goal for 2021 was established at 6.02%. This was a 1% reduction from the prior year target and was a cautious acknowledgement that the operating environment could encounter lower than anticipated after tax net income with increased credit provisioning. The budget was mindful that in a recessed economy, the ability to generate meaningful levels of growth may be hindered, which would place gains in net interest revenues at risk.

12% Return on Member Equity

9% 10.43%

6% 7.42% 7.37%

3%

2019 2020 2021

Following two years of declines in return on equity results, Affinity rebounded with a strong ROE at 10.43% by the end of 2021. This outcome exceeded prior year levels significantly, and the strength of the ROE metric was correlated to the efficiency of operations. The year 2021 saw consolidated net income after tax well exceeding budget by 78%, as well as exceeding 2020 results by 55%. This level of earnings provided the capital stability to support the longer term growth strategy outlined in the capital plan. Reported after tax net income for the Credit Union was comprised of the consolidated results from its wholly owned subsidiary operations including wealth and insurance.

A notable contribution to the healthy net income was a significant gain in net interest margin year over year, driven largely by our members’ opting to accumulate savings in lower yielding demand accounts rather than lock deposits into longer term deposits. In addition, the 2021 budget for credit loss provision was $13.4 million in anticipation of pandemic triggered defaults. Affinity’s actual experience was contrary, yielding a positive variance to budget of $17.9 million with the probability of default for most loans decreasing as the economy recovered.

Affinity’s operating cost structure was critical in achieving an efficiency ratio that was lower than budget within the pandemic low-rate environment. The target efficiency ratio for 2021 was set at 66.84%. Since efficiency is a measure of the spend required to earn a dollar of revenue, a higher emphasis on cost control was required to compensate for any interest margin shortfalls and maintain the ratio within the targeted range in the capital plan.

73% Efficiency Ratio

68%

63%

58% 68.47%

64.30%

2019 2020 59.99%

2021

Through diligent expense oversight combined with favorable member behavior in their desire to place larger volumes of savings in highly liquid, low interest demand products, as well as some beneficial gains within our venture capital portfolio investments, Affinity finished 2021 with an exceptional efficiency ratio of 59.99%. This outcome surpassed budget and yielded a significant year over year efficiency gain, repositioning the Credit Union to be within the capital plan targets by year end. The momentum of this positive trendline should anticipate continued optimism for out-performance in operational efficiency.

For 2021, the target capital level was established at 15.35%. At Affinity, total capital includes an economic capital component, the purpose of which is primarily to mitigate our unique risks, particularly any elevated credit risk inherent in our current environment due to a prolonged period of economic uncertainty.

16% Total Capital/Risk-Weighted Assets

15% 15.12% 15.47%

14% 14.25%

13%

2019 2020 2021

In 2021, despite the skepticism of a lengthy economic recovery, Affinity continued its upward year over year trajectory in enhancing its capital position, finishing the year achieving 15.47%. This positioned the Credit Union 12 basis points ahead of budget and resulted in a 35 basis points gain over 2020.

With well managed growth and strong earnings, Affinity continued to build the capital required to support our strategic objectives, strengthened our capacity to withstand economic downturns or extraordinary events, and empowered the Credit Union to pursue new opportunities.

Operating Summary

The key components of Affinity’s comprehensive income included net interest margin, provision for credit losses, other income, operating expenses and provision for income taxes. The 2021 target was $35.9 million.

Comprehensive Income ($ millions)

$63 $64.1

$53

$43

$38.7 $41.4

$33 2019 2020 2021

Affinity achieved a record result in 2021, the best in recent history for the Credit Union, closing the year at $64.1 million. Financial performance exceeded target by $28.1 million and was a $22.7 million improvement over 2020.

Net Interest Margin Net interest margin represents the revenue Affinity earns through financial intermediation. Loan and deposit growth combined with the level of interest rates directly influence improvements to the net interest margin. The 2021 budget contemplated industry and market sentiments at the time that interest rates would remain unchanged for the foreseeable future. With no significant increase to interest rate in the budget, interest margin growth was highly dependent on the Credit Union’s ability to retain and attract loans and deposits with competitive pricing that returned the best value to members.

A goal of 2.18% was set for 2021, which was a 14 basis point decrease from the 2020 target and a six basis point decrease from 2020 actual results.

2.5% Net Interest Margin

2.4%

2.37%

2.3%

2.2%

2019 2.24%

2020 2.26%

2021

Members were cautiously optimistic as the economy began to recover in 2021. While spending habits remained conservative, amid uncertainty with markets, employment and financial support programs, members continued to deposit relatively large volumes of available savings in short term, low yielding demand products. Access to these low-cost member deposits to finance lending activity put less reliance on the more expensive wholesale deposit channel. Overall, Affinity completed the year with interest expense yielding a positive variance to budget of $8.2 million and was $22.4 million improved over 2020.

Growth in interest income posed to be a greater challenge for Affinity as supply chain disruptions combined with businesses starting or re-opening amidst COVID-19 restrictions reduced the demand for lending activity in 2021. While the Credit Union did achieve its target loan growth for the year, much of the loan growth occurred late in the year and was written at lower-than-expected interest rates. In addition, any excess liquidity investments resulting from the continued deposit growth were also invested at lower interest rates. Collectively, the Credit Union ended 2021 with interest income $2.2 million below budget and $11.5 million lower than 2020. By the end of 2021, Affinity achieved a net interest margin of 2.26% which was 8 basis points higher than budget and 2 basis points higher than 2020. Year over year, the net interest margin grew by $10.9 million.

Provision for Credit Losses The provision for credit losses is an estimate of the Credit Union’s potential losses, primarily due to credit risk. The year 2021 was expected to be a year of economic recovery but with the uncertainty of persistent COVID-19 restrictions and the threat of emerging variants that could compromise employment, consumers and businesses were challenged to find adequate cash flow to service their existing and any new debt. Affinity set a target for provision of $13.4 million, which was approximately $0.5 million lower than 2020 actual results.

1.3% Loan Delinquency

0.8% 0.79% 0.82% 0.81%

0.52% 0.54% 0.41% 0.54%

0.38% 0.45%

0.3%

2019 2020 2021

Consumer Commercial Agricultural

Affinity’s actual experience in 2021 yielded a $17.2 million improvement over 2020 in stage 1 and stage 2 loans combined. The largest triggers for this significant gain included a drop in loss rates, which resulted in reduced write offs, a decrease in stage 2 principal balances, as well as favorable impacts through two updates to the forward-looking factors applied to the loan loss model. Stage 3 saw an improvement of slightly more than $0.8 million over 2020 actual outcomes, primarily impacted by positive resolution in 2021 for new credit risk exposures that emerged toward the end of 2020 and no

new material loss provisioning in 2021. For definitions related to loan staging, refer to Note 4 accompanying the consolidated financial statements.

Credit quality declined slightly year over year with overall delinquency greater than 90 days finishing the year at 0.53% of total loans, which was three basis points higher than 2020. The commercial portfolio saw the largest change between years with delinquency rising from 0.41% in 2020 to 0.81% in 2021, a 40 basis point increase. Both the consumer and agricultural portfolios fared better in 2021 with an improvement in the consumer portfolio of 16 basis points, while the agricultural portfolio saw a delinquency decline of nine basis points between years.

In aggregate, while the Credit Union included general risks associated with the uncertain economic environment arising from the ongoing presence of COVID-19 variants in its forward-looking indicators of loan losses, it ended the year with a total recovery in loss provisioning of $4.5 million, which was a $17.9 million betterment over budget and was an $18.4 million improvement over 2020.

Other Income Other income includes service fee revenues, returns from wealth advisory services, regular dividends, as well as diversification revenues from insurance operations and gains from the Credit Union’s venture capital investments. The target set for 2021 was $43.7 million, which was $7 million lower than the 2020 actual results.

$59

$55 Other Income ($ millions)

$56.6

$51

$50.7

$47 $48.3

2019 2020 2021

Affinity closed 2021 with a strong $56.6 million in other income, which was a $12.9 million betterment over budget and was a $5.9 million improvement over 2020.

Fee income, including wealth advisory services exceeded 2020 levels by $3.3 million. Dividend income decreased by $1.8 million year over year primarily due to the discontinuation of the SaskCentral dividend. The expected negative mark to market adjustments were offset in part by gains in foreign exchange revenue in 2021, which contributed to a $3.9 million decrease in these revenues from 2020.

From a diversification perspective, Affinity experienced a substantial recovery in the valuation of venture capital investments, which gave rise to an $8 million gain on financial assets over 2020. Revenues from insurance operations ended 2021 at $10.9 million, which was a slight decline of $0.3 million from the prior year.

Operating Expenses Affinity’s operating expenses include the broad categories encompassed by personnel, general business, occupancy, organizational and security. Given the uncertainty in the pace of economic recovery and the level of interest rates, which could negatively impact the financial margin and loan loss provisions, a higher emphasis was placed on cost control, with increased effort made to reduce discretionary expenditures. For 2021, the target

for aggregate operating expenses was set at $125.8 million, which was a $3.5 million increase over 2020 actual spending.

$131 Operating Expenses ($ millions)

$127

$123 $127.6

$122.3 $124.2

$119 2019 2020 2021

Operating expenses ended the year at $124.2 million, which was $1.6 million under budget but was $1.9 million higher than 2020 actual results. The Credit Union continued to optimize its operating cost structure through process and technological innovations in 2021, with the goal of returning savings derived back to our members either in the form of improved services or better rates and fees.

Personnel expenses were $0.8 million under budget and $2.7 million higher than prior year. Larger budget variances were realized in salaries and benefits, training and loan interest rebates.

Occupancy expenses were $0.2 million under budget, primarily due to lower costs related to rent and utilities. Similarly, organizational costs were $0.2 million under budget due largely to pandemic driven changes in community spend and officials meeting and training formats, which moved in large part from in person to a virtual setting, resulting in overall cost reductions. Member security costs tracked very closely with budget in 2021.

General business expenses finished the year $0.4 million under budget and $1.1 million lower than 2020. The larger positive variances that contributed to the 2021 budget gain included savings in member loyalty points, communication lines, software costs and marketing. Several negative budget variances also arose that offset the gains, including higher than expected loan collection costs and fraud losses.

Provision for Income Tax Provision for income tax is the estimated amount of corporate income taxes based on the earnings from each subsidiary and then reported on a consolidated basis by Affinity. This provision includes both a current, as well as a deferred portion. At the end of 2021, the provision for income tax was $23.3 million, which was $10.2 million over budget and was $10.7 million higher than 2020. The significant increase in income tax provision was directly related to the higher net income achieved in 2021.

Financial Position Summary

Financial Investments The Credit Union’s financial investments were primarily comprised of a liquidity reserve, term deposits, co-operative shares, corporate and government debt, a venture capital portfolio, as well as accrued interest earned on these investments. The 2021 target level established for investments was $1.36 billion, which anticipated growth of $16.8 million from the end of 2020.

Affinity concluded the year reporting financial investments at $1.39 billion, which was approximately $31 million higher than budget and reflected a growth of 3.57% or $48 million over 2020. In 2021, to maximize margin while retaining adequate operating liquidity, the Credit Union shifted investments from low interest overnight deposits to higher yielding government and higher quality corporate bonds. In addition, an incremental $7.7 million was invested in our venture capital portfolio.

Collectively, this strategic change resulted in an overall increase in investment income that was 15 basis points or $3.1 million higher than budget.

Loans Loans again formed the largest component of Affinity’s assets throughout 2021. To best leverage our capital and mitigate risk, the Credit Union adopted a target loan mix for consumer (50-70%), agriculture (10-20%) and commercial portfolios (30-40%). The 2021 target for overall loan growth was established at 4.76%, including a further breakdown of 3.95% for consumer, 7.79% for agriculture and 5.49% for commercial.

Loan Growth

9%

6% 6.17%

5.19%

3%

0%

2019 0.65%

2020 2021

The loan mix achieved by the end of 2021 was well within expectations with the total consumer portfolio at 53%, agriculture 16% and commercial 31%. Affinity completed 2021 with overall loan growth of 5.19%, which was 43 basis points or $1.4 million higher than budget and a significant improvement over the growth achieved in 2020. Loans made up 77.23% of the Credit Union’s asset base and represented an increase of 0.51% from the 2020 result of 76.72%. Typically, the higher the loan percentage, the larger the profit contribution as more assets are deployed in higher yielding loans.

Excluding accrued interest, consumer loans and mortgages grew by 1.85%, but fell short of budget by $65.6 million. Agricultural loans and mortgages saw growth of 7.57%, which was slightly below budget by $8.9 million. Commercial loans and mortgages experienced strong growth at 9.91%, which exceeded budget by $65.9 million. In 2021, to supplement organic loan growth, Affinity actively participated in the purchase of commercial and residential mortgages from third parties, resulting in net growth in the purchased loan portfolio of 12.39%, which was $32.3 million over budget.

Residential mortgages, including Home Equity Lines of Credit (HELOC) comprised a significant amount of our credit portfolio in 2021. At December 31, 2021, Affinity’s residential mortgage gross carrying value was $2.3 billion (2020 - $2.2 billion). The following table provides a breakdown between insured (including those by both Canada Mortgage and Housing Corporation (CMHC) and Sagen) and uninsured mortgages:

In Thousands of Dollars

Residential Mortgages 2021

Insured Uninsured

$724,664 $1,555,156

31.79% 68.21% 2020

Insured Uninsured

$728,938 $1,466,849

33.2% 66.8%

The Credit Union has established policies and procedures for maximum amortization periods for residential mortgage loans, specific to the loan product.

At December 31, 2021, the Credit Union’s residential mortgage portfolio original amortizations are outlined in the following tables. Portfolio percentages are illustrated for both the outstanding mortgage balance and the number of mortgage loans.

2021

Original Amortization Period Under 20 yrs 20 - 24 yrs 25 - 29 yrs 30 - 34 yrs 35 yrs+ Revolving

By Outstanding Balance 8.6% 7.7% 47.4% 24.3% 3.6% 8.3%

By # of Mtg. Loans 13.6% 7.6% 33.3% 14.9% 2.8% 27.8%

2020

Original Amortization Period Under 20 yrs 20 - 24 yrs 25 - 29 yrs 30 - 34 yrs 35 yrs+ Revolving

By Outstanding Balance 7.7% 7.8% 45.4% 24.7% 4.5% 9.8%

By # of Mtg. Loans 13.4% 7.8% 31.7% 14.8% 3.3% 29.0%

Deposits Deposits formed the largest component of Affinity’s liabilities and served as the primary source for financing asset growth. After an exceptional year in 2020 yielding more than 24% growth in demand deposits, 2021 was anticipated to see a decline in both demand, as well as term deposits. The 2021 growth target set for deposits was 3.83%, which was considerably lower than the 2020 actual realized growth. By category, the target established for demand deposits was 0.54% and 4.67% for term deposits. The introduction of a new market linked GIC product in late 2020 was expected to support deposit growth in all term segments in 2021.

11%

8% Deposit Growth

9.30%

5%

4.94%

3.97%

3%

2019 2020 2021

Affinity ended the year with a relatively balanced deposit mix between demand and term products. Overall, the Credit Union achieved deposit growth of 3.97%, which was 14 basis points higher than budget but was a growth decline of $266.5 million from 2020.

Excluding accrued interest, chequing and savings deposits experienced solid growth in 2021, ending the year with growth of 11.36%, which was $251.8 million higher than budget. Terms and registered deposits achieved growth of 1.63%, which was $30.2 million under budget. Members remained cautious in their appetite to lock in savings in this prolonged low-rate environment and instead, continued to park their funds conservatively in highly liquid demand products.

Given another year of successful growth in organic demand deposits, financing through nominee sourced deposits was scaled downward in 2021 by 38.35% or $126.6 million.

Capital and Liquidity Management

Capital Monitoring and Management As a regulated financial institution, Affinity is required to maintain an adequate level of capital reserves to mitigate risk. A strong capital position protects the Credit Union against the impact of unexpected losses and can be leveraged to support ongoing growth in our traditional business lines or through diversification opportunities. With Affinity’s main source of capital being derived from retained earnings, building capital is dependent upon generating strong earnings.

On an annual basis a capital plan is developed to ensure Affinity generates sufficient capital to meet our strategic objectives, provide the Credit Union with the ability to withstand economic downturns or extraordinary events, while still maintaining the minimum regulatory capital requirements. The 2021 plan considered various growth scenarios and the impact on key financial performance indicators for return on equity and operating efficiency to determine an optimal level of growth. The plan also evaluated Affinity’s internal Economic Capital requirement to ensure capital levels were appropriate for the Credit Union’s unique risk profile. Our capital position was monitored on a regular basis by forecasting changes in our business model against capital adequacy to support ongoing business decisions. This included a regular assessment of existing and emerging risks to ensure the adequacy of both the internal capital requirements and the minimum regulatory requirements.

Our regulator, Credit Union Deposit Guarantee Corporation (The Corporation) measured capital adequacy as total capital as a percentage of risk weighted assets. The Corporation’s minimum requirement is 11.5%, which aligns with our P-SIFI (Provincially Systemically Important Financial Institution) designation. Affinity’s capital adequacy policy requires an additional 1% buffer over the greater of (i) the regulatory minimum or (ii) Affinity’s Economic Capital requirement. For all measurement dates, Affinity’s Economic Capital requirement was lower than the regulatory minimum of 11.5%, meaning that inclusive of the buffer, Affinity’s minimum capital requirement in 2021 was 12.5%.

At the end of 2021, Affinity’s capital to risk weighted assets was 15.47%. This represented total eligible capital of $650.8 million, an increase of $57.5 million during the year and a capital surplus of $167 million compared to minimum regulatory requirements.

Internal Capital Adequacy Assessment Process (ICAAP) Affinity’s Internal Capital Adequacy Assessment Process (ICAAP) quantifies the Credit Union’s Economic Capital requirement. ICAAP is a key component to ensure capital levels are commensurate with the Credit Union’s risk profile. A stress test is then applied to each identified risk using a plausible yet severe stress scenario. The combined base capital together with the additional capital allocation for the stress scenario forms the Credit Union’s total Economic Capital requirement. All key risks are monitored using a risk register which is reviewed and refreshed on a quarterly basis.

Liquidity Management Adequate liquidity is critical for the overall safety and soundness of the Credit Union. Affinity’s liquidity management framework aligns to the liquidity risk management principles issued by The Corporation. These principles complement the regulatory liquidity adequacy standards and cover all facets of liquidity management ranging from the initial setting of the Board’s risk appetite to the daily liquidity management function, including appropriate debt facilities and interaction with third-party liquidity providers. Finally, the principles addresses the identification, management and resolution of a liquidity crisis event.

In 2021, liquidity management included continual monitoring of liquidity sources across multiple time periods to ensure that Affinity could satisfy cash demands. The Board established policy limits for minimum operating liquidity surpluses over a one-year timeline ensures sufficient liquidity is available to satisfy all expected cash outflows, as well as an adequate buffer to withstand the stress of an unusual or unexpected event. Management also established more stringent operating targets to trigger corrective action long before any policy shortfalls would occur. During 2021, we consistently exceeded the minimum policy limits for all time intervals within the 12-month period.

From a regulatory perspective Affinity must maintain a portfolio of statutory liquidity investments with Credit Union Central of Saskatchewan (SaskCentral) equal to 10% of the Credit Union’s deposits and borrowings to support the provincial credit union system’s liquidity program. CUDGC also requires all credit unions to maintain a minimum 100% liquidity coverage ratio (LCR). The LCR is a ratio between the Credit Union’s high-quality liquid assets and the cash outflows associated with the expected deposit run-off from a prescribed 30-day stress scenario. Affinity’s Board established a higher policy minimum of 120% for the LCR. Throughout 2021 we exceeded the higher LCR policy threshold and the 10% statutory liquidity requirement. The deposit growth that began in 2020 with the start of the pandemic continued throughout 2021 resulting in excess liquidity levels that surpassed the credit union’s lending needs. Our investment strategies have been heavily influenced by the uncertainty surrounding the timing and velocity that our members may deploy the excess savings accumulated over the last two years. With this heightened uncertainty, excess liquidity was invested primarily in short-term deposits or marketable securities that could be easily liquidated as needed. This conservative approach yielded a positive impact on the policy measures noted above.

Affinity’s ability to borrow funds is a key component of the Credit Union’s overall liquidity management program and Affinity currently has access to $160 million in committed credit facilities. The existing credit facilities with SaskCentral were restructured in 2021 to increase the total committed facilities to $130 million or approximately 2% of the Credit Union’s assets. A new $100 million facility with another provider was approved in 2021 and is expected to be available early next year. Throughout 2021 these stand-by facilities were largely unused, but this borrowing capacity can provide considerable funding support for the Credit Union during a stressed liquidity event.

Following the first mortgage-backed security (MBS) issuance in late 2020, Affinity issued two additional MBS pools during the year, bringing the total MBS outstanding to $23 million. Affinity will continue this strategy to build contingency liquidity reserves. We’ve also continued to maintain a number of relationships with nominee deposit brokers, which connected Affinity to depositors outside of Saskatchewan thus diversifying our geographic concentration risk.

The Credit Union also maintained a contingency plan (CFP) that clearly set out strategies for addressing liquidity shortfalls in emergency situations. The CFP outlined the roles, responsibilities, procedures and action plans required to respond to a severe liquidity event. It incorporates various early warning

indicators and trigger events that would initiate the CFP or Affinity’s Recovery Plan, which was developed in 2020 and further refined in 2021 following assessment criteria outlined in the P-SIFI directive. The CFP and Recovery Plan are reviewed and tested annually.

Overall Affinity’s liquidity remained healthy, and we were well positioned to support the rise in economic activity expected as the effect of the pandemic tapered off.

Outlook

In 2020, Saskatchewan’s GDP contracted about the same extent as Canada’s did on the whole, yet we didn’t see the same extent of rebound provincially in 2021 as we saw nationally. However, growth is expected to be stronger in 2022 and the momentum will continue into 2023.

In Saskatchewan, the expected rebound is based on developments in a few key industries. For one, unless we encounter severe weather again in 2022, we expect to see a major rebound in agriculture, supported by strong crop prices. The energy sector will also benefit from strong prices, and this will incentivize expansion and production. And a similar story is true for potash. Favourable fertilizer prices, elevated crop prices and increasing global food demand are boosting both production and investment. Finally, the housing sector is expected to remain strong but could be constrained by supply. As mentioned, housing did quite well during the pandemic as households built up unprecedented amounts of savings. Looking forward, recovering labour markets, combined with an increase in young millennials who are at home buying age should see housing starts remaining elevated over the near-term. Overall, residential investment should provide a real boost to economic activity.

On the employment front, Saskatchewan is in a strong position relative to other provinces. We should see employment return to pre-pandemic levels in 2022, and job growth continue into 2023. Many of the gains we’ll see in employment will come from the service sectors, which was particularly hard hit by the pandemic. Employment growth will also be seen in the primary sectors as investment picks up.

Stronger employment and healthy household balance sheets will drive a strong return in consumer spending. As restrictions are removed, it’s expected that consumers will be deploying accumulated savings to satisfy pent-up demand. By 2023, consumer spending is likely to return to a more normal level.

The key risk factor for 2022 is our success in containing the spread of the Omicron variant and any other emerging variants of COVID-19. Trade recovery is likely the single most important factor in accelerating a global economic rebound. Sustained foreign demand for exports and assured access to imports through a reliable cross border flow of essential goods and services will foster a robust economic recovery.

A second risk factor is the direction of inflation. Pressure on this front could pose challenges to a rapid economic recovery. For one, inflation yields a higher cost of living for households and secondly, sustained inflation will lead the Bank of Canada to hike interest rates and increase the cost of borrowing. It’s anticipated that in order to keep inflation in check, the Bank of Canada will begin raising interest rates in March of 2022 with subsequent increases over the remainder of the year.

Affinity has taken the evolving business environment into consideration in developing plans for 2022 and beyond. We are confident that our continued focus on the member and their experience in banking with Affinity will continue to produce strong business results. We’ll maintain a specific focus on making member experiences even more seamless and personalized, to delivering high-quality financial advice that supports the financial wellness of members and to leveraging our key differentiators, like our local presence and co-operative business model. Of course, we’ll also maintain a strong focus on preserving

a solid financial foundation to ensure the long-term sustainability of the business, which includes maintaining excellent governance and risk management practices.

Risk Management

Overview Affinity exists to provide value to its members and stakeholders. We do this by taking on strategic risk to create, preserve and realize value. When taking on strategic risk, we’re inherently exposed to other material risks which are consistent with our industry. Our Boardapproved Risk Appetite Framework contains risk appetite metrics for all material risk categories.

Affinity’s Risk Governance Framework provides overarching guidance to our risk program by outlining our risk philosophy, how we categorize the types of risk we are exposed to and our risk management governance. In addition, it provides the foundation for the Board’s oversight to management’s risk-based decision making.

The diagram below provides an overview of Affinity’s approach to risk governance through an integrated risk management approach.

Members Require Strength, Stability and Safeguarded Assets

Board Desired Key Performance Indicators

Risk Appetite

Legal and Regulatory Compliance Requirements

External Rating

Credit Risk Market Risk Liquidity Risk Operational Risk

Legal and Regulatory Risk

Reputational Risk

Integrated Enterprise Risk Management Strategic Risk

Risk Governance Our Board-approved Risk Governance Framework provides an integrated approach to enterprise risk management that encompasses all elements of risk governance.

Affinity utilizes the lines of defence model to clarify segregation of risk management accountabilities. Under this model, ownership for risk resides at all levels of Affinity. The model provides a structure to organize Affinity’s risk management roles and responsibilities; each line of defense is clearly defined in terms of business lines, roles and accountabilities, with functional independence.

The Chief Risk Officer (CRO) and Risk Management Function (RMF) operate within a Board-approved mandate. The CRO reports functionally to the Board of Directors, through the Risk Committee, and directly to the Chief Executive Officer. The RMF operating in the second line of defence is an independent and enterprise-wide function that is accountable for oversight and effective challenge of all significant material risks faced by the Credit Union.

Risk Management Committee Structure Our integrated risk management program supports the Board in understanding our key risks and the activities to manage them. The Board delegates to the Risk Committee its responsibility to oversee risk management and understanding of the types of risk Affinity is exposed to. The diagram below outlines Affinity’s risk management committee structure.

Board of Directors

Risk Committee

Strategic Risk Committee (SRCo) Audit & Finance Committee

Asset Liability Committee (ALCo)

Operational Risk Committee (ORCo)

Management Committees: The Strategic Risk Committee (SRCo) includes all members of executive management and sets the ‘tone from the top’. It provides oversight to the Asset Liability Committee, the Credit Risk Committee and the Operational Risk Committee.

SRCo is responsible for awareness of key risks that have the potential to impact successful execution of strategies and annual operating plans as approved by the Board of Directors.

Governance Committee HR & Compensation Committee

Credit Risk Committee (CRCo)

In addition, SRCo monitors internal and external environments to identify and assess existing and emerging risks and the resulting business implications. Subsequently, it directs action to ensure risks are maintained within the Credit Union’s risk appetite.

The Asset Liability Committee (ALCo) provides forward-looking balance sheet management and execution within the parameters of Boardapproved risk appetite and policy. It reviews economic trends, interest rate forecasts,

investment portfolio risk and performance, liquidity, foreign exchange exposures and capital adequacy. The purpose of the committee is to develop and recommend balance sheet risk management strategies to SRCo and approve and monitor balance sheet risk management tactics.

The Credit Risk Committee (CRCo) assesses historical and emerging credit risk by reviewing internal reporting and environmental scanning. The committee assesses new areas of opportunity and recommends actions to SRCo to manage risks within approved tolerances, while supporting planned growth and profitability objectives.

The Operational Risk Committee (ORCo) is comprised of cross functional subject matter experts to identify, discuss and mitigate current and emerging operational risk issues that affect, or have the potential to affect, the successful operation of the Credit Union. Further, it identifies and promotes opportunities to improve service to members, creates an operational risk-aware culture, contributes to operational improvements and fosters cross functional synergy.

Risk Philosophy The Credit Union balances risk and reward to meet goals for our members, community, employees, growth and financial sustainability. In pursuit of these goals, we accept risks we understand and can manage within prudent levels.

Risk Culture At Affinity, we understand that our risk culture is influenced by the actions of our people, the means by which work is done, and the manner in which decisions are made. Our risk culture is congruent with Affinity’s desired culture, and is fostered and supported through strong board oversight, an integrated risk governance structure, awareness and education, risk appetite, policies, program guides and procedures. It’s also fostered by a variety of tools that support identification, measurement, analysis, risk communication and reporting, and risk informed decision-making. Material Risk Categories Strategic Risk: Strategic risk is the risk Affinity ineffectively or improperly implements its strategies or is unable to adapt to changes in the business environment to meet the needs and expectations of members, other stakeholders or achieve expected benefits. It also includes the failure to achieve organic growth initiatives.

Management identifies risks that could hinder achievement of corporate strategy and develops action plans to mitigate risks that exceed risk appetite. Quarterly, management reviews the risk register and status of action plans. Subsequently, Risk Management Function provides risk status reporting to the Board of Directors.

Credit and Counterparty Risk: Credit risk is the risk Affinity faces when a borrower, guarantor or counterparty fails to meet their financial or contractual obligations.

In 2021, we continued to support our members and communities by working with borrowers to assist them through COVID-19 economic impacts. Management monitors specific industry sectors vulnerable to the pandemic economic impacts.

Affinity manages credit risk by establishing credit risk policies, delegation of authority and concentration limits, including maximum limits on individual and connected accounts. Prudent underwriting standards are designed to ensure an appropriate balance of risk and return.

Management monitors credit risk exposures including portfolio concentration on a regular basis and proactively implements enhanced account management of higher risk accounts. This is effective to resolve problem accounts before they become delinquent or incur a loss. Strong monitoring processes are in place for larger borrowers that encounter difficulty.

Operational Risk: Affinity faces operational risk resulting from people, inadequate or failed internal processes, controls and systems or from external events including the risk of fraud. Operational risk is inherent in all activities within the Credit Union, including processes and controls used to manage other material risks, such as credit, market, liquidity, legal and regulatory and reputational risk. Unlike other material risk categories, taking on operational risk doesn’t generate financial gain.

Risk Control Self-Assessments (RCSAs) are the primary tools Affinity uses to identify and assess operational risk exposures. The RCSA process assists in the implementation of Affinity’s Internal Control Framework. As a financial institution, Affinity relies on the services of third parties. Our Vendor Risk Management program is our primary tool to manage third-party service provider risk.

Legal and Regulatory Risk: Legal and regulatory risk is the risk Affinity faces when failing to comply with governing laws, satisfying contractual obligations or meeting regulatory requirements.

Affinity operates in a heavily regulated industry. We actively monitor and evaluate potential impacts of regulatory developments. Appropriate policies, procedures, training, internal oversight functions and Code of Conduct ensured that we’re successful in meeting regulatory obligations.

As a Provincial Systemically Important Financial Institution (P-SIFI), Affinity’s regulator holds us to the highest standard of regulatory rigor. This requires us to hold higher levels of capital to cover losses, report on an additional liquidity metric and develop and maintain an executable recovery plan to guide the recovery of the Credit Union should it find itself in a distressed situation.

Liquidity Risk: Liquidity risk is the risk of loss due to an inability to access funding sources or having insufficient cash or cash equivalents to meet financial obligations as they come due in a timely and cost-effective manner.

Affinity prudently manages liquidity to ensure sufficient liquidity is available to meets its obligations. Strategies in place to manage liquidity levels include adhering to established targets for the excess liquidity investment portfolio, stand-by credit facilities with SaskCentral and other financial institutions and established programs for deposit gathering and loan syndication.

The Credit Union maintains sufficient levels of unencumbered high-quality liquid assets as prescribed by the Credit Union Deposit Guarantee Corporation’s Liquidity Adequacy Standards.

ALCo reviews the Credit Union’s liquidity risk and liquidity position and provides reporting to SRCo. Quarterly, an operating liquidity report is provided to the Board of Directors.

As a P-SIFI, Affinity also provides quarterly net cumulative cash flow reporting to its regulator.

Market Risk: Market risk exposes Affinity to the risk of loss when decreases in the value of financial instruments or portfolios of financial instruments occur because of changes in interest rates and timing differences in the repricing of assets and liabilities. This also includes changes in movements and volatility of foreign exchange rates.

Affinity actively manages its market risk by modeling several interest rate change scenarios and their impacts to our short-term interest rate margin and long-term value of equity. ALCo reviews interest rate simulation reports and recommends hedging strategies, such as derivatives to manage interest rate risk. Interest rate strategies are limited to activities permitted under the Credit Union Act, Regulations and Standards of Sound Business Practices. Currently, derivatives are limited to interest rate swaps, forward rate agreements, caps and floors, and purchased interest rate options.