focus on the
FUTURE
12.31.2013
CONSOLIDATED F I N A N C I A L S TAT E M E N T S
TA B L E
OF CONTENTS
MANAGEMENT’S RESPONSIBILITY INDEPENDENT AUDITOR’S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position.......................................................................... Consolidated Income Statement................................................................................................. Consolidated Statement of Comprehensive Income............................................................... Consolidated Statement of Changes in Members’ Equity...................................................... Consolidated Statement of Cash Flows......................................................................................
3 4 5 6 7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.................................................................... 8
12.31.2013
Management's Responsibility
To the Members of Cornerstone Credit Union Financial Group Limited: Management is responsible for the preparation and presentation of the accompanying consolidated financial statements, including responsibility for significant accounting judgments and estimates in accordance with International Financial Reporting Standards and ensuring that all information in the annual report is consistent with the statements. This responsibility includes selecting appropriate accounting principles and methods, and making decisions affecting the measurement of transactions in which objective judgment is required. In discharging its responsibilities for the integrity and fairness of the consolidated financial statements, management designs and maintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions are authorized, assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation of consolidated financial statements. The Board of Directors and Audit and Risk Committee are composed entirely of Directors who are neither management nor employees of the Credit Union. The Board is responsible for overseeing management in the performance of its financial reporting responsibilities, and for approving the financial information included in the annual report. The Audit and Risk Committee has the responsibility of meeting with management, internal auditors, and external auditors to discuss the internal controls over the financial reporting process, auditing matters and financial reporting issues. The Committee is also responsible for recommending the appointment of the Credit Union's external auditors. MNP LLP is appointed by the members to audit the consolidated financial statements and report directly to them; their report follows. The external auditors have full and free access to, and meet periodically and separately with, both the Committee and management to discuss their audit findings. February 13, 2014
Chief Exe Executive xecutiive Officer
VP PF Fi Finance inance na n anc n e
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
1
Independent Auditors’ Report
To the Members of Cornerstone Credit Union Financial Group Limited: We have audited the accompanying consolidated financial statements of Cornerstone Credit Union Financial Group Limited and its subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2013, and the consolidated statements of income, 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 Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Cornerstone Credit Union Financial Group Limited and its subsidiaries as at December 31, 2013 and their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards.
Saskatoon, Saskatchewan February 13, 2014
Chartered Accountants
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
2
Cornerstone Credit Union Financial Group Limited Consolidated Statement of Financial Position As at December 31, 2013 2013
2012
(In thousands)
(In thousands)
Assets Cash and cash equivalents (Note 5) Investments (Note 6) Member loans receivable (Note 7) Other assets (Note 8) Property, plant and equipment (Note 9) Intangible assets (Note 10) Goodwill (Note 11)
321 117,911 720,355 1,464 13,844 634 179
35,732 131,678 624,831 1,395 12,028 716 223
854,708
806,603
8,000 757,574 14,175 6,093 8,839
727,841 9,504 5,325 8,610
794,681
751,280
57,392 2,379 256
52,339 2,379 605
60,027
55,323
854,708
806,603
Liabilities Loan payable (Note 12) Member deposits (Note 13) Securitization debt (Note 14) Other liabilities (Note 16) Membership shares (Note 17)
Commitments (Note 23) Events after the reporting period (Note 25)
Members' equity Retained earnings Contributed surplus Accumulated other comprehensive income
Approved pp on behalf of the Board
Director D Di rector
Director D Dire Di irector
The accompanying notes are an integral part of these financial statements Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
3
Cornerstone Credit Union Financial Group Limited Consolidated Statement of Income For the year ended December 31, 2013
Interest income Member loans Investments
2013
2012
(In thousands)
(In thousands)
30,179 3,742
28,327 4,568
33,921
32,895
8,892 239
9,567 33
9,131
9,600
24,790
23,295
7,006
6,932
31,796
30,227
15,352 683 453 1,602 6,614
15,146 680 456 1,635 6,593
24,704
24,510
Income before provision for (recovery of) impaired loans, patronage refund and income taxes
7,092
5,717
Provision for (recovery of) impaired loans Patronage refund (Note 18)
191 1,017
Income before income taxes
5,884
Interest expense Member deposits Borrowed money
Gross financial margin Other income
Operating Expenses Personnel Security Organizational Occupancy General Business
Provision for income taxes (Note 15) Current Deferred
Net income
(41) 985 4,773
876 (45)
653 13
831
666
5,053
4,107
The accompanying notes are an integral part of these financial statements Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
4
Cornerstone Credit Union Financial Group Limited Consolidated Statement of Comprehensive Income For the year ended December 31, 2013
Net income Available-for-sale financial assets Net fair value loss on available-for-sale financial assets (net of tax of $55) (2012 - $53) Cash flow hedges Net fair value gain on derivatives designated as cash flow hedges (net of tax of $nil) (2012 - $49) Other comprehensive loss, net of income tax Total comprehensive income
2013
2012
(In thousands)
(In thousands)
5,053 (350) 1 (349) 4,704
4,107 (330) 323 (7) 4,100
The accompanying notes are an integral part of these financial statements
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
5
Cornerstone Credit Union Financial Group Limited Consolidated Statement of Changes in Members' Equity For the year ended December 31, 2013
Contributed surplus
Accumulated other Retained comprehensive earnings income
Total equity (In thousands)
Balance January 1, 2012
2,379
48,232
-
4,107 -
Balance December 31, 2012 Net income for the year Other comprehensive loss for the year
2,379
52,339
605
-
5,053 -
(349)
Balance December 31, 2013
2,379
57,392
256
Net income for the year Other comprehensive loss for the year
612 (7)
51,223 4,107 (7) 55,323 5,053 (349) 60,027
The accompanying notes are an integral part of these financial statements Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
6
Cornerstone Credit Union Financial Group Limited Consolidated Statement of Cash Flows For the year ended December 31, 2013
Cash provided by (used for) the following activities Operating activities Interest received from member loans Interest received from investments Other income Cash paid to suppliers and employees Interest paid on deposits Interest paid on borrowings Patronage refund Income taxes paid
Financing activities Advances on loan payable Net change in member deposits Net proceeds from securitization of mortgages Net change in membership shares (Note 17)
Investing activities Net change in member loans receivable Net change in investments Purchases of property, plant and equipment (Note 9) Purchases of intangible assets (Note 10)
Decrease in cash resources Cash resources, beginning of year Cash resources, end of year
2013
2012
(In thousands)
(In thousands)
29,926 3,923 7,006 (22,806) (9,168) (239) (1,017) (862)
28,440 4,731 6,932 (23,276) (9,738) (33) (985) (524)
6,763
5,547
8,000 30,010 4,671 229
28,289 9,504 491
42,910
38,284
(95,462) 13,187 (2,748) (61)
(57,046) 11,245 (505) (79)
(85,084)
(46,385)
(35,411) 35,732
(2,554) 38,286
321
35,732
The accompanying notes are an integral part of these financial statements Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
7
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
1.
Reporting entity Cornerstone Credit Union Financial Group Limited (the “Credit Union”) was formed pursuant to the Credit Union Act 1998 of Saskatchewan (“the Act”) and operates thirteen Credit Union branches. The Credit Union serves members and non-members in Archerwill, Bjorkdale, Elfros, Ituna, Kelliher, Lestock, Rose Valley, Saltcoats, Springside, Theodore, Tisdale, Wynyard, Yorkton, Saskatchewan and the surrounding communities. The address of the Credit Union’s registered office is 1202-100th Street, Tisdale, Saskatchewan. The consolidated financial statements of the Credit Union as at and for the year ended December 31, 2013 comprise the Credit Union and its wholly owned subsidiaries CGT Cornerstone Holdings Limited, Tisdale Financial Plus Limited, and 101060086 Saskatchewan Ltd., a wholly owned subsidiary of Tisdale Financial Plus Limited. Together, these entities are referred to as Cornerstone Credit Union Financial Group Limited. The Credit Union operates as one segment principally in personal and commercial banking in East Central Saskatchewan. Operating branches are similar in terms of products and services provided, methods used to distribute products and services, types of customers and the nature of the regulatory environment. The Credit Union conducts its principal operations through various branches, offering products and services including deposit business, individual lending, and independent business and commercial lending. The deposit business provides a wide range of deposit and investment products and sundry financial services to all members. The lending business provides a variety of credit products and services designed specifically for each particular group of borrowers. Other business comprises business of a corporate nature such as real estate and insurance, investment, risk management, asset liability management, treasury operations and revenue and expenses not expressly attributed to the business units. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) and interpretations adopted by the International Accounting Standards Board (“IASB”). The consolidated financial statements were approved by the Board of Directors and authorized for issue on February 13, 2014.
2.
Change in accounting policies Standards and Interpretations effective in the current period The following new or amended standards, and their resulting consequential amendments, were applied for the first time in the current year: IAS 19 Employee Benefits The amendment to IAS 19 significantly impacted the accounting for defined benefit plans. The Credit Union has no defined benefit plans; therefore, this amendment had no impact on the Credit Union’s financial results. The amendment also revised the accounting for termination benefits and amended the definitions of short and long term which did not have a material impact on the Credit Union’s financial results. IFRS 7 Financial Instruments: Disclosure The amendment to IFRS 7 introduced disclosure on financial assets that were offset in accordance with IAS 32 and master netting or similar arrangements. The revised IFRS 7 impacted current year and prior year disclosures only (refer to Note 21) and had no impact on the Credit Union’s financial results. IFRS 10 Consolidated Financial Statements As a result of adopting IFRS 10, the Credit Union has changed its accounting policies with respect to determining whether it has control over and consequently consolidates its investees. IFRS 10 changes the definition of control such that an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In accordance with the transitional provisions of IFRS 10, the Corporation has re-assessed the control conclusion for its investees at January 1, 2013 and concluded that the new standard does not change its previous conclusion.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
8
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
2.
Change in accounting policies (Continued from previous page) IFRS 11 Joint Arrangements As a result of adopting IFRS 11, the Credit Union changed its accounting policies with respect to the classification and accounting of arrangements over which it has joint control with one or more other parties i.e. joint arrangements. Joint arrangements are now classified as either joint ventures or joint operations based on the Credit Union’s contractual rights and obligations. Joint venturers use the equity method in accordance with amended IAS 28 to account for their interest in the joint venture as proportionate consolidation is no longer permissible. For joint operations, the relevant assets, liabilities, income and expenses are recognized and measured based on applicable IFRSs, in relation to their interest in the arrangement. IFRS 12 Disclosure of Interests in Other Entities IFRS 12 requires disclosures with respect to interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. In general, the adoption of IFRS 12 has resulted in additional disclosures in the Credit Union’s consolidated financial statements. Refer to Note 4. IFRS 13 Fair Value Measurement IFRS 13 improves consistency and reduces complexity of fair value measurements by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. In accordance with the transitional provisions, IFRS 13 has been applied prospectively from January 1, 2013. The adoption of IFRS 13 did not have an impact on the measurement of the Credit Union’s assets and liabilities but has resulted in additional disclosures. Refer to Note 22.
3.
Basis of preparation Basis of measurement The consolidated financial statements have been prepared using the historical basis except for the revaluation of certain financial instruments. Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Credit Union’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand. Significant accounting judgments, estimates and assumptions The preparation of the Credit Union’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainties about these assumptions and estimates could result in outcomes that would require a material adjustment to the carrying amount of the asset or liability affected in the future. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in comprehensive income in the period in which the estimate is revised if revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date are discussed below. Allowance for impaired loans The Credit Union reviews its individually significant loans at each reporting date to assess whether an impairment loss should be recognized. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Credit Union makes judgments about the borrower’s financial situation and the net realizable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
9
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
3.
Basis of preparation (Continued from previous page) Member loans receivable that have been assessed individually and found not to be impaired and all individually insignificant loans are assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective provision assessment takes account of data from the loan portfolio such as credit quality, delinquency, historical performance and industry economic outlook. The impairment loss on member loans receivable is disclosed in more detail in Note 7. 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 to reduce any differences between loss estimates and actual loss experience. For purposes of the collective provision loans are classified into separate groups with similar risk characteristics, based on the type of product and type of security. Financial instrument not traded on active markets For financial instruments not traded in active markets, where fair values are determined, they are determined using valuation techniques such as the discounted cash flow model that rely on assumptions that are based on observable active markets or rates. Certain assumptions take into consideration liquidity risk, credit risk and volatility. Impairment of non-financial assets At each reporting date, the Credit Union assesses whether there are any indicators of impairment for non-financial assets. Non-financial assets that have an indefinite useful life or are not subject to amortization, such as goodwill, are tested annually for impairment or more frequently if impairment indicators exist. Other non-financial assets are tested for impairment if there are indicators that their carrying amounts may not be recoverable. Income taxes The Credit Union periodically assesses its liabilities and contingencies related to income taxes for all years open to audit based on the latest information available. For matters where it is probable that an adjustment will be made, the Credit Union records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes that they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities. Impairment of available-for-sale financial assets Management determines when an available-for-sale financial asset is impaired in accordance with IAS 39 Financial Instruments: Recognition and Measurement. This determination requires significant judgment. Management evaluates the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and short-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow. When the fair value declines, management makes assumptions about the decline in value to determine if it is an impairment to be recognized in profit or loss. At December 31, 2013, impairment losses of $25 have been recognized for available-for-sale assets (2012 - $nil). The carrying amount of available-for-sale assets is $55,928 (2012 - $38,951).
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
10
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
3.
Basis of preparation (Continued from previous page) Deferred income taxes The calculation of deferred income tax is based on assumptions, which are subject to uncertainty as to timing and which tax rates are expected to apply when temporary differences reverse. Deferred income tax recorded is also subject to uncertainty regarding the magnitude of non-capital losses available for carry forward and of the balances in various tax pools as the corporate tax returns have not been prepared as of the date of financial statement preparation. By their nature, these estimates are subject to measurement uncertainty, and the effect on the consolidated financial statements from changes in such estimates in future years could be material. Further details are contained in Note 15. Type of joint arrangement The Credit Union determined that CEAMS is a joint venture because the venturers have rights to the net assets of the arrangement if the venture was liquidated. Useful lives of property, plant, equipment and intangible assets Estimates must be utilized in evaluating the useful lives of all property, plant, equipment and intangible assets for calculation of the amortization for each class of assets. For further discussion of the estimation of useful lives, refer to the headings property, plant and equipment and intangible assets contained in Note 4. Securitization derecognition The determination of whether the Credit Union’s securitization arrangements qualify for derecognition requires management judgment on the evaluation of the criteria for derecognition. For further discussion of derecognition of securitized assets refer to the securitization heading and related discussion contained in Note 4.
4.
Summary of significant accounting policies The principle accounting policies adopted in the preparation of the consolidated financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. Certain comparative amounts have been reclassified to conform to the current year’s presentation. Regulations to the Act specify that certain items are required to be disclosed in the consolidated financial statements which are presented at annual meetings of members. It is management's opinion that the disclosures in these consolidated financial statements and notes comply, in all material respects, with the requirements of the Act. Where necessary, reasonable estimates and interpretations have been made in presenting this information. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Credit Union and its subsidiaries. Subsidiaries are entities controlled by the Credit Union. Control is achieved where the Credit Union is exposed, or has rights, to variable returns from its involvement with the investee and it has the ability to affect those returns through its power over the investee. In assessing control, only rights which give the Credit Union the current ability to direct the relevant activities and that the Credit Union has the practical ability to exercise, is considered. The results of subsidiaries acquired or disposed of during the year are included in these consolidated financial statements from the effective date of acquisition or up to the effective date of disposal, as appropriate. The consolidated financial statements have been prepared using uniform accounting policies for like transactions and other events in similar circumstances. Where necessary, adjustments are made to the financial statements of subsidiaries to ensure consistency with those used by other members of the group. Any balances, unrealized gains and losses or income and expenses arising from intra-Company transactions, are eliminated upon consolidation. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Credit Union’s interest in the investee. Unrealized losses are eliminated in the same manner as unrealized gains, but only to the extent that there is no evidence of impairment.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
11
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) Foreign currency translation Transactions denominated in foreign currencies are translated into the functional currency of the Credit Union at exchange rates prevailing at the transaction dates (spot exchange rates). Monetary assets and liabilities are retranslated at the exchange rates at the statement of financial position date. Exchange gains and losses on translation or settlement are recognized in profit or loss for the current period. Non-monetary items that are measured at historical cost are translated using the exchange rates at the date of the transaction and non-monetary items that are measured at fair value are translated using the exchange rates at the date when the items’ fair value was determined. Translation gains and losses are included in profit or loss. Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Credit Union and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Interest income is recognized in profit or loss for all financial assets measured at amortized cost using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash flows through the expected life of the financial instrument back to the net carrying amount of the financial asset. The application of the method has the effect of recognizing revenue of the financial instrument evenly in proportion to the amount outstanding over the period to maturity or repayment. Interest penalties received as a result of loan prepayments by members are recognized as income in the year in which the prepayment is made, unless only minor modifications (based on a present value of future cash flows test) were made to the loan in which case they are deferred and amortized using the effective interest method. Fees related to the origination or renewal of a loan are considered an integral part of the yield earned on a loan and are recognized using the effective interest method over the estimated repayment term of the related loan. Investment income is recognized as interest is earned on interest-bearing investments, and when dividends are declared on shares. Investment security gains and losses are recognized in accordance with the requirements of their classification as outlined further under the Financial Instruments policy note. Commission revenue is recognized net of broker commission expense as earned on the effective date of each policy. Other revenue is recognized as services are provided to members. Financial instruments Classification and measurement All financial instruments are initially recognized at fair value at acquisition. Measurement in subsequent periods depends on whether the financial instrument has been classified as fair value through profit or loss, available-for-sale, held-tomaturity, loans and receivables, or other financial liabilities as described below. Transactions to purchase or sell these items are recorded on the settlement date. During the year, there has been no reclassification of financial instruments. Financial instruments classified as fair value through profit or loss are measured at fair value with unrealized gains and losses recognized through profit or loss. The Credit Union's financial instruments classified as fair value through profit or loss include cash and cash equivalents, derivative assets and liabilities, and loan payable. Available for sale financial assets are measured at fair value with unrealized gains and losses recognized in other comprehensive income. Certain equity instruments which do not trade in an open market and whose fair value cannot be reliably measured are recorded at cost. The Credit Union’s financial instruments classified as available for sale include shares and certain term deposits and bond investments. The Credit Union's shares in SaskCentral and Concentra Financial have been classified as available for sale. Financial assets classified as held-to-maturity are subsequently measured at amortized cost using the effective interest rate method. The Credit Union's financial instruments classified as held-to-maturity include certain term deposits and bond investments.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
12
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) Financial assets classified as loans and receivables are subsequently measured at amortized cost. The Credit Union's financial instruments classified as loans and receivables include all member loans receivable and accrued interest thereon and other receivable balances. Financial instruments classified as other financial liabilities include member deposits, accounts payable and accruals, securitization debt and membership shares. Other financial liabilities are subsequently carried at amortized cost. Derecognition of financial assets Derecognition of a financial asset occurs when: The Credit Union does not have rights to receive cash flows from the asset; The Credit Union has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through" arrangement; and either: The Credit Union has transferred substantially all the risks and rewards of the asset, or The Credit Union has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Credit Union has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred or retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Credit Union’s continuing involvement in the asset. In that case, the Credit Union also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Credit Union has retained. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of the existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognized in comprehensive income. The Credit Union designates certain financial assets upon initial recognition as at fair value through profit or loss (fair value option). Financial instruments in this category are the embedded derivatives and interest rate swaps not designated as hedging instruments. Derivative financial instruments Derivative instruments are recorded at fair value, including those derivatives that are embedded in financial or non financial contracts that are not closely related to the host contracts. Changes in the fair values of derivative instruments are recorded in profit or loss with the exception of derivative instruments designated as effective cash flow hedges, which are recorded in other comprehensive income. Hedges The Credit Union has entered into interest rate swap contracts with Concentra Financial to hedge the Credit Union's exposure to interest rate risks. IAS 39 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each type of hedge.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
13
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) Derivatives may be designated as hedging instruments, provided that the Credit Union formally documents the hedging relationship at its inception by outlining the risk management strategy being implemented along with the details of both the hedging instrument and hedged item. The documentation identifies the specific asset or liability being hedged, the risk that is being hedged, the type of derivative used, the intended term of the hedging relationship and the method recognizing the gains, losses, revenues and expenses associated with the items in the hedging relationship. The Credit Union must formally assess, at inception and over the term of the hedging relationship, whether the hedging relationship is effective in achieving offsetting changes in cash flow or fair value attributable to the risk being hedged. If it is determined that a derivative is not highly effective as a hedging instrument or the hedged item is terminated or sold, the Credit Union discontinues hedge accounting. Fair value hedge The Credit Union held no fair value hedges throughout the current or previous year. Cash flow hedge The Credit Union hedges its interest rate risk using pay floating, receive fixed interest rate swaps, or pay fixed, receive floating swaps. The effective portion of the gains or losses arising from re-measuring the fair value of the interest rate swaps are recognized in other comprehensive income and transferred to profit or loss in the same periods during which the hedged transactions impact profit or loss. The ineffective portion of the gain or loss on the hedging item is recognized immediately in profit or loss. When the derivative instrument no longer satisfies the conditions of effective hedging, hedge accounting ceases to be prospectively applied. The amounts previously recorded in other comprehensive income are reclassified to profit or loss in the period or periods during which the hedged item affects profit or loss. Gains or losses on derivatives are reclassified immediately to profit or loss when the hedged item is sold or terminated early. Fair value measurements The Credit Union classifies fair value measurements recognized in the consolidated statement of financial position using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Quoted prices (unadjusted) are available in active markets for identical assets or liabilities; Level 2: Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require the Credit Union to develop its own assumptions. Fair value measurements are classified in the fair value hierarchy based on the lowest level input that is significant to that fair value measurement. This assessment requires judgment, considering factors specific to an asset or a liability and may affect placement within the fair value hierarchy. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits and short-term highly liquid investments with original maturities of three months or less that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents are shown net of bank overdrafts that are repayable on demand and form an integral part of the Credit Union’s cash management system. Cash subject to restrictions that prevent its use for current purposes is included in restricted cash. Investments Each investment is classified into one of the categories described under financial instruments. The classification dictates the accounting treatment for the carrying value and changes in that value. All investments are adjusted to recognize other than a temporary impairment in the underlying value. SaskCentral and Concentra Financial deposits and shares SaskCentral and Concentra Financial deposits are accounted for as held to maturity, adjusted to recognize other than a temporary impairment in the underlying value, or as available for sale, based on management’s intent. Shares are accounted for as available for sale at cost, as no market exists for these investments.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
14
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) Portfolio investments Investments in securities are classified as available for sale or held to maturity, based on management’s intent. Investments in equity instruments that do not have a quoted market price in an active market are classified as available for sale and measured at cost. Member loans receivable Loans are initially recognized at their fair value and subsequently measured at amortized cost. Amortized cost is calculated as the loans’ principal amount, less any allowance for anticipated losses, plus accrued interest. Interest revenue is recorded on the accrual basis using the effective interest method. Loan administration fees are amortized over the term of the loan using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to the carrying amount of the financial asset. Allowance for loan impairment Allowance for loan impairment represents specific and general provisions established as a result of reviews of individual loans and groups of loans. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Credit Union makes judgments about the credit worthiness of the borrower’s financial situation and the net realizable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Member loans receivable that have been assessed individually and found not to be impaired are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective provision takes account of data from the loan portfolio and based on analysis of historical data, such as credit quality, levels of arrears, historical performance and economic outlook. Individual allowances are established by reviewing the credit worthiness of individual borrowers and the value of the collateral underlying the loan. Collective allowances are established by reviewing specific arrears and current economic conditions. Restructured loans are not considered impaired where reasonable assurance exists that the borrower will meet the terms of the modified debt agreement. Restructured loans are defined as loans greater than 90 days delinquent that have been restructured outside the Credit Union’s normal lending practices as it relates to extensions, amendments and consolidations. Loans are classified as impaired, and a provision for loss is established, when there is no longer reasonable assurance of the timely collection of the full amount of principal or interest. It is the Credit Union’s policy that whenever a payment is 90 days past due, loans are classified as impaired unless they are fully secured or collection efforts are reasonably expected to result in repayment of the debt. In such cases, a specific provision is established to write down the loan to the estimated future net cash flows from the loan discounted at the loans’ original effective interest rate. In cases where it is impractical to estimate the future cash flows, the carrying amount of the loan is reduced to its fair value calculated based on an observable market price. Any previously accrued but unpaid interest on the loan is charged to the allowance for loan impairment. Interest income after the impairment is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Impairment of financial assets For financial assets carried at amortized cost, the Credit Union first assesses individually whether objective evidence of impairment exists for financial assets that are significant, or collectively for financial assets that are not individually significant. If the Credit Union determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the financial asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
15
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the financial asset is reduced through the use of the provision for impaired financial assets and the amount of the impairment loss is recognized in profit or loss. The present value of the estimated future cash flows is discounted at the financial assets' original effective interest rate. The calculation of the present value of estimated future cash flows reflects the projected cash flows including provisions for impaired financial assets, prepayment losses, and costs to securitize and service financial assets. 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 profit or loss. Impairment of non-financial assets At the end of each reporting period, the Credit Union reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Credit Union estimates the recoverable amount of the cash-generating units (“CGU”) to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU’s, or otherwise they are allocated to the smallest group of CGU’s for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Securitization The Credit Union securitizes loan assets, generally through the sale of these assets to third parties. As the Credit Union remains exposed to residual risk and reward through the retention of items such as servicing requirements and the right to excess spread, these assets have not been de-recognized, as the de-recognition criteria have not been met and they continue to be reported on the consolidated statement of financial position. The residual risks associated with these assets are mitigated by the Credit Union’s risk policies. Syndication The Credit Union syndicates individual assets with various other financial institutions primarily to manage credit risk, create liquidity and manage regulatory capital for the Credit Union. Syndicated loans transfer substantially all the risks and rewards related to the transferred financial assets and are derecognized from the Credit Union’s consolidated statement of financial position. All loans syndicated by the Credit Union are on a fully serviced basis. The Credit Union receives fee income for services provided in the servicing of the transferred financial assets. Fee income is recognized in other income on an accrual basis in relation to the reporting period in which the costs of providing the services are incurred.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
16
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) Foreclosed assets Foreclosed assets held for sale are initially recorded at the lower of cost and estimated net realizable value. Cost comprises the balance of the loan at the date on which the Credit Union obtains title to the asset plus subsequent disbursements related to the asset, less any revenues or lease payments received. Foreclosed assets held for sale are subsequently valued at the lower of their carrying amount and fair value less cost to sell. Foreclosed assets are recorded in member loans receivable. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. All assets having limited useful lives are depreciated using the straight-line method over their estimated useful lives. Land has an unlimited useful life and is therefore not depreciated. Assets are depreciated from the date of acquisition. Internally constructed assets are depreciated from the time an asset is available for use. The depreciation rates applicable for each class of asset during the current and comparative period are as follows:
Buildings and improvements Automotive Furniture and equipment
Rate 10-40 years 3 years 3-10 years
The residual value, useful life and depreciation method applied to each class of assets are reassessed at each reporting date. Gains or losses on the disposal of property, plant and equipment will be determined as the difference between the net disposal proceeds and the carrying amount of the asset, and recognised in profit or loss as other operating income or other operating costs, respectively. Intangible assets Computer software The Credit Union's only intangible asset is computer software which is amortized to profit or loss on a straight-line basis over its estimated useful life of 3 - 10 years. The useful life of computer software will be reviewed on an annual basis and the useful life is altered if estimates have changed significantly. Gains or losses on the disposal of intangible assets will be determined as the difference between the net disposal proceeds and the carrying amount of the asset, and recognised in profit or loss as other operating income or other operating costs, respectively. Goodwill Goodwill arising in a business combination is recognized as an asset at the date of control (acquisition date). Goodwill is measured as the excess of the cost of the acquisition over the Credit Union’s interests in the net fair value of the identifiable net assets, liabilities and contingent liabilities of the acquiree recognized at the date of acquisition. Goodwill arose from an agreement to acquire a significant portfolio of financial assets and liabilities from another financial institution. In addition, the Credit Union acquired the financial assets and liabilities of two realty companies. Goodwill was recorded as at the acquisition dates. The Credit Union evaluates the carrying value of goodwill annually to determine if there is any impairment based on the estimates of current and expected undiscounted cash flows from the underlying net assets, taking into consideration operating trends and other relevant factors. The decline in the value of goodwill, if any, will be recorded as an impairment loss in profit or loss.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
17
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) Income taxes The Credit Union accounts for income taxes using the asset and liability method. Current and deferred tax are recognized in profit or loss except to the extent that the tax is recognized either in other comprehensive income or directly in equity, or the tax arises from a business combination. Under this method, the provision for income taxes is based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the assets are realized or the liabilities are settled. 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 income. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred 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. Leases A lease that transfers substantially all of the benefits and risks of ownership is classified as a finance lease. At the inception of a finance lease, an asset and a payment obligation are recorded at an amount equal to the lesser of the present value of the minimum lease payments and the asset’s fair market value at inception of the lease. Assets under finance leases are amortized on a straight-line basis, over their estimated useful lives. All other leases are accounted for as operating leases and rental payments are expensed as incurred. Employee benefits The Credit Union’s post employment benefit programs consist of a defined contribution plan. Credit Union contributions to the defined contribution plan are expensed as incurred. Pension benefits of $671 (2012 – $632) were paid to the defined contribution retirement plan during the year. Accounts payable Accounts payable are initially recorded at fair value and are subsequently carried at amortized cost, which approximates fair value due to the short term nature of these liabilities. Member deposits Member deposits are initially recognized at fair value, net of transaction costs directly attributable to the issuance of the instrument, and are subsequently measured at amortized cost using the effective interest rate method. Membership shares Shares are classified as liabilities or member equity in accordance with their terms. Shares redeemable at the option of the member, either on demand or on withdrawal from membership, are classified as liabilities. Shares redeemable at the discretion of the Credit Union Board of Directors are classified as equity. Shares redeemable subject to regulatory restrictions are accounted for using the criteria set out in IFRIC 2 Members' Shares in Cooperative Entities and Similar Instruments.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
18
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) Standards issued but not yet effective The Credit Union has not yet applied the following new standards, interpretations and amendments to standards that have been issued as at December 31, 2013 but are not yet effective. Unless otherwise stated, the Credit Union does not plan to early adopt any of these new or amended standards and interpretations. IFRS 3 Business combinations The amendments to IFRS 3, issued in December 2013, clarify the accounting for contingent consideration in a business combination. At each reporting period, an entity measures contingent consideration classified as an asset or a financial liability at fair value, with changes in fair value recognized in profit or loss. The amendments are effective for business combinations for which the acquisition date is on or after July 1, 2014. The Credit Union does not expect this amendment to have a material impact on its consolidated financial statements. Additional amendments to IFRS 3, issued in December 2013, clarify that IFRS 3 does not apply to the accounting for the formation of all types of joint arrangements in the financial statements of the joint arrangement itself. The amendments are effective for annual periods beginning on or after July 1, 2014. The Credit Union does not expect this amendment to have a material impact on its consolidated financial statements. IFRS 7 Financial instruments: disclosures and IAS 32 Financial instruments: presentation Financial assets and financial liabilities may be offset, with the net amount presented in the statement of financial position, only when there is a legally enforceable right to set off and when there is either an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. The amendments to IAS 32, issued in December 2011, clarify the meaning of the offsetting criterion "currently has a legally enforceable right to set off" and the principle behind net settlement, including identifying when some gross settlement systems may be considered equivalent to net settlement. The Credit Union has yet to determine the impact of this amendment on its consolidated financial statements. The amendments are effective for annual periods beginning on or after January 1, 2014. IFRS 9 Financial instruments IFRS 9 was issued in November 2009 and subsequently amended as part of an ongoing project to replace IAS 39 Financial instruments: Recognition and measurement. The standard requires the classification of financial assets into two measurement categories based on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. The two categories are those measured at fair value and those measured at amortized cost. The classification and measurement of financial liabilities is primarily unchanged from IAS 39. However, for financial liabilities measured at fair value, changes in the fair value attributable to changes in an entity’s “own credit risk” is now recognized in other comprehensive income instead of in profit or loss. This new standard will also impact disclosures provided under IFRS 7 Financial instruments: disclosures. In November 2013, the IASB amended IFRS 9 for the significant changes to hedge accounting. In addition, an entity can now apply the “own credit requirement” in isolation without the need to change any other accounting for financial instruments. The mandatory effective date of January 1, 2015 has been removed to provide sufficient time for preparers of financial statements to make the transition to the new requirements. The Credit Union is currently assessing the impact of this amendment on its consolidated financial statements. IFRS 10 Consolidated financial statements and IFRS 12 Disclosure of interests in other entities The amendments to IFRS 10, issued in October 2012, introduce a consolidation exception for investment entities. They do this by defining an investment entity and requiring an investment entity to measure subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial instruments or IAS 39 Financial Instruments: Recognition and measurement. The related amendments to IFRS 12, issued at the same time, require additional disclosure for investment entities. The amendments are effective for annual periods beginning on or after January 1, 2014. The Credit Union does not expect this amendment to have a material impact on its consolidated financial statements. IAS 16 Property, plant and equipment and IAS 38 Intangible assets The amendments to IAS 16 and IAS 38, issued in December 2013, clarify how an entity calculates the gross carrying amount and accumulated depreciation when a revaluation is performed. The amendments are effective for annual periods beginning on or after July 1, 2014. The Credit Union does not expect this amendment to have a material impact on its consolidated financial statements.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
19
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
4.
Summary of significant accounting policies (Continued from previous page) IAS 24 Related party disclosures The amendments to IAS 24, issued in December 2013, clarify that a management entity, or any member of a group of which it is a part, that provides key management services to a reporting entity, or its parent, is a related party of the reporting entity. The amendments also require an entity to disclose amounts incurred for key management personnel services provided by a separate management entity. This replaces the more detailed disclosure by category required for other key management personnel compensation. The amendments will only affect disclosure and are effective for annual periods beginning on or after July 1, 2014. IAS 36 Impairment of assets The amendments to IAS 36, issued in May 2013, require: • Disclosure of the recoverable amount of impaired assets; and • Additional disclosures about the measurement of the recoverable amount when the recoverable amount is based on fair value less costs of disposal, including the discount rate when a present value technique is used to measure the recoverable amount. The amendments will only affect disclosure and are effective for annual periods beginning on or after January 1, 2014. IAS 39 Financial Instruments: Recognition and measurement The amendments to IAS 39, issued in June 2013, clarify that novation of a hedging derivative to a clearing counterparty as a consequence of laws or regulations or the introduction of laws or regulations, does not terminate hedge accounting. The amendments are effective for annual periods beginning on or after January 1, 2014. The Credit Union does not expect this amendment to have a material impact on its consolidated financial statements.
5.
Cash and cash equivalents 2013 Cash Cash equivalents
6.
2012
226 95
12,987 22,745
321
35,732
Investments 2013 Available for sale SaskCentral - liquidity pool Portfolio bonds SaskCentral and Concentra Financial shares Other equity instruments Held to maturity Concentra Financial SaskCentral - liquidity pool
Accrued interest
2012
31,249 15,083 6,446 3,150
30,139 6,446 2,366
55,928
38,951
16,953 44,420
30,717 61,220
61,373
91,937
117,301
130,888
610
790
117,911
131,678
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
20
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
6.
Investments (Continued from previous page) Pursuant to Regulations, SaskCentral requires that the Credit Union maintain 10% of its total liabilities in specified liquidity deposits. The provincial regulator for Credit Unions, Credit Union Deposit Guarantee Corporation (CUDGC), requires that the Credit Union adhere to these prescribed limits and restrictions. As of December 31, 2013 the Credit Union met the requirement. The table below shows the credit risk exposure on investments, excluding liquidity reserves and balances on deposit with SaskCentral and Concentra Financial. Ratings are as provided by Dominion Bond Rating Services (DBRS) unless otherwise indicated. Investment portfolio rating AA A Unrated
13,258 106 11,315
28,070 107 10,774
24,679
38,951
SaskCentral and Concentra Financial shares are included in the unrated category above. 7.
Member loans receivable Principal and allowance by loan type: 2013 Principal performing Agriculture loans Commercial loans Consumer loans Lines of credit Mortgages
Foreclosed assets Accrued interest Total
Principal impaired
Allowance specific
Allowance collective
Net carrying value
76,642 55,753 59,958 72,834 448,245
766 1,080 1,632 4 1,968
121 203 4 427
25 260 206 265
77,383 56,452 61,181 72,834 449,521
713,432
5,450
755
756
717,371
22 2,962
16
16
-
716,416
5,466
771
756
22 2,962 720,355 2012
Principal performing Agriculture loans Commercial loans Consumer loans Lines of credit Mortgages Credit derivatives
Accrued interest Total
Principal impaired
Allowance specific
Allowance collective
Net carrying value
67,126 53,704 61,796 50,959 386,521 55
655 571 970 85 1,159 -
90 236 85 244 -
29 364 145 290 -
67,752 53,821 62,385 50,959 387,146 55
620,161
3,440
655
828
622,118
2,713
10
10
-
622,874
3,450
665
828
2,713 624,831
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
21
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
7.
Member loans receivable (Continued from previous page) The Credit Union has securitized loans receivable under the National Housing Authority Mortgage Backed Security program in the amount of $14,209 (2012 - $9,517) which do not qualify for de-recognition and are therefore included in the above Mortgages balance at December 31, 2013. The allowance for loan impairment changed as follows: 2013
2012
Balance, beginning of year Provision for (recovery of) loan impairment
1,493 191
1,658 (41)
Less: accounts written off, net of recoveries
1,684 157
1,617 124
Balance, end of year
1,527
1,493
A loan is considered past due when a counterparty has not made a payment by the contractual due date. The table that follows presents the carrying value of loans at year-end that are past due but not classified as impaired because they are either i) less than 90 days past due, or ii) fully secured and collection efforts are reasonably expected to result in repayment. December 31, 2013
31-60 days
61-90 days
91 days and greater
Total
Personal Commercial Agriculture
2,773 661 904
87 30 57
138 626 250
2,998 1,317 1,211
Total
4,338
174
1,014
5,526
December 31, 2012 Personal Commercial Agriculture Total
31-60 days
61-90 days
91 days and greater
Total
659 290 761
26 548 124
123 582 17
808 1,420 902
1,710
698
722
3,130
The principal collateral and other credit enhancements the Credit Union holds as security for loans include (i) insurance, mortgages over residential lots and properties, (ii) recourse to business assets such as real estate, equipment, inventory and accounts receivable, (iii) recourse to commercial real estate properties being financed, and (iv) recourse to liquid assets, guarantees and securities. Valuations of collateral are updated periodically depending on the nature of the collateral. The Credit Union has policies in place to monitor the existence of undesirable concentration in the collateral supporting its credit exposure. In management's estimation, the fair value of the collateral is sufficient to offset the risk of loss on the loans past due but not impaired.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
22
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
8.
Other assets
Accounts receivable Prepaid expenses and deposits Deferred tax asset
9.
2013
2012
799 480 185
745 560 90
1,464
1,395
Property, plant and equipment Buildings and Land improvements
Automotive
Furniture and equipment
Total
Cost Balance at December 31, 2011 Additions Impairments
990 (2)
14,534 315 (5)
61 -
5,347 190 -
20,932 505 (7)
Balance at December 31, 2012
988
14,844
61
5,537
21,430
Additions Disposals Balance at December 31, 2013
-
2,617 (84)
-
131 (95)
2,748 (179)
988
17,377
61
5,573
23,999
Balance at December 31, 2011
-
4,748
33
3,670
8,451
Depreciation
-
499
17
435
951
Balance at December 31, 2012
-
5,247
50
4,105
9,402
Depreciation Disposals
-
Balance at December 31, 2013
-
5,665
61
4,429
10,155
Net book value At December 31, 2012
988
9,597
11
1,432
12,028
At December 31, 2013
988
11,712
-
1,144
13,844
Accumulated depreciation and impairment losses
502 (84)
11 -
418 (94)
931 (178)
During 2013 the building in Yorkton was under construction. Total construction costs included in the carrying amount of property, plant and equipment are $2,872 (2012 – $298).
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
23
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
10.
Intangible assets
Cost Accumulated depreciation and impairment losses
2013
2012
1,131 (497)
1,070 (354)
634
716 Computer software
Cost Balance December 31, 2011
991
Additions
79
Balance at December 31,2012
1,070
Additions
61
Balance at December 31,2013
1,131
Accumulated depreciation and impairment losses
11.
Balance December 31, 2011 Depreciation
226
Balance at December 31, 2012
354
Depreciation
143
Balance at December 31, 2013
497
128
Goodwill 2013
2012
Cost
728
728
Accumulated impairment losses, beginning of year Impairment losses recognized in the year
505 44
505 -
549
505
179
223
Carrying amount
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
24
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013 12.
Loan payable SaskCentral The Credit Union has an authorized line of credit due on demand, with no fixed repayment date, bearing interest at prime minus 0.5% CDN and prime plus 0.5% US in the amount of $15,000 CDN (2012 - $10,000) and $1,000 US (2012 -$1,000) from SaskCentral. Borrowings are secured by an assignment of book debts, financial services agreement, and an operating account agreement. Concentra Financial The Credit Union has an authorized line of credit due on demand, with no fixed repayment date, bearing interest at one month CDOR plus 0.5% in the amount of $10,000 CDN (2012 - $nil) from Concentra Financial. As at December 31, 2013 the balance was $8,000 (2012 - $nil). Un-advanced balances carry a standby fee of 15 basis points annually, assessed monthly on unused average balances. Assets pledged as collateral are deposits held with Concentra Financial, with a carrying amount of $10,000.
13.
Member deposits 2013 Chequing, Savings, Investor savings Registered savings plans Term deposits Accrued interest
2012
459,458 126,056 168,978 3,082
450,198 117,220 157,064 3,359
757,574
727,841
Total deposits include $3,475 (2012 - $3,144) denominated in foreign currencies. Member deposits are subject to the following terms: Chequing, savings and investor savings products are due on demand and bear interest at rates up to 1.75% (2012 1.75%). Registered savings plans are subject to fixed and variable rates of interest up to 4.30% (2012 - 5.06%), with interest payments due monthly, annually or on maturity. Term deposits are subject to fixed and variable rates of interest up to 4.80% (2012 - 4.85%), with interest payments due monthly, annually or on maturity. 14.
Securitization debt
Securitization debt Issuance costs net of discounts Accrued interest
2013
2012
14,215 (64) 24
9,532 (43) 15
14,175
9,504
The terms of the agreement require cash outflows to the purchaser of the securitized debt. Future payments, excluding interest, are as follows: Not later than 1 year Later than 1 year and not later than 5 years
389 13,826
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
25
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
15.
Income tax Income tax expense recognized in profit (loss) The applicable tax rate for the Credit Union is the aggregate of the federal income tax rate of 11.63% (2012 - 11%) and the provincial tax rate of 2% (2012 - 2%). Subsidiary income is taxed at a combined rate of 27%. Deferred income tax expense recognized in profit (loss) The deferred income tax recovery recognized in profit (loss) for the current year is a result of the following changes: 2013
2012
Deferred tax liability Property, plant and equipment
(42)
(60)
Deferred tax asset Goodwill Tax losses Allowance for impaired loans
65 21 141
66 65 19
227
150
Net deferred tax asset (liability)
185
90
Net deferred tax asset (liability) is reflected in the statement of financial position as follows Deferred tax asset
185
90
185
90
2013
2012
27.00 % (13.37)% 0.49 %
27.00 % (14.00)% 0.95 %
14.12 %
13.95 %
Reconciliation between average effective tax rate and the applicable tax rate Applicable tax rate Reduction for Credit Unions Non-deductible and other items Average effective tax rate (tax expense divided by profit before tax)
In October 2013, the government enacted a change in the federal tax rate from 11% to 15% that was introduced in the March 2013 budget. This increase in tax rate will impact income within the Credit Union with a phase in over the five year period from 2013 to 2018. Federally, the result is 20% of the Credit Union’s taxable income will be taxed at a rate of 15% (prorated from March 21, 2013), with the remaining income continuing to be taxed at a rate of 11% for 2013 . By 2018 100% of the Credit Union's taxable income will be taxed at a rate of 15%. No changes in provincial tax rates were substantially enacted in 2013. No changes in susidiary tax rates were enacted during 2013.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
26
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013 16.
Other liabilities 2012
2013 Accounts payable Corporate income tax payable
17.
5,870 223
5,116 209
6,093
5,325
Membership shares Authorized: Unlimited number of Common shares, at an issue price of $5. Unlimited number of Surplus shares, at an issue price of $1.
Issued (in thousands): 2012
2013 22 Common shares (2012 - 22) 8,731 Surplus shares (2012 - 8,500)
108 8,731
110 8,500
8,839
8,610
All common and surplus shares are classified as liabilities. When an individual becomes a member of the Credit Union, they are issued a common share at $5 per share. Each member of the Credit Union has one vote, regardless of the number of common shares held. Surplus shares are established as a means of returning excess earnings to the members and at the same time increasing the Credit Union's equity base. The Articles of Incorporation for the Credit Union disclose the conditions concerning surplus shares. During the year, the Credit Union issued 1 (2012 - 1) and redeemed 1 (2012 - 1) common shares, and also issued 957 (2012 - 1,283) and redeemed 726 (2012 - 791) surplus shares . 18.
Patronage The Board of Directors authorized a patronage refund of $1,000 (2012 - $985) to be allocated to purchase surplus shares for the members based on participation for the year ended December 31, 2013. The patronage refund of $1,017 has been reflected in the Consolidated Statement of Income with related tax savings of approximately $139 being reflected in the current year's provision for income taxes.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
27
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013 19.
Related party transactions Key management compensation of the Credit Union Key management personnel ("KMP") of the Credit Union are the Chief Executive Officer, Vice-President of Finance, VicePresident of Corporate Services, Vice-President of Retail Services, Vice-President of Human Resources, Vice-President of Marketing and Strategic Solutions and members of the Board of Directors. KMP remuneration includes the following expenses: 2012 2013 Salaries and short-term benefits
1,283
1,275
Future incentive payments to KMP were accrued but not paid during the year. These incentives amounted to $208 (2012 $70). Transactions with joint ventures of the Credit Union Credit Union Electronic Account Management Services Association (the “CEAMS�) is an unincorporated entity that provides electronic account management and financial services systems for its members. CEAMS was formed on June 1, 1997 and commenced operations immediately thereafter. The activities of CEAMS are transacted in accordance with the terms and conditions of the Memorandum of Association, dated June 1, 1997, as amended from time to time. The Credit Union owns a nominal interest in this joint venture. Transactions with key management personnel The Credit Union, in accordance with its policy, grants credit to its directors, management and staff at market rates. Loans made to directors and KMP are approved under the same lending criteria applicable to members. There are no loans to KMP that are impaired. Directors, management and staff of the Credit Union hold deposit accounts. These accounts are maintained under the same terms and conditions as accounts of other members, and are included in deposit accounts on the statement of financial position. There are no benefits or concessional terms and conditions applicable to the family members of KMP. In the ordinary course of business, the Credit Union provided normal financial services to its wholly-owned subsidiaries Tisdale Financial Plus Limited, CGT Cornerstone Holdings Limited., and 101060086 Saskatchewan Ltd. on terms similar to those offered to non-related parties. These loans and deposits were made in the normal course of operations and are measured at the exchange amount, which is the consideration established and agreed to by the related parties. 2012 2013 Aggregate loans to KMP Aggregate revolving credit facilities to KMP Less: approved and undrawn lines of credit Less: Membership shares included as liabilities
2,309 569 (470) (39)
1,573 616 (234) (53)
2,369
1,902
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
28
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
19.
Related party transactions (Continued from previous page)
During the year the aggregate value of loans approved to KMP amounted to: Revolving Credit Mortgages Loans
Income and expense transactions with KMP consisted of: Interest earned on loans to KMP Total interest paid on deposits to KMP
2013
2012
219 705 417
53 786 88
1,341
927
2013
2012
184 28
66 53
2013
2012
The total value of member deposits from KMP as at the year-end: Chequing and demand deposits Term deposits Registered plans
1,831 71 409
1,654 438 934
Total value of member deposits due to KMP
2,311
3,026
Directors’ fees and expenses Directors fees and committee remuneration Directors expenses Meeting, training and conference costs
2013
2012
89 20 18
81 22 25
SaskCentral and Concentra Financial The Credit Union is a member of SaskCentral, which acts as a depository for surplus funds received from and loans made to credit unions. SaskCentral also provides other services for a fee to the Credit Union and acts in an advisory capacity. The Credit Union is related to Concentra Financial, which is owned in part by SaskCentral. Concentra Financial provides financial intermediation and trust services to Canadian credit unions and associated commercial and retail customers. Interest earned on investments during the year ended December 31, 2013 amounted to $2,180 (2012 - $2,655) Interest paid on borrowings during the year ended December 31, 2013 amounted to $23 (2012 - $11). Payments made for affiliation dues for the year ended December 31, 2013 amounted to $302 (2012 - $293). Celero Solutions The Credit Union has entered into an agreement with Celero Solutions to provide the delivery of banking system services and the maintenance of the infrastructure needed to ensure uninterrupted delivery of such services. Celero Solutions was formed as a joint venture by the Credit Union Centrals of Alberta, Saskatchewan and Manitoba along with Concentra Financial.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
29
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013 20.
Capital management A capital management framework is included in policies and procedures established by the Board of Directors. The Credit Union’s objectives when managing capital are to:
Adhere to regulatory capital requirements as minimum benchmarks; Co-ordinate strategic risk management and capital management; Develop financial performance targets/budgets/goals; Administer a patronage program that is consistent with capital requirements; Administer an employee incentive program that is consistent with capital requirements; and Develop a growth strategy that is coordinated with capital management requirements.
Credit Union Deposit Guarantee Corporation (CUDGC) prescribes capital adequacy measures and minimum capital requirements. The capital adequacy rules issued by CUDGC have been based on the Basel III framework, consistent with the financial industry in general. CUDGC’s Standards of Sound Business Practice (SSBP) that incorporate the Basel III framework took effect on July 1, 2013. The credit union’s capital management practices have changed in the year to ensure compliance with CUDGC requirements. The Credit Union follows a risk-weighted asset calculation for credit and operational risk. Under this approach, credit unions are required to measure capital adequacy in accordance with instructions for determining risk-adjusted capital and risk-weighted assets, including off-balance sheet commitments. Based on the prescribed risk of each type of asset, a weighting of 0% to 1,250% is assigned. The ratio of regulatory capital to risk-weighted assets is calculated and compared to the standard outlined by CUDGC. Regulatory standards require credit unions to maintain a minimum total eligible capital to risk-weighted assets of 8%, a minimum tier 1 capital to risk-weighted assets of 6% and a minimum common equity tier 1 capital to risk-weighted assets of 4.5%. Eligible capital consists of total tier 1 and tier 2 capital. In addition to the minimum capital ratios, the Credit Union is required to hold a capital conservation buffer of 2.5% effective January 1, 2016. The capital conservation buffer is designed to avoid breaches of the minimum capital requirement. Tier 1 capital is defined as a credit union’s primary capital and comprises the highest quality of capital elements while tier 2 is secondary capital and falls short of meeting tier 1 requirements for permanence or freedom from mandatory charges.Tier 1 capital consists of two components: common equity tier 1 capital and additional tier 1 capital. Common equity tier 1 capital includes retained earnings, contributed surplus and accumulated other comprehensive income (AOCI). Deductions from common equity tier 1 capital include goodwill, intangible assets, deferred tax assets (except those arising from temporary differences), increases in equity capital resulting from securitization transactions, unconsolidated substantial investments and fair value gains/losses on own-use property. Additional tier 1 capital consists of qualifying membership shares and other investment shares issued by the Credit Union that meet the criteria for inclusion in additional tier 1 capital. Tier 2 capital includes a collective allowance for credit losses to a maximum of 1.25% of risk-weighted assets, subordinated indebtedness, and qualifying membership shares or other investment shares issued by the Credit Union that meet the criteria for inclusion in tier 2 capital and are not included in tier 1 capital. Regulatory standards also require the Credit Union to maintain a minimum leverage ratio of 5%. This ratio is calculated by dividing eligible capital by total assets less deductions from capital plus specified off-balance sheet exposures. Based on the type of off-balance sheet exposure, a conversion factor is applied to the leverage ratio. The following table compares Credit Union Deposit Guarantee Corporation regulatory standards to the Credit Union’s board policy for 2013:
Total eligible capital to risk-weighted assets Tier 1 capital to risk-weighted assets Common equity tier 1 capital to risk-weighted assets Minimum leverage ratio
Regulatory standards
Board limits
8.00 6.00 4.50 5.00
11.00 9.00 9.00 7.00
% % % %
% % % %
During the year, the Credit Union complied with all external capital requirements.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
30
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
20.
Capital management (Continued from previous page) The following table summarizes key capital information under Basel III as at December 31, 2013: 2013 Eligible capital Common equity tier 1 capital Additional tier 1 capital
59,029 -
Total tier 1 capital Total tier 2 capital
59,029 9,595
Total eligible capital
68,624
Risk-weighted assets Total eligible capital to risk-weighted assets Total tier 1 capital to risk-weighted assets Common equity tier 1 capital to risk-weighted assets Minimum leverage ratio
10.94 % 9.41 % 9.41 % 7.52 %
The following table summarizes key capital information under the previous Basel II standards as at December 31, 2012: 2012 Eligible capital Total tier 1 capital Total tier 2 capital
63,105 828
Total eligible capital
63,933
Risk-weighted assets Total eligible capital to risk-weighted assets Tier 1 capital to total assets Tier 2 capital to tier 1 capital 21.
11.45 % 7.82 % 1.31 %
Financial instruments The Credit Union as part of its operations carries a number of financial instruments. It is management's opinion that the Credit Union is not exposed to significant interest, currency or credit risks arising from these financial instruments except as otherwise disclosed. Risk management policy The Credit Union carries a number of financial instruments which result in exposure to the following risks: credit risk, market risk, and liquidity risk. The Credit Union, as part of operations, has established avoidance of undue concentrations of risk, hedging of risk exposures, and requirements for collateral to mitigate credit risk as risk management objectives. In seeking to meet these objectives, the Credit Union follows risk management policies approved by its Board of Directors. These risk management policies and procedures include the following:
Ensure all activities are consistent with the mission, vision and values of the Credit Union; Balance risk and return; Manage credit, market and liquidity risk through preventative and detective controls; Ensure credit quality is maintained; Ensure credit, market, and liquidity risk are maintained at acceptable levels; Diversify risk in transactions, member relationships and loan portfolios; Price according to risk taken; and
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
31
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
21.
Financial instruments (Continued from previous page) Use consistent credit risk exposure tools.
Various Board of Directors committees are involved in risk management oversight, including the Audit and Risk Committee and Conduct Review Committee. There have been no significant changes from the previous year in the exposure to risk, policies and procedures or methods used to measure risk. Credit risk Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Credit Union. Credit risk primarily arises from loans receivable. Management and the Board of Directors review and update the credit risk policy annually. The Credit Union's maximum credit risk exposure before taking into account any collateral held is the carrying amount of loans as disclosed on the statement of financial position with additional detail reported in Note 7. For investment securities and derivative instruments, the Credit Union is exposed to the risk of default by the counterparty for instruments reported in Note 6. Concentration of credit risk exists if a number of borrowers are engaged in similar economic activities or are located in the same geographical region, and indicate the relative sensitivity of the Credit Union's performance to developments affecting a particular segment of borrowers or geographical region. Geographical risk exists for the Credit Union due to its primary service area being Archerwill, Bjorkdale, Elfros, Ituna, Kelliher, Lestock, Rose Valley, Saltcoats, Springside, Theodore, Tisdale, Wynyard, Yorkton, and surrounding areas. Credit risk management for loan portfolio The Credit Union employs a risk measurement process for its loan portfolio which is designed to assess and quantify the level of risk inherent in credit granting activities. Risk is measured by reviewing qualitative and quantitative factors that impact the loan portfolio and starts at the time of a member credit application and continues until the loan is fully repaid. Management of credit risk is established in policies and procedures by the Board of Directors. The primary credit risk management policies and procedures include the following:
Loan security (collateral) requirements: Security valuation processes, including method used to determine the value of real property and personal property when that property is subject to a mortgage or other charge; and Maximum loan to value ratios where a mortgage or other charge on real or personal property is taken as security. Borrowing member capacity (repayment ability) requirements; Borrowing member character requirements; Limits on aggregate credit exposure per individual and/or related parties; Limits on concentration of credit risk by loan type, industry and economic sector; Limits on types of credit facilities and services offered; Internal loan approval processes and loan documentation standards; Loan re-negotiation, extension and renewal processes; Processes that identify adverse situations and trends, including risks associated with economic, geographic and industry sectors; Control and monitoring processes including portfolio risk identification and delinquency tolerances; Timely loan analysis processes to identify, assess and manage delinquent and impaired loans; Collection processes that include action plans for deteriorating loans; Overdraft control and administration processes; and Loan syndication processes.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
32
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
21.
Financial instruments (Continued from previous page) Credit risk management for investments and derivative instruments Management of risk in relation to investments and derivatives is performed as per board approved policies which set out eligible investment securities and limits on exposure to single entities, issuer groups and maximum terms of investment. Eligible derivatives are defined in policy which includes limits on approval for purchase and disposal of investments and derivatives. Credit risk within these portfolios is monitored and measured by reviewing exposure to individual counterparties and ensuring the Credit Union remains within policy limits by issuer weightings and by dollar amount. The quality of the counterparty is assessed through published credit ratings which is outlined in Note 6. Credit commitments To meet the needs of its members and manage its own exposure to fluctuations in interest rates, the Credit Union participates in various commitments and contingent liability contracts. The primary purpose of these contracts is to make funds available for the financing needs of members. These are subject to normal credit standards, financial controls, risk management and monitoring procedures. The contractual amounts of these credit instruments represent the maximum credit risk exposure without taking into account the fair value of any collateral, in the event other parties fail to perform their obligations under these instruments. The Credit Union makes the following instruments available to its members: (a)
guarantees and standby letters of credit representing irrevocable assurances that the Credit Union will pay if a member cannot meet their obligations to a third party;
(b)
commitments to extend credit representing unused portions of authorizations to extend credit in the form of loans, (including lines of credit and credit cards), guarantees or letters of credit.
The amounts shown on the table below do not necessarily represent future cash requirements since many commitments will expire or terminate without being funded. As at year-end, the Credit Union had the following outstanding financial instruments subject to credit risk: 2013 Unadvanced lines of credit Guarantees and standby letters of credit Commitments to extend credit
2012
87,246 1,014 49,824
79,098 1,175 40,377
138,084
120,650
Market risk Market risk is the risk of loss in value of financial instruments that may arise from changes in market factors such as interest rates, equity prices and credit spreads. The Credit Union's exposure changes depending on market conditions. Market risks that have a significant impact on the Credit Union include fair value risk and interest rate risk. Market risk arises from changes in interest rates that affect the Credit Union's net interest income. Exposure to this risk directly impacts the Credit Union's income from its loan and deposit portfolios. The Credit Union's objective is to earn an acceptable net return on these portfolios, without taking unreasonable risk, while meeting member owner needs. Risk measurement The Credit Union's risk position is measured and monitored each quarter to ensure compliance with policy. Management provides quarterly reports on these matters to the Credit Union's Board of Directors.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
33
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
21.
Financial instruments (Continued from previous page) Objectives, policies and processes Management is responsible for managing the Credit Union's interest rate risk, monitoring approved limits and compliance with policies. The Credit Union manages market risk by developing and implementing asset and liability management policies, which are approved and periodically reviewed by the Board. The Credit Union's goal is to achieve adequate levels of profitability, liquidity and safety. The Board of Directors reviews the Credit Union's investment and asset liability management policies periodically to ensure they remain relevant and effective in managing and controlling risk. Interest rate risk Interest rate risk is the sensitivity of the Credit Union’s financial condition to movements in interest rates. Cash flow interest rate risk is the risk that the future cash flows of the Credit Union’s financial instruments will fluctuate due to changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in prevailing market interest rates. Interest margins reported in the profit or loss may increase or decrease in response to changes in market interest rates. The Credit Union incurs interest rate risk on its loans and other interest bearing financial instruments. In managing interest rate risk, the Credit Union relies primarily upon use of asset - liability and interest rate sensitivity simulation models, which is monitored by the Credit Union’s finance department and reported to the Asset and Liability Committee ("ALCO") which is responsible for managing interest rate risk. Periodically, the Credit Union may enter into interest rate swaps to adjust the exposure to interest rate risk by modifying the repricing of the Credit Union’s financial instruments. Sensitivity analysis is used to assess the change in value of the Credit Union’s financial instruments against a range of incremental basis point changes in interest rates over a twelve month period. Interest rate shock analysis is calculated in a similar manner to sensitivity analysis but involves a more significant change of 75 basis points or greater in interest rates. Sensitivity analysis and interest rate shock analysis are calculated on a monthly basis and are reported to the ALCO. Based on current differences between financial assets and financial liabilities as at year-end, the Credit Union estimates that an immediate and sustained 100 basis point increase in interest rates would increase net interest margin by $929 over the next 12 months while an immediate and sustained 75 basis point decrease in interest rates would decrease net interest income by $818 over the next 12 months. Other types of interest rate risk are basis risk (the risk of loss arising from changes in the relationship of interest rates which have similar but not identical characteristic; for example, the difference between prime rates and the Canadian Deposit Offering Rate) and prepayment risk (the risk of loss of interest income arising from the early repayment of fixed rate mortgages and loans), both of which are monitored on a regular basis and are reported to the ALCO. The Credit Union's major source of income is financial margin which is the difference between interest earned on investments and loans to members and interest paid to members on their deposits. The objective of managing the financial margin is to match re–pricing or maturity dates of loans and investments and member deposits within policy limits. These limits are intended to limit the Credit Union's exposure to changing interest rates and to wide fluctuations of income during periods of changing interest rates. The differential represents the net mismatch between loans and investments and member deposits for those particular maturity dates. Certain items on the statement of financial position, such as noninterest bearing member deposits and equity do not provide interest rate exposure to the Credit Union. These items are reported as non-interest rate sensitive in the table below. Amounts with variable interest rates, or due on demand, are classified as on demand. A significant amount of member loans receivable and member deposits can be settled before maturity on payment of a penalty. No adjustment has been made for repayments that may occur prior to maturity. Interest rate sensitivity In the table below, the carrying amounts of financial instruments are presented in the periods in which they next re – price to market rates or mature and are summed to show the net interest rate sensitivity gap.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
34
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
21.
Financial instruments (Continued from previous page) Contractual repricing and maturity All financial instruments are reported in the schedule below based on the earlier of their contractual re – pricing date or maturity date. The schedule below does not identify management's expectations of future events where re – pricing and maturity dates differ from contractual dates. 2013 2012 On demand
Within 3 months
Over 3 months to 1 year
Non-Interest Over 1 year to 5 years Over 5 years Sensitive
Total
Total
Assets Cash and cash equivalents Average yield % Investments Average yield % Member loans receivable Average yield % Accounts receivable Subtotal
(2,550) 1.93 -
-
-
-
-
2,871
321
35,732
610
0.91 117,911
0.71 131,678
1.91
2.64
720,355
624,831
18,838
12,824
75,499
10,140
2.83
2.06
1.89
0.29
-
317,954
15,895
61,463
312,491
9,554
2,998
4.54
4.34
4.57
4.46
5.87
-
4.50
4.76
-
-
-
-
-
799
799
745
-
315,404
34,733
74,287
387,990
19,694
7,278
839,386
792,986
461,604
41,526
73,159
157,554
712
23,019
757,574
727,841
0.73 8,000
1.78 -
1.76 -
2.17 -
2.36 -
-
1.17 8,000
1.25 -
2.50
-
-
-
-
-
2.50
-
-
-
-
-
-
8,839
8,839
8,610
-
93
279
13,779
-
24
14,175
9,504
-
2.06
2.06
2.26
-
-
2.26
1.85
-
-
-
-
-
5,870
5,870
5,116
37,752
794,458
751,071
44,928
41,915
Liabilities Member deposits Average yield % Loan payable Average yield % Membership shares Securitization debt Average yield % Accounts payable Subtotal
469,604
41,619
73,438
171,333
712
On balance sheet mismatch
(154,200)
(6,886)
849
216,657
18,982
Off balance sheet
65,000
-
(20,000)
(45,000)
Net sensitivity
(89,200)
(6,886)
(19,151)
171,657
18,982
(30,474) (30,474)
44,928
41,915
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
35
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
21.
Financial instruments (Continued from previous page) The Credit Union enters into interest rate swaps under policies and procedures which ensure that they are utilized for reducing the Credit Union's exposure to fluctuating interest rates. All interest rate swaps are purchased on behalf of the Credit Union by Concentra Financial. As at December 31, 2013, the notional principal of the swaps was $65,000 (2012 – $50,000). This notional balance adds $65,000 of variable assets and $65,000 of liabilities at fixed rates to the above table. As at 2013 the fair value of the swap resulted in a liability of $9 (2012 - $3), which was included in accounts payable and the change in fair value of $94 (2012 - $91) was charged to other comprehensive income. Fair value risk Fair value risk is the potential for loss from an adverse movement in the value of a financial instrument. The Credit Union incurs fair value risk on its loans, certain deposit accounts and investments held. The Credit Union does not hedge its fair value risk. See Note 22 for further information on fair value of financial instruments. Liquidity risk Liquidity risk is the risk that the Credit Union cannot meet a demand for cash or fund its obligations as they come due. The Credit Union's management oversees the Credit Union's liquidity risk to ensure the Credit Union has access to enough readily available funds to cover its financial obligations as they come due. The Credit Union's business requires such liquidity for operating and regulatory purposes. Refer to Note 6 for further information about the Credit Union's regulatory requirement. Liquidity risk is managed through a three tiered structure consisting of the local Credit Union level, the provincial Credit Union level and the national Credit Union level. Locally, the Credit Union manages its liquidity position from three perspectives: Structural liquidity risk, which addresses the risk due to mismatches in effective maturities between assets and liabilities, more specifically the risk of over reliance on short-term liabilities to fund long-term illiquid assets; Tactical liquidity risk, which addresses the day-to-day funding requirements that are managed by imposing prudential limits on net fund outflows; Contingent liquidity risk, which assess the impact of sudden stressful events and the Credit Union’s responses thereto. The primary liquidity risk policies and procedures include the following: Liquidity risk management framework to measure and control liquidity risk exposure; Measurement of cashflows; Maintain a line of credit and borrowing facility with SaskCentral and others; Maintenance of a pool of high quality liquid assets; Monitoring of single deposits and sources of deposits; Monitoring of term deposits; and Contingency planning. Provincially, SaskCentral manages a statutory liquidity pool on behalf of Saskatchewan Credit Unions. Nationally, Central 1 Credit Union maintains required levels of marketable investment securities to support national system liquidity needs. SaskCentral maintains bi-lateral credit union lines with the other participating centrals for the purpose of accessing funding in a liquidity event as a participant in the national liquidity program.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
36
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
21.
Financial instruments (Continued from previous page) The following table details contractual maturities of financial liabilities: As at December 31, 2013: < 1 year
1-2 years
> 2 years
Member deposits Securitization debt Loan payable Issued financial guarantee contracts Accounts payable Derivatives Membership shares
603,698 700 8,000 20,121 5,870 90 -
76,604 700 845 47 -
92,369 14,000 2,535 70 8,839
772,671 15,400 8,000 23,501 5,870 207 8,839
Total
638,479
78,196
117,813
834,488
< 1 year
1-2 years
> 2 years
Total
Member deposits Securitization debt Issued financial guarantee contracts Accounts payable Derivatives Membership shares
593,652 408 17,002 5,116 90 -
60,946 408 1,759 37 -
87,659 9,425 3,144 8,610
742,257 10,241 21,905 5,116 127 8,610
Total
616,268
63,150
108,838
788,256
Total
As at December 31, 2012:
The Credit Union manages liquidity risk on a net asset and liability basis. The following tables explain the contractual maturities of financial assets held for the purpose of managing liquidity risk. As at December 31, 2013 < 1 year
1-2 years
> 2 years
Cash and cash equivalents Investments Member loans receivable Issued financial guaranteed contracts Accounts receivable
321 33,860 414,557 614 799
34,363 111,803 614 -
53,836 237,018 15,185 -
321 122,059 763,378 16,413 799
Total
450,151
146,780
306,039
902,970
1-2 years
> 2 years
Total
As at December 31, 2012 < 1 year
Total
Cash and cash equivalents Investments Member loans receivable Issued Financial Guarantee Contracts Accounts receivable Derivatives
35,732 63,035 341,676 381 745 -
28,310 76,774 381 -
45,769 251,836 9,118 4
35,732 137,114 670,286 9,880 745 4
Total
441,569
105,465
306,727
853,761
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
37
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
21.
Financial instruments (Continued from previous page) The above tables were prepared using undiscounted contractual maturities of financial assets and liabilities including interest that will be earned or paid on these amounts. Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. In seeking to manage the risks from foreign exchange rate fluctuations, the Credit Union maintains foreign cash balances to approximately offset deposits held in foreign funds. Foreign currency risk is not considered significant at this time as the Credit Union does not engage in any active trading of foreign currency positions or hold significant excess foreign currency denominated financial investments for an extended period.
22.
Fair value measurements Recurring fair value measurements The Credit Unionâ&#x20AC;&#x2122;s assets and liabilities measured at fair value on a recurring basis have been categorized into the fair value hierarchy as follows: 2013 Fair Value Level 1 Level 2 Level 3 Assets Financial assets at fair value through profit or loss Cash and cash equivalents Available-for-sale financial assets Investments Other assets Derivative financial instruments designated as hedges Total assets
321
321
46,332
15,083
94
-
-
-
31,249
-
94
-
31,343
-
46,747
15,404
Liabilities Financial liabilities at fair value through profit or loss Loans payable
8,000
8,000
-
-
Total liabilities
8,000
8,000
-
-
38,747
7,404
Total recurring fair value measurements
31,343
-
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
38
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
22.
Fair value measurements (Continued from previous page) 2012 Fair Value Assets Financial assets at fair value through profit or loss Cash and cash equivalents Available-for-sale financial assets Investments Other assets Derivative financial assets designated as hedges
Level 1
Level 2
Level 3
35,732
35,732
-
-
30,139
30,139
-
-
91
-
91
-
Total assets
65,962
65,871
91
-
Total recurring fair value measurements
65,962
65,871
91
-
All recurring and non-recurring level 2 fair value measurements use a net present value valuation technique and inputs consisting of actual balances, actual rates, market rates (for similar instruments) and payment frequency. As outlined in Note 4 to the consolidated financial statements, the Credit Union's SaskCentral and Concentra Financial shares and investments in equity instruments that do not have a quoted market price in an active market are classified as available for sale and measured at cost, therefore are not included in the above table. Amortized cost of these items totalled $9,596 (2012 - $8,812). Asset and liabilities for which fair value is only disclosed The following table analyses within the fair value hierarchy the Credit Unionâ&#x20AC;&#x2122;s assets and liabilities (by class) not measured at fair value at December 31, 2013 but for which fair value is disclosed: 2013 Fair Value
Level 1
Level 2
Level 3
Assets Investments Member loans receivable Accounts receivable
62,495 720,779 799
799
62,495 720,779 -
-
Total assets
784,073
799
783,274
-
Liabilities Member deposits Accounts payable Securitization debt Membership shares
761,043 5,870 14,501 8,839
5,870 -
761,043 14,501 8,839
-
Total liabilities
790,253
5,870
784,383
-
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
39
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013
22.
Fair value measurements (Continued from previous page) 2012 Fair Value
Level 1
Level 2
Level 3
Assets Investments Member loans receivable Accounts receivable
93,821 628,502 745
745
93,821 628,502 -
-
Total assets
723,068
745
722,323
-
Liabilities Member deposits Accounts payable Securitization debt Membership shares
731,717 5,116 9,570 8,610
5,116 -
731,717 9,570 8,610
-
Total liabilities
755,013
5,116
749,897
-
All fair values disclosed and categorised within Level 2 of the hierarchy use a net present value valuation technique and inputs consisting of actual balances, actual rates, market rates (for similar instruments) and payment frequency. 23.
Commitments In 2008, the Credit Union entered into a ten year commitment, through the CEAMS joint venture, for the provision of retail banking services provided by Celero with a five year contract renewal option. The annual operating fee is calculated as a percentage of the aggregate fees paid by all Credit Unions using the banking system. The annual operating fees to December 31, 2013 were $802 and recorded as an expense (2014 estimate of operating fees - $829). In prior years the Credit Union entered into an agreement to purchase units in the APEX Investment Fund. The Credit Union makes advances to the Fund when requested which decreases the remaining commitment. Redemption of units does not increase the total remaining commitment to the Fund. At the end of December 2013 the Credit Union has advanced $3,962 of their total commitment of $4,890 to the APEX Investment Fund. In the current year the Credit Union entered into an agreement to purchase units in the APEX II Investment Fund. The Credit union makes advances to the Fund when requested which decreases the total commitment. Redemption of units does not increase the total remaining commitment to the Fund. At the end of December 2013 the Credit Union had commited $5,000 to the APEX II Fund. In conjunction with the completion of the Yorkton branch building expansion, the Credit Union has commited $3,824 to the finalization of the expansion project. The building expansion is expected to be completed in 2014. Leases The Credit Union has entered into lease agreements on various premises and equipment for varying periods between 1 and 5 years. Future minimum lease commitments are as follows: Not later than 1 year Later than 1 year and not later than 5 years
34 47
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
40
Cornerstone Credit Union Financial Group Limited Notes to the Consolidated Financial Statements For the year ended December 31, 2013 24.
Other legal and regulatory risk Legal and regulatory risk is the risk that the Credit Union has not complied with requirements set out in terms of compliance such as standards of sound business practice, anti-money laundering legislation or their code of conduct/conflict of interest requirements. In seeking to manage these risks, the Credit Union has established policies and procedures and monitors to ensure ongoing compliance.
25.
Events after the reporting period Effective January 1, 2014, the Credit Union sold the shares of its wholly owned subsidiary, Tisdale Financial Plus Limited, and the shares of 101060086 Saskatchewan Ltd., a wholly owned subsidiary of Tisdale Financial Plus Limited.
Cornerstone Credit Union Financial Group Limited | Consolidated Financial Statements | December 31, 2013
41
CORNERSTONECU.COM