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B u i l d i n g S u c c e s s To g e t h e rMomentum
Annual Report 2013
Atlantic Central serving:New Brunswick
Newfoundland and LabradorNova Scotia
Prince Edward Island
www.atlanticcreditunions.ca
B u i l d i n g S u c c e s s To g e t h e rMomentum…
The singular word momentum implies a drive, an energy, a force to get things moving. And moving implies direction; going toward something. We’re moving toward change: consumer behaviour
is changing; our members’ needs are changing; technology is changing; the market place is changing and therefore so must we. Change doesn’t imply abandonment of the co-
operative principles that guided our predecessors and continue to guide us; that make us stand apart from other financial institutions. It implies we are evolving
to better serve our members. It means ensuring a healthy future where the Atlantic credit union system is thriving. Together we
will continue to build strong communities and dedicate ourselves to the people who live in them.
Table Contentsof
Highlights .............................................................. 2-3
Vision, Mission and Values ................................... 4
Message from the Board of Directors .................. 5
Message from the President and CEO .................. 6-7
Co-operative Social Responsibility ........................ 8-9
Executive Management Team .............................. 10
Management Discussion and Analysis .................. 11-13
Financial Statements ............................................ 14-52
Corporate Governance ......................................... 53-55
Affiliate Boards ..................................................... 56
Layout, Printing and Assembly: Atlantic Central Printing and SuppliesBoard and Management Photos: Precision Photographic Services
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2013 Home Financing and Mortgage Rate ProgramIn 2013 League Savings and Mortgage Company (LSM) in collaboration with Atlantic Central and with the
support of Atlantic credit unions launched the Mortgage Rate Program
promoting a 2.99% rate to supplement the existing
regional Home Financing Campaign. This marked the
first time a consistent rate was advertised by participating credit
unions across the Atlantic Region. Aside from measuring mortgage business and creating awareness
that credit unions offer competitive mortgage rates we wanted to get an indication of the ability to attract ancillary business within credit unions, create new member relationships and expand existing member relationships. This program was a significant undertaking and a massive accomplishment for the Atlantic credit union system.
In total, $152m in mortgage business was booked: $26.5m on LSM’s books with mortgages being booked for 33 credit unions. In addition, Atlantic Central helped credit unions promote their financial advice services and awareness around convenient access to credit union products and services with the introduction of two new campaigns.
The Atlantic credit union system includes 56 credit unions across the four Atlantic Provinces; Atlantic Central, the trade association that provides leadership, advocacy and liquidity management for the system; Atlantic Central’s subsidiary, League Savings and Mortgage Company, which provides mortgage and financial services to credit unions and their members; and an affiliated banking and electronic information services provider, League Data Limited. Rooted in the communities they serve, credit unions are an integral part of community life and play a significant role in the economic fabric of Atlantic Canada.
Syndication LoansA number of the recommendations in the Role and Relationship Committee Report focus on how to improve our competitive position. In response to this Atlantic Central and League Savings and Mortgage Company are committed to providing competitive rates on deposits and continue to actively seek out options for credit unions to help manage excess liquidity. In 2013 the Lending Services team grew the syndicated mortgage portfolio for the benefit of Atlantic credit unions from $18m to $47m.
There were a number of factors in play that contributed to the success of the Syndication Program in 2013: sharing application fees with the referring credit union; reduction of the administration fee; and a larger number of referrals from credit unions that were able to be acted upon.
A great deal of work is required to achieve growth when considering a syndication loan. In 2013 consideration was given to requests totalling $134m.
We are committed to continued growth in this area in 2014 and will proactively seek syndication options for Atlantic credit unions.
Highlights
$18m to $47m
from
$152min mortgages booked
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New Atlantic System Vision and Model RecommendationThe new vision and model recommendation for the Atlantic credit union system is the result of work that began with the Role and Relationship Committee Report released in 2011. The Committee identified the urgent need for significant structural change in the Atlantic credit union system. At the 2013 Annual General Meeting, Atlantic Central committed to bringing a new system vision and operating model recommendation to credit unions at the Fall Conference in October.
The recommendation starts with a ten-year system vision of a relevant and thriving Atlantic credit union system. “Vision 2023” provides a glimpse into the Atlantic credit union system as it could be ten years from now if we commit to making
transformational changes. Trends in consumer behaviour and needs, the fast pace of changing technology, and changes in both the credit union system and the financial services industry, all indicate that the credit union system will look vastly different than it does today. We envision significant consolidation both in the Atlantic region and nationally. It is anticipated that branches will also undergo major changes: modern branches in key locations combined with alternative service delivery channels will enable credit unions to maintain a meaningful presence in their communities and meet members’ needs how and when they want to be served.
The new operating model recommendation, called the Linked Hub, was chosen for its potential to increase scale, capabilities and create efficiencies within our system as well as providing a platform for credit unions to thrive in the future. Underpinning the decision process was the commitment to stay true to the democratic process and the co-operative principles that have guided us. One key factor of the model
recommendation is that it positions us well to deliver on a unique value proposition that is relevant in our market while enabling credit unions to retain their local identity and close community connections.
The system vision and Linked Hub model is the subject of ongoing consultation and collaboration with credit unions in meetings and discussions across the region. Those discussions will continue at our Annual General Meeting in April, 2014.
56 Credit Unions
$4.35 Billion in Assets
320,400 Members
with
serving
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Vision, Missionand Values
VisionTo be an innovative leader contributing to a strong and effective network of credit unions.
MissionThrough our leadership and the excellence of our people, products and services, we support credit unions in becoming the financial institution of choice.
ValuesStewardshipWe accept the roles of support and leadership defined for us by the credit unions of Atlantic Canada, and with them, support the well-being of the credit union network and the communities it serves. We will operate in a socially responsible and profitable manner for the common good of our stakeholders.
ServiceWe are committed to providingprofessional service to our stakeholders, who include credit unions and their employees, to our affiliates and their employees, and to each other.
RespectWe will conduct ourselves respectfully – respectful of diversity, respectful of ourselves and respectful of others in order to build and sustain a productive workplace.
AccountabilityWe choose to be accountable for our actions and the results we deliver to our stakeholders. We share responsibility for the well-being and success of Atlantic Central and the credit unions it serves.
Continuous Growth and DevelopmentWe commit to continually strengthening our organization and services. We will initiate learning and improve personally,departmentally and corporately to enhance our contributions for the well-being of our stakeholders and the communities we serve.
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Change. It’s one word, but one that evokes strong emotion and holds different meaning for every person touched by it. But it also implies possibility. The changing needs of consumers, increasing reliance on technology and fast pace of change in the financial services sector has been reviewed and discussed at length, and the Board acknowledges these challenges affect Atlantic Central and our member credit unions. The credit union system must evolve as consumer needs evolve. This does not imply a move away from our co-operative values. We are still firmly rooted in the beliefs that gave birth to the credit union movement in Canada more than 100 years ago. Dedication and commitment to the people and communities credit unions serve will be a guiding and unchanging principle as we navigate change to ensure a successful future.
The journey from the AGM in 2013, and the promise from Atlantic Central to present a new system vision and operating model recommendation to credit unions at the Fall Conference, to where we are today has been one of hard work and determination. The Atlantic Central Board was actively engaged in conversations with management in 2013 to explore ways to ensure a healthy future that sees the Atlantic credit union system not only growing, but thriving. Collaboration with system partners and the National Chairs and CEOs as well as Deloitte has seen Atlantic Central proactively engaging partners across Canada and internationally.
After months of in-depth research and discussions, the Linked Hub model was recommended as the most viable option for developing a more effective, efficient and competitive Atlantic credit union system. Consultation sessions with credit unions in Atlantic Canada began in Q4 2013 and will carry into 2014. An analysis of credit union responses and next steps will be assessed by the Board in March and brought to our AGM in 2014 for further discussion.
“The only way to make sense out of change is to plunge into it, move with it, and join the dance.”
- British Philosopher Allan Watts
Atlantic Central experienced success in 2013 with financial results exceeding budget expectations. The Board approved a 2.3% dividend on common shares which was distributed to credit unions. Central’s rebate in 2013 was $2.2 million and represented 50% of Central’s 2013 Operating Income. The rebates were distributed as at January 31, 2014. As was the practice in 2012, funds were retained in a Special Reserve to be used for system development and initiatives as Atlantic Central and its member credit unions move toward transformational system change. Atlantic Central is very pleased to be able to share our financial success with our member credit unions and we thank you for your continued support.
The Board of Directors would like to congratulate Michael Leonard on his appointment as President and CEO of Atlantic Central. He has demonstrated strong leadership and a commitment to the success of Atlantic credit unions in delivering the new vision and model recommendation as promised at the AGM in 2013. His exhaustive work with credit unions and system partners nationally and internationally to inform the decision-making process in choosing the best model option for the Atlantic system shows a clear desire to guide Atlantic Central and member credit unions to a successful, healthy future of increasing growth.
The Board would also like to recognize the legacy of former Atlantic Central President and CEO, Bernie O’Neil, in laying the foundation and leading the way to the successful formation of Atlantic Central. His lifelong commitment to the credit union and co-operative movement is to be commended. Through his foresight into the required evolution of the credit union system he positioned Atlantic Central to lead the change that is so urgently required now.
On behalf of the Board of Directors, I would like to thank the management team and staff of Atlantic Central for their continued commitment to credit union success as we gain momentum and work toward a new vision full of possibilities and opportunities.
Dave MacLeanChair
Message Board Directors
from the
of
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Message from the President and CEO
“The first step in the being of anything is the theoretic or the vision of possibilities of things that might be.”
- Rev. Dr. Moses Coady
2013 was a year of change, an opportunity to reflect on our successes of the past, and contemplate new directions. It is clear that our industry and consumers in general are changing. Now it is up to us to determine how we will change to meet this new future; one where financial products and services are more accessible and more competitively priced than ever. How we address this new future is the puzzle that your Atlantic Central has committed to solve. 2013 was committed to exploring options and developing a new vision, model and strategic plan for your Atlantic Central and our system.
We continue to be committed to the recommendations from the Role and Relationship Committee. Chief among them was their guidance on leadership and the need to lead through collaboration, not consensus, and to seek a new vision and model for the system. We also committed to continuous two-way communication and invested significant time and energy in seeking your input and feedback every step of the way. We know the only way to build greater success for our system is to work collaboratively as a system and that means building our future together. We commit to continuing the momentum that has begun with you as we move through our system change process.
In addition to the new vision and model work, our strategic plan calls for a significant focus on developing effective partnerships with other organizations. We invested significant time and effort in building new relationships in 2013. At our Fall Conference we outlined our work with other provincial centrals in Project Jigsaw, a collaboration with Manitoba and Saskatchewan Centrals aimed at developing new system and central models. We expect to see significant change at the Central level
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in the next several years and your Central will push hard for this change. In addition, we continue to develop our relationship with Desjardins. In our view the national system must come together in the best interests of all of our members, whether they belong to a credit union or caisse populaire. 2013 was also an opportunity to develop relationships internationally, and I would like to thank the World Council of Credit Unions as well as the Customer Owned Banking Association in Australia and the Credit Union National Association in the United States for their interest in our work and their offers to share their own experiences as we build our new future. Leveraging these relationships will be an important part of our work in the coming years, and I am always impressed with the co-operative approach we all take to sharing information. Finally, and perhaps most importantly, we have invested significant time and effort in building our relationship with our partner, League Data Limited. We know that by working more closely together we can deliver greater value to you and your members. In 2013 we implemented new structures to improve communications and alignment of our business plans and you should expect to see more joint efforts between our companies in the future.
We also recognize that as we evolve to meet our members’ needs in the future we will require changes to our legislative and regulatory frameworks, as well as continuing to develop effective relationships with federal and provincial regulators. We have worked well with the regulators in all four provinces as well as their federal counterparts. I would like to take this opportunity to thank them for their engagement in 2013 and we look forward to continuing our dialogue in the future.
We worked hard to provide you with new and better products and services. In 2013 we announced a new partnership with Concentra Financial to bring greater returns on your investments with Atlantic Central and made significant changes to our line of credit structure. In response to your requests for additional investment opportunities, we increased our syndication portfolio from $18 million to $47 million during the year. In collaboration with League Savings and Mortgage Company
we also co-ordinated the first regional mortgage campaign with an advertised interest rate, which resulted in $152 million in mortgage business advanced throughout the region. Finally, we worked with two credit unions to pilot Intelliresponse, an online member engagement program designed to provide 24/7 access for members to ask questions and receive answers immediately. This is just the beginning of our efforts to provide better products and services and we expect even greater results in 2014 and beyond.
I would like to take this opportunity to thank our Board of Directors for their vision and leadership throughout the year. You as the members of Atlantic Central have been well served by their dedication to improving our regional system. I would also like to thank the employees of Atlantic Central and League Savings and Mortgage Company. Transitioning to a new President and CEO can be challenging and they have responded well in this environment of constant change. Finally, I would like to thank you, the leaders of our credit union system, for your support in my first year as President and CEO, and for your engagement and open, honest debate as we consider how to move our regional system forward.
So, as we close the book on 2013 we remain focused on our future; a future focused on our members and prospective members. Just as credit unions were originally created to serve our communities and the people who live in them, we will remain focused on that same objective; serving and building stronger communities in Atlantic Canada remains our highest priority.
Michael LeonardPresident and CEO
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Co-operative Social ResponsibilityThe Board of Directors of Atlantic Central takes co-operative social responsibility (CSR) seriously as part of Atlantic Central’s commitment to pursuing socially and environmentally responsible business practices. This commitment is reflected in Atlantic Central’s charitable giving, awards and recognition programs and the management of our facilities and operations.
A formal CSR Committee was created in 2012 with the mandate to create a CSR strategy and review and approve the distribution of funds to various organizations and events that meet the criteria including a focus on the following areas:
• education;• health care;• community and social well-being;• environment;• arts and culture; and• co-operative development.
2013 marked a change in how the Committee measures CSR efforts. The use of the 3P’s approach (people, planet, profit), also known as the triple bottom line, was
adopted. It measures a focus on people – a company’s social responsibility;
planet – a company’s enviromental responsibility; and profit – a
company’s economic value. This is a widely held philosophy among
credit union and co-operative organizations world-wide.
The CSR Committee also oversees the nomination and selection process for the Coady Award which is presented at the Atlantic Central Annual General Meeting to an Atlantic credit union that demonstrates strong and meaningful support to its community. In 2013 Tignish Credit Union was the recipient of the Coady Award for their support of financial literacy and education around the history of co-operatives, breakfast programs, significant monetary donations to community needs, support for the IWK and Relay for Life, numerous staff volunteer hours as well as their commitment to reducing their environmental footprint by implementing “green” strategies at their branches.
Regional Charitable Giving and Sponsorships
Bursary ProgramAtlantic Central administers a bursary program throughout the region on behalf of Atlantic credit unions. This year 44 bursaries valued at $500 each were disbursed through the community colleges in each of the four provinces.
Canadian Blood Services: Partners for Life Atlantic Central, League Savings and Mortgage Company, League Data Limited and Atlantic credit union staff are Partners for Life with Canadian Blood Services. In 2013, 207 life-saving units of blood were donated.
Red Cross Atlantic Central is proud to support the Red Cross in both their international and local disaster relief efforts. To that end, we provided a $5,000 donation that supplemented
the significant in-kind support that participating credit unions offered by collecting donations on behalf of the Red Cross’s campaign for Typhoon Haiyan.
Atlantic Central and League Savings and Mortgage Company have also supported staff volunteering for the “Ready When the Time Comes” (RWTC) local disaster relief volunteer program. Our RWTC volunteers were active for a number of days in response to the Alberta flood disaster.
Supporting Co-operative PartnersA total of $20,000 has been provided in support of provincial co-operative councils in New Brunswick, Nova Scotia and Prince Edward Island.
Regional Food DriveAtlantic Central organized a regional food drive for International Credit Union Day, and donations from Atlantic credit unions to local food banks exceeded 12,000 pounds of food and cash donations in excess of $8,800.
Alberta Flood, Typhoon Haiyan relief efforts.
$24,141 for Red Cross
12,000 lbs12,000 lbs$8,800$8,800
People Planet Profit
StrongMeaningful
Support
Photo courtesy of Nourish Nova Scotia
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Provincial Charitable Giving and Sponsorships
Kids Eat Smart Program Atlantic Central provided $5,000 to the Kids Eat Smart Program in Newfoundland and Labrador. This is a registered charity
run by volunteers dedicated to educating and providing school children with quality nutrition programs at schools and community centres throughout the province.
Nourish Nova ScotiaNourish Nova Scotia is a province-wide, non-profit organization that supports nourishment and food literacy programs in
Nova Scotia school communities. Sydney Credit Union has been an active supporter of the Nourish Program in Cape Breton for several years. In 2013 Atlantic Central became the first corporate sponsor of the program with a donation of $5,000. The CSR Committee is currently investigating similar opportunities in New Brunswick and Prince Edward Island.
Junior Achievement PEI Business Hall of FameAtlantic Central committed $2,500 to this annual event which is a major fundraiser for Junior Achievement and a highlight for Prince Edward Island businesses.
Relay for Life (PEI) Relay for Life is an inspirational, non-competitive, 12-hour overnight fundraising event that brings people and communities together to celebrate life and fight cancer. 2013 was the seventh year that the PEI Credit Unions served as Provincial Event Sponsor for the Canadian Cancer Society’s Relay for Life events across PEI and the second year that Atlantic Central committed to support them in their marketing efforts for the event.
United Way Employees of Atlantic Central, League Savings and Mortgage Company, and League Data Limited did a fantastic job in their fundraising efforts for the 2013 United Way Campaign; their contribution for 2013 was an impressive $16,346!
Young Adults with Cancer Canada (YACC) YACC’s mission is to “build a community of young adults diagnosed with cancer that provides information, support, skills and opportunity”. Support was approved for YACC in the amount of $7,000.
International SponsorshipsThe CSR Committee made a motion to support two projects in Cuba. A $10,000 commitment focuses on credit union development and $5,000 will provide support to Cuban Farmers Agricultural Co-operative development work.
Other$10,000 was given to St. Mary’s University in support of the Co-operative and Credit Union Management Education Program.
$5,000 was given in support of the QEII Health Sciences Centre in Halifax, Nova Scotia.
The CSR Committee set aside a budget of $10,000 for other philanthropic opportunities.
Support for local communities and co-operative initiatives.
$111,988
Photo courtesy of Nourish Nova Scotia
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Our Executive Management Team is comprised of:(L-R): Kim Walker, Michael Leonard, Sharon Arnold, Paul Paruch and Victoria Mainprize
Executive Management Team
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Management
Risk ManagementRisk management is one of the most important responsibilities of Atlantic Central (the “Central”). The Central’s risk management strategies and policies are governed by the principle of optimizing risk for the protection and creation of shareholder value, and are designed to ensure that the Central’s risk-taking is consistent with its business objectives and risk tolerance. Optimizing risk means striking a balance between risk and reward, ensuring that the Central’s risk-taking is consistent with its Risk Appetite Statement. The Risk Appetite Statement reflects the aggregate level and type of risks that the Central is willing to accept in order to achieve its business objectives.
The Central uses an enterprise-wide approach to identify, measure, monitor and manage risk. Authority for all risk-taking activities rests with the Board of Directors, which approves the Risk Appetite Statement and risk management policies, delegates limits and regularly reviews management’s risk assessments and compliance with approved policies. The Risk Committee of the Board of Directors is responsible for ensuring that management has developed and maintained an effective Enterprise Risk Management Framework for evaluating the business strategies being used for allocation of human, capital and other resources.
The Management Finance Committee (MFC) is responsible for the review and evaluation of financial risks and performance. The MFC reviews financial risk management policies, recommends changes to policies and procedures as appropriate, and monitors compliance with financial policies. The Asset/Liability Management Committee (ALCO) is responsible for ensuring the effective and prudent management of the Central’s financial assets and liabilities. ALCO achieves this by developing and implementing financial strategies and related processes consistent with the short and long-term goals set by the Board.
Qualified professionals throughout the Central manage these risks through comprehensive and integrated control processes and models, including regular review
and assessment of risk measurement and reporting processes. The various processes within the Central’s risk management framework are designed to ensure that risks in the various business activities are properly identified, measured, assessed and controlled. Stress testing is an important tool used by Management in making business and risk management decisions.
Internal Audit reports independently to the Audit Committee of the Board on the effectiveness of the risk management policies and the extent to which internal controls are in place and operating effectively.
The risks are summarized into the following categories: capital adequacy, governance, credit, legal and regulatory, liquidity, market, operational, and strategic.
Capital Adequacy RiskCapital adequacy risk is the risk of financial loss or regulatory intervention due to the failure of the Central to maintain the necessary capital to meet regulatory requirements and/or support its business plans.
The Central has established capital management policies, which govern the quantity and quality of capital the Central will maintain. In addition, a capital plan is prepared annually which forecasts the amount of capital required and the sources that will be used to fund those requirements. The capital policies and plans are reviewed and approved annually by the Board of Directors.
Management regularly monitors the Central’s capital position and reports to the Board of Directors on a quarterly basis.
Governance RiskGovernance risk is the risk of financial and/or reputational impairment caused by a lack of effectiveness of the Board of Directors and senior management.
Governance risk is mitigated through qualification criteria, Director orientation, and ongoing development and training, regular Board and committee meetings, the annual strategic planning process and an annual evaluation process.
Discussion and Analysis
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legislation and regulation where applicable to its operations in those respective provinces. OSFI regularly reviews the activities of the Central and periodically carries out on-site examinations. All correspondence to and from OSFI is reported to the Board of Directors by management.
The Central maintains a legislative and policy compliance management system in which all legislative and policy requirements are regularly reviewed and reported on. New policies and procedures are developed to address legislative requirements as appropriate.
The Board of Directors receives a quarterly compliance report in which any deficiencies and corresponding action plans are identified.
Liquidity RiskLiquidity risk is the risk of being unable to obtain funds at a reasonable price or within a reasonable time period to meet obligations as they come due.
The Central has established policies to ensure it is able to generate sufficient funds to meet all of its financial commitments in a timely and cost-effective manner. These policies require a liquidity management plan that establishes the following:
• the appropriate level of liquidity for the organization;• a minimum liquidity target; • standards for qualifying liquidity assets;• a process for monitoring liquidity and forecasting
future cash requirements; • a process for conducting stress testing and scenario
testing; and• a contingency funding plan.
The policies and liquidity management plan are annually reviewed and approved by the Board of Directors.
Management carries out the monitoring, forecasting and reporting functions associated with liquidity management, and reports to the Board on a quarterly basis.
Market RiskMarket risk is the risk of loss that results from changes in interest rates, foreign exchange rates, equity prices and commodity prices.
Credit RiskCredit risk is the potential for loss due to the failure of a borrower or counterparty to meet its financial or contractual obligation.
To ensure effective credit risk management, the Central has established policies and procedures for credit risk. Credit policies are reviewed and approved annually by the Board of Directors. Management regularly reviews its credit procedures to ensure they provide extensive, up-to-date guidance for the underwriting and administration of all types of loans.
Procedures are in place governing credit activities including:
• application of stringent underwriting criteria;• the use of qualified personnel and the clear
delegation of decision-making authority;• portfolio diversification to mitigate credit exposure
by establishing concentration limits; and• oversight by the Board and management committees
before funding is permitted, and once approved, ongoing credit risk evaluation and assessment.
The Central maintains both specific and collective allowances for credit losses. Specific allowances are established based on management’s knowledge of the property and prevailing conditions. Collective allowances are maintained to cover any impairment in the loan portfolio that cannot yet be associated with specific loans. The collective allowance is determined based on the Central’s risk weighted portfolio and other factors including an assessment of market risk.
Management regularly monitors the Central’s credit risk and reports to the Board of Directors on a quarterly basis.
Legal and Regulatory RiskLegal and regulatory risk is the risk of loss due to the failure to adhere to legal and regulatory standards.The Central is governed by the Co-operative Credit Associations Act (Canada) and the Credit Union Act (Nova Scotia). The Central is regulated federally by the Office of the Superintendent of Financial Institutions (OSFI) and provincially by the Nova Scotia Superintendent of Credit Unions. The Central also complies with New Brunswick, Newfoundland and Labrador, and Prince Edward Island
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Market risk exposures are managed through policies, standards and limits established by the Board of Directors, which are formally reviewed and approved annually. The Central uses a variety of techniques to identify, measure and control market risk. Derivatives may be used only to offset clearly identified risks. The Central has developed standards regarding the use of derivative products.
Interest rate risk is the potential impact on the Central’s earnings due to changes in interest rates. This risk comes mainly from differences in the maturities or re-pricing dates of assets and liabilities. The Central has developed standards with respect to the matching of assets and liabilities. In addition, the Central uses a combination of static gap and income simulation models to measure and monitor interest rate risk exposure under various interest rate scenarios and utilizes interest rate swaps to assist in managing its interest rate risk.
Sensitivity analysis of an interest rate increase and decrease of 100 basis points is illustrated in the table below.
Earnings at risk over the next 12 months as at December 31:
(Dollars) 2013 2012100 basis point increase (461,048) (864,700) 100 basis point decrease 603,707 861,200
Foreign exchange risk is the potential impact on the Central’s earnings due to currency movements. The Central’s foreign exchange policies and procedures outline permissible types of transactions, authorizations, limits, and monitoring and reporting requirements. The Central is authorized to hold up to $250,000 CAD in excess of, or short of its foreign currency liabilities. The Central’s exposure to foreign exchange fluctuations is monitored on a daily basis.
Equity and commodity risk is the potential impact on the Central’s earnings due to movements in equity and commodity prices. The Central does not have significant business activities in equities or commodities and, as such, is not exposed to material risk in these areas.
Management provides quarterly reports to the Board of Directors on market risk.
Operational RiskOperational risk is the risk of direct or indirect loss resulting from inadequate or failed processes, technology or human performance, or from external events.
While operational risk can never be fully eliminated, the Central manages this type of risk through implementation of a comprehensive set of procedures and policies. Elements include:
• developing and maintaining a comprehensive system of internal controls, encompassing segregation of functional activities, managerial reporting and delegation of authority;
• striving to maintain industry best practices in the area of operational risk management through continued monitoring and evaluation of our practices;
• selection and training of highly qualified staff, supported by policies that provide for skills upgrading, clear authorization levels and adherence to an employee code of conduct; and
• maintaining adequate insurance to reduce the impact of any potential losses, supported by a detailed business continuity plan.
Strategic RiskStrategic risk is the risk of loss due to failure to create, implement and monitor an effective strategic plan, including procedures for the development and review of new business initiatives and changing business circumstances.
Strategic priorities for the next three years are established during the Annual Board and Management Planning Session. Management then develops the annual business plan for approval by the Board of Directors. Management reports to the Board of Directors on the progress towards achieving the annual business plan at each regular Board meeting. Credit unions are also provided with regular progress reports.
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Management’s Responsibility For Financial Statements
Management has the responsibility of preparing the accompanying consolidated financial statements and ensuring that all information in the annual report is consistent with the consolidated financial statements. This responsibility includes selecting appropriate accounting principles and making objective judgments and estimates in accordance with International Financial Reporting Standards.
In discharging its responsibility 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 safeguarded and proper records maintained. The Board of Directors has appointed an Audit Committee to review the annual financial statements with management and auditors before final approval by the Board.
Both the federal and provincial regulators of financial institutions may conduct examinations and make such enquiries into the affairs of Atlantic Central and its subsidiary as they deem necessary to ensure the safety of depositors and members of Atlantic Central and to ensure that Atlantic Central is in sound financial condition. Their findings are reported directly to management.
Grant Thornton LLP, the independent auditors, have examined the consolidated financial statements of Atlantic Central in accordance with Canadian generally accepted auditing standards and have expressed their opinion in the following report to members.
Michael Leonard President and CEO
Sharon Arnold, CA Senior Vice President, Finance
Atlantic CentralConsolidated Financial Statements
December 31, 2013
Management’s Responsibility For Financial Statements
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Independent Auditors’ Report
To the members of Atlantic Central
We have audited the accompanying consolidated financial statements of Atlantic Central (the “Central”), which comprise the consolidated balance sheet 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these 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 auditor’s 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 Central’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 Central’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 Atlantic Central as at December 31, 2013, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Grant Thornton LLP Chartered Accountants
February 19, 2014 Halifax, Canada
Independent Auditors’ Report
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Consolidated Balance Sheet
December 31(Cdn Dollars) Note 2013 2012AssetsCash and cash equivalents $ 39,589,724 $ 16,056,354 Investments 5 544,089,435 575,506,944 Loans and mortgages 6 470,697,269 461,754,968 Accrued interest 4,509,711 5,186,492 Income tax receivable ‐ 554,162 Fixed assets 7 4,152,016 4,249,844 Deferred tax assets 11 804,620 716,004 Other assets 3,782,336 3,462,558
$ 1,067,625,111 $ 1,067,487,326 LiabilitiesDeposits 15 $ 940,743,834 $ 960,037,444 Accrued interest 4,845,404 4,727,707 Accounts payable and accrued liabilities 6,807,562 7,049,120 Mortgage backed securities 19 22,379,569 5,460,960 Income tax payable 173,057 ‐ Subordinated debtentures 17 6,381,000 6,390,000
981,330,426 983,665,231 Members' equityCapital stock 8 41,468,182 40,193,432 Contributed surplus 6,018,056 6,018,056 Special reserve 8 2,293,741 600,000 Retained earnings 20,795,058 19,998,062 Accumulated other comprehensive income 1,732,908 3,025,805
72,307,945 69,835,355 Minority interest in subsidiary 21 13,986,740 13,986,740
86,294,685 83,822,095 $ 1,067,625,111 $ 1,067,487,326
Commitments and contractual obligations 10
Approved: On Behalf of the Board: Michael Leonard President and CEO
Dave MacLean Chair
Doug Dewling Director
See accompanying notes to the financial statements
Consolidated Balance Sheet
17
Consolidated Statement of Income
Year Ended December 31(Cdn Dollars) Note 2013 2012
Financial income
Interest on investments $ 11,360,951 $ 10,930,609
Interest on loans and mortgages 19,891,457 21,710,359
31,252,408 32,640,968
Financial expense 15,492,030 15,657,026
Gross financial margin 15,760,378 16,983,942
Provision for losses (recovery) 180,441 (352,645)
Net financial margin 15,579,937 17,336,587
Other financial income 417,332 621,120
Net financial income 15,997,269 17,957,707
Non‐interest income 18 9,657,227 9,493,826
25,654,496 27,451,533
Operating expenses
Salaries and staff related 10,370,175 10,764,728
Office expense 2,727,062 2,815,913
Marketing and business development 1,206,242 1,042,589
Democracy 1,527,258 1,453,383
Professional Fees 545,448 438,999
Other expenses 856,337 1,110,684
17,232,522 17,626,296
Operating income 8,421,974 9,825,237
Special Projects 3 288,676 ‐
Distributions 3,092,037 5,103,470
Income before taxes 5,041,261 4,721,767
Income taxes 11 1,527,997 1,493,320
Net income $ 3,513,264 $ 3,228,447
See accompanying notes to the financial statements
Consolidated Statement of Income
18
Consolidated
Statemen
t of C
ompreh
ensive
Income
Year End
ed Decem
ber 31
(Cdn
Dollars)
Note
2013
2012
Net income
$3,513,264
$3,228,447
Other co
mpreh
ensive
income (OCI)
Items that w
ill be reclassifie
d subseq
uently to
income:
Net ch
ange
in unrealized
gains (losses) on available for sale investmen
ts:
Net unrealized
gains (losses) on available for sale investmen
ts(1,498,180)
78,964
Re
classification of net re
alized
gains to
net income
(242,042)
(67,126)
Income tax expe
nse:
11 On un
realized
losses (gains) o
n available for sale investmen
ts385,822
48,724
On reclassification of net re
alized
gains to
net income
61,503
14,909
Other co
mpreh
ensive
income
(1,292,897)
75,471
Compreh
ensive
income
$2,220,367
$3,303,918
Net income attributable to
:
Minority
interest ‐ Preferred shareh
olde
rs of sub
sidary
321,695
419,602
Shareh
olde
rs3,191,569
2,808,845
$3,513,264
$3,228,447
Compreh
ensive
income attributable to
:
Minority
interest ‐ Preferred shareh
olde
rs of sub
sidary
321,695
419,602
Shareh
olde
rs1,898,672
2,884,316
$2,220,367
$3,303,918
See accompanying no
tes to the fin
ancial statem
ents
Cons
olid
ated
Sta
tem
ent o
f Com
preh
ensi
ve In
com
e
19
Consolidated
Statemen
t of C
hanges in
Mem
bers’ Equ
ity
Year End
ed Decem
ber 31, 2013 (Cdn
Dollars)
Capital
Stock
(Note 8)
Contrib
uted
Surplus
Special
Reserve
Retained
Earnings
Accumulated
Other
Compreh
ensive
Income
Total
Mem
bers
Equity
Minority
Interest
Total
Equity
Balance at beginning
of year
$40,193,432
$
6,018,056
$
600,000
$19,998,062
$
3,025,805
$69,835,355
$
13,986,740
$
83,822,095
Net income
‐
‐
‐
3,191,569
‐
3,191,569
321,695
3,513,264
Other co
mpreh
ensive
income
‐
‐
‐
‐
(1,292,897)
(1,292,897)
‐
(1,292,897)
Compreh
ensive
income
‐
‐
‐
3,191,569
(1,292,897)
1,898,672
321,695
2,220,367
Transfer to
special reserve
‐
‐
1,693,741
(1,693,741)
‐
‐
‐
‐
Issued
in equ
ity re
balancing
1,388,510
‐
‐
‐
‐
1,388,510
‐
1,388,510
Rede
emed
in equ
ity re
balancing
(113,760)
‐
‐
‐
‐
(113,760)
‐
(113,760)
Cash dividen
d paid on shares
‐
‐
‐
(939,558)
‐
(939,558)
(321,695)
(1,261,253)
Income tax recovery on cash dividen
d‐
‐
‐
238,726
‐
238,726
‐
238,726
Balance at end
of year
$41,468,182
$
6,018,056
$
2,293,741
$
20,795,058
$
1,732,908
$72,307,945
$
13,986,740
$
86,294,685
Year End
ed Decem
ber 31, 2012 (Cdn
Dollars)
Capital
Stock
(Note 8)
Contrib
uted
Surplus
Special
Reserve
Retained
Earnings
Accumulated
Other
Compreh
ensive
Income
Total
Mem
bers
Equity
Minority
Interest
Total
Equity
Balance at beginning
of year
$40,213,482
$
6,018,056
$
‐
$18,728,304
$
2,950,334
$67,910,176
$
13,986,740
$
81,896,916
Net income
‐
‐
‐
2,808,845
‐
2,808,845
419,602
3,228,447
Other co
mpreh
ensive
income
‐
‐
‐
‐
75,471
75,471
‐
75,471
Compreh
ensive
income
‐
‐
‐
2,808,845
75,471
2,884,316
419,602
3,303,918
Transfer to
special reserve
‐
‐
600,000
(600,000)
‐
‐
‐
‐
Rede
emed
(20,050)
‐
‐
(7,000)
‐
(27,050)
‐
(27,050)
Cash dividen
d paid on shares
‐
‐
‐
(1,200,262)
‐
(1,200,262)
(419,602)
(1,619,864)
Income tax recovery on cash dividen
d‐
‐
‐
268,175
‐
268,175
‐
268,175
Balance at end
of year
$40,193,432
$
6,018,056
$
600,000
$19,998,062
$
3,025,805
$69,835,355
$
13,986,740
$
83,822,095
See accompanying no
tes to the fin
ancial statem
ents
Cons
olid
ated
Sta
tem
ent o
f Cha
nges
in M
embe
rs’ E
quit
y
20
Consolidated Statement of Cash Flows
Year Ended December 31(Cdn Dollars) 2013 2012
Increase (decrease) in cash and cash equivalentsOperating activities
Income before taxes $ 5,041,261 $ 4,721,767 Adjustments:Loans and mortgages, net (8,942,301) (4,460,894) Deposits, net (19,293,610) 38,265,776 Mortgage backed securities, net 16,918,609 5,460,960 Depreciation 505,245 581,121 Interest receivable/payable, net 794,478 (520,931) Taxes paid, net of refunds (461,071) (1,462,821) Other items, net (542,335) 1,353,802
(5,979,724) 43,938,780 Financing activities
Net proceeds from (redemptions) issuance of capital 1,274,750 (27,050) Subordinated debentures (9,000) ‐ Dividends paid to minority interest (321,695) (419,602) Dividends, net of income tax recovery (700,832) (932,087)
243,223 (1,378,739) Investing activities
Investments, net 23,700,835 (63,238,238) Fixed assets, net (407,417) (210,874)
23,293,418 (63,449,112)
Net increase (decrease) in cash and cash equivalents 17,556,917 (20,889,071)
Cash and cash equivalents (net)Beginning of year 22,033,773 42,922,844 End of year $ 39,590,690 $ 22,033,773
Includes: Cash and balances with financial institutions $ 39,589,724 $ 16,056,354
Cash included in investments 966 5,977,419 $ 39,590,690 $ 22,033,773
Supplemental disclosure of cash flow information Interest received $ 32,498,568 $ 32,965,491
Dividends received 174,566 132,552 Interest paid 16,074,946 16,627,552
See accompanying notes to the financial statements
Consolidated Statement of Cash Flows
21
Notes to Financial Statements – December 31, 2013
1. Reporting entity
Atlantic Central (“the Company” or “the Central”) is incorporated in Nova Scotia under the Credit Union Act. The Company is regulated federally by the Office of the Superintendent of Financial Institutions (OSFI) and provincially by the Office of the Superintendent of Credit Unions. On January 1, 2011, pursuant to a Definitive Combination Agreement dated June 30, 2010, the Company purchased the assets and assumed the liabilities of Credit Union Central of New Brunswick and Credit Union Central of Prince Edward Island. With the proclamation of amended credit union legislation in each of Nova Scotia, New Brunswick and Prince Edward Island, the three Centrals completed a business combination to form Atlantic Central on that date.
Atlantic Central is the continuance of Credit Union Central of Nova Scotia and is owned by credit unions in the Atlantic Provinces. Its head office is located at 6074 Lady Hammond Road in Halifax, Nova Scotia, and the Company also operates out of offices in Sydney, Nova Scotia, Riverview, New Brunswick and Charlottetown, Prince Edward Island. The Company’s key financial role is the management of the Atlantic credit union system’s liquidity reserve requirements. Additionally, Central provides financial, trade association, and other support services to Atlantic credit unions, their members, and others.
2. Basis of presentation
The consolidated financial statements are presented in Canadian dollars and have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The principal accounting policies applied in the preparation of the consolidated financial statements are set out in Note 3.
The consolidated financial statements include the accounts of the subsidiary, League Savings and Mortgage Company (League Savings). Subsidiaries are defined as entities controlled by the Company. Control is defined as the power to govern the financial and operating policies so as to obtain benefits from the entity’s activities. Subsidiaries are consolidated from the date control is transferred, and consolidation ceases on the loss of control.
Significant inter‐company transactions and account balances have been eliminated from the consolidated accounts. The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments as indicated in Note 3.
Use of estimates and assumptions
In preparing the Company’s financial statements, management is required to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recorded in the period in which the estimate reversed if the revision affects only that period or in the period of revision and in future periods if the revision affects both the current and future periods.
Notes to Financial Statements – December 31, 2013
22
Notes to Financial Statements – December 31, 2013
The judgments and estimates that have the most significant effect on the amounts recognized in the financial statements are decisions with respect to the fair value of financial instruments, the allowance for loan losses, the derecognition of loans and mortgages, and income taxes.
Fair value of financial instruments
The determination of the fair value of financial instruments requires the exercise of judgement by management. The fair value of financial instruments traded in active markets at the balance sheet date is based on their quoted market prices. Where independent quoted market prices do not exist, fair value may be based on other observable current market transactions or based on a valuation technique which maximizes the use of observable market inputs.
For certain types of equity instruments fair value is assumed to approximate carrying value where the range of reasonable valuation techniques is significant and the probabilities of such valuation techniques cannot be reasonably assessed. In such instances fair value may not be reliably measured due to the equity instruments’ unique characteristics, including trading restrictions or that quoted market prices for similar securities are not available.
Allowance for credit losses
Judgements about the impairment of loans and mortgages, and the related allowances for credit losses, are based on management’s best estimate of the present value of the cash flows that are expected to be received. This includes estimates about the borrower’s financial situation and the net realizable value of any underlying collateral. Collectively assessed allowances cover credit losses in portfolios of loans and mortgages having similar credit characteristics, and include judgements regarding factors such as portfolio credit quality, concentrations of credit, and economic factors. In order to estimate collective allowances, assumptions are made in determining modelling parameters based on historical experience and current economic conditions.
Derecognition of loans and mortgages
In determining whether to derecognize loans and mortgages, judgement is applied in determining whether we have transferred substantially all of the risks and rewards of ownership in transferring the assets to another entity, and the degree of control exercised by the Company over the other entity.
Income taxes
The determination of deferred tax assets or liabilities requires judgement as the recognition is dependent on projections of future taxable profits and tax rates that are expected to be in effect in the period the asset is realized or the liability is settled.
The consolidated financial statements were authorized for issue by the Board of Directors on February 19, 2014.
Notes to Financial Statements – December 31, 2013
23
Notes to Financial Statements – December 31, 2013
The judgments and estimates that have the most significant effect on the amounts recognized in the financial statements are decisions with respect to the fair value of financial instruments, the allowance for loan losses, the derecognition of loans and mortgages, and income taxes.
Fair value of financial instruments
The determination of the fair value of financial instruments requires the exercise of judgement by management. The fair value of financial instruments traded in active markets at the balance sheet date is based on their quoted market prices. Where independent quoted market prices do not exist, fair value may be based on other observable current market transactions or based on a valuation technique which maximizes the use of observable market inputs.
For certain types of equity instruments fair value is assumed to approximate carrying value where the range of reasonable valuation techniques is significant and the probabilities of such valuation techniques cannot be reasonably assessed. In such instances fair value may not be reliably measured due to the equity instruments’ unique characteristics, including trading restrictions or that quoted market prices for similar securities are not available.
Allowance for credit losses
Judgements about the impairment of loans and mortgages, and the related allowances for credit losses, are based on management’s best estimate of the present value of the cash flows that are expected to be received. This includes estimates about the borrower’s financial situation and the net realizable value of any underlying collateral. Collectively assessed allowances cover credit losses in portfolios of loans and mortgages having similar credit characteristics, and include judgements regarding factors such as portfolio credit quality, concentrations of credit, and economic factors. In order to estimate collective allowances, assumptions are made in determining modelling parameters based on historical experience and current economic conditions.
Derecognition of loans and mortgages
In determining whether to derecognize loans and mortgages, judgement is applied in determining whether we have transferred substantially all of the risks and rewards of ownership in transferring the assets to another entity, and the degree of control exercised by the Company over the other entity.
Income taxes
The determination of deferred tax assets or liabilities requires judgement as the recognition is dependent on projections of future taxable profits and tax rates that are expected to be in effect in the period the asset is realized or the liability is settled.
The consolidated financial statements were authorized for issue by the Board of Directors on February 19, 2014.
Notes to Financial Statements – December 31, 2013
3. Summary of significant accounting policies
Financial instruments
Financial assets and liabilities are initially recognized at fair value and are subsequently accounted for based on their classification as described below.
Financial assets must be classified as fair value through profit or loss (FVTPL), available for sale (AFS), held‐to‐maturity (HTM) or loans and receivables (L&R). Financial liabilities are required to be classified as (FVTPL) or other financial liabilities (OFL). All financial instruments, including all derivatives, are measured at fair value on the balance sheet with the exception of loans and receivables, held‐to‐maturity investments and other financial liabilities which are measured at amortized cost.
A financial asset is derecognized when the contractual rights to the cash flows from the asset have expired, or the Company transfers the contractual rights to receive the cash flows from the asset, or has assumed an obligation to pay those cash flows to a third party and the Company has transferred substantially all of the risks and rewards of ownership of that asset to a third party. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.
Changes in fair values of financial assets and financial liabilities classified as FVTPL are reported in earnings, while the changes in value of available for sale financial assets are reported within other comprehensive income (OCI) until the financial asset is disposed of, or becomes impaired.
Accumulated OCI is reported on the balance sheet as a separate component of Members’ Equity. It includes, on a net of taxes basis, the net unrealized gains and losses on available for sale financial assets. The Company has classified its financial instruments as follows:
FVTPL Interest rate swaps
AFS Investments
L&R Loans and mortgages, accrued interest and other assets
OFL Borrowings, deposits, mortgage backed securities (MBS), accrued interest, accounts payable and accrued liabilities and subordinated debentures
Cash and cash equivalents
Cash and cash equivalents include cash on hand, and balances with financial institutions that are utilized primarily in the payments function. Certain cash accounts that are utilized in the Company’s investment activities are reported in investments.
Investments
Investments have been designated as available for sale. Investments are initially recorded at cost with premiums and discounts amortized to maturity. Except as noted below, investments are reported at market value with any unrealized gains or losses reported in OCI.
Notes to Financial Statements – December 31, 2013
24
Notes to Financial Statements – December 31, 2013
Certain investments in co‐operative partners are reported at cost, as fair value cannot be reliably measured.
Investment income is recognized on an accrual basis. Realized gains and losses on the disposal of securities are included in investment income. All securities are held for investment purposes.
Loans and mortgages
Loans and mortgages have been designated as loans and receivables. Loans and mortgages are net of allowances established to recognize anticipated losses. The amount provided for anticipated loan losses is determined by reference to specific loans or mortgages in arrears and by the judgment of management.
Loans are assessed for impairment either individually, where appropriate, or collectively. A collective allowance has been established to provide for losses on loans and mortgages where past experience and existing economic and portfolio conditions indicate that losses have occurred, but where such losses cannot be specifically identified on an account‐by‐account basis.
Specific allowances are provided for individual loans that have experienced deterioration in credit quality such that there is no longer a reasonable assurance of the timely collection of the full amount of principal and interest, and where the current carrying value of the loan is greater than the present value of the future cash flows. The assessment of individual loans includes monthly reporting on delinquent accounts as well as an evaluation of other accounts where the possibility of loss exists, and includes an assessment of the security on the loan.
The collective allowance is determined based on management’s judgment considering business and economic conditions, portfolio composition, historical credit performance and other relevant factors. Pools of loans are assessed based on attributes specific to a defined group of borrowers, and considers other characteristics that directly affect the collectability of loans that are unique to the defined group of borrowers (such as inherent credit risk, industry, and geography). Each pool of loans is assigned a portfolio risk factor, which is used to determine a base amount required for the collective allowance. This base amount is adjusted to reflect the fluctuations in market conditions that most highly correlate with credit losses.
Assets received from borrowers in the event of borrower default are recorded as real estate held for resale (classified under loans and mortgages), and are recorded at their fair value less costs to sell. On the acquisition date any excess of the carrying value of the loan over the fair value of the assets received is recognized by a charge to the provision for credit losses. Any subsequent change in the fair value of real estate held for resale is recognized by a charge to lending services expenses.
The subsidiary company periodically sells or purchases mortgages, primarily to or from credit unions. In these transactions, the seller continues to administer the loans sold, but the contractual right to receive payments on the loans is offset by an obligation to transfer these payments to the purchaser. The loans sold by the subsidiary are derecognized, and the loans purchased are recognized, on the date of the transfer.
Mortgage backed securities
The Company securitizes insured residential mortgages through the creation of mortgage backed securities (MBS) under the National Housing Act Mortgage‐Backed Securities (NHA MBS) program sponsored by Canada
Notes to Financial Statements – December 31, 2013
25
Notes to Financial Statements – December 31, 2013
Mortgage and Housing Corporation (CMHC). The MBS created under the program are sold to third‐party investors. Under the NHA MBS program, the Company continues to administer the loans securitized, and is entitled to the payments received on the mortgages. At the same time, the Company is obligated to make the payments due on the issued MBS, including the investment yield due to the investors in the security, regardless of whether the Company has collected the funds from the mortgagor. The sale of mortgages through the NHA MBS program does not meet the requirements for derecognition. The Company has not transferred substantially all the risks and rewards of ownership of the underlying mortgages, as the Company retains the prepayment, credit and interest rate risk associated with the mortgages. As a result, the Company continues to recognize the underlying mortgages in assets as secured loans and the cash proceeds from the securitization are recognized as liabilities.
Fixed assets
Land is carried at cost. Buildings, equipment and improvements are carried at cost less accumulated depreciation. Depreciation is calculated using the straight‐line method over the estimated useful lives of the related assets. The useful life and residual value of fixed assets are reviewed at least annually. Depreciation rates are as follows:
Buildings and improvements 2‐10%
Furniture and equipment 20‐33%
Impairment
Investments are reviewed for impairment on at least an annual basis. Changes in the fair value of available for sale investments are reported in other comprehensive income. If the investment is impaired, however, any cumulative losses previously recognized in OCI are reclassified from equity to net income.
Loans and mortgages are classified as impaired at the earlier of when, in the opinion of management, there is reasonable doubt as to the collectability of principal or interest, or when interest or principal is contractually past due 90 days, unless the loan or mortgage is both well secured and in the process of collection. Interest on an impaired loan or mortgage continues to be recognized in earnings on an accrual basis and is provided for in the allowance for loan losses.
Non‐financial assets are assessed for impairment at least annually and, where impairment exists, the carrying value is reduced to the recoverable amount, and any adjustment is recognized in earnings.
Revenue and expense recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can readily be measured. The principal sources of revenue are interest and fee income. Operating expenses are recognized upon the utilization of the services or at the date of their origin.
Notes to Financial Statements – December 31, 2013
26
Notes to Financial Statements – December 31, 2013
Interest on loans and mortgages is recognized and reported on an accrual basis using the effective interest method. Expenses incurred directly in the origination of loans and mortgages are deferred and recognized in the income statement, as a reduction to income over the expected life of the relevant loans and mortgages.
The Company periodically sells mortgages. Gains or losses are recognized on transfers of mortgages to other parties when the Company has transferred the significant risks and rewards of ownership. Where the Company continues to service the mortgages, an administration fee is calculated on the outstanding balance of the mortgages. This fee is recognized as the services are provided and reported in earnings as other income.
Leases
A lease transfers the economic ownership of a leased asset if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is then recognized at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any. A corresponding amount is recognized as a finance leasing liability.
All other leases are treated as operating leases. Payments on operating lease agreements are recognized as an expense on a straight‐line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.
Income taxes
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.
Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year‐end date.
Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit or loss.
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.
The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year‐end date and are expected to apply when the liabilities / (assets) are settled / (recovered).
Notes to Financial Statements – December 31, 2013
27
Notes to Financial Statements – December 31, 2013
Deposits
Deposits are measured at fair value on recognition net of transaction costs directly attributable to issuance. Subsequent measurement is at amortized cost using the effective interest method.
Business combinations
Business combinations are accounted for using the acquisition method. The acquisition method involves the recognition of the acquiree’s identifiable assets and liabilities, including contingent liabilities, regardless of whether they were recorded in the financial statements prior to acquisition. On initial recognition, the assets and liabilities of the acquired entity are included in the consolidated balance sheet at their fair values.
Employee benefits
Short‐term employee benefits include salaries and wages, compensated absences, medical and dental plans, and variable compensation. The Company also contributes on behalf of employees to a Group Savings for Retirement Program and to life and long‐term disability insurance plans. Under these defined contribution programs the Company pays fixed contributions to an independent entity and has no legal or constructive obligation to pay further contributions. These costs are expensed as the related service is provided, and are reported in income as employee benefits.
Special projects
Expenses that are not expected to recur in normal operations, including certain expenses relating to credit union system initiatives, are charged to special projects.
Changes in accounting standards
Effective January 1, 2013 the following new and amended accounting standards were adopted by the Company; IAS 1 – Presentation of Financial Statements (Amended), IFRS 10 – Consolidation, IFRS 11 – Joint Arrangements, IFRS 12 – Disclosure of Interests in Other Entities, and IFRS 13 – Fair Value Measurement.
IAS 1 (Amended) prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. The amended standard requires an entity to present the items of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss. As a result of adopting this standard, the Company has modified the presentation of its Consolidated Statement of Comprehensive Income.
IFRS 10 requires a parent to present consolidated financial statements as those of a single economic entity, replacing the requirements previously contained in IAS 27 Consolidated and Separate Financial Statements and SIC‐12 Consolidation – Special Purposes Entities. IFRS 10 establishes the principles of control and introduces a new approach to determining whether an investor controls an investee and therefore must
Notes to Financial Statements – December 31, 2013
28
Notes to Financial Statements – December 31, 2013
consolidate the investee. The Standard introduces a single consolidation model for all entities based on control, irrespective of the nature of the investee. The Company has concluded that there were no entities to be consolidated or deconsolidated on adoption of this standard.
IFRS 11 provides a framework for entities to assess whether or not they participate in a joint arrangement, joint venture or joint operations. The Company has concluded that there were no activities of the Company which constituted a joint arrangement, joint venture or joint operations under IFRS 11.
IFRS 12 requires an entity to disclose information that enables users of its financial statements to evaluate the nature of, and risks associated with, its interests in other entities; and the effects of those interests on its financial position, financial performance and cash flows. The adoption of this standard did not have a material impact on the Consolidated Financial Statements.
IFRS 13 replaces the guidance on fair value measurement in existing IFRS accounting literature with a single standard. The standard establishes a framework for measuring fair value including a revised definition of fair value and sets out disclosure requirements for fair value measurements. The Company has concluded that there were no significant changes in the fair value measurement of financial instruments required on adoption of this new standard although additional enhancements have been made to disclosures on fair value measures in the Consolidated Financial Statements (See Note 9).
The adoption of these new and amended standards has not resulted in changes in the carrying amount of assets or liabilities as previously reported.
A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2013 and have not yet been adopted by the Company in preparing these consolidated financial statements. Other than the introduction of IFRS 9, these changes are not expected to have a material impact on the financial statements.
IFRS 9 ‐ Financial Instruments
In November 2009, the IASB issued IFRS 9 – Financial Instruments, introducing new requirements for classifying and measuring financial assets. This new standard replaces the requirements in IAS 39 – Financial Instruments: Recognition and Measurement for classification and measurement of financial assets. IFRS 9 is the first part of a multi‐phase project to replace IAS 39. The main features of the initial release of the new standard are:
A financial asset will be classified as either fair value or amortized cost. The available‐for‐sale, held‐to‐maturity, and loans and receivables categories will no longer exist.
Classification of financial assets is based on the entity’s business model for managing the financial asset and their contractual cash flow characteristics.
Changes in the fair value of financial assets classified as fair value are recognized in profit or loss, except for equity investments not held for trading, which may be held at fair value through other comprehensive income.
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Notes to Financial Statements – December 31, 2013
In 2012 the IASB proposed limited amendments in an exposure draft, which introduced a fair value through OCI measurement category for qualifying debt instruments. In 2013 the IASB issued additional amendments, including new hedge accounting requirements, and removed the January 1, 2015 effective date. The new effective date has not yet been determined. The impact of IFRS 9 on the Company has not yet been determined.
Other standards and amendments have been issued but are not yet effective and are not expected to have a material impact. They include:
Standard
Effective Date (periods beginning on or after)
IFRS 10 Consolidated Financial Statements – which amends the standard to require a parent that is an investment entity to measure its investments in subsidiaries at fair value through profit or loss, instead of consolidating subsidiaries in its consolidated financial statements
January 1, 2014
IFRS 12 Disclosure of Interests in Other Entities – which adds disclosure requirement for investment entities.
January 1, 2014
IAS 27 Separate Financial Statements – which is amended with respect to investment entities.
January 1, 2014
IAS 32 – Financial Instruments: Presentation – which clarifies requirements for offsetting financial assets and financial liabilities.
January 1, 2014
4. Risk management
The Company has an enterprise‐wide approach to the identification, measurement, monitoring and management of risks faced across the organization. The Company manages significant risks efficiently and effectively through an Enterprise Risk Management Framework (ERM) which includes a comprehensive infrastructure of policies, procedures, methods, oversight and independent review, designed to reduce the significant risks and to manage those risks within appropriate tolerances for the Company.
Authority for all risk‐taking activities rests with the Board of Directors (Board), which approves the Company’s Risk Appetite Statement and risk management policies, delegates limits and regularly reviews management’s risk assessments and compliance with approved policies. Qualified professionals throughout the Company manage these risks through comprehensive and integrated control processes and models, including regular review and assessment of risk measurement and reporting processes.
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Notes to Financial Statements – December 31, 2013
The various processes within the Company’s risk management framework are designed to ensure that risks in the various business activities are properly identified, measured, stress tested, assessed and controlled. Internal Audit reports independently to the Audit, Risk & Conduct Review Committees of the Board on the effectiveness of the risk management policies and the extent to which internal controls are in place and operating effectively.
Stress testing is a risk measurement technique that examines the potential effects on the Company’s financial condition resulting from adverse economic, liquidity, credit, and/or financial market conditions. The Company’s risk management processes include stress testing scenarios including exceptional but plausible adverse events that can impact the Company’s financial results and capital requirements, the results of which are used to enhance our understanding of our risk profile, and to support our strategic decision making. Stress testing results are also explicitly incorporated into the Company’s Internal Capital Adequacy Assessment Process (ICAAP) and Capital Plan.
The Management Finance Committee (MFC) is responsible for the review and evaluation of the financial risks and performance of the Company, including the management of:
Credit risk Liquidity
Interest rate risk Foreign exchange
Investment portfolio Derivatives
Large exposures Capital
The MFC reviews financial risk management policies, recommends changes to policies and procedures as appropriate, and monitors compliance with financial policies.
The Asset Liability Management Committee (ALCO) has been established to ensure the effective and prudent management of the Company’s financial assets and liabilities. ALCO will achieve this by developing and implementing financial strategies and related processes consistent with the short and long term goals set by the Board.
The Company’s principal business activities result in a balance sheet that consists primarily of financial instruments. The key risks related to our financial instruments are credit, liquidity and market risk.
Credit risk
Credit risk is the potential for loss due to the failure of a borrower, endorser or guarantor to fulfill its payment obligation to the Company. Credit risk arises in the Company’s direct lending operations and in its funding and investing activities where counterparties have repayment or other obligations to the Company. The Company
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Notes to Financial Statements – December 31, 2013
has established policies and procedures for credit risk management, including counterparty limits relating to investment activities.
Management of credit risk requires prudent and conservative underwriting criteria administered by well‐trained and experienced personnel. Credit risk management practices also include consistent and timely collection procedures, conservative analysis of property appraisals, and a realistic loan allowance process to provide a regular evaluation of the loan portfolio. Credit policies are reviewed and approved annually by the Board. Management regularly reviews its credit procedures to ensure they provide extensive, up‐to‐date guidance for the underwriting and administration of all types of loans.
All loans are risk rated at the time of approval, and may be subject to subsequent risk assessment based on factors such as loan type, amount, original risk rating and payment history. Loans with higher risk require more intensive analysis and higher levels of approval. The Credit Committee of the Board reviews all loans above the lending limits of management.
The Company maintains both specific and collective allowances for credit losses. Specific allowances are established based on management’s knowledge of the property and prevailing conditions. Collective allowances are maintained to cover any impairment in the loan portfolio that cannot yet be associated with specific loans. The collective allowance is determined based on the Company’s risk weighted portfolio and other factors including an assessment of market risk.
Management regularly monitors the Company’s credit risk and reports to the Board on a quarterly basis.
Liquidity risk
Liquidity refers to the capacity to generate or obtain sufficient cash or its equivalent in a timely manner at a reasonable price to meet the Company’s commitments as they fall due and to fund new business opportunities. Liquidity risk is the potential for losses to be incurred from holding insufficient liquidity to survive a contingent stress event.
The Company’s primary role is to manage liquidity for the credit union systems in Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador. In its role as a credit union service partner, League Savings’ primary financial role is to accept deposits from credit unions, their members, and others, and to employ those funds to advance loans and mortgages to credit union members and others.
The Company has established policies to ensure that it is able to generate sufficient funds to meet all of its financial commitments in a timely and cost‐effective manner. In addition, a liquidity plan is prepared which forecasts the amount of liquidity required and the sources that will be used to fund those requirements. These policies and plans are annually reviewed and approved by the Board.
The Company’s liquidity management practices include:
Ensuring the quality of investments acquired for liquidity purposes meet very high standards
Matching the maturities of assets and liabilities
Diversifying funding sources
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Notes to Financial Statements – December 31, 2013
Establishing and maintaining minimum liquidity reserves
Monitoring actual cash flows on a daily basis
Forecasting future cash flow requirements
Utilizing lines of credit to fund temporary needs and selling or securitizing mortgage pools to meet longer term requirements
Scenario testing and contingency planning
While operating under similar liquidity management frameworks, certain liquidity management practices of the Central and the subsidiary, League Savings, differ due to the specific nature of each organization. While the Central’s primary financial role is to manage the liquidity requirements of the Atlantic credit union system, League Savings acts primarily in the mortgage lending and deposit taking industry. In particular, the potential liquidity stresses that are modelled in scenario testing are different.
As the credit unions’ system liquidity provider, Central’s cash flows are impacted by the liquidity requirements of the individual Atlantic credit unions. As a result, the Company’s liquidity stress testing assesses the impact of increases in the drawdowns of credit union lines of credit, and decreases in credit union excess liquidity deposits (deposits above the levels that credit unions are required to maintain with the Central).
League Savings’ cash flows are most significantly impacted by its credit union corporate deposits. As such, its scenario testing focuses on increases in the redemptions of these deposits.
Management monitors the Company’s liquidity position daily and reports to the Board on a quarterly basis.
Market risk
Market risk is the risk of loss that results from changes in interest rates, foreign exchange rates, equity prices and commodity prices. Market risk exposures are managed through policies, standards and limits established by the Board, which are formally reviewed and approved annually.
The Company uses a variety of techniques to identify, measure and control market risk. Derivatives may be used only to offset clearly identified risks. The Company has developed standards regarding the use of derivative products.
Interest rate risk is the risk that a movement in interest rates will have on the financial condition of the Company. The Company’s interest rate risk policies include limits on the allowable variation in forecasted financial margin due to interest rate changes. The Company manages and controls interest rate risk primarily by managing asset/liability maturities; however, off‐balance sheet techniques such as interest rate risk contracts may be used to hedge against specific interest rate exposures.
The Company measures interest rate risk through a combination of gap and income simulation analysis on a quarterly basis. Gap analysis measures the difference between the amount of assets and liabilities repricing in specific time periods. Income simulation models are used to measure interest rate exposure
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Notes to Financial Statements – December 31, 2013
under various assumptions about interest rates, products, volumes and pricing. Sensitivity analysis of an interest rate increase and decrease of 100 basis points is disclosed in the table below.
Earnings at risk over the next 12 months as at December 31:
2013 2012
100 basis point increase $ (461,048) $ (864,700)
100 basis point decrease 603,707 861,200
Management provides quarterly reports to the Board on interest rate risk. The Board has established limits on the Company’s maximum exposure to interest rate risk, and the Company’s earnings at risk were within this limit.
5. Investments
2013 2013 2012 2012
Cost Market Value Cost Market Value
Banks (a) $ 233,845,586 $ 234,041,326 $ 239,763,938 $ 240,401,503
Government debt 69,106,177 69,670,563 55,228,066 56,742,096
Corporate debt 67,242,410 67,619,177 112,620,223 113,430,660
Co‐operative deposits 166,318,013 166,373,864 158,524,881 158,619,877
Co‐operative equities 4,851,915 4,883,065 4,904,281 4,931,128
Corporate equities 112,461 1,501,440 112,461 1,381,680
$ 541,476,562 $ 544,089,435 $ 571,153,850 $ 575,506,944
(a) Includes cash and cash equivalents utilized in the investments function
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Notes to Financial Statements – December 31, 2013
6. Loans and mortgages
Total Impaired Total Specific Net Loans Loans Allowance Allowance Loans
2013 (included in total allowance)
Insured residential mortgages $ 341,266,764 $ 24,734 $ 206,656 $ ‐ $ 341,060,108Uninsured residential mortgages 96,416,644 38,654 474,365 35,641 95,942,279 Loans & non‐residential mortgages 101,304,456 34,825 975,131 ‐ 100,329,325Co‐operatives 18,368,544 ‐ ‐ ‐ 18,368,544 Real estate held for sale 1,822,498 ‐ ‐ ‐ 1,822,498
559,178,906 98,213 1,656,152 35,641 557,522,754Less: under administration Residential insured 79,149,992 ‐ ‐ ‐ 79,149,992 Residential uninisured 7,675,493 ‐ ‐ ‐ 7,675,493 Non‐residential ‐ ‐ ‐ ‐ ‐
86,825,485 ‐ ‐ ‐ 86,825,485 $ 472,353,421 $ 98,213 $ 1,656,152 $ 35,641 $ 470,697,269
2012 Insured residential mortgages $ 317,631,230 $ ‐ $ 192,986 $ ‐ $ 317,438,244Uninsured residential mortgages 95,524,753 10,104 415,015 10,104 95,109,738 Loans & non‐residential mortgages 98,162,522 731,931 1,043,238 19,116 97,119,284 Co‐operatives 33,069,783 ‐ ‐ ‐ 33,069,783 Real estate held for sale 1,117,699 ‐ ‐ ‐ 1,117,699
545,505,987 742,035 1,651,239 29,220 543,854,748Less: under administration Residential insured 74,239,642 ‐ ‐ ‐ 74,239,642 Residential uninsured 7,699,243 ‐ ‐ ‐ 7,699,243 Non‐residential 160,895 ‐ ‐ ‐ 160,895
82,099,780 ‐ ‐ ‐ 82,099,780 $ 463,406,207 $ 742,035 $ 1,651,239 $ 29,220 $ 461,754,968
Continuity of allowance for loan losses 2013 2012 Allowance, beginning of year $ 1,651,239 $ 2,004,420 Write‐offs (recoveries) 537 (536) Loan loss provisions (recoveries) 4,376 (352,645) Allowance, end of year $ 1,656,152 $ 1,651,239
The following is an analysis of loans that are impaired or may become impaired based on the age of repayments outstanding:
2013 2012 31 to 60 days $ 1,625,070 $ 1,922,128 61 to 90 days 190,764 438,651 91 to 180 days 191,754 737,346 over 180 days 124,366 ‐
$ 2,131,954 $ 3,098,125
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Notes to Financial Statements – December 31, 2013
7. Fixed assets
2013 Land Total
Gross carrying amount
Balance at January 1 $ 575,003 $ 6,128,092 5,926,129 $ 12,629,224
Additions ‐ 97,894 347,459 445,353
Disposals ‐ ‐ (54,194) (54,194)
Balance at December 31 575,003 6,225,986 6,219,394 13,020,383
Accumulated depreciation
Balance at January 1 $ ‐ $ (2,803,230) $ (5,576,150) $ (8,379,380)
Disposals ‐ ‐ 16,258 16,258
Depreciation ‐ (299,743) (205,502) (505,245)
Balance at December 31 ‐ (3,102,973) (5,765,394) (8,868,367)
Carrying amount December 31 $ 575,003 $ 3,123,013 $ 454,000 $ 4,152,016
2012
Gross carrying amount
Balance at January 1 $ 575,003 $ 6,097,651 $ 5,853,377 $ 12,526,031
Additions ‐ 44,406 166,468 210,874
Disposals ‐ ‐ ‐ ‐
Balance at December 31 $ 575,003 6,142,057 6,019,845 12,736,905
Accumulated depreciation
Balance at January 1 ‐ (2,490,738) (5,415,202) (7,905,940)
Disposals ‐ ‐ ‐ ‐
Depreciation ‐ (326,457) (254,664) (581,121)
Balance at December 31 ‐ (2,817,195) (5,669,866) (8,487,061)
Carrying amount December 31 $ 575,003 $ 3,324,862 $ 349,979 $ 4,249,844
Buildings and improvements
Furniture and equipment
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Notes to Financial Statements – December 31, 2013
8. Capital stock
Authorized capital stock, and the amounts outstanding, is as follows:
Par Redemption Authorized Shares Amount Shares Amount Value Price
Opening balance 4,019,331 $ 40,193,310 4,021,336 $ 40,213,360 Issued 138,851 1,388,510 67,511 675,110 Redeemed (11,376) (113,760) (69,516) (695,160) Common shares None None $ Unlimited 4,146,806 41,468,060 4,019,331 40,193,310
Opening balance 31,991 $ 32 31,991 $ 32 Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ ‐ ‐ Preferred Shares ‐ Class B $ 0.001 $ 100 $ 10,000,000 31,991 32 31,991 32
Opening balance 26,700 $ 27 26,700 $ 27 Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ ‐ ‐ Preferred Shares ‐ Class NB $ 0.001 $ 100 $ 10,000,000 26,700 27 26,700 27
Opening balance 4,100 $ 4 4,100 $ 4 Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ ‐ ‐ Preferred Shares ‐ Class NL $ 0.001 $ 100 $ 10,000,000 4,100 4 4,100 4
Opening balance 59,290 $ 59 59,360 $ 59 Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ (70) ‐ Preferred Shares ‐ Class NS $ 0.001 $ 100 $ 10,000,000 59,290 59 59,290 59
Opening balance 100 $ ‐ 100 $ ‐ Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ ‐ ‐ Preferred Shares ‐ Class PEI $ 0.001 $ 100 $ 10,000,000 100 ‐ 100 ‐
4,268,987 $ 41,468,182 4,141,512 $ 40,193,432
Outstanding2013 2012
Shares are owned by member credit unions, who must maintain Common Shares in amounts proportionate to that member’s pro‐rata share of system assets. Common Share ownership requirements are determined by the Board. All classes of shares are non‐voting. Members hold votes proportionate to their pro‐rata share of system assets.
All of the Class B, Class NB, Class NL, Class NS and Class PEI shares were issued as part of the business combination described in Note 1. The Company may at any time, upon providing 30 days notice, and subject
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Notes to Financial Statements – December 31, 2013
8. Capital stock
Authorized capital stock, and the amounts outstanding, is as follows:
Par Redemption Authorized Shares Amount Shares Amount Value Price
Opening balance 4,019,331 $ 40,193,310 4,021,336 $ 40,213,360 Issued 138,851 1,388,510 67,511 675,110 Redeemed (11,376) (113,760) (69,516) (695,160) Common shares None None $ Unlimited 4,146,806 41,468,060 4,019,331 40,193,310
Opening balance 31,991 $ 32 31,991 $ 32 Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ ‐ ‐ Preferred Shares ‐ Class B $ 0.001 $ 100 $ 10,000,000 31,991 32 31,991 32
Opening balance 26,700 $ 27 26,700 $ 27 Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ ‐ ‐ Preferred Shares ‐ Class NB $ 0.001 $ 100 $ 10,000,000 26,700 27 26,700 27
Opening balance 4,100 $ 4 4,100 $ 4 Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ ‐ ‐ Preferred Shares ‐ Class NL $ 0.001 $ 100 $ 10,000,000 4,100 4 4,100 4
Opening balance 59,290 $ 59 59,360 $ 59 Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ (70) ‐ Preferred Shares ‐ Class NS $ 0.001 $ 100 $ 10,000,000 59,290 59 59,290 59
Opening balance 100 $ ‐ 100 $ ‐ Issued ‐ ‐ ‐ ‐ Redeemed ‐ ‐ ‐ ‐ Preferred Shares ‐ Class PEI $ 0.001 $ 100 $ 10,000,000 100 ‐ 100 ‐
4,268,987 $ 41,468,182 4,141,512 $ 40,193,432
Outstanding2013 2012
Shares are owned by member credit unions, who must maintain Common Shares in amounts proportionate to that member’s pro‐rata share of system assets. Common Share ownership requirements are determined by the Board. All classes of shares are non‐voting. Members hold votes proportionate to their pro‐rata share of system assets.
All of the Class B, Class NB, Class NL, Class NS and Class PEI shares were issued as part of the business combination described in Note 1. The Company may at any time, upon providing 30 days notice, and subject
Notes to Financial Statements – December 31, 2013
to any limitations set by applicable legislation or the Office of the Superintendent of Financial Institutions, redeem these shares for the redemption price.
In 2012 Common Shares totalling $20,050 (2,005 shares), and 70 Class NS shares with a par value of $0.07 and a redemption value of $7,000, were redeemed as a result of the wind‐up of a credit union.
Other than the redemption of shares as a result of the wind‐up of a credit union, the Company has no plans to redeem any of the remaining Class B, Class NB, Class NL, Class NS or Class PEI shares at this time. The redemption value of the remaining shares is $12,218,100 (2012 ‐ $12,218,100).
Common shareholders have the right to receive any dividends that may be declared out of the ordinary income of the Company. Holders of the Class B, Class NB, Class NL, Class NS and Class PEI shares have the right to receive any dividends that may be declared out of the extraordinary income of the Company on that respective class of shares. Ordinary income refers to income earned in the ordinary course of business after January 1, 2011. Extraordinary income refers to income which does not typically result from normal business activities.
In December 2013, the Company transferred $1,693,741 (2012 ‐ $600,000) in Retained Earnings to a Special Reserve to be used to fund future Atlantic credit union initiatives.
9. Financial instruments
a) Interest rate risk
The Company earns and pays interest on certain assets and liabilities. To the extent that the assets, liabilities and financial instruments mature or reprice at different points in time, the Company is exposed to interest rate risk. The table below summarizes carrying amounts of balance sheet instruments by the earlier of the contractual repricing or maturity dates.
An estimate of prepayments has been determined by management and includes the estimated principal portion of regular mortgage payments and full payouts of mortgage loans during their term based upon historical trends for these types of payments.
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Notes to Financial Statements – December 31, 2013
(Reported in $000's) Within 3 Months 1 Year Over 5 Non‐interest Average3 Months to 1 Year to 5 Years Years Sensitive Total Rate
2013 %AssetsCash and investments $ 145,359 $ 153,775 $ 212,596 $ 23,933 $ 48,016 $ 583,679 1.86 Loans and mortgages 30,748 88,840 352,765 ‐ (1,656) 470,697 4.24 Other assets ‐ ‐ ‐ ‐ 13,249 13,249
$ 176,107 $ 242,615 $ 565,361 $ 23,933 $ 59,609 $ 1,067,625 Liabilities and equityDeposits $ 310,631 $ 385,027 $ 245,086 $ ‐ $ ‐ $ 940,744 1.44 Other liabilities ‐ ‐ ‐ ‐ 11,825 11,825 Mortgage backed securities ‐ ‐ 22,380 ‐ ‐ 22,380 2.29 Equity and subordinated debentures ‐ ‐ ‐ ‐ 92,676 92,676
$ 310,631 $ 385,027 $ 267,466 $ ‐ $ 104,501 $ 1,067,625 Subtotal $ (134,524) $ (142,412) $ 297,895 $ 23,933 $ (44,892) $ ‐ Derivatives 10,000 ‐ (10,000) ‐ ‐ ‐ Prepayment estimate 13,229 39,686 (52,915) ‐ ‐ ‐ Excess (deficiency) $ (111,295) $ (102,726) $ 234,980 $ 23,933 $ (44,892) $ ‐
2012 AssetsCash and investments $ 144,883 $ 182,297 $ 239,401 $ 15,015 $ 9,967 $ 591,563 1.94 Loans and mortgages 48,456 78,504 336,446 ‐ (1,651) 461,755 4.64 Other assets ‐ ‐ ‐ ‐ 14,169 14,169
$ 193,339 $ 260,801 $ 575,847 $ 15,015 $ 22,485 $ 1,067,487 Liabilities and equityDeposits $ 325,461 $ 353,252 $ 253,746 $ ‐ $ 27,578 $ 960,037 1.48 Other liabilities ‐ ‐ ‐ ‐ 11,777 11,777 Mortgage backed securities ‐ ‐ 5,461 ‐ ‐ 5,461 2.08 Equity and subordinated debentures ‐ ‐ ‐ ‐ 90,212 90,212
$ 325,461 $ 353,252 $ 259,207 $ ‐ $ 129,567 $ 1,067,487 Subtotal $ (132,122) $ (92,451) $ 316,640 $ 15,015 $ (107,082) $ ‐ Derivatives 35,000 (25,000) (10,000) ‐ ‐ ‐ Prepayment estimate 12,617 37,850 (50,467) ‐ ‐ ‐ Excess (deficiency) $ (84,505) $ (79,601) $ 256,173 $ 15,015 $ (107,082) $ ‐
b) Interest rate swap agreements
The Company may enter into interest rate swap agreements as a component of its overall risk management strategy. These agreements are contractual arrangements between two parties to exchange a series of cash flows. In an interest rate swap agreement, counterparties generally exchange fixed and floating rate interest payments based on a notional value. Typically, the floating rate is reset periodically, and the net interest amount is exchanged between the counterparties at scheduled dates. The primary risks associated with these contracts are the exposure to movements in interest rates and the ability of the counterparties to meet the
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Notes to Financial Statements – December 31, 2013
terms of the contract. Interest rate swap agreements are used to manage interest rate risk by modifying the repricing or maturities of assets and liabilities. Interest rate swap agreements are considered financial derivatives and are recorded at fair value.
Interest rate swap contracts outstanding at December 31 are as follows:
Notional Value
RateMarket Value
Notional Value
RateMarket Value
Pay fixed swaps:Term to maturity
Within 1 year $ ‐ ‐ $ ‐ $ 25,000,000 1.31% $ 12,969
1 year to 5 years 10,000,000 1.45% (17,971) 10,000,000 1.45% 8,979
Over 5 years ‐ ‐ ‐ ‐ ‐ ‐
$ 10,000,000 $ (17,971) $ 35,000,000 $ 21,948
2013 2012
Rates represent the weighted average interest rates the Company is contractually committed to pay/receive until the swap matures. The floating side of all swaps are based on the three‐month Canadian Dealer Offered Rate (CDOR). Market value represents the mark to market value of outstanding contracts ‐ generally, the net amount that would be payable or receivable on the reporting date based on the floating rate at current market rates. There were no “receive fixed” swaps outstanding at December 31.
Income and expenses on interest rate swap agreements are recognized over the life of the contract as an adjustment to interest expense. Accrued expenses are recorded in accrued interest payable. Mark to market gains (losses) on swaps are recorded in other assets (other liabilities), while the change in market value is recorded in Financial Expense.
c) Index linked deposits
The Company offers index linked term deposits, which are non‐redeemable 3‐ and 5‐year term deposits that pay, on maturity, a return to the depositor linked to the performance of a market index. The interest paid to the depositor at maturity is based on the growth in the index over the term of the deposits.
To offset the risk of this variable interest rate, the Company enters into agreements, whereby the Company pays a fixed rate of interest for the term of each index linked deposit based on the face value of the deposits sold. At the end of the term, the Company receives an amount equal to the amount that will be paid to the depositors. At December 31, 2013 the balance of outstanding index linked deposits was $7,252,860 (2012 ‐ $7,625,303).
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Notes to Financial Statements – December 31, 2013
d) Fair value
The following table presents the fair value of on‐ and off‐balance sheet financial instruments of the Company based on the valuation methods and assumptions set out below. Fair value represents the amount at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions, and is measured using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.
Fair value is best evidenced by a quoted market price, if one exists. Quoted market prices are not available for a significant portion of the Company’s financial instruments.
The fair values disclosed exclude the values of assets and liabilities that are not considered financial instruments such as land, buildings and equipment. In addition, items such as the value of intangible assets such as customer relationships which, in management’s opinion add significant value to the Company, are not included in the disclosures below.
A three‐tier hierarchy is used as a framework for disclosing fair values based on inputs used to value the Company’s financial instruments recorded at fair value. Valuation methods used in this framework are categorized under the following fair value hierarchy:
Level 1 – Quoted prices for active markets for identical financial instruments that the entity can access at the measurement date.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and model‐derived valuations in which all significant inputs are observable in active markets.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not based on observable market data.
The carrying value of cash and cash equivalents approximate their fair value as they are short term in nature or are receivable on demand. For investments, corporate shares are valued using quoted market prices (Level 1); banks, bonds and some co‐operative deposit investments are valued using market prices provided by third‐party brokers (Level 2); and co‐operative securities are carried at cost. There have been no transfers between Level 1 and 2 during the year.
For variable rate loans and deposits the carrying value is also considered to be a reasonable estimate of fair value. For fixed rate loans and mortgages, some co‐operative deposit investments, deposits, and mortgage backed securities, the fair value is calculated using a discounted cash flow model, based on weighted average interest rates and the term to maturity of the instrument (Level 2). The discount rates applied were based on the current market rate offered for the average remaining term to maturity.
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Notes to Financial Statements – December 31, 2013
The calculation of estimated fair values is based on market conditions at a specific point in time and may not be reflective of future fair values.
2013 2012 Estimated Estimated
Cost Fair Value Cost Fair ValueAssetsCash and cash equivalents $ 39,589,724 $ 39,589,724 $ 16,056,354 $ 16,056,354 Investments 541,476,562 544,089,435 571,153,850 575,506,944 Loans and mortgages 470,697,269 479,009,821 461,754,968 474,878,247 Accrued interest 4,509,711 4,509,711 5,186,492 5,186,492
LiabilitiesDeposits $ 940,743,834 $ 943,054,258 $ 960,037,444 $ 962,360,501 Accrued interest 4,845,404 4,845,404 4,727,707 4,727,707 Mortgage backed securities 22,379,569 22,465,221 5,460,960 5,460,960
Derivatives $ ‐ $ (17,971) $ ‐ $ 21,948
10. Commitments and contractual obligations
a) Approved loans and mortgages
At December 31, 2013 the Company had approved lines of credit in the amount of $100,474,723 (2012 ‐ $190,276,534) and approved mortgages in the amount of $7,333,521 (2012 ‐ $7,811,287) which have not been advanced.
b) Clearing and settlement agreement
The Company has entered into a contract for clearing, settlement and US Dollar account services. The contract expires in July 2018. Pricing is subject to annual adjustment effective January 1st of each calendar year.
c) Interest rate swap agreements
The Company, as intermediary for certain credit unions, may enter into various interest rate swap agreements in order that the credit unions may manage their exposure to interest rate fluctuations. The terms of the agreements provide that the Company pay a fixed interest rate on notional principal amounts due to mature in the future in exchange for variable or short term interest rate returns on these same amounts. In turn,
Notes to Financial Statements – December 31, 2013
42
Notes to Financial Statements – December 31, 2013
reciprocal interest rate swap agreements would be entered into with the respective credit unions. There were no such matching interest rate swap agreements outstanding at December 31, 2013.
d) Foreign exchange forward agreements
The Company, as intermediary for certain credit unions, may enter into various forward agreements in order that the credit unions may manage their exposure to foreign currency fluctuations. The terms of the agreements provide that the Company buy or sell a fixed amount of foreign currency, at a fixed exchange rate, on a specified future date. In turn, a reciprocal agreement is entered into with the credit unions, to sell or buy the same amount of foreign currency on the same dates. There were no forward rate agreements outstanding at December 31, 2013.
e) Rental of premises
The Company has entered into operating leases for the rental of premises in Charlottetown. The term of the lease is from January 1, 2011 to December 31, 2017, and there is an option to extend the lease for a further five‐year term.
The Company has also entered into a sublease to rent a portion of the space to a third party. The term of the sublease is from November 1, 2012 to October 30, 2017, and there is an option to extend the sublease for a further five‐year term.
League Savings also had an operating lease for premises in Sydney which includes a requirement to pay basic rent of $25 per rentable square foot and additional rent of the Company’s proportionate share of all increases in operating costs over $9.50 per rentable square foot of the premises, determined at the commencement of each calendar year. The original term of the lease is from August 1, 2007 to July 31, 2012, and there was an option to extend the lease for further consecutive five‐year terms, which was exercised in 2012.
Lease payments of $122,179 were recognized as an expense during the period, including minimum lease payments of $109,500 and contingent costs of $12,679. Sublease payments of $9,000 were recognized as revenue during the period.
The Company has committed to pay annual lease payments, and has commitments to receive sublease payments, as follows:
After 2014 2015 2016 2017 2018 5 Years
Lease payments $ 109,500 $ 109,500 $ 109,500 $ 87,365 $ ‐ $ ‐ Sublease payments 15,000 18,000 18,000 15,000 ‐ ‐ Net lease payments $ 94,500 $ 91,500 $ 91,500 $ 72,365 $ ‐ $ ‐
Notes to Financial Statements – December 31, 2013
43
Notes to Financial Statements – December 31, 2013
reciprocal interest rate swap agreements would be entered into with the respective credit unions. There were no such matching interest rate swap agreements outstanding at December 31, 2013.
d) Foreign exchange forward agreements
The Company, as intermediary for certain credit unions, may enter into various forward agreements in order that the credit unions may manage their exposure to foreign currency fluctuations. The terms of the agreements provide that the Company buy or sell a fixed amount of foreign currency, at a fixed exchange rate, on a specified future date. In turn, a reciprocal agreement is entered into with the credit unions, to sell or buy the same amount of foreign currency on the same dates. There were no forward rate agreements outstanding at December 31, 2013.
e) Rental of premises
The Company has entered into operating leases for the rental of premises in Charlottetown. The term of the lease is from January 1, 2011 to December 31, 2017, and there is an option to extend the lease for a further five‐year term.
The Company has also entered into a sublease to rent a portion of the space to a third party. The term of the sublease is from November 1, 2012 to October 30, 2017, and there is an option to extend the sublease for a further five‐year term.
League Savings also had an operating lease for premises in Sydney which includes a requirement to pay basic rent of $25 per rentable square foot and additional rent of the Company’s proportionate share of all increases in operating costs over $9.50 per rentable square foot of the premises, determined at the commencement of each calendar year. The original term of the lease is from August 1, 2007 to July 31, 2012, and there was an option to extend the lease for further consecutive five‐year terms, which was exercised in 2012.
Lease payments of $122,179 were recognized as an expense during the period, including minimum lease payments of $109,500 and contingent costs of $12,679. Sublease payments of $9,000 were recognized as revenue during the period.
The Company has committed to pay annual lease payments, and has commitments to receive sublease payments, as follows:
After 2014 2015 2016 2017 2018 5 Years
Lease payments $ 109,500 $ 109,500 $ 109,500 $ 87,365 $ ‐ $ ‐ Sublease payments 15,000 18,000 18,000 15,000 ‐ ‐ Net lease payments $ 94,500 $ 91,500 $ 91,500 $ 72,365 $ ‐ $ ‐
Notes to Financial Statements – December 31, 2013
11. Income taxes
The components of tax expense are as follows:
2013 2012
Current tax expense
Federal and provincial $ 1,279,012 869,409
Capital and Large Corporate Tax 337,600 308,847 1,616,612 1,178,256
Deferred tax expense
Origination and reversal of deductible temporary differences (11,820) 277,811
Reduction in tax rate (76,795) 37,253
(88,615) 315,064 Total tax expense $ 1,527,997 1,493,320
The provision for income taxes differs from the result which would be obtained by applying the combined Canadian Federal and Provincial statutory income tax rates to income before taxes. This difference results from the following:
2013 2012
Income before income taxes $ 5,041,263 4,721,767
Statutory income tax rate 42.67% 41.28%
Expected income tax 2,151,107 1,949,146
Effect on income tax of:
Non‐taxable dividends (70,642) (51,598)
Permanent tax differences 38,519 34,428
Capital and Large Corporate Tax 192,426 176,940
Credit union deduction (432,046) (351,867)
General tax rate reduction (277,387) (300,806)
Future tax rate reduction (76,795) 37,253
Other 2,815 (176) Total income tax expense $ 1,527,997 1,493,320
Notes to Financial Statements – December 31, 2013
44
Notes to Financial Statements – December 31, 2013
The components of the future income tax asset are as follows:
Balance Balance BalanceDecember
31 2011
NetIncome
OCIDecember
312012
NetIncome
OCIDecember
312013
Deferred tax assets
Property and equipment $ 87,840 $ 46,382 $ ‐ $ 134,222 $ 74,778 $ ‐ $ 209,000
Allowance for impaired loans 516,704 (38,705) ‐ 477,999 10,924 ‐ 488,923
Losses carried forward 324,492 (293,408) ‐ 31,084 (30,936) ‐ 148
Net donations carried forward 101,926 (64,066) ‐ 37,860 24,755 ‐ 62,615
Other 106 34,733 ‐ 34,839 9,095 ‐ 43,934
1,031,068 (315,064) ‐ 716,004 88,616 ‐ 804,620
Recognized in: Recognized in:
12. Capital requirements
The Company manages its capital under guidelines established by the Office of the Superintendent of Financial Institutions (OSFI), which require the Central and League Savings to maintain capital ratios that are adequate in relation to their levels of business activity. For the Central, OSFI prescribes a liabilities to capital borrowing multiple not to exceed 20 times capital.
League Savings is subject to guidelines OSFI has issued based on standards issued by the Bank for International Settlements, Basel Committee of Banking Supervisors (BCBS). OSFI has adopted capital guidelines based on the standards known as Basel II, which became effective for League Savings in 2008. Pillar 1 of the Basel II framework defines minimum capital requirements, while Pillar 2 addresses standards for the management of capital requirements.
Capital requirements are determined based on exposures to credit risk, operational risk, and for entities with significant trading activity, market risk. The standards provide different methodologies for the calculation of risk exposures based on a company’s relative size and sophistication. League Savings has implemented the Standardized Approach for credit risk, and the Basic Indicator Approach (BIA) for operational risk. The Company is not subject to the requirements for market risk.
Pillar 2 of the Basel II framework requires that institutions have a process in place to make an internal assessment of its overall capital position relative to its own unique circumstances and risk profile. This process, referred to as ICAAP, is approved by the League Savings Board. The Company’s internal capital requirements have been calculated in accordance with the approved ICAAP. In particular, the Company sets internal capital limits that are adjusted based on an annual assessment of the Company’s risk profile as identified in an Enterprise Risk Management framework. These internal limits provide for capital that is in excess of the regulatory minimums.
Notes to Financial Statements – December 31, 2013
45
Notes to Financial Statements – December 31, 2013
In December 2012, OSFI issued its revised guideline for Capital Adequacy Requirements, effective January 2013, based on the Basel II and Basel III framework. Under Basel III, there are three primary regulatory capital ratios used to assess capital adequacy, Common Equity Tier 1, Tier 1 and Total Capital ratios, which are determined by dividing those capital components by risk‐weighted assets.
Basel III introduced a new category of capital, Common Equity Tier 1 (CET1), which consists primarily of common shareholders’ equity net of regulatory adjustments. These regulatory adjustments include goodwill, intangible assets net of deferred tax liabilities, deferred tax assets that rely on future profitability, defined‐benefit pension fund net assets, shortfall of credit provision to expected losses and investments in other financial institutions over certain thresholds.
In addition, new or revised capital components included in common equity are unrealized losses on securities and reduced amounts for non‐controlling interests. Transitional requirements result in a five‐year phase‐in of new deductions and additional capital components to common equity.
OSFI’s Basel III capital requirements include rules to implement the BCBS guidance on non‐viability contingent capital (NVCC). The NVCC rules require that all capital instruments include loss absorption features. The Subordinate Debentures and Preferred Shares issued by League Savings are considered non‐qualifying capital instruments under the Basel III NVCC rules and are therefore subject to a 10% phase‐out per year beginning in 2013.
As of January 2019, under the BCBS rules League Savings will be required to meet new minimum requirements of: Common Equity Tier 1 ratio of 4.5% plus a capital conservation buffer of 2.5%, collectively 7%. Including the capital conservation buffer, the minimum Tier 1 ratio will be 8.5%, and the Total Capital ratio will be 10.5%.
OSFI required Canadian deposit‐taking institutions to fully implement the 2019 Basel III reforms in 2013, without the transitional phase‐in provisions for capital deductions (referred to as ‘all‐in’), and achieve a minimum 7% common equity target, by the first quarter of 2013.
Capital ratios are monitored regularly and reported to the Board quarterly. The Capital Management Plan, which forecasts capital requirements and includes contingency plans in the event of unanticipated changes, is reviewed by the Board annually.
Details of the Company’s regulatory capital at December 31 were as follows:
2013 2012
Central:
Maximum borrowing multiple 20 20
Actual borrowing multiple 11.6 12.5
Notes to Financial Statements – December 31, 2013
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Notes to Financial Statements – December 31, 2013
League Savings and Mortgage Company: 2013 2012
Risk‐weighted assets for:Credit risk $ 131,884,000 $ 127,490,000 Operational risk 22,375,000 24,788,000 Total $ 154,259,000 $ 152,278,000
Capital elements:Common shares $ 2,110,000 $ 2,110,000 Contributed surplus 1,786,000 1,786,000 Unrealized gain on AFS investments 233,000 ‐ Retained earnings 15,127,000 14,329,000 Common Equity Tier 1 19,256,000 18,225,000 Preferred shares 12,588,000 13,987,000 Total Tier 1 31,844,000 32,212,000 Subordinated debentures 6,392,000 7,102,000 Unrealized gain on AFS investments ‐ 75,000 Tier 2 capital 6,392,000 7,177,000 Total regulatory capital $ 38,236,000 $ 39,389,000
Ratios:Common Equity Tier 1 12.48% 11.97%Total Tier 1 20.64% 21.15%Total capital 24.79% 25.87%Assets to capital multiple 12.45 11.43
OSFI targets (a):Common Equity Tier 1 7.00% n/a Total Tier 1 8.50% 7.00%Total capital 10.50% 10.00%Assets to capital multiple 20 20
(a) New OSFI targets, including a new Common Equity Tier 1 target of 7%, were effective January 1, 2013.
The Company’s capital ratios have been in compliance with the regulatory requirements throughout the year.
Notes to Financial Statements – December 31, 2013
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Notes to Financial Statements – December 31, 2013
13. Related party transactions
Key management personnel
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the activities of the Company, and include members of the Board of Directors, the President and CEO, and other senior officers of the Company.
The President and CEO, and each of the 4 (2012 ‐ 5) other senior officers of the Company earned variable compensation during the year. The Company’s Total Compensation Program does not include guaranteed bonuses or deferred compensation payments. Variable compensation is earned during the year and paid in cash in the following year.
The components of total compensation received by key management personnel, and balances due to/from key management personnel are as follows:
2013 2012
Short‐term employee benefits $ 905,430 $ 1,206,963
Contributions to a group savings for retirement program 59,589 78,448
Variable compensation 161,170 230,022
Retirement allowance ‐ 154,000
Mortgage balances due from key management 275,615 106,675
Deposit balances due to key management 1,443,713 1,686,550
Short‐term employee benefits include salaries, director remuneration and other benefits. The mortgage and deposit transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.
Associates
During the normal course of operations the Company and the subsidiary, League Savings and Mortgage Company, transact business with League Data Limited, a related company by virtue of common ownership. These transactions are measured at the exchange amount and are as follows:
Notes to Financial Statements – December 31, 2013
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Notes to Financial Statements – December 31, 2013
2013 2012
Income and fees related to the management contract $ 60,000 $ 60,000 Rental and other income 111,148 107,167
Services and equipment purchases from League Data Limited 504,529 395,879
Deposits held by Central 6,494,322 6,194,305
Amount receivable from (payable to) League Data Limited (22,295) 94,291
14. Credit facilities
The Company has established an operating line of credit of $4,000,000 with the Bank of Nova Scotia, and an operating line of credit of $35,000,000 with Central 1. Each line of credit bears interest at the institution’s prime lending rate. As security, the Company has provided an assignment of marketable securities having a carrying value of $39,000,000. At December 31, 2013 and 2012 the amount outstanding on these facilities was nil.
The Company has also established an additional $100,000,000 disruption event credit facility with Central 1, secured by a general assignment of assets, bearing interest at the greater of Central 1’s cost of funds plus 0.75 basis points, or 1‐month CDOR plus 0.75 basis points. The facility provides liquidity and working capital in a disruption event that impacts the Company’s ability to function in the ordinary course of business to provide liquidity to its member credit unions.
League Savings has also established a line of credit with Central 1 secured by an assignment of insured residential mortgages, bearing interest at prime, up to an amount of $25,000,000. At December 31, 2013 and 2012 the amount outstanding on this facility was nil.
15. Deposits
2013 2012
Current accounts $ 39,466,523 $ 27,578,142
Cash management 159,392,497 206,475,749
Segregated liquidity 272,802,604 263,375,465
Registered 7,893,454 7,512,180
Other demand 7,325,785 6,839,482
Total demand deposits 486,880,863 511,781,018
Registered 175,516,142 169,428,570
Other term 278,346,829 278,827,856
Total term deposits 453,862,971 448,256,426
$ 940,743,834 $ 960,037,444
Notes to Financial Statements – December 31, 2013
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Notes to Financial Statements – December 31, 2013
16. Assets under administration
(a) Mortgages and mutual funds
Assets under administration include mortgages under administration, which are not the property of the Company and are not reflected in the balance sheet.
(b) Syndicated loans
The Company provides a loan syndication program for credit unions. These loans, which are under the Company’s administration, are not the property of the Company and are not reflected on the balance sheet. Although most of the loan syndications are purchased by credit unions, the Company can be a participant if a loan is not fully subscribed to by credit unions.
When the Company participates in the loan syndication, the amount is included in loans and mortgages on the balance sheet as “non‐residential”. Where a fully subscribed loan syndication has not been distributed to credit unions, the undistributed amount is also included in loans and mortgages as “non‐residential”.
Assets under administration at December 31 were as follows:
2013 2012
Assets under administration $ 86,825,485 $ 82,099,780
Syndicated loans 47,100,965 18,618,739
Included in non‐residential 409,357 472,704
17. Subordinated debentures
Subordinated debentures are issued by League Savings. Series B debentures are unsecured and subordinated to all other indebtedness of the Company. The minimum interest rate is equal to 1.5 times the dividend rate on the Preferred A shares. Series B debentures are convertible into Preferred A shares at the option of the holder and redeemable at the option of the Company after the fifth anniversary of the date of issue, subject to the approval of the Office of the Superintendent of Financial Institutions.
Notes to Financial Statements – December 31, 2013
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Notes to Financial Statements – December 31, 2013
Maturity Earliest Date Redemption 2013 2012
Series B December 31, 2024 December 31, 2009 $ 6,381,000 $ 6,390,000
During the year there were no subordinated debentures issued or redeemed. In 2013, $9,000 in subordinated debentures were purchased by Atlantic Central from a credit union. The subordinated debentures held by Atlantic Central are eliminated on consolidation.
18. Non‐interest income
Non‐interest income includes the following:
2013 2012
Banking services fees $ 5,524,041 $ 5,643,630
Banking services expenses (3,552,319) (3,736,066)
Lending services fees 1,476,300 1,723,569
Lending services expenses (1,021,955) (1,094,984)
Investment services fees 30,595 26,995
Investment services expenses (560,758) (530,977)
Member assessments 6,049,898 5,879,550
Management fees 60,000 60,000
Fee for service 836,446 927,134
Printing revenues 847,956 791,987
Printing expenses (469,007) (475,234)
Rentals 120,000 108,534
Other 316,030 169,688
$ 9,657,227 $ 9,493,826
The expenses detailed above include direct expenses only. Salary and staff related costs, and other indirect costs required to provide these services, are reported in operating expenses.
Notes to Financial Statements – December 31, 2013
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Notes to Financial Statements – December 31, 2013
19. Mortgage backed securities
Balances relating to mortgage backed securities under the NHA MBS program are as follows:
2013 2012
Carrying value of NHA MBS assets $ 22,410,339 $ 5,491,326
Carrying value of associated liabilities 22,379,569 5,460,960
20. Segmented information
Atlantic Central provides financial and trade services to credit unions, while the subsidiary, League Savings and Mortgage Company, provides lending and investment services. Results for the Company’s major segments are based on the Company’s internal financial reporting systems.
2013 Central LS&M Total
Net financial income $ 5,275,284 $ 10,721,985 $ 15,997,269
Non‐interest income (expense) 10,067,741 (410,514) 9,657,227
15,343,025 10,311,471 25,654,496
Operating expenses 9,898,284 7,334,238 17,232,522 Special Projects 223,379 65,297 288,676
Rebates /distributions 2,175,125 916,912 3,092,037
12,296,788 8,316,447 20,613,235
Income before taxes $ 3,046,237 $ 1,995,024 $ 5,041,261
2012
Net financial income $ 5,202,233 $ 12,755,474 $ 17,957,707
Non‐interest income (expense) 9,798,739 (304,913) 9,493,826
15,000,972 12,450,561 27,451,533
Operating expenses 10,029,095 7,597,201 17,626,296
Special Projects ‐ ‐ ‐
Rebates /distributions 2,867,960 2,235,510 5,103,470
12,897,055 9,832,711 22,729,766
Income before taxes $ 2,103,917 $ 2,617,850 $ 4,721,767
Notes to Financial Statements – December 31, 2013
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Notes to Financial Statements – December 31, 2013
21. Minority interest
The minority interest represents the Preferred A shares of League Savings and Mortgage Company.
22. Compensation
Compensation is a key factor in recruiting, retaining, motivating and rewarding a talented and committed workforce. Pay determination policies and guidelines emphasize continued development of knowledge, expansion of skills, performance and the ability to be flexible and adaptable to change.
The goals of our Total Compensation Program are to provide levels of compensation that are internally equitable, externally competitive, financially feasible, and that will enable the Company to attract, retain and reward highly qualified individuals. Total Compensation includes base pay, variable pay (which must be re‐earned each year) and employee benefits.
The Executive/HR Committee of the Board is responsible for:
Establishing an annual performance plan with specific objectives and monitoring and conducting annual performance evaluations of the President & CEO against these objectives.
Determining and recommending to the Board an appropriate total compensation package (including variable compensation) for the President & CEO.
Reviewing annually the terms and conditions of the variable compensation plan for employees and recommending adoption by the Board.
The Board has delegated to the President & CEO the responsibility for the implementation and administration of all management or executive policies, including the Total Compensation Program for employees. The variable compensation program is governed by the Performance Sharing Incentive Plan, which is based on the following principles:
The President & CEO will have the ultimate discretion to determine whether payment occurs and what the payment will be for the year based on the annual performance of the Company.
Company performance is evaluated based on financial, customer service, and balanced scorecard results.
The plan is self‐funded – if the Company does not achieve the designated level of financial performance there will be no payout under the plan.
Individual performance will determine participation in, and individual payments under the plan. Individual performance is measured against annual individual performance plans.
Compensation to members of the Board of Directors is limited to an annual honorarium. Directors do not participate in any variable compensation programs. Compensation paid to Directors and key management personnel are detailed in Note 13 – related party transactions.
Notes to Financial Statements – December 31, 2013
53
Corporate GovernanceCorporate GovernanceSound governance and ethical behaviour begins with our Board of Directors, which is accountable to our shareholder members and assumes responsibility for the stewardship of Atlantic Central (the “Central”). The Board of Directors is responsible for overseeing the management of the business and affairs of the Central and for providing effective leadership to the Central and the credit union system, with an objective of enhancing stakeholder value. Among its many specific duties, the Board of Directors approves strategic goals and business plans; sets policy to direct the overall operations of the Central; provides advice, counsel and oversight to the President and CEO; oversees the ethical, legal and social conduct of the Central; oversees the risk management of the Central; and reviews the Central’s ongoing financial performance. The Board of Directors ensures that appropriate structures and procedures are in place to ensure its independence from management.
Board CompositionThe Board of Directors of the Central consists of twelve Directors as follows:
(i) Two Directors elected at large by delegates representing the Central’s member credit unions within the New Brunswick Regional Group;
(ii) Two Directors elected at large by delegates representing the Central’s member credit unions within the Newfoundland and Labrador Regional Group;
(iii) Six Directors elected by delegates representing the Central’s member credit unions within the Nova Scotia Regional Group, as follows:
a. One Director elected by delegates representing the Central’s member credit unions within NS Peer Group 1 (credit unions with total assets under $30,000,000);
b. Two Directors elected by delegates representing the Central’s member credit unions within NS Peer Group 2 (credit unions
with total assets between $30,000,000 and $100,000,000); and
c. Three Directors elected by delegates representing the Central’s member credit unions within NS Peer Group 3 (credit unions with total assets over $100,000,000); and
(iv) Two Directors elected at large by delegates representing the Central’s member credit unions within the Prince Edward Island Regional Group.
The following individuals currently serve as the Board of Directors:
- Dave MacLean, Chair- Paul Newman, Vice-Chair- Pat Duffield, Second Vice-Chair- Doug Dewling- Jim Kavanaugh- Bernard Keefe- Michael MacIsaac- Ron Marman- Kurt Peacock- Willy Robinson- Louis Shea- Raymond Surette
The Board and each committee meets at least once each fiscal quarter and holds an annual strategic planning session. The Board meets at other times when matters requiring its approval or consideration are raised and it is not possible or prudent to wait for the next regularly scheduled meeting. The Board of Directors met eight times in 2013.
Committees of the BoardThe Board has established the following standing committees: Executive/Human Resources; Audit; Risk; Conduct Review; Governance; Co-operative Social Responsibility; and System Credit.
Executive/Human Resources Committee: Its six members include the Board Chair, Past Chair (one year only), Vice-Chair and Second Vice-Chair and two members at large elected by the Board as a whole, one of whom shall concurrently be a member of the Board of the Central’s subsidiary, League Savings and Mortgage Company (LSM), serving as an appointee of the Central. This Committee is responsible for addressing matters in between scheduled Board meetings that require immediate attention, and acts as a Human Resources Committee. In this capacity, the Committee makes recommendations to the Board on the President and CEO’s compensation and performance evaluation.
Committee Members: Dave MacLean (Chair), Paul Newman, Pat Duffield, Kurt Peacock, Louis Shea and Raymond Surette.
54
Audit, Risk and Conduct Review Committees: The Committees shall consist of at least three Directors, none of whom are employees or officers of the Central or LSM. The Audit Committee is responsible to ensure that management has designed and implemented an effective system of financial management and related internal controls. It reviews and reports on the audited financial statements and ensures compliance with certain regulatory and statutory requirements. It is also responsible to meet periodically with internal and external auditors. The Risk Committee is responsible for ensuring that management has developed and maintained an effective Enterprise Risk Management Framework for evaluating the business strategies being used for allocation of human, capital and other resources. The Conduct Review Committee is responsible to ensure that the Central has developed and adheres to ethical standards and sound business conduct in such areas as conflict of interest and related party procedures.
Committee Members: Doug Dewling (Chair), Jim Kavanaugh, Michael MacIsaac and Louis Shea.
Governance Committee: The Governance Committee is responsible for reviewing and recommending changes, as appropriate, to the governance structure of the Central and for ensuring that an effective governance system is in place, including a schedule for regular policy review and compliance. In addition, this Committee ensures Board decisions and positions are appropriately translated into documented policies. The Committee oversees the procedures for nominating and electing the Central Directors to ensure compliance with the Central’s By-laws and resolves any issues or questions related to this process. The Committee is responsible for overseeing the Director evaluation process, and for establishing and monitoring the orientation program for new Directors, as well as the monitoring of ongoing training and development of Board members.
Committee Members: Raymond Surette (Chair), Michael MacIsaac, Ron Marman and Willy Robinson.
Co-operative Social Responsibility Committee: The Committee is comprised of at least four Directors representing each Atlantic Province and is responsible for establishing and overseeing the terms of reference for
charitable giving, awards and recognition programs, and sustainability as set out and approved by the Board from time to time.
Committee Members: Pat Duffield (Chair), Doug Dewling, Bernard Keefe and Willy Robinson.
System Credit Committee: The Committee is comprised of no fewer than five Directors and is responsible for evaluating and approving or rejecting all loans above the lending limits for management; including syndicated loans.
Committee Members: Raymond Surette (Chair), Pat Duffield, Bernard Keefe, Paul Newman and Willy Robinson.
Mandate of the Board of DirectorsWhile the Board’s fundamental responsibility is to oversee the management of the business and affairs of the Central, any responsibility that is not specifically delegated to the President and CEO remains with the Board. In particular, the Board oversees the Central’s strategic direction to ensure it serves the organization, its member credit unions, employees and communities of New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The Board assumes overall stewardship with respect to the Central’s mission and values, its long-term objectives and the approval of corporate strategies. Specifically, the Board is responsible for the following:
• the selection, succession, evaluation, compensation and employment conditions of the President and CEO;
• establishing and approving Board policies;• overseeing the Central’s internal control framework;• developing and approving strategic goals and
business plans for the Central;• providing advice to the President and CEO;• evaluating the Board’s performance and overseeing
the ethical, legal and social conduct of the organization; and
• reviewing the financial performance and condition of the organization.
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Name Board and Planning Session
Audit, Risk & Conduct Review
Committees
Executive/HRCommittee
GovernanceCommittee
Co-operative Social Responsibility
Committee
*Dave MacLean 8/8 - 7/7 - -
*Paul Newman 8/8 - 7/7 - -
*Pat Duffield 7/8 - 6/7 - 2/4
Doug Dewling 8/8 6/6 - - 4/4
Jim Kavanaugh 8/8 6/6 - - -
Bernard Keefe 7/8 - - - 2/3
Michael MacIsaac 8/8 6/6 - 4/4 -
Ron Marman 7/7 - - 3/3 -
Kurt Peacock 7/8 - 6/7 - -
Willy Robinson 8/8 - - 4/4 4/4
Louis Shea 8/8 6/6 7/7 - -
Raymond Surette 8/8 - 5/5 4/4 -
* Table Officers
Attendance at Board and Committee MeetingsThe Board of Directors recognizes the importance of each individual Director’s participation at Board and committee meetings. Every Director is expected to attend all Board and committee meetings unless adequate cause is given for missing a meeting. The following table sets out the attendance of each Board member at Board and Committee meetings throughout 2013.
Board EvaluationsAs part of its commitment to ongoing development and improvement, the Board of Directors conducts an annual self-evaluation. This evaluates the Board’s effectiveness in the following governance areas: the Central’s Mission and Vision; strategic leadership; financial performance; internal controls and oversight, including financial oversight, risk oversight, and human resources oversight; co-operative social responsibility; compliance and accountability; stakeholder relations; Board functioning and Board and management relations; and learning and development. The results of the evaluation are used to guide the training and development agenda for the Board in the upcoming year.
Evolving Governance ProcessesAt the Central, we recognize that our governance standards must evolve to respond to changes in our organization, the credit union system, stakeholder expectations and regulatory requirements, and to ensure that the Central and its stakeholders receive the benefit of exceptional governance practices. The Board and management continually monitor developments in corporate governance practices and are committed to ongoing training and development to ensure that the Central continues to lead the credit union system with its governance practices.
Dave MacLean, Chair
Jim Kavanaugh
Kurt Peacock
Paul Newman, Vice-Chair
Bernard Keefe
Willy Robinson
Pat Duffield, 2nd Vice-Chair
Michael MacIsaac
Louis Shea
Doug Dewling
Ron Marman
Raymond Surette
Board of Directors
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Affiliate BoardsCanadian Co-operative Association (CCA)Atlantic Central (the “Central”) appoints three delegates to CCA. Delegates from shareholders/members in the Atlantic region elect two Directors. Raymond Surette from the Central is a Director on the CCA Board representing the Atlantic Provinces (term expires 2014).
League Savings and Mortgage Company (LSM)The Central is entitled to appoint six members to the Board of its subsidiary, LSM. Currently the Directors appointed by the Central to the Board of LSM are Ron Andrews, John Peach, Jim MacFarlane, Raymond Surette, Kevin MacAdam and Doug Dewling. The Directors serve at the pleasure of the Central.
Northwest & Ethical Investments Inc.(NEI)The Central owns one common voting share of NEI. Central is entitled to elect one Director to the Board. The current Director for the Atlantic Provinces is Bernie O’Neil (term expires 2015).
Concentra FinancialThe Atlantic Provinces fall under the “minority shareholders” category and are entitled to elect one Director to Concentra’s Board. The minority shareholders consist of the Central, Central 1, and La Federation des Caisses Populaires du Manitoba. This position is not currently filled by a nominee from the Central.
The Co-operatorsThe Central appoints two delegates, currently Michael MacIsaac and Kurt Peacock. The Atlantic regional delegates elect three Directors to The Co-operators’ Board to represent the Atlantic Region. The Central appointed Jim MacFarlane to serve in one of these positions (term expires 2014).
Credit Union Central of Canada (CUCC)Two positions on the CUCC Board are designated for the Central, representing the Atlantic Region. The current Directors are Dave MacLean from the Central (term expires 2015) and Paul MacNeill from Souris Credit Union (term expires 2016).
League Data LimitedThe President and CEO of the Central has a dedicated seat on the Board of League Data Limited.
Nova Scotia Co-operative CouncilA Director to the Nova Scotia Co-operative Council Board is appointed by the Board of the Central. Michael MacIsaac is the Central Director serving on the Nova Scotia Co-operative Council Board.
Prince Edward Island Co-operative CouncilThe Central has a designated seat on the Board of the Prince Edward Island Co-operative Council and the Director serves at the pleasure of the Central. The Central appointee is Jeanette Wakelin (term expires 2014).
Atlantic Central serving:New Brunswick
Newfoundland and LabradorNova Scotia
Prince Edward Island
www.atlanticcreditunions.ca
B u i l d i n g S u c c e s s To g e t h e rMomentum…
The singular word momentum implies a drive, an energy, a force to get things moving. And moving implies direction; going toward something. We’re moving toward change: consumer behaviour
is changing; our members’ needs are changing; technology is changing; the market place is changing and therefore so must we. Change doesn’t imply abandonment of the co-
operative principles that guided our predecessors and continue to guide us; that make us stand apart from other financial institutions. It implies we are evolving
to better serve our members. It means ensuring a healthy future where the Atlantic credit union system is thriving. Together we
will continue to build strong communities and dedicate ourselves to the people who live in them.
B u i l d i n g S u c c e s s To g e t h e rMomentum
Annual Report 2013