firstontario credit union limited · reliance on key management 27 geographic, ... the dividend...

This offering statement must be delivered to every purchaser of the securities described herein prior to the

purchaser becoming obligated to complete the purchase and, upon request, to any prospective purchasing

member.

No official of the Government of the Province of Ontario has considered the merits of the matters addressed in this offering statement. The securities being offered are not guaranteed by the Deposit Insurance Corporation of Ontario or any similar public agency. The prospective purchaser of these securities should carefully review the offering statement and any other documents it refers to, examine in particular the section on risk factors beginning on page 21 and, further, may wish to consult a financial or tax advisor about this investment.

FirstOntario Credit Union Limited

OFFERING STATEMENT

dated March 31, 2015

MINIMUM $20,000,000 -- MAXIMUM $70,000,000 CLASS B SPECIAL SHARES, SERIES 2015

(NON-CUMULATIVE, NON-VOTING, NON-PARTICIPATING, REDEEMABLE SPECIAL SHARES)

("Class B Investment Shares, Series 2015")

The subscription price for each Class B Investment Share, Series 2015 will be $1.00 per share, with a minimum of 1,000 shares per member which may be subscribed for $1,000.00, to a maximum of 250,000 shares per member which may be subscribed for $250,000.00. There is no market through which these securities may be sold. The purchaser of these securities may reverse his/her decision to purchase the securities if he/she provides notice in writing, or by facsimile, or by e-mail in combination with a telephone call, to the person from whom the purchaser purchases the security, within two days, excluding weekends and holidays, of having signed a subscription form. The Class B Investment Shares, Series 2015 are subject to the transfer and redemption restrictions under the Credit Unions and Caisses Populaires Act, 1994 and the restrictions under this offering statement as set out on pages 20 and 21.

THE SECURITIES OFFERED ARE NOT DEPOSITS. THE SECURITIES OFFERED ARE NOT INSURED. THE DIVIDENDS ON THE SECURITIES ARE NOT GUARANTEED.

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page a

TABLE OF CONTENTS OFFERING STATEMENT SUMMARY i FirstOntario Credit Union Limited (the “Credit Union”) i The Offering i Use of Proceeds ii Risk Factors ii Dividend Policy ii Summary Financial Information iv GLOSSARY OF TERMS vi DETAILED OFFERING STATEMENT 1 The Credit Union 1 BUSINESS OF THE CREDIT UNION 1 General Description of the Business 1 Personal Financial Services 1 Lending Services 2 Personal Loans 2 Residential Mortgages 3 Commercial Loans 3 Institutional Loans 4 Agricultural Loans 4 Unincorporated Association Loans 4 Syndicated Loans 4 Other Limits contained in the Credit Union’s Credit Risk Management Policy 4 Summary Lending Comments 4 Mission, Vision & Values 5 Bond of Association and Membership 5 Corporate Governance 6 Business Strategy 7 The Regulatory Framework 7 Central 1 Credit Union; Credit Union Central of Canada 8 Tier I and Tier II Regulatory Capital 9 Capital Adequacy 9 Additional Information 10 CAPITAL STRUCTURE OF THE CREDIT UNION 10 DESCRIPTION OF SECURITIES BEING OFFERED 17 Class B Investment Shares, Series 2015 17 Issue 17 Dividends 17 Canadian Federal Income Tax Considerations 17 RRSP, RRIF and TFSA-Eligible 18 Rights on Distributions of Capital 19 Voting Rights 19 Redemption Provisions and Restrictions 19 Restrictions on Transfer 20

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page b

Articles of Amalgamation; Articles of Amendment 20 RISK FACTORS 21 Transfer and Redemption Restrictions 21 Capital Adequacy 21 Payment of Dividends 22 Credit Risk 22 Market Risk 23 Liquidity Risk 23 Structural Risk 25 Operational Risk 26 Regulatory Action 27 Reliance on Key Management 27 Geographic, Economic and Competitive Risk 27 DIVIDEND RECORD AND POLICY 29 USE OF PROCEEDS FROM SALE OF SECURITIES 30 PLAN OF DISTRIBUTION 30 MARKET FOR THE SECURITIES 32 SENIOR DEBT (RANKING AHEAD OF CLASS B INVESTMENT SHARES, SERIES 2015) 32 AUDITORS, REGISTRAR AND TRANSFER AGENT 33 DIRECTORS AND SENIOR MANAGEMENT 33 Board of Directors 33 Senior Management 34 LAWSUITS AND OTHER MATERIAL OR REGULATORY ACTIONS 35 MATERIAL INTERESTS OF DIRECTORS, OFFICERS AND EMPLOYEES 35 MATERIAL CONTRACTS 35 MANAGEMENT DISCUSSION AND ANALYSIS 42 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION 58 AUDITOR’S CONSENT 59 STATEMENT OF OTHER MATERIAL FACTS 60 BOARD RESOLUTION 61 CERTIFICATE 62 Subscription Form 63 AUTHORIZATION TO PLACE FUNDS ON HOLD 64 AUTHORIZATION TO PLACE FUNDS IN ESCROW 65 SCHEDULE A – AUDITED FINANCIAL STATEMENTS 66 SCHEDULE B – CONDENSED INTERIM REVIEW FINANCIAL STATEMENTS 127

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page i

OFFERING STATEMENT SUMMARY

The following is a summary only and is qualified in its entirety by the more detailed information appearing elsewhere in this

offering statement. A “Glossary of Terms” can be found at the end of this summary, prior to the detailed offering statement.

FirstOntario Credit Union Limited (the “Credit Union”)

The Credit Union was formed by the amalgamation, on August 31, 1999, of Avestel Credit Union Limited and Family Savings and Credit Union (Niagara) Limited. Avestel Credit Union Limited was itself created by amalgamation on December 1, 1996, amalgamating the former Avestel Credit Union Limited (which had been incorporated in 1940 as the Stelco Employees Credit Union (Hamilton Works) Ltd.) and CUNA of Ontario Credit Union Limited. Family Savings and Credit Union (Niagara) Limited was incorporated on October 20, 1949 as St. Catharines Auto Workers’ Credit Union Limited, and initially served the employees of General Motors. The Credit Union’s head office is located at 970 South Service Road, Suite 301, Stoney Creek ON L8E 6A2. The Credit Union serves approximately 101,000 members through 29 branches and 3 commercial services locations located in the Golden Horseshoe and Southwestern Ontario, through its ATMs and Personal Assisted Tellers (“PATs”), and through its Internet, mobile and telephone banking platforms. The Credit Union provides a full range of retail and commercial credit and non-credit financial services and products. The Credit Union is open to mergers and acquisitions with small to medium sized credit unions, but is not actively considering any potential transactions as of the date hereof. The Credit Union has recently commenced a process that will result in its conversion to a new banking system in the fall of 2016. The Credit Union seeks to increase significantly the proportion of its revenue that does not consist of financial margin or service charges. This non-traditional income may come from various joint ventures, from the expansion of its wealth management operations, from the sale of its excess loan securitization limit to other financial institutions, the possible provision of hosted core banking services, from investing in income and equity type investments and from other sources. See also “Business of the Credit Union”, on pages 1 to 10.

The Offering The Credit Union offers for sale to its members, at $1.00 per share, Class B Non-Cumulative, Non-Voting, Non-Participating, Redeemable Special Shares, Series 2015 (“Class B Investment Shares, Series 2015”), in the capital of the Credit Union. Class B Investment Shares, Series 2015, are special, non-membership shares and constitute part of the authorized capital of the Credit Union. Subscriptions will be accepted from members of the Credit Union for a minimum of 1,000 Class B Investment Shares, Series 2015, and a maximum of 250,000 Class B Investment Shares, Series 2015. Class B Investment Shares, Series 2015, are not redeemable for five years following their issuance, except when the shareholder dies or is expelled from membership in the Credit Union. All redemptions are also subject to a limit (of 10% of the number of the Class B Investment Shares, Series 2015, issued and outstanding at the end of the prior fiscal year) on the maximum number of shares that can be redeemed in any fiscal year. Transfer of such shares will only be affected through the Credit Union, and transfers are generally restricted to other members of the Credit

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page ii

Union. The Credit Union, at its option, may acquire the Class B Investment Shares, Series 2015, at the Redemption Amount, for cancellation after a period of five years following the issuance of the shares. See “Description of Securities Being Offered” on pages 17 to 20. Subscriptions for the Class B Investment Shares, Series 2015, shall be accepted as of the date of this offering statement, and for a period of six months thereafter, or until the date on which subscriptions have been received for the maximum 70,000,000 Class B Investment Shares, Series 2015, or until the date on which the Board of Directors (the “Board”), having received subscriptions for at least the minimum 20,000,000 Class B Investment Shares, Series 2015, but not for the maximum 70,000,000 Class B Investment Shares, Series 2015, and noting that six months has not yet passed since the date of this offering statement, resolves to close the offering, whichever shall occur first (the “Closing Date”). The shares so subscribed shall be issued within sixty days after the Closing Date (the “Issue Date”).

The securities to be issued under this offering statement are not secured by any assets of the Credit Union, and are not covered by deposit insurance or any other form of guarantee as to repayment of the principal amount or dividends. The Class B Investment Shares, Series 2015, will qualify as Regulatory Capital, to the extent permitted and as defined in the Act.

Use of Proceeds If fully subscribed, the gross proceeds of this issue will be $70,000,000. The costs of issuing these securities are not expected to exceed $500,000, and these costs will be deducted from the gross proceeds in arriving at the amount to be reported as share capital outstanding. The estimated maximum net proceeds of this offering are $69,500,000. The principal use of the net proceeds, and the purpose of this offering, is to add to the Credit Union’s Regulatory Capital in order to provide for the future growth, development and stability of the Credit Union, while maintaining a prudent cushion in the amount of Regulatory Capital above regulatory requirements. Based on the total assets and regulatory capital at December 31, 2014, the Credit Union's Leverage Ratio would increase to 5.99% if this offering is minimally subscribed and to 7.85% if fully subscribed. Based upon the Credit Union's statement of financial position at December 31, 2014, this offering would support additional growth of $1.3 billion if minimally subscribed, and $2.6 billion if fully subscribed, without contravening the regulatory minimum requirement of 4%.

Risk Factors Investments in the Class B Investment Shares, Series 2015, are subject to a number of risks, including regulatory redemption restrictions, the continuous need to maintain minimum Regulatory Capital levels, the uncertainty of payment of dividends, credit risk, market risk, liquidity risk, structural risk, operational risk, potential regulatory actions, reliance on key management, geographic risk, economic risk, and competitive risk. See “Risk Factors” on pages 21 to 28.

Dividend Policy The dividend policy of the Credit Union’s Board, as it relates to Class B Investment Shares, Series 2015, shall be to pay a dividend or dividends in every year in which there are sufficient profits to do so while still fulfilling all other Regulatory Capital, liquidity, and operational requirements. The dividend rate shall be established by the Board, in its sole and absolute discretion, based on financial and other considerations prevailing at the time of the declarations, and, in particular, on the Credit Union’s earnings. The Board

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page iii

shall consider whether or not a dividend shall be declared, the rate of that dividend and the manner in which it is paid, including whether in the form of additional Class B Investment Shares, Series 2015, in cash, or partly in shares and partly in cash. The Board shall consider this at least annually, and any declared dividend will be paid following each fiscal year end and before each annual general meeting of members. There can be no guarantee that a dividend will be paid in each year. The Board has defined an appropriate rate to be the greater of 4.05% or a rate which exceeds by 125 Basis Points the simple average of the yields on the monthly series of the Government of Canada five-year bonds (CANSIM Identifier VI22540) as published by the Bank of Canada on its website, www.bank-banque-canada.ca during the Credit Union’s fiscal year, for fiscal years ending on or before August 31, 2020. For fiscal years ending after that date, the Board has defined an appropriate rate to be a rate equal to or greater than the rate which exceeds by 125 Basis Points the simple average of the yields on the monthly series of the Government of Canada five-year bonds (CANSIM Identifier VI22540) as published by the Bank of Canada on its website, www.bank-banque-canada.ca during the Credit Union’s fiscal year. The Credit Union will pro-rate the dividend in the year the shares are issued. This dividend policy is subject to change or exception at any time, at the Board’s discretion. Dividends paid on Class B Investment Shares, Series 2015, will be deemed to be interest and not dividends, and are therefore not eligible for the tax treatment given to dividends from taxable Canadian corporations, commonly referred to as the “dividend tax credit”.

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page iv

Summary Financial Information This summary financial information should be read in conjunction with the more detailed audited financial statements attached hereto as Schedule A and condensed interim review financial statements attached hereto as Schedule B, including the notes to those financial statements, and Management’s Discussion and Analysis beginning at page 42.

SUMMARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at As at As at As at

December 31, 2014 August 31, 2014 August 31, 2013 August 31, 2012

ASSETS

Loans receivable from Members 2,434,025$ 2,289,017$ 1,882,284$ 1,620,961$

Cash and cash equivalents 28,958 35,878 23,276 27,105

Investments 188,690 182,403 150,871 135,845

Fixed assets 23,081 22,483 17,480 16,379

Derivative financial instruments 1,451 1,673 1,342 1,140

Other assets 3,772 1,524 3,174 4,203

Total Assets 2,679,977$ 2,532,978$ 2,078,427$ 1,805,633$

LIABILITIES

Members' deposits and shares 1,877,221$ 1,857,874$ 1,512,362$ 1,316,474$

Loans payable 672,089 540,232 441,815 375,824

Other liabilities 14,299 20,241 19,259 17,282

Derivative financial instruments 2,469 3,179 1,770 2,711

Total Liabilities 2,566,078 2,421,526 1,975,206 1,712,291

MEMBERS' EQUITY

Investment shares 40,312 38,373 36,440 34,657

Retained earnings and contributed surplus 77,165 77,096 68,026 62,195

Accumulated other comprehensive loss (3,578) (4,017) (1,245) (3,510)

Total members' equity 113,899 111,452 103,221 93,342

Total liabilities and members' equity 2,679,977$ 2,532,978$ 2,078,427$ 1,805,633$

(thousands of dollars)

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page v

SUMMARY CONSOLDATED STATEMENTS OF INCOME

Four Months Fiscal Year Fiscal Year Fiscal Year

Ended Ended Ended Ended


Interest and investment income 32,853$ 91,565$ 78,743$ 73,228$

Interest expense 15,937 42,031 35,303 32,320

Operating margin before the following 16,916 49,534 43,440 40,908

Provision for impaired loans (780) (1,998) 585 (4,268)

Other income 4,081 9,708 8,603 7,770

Gain on sale of joint venture - - - 10,334

Operating margin 20,217 57,244 52,628 54,744

Operating expenses 17,810 50,215 44,033 41,331

Operating income 2,407 7,029 8,595 13,413

Unrealized gains (losses) (220) 725 (111) 1,136

Income before income taxes 2,187 7,754 8,484 14,549

Income taxes 390 1,252 1,054 1,639

Net income for the period/year 1,797$ 6,502$ 7,430$ 12,910$

(thousands of dollars)

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page vi

GLOSSARY OF TERMS

"Act" - the Credit Unions and Caisses Populaires Act, 1994, as now enacted or as the same may from time to time be amended, re-enacted or replaced.

"Agricultural Loan" - a loan to finance the production of cultivated or uncultivated field-grown crops; the production of horticultural crops, the raising of livestock, fish, poultry and fur-bearing animals; or the production of eggs, milk, honey, maple syrup, tobacco, wood from woodlots, and fibre and fodder crops.

"Administration" - a legal status ordered by the Deposit Insurance Corporation of Ontario ("DICO") in any of the following circumstances: (1) DICO, on reasonable grounds, believes that a credit union is conducting its affairs in a way that might be expected to harm the interests of members, depositors or shareholders or that tends to increase the risk of claims against the deposit insurer, but that Supervision by DICO as stabilization authority would, in this case, not be appropriate; (2) A credit union has failed to comply with an order of DICO made while the Credit Union was subject to Supervision; (3) DICO is of the opinion that the assets of a credit union are not sufficient to give adequate protection to its depositors; (4) A credit union has failed to pay any liability that is due or, in the opinion of DICO, will not be able to pay its liabilities as they become due; (5) after a general meeting and any adjournment of no more than two weeks, the members of a credit union have failed to elect the minimum number of directors required under the Act (currently five); (6) if a vacancy occurs in the board of a credit union resulting in there not being a quorum of directors in office, and a general meeting is not called promptly to reconstitute the board; or (7) DICO has received a report from the Superintendent of Financial Services that the Superintendent has ordered a credit union to cease operations; under which DICO has the power to: (a) Carry on, manage and conduct the operations of that credit union; (b) Preserve, maintain, realize, dispose of and add to the property of that credit union; (c) Receive the income and revenues of that credit union; (d) Exercise the powers of that credit union and of its directors, officers, and committees; (e) Exclude the directors of that credit union and its officers, committee members, employees and agents from its property and business; and (f) Require that credit union, with or without obtaining member and shareholder consent, to, (i) amalgamate with another credit union, (ii) dispose of its assets and liabilities, or (iii) be wound up.

"Basis Point" - one-hundredth of one percent (0.01%). "Bridge Loan" - a loan to an individual made under the following circumstances:

1. The loan is for the purchase of residential property in which the purchaser will reside. The property must consist of four units or less.

2. The term of the loan is not greater than 120 days. 3. The funds from the sale of another residential property owned by the individual will be used

to repay the loan. 4. The credit union must receive a copy of the executed purchase and sale agreement for both

properties before the loan is made. 5. The conditions of each of the purchase and sale agreements must be satisfied before the loan is

made. 6. The loan is fully secured by a mortgage on the residential property being sold or, before the

loan is made, the borrower's solicitor has given the credit union an irrevocable letter of direction from the borrower stating that the funds from the sale of the residential property being sold will be remitted to the credit union.

"Class 1 Credit Union" - a credit union which is not a Class 2 credit union.

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page vii

"Class 2 Credit Union" - a credit union which, at any time after January 31, 2007, has total assets equal to or exceeding $50,000,000, or has made (or is deemed to have made) a Commercial Loan. A credit union may also apply to the Superintendent to be classified as a Class 2 Credit Union, and the Superintendent can make that classification.

"Commercial Loan" - a loan, other than any of the following types of loans, made for any purpose: an Agricultural Loan; a Bridge Loan; an Institutional Loan; a Personal Loan; a Mortgage Loan; an Unincorporated Association Loan; a loan that consists of deposits made by the credit union with a financial institution, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada; a loan fully secured by a deposit with a financial institution (including the credit union making the loan), Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada; a loan fully secured by debt obligations guaranteed by a financial institution other than the credit union making the loan, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada; a loan that is fully secured by a guarantee of a financial institution other than the credit union making the loan, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada; an investment in a debt obligation that is fully guaranteed by a financial institution other than the credit union making the loan, fully secured by deposits with a financial institution (including the credit union making the loan), or fully secured by debt obligations that are fully guaranteed by a financial institution other than the credit union making the loan; an investment in a debt obligation issued by the federal government, a provincial or territorial government, a municipality, or any agency of such a government or municipality; an investment in a debt obligation guaranteed by, or fully secured by securities issued by, the federal government, a provincial or territorial government, a municipality, or by an agency of such a government or municipality; an investment in a debt obligation issued by a league, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, or La Caisse centrale Desjardins du Québec; an investment in a debt obligation that is widely-distributed; an investment in shares or ownership interests that are widely-distributed; an investment in a participating share; or an investment in shares of a league, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, or La Caisse centrale Desjardins du Québec. A Commercial Loan includes the supply of funds for use in automated bank machines not owned and operated by the credit union supplying the funds.

"Escrow" - a form of trust agreement in which funds are temporarily placed under the control of a third party (trustee) until specific conditions, set out in advance, are met.

"Institutional Loan" - a loan given to the federal government or a federal government agency, a provincial or territorial government or an agency of one, a municipality or an agency of one, a school board or college funded primarily by the federal or a provincial or territorial government, or an entity primarily funded by the federal government, a provincial or territorial government, or a municipality.

"Leverage Ratio" - total Regulatory Capital divided by total assets. "Membership Shares" - shares required, according to a credit union's by-laws, to maintain a membership in the

credit union. “Mortgage Loan" - loan that is secured by a mortgage on an individual condominium unit or a building with

one to four units where at least one half of the floor area of the building is utilized as one or more private residential dwellings, occupied by the borrower, and to which any of the following apply:

1. The amount of the loan, together with the amount then outstanding of any mortgage having

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page viii

an equal or prior claim against the mortgaged property, does not exceed 80% of the value of the property when the loan is made.

2. The loan is insured under the National Housing Act (Canada), or guaranteed or insured by a government agency.

3. The loan is insured by an insurer licensed to undertake mortgage insurance. "Non-Cumulative" - dividends not declared or paid for one fiscal year are not carried forward or added to the

dividend of a following year but are forever extinguished. "Non-Participating" - in case of dissolution, shareholders receive only the Redemption Amount (see below)

and do not participate in receiving any of the residual value of the credit union's assets. "Non-Voting" - holders vote only at special meetings as required by the Act. "Personal Loan" - loan given to an individual for personal, family or household use; or to an individual or entity

for any other use if the loan, and all other loans outstanding to that individual or entity, does not exceed $25,000.

"Redemption Amount" - the amount a shareholder receives on redemption or at which shares are transferred from one member to another; this amount is equal to the issue price of the shares ($1 per share) plus any dividends which have been declared but not yet paid.

"Regulatory Capital" – the sum of Membership Shares; Class A Patronage Shares, Series 1; Class B Investment Shares, Series 1, Series 2, Series 2010, Series 2013, and Series 2015; contributed surplus; retained earnings; accumulated other comprehensive income; and the collective provision for impaired loans.

"Risk-Weighted Assets" – the absolute value of assets in specified categories is multiplied by a percentage, varying between 0% and 150% depending on the risk attributed to each category. The sum of all the categories is the Credit Union’s Risk-Weighted Assets.

"Risk-Weighted Assets Ratio" – total Regulatory Capital divided by Risk-Weighted Assets. "Schedule I Banks" - Schedule I banks are domestic banks and are authorized under the Bank Act to accept

deposits, which may be eligible for deposit insurance provided by the Canada Deposit Insurance Corporation.

"Schedule II Banks" - Schedule II banks are foreign bank subsidiaries authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canada Deposit and Insurance Corporation. Foreign bank subsidiaries are controlled by eligible foreign institutions.

"Special Resolution" - a resolution passed by two-thirds or more of the votes cast by or on behalf of the persons who voted in respect of that resolution.

"Substantial Portion" - assets having an aggregate value equal to or greater than 15 per cent of a credit union's assets at the end of its previous fiscal year.

"Supervision" - a legal status ordered by DICO when: (1) A credit union asks, in writing, that it be subject to supervision; (2) A credit union is not in compliance with prescribed Regulatory Capital or liquidity requirements; (3) DICO has reasonable grounds for believing that a credit union is conducting its affairs in a way that might be expected to harm the interests of members or depositors or that tends to increase the risk of claims against DICO; (4) A credit union or an officer or director of it does not file, submit or deliver a report or document required to be filed, submitted or delivered under this Act within the time limits outlined under this Act; (5) A credit union did not comply with an order of the Superintendent and the Superintendent has requested, in writing, that the credit union be subject to supervision; or (6) A credit union has failed to comply with an order of DICO; under which DICO, acting as stabilization authority, can: (a) order that credit union to correct any practices that the authority feels are contributing to the problem or situation that caused it to be ordered subject to DICO's supervision; (b) order that credit union and its directors, committee members, officers and employees not

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page ix

to exercise any powers of that credit union or of its directors, committee members, officers and employees; (c) establish guidelines for the operation of that credit union; (d) order that credit union not to declare or pay a dividend or to restrict the amount of a dividend to be paid to a rate or amount set by DICO; (e) attend meetings of that credit union's board and its credit and audit committees; and (f) propose bylaws for that credit union and amendments to its articles of incorporation.

"Syndicated Loans" – loan, including any related credit facilities made under a syndicated loan agreement by a credit union, a league, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada acting as the syndicating credit union where:

1. The parties to the syndicated loan agreement are the borrower, the syndicating credit union and one or more of the following:

i. Another credit union or its subsidiary or affiliate. ii. A league, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada. iii. A financial institution other than a securities dealer.

2. Each of the parties to the syndicated loan agreement, other than the borrower, agrees to contribute a specified portion of the loan and to be bound by the terms and conditions of the syndicated loan agreement. 3. The syndicating credit union contributes at least 10 per cent of the loans, including any related credit facilities, and underwrites, disburses and administers them on behalf of the parties to the syndicated loan agreement.

"Unincorporated Association Loan" - loan to an unincorporated association or organization that is not a partnership registered under the Business Names Act, and that is operated on a non-profit basis for educational, benevolent, fraternal, charitable, religious or recreational purposes.

FirstOntario Credit Union Limited Offering Statement, Class B Investment Shares, Series 2015 Page 1

DETAILED OFFERING STATEMENT

The Credit Union FirstOntario Credit Union Limited (the “Credit Union”) was formed by the amalgamation, on August 31, 1999, of Avestel Credit Union Limited and Family Savings and Credit Union (Niagara) Limited. Avestel Credit Union Limited was itself created by amalgamation on December 1, 1996, amalgamating the former Avestel Credit Union Limited (which had been incorporated in 1940 as the Stelco Employees Credit Union (Hamilton Works) Ltd.) and CUNA of Ontario Credit Union Limited. Family Savings and Credit Union (Niagara) Limited was incorporated on October 20, 1949 as St. Catharines Auto Workers’ Credit Union Limited, and initially served the employees of General Motors. The Credit Union’s head office is located at 970 South Service Road, Suite 301, Stoney Creek ON L8E 6A2. The Credit Union serves approximately 101,000 members through 29 branches and 3 commercial services locations located in the Golden Horseshoe and Southwestern Ontario, through its ATMs and Personal Assisted Tellers (“PATs”), and through its Internet, mobile and telephone banking platforms. The Credit Union provides a full range of retail and commercial credit and non-credit financial services and products. The Credit Union is open to mergers and acquisitions with small to medium sized credit unions, but is not actively considering any potential transactions as of the date hereof. The Credit Union has recently commenced a process that will result in its conversion to a new banking system in the fall of 2016. The Credit Union seeks to increase significantly the proportion of its revenue that does not consist of financial margin or service charges. This non-traditional income may come from various joint ventures, from the expansion of its wealth management operations, from the sale of its excess loan securitization limit to other financial institutions, the possible provision of hosted core banking services, from investing in income and equity type investments and from other sources. See also “Business of the Credit Union”, on pages 1 to 10.

BUSINESS OF THE CREDIT UNION General Description of the Business An overview of the products and services offered by the Credit Union follows: Personal Financial Services The Credit Union provides a broad range of personal financial products and services to its members. Retail financial products for individuals include Canadian-dollar savings and chequing accounts (including a high-interest savings account), U.S.-dollar chequing accounts, and an extensive variety of Canadian-dollar term deposit products in both short terms of 30 to 364 days (which are also available in US dollars) and longer terms of one to five years. The Credit Union also offers a variety of business


accounts to serve the needs of its small business members. Registered investment options include registered retirement savings plans (“RRSPs”) and their locked-in equivalent, registered retirement income funds (“RRIFs”) and their locked-in equivalent, tax-free savings accounts (“TFSAs”), and registered education savings plans (“RESPs”). Investment services also include mutual funds, full brokerage services, and on-line securities trading offered through arrangements with Credential Asset Management Inc. and Credential Securities Inc. outlined at page 40. As at December 31, 2014, members of the Credit Union had $234,616,000 administered by the Credit Union, primarily in mutual funds, stocks and bonds. All registered plans are trusteed by Concentra Trust (“Concentra Trust”). The Credit Union owns and operates 41 Automated Banking Machines (“ABMs”) located primarily at its branches. The Credit Union is also linked to the Interac, Cirrus System and Plus networks and is a member of The Exchange® Network, giving members access to their accounts at point of sale terminals and ABMs well beyond its own branch network and throughout Ontario, Canada, and internationally. The Credit Union also owns and operates 16 Personal Assisted Tellers (“PATs”), located at 14 of its branch locations and its corporate office. The Credit Union has arrangements with two deposit brokers to assist it in its efforts to attract members’ deposits. The Credit Union’s structural risk management policy limits these deposits in the aggregate to 15% of the Credit Union’s total assets (approximately $402 million). The Credit Union offers a MasterCard credit card through an arrangement with a third party. The Credit Union does not hold the accounts receivable owing from its credit card holders. Lending Services The Credit Union, as a Class 2 Credit Union, is permitted to offer Personal Loans, Mortgage Loans, Bridge Loans, Commercial Loans, Agricultural Loans, Institutional Loans, Syndicated Loans and Unincorporated Association Loans, up to limits defined in its lending policies, which are required by regulation to meet a “prudent person” standard. The Credit Union is also subject to a limit on loans to any one person and their “connected persons”, as that phrase is defined in a regulation passed pursuant to the Act, of 25% of its Regulatory Capital (approximately $35 million). The Board has approved, and management follows, its lending policies in all areas to minimize the risk of loan losses. A variety of loan-related group insurance products are also available to members for personal loans and mortgages. Personal Loans Personal Loans consist of instalment loans, demand loans, and lines of credit. According to the Credit Union’s credit risk management and structural risk management policies, aggregate Personal Loans are not to exceed 30% of the Credit Union’s total assets (currently approximately $804 million), any single secured Personal Loan is generally limited to $1,000,000, and any single unsecured Personal Loan is generally limited to $300,000, and no more than 90% of such loans can be unsecured or undersecured. As at December 31, 2014, the Credit Union’s Personal Loan portfolio totalled $134,321,000. Included in the Credit Union’s Personal Loan portfolio are vehicle loans granted by what it refers to as its “dealer finance centre”. The Credit Union has arrangements with approximately 120 vehicle dealers


whereby the vehicle dealer completes and submits the required loan and personal identification documents to the Credit Union which then approves and funds the loan. Since these Personal Loans tend to be riskier than general, the Credit Union’s credit risk management policy limits these loans in the aggregate to 20% of the Credit Union’s portfolio of Personal Loans and Mortgage Loans, and no more than 70% of these loans can be unsecured or under-secured. As of December 31, 2014, the Credit Union has approximately $59,205,000 outstanding in such Personal Loans. The Credit Union also operates a successful “micro loan” program, to assist members of disadvantaged groups in setting up small businesses. Individual micro loans are limited to $2,500. Residential Mortgages The Credit Union offers Mortgage Loans and Bridge Loans to its members through its branch network and independent mortgage brokers. It grants Mortgage Loans to individuals according to conventional mortgage lending standards for residential property. As of December 31, 2014, approximately 82% of the Credit Union’s portfolio of Mortgage Loans consists of conventional mortgages; the remainder are high-ratio mortgages insured either by the Canada Mortgage and Housing Corporation or by Genworth Financial Mortgage Insurance Company Canada, the insurance regarding $248,182,000 of which was purchased in bulk. According to the Credit Union’s credit risk management and structural risk management policy, individual Mortgage Loans are generally limited to 0.25% of Regulatory Capital and deposits (approximately $4.9 million), and individual Bridge Loans are generally limited to $500,000, and aggregate Mortgage Loans are limited to 80% of total assets (approximately $2 billion). As at December 31, 2014, the Credit Union’s portfolio of Mortgage Loans and Bridge Loans totalled $1,605,149,000. In addition, the Credit Union’s members had $531,588,000 then outstanding in Mortgage Loans which had been securitized by the Credit Union through the securitization program discussed at page 25. The Credit Union has recently launched a Mortgage Loan program for those who cannot meet all of the covenants of a conventional residential mortgage, such as self-employment income or non-traditional income sources. The Credit Union believes any risks associated with these Mortgage Loans are mitigated through pricing and various compensating adjudication standards, such as requiring lower loan to value ratios and higher levels of property appraisals. Commercial Loans Commercial Loans consist of mortgages, term loans and operating lines of credit to small and medium-sized businesses, and mortgages that do not meet the definition of a Mortgage Loan because the property is non-owner-occupied, multi-unit residential or non-residential property. According to the Credit Union’s credit risk management and structural risk management policy, individual Commercial Loans are limited to 20% of the Credit Union’s Regulatory Capital (approximately $28 million), and aggregate Commercial Loans are limited to 38% of the Credit Union’s total assets according to the structural risk management policy (approximately $1 billion), and to the lesser of 35% of total assets and 40% of Regulatory Capital and members’ deposits (approximately $795 million) according to the Credit Union’s credit risk management policy. The Credit Union also has 6 categories of credit risk posed to it by commercial borrowers, and limits the percentage of Commercial Loans that can be made to borrowers in the four riskier categories. The Credit Union’s credit risk management policy imposes formal limits on the portion of the Commercial Loan portfolio that can come from specified industry classifications and sub-classifications, and from particular geographic areas. As at December 31, 2014,


the Credit Union’s Commercial Loan portfolio totalled $688,644,000. In addition, the Credit Union’s members had $109,828,000 then outstanding in Commercial Loans which had been securitized by the Credit Union through the securitization program discussed at page 25. Institutional Loans Institutional Loans are loans to the federal or a provincial, territorial or municipal government or governmental agency, a school board or college funded primarily by the federal or a provincial or territorial government, or an entity funded primarily by the federal or a provincial or municipal government. The Credit Union’s credit risk management policy limits aggregate Institutional Loans to the lesser of 35% of total assets and 40% of Regulatory Capital and members’ deposits. As at December 31, 2014, the Credit Union had no Institutional Loans outstanding. Agricultural Loans Agricultural Loans consist of mortgages, term loans and operating lines of credit to all types of agricultural businesses. The Credit Union’s structural risk management policy limits aggregate Agricultural Loans to 38% of the Credit Union’s total assets, and the Credit Union’s credit risk management policy limits individual Agricultural Loans to 20% of Regulatory Capital, and limits aggregate Agricultural Loans to the lesser of 35% of total assets and 40% of Regulatory Capital and Deposits. As at December 31, 2014, the Credit Union’s Agricultural Loan portfolio totalled $3,803,000. Unincorporated Association Loans Unincorporated Association Loans consist of any loan made to an unincorporated association or organization that is not a partnership, and that is operated on a non-profit basis for educational, benevolent, fraternal, charitable, religious or recreational purposes. The Credit Union’s credit risk management policy limits individual Unincorporated Association Loans to 15% of Regulatory Capital (approximately $21 million), and limits aggregate Unincorporated Association Loans to 10% of its Commercial Loan portfolio. As at December 31, 2014, the Credit Union’s Unincorporated Association Loan portfolio totalled $5,531,000. Syndicated Loans Syndicated Loans are loans made by a syndicating credit union and other financial institutions pursuant to a syndicated loan agreement, enabling several lenders to cooperate in making a larger loan than any one of them would have been able or willing to offer to the borrower individually. The Credit Union’s credit risk management policy limits individual Syndicated Loans to 20% of Regulatory Capital, and limits aggregate Syndicated Loans to the lesser of 35% of total assets and 40% of Regulatory Capital and members’ deposits. As at December 31, 2014, the Credit Union’s Syndicated Loan portfolio totalled $79,240,000. All of these loans are included in the Credit Union’s Commercial Loan portfolio. Other Limits Contained in the Credit Union’s Credit Risk Management Policy The Credit Union’s credit risk management policy also contains limits on the percentage particular products can be of the Credit Union’s portfolio of Personal Loans and Mortgage Loans. Summary Lending Comments For further information regarding any of these loan portfolios, see the “Loan Composition” heading in the table presented in the “Management Discussion and Analysis” section, on page 57, note 5 in the


Credit Union’s audited financial statements, on pages 87 and 88 of Schedule A hereto, and note 4 in the condensed interim review financial statements, on pages 133 and 134 of Schedule B hereto. Mission, Vision and Values The Credit Union’s mission is to be a co-operative financial institution that truly cares about improving the lives of its members and of the communities in which it operates. The Credit Union’s vision is to be first in the communities it serves by being more than a financial institution. Its values are to:

• do the right things for all of the right reasons.

• treat everyone with respect.

• use the Credit Union’s profits for a higher purpose.

• be a hands-on contributor to the communities it serves.

• commit to professional development.

• be an innovative leader in the co-operative system.

• provide the best member experience, more than everyone else, at every level, every day. Bond of Association and Membership The Act requires that a bond of association exist among members of a credit union. Typically, such bonds of association may be community-based, employer-based, or otherwise based on a group of members with a form of common association. The Credit Union’s bond of association is as fully described in section 2.01 of its by-laws, which permits any person who, if an individual, whether a minor or an adult, resides or is employed in Ontario to be a member of the Credit Union. The Credit Union’s by-laws also permit those not otherwise qualifying for membership under its bond of association to become members, but only if the aggregate number of such members does not exceed 3% of the membership of the Credit Union. Certain entities (i.e., corporations, partnerships, and government ministries and agencies) may also become members. Once one becomes a member of the Credit Union, one can remain a member of the Credit Union, even if one no longer qualifies for membership in the Credit Union. Membership in the Credit Union is granted to applicants who are within the bond of association by enabling them to purchase and hold the required number of Membership Shares as specified in paragraphs 2.03 of the by-laws of the Credit Union. All members of the Credit Union are required eventually to hold thirty (30) five-dollar ($5.00) membership shares of the Credit Union. Purchases of membership shares in excess of the first five shares are typically funded through an annual membership dividend of $5.00, which, until the member owns the minimum required number of membership shares, is, once paid, debited from the member’s account to purchase the additional membership share the member is required to purchase that year. The Credit Union’s by-laws also permit members of the Credit Union to hold, if those members choose to do so, up to two hundred (200) additional Membership Shares in the Credit Union.


Corporate Governance The business of the Credit Union is directed and governed by its Board, a group of 12 qualified individuals who are elected by the members who are in full compliance with the minimum Membership Share requirement outlined above, and who, if they are individuals, are over the age of 14 years, prior to the annual general meeting of the Credit Union pursuant to a procedure outlined in the Credit Union’s by-laws as of the date on which ballots for the director election are forwarded to the Credit Union’s members. Each director is elected for a three-year term on a staggered basis to provide for continuity of Board members. No class or series of shares, other than Membership Shares, carries the right to elect the Credit Union’s Board. The Credit Union follows a nomination procedure with regard to its director elections which is contained in its by-laws. No person may serve as a director of the Credit Union for more than four consecutive three-year terms, according to the Credit Union’s by-laws. The Board has established committees to assist in its effective functioning and to comply with the requirements of the Act. An Audit Committee has been formed, and is composed of at least four members of the Board. Its mandate and duties are set out in the Regulations to the Act. The Audit Committee is responsible for, among other things, reviewing any financial statements which are presented to the members, either at an annual general meeting or within an offering statement, and making recommendations to the Board as to the approval of such financial statements. The Credit Union has a Governance Committee, consisting of the Board Chair, Vice Chair and 3 or more members at large. The Governance Committee is responsible for effective governance of the Credit Union, specifically creating a healthy governance culture. The Credit Union also has an Election Committee consisting of at least four members who are individuals at least 18 years of age and are not eligible for re-election in the upcoming director election process, regardless of whether or not they stand for re-election. The primary responsibility of this committee is to provide regular oversight on the operations of the Board elections The Credit Union also has a Corporate Social Responsibility (“CSR”) Committee that is composed of four or more members of the Board. The CSR Committee is responsible for the creation and oversight of a CSR strategy in accordance with the CSR Policy. Other Board committees formed from time to time are ad hoc, informal and advisory in nature. The Board has overall responsibility for and authority within the Credit Union, and directs the activities of the President and Chief Executive Officer, to whom it has delegated certain responsibilities according to Board policies. The Credit Union has senior management as outlined on pages 34 and 35 of the offering statement. The Credit Union has 322 full-time employees and 81 part-time employees, the part-time employees equating to 61 full-time positions. For the names, municipality of residence, offices with the Credit Union and the present principal occupations of the directors and senior managers of the Credit Union as of the date of this offering statement, see “Directors and Senior Management”, beginning on page 33 of the offering statement.


The duties, powers and standards of care and performance for boards of directors, officers and committee members of credit unions are specified in the Act and the regulations passed pursuant to it, and include a duty to act honestly, in good faith, and with a view to the best interest of the credit union, and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The Credit Union is open to mergers and acquisitions with small to medium sized credit unions. The Credit Union is not, however, involved in any merger or acquisition discussions at this time. Business Strategy The Credit Union sees two pillars in its strategic plan: the member experience, and its financial model. The Credit Union seeks to become more intimate with and relevant to its members through more intelligent use of the data it has on its members, to improve member service and the Credit Union’s service culture. The Credit Union recognizes that profitability can no longer be solely reliant on financial margin (the difference between the interest it pays to its members and on funds the Credit Union borrows from other sources, and the interest it receives from members on their loans and mortgages). The Credit Union seeks to develop sustainable non-margin income through sources like insurance products, wealth management, real estate joint ventures, etc. The Credit Union will not, in the process of developing non-financial margin income, compromise its enterprise risk management practices and principles, or its level of corporate social responsibility. The Regulatory Framework The Credit Unions and Caisses Populaires Act, 1994 (See also “Capital Adequacy”, on pages 9, 10, 21 and 22) Credit unions and caisses populaires in Ontario are governed by the Credit Unions and Caisses

Populaires Act, 1994, with its accompanying regulations and guidelines (collectively referred to as the “Act”). The Deposit Insurance Corporation of Ontario (“DICO”) is charged with the responsibility of exercising certain powers and performing certain duties that are conferred or imposed by the Act. Among these duties is monitoring compliance with section 84 of the Act, which requires that adequate and appropriate forms of Regulatory Capital and liquidity be maintained by credit unions and caisses populaires. Credit unions and caisses populaires which do not meet the minimum Regulatory Capital levels required may be granted a variation of the Regulatory Capital requirements by DICO, subject to such terms and conditions as it may impose. DICO is an Ontario Provincial Agency under the Act. DICO’s role is to protect depositors in Ontario credit unions and caisses populaires from loss of their deposits. Deposit insurance is part of a comprehensive deposits protection program for all Ontario credit unions and caisses populaires which is backed by provincial legislation. DICO is also able to impose certain requirements as a condition of continuing its deposit insurance coverage and, in the event that a credit union or caisse populaire fails to comply and is believed to represent a threat to the deposit insurance fund, has broader power to take corrective action, which may include placing the credit union under Supervision or Administration,


should circumstances so warrant. DICO has rated the Credit Union on its differential premium system, enabling calculation of the Credit Union’s deposit insurance premium for its fiscal year ending August 31, 2015, and its insurance is in place and in good standing regarding that fiscal year. The Credit Union is required to report to DICO immediately any actual or anticipated event which is likely to have a material impact on the Credit Union’s financial position and increase DICO’s insurance risk. In that event, DICO reserves the right to impose other terms, conditions, or requirements as DICO deems appropriate. Central 1 Credit Union; Credit Union Central of Canada Each province in Canada has one or more central credit unions that serve their member credit unions in the province and in Ontario, one of these bodies is Central 1 Credit Union (“Central 1”). Central 1 was formed through a merger of Credit Union Central of British Columbia (“CUCBC”) and Credit Union Central of Ontario (“CUCO”) on July 1, 2008. As an incorporated association owned by its approximately 140 member credit unions in Ontario and British Columbia, Central 1 provides liquidity management, payments, Internet and trade association services to its member credit unions. As the central banker for its member credit unions, Central 1 provides, through an arrangement with a third party, centralized cheque clearing, and itself provides lending services to member credit unions. Lending services include lines of credit, demand loans, and term loans at fixed and variable rates. Central 1 also undertakes government relations, economic forecasting, and market research and planning. As a member of Credit Union Central of Canada ("CUCC"), Central 1 and its member credit unions enjoy access to national government relations efforts, national marketing and research, and a voice in the World Council of Credit Unions, a world-wide association of national credit union associations of which CUCC is a member. To become a member of Central 1, the Credit Union must purchase membership shares calculated based on the percentage its total assets were of the system’s total assets as of the preceding calendar year end. The Credit Union must also maintain a liquidity reserve deposit at Central 1 equal to 6% of its total assets, and pay membership dues which are calculated using a formula which is based on the Credit Union's membership. As at December 31, 2014, the Credit Union’s membership in Central 1 is in good standing. As a pre-condition of the merger to form Central 1, CUCO was required to divest itself of investments in certain third party asset-backed commercial paper (“ABCP”). The resolution approved the creation of a limited partnership (the “Partnership”) to acquire these investments funded by member credit unions in proportion to their share investment in CUCO. As a result, on July 1, 2008, immediately prior to the merger of CUCO and CUCBC, the excluded ABCP with a total par value of $186,916,000 was acquired by the Partnership at its estimated fair value of $133,564,000, including accrued interest, net of expenses, and other assets. As there was no liquid market in these ABCP investments, the fair values used to determine the acquisition price were provided by Edenbrook Hill Capital Ltd., a firm engaged by CUCO to provide an independent valuation of these assets underlying the ABCP investments. Members of CUCO were required to purchase units in the Partnership based on their proportionate share


ownership in CUCO prior to the date of the merger. In January 2009, the restructuring of the ABCP investments took place as part of the Pan Canadian Investors Committee’s restructuring. The Partnership’s ABCP investments were exchanged for Restructured Asset Backed Notes (“RABN”). On August 17, 2011 CUCO discontinued as a regulated financial institution and continued as a co-operative known as CUCO Cooperative Association (“CUCO Co-op”). On August 31, 2011 CUCO Co-op purchased the investment portfolio of long term notes from the Partnership in exchange for Class B investment shares which were distributed to the Partnership’s unit holders. This combination of steps restructured the Credit Union’s holding in the assets, created a new investment and unlocked a potential tax shelter on any future gains in value. On October 24, 2011, the Board of the Partnership approved a resolution to dissolve the limited partnership as it had ceased operations and disposed of all assets. As the investment in CUCO Co-op Class B investment shares represented a new investment, the Credit Union elected to classify it as a “fair value through profit and loss” instrument, requiring the investment to be carried at fair value with all gains and losses in value to be recorded in other comprehensive income. At December 31, 2014 CUCO Co-op provided the Credit Union with an estimate of fair value of its investment of $3,208,000. Tier I and Tier II Regulatory Capital Capital is defined in the general regulation passed pursuant to the Act as the Credit Union’s Tier 1 capital and Tier 2 capital. Tier 1 capital, regarded as the most permanent form of capital, includes the Credit Union’s Membership Shares; retained earnings; its Class A Patronage Shares, Series 1, and its Class B Investment Shares, Series 1, issued prior to October 1, 2009; and its Class B Investment Shares, Series 2, 2010, 2013 and 2015; which are not eligible to be redeemed in the twelve months following the date of the determination. The Credit Union’s Tier 2 capital includes the remaining Class A Patronage Shares, Series 1, and Class B Investment Shares, Series 1, 2, 2010, 2013 and 2015, and the Credit Union’s collective loan provision. A credit union, to the extent that its Tier 2 capital exceeds its Tier 1 capital, may not include the excess Tier 2 capital as Regulatory Capital. Since the Credit Union’s Tier 1 capital at all times exceeds its Tier 2 capital, both its Tier 1 capital and also its Tier 2 capital are included in Regulatory Capital. Changes to the Act and its associated regulations are under consideration, and may affect the treatment of the shares in the Credit Union, including the Class B Investment Shares, Series 2015, as Regulatory Capital. Capital Adequacy As at December 31, 2014, and at August 31, 2014, 2013 and 2012, the Credit Union was in compliance with the Regulatory Capital adequacy requirements of the Act, as indicated under the “Compliance with Capital Requirements” heading of the table at page 57 of the offering statement. Based on the total assets and Regulatory Capital at December 31, 2014, the Credit Union's Leverage Ratio would increase to 5.99% if this offering is minimally subscribed and to 7.85% if fully subscribed. Based upon the Credit Union's statement of financial position at December 31, 2014, this offering would support additional growth of $1.3 billion if minimally subscribed, and $2.6 billion if


fully subscribed, while still maintaining the Leverage Ratio at no less than the regulatory minimum requirement of 4%. The growth possible for the Credit Union, if this offering is fully or minimally subscribed, is calculated as follows. If this offering is fully subscribed, the Credit Union will have Regulatory Capital of $210,454,000. Dividing this amount of Regulatory Capital by the required Leverage Ratio of 4.00% reveals that the Credit Union would then have sufficient Regulatory Capital to support assets of $5.3 billion. Subtracting from this level of assets the Credit Union’s total assets as reported on its statement of financial position at December 31, 2014 indicates that the Credit Union could grow by approximately $2.6 billion if this offering is fully subscribed. The Credit Union’s Leverage Ratio in this case will be 7.85%, assuming no growth from the assets disclosed on the Credit Union’s financial statements as at December 31, 2014. If this offering is only minimally subscribed, however, the Credit Union will have Regulatory Capital of $160,454,000. Dividing this level of Regulatory Capital by the required Leverage Ratio of 4.00% reveals that the Credit Union would then have sufficient Regulatory Capital to support assets of $4.0 billion. Subtracting from this level of assets the Credit Union’s total assets as reported on its statement of financial position at December 31, 2014 indicates that the Credit Union could grow by approximately $1.3 billion if this offering is minimally subscribed. The Credit Union’s Leverage Ratio in this case would be 5.99%, assuming no growth from the assets disclosed on the Credit Union’s financial statements as at December 31, 2014. Changes to the Act and its associated regulations are under consideration, and may affect either the treatment of the shares in the Credit Union, including the Class B Investment Shares, Series 2015, as Regulatory Capital, or the minimum required Leverage Ratio and Risk-Weighted Assets Ratio. Additional Information For more information regarding the Credit Union’s operations, see “Management Discussion and Analysis” beginning on page 42, the audited financial statements as at August 31, 2014 attached hereto as Schedule A, and the condensed interim review financial statements as at December 31, 2014 attached hereto as Schedule B.

CAPITAL STRUCTURE OF THE CREDIT UNION The Credit Union has three classes of shares in its capital structure: Membership Shares, Class A Special Shares (the “Class A Shares”), and Class B Special Shares (the “Class B Shares”), of which both Class A Shares and Class B Shares are issuable in series. The Credit Union has created and authorized one series of Class A Shares (the “Class A Patronage Shares, Series 1”), and five series of Class B Shares (the “Class B Investment Shares, Series 1”, the “Class B Investment Shares, Series 2”, the “Class B Investment Shares, Series 2010”, the “Class B Investment Shares, Series 2013”, and the “Class B Investment Shares, Series 2015”). The Credit Union, as of the date hereof, has no Class A Patronage Shares, Series 1, issued or outstanding. The Class B Investment Shares, Series 2013, were created on November 14, 2013, to facilitate the Credit Union’s purchase of the assets of Rochdale Credit Union Limited.


The following represents a summary of the rights of the Membership Shares, the Class A Patronage Shares, Series 1, and the Class B Investment Shares, Series 1, Series 2, Series 2010, and Series 2013, in the capital structure of the Credit Union regarding dividends, return of capital on dissolution, redeemability at the holder’s initiative, redeemability at the Credit Union’s initiative, voting, and treatment of shares as Regulatory Capital. The rights of the Class B Investment Shares, Series 2015, are discussed under the heading “Description of Securities Being Offered”, beginning at page 17 hereof.

Right Membership Shares

Class A Patronage

Shares, Series 1

Class B Investment

Shares, Series 1

Class B Investment

Shares, Series 2

Class B Investment

Shares, Series 2010

Class B Investment

Shares, Series 2013

Dividends

The holders of the Membership Shares are entitled, after payment of dividends to holders of the Class B Investment Shares, Series 1, 2, 2010, 2013 and 2015, and of the Class A Patronage Shares, Series 1, to receive Non-Cumulative cash or share dividends if, as and when declared by the Board. Dividends are taxed as interest income and not as dividends.

The holders of Class A Patronage Shares, Series 1, are entitled, in preference to holders of the Membership Shares, but ranking junior to the holders of Class B Investment Shares, Series 1, 2 2010, 2013 and 2015, to receive Non-Cumulative cash or share dividends if, as, and when declared by the Board. Holders of Class A Patronage Shares, Series 1, may, however, consent, by majority vote at a special meeting, to the prior payment of dividends to holders of a

The holders of Class B Investment Shares, Series 1, are entitled, in preference to holders of the Class A Patronage Shares, Series 1 and of the Membership Shares, but equally with holders of the Class B Investment Shares, Series 2, 2010, 2013 and 2015, to receive Non-Cumulative cash or share dividends if, as and when declared by the Board. Holders of Class B Investment Shares, Series 1, may, however, consent, by majority vote at a special meeting, to the prior

The holders of Class B Investment Shares, Series 2, are entitled, in preference to holders of the Class A Patronage Shares, Series 1, and of the Membership Shares, but equally with the holders of the Class B Investment Shares, Series 1, 2010, 2013 and 2015, to receive Non-Cumulative cash or share dividends if, as and when declared by the Board. Holders of Class B Investment Shares, Series 2, may, however, consent, by majority vote at a special meeting, to the prior





Class A Patronage

Shares, Series 1

Class B Investment

Shares, Series 1

Class B Investment

Shares, Series 2

Class B Investment

Shares, Series 2010

Class B Investment

Shares, Series 2013

junior class of shares. Dividends are taxed as interest income and not as dividends.

payment of dividends to holders of a junior class of shares. Dividends are taxed as interest income and not as dividends.




Return of capital on dissolution

The holders of the Membership Shares are entitled, on dissolution of the Credit Union, to receive an amount representing equal portions of the assets or property of the Credit Union remaining after payment of all of its debts and obligations, including redemption of the Class B Investment Shares, Series 1, 2, 2010, 2013 and 2015, and the Class A Patronage Shares, Series 1.

The holders of Class A Patronage Shares, Series 1, are entitled, in preference to the holders of the Membership Shares, but junior to the holders of the Class B Investment Shares, Series 1, 2 2010, 2013 and 2015, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of the Credit Union, after payment of all of its other debts and obligations.

The holders of Class B Investment Shares, Series 1, are entitled, in preference to the holders of the Class A Patronage Shares, Series 1, and the Membership Shares, but rateably with the holders of the Class B Investment Shares, Series 2, 2010, 2013 and 2015, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of the Credit Union, after payment of all of its other debts and obligations.




Redeemability at the holder’s initiative

Membership Shares are not redeemable at

Holders who are withdrawing

Holders may request that the Credit






Class A Patronage

Shares, Series 1

Class B Investment

Shares, Series 1

Class B Investment

Shares, Series 2

Class B Investment

Shares, Series 2010

Class B Investment

Shares, Series 2013

(Retraction) the member’s initiative. See below, however, regarding the Credit Union’s obligation to redeem the Membership Shares at its initiative in certain circumstances.

or expelled from membership in the Credit Union, or who have died, may request that the Credit Union redeem the Class A Patronage Shares, Series 1, they hold, at any time. Redemption requests are processed on a first-come, first-served basis, and any shares not redeemed in a particular fiscal year are the first shares redeemed in the next fiscal year. All redemptions are at the discretion of the Board. In no case shall the total number of Class A Patronage Shares, Series 1, redeemed in any fiscal year exceed 10% of the issued and outstanding Class A Patronage Shares, Series

Union redeem the Class B Investment Shares, Series 1, they hold, at any time three years or more after the issuance of these shares, or at any time after the death or expulsion from membership of the holder of the Class B Investment Shares, Series 1. Redemption requests made by estates of deceased shareholders are processed on a first-come, first served basis, and any shares not redeemed in a particular fiscal year are the first shares redeemed in the next fiscal year. Other redemption requests are processed twice annually, and are pro-rated if redemption requests exceed the

Union redeem the Class B Investment Shares, Series 2, they hold, at any time five years or more after the issuance of these shares, or at any time after the death or expulsion from membership of the holder of the Class B Investment Shares, Series 2. Redemption requests are processed on a first-come, first-served basis, and any shares not redeemed in a particular fiscal year are the first shares redeemed in the next fiscal year. All redemptions are at the discretion of the Board. In no case shall the total number of Class B Investment Shares, Series 2, redeemed in any fiscal year exceed

Union redeem the Class B Investment Shares, Series 2010, they hold, at any time five years or more after the issuance of these shares, or at any time after the death or expulsion from membership of the holder of the Class B Investment Shares, Series 2010. Redemption requests are processed on a first-come, first-served basis twice annually, and any shares not redeemed in a particular fiscal year are the first shares redeemed in the next fiscal year. All redemptions are at the discretion of the Board. In no case shall the total number of Class B Investment Shares, Series 2010,

Union redeem the Class B Investment Shares, Series 2013, they hold, at any time five years or more after the issuance of these shares, or at any time after the death or expulsion from membership of the holder of the Class B Investment Shares, Series 2013. Redemption requests are processed on a first-come, first-served basis, and any shares not redeemed in a particular fiscal year are the first shares redeemed in the next fiscal year. All redemptions are at the discretion of the Board. In no case shall the total number of Class B Investment Shares, Series 2013, redeemed in



Class A Patronage

Shares, Series 1

Class B Investment

Shares, Series 1

Class B Investment

Shares, Series 2

Class B Investment

Shares, Series 2010

Class B Investment

Shares, Series 2013

1, reported on the Credit Union’s audited financial statements for the preceding fiscal year, and in no case shall a redemption occur which would cause the Credit Union to fail to comply with Regulatory Capital and liquidity requirements.

redemption limit. All redemptions are at the discretion of the Board. In no case shall the total number of Class B Investment Shares, Series 1, redeemed in any fiscal year exceed 10% of the issued and outstanding Class B Investment Shares, Series 1, reported on the Credit Union’s audited financial statements for the preceding fiscal year, and in no case shall a redemption occur which would cause the Credit Union to fail to comply with Regulatory Capital and liquidity requirements.

10% of the issued and outstanding Class B Investment Shares, Series 2, reported on the Credit Union’s audited financial statements for the preceding fiscal year, and in no case shall a redemption occur which would cause the Credit Union to fail to comply with Regulatory Capital and liquidity requirements.

redeemed in any fiscal year exceed 10% of the issued and outstanding Class B Investment Shares, Series 2010, reported on the Credit Union’s audited financial statements for the preceding fiscal year, and in no case shall a redemption occur which would cause the Credit Union to fail to comply with Regulatory Capital and liquidity requirements.

any fiscal year exceed 10% of the issued and outstanding Class B Investment Shares, Series 2013, reported on the Credit Union’s audited financial statements for the preceding fiscal year, and in no case shall a redemption occur which would cause the Credit Union to fail to comply with Regulatory Capital and liquidity requirements.

Redeemability at the Credit Union’s initiative

Upon death, or upon withdrawal or expulsion from membership in the Credit Union, the

The Credit Union may at its initiative purchase for cancellation, subject to continued







Class A Patronage

Shares, Series 1

Class B Investment

Shares, Series 1

Class B Investment

Shares, Series 2

Class B Investment

Shares, Series 2010

Class B Investment

Shares, Series 2013

Credit Union must redeem the member’s Membership Shares held at the amount paid up for each such membership Share, plus any declared but unpaid dividends thereon, unless such redemption would cause the Credit Union to fail to comply with Regulatory Capital and liquidity requirements.

compliance with Regulatory Capital and liquidity requirements, at the Redemption Amount, all or any portion of the Class A Patronage Shares, Series 1, outstanding at any time five years or more after the shares were issued.

compliance with Regulatory Capital and liquidity requirements, at the Redemption Amount, all or any portion of the Class B Investment Shares, Series 1, outstanding at any time five years or more after the shares were issued.




Voting Each member of the Credit Union over the age of 14 years has one vote on any matter considered by any annual or special meeting of its membership, and in the Board elections conducted prior to the annual general meeting.

Class A Patronage Shares, Series 1, do not carry any voting rights, except when the Act requires that those shares carry voting rights. When the Class A Patronage Shares, Series 1, carry voting rights, each Class A Patronage Share, Series 1, carries one vote.

Class B Investment Shares, Series 1, do not carry any voting rights, except when the Act requires that those shares carry voting rights. When the Class B Investment Shares, Series 1, carry voting rights, each Class B Investment Share, Series 1, carries one vote.




Treatment as Regulatory Capital

The Credit Union includes all of its

The Credit Union includes 90%







Class A Patronage

Shares, Series 1

Class B Investment

Shares, Series 1

Class B Investment

Shares, Series 2

Class B Investment

Shares, Series 2010

Class B Investment

Shares, Series 2013

membership Shares as Tier I Regulatory Capital.

of the Class A Patronage Shares, Series 1, as Tier I Regulatory Capital, and includes the remaining 10% of the Class A Patronage Shares, Series 1, as Tier II Regulatory Capital.

of the Class B Investment Shares, Series 1, issued prior to October 1, 2009, as Tier I Regulatory Capital, and includes the remaining 10% of the Class B Investment Shares, Series 1, as Tier II Regulatory Capital.

of the Class B Investment Shares, Series 2, as Tier I Regulatory Capital, and includes the remaining 10% of the Class B Investment Shares, Series 2, as Tier II Regulatory Capital.



Capital is defined by its relative permanence (i.e., inability to be redeemed quickly), freedom from mandatory fixed charges against the earnings of the Credit Union (e.g., cumulative dividends), and subordinate position to the rights of depositors and other creditors of the Credit Union, who are paid the sums they are due before the holders of capital receive any funds. Tier 1 capital qualifies as capital under all three definitions. Tier 2 capital, in general, meets only two of the three definitions. A credit union, to the extent that its Tier 2 capital exceeds its Tier 1 capital, may not include the excess Tier 2 capital as Regulatory Capital. A credit union’s Membership Shares and retained earnings qualify as Tier 1 capital. Since the Credit Union’s Tier 1 capital at all times exceeds its Tier 2 capital, both its Tier 1 capital and also its Tier 2 capital are included in Regulatory Capital. Changes to the Act and its associated regulations are under consideration, and may affect either the treatment of the shares in the Credit Union as Regulatory Capital. Information on the Class B Investment Shares, Series 2015 follows below under the heading “Description of Securities Being Offered”.


DESCRIPTION OF SECURITIES BEING OFFERED

Class B Investment Shares, Series 2015 Issue Class B Investment Shares, Series 2015, issuable at $1.00 each, will only be issued to individual members of the Credit Union, to RRSPs and RRIFs with an individual member of the Credit Union as the annuitant, or to TFSAs with an individual member of the Credit Union as the holder. An individual must be at least 18 years of age and a resident of Ontario to purchase Class B Investment Shares, Series 2015. Corporations and partnerships may not purchase Class B Investment Shares, Series 2015. Dividends The holders of Class B Investment Shares, Series 2015, are entitled, in preference to holders of the Class A Patronage Shares, Series 1, and of the Membership Shares, but equally with the Class B Investment Shares, Series 1, 2, 2010, and 2013, to receive dividends if, as and when declared by the Board. Holders of the Class B Investment Shares, Series 2015, may, however, by majority vote at a special meeting, consent to the prior payment of dividends to holders of a junior class of shares. The payment of such dividends will be in cash, in additional Class B Investment Shares, Series 2015, or in a combination of both, and on such terms as may be determined from time to time by the Board. For a discussion of the Credit Union’s dividend policy regarding Class B Investment Shares, Series 2015, see pages ii, iii, 29 and 30. Canadian Federal Income Tax Considerations The following summary has been prepared by management, and outlines the principal Canadian federal income tax consequences applicable to a holder of a Class B Investment Share, Series 2015, who acquires the share pursuant to this offering and who, for the purposes of the Income Tax Act (Canada) (the “Act”), is resident in Canada and holds the share as capital property. This summary is based on the facts contained in this offering statement and based upon management’s understanding of the provisions of the Act and the regulations thereunder as they currently exist and current published administrative policies and assessing practices of the Canada Revenue Agency (the “CRA”). This summary takes into account specific proposals to amend the Act and the regulations thereunder that have been publicly announced by the Minister of Finance (Canada) prior to the date hereof. There can be no assurance that these proposals will be enacted in their current form or at all, or that the CRA will not change its administrative and assessing practices. This summary does not otherwise take into account or anticipate any changes in law, whether by legislative, governmental or judicial decision or action. This summary does not also take into account provincial, territorial or foreign tax legislation or considerations. No advance income tax ruling has been requested or obtained in connection with this offering statement, and there is a risk that the CRA may have a different view of the income tax consequences to holders from that described herein. INVESTORS ARE CAUTIONED THAT THIS COMMENTARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO CONSTITUTE ADVICE TO ANY PARTICULAR


INVESTOR. INVESTORS SHOULD SEEK INDEPENDENT ADVICE FROM THEIR OWN TAX ADVISORS.

Dividends A holder of a Class B Investment Share, Series 2015, will be required to include in computing income the dividends paid on the shares, whether paid in cash or in the form of additional shares. Dividends paid to a holder of a Class B Investment Share, Series 2015, are deemed to be interest for Canadian income tax purposes. This income will be subject to income tax in the same manner as other interest income. Redemption On redemption of a Class B Investment Share, Series 2015, to the extent that the redemption proceeds exceed the paid-up capital of the share, the excess is deemed to be interest received by the holder of the Class B Investment Share, Series 2015. This interest must be included in computing the income of the holder in the year of redemption. The proceeds of disposition under these circumstances are reduced by the amount of deemed interest. To the extent that the proceeds of disposition exceed (or are exceeded by) the adjusted cost base and reasonable disposition costs, a capital gain (or capital loss) may be realized and taxed as described below. Other Dispositions The disposition of a Class B Investment Share, Series 2015, to another member may give rise to a capital gain (or capital loss) to the extent that the proceeds of disposition exceed (or are exceeded by) the aggregate of the adjusted cost base of the Class B Investment Share, Series 2015, and reasonable disposition costs. One-half of the capital gain is included in computing the income of the holder of the Class B Investment Share, Series 2015, and one-half of any capital loss may be deducted but only against capital gains of the holder. Unused capital losses may be carried back to the three preceding taxation years to offset capital gains in those years, and they may be carried forward indefinitely. Under certain specific circumstances, the capital loss may be denied and therefore not available to offset capital gains of the holder. In addition, if certain criteria are met, an allowable capital loss may be considered a business investment loss and may be applied to reduce other income of the holder. This loss or a portion thereof may be carried back to the three preceding taxation years to reduce income in those years and may be carried forward for 10 taxation years, to reduce other income, after which it reverts to a net capital loss. Eligibility for Deferred Income Plans The Class B Investment Shares, Series 2015, will be a qualified investment for registered plans (i.e., RRSP, RRIF, TFSA). The transfer of any shares by a holder to a registered plan constitutes a disposition of the shares by the holder for income tax purposes. In such circumstances, the holder is deemed to receive the proceeds of disposition for the shares equal to their fair market value at that time of such transfer, and this amount is included in computing the capital gain or loss from the disposition. Any capital loss arising on such disposition is denied to the shareholder. Interest expense related to shares transferred to an RRSP is not deductible for income tax purposes.

RRSP, RRIF and TFSA-Eligible Concentra Trust will accept Class B Investment Shares, Series 2015, purchased in this offering to be contributed to a member’s RRSP, RRIF or TFSA. The proceeds of redemption or transfer of Class B


Investment Shares, Series 2015, held in a RRSP, RRIF or TFSA will remain inside that RRSP, RRIF or TFSA as applicable, unless the annuitant specifically requests otherwise in writing. Rights on Distributions of Capital On liquidation or dissolution, holders of Class B Investment Shares, Series 2015, will be paid the Redemption Amount for each such share held, in priority to holders of the Class A Patronage Shares, Series 1, and of the Membership Shares, and rateably with holders of the Class B Investment Shares, Series 1, 2, 2010, and 2013, but after provision for payment of all the Credit Union’s other debts and obligations. Holders of Class B Investment Shares, Series 2015, shall not thereafter be entitled, as holders of Class B Investment Shares, Series 2015, to participate in the distribution of the Credit Union’s assets then remaining, but will retain any rights they may have to such a distribution as holders of Class A Patronage Shares, Series 1, or of Membership Shares. Distributions regarding Class B Investment Shares, Series 2015, held in an RRSP, RRIF or TFSA will remain in that RRSP, RRIF or TFSA, as applicable, unless the annuitant specifically requests otherwise in writing. Voting Rights The Class B Investment Shares, Series 2015, are Non-Voting for the purposes of annual or special meetings of the members of the Credit Union. In the event of a proposed dissolution, amalgamation, continuance under other Ontario legislation or under the laws of another jurisdiction, a purchase of assets representing a Substantial Portion of the Credit Union’s assets, the sale, lease or transfer of a Substantial Portion of its assets, or a proposed resolution which affects the rights attaching to the Class B Investment Shares, Series 2015, it shall hold a special meeting of the holders of Class B Investment Shares, Series 2015, which may be held separately from the special meeting of the holders of any other series of Class B Shares if their rights are affected differently from those of the holders of any other series of Class B Shares. The holders of Class B Investment Shares, Series 2015, shall have one vote per Class B Investment Share, Series 2015, held at such meetings to consider such an event or resolution, which requires approval by Special Resolution. Approval at a meeting of the members of the Credit Union, and at meetings of the holders of all other classes of shares in its capital structure, including the Class A Shares, may also be required. Redemption Provisions and Restrictions Holders of Class B Investment Shares, Series 2015, may not request that the Credit Union redeem the shares they hold until five years after the issuance of those shares, except where the holder dies or is expelled from membership in the Credit Union. Redemptions are subject to the aggregate limits detailed below. Approval of any redemption request is in the sole and absolute discretion of the Board. The Board may not approve a request if, in the opinion of the Board, honouring such redemption request will cause the Credit Union to be unable to comply with the Regulatory Capital and liquidity requirements of section 84 of the Act. In no case shall total redemptions approved for holders of Class B Investment Shares, Series 2015, in any fiscal year exceed an amount equal to 10% of the total Class B Investment Shares, Series 2015, outstanding at the end of the previous fiscal year. The Board will approve redemption requests at its first Board meetings following December 31 and June 30 in any fiscal year, on a first come, first served basis, as evidenced by the time and date to be marked on each request when received by the


Credit Union. Redemption requests not fulfilled during one fiscal year will be carried forward and considered at the next possible redemption date or withdrawn, at the option of the shareholder. The Credit Union has the option of redeeming, at the Redemption Amount, all or any portion of the Class B Investment Shares, Series 2015, then outstanding, subject to restrictions in the Act, after giving at least 21 days notice of its intent to redeem, at any time after the fifth anniversary of the Issue Date. If the Credit Union redeems only a portion of the Class B Investment Shares, Series 2015, then outstanding, the Credit Union must redeem such Class B Investment Shares, Series 2015, pro rata from all holders of such shares at that time. The proceeds of any redemption of Class B Investment Shares, Series 2015, held inside an RRSP, RRIF or TFSA will remain inside the RRSP, RRIF or TFSA as applicable, unless the annuitant specifically requests otherwise in writing. Purchasers of Class B Investment Shares, Series 2015, who are intending to include such shares in an RRSP or RRIF contract should carefully review the above redemption provisions and restrictions before proceeding. A member holding Class B Investment Shares, Series 2015 in a RRIF will be responsible for ensuring there are sufficient other assets in the RRIF to satisfy the minimum statutory withdrawal requirements for the RRIF annually. Restrictions on Transfer Class B Investment Shares, Series 2015, may not be transferred except to another member of the Credit Union. Transfers will be subject to the approval of the Board. Transfer requests must be in writing, using a form approved by the Board. Transfer requests will be tendered to the registered office of the Credit Union. Class B Investment Shares, Series 2015, will be transferred to other members at a price equal to the current Redemption Amount. The proceeds of disposition of Class B Investment Shares, Series 2015, held inside an RRSP, RRIF or TFSA will remain inside that RRSP, RRIF or TFSA, as applicable, unless the annuitant specifically requests otherwise in writing. No member, through transfers of Class B Investment Shares, Series 2015, from other members, will be allowed to hold more Class B Investment Shares, Series 2015, than the member would otherwise have been able to subscribe for in this initial offering (250,000 shares). There is no market for the Class B Investment Shares, Series 2015, issued by the Credit Union. The Credit Union may, however, choose to maintain a list of willing buyers, and attempt to facilitate a transfer to a willing buyer rather than process a redemption when a holder of Class B Investment Shares, Series 2015, requests redemption; this procedure will not apply when a holder of Class B Investment Shares, Series 2015, or his or her estate, is required by law to transfer the shares to another member of the Credit Union (e.g., by the Will of a deceased shareholder), or has already located a purchaser for his or her Class B Investment Shares, Series 2015. Articles of Amalgamation; Articles of Amendment Prospective purchasers of Class B Investment Shares, Series 2015, may obtain, on request at the registered office of the Credit Union, a copy of the articles of amalgamation creating the Credit Union, and the articles of amendment creating all of the classes and series of shares in its capital structure which were created after the Credit Union’s creation by amalgamation, including the Class B Investment Shares, Series 2015. These documents define the Credit Union’s share capital structure, including the full terms and conditions of the Class B Investment Shares, Series 2015.


RISK FACTORS

The Credit Union’s enterprise risk management policy states that the Credit Union’s risk appetite is moderate (i.e., willing to accept risks). The policy requires that significant risks have Board-approved risk management policies and/or strategies and risk tolerances in place. The Credit Union is of the opinion that its strategy requires the undertaking of managed, prudent and moderate risks in order to achieve its objectives, when that is supported by its financial capacity. The following risk factors should be considered in making a decision to purchase Class B Investment Shares, Series 2015.

Transfer and Redemption Restrictions There is no market through which the Class B Investment Shares, Series 2015 may be sold. Further, it is not expected that any market will develop. These securities may only be transferred to another member of the Credit Union. Note that such a transfer is not treated as redemption, and is therefore not limited as outlined below. See “Restrictions on Transfer”, on pages 20 and 21, for a further discussion of transfers of Class B Investment Shares, Series 2015. The Act prohibits redemption of shares if the Board of the Credit Union has reasonable grounds to believe that the Credit Union is, or the payment would cause it to be, in contravention of prescribed liquidity and Regulatory Capital adequacy tests for credit unions. Redemptions of Class B Investment Shares, Series 2015, are permitted at the sole and absolute discretion of the Board, and are not permitted during the five years following their issuance except when a shareholder dies or is expelled from membership in the Credit Union. Redemptions are limited in any fiscal year to 10% of the Class B Investment Shares, Series 2015, outstanding at the end of the previous fiscal year. Consequently, holders of Class B Investment Shares, Series 2015, may not be able to sell or redeem their securities when they wish to do so. Members who intend to hold Class B Investment Shares, Series 2015, within an RRSP or RRIF contract should carefully review this risk factor before proceeding.

Capital Adequacy The Act requires the Credit Union to maintain a Risk-Weighted Assets Ratio and a Leverage Ratio equal to or greater than a percentage stated in the Regulations passed pursuant to the Act. The Credit Union is currently required to maintain a Leverage Ratio of 4.00% and a Risk-Weighted Assets Ratio of 8.00%. The Credit Union complies with both of these requirements as of the date hereof, and in its capital management policy has set a permitted range for the Leverage Ratio of between 5% and 6%, and a permitted range for the Risk-Weighted Assets Ratio of between 10% and 12%. Changes to the Act and its associated regulations are under consideration, and may affect either the treatment of the shares in the Credit Union, including the Class B Investment Shares, Series 2015, as Regulatory Capital, or the minimum required Leverage Ratio and Risk-Weighted Assets Ratio.


For further information regarding the Credit Union’s Regulatory Capital adequacy, see “Capital Adequacy” on pages 9 and 10.

Payment of Dividends

The Credit Union has established a record for the payment of dividends on its Class B Investment Shares, Series 1, 2, 2010 and 2013, in its last five fiscal years, detailed on page 29, but has no history of dividend payments on the Class B Investment Shares, Series 2015, since this is the first issuance of these shares. Past payment of dividends or other distributions in no way indicates the likelihood of future payments of dividends. The payment of dividends to the holders of Class B Investment Shares, Series 2015, is dependent on the ability of the Credit Union to meet the Regulatory Capital requirements of the Act, and on the availability of earnings; the Credit Union’s capital management policy prohibits dividends, interest rebates and patronage dividends which exceed annual profitability or would cause the Credit Union to fall below the minimum Leverage Ratio and Risk-Weighted Assets Ratio required by that policy. Dividends on Class B Investment Shares, Series 2015, are taxed as interest and not as dividends, and are therefore not eligible for the tax treatment given to dividends from taxable Canadian corporations, commonly referred to as the “dividend tax credit”. The Board has stated a dividend policy for Class B Investment Shares, Series 2015, as outlined on pages ii, iii, 29 and 30 hereof; this policy may be changed at any time, at the discretion of the Board, and the Board may at any time approve exceptions to this policy. Dividends paid may therefore not be in accordance with this policy.

Credit Risk

The major activity of the Credit Union is the lending of money to members and, as a result, there exists the risk of loss from uncollectible loans. The lending policies of the Credit Union, the care and attention of staff and management in applying such policies to loan applications and loans granted, and the security taken in connection with such applications, will affect the future profitability of the Credit Union and impact on its ability to pay dividends and redeem Class B Investment Shares, Series 2015, when the members wish it to do so. A discussion of the Credit Union’s accounting policies regarding its loans to its members is found in note 3(b) to the audited financial statements included in this offering statement, under the heading “Financial instruments – recognition and measurement”, at page 74 of Schedule A hereto. Further discussion of the composition of the Credit Union’s loan portfolio, and its allowance and provision for impaired loans, appears in notes 5 and 6 to the audited financial statements beginning at page 87 of Schedule A hereto, in notes 4 and 5 to the condensed interim review financial statements beginning at page 133 of Schedule B hereto, and in the table of financial performance indicators on page 57.


Market Risk

The Credit Union is also exposed to risk in respect of its investments. The market risk management policy of the Credit Union, approved by its Board, defines market risk as the risk to income from holding investments in foreign currency, equities, commodities or interest rate products. The policy requires the Credit Union to make investments to maximize after-tax yields while maintaining a high level of security, and requires the Credit Union’s investments to reflect, in order of priority, safety of principal, liquidity, income, the needs of the credit union system, and the social, economic and ethical wellbeing of the community. Qualifying investments for purposes other than liquidity are the following:

• the financial assets referred to in its liquidity risk management policy (discussed at pages 23, 24 and 25 under the heading “Liquidity Risk”);

• banker’s acceptances, discounted notes, bonds, debentures and other debt obligations issued by a bank listed in Schedule I or II of the Bank Act (Canada) rated as investment grade (i.e., not less than BBB- as rated by Standard & Poors, BBB(low) by the Dominion Bond Rating Service, or Baa3 by Moody’s);

• Commercial paper, corporate bonds, debentures and other debt obligations issued by corporations that are widely distributed, rated as investment grade;

• The required number of membership shares in Central 1 and other partners; and

• Derivative investments purchased for hedging purposes only, as provided in the structural risk management policy outlined at pages 25 and 26.

The policy also limits the percentage of the portfolio which can be invested in any one of the classes of investment noted above, and the maximum term of the investments in each of the classes of investment noted above. The Credit Union is also permitted to invest in subsidiaries with Board approval. The Credit Union has in the past, and may in the future, invest with other partners in real estate joint ventures, with the objective of earning both ordinary income and capital gains. As of December 31, 2014, the Credit Union complied with this investment policy.

Liquidity Risk The Credit Union’s liquidity risk management policy defines “liquidity risk management” as the ability of a financial institution to generate or obtain sufficient cash or its equivalents in a timely manner at a reasonable price to meet its commitments as they fall due, and “liquidity risk” as the inability to meet this objective without a material negative impact to earnings and capital. Since the Credit Union is a Class 2 Credit Union, it is simply required to establish and maintain prudent levels and forms of liquidity that are sufficient to meet its cash flow needs. The Credit Union’s liquidity management policy requires the Credit Union to establish a liquidity risk tolerance level which represents the amount of liquidity required to cover probable fluctuations in day-to-day operational requirements plus an adequate cushion of excess liquidity to meet liquidity needs against a range of liquidity stress scenarios. This liquidity risk tolerance is currently set at 8% of


members’ deposits and the Credit Union’s borrowing, with a target range of between 8% and 16% of members’ deposits and the Credit Union’s borrowing. The policy also requires the Credit Union to maintain liquidity of at least 6% of its total assets, and has set a maximum operating liquidity threshold at 16% of its total assets. The policy also requires the Credit Union to endeavour to ensure that its deposit liabilities are not unduly concentrated with respect to an individual person and his or her connected persons, the type of deposit instrument, the term to maturity, brokered deposits, the market source of funds, if applicable, and the currency of deposit, if applicable. The Credit Union’s liquidity risk management policy also considers structural funding risk, the management of which requires the diversification of sources of liquidity for various time periods. The Credit Union will endeavor to maintain access to multiple sources of liquidity to reduce risk, including retail deposits, institutional deposits, credit facilities, and securitization or sale of Mortgage Loans, Personal Loans, and Commercial Loans. In addition to other required liquidity investments, an amount equivalent to large deposits (defined as 0.5% of members’ deposits) made by a single depositor or a group of connected depositors will be invested in liquid securities when liquidity falls below the Credit Union’s liquidity risk tolerance. Assets which may be purchased as part of the Credit Union’s liquidity portfolio are:

• Cash;

• Deposits in or debt obligations of a league, central credit union, or related association;

• Treasury bills, bonds, debentures and other debt obligations issued and guaranteed by the federal or a Canadian provincial government;

• Canadian-dollar deposits with, or bankers’ acceptances, bonds or debentures issued by, Schedule I or Schedule II banks with a rating of at least R-1 middle by the Dominion Bond Rating Service or a rating of at least A-1 or A+ by Standard and Poor’s; and

• Bonds, debentures and other debt obligations issued by a Canadian municipality with a rating of at least R-1 middle by the Dominion Bond Rating Service or a rating of at least A-1 or A+ by Standard and Poor’s.

The policy also imposes limits, in the aggregate and by issuer, on each of these investment categories. The Credit Union maintained an average liquidity position of 9.33% in the four months ended December 31, 2014, and of 9.60% in its fiscal year ended August 31, 2014. The Credit Union has access to a CDN $124 million credit facility from Central 1, and of CDN $100 million credit facility from Caisse centrale Desjardins du Québec, which are available to cover shortfalls in cash resources and for liquidity purposes if warranted. For further information, see “Senior Debt” starting at page 32. As part of its liquidity management practices, the Credit Union regularly securitizes Mortgage Loans and Commercial Loans through a securitization program, the details of which are provided in note 8 to the audited consolidated financial statements at pages 91 and 92 of Schedule A hereto, and at note 7 in


the condensed interim review financial statements at pages 137 and 138 of Schedule B hereto. Total outstanding securitizations as of December 31, 2014 are $815,884,000. The Credit Union is a direct issuer of asset backed securities backed by Mortgage Loans, and has a larger allocation than it can use itself; the Credit Union, while it cannot make full use of this allocation itself, has developed relationships with other financial institutions which allow the Credit Union to earn other income from effectively selling off or allowing another financial institution to use the Credit Union’s unused allocation pursuant to the programs outlined at page 42.

Structural Risk

Structural risk comprises exposure to interest rate movements (basis risk, mismatch risk, yield curve risk and option risk), and exposure to foreign exchange rate movements.

• Basis risk is the risk to income from variable rate deposits funding variable rate loans that change at different speeds.

• Repricing or mismatch risk is the risk to income from variable rate deposits funding fixed rate loans or variable rate loans funded by fixed rate deposits.

• Yield curve risk is the risk to income from fixed rate deposits funding fixed rate loans of a different term.

• Optionality risk is the risk to income from options embedded in many deposit or loan products. Regarding sources and uses of funds, it is the Credit Union’s policy to price all loans and deposits so that, overall, a net contribution to earnings is provided and will be in line with member expectations. The Credit Union will maintain an appropriate asset mix of loans and investments consistent with the Credit Union’s annual business plan; maximum terms to maturity for various products will be established by operational policy. The Credit Union will maintain an appropriate mix of deposits, reflecting member expectations and relating appropriately to the asset mix maintained by the Credit Union; maximum term to maturity for various deposits will be established by operational policy. The Credit Union uses two types of models to assess long term structural risk. The Credit Union uses market valuation model, known as “economic value at risk” and “duration of capital”, in order to evaluate exposure to yield curve risk over the long term. The permitted exposure of equity at risk to a 100 Basis Point upward or downward shock to interest rates should not exceed 10% of equity. The upper and lower limits for duration of equity are +10.0 and -10.0 years. The Credit Union also uses an income simulation model in order to evaluate short-term repricing (i.e., mismatch) risk and basis risk. The allowable exposure to earnings at risk for a shock to interest rates determined by the asset liability committee of senior management (currently a 75 Basis Point increase and a 75 Basis Point decrease) is 2.0% of Regulatory Capital for the next year. The Credit Union can respond to market interest rate changes with immediate pricing adjustments to deposit and loan products, if necessary, to correct a potential mismatch, although such adjustments may not succeed in fully eliminating the mismatch; the Credit Union may also use derivatives


purchased from permitted counterparties to reduce interest rate risk to an acceptable level. See pages 39 and 40 for further information. As at December 31, 2014, the Credit Union’s earnings risk was $684,000 for a 75 Basis Points downward shock in interest rates, and $663,000 for a 75 Basis Points upward shock in interest rates. As at December 31, 2014 the economic value of equity was 1.89%, and the duration of capital was 1.9 years. These exposures are in compliance with the Board’s policy in this regard. In the event that the Credit Union’s exposure to interest rate risk was to exceed the policy limits described above, future profitability could become seriously eroded should interest rates move in the direction where the Credit Union has an exposure, with a resulting negative impact on the ability of the Credit Union to pay dividends or redeem shares. Management, however, could employ one or more of several techniques, including investments in derivatives, to mitigate the potential risk.

Operational Risk Operational risk is the risk that, in any operational area of the Credit Union (i.e., capital, credit, market, structural, and liquidity management), a financial loss will result from fraud, human error, or bad judgement. The Credit Union’s operational risk management policy requires appropriate and effective internal control policies, segregation of duties, information systems, accounting and record-keeping, safeguarding of physical assets from loss or misappropriation, a list of designated counterparties for material transactions, insurance, duplicates or back-ups of records, and business continuity and disaster recovery plans (reviewed by the Audit Committee and annually tested, with the most recent test not raising any concerns). The policy also sets out a framework under which the Credit Union can “outsource” business activities to outside service providers. The Credit Union operates with unionized staff who are covered by two collective agreements and represented by two unions. Of those two agreements, one has expired as of the date hereof and has not yet been successfully renegotiated. Although Board and management both believe the likelihood of a strike is low, a strike of some or all of the employees covered by this collective agreement is a possibility. The Credit Union takes what it believes to be all necessary and reasonable steps to guard against cybersecurity threats. Employees of the Credit Union, together with an external service provider, continuously monitor all access points to the Credit Union’s network from outside, and the external service provider advises the Credit Union on external threats. The Credit Union has recently commenced a process that will result in its conversion to a new banking system. It has signed a contract with Temenos Software Canada Ltd., outlined on page 38, and has recently commenced work on this project. The Credit Union anticipates that this project will take 18 months, resulting in a conversion to the new banking system in the fall of 2016. The Credit Union estimates that this project will have a 10-year all-in cost of approximately $18 million. The Credit Union is of the opinion that the risk of this project to its operations is mitigated by the robust due diligence process it followed in selecting Temenos Software Canada Ltd. as its provider, and by the governance structure it has adopted for the conversion process.


The Credit Union is open and responsive to potential merger and acquisition opportunities, but only with small to medium sized credit unions.

Regulatory Action Under the Act, DICO has the authority to place a credit union under Supervision or Administration should it believe that there is a potential for that credit union or caisse populaire to encounter financial or management problems which could affect its financial well-being or which could tend to increase the risk of claims by that credit union or caisse populaire against the deposit insurance fund. The Credit Union is not currently under Supervision or Administration, and is not aware of any threat to place it under either Supervision or Administration. The Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) regularly audits the Credit Union’s compliance with Canadian requirements to combat money-laundering and terrorist financing. In the event that the Credit Union was found not be in compliance with these requirements, the Credit Union could be fined amounts ranging from $1 to $500,000 per violation depending on the seriousness of the violation. In the event of extensive non-compliance or little expectation of immediate or future compliance, the Credit Union could be subject to criminal penalties. FINTRAC has never imposed a fine on the Credit Union in this regard.

Reliance on Key Management The success of the Credit Union’s business strategy is dependent on the ability of the Credit Union to retain its senior management personnel. The inability to retain such persons, or replace them with individuals of equal competence, could adversely affect the Credit Union’s financial performance. The Credit Union does not have employment contracts with any of its senior managers that require such persons to provide the Credit Union with notice, longer than that which would be ordinarily required by law, of the termination of his or her employment relationship with the Credit Union. The Credit Union carries “key person” life insurance on its President and Chief Executive Officer, its Executive Vice Presidents, and its Vice Presidents. The Credit Union has emergency succession plans in place for all key management positions to address short-, medium-, and long-term absences of the incumbents in those positions.

Geographic, Economic and Competitive Risk

Like every other financial institution, the Credit Union is affected by periods of economic downturn that result in a lack of consumer confidence, a drop in demand for loans and mortgages, or a reduction in the level of savings. The Credit Union, as a community-bond credit union, is dependent to a significant degree on the economic performance of the communities that it serves. The Conference Board of Canada’s publication Provincial Outlook Executive Summary, Winter 2015, comments on the Canadian economy in general terms. The report states that the plunge in the price of oil is expected to have a major impact on the economy. Revenues in the oil and gas industry have seen


a sharp decline, resulting in steep cuts in their capital budgets. Federal and provincial government revenues will be directly impacted by those revenues directly tied to the price of oil and gas, while overall revenues are expected to be squeezed from reduced nominal GDP growth. The Conference Board is expecting 2015 GDP growth to be 1.9%, down from 2014’s growth of 2.4%. Central 1’s publication Interest Rate Risk Forecast, February 2015, suggests that the Bank of Canada will further decrease rates in the near term and then maintain that rate through 2016. The market is suggesting a 44% probability that the Bank of Canada will not make any further changes to rates before the end of 2015. Other economists, however, forecast the Bank of Canada will start raising rates in early 2016, but the increase will be modest. Central 1 suggests that the stimulus impact of lower oil prices, certain of the world’s central bankers providing stimulus, and lower bond yields will take time to work through the economic channels. Central 1 suggests the yield curve will move towards a normal slope starting in the latter half of 2015 into 2016. The Conference Board of Canada’s publication Provincial Outlook Executive Summary, Winter 2015, predicts improving prospects for Ontario’s economy due to stronger U.S. growth, the lower Canadian dollar, and the Pan-Am Games. The Conference Board predicts that Ontario’s economy will grow by 2.9% and 2.6% respectively in 2015 and 2016, and that unemployment will continue to decline, to 6.7% in 2016. Finally, the Conference Board forecasts average primary household income will increase by 2.8% in 2015 and 3.1% in 2016. Central 1’s publication Economic Analysis of Ontario January 2015, forecasts that the Hamilton Niagara Peninsula Economic Region, which includes Brantford, is set for modest economic growth. Central 1 forecasts employment will increase by 1.5% in both 2015 and 2016, with the unemployment rate decreasing to 5.8% in 2016. Central 1 predicts that housing sales will continue to increase in the 3% - 4% range in 2015 and 2016, with average sale prices increasing in the 3.6% - 4.0% range in the same time period. The financial services industry continues to be extremely competitive. The major banks have expanded their traditional core banking business into other financial services, where they now dominate the brokerage and trust industries. As a result, the sheer size and increasing scope of their diversified operations represent both a challenge and an opportunity to credit unions. The success of credit unions depends largely on their ability to differentiate themselves from large banks, and on their ability to provide personal service while supplying new products and services to meet their members’ needs, thereby ensuring that they earn sufficient profits to continue to grow and prosper. The Credit Union offers a full range of products and services.


DIVIDEND RECORD AND POLICY The Credit Union has declared and paid the following dividends with regard to its last five fiscal years:

Please note that all dividends paid as outlined above were paid in the form of additional shares of the same class and series. The Credit Union also paid a dividend, in each of the fiscal years noted above, of $5.00 per member, which was then used to pay for the Membership Share, if any, which that member was required by the by-laws of the Credit Union to purchase. The Credit Union or a predecessor has declared and paid a dividend equal to or greater than the dividend policy established for the relevant series of Class B Shares in each and every year since the shares of that series were issued by the Credit Union or the appropriate predecessor. Past payment of dividends is in no way an indicator of the likelihood of payment of future dividends. For a discussion of the priority of the various classes of shares in the payment of dividends, and the restrictions placed on the Board in the declaration of dividends, see pages ii, iii, 11, 12, 17, and 22. The dividend policy of the Credit Union’s Board for Class B Investment Shares, Series 2015, shall be to pay a dividend or dividends in every year in which there are sufficient profits to do so while still fulfilling all Regulatory Capital, liquidity, and operational requirements. The dividend rate shall be established by the Board, in its sole and absolute discretion, based on financial and other considerations prevailing at the time of the declarations. The Board shall consider whether or not a dividend shall be declared, and at what rate and in which manner, including whether in the form of additional Class B Investment Shares, Series 2015, in cash, or partly in shares and partly in cash. Fractional shares will not be issued; dividends, paid in the form of shares will be rounded to the closest whole dollar amount before payment, with 0.50 rounded down. The Board shall consider this at least annually, and any declared dividend will be paid following each fiscal year end and before each annual general meeting of members. There can be no guarantee that a dividend will be paid each year. The Board has defined an appropriate dividend rate to be the greater of 4.05% or a rate which exceeds by 125 Basis Points the simple average of the yields on the monthly series of the Government of Canada five-year bonds (CANSIM Identifier V122540) as published by the Bank of Canada on its website, www.bank-banque-canada.ca during the Credit Union’s fiscal year, for fiscal years ending on or before

Fiscal Year Class B Investment Class B Investment Class B Investment Class B Investment Membership

Ended Shares, Series 1 Shares, Series 2 Shares, Series 2010 Shares, Series 2013 Shares

Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate

($000's ) ($000's ) ($000's ) ($000's ) ($000's )

August 31, 2014 167$ 3.000% 204$ 3.000% 2,124$ 5.500% 27$ 3.000% 425$ $5/member

August 31, 2013 163$ 3.000% 204$ 3.000% 2,018$ 5.500% 408$ $5/member

August 31, 2012 162$ 3.000% 200$ 3.000% 1,920$ 5.500% 402$ $5/member

August 31, 2011 176$ 3.321% 219$ 3.321% 1,816$ 5.500% 362$ $5/member

August 31, 2010 165$ 3.058% 208$ 3.058% 541$ 5.500% 342$ $5/member


August 31, 2020. For fiscal years ending after that date, the Board has defined an appropriate rate to be a rate equal to or greater than the rate which exceeds by 125 Basis Points the simple average of the yields on the monthly series of the Government of Canada five-year bonds (CANSIM Identifier V122540) as published by the Bank of Canada on its website, www.bank-banque-canada.ca, during the Credit Union’s fiscal year. The dividend, in the fiscal year Class B Investment Shares, Series 2015 sold pursuant to this offering statement are issued, shall be pro-rated for the number of days the Class B Investment Shares, Series 2015 were issued and outstanding in that fiscal year. Dividends paid on Class B Investment Shares, Series 2015, will be taxed as interest and not as dividends, and are therefore not eligible for the tax treatment given to dividends received from taxable Canadian corporations, commonly referred to as the “dividend tax credit”. The dividend policy followed by the Credit Union is at the discretion of the Board, and is subject to change or exception at any time. Dividends paid may therefore not be in accordance with the policy outlined above. Following consideration and payment of a dividend on the Class B Investment Shares, Series 1, 2, 2010, 2013 and 2015, the Board may decide to pay a dividend on shares ranking junior to those shares, including the Class A Patronage Shares, Series 1 (if any are then issued and outstanding), and the Membership Shares.

USE OF PROCEEDS FROM SALE OF SECURITIES The principal uses of the net proceeds and purpose of this offering will be to enable the Credit Union to add to its Regulatory Capital to provide for the Credit Union’s future growth, development and stability, while maintaining a prudent cushion in the amount of Regulatory Capital above regulatory requirements.

PLAN OF DISTRIBUTION 1. The price to members for each Class B Investment Share, Series 2015, will be $1.00. 2. There will be no discounts or commissions paid to anyone for the sale of these securities. 3. One hundred per cent (100%) of the proceeds of the sale of these securities will go to the Credit

Union, which will then be responsible for the payment of the costs associated with this offering statement.

Subscriptions for the Class B Investment Shares, Series 2015, shall be accepted as of the date hereof, and for a period of six months thereafter, or until the date on which subscriptions have been received for the maximum 70,000,000 Class B Investment Shares, Series 2015, or until a date, after the Credit Union has received subscriptions for the minimum 20,000,000 Class B Investment Shares, Series 2015, but before the Credit Union has received subscriptions for the maximum 70,000,000 Class B Investment Shares, Series 2015, and before six months have passed from the date hereof, on which the Board in its sole and absolute discretion shall determine to close the offering, whichever shall occur first (the "Closing Date"). Subscriptions will be accepted on a first come, first served basis, and


subscription forms will be marked with the time and date accepted. The Credit Union will closely monitor subscriptions being received as total subscriptions approach the maximum. Potential purchasers making subscription requests at that time may not be allowed to subscribe for the full number or amount of shares they desire, or their subscription request may be refused. This offering may not be over-subscribed, and subscriptions will not be pro-rated. If the funds to be used by a subscriber to pay for shares subscribed are on deposit at the Credit Union, the subscriber will authorize the Credit Union to place these funds “on hold” to guarantee payment of these shares. If the offering is completed, such hold will be released, and the authorized amount will be used to pay for the shares for which the member subscribed. If the offering is withdrawn, or if the decision to buy is reversed by the subscriber (as described on the cover of this offering statement), the hold on the funds will be released immediately thereafter. If the funds to be used by a subscriber to pay for shares subscribed are coming from outside the Credit Union, such funds will be held in Escrow, in accounts to be trusteed by Concentra Trust, until the offering is completed or withdrawn, or until the subscriber exercises the right to reverse the decision to purchase the securities (as described on the cover of this offering statement). If the offering is completed, the proceeds will be released from Escrow and used to pay for the shares for which the member subscribed. If the offering is withdrawn, or if the subscriber reverses the decision to buy, the proceeds will be refunded in full, plus interest calculated at a rate equal to the Credit Union’s 30-day term deposit rate, pro-rated for the number of days the funds were in Escrow, to those who subscribed. The above-noted terms and conditions regarding holds on subscribers’ deposit accounts and regarding Escrow accounts are detailed on the Credit Union's subscription form for Class B Investment Shares, Series 2015, and on separate agreements, to be signed by subscribers, authorizing transfers and holds on deposit accounts and/or placement of proceeds in Escrow accounts. Copies of the subscription form and the forms for authorization of a hold on funds in deposit accounts and/or placement of funds in Escrow accounts are printed on pages 63, 64 and 65. If fully subscribed, the gross proceeds to be derived by the Credit Union from the sale of the Class B Investment Shares, Series 2015, shall be $70,000,000. The costs of issuing these securities are not expected to exceed $500,000, and these costs will be deducted from the gross proceeds in arriving at the amount to be reported as share capital outstanding. The estimated maximum net proceeds of this offering of securities are $69,500,000. If, after six months from the date of this offering statement, subscriptions received for the Class B Investment Shares, Series 2015, amount to less than $20,000,000 in the aggregate, this offering for Class B Investment Shares, Series 2015, will either be renewed with the approval of the Superintendent of Financial Services, or be cancelled and withdrawn, and all funds "frozen" or held in Escrow to support subscriptions will be returned to the respective members within 30 days thereof, with applicable interest, without shares being issued. If at that time, however, sales amount to at least $20,000,000 but do not amount to $70,000,000, the Credit Union may proceed to close the offering, or apply to the Superintendent of Financial Services for a renewal of the offering for a period not exceeding six months. If at that time subscriptions for the Class B Investment Shares, Series 2015,


amounting to $70,000,000 have been received, such shares for which subscriptions have been received will be issued within sixty business days after the Closing Date (the “Issue Date”). The Class B Investment Shares, Series 2015, will not be sold by underwriters or other dealers in securities. The minimum subscription per member shall be $1,000 for 1,000 Class B Investment Shares, Series 2015. The maximum subscription per member shall be $250,000 for 250,000 Class B Investment Shares, Series 2015. Shares will only be issued subject to the full price of such securities being paid.

MARKET FOR THE SECURITIES There is no market for the Class B Investment Shares, Series 2015. These securities may only be transferred to another member of the Credit Union.

SENIOR DEBT (RANKING AHEAD OF CLASS B INVESTMENT SHARES, SERIES 2015)

The Credit Union has arranged a credit facility, totalling CDN $124 million, at Central 1. That amount is available to cover fluctuations in daily clearing volume on the Canadian-dollar chequing accounts of the members of the Credit Union, and to provide liquidity if warranted. As security for these credit facilities, the Credit Union has given Central 1 a general security agreement. The line of credit will next be reviewed as of December 31, 2015. The Credit Union has also arranged a credit facility, totalling CDN $100 million, with Caisse centrale Desjardins du Québec. That amount is available for general corporate purposes. As security for this credit facility, the Credit Union has given Caisse centrale Desjardins du Québec a security interest in certain Mortgage Loans. The line of credit will next be reviewed as of July 11, 2015. The balance outstanding on the credit facilities of the Credit Union during the four months ended December 31, 2014, and the fiscal years ended August 31, 2014, 2013 and 2012 is outlined below.

Fiscal Period Canadian-Dollar Capital

Ended Operating Account Term Loans Letters of Credit Markets/Other

High Low High Low High Low High Low

Balance Balance Balance Balance Balance Balance Balance Balance

December 31, 2014 9,500,000$ -$ 140,000,000$ 153,000,000$ -$ -$ -$ 1,707,000$ 593,000$

August 31, 2014 9,500,000$ -$ 73,000,000$ 103,000,000$ 4,000,000$ -$ -$ 1,707,000$ 260,000$

August 31, 2013 9,500,000$ -$ 74,000,000$ 74,000,000$ -$ -$ -$ 1,476,000$ 260,000$

August 31, 2012 9,500,000$ -$ 56,000,000$ 56,000,000$ -$ -$ -$ 3,016,000$ 1,089,000$

End of Period

Balance

The Credit Union’s US-dollar operating line was not used at any relevant time. Members’ deposits in the Credit Union, as well as its other liabilities, including unsecured creditors, rank prior to the Credit Union’s obligations to the holders of any class or series of its shares, including the Class B Investment Shares, Series 2015.


AUDITORS, REGISTRAR AND TRANSFER AGENT The auditors of the Credit Union are KPMG LLP, Chartered Professional Accountants, Licensed Public Accountants, Box 976, Suite 700, 21 King Street West, Hamilton, Ontario L8P 4W7 (phone: 905-523-8200, fax: 905-523-2222, website www.kpmg.ca). The registrars and transfer agents for the Class B Investment Shares, Series 2015 are designated staff of the Credit Union.

DIRECTORS AND SENIOR MANAGEMENT

Board of Directors The following table sets forth the board of directors of the Credit Union:

Name Municipality of Residence

Principal Occupation Position / Office

Ron Fleet Fisherville, Ontario.

Retired Chair, Elections Committee Member, CSR Committee

Sandra Gribben Niagara Falls, Ontario.

Retired Chair, CSR Committee Member, Governance Committee

Irene Lowell St. Catharines, Ontario.

Retired Member, Governance Committee and Elections Committee

Dianne MacLean Stoney Creek, Ontario.

Retired Corporate Secretary; Vice Chair, Audit Committee; Member, Governance Committee

Lucy Morton Hamilton, Ontario.

Registered Nurse Member, Elections Committee and CSR Committee

Evelyn Myrie Hamilton, Ontario.

Consulting Firm Principal Member, Audit Committee and Governance Committee

Lorie Peacock St. Catharines, Ontario.

Labourer Member, Elections Committee and Governance Committee


Name Municipality of Residence

Principal Occupation Position / Office

Otto Penner Niagara Falls, Ontario.

Retired Vice Chair; Chair, Governance Committee Member, Elections Committee

Catherine Rogers St. Catharines, Ontario.

Retired Member, Audit Committee and CSR Committee

Carey Smith Oakville, Ontario.

Auto Industry Regulator Chair Member, Governance Committee

Richard Sroka Brantford, Ontairo

Retired Member, Audit Committee and CSR Committee

Stuart Walker Burlington, Ontario.

Finance Manager Chair, Audit Committee Member, CSR Committee

Senior Management

The following table sets forth the senior management of the Credit Union:

Name/Municipality of Residence

Position/Title

Kelly McGiffin

Ancaster, Ontario.

President and Chief Executive Officer

Dave Schurman

Oakville, Ontario.

Executive Vice President and Chief Operating Officer

James Olson St. Catharines, Ontario.

Executive Vice President and Chief Administration Officer

Lloyd Smith St. Catharines, Ontario.

Executive Vice President and Chief Risk Officer

Carol Mayer Ancaster, Ontario.

Executive Vice President, Internal Services

Mary DeSousa Oakville, Ontario.

Executive Vice President, Marketing

Barry Doan Hamilton, Ontario

Executive Vice President and Chief Financial Officer

Jennifer Saunders-Finlay Hamilton, Ontario.

Vice President, Governance

Tom Bijvoet Oakville, Ontario.

Executive Vice President, Information Technology

All of the senior managers have been employed by the Credit Union for at least the five years preceding the date hereof, except for Mary DeSousa and Tom Bijvoet. Ms. DeSousa was previously


employed by a national title insurance provider in Canada and has spent the last 20 years in various senior marketing positions. Mr. Bijvoet is a long term credit union information technology executive at a large size credit union.

LAWSUITS AND OTHER MATERIAL OR REGULATORY ACTIONS As at December 31, 2014, except for actions that may be used to recover delinquent loans where the Credit Union is the plaintiff, the Credit Union is not aware of any material pending or contemplated legal proceedings to which it is a party. The Credit Union is not aware of any regulatory actions pending or contemplated against the Credit Union.

MATERIAL INTERESTS OF DIRECTORS, OFFICERS AND EMPLOYEES All loans to the directors, officers and employees of the Credit Union and their spouses and immediate dependent family members are made in the normal course of business, using standard credit granting criteria. Loans are made to these individuals on the same terms and conditions as loans are made to the general membership, except in certain cases interest rate, depending on the type of loan, as specified in the Credit Union’s human resources policy. The aggregate value of loans in all categories to restricted parties of the Credit Union, as of December 31, 2014, amounted to $2,286,000. No allowance was required in respect of these loans. As members of the Credit Union, directors, officers and employees of the Credit Union each hold Membership Shares in the number required to maintain membership in the Credit Union. Accordingly, each director, officer and employee may subscribe for the Class B Investment Shares, Series 2015, should any of such persons wish to do so.

MATERIAL CONTRACTS The following material contracts have been entered into by, or have bound, the Credit Union during the last three years. General Security Agreement with Central 1 Credit Union, dated February 8, 2010 The Credit Union has granted to Central 1 a general security interest in all of its assets to secure its obligations under the credit facility. This security interest does not extend to assets which the Credit Union is holding to meet its regulatory liquidity requirements. The agreement outlines certain defaults; when a default has occurred, Central 1 is permitted to withhold further advances and demand repayment of all sums owing.


Credit Agreement with the Lenders from time to time parties hereto as Lenders and Caisse Centrale Desjardins as Adminsitrative Agent and as Issuing Lender, dated July 11, 2014 This agreement gives the Credit Union access to its $100 million credit facility from Caisse Centrale Desjardins for its general corporate purposes. The first annual review of this credit facility is scheduled for July 10, 2015. The amount outstanding under the credit facility from time to time is secured by certain Mortgage Loans made by the Credit Union to its members. The Credit Union is required to maintain certain financial covenants, with which it is in full compliance as at the date hereof. The agreement also defines certain standard events of default, none of which has occurred as of the date hereof; if the Credit Union were to default, the credit facility could be cancelled and an immediate demand for the repayment of any amounts then outstanding made. Credit Union Banking and Credit Services Agreement Form of Adhesion with Credit Union Central of Ontario Limited (“CUCO”), dated January 1, 2007 This agreement was assigned to Central 1 on CUCO’s merger with CUCBC, and regulates all aspects of the Credit Union’s relationship with Central 1: banking services, credit facilities, clearing and settlement services, bill payment services, direct deposit services, pre-authorized debit services, money orders, US retail services, swaps, securities trading, custodial services, structured products services, index-linked term deposits, pooled liquidity, on-line delivered services, and fees. The agreement may be terminated by Central 1 without notice at any time if any of the Credit Union’s representations or warranties are untrue, or if the Credit Union breaches any term of this agreement and such breach is not cured within 30 days after notice. The Credit Union also has the right to terminate the agreement without notice if Central 1 breaches any term of this agreement and such breach is not cured within 30 days after notice. The Credit Union also has the right to terminate the agreement by paying its indebtedness, terminating any other lending or credit agreement it has with Central 1, paying in full the amount of any guarantee it has given of the indebtedness of another person, and performing its obligations under any security agreement granted by the Credit Union in favour of Central 1. Agreement with COPE Local 343 effective January 1, 2010 and expired December 31, 2014; Agreement with UNIFOR Local 199, effective April 1, 2014 and expiring March 31, 2017 These agreements regulate all aspects of the Credit Union’s relationship with its unionized employees. The Credit Union has one collective agreement negotiation pending as of the date hereof.


Prolender License, Maintenance, Training, and Hosting Services Agreements dated September 30, 2003 and Professional Services Agreement with Homebank Technologies Inc. (now CRI Canada), dated May 30, 2003 These agreements provide the Credit Union with the license to use its loans origination software, and with services to have that software and the forms it produces customized for the Credit Union’s needs. The agreements have seven-year terms; at the conclusion of the term or any renewal term, the Credit Union has the option to renew the agreement for a further term of five years. The agreement can be terminated by either party for breach if that breach is not corrected by the defaulting party within 30 days after receiving notice of the breach, and immediately on the insolvency or bankruptcy of the other party. The Credit Union cannot assign or transfer the agreement to anyone other than an affiliate without consent; CRI Canada can assign or transfer the agreement on notice to the Credit Union. Financial Institution Agreement with DealerAccess Canada Inc., dated October 18, 2005; first Amendment dated November 21, 2007 This agreement provides the Credit Union with the development and maintenance of a portal through which vehicle dealers can submit loans to the Credit Union’s Dealer Finance Centre electronically for approval. The agreement is exclusive. The agreement had an initial three-year term, and renews for further one-year terms unless either party provides notice to the other at least 60 days before the expiry of any term or renewal term of its intention not to renew the agreement. DealerAccess can suspend services to the Credit Union for non-payment of fees. Either party can terminate the agreement immediately on the insolvency or bankruptcy of the other party, or on notice periods not exceeding 30 days for a material breach of the agreement. Administration Agreement with CUMIS Life Insurance Company dated September 1, 2008; Memorandum of Agreement (Creditor Insurance Profit-Sharing Program) with CUMIS Life Insurance Company, dated September 1, 2007 The administration agreement provides the Credit Union with the ability to offer creditor life and disability insurance to its borrowing members. This agreement is exclusive. CUMIS pays the Credit Union administration fees for its efforts in promoting the product to its borrowing members and administering the application and claims process. The agreement has a term of five years, and thereafter renews for successive terms of one year unless otherwise terminated in accordance with its terms. Either party can terminate the agreement for cause, or require the other party to enter into negotiations regarding the early termination of the agreement on a date not less than 180 days in the future. Pursuant to the profit-sharing agreement, rather than receiving an administration fee on its sales of each product, the Credit Union can instead receive a share of the profits earned on that product, calculated as outlined in the agreement. The agreement had an initial one-year term, and has renewed for successive one-year terms. Either party can terminate the agreement on 90 days prior written notice. This agreement is also exclusive.


Participation Agreement (CUMIS Personal Lines Insurance Program) with CUMIS General Insurance Company, effective September 1, 2014 This agreement permits the Credit Union to offer homeowners and automobile insurance products to its members. The Credit Union will not promote similar products offered by any other insurance company to its members. CUMIS compensates the Credit Union at agreed-upon rates when its members purchase insurance products from CUMIS. The agreement expires September 1, 2017, and thereafter renews for one-year terms unless terminated in accordance with the agreement. Either party can terminate the agreement on 90 days’ prior written notice to the other party, or on 5 days’ prior written notice to the other party in the case of material breach. Credit Union Agreement with Credit Union Central of British Columbia (“CUCBC”, now Central 1), dated December 11, 2007 This agreement provides the Credit Union with access, through Central 1, to the Canada Mortgage and Housing Corporation’s Mortgage Backed Security Program and the Canada Mortgage Bond Program, which are securitization programs enabling the Credit Union to sell insured and uninsured Mortgage Loans to Central 1 for inclusion in the programs. The Credit Union continues to service the Mortgage Loans. The agreement can only be terminated by either party when there are no Mortgage Loans involved in either program. License and Service Agreement with FISERV Solutions Inc., dated July 22, 2002; First Addendum effective November 16, 2005; Second Addendum effective January 27, 2006 This agreement provides the Credit Union with a license to use, and the maintenance of, the Credit Union’s banking system, for which the Credit Union paid a license fee and pays ongoing maintenance fees. The agreement is perpetual, unless terminated in accordance with its terms. The Credit Union can terminate the agreement as a result of a material default by FISERV on 30 days’ notice, and FISERV has the right to terminate the agreement immediately on certain defaults by the Credit Union. The license can be transferred on a sale of the assets by the Credit Union, or on the amalgamation of the Credit Union with another entity, on FISERV’s prior written consent. This agreement will eventually be terminated due to the banking system conversion. Services Agreement with Temenos Software Canada Ltd., signed December 5, 2014; Software Agreement signed December 8, 2014 These agreements set out the general terms and conditions of the relationship between the parties regarding the provision and implementation of the Credit Union’s new banking system. The Credit Union can terminate this agreement at any time without penalty at any time when there are no service orders in effect. The Credit Union can terminate any service order on 90 days’ notice, but is not entitled to a refund of fees paid and must pay fees accruing during the 90-day notice period; regarding the software service order, however, all license fees must be paid, and Temenos is also entitled to recover any expenses it has incurred in excess of those license fees. The agreement may be terminated for a material breach if that breach is not cured within 30 days. The Credit Union will be provided with a non-exclusive, non-transferable, non-sublicesable license to use the software to process transactions on its own behalf and on behalf of other financial institutions as a service bureau. The


initial term of the license is for 16.5 years from November 30, 2014; there is an option to renew that license for a further 10-year term at a fixed price. Amended and Restated Connection Services Agreement with DirectCash Management Inc., in its capacity as the Managing General Partner of the DirectCash Canada Limited Partnership, the DirectCash ATM Management Partnership, and the DirectCash AGM Processing Partnership (formerlyThreshold Financial Technologies Inc., as of March 1, 2007 This agreement is for the provision of switching services for shared-cash dispensing and point-of-sale services. This agreement is currently subject to an option to renew for either a 7-year or a 10-year term, which option must be exercised by March 31, 2015. If a termination is based on a non-monetary breach of the agreement, the defaulting party must be given at least 50 days prior notice of termination. If a termination is based on a monetary breach, the termination can occur immediately after notice of the default and a remedial period lasting 7 business days. Termination can also occur immediately upon the insolvency of a party. The agreement is exclusive. ISDA Master Agreement with Credit Union Central of Ontario Limited (now Central 1 Credit Union) This agreement enables the Credit Union to enter into derivative contracts with this counterparty. As at December 31, 2014, the Credit Union had 4 fixed pay amortizing interest rate swaps outstanding with a total notional value of $10.9 million and maturing between September 2015 and June 2021. Under the terms of these agreements, the counterparty to the swap is obligated to pay the Credit Union a variable rate and the Credit Union is obligated to pay the counterparty a fixed rate, with both payments based upon the notional value of the underlying swap. The variable rate is repriced monthly by the counterparty to the swap. The Credit Union is currently paying fixed rates in the range of 3.05% to 4.00% and is receiving a variable rate as at December 31, 2014 of 1.30%. As at December 31, 2014, the Credit Union had 7 fixed pay interest rate swaps outstanding with a total notional value of $45 million and maturing between October 2018 and December 2019. Under the terms of these agreements, the counterparty to the swap is obligated to pay the Credit Union a variable rate and the Credit Union is obligated to pay the counterparty a fixed rate, with both payments based upon the notional value of the underlying swap. The variable rate is repriced monthly by the counterparty to the swap. The Credit Union is currently paying fixed rates in the range of 1.89% to 2.72% and is receiving a variable rate as at December 31, 2014 of 1.30%. As at December 31, 2014, the Credit Union had 1 fixed pay, delayed start interest rate swap outstanding with a total notional value of $5 million, effective January 2015 and maturing January 2020. Under the terms of this agreement, the counterparty to the swap is obligated to pay the Credit Union a variable rate and the Credit Union is obligated to pay the counterparty a fixed rate, with both payments based upon the notional value of the underlying swap. The variable rate is repriced monthly by the counterparty to the swap after the effective date. The Credit Union will pay fixed rate of 2.72% and will receive a variable rate based on CDOR.


As at December 31, 2014, the Credit Union had 1 bond forward outstanding with a notional value of $5 million. Settlement date of the bond forward is January 29, 2015. Under the terms of this agreement, the counterparties to the bond forward is obligated to net settle the calculated change in value of the relevant underlying Government of Canada bond. The Credit Union has also entered into equity-linked purchase option agreements with various counterparties to eliminate the risk involved in its equity-linked term deposit products. The Credit Union pays a fixed amount based on the notional amount at the inception of the equity-linked purchase option contract. At the end of the term the Credit Union receives, from the counterparties, payments equal to the amount that will be paid to the depositors based on the performance of the respective indices. Credit Union Registered Plans Agency Agreement with Concentra Financial Services Association, dated November 6, 2008 This agreement enables the Credit Union to offer to its members, as the agent for Concentra Financial Services Association, (a federally-regulated retail association serving the credit union system across Canada) various deposit products offered by the Association in return for the payment to the Credit Union by the Association of a commission, and to offer its members the RESP developed by Concentra Trust containing only fixed-term and variable deposits, and the RRSP, RRIF, and TFSA products developed by Concentra Trust containing the Credit Union’s shares, either alone or in combination with fixed-term and variable deposits, including pension lock-ins of those plans in the Ontario and federal jurisdictions. Regarding the registered plans, the Credit Union pays Concentra Trust a fee for the set-up of each plan, and a monthly trustee fee for each contract participating in the plan. The Credit Union administers the registered plans as the agent of Concentra Trust. The agreement initially had a one-year term; that term renews automatically for a further one-year term unless the agreement is terminated in accordance with its terms. Letter Agreement with Credential Financial Inc. (“CFI”), dated January 22, 2010 This agreement enables the Credit Union to offer its members mutual funds, stocks, bonds and other securities through Credential Securities Inc. (“CSI”), Credential Asset Management Inc. (“CAM”), and Credential Financial Strategies (“CFS”), through a representative or representatives employed by CFS on the Credit Union’s behalf. The Credit Union receives certain payments from CFI when its members purchase investment products offered by CSI or CAM. This agreement expired March 31, 2013, and both parties are continuing to abide by the agreement while negotiating a new agreement. CFI, CSI, CAM and CFS are owned and operated by the Canadian credit union system.


Ficanex Canadian Exchange Licensee Membership Agreement with Ficanex Services Limited Partnership dated January 31, 2005 This agreement provides the Credit Union with its membership in the Exchange Network, an ABM network. The Credit Union pays to the limited partnership royalty and transaction fees. The agreement continues for five years; the parties can, if the Credit Union is not in default, renew the agreement for additional terms of five years. Ficanex can terminate the agreement immediately if the Credit Union has not corrected a breach of the agreement within 30 days after being notified of the breach. Ficanex and the Credit Union can terminate the agreement immediately for certain breaches. Particular rules apply in mergers, depending on the membership status in the network of the entity with which the Credit Union is merging. The agreement is governed by the laws of British Columbia. Services Agreement with The Toronto-Dominion Bank operating a division as CUETS Financial, dated January 1, 2014 This agreement permits the Credit Union to offer certain MasterCard products to its members pursuant to terms and conditions that are standard to Ontario credit unions. The Credit Union receives revenue for its efforts in marketing these products to its members, and pays the Bank fees for the services it provides. This agreement is exclusive. The agreement continues until December 31, 2017, and automatically renews for two-year terms thereafter unless either party notifies the other of its intention not to renew the agreement. The Credit Union does not hold its members’ credit card receivables, but there is provision in the agreement for it to guarantee the obligations of members who it chooses to assist in building a credit history. Master Communications Agreement (Retail) with Bell Canada, dated July 11, 2012 This agreement provides the Credit Union with all of its required telecommunication services. The agreement continues until the term of the last remaining schedule expires or terminates. Bell may change fees for the renewal term of any schedule by providing notice of the changed fees at least 90 days before the term of the schedule expires. Co-Owners’ Agreement with 1743753 Ontario Inc., 1743754 Ontario Inc., 1743752 Ontario Inc., 1812502 Ontario Inc., and two individuals dated April 1, 2011 This agreement is a co-ownership agreement regarding 2441 Lakeshore Road West, Oakville, Ontario. One of the corporations owns the property, and the agreement sets out the relationship among all of the co-owners. The owner’s proportionate shareholders are all of the other co-owners, and it has a Board divided equally between the Credit Union on one hand and the other co-owners on the other. The Credit Union owns a half-interest in the property as a tenant-in-common, and pays its proportionate share of the expenses. The property is managed by a committee where the Credit Union holds one-half of the votes. The Credit Union has a right of first refusal to purchase the interest of another co-owner who wishes to sell to a third party, or to piggyback the sale of its interest to the same third-party purchaser. All of the co-owners have a right of first refusal to purchase the interest of a co-owner who no longer wishes to be part of the arrangement. The non-defaulting co-owners can purchase the interest of a defaulting co-owner at fair market value.


Co-Owners’ Agreement related to a property development project dated December 17, 2014 This agreement is a co-ownership agreement regarding 136 James Street and 51 Lake Street, St. Catharines, Ontario, properties which are to be developed into multi-storey, multi-unit buildings to be used for student housing, and are already pre-sold to a corporation skilled in the operation and management of such properties. The Credit Union has an interest in the project by way of a profit-sharing arrangement in place to share the profits gained through the construction and sale of the buildings. Co-Owners’ Agreement related to the purchase and operation of a retail shopping plaza dated February 26, 2015 This agreement is a co-ownership agreement regarding the purchase and operation of a retail shopping plaza located at 370 Highland Road West, Kitchener, Ontario. The Credit Union has an interest in the project by way of a profit-sharing arrangement in place to share the profits gained through the operation of the plaza. The plaza will be professionally managed by a property manager pursuant to the agreement. Two Mortgage Transfer and Servicing Agreements with two different Canadian financial institutions, one dated February 1, 2015 and one dated March 10, 2014 These agreements allow the Credit Union to purchase certain Mortgage Loans from the counterparty financial institution, which will continue to service those loans and receive a fee for doing so. The Credit Union is then permitted to sell those Mortgage Loans to other investors for the purpose of creating mortgage-backed securities. The Credit Union is not under any obligation to acquire any Mortgage Loans from either financial institution. The agreement can be terminated for cause in accordance with its terms. The agreements can generally be assigned only on the prior written consent of the other party. Mortgage Underwriting and Servicing Agreement with a Canadian Mortgage Originator and Servicer, dated July 16, 2014 This agreement permits the Credit Union to engage the other financial institution to underwrite and service, on the Credit Union’s behalf, certain Mortgage Loans originated and funded by the Credit Union. The agreement contains maximum limits on the Mortgage Loans to which the other financial institution can commit the Credit Union. The agreement has a three-year term, which automatically renews for an indefinite number of one-year terms unless either party gives notice to the other of its intention not to renew the agreement.

MANAGEMENT DISCUSSION AND ANALYSIS The purpose of this report is to provide the readers of this offering statement with Management’s insights of FirstOntario’s financial results for the 2012, 2013 and 2014 fiscal years and the four month interim period ending December 31, 2014. The audited financial statements for the fiscal years of 2013 and 2014 are attached along with the condensed interim review financial statements for the four


month period ending December 31, 2014. This report will provide an overview of growth and profitability along with an overview of key inherent risks that financial institutions like FirstOntario face and how those risks are managed. Overview With over $2.6 billion in assets and over $4.6 billion in Member’s funds under management, FirstOntario is the third largest credit union in Ontario and the fourteenth largest in Canada. FirstOntario is a full service credit union providing a wide range of credit, investment and financial advice. FirstOntario provides these services to approximately 101,000 retail and commercial Members through 29 branches and 2 commercial service centres in communities within the Golden Horseshoe and South-Western regions of Ontario. Fiscal 2015 is the first year of a five year strategic plan developed in 2014. The new strategic plan transforms our past growth strategy to a growth strategy focused on enriching our Members’ experiences. In addition, our current environment of low interest rates and decreasing margins requires FirstOntario to be focused on making innovative investments to grow our non-margin revenue services. Our strategic plan focuses our attention in this area to ensure we have a solid capital foundation on which to improve the lives of our Members and our communities. The essence of our new strategic plan is to allow FirstOntario to become F1RST in our communities by being more than a Financial Institution. Income Four Months Ended December 31, 2014 Pre-tax operating income for the four months ended December 31, 2014 was $2.4 million, down from $2.6 million in 2013. The decline is due to an increase in operating margin offset by an increase in expense mainly driven by the timing of the merger with Rochdale Credit Union Limited on November 30, 2013 along with our strategic investments in new branches. 2012 – 2014 Fiscal Years The following is a chart of pre-tax operating income and pre-tax income 2012 - 2014. Pre-tax operating income adds back unrealized losses to pre-tax income. Unrealized losses are a result of changes in fair value of our specific investments and derivatives required to be reported in income. While some of the losses may be realized in the future, Management plans to minimize the realization of these losses.


Our 2014 normalized pre-tax operating income of $7.0 million was an increase over 2013 of $0.9 million, 2013 had normalized pre-tax operating income of $6.2 million, an increase over 2012 of $0.7 million and 2012 had normalized pre-tax operating income of $5.5 million, a decrease of $0.4 million over 2011. Normalized pre-tax operating income adjust 2012 and 2013 pre-tax operating income for the following impacts:

• 2012 results included a one-time, non-recurring gain of $10.3 million on the sale of a joint venture investment; this gain was subtracted to determine normalized pre-tax operating income.

• 2012 results included the provision for a possible future commercial loan loss in the amount of $2.4 million. During 2013 the commercial loan was paid out and the specific provision was reversed. This expense in 2012 and recovery of past expenses in 2013 were reversed in determining normalized pre-tax operating income.

The 2014 and 2013 increases are mainly attributed to higher interest margin as a result of a growing balance sheet offset by a lower margin yield and higher expenses to support our growing balance sheet. In 2012, the decrease was a result of increased expenses to support a growing balance sheet exceeding, in the short term, the increase in margin due to the increasing balance sheet in a shrinking margin yield environment. During 2014, unrealized investment gains of $0.7 million were included in pre-tax income (2013 – losses of $0.1 million; 2012 – gains of $1.1 million). A further $1.4 million in pre-tax unrealized investment losses were included in other comprehensive income in 2014 (2013 – gains of $0.8 million; 2012 – gains of $0.3 million). As a result of mandatory changes for IFRS accounting policies, pension and retirement benefit actuarial gains and losses are recognized in other comprehensive income. For 2014, the pre-tax actuarial loss was $2.2 million (2013 – gain of $2.0 million). FirstOntario’s 2015 Business Plan includes a $6.4 million pre-tax operating income target.

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2012 2013 2014

Income Trend ($ Thousands)

Normalized Pre-tax Operating Income Pre-tax Operating Income Pre-tax Income


Assets December 31, 2014 Assets under management grew by $154.8 million (5.4% or 16.1% annualized) for the four months ended December 31, 2014. 2012 – 2014 Fiscal Years The following chart shows assets and assets under management. Assets under management include off balance sheet Member loans that are part of our securitization programs that we continue to administer and Member mutual fund balances.

Assets under management grew to $2.9 billion in 2014, growth of $482.8 million, 20.2% (2013 – $260.7 million, 12.2% growth; 2012 - $228.4 million, 12.0% growth). FirstOntario merged with Rochdale Credit Union on November 30, 2013, who had $105.1 million in assets under management, expanding our branch network to Woodstock, Brantford, Norwich and Ingersoll. Assets increased $454.6 million in 2014 (2013 - $272.8 million, 2012 - $277.7 million), securitized Member loans decreased $34.6 million (2013 - $37.8 million, 2012 - $74.1 million) due to mandatory IFRS accounting policy changes that require securitized residential mortgages to be recorded on the balance sheet with an offsetting debt since 2011. Member mutual fund and other financial wealth management investment balances increased by $62.8 million in 2014 due to increased Member investments and growth in the equity markets (2013 - $25.7 million growth; 2012 - $24.8 million growth).

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2012 2013 2014

Assets ($ millions)

Assets Assets Under Management


Investment in Affiliates FirstOntario is a member of Central 1 Credit Union – whose primary function is to maintain a liquidity pool for use by its member credit unions. This liquidity arrangement means that a credit union Member’s deposits are backed by a larger organization and by the combined strength of a network of approximately 130 affiliated credit unions in Canada. FirstOntario holds 5.8% of Class B Investment Shares in CUCO Cooperative Association (“CUCO Co-op Class B Shares”) that holds investments in certain third party asset-backed commercial paper previously held by Credit Union Central of Ontario Limited. December 31, 2014 The CUCO Cooperative Association Shares are being carried at $3.2 million as at December 31, 2014. FirstOntario received a capital distribution of $2.0 million in November 2014. 2012 – 2014 Fiscal Years The CUCO Cooperative Association Shares were carried at $5.1 million (2013 - $6.0 million; 2012 - $6.0 million). During 2014, the fair value of the shares increased by $0.4 million (2013 - $0.8 million; 2012 - $1.0 million) and FirstOntario received $1.7 million in capital distributions decreasing the CUCO Cooperative Association Shares carrying value (2013 - $0.8 million; 2012 - $0.5 million). In addition, FirstOntario acquired an additional $0.4 million in shares as a result of the Rochdale Credit Union merger in 2014. Members’ Equity December 31, 2014 Members’ equity increased by $2.4 million (2.2% or 6.6% annualized) in the four months ended December 31, 2014. 2012 – 2014 Fiscal Years Members’ equity increased to $111.5 million in 2014, growth of $8.2 million, 8.0% (2013 - $9.9 million, 10.6%; 2012 - $11.2 million, 13.6%). Growth in 2014 primarily came from net income and the contributed surplus from the merger with Rochdale Credit Union. This was offset by a decline in our accumulated other comprehensive income caused by fair value losses related to our cash flow hedging reserve and actuarial losses related to our employee benefit plans The growth in 2012 included the after tax gain on sale of a joint venture in the amount of $9.2 million. Due to the difference in the redemption rights of the investment shares issued in 2010, these shares are reported in members’ equity rather than liabilities where the previously issued investment shares series are reported.


Net Interest Income By definition, net interest income (“Operating Margin Before the Following” line on the Consolidated Statement of Income) is the difference between interest paid by Members on loans and income earned on our investment portfolio minus interest paid to members on their deposits and interest paid on outside debt obligations. Four Months Ended December 31, 2014 For the four months ended December 31, 2014, FirstOntario derived 84% (2013 – 87%) of its gross revenue from net interest income; an increase of 7.5% (22.5% annualized) over 2013 with net interest income as a percentage of average assets of 1.94% annualized. The year over year increase was a result of the merger with Rochdale Credit Union on November 30, 2013. 2012 – 2014 Fiscal Years FirstOntario derived 87% of its gross revenue from net interest income in 2014 (2013 – 83%; 2012 – 75%). The ability to grow net interest income is dependent upon growth in Member loans and deposits and the interest rates associated with those Member products. Net interest income is impacted by changes in interest rates over time (interest rate risk). FirstOntario strives to manage and minimize interest rate risk, sustaining a high but stable net interest income over a number of years. Net interest income increased by 14.0% 2014 (2013 – 6.2%; 2012 – 8.2%), due to market interest rates, growth in Funds Under Management (FUM) and Members borrowing for longer terms than deposit terms taken out. Net interest income as a percentage of average assets decreased from 2.24% in 2013 to 2.15% in 2014 (2012 – 2.45%). In 2014, approximately $155 million in residential mortgages were securitized compared to $78 million in 2013 (2012 - $154.9 million). Other Income Four Months Ended December 31, 2014 For the four months ended December 31, 2014, other income was $4.1 million, up $1.0 million from 2013. The increase is a result of commissions, mortgage and loan fees, securitization gains and the gain on sale of our former head office. 2012 – 2014 Fiscal Years Other income for 2014 was $9.7 million, an increase of $1.1 million (2013 - $9.5 million decrease, 2012 - $10.4 increase), which equates to a return on average assets of 0.42% (2013 – 0.44%; 2012 – 1.1%). The increase in 2012 and the subsequent decrease in 2013 is a result of the gain on sale of a joint venture investment discussed above.


FirstOntario enters into transactions in the normal course of business by which it transfers recognized financial assets directly to third parties or Special Purpose Entity’s (SPE’s). FirstOntario securitizes mortgage backed securities through programs sponsored by the Canada Mortgage and Housing Corporation and other third party programs. In situations where FirstOntario transfers substantially all the risks and rewards of ownership, derecognition of that asset occurs. In some cases, FirstOntario retains the rights to certain cashflows related to these derecognized assets which are recorded in other income. Securitization income increased from 2013 due to a greater utilization of our capacity to issue mortgage backed securities. In 2012, the loss related to securitization activities was a result of the revaluation of the related interest spread receivable associated with residential mortgages that were securitized prior to September 2010 under old Canadian GAAP. This revaluation was a result of accelerated prepayments and increasing interest rates. The distribution of our other, non-interest income sources is depicted in the following chart:

Operating Expenses Four Months Ended December 31, 2014 For the four months ended December 31, 2014, operating expenses were $17.8 million, an increase of $2.4 million over 2013. As a percentage of average assets operating expenses were 2.04%, down by 6% from fiscal 2014. The $2.4 million increase over 2013 is principally driven by the Rochdale Credit Union merger, expanded and upgraded branch network and general inflation. 2012 – 2014 Fiscal Years Expenses increased by $6.2 million or 14.0% to $50.2 million in 2014 (2013 - $2.7 million, 6.5% increase; 2012 – $3.5 million, 9.3% increase). These increases were primarily driven by the previous mentioned merger with Rochdale Credit Union and the expansion of our branch network to support our growth. Financial institutions also measure operating expenses as a percentage of average assets. As financial institutions grow their assets, expenses assessed as a percentage of average assets should decline. During the year, our operating expenses improved by 4% moving down to 2.18% (2013 – 2.27%; 2012 – 2.48%), over the past 3 years this ratio has improved by 21%.

2014 2013 2012

In Thousands of Dollars Income Mix Income Mix Income Mix

Service Charges 3,415$ 35.30% 3,239$ 37.70% 3,604$ 35.30%

Commissions 3,217 33.10% 2,901 33.70% 2,658 33.10%

Mortgage and Loan Fees 2,207 22.70% 1,821 21.20% 1,704 22.70%

Foreign Exchange 290 3.00% 201 2.30% 196 3.00%

Other 245 2.50% 372 4.30% 668 2.50%

Securitization 334 3.40% 69 0.80% (1,060) 3.40%

Total Other Income 9,708$ 100.00% 8,603$ 100.00% 7,770$ 100.00%

Gain on Sale of Joint Venture - - 10,334

Total Other Income 9,708$ 8,603$ 18,104$


Loan Portfolio Four Months Ended December 31, 2014 As at December 31, 2014, there has been no material change to the portfolio mix as at August 31, 2014. Overall growth of the portfolio was 6.3% (18.9% annually). 2012 – 2014 Fiscal Years The following chart summarizes FirstOntario’s total loans including on balance sheet and off balance sheet securitized loans. Growth is the percentage year over year increase and the Portfolio Mix is the ratio of a category to the total loan portfolio.

Significant growth continued in our residential mortgage loan portfolio through our branches and due to our continued focus on building relationships with mortgage brokers. New Members as a result of brokered mortgages are then introduced to FirstOntario and the full services we offer. Growth in our commercial loan portfolio increased in 2014 by 13.9% (2013 – 7.4%; 2012 – 8.2%) as we continued to use our cautious approach, keeping in mind the economic challenges, while attracting new commercial members. Commercial loans are generally secured by mortgages over land and

2.00%

2.10%

2.20%

2.30%

2.40%

2.50%

2.60%

2012 2013 2014

Operating Expenses(% of Average Assets)

In Thousands of Dollars 2014 2013 2012

Total Loan Portfolio $ 2,399,091 $ 2,029,011 $ 1,810,252

Growth

Portfolio

Mix Growth

Portfolio

Mix Growth

Portfolio

Mix

Personal Loans -2.5% 5.9% 0.3% 7.1% 0.9% 7.9%

Residential Mortgage Loans 23.0% 62.6% 16.5% 60.2% 18.5% 57.9%

Commercial Loans 13.9% 31.5% 7.4% 32.7% 8.2% 34.2%

Total 18.2% 100.0% 12.1% 100.0% 13.3% 100.0%


buildings. The geographic and industry diversification within the commercial portfolio continues to improve. As at August 31, 2014, 17% (2013 – 21%; 2012 – 21%) of the on-balance sheet loan portfolio is associated with five of our largest commercial Members. Commercial loans are well secured, with average outstanding loan balances at 48% of the value of security as determined by qualified appraisers as at August 31, 2014 (2013 – 48%; 2012 – 48%). Our continued conservative lending practices have resulted in minimal delinquencies and write-offs over a number of years. Allowance for Impaired Loans The allowance for impaired loans is governed by Board policy and reviewed on an annual basis and approved by the Audit Committee of the Board. The allowance is monitored by Management on a monthly basis with a detailed review on a semi-annual basis. Watch list accounts, delinquencies, credit quality, bankruptcy trends and economic trends are considered during the semi-annual review. The provision for impaired loans is monitored to ensure compliance with Board policy and regulatory requirements.


The following is a chart that provides a summary of our allowance for impaired loans, net write-offs (loan write-offs less recoveries), impaired loans and greater than 90 day delinquency. FirstOntario’s loan portfolio continues its strong performance due to adherence to conservative lending practices, outperforming industry norms.

FirstOntario’s results in 2013 were materially impacted by one commercial loan. In 2012 we prudently allowed for a possible loss; however we subsequently collected on this loan in 2013 minimizing our loss. Adjusting for this impact, the 2013 annual provision for impaired loans as a percentage of average assets would have increased to 0.10%.

August 31

In Thousands of Dollars

December 31,

2014 2014 2013 2012

On Balance Sheet Loan Portfolio 2,428,114$ 2,282,742$ 1,878,082$ 1,621,497$

Allowance for Impaired LoansSpecific 1,718$ 1,699$ 1,937$ 3,848$

Collective 5,408 4,918 4,320 3,977

7,126$ 6,617$ 6,257$ 7,825$

Annual provision for impaired loans 780$ 1,998$ (585)$ 4,268$

Net Write-offs 271$ 1,813$ 983$ 2,046$

Impaired loans net of related security

Impaired loans 36,959$ 33,511$ 24,660$ 21,351$

Related security less expected costs 35,686 31,812 22,723 17,503

1,273$ 1,699$ 1,937$ 3,848$

Delinquency > 90 Days 0.70% 0.60% 0.48% 0.52%

% of Loan Portfolio

Allowance for Impaired LoansSpecific 0.07% 0.07% 0.10% 0.24%

Non-Specific 0.22% 0.22% 0.23% 0.25%

0.29% 0.29% 0.33% 0.48%

Annual provision for impaired loans 0.03% 0.09% -0.03% 0.26%

Net Write-offs 0.01% 0.08% 0.05% 0.13%

Impaired Loans 1.52% 1.47% 1.31% 1.32%


Our specific allowance for impaired loans is determined by taking the gross amount of our impaired loans less the value of related security, after costs. Our gross impaired loans increased to $37 million as at December 31, 2014 from $33.5 million, August 31, 2014 (2013 - $24.7 million; 2012 - $21.4 million). FirstOntario holds security related to these loans of $35.7 million and $31.8 million respectively (2013 - $22.7 million; 2012 - $17.5 million). FirstOntario uses an internal risk rating grid to assess and monitor new loans and our loan portfolio, both retail and commercial. The majority of the retail loan portfolio, 78%, has risk ratings of B or better as at December 31, 2014 and August 31, 2014 (2013 – 77%; 2012 – 74%). The commercial portfolio has 83% of loans rated as Satisfactory or better as at December 31, 2014, 82% as at August 31, 2014 (2013 – 89%; 2012 – 84%). The decline in the commercial portfolio ratios is primarily due to loans that are on our watchlist as result of their debt service ratios being less than 1.1 to 1. However, the majority of these loans are current with their contracted loan payments and are well secured by commercial properties. These measures and the performance of the loan portfolio indicate FirstOntario has a very strong lending operation. Deposit Portfolio Four Months Ended December 31, 2014 FirstOntario has grown its deposit base 1.2% since August 31, 2014 (3.4% annualized). Chequing grew by 7.5% (22.5% annualized), Savings by 0.9% (2.8% annualized), Term deposits by 0.2% (0.7% annualized) and Registered plans saw a reduction of 0.3% (0.8% reduction annualized). On an annualized basis, the average cost of Member deposits for the four months ended December 31, 2014 was 1.75%. 2012 – 2014 Fiscal Years FirstOntario grew its deposit base 22.5% in 2014 (2013 – 14.7%; 2012 – 7.3%). Term Deposits grew by 30.4% (2013 – 23.2%; 2012 – 1.1% decrease), Savings by 24.2% (2013 – 10.4%; 2012 – 22.6%), Chequing by 21.2% (2013 – 16.4%; 2012 – 4.6%) and Registered plans by 15.3% (2013 – 10.8%; 2012 – 6.8%). The average cost of all Member deposits in 2014 was 1.75% (2013 – 1.70%; 2012 – 1.78%). RISK MANAGEMENT The Board of Directors have overall responsibility for the oversight of FirstOntario’s risk management. Board policy sets FirstOntario’s philosophy to have appropriate and prudent policies, procedures and controls to manage operational risk. The Board’s Enterprise Risk Management Committee’s responsibilities include the development and monitoring of controls to support the enterprise risk management framework and regularly reports to the Board. The Audit Committee’s responsibilities include the management of risk and controls related to the safeguarding of assets and financial reporting.


Enterprise Risk Management Enterprise Risk Management (“ERM”) provides a uniform process to identify measure, treat and report on significant risks within FirstOntario. ERM is a discipline to enable the achievement of our strategic plan objectives within the Board of Director’s approved risk appetite. During 2014, the Board of Directors reviewed and discussed FirstOntario’s complete inventory of risks, paying special attention to significant (i.e., top ten risks) and emerging risks. The Board of Directors also reviewed the process Management undertook in documenting and rating the effectiveness of controls in place to reduce inherent risks within the Credit Union. Through the Internal Audit department, FirstOntario conducted testing of documented controls to provide a level of independence and assurance that the controls as stated are in fact effective. FirstOntario’s takes both integrative and holistic approaches to managing and mitigating identified risks. FirstOntario’s approaches to managing and mitigating specific risks are as follows: Credit Risk Credit risk is the risk of financial loss to FirstOntario if a Member or counterparty to a financial instrument fails to meets its contractual obligations. This risk primarily arises from FirstOntario’s loans and advances to Members. FirstOntario’s lending philosophy is established by Board approved Credit Risk Management policies. Our Credit Risk Management policies provide detailed guidance to Management that includes:

• Creating operational credit policies covering eligible purposes of loans, collateral requirements, credit assessment, risk rating and reporting, and compliance with regulatory requirements.

• Establishing a lending authority structure for the approval and renewal of Member loans.

• Limits on concentrations of exposures related to Members, industries and geographic locations. Interest Rate Risk Interest rate risk is the risk to net interest income associated with changing interest rates on FirstOntario’s interest bearing loans and investments and interest bearing deposits and other debt obligations. FirstOntario is required by legislation to measure and manage interest rate risk. FirstOntario complies with this requirement through its Board approved Structural Risk Management Policy. FirstOntario uses sophisticated industry standard tools and techniques to aid in monitoring and controlling interest rate risk to within prudent limits. An Asset and Liability Committee, made up of senior Management, reviews interest rate risk on a regular basis. One of the tools used is an income simulation model. The purpose of the model is to simulate the 12


month net interest income of the current mix of business taking into account current and forecasted interest rates (yield curves), growth assumptions on new business (loans and deposits), behaviours of Members (impacted by prepayment assumptions) and competitive pricing conditions. The main form of interest rate risk measurement is the usage of a parallel shock test that is sustained for a twelve-month period. The purpose of the shock test is to have a single test that will replicate many of the unexpected interest rate risks facing the credit union. For this purpose, FirstOntario uses a 1% shock rate. However, depending on market and economic conditions, this shock rate can and will be amended from time to time. If management determines that the level of interest rate risk is too high or approaching Board policy limits, various strategies are evaluated and implemented. Some of these strategies are internally focused such as product pricing on loans and deposits while other strategies are external. With respect to external strategies, FirstOntario will engage in the use of interest rate derivatives, primarily where FirstOntario will swap fixed rate funding for float rate funding or vice versa. Liquidity Risk FirstOntario is prescribed by the Credit Union Act to maintain certain levels of liquidity. Under the Regulations, FirstOntario must establish and maintain prudent levels of liquidity that are sufficient to meet its cash flow needs, including deposit withdrawals and all other obligations as they come due. FirstOntario complies with this requirement through its Board approved Liquidity Risk Management Policy. The policy addresses limits on the sources, quality and amount of liquid assets to meet normal operations (day to day commitments including Member withdrawals), contingency funding for significant deposit withdrawals and regulatory requirements. The Board’s policy requires operational liquidity to be maintained within a range of 8.0% to 16%. Generally, our liquidity levels are in the 9% to 11% range thereby allowing FirstOntario to maximize our net interest income returns. On occasion FirstOntario’s liquidity levels do drop to the 8.0% to 9% range. When this happens, steps are taken to restore liquidity levels to above 9%. To ensure FirstOntario continually maintains the minimum liquidity levels, management measures and monitors liquidity levels on a daily basis. Management also prepares detailed monthly and three-month cash flow forecasts. If there is any risk of liquidity dropping below 8.0% a plan for corrective action would be developed and implemented. As at August 31, 2014, FirstOntario’s liquidity ratio was 9.60% (9.12% at December 31, 2014). To ensure FirstOntario has adequate sources of liquidity, Management has developed a liquidity plan, which sets out various liquidity sources. Our primary liquidity is derived internally from Member deposits. FirstOntario has three external liquidity sources. These include funding from deposit brokers, securitization of residential mortgage loans through the issuance of Mortgaged Backed Securities and Canada Mortgage Bonds and the sale of commercial mortgage loans through other credit unions and other credit union affiliated partners. As part of our contingency liquidity plan, FirstOntario has available $224 million in operating loan facilities with Central 1 Credit Union and Caisse Centrale Desjardins. On December 31, 2014 there was an authorized overdraft of $nil (August 31, 2014 - $4.9 million; August 31, 2013 - $2.4 million; August 31, 2012 - $nil) and $55.0 million (August 31, 2014 - $11.0; August 31, 2013 - $74.0 million; August 31, 2012 - $56.0 million) in term loans with Central 1, and $85.0 million (August 31, 2014 - $62.0 million; August 31, 2013 - $nil;


August 31, 2012 - $nil) in term loans with Desjardins. These loans are generally used to funds mortgages until they are securitized at which time the loans are replaced by long term debt associated with the securitization. In January 2015, $64.6 million in residential mortgages were securitized and in February 2015, $30.5 million in residential mortgages were securitized. Foreign Exchange Risk FirstOntario provides members with the opportunity to buy and sell US dollars (cash, cheques and drafts). In addition, FirstOntario provides members with US dollar deposits (chequing, savings and short-term deposits). By providing these services, FirstOntario is exposed to foreign exchange risk, which is the risk to income that could result from changes to US currency rates. To measure and control our exposure to US currency risk, FirstOntario tracks the net US position (US dollar assets less US dollar liabilities) on a daily basis. Within our Liquidity Risk Management Policy, the maximum US currency exposure FirstOntario can take is $500,000. Management operates on a day-to-day basis at a lower limit of between $200,000 and $300,000. To ensure we maintain our foreign exchange risk to within policy limits, FirstOntario enters into various foreign exchange forward contracts (contract to purchase US dollars in the future at an agreed upon exchange rate). Capital Risk Management Capital is monitored monthly on both a capital leverage and a risk weighted basis. Capital adequacy is assessed during the annual planning process. Future capital requirements are based on planned asset growth and investments in fixed assets.


The following chart summarizes FirstOntario’s capital position for 2014 and 2013:

On both the leverage and risk weighted ratio basis, capital is in excess of regulatory minimums. In addition, our Tier 1 capital was 94.06% on December 31, 2014 (August 31, 2014 – 94.42%; August 31, 2013 – 96.12%; August 31, 2012 – 95.63%) is well in excess of the regulatory minimum of 50%.

In Thousands of Dollars August 31

Decem ber 31,

2014 2014 2013 2012

Capital 140,954$ 138,636$ 126,913$ 119,365$

Leverage ratio 5.26% 5.48% 6.11% 6.61%

Minimum regulatory limit 4.00% 4.00% 4.00% 4.00%

Risk W eighted ratio 10.07% 10.48% 11.53% 12.21%

Minimum regulatory limit 8.00% 8.00% 8.00% 8.00%

Tier 1 Capital 132,583$ 130,907$ 121,989$ 114,145$

% of Total Capital 94.06% 94.42% 96.12% 95.63%

Tier 2 Capital 8,371$ 7,729$ 4,924$ 5,220$

% of Total Capital 5.94% 5.58% 3.88% 4.37%


Financial Performance Indicators The following table presents financial performance indicators for the four months ended December 31, 2014, and for the

fiscal years ended August 31, 2014, 2013 and 2012. These figures are based on the audited financial statements as at each

fiscal year-end, and on the condensed interim review financial statements for the four-month period. (Figures provided as

Basis Points (“bp”) are calculated on the basis of average assets held during the fiscal period, calculated using a simple

average of the opening and closing total asset balance.)

Further information is available in the audited financial statements that are attached hereto as Schedule A, and the condensed interim review financial statements attached hereto as Schedule B.

Four Months Fiscal Year Fiscal Year Fiscal Year

Financial Performance Indicators Ended Ended Ended Ended


Profitability

Total assets ($ thousands) 2,679,977$ 2,532,978$ 2,078,427$ 1,805,633$

Net earnings for the period ($ thousands) 1,797$ 6,502$ 7,430$ 12,910$

Annualized (bp)

Net income for the period, annualized 23 28 38 77

Operating margin before provision impaired loans and other income 194 215 224 245

Provision for impaired loans 9 9 (3) 26

Other income 47 42 44 47

Gain on sale of joint venture - - - 62

Operating expenses 204 218 227 248

Provision for income taxes 4 5 5 10

Compliance with Capital Requirements

Risk Weighted Assets Ratio 10.07% 10.48% 11.53% 12.21%

Minimum Risk Weighted Assets Ratio 8.00% 8.00% 8.00% 8.00%

Leverage Ratio 5.26% 5.48% 6.11% 6.61%

Minimum Leverage Ratio Requirement 4.00% 4.00% 4.00% 4.00%

Loan Composition

Total gross loans outstanding ($ thousands) 2,434,025$ 2,289,017$ 1,882,284$ 1,620,961$

Mortgage Loans (% of total gross loans) 66.27% 65.78% 62.84% 60.34%

Personal Loans (% of total gross loans) 5.45% 6.05% 7.54% 8.73%

Commercial Loans (% of total gross loans) 28.28% 28.17% 29.62% 30.93%

Loan Quality

Allowance for impaired loans (% of total gross loans) 0.29% 0.29% 0.33% 0.48%

Other Factors

Total members' deposits ($ thousands) 1,845,748$ 1,824,726$ 1,483,596$ 1,289,132$

Average liquidity during the period (% of total deposits and borrowings*) 9.42% 9.57% 9.80% 9.73%

Asset growth (% change for the period annualized) 17.36% 21.87% 15.11% 18.17%

Total Regulatory Capital ($ thousands) 140,954 138,636$ 126,913$ 119,365$

Regulatory Capital Growth (% change for the year) 5.00% 9.24% 6.32% 10.49%

* Borrowi ngs e xcl ude s e curi ti za ti on de bt i n a ccorda nce wi th the Cre di t Uni on's Li qui d i ty Ri s k Ma na ge me nt Pol i cy


MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL INFORMATION Management is responsible for the preparation, presentation and consistency of the financial statements. This responsibility includes selecting appropriate accounting principles consistent with International Financial Reporting Standards and the Credit Unions and Caisses Populaires Act, 1994 (Ontario). The preparation of the financial statements necessarily involves the use of estimates and approximations which are made using careful judgment. Management is responsible for maintaining a system of internal controls designed to provide reasonable assurance as to the reliability of financial information and to ensure assets under the control of the Credit Union are safeguarded and accurate records are maintained. The Audit Committee of the Board meets periodically with management and the external auditors to review the internal accounting controls and the quality of the financial reporting process. The committee reviews the financial statements and the management letter with management and the external auditors, and reports to the Board on its findings prior to the Board’s approval of the audited financial statements. The committee then ensures that appropriate and timely action is taken to address any identified exposures in the management letter. The Audit Committee’s role is discussed further at page 6. The Board is responsible for ensuring that management fulfils its responsibilities for financial reporting and meets at least quarterly to review and approve management’s financial reports. The Deposit Insurance Corporation of Ontario conducts a periodic examination of the financial conditions and affairs of the Credit Union. The examination includes a review of the Credit Union’s compliance with the provisions of the Act. The members’ external auditors conduct an independent examination of the financial statements and report on the fairness of the statements and the application of international financial reporting standards in their preparation in all material respects. The auditors have free and independent access to the Audit Committee. Kelly McGiffin Barry Doan President and Chief Executive Officer Executive Vice President and Chief Financial Officer

KPMG LLP Chartered Accountants Box 976 21 King Street West Suite 700 Hamilton ON L8N 3R1

Telephone (905) 523-8200 Telefax (905) 523-2222 www.kpmg.ca

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

KPMG Confidential


AUDITORS’ CONSENT To the Board of Directors of FirstOntario Credit Union Limited We consent to the use of our report to the Members of FirstOntario Credit Union Limited (the Credit Union) on the consolidated financial statements of the Credit Union, which comprise the consolidated statement of financial position as at August 31, 2014 and the statements of income and other comprehensive income, changes in members’ equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information, in the Offering Statement dated March 31, 2015 relating to the sale and issuance of Class B Special Shares, Series 2015, of the Credit Union. Our report is dated October 29, 2014. KPMG LLP Chartered Professional Accountants, Licensed Public Accountants Hamilton, Canada March 31, 2015


STATEMENT OF OTHER MATERIAL FACTS

There are no other material facts relating to the issues of securities in this offering statement which have not been suitably disclosed herein.


BOARD RESOLUTION

March 31, 2015

"The Board of Directors of FirstOntario Credit Union Limited approves the issue of Series 2015, Class B Special Shares (Class B Investment Shares, Series 2015), subject to the Articles of Amalgamation and Articles of Amendment of FirstOntario Credit Union Limited, and as described in the Offering Statement to be dated March 31, 2015."

I certify the above to be a true copy of a resolution adopted by the Board of Directors of FirstOntario Credit Union Limited at their meeting of February 11, 2015.

Dianne MacLean, Corporate Secretary

Offering Statement,

Credit Unions and Caisses Populaires Act, 1994

The foregoing, constitutes full, true and plain disclosure of all material facts relating to thsecurities offered by this Offering Statement as required by Part V of the Credit Unions and Caisses Populaires Act, 1994, and the regulations thereunder.

Dated at Stoney Creek, Ontario,

Kelly McGiffin, Chief Executive Officer

Carey Smith, Chair

FirstOntario Credit Union Limited ring Statement, Class B Investment Shares, Series 2015

CERTIFICATE

Form 1


CERTIFICATE OF DISCLOSURE

(Subsection 77 (4) of the Act)

constitutes full, true and plain disclosure of all material facts relating to thsecurities offered by this Offering Statement as required by Part V of the Credit Unions and Caisses Populaires Act, 1994, and the regulations thereunder.

, March 31, 2015

, Chief Executive Officer

Class B Investment Shares, Series 2015 Page 62


constitutes full, true and plain disclosure of all material facts relating to the securities offered by this Offering Statement as required by Part V of the Credit Unions and


Subscription Form Please accept my subscription for (____________) (number of shares) Class B Investment Shares, Series 2015 (at $1.00 per share) of FirstOntario Credit Union Limited. Name (as it should appear on share certificate/shareholders’ register) Social Insurance Number Joint Subscriber (if any) Social Insurance Number Street Address Apt. # Account # City Province Postal Code

Source of Funds (check as many as apply):

� $______________ is already on deposit at the Credit Union. I have signed a separate authorization form to put these funds on hold until this offering is completed or withdrawn.

� $______________ is coming from outside the Credit Union. I have signed a separate authorization form to place these funds in Escrow until this offering is completed or withdrawn.

Type of Share Ownership

� $______________ of the shares being subscribed are to be put into my RRSP at the Credit Union.

� $______________ of the shares being subscribed are to be put into my RRIF at the Credit Union.

� $______________ of the shares being subscribed are to be put into my TFSA at the Credit Union.

� $______________ of the shares are to be held by me outside any RRSP(s), RRIF(s) or TFSA(s) I may have.

By signing this form, I/we hereby acknowledge that I am a member / we are members of the Credit Union, I/we have received and read in its entirety a copy of the offering statement dated March 31, 2015 for the Credit Union’s Class B Investment Shares, Series 2015, serial number ____________, including the audited financial statements attached thereto as Schedule A and the condensed interim review financial statements attached thereto as Schedule B, and that I/we have noted in particular the Description of Securities Being Offered as set out on pages 17 to 20 and the Risk Factors starting on page 21. I/we also understand that the securities being purchased are NOT deposits, and are NOT insured by the Deposit Insurance Corporation of Ontario, and that dividends on these securities are NOT guaranteed. I/We have considered whether or not I/we should obtain independent advice on the suitability of this investment to my/our particular financial situation, and have either obtained such advice or determined that I/we do not require such advice.

Member’s Signature Date Time(a.m./p.m.) Joint Subscriber’s Signature Date Time(a.m./p.m.)

FOR OFFICE USE ONLY Date and Time (a.m./p.m.) Accepted by: Employee’s Signature Branch #


Authorization to Place Funds on Hold

Name of Member: Date: I have subscribed today to buy a total of ____________ Class B Investment Shares, Series 2015, of FirstOntario Credit Union Limited (the “Credit Union”). By signing this form below, I hereby authorize the Credit Union to place these funds on hold to guarantee payment for these shares. This hold will be released only in one of the following three manners:

1. Upon the offering being closed, the Credit Union will release the hold and then debit the accounts to pay for the shares on the Issue Date.

2. If the offering is withdrawn or cancelled for any reason, the Credit Union will release the hold immediately.

3. If I exercise my right to reverse my decision to purchase these shares within two days, excluding weekends and holidays, following receipt of a copy of the offering statement, dated March 31, 2015, for the Class B Investment Shares, Series 2015, the Credit Union will release the hold on funds immediately upon being informed of such reversal.

Branch # Acc’t # Type $ Branch # Acc’t # Type $ Branch # Acc’t # Type $ Branch # Acc’t # Type $ Branch # Acc’t # Type $ Branch # Acc’t # Type $ (Credit Union Witness) (Credit Union Member/Share Subscriber) (Credit Union Witness) (Joint Subscriber, if any)


Authorization to Place Funds in Escrow

Name of Member: Date:

I have subscribed today to buy a total of ___________________ Class B Investment Shares, Series 2015, of FirstOntario Credit Union Limited (the “Credit Union”). By signing this form below, I hereby authorize the Credit Union to place the funds specified below, as soon as such funds are made payable to the Credit Union, into an Escrow account, to be trusteed by Concentra Trust, to guarantee payment for these shares. These funds will be released from Escrow only in one of the following four manners: 1. Upon the offering being closed, Concentra Trust will release the funds from Escrow to the

Credit Union to pay for the shares on the Issue Date. 2. If the offering is withdrawn or cancelled for any reason, Concentra Trust will immediately

release the non-registered funds from Escrow and pay them to me, together with interest calculated at the Credit Union’s 30-day term deposit rate, prorated for the number of days such funds were in Escrow.

3. If I exercise my right to reverse my decision to purchase these shares within two days, excluding weekends and holidays, following receipt of a copy of the offering statement, dated March 31, 2015, for the Class B Investment Shares, Series 2015, Concentra Trust will immediately release the non-registered funds from Escrow and pay them to me, together with interest calculated at the Credit Union’s 30-day term deposit rate, prorated for the number of days such funds were in Escrow.

4. If all or part of such funds which are used to purchase shares are identified as being part of a registered plan contract, the registered funds will be transferred directly into a registered plan contract of the same type held in Escrow at the Credit Union under the control of Concentra Trust. If not used to pay for shares under the terms outlined above, the registered funds will stay in such registered plan contract until I have given Concentra Trust direction as to their disposition.

The source(s) of funds and dollar amount(s) to be placed in Escrow under this agreement is (are): Source $ Source $ (Credit Union Witness) (Credit Union Member/Share Subscriber) (Credit Union Witness) (Joint Subscriber, if any)


SCHEDULE A

AUDITED FINANCIAL STATEMENTS

KPMG LLP Chartered Accountants Box 976 21 King Street West Suite 700 Hamilton ON L8N 3R1

Telephone (905) 523-8200 Telefax (905) 523-2222 www.kpmg.ca

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

KPMG Confidential


INDEPENDENT AUDITORS’ REPORT

To the Members of FirstOntario Credit Union Limited

We have audited the accompanying consolidated financial statements of FirstOntario Credit Union Limited, which comprise the consolidated statement of financial position as at August 31, 2014, the consolidated statements of income and other comprehensive income, changes in members’ equity and cash flows for the year then ended, and notes, comprising 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 our 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, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of FirstOntario Credit Union Limited as at August 31, 2014, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

Chartered Professional Accountants, Licensed Public Accountants Hamilton, Canada October 29, 2014

Offering Statem

FIRSTONTARIO CREDIT Consolidated Statement of Financial Position As at August 31, 2014, with comparative informa

(In thousands of dollars)

Assets Loans Receivable from MembersResidential mortgage loans (note 5)Personal loans (note 5) Commercial loans (note 5) Accrued interest receivable

Other Cash and cash equivalents (note 7)Investments (note 9) Fixed assets (note 10) Derivative financial instruments (note 15)Other assets

Liabilities Members’ Deposits and SharesDeposits (note 11) Membership shares (note 12)Investment shares (note 12) Accrued interest on deposits and shar

Other Loans payable (note 14) Accounts payable and accrued liabilitiesDerivative financial instruments (note 15)

Members’ Equity Investment shares (note 12) Contributed surplus Retained earnings Accumulated other comprehensive loss

Commitments (note 20)

See accompanying notes to Consolidated Financial Statements.

On behalf of the Board:

Director

FirstOntario Credit Union Limited tement, Class B Investment Shares, Series 2015

FIRSTONTARIO CREDIT UNION LIMITED Statement of Financial Position

As at August 31, 2014, with comparative information for 2013

2014

Loans Receivable from Members Residential mortgage loans (note 5) $ 1,497,348

137,637 641,140

12,892

2,289,017

and cash equivalents (note 7) 35,878 182,403 22,483

Derivative financial instruments (note 15) 1,673 1,524

$ 2,532,978

Members’ Deposits and Shares $ 1,824,726

Membership shares (note 12) 7,301 13,304

Accrued interest on deposits and shares 12,543

1,857,874

540,232 Accounts payable and accrued liabilities 20,241 Derivative financial instruments (note 15) 3,179

2,421,526

38,373 4,865 72,231

Accumulated other comprehensive loss (4,017)

111,452

$ 2,532,978

mpanying notes to Consolidated Financial Statements.

Director

Page 68

2013

$ 1,176,256 141,178 554,391 10,459

1,882,284

23,276 150,871 17,480 1,342 3,174

$ 2,078,427

$ 1,483,596 6,459 12,293 10,014

1,512,362

441,815 19,259 1,770

1,975,206

36,440 645 67,381 (1,245)

103,221

$ 2,078,427


FIRSTONTARIO CREDIT UNION LIMITED Consolidated Statement of Income For the year ended August 31, 2014, with comparative information for 2013

(In thousands of dollars) 2014 2013

Interest and Investment Income Residential mortgage loans (note 5) $ 46,830 $ 38,259 Personal loans (note 5) 8,954 9,401 Commercial loans (note 5) 31,521 27,795 Other 4,260 3,288

91,565 78,743

Interest Expense Members’ deposits (note 11) 28,167 23,516 Dividends on membership and investment shares (note 12) 823 869 Derivative instruments 405 810 Loans (note 14) 12,636 10,108

42,031 35,303

Operating Margin before the Following 49,534 43,440 Provision for impaired loans (note 6) (1,998) 585 Other income 9,708 8,603

Operating Margin 57,244 52,628

Operating Expenses Salaries and employee benefits 27,060 23,597 Administrative 16,808 14,886 Occupancy 4,972 4,336 Members' deposit insurance protection 1,375 1,214

50,215 44,033

Operating Income 7,029 8,595

Unrealized Gains (Losses) Investments 428 752 Net gains (losses) on derivative financial instruments 297 (863)

725 (111)

Income before Income Taxes 7,754 8,484

Income taxes (note 19) 1,252 1,054

Net income for the year $ 6,502 $ 7,430



FIRSTONTARIO CREDIT UNION LIMITED Consolidated Statement of Income and Other Comprehensive Income For the year ended August 31, 2014, with comparative information for 2013


Net income for the year $ 6,502 $ 7,430

Other Comprehensive Income (Loss) Items that are or may be reclassified subsequently to net income: Net gain (loss) on cash flow hedges (1,118) (93) Net gain (loss) on cash flow hedges transferred to earnings (297) 863 Net change in fair value of available or sale investments 55 37 Related income taxes (note 19) 292 (93) Items that are not recycled or reclassified to net income: Actuarial gain (loss) on employee benefits, net of tax (1,776) 1,551

Total Income and Other Comprehensive Income for the year $ 3,658 $ 9,695

Consolidated Statement of Changes in Members’ Equity

For the year ended August 31, 2014, with comparative information for 2013


Investment Shares (note 12) Balance at beginning of year $ 36,440 $ 34,657 Shares issued during year 2,018 1,920 Shares redeemed during year (85) (137)

Balance at end of year 38,373 36,440

Contributed Surplus Balance at beginning of year 645 645 Merger with Rochdale Credit Union Limited (note 21) 4,220 -

Balance at end of year 4,865 645

Retained Earnings Balance at beginning of year 67,381 61,550 Net income for the year 6,502 7,430 Dividends paid (net of income tax recovery of $366 (2013– $321)) (1,652) (1,599)

Balance at end of year 72,231 67,381

Accumulated Other Comprehensive Income (Loss), net of tax

Cash flow hedging reserve: Balance at beginning of year (620) (1,303) Merger with Rochdale Credit Union Limited (note 21) 72 - Other comprehensive income (loss) for the year (1,113) 683

Balance at end of year (1,661) (620)

Fair value reserve on available for sale investments: Balance at beginning of year 66 35 Other comprehensive income for the year 45 31

Balance at end of year 111 66

Employee benefit adjustments: Balance at beginning of year (691) (2,242) Other comprehensive income (loss) for the year (1,776) 1,551

Balance at end of year (2,467) (691)

Balance at end of year (4,017) (1,245)

Total Members’ Equity $ 111,452 $ 103,221



FIRSTONTARIO CREDIT UNION LIMITED Consolidated Statement of Cash Flows For the year ended August 31, 2014, with comparative information for 2013


Cash Flows from Operating Activities Net income for the year $ 6,502 $ 7,430 Adjustments for: Amortization of fixed assets 2,557 2,450 Net change in fair value of assets recorded as fair value through profit or loss (675) (890) Net changes in accrued employee retirement benefits 990 (188) Other non–cash items, net (4,249) 6,637 Net interest income (49,534) (43,440) Income tax expense 1,252 1,077

Changes in operating assets: Net change in loans receivable from members (312,952) (258,153) Net change in derivative assets held for risk management (331) (202)

Changes in operating liabilities: Net change in deposits 247,460 194,464 Net change in derivative liabilities held for risk management 1,409 (941)

Interest received 85,847 72,773 Interest paid (39,136) (33,998) Investment income 1,926 2,746 Income tax paid (1,225) (2,292)

Cash flows used in operating activities (60,159) (52,527)

Cash Flows from Financing Activities Net change in membership shares 291 221 Net change in investment shares 7 82 Net change in loans payable 98,417 65,991

Cash flows from financing activities 98,715 66,294

Cash Flows from Investing Activities Net investment purchases (23,195) (14,045) Merger with Rochdale Credit Union (note 21) 2,774 - Purchase of fixed assets, net of disposals (5,533) (3,551)

Cash flows used in investing activities (25,954) (17,596)

Cash and cash equivalents Net increase (decrease) during year 12,602 (3,829) Balance at beginning of year 23,276 27,105

Balance at end of year $ 35,878 $ 23,276


FIRSTONTARIO CREDIT UNION LIMITED Notes to Consolidated Financial Statements For the year ended August 31, 2014, with comparative information for 2013


1. Corporate Information

FirstOntario Credit Union Limited (“FirstOntario”) is a financial institution incorporated in Ontario

which operates in compliance with the Credit Unions and Caisses Populaires Act of Ontario (the

“Act”) and is a member of Central 1 Credit Union (“Central 1”). The location of the head office and

principal place of business of FirstOntario is 970 South Service Road, Stoney Creek, Ontario, L8E

6A2.

FirstOntario exists to help Members meet their financial needs in their local communities.

FirstOntario’s principal activities are the provision of deposit–taking, lending and other financial

services.

FirstOntario’s Member deposits are insured by the Deposit Insurance Corporation of Ontario

(“DICO”) under a mandatory program, the expense for which amounted to $1,375,000 in 2014 and

$1,214,000 in 2013. At August 31, 2014 there were 99,867 Members (2013 – 90,167).

2. Basis of Preparation:

Statement of compliance

The Consolidated Financial Statements of FirstOntario have been prepared in accordance with

International Financial Reporting Standards (“IFRS”). IFRS comprise of accounting standards

issued by the International Accounting Standards Board (“IASB”) as well as interpretations issued

by the IFRS Interpretations Committee.

These financial statements were approved by FirstOntario’s Board of Directors on October 29,

2014. The significant accounting policies used in the preparation of these Consolidated Financial

Statements are summarized below and have been applied consistently to all years presented in

the financial statements.

Use of estimates and judgments

The preparation of Consolidated Financial Statements in conformity with IFRS requires

management to make estimates and assumptions that affect the reported amounts of assets and

liabilities and the reported amounts in revenue and expenses during the reporting year. Actual

future results could differ from those estimates.

Items which result in the most significant areas of application of judgment and estimates include

the following:

(a) Fair value of financial instruments:

Where fair value of financial assets and liabilities cannot be derived from active markets,

FirstOntario uses valuation techniques that include inputs derived from either observable

market data or utilizing management judgment. Refer to Note 17 for information relating to

these estimates.



2. Basis of Preparation (continued):

Use of estimates and judgments (continued)

(b) Allowance for impairment on loans:

FirstOntario reviews its loan portfolio frequently to assess impairment, and uses considerable

judgment in determining whether or not a loan is impaired as a result of observable evidence.

If a loan is considered to be impaired, the amount of the loss is estimated based on

management’s best estimates. Refer to Note 6 for information relating to these estimates.

(c) Employee retirement benefits:

FirstOntario estimates the present value of employee retirement benefits, which depends on a

number of assumptions including discount rates, expected salary and other cost increases,

and mortality rates. The present value of the defined benefit obligation is determined by

discounting the estimated future cash outflows using interest rates of high quality corporate

bonds that are denominated in the currency in which the benefits will be paid, and that have

terms to maturity approximating the terms of the related pension liability. Refer to Note 18 for

information relating to these estimates.

(d) Hedging and securitizations:

FirstOntario enters into securitization and hedging transactions which require management’s

best estimates of key assumptions that market participants would use in determining fair

value. For more information relating to these estimates refer to note 8 for securitizations and

note 16 for hedges.

3. Significant Accounting Policies:

These consolidated financial statements have been prepared on a going concern basis. The

significant accounting policies applied in the preparation of these consolidated financial statements

are set out below. The policies have been consistently applied to all of the years presented.

(a) Basis of consolidation:

The Consolidated Financial Statements include the assets, liabilities and results of the

operations of FirstOntario and its wholly owned subsidiary 1320818 Ontario Limited which

supplies information technology services and operates the banking system for FirstOntario. All

intercompany transactions and balances have been eliminated.

Investments in which FirstOntario exercises joint control are accounted for as jointly controlled

assets, whereby FirstOntario’s share of revenue and expenses of the joint venture are

included in the Consolidated Statement of Income. FirstOntario’s net share of assets and

liabilities of the investments are included in the Consolidated Statement of Financial Position.

Investments are considered to be jointly controlled if there is a contractual agreement to share

authority over determining the investments’ operating, investment and financing policies. The

joint venture in which FirstOntario participates consists of investments in retail complexes

which generate income from the leasing of space for commercial use.



3. Significant Accounting Policies (continued):

(b) Financial instruments – recognition and measurement:

Financial assets and liabilities, including derivatives, are recognized on the Consolidated

Statement of Financial Position of FirstOntario at the time that FirstOntario becomes party to

the contractual provisions of the instrument. FirstOntario recognizes financial instruments at

the trade date.

All financial assets and liabilities are measured at fair value upon initial recognition.

Subsequent measurement is dependent upon the financial instrument’s classification.

Financial assets and liabilities comprise cash and cash equivalents, derivatives, investments,

loans receivable from Members, Member’s deposits and shares, loans payable and accounts

payable and accrued liabilities.

Classification of financial instruments

Financial assets and liabilities designated as fair value through profit and loss (“FVTPL”) are

financial instruments either classified as held for trading (“HFT”) or are managed and

evaluated on a fair value basis in accordance with a documented risk management strategy.

HFT financial assets and liabilities are acquired or incurred principally for resale, generally

within a short period of time.

FVTPL financial assets and liabilities are subsequently measured at fair value at each

reporting date. Gains and losses realized on disposal together with dividends and interest

earned on these instruments are reported in interest and investment income. Unrealized gains

and losses from changes in fair value are reported separately in the Consolidated Statement

of Income. There are regulatory restrictions imposed by the Deposit Insurance Corporation of

Ontario on the use of this designation including that loans receivable from members are

precluded from being designated FVTPL and that the fair value designated financial

instruments are managed on a fair value basis.

Held–to–maturity (“HTM”) financial assets are non–derivative financial assets with fixed or

determinable payments and fixed maturity, other than Loans and Receivables, that

FirstOntario has the positive intention and ability to hold to maturity. These financial assets are

subsequently measured at amortized cost using the effective interest method.

Available–for–sale (“AFS”) financial assets are those non–derivative financial assets that are

not classified as FVTPL, HTM or Loans and Receivables. AFS instruments are subsequently

measured at fair value whereby the unrealized gains and losses are recognized in other

comprehensive income and included in accumulated other comprehensive income (“AOCI”),

as discussed below, until sale or significant and prolonged impairment when the cumulative

gain or loss is transferred to the Consolidated Statement of Income. AFS financial assets

whose fair value is not reliably measurable are carried at cost. Realized gains and losses on

sale are recorded in other income. Write downs to reflect impairment in value are recorded in

unrealized gains (losses).




(b) Financial instruments – recognition and measurement (continued):

Loans and Receivables are non–derivative financial assets with fixed or determinable

payments that are not quoted in an active market. Financial assets classified as Loans and

Receivables are initially accounted for net of transaction costs and are subsequently

measured at amortized cost by applying the effective interest method.

Financial liabilities classified as Other Liabilities are subsequently measured at amortized cost.

Financial liabilities are initially recognized on the trade date FirstOntario becomes party to the

contractual provision of the instrument. FirstOntario derecognizes a financial liability when its

contractual obligations are discharged, cancelled or expire.

Classification of investment instruments is outlined in Note 9. Classification of all financial

instruments is outlined in Note 17.

Effective interest rate method

Interest income and expense are recognized in the Consolidated Statement of Income using

the effective interest method. The effective interest rate is the rate that discounts the estimated

future cash payments and receipts through the expected life of the financial asset or liability to

its net carrying amount upon initial recognition. The effective interest rate is established on

initial recognition of the financial asset or liability and is not revised subsequently. The

calculation of the effective interest rate includes transaction costs, fees and discounts or

premiums that are an integral part of the effective yield on the financial asset or liability.

Transaction costs

Transaction costs are incremental costs that are directly attributable to the acquisition,

issuance or disposal of a financial asset or liability. Transaction costs related to FVTPL

financial assets and liabilities are expensed as incurred. Transaction costs relating to AFS and

HTM financial assets and loans and receivables are capitalized and amortized over the

expected life of the instrument using the effective interest method.

Offsetting

Financial assets and liabilities are offset and the net amount presented in the statement of

financial position when, and only when, FirstOntario has a legal right to set off the recognized

amounts and it intends either to settle on a net basis or to realize the asset and settle the

liability simultaneously.

Income and expenses are presented on a net basis only when permitted under IFRSs, or for

gains and losses arising from a group of similar transactions.





Identification and measurement of impairment losses

At each reporting date FirstOntario assesses whether there is objective evidence that financial

assets not carried at fair value through profit or loss are impaired. A financial asset or group of

financial assets is (are) impaired when objective evidence demonstrates that a loss event has

occurred after the initial recognition of the asset(s), and that the loss event has an impact on

the future cash flows of the asset(s) that can be estimated reliably.

For available–for–sale investments in equity securities, objective evidence includes a

significant or prolonged decline in its fair value below its cost.

For loans and receivables and held to maturity assets, impairment is assessed at the

individual and collective levels. Objective evidence can include, but is not limited to,

reasonable doubt as to the collectability of principal and interest, or when loan payments are

90 days past due. Collective allowances are established on a portfolio basis to absorb

probable loan losses for which a loss event has occurred but has not yet been identified by

management. The collectively assessed allowance is based on portfolio quality, past

experience, current economic conditions and management’s judgment.

Derivative financial instruments

Derivative financial instruments are financial contracts whose value is derived from interest

rates or other financial indices in the equity markets. In the ordinary course of business,

FirstOntario enters into various derivative contracts, including interest rate swaps, equity–

linked options, foreign exchange forwards and bond forwards. FirstOntario enters into such

contracts to manage interest rate fluctuations and foreign exchange risk as part of

FirstOntario’s asset/liability management program.

Interest rate swaps involve the periodic exchange of payments without the exchange of the

notional principal amount upon which the payments are based. Equity–linked options are

purchased to hedge deposit products whose interest is linked to various equity indices or a

specific bundle of equities. These contracts pay returns based on the change in value of equity

indices or a specific bundle of equities.

Foreign exchange contracts are used to hedge FirstOntario’s net US dollar liability position.

Derivatives are measured at fair value and are reported as assets where they have a positive

fair value and as liabilities where they have a negative fair value. In both cases they are

reported as derivative financial instruments in the financial statements.





Derivatives embedded in other financial instruments are separated from the host contract and

accounted for separately if their economic characteristics and risks are not closely related to

those of the host contract; the terms of the embedded derivatives would meet the definition of

a derivative if it was a free standing instrument, and the combined contract is not designated

as FVTPL and recorded at fair value. These embedded derivatives are classified as part of the

host instrument and measured at fair value with changes therein recognized on the

Consolidated Statement of Income.

Accrued interest receivable is recorded in other assets and accrued interest payable is

recorded in accounts payable and accrued liabilities. Interest income or expense is recorded in

interest income or interest expense, as applicable.

Hedge accounting

FirstOntario formally documents all relationships between hedging instruments and hedged

items; as well as risk management objectives and strategies for undertaking various hedge

transactions. This process includes linking all derivatives to specific assets and liabilities

recognized on the Consolidated Statement of Financial Position or specific firm commitments

or forecasted transactions that are highly probable to occur and prevent exposure to variations

in cash flows that could ultimately affect reported net income. FirstOntario also formally

assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that

are used in hedging transactions are highly effective in offsetting changes in fair values or

cash flows of hedged items attributable to the hedged risk. FirstOntario designates its interest

rate hedge agreements as hedges of the underlying financial instrument.

IFRS specifies the criteria that must be satisfied in order for hedge accounting to be applied

and prescribes the accounting treatment for those permitted hedging strategies applicable to

FirstOntario – fair value hedges and cash flow hedges.

In a fair value hedge, the change in fair value of the hedging derivative is offset on the

Consolidated Statement of Income by the change in fair value of the hedged item relating to

the hedged risk. FirstOntario utilizes fair value hedges primarily to convert fixed rate financial

assets and liabilities to floating rate. The main financial instruments designated in fair value

hedging relationships are loans. If the derivative expires or is sold, terminated or exercised, no

longer meets the criteria for fair value hedge accounting, or the designation is revoked, hedge

accounting is discontinued prospectively. The fair value of the hedged item related to the

hedged risk is reported as other assets. The fair value of the hedging instrument is recorded

as a derivative asset or liability.





In a cash flow hedge, the effective portion of changes in fair value of the derivative is

recognized in other comprehensive income (“OCI”) and presented in the cash flow hedging

reserve in equity. The amount recognized in OCI is reclassified and included on the

Consolidated Statement of Income in the same year that the hedged cash flows affect income.

This will be offset by increased net interest income on assets and liabilities that are hedged.

FirstOntario utilizes cash flow hedges primarily to convert floating rate assets and liabilities to

fixed rate. Any hedge ineffectiveness is measured and is immediately recognized in the

Consolidated Statement of Income.

When either a fair value or cash flow hedge is discontinued, any cumulative adjustment to

either the hedged item or other comprehensive income (loss) is recognized in income over the

remaining term of the original hedge (fair value hedge) and as the hedged item impacts

earnings (cash flow hedge) or immediately if the forecast transaction is no longer expected to

occur.

(c) Loan securitizations:

FirstOntario periodically securitizes residential mortgages and commercial loans by legally

selling them to funding partners. Securitized assets are assessed for derecognition under IAS

39 Financial Instruments: Recognition and Measurement. When the derecognition criteria are

met, the assets are de–recognized from the Consolidated Statement of Financial Position.

Under the transition to IFRS, the derecognition criteria is applied prospectively from the date of

transition and transactions entered into prior to the transition date (September 1, 2010) are

assessed under previous Canadian GAAP.

Securitized residential mortgages that are assessed under IAS 39 do not meet derecognition

requirements as substantially all of the risks and rewards of the loans are held with

FirstOntario. As a result, these loans are reported on the Statement of Financial Position.

Securitized residential mortgages that are not reported on the Statement of Financial Position

met the derecognition requirements of previous Canadian GAAP.

Commercial loans sold met the derecognition requirements and are not reported on the

Statement of Financial Position as substantially all of the risks and rewards of the loan is

transferred to the funding partner and FirstOntario has received consideration in exchange.

For those commercial loans sold, no gain is recorded as the consideration received is

equivalent to the carrying value of the asset.

Revenue from servicing loans and mortgages is recorded as the services are provided.

(d) Cash and cash equivalents:

Cash and cash equivalents includes cash on hand, current accounts, short term deposits with

other financial institutions, cheques and other items in transit. Given their short term nature,

the carrying value of cash and cash equivalents equals fair value.




(e) Investments:

Investments are recorded at fair value unless the investment is designated as Loans and

Receivables or represents an interest in an investment property held under a joint venture

agreement. Any gains and losses on disposal of investments are recorded in the year they

occur and are included in other investment income in the Consolidated Statement of Income.

(f) Intangible assets:

Computer software that is not an integral part of other property is accounted for as intangible

assets. Computer software is stated at cost less accumulated amortization and accumulated

impairment losses and is presented as part of fixed assets in the Consolidated Statement of

Financial Position. Amortization of computer software is calculated by applying the straight–

line method at rates based on estimated useful lives between 3 and 7 years. Amortization

methods and useful lives are reviewed at each reporting date and adjusted if appropriate.

(g) Fixed assets:

Fixed assets are stated at cost less accumulated amortization and accumulated impairment

losses. When parts of an item of fixed assets have different useful lives, they are accounted

for as separate items (major components) of fixed assets. Amortization is based on the cost of

an asset less its residual value. Major components are amortized separately. Land is not

amortized. Amortization on buildings and equipment is recognized in net income using the

straight–line method at rates based on the estimated useful lives of the related assets and

components as follows:

Asset

Buildings 20 – 40 years Parking lots and site improvements 10 – 25 years Equipment 3 – 10 years Leasehold improvements Shorter of useful life and term of lease + one renewal period

Depreciation methods, useful lives and residual values are reviewed at each financial year end

and adjusted if appropriate.

(h) Investment property:

Investment property is property held to earn rentals and/or for capital appreciation.

FirstOntario applies the cost model in accounting for investment property. Investment property

primarily consists of land and buildings held under a joint venture agreement. Amortization of

buildings is based on the straight–line method at rates based on estimated useful lives of 40

years. Land is not amortized.




(i) Shares:

Membership and investment shares are classified either as liabilities or member’s equity.

Where shares are redeemable at the option of the Member, either on demand or on

withdrawal from membership, the shares are classified as other liabilities and carried at

amortized cost. Shares that are redeemable at the discretion of FirstOntario’s Board of

Directors are classified as equity.

(j) Dividends on shares classified as other liabilities are reported as interest expense. Dividends

on shares classified as equity are charged to retained earnings on the date at which

distributions are declared payable by the Board of Directors. All dividends on shares are

deductible for income tax purposes.

(k) Impairment of non–financial assets:

Non–financial assets other than deferred tax assets are reviewed for impairment whenever

events or changes in circumstances indicate that the carrying value may not be recoverable at

each reporting date. An impairment loss is recognized for the amount by which the asset’s

carrying value exceeds its recoverable amount. The recoverable amount is the higher of an

asset’s fair value less costs to sell and value in use. Impairment losses are recognized in net

income.

Non–financial assets that have incurred impairment losses in prior years are reviewed for

possible reversal of the impairment loss at each reporting date. A reversal of impairment is

limited to the original impaired amount.

(l) Revenue recognition:

Loan interest and revenue is recognized on the effective yield basis.

(m) Foreign exchange:

The Consolidated Financial Statements are presented in Canadian dollars, which is

FirstOntario’s functional currency. Monetary assets and liabilities denominated in foreign

currencies, primarily US dollars, are translated into Canadian dollars at exchange rates

prevailing at the year–end. Fixed assets, intangible assets and investment property are carried

at the historical Canadian dollar cost. Income and expenses are translated at the exchange

rates in effect on the date of the transactions. Exchange gains and losses arising on the

translation of monetary assets and liabilities are included in other income. Foreign currency

differences arising on translation of available–for–sale equity investments and cash flow

hedges are recognized in other comprehensive income.

(n) Provisions:

A provision is recognised if, as a result of a past event, FirstOntario has a present legal or

constructive obligation that can be estimated reliably, and it is probable that an outflow of

economic benefits will be required to settle the obligation. Provisions are determined by

discounting the expected future cash flows at a pre–tax rate that reflects current market

assessments of the time value of money and the risks specific to the liability.




(o) Employee retirement benefits:

FirstOntario provides retirement benefits to certain employees. These benefits include

registered pension plans, medical benefits, dental care and life insurance.

A defined contribution plan is a pension plan under which FirstOntario pays contributions to a

separate entity. FirstOntario has no legal or constructive obligation to pay further contributions

after its payment of a contribution in accordance with the pension plan. Defined contribution

pension plan contributions are expensed in the year during which services are rendered by

employees.

A defined benefit plan is a pension plan that defines the amount of the pension benefit that an

employee will receive upon retirement, usually dependent on one or more factors, such as

age, years of service and compensation. Employment retirement benefits include both pension

and other post–retirement benefits.

The Credit Union’s net obligation in respect of defined benefit plans is calculated separately

for each plan by estimating the amount of future benefit that employees have earned in the

current and prior periods, discounting that amount and deducting the fair value of any plan

assets.

The calculation of defined benefit obligations is performed annually by a qualified actuary

using the projected unit credit method. When the calculation results in a potential asset for the

Credit Union, the recognized asset is limited to the present value of economic benefits

available in the form of any future refunds from the plan or reductions in future contributions to

the plan. To calculate the present value of economic benefits, consideration is given to any

applicable minimum funding requirements.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and

losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any,

excluding interest), are recognized immediately in OCI. The Credit Union determines the net

interest expense (income) on the net defined benefit liability (asset) for the period by applying

the discount rate used to measure the defined benefit obligation at the beginning of the annual

period to the then-net defined benefit liability (asset), taking into account any changes in the

net defined benefit liability (asset) during the period as a result of contributions and benefit

payments. Net interest expense and other expenses related to defined benefit plans are

recognized in salaries and benefits in net income.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in

benefit that relates to past service or the gain or loss on curtailment is recognized immediately

in net income. The Credit Union recognizes gains and losses on the settlement of a defined

benefit plan when the settlement occurs.




(p) Income taxes:

FirstOntario follows the asset and liability method of accounting for income taxes, whereby

FirstOntario recognizes both the current and future income tax consequences of all

transactions that have been recorded in the financial statements.

Current income taxes are the expected taxes refundable or payable on the taxable income for

the year, using tax rates enacted or substantively enacted at the balance sheet date, and any

adjustment to taxes payable in respect of previous years.

Deferred income taxes provide for temporary differences between the carrying values of

assets and liabilities and the amounts used for taxation purposes. The amount of deferred

income tax provided is based on the expected timing of realization or settlement of the

carrying value of assets and liabilities, using tax rates enacted or substantively enacted at the

balance sheet date. A deferred income tax asset is recognized only to the extent that it is

probable that future taxable income will be available to utilize taxable benefits associated with

the temporary difference in carrying value.

Deferred tax assets and liabilities are included either in other assets or accounts payable and

accrued liabilities, as applicable, in the Consolidated Statement of Financial Position.

(q) Adoption of new and amended standards:

FirstOntario has adopted the following new and amended standards with an initial application

date of September 1, 2013:

IFRS 10 – Consolidated Financial Statements and IFRS 12 – Disclosure of Interests in Other

Entities:

FirstOntario adopted IFRS 10 and IFRS 12, which were applied retrospectively. Under IFRS

10, there is one approach for determining if an investor controls an investee for all entities,

based on the concept of power, variability of returns and their linkage. This replaced the

previous approach which emphasises legal control or exposure to risks and rewards,

depending on the nature of the entity. IFRS 12 includes the disclosure requirements for

subsidiaries and associates and introduces new requirements for unconsolidated structured

entities.

IFRS 11 - Joint Arrangements:

IFRS 11 replaces IAS 31 Interests in Joint Ventures, and the guidance contained in a related

interpretation, SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers,

has been incorporated in IAS 28 (as revised in 2011). Under IFRS 11, there are now only two

types of joint arrangements – joint operations and joint ventures. The classification of joint

arrangements under IFRS 11 is determined based on the rights and obligations of parties to

the joint arrangements by considering the structure, the legal form of the arrangements, the

contractual terms agreed by the parties to the arrangement, and, when relevant, other facts

and circumstances. Investments in joint ventures are accounted for using the equity method

(proportionate consolidation is no longer allowed). For a joint operation, the venturer

recognizes its share of the assets, liabilities, revenue and expenses of the joint operation.




(q) Adoption of new and amended standards (continued):

IAS 28 Investments in Associates and Joint Ventures:

As a result of replacement of IAS 31, IAS 28 has been expanded to provide consistent

guidance on equity accounting for both associates and joint ventures. The changes include the

following:

• New requirements relating to the method of recording associated and joint ventures that

are held for sale; and,

• Disclosures relating to changes in interest held in associates and joint ventures.

FirstOntario determined that its consolidated group structure remained unchanged under IFRS

10, 11 and IAS 28 and as a result, there was no impact on FirstOntario’s consolidated financial

statements.

IFRS 13 – Fair Value Measurement:

IFRS 13 establishes a single framework for measuring fair value and making disclosures

about fair value measurements when such measurements are required or permitted by other

IFRSs. It unifies the definition of fair value as the price that would be received to sell an asset

or paid to transfer a liability in an orderly transaction between market participants at the

measurement date. It replaces and expands the disclosure requirements about fair value

measurements in other IFRSs.

In accordance with the transitional provisions of IFRS 13, FirstOntario has applied the new fair

value measurement guidance prospectively. The adoption of IFRS 13 did not have any impact

on FirstOntario’s reported financial results or financial position. However, there were certain

new and revised disclosures as set out in Note 17.

IAS 19 – Employee Benefits (revised):

FirstOntario adopted IAS 19 Employee Benefits (“IAS 19 revised”), which was applied

retrospectively. The revised standard introduces a new approach to the calculation of the net

interest income or expense on the net defined benefit liability (asset). Under the revised

standard an entity is no longer able to recognize in the statement of operations the long-term

expected return on the plan assets actually held. Net interest under the amended standard is

calculated on the retirement benefit obligation based on the discounted rate that is used to

measure the defined benefit obligation. The quantitative impact of this change is set out below.

The revised standard also allows for entities to transfer the amounts recognized in other

comprehensive income to a separate category within equity; previously it was a requirement to

transfer the amounts recognized in other comprehensive income to retained earnings.



3. Summary of significant accounting policies (continued):

(q) Adoption of new and amended standards (continued):

IAS 19 – Employee Benefits (revised) (continued):

On adoption of IAS 19 revised, FirstOntario chose to amend its accounting policy related to

the recognition of unrealized actuarial gains and losses. FirstOntario will transfer cumulative

amounts recognized through other comprehensive income to another component of equity,

accumulated other comprehensive income – employee benefits (“AOCI – employee benefits”).

The impact on retained earnings and AOCI – employee benefits as a result of the adoption of

IAS 19 revised is as follows:

As Impact of

previously transitional As

Retained earnings reported adjustments revised

As at September 1, 2012 $ 61,738 $ (188) $ 61,550 Net income from operations 7,519 (89) 7,430 Dividends paid, net of tax (1,599) - (1,599)

Balance at August 31, 2013 $ 67,658 $ (277) $ 67,381

Accumulated other As Impact of

comprehensive income - previously transitional As

Employee benefits reported adjustments revised

As at September 1, 2012 $ - $ (2,242) $ (2,242) Actuarial losses on defined

benefit pension plans - 1,551 1,551

Balance at August 31, 2013 $ - $ (691) $ (691)

4. New Standards and Interpretations not yet effective:

Future changes in accounting policy

(a) Amendments to IAS 32, Offsetting Financial Assets and Liabilities:

The amendments to IAS 32 clarify the allowable circumstances for an entity to present a

financial asset and liability as a net balance (‘offsetting’). The amendments also describe when

a settlement mechanism provides for net settlement or gross settlement that is equivalent to

net settlement. FirstOntario intends to adopt the amendments to IAS 32 in its financial

statements for the fiscal year beginning September 1, 2014 with the amendments applied

retrospectively. FirstOntario does not expect the amendments to have a material impact on the

financial statements.



4. New Standards and Interpretations not yet effective (continued):

Future changes in accounting policy (continued):

(b) Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39):

The amendments add a limited exception to IAS 39, to provide relief from discontinuing an

existing hedging relationship when a substitution of a derivative contract that was not

contemplated in the original hedging documentation meets specific criteria.

FirstOntario intends to adopt the amendments in its financial statements for the annual period

beginning September 1, 2014. The extent of the impact of adoption of the amendments has

not yet been determined.

(c) IFRS 9 Financial Instruments (“IFRS 9”) replaces the guidance in IAS 39 Financial

Instruments: Recognition and Measurement, on the classification and measurement of

financial assets. The Standard eliminates the existing IAS 39 categories of held to maturity,

available–for–sale and loans and receivable.

Financial assets will be classified into one of two categories on initial recognition:

• financial assets measured at amortized cost; or

• financial assets measured at fair value.

Gains and losses on remeasurement of financial assets measured at fair value will be

recognized in net income, except that for an investment in an equity instrument which is not

held–for–trading, IFRS 9 provides, on initial recognition, an irrevocable election to present all

fair value changes from the investment in OCI. The election is available on an individual

share–by–share basis. Amounts presented in OCI will not be reclassified to net income at a

later date.

Under IFRS 9, for financial liabilities measured at fair value under the fair value option,

changes in fair value attributable to changes in credit risk will be recognized in OCI, with the

remainder of the change recognized in profit or loss. However, if this requirement creates or

enlarges an accounting mismatch in net income, the entire change in fair value will be

recognized in net income. Amounts presented in OCI will not be reclassified to net income at a

later date.

IFRS 9 also requires derivative liabilities that are linked to and must be settled by delivery of

an unquoted equity instrument to be measured at fair value, whereas such derivative liabilities

are measured at cost under IAS 39.

IFRS 9 also includes the requirements of IAS 39 for the derecognition of financial assets and

liabilities without change.The IASB has deferred the mandatory effective date of the existing

chapters of IFRS 9 to fiscal years beginning on or after January 1, 2018. The early adoption of

the standard is permitted. FirstOntario intends to adopt IFRS 9 in its financial statements for its

fiscal year beginning on September 1, 2018. It is expected that IFRS 9, when initially applied,

will have a significant impact on FirstOntario’s financial statements. As well, the

implementation and ability to elect options provided by the new standards may be influenced

by the regulators (DICO).



4. New Standards and Interpretations not yet effective (continued):

Future changes in accounting policy (continued):

(d) In December 2013, the IASB issued narrow-scope amendments to a total of nine standards as

part of its annual improvements process. The IASB uses the annual improvements process to

make non-urgent but necessary amendments to IFRS. Most amendments will apply

prospectively for annual periods beginning on or after July 1, 2014; earlier application is

permitted, in which case, the related consequential amendments to other IFRSs would also

apply.

Amendments were made to clarify the following in their respective standards:

• Classification and measurement of contingent consideration; and scope exclusion for

the formation of joint arrangements in IFRS 3 Business Combinations;

• Disclosures on the aggregation of operating segments in IFRS 8 Operating segments;

• Measurement of short-term receivables and payables; and scope of portfolio

exception in IFRS 13 Fair Value Measurement;

The Credit Union intends to adopt these amendments in its financial statements for the annual

period beginning on September 1, 2014. The extent of the impact of adoption of the

amendments has not yet been determined.



5. Loans Receivable from Members:

Loans receivable from Members, which have been designated as loans and receivables, are as

follows:


Residential Mortgage Loans $ 1,497,797 $ 1,176,519 Allowance for impaired loans (449) (263)

1,497,348 1,176,256

Personal Loans 140,118 143,658 Allowance for impaired loans (2,481) (2,480)

137,637 141,178

Commercial Loans 644,827 557,905 Allowance for impaired loans (3,687) (3,514)

641,140 554,391

$ 2,276,125 $ 1,871,825

Certain Residential Mortgage Loans are securitized and have been legally transferred to other

entities for funding purposes. These loans are administered by FirstOntario and recognized on the

Consolidated Statement of Financial Position to the extent of FirstOntario’s continuing

involvement. A summary of the carrying values of Residential Mortgage Loans is as follows:


Loans held by FirstOntario $ 1,036,943 $ 812,761 Loans held by Securitization Trusts 460,854 363,758

$ 1,497,797 $ 1,176,519

Certain loans transferred to a funding partner transacted prior to the transition to IFRS are not

recorded on the Statement of Financial Position and are not included in the above figures. Further

details are provided in Note 8.

Interest income for the year is as follows:


Residential Mortgage Loans $ 46,830 $ 38,259 Personal Loans 8,954 9,401 Commercial Loans 31,521 27,795

$ 87,305 $ 75,455



5. Loans Receivable from Members (continued):

Total fees paid to third parties associated with lending activities capitalized in other assets were

$7,569,000 as at August 31, 2014 (2013 – $5,921,000). Charges amortized into interest expense

in respect of these fees was $2,456,000 during 2014 (2013 – $1,910,000).

The following summarizes FirstOntario’s loan portfolio by the contractual repricing or maturity date,

whichever is earlier:

2014 2013

Principal Average Principal Average (In thousands of dollars) Balance Yield Balance Yield

Floating $ 607,450 4.27% $ 487,199 4.32%

Within 1 year 197,029 4.86% 154,079 5.11% Over 1 year 1,478,263 4.09% 1,236,804 4.30%

2,282,742 4.20% 1,878,082 4.37% Provision for loan losses (6,617) (6,257)

$ 2,276,125 $ 1,871,825

6. Allowance for Impaired Loans:

A summary of the allowance for impaired loans is as follows:

2014 2013

Residential

Mortgage Personal Commercial Collective

(In thousands of dollars) Loans Loans Loans Allowance Total Total

Balance at beginning of year $ 61 $ 958 $ 918 $ 4,320 $ 6,257 $ 7,825

Transfer from Rochdale - - - 175 175 -

Loans written off (66) (1,435) (540) - (2,041) (1,117)

Recoveries - 228 - - 228 134

Net provision for impaired loans 205 1,026 344 423 1,998 (585)

Balance at end of year $ 200 $ 777 $ 722 $ 4,918 $ 6,617 $ 6,257

A summary of impaired loans are as follows:

2014 2013

Residential

Mortgage Personal Commercial

(In thousands of dollars) Loans Loans Loans Total Total

Gross amount of loans identified as impaired $ 17,566 $ 1,737 $ 14,208 $ 33,511 $ 24,660

Related security less expected costs 17,366 960 13,486 31,812 22,723

Balance at end of year $ 200 $ 777 $ 722 $ 1,699 $ 1,937



6. Allowance for Impaired Loans (continued):

A summary of loans past due but not impaired are as follows:

2014 2013

< 30 30–59 60–89

(In thousands of dollars) days days days Total Total

Residential mortgage loans $ 24,778 $ 4,348 $ 1,667 $ 30,793 $ 26,565

Personal loans 2,550 705 324 3,579 6,130

Commercial loans 763 5 - 768 21,178

Balance at end of year $ 28,091 $ 5,058 $ 1,991 $ 35,140 $ 53,873

The carrying amount of loans that were renegotiated during the year that otherwise would have

been listed as past due greater than 90 days were nil (2013 – nil).

FirstOntario’s commercial loan portfolio contains Member concentration risk, whereby a large

amount of the loans are connected to certain individuals. Collectively, the largest five commercial

Members by loan dollar value are associated with approximately 17% (2013 – 21%) of the

commercial loan portfolio.

FirstOntario’s commercial loan portfolio consists of the following industry sectors:

2014 2013

Hospitality 19% 25%

Retail & Commercial Buildings 53% 50%

Other 28% 25%

Collateral

There are documented policies and procedures in place for the valuation of financial and non–

financial collateral. The fair value of non–financial collateral is updated if there has been a

significant change in the terms and conditions of the loan and (or) the loan is considered impaired.

For impaired loans, an assessment of the collateral is taken into consideration when estimating the

expected future cash flows and net realizable amount of the loan.

The amount and type of collateral and other credit enhancements required depend upon

FirstOntario’s assessment of counterparty credit quality and repayment capacity. FirstOntario

complies with industry standards for collateral valuation, frequency of recalculation of the collateral

requirements, documentation, registration and perfection procedures, and monitoring. Non–

financial assets accepted by FirstOntario as collateral include vehicles, residential real estate, real

estate under development, commercial real estate and certain business assets (accounts

receivable, inventory, and fixed assets). Financial collateral includes cash and negotiable

securities issued by governments and investment grade issuers. Guarantees are also accepted to

reduce credit risk.

The fair value of collateral held with respect to assets that are either past due greater than 30 days

or impaired is $57,981,000 as at August 31, 2014 (2013 – $46,160,000).




The following tables illustrate the credit quality of loans that are neither past due nor impaired:

Credit quality of loans – August 31, 2014

Retail Mortgage and Personal Loans Commercial Loans

Rating % of Portfolio Rating % of Portfolio

Unscored 2% Undoubted 1%

A+ 2% Superior 7%

A 53% Satisfactory 74%

B 23% Watch List 18%

C 11%

D 5%

E 4%

Credit quality of loans – August 31. 2013




A+ 2% Superior 8%



C 11%

D 5%

E 4%

Refer to Note 16 – Financial Risk Management for a detailed explanation of the credit risk rating

process of both portfolios.

7. Cash and Cash Equivalents:


Cash on hand $ 8,379 $ 7,348 Cash at Central 1 24,076 13,957 Restricted cash 3,340 1,784

Other cash and cash equivalents 83 187

Total cash and cash equivalents $ 35,878 $ 23,276



8. Loan Securitizations:

FirstOntario enters into transactions in the normal course of business by which it transfers

recognized financial assets directly to third parties or SPE’s. FirstOntario securitizes mortgage

backed securities through programs sponsored by the Canada Mortgage and Housing Corporation

and other third party programs.

Full derecognition occurs when FirstOntario transfers its contractual right to receive cash flows

from the financial assets, or retains the right but assumes an obligation to pass on the cash flows

from the asset, and transfers substantially all the risks and rewards of ownership. The risks include

credit, interest rate, prepayment and other price risks.

The financial assets that do not qualify for derecognition are mortgages converted into mortgage

backed securities and then subsequently sold. Residential and commercial mortgages that have

been derecognized are those that meet the qualifications required to be derecognized under IFRS.

The following table summarizes FirstOntario’s securitization activity during the years ended

August 31, 2014 and 2013:

2014 2013

Residential Commercial Residential Commercial

(in thousands of dollars) mortgages mortgages mortgages mortgages

Amount securitized/sold $ 155,393 $ 147,539 $ 78,411 $ 6,000

Net cash proceeds received 153,889 146,770 77,761 6,000

Outstanding balances of securitized loans 465,513 212,367 408,696 106,001

The following table summarizes the balances for securitized loans that are not recorded on the Statement of Financial Position:

2014 2013


(in thousands of dollars) mortgages mortgages mortgages mortgages

Retained rights to future excess spread $ 13 $ 2,160 $ 459 $ -

Outstanding balances of off–balance sheet securitized loans 4,659 212,367 44,928 106,001



8. Loan Securitizations (continued):

Retained rights are reported as investments on the Consolidated Statement of Financial Position

(Note 9). The following table summarizes the weighted average key assumptions at the date of

off–balance sheet securitization for retained rights related to mortgage pools sold prior to

September 1, 2010 or fully derecognized under IFRS:

2014 2013


mortgages mortgages mortgages mortgages

Average life 0.2 years 5.6 years 0.7 years na

Prepayment rate 39.96% 0.00% 39.96% na

Excess spread 2.90% na 2.90% na

Discount rate 1.83% 2.19% 1.83% na

Expected credit losses 0.00% 0.00% 0.00% na

9. Investments:

Investments are as follows:


Investments held to maturity Liquidity reserve deposits – Central 1 (c) $ 150,086 $ 121,088

Accrued interest 1,322 1,030 Investments available for sale, fair value

Preferred shares (a) 13 9 Common shares (a) 324 317 Income trusts and limited partnerships (a) 243 239

Total liquid investments 151,988 122,683

Investment held as fair value through profit and loss CUCO Cooperative Association (b) 5,146 5,972

Investments available for sale

Cost Shares – Central 1 (c) 12,718 11,177

Fair value Retained rights – loan securitizations 2,173 459

Real Estate Joint Ventures (d) 10,143 10,296

Other investments 235 284

$ 182,403 $ 150,871



9. Investments (continued):

The following summarizes FirstOntario’s investments by the contractual repricing or maturity date,


2014 2013

Carrying Average Carrying Average

(In thousands of dollars) Amount Yield Amount Yield

Within 1 year $ 28,826 1.59% $ 21,453 2.29% Over 1 year 121,260 1.87% 99,635 1.91%

150,086 1.82% 121,088 1.98% Non–rate sensitive 30,995 28,753 Accrued interest 1,322 1,030

$182,403 $150,871

(a) Financial instruments classified as AFS:

The table below presents the income and losses of the financial assets classified as AFS.


Interest and investment income $ 45 $ 126

Unrealized pre–tax income recognized in OCI 55 37

(b) CUCO Cooperative Association:

As a result of the merger between Credit Union Central of Ontario Limited (“CUCO”) and

Credit Union Central of British Columbia (“CUCBC”) to form Central 1 in 2008, member credit

unions were required to invest in a limited partnership (“ABCP LP”) in order to acquire third–

party asset–backed commercial paper (“ABCP”). Members of CUCO were required to

purchase units in the ABCP LP based on their proportionate asset size. FirstOntario was

required to purchase 6,667,059 units in the ABCP LP.

On August 31, 2011, the ABCP LP sold its assets to CUCO Cooperative Association (“CUCO

Co–op”) in consideration for CUCO Co–op Class B Investment shares. On the date of the

transfer, FirstOntario was issued 5.4% of the outstanding CUCO Co–op Class B investment

shares, equivalent to FirstOntario’s share of the fair value of the assets transferred by ABCP

LP. As a result, FirstOntario holds the same relative holdings under the current capital

structure of the CUCO Co–op as it did under the ABCP LP.

The CUCO Co–op is governed by a Board of Directors that was elected by Ontario member

credit unions and each member records its proportionate share of net income or loss in the

CUCO Co–op as determined in accordance with IFRS.




(b) CUCO Cooperative Association (continued):

The fair value of these units is directly related to the ABCP investments held by the CUCO

Co–op. As there is no separately quoted market value for the underlying ABCP investments,

fair value of the underlying ABCP investments are determined by CUCO Co–op’s independent

valuator. In determining fair value of these notes, the CUCO Co–op used all available

information, including interest rate, maturity dates and credit ratings of the borrowers.

Estimated yields that a hypothetical investor would require in order to purchase the ABCP

investments were developed and the net present value of the notes were then calculated

using this information. The recorded amount is the best estimate by the valuator and could

change significantly in the future. During the year a gain of $428,000 (2013 – $758,000) was

recorded as a result of changes in fair value of the investment and was included in unrealized

gain (loss) on investments in the Consolidated Statement of Income.

(c) Central 1 Shares:

As a member of Central 1, FirstOntario is required to maintain an investment in Central 1

shares equal to its share of the level of capital required by Central 1. FirstOntario’s share of

Central 1 capital requirements is based on asset size relative to other Class “A” members.

Central 1 rebalances their shares annually. During 2014, FirstOntario was required to

purchase 806,827 (2013 – 1,312,108) Central 1 Class A shares and received $278,000

(2013 –$97,000) in dividends. In addition, as part of the merger with Rochdale Credit Union

Limited, an additional 333,495 Central 1 Class A shares and 400,800 Central 1 Class E

shares were acquired. The following table summarizes the investment in Central 1 Shares as

at August 31, 2014:


7,159,132 Central 1 Class “A” Shares (2013 – 6,018,810) $ 7,159 $ 6,019 5,559,000 Central 1 Class “E” Shares (2013 – 5,158,200) 5,559 5,158

$ 12,718 $ 11,177

As there is no active market for these shares, the fair market value is not reliably determinable

as future cash flows cannot be adequately predicted with a standard valuation technique. As a

result, these shares are carried at cost. FirstOntario does not intend to dispose of the shares

in the near future.

Central 1 requires that member credit unions maintain with them liquidity and secondary

liquidity reserve deposits equal to 6% of the member credit union's assets. These reserve

deposits are determined on a quarterly basis and are classified as held to maturity.




(d) Real Estate Joint Ventures:

FirstOntario periodically enters into agreements with third parties to jointly control retail

complexes. FirstOntario’s portion of the revenue and expenses from participation in the

ventures has been included in investment income as follows:


Revenues $ 681 $ 682 Expenses 546 602

Earnings from joint ventures $ 135 $ 80

The expenses of the joint ventures included amortization in the amount of $181,000 (2013 –

$181,000). Operating cash flow generated by the ventures was $256,000 (2013 – $241,000).

During the year, FirstOntario received $288,000 (2013 – $288,000) in distributions from the

ventures.

FirstOntario applies the equity method in accounting for investments in real estate. Costs

include initial acquisition costs and other costs incurred prior to the real estate being ready for

its intended use. Investment properties held under the ventures is as follows:


Real estate held for investment purposes $ 10,505 $ 10,505 Accumulated amortization (619) (438)

Net book value, August 31 $ 9,886 $ 10,067

Reconciliations of the net book value for investment properties are summarized below:


Net book value at the beginning of the year $ 10,067 $ 10,248 Disposals - - Amortization (181) (181)

Net book value at the end of the year $ 9,886 $ 10,067




(d) Real Estate Joint Ventures (continued):

The net book value of investment properties is included as part of the real estate joint venture

investment of $10,143,000 (2013 – $10,296,000).

Fair value of the investment properties held through these investments was $14,150,000 as at

August 31, 2014 (2013 – $14,150,000). Fair value was determined by an experienced

registered independent appraiser having an appropriate recognized professional qualification.

Fair values were determined considering recent market transactions for similar properties in

the same location as FirstOntario’s investment property.

10. Fixed Assets:

(In thousands of dollars) 2014

Accumulated Net book

Cost amortization value

Land $ 1,792 $ - $ 1,792 Parking lots/Site improvements 662 496 166 Buildings 11,264 6,831 4,433 Equipment 19,670 14,623 5,047 Leasehold improvements 14,928 4,524 10,404

Tangible assets 48,316 26,474 21,842 Intangible assets (software) 12,760 12,119 641

Total fixed assets $ 61,076 $ 38,593 $ 22,483







Amortization in respect of the above assets for the year amounts to $2,557,000 (2013 –

$2,450,000).



10. Fixed Assets (continued):

Reconciliations of the net book value for each class of fixed asset are summarized below.


Land Net book value at the beginning of the year $ 1,281 $ 1,510 Additions 511 22 Disposals - (251)

Net book value at the end of the year 1,792 1,281 Parking lots/Site improvements Net book value at the beginning of the year 183 230 Disposals - (15) Amortization (17) (32)

Net book value at the end of the year 166 183 Buildings Net book value at the beginning of the year 3,736 4,166 Additions 995 197 Disposals - (344) Amortization (298) (283)

Net book value at the end of the year 4,433 3,736 Equipment Net book value at the beginning of the year 4,626 3,973 Additions 1,577 1,849 Disposals (6) (5) Amortization (1,150) (1,191)

Net book value at the end of the year 5,047 4,626 Leasehold improvements Net book value at the beginning of the year 6,976 5,752 Additions 4,170 1,826 Amortization (742) (602)

Net book value at the end of the year 10,404 6,976 Intangible assets (software) Net book value at the beginning of the year 678 748 Additions 313 272 Amortization (350) (342)

Net book value at the end of the year 641 678 Total net book value $ 22,483 $ 17,480



11. Members’ Deposits:

Members’ deposits, which are designated as other liabilities, are as follows:


Chequing $ 225,320 $ 185,875 Savings 443,416 356,928 Term Deposits 614,410 471,115 Registered Plans 541,580 469,678

$ 1,824,726 $ 1,483,596

Included in registered plans and term deposits are $20,513,000 in Equity–Linked Deposits at

August 31, 2014 (2013 – $19,840,000). See Note 15 for the related derivatives used to hedge

exposure to equity market risk.

Interest expense for the year is as follows:


Savings $ 3,970 $ 3,102 Term Deposits 13,282 10,551 Registered Plans 10,915 9,863

$ 28,167 $ 23,516

The following summarizes FirstOntario’s Members’ deposits by the contractual repricing or

maturity date, whichever is earlier:

2014 2013

Principal Average Principal Average

(In thousands of dollars) Balance Yield Balance Yield

Floating $ 467,134 1.21% $ 373,809 1.25%

Within 1 year 612,386 2.19% 495,359 2.23%

Over 1 year 442,934 2.35% 363,910 2.24%

1,522,454 1.94% 1,233,078 1.94% Non–rate sensitive 302,272 250,518

$ 1,824,726 $ 1,483,596

Members’ deposits held in registered plans are as follows:


Tax free savings accounts $ 132,189 $ 96,827 Registered savings plans 275,487 250,290 Registered retirement income funds 133,904 122,561

$ 541,580 $ 469,678

Concentra Financial Services Association acts as the trustee for the majority of FirstOntario’s tax

deferred savings plans (registered retirement savings plans and registered retirement income

funds). FirstOntario accepts deposits on behalf of the trustee and retains the funds deposited.



12. Membership and Investment Shares:

Authorized Share Capital

An unlimited number of membership shares. Such shares are issued for $5 each and Members

under the age of twenty–one must hold one membership share while those twenty–one and over

are required to hold at least five shares and increase their holdings of membership shares to thirty

shares over a twenty–five year period. Membership shares are redeemable, on withdrawal from

membership, at the amount paid thereon provided the credit union is meeting the “capital

adequacy” requirements (see Note 13) and they rank junior to Class A and Class B special shares

for priority in the payment of dividends.

An unlimited number of Class A and Class B special shares. Such shares are generally non–

voting and non–participating with non–cumulative dividend entitlements. In respect of dividends,

both classes rank senior to the membership shares and the Class B special shares rank ahead of

the Class A special shares.

The Board of Directors has authorized a Series 1, Series 2, Series A and Series 2010 for Class B

special shares (“investment shares”). The investment shares have an issue price of $1 each and

are entitled to receive dividends if, as and when declared by the Board of Directors. Series 1,

Series 2 and Series A investment shares are redeemable at the holder’s request. Series 2010

investment shares are redeemable at the sole and absolute discretion of the Board of Directors

starting in 2015. In any year, redemptions are restricted to 10% of the respective series of the

outstanding investment shares.

Issued and Outstanding

Membership shares and Series 1, 2 and A investment shares are designated as other liabilities

and dividends are recorded using the effective interest rate method. Series 2010 investment

shares are classified as equity as these shares are redeemable at the sole and absolute discretion

of the Board of Directors.


Membership shares:

1,460,147 (2013 – 1,291,702) Membership Shares $ 7,301 $ 6,459

Investment shares:

5,568,668 (2013 – 5,473,779) Class B, Series 1, Special Shares 5,568 5,474

6,816,790 (2013 – 6,818,892) Class B, Series 2, Special Shares 6,817 6,819

918,780 (2013 – Nil) Class B, Series A, Special Shares 919 -

Investment shares classified as liabilities 13,304 12,293 38,619,517 (2013 – 36,686,639)

Class B, Series 2010, Special Shares 38,373 36,440

$ 51,677 $ 48,733



12. Membership and Investment Shares (continued):

Dividends

Dividends earned by membership and investment shares classified as liabilities and expensed on

the Consolidated Statement of Income were as follows:


Membership shares $ 426 $ 456 Series 1, 2 and A investment shares 397 413

Dividends on membership and investment shares $ 823 $ 869

Dividends on Series 2010 shares (classified as equity) $ 2,018 $ 1,920

On January 22, 2014, the Board of Directors approved the issue of 366,972 Series 1 and 2

investment shares in payment of a dividend for the year from December 1, 2012 to November 30,

2013.

On October 23, 2013, the Board of Directors approved the issue of 2,017,615 Series 2010

investment shares in payment of a dividend for the year from September 1, 2012 to August 31,

2013.




The tables below present a reconciliation of the change in shares during the year:

2014 2013

Membership Shares Opening balance 1,291,702 1,247,560 Shares issued during year 85,057 81,614 Merger with Rochdale Credit Union 110,160 - Shares redeemed (26,772) (37,472)

Membership shares, August 31 1,460,147 1,291,702

Class B, Series 1, Special Shares Opening balance 5,473,779 5,407,473 Shares issued during year 162,693 161,990 Shares redeemed (67,804) (95,684)

Class B, Series 1, Special Shares, August 31 5,568,668 5,473,779

Class B, Series 2, Special Shares Opening balance 6,818,892 6,667,052 Shares issued during year 204,278 199,635 Shares redeemed (206,381) (47,795)


Class B, Series A, Special Shares Opening balance - - Merger with Rochdale Credit Union 918,780 -

Class B, Series A, Special Shares, August 31 918,780 -

Class B, Series 2010, Special Shares Opening balance 36,686,639 34,903,759 Shares issued during year 2,017,615 1,919,766 Shares redeemed (84,737) (136,886)




13. Regulatory Reporting and Disclosure:

(a) Capital Management:

FirstOntario maintains policies and procedures relative to capital management so as to ensure

that capital levels are sufficient to cover risks inherent in the business.

FirstOntario’s objectives when managing capital are:

(i) To ensure that the quantity, quality and composition of capital required reflects the

inherent risks of FirstOntario and to support the current and planned operations and

portfolio growth.

(ii) To provide a basis for confidence among Members, depositors, creditors and regulatory

agencies.

(iii) To ensure that FirstOntario maintains a level of capital that sufficiently protects against

unanticipated losses and to comply with the minimum regulatory capital requirements set

out in the Act.

Regulatory capital is calculated as a percentage of total assets and of risk–weighted assets.

Risk–weighted assets are calculated by applying risk weight percentages, as prescribed by the

Act, to various asset categories, operational and interest rate risk criteria. The prescribed risk

weights are dependent upon the degree of risk associated with the asset.

FirstOntario manages its Tier 1 and Tier 2 capital in accordance with internal policies and

regulatory requirements. Tier 1 capital is the highest quality and consists of retained earnings,

contributed surplus, accumulated other comprehensive losses, membership shares and the

portion of the value of Class B investment shares that are not redeemable within 12 months.

Tier 2 capital is comprised of the value of Class B investment shares ineligible as Tier 1 capital

and the eligible portion of the allowance for impaired loans.



13. Regulatory Reporting and Disclosure (continued):

(a) Capital Management (continued):

The amount and composition of Tier 1 and Tier 2 capital were as follows.


Tier 1 Capital Retained earnings $ 72,231 $ 67,381 Contributed surplus 4,865 645 Membership shares 7,301 6,459 Class B Investment Shares,

Series 1 (90%) 5,011 4,927 Class B Investment Shares,


Series A (90%) 828 - Class B Investment Shares,

Series 2010 (90%) (2013 – 100%) 34,536 36,440

Total Tier 1 Capital 130,907 121,989

Tier 2 Capital Class B Investment Shares, Series 1 (10%) 557 547 Class B Investment Shares, Series 2 (10%) 682 682 Class B Investment Shares, Series A (10%) 91 - Class B Investment Shares, Series 2010 (10%) (2013 – nil) 3,837 -

Accumulated other comprehensive gains on AFS investments 111 66 Accumulated other comprehensive losses – employee benefit adjustments (2,467) (691) Collective allowance for impaired loans 4,918 4,320


Total Regulatory Capital $ 138,636 $ 126,913

Under the Regulations of the Act, FirstOntario must maintain minimum levels of regulatory

capital. The leverage ratio calculates regulatory capital as a percentage of assets. The risk–

weighted capital ratio calculates regulatory capital as a percentage of risk–weighted assets.

FirstOntario complied with these requirements as follows:

Regulatory Leverage Ratio Risk–Weighted Capital Ratio

Capital Minimum Actual Minimum Actual

2014 $138,636,000 4.00% 5.48% 8.00% 10.48%

2013 $126,913,000 4.00% 6.11% 8.00% 11.53%




(b) Remuneration of officers and employees:

The Act requires disclosure of the five highest paid officers and employees of FirstOntario

where total remuneration exceeds $150,000. The names, positions and remuneration paid

during 2014 of those officers and employees are as follows:

Salary Benefits Total

Kelly McGiffin, Chief Executive Officer $ 479,000 $ 40,000 $ 519,000

David Schurman, Chief Operating Officer 266,000 29,000 295,000

Barry Doan, Chief Financial Officer 262,000 33,000 295,000

James Olson, Chief Administration Officer 259,000 30,000 289,000

Lloyd Smith, Chief Risk Officer 243,000 32,000 275,000

Remuneration is fair and competitive and is targeted to be in the 50th percentile of similar

positions in credit unions of equal asset size. FirstOntario actively participates in

compensation surveys to ensure alignment with the market and employs third party

compensation consultants to provide more independence to the process.

Executive compensation is reviewed and approved by the Board on an annual basis. As part

of this review, the Board considers market expectations and projections of changes for

comparable positions using, where available, independent, competent and relevant sources.




(c) Related party transactions:

FirstOntario’s related parties include:

(i) All members of the Board, Officers and Executives of FirstOntario.

(ii) FirstOntario’s subsidiary (1320828 Ontario Limited) and joint ventures noted in Note 9. As

at August 31, 2014, no balances (2013 – nil) existed between FirstOntario and these

related parties.

(iii) Defined benefit plans that are referred to in Note 18. FirstOntario’s transactions with the

plans include contributions paid into the plans. FirstOntario also pays for the expenses of

the employee defined contribution plan. FirstOntario has not entered into other

transactions with the defined benefit plans.

The following table outlines remuneration of members of the Board, Officers and Executives:


Salaries, bonuses, and other short–term employee benefits $ 1,815 $ 1,953 Post–employment benefits 97 110 Directors’ remuneration 227 207

Total compensation $ 2,139 $ 2,270

Related party balances as at August 31 are outlined in the following table:


Loans Residential Mortgages $ 2,273 $ 2,130 Personal Loans 137 80 Accrued interest 3 2 Deposits and Shares Deposits 1,670 1,902 Membership Shares 3 3 Investment Shares 105 100 Accrued interest 134 151

Total interest revenue derived from lending activity relating to key management personnel was

$84,000 (2013 – $62,000) during the year. Total interest expense from deposit–taking activity

from related parties was $192,000 (2013 – $168,000) during the year. During 2014 and 2013,

no loans held by related parties were impaired.



14. Loans Payable:

The following table details loans payable to Central 1 and our funding partners. Security pledged is

set out in Note 20(c). All loans payable are classified as other liabilities.


Central 1 Credit Facilities Term loan facilities, bearing a variable weighted average interest rate of 1.80% (2013 – 1.79%)

due within one year $ 11,000 $ 74,000 Overdraft facility, bearing a variable interest rate

of 1.75%, payable on demand 4,885 2,443 Caisse centrale Desjardins Credit Facilities Term loan facilities, bearing a variable weighted average interest rate of 1.74% due within

one year 62,000 - Securitization Debt Canada Mortgage Bond bullet bonds, secured

by residential mortgages, bearing a weighted average fixed interest rate of 2.82% (2013 – 2.82%), weighted average maturity date of 2016 (2013 – 2016) 94,308 94,140

Mortgage Backed Securities secured by

residential mortgage loans, bearing a weighted average fixed interest rate of 2.43%

(2013 – 2.34%), expected weighted average maturity date of 2017 (2013 – 2018) 349,641 249,549 Mortgage Backed Securities secured by

residential mortgage loans, bearing a weighted average variable interest rate of 1.85%

(2013 – 1.79%), expected weighted average maturity date of 2016 (2013 – 2017) 18,398 21,683

$ 540,232 $ 441,815

The term loan facility with Caisse centrale Desjardins is subject to certain financial and non-

financial covenants. As at August 31, 2014, the Credit Union was in compliance with all financial

and non-financial covenants.

Interest expense associated with loans payable during the year consisted of the following:


Term loans $ 833 $ 374 Securitization of residential mortgages 11,803 9,734

$ 12,636 $ 10,108



15. Derivative Financial Instruments:

(a) Asset liability management:

In the ordinary course of business, FirstOntario purchases derivative instruments from Central

1 and Concentra in order to hedge against exposure to interest rate fluctuations.

Derivative instruments have a fair value that varies based on the particular instrument and

changes in interest rates. The purpose of these instruments is to provide a hedge against

interest rate fluctuations by improving FirstOntario’s matching of its asset and liability position.

(b) Product related:

FirstOntario offers deposit products linked to changes in equity indexes or specific bundles of

equities. FirstOntario hedges the underlying risk of these products by entering into equity–

linked purchase option contracts. Under the terms of these contracts, FirstOntario will receive

payments approximate to the future payments to Members.

(c) Foreign exchange forward contracts:

FirstOntario offers deposit products denominated in US dollars. In order to meet liquidity

reserve requirements FirstOntario sells US dollars and purchases US dollar foreign exchange

forward contracts to hedge the exchange risk.

The following table summarizes the notional amounts, maturities and fair values of FirstOntario’s

derivative portfolio as at August 31, 2014 and 2013:

(In thousands of dollars) As at August 31, 2014

Within 1 to 5 Over Fair Value

1 year years 5 years Total Assets Liabilities

Pay fixed interest rate swaps $ - $ 39,131 $ 21,855 $ 60,986 $ - $ 1,588

Bond forwards 25,000 - - 25,000 - 115

Equity linked options 10,527 9,412 48 19,987 1,673 1,458

Foreign exchange forward contracts 23,540 - - 23,540 - 18

2014 Total $ 59,067 $ 48,543 $ 21,903 $ 129,513 $ 1,673 $ 3,179




Pay fixed interest rate swaps $ 23,186 $ 9,373 $ - $ 32,559 $ - $ 512

Receive fixed interest rate swaps 6,714 - - 6,714 27 -

Bond forwards 42,500 - - 42,500 16 -

Equity linked options 4,529 14,308 - 18,837 1,139 1,258

Foreign exchange forward contracts 21,200 - - 21,200 160 -

2013 Total $ 98,129 $ 23,681 $ - $ 121,810 $ 1,342 $ 1,770



15. Derivative Financial Instruments (continued):

Notional amounts are the contract amounts used to calculate the cash flows to be exchanged.

They are a common measure of the volume of outstanding transactions, but do not represent

credit or market risk exposure. Notional amounts, other than foreign exchange forward contracts,

are not exchanged.

FirstOntario is exposed to credit risk which arises from the possibility that a counterparty to a

derivative contract could default on their obligation to FirstOntario. However, credit risk associated

with derivative contracts is normally a small fraction of the notional principal amount of the

contract. Derivative contracts expose FirstOntario to loss only if changes in market rates cause a

material unfavourable affect on a counterparty’s position, which could then lead to the counterparty

defaulting on its payment. FirstOntario only enters into derivative contracts with counterparties that

FirstOntario has determined to be creditworthy.

16. Financial Risk Management:

The Board of Directors (the "Board”) has overall responsibility for the establishment and oversight

of FirstOntario’s risk management framework. The Board has delegated to the Audit Committee

the responsibility for the development and monitoring of risk management policies. The Audit

Committee reports regularly to the Board on its activities.

All risk management policies and established limits ensure that FirstOntario is in full adherence to

the regulatory requirements prescribed in the Act as well as DICO’s standards of Sound Business

and Financial Practices. The Board receives reports from management on FirstOntario’s exposure

to credit, interest rate, liquidity, foreign currency and other price risk regularly in order to monitor

financial risks.

(a) Credit Risk:

Credit risk is the potential for financial loss to FirstOntario if a borrower or guarantor fails to

meet payment obligations in accordance with agreed terms. FirstOntario’s financial assets that

are affected by credit risk include loans receivable from Members, investments, and derivative

financial instruments. Credit risk is one of the most significant financial risks to FirstOntario.

FirstOntario’s primary objective when managing credit risk is to ensure a portfolio of high

quality financial assets properly diversified so as to balance the risk associated with the

portfolio and return on assets.

Credit risk is managed in accordance with the Credit Risk Management Policy for loans

receivable from Members and the Market Risk Management Policy for investments and

derivative financial instruments.



16. Financial Risk Management (continued):

(a) Credit Risk (continued):

For loans receivable from Members, credit risk is managed through an infrastructure based

upon:

(i) Approval by the Board of all credit risk management policies;

(ii) Approval by the Vice President Credit of the discretionary limits of lending officers

throughout FirstOntario;

(iii) Credit adjudication subject to compliance with established policies, exposure guidelines

and discretionary limits, as well as adherence to established standards of credit

assessment. Credit approvals are escalated to the Management Credit Committee and

ultimately to the Board dependent upon credit exposure level and restricted party

transactions;

(iv) The Credit Department is charged with oversight of the following:

a. The establishment of guidelines to monitor and limit concentrations in the portfolios in

accordance with Board approved policies governing regulatory requirements, industry

risk and group exposures;

b. The development and implementation of credit risk models and policies for

establishing borrower risk ratings to quantify and monitor the level of risk and facilitate

management of retail and commercial credit;

c. Implementation of an ongoing monitoring process of the key risk factors used in

FirstOntario credit risk models.

Management has designed and implemented an effective system to measure, monitor and

report credit risk exposure. Management reports credit risk exposure to the Board regularly.

In conducting lending activities, FirstOntario diversifies its portfolio of loans receivable from

Members in order to reduce overall credit risk. Residential mortgage and personal loans are

diversified between authorized loan types, forms of security and certain sectoral groupings.

Commercial loans are diversified through the establishment of credit exposure limits for

specific industry sectors, groups of related borrowers and geographic location.

Credit exposure is assessed through the following:

(i) Probability of default, which is an estimate of probability that a Member with a certain

borrower risk rating, will default within a one year time horizon.

(ii) Loss given default, which represents the unsecured portion expected to be lost when a

borrower defaults.





Credit risk rating systems are designed to assess and quantify the risk inherent in credit

activities in an accurate and consistent manner as follows:

(i) Commercial loans are principally assessed based on the Member’s ability to service debt

(debt service coverage ratio) and the secured amount (loan to value ratio). Management

regularly reviews the commercial loan portfolio and assesses the credit risk associated

with each loan.

(ii) Automated credit scoring systems are used in assessing credit risk associated with

residential mortgage and personal loans. These loans are managed as pools of

homogeneous risk exposures using internal benchmarks based upon Equifax Beacon

Score’s. These global standard credit scores track each individual’s past credit history

and, using a mathematical model, predicts how likely a person is to repay a loan.

For investments and derivative financial instruments, risk is measured by reviewing exposure

to individual counterparties to ensure the assets are within the policy limit by issuer weightings

and by dollar amount. The quality of the counterparties is assessed through published credit

rating agencies.

Except as noted, the carrying amount of financial assets recorded in the financial statements

represents FirstOntario’s maximum exposure to credit risk without taking into account the

value of any collateral obtained. FirstOntario is also exposed to credit risk through transactions

which are not recognized in the Consolidated Statement of Financial Position, such as

granting financial guarantees and extending loan commitments. Refer to Note 20 for further

details. The risk of losses from loans undertaken is reduced by the nature and quality of

collateral obtained. Refer to Note 6 for a description of the nature of the security held against

loans as at the date of the Consolidated Statement of Financial Position.

(b) Interest Rate Risk:

Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate

because of changes in market interest rates. FirstOntario is exposed to interest rate risk when

entering into banking transactions with Members, primarily deposit and lending activities.

FirstOntario’s exposure to interest rate risk depends on the size and direction of interest rate

changes, and on the size and maturity of mismatched positions. An interest–sensitive asset or

liability is repriced when market interest rates change, when there is cash flow from final

maturity, normal amortization, or when Members exercise prepayment, conversion or

redemption options are offered for the specific product.

Interest rate risk is managed in accordance with the Structural Risk Management Policy. The

Board delegates the responsibility to manage interest rate risk on a day–to–day basis to

management.




(b) Interest Rate Risk (continued):

FirstOntario’s Structural Risk Management Policy includes:

(i) Guidelines and limits on the structuring of the maturities, price and mix of deposits, loans,

mortgages and investments and the management of cash flows derived from financial

assets in relation to liabilities.

(ii) Guidelines and limits on the use of derivative products to hedge against changes in cash

flows as a result of changes in interest rates.

The following table summarizes carrying amounts of Consolidated Statement of Financial

Position assets, liabilities and equity, and derivative instruments to arrive at FirstOntario’s

interest rate gap based on the earlier of contractual re–pricing and maturity dates:


Within 3 Months 1 to 5 Over Non Interest

3 Months to 1 Year Years 5 years Sensitive Total

Assets

Loans receivable $ 694,491 $ 103,371 $ 1,460,288 $ 17,975 $ - $ 2,276,125

Cash - - - - 35,878 35,878

Investments 15,821 13,005 121,260 - 32,317 182,403

Other 678 463 528 4 36,899 38,572

710,990 116,839 1,582,076 17,979 105,094 2,532,978

Liabilities and equity

Deposits 878,324 201,196 442,934 - 302,272 1,824,726

Loans 103,220 24,846 412,166 - - 540,232

Other 789 651 823 916 164,841 168,020

982,333 226,693 855,923 916 467,113 2,532,978

Gap – Financial Position (271,343) (109,854) 726,153 17,063 (362,019) -

Gap – Derivatives and

net securitization gap 69,067 14,805 (38,872) (45,000) - -

Interest rate gap 2014 $ (202,276) $ (95,049) $ 687,281 $ (27,937) $ (362,019) $ -








Assets


Cash - - - - 23,276 23,276

Investments 7,742 13,711 99,635 - 29,783 150,871

Other - 285 187 870 31,113 32,455

572,345 84,414 1,331,492 6,004 84,172 2,078,427


Deposits 536,787 332,381 363,910 - 250,518 1,483,596

Loans 102,477 26,768 312,570 - - 441,815

Other 122 237 1,411 - 151,246 153,016

639,386 359,386 677,891 - 401,764 2,078,427



net securitization gap (15,946) 22,671 (6,725) - - -

Interest rate gap 2013 $ (82,987) $ (252,301) $ 646,876 $ 6,004 $ (317,592) $ -

Key metrics involved in management of interest rate risk include the use of Earnings at Risk

(“EaR”) and Economic Value of Equity at Risk (“EVEaR”). EaR is defined as the change in the

net interest income from a 100 basis point (“bps”) shock to interest rates. This exposure is

measured over a 12 month period. EVEaR is defined as the difference in the change in the

present value of the asset portfolio and the change in the present value of the liability portfolio,

including off–Statement of Financial Position instruments, resulting from a 100 bps interest

rate shock.

The following table summarizes the EaR and EVEaR as follows:


EaR $ - $ -

EVEaR 1.1% 2.9%

Fair Value Hedges

FirstOntario has designated certain hedging relationships involving amortizing interest rate

swaps that convert fixed rate commercial loans to floating rates as fair value hedges in

accordance with IAS 39 Financial Instruments: Recognition and Measurement. Losses for the

year relating to fair value hedging relationships from hedging instruments were $963,000

(2013 – $727,000) and $199,000 (2013 – $1,323,000) for the hedged items. Fair values of the

interest rate swaps involved in these hedges at the end of the year were in a liability position

of $258,000 (2013 – $494,000).





Cash Flow Hedges

FirstOntario has designated certain hedging relationships involving interest rate swaps that

convert variable rate deposits to fixed rate deposits as cash flow hedges. During the year,

$2,000 (2013 – $49,000) of hedge ineffectiveness arose and was recorded in the

Consolidated Statement of Income. Fair values of the interest rate swaps involved in these

hedges at the end of the year was a liability of $1,177,000 (2013 – $52,000). The amount of

other comprehensive loss that is expected to be reclassified to the Consolidated Statement of

Income over the next 12 months is $550,000 (2013 – $91,000).

FirstOntario has also designated hedging relationships involving bond forwards that hedge

forecasted debt issuances associated with securitization activity as cash flow hedges.

Realized gains (losses) on these derivatives are deferred and amortized in accordance with

the effective interest rate method along with the debt originated. No ineffectiveness has arisen

during the year. Fair values of the bond forwards involved in these hedges that were

unrealized at the end of the year was a liability of $115,000 (2013 – asset of $16,000). The

amount of other comprehensive loss that is expected to be reclassified to the Consolidated

Statement of Income over the next 12 months is $286,000 (2013 – $262,000).

(c) Liquidity Risk:

Liquidity risk is the risk that FirstOntario will encounter difficulty in meeting obligations

associated with financial liabilities that are settled by delivering cash or other financial assets.

FirstOntario engages in proper liquidity risk management practices to comply with regulatory

requirements and to guarantee the funding of Member needs and obligations. FirstOntario’s

overall objective when managing liquidity is to ensure limited exposure to material liquidity risk.

Liquidity risk is managed in accordance with the Liquidity Risk Management Policy. Key

elements of this policy include limits on the sources, quality and amount of liquid assets to

meet operational requirements, regulatory requirements and contingency funding. Liquidity is

monitored by management through FirstOntario’s Asset/Liability Committee (“ALCO”),

consisting of the executive.

Under the Regulations, FirstOntario must establish and maintain prudent levels of liquidity that

are sufficient to meet its cash flow needs, including depositor withdrawals and all other

obligations as they come due. FirstOntario targets to maintain operating liquidity within the

range of 8% to 16%. The low end of the range has been established in order to maintain a

comfortable cushion beyond the minimum policy requirements in order to meet cash needs,

even during periods of market volatility. As at August 31, 2014 FirstOntario’s liquidity ratio was

9.60% (2013 – 8.99%) and assets held for liquidity purposes totalled $177,709,000 (2013 –

$140,149,000), consisting of $150,086,000 (2013 – $121,088,000) liquidity reserve deposits

and $27,623,000 (2013 – $19,061,000) cash.




(c) Liquidity Risk (continued):

The tables below demonstrate FirstOntario’s ability to pay future obligations as financial assets

and liabilities mature as at August 31, 2014 and 2013. These cash flows include both the

contractual cash flows currently exposed on the Statement of Financial Position and the cash

flows that will be generated in the future. In the case of loans, the cash flows include estimated

prepayments and credit losses based on experience and current economic conditions.


Within 2 to 12 1 to 3 3 to 5 Over 5 Not

1 month months years years years Specified Total

Assets

Loans receivable

from members $ 338,333 $ 495,847 $ 908,773 $ 682,271 $ 18,269 $ - $ 2,443,493

Cash 35,878 - - - - - 35,878

Investments 8,478 24,107 54,577 71,859 - 30,995 190,016

Derivative financial

instruments 48 1,201 303 121 - - 1,673

Total Cash Inflow $ 382,737 $ 521,155 $ 963,653 $ 754,251 $ 18,269 $ 30,995 $ 2,671,060

Liabilities

Members’ deposits

and shares $ 859,100 $ 538,749 $ 337,520 $ 122,284 $ - $ - $ 1,857,653

Loans payable 80,577 41,001 317,807 130,942 - - 570,327

Other liabilities 20,241 - - - - - 20,241


instruments 175 1,543 264 903 294 - 3,179

Total Cash Outflow $ 960,093 $ 581,293 $ 655,591 $ 254,129 $ 294 $ - $ 2,451,400








Assets

Loans receivable

from members $ 524,561 $ 308,378 $ 587,656 $ 584,401 $ 5,134 $ - $ 2,010,130

Cash 23,276 - - - - - 23,276

Investments 3,289 21,321 29,427 74,935 - 28,753 157,725


instruments 205 271 704 162 - - 1,342


Liabilities

Members’ deposits

and shares $ 704,590 $ 428,055 $ 309,106 $ 64,773 $ - $ - $ 1,506,524

Loans payable 79,581 42,526 207,741 138,304 - - 468,152



instruments 6 376 1,210 178 - - 1,770

Total Cash Outflow $ 802,468 $ 470,957 $ 518,057 $ 203,255 $ - $ - $ 1,994,737

(d) Foreign Currency Risk:

Currency risk is the risk that the fair value of future cash flows of a financial instrument will

fluctuate due to changes in foreign exchange rates. FirstOntario is exposed to foreign currency

risk as a result of its Members’ activities in US dollar currency denominated deposits and cash

transactions. Activities that expose FirstOntario to currency risk are measured, monitored and

controlled daily to minimize risk. At any point in time, net US dollar exposure is limited by the

Market Risk Management Policy to $500,000 through the use of foreign exchange forward

contracts. As at August 31, 2014, FirstOntario does not have significant exposure to changes

in foreign currency exchange rates.




(e) Equity and Other Price Risk:

Other price risk is the risk that the fair value or future cash flows of a financial instrument will

fluctuate because of changes in market prices other than those arising from interest rate risk

or currency risk. FirstOntario is primarily exposed to other price risk through investments.

However, these investments are limited by policy to ensure diversification and quality of

financial assets. As at August 31, 2014, had the value of FirstOntario’s preferred, common,

income trust and CUCO shares increased or decreased by 10% with all other variables

remaining unchanged, the portfolio’s asset value would have increased or decreased

respectively by $573,000 (2013 – $654,000) or 0.5% (2013 – 0.6%) of total Member’s Equity.

17. Fair Values of Financial Instruments:

The following table represents the fair values of FirstOntario’s financial instruments. The fair

values disclosed do not include the value of assets that are not considered financial instruments,

such as fixed assets. The value of intangibles such as long–term Member relationships are also

not included in the fair value amounts, although FirstOntario considers the value of intangibles to

be significant.

While the fair value amounts are intended to represent estimates of the amounts at which these

instruments could be exchanged in a current transaction between willing parties, some of

FirstOntario’s financial instruments lack an available trading market. Consequently, the fair values

presented are estimates derived using present value and other valuations techniques and may not

be indicative of the net realizable values.

Due to the judgment used in applying a wide range of acceptable valuation techniques and

estimates in calculating fair value amounts, fair values are not necessarily comparable among

financial institutions. 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.



17. Fair Values of Financial Instruments (continued):

2014 2013

Carrying Carrying

(In thousands of dollars) Value Fair Value Difference Value Fair Value Difference

Loans and Receivables

Loans receivable $ 2,289,017 $ 2,311,723 $ 22,706 $ 1,882,284 $ 1,898,130 $ 15,846

Held to Maturity

Investments 151,408 152,998 1,590 122,118 122,339 221

Fair Value through Profit and Loss

Cash and cash equivalents 35,878 35,878 - 23,276 23,276 -

Investments 5,146 5,146 - 5,972 5,972 -


instruments 1,673 1,673 - 1,342 1,342 -

Available for Sale

Investments 15,471 15,471 - 12,201 12,201 -

Total financial assets $ 2,498,593 $ 2,522,889 $ 24,296 $ 2,047,193 $ 2,063,260 $ 16,067

Other Liabilities

Deposits and shares $ 1,857,874 $ 1,859,138 $ (1,264) $ 1,512,362 $ 1,514,305 $ (1,943)

Loan s payable 540,232 548,275 (8,043) 441,815 445,223 (3,408)

Accounts payable and

accrued liabilities 20,241 20,241 - 18,291 18,291 -



instruments 3,179 3,179 - 1,770 1,770 -

Total financial liabilities $ 2,421,526 $ 2,430,833 $ (9,307) $ 1,974,238 $ 1,979,589 $ (5,351)

Interest rate sensitivity is the main cause of change in fair values of FirstOntario’s financial

instruments.

The following methods and assumptions were used to estimate the fair value of financial

instruments:

(a) The fair values of cash and accounts payable and accrued liabilities are assumed to

approximate their book values, due to their short–term nature.

(b) The estimated fair value of floating rate loans, demand deposits and floating rate deposits are

assumed to be equal to book value as the interest rates on these loans and deposits reprice to

market on a periodic basis.

(c) The estimated fair values of fixed rate investments, fixed rate loans and fixed rate deposits are

determined by discounting the expected future cash flows of these investments, loans,

deposits and borrowings at current market rates for products with similar terms and credit

risks.

(d) The estimated fair values of derivative instruments are determined through valuation models

on the derivative notional amounts, maturity dates and rates.




(e) The estimated fair values of investments in publicly listed equity securities are determined

using quoted market prices.

Fair value measurements can be classified in a hierarchy in order to discern the significance of

management assumptions and other inputs incorporated into the measurements. The three levels

of fair value hierarchy are:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either

directly or indirectly. This category includes instruments valued using: quoted

market prices in active markets for similar instruments; quoted prices for identical

or similar instruments in markets that are consider less than active; or other

valuation techniques where all significant inputs are directly or indirectly observable

form market data.

Level 3 – Inputs for the asset or liability that are not based on observable market data. This

category includes all instruments where the valuation technique includes inputs not

based on observable data and the unobservable inputs have a significant effect on

the instrument’s valuation. This category includes instruments that are valued

based on quoted prices for similar instruments where significant unobservable

adjustments are required to reflect differences between the instruments.

The following table summarizes the classification of FirstOntario’s financial instruments held and

reported on the Statement of Financial Position at fair value:

(in thousands of dollars) As at August 31, 2014

Level 1 Level 2 Level 3 Total

Assets

Investments – FVTPL securities $ - $ 5,146 $ - $ 5,146

Investments – Marketable equity securities 580 - - 580

Investments – Retained rights – loan securitizations - 2,173 - 2,173

Derivative financial instruments - 1,673 - 1,673

Total assets held at fair value $ 580 $ 8,992 $ - $ 9,572

Liabilities

Derivative financial instruments $ - $ 3,179 $ - $ 3,179

Total liabilities held at fair value $ - $ 3,179 $ - $ 3,179




(in thousands of dollars) As at August 31, 2013


Assets



Investments – Retained rights – loan securitizations - 459 - 459



Liabilities



Fair value of financial instruments held at amortized cost using the fair value hierarchy:

The following table summarizes the fair value hierarchy classification of FirstOntario’s financial

instruments which are not carried at fair value on the consolidated balance sheet as at August 31,

2014 with comparative information for 2013. The table does not include fair value information for

financial assets and financial liabilities not measured at fair value if the carrying amount is a

reasonable approximation of fair value. FirstOntario’s financial instruments held at amortized cost

are all classified as Level 2.

(in thousands of dollars) 2014 2013

Assets

Loans Receivable $ 2,311,723 $ 1,898,130

Investments 152,998 122,339

Total assets held at fair value $ 2,464,721 $ 2,020,469

Liabilities

Deposits and Shares $ 1,859,138 $ 1,514,305

Loans Payable 548,275 445,223

Total liabilities held at fair value $ 2,407,413 $ 1,959,528



18. Employee Retirement Benefits:

FirstOntario provides retirement benefits to certain employees. These benefits include registered

pension plans, medical benefits, dental care and life insurance.

The fair value of accrued benefit obligations were determined by independent actuaries as at

August 31, 2014.

Defined Benefit Pensions Other Defined Benefit Plans (In thousands of dollars) 2014 2013 2014 2013

Accrued benefit obligation Balance at the beginning of year $ 11,817 $ 12,506 $ 5,104 $ 5,330 Merger with Rochdale Credit Union 1,832 - - - Current service cost 372 468 4 4 Interest cost 629 535 232 217 Benefits paid (580) (402) (196) (144) Settlements - (167) - - Actuarial loss (gain) 2,646 (1,123) 763 (303)

Balance at end of year 16,716 11,817 5,907 5,104

Plan assets Fair value at beginning of year 10,391 9,282 - - Merger with Rochdale Credit Union 2,390 - - - Expected return on plan assets 590 397 - - Actuarial gain on plan assets 1,176 524 - - Employer contributions 1,121 738 196 144 Employee contributions 15 19 - - Benefits paid (580) (402) (196) (144) Settlements - (167) - -

Fair value at end of year 15,103 10,391 - -

Funded status - deficit $ (1,613) $ (1,426) $ (5,907) $ (5,104)

The following table provides the amounts recognized in the Consolidated Statement of Financial

Position as follows:

Defined Benefit Pensions Other Defined Benefit Plans

(In thousands of dollars) 2014 2013 2014 2013

Prepaid benefit costs recorded in other assets $ 36 $ 568 $ - $ - Accrued benefit liability recorded in other liabilities (1,649) (1,994) (5,907) (5,104)

Net amount recognized $ (1,613) $ (1,426) $ (5,907) $ (5,104)



18. Employee Retirement Benefits (continued):

FirstOntario’s net benefit plan expenses recognized in other comprehensive income were as

follows:



Cumulative actuarial gain (loss) at September 1 $ (1,001) $ (2,648) $ 131 $ (172) Actuarial gain (loss) in the year on liability (2,646) 1,123 (763) 303 Actuarial gain (loss) in the year on plan assets 1,176 524 - -

Cumulative actuarial gain (loss) $ (2,471) $ (1,001) $ (632) $ 131

The net adjustments recognized in other comprehensive income of $1,776 (2013 - $1,551) during the year are net of tax of $457 (2013 – tax recovery of $399) as disclosed in note 19.

FirstOntario’s net benefit plan expenses recognized in the consolidated statement of operations

were as follows:

Defined Benefit Pensions Other Defined Benefit Plans (In thousands of dollars) 2014 2013 2014 2013

Current service cost $ 372 $ 468 $ 4 $ 4 Interest cost 629 535 232 217 Expected return on plan assets (590) (397) - -

Total included in employee benefits expense $ 411 $ 606 $ 236 $ 221

Defined Contribution Pension


Contributions recorded as expenses $ 1,050 $ 916

These net benefit plan and contribution expenses are included in salaries and employee benefits

on the Consolidated Statement of Income. Aggregate contributions relating to defined benefit

pensions and other defined benefit plans expected for the year ended August 31, 2015, is

$821,000.




The significant actuarial assumptions adopted by are as follows (weighted–average assumptions):

Defined Benefit Pensions Other Defined Benefit Plans 2014 2013 2014 2013

Discount rate 4.0% 4.7% 4.0% 4.7% Rate of compensation increase 3.0% 3.0% - -

For measurement purposes, 5.0% and 3.0% rates of increase in the per capita cost of covered

health care and dental care benefits respectively were assumed for 2014. The rate of increase for

health care benefits was assumed to remain unchanged at 5.0%. The rate of increase for dental

care benefits was assumed to remain unchanged at 3.0%.

A one percentage–point change in assumed health–care cost trend rates, discount rates and

salary costs would have the following impact on other defined benefit plans:

2014 2013

(In thousands of dollars) Defined Other Defined Other

benefit plans benefit plans

Health care 1% increase $ na $ 710 $ na $ 531 1% decrease na (596) na (451)

Discount rate 1% increase $ (2,568) $ (691) $ (1,604) $ (538) 1% decrease 3,077 784 1,860 603

Salary rate 1% increase $ 133 $ na $ 136 $ na 1% decrease (129) na (131) na



19. Income Taxes:

The components of income tax expense (benefit) were as follows:

(in thousands of dollars) 2014 2013

Current income tax expense $ 980 $ 1,280 Deferred income tax expense 272 (226)

Total income tax expense $ 1,252 $ 1,054

Major components of income tax expense (benefit) include the following:

2014 2013

Combined federal and provincial income taxes 39.5% 39.5% Small business and credit union deductions (21.7) (22.6) Income and expense permanent differences 0.3 0.2 Tax rate change (1.0) (4.4) Other (1.0) (0.2)

Total income tax expense 16.1% 12.5%



19. Income Taxes (continued):

The movements of deferred tax assets and liabilities are presented below:

August 31 Charge to Charge to August 31

(In thousands of dollars) 2013 Income OCI 2014

Fixed assets $ (125) $ (212) $ - $ (337) Allowance for loan losses 805 143 - 948 Derivatives (129) (96) - (225) Employee retirement benefits 1,255 (184) 457 1,528 Investments (104) 103 (10) (11) Cash flow hedges 154 (12) 302 444 Acquisition of Prime Financial Savings & Credit Union Limited 1 (1) - - Other (7) (13) - (20)

Total $ 1,850 $ (272) $ 749 $ 2,327

August 31 Charge to Charge to August 31

(In thousands of dollars) 2012 Income OCI 2013

Fixed assets $ (131) $ 6 $ - $ (125) Allowance for loan losses 1,026 (221) - 805 Derivatives (276) 147 - (129) Employee retirement benefits 1,402 252 (399) 1,255 Investments (151) 53 (6) (104) Cash flow hedges 120 121 (87) 154 Acquisition of Prime Financial Savings & Credit Union Limited 122 (121) - 1 Other 4 (11) - (7)

Total $ 2,116 $ 226 $ (492) $ 1,850

The tax effect of items recorded in the Statement of Other Comprehensive Income was as follows:


Net gain (loss) on cash flow hedges $ 357 $ (98) Net gain (loss) on cash flow hedges transferred to earnings (55) 11 Net change in fair value of available–for–sale investments (10) (6) Actuarial gain (loss) on defined benefit pension plans 457 (399)

Total tax effect of components of Other Comprehensive Income $ 749 $ (492)



20. Commitments:

(a) Leases:

FirstOntario leases space for most of its branches and some computer equipment. The leases

have varying terms, escalation clauses and renewal rights. Lease payments made as a result

of operating leases during the year were $2,498,000 (2013 – $2,249,000). Total future

minimum lease payments under non–cancellable operating leases are as follows:


Within 1 year $ 3,073 $ 2,245 1 to 5 years 9,832 7,857 Over 5 years 6,553 5,859

(b) Mortgage commitments and lines of credit:

At August 31, 2014, FirstOntario has issued commitments to provide residential mortgage and

commercial loans totaling $60,136,000 (2013 – $25,200,000). FirstOntario has also provided

lines of credit to Members totaling $464,051,000 at August 31, 2014 (2013 – $417,500,000),

against which Members have drawn $295,852,000 (2013 – $262,300,000).

(c) Credit facilities:

Central 1 has provided an operating loan facility to FirstOntario of $124,000,000 (2013 –

$108,000,000). Loans to Members have been pledged as security for these facilities and the

term loan by an assignment of book debts and a general security agreement.

Caisse centrale Desjardins has provided an operating facility to FirstOntario in the amount of

$100,000,000. When amounts are drawn against the facility, certain residential mortgages

have been pledged as security. See the Consolidated Statement of Financial Position and

Note 14 for the outstanding amount on this facility.

(d) Contracts:

Interac ATM and point of sale switching servicing totaling $900,000 over the next year at

present service levels (2013 – $1.6 million over the next 2 years).

Banking system support services and software maintenance totaling $475,000 over the next

year (2013 – $1,000,000 over the next 2 years).

Telephone network and voice services totaling $3,500,000 over the next 5 years (2013 –

$3,900,000 over the next 6 years).

(e) Naming rights:

During the year, the Credit Union entered into an agreement with Global Spectrum, L.P. for

the naming rights to the FirstOntario Centre. The agreement provides the naming rights for 10

years at an estimated cost of $396,000 per year for an aggregate total of $3,955,000.



21. Merger with Rochdale:

On October 22, 2013, the Members of Rochdale Credit Union voted in favour to merge operations

with FirstOntario. Founded in 1942, Rochdale Credit Union serviced 6,500 Members through its

four branches in Woodstock, Ingersoll, Norwich and Brantford. On November 30, 2013, all of the

assets and liabilities were transferred to FirstOntario.

The table below represents the fair market values of assets and liabilities transferred as a result of

the transaction:


Residential mortgage, personal and commercial loans $ 91,348 Liquidity reserve deposits – Central 1 6,248 Cash 2,774 Other assets 2,717 Fixed assets 2,027 Deposits (93,670) Accruals and accounts payable (5,754) Investment shares (919) Member shares (551)

Fair market value of net assets acquired $ 4,220

The fair market value of net assets acquired was recorded in contributed surplus.

22. Comparative information:

Certain comparative information has been reclassified to conform with the financial statement

presentation adopted in the current year.


SCHEDULE B

CONDENSED INTERIM REVIEW FINANCIAL STATEMENTS

Offering Statem

FIRSTONTARIO CREDIT Condensed Consolidated As at December 31, 2014, with comparative information for August 31, 2014(Unaudited)


Assets Loans Receivable from MembersResidential mortgage loans (note 4)Personal loans (note 4) Commercial loans (note 4) Accrued interest receivable

Other Cash and cash equivalents (note 6)Investments (note 8) Fixed assets (note 9) Derivative financial instruments (note 14)Other assets

Liabilities Members’ Deposits and SharesDeposits (note 10) Membership shares (note 11)Investment shares (note 11) Accrued interest on deposits and shares

Other Loans payable (note 13) Accounts payable and accrued liabilitiesDerivative financial instruments (note 14)

Members’ Equity Investment shares (note 11) Contributed surplus Retained earnings Accumulated other comprehensive loss

Commitments (note 19)

See accompanying notes to Condensed

On behalf of the Board:

Director

FirstOntario Credit Union Limited tement, Class B Investment Shares, Series 2015

FIRSTONTARIO CREDIT UNION LIMITED olidated Interim Statement of Financial Position

As at December 31, 2014, with comparative information for August 31, 2014

December 31,

2014

Loans Receivable from Members gage loans (note 4) $ 1,604,338

131,884 684,766

13,037

2,434,025

and cash equivalents (note 6) 28,958 188,690 23,081

Derivative financial instruments (note 14) 1,451 3,772

$ 2,679,977

Members’ Deposits and Shares $ 1,845,748

Membership shares (note 11) 7,262 13,195

Accrued interest on deposits and shares 11,016

1,877,221

672,089 able and accrued liabilities 14,299

Derivative financial instruments (note 14) 2,469

2,566,078

40,312 4,865 72,300

Accumulated other comprehensive loss (3,578)

113,899

$ 2,679,977

Condensed Consolidated Interim Financial Statements.

Director

Page 128

Interim Statement of Financial Position

August 31,

2014

$1,497,348 137,637 641,140 12,892

2,289,017

35,878 182,403 22,483 1,673 1,524

$2,532,978

$1,824,726 7,301 13,304 12,543

1,857,874

540,232 20,241 3,179

2,421,526

38,373 4,865 72,231 (4,017)

111,452

$2,532,978

Financial Statements.


FIRSTONTARIO CREDIT UNION LIMITED Condensed Consolidated Interim Statement of Income For the four month period ending December 31, 2014, with comparative information for the four

month period ending December 31, 2013 (Unaudited)

December 31, December 31,


Interest and Investment Income Residential mortgage loans (note 4) $ 17,412 $ 14,521 Personal loans (note 4) 2,732 3,049 Commercial loans (note 4) 11,118 9,946 Other 1,591 1,212

32,853 28,728

Interest Expense Members’ deposits (note 10) 10,716 8,581 Dividends on membership and investment shares (note 11) 282 287 Derivative instruments 190 136 Loans (note 13) 4,749 3,993

15,937 12,997

Operating Margin before the Following 16,916 15,731 Provision for impaired loans (note 5) (780) (778) Other income 4,081 3,061

Operating Margin 20,217 18,014

Operating Expenses Salaries and employee benefits 9,648 8,376 Administrative 5,729 5,104 Occupancy 1,935 1,526 Members' deposit insurance protection 498 440

17,810 15,446

Operating Income 2,407 2,568

Unrealized Gains (Losses) Investments 81 194 Net gains (losses) on derivative financial instruments (301) 332

(220) 526

Income before Income Taxes 2,187 3,094

Income taxes (note 18) 390 555

Net income for the period $ 1,797 $ 2,539

See accompanying notes to Condensed Consolidated Interim Financial Statements.


FIRSTONTARIO CREDIT UNION LIMITED Condensed Consolidated Interim Statement of Income and Other

Comprehensive Income

For the four month period ending December 31, 2014, with comparative information for the four month period ending December 31, 2013

(Unaudited)



Net income for the period $ 1,797 $ 2,539

Other Comprehensive Income (Loss) Items that are or may be reclassified subsequently to net income: Net gain (loss) on cash flow hedges 293 (87) Net gain (loss) on cash flow hedges transferred to earnings 300 (332) Net change in fair value of available for sale investments (40) 53 Related income taxes (note 18) (114) 57 Items that are not recycled or reclassified to net income: Actuarial gain (loss) on employee benefits, net of tax - (592)

Total Income and Other Comprehensive Income for the period $ 2,236 $ 1,638

Condensed Consolidated Interim Statement of Changes in Members’ Equity

For the four month period ending December 31, 2014, with comparative information for the four month period ending December 31, 2013

(Unaudited)



Investment Shares (note 11) Balance at beginning of period $ 38,373 $ 36,440 Shares issued during period 2,124 2,018 Shares redeemed during period (185) (8)

Balance at end of period 40,312 38,450

Contributed Surplus Balance at beginning of period 4,865 645 Merger with Rochdale Credit Union Limited (note 20) - 4,220


Retained Earnings Balance at beginning of period 72,231 67,381 Net income for the period 1,797 2,539 Dividends paid (net of income tax recovery of $396 (2013– $366)) (1,728) (1,652)


Accumulated Other Comprehensive Income (Loss), net of tax Cash flow hedging reserve: Balance at beginning of period (1,661) (620) Merger with Rochdale Credit Union Limited (note 20) - 72 Other comprehensive income (loss) for the period 471 (350)

Balance at end of period (1,190) (898)

Fair value reserve on available for sale investments: Balance at beginning of period 111 66 Other comprehensive income for the period (32) 41

Balance at end of period 79 107

Employee benefit adjustments: Balance at beginning of period (2,467) (691) Other comprehensive income (loss) for the period - (592)

Balance at end of period (2,467) (1,283)

Balance at end of period (3,578) (2,074)

Total Members’ Equity $ 113,899 $ 109,509



FIRSTONTARIO CREDIT UNION LIMITED Condensed Consolidated Interim Statement of Cash Flows For the four month period ending December 31, 2014, with comparative information for the four

month period ending December 31, 2013 (Unaudited)



Cash Flows from Operating Activities Net income for the period $ 1,797 $ 2,539 Adjustments for: Amortization of fixed assets 935 817 Net change in fair value of assets recorded as fair value through profit or loss (305) (234) Net changes in accrued employee retirement benefits 31 982 Other non–cash items, net (7,724) (2,634) Net interest income (16,916) (15,731) Income tax expense 390 555

Changes in operating assets: Net change in loans receivable from members (144,863) (129,047) Net change in derivative assets held for risk management 222 346

Changes in operating liabilities: Net change in deposits 21,022 76,403 Net change in derivative liabilities held for risk management (710) 334

Interest received 31,605 27,824 Interest paid (17,068) (14,838) Investment income 721 1,763 Income tax paid (408) (408)

Cash flows used in operating activities (131,271) (51,329)

Cash Flows from Financing Activities Net change in membership shares (39) (4) Net change in investment shares (294) 190 Net change in loans payable 131,857 54,002

Cash flows from financing activities 131,524 54,188

Cash Flows from Investing Activities Net investment purchases (5,640) (10,449) Merger with Rochdale Credit Union (note 20) - 2,774 Purchase of fixed assets, net of disposals (1,533) (719)

Cash flows used in investing activities (7,173) (8,394)

Cash and cash equivalents Net decrease during period (6,920) (5,535) Balance at beginning of period 35,878 23,276

Balance at end of period $ 28,958 $ 17,741


FIRSTONTARIO CREDIT UNION LIMITED Notes to Condensed Consolidated Interim Financial Statements For the four month period ended December 31, 2014 (Unaudited)


1. Corporate Information

FirstOntario Credit Union Limited (“FirstOntario”) is a financial institution incorporated in Ontario

which operates in compliance with the Credit Unions and Caisses Populaires Act of Ontario (the

“Act”) and is a member of Central 1 Credit Union (“Central 1”). The location of the head office and

principal place of business of FirstOntario is 970 South Service Road, Stoney Creek, Ontario, L8E

6A2.

FirstOntario exists to help Members meet their financial needs in their local communities.

FirstOntario’s principal activities are the provision of deposit–taking, lending and other financial

services.

FirstOntario’s Member deposits are insured by the Deposit Insurance Corporation of Ontario

(“DICO”) under a mandatory program. At December 31, 2014 there were 100,902 Members

(August 31, 2014 – 99,867).

2. Basis of Preparation:

Statement of compliance

The unaudited condensed consolidated interim financial statements of FirstOntario (the “interim

financial statements”) have been prepared in accordance with International Accounting Standards

34, Interim Financial Reporting (IAS 34), as issued by the International Accounting Standards

Board (“IASB”) and using the accounting policies and methods as were used for the Credit Union’s

annual financial statements for the year ended August 31, 2014 (the “annual financial

statements”). The interim financial statements should be read in conjunction with the annual

financial statements.

The interim financial statements are the representation of management and have been prepared

in accordance with International Financial Reporting Standards (“IFRS”). IFRS comprise of

accounting standards issued by the IASB as well as interpretations issued by the IFRS

Interpretations Committee.

These interim financial statements were approved by FirstOntario’s Board of Directors on February

11, 2015. The significant accounting policies used in the preparation of these interim financial

statements have been applied consistently to all periods presented in the interim financial

statements.

Use of estimates and judgments

The preparation of interim financial statements in conformity with IAS 34 requires management to

make estimates and assumptions that affect the reported amounts of assets and liabilities and the

reported amounts in revenue and expenses during the reporting period. Actual future results could

differ from those estimates.

Items which result in the most significant areas of application of judgment and estimates are

disclosed in note 2 of the annual financial statements and in notes 5, 7, 15, 16 and 17 of these

interim financial statements.



3. Significant Accounting Policies:

Information about significant accounting policies are disclosed in note 3 of the annual financial

statements.

4. Loans Receivable from Members:

Loans receivable from Members, which have been designated as loans and receivables, are as

follows:

December 31, August 31,


Residential Mortgage Loans $ 1,605,149 $ 1,497,797 Allowance for impaired loans (811) (449)

1,604,338 1,497,348

Personal Loans 134,321 140,118 Allowance for impaired loans (2,437) (2,481)

131,884 137,637

Commercial Loans 688,644 644,827 Allowance for impaired loans (3,878) (3,687)

684,766 641,140

$ 2,420,988 $ 2,276,125

Certain Residential Mortgage Loans are securitized and have been legally transferred to other

entities for funding purposes. These loans are administered by FirstOntario and recognized on the

Condensed Consolidated Interim Statement of Financial Position to the extent of FirstOntario’s

continuing involvement. A summary of the carrying values of Residential Mortgage Loans is as

follows:



Loans held by FirstOntario $ 1,074,957 $ 1,036,943 Loans held by Securitization Trusts 530,192 460,854

$ 1,605,149 $ 1,497,797

Certain loans transferred to a funding partner transacted prior to the transition to IFRS are not

recorded on the Condensed Consolidated Interim Statement of Financial Position and are not

included in the above figures. Further details are provided in Note 7.

Interest income for the period is as follows:



Residential Mortgage Loans $ 17,412 $ 14,521 Personal Loans 2,732 3,049 Commercial Loans 11,118 9,946

$ 31,262 $ 27,516



4. Loans Receivable from Members (continued):

Total fees paid to third parties associated with lending activities capitalized in other assets were

$8,447,000 as at December 31, 2014 (August 31, 2014 – $7,569,000). Charges amortized into

interest expense in respect of these fees was $966,000 during the four month period ended

December 31, 2014 (2013 – $762,000).

The following summarizes FirstOntario’s loan portfolio by the contractual repricing or maturity date,



2014 2014

Principal Average Principal Average (In thousands of dollars) Balance Yield Balance Yield

Floating $ 647,041 4.20% $ 607,450 4.27%

Within 1 year 236,162 4.94% 197,029 4.86% Over 1 year 1,544,911 4.06% 1,478,263 4.09%

2,428,114 4.18% 2,282,742 4.20% Provision for loan losses (7,126) (6,617)

$ 2,420,988 $2,276,125

5. Allowance for Impaired Loans:

A summary of the allowance for impaired loans is as follows:


2014 2014

Residential

Mortgage Personal Commercial Collective

(In thousands of dollars) Loans Loans Loans Allowance Total Total

Balance at beginning of period $ 200 $ 777 $ 722 $ 4,918 $ 6,617 $ 6,257

Transfer from Rochdale - - - - - 175

Loans written off (57) (246) - - (303) (2,041)

Recoveries - 32 - - 32 228

Net provision for impaired loans 167 138 (15) 490 780 1,998

Balance at end of period $ 310 $ 701 $ 707 $ 5,408 $ 7,126 $ 6,617

A summary of impaired loans are as follows:


2014 2014

Residential

Mortgage Personal Commercial

(In thousands of dollars) Loans Loans Loans Total Total

Gross amount of loans identified as impaired $ 19,373 $ 3,651 $ 13,935 $ 36,959 $ 33,511

Related security less expected costs 19,083 2,965 13,638 35,686 31,812

Balance at end of period $ 290 $ 686 $ 297 $ 1,273 $ 1,699




A summary of loans past due but not impaired are as follows:


2014 2014

< 30 30–59 60–89

(In thousands of dollars) days days days Total Total

Residential Mortgage Loans $ 30,566 $ 6,220 $ 2,152 $ 38,938 $ 30,793

Personal Loans 5,705 1,583 547 7,835 3,579

Commercial Loans 5,133 584 - 5,717 768

Balance at end of period $ 41,404 $ 8,387 $ 2,699 $ 52,490 $ 35,140

The carrying amount of loans that were renegotiated during the period that otherwise would have

been listed as past due greater than 90 days were nil (August 31, 2014 – $nil).

FirstOntario’s commercial loan portfolio contains Member concentration risk, whereby a large

amount of the loans are connected to certain individuals. Collectively, the largest five commercial

Members by loan dollar value are associated with approximately 17% (August 31, 2014 – 17%) of

the commercial loan portfolio.

FirstOntario’s commercial loan portfolio consists of the following industry sectors:


2014 2014

Hospitality 22% 19%

Retail & Commercial Buildings 51% 53%

Other 27% 28%

Collateral

There are documented policies and procedures in place for the valuation of financial and non–

financial collateral. The fair value of non–financial collateral is updated if there has been a

significant change in the terms and conditions of the loan and (or) the loan is considered impaired.

For impaired loans, an assessment of the collateral is taken into consideration when estimating

the expected future cash flows and net realizable amount of the loan.

The amount and type of collateral and other credit enhancements required depend upon

FirstOntario’s assessment of counterparty credit quality and repayment capacity. FirstOntario

complies with industry standards for collateral valuation, frequency of recalculation of the collateral

requirements, documentation, registration and perfection procedures, and monitoring. Non–

financial assets accepted by FirstOntario as collateral include vehicles, residential real estate, real

estate under development, commercial real estate and certain business assets (accounts

receivable, inventory, and fixed assets). Financial collateral includes cash and negotiable

securities issued by governments and investment grade issuers. Guarantees are also accepted to

reduce credit risk.

The fair value of collateral held with respect to assets that are either past due greater than 30 days

or impaired is $68,834,000 as at December 31, 2014 (August 31, 2014 – $57,981,000).




The following tables illustrate the credit quality of loans that are neither past due nor impaired:

Credit quality of loans – December 31, 2014




A+ 2% Superior 6%



C 11%

D 5%

E 4%

Credit quality of loans – August 31, 2014




A+ 2% Superior 7%



C 11%

D 5%

E 4%

Refer to Note 15 – Financial Risk Management for a detailed explanation of the credit risk rating

process of both portfolios.

6. Cash and Cash Equivalents:



Cash on hand $ 8,758 $ 8,379 Cash at Central 1 15,518 24,076 Restricted cash 4,411 3,340

Other cash and cash equivalents 271 83

Total cash and cash equivalents $ 28,958 $ 35,878



7. Loan Securitizations:

FirstOntario enters into transactions in the normal course of business by which it transfers

recognized financial assets directly to third parties or Special Purpose Entity’s (“SPE’s”).

FirstOntario securitizes mortgage backed securities through programs sponsored by the Canada

Mortgage and Housing Corporation and other third party programs.

Full derecognition occurs when FirstOntario transfers its contractual right to receive cash flows

from the financial assets, or retains the right but assumes an obligation to pass on the cash flows

from the asset, and transfers substantially all the risks and rewards of ownership. The risks include

credit, interest rate, prepayment and other price risks.

The financial assets that do not qualify for derecognition are mortgages converted into mortgage

backed securities and then subsequently sold. Residential and commercial mortgages that have

been derecognized are those that meet the qualifications required to be derecognized under IFRS.

The following table summarizes FirstOntario’s securitization activity during the four month period

ended December 31, 2014 and the year ended August 31, 2014:


2014 2014


(In thousands of dollars) mortgages mortgages mortgages mortgages

Amount securitized/sold $ 97,249 $ 75,206 $ 155,393 $ 147,539

Net cash proceeds received 97,099 74,513 153,889 146,770

Outstanding balances of securitized loans 531,588 284,296 465,513 212,367

The following table summarizes the balances for securitized loans that are not recorded on the Condensed Consolidated Interim Statement of Financial Position:


2014 2014


(In thousands of dollars) mortgages mortgages mortgages mortgages

Retained rights to future excess spread $ - $ 2,721 $ 13 $ 2,160

Outstanding balances of off–balance sheet securitized loans 1,396 284,296 4,659 212,367



7. Loan Securitizations (continued):

Retained rights are reported as investments on the Condensed Consolidated Interim Statement of

Financial Position (Note 8). The following table summarizes the weighted average key

assumptions at the date of off–balance sheet securitization for retained rights related to mortgage

pools sold prior to September 1, 2010:


2014 2014


mortgages mortgages mortgages mortgages

Average life 0.2 years 5.5 years 0.2 years 5.6 years

Prepayment rate 39.96% 0.00% 39.96% 0.00%

Excess spread 2.90% na 2.90% na

Discount rate 1.83% 2.27% 1.83% 2.19%

Expected credit losses 0.00% 0.00% 0.00% 0.00%

8. Investments:

Investments are as follows:

December 31, August 31, (In thousands of dollars) 2014 2014

Investments held to maturity Liquidity reserve deposits – Central 1 (c) $ 156,556 $ 150,086

Accrued interest 1,565 1,322 Investments available for sale, fair value

Preferred shares (a) 17 13 Common shares (a) 291 324 Income trusts and limited partnerships (a) 243 243

Total liquid investments 158,672 151,988

Investment held as fair value through profit and loss CUCO Cooperative Association (b) 3,208 5,146

Investments available for sale

Cost Shares – Central 1 (c) 13,095 12,718

Fair value Retained rights – loan securitizations 2,721 2,173

Real Estate Joint Ventures (d) 10,631 10,143

Other investments 363 235

$ 188,690 $ 182,403




The following summarizes FirstOntario’s investments by the contractual repricing or maturity date,


December 31, August 31, 2014 2014

Carrying Average Carrying Average

(In thousands of dollars) Amount Yield Amount Yield

Within 1 year $ 11,470 2.03% $ 28,826 1.59% Over 1 year 145,086 1.85% 121,260 1.87%

156,556 1.86% 150,086 1.82% Non–rate sensitive 30,569 30,995 Accrued interest 1,565 1,322

$188,690 $182,403

(a) Financial instruments classified as AFS:

The table below presents the income and losses of the financial assets classified as AFS.



Interest and investment income $ 15 $ 5

Unrealized pre–tax income recognized in OCI (40) 53

(b) CUCO Cooperative Association:

As a result of the merger between Credit Union Central of Ontario Limited (“CUCO”) and

Credit Union Central of British Columbia (“CUCBC”) to form Central 1 in 2008, member credit

unions were required to invest in a limited partnership (“ABCP LP”) in order to acquire third–

party asset–backed commercial paper (“ABCP”). Members of CUCO were required to

purchase units in the ABCP LP based on their proportionate asset size. FirstOntario was

required to purchase 6,667,059 units in the ABCP LP.

On August 31, 2011, the ABCP LP sold its assets to CUCO Cooperative Association (“CUCO

Co–op”) in consideration for CUCO Co–op Class B Investment shares. On the date of the

transfer, FirstOntario was issued 5.4% of the outstanding CUCO Co–op Class B investment

shares, equivalent to FirstOntario’s share of the fair value of the assets transferred by ABCP

LP. As a result, FirstOntario holds the same relative holdings under the current capital

structure of the CUCO Co–op as it did under the ABCP LP.

The CUCO Co–op is governed by a Board of Directors that was elected by Ontario member

credit unions and each member records its proportionate share of net income or loss in the

CUCO Co–op as determined in accordance with IFRS.




(b) CUCO Cooperative Association (continued):

The fair value of these units is directly related to the ABCP investments held by the CUCO

Co–op. As there is no separately quoted market value for the underlying ABCP investments,

fair value of the underlying ABCP investments are determined by CUCO Co–op’s independent

valuator. In determining fair value of these notes, the CUCO Co–op used all available

information, including interest rate, maturity dates and credit ratings of the borrowers.

Estimated yields that a hypothetical investor would require in order to purchase the ABCP

investments were developed and the net present value of the notes were then calculated

using this information. The recorded amount is the best estimate by the valuator and could

change significantly in the future. During the period a gain of $81,000 (2013 – $194,000) was

recorded as a result of changes in fair value of the investment and was included in unrealized

gain (loss) on investments in the Condensed Consolidated Interim Statement of Income.

(c) Central 1 Shares:

As a member of Central 1, FirstOntario is required to maintain an investment in Central 1

shares equal to its share of the level of capital required by Central 1. FirstOntario’s share of

Central 1 capital requirements is based on asset size relative to other Class “A” members.

Central 1 rebalances their shares annually. During the four months ended December 31,

2014, FirstOntario was required to purchase 376,572 (August 31, 2014 – 806,827) Central 1

Class A shares and received $nil (August 31, 2014 –$278,000) in dividends. During the 12

months ended August 31, 2014, as part of the merger with Rochdale Credit Union Limited, an

additional 333,495 Central 1 Class A shares and 400,800 Central 1 Class E shares were

acquired. The following table summarizes the investment in Central 1 Shares:



7,535,704 Central 1 Class “A” Shares (August 31, 2014 – 7,159,132) $ 7,536 $ 7,159 5,559,000 Central 1 Class “E” Shares (August 31, 2014 – 5,559,000) 5,559 5,559

$ 13,095 $ 12,718

As there is no active market for these shares, the fair market value is not reliably determinable

as future cash flows cannot be adequately predicted with a standard valuation technique. As a

result, these shares are carried at cost. FirstOntario does not intend to dispose of the shares

in the near future.

Central 1 requires that member credit unions maintain with them liquidity and secondary

liquidity reserve deposits equal to 6% of the member credit union's assets. These reserve

deposits are determined on a quarterly basis and are classified as held to maturity.




(d) Real Estate Joint Ventures:

FirstOntario periodically enters into agreements with third parties to jointly control retail

complexes. FirstOntario’s portion of the revenue and expenses from participation in the

ventures has been included in investment income as follows:



Revenues $ 175 $ 227 Expenses 184 182

Earnings from joint ventures $ (9) $ 45

The expenses of the joint ventures included amortization in the amount of $52,000 (2013 –

$60,000). Operating cash flow generated by the ventures was a deficit of $55,000 (2013 –

positive cashflows of $85,000). During the period, FirstOntario received $96,000 (2013 –

$96,000) in distributions from the ventures.

FirstOntario applies the equity method in accounting for investments in real estate. Costs

include initial acquisition costs and other costs incurred prior to the real estate being ready for

its intended use. Investment properties held under the ventures is as follows:



Real estate held for investment purposes $ 10,505 $ 10,505 Accumulated amortization (671) (619)

Net book value $ 9,834 $ 9,886

Reconciliations of the net book value for investment properties are summarized below:



Net book value at the beginning of the period/year $ 9,886 $ 10,067 Amortization (52) (181)

Net book value at the end of the period/year $ 9,834 $ 9,886




(d) Real Estate Joint Ventures (continued):

The net book value of investment properties is included as part of the real estate joint venture

investment of $10,111,000 (August 31, 2014 – $10,143,000).

Fair value of the investment properties held through these investments was $14,150,000 as at

August 31, 2014 (2013 – $14,150,000). Fair value was determined by an experienced

registered independent appraiser having an appropriate recognized professional qualification.

Fair values were determined considering recent market transactions for similar properties in

the same location as FirstOntario’s investment property.

9. Fixed Assets:

December 31,





Tangible assets 44,907 23,988 20,919 Intangible assets (software) 14,404 12,242 2,162


August 31,







Amortization in respect of the above assets for the period amounts to $935,000 (2013 –

$817,000).



9. Fixed Assets (continued):

Reconciliations of the net book value for each class of fixed asset are summarized below.



Land Net book value at the beginning of the period/year $ 1,792 $ 1,281 Additions - 511 Disposals (470) -

Net book value at the end of the period/year 1,322 1,792 Parking lots/Site improvements Net book value at the beginning of the period/year 166 183 Disposals (88) - Amortization (4) (17)

Net book value at the end of the period/year 74 166 Buildings Net book value at the beginning of the period/year 4,433 3,736 Additions 15 995 Disposals (1,052) - Amortization (84) (298)

Net book value at the end of the period/year 3,312 4,433 Equipment Net book value at the beginning of the period/year 5,047 4,626 Additions 528 1,577 Disposals - (6) Amortization (407) (1,150)

Net book value at the end of the period/year 5,168 5,047 Leasehold improvements Net book value at the beginning of the period/year 10,404 6,976 Additions 2,174 4,170 Disposals (1,218) - Amortization (317) (742)

Net book value at the end of the period/year 11,043 10,404 Intangible assets (software) Net book value at the beginning of the period/year 641 678 Additions 1,644 313 Amortization (123) (350)

Net book value at the end of the period/year 2,162 641 Total net book value $ 23,081 $ 22,483



10. Members’ Deposits:

Members’ deposits, which are designated as other liabilities, are as follows:



Chequing $ 242,243 $ 225,320 Savings 447,502 443,416 Term Deposits 615,897 614,410 Registered Plans 540,106 541,580

$ 1,845,748 $ 1,824,726

Included in registered plans and term deposits are $15,571,000 in Equity–Linked Deposits at

December 31, 2014 (August 31, 2014 – $20,513,000). See Note 14 for the related derivatives

used to hedge exposure to equity market risk.

Interest expense for the period is as follows:



Savings $ 1,519 $ 1,123 Term Deposits 5,297 4,053 Registered Plans 3,900 3,405

$ 10,716 $ 8,581

The following summarizes FirstOntario’s Members’ deposits by the contractual repricing or

maturity date, whichever is earlier:


Principal Average Principal Average

(In thousands of dollars) Balance Yield Balance Yield

Floating $ 468,831 1.20% $ 467,134 1.21%

Within 1 year 561,347 2.22% 612,386 2.19%

Over 1 year 493,014 2.35% 442,934 2.35%

1,523,192 1.95% 1,522,454 1.94% Non–rate sensitive 322,556 302,272

$ 1,845,748 $ 1,824,726



10. Members’ Deposits (continued):

Members’ deposits held in registered plans are as follows:


Tax free savings accounts $ 136,320 $ 132,189 Registered savings plans 266,214 275,487 Registered retirement income funds 137,572 133,904

$ 540,106 $ 541,580

Concentra Financial Services Association acts as the trustee for the majority of FirstOntario’s tax

deferred savings plans (registered retirement savings plans and registered retirement income

funds). FirstOntario accepts deposits on behalf of the trustee and retains the funds deposited.

11. Membership and Investment Shares:

Authorized Share Capital

An unlimited number of membership shares. Such shares are issued for $5 each and Members

under the age of twenty–one must hold one membership share while those twenty–one and over

are required to hold at least five shares and increase their holdings of membership shares to thirty

shares over a twenty–five year period. Membership shares are redeemable, on withdrawal from

membership, at the amount paid thereon provided the credit union is meeting the “capital

adequacy” requirements (see Note 12) and they rank junior to Class A and Class B special shares

for priority in the payment of dividends.

An unlimited number of Class A and Class B special shares. Such shares are generally non–

voting and non–participating with non–cumulative dividend entitlements. In respect of dividends,

both classes rank senior to the membership shares and the Class B special shares rank ahead of

the Class A special shares.

The Board of Directors has authorized a Series 1, Series 2, Series 2013 and Series 2010 for Class

B special shares (“investment shares”). The investment shares have an issue price of $1 each and

are entitled to receive dividends if, as and when declared by the Board of Directors. Series 1,

Series 2 and Series 2013 investment shares are redeemable at the holder’s request. Series 2010

investment shares are redeemable at the sole and absolute discretion of the Board of Directors

starting in 2015. In any year, redemptions are restricted to 10% of the respective series of the

outstanding investment shares.




Issued and Outstanding

Membership shares and Series 1, 2 and 2013 investment shares are designated as other liabilities

and dividends are recorded using the effective interest rate method. Series 2010 investment

shares are classified as equity as these shares are redeemable at the sole and absolute discretion

of the Board of Directors.



Membership shares:

1,452,321 (August 31, 2014 – 1,460,147) Membership Shares $ 7,262 $ 7,301

Investment shares:

5,526,921 (August 31, 2014 – 5,568,668) Class B, Series 1, Special Shares 5,527 5,568

6,752,105 (August 31, 2014 – 6,816,790) Class B, Series 2, Special Shares 6,752 6,817

916,271 (August 31, 2014 – 918,779) Class B, Series 2013, Special Shares 916 919

Investment shares classified as liabilities 13,195 13,304 40,558,071 (August 31, 2014 – 38,619,517)

Class B, Series 2010, Special Shares 40,312 38,373

$ 53,507 $ 51,677

Dividends

Dividends earned by membership and investment shares classified as liabilities and expensed on

the Condensed Consolidated Interim Statement of Income were as follows:



Membership shares $ 152 $ 152 Series 1, 2 and A investment shares 130 135

Dividends on membership and investment shares $ 282 $ 289

Dividends on Series 2010 shares (classified as equity) $ 2,124 $ 2,018

On November 13, 2014, the Board of Directors approved the issue of 2,124,048 Series 2010

investment shares in payment of a dividend for the year from September 1, 2013 to August 31,

2014.




The tables below present a reconciliation of the change in shares during the period/year:


2014 2014

Membership Shares Opening balance 1,460,147 1,291,702 Shares issued during the period/year - 85,057 Merger with Rochdale Credit Union - 110,160 Shares redeemed (7,826) (26,772)

Membership shares, ending balance 1,452,321 1,460,147

Class B, Series 1, Special Shares Opening balance 5,568,668 5,473,779 Shares issued during the period/year - 162,693 Shares redeemed (41,747) (67,804)

Class B, Series 1, Special Shares, ending balance 5,526,921 5,568,668

Class B, Series 2, Special Shares Opening balance 6,816,789 6,818,892 Shares issued during the period/year - 204,278 Shares redeemed (64,684) (206,381)


Class B, Series A, Special Shares Opening balance 918,780 - Merger with Rochdale Credit Union - 918,780 Shares redeemed (2,509) -

Class B, Series A, Special Shares, ending balance 916,271 918,780

Class B, Series 2010, Special Shares Opening balance 38,619,517 36,686,639 Shares issued during the period/year 2,124,048 2,017,615 Shares redeemed (185,494) (84,737)




12. Regulatory Reporting and Disclosure:

(a) Capital Management:

FirstOntario maintains policies and procedures relative to capital management so as to ensure

that capital levels are sufficient to cover risks inherent in the business.

FirstOntario’s objectives when managing capital are:

(i) To ensure that the quantity, quality and composition of capital required reflects the

inherent risks of FirstOntario and to support the current and planned operations and

portfolio growth.

(ii) To provide a basis for confidence among Members, depositors, creditors and regulatory

agencies.

(iii) To ensure that FirstOntario maintains a level of capital that sufficiently protects against

unanticipated losses and to comply with the minimum regulatory capital requirements set

out in the Act.

Regulatory capital is calculated as a percentage of total assets and of risk–weighted assets.

Risk–weighted assets are calculated by applying risk weight percentages, as prescribed by the

Act, to various asset categories, operational and interest rate risk criteria. The prescribed risk

weights are dependent upon the degree of risk associated with the asset.

FirstOntario manages its Tier 1 and Tier 2 capital in accordance with internal policies and

regulatory requirements. Tier 1 capital is the highest quality and consists of retained earnings,

contributed surplus, accumulated other comprehensive losses, membership shares and the

portion of the value of Class B investment shares that are not redeemable within 12 months.

Tier 2 capital is comprised of the value of Class B investment shares ineligible as Tier 1 capital

and the eligible portion of the allowance for impaired loans.




(a) Capital Management (continued):

The amount and composition of Tier 1 and Tier 2 capital were as follows.



Tier 1 Capital

Retained earnings $ 72,300 $ 72,231 Contributed surplus 4,865 4,865 Membership shares 7,262 7,301 Class B Investment Shares,



Series 2013 (90%) 825 828 Class B Investment Shares,

Series 2010 (90%) 36,280 34,536


Tier 2 Capital Class B Investment Shares, Series 1 (10%) 553 557 Class B Investment Shares, Series 2 (10%) 675 682 Class B Investment Shares, Series 2013 (10%) 91 91 Class B Investment Shares, Series 2010 (10%) 4,032 3,837 Accumulated other comprehensive gains on AFS investments 79 111 Accumulated other comprehensive losses – employee benefit adjustments (2,467) (2,467) Collective allowance for impaired loans 5,408 4,918


Total Regulatory Capital $ 140,954 $ 138,636

Under the Regulations of the Act, FirstOntario must maintain minimum levels of regulatory

capital. The leverage ratio calculates regulatory capital as a percentage of assets. The risk–

weighted capital ratio calculates regulatory capital as a percentage of risk–weighted assets.

FirstOntario complied with these requirements as follows:

Regulatory Leverage Ratio Risk–Weighted Capital Ratio

Capital Minimum Actual Minimum Actual

December 31, 2014

$140,954,000 4.00% 5.26% 8.00% 10.07% August 31, 2014

$138,636,000 4.00% 5.48% 8.00% 10.48%




(b) Related party transactions:

FirstOntario’s related parties include:

(i) All members of the Board, Officers and Executives of FirstOntario.

(ii) FirstOntario’s subsidiary (1320828 Ontario Limited) and joint ventures noted in Note 8. As

at December 31, 2014, no balances (August 31, 2014 – nil) existed between FirstOntario

and these related parties.

(iii) Defined benefit plans that are referred to in Note 17. FirstOntario’s transactions with the

plans include contributions paid into the plans. FirstOntario also pays for the expenses of

the employee defined contribution plan. FirstOntario has not entered into other

transactions with the defined benefit plans.

The following table outlines remuneration of members of the Board, Officers and Executives:



Salaries, bonuses, and other short–term employee benefits $ 642 $ 602 Post–employment benefits 33 29 Directors’ remuneration 78 76

Total compensation $ 753 $ 707

Related party balances are outlined in the following table:


Loans Residential Mortgages $ 2,161 $ 2,273 Personal Loans 125 137 Accrued interest 1 3 Deposits and Shares Deposits 2,155 1,670 Membership Shares 3 3 Investment Shares 111 105 Accrued interest 191 134

Total interest revenue derived from lending activity relating to key management personnel was

$25,000 (2013 – $28,000) during the period. Total interest expense from deposit–taking

activity from related parties was $90,000 (2013 – $64,000) during the period. During the four

month periods ended December 31, 2014 and 2013, no loans held by related parties were

impaired.



13. Loans Payable:

The following table details loans payable to Central 1 and our funding partners. Security pledged is

set out in Note 19(c). All loans payable are classified as other liabilities.



Central 1 Credit Facilities

Term loan facilities, bearing a variable weighted average interest rate of 1.87% (August 31, 2014 – 1.80%)

due within one year $ 55,000 $ 11,000

Overdraft facility, bearing a variable interest rate of 1.75%, payable on demand - 4,885

Caisse centrale Desjardins Credit Facilities

Term loan facilities, bearing a variable weighted average interest rate of 1.71% due within

one year (August 31, 2014 – 1.74%) 85,000 62,000

Securitization Debt

Canada Mortgage Bond bullet bonds, secured by residential mortgages, bearing a weighted

average fixed interest rate of 2.82% (August 31, 2014 – 2.82%), weighted average maturity date of 2016 (2013 – 2016) 94,322 94,308

Mortgage Backed Securities secured by residential mortgage loans, bearing a weighted average fixed interest rate of 2.31%

(August 31, 2014 – 2.43%), expected weighted average maturity date of 2017 (August 31, 2014 – 2017) 421,053 349,641

Mortgage Backed Securities secured by residential mortgage loans, bearing a weighted average variable interest rate of 1.87%

(August 31, 2014 – 1.85%), expected weighted average maturity date of 2016 (August 31, 2014 – 2016) 16,714 18,398

$ 672,089 $ 540,232

The term loan facility with Caisse centrale Desjardins is subject to certain financial and non-

financial covenants. As at December 31, 2014, the Credit Union was in compliance with all

financial and non-financial covenants.

Interest expense associated with loans payable during the period consisted of the following:



Term loans $ 574 $ 314 Securitization of residential mortgages 4,175 3,679

$ 4,749 $ 3,993



14. Derivative Financial Instruments:

(a) Asset liability management:

In the ordinary course of business, FirstOntario purchases derivative instruments from Central

1 and Concentra in order to hedge against exposure to interest rate fluctuations.

Derivative instruments have a fair value that varies based on the particular instrument and

changes in interest rates. The purpose of these instruments is to provide a hedge against

interest rate fluctuations by improving FirstOntario’s matching of its asset and liability position.

(b) Product related:

FirstOntario offers deposit products linked to changes in equity indexes or specific bundles of

equities. FirstOntario hedges the underlying risk of these products by entering into equity–

linked purchase option contracts. Under the terms of these contracts, FirstOntario will receive

payments approximate to the future payments to Members.

(c) Foreign exchange forward contracts:

FirstOntario offers deposit products denominated in US dollars. In order to meet liquidity

reserve requirements FirstOntario sells US dollars and purchases US dollar foreign exchange

forward contracts to hedge the exchange risk.

The following table summarizes the notional amounts, maturities and fair values of FirstOntario’s

derivative portfolio as at December 31, 2014 and August 31, 2014:

(In thousands of dollars) As at December 31, 2014



Pay fixed interest rate swaps $ 9,047 $ 45,000 $ 6,839 $ 60,886 $ - $ 1,736

Bond forwards 5,000 - - 5,000 - 3

Equity linked options 10,127 5,663 48 15,838 1,101 730

Foreign exchange forward contracts 12,050 - - 12,050 350 -

December 31, 2014 Total $ 36,224 $ 50,663 $ 6,887 $ 93,774 $ 1,451 $ 2,469




Pay fixed interest rate swaps $ - $ 39,131 $ 21,855 $ 60,986 $ - $ 1,588

Bond forwards 25,000 - - 25,000 - 115

Equity linked options 10,527 9,412 48 19,987 1,673 1,458

Foreign exchange forward contracts 23,540 - - 23,540 - 18

August 31, 2014 Total $ 59,067 $ 48,543 $ 21,903 $ 129,513 $ 1,673 $ 3,179



14. Derivative Financial Instruments (continued):

Notional amounts are the contract amounts used to calculate the cash flows to be exchanged.

They are a common measure of the volume of outstanding transactions, but do not represent

credit or market risk exposure. Notional amounts, other than foreign exchange forward contracts,

are not exchanged.

FirstOntario is exposed to credit risk which arises from the possibility that a counterparty to a

derivative contract could default on their obligation to FirstOntario. However, credit risk associated

with derivative contracts is normally a small fraction of the notional principal amount of the

contract. Derivative contracts expose FirstOntario to loss only if changes in market rates cause a

material unfavourable effect on a counterparty’s position, which could then lead to the

counterparty defaulting on its payment. FirstOntario only enters into derivative contracts with

counterparties that FirstOntario has determined to be creditworthy.

15. Financial Risk Management:

The Board of Directors (the "Board”) has overall responsibility for the establishment and oversight

of FirstOntario’s risk management framework. The Board has delegated to the Audit Committee

the responsibility for the development and monitoring of risk management policies. The Audit

Committee reports regularly to the Board on its activities.

All risk management policies and established limits ensure that FirstOntario is in full adherence to

the regulatory requirements prescribed in the Act as well as DICO’s standards of Sound Business

and Financial Practices. The Board receives reports from management on FirstOntario’s exposure

to credit, interest rate, liquidity, foreign currency and other price risk regularly in order to monitor

financial risks.

(a) Credit Risk:

Credit risk is the potential for financial loss to FirstOntario if a borrower or guarantor fails to

meet payment obligations in accordance with agreed terms. FirstOntario’s financial assets that

are affected by credit risk include loans receivable from Members, investments, and derivative

financial instruments. Credit risk is one of the most significant financial risks to FirstOntario.

FirstOntario’s primary objective when managing credit risk is to ensure a portfolio of high

quality financial assets properly diversified so as to balance the risk associated with the

portfolio and return on assets.

Credit risk is managed in accordance with the Credit Risk Management Policy for loans

receivable from Members and the Market Risk Management Policy for investments and

derivative financial instruments.





For loans receivable from Members, credit risk is managed through an infrastructure based

upon:

(i) Approval by the Board of all credit risk management policies;

(ii) Approval by the Vice President Credit of the discretionary limits of lending officers

throughout FirstOntario;

(iii) Credit adjudication subject to compliance with established policies, exposure guidelines

and discretionary limits, as well as adherence to established standards of credit

assessment. Credit approvals are escalated to the Management Credit Committee and

ultimately to the Board dependent upon credit exposure level and restricted party

transactions;

(iv) The Credit Department is charged with oversight of the following:

a. The establishment of guidelines to monitor and limit concentrations in the portfolios in

accordance with Board approved policies governing regulatory requirements, industry

risk and group exposures;

b. The development and implementation of credit risk models and policies for

establishing borrower risk ratings to quantify and monitor the level of risk and facilitate

management of retail and commercial credit;

c. Implementation of an ongoing monitoring process of the key risk factors used in

FirstOntario credit risk models.

Management has designed and implemented an effective system to measure, monitor and

report credit risk exposure. Management reports credit risk exposure to the Board regularly.

In conducting lending activities, FirstOntario diversifies its portfolio of loans receivable from

Members in order to reduce overall credit risk. Residential mortgage and personal loans are

diversified between authorized loan types, forms of security and certain sectoral groupings.

Commercial loans are diversified through the establishment of credit exposure limits for

specific industry sectors, groups of related borrowers and geographic location.

Credit exposure is assessed through the following:

(i) Probability of default, which is an estimate of probability that a Member with a certain

borrower risk rating, will default within a one year time horizon.

(ii) Loss given default, which represents the unsecured portion expected to be lost when a

borrower defaults.





Credit risk rating systems are designed to assess and quantify the risk inherent in credit

activities in an accurate and consistent manner as follows:

(i) Commercial loans are principally assessed based on the Member’s ability to service debt

(debt service coverage ratio) and the secured amount (loan to value ratio). Management

regularly reviews the commercial loan portfolio and assesses the credit risk associated

with each loan.

(ii) Automated credit scoring systems are used in assessing credit risk associated with

residential mortgage and personal loans. These loans are managed as pools of

homogeneous risk exposures using internal benchmarks based upon Equifax Beacon

Score’s. These global standard credit scores track each individual’s past credit history

and, using a mathematical model, predicts how likely a person is to repay a loan.

For investments and derivative financial instruments, risk is measured by reviewing exposure

to individual counterparties to ensure the assets are within the policy limit by issuer weightings

and by dollar amount. The quality of the counterparties is assessed through published credit

rating agencies.

Except as noted, the carrying amount of financial assets recorded in the financial statements

represents FirstOntario’s maximum exposure to credit risk without taking into account the

value of any collateral obtained. FirstOntario is also exposed to credit risk through transactions

which are not recognized in the Condensed Consolidated Interim Statement of Financial

Position, such as granting financial guarantees and extending loan commitments. Refer to

Note 19 for further details. The risk of losses from loans undertaken is reduced by the nature

and quality of collateral obtained. Refer to Note 5 for a description of the nature of the security

held against loans as at the date of the Condensed Consolidated Interim Statement of

Financial Position.

(b) Interest Rate Risk:

Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate

because of changes in market interest rates. FirstOntario is exposed to interest rate risk when

entering into banking transactions with Members, primarily deposit and lending activities.

FirstOntario’s exposure to interest rate risk depends on the size and direction of interest rate

changes, and on the size and maturity of mismatched positions. An interest–sensitive asset or

liability is repriced when market interest rates change, when there is cash flow from final

maturity, normal amortization, or when Members exercise prepayment, conversion or

redemption options are offered for the specific product.

Interest rate risk is managed in accordance with the Structural Risk Management Policy. The

Board delegates the responsibility to manage interest rate risk on a day–to–day basis to

management.





FirstOntario’s Structural Risk Management Policy includes:

(i) Guidelines and limits on the structuring of the maturities, price and mix of deposits, loans,

mortgages and investments and the management of cash flows derived from financial

assets in relation to liabilities.

(ii) Guidelines and limits on the use of derivative products to hedge against changes in cash

flows as a result of changes in interest rates.

The following table summarizes carrying amounts of Condensed Consolidated Interim

Statement of Financial Position assets, liabilities and equity, and derivative instruments to

arrive at FirstOntario’s interest rate gap based on the earlier of contractual re–pricing and

maturity dates:




Assets


Cash 28,958 28,958

Investments 3,936 7,543 145,986 - 31,225 188,690

Other 446 260 351 45 40,239 41,341

$ 748,492 $ 139,770 $ 1,681,305 $ 9,988 $ 100,422 $ 2,679,977


Deposits 846,625 183,553 493,014 - 322,556 1,845,748

Loans 170,061 111,359 390,669 - - 672,089

Other 605 190 1,457 188 159,700 162,140

$ 1,017,291 $ 295,102 $ 885,140 $ 188 $ 482,256 $ 2,679,977


Gap – Derivatives and 63,982 (8,019) (45,137) (10,826) - -

net securitization gap

Interest rate gap $ (204,817) $ (163,351) $ 751,028 $ (1,026) $ (381,834) $ -








Assets


Cash - - - - 35,878 35,878

Investments 15,821 13,005 121,260 - 32,317 182,403

Other 678 463 528 4 36,899 38,572

$ 710,990 $ 116,839 $ 1,582,076 $ 17,979 $ 105,094 $ 2,532,978


Deposits 878,324 201,196 442,934 - 302,272 1,824,726

Loans 103,220 24,846 412,166 - - 540,232

Other 789 651 823 916 164,841 168,020

$ 982,333 $ 226,693 $ 855,923 $ 916 $ 467,113 $ 2,532,978



net securitization gap 69,067 14,805 (38,872) (45,000) - -

Interest rate gap $ (202,276) $ (95,049) $ 687,281 $ (27,937) $ (362,019) $ -

Key metrics involved in management of interest rate risk include the use of Earnings at Risk

(“EaR”) and Economic Value of Equity at Risk (“EVEaR”). EaR is defined as the change in the

net interest income from a 100 basis point (“bps”) shock to interest rates. This exposure is

measured over a 12 month period. EVEaR is defined as the difference in the change in the

present value of the asset portfolio and the change in the present value of the liability portfolio,

including off–Statement of Financial Position instruments, resulting from a 100 bps interest

rate shock.

The following table summarizes the EaR and EVEaR as follows:



EaR $ 148,000 $ -

EVEaR 1.9% 1.1%

Fair Value Hedges

FirstOntario has designated certain hedging relationships involving amortizing interest rate

swaps that convert fixed rate commercial loans to floating rates as fair value hedges in

accordance with IAS 39 Financial Instruments: Recognition and Measurement. Losses for the

period relating to fair value hedging relationships from hedging instruments was $82,000

(2013 – $46,000) and $170,000 (2013 – $92,000) for the hedged items. Fair values of the

interest rate swaps involved in these hedges at December 31, 2014 was a liability of $176,000

(August 31, 2014 – liability of $258,000).





Cash Flow Hedges

FirstOntario has designated certain hedging relationships involving interest rate swaps that

convert variable rate deposits to fixed rate deposits as cash flow hedges. During the period,

$150,000 (2013 – $43,000) of hedge ineffectiveness arose and was recorded in the

Condensed Consolidated Interim Statement of Income. Fair values of the interest rate swaps

involved in these hedges at December 31, 2014 was a liability of $1,464,000 (August 31,

2014– $1,177,000).

FirstOntario has also designated hedging relationships involving bond forwards that hedge

forecasted debt issuances associated with securitization activity as cash flow hedges.

Realized gains (losses) on these derivatives are deferred and amortized in accordance with

the effective interest rate method along with the debt originated. No ineffectiveness has arisen

during the period. Fair values of the bond forwards involved in these hedges that were

unrealized at December 31, 2014 was a liability of $3,000 (August 31, 2014 – $115,000).

(c) Liquidity Risk:

Liquidity risk is the risk that FirstOntario will encounter difficulty in meeting obligations

associated with financial liabilities that are settled by delivering cash or other financial assets.

FirstOntario engages in proper liquidity risk management practices to comply with regulatory

requirements and to guarantee the funding of Member needs and obligations. FirstOntario’s

overall objective when managing liquidity is to ensure limited exposure to material liquidity risk.

Liquidity risk is managed in accordance with the Liquidity Risk Management Policy. Key

elements of this policy include limits on the sources, quality and amount of liquid assets to

meet operational requirements, regulatory requirements and contingency funding. Liquidity is

monitored by management through FirstOntario’s Asset/Liability Committee (“ALCO”),

consisting of the executive.

Under the Regulations, FirstOntario must establish and maintain prudent levels of liquidity that

are sufficient to meet its cash flow needs, including depositor withdrawals and all other

obligations as they come due. FirstOntario targets to maintain operating liquidity within the

range of 8% to 16%. The low end of the range has been established in order to maintain a

comfortable cushion beyond the minimum policy requirements in order to meet cash needs,

even during periods of market volatility. As at December 31, 2014 FirstOntario’s liquidity ratio

was 9.12% (August 31, 2014 – 9.60%) and assets held for liquidity purposes totalled

$181,103,000 (August 31, 2014 – $177,709,000), consisting of $156,556,000 (August 31,

2014 – $150,086,000) liquidity reserve deposits and $24,547,000 (August 31, 2014 –

$27,623,000) cash.





The tables below demonstrate FirstOntario’s ability to pay future obligations as financial assets

and liabilities mature as at December 31, 2014 and August 31, 2014. These cash flows

include both the contractual cash flows currently exposed on the Statement of Financial

Position and the cash flows that will be generated in the future. In the case of loans, the cash

flows include estimated prepayments and credit losses based on experience and current

economic conditions.




Assets

Loans receivable

from members $ 366,706 $ 539,133 $ 1,123,703 $ 1,056,122 $ 10,072 $ - $ 3,095,736

Cash 28,958 - - - - - 28,958

Investments 3,315 12,780 68,919 90,907 - 30,569 206,490


instruments 376 728 195 103 49 - 1,451

Total Cash Inflow $ 399,355 $ 552,641 $ 1,192,817 $ 1,147,132 $ 10,121 $ 30,569 $ 3,332,635

Liabilities

Members’ deposits

and shares $ 868,246 $ 516,367 $ 455,640 $ 241,759 $ - $ - $ 2,082,012

Loans payable 146,548 138,114 305,252 181,512 - - 771,426



instruments 20 901 721 461 366 - 2,469

Total Cash Outflow $ 1,029,113 $ 655,382 $ 761,613 $ 423,732 $ 366 $ - $ 2,870,206








Assets

Loans receivable

from members $ 338,333 $ 495,847 $ 908,773 $ 682,271 $ 18,269 $ - $ 2,443,493

Cash 35,878 - - - - - 35,878

Investments 8,478 24,107 54,577 71,859 - 30,995 190,016


instruments 48 1,201 303 121 - - 1,673


Liabilities

Members’ deposits

and shares $ 859,100 $ 538,749 $ 337,520 $ 122,284 $ - $ - $ 1,857,653

Loans payable 80,577 41,001 317,807 130,942 - - 570,327



instruments 175 1,543 264 903 294 - 3,179

Total Cash Outflow $ 960,093 $ 581,293 $ 655,591 $ 254,129 $ 294 $ - $ 2,451,400

(d) Foreign Currency Risk:

Currency risk is the risk that the fair value of future cash flows of a financial instrument will

fluctuate due to changes in foreign exchange rates. FirstOntario is exposed to foreign currency

risk as a result of its Members’ activities in US dollar currency denominated deposits and cash

transactions. Activities that expose FirstOntario to currency risk are measured, monitored and

controlled daily to minimize risk. At any point in time, net US dollar exposure is limited by the

Market Risk Management Policy to $500,000 through the use of foreign exchange forward

contracts. As at December 31, 2014, FirstOntario does not have significant exposure to

changes in foreign currency exchange rates.




(e) Equity and Other Price Risk:

Other price risk is the risk that the fair value or future cash flows of a financial instrument will

fluctuate because of changes in market prices other than those arising from interest rate risk

or currency risk. FirstOntario is primarily exposed to other price risk through investments.

However, these investments are limited by policy to ensure diversification and quality of

financial assets. As at December 31, 2014, had the value of FirstOntario’s preferred, common,

income trust and CUCO shares increased or decreased by 10% with all other variables

remaining unchanged, the portfolio’s asset value would have increased or decreased

respectively by $376,000 (August 31, 2014 – $573,000) or 0.3% (August 31, 2014 – 0.5%) of

total Member’s Equity.

16. Fair Values of Financial Instruments:

The following table represents the fair values of FirstOntario’s financial instruments. The fair

values disclosed do not include the value of assets that are not considered financial instruments,

such as fixed assets. The value of intangibles such as long–term Member relationships are also

not included in the fair value amounts, although FirstOntario considers the value of intangibles to

be significant.

While the fair value amounts are intended to represent estimates of the amounts at which these

instruments could be exchanged in a current transaction between willing parties, some of

FirstOntario’s financial instruments lack an available trading market. Consequently, the fair values

presented are estimates derived using present value and other valuations techniques and may not

be indicative of the net realizable values.

Due to the judgment used in applying a wide range of acceptable valuation techniques and

estimates in calculating fair value amounts, fair values are not necessarily comparable among

financial institutions. 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.





2014 2014

Carrying Carrying

(In thousands of dollars) Value Fair Value Difference Value Fair Value Difference

Loans and Receivables

Loans receivable $ 2,434,025 $ 2,450,869 $ 16,844 $ 2,289,017 $2,311,723 $ 22,706

Held to Maturity

Investments 158,121 159,868 1,747 151,408 152,998 1,590


Cash and cash equivalents 28,958 28,958 - 35,878 35,878 -

Investments 3,208 3,208 - 5,146 5,146 -


Instruments 1,451 1,451 - 1,673 1,673 -

Available for Sale

Investments 16,367 16,367 - 15,471 15,471 -

Total financial assets $ 2,642,130 $ 2,660,721 $ 18,591 $ 2,498,593 $ 2,522,889 $ 24,296

Other Liabilities

Deposits and shares $ 1,877,221 $ 1,882,080 $ 4,859 $ 1,857,874 $1,859,138 $ (1,264)

Loan s payable 672,089 679,346 7,257 540,232 548,275 (8,043)

Accounts payable and

accrued liabilities 14,299 14,299 - 20,241 20,241 -



instruments 2,469 2,469 - 3,179 3,179 -

Total financial liabilities $ 2,566,078 $ 2,578,194 $ 12,116 $ 2,421,526 $ 2,430,833 $ (9,307)

Interest rate sensitivity is the main cause of change in fair values of FirstOntario’s financial

instruments.

The following methods and assumptions were used to estimate the fair value of financial

instruments:

(a) The fair values of cash and accounts payable and accrued liabilities are assumed to

approximate their book values, due to their short–term nature.

(b) The estimated fair value of floating rate loans, demand deposits and floating rate deposits are

assumed to be equal to book value as the interest rates on these loans and deposits reprice to

market on a periodic basis.

(c) The estimated fair values of fixed rate investments, fixed rate loans and fixed rate deposits are

determined by discounting the expected future cash flows of these investments, loans,

deposits and borrowings at current market rates for products with similar terms and credit

risks.




(d) The estimated fair values of derivative instruments are determined through valuation models

on the derivative notional amounts, maturity dates and rates.

(e) The estimated fair values of investments in publicly listed equity securities are determined

using quoted market prices.

Fair value measurements can be classified in a hierarchy in order to discern the significance of

management assumptions and other inputs incorporated into the measurements. The three

levels of fair value hierarchy are:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either

directly or indirectly. This category includes instruments valued using: quoted

market prices in active markets for similar instruments; quoted prices for identical or

similar instruments in markets that are consider less than active; or other valuation

techniques where all significant inputs are directly or indirectly observable form

market data.

Level 3 – Inputs for the asset or liability that are not based on observable market data. This

category includes all instruments where the valuation technique includes inputs not

based on observable data and the unobservable inputs have a significant effect on

the instrument’s valuation. This category includes instruments that are valued

based on quoted prices for similar instruments where significant unobservable

adjustments are required to reflect differences between the instruments.

The following table summarizes the classification of FirstOntario’s financial instruments held and

reported on the Condensed Consolidated Interim Statement of Financial Position at fair value:



Assets






Liabilities








Assets






Liabilities



Fair value of financial instruments held at amortized cost using the fair value hierarchy:

The following table illustrates the fair value hierarchy classification of FirstOntario’s financial

instruments which are not carried at fair value on the Condensed Consolidated Interim Statement

of Financial Position as at December 31, 2014 with comparative information for August 31, 2014.

The table does not include fair value information for financial assets and financial liabilities not

measured at fair value if the carrying amount is a reasonable approximation of fair value.

FirstOntario’s financial instruments held at amortized cost are all classified as Level 2.



Assets

Loans Receivable $ 2,450,869 $ 2,311,723

Investments 159,868 152,998

Total assets held at fair value $ 2,610,737 $ 2,464,721

Liabilities

Deposits and Shares $ 1,882,080 $ 1,859,138

Loans Payable 679,346 548,275

Total liabilities held at fair value $ 2,561,426 $ 2,407,413



17. Employee Retirement Benefits:

FirstOntario provides retirement benefits to certain employees. These benefits include registered

pension plans, medical benefits, dental care and life insurance.

The fair value of accrued benefit obligations were determined by independent actuaries as at

December 31, 2014.

Defined Benefit Pensions Other Defined Benefit Plans December 31, August 31, December 31, August 31,


Accrued benefit obligation Balance at the beginning of period/year $ 16,716 $ 11,817 $ 5,907 $ 5,104 Merger with Rochdale Credit Union - 1,832 - - Current service cost 141 372 2 4 Interest cost 219 629 77 232 Benefits paid (863) (580) (73) (196) Employee contributions 6 - - - Actuarial loss (gain) - 2,646 - 763

Balance at end of period/year 16,219 16,716 5,913 5,907

Plan assets Fair value at beginning of period/year 15,103 10,391 - - Merger with Rochdale Credit Union - 2,390 - - Expected return on plan assets 196 590 - - Actuarial gain on plan assets - 1,176 - - Employer contributions 145 1,121 73 196 Employee contributions - 15 - - Benefits paid (863) (580) (73) (196)

Fair value at end of period/year 14,581 15,103 - -

Funded status - deficit $ (1,638) $ (1,613) $ (5,913) $ (5,907)

The following table provides the amounts recognized in the Condensed Consolidated Interim

Statement of Financial Position as follows:

Defined Benefit Pensions Other Defined Benefit Plans December 31, August 31, December 31, August 31,


Prepaid benefit costs recorded in other assets $ 81 $ 36 $ - $ - Accrued benefit liability recorded in other liabilities (1,719) (1,649) (5,913) (5,907)

Net amount recognized $ (1,638) $ (1,613) $ (5,913) $ (5,907)




FirstOntario’s net benefit plan expenses recognized in other comprehensive income for the period

were as follows:


December 31, December 31, December 31, December 31,


Cumulative actuarial losses at September 1 $ (2,471) $ (1,001) $ (632) $ 131 Actuarial gain (loss) in the period on liability - (882) - (254) Actuarial gain (loss) in the period on plan assets - 392 - -

Cumulative actuarial gain (loss) $ (2,471) $ (1,491) $ (632) $ (123)

The net adjustments recognized in other comprehensive income of nil (2013 - $592) during the period are net of tax of nil (2013 – tax recovery of $152) as disclosed in note 18.

FirstOntario’s net benefit plan expenses recognized in the Condensed Consolidated Interim

Statement of Operations were as follows:


December 31, December 31, December 31, December 31,


Current service cost $ 141 $ 124 $ 2 $ 2 Interest cost 219 210 77 77 Expected return on plan assets (196) (197) - -

Total included in employee benefits expense $ 164 $ 137 $ 79 $ 79

Defined Contribution Pension December 31, December 31,


Contributions recorded as expenses $ 379 $ 342

These net benefit plan and contribution expenses are included in salaries and employee benefits

on the Condensed Consolidated Interim Statement of Income.

The significant actuarial assumptions adopted are as follows (weighted–average assumptions):


December 31, August 31, December 31, August 31,

2014 2014 2014 2014

Discount rate 4.0% 4.0% 4.0% 4.0% Rate of compensation increase 3.0% 3.0% - -




The expected rate of return on plan assets is based on the risks and associated returns expected

of the underlying plan assets. Plan assets are held in balanced funds which includes equities and

long–term bonds.

For measurement purposes, 5.0% and 3.0% rates of increase in the per capita cost of covered

health care and dental care benefits respectively were assumed for December 31, 2014. The rate

of increase for health care benefits was assumed to remain unchanged at 5.0%. The rate of

increase for dental care benefits was assumed to remain unchanged at 3.0%.

A one percentage–point change in assumed health–care cost trend rates, discount rates and

salary costs would have the following impact on other defined benefit plans:


(In thousands of dollars) Defined Other Defined Other

benefit plans benefit plans

Health care 1% increase $ na $ 710 $ na $ 710 1% decrease na (596) na (596)

Discount rate 1% increase $ (2,568) $ (691) $ (2,568) $ (691) 1% decrease 3,077 784 3,077 784

Salary rate 1% increase $ 133 $ na $ 133 $ na 1% decrease (129) na (129) na



18. Income Taxes:

The components of income tax expense (benefit) are as follows:

December 31, December 31, (In thousands of dollars) 2014 2013

Current income tax expense $ 367 $ 464 Deferred income tax expense 23 91

Total income tax expense $ 390 $ 555

Major components of income tax expense (benefit) include the following:

December 31, December 31, 2014 2013

Combined federal and provincial income taxes 39.5% 39.5% Small business and credit union deductions (20.9) (22.6) Income and expense permanent differences 0.4 0.4 Tax rate change (1.2) - Other - 0.6

Total income tax expense 17.8% 17.9%



18. Income Taxes (continued):

The movements of deferred tax assets and liabilities are presented below:

Four months ended December 31, 2014

Opening Charge to Charge to Closing

(In thousands of dollars) balance Income OCI balance

Fixed assets $ (337) $ (55) $ - $ (392) Allowance for loan losses 948 137 - 1,085 Derivatives (225) 53 - (172) Employee retirement benefits 1,528 20 - 1,548 Investments (11) (162) 7 (166) Cash flow hedges 444 14 (121) 337 Other (20) (30) - (50)

Total $ 2,327 $ (23) $ (114) $ 2,190

Year ended August 31, 2014

Opening Charge to Charge to Closing

(In thousands of dollars) balance Income OCI balance

Fixed assets $ (125) $ (212) $ - $ (337) Allowance for loan losses 805 143 - 948 Derivatives (129) (96) - (225) Employee retirement benefits 1,255 (184) 457 1,528 Investments (104) 103 (10) (11) Cash flow hedges 154 (12) 302 444 Acquisition of Prime Financial Savings & Credit Union Limited 1 (1) - - Other (7) (13) - (20)

Total $ 1,850 $ (272) $ 749 $ 2,327

The tax effect of items recorded in the Condensed Consolidated Interim Statement of Other

Comprehensive Income for the period ended December 31, 2014 was as follows:


Net gain (loss) on cash flow hedges $ (184) $ 124 Net gain (loss) on cash flow hedges transferred to earnings 62 (55) Net change in fair value of available–for–sale investments 8 (12) Actuarial gain (loss) on defined benefit pension plans - 152

Total tax effect of components of Other Comprehensive Income $ (114) $ 209



19. Commitments:

(a) Leases:

FirstOntario leases space for most of its branches and some computer equipment. The leases

have varying terms, escalation clauses and renewal rights. Lease payments made as a result

of operating leases during the period were $928,610 (for four months). Total future minimum

lease payments under non–cancellable operating leases are as follows:


Within 1 year $ 2,347 1 to 5 years 10,382 Over 5 years 6,706

(b) Mortgage commitments and lines of credit:

At December 31, 2014, FirstOntario has issued commitments to provide residential mortgage

and commercial loans totaling $60,090,000. FirstOntario has also provided lines of credit to

Members totaling $483,748,000 at December 31, 2014, against which Members have drawn

$302,503,000.

(c) Credit facilities:

Central 1 has provided an operating loan facility to FirstOntario of $124,000,000. Loans to

Members have been pledged as security for these facilities and the term loan by an

assignment of book debts and a general security agreement.

Caisse centrale Desjardins has provided an operating facility to FirstOntario in the amount of

$100,000,000. When amounts are drawn against the facility, certain residential mortgages

have been pledged as security. See the Condensed Consolidated Interim Statement of

Financial Position and Note 13 for the outstanding amount on this facility.

(d) Contracts:

Interac ATM and point of sale switching servicing totaling $900,000 over the next year at

present service levels.

Banking system support services and software maintenance totaling $4,125,000 over the next

year.

Telephone network and voice services totaling $3,500,000 over the next 5 years.

(e) Naming rights:

During the year ended August 31, 2014, the Credit Union entered into an agreement with

Global Spectrum, L.P. for the naming rights to the FirstOntario Centre. The agreement

provides the naming rights for 10 years at an estimated cost of $396,000 per year for an

aggregate total of $3,955,000.



19. Commitments (continued):

(f) Joint venture commitments:

Subsequent to December 31, 2014, the Credit Union entered into a co-owner’s agreement

related to the purchase and operation of a retail shopping plaza. The agreement requires an

initial investment by the Credit Union of $5,150,000. The Credit Union advanced its share of

the initial investment on March 23, 2015.

20. Merger with Rochdale:

On October 22, 2013, the Members of Rochdale Credit Union voted in favour to merge operations

with FirstOntario. Founded in 1942, Rochdale Credit Union serviced 6,500 Members through its

four branches in Woodstock, Ingersoll, Norwich and Brantford. On November 30, 2013, all of the

assets and liabilities were transferred to FirstOntario.

The table below represents the fair market values of assets and liabilities transferred as a result of

the transaction:


Residential mortgage, personal and commercial loans $ 91,348 Liquidity reserve deposits – Central 1 6,248 Cash 2,774 Other assets 2,717 Fixed assets 2,027 Deposits (93,670) Accruals and accounts payable (5,754) Investment shares (919) Member shares (551)

Fair market value of net assets acquired $ 4,220

The fair market value of net assets acquired was recorded in contributed surplus.

firstontario credit union limited · reliance on key management 27 geographic, ... the dividend...

Documents