FirstOntario Credit Union Limited OFFERING STATEMENT

Transcription

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.
TABLE OF CONTENTS
OFFERING STATEMENT SUMMARY
FirstOntario Credit Union Limited (the “Credit Union”)
The Offering
Use of Proceeds
Risk Factors
Dividend Policy
Summary Financial Information
GLOSSARY OF TERMS
DETAILED OFFERING STATEMENT
The Credit Union
BUSINESS OF THE CREDIT UNION
General Description of the Business
Personal Financial Services
Lending Services
Personal Loans
Residential Mortgages
Commercial Loans
Institutional Loans
Agricultural Loans
Unincorporated Association Loans
Syndicated Loans
Other Limits contained in the Credit Union’s Credit Risk Management Policy
Summary Lending Comments
Mission, Vision & Values
Bond of Association and Membership
Corporate Governance
Business Strategy
The Regulatory Framework
Central 1 Credit Union; Credit Union Central of Canada
Tier I and Tier II Regulatory Capital
Capital Adequacy
Additional Information
CAPITAL STRUCTURE OF THE CREDIT UNION
DESCRIPTION OF SECURITIES BEING OFFERED
Class B Investment Shares, Series 2015
Issue
Dividends
Canadian Federal Income Tax Considerations
RRSP, RRIF and TFSA-Eligible
Rights on Distributions of Capital
Voting Rights
Redemption Provisions and Restrictions
Restrictions on Transfer
Offering Statement, Class B Investment Shares, Series 2015
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Articles of Amalgamation; Articles of Amendment
RISK FACTORS
Transfer and Redemption Restrictions
Capital Adequacy
Payment of Dividends
Credit Risk
Market Risk
Liquidity Risk
Structural Risk
Operational Risk
Regulatory Action
Reliance on Key Management
Geographic, Economic and Competitive Risk
DIVIDEND RECORD AND POLICY
USE OF PROCEEDS FROM SALE OF SECURITIES
PLAN OF DISTRIBUTION
MARKET FOR THE SECURITIES
SENIOR DEBT (RANKING AHEAD OF CLASS B INVESTMENT SHARES,
SERIES 2015)
AUDITORS, REGISTRAR AND TRANSFER AGENT
DIRECTORS AND SENIOR MANAGEMENT
Board of Directors
Senior Management
LAWSUITS AND OTHER MATERIAL OR REGULATORY ACTIONS
MATERIAL INTERESTS OF DIRECTORS, OFFICERS AND EMPLOYEES
MATERIAL CONTRACTS
MANAGEMENT DISCUSSION AND ANALYSIS
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION
AUDITOR’S CONSENT
STATEMENT OF OTHER MATERIAL FACTS
BOARD RESOLUTION
CERTIFICATE
Subscription Form
AUTHORIZATION TO PLACE FUNDS ON HOLD
AUTHORIZATION TO PLACE FUNDS IN ESCROW
SCHEDULE A – AUDITED FINANCIAL STATEMENTS
SCHEDULE B – CONDENSED INTERIM REVIEW FINANCIAL STATEMENTS
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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
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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
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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”.
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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
December 31, 2014
(thousands of dollars)
ASSETS
Loans receivable from Members
Cash and cash equivalents
Investments
Fixed assets
Derivative financial instruments
Other assets
Total Assets
LIABILITIES
Members' deposits and shares
Loans payable
Other liabilities
$
2,434,025
As at
August 31, 2014
$
$
1,882,284
As at
August 31, 2012
$
1,620,961
28,958
35,878
23,276
27,105
188,690
182,403
150,871
135,845
23,081
22,483
17,480
16,379
1,451
1,673
1,342
1,140
3,772
1,524
3,174
4,203
$
2,679,977
$
2,532,978
$
2,078,427
$
1,805,633
$
1,877,221
$
1,857,874
$
1,512,362
$
1,316,474
Total Liabilities
MEMBERS' EQUITY
Investment shares
Retained earnings and contributed surplus
Accumulated other comprehensive loss
672,089
540,232
441,815
375,824
14,299
20,241
19,259
17,282
2,469
3,179
1,770
2,711
2,566,078
2,421,526
1,975,206
1,712,291
40,312
38,373
36,440
34,657
77,165
77,096
68,026
62,195
(3,578)
(4,017)
(1,245)
(3,510)
113,899
Total members' equity
Total liabilities and members' equity
2,289,017
As at
August 31, 2013
$
2,679,977
111,452
$
2,532,978
103,221
$
2,078,427
93,342
$
1,805,633
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SUMMARY CONSOLDATED STATEMENTS OF INCOME
Four Months
Ended
December 31, 2014
(thousands of dollars)
Fiscal Year
Ended
August 31, 2013
Fiscal Year
Ended
August 31, 2012
32,853 $
91,565 $
78,743 $
73,228
15,937
42,031
35,303
32,320
16,916
49,534
43,440
40,908
(780)
4,081
-
(1,998)
9,708
-
585
8,603
-
(4,268)
7,770
10,334
Operating margin
20,217
57,244
52,628
54,744
Operating expenses
17,810
50,215
44,033
41,331
2,407
7,029
8,595
13,413
(220)
725
(111)
1,136
2,187
7,754
8,484
14,549
390
1,252
1,054
1,639
6,502 $
7,430 $
Interest and investment income
Interest expense
$
Fiscal Year
Ended
August 31, 2014
Operating margin before the following
Provision for impaired loans
Other income
Gain on sale of joint venture
Operating income
Unrealized gains (losses)
Income before income taxes
Income taxes
Net income for the period/year
$
1,797 $
12,910
Page v
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.
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"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
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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
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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.
Page ix
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.
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
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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
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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.
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 mediumsized 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,
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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
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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.
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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 parttime 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.
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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,
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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
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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 cooperative 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
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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.
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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
Dividends
Membership
Shares
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
NonCumulative
cash or share
dividends if, as
and when
declared by the
Board.
Dividends are
taxed as
interest income
and not as
dividends.
Class A
Patronage
Shares,
Series 1
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 NonCumulative
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
Class B
Investment
Shares,
Series 1
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
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
Class B
Investment
Shares,
Series 2
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
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 B
Investment
Shares,
Series 2010
The holders
of Class B
Investment
Shares, Series
2010, 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, 2, 2013 and
2015, to
cash or share
dividends if,
as and when
declared by
the Board.
Holders of
Class B
Investment
Shares, Series
2010, may,
however,
consent, by
majority vote
at a special
meeting, to
the prior
Class B
Investment
Shares,
Series 2013
The holders
of Class B
Investment
Shares, Series
2013, 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, 2, 2010 and
2015, to
cash or share
dividends if,
as and when
declared by
the Board.
Holders of
Class B
Investment
Shares, Series
2013, may,
however,
consent, by
majority vote
at a special
meeting, to
the prior
Page 11
Right
Membership
Shares
Class A
Patronage
Shares,
Series 1
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.
Redeemability at
the holder’s
initiative
Membership
Shares are not
redeemable at
Holders who
are
withdrawing
Class B
Investment
Shares,
Series 1
payment of
dividends to
holders of a
junior class of
shares.
Dividends are
taxed as
interest
income and
not as
dividends.
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.
Holders may
request that
the Credit
Class B
Investment
Shares,
Series 2
payment of
dividends to
holders of a
junior class of
shares.
Dividends are
taxed as
interest
income and
not as
dividends.
The holders
of Class B
Investment
Shares, Series
2, 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
1, 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.
Holders may
request that
the Credit
Class B
Investment
Shares,
Series 2010
payment of
dividends to
holders of a
junior class of
shares.
Dividends are
taxed as
interest
income and
not as
dividends.
The holders
of Class B
Investment
Shares, Series
2010, 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
1, 2, 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.
Holders may
request that
the Credit
Class B
Investment
Shares,
Series 2013
payment of
dividends to
holders of a
junior class of
shares.
Dividends are
taxed as
interest
income and
not as
dividends.
The holders
of Class B
Investment
Shares, Series
2013, 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
1, 2, 2010 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.
Holders may
request that
the Credit
Page 12
Right
Membership
Shares
(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.
Class A
Patronage
Shares,
Series 1
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
Class B
Investment
Shares,
Series 1
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 firstcome, 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
Class B
Investment
Shares,
Series 2
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
Class B
Investment
Shares,
Series 2010
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,
Class B
Investment
Shares,
Series 2013
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
Page 13
Right
Membership
Shares
Class A
Patronage
Shares,
Series 1
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.
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 B
Investment
Shares,
Series 1
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.
The Credit
Union may at
its initiative
purchase for
cancellation,
subject to
continued
Class B
Investment
Shares,
Series 2
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.
Class B
Investment
Shares,
Series 2010
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.
Class B
Investment
Shares,
Series 2013
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.
The Credit
Union may at
its initiative
purchase for
cancellation,
subject to
continued
The Credit
Union may at
its initiative
purchase for
cancellation,
subject to
continued
The Credit
Union may at
its initiative
purchase for
cancellation,
subject to
continued
Page 14
Right
Voting
Treatment as
Regulatory
Capital
Membership
Shares
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.
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.
The Credit
Union includes
all of its
Class A
Patronage
Shares,
Series 1
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.
Class B
Investment
Shares,
Series 1
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.
Class B
Investment
Shares,
Series 2
compliance
with
Regulatory
Capital and
liquidity
requirements,
at the
Redemption
Amount, all
or any portion
of the Class B
Investment
Shares, Series
2, outstanding
at any time
five years or
more after the
shares were
issued.
Class B
Investment
Shares,
Series 2010
compliance
with
Regulatory
Capital and
liquidity
requirements,
at the
Redemption
Amount, all
or any portion
of the Class B
Investment
Shares, Series
2010,
outstanding at
any time five
years or more
after the
shares were
issued.
Class B
Investment
Shares,
Series 2013
compliance
with
Regulatory
Capital and
liquidity
requirements,
at the
Redemption
Amount, all
or any portion
of the Class B
Investment
Shares, Series
2013,
outstanding at
any time five
years or more
after the
shares were
issued.
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.
The Credit
Union
includes 90%
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.
The Credit
Union
includes 90%
Class B
Investment
Shares, Series
2, do not
carry any
voting rights,
except when
the Act
requires that
those shares
carry voting
rights. When
the Class B
Investment
Shares, Series
2, carry
voting rights,
each Class B
Investment
Share, Series
2, carries one
vote.
The Credit
Union
includes 90%
Class B
Investment
Shares, Series
2010, do not
carry any
voting rights,
except when
the Act
requires that
those shares
carry voting
rights. When
the Class B
Investment
Shares, Series
2010, carry
voting rights,
each Class B
Investment
Share, Series
2010, carries
one vote.
The Credit
Union
includes 90%
Class B
Investment
Shares, Series
2013, do not
carry any
voting rights,
except when
the Act
requires that
those shares
carry voting
rights. When
the Class B
Investment
Shares, Series
2013, carry
voting rights,
each Class B
Investment
Share, Series
2013, carries
one vote.
The Credit
Union
includes 90%
Page 15
Right
Membership
Shares
membership
Shares as Tier
I Regulatory
Capital.
Class A
Patronage
Shares,
Series 1
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.
Class B
Investment
Shares,
Series 1
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.
Class B
Investment
Shares,
Series 2
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.
Class B
Investment
Shares,
Series 2010
of the Class B
Investment
Shares, Series
2010, as Tier
I Regulatory
Capital, and
includes the
remaining
10% of the
Class B
Investment
Shares, Series
2010, as Tier
II Regulatory
Capital.
Class B
Investment
Shares,
Series 2013
of the Class B
Investment
Shares, Series
2013, as Tier
I Regulatory
Capital, and
includes the
remaining
10% of the
Class B
Investment
Shares, Series
2013, 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.
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”.
Page 16
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
Page 17
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
Page 18
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
Page 19
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.
Page 20
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%.
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.
Page 21
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.
Page 22
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 dayto-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
Page 23
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
Page 24
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
Page 25
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.
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.
Page 26
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
Page 27
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.
Page 28
DIVIDEND RECORD AND POLICY
The Credit Union has declared and paid the following dividends with regard to its last five fiscal years:
Fiscal Year
Ended
Class B Investment
Shares, Series 1
Amount
Rate
Class B Investment
Shares, Series 2
Amount
Rate
($000's )
Class B Investment
Shares, Series 2010
Amount
Rate
($000's )
Class B Investment
Shares, Series 2013
Amount
Rate
($000's )
Membership
Shares
Amount
Rate
($000's )
August 31, 2014 $
167
3.000%
$
204
3.000%
$
2,124
5.500%
August 31, 2013 $
163
3.000%
$
204
3.000%
$
2,018
August 31, 2012 $
162
3.000%
$
200
3.000%
$
August 31, 2011 $
176
3.321%
$
219
3.321%
August 31, 2010 $
165
3.058%
$
208
3.058%
$
($000's )
27
3.000%
$
425 $5/member
5.500%
$
408 $5/member
1,920
5.500%
$
402 $5/member
$
1,816
5.500%
$
362 $5/member
$
541
5.500%
$
342 $5/member
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
Page 29
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
Page 30
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,
Page 31
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
Ended
December 31, 2014
August 31, 2014
August 31, 2013
August 31, 2012
Canadian-Dollar
Operating Account
High
Low
Balance
Balance
Term Loans
High
Balance
End of Period
Balance
Low
Balance
$
9,500,000
$
-
$
140,000,000
$
153,000,000
$
$
9,500,000
$
-
$
73,000,000
$
103,000,000
$
$
9,500,000
$
-
$
74,000,000
$
74,000,000
$
$
9,500,000
$
-
$
56,000,000
$
56,000,000
$
-
Capital
Markets/Other
High
Low
Balance
Balance
Letters of Credit
High
Low
Balance
Balance
$
-
$
-
$
1,707,000
$
593,000
$
-
$
-
$
1,707,000
$
260,000
-
$
-
$
-
$
1,476,000
$
260,000
-
$
-
$
-
$
3,016,000
$
1,089,000
4,000,000
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.
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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: 905-5238200, 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
Labourer
Member, Elections
Committee and Governance
Committee
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Name
Municipality of Residence
Principal Occupation
Position / Office
Otto Penner
Niagara Falls, Ontario.
Retired
Vice Chair;
Chair, Governance
Committee
Member, Elections
Committee
Catherine Rogers
Retired
and CSR Committee
Carey Smith
Oakville, Ontario.
Auto Industry Regulator
Chair
Member, Governance
Committee
Richard Sroka
Brantford, Ontairo
Retired
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
Kelly McGiffin
Ancaster, Ontario.
Dave Schurman
Oakville, Ontario.
James Olson
Lloyd Smith
Carol Mayer
Ancaster, Ontario.
Mary DeSousa
Oakville, Ontario.
Barry Doan
Hamilton, Ontario
Jennifer Saunders-Finlay
Hamilton, Ontario.
Tom Bijvoet
Oakville, Ontario.
Position/Title
President and Chief Executive Officer
Executive Vice President and Chief Operating Officer
Executive Vice President and Chief Administration Officer
Executive Vice President and Chief Risk Officer
Executive Vice President, Internal Services
Executive Vice President, Marketing
Executive Vice President and Chief Financial Officer
Vice President, Governance
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
Page 34
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.
Page 35
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.
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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.
Page 37
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
Page 38
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.
Page 39
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.
Page 40
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.
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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 profitsharing 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
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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
$2.6 million in 2013. The decline is due to an increase in operating margin offset by an increase in
expense mainly driven by the timing of the merger with Rochdale Credit Union Limited on
November 30, 2013 along with our strategic investments in new branches.
2012 – 2014 Fiscal Years
The following is a chart of pre-tax operating income and pre-tax income 2012 - 2014. Pre-tax
operating income adds back unrealized losses to pre-tax income. Unrealized losses are a result of
changes in fair value of our specific investments and derivatives required to be reported in income.
While some of the losses may be realized in the future, Management plans to minimize the realization
of these losses.
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Income Trend ($ Thousands)
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$2012
Normalized Pre-tax Operating Income
2013
Pre-tax Operating Income
2014
Pre-tax Income
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.
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Assets
December 31, 2014
Assets under management grew by $154.8 million (5.4% or 16.1% annualized) for the four months
ended December 31, 2014.
The following chart shows assets and assets under management. Assets under management include off
balance sheet Member loans that are part of our securitization programs that we continue to administer
and Member mutual fund balances.
Assets ($ millions)
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$2012
2013
Assets
2014
Assets Under Management
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).
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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 Coop 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.
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.
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.
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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.
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.
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
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.
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.
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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:
2014
In Thousands of Dollars
Service Charges
Commissions
Mortgage and Loan Fees
Foreign Exchange
Other
Securitization
Total Other Income
Gain on Sale of Joint Venture
Total Other Income
Income
$
3,415
3,217
2,207
290
245
334
$
9,708
$
9,708
2013
Mix
35.30%
33.10%
22.70%
3.00%
2.50%
3.40%
100.00%
Income
3,239
2,901
1,821
201
372
69
$
8,603
$
8,603
$
Mix
37.70%
33.70%
21.20%
2.30%
4.30%
0.80%
100.00%
2012
Income
Mix
$ 3,604
35.30%
2,658
33.10%
1,704
22.70%
196
3.00%
668
2.50%
(1,060)
3.40%
$ 7,770 100.00%
10,334
$ 18,104
Operating Expenses
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.
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%.
Page 48
Operating Expenses
(% of Average Assets)
2.60%
2.50%
2.40%
2.30%
2.20%
2.10%
2.00%
2012
2013
2014
Loan Portfolio
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).
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.
Total Loan Portfolio
Personal Loans
Residential Mortgage Loans
Commercial Loans
Total
2014
$ 2,399,091
Portfolio
Growth
Mix
-2.5%
5.9%
23.0%
62.6%
13.9%
31.5%
18.2%
100.0%
2013
2012
$ 2,029,011
$ 1,810,252
Portfolio
Portfolio
Growth
Mix
Growth
Mix
0.3%
7.1%
0.9%
7.9%
16.5%
60.2%
18.5%
57.9%
7.4%
32.7%
8.2%
34.2%
12.1%
100.0%
13.3%
100.0%
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
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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.
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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.
August 31
On Balance Sheet Loan Portfolio
December 31,
2014
$
2014
2013
2012
2,428,114 $ 2,282,742 $ 1,878,082 $ 1,621,497
Specific
Collective
$
$
1,718 $
5,408
7,126 $
1,699 $
4,918
6,617 $
1,937 $
4,320
6,257 $
3,848
3,977
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
$
Related security less expected costs
$
36,959 $
35,686
1,273 $
33,511 $
31,812
1,699 $
24,660 $
22,723
1,937 $
21,351
17,503
3,848
0.70%
0.60%
0.48%
0.52%
0.07%
0.22%
0.29%
0.07%
0.22%
0.29%
0.10%
0.23%
0.33%
0.24%
0.25%
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%
Delinquency > 90 Days
% of Loan Portfolio
Specific
Non-Specific
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%.
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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
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%.
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.
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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
Page 53
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 twelvemonth 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;
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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.
Page 55
The following chart summarizes FirstOntario’s capital position for 2014 and 2013:
August 31
Decem ber 31,
2014
$
Capital
Leverage ratio
Minim um regulatory limit
Risk W eighted ratio
Minim um regulatory limit
140,954
2014
$
138,636
2013
$
126,913
2012
$
119,365
5.26%
4.00%
5.48%
4.00%
6.11%
4.00%
6.61%
4.00%
10.07%
8.00%
10.48%
8.00%
11.53%
8.00%
12.21%
8.00%
Tier 1 Capital
% of Total Capital
$
132,583 $
94.06%
130,907 $
94.42%
121,989 $
96.12%
114,145
95.63%
Tier 2 Capital
% of Total Capital
$
8,371 $
5.94%
7,729 $
5.58%
4,924 $
3.88%
5,220
4.37%
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%.
Page 56
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.)
Financial Performance Indicators
Profitability
Total assets ($ thousands)
Net earnings for the period ($ thousands)
Annualized (bp)
Net income for the period, annualized
Operating margin before provision impaired loans and other income
Provision for impaired loans
Other income
Gain on sale of joint venture
Operating expenses
Provision for income taxes
Four Months
Fiscal Year
Fiscal Year
Fiscal Year
Ended
Ended
Ended
Ended
December 31, 2014 August 31, 2014 August 31, 2013 August 31, 2012
$
$
Compliance with Capital Requirements
Risk Weighted Assets Ratio
Minimum Risk Weighted Assets Ratio
Leverage Ratio
Minimum Leverage Ratio Requirement
Loan Composition
Total gross loans outstanding ($ thousands)
Mortgage Loans (% of total gross loans)
Personal Loans (% of total gross loans)
Commercial Loans (% of total gross loans)
$
Loan Quality
Allowance for impaired loans (% of total gross loans)
Other Factors
Total members' deposits ($ thousands)
Average liquidity during the period (% of total deposits and borrowings*)
Asset growth (% change for the period annualized)
Total Regulatory Capital ($ thousands)
Regulatory Capital Growth (% change for the year)
$
2,679,977 $
1,797 $
2,532,978 $
6,502 $
2,078,427 $
7,430 $
1,805,633
12,910
23
194
9
47
204
4
28
215
9
42
218
5
38
224
(3)
44
227
5
77
245
26
47
62
248
10
10.07%
8.00%
5.26%
4.00%
10.48%
8.00%
5.48%
4.00%
11.53%
8.00%
6.11%
4.00%
12.21%
8.00%
6.61%
4.00%
2,434,025
$
2,289,017
$
1,882,284
$
1,620,961
66.27%
65.78%
62.84%
5.45%
6.05%
7.54%
8.73%
28.28%
28.17%
29.62%
30.93%
0.29%
0.29%
0.33%
0.48%
1,845,748
$
1,824,726
$
1,483,596
60.34%
$
1,289,132
9.42%
9.57%
9.80%
9.73%
17.36%
21.87%
15.11%
18.17%
140,954 $
5.00%
138,636
$
9.24%
126,913
6.32%
$
119,365
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 m e nt Pol i cy
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.
Page 57
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
President and Chief Executive Officer
Barry Doan
Executive Vice President and Chief
Financial Officer
Page 58
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
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
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
Page 59
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.
Page 60
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
Page 61
CERTIFICATE
Form 1
Credit Unions and Caisses Populaires Act, 1994
CERTIFICATE OF DISCLOSURE
(Subsection 77 (4) of the Act)
The foregoing, constitutes full, true and plain disclosure of all material facts relating to the
th
securities 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,, March 31, 2015
Kelly McGiffin,, Chief Executive Officer
Carey Smith, Chair
Offering
ring Statement, Class B Investment Shares, Series 2015
Page 62
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. #
City
Province
Account #
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 #
Page 63
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)
(Joint Subscriber, if any)
Page 64
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 Member/Share Subscriber)
(Joint Subscriber, if any)
Page 65
SCHEDULE A
AUDITED FINANCIAL STATEMENTS
Page 66
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
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
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
Page 67
FIRSTONTARIO CREDIT UNION LIMITED
Consolidated Statement of Financial Position
As at August 31, 2014, with comparative informa
information for 2013
(In thousands of dollars)
2014
2013
$ 1,497,348
137,637
641,140
12,892
2,289,017
$ 1,176,256
141,178
554,391
10,459
1,882,284
35,878
182,403
22,483
1,673
1,524
$ 2,532,978
23,276
150,871
17,480
1,342
3,174
$ 2,078,427
$ 1,824,726
7,301
13,304
12,543
1,857,874
$ 1,483,596
6,459
12,293
10,014
1,512,362
540,232
20,241
3,179
2,421,526
441,815
19,259
1,770
1,975,206
Assets
Loans Receivable from Members
Residential 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 Shares
Deposits (note 11)
Membership shares (note 12)
Investment shares (note 12)
Accrued interest on deposits and shar
shares
Other
Loans payable (note 14)
Accounts payable and accrued liabilities
Members’ Equity
Contributed surplus
Retained earnings
38,373
4,865
72,231
(4,017)
111,452
36,440
645
67,381
(1,245)
103,221
Commitments (note 20)
$ 2,532,978
$ 2,078,427
Offering Statem
tement, Class B Investment Shares, Series 2015
Page 68
See accompanying
mpanying notes to Consolidated Financial Statements.
On behalf of the Board:
Director
Director
Consolidated Statement of Income
For the year ended August 31, 2014, with comparative information for 2013
Interest and Investment Income
Other
$
Interest Expense
Members’ deposits (note 11)
Dividends on membership and investment shares (note 12)
Derivative instruments
Loans (note 14)
Operating Margin before the Following
Provision for impaired loans (note 6)
Other income
Operating Margin
Operating Expenses
Salaries and employee benefits
Administrative
Occupancy
Members' deposit insurance protection
Operating Income
Unrealized Gains (Losses)
Investments
Net gains (losses) on derivative financial instruments
46,830
8,954
31,521
4,260
91,565
$
$
38,259
9,401
27,795
3,288
78,743
28,167
823
405
12,636
42,031
23,516
869
810
10,108
35,303
49,534
(1,998)
9,708
57,244
43,440
585
8,603
52,628
27,060
16,808
4,972
1,375
50,215
7,029
23,597
14,886
4,336
1,214
44,033
8,595
752
(863)
(111)
8,484
428
297
725
7,754
Income before Income Taxes
Income taxes (note 19)
Net income for the year
2013
2014
1,252
6,502
$
1,054
7,430
See accompanying notes to Consolidated Financial Statements.
Page 69
Consolidated Statement of Income and Other Comprehensive Income
Other Comprehensive Income (Loss)
Items that are or may be reclassified subsequently to net income:
Net gain (loss) on cash flow hedges
Net gain (loss) on cash flow hedges transferred to earnings
Net change in fair value of available or sale investments
Related income taxes (note 19)
Items that are not recycled or reclassified to net income:
Actuarial gain (loss) on employee benefits, net of tax
Total Income and Other Comprehensive Income for the year
2013
2014
$
6,502
$
(93)
863
37
(93)
(1,118)
(297)
55
292
$
(1,776)
3,658
7,430
$
1,551
9,695
Consolidated Statement of Changes in Members’ Equity
Investment Shares (note 12)
Balance at beginning of year
Shares issued during year
Shares redeemed during year
Balance at end of year
2013
2014
$
Contributed Surplus
Merger with Rochdale Credit Union Limited (note 21)
36,440
2,018
(85)
38,373
$
645
645
645
4,220
4,865
Retained Earnings
Dividends paid (net of income tax recovery of $366 (2013– $321))
34,657
1,920
(137)
36,440
67,381
6,502
(1,652)
72,231
61,550
7,430
(1,599)
67,381
(620)
72
(1,113)
(1,661)
(1,303)
683
(620)
Accumulated Other Comprehensive Income (Loss), net of tax
Cash flow hedging reserve:
Other comprehensive income (loss) for the year
Fair value reserve on available for sale investments:
Other comprehensive income for the year
Employee benefit adjustments:
Other comprehensive income (loss) for the year
Total Members’ Equity
35
31
66
66
45
111
$
(691)
(1,776)
(2,467)
(2,242)
1,551
(691)
(4,017)
111,452
(1,245)
103,221
$
Page 70
Consolidated Statement of Cash Flows
2013
2014
Cash Flows from Operating Activities
Adjustments for:
Amortization of fixed assets
Net change in fair value of assets recorded as fair value
through profit or loss
Net changes in accrued employee retirement benefits
Other non–cash items, net
Net interest income
Income tax expense
$
Changes in operating assets:
Net change in loans receivable from members
Net change in derivative assets held for risk management
Changes in operating liabilities:
Net change in deposits
Net change in derivative liabilities held for risk management
Interest received
Interest paid
Investment income
Income tax paid
Cash flows used in operating activities
6,502
$
7,430
2,557
2,450
(675)
990
(4,249)
(49,534)
1,252
(890)
(188)
6,637
(43,440)
1,077
(312,952)
(331)
(258,153)
(202)
247,460
1,409
194,464
(941)
85,847
(39,136)
1,926
(1,225)
(60,159)
72,773
(33,998)
2,746
(2,292)
(52,527)
291
7
98,417
98,715
221
82
65,991
66,294
(23,195)
2,774
(5,533)
(25,954)
(14,045)
(3,551)
(17,596)
12,602
23,276
35,878
(3,829)
27,105
23,276
Cash Flows from Financing Activities
Net change in membership shares
Net change in investment shares
Net change in loans payable
Cash flows from financing activities
Cash Flows from Investing Activities
Net investment purchases
Merger with Rochdale Credit Union (note 21)
Purchase of fixed assets, net of disposals
Cash flows used in investing activities
Net increase (decrease) during year
$
$
Page 71
Notes to Consolidated Financial Statements
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.
Page 72
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.
Page 73
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).
Page 74
(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.
Page 75
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 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.
Page 76
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.
Page 77
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.
Page 78
(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.
Page 79
(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.
Page 80
(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.
Page 81
(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.
Page 82
(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.
Page 83
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
previously
reported
Retained earnings
As at September 1, 2012
Net income from operations
Dividends paid, net of tax
Balance at August 31, 2013
$
$
Accumulated other
comprehensive income Employee benefits
As at September 1, 2012
Actuarial losses on defined
benefit pension plans
Balance at August 31, 2013
61,738
7,519
(1,599)
67,658
Impact of
transitional
adjustments
$
(188)
(89)
(277)
$
As
previously
reported
As
revised
$
$
Impact of
transitional
adjustments
61,550
7,430
(1,599)
67,381
As
revised
$
-
$
(2,242)
$
(2,242)
$
-
$
1,551
(691)
$
1,551
(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
Page 84
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).
Page 85
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.
Page 86
5. Loans Receivable from Members:
Loans receivable from Members, which have been designated as loans and receivables, are as
follows:
2013
2014
Allowance for impaired loans
$ 1,497,797
(449)
1,497,348
$ 1,176,519
(263)
1,176,256
Personal Loans
140,118
(2,481)
137,637
143,658
(2,480)
141,178
Commercial Loans
644,827
(3,687)
641,140
$ 2,276,125
557,905
(3,514)
554,391
$ 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
Loans held by Securitization Trusts
2013
2014
$ 1,036,943
460,854
$ 1,497,797
$
812,761
363,758
$ 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:
Personal Loans
Commercial Loans
2013
2014
$
$
46,830
8,954
31,521
87,305
$
$
38,259
9,401
27,795
75,455
Page 87
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
Balance
Yield
Balance
Yield
Floating
Within 1 year
Over 1 year
4.27% $ 487,199
4.86%
154,079
4.09%
1,236,804
4.20%
1,878,082
(6,257)
$ 1,871,825
$
607,450
197,029
1,478,263
2,282,742
(6,617)
$ 2,276,125
Provision for loan losses
4.32%
5.11%
4.30%
4.37%
6. Allowance for Impaired Loans:
A summary of the allowance for impaired loans is as follows:
2014
2013
Total
Total
Residential
Mortgage
Loans
Personal
Loans
Transfer from Rochdale
Loans written off
Recoveries
Net provision for impaired loans
$
61
(66)
205
$
$
200
$
958
(1,435)
228
1,026
777
Commercial
Loans
Collective
Allowance
$
918
(540)
344
$
4,320
175
423
$ 6,257
175
(2,041)
228
1,998
$ 7,825
(1,117)
134
(585)
$
722
$
4,918
$ 6,617
$ 6,257
2014
2013
Commercial
Loans
Total
Total
$ 14,208
13,486
$ 33,511
31,812
$ 24,660
22,723
$
$ 1,699
$ 1,937
A summary of impaired loans are as follows:
Residential
Mortgage
Loans
Personal
Loans
Gross amount of loans identified as impaired
$ 17,566
17,366
$
1,737
960
$
$
777
200
722
Page 88
6. Allowance for Impaired Loans (continued):
A summary of loans past due but not impaired are as follows:
2014
2013
days
Total
Total
< 30
30–59
60–89
days
days
Residential mortgage loans
Personal loans
Commercial loans
$ 24,778
2,550
763
$
4,348
705
5
$
1,667
324
-
$ 30,793
3,579
768
$ 26,565
6,130
21,178
$ 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
Hospitality
Retail & Commercial Buildings
Other
19%
53%
28%
2013
25%
50%
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).
Page 89
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
Unscored
A+
A
B
C
D
E
2%
2%
53%
23%
11%
5%
4%
% of Portfolio
Undoubted
Superior
Satisfactory
Watch List
1%
7%
74%
18%
Credit quality of loans – August 31. 2013
Commercial Loans
Rating
% of Portfolio
Rating
Unscored
A+
A
B
C
D
E
3%
2%
53%
22%
11%
5%
4%
% of Portfolio
Undoubted
Superior
Satisfactory
Watch List
0%
8%
81%
11%
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
Cash at Central 1
Restricted cash
Other cash and cash equivalents
Total cash and cash equivalents
2013
2014
$
$
8,379
24,076
3,340
83
35,878
$
$
7,348
13,957
1,784
187
23,276
Page 90
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:
2013
2014
(in thousands of dollars)
Residential Commercial
mortgages
mortgages
Residential
mortgages
Commercial
mortgages
Amount securitized/sold
Net cash proceeds received
Outstanding balances of securitized loans
$ 155,393
153,889
465,513
$
$
$ 147,539
146,770
212,367
78,411
77,761
408,696
6,000
6,000
106,001
The following table summarizes the balances for securitized loans that are not recorded on the
Statement of Financial Position:
2013
2014
Retained rights to future excess spread
Outstanding balances of off–balance sheet securitized loans
mortgages
mortgages
Residential
mortgages
Commercial
mortgages
$
$
$
13
4,659
$
2,160
212,367
459
44,928
106,001
Page 91
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:
2013
2014
mortgages
mortgages
Average life
Prepayment rate
Excess spread
Discount rate
Expected credit losses
0.2 years
39.96%
2.90%
1.83%
0.00%
Residential
mortgages
Commercial
mortgages
0.7 years
39.96%
2.90%
1.83%
0.00%
na
na
na
na
na
5.6 years
0.00%
na
2.19%
0.00%
9. Investments:
Investments are as follows:
Investments held to maturity
Liquidity reserve deposits – Central 1 (c)
2013
2014
$
Accrued interest
Investments available for sale, fair value
Preferred shares (a)
Common shares (a)
Income trusts and limited partnerships (a)
Total liquid investments
Investment held as fair value through profit and loss
CUCO Cooperative Association (b)
Investments available for sale
Cost
Shares – Central 1 (c)
Fair value
Retained rights – loan securitizations
Real Estate Joint Ventures (d)
Other investments
$
150,086
$
121,088
1,322
1,030
13
324
243
151,988
9
317
239
122,683
5,146
5,972
12,718
11,177
2,173
459
10,143
235
182,403
10,296
284
150,871
$
Page 92
9. Investments (continued):
The following summarizes FirstOntario’s investments by the contractual repricing or maturity date,
Within 1 year
Over 1 year
Non–rate sensitive
Accrued interest
Carrying
Amount
$ 28,826
121,260
150,086
30,995
1,322
$182,403
2013
2014
Average
Yield
1.59%
1.87%
1.82%
Carrying
Amount
Average
Yield
$ 21,453
99,635
121,088
28,753
1,030
$150,871
2.29%
1.91%
1.98%
(a) Financial instruments classified as AFS:
The table below presents the income and losses of the financial assets classified as AFS.
Unrealized pre–tax income recognized in OCI
2013
2014
$
45
55
$
126
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.
Page 93
(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)
5,559,000 Central 1 Class “E” Shares (2013 – 5,158,200)
2013
2014
$
$
7,159
5,559
12,718
$
$
6,019
5,158
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.
Page 94
(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
Expenses
Earnings from joint ventures
2013
2014
$
$
681
546
135
$
682
602
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
Accumulated amortization
Net book value, August 31
2013
2014
$
$
10,505
(619)
9,886
$
10,505
(438)
10,067
$
Reconciliations of the net book value for investment properties are summarized below:
Net book value at the beginning of the year
Disposals
Amortization
Net book value at the end of the year
2013
2014
$
$
10,067
(181)
9,886
$
$
10,248
(181)
10,067
Page 95
(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:
Cost
Land
Parking lots/Site improvements
Buildings
Equipment
Tangible assets
Intangible assets (software)
Total fixed assets
$
$
1,792
662
11,264
19,670
14,928
48,316
12,760
61,076
2014
Net book
value
Accumulated
amortization
$
$
496
6,831
14,623
4,524
26,474
12,119
38,593
$
$
Cost
Land
Buildings
Equipment
Tangible assets
Total fixed assets
$
$
1,281
662
10,269
18,099
10,758
41,069
12,447
53,516
2013
Net book
value
Accumulated
amortization
$
$
479
6,533
13,473
3,782
24,267
11,769
36,036
1,792
166
4,433
5,047
10,404
21,842
641
22,483
$
$
1,281
183
3,736
4,626
6,976
16,802
678
17,480
Amortization in respect of the above assets for the year amounts to $2,557,000 (2013 –
$2,450,000).
Page 96
10. Fixed Assets (continued):
Reconciliations of the net book value for each class of fixed asset are summarized below.
Land
Additions
Disposals
2013
2014
$
1,281
511
1,792
$
1,510
22
(251)
1,281
Disposals
Amortization
183
(17)
166
230
(15)
(32)
183
Buildings
Additions
Disposals
Amortization
3,736
995
(298)
4,433
4,166
197
(344)
(283)
3,736
Equipment
Additions
Disposals
Amortization
4,626
1,577
(6)
(1,150)
5,047
3,973
1,849
(5)
(1,191)
4,626
Additions
Amortization
6,976
4,170
(742)
10,404
5,752
1,826
(602)
6,976
Additions
Amortization
678
313
(350)
748
272
(342)
641
678
Total net book value
$ 22,483
$
17,480
Page 97
11. Members’ Deposits:
Members’ deposits, which are designated as other liabilities, are as follows:
2013
2014
Chequing
Savings
Term Deposits
Registered Plans
$
185,875
356,928
471,115
469,678
$ 1,483,596
$
225,320
443,416
614,410
541,580
$ 1,824,726
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:
2013
2014
Savings
Term Deposits
Registered Plans
$
$
3,970
13,282
10,915
28,167
$
$
3,102
10,551
9,863
23,516
The following summarizes FirstOntario’s Members’ deposits by the contractual repricing or
maturity date, whichever is earlier:
Floating
Within 1 year
Over 1 year
2013
Principal Average
Balance
Yield
2014
Principal Average
Balance
Yield
$
467,134
612,386
442,934
1,522,454
302,272
$ 1,824,726
1.21% $ 373,809
2.19%
495,359
2.35%
363,910
1.94%
1,233,078
250,518
$ 1,483,596
1.25%
2.23%
2.24%
1.94%
Members’ deposits held in registered plans are as follows:
Tax free savings accounts
Registered savings plans
Registered retirement income funds
2013
2014
$
$
132,189
275,487
133,904
541,580
$
$
96,827
250,290
122,561
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.
Page 98
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
Investment shares:
5,568,668 (2013 – 5,473,779)
Class B, Series 1, Special Shares
6,816,790 (2013 – 6,818,892)
918,780 (2013 – Nil)
Class B, Series A, Special Shares
Investment shares classified as liabilities
38,619,517 (2013 – 36,686,639)
2013
2014
$ 7,301
$
6,459
5,568
5,474
6,817
6,819
919
13,304
12,293
38,373
36,440
$ 51,677
$
48,733
Page 99
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:
2013
2014
Membership shares
Series 1, 2 and A investment shares
Dividends on membership and investment shares
$
$
$
426
397
823
$
456
413
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.
Page 100
The tables below present a reconciliation of the change in shares during the year:
2014
2013
Membership Shares
Opening balance
Merger with Rochdale Credit Union
Shares redeemed
Membership shares, August 31
1,291,702
85,057
110,160
(26,772)
1,460,147
1,247,560
81,614
(37,472)
1,291,702
Opening balance
Shares redeemed
Class B, Series 1, Special Shares, August 31
5,473,779
162,693
(67,804)
5,568,668
5,407,473
161,990
(95,684)
5,473,779
Opening balance
Shares redeemed
6,818,892
204,278
(206,381)
6,816,789
6,667,052
199,635
(47,795)
6,818,892
Opening balance
Class B, Series A, Special Shares, August 31
918,780
918,780
Opening balance
Shares redeemed
36,686,639
2,017,615
(84,737)
38,619,517
-
34,903,759
1,919,766
(136,886)
36,686,639
Page 101
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.
Page 102
13. Regulatory Reporting and Disclosure (continued):
(a) Capital Management (continued):
The amount and composition of Tier 1 and Tier 2 capital were as follows.
2013
2014
Tier 1 Capital
Retained earnings
Contributed surplus
Membership shares
Class B Investment Shares,
Series 1 (90%)
Series 2 (90%)
Series A (90%)
Series 2010 (90%) (2013 – 100%)
Total Tier 1 Capital
$ 72,231
4,865
7,301
Tier 2 Capital
Class B Investment Shares, Series 1 (10%)
Class B Investment Shares, Series A (10%)
Class B Investment Shares, Series 2010 (10%) (2013 – nil)
Accumulated other comprehensive gains on AFS investments
Accumulated other comprehensive losses – employee
benefit adjustments
Collective allowance for impaired loans
Total Regulatory Capital
$
67,381
645
6,459
5,011
4,927
6,135
6,137
828
-
34,536
130,907
36,440
121,989
557
682
91
3,837
547
682
-
111
66
(691)
4,320
4,924
(2,467)
4,918
7,729
$ 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
Capital
2014
2013
$138,636,000
$126,913,000
Leverage Ratio
Minimum
Actual
4.00%
4.00%
5.48%
6.11%
Risk–Weighted Capital Ratio
Minimum
Actual
8.00%
8.00%
10.48%
11.53%
Page 103
(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
Kelly McGiffin, Chief Executive Officer
David Schurman, Chief Operating Officer
Barry Doan, Chief Financial Officer
James Olson, Chief Administration Officer
Lloyd Smith, Chief Risk Officer
Benefits
Total
$ 479,000 $ 40,000 $ 519,000
266,000
29,000
295,000
262,000
33,000
295,000
259,000
30,000
289,000
243,000
32,000
275,000
th
Remuneration is fair and competitive and is targeted to be in the 50 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.
Page 104
(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
Post–employment benefits
Directors’ remuneration
Total compensation
2013
2014
$
$
1,815
97
227
2,139
$
$
1,953
110
207
2,270
Related party balances as at August 31 are outlined in the following table:
Loans
Personal Loans
Accrued interest
Deposits and Shares
Deposits
Membership Shares
Investment Shares
Accrued interest
2013
2014
$
2,273
137
3
1,670
3
105
134
$
2,130
80
2
1,902
3
100
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.
Page 105
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.
2013
2014
Central 1 Credit Facilities
Term loan facilities, bearing a variable weighted
average interest rate of 1.80% (2013 – 1.79%)
due within one year
$
Overdraft facility, bearing a variable interest rate
of 1.75%, payable on demand
11,000
$
74,000
4,885
2,443
62,000
-
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
average variable interest rate of 1.85%
(2013 – 1.79%), expected weighted average
maturity date of 2016 (2013 – 2017)
18,398
21,683
Caisse centrale Desjardins Credit Facilities
average interest rate of 1.74% due within
one year
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)
$
540,232
$
441,815
The term loan facility with Caisse centrale Desjardins is subject to certain financial and nonfinancial 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
Securitization of residential mortgages
2013
2014
$
$
833
11,803
12,636
$
$
374
9,734
10,108
Page 106
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:
Pay fixed interest rate swaps
As at August 31, 2014
$
Within
1 to 5
Over
1 year
years
5 years
-
$
39,131
$
21,855
Fair Value
Total
$
60,986
Assets
$
-
Liabilities
$
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
21,903
$ 129,513
$
$
48,543
$
$
1,673
$
3,179
$
Receive fixed interest rate swaps
Bond forwards
Within
1 to 5
Over
1 year
years
5 years
23,186
$
9,373
$
-
Fair Value
Total
$
32,559
Assets
$
-
Liabilities
$
512
6,714
-
-
6,714
27
-
42,500
-
-
42,500
16
-
4,529
14,308
-
18,837
1,139
1,258
21,200
-
-
21,200
160
-
2013 Total
98,129
-
$ 121,810
$
$
23,681
$
$
1,342
$
1,770
Page 107
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.
Page 108
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.
Page 109
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.
Page 110
(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:
Assets
Loans receivable
Cash
Investments
Other
Liabilities and equity
Deposits
Loans
Other
Gap – Financial Position
Gap – Derivatives and
net securitization gap
Interest rate gap 2014
Within
3 Months
3 Months
to 1 Year
1 to 5
Years
$ 694,491
15,821
678
$ 103,371
13,005
463
$ 1,460,288
121,260
528
710,990
116,839
1,582,076
878,324
103,220
789
201,196
24,846
651
982,333
(271,343)
69,067
$ (202,276)
$ 2,276,125
35,878
182,403
38,572
17,979
105,094
2,532,978
442,934
412,166
823
916
302,272
164,841
1,824,726
540,232
168,020
226,693
855,923
916
467,113
2,532,978
(109,854)
726,153
17,063
(95,049)
$
(38,872)
$ 687,281
17,975
4
$
Total
35,878
32,317
36,899
14,805
$
Over Non Interest
5 years
Sensitive
(362,019)
(45,000)
$
(27,937)
-
$ (362,019)
$
-
Page 111
Within
3 Months
Assets
Loans receivable
Cash
Investments
Other
1 to 5
Years
70,418
13,711
285
$ 1,231,670
99,635
187
572,345
84,414
1,331,492
536,787
102,477
122
332,381
26,768
237
363,910
312,570
1,411
639,386
359,386
677,891
-
(67,041)
(274,972)
653,601
6,004
(15,946)
22,671
$ 564,603
7,742
-
Deposits
Loans
Other
Interest rate gap 2013
3 Months
to 1 Year
$
(82,987)
$
$ (252,301)
Over
5 years
$
5,134
870
$
$ 1,871,825
23,276
150,871
32,455
6,004
84,172
2,078,427
-
250,518
151,246
1,483,596
441,815
153,016
401,764
2,078,427
(317,592)
$
Total
23,276
29,783
31,113
(6,725)
$ 646,876
Non Interest
Sensitive
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
2013
2014
$
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).
Page 112
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.
Page 113
(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
495,847 $
908,773 $
Total
Assets
Loans receivable
from members
$
Cash
Investments
338,333 $
682,271 $
18,269 $
- $ 2,443,493
35,878
-
-
-
-
-
35,878
8,478
24,107
54,577
71,859
-
30,995
190,016
48
1,201
303
121
-
-
1,673
Derivative financial
instruments
Total Cash Inflow
$
382,737 $
521,155 $
963,653 $
754,251 $
18,269 $
30,995 $ 2,671,060
$
859,100 $
538,749 $
Liabilities
Members’ deposits
and shares
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
175
1,543
264
903
294
-
3,179
581,293 $
655,591 $
254,129 $
294 $
- $ 2,451,400
Page 114
instruments
Total Cash Outflow
$
960,093 $
Within
2 to 12
1 to 3
3 to 5
Over 5
Not
1 month
months
years
years
years
Specified
524,561 $
308,378 $
Total
Assets
Loans receivable
from members
$
Cash
587,656 $
584,401 $
5,134 $
- $ 2,010,130
23,276
-
-
-
-
-
23,276
3,289
21,321
29,427
74,935
-
28,753
157,725
205
271
704
162
-
-
1,342
617,787 $
659,498 $
5,134 $
28,753 $ 2,192,473
64,773 $
Investments
instruments
Total Cash Inflow
$
551,331 $
329,970 $
$
704,590 $
428,055 $
Liabilities
Members’ deposits
- $
- $ 1,506,524
Loans payable
and shares
79,581
42,526
207,741
309,106 $
138,304
-
-
468,152
Other liabilities
18,291
-
-
-
-
-
18,291
6
376
1,210
178
-
-
1,770
470,957 $
518,057 $
203,255 $
- $
- $ 1,994,737
instruments
Total Cash Outflow
$
802,468 $
(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.
Page 115
(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.
Page 116
17. Fair Values of Financial Instruments (continued):
2013
2014
Carrying
Carrying
Value
Fair Value
22,706
$ 1,882,284
$ 1,898,130
152,998
1,590
122,118
122,339
221
35,878
-
23,276
23,276
-
5,146
5,146
-
5,972
5,972
-
1,673
1,673
-
1,342
1,342
-
15,471
15,471
-
12,201
12,201
-
$ 2,498,593
$ 2,522,889
$
24,296
$ 2,047,193
$ 2,063,260
$
16,067
Deposits and shares $ 1,857,874
$ 1,859,138
$
(1,264)
$ 1,512,362
$ 1,514,305
$
(1,943)
(8,043)
441,815
445,223
Value
Fair Value
$ 2,289,017
$ 2,311,723
151,408
Difference
Difference
Loans and Receivables
Loans receivable
$
$
15,846
Held to Maturity
Investments
Fair Value through Profit and Loss
Cash and cash equivalents 35,878
Investments
instruments
Available for Sale
Investments
Total financial assets
Other Liabilities
Loans payable
(3,408)
540,232
548,275
20,241
20,241
-
18,291
18,291
-
3,179
3,179
-
1,770
1,770
-
$ 2,421,526
$ 2,430,833
$ 1,974,238
$ 1,979,589
Accounts payable and
accrued liabilities
instruments
Total financial liabilities
$
(9,307)
$
(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.
Page 117
(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:
Level 1
Level 2
Level 3
Total
Assets
Investments – FVTPL securities
$
Investments – Marketable equity securities
- $
5,146 $
- $
5,146
580
-
-
580
Investments – Retained rights – loan securitizations
-
2,173
-
2,173
-
1,673
-
1,673
Total assets held at fair value
$
580 $
8,992 $
- $
9,572
$
- $
3,179 $
- $
3,179
Total liabilities held at fair value
$
- $
3,179 $
- $
3,179
Liabilities
Page 118
Level 1
Level 2
Level 3
Total
Assets
$
- $
5,972 $
- $
5,972
565
-
-
565
-
459
-
459
-
1,342
-
1,342
$
565 $
7,773 $
- $
8,338
$
- $
1,770 $
- $
1,770
$
- $
1,770 $
- $
1,770
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.
2013
2014
Assets
Loans Receivable
$
Investments
2,311,723
$
1,898,130
122,339
152,998
$
2,464,721
$
2,020,469
$
1,859,138
$
1,514,305
Liabilities
Deposits and Shares
Loans Payable
445,223
548,275
$
2,407,413
$
1,959,528
Page 119
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
2014
2013
Accrued benefit obligation
Balance at the beginning of year
Current service cost
Interest cost
Benefits paid
Settlements
Actuarial loss (gain)
$ 11,817
1,832
372
629
(580)
2,646
16,716
$ 12,506
468
535
(402)
(167)
(1,123)
11,817
$ 5,104
4
232
(196)
763
5,907
$ 5,330
4
217
(144)
(303)
5,104
Plan assets
Fair value at beginning of year
Expected return on plan assets
Actuarial gain on plan assets
Employer contributions
Employee contributions
Benefits paid
Settlements
Fair value at end of year
10,391
2,390
590
1,176
1,121
15
(580)
15,103
9,282
397
524
738
19
(402)
(167)
10,391
196
(196)
-
144
(144)
-
$ (1,613)
$ (1,426)
$ (5,907)
$ (5,104)
Funded status - deficit
Other Defined Benefit Plans
2014
2013
The following table provides the amounts recognized in the Consolidated Statement of Financial
Position as follows:
Prepaid benefit costs recorded
in other assets
Accrued benefit liability recorded
in other liabilities
Net amount recognized
2014
2013
$
36
(1,649)
$ (1,613)
$
568
(1,994)
$ (1,426)
2014
2013
$
-
(5,907)
$ (5,907)
$
-
(5,104)
$ (5,104)
Page 120
18. Employee Retirement Benefits (continued):
FirstOntario’s net benefit plan expenses recognized in other comprehensive income were as
follows:
2014
2013
Cumulative actuarial gain (loss) at September 1
Actuarial gain (loss) in the year on liability
Actuarial gain (loss) in the year on plan assets
Cumulative actuarial gain (loss)
$ (1,001)
(2,646)
1,176
$ (2,471)
$ (2,648)
1,123
524
$ (1,001)
2014
2013
$
$
131
(763)
(632)
$
$
(172)
303
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:
Interest cost
Total included in employee benefits expense
Contributions recorded as expenses
2014
2013
$
$
372
629
(590)
411
$
$
468
535
(397)
606
2014
2013
$
$
4
232
236
$
$
4
217
221
Defined Contribution Pension
2014
2013
$ 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.
Page 121
The significant actuarial assumptions adopted by are as follows (weighted–average assumptions):
2014
2013
Discount rate
Rate of compensation increase
2014
2013
4.7%
3.0%
4.0%
3.0%
4.7%
-
4.0%
-
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:
2013
Defined
benefit
2014
Health care
1% increase
1% decrease
Discount rate
1% increase
1% decrease
Salary rate
1% increase
1% decrease
Defined
benefit
$
na
na
Other
plans
$
710
(596)
$ (2,568)
3,077
$
(691)
784
$
$
na
na
133
(129)
$
$
531
(451)
$ (1,604)
1,860
$
(538)
603
$ 136
(131)
$
na
na
na
na
Other
plans
Page 122
19. Income Taxes:
The components of income tax expense (benefit) were as follows:
Current income tax expense
Deferred income tax expense
Total income tax expense
2013
2014
$
$
980
272
1,252
$
$
1,280
(226)
1,054
Major components of income tax expense (benefit) include the following:
2014
Combined federal and provincial income taxes
Small business and credit union deductions
Income and expense permanent differences
Tax rate change
Other
39.5%
(21.7)
0.3
(1.0)
(1.0)
16.1%
2013
39.5%
(22.6)
0.2
(4.4)
(0.2)
12.5%
Page 123
19. Income Taxes (continued):
The movements of deferred tax assets and liabilities are presented below:
Fixed assets
Allowance for loan losses
Derivatives
Employee retirement benefits
Investments
Cash flow hedges
Acquisition of Prime Financial Savings &
Credit Union Limited
Other
Total
Fixed assets
Derivatives
Investments
Cash flow hedges
Other
Total
August 31
2013
Charge to
Income
Charge to August 31
OCI
2014
$
$
$
(125)
805
(129)
1,255
(104)
154
(212)
143
(96)
(184)
103
(12)
$
(337)
948
(225)
1,528
(11)
444
749
(20)
$ 2,327
1
(7)
$ 1,850
$
August 31
2012
Charge to
Income
Charge to August 31
OCI
2013
$
$
$
(131)
1,026
(276)
1,402
(151)
120
122
4
$ 2,116
$
(1)
(13)
(272)
457
(10)
302
6
(221)
147
252
53
121
(121)
(11)
226
$
$
(399)
(6)
(87)
$
(125)
805
(129)
1,255
(104)
154
(492)
1
(7)
$ 1,850
The tax effect of items recorded in the Statement of Other Comprehensive Income was as follows:
Net change in fair value of available–for–sale investments
Actuarial gain (loss) on defined benefit pension plans
Total tax effect of components of Other Comprehensive Income
2013
2014
$
$
357
(55)
(10)
457
749
$
$
(98)
11
(6)
(399)
(492)
Page 124
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
1 to 5 years
Over 5 years
2013
2014
$
3,073
9,832
6,553
$
2,245
7,857
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.
Page 125
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
Liquidity reserve deposits – Central 1
Cash
Other assets
Fixed assets
Deposits
Accruals and accounts payable
Investment shares
Member shares
Fair market value of net assets acquired
$ 91,348
6,248
2,774
2,717
2,027
(93,670)
(5,754)
(919)
(551)
$ 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.
Page 126
SCHEDULE B
CONDENSED INTERIM REVIEW FINANCIAL STATEMENTS
Page 127
Condensed Consolidated
olidated Interim Statement of Financial Position
As at December 31, 2014, with comparative information for August 31, 2014
(Unaudited)
December 31,
2014
August 31,
2014
Assets
Loans Receivable from Members
Residential mortgage
gage loans (note 4)
Accrued interest receivable
Other
Cash and cash equivalents (note 6)
Investments (note 8)
Fixed assets (note 9)
Other assets
$ 1,604,338
131,884
684,766
13,037
2,434,025
$1,497,348
137,637
641,140
12,892
2,289,017
28,958
188,690
23,081
1,451
3,772
$ 2,679,977
35,878
182,403
22,483
1,673
1,524
$2,532,978
$ 1,845,748
7,262
13,195
11,016
1,877,221
$1,824,726
7,301
13,304
12,543
1,857,874
672,089
14,299
2,469
2,566,078
540,232
20,241
3,179
2,421,526
Liabilities
Members’ Deposits and Shares
Deposits (note 10)
Membership shares (note 11)
Accrued interest on deposits and shares
Other
Loans payable (note 13)
Accounts payable
able and accrued liabilities
Members’ Equity
Contributed surplus
Retained earnings
40,312
4,865
72,300
(3,578)
113,899
38,373
4,865
72,231
(4,017)
111,452
$ 2,679,977
$2,532,978
Commitments (note 19)
See accompanying notes to Condensed Consolidated Interim Financial Statements.
On behalf of the Board:
Director
Director
Offering Statem
tement, Class B Investment Shares, Series 2015
Page 128
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,
2014
2013
Interest and Investment Income
Other
$
Interest Expense
Members’ deposits (note 10)
Dividends on membership and investment shares (note 11)
Derivative instruments
Loans (note 13)
Operating Margin before the Following
Provision for impaired loans (note 5)
Other income
Operating Margin
Operating Expenses
Salaries and employee benefits
Administrative
Occupancy
Members' deposit insurance protection
Operating Income
Unrealized Gains (Losses)
Investments
Net gains (losses) on derivative financial instruments
$
$
14,521
3,049
9,946
1,212
28,728
10,716
282
190
4,749
15,937
8,581
287
136
3,993
12,997
16,916
(780)
4,081
20,217
15,731
(778)
3,061
18,014
9,648
5,729
1,935
498
17,810
2,407
8,376
5,104
1,526
440
15,446
2,568
194
332
526
3,094
81
(301)
(220)
2,187
Income before Income Taxes
Income taxes (note 18)
Net income for the period
17,412
2,732
11,118
1,591
32,853
390
1,797
$
555
2,539
Page 129
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)
December 31,
December 31,
2014
2013
Other Comprehensive Income (Loss)
Items that are or may be reclassified subsequently to net income:
Net change in fair value of available for sale investments
Related income taxes (note 18)
Items that are not recycled or reclassified to net income:
Actuarial gain (loss) on employee benefits, net of tax
Total Income and Other Comprehensive Income for the period
$
1,797
$
(87)
(332)
53
57
293
300
(40)
(114)
$
2,236
2,539
$
(592)
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)
December 31,
December 31,
2014
2013
Investment Shares (note 11)
Balance at beginning of period
Shares issued during period
Shares redeemed during period
Balance at end of period
$
Contributed Surplus
38,373
2,124
(185)
40,312
$
36,440
2,018
(8)
38,450
4,865
4,865
645
4,220
4,865
Retained Earnings
Dividends paid (net of income tax recovery of $396 (2013– $366))
72,231
1,797
(1,728)
72,300
67,381
2,539
(1,652)
68,268
Accumulated Other Comprehensive Income (Loss), net of tax
Cash flow hedging reserve:
Other comprehensive income (loss) for the period
(1,661)
471
(1,190)
(620)
72
(350)
(898)
Fair value reserve on available for sale investments:
Other comprehensive income for the period
111
(32)
79
Employee benefit adjustments:
Other comprehensive income (loss) for the period
Total Members’ Equity
(2,467)
(2,467)
(3,578)
113,899
$
66
41
107
$
(691)
(592)
(1,283)
(2,074)
109,509
Page 130
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)
December 31,
December 31,
2014
2013
Cash Flows from Operating Activities
Adjustments for:
Amortization of fixed assets
Net change in fair value of assets recorded as fair value
through profit or loss
Net changes in accrued employee retirement benefits
Other non–cash items, net
Net interest income
Income tax expense
$
1,797
$
817
935
Changes in operating assets:
Net change in loans receivable from members
Net change in derivative assets held for risk management
Changes in operating liabilities:
Net change in deposits
Net change in derivative liabilities held for risk management
(305)
31
(7,724)
(16,916)
390
(234)
982
(2,634)
(15,731)
555
(144,863)
222
(129,047)
346
76,403
334
21,022
(710)
Interest received
Interest paid
Investment income
Income tax paid
Cash flows used in operating activities
2,539
31,605
(17,068)
721
(408)
(131,271)
27,824
(14,838)
1,763
(408)
(51,329)
(39)
(294)
131,857
131,524
(4)
190
54,002
54,188
Net investment purchases
Merger with Rochdale Credit Union (note 20)
Purchase of fixed assets, net of disposals
Cash flows used in investing activities
(5,640)
(1,533)
(7,173)
(10,449)
2,774
(719)
(8,394)
Net decrease during period
(6,920)
35,878
28,958
(5,535)
23,276
17,741
Cash Flows from Financing Activities
Net change in membership shares
Net change in investment shares
Net change in loans payable
Cash flows from financing activities
Cash Flows from Investing Activities
$
$
Page 131
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
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.
Page 132
(Unaudited)
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,
2014
August 31,
2014
$ 1,605,149
(811)
1,604,338
$ 1,497,797
(449)
1,497,348
Personal Loans
134,321
(2,437)
131,884
140,118
(2,481)
137,637
Commercial Loans
688,644
(3,878)
684,766
$ 2,420,988
644,827
(3,687)
641,140
$ 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
Loans held by Securitization Trusts
December 31,
2014
August 31,
2014
$ 1,074,957
530,192
$ 1,605,149
$ 1,036,943
460,854
$ 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:
December 31,
2014
$
17,412
2,732
11,118
$
31,262
December 31,
2013
$
14,521
3,049
9,946
$
27,516
Page 133
Personal Loans
Commercial Loans
(Unaudited)
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,
December 31,
2014
Principal Average
Balance
Yield
Floating
Within 1 year
Over 1 year
4.20% $ 607,450
4.94%
197,029
4.06%
1,478,263
4.18%
2,282,742
(6,617)
$2,276,125
$
647,041
236,162
1,544,911
2,428,114
(7,126)
$ 2,420,988
Provision for loan losses
August 31,
2014
Principal Average
Balance
Yield
4.27%
4.86%
4.09%
4.20%
5. Allowance for Impaired Loans:
A summary of the allowance for impaired loans is as follows:
December 31,
Residential
Mortgage
Loans
Personal
Loans
$
$
Transfer from Rochdale
Loans written off
Recoveries
Net provision for impaired loans
200
(57)
167
$
310
777
Commercial
Loans
$
(246)
32
138
$
701
722
Collective
Allowance
$
(15)
$
707
4,918
490
$
2014
Total
Total
$ 6,617
$ 6,257
(303)
32
780
5,408
August 31,
2014
$ 7,126
175
(2,041)
228
1,998
$ 6,617
A summary of impaired loans are as follows:
December 31,
2014
Residential
Mortgage
Loans
Personal
Loans
Gross amount of loans identified as impaired
$ 19,373
19,083
$
3,651
2,965
$
$
686
290
August 31,
2014
Commercial
Loans
Total
Total
$ 13,935
13,638
$ 36,959
35,686
$ 33,511
31,812
$
$ 1,273
$ 1,699
297
Page 134
(Unaudited)
A summary of loans past due but not impaired are as follows:
< 30
days
30–59
days
December 31,
August 31,
2014
2014
Total
Total
60–89
days
Personal Loans
Commercial Loans
$ 30,566
5,705
5,133
$
6,220
1,583
584
$
2,152
547
-
$ 38,938
7,835
5,717
$ 30,793
3,579
768
$ 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:
December 31,
2014
Hospitality
Retail & Commercial Buildings
Other
22%
51%
27%
August 31,
2014
19%
53%
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).
Page 135
(Unaudited)
The following tables illustrate the credit quality of loans that are neither past due nor impaired:
Credit quality of loans – December 31, 2014
Commercial Loans
Rating
% of Portfolio
Rating
Unscored
A+
A
B
C
D
E
2%
2%
53%
23%
11%
5%
4%
Undoubted
Superior
Satisfactory
Watch List
2%
6%
75%
17%
Credit quality of loans – August 31, 2014
Commercial Loans
Rating
% of Portfolio
Rating
Unscored
A+
A
B
C
D
E
2%
2%
53%
23%
11%
5%
4%
% of Portfolio
% of Portfolio
Undoubted
Superior
Satisfactory
Watch List
1%
7%
74%
18%
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
Cash at Central 1
Restricted cash
Other cash and cash equivalents
Total cash and cash equivalents
August 31,
2014
December 31,
2014
$
$
8,758
15,518
4,411
271
28,958
$
$
8,379
24,076
3,340
83
35,878
Page 136
(Unaudited)
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:
Amount securitized/sold
Net cash proceeds received
Outstanding balances of securitized loans
December 31,
August 31,
2014
2014
mortgages
mortgages
Residential
mortgages
Commercial
mortgages
$
$
$ 147,539
146,770
212,367
97,249
97,099
531,588
$
75,206
74,513
284,296
155,393
153,889
465,513
The following table summarizes the balances for securitized loans that are not recorded on the
Condensed Consolidated Interim Statement of Financial Position:
August 31,
2014
December 31,
2014
Retained rights to future excess spread
Outstanding balances of off–balance sheet securitized loans
mortgages
mortgages
Residential
mortgages
Commercial
mortgages
$
$
$
1,396
$
2,721
284,296
13
4,659
2,160
212,367
Page 137
(Unaudited)
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:
August 31,
2014
December 31,
2014
mortgages
mortgages
Average life
Prepayment rate
Excess spread
Discount rate
Expected credit losses
0.2 years
39.96%
2.90%
1.83%
0.00%
Residential
mortgages
Commercial
mortgages
0.2 years
39.96%
2.90%
1.83%
0.00%
5.6 years
0.00%
na
2.19%
0.00%
5.5 years
0.00%
na
2.27%
0.00%
8. Investments:
Investments are as follows:
Investments held to maturity
Liquidity reserve deposits – Central 1 (c)
August 31,
2014
December 31,
2014
$
Accrued interest
Investments available for sale, fair value
Preferred shares (a)
Common shares (a)
Income trusts and limited partnerships (a)
Total liquid investments
Investment held as fair value through profit and loss
CUCO Cooperative Association (b)
Investments available for sale
Cost
Shares – Central 1 (c)
Fair value
Retained rights – loan securitizations
Real Estate Joint Ventures (d)
Other investments
$
156,556
$
150,086
1,565
1,322
17
291
243
158,672
13
324
243
151,988
3,208
5,146
13,095
12,718
2,721
2,173
10,631
363
188,690
10,143
235
182,403
$
Page 138
(Unaudited)
The following summarizes FirstOntario’s investments by the contractual repricing or maturity date,
Within 1 year
Over 1 year
Accrued interest
December 31,
2014
Carrying
Average
Amount
Yield
August 31,
2014
Carrying
Average
Amount
Yield
$ 11,470
145,086
156,556
30,569
1,565
$188,690
$ 28,826
121,260
150,086
30,995
1,322
$182,403
2.03%
1.85%
1.86%
1.59%
1.87%
1.82%
(a) Financial instruments classified as AFS:
The table below presents the income and losses of the financial assets classified as AFS.
December 31,
December 31,
2014
2013
Unrealized pre–tax income recognized in OCI
$
15
(40)
$
5
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.
Page 139
(Unaudited)
(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)
5,559,000 Central 1 Class “E” Shares (August 31, 2014 – 5,559,000)
August 31,
2014
December 31,
2014
$
$
7,536
5,559
13,095
$
$
7,159
5,559
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.
Page 140
(Unaudited)
(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
Expenses
Earnings from joint ventures
December 31,
2014
$
$
175
184
(9)
December 31,
2013
$
227
182
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
Accumulated amortization
Net book value
August 31,
2014
December 31,
2014
$
$
10,505
(671)
9,834
$
10,505
(619)
9,886
$
Reconciliations of the net book value for investment properties are summarized below:
Net book value at the beginning of the period/year
Amortization
Net book value at the end of the period/year
August 31,
2014
December 31,
2014
$
$
9,886
(52)
9,834
$
$
10,067
(181)
9,886
Page 141
(Unaudited)
(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:
Cost
Land
Buildings
Equipment
Tangible assets
Total fixed assets
$
$
1,322
327
7,199
20,198
15,861
44,907
14,404
59,311
Accumulated
amortization
$
$
253
3,887
15,030
4,818
23,988
12,242
36,230
December 31,
2014
Net book
value
$
$
August 31,
2014
Net book
value
Cost
Land
Buildings
Equipment
Tangible assets
Total fixed assets
$
$
1,792
662
11,264
19,670
14,928
48,316
12,760
61,076
Accumulated
amortization
$
$
496
6,831
14,623
4,524
26,474
12,119
38,593
1,322
74
3,312
5,168
11,043
20,919
2,162
23,081
$
$
1,792
166
4,433
5,047
10,404
21,842
641
22,483
Amortization in respect of the above assets for the period amounts to $935,000 (2013 –
$817,000).
Page 142
(Unaudited)
9. Fixed Assets (continued):
Reconciliations of the net book value for each class of fixed asset are summarized below.
Land
Additions
Disposals
December 31,
2014
$
1,792
(470)
1,322
August 31,
2014
$
1,281
511
1,792
Disposals
Amortization
166
(88)
(4)
74
183
(17)
166
Buildings
Additions
Disposals
Amortization
4,433
15
(1,052)
(84)
3,312
3,736
995
(298)
4,433
Equipment
Additions
Disposals
Amortization
5,047
528
(407)
5,168
4,626
1,577
(6)
(1,150)
5,047
Additions
Disposals
Amortization
10,404
2,174
(1,218)
(317)
11,043
6,976
4,170
(742)
10,404
Additions
Amortization
641
1,644
(123)
678
313
(350)
2,162
641
Total net book value
$ 23,081
$
22,483
Page 143
(Unaudited)
10. Members’ Deposits:
Members’ deposits, which are designated as other liabilities, are as follows:
August 31,
2014
December 31,
2014
Chequing
Savings
Term Deposits
Registered Plans
$
242,243
447,502
615,897
540,106
$ 1,845,748
$
225,320
443,416
614,410
541,580
$ 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:
December 31,
2014
Savings
Term Deposits
Registered Plans
$
$
1,519
5,297
3,900
10,716
December 31,
2013
$
1,123
4,053
3,405
8,581
$
The following summarizes FirstOntario’s Members’ deposits by the contractual repricing or
maturity date, whichever is earlier:
Floating
Within 1 year
Over 1 year
December 31,
2014
Principal Average
Balance
Yield
$ 468,831
561,347
493,014
1,523,192
322,556
$ 1,845,748
August 31,
2014
Principal Average
Balance
Yield
1.20% $ 467,134
2.22%
612,386
2.35%
442,934
1.95%
1,522,454
302,272
$ 1,824,726
1.21%
2.19%
2.35%
1.94%
Page 144
(Unaudited)
10. Members’ Deposits (continued):
Members’ deposits held in registered plans are as follows:
Tax free savings accounts
Registered savings plans
Registered retirement income funds
August 31,
2014
December 31,
2014
$
$
136,320
266,214
137,572
540,106
$
$
132,189
275,487
133,904
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.
Page 145
(Unaudited)
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
Investment shares:
5,526,921 (August 31, 2014 – 5,568,668)
6,752,105 (August 31, 2014 – 6,816,790)
916,271 (August 31, 2014 – 918,779)
Investment shares classified as liabilities
40,558,071 (August 31, 2014 – 38,619,517)
August 31,
2014
December 31,
2014
$ 7,262
$
7,301
5,527
5,568
6,752
6,817
916
13,195
919
13,304
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:
December 31,
2014
Membership shares
Series 1, 2 and A investment shares
Dividends on membership and investment shares
$
Dividends on Series 2010 shares (classified as equity)
December 31,
2013
$
$
152
130
282
$
152
135
289
$
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.
Page 146
(Unaudited)
The tables below present a reconciliation of the change in shares during the period/year:
December 31,
2014
August 31,
2014
Membership Shares
Opening balance
Shares issued during the period/year
Shares redeemed
Membership shares, ending balance
1,460,147
(7,826)
1,452,321
1,291,702
85,057
110,160
(26,772)
1,460,147
Opening balance
Shares redeemed
Class B, Series 1, Special Shares, ending balance
5,568,668
(41,747)
5,526,921
5,473,779
162,693
(67,804)
5,568,668
Opening balance
Shares redeemed
6,816,789
(64,684)
6,752,105
6,818,892
204,278
(206,381)
6,816,789
Opening balance
Shares redeemed
Class B, Series A, Special Shares, ending balance
918,780
(2,509)
916,271
Opening balance
Shares redeemed
38,619,517
2,124,048
(185,494)
40,558,071
918,780
918,780
36,686,639
2,017,615
(84,737)
38,619,517
Page 147
(Unaudited)
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.
Page 148
(Unaudited)
(a) Capital Management (continued):
The amount and composition of Tier 1 and Tier 2 capital were as follows.
August 31,
2014
December 31,
2014
Tier 1 Capital
Retained earnings
Contributed surplus
Membership shares
Series 1 (90%)
Series 2 (90%)
Series 2013 (90%)
Series 2010 (90%)
$
Tier 2 Capital
Accumulated other comprehensive gains on AFS investments
Accumulated other comprehensive losses – employee
benefit adjustments
Collective allowance for impaired loans
Total Regulatory Capital
72,300
4,865
7,262
$
72,231
4,865
7,301
4,974
5,011
6,077
6,135
825
828
36,280
132,583
34,536
130,907
553
675
91
4,032
79
557
682
91
3,837
111
(2,467)
5,408
8,371
(2,467)
4,918
7,729
$ 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
Capital
December 31, 2014
$140,954,000
August 31, 2014
$138,636,000
Leverage Ratio
Minimum
Actual
Risk–Weighted Capital Ratio
Minimum
Actual
4.00%
5.26%
8.00%
10.07%
4.00%
5.48%
8.00%
10.48%
Page 149
(Unaudited)
(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
Post–employment benefits
Directors’ remuneration
Total compensation
December 31,
2014
$
$
642
33
78
753
December 31,
2013
$
$
602
29
76
707
Related party balances are outlined in the following table:
Loans
Personal Loans
Accrued interest
Deposits and Shares
Deposits
Membership Shares
Investment Shares
Accrued interest
August 31,
2014
December 31,
2014
$
2,161
125
1
2,155
3
111
191
$
2,273
137
3
1,670
3
105
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.
Page 150
(Unaudited)
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.
August 31,
2014
December 31,
2014
Central 1 Credit Facilities
average interest rate of 1.87% (August 31, 2014 – 1.80%)
due within one year
$
Overdraft facility, bearing a variable interest rate
of 1.75%, payable on demand
55,000
$
11,000
-
4,885
85,000
62,000
94,322
94,308
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
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
Caisse centrale Desjardins Credit Facilities
average interest rate of 1.71% due within
one year (August 31, 2014 – 1.74%)
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)
$
672,089
$
540,232
The term loan facility with Caisse centrale Desjardins is subject to certain financial and nonfinancial 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
Securitization of residential mortgages
December 31,
2014
$
$
574
4,175
4,749
December 31,
2013
$
$
314
3,679
3,993
Page 151
(Unaudited)
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:
As at December 31, 2014
$
Bond forwards
Within
1 to 5
Over
1 year
years
5 years
9,047
$
45,000
$
6,839
5,000
-
-
10,127
5,663
12,050
-
December 31, 2014 Total
36,224
$
$
50,663
$
Fair Value
Total
$
60,886
Assets
$
$
1,736
5,000
-
3
48
15,838
1,101
730
-
12,050
350
-
6,887
$
93,774
$
-
Liabilities
1,451
$
2,469
$
Bond forwards
Within
1 to 5
Over
1 year
years
5 years
-
$
39,131
$
21,855
25,000
-
-
10,527
9,412
23,540
-
August 31, 2014 Total
59,067
$
$
48,543
$
Fair Value
Total
$
60,986
Assets
$
-
Liabilities
$
1,588
25,000
-
115
48
19,987
1,673
1,458
-
23,540
-
18
21,903
$ 129,513
$
1,673
$
3,179
Page 152
(Unaudited)
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.
Page 153
(Unaudited)
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.
Page 154
(Unaudited)
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.
Page 155
(Unaudited)
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
Loans receivable
Cash
Investments
Other
Deposits
Loans
Other
Within
3 Months
3 Months
to 1 Year
1 to 5
Years
$ 744,110
$ 131,967
$ 1,534,968
3,936
446
7,543
260
145,986
351
$ 748,492
$ 139,770
$ 1,681,305
846,625
170,061
605
183,553
111,359
190
493,014
390,669
1,457
$ 1,017,291
$ 295,102
$ 885,140
(268,799)
63,982
(155,332)
(8,019)
$ (204,817)
$ (163,351)
Over Non Interest
5 years
Sensitive
$
$
$
796,165
(45,137)
9,943
$
Total
45
28,958
31,225
40,239
$ 2,420,988
28,958
188,690
41,341
9,988
$ 100,422
$ 2,679,977
188
322,556
159,700
1,845,748
672,089
162,140
188
$ 482,256
$ 2,679,977
9,800
(10,826)
(381,834)
-
(1,026)
$ (381,834)
-
Interest rate gap
$ 751,028
$
$
-
Page 156
(Unaudited)
Assets
Loans receivable
Cash
Investments
Other
Deposits
Loans
Other
Interest rate gap
Within
3 Months
3 Months
to 1 Year
1 to 5
Years
$ 694,491
15,821
678
$ 103,371
13,005
463
$ 1,460,288
121,260
528
$
17,975
4
$
35,878
32,317
36,899
$ 2,276,125
35,878
182,403
38,572
$ 710,990
$ 116,839
$ 1,582,076
$
17,979
$ 105,094
$ 2,532,978
878,324
103,220
789
201,196
24,846
651
442,934
412,166
823
916
302,272
164,841
1,824,726
540,232
168,020
$ 982,333
$ 226,693
$ 855,923
916
$ 467,113
$ 2,532,978
(271,343)
(109,854)
69,067
$ (202,276)
14,805
$
(95,049)
Over
5 years
$
726,153
17,063
(38,872)
$ 687,281
Non Interest
Sensitive
(362,019)
(45,000)
$
(27,937)
Total
-
$ (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
EVEaR
December 31,
2014
$ 148,000
1.9%
August 31,
2014
$
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).
Page 157
(Unaudited)
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.
Page 158
(Unaudited)
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.
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
$
Cash
Investments
366,706 $
539,133 $ 1,123,703 $ 1,056,122 $
10,072 $
- $ 3,095,736
28,958
-
-
-
-
-
28,958
3,315
12,780
68,919
90,907
-
30,569
206,490
376
728
195
103
49
-
1,451
instruments
Total Cash Inflow
$
399,355 $
552,641 $ 1,192,817 $ 1,147,132 $
10,121 $
30,569 $ 3,332,635
$
868,246 $
516,367 $
455,640 $
241,759 $
- $
- $ 2,082,012
Loans payable
146,548
138,114
Other liabilities
14,299
-
305,252
181,512
-
-
771,426
-
-
-
-
14,299
20
901
721
461
366
-
2,469
655,382 $
761,613 $
423,732 $
366 $
- $ 2,870,206
Page 159
Liabilities
Members’ deposits
and shares
instruments
Total Cash Outflow
$ 1,029,113 $
(Unaudited)
Within
2 to 12
1 to 3
3 to 5
Over 5
Not
1 month
months
years
years
years
Specified
338,333 $
495,847 $
Total
Assets
Loans receivable
from members
$
Cash
908,773 $
682,271 $
18,269 $
- $ 2,443,493
35,878
-
-
-
-
-
35,878
8,478
24,107
54,577
71,859
-
30,995
190,016
48
1,201
303
121
-
-
1,673
Investments
instruments
Total Cash Inflow
$
382,737 $
521,155 $
963,653 $
754,251 $
18,269 $
30,995 $ 2,671,060
$
859,100 $
538,749 $
337,520 $
122,284 $
- $
- $ 1,857,653
Liabilities
Members’ deposits
and shares
Loans payable
80,577
41,001
317,807
130,942
-
-
570,327
Other liabilities
20,241
-
-
-
-
-
20,241
175
1,543
264
903
294
-
3,179
581,293 $
655,591 $
254,129 $
294 $
- $ 2,451,400
instruments
Total Cash Outflow
$
960,093 $
(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.
Page 160
(Unaudited)
(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.
Page 161
(Unaudited)
December 31,
August 31,
2014
2014
Carrying
Carrying
Value
Fair Value
$ 2,434,025
$ 2,450,869
158,121
159,868
Value
Fair Value
16,844
$ 2,289,017
$2,311,723
1,747
151,408
152,998
Difference
Difference
Loans and Receivables
Loans receivable
$
$
22,706
Held to Maturity
Investments
1,590
Cash and cash equivalents 28,958
28,958
-
35,878
35,878
-
3,208
3,208
-
5,146
5,146
-
1,451
1,451
-
1,673
1,673
-
16,367
16,367
-
15,471
15,471
-
$ 2,642,130
$ 2,660,721
$
18,591
$ 2,498,593
$ 2,522,889
$
24,296
Deposits and shares $ 1,877,221
$ 1,882,080
$
4,859
$ 1,857,874
$1,859,138
$
(1,264)
Investments
Instruments
Available for Sale
Investments
Total financial assets
Other Liabilities
Loans payable
672,089
679,346
7,257
540,232
548,275
(8,043)
14,299
14,299
-
20,241
20,241
-
2,469
2,469
-
3,179
3,179
-
$ 2,566,078
$ 2,578,194
12,116
$ 2,421,526
$ 2,430,833
Accounts payable and
accrued liabilities
instruments
Total financial liabilities
$
$
(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.
Page 162
(Unaudited)
(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:
Level 1
Level 2
Level 3
Total
Assets
$
-
$
3,208 $
- $
3,208
551
-
-
551
-
2,721
-
2,721
-
1,451
-
1,451
7,380 $
- $
7,931
$
551 $
Liabilities
$
-
$
2,469 $
- $
2,469
$
-
$
2,469 $
- $
2,469
Page 163
(Unaudited)
Level 1
Level 2
Level 3
Total
Assets
$
- $
5,146 $
580
- $
-
-
5,146
580
-
2,173
-
2,173
-
1,673
-
1,673
$
580 $
8,992 $
- $
9,572
$
- $
3,179 $
- $
3,179
$
- $
3,179 $
- $
3,179
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.
December 31,
August 31,
2014
2014
Assets
Loans Receivable
$
Investments
2,450,869
$
2,311,723
152,998
159,868
$
2,610,737
$
2,464,721
$
1,882,080
$
1,859,138
Liabilities
Deposits and Shares
Loans Payable
548,275
679,346
$
2,561,426
$
2,407,413
Page 164
(Unaudited)
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.
Accrued benefit obligation
Balance at the beginning of period/year
Interest cost
Benefits paid
Actuarial loss (gain)
Balance at end of period/year
December 31,
August 31,
2014
2014
$ 16,716
141
219
(863)
6
16,219
$ 11,817
1,832
372
629
(580)
2,646
16,716
$ 5,907
2
77
(73)
5,913
$ 5,104
4
232
(196)
763
5,907
15,103
196
145
(863)
14,581
10,391
2,390
590
1,176
1,121
15
(580)
15,103
73
(73)
-
196
(196)
-
$ (1,638)
$ (1,613)
$ (5,913)
$ (5,907)
Plan assets
Fair value at beginning of period/year
Actuarial gain on plan assets
Employer contributions
Benefits paid
Fair value at end of period/year
Funded status - deficit
December 31,
August 31,
2014
2014
The following table provides the amounts recognized in the Condensed Consolidated Interim
Statement of Financial Position as follows:
Prepaid benefit costs recorded
in other assets
Accrued benefit liability recorded
in other liabilities
Net amount recognized
December 31,
August 31,
2014
2014
$
81
(1,719)
$ (1,638)
$
36
(1,649)
$ (1,613)
December 31,
August 31,
2014
2014
$
-
(5,913)
$ (5,913)
$
-
(5,907)
$ (5,907)
Page 165
(Unaudited)
FirstOntario’s net benefit plan expenses recognized in other comprehensive income for the period
were as follows:
2014
2013
Cumulative actuarial losses at September 1
$ (2,471)
Actuarial gain (loss) in the period on liability
Actuarial gain (loss) in the period on plan assets
Cumulative actuarial gain (loss)
$ (2,471)
$ (1,001)
(882)
392
$ (1,491)
2014
2013
$
$
(632)
(632)
$
$
131
(254)
(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:
2014
2013
Interest cost
Total included in employee benefits expense
$
$
141
219
(196)
164
$
$
124
210
(197)
137
2014
2013
$
$
2
77
79
$
2
77
79
$
Defined Contribution Pension
2014
2013
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,
2014
2014
Discount rate
Rate of compensation increase
4.0%
3.0%
December 31,
August 31,
2014
2014
4.0%
3.0%
4.0%
-
4.0%
-
Page 166
(Unaudited)
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:
Health care
1% increase
1% decrease
Discount rate
1% increase
1% decrease
Salary rate
1% increase
1% decrease
December 31,
2014
Defined
Other
benefit
plans
August 31,
2014
Defined
benefit
$
710
(596)
$
$ (2,568)
3,077
$
(691)
784
$
$
na
na
$
na
na
133
(129)
$
710
(596)
$ (2,568)
3,077
$
(691)
784
$
$
na
na
na
na
Other
plans
133
(129)
Page 167
(Unaudited)
18. Income Taxes:
The components of income tax expense (benefit) are as follows:
Current income tax expense
Deferred income tax expense
December 31,
2014
$
$
367
23
390
December 31,
2013
$
$
464
91
555
Major components of income tax expense (benefit) include the following:
December 31,
2014
Combined federal and provincial income taxes
Small business and credit union deductions
Income and expense permanent differences
Tax rate change
Other
39.5%
(20.9)
0.4
(1.2)
17.8%
December 31,
2013
39.5%
(22.6)
0.4
0.6
17.9%
Page 168
(Unaudited)
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
balance
Income
OCI
balance
Fixed assets
Derivatives
Investments
Cash flow hedges
Other
Total
$
(337)
948
(225)
1,528
(11)
444
(20)
$ 2,327
Opening
balance
Fixed assets
Derivatives
Investments
Cash flow hedges
Other
Total
$
(125)
805
(129)
1,255
(104)
154
1
(7)
$ 1,850
$
$
(55)
137
53
20
(162)
14
(30)
(23)
$
$
7
(121)
(114)
$
(392)
1,085
(172)
1,548
(166)
337
(50)
$ 2,190
Year ended August 31, 2014
Charge to
Charge to
Closing
Income
OCI
balance
$
$
(212)
143
(96)
(184)
103
(12)
(1)
(13)
(272)
$
$
457
(10)
302
$
(337)
948
(225)
1,528
(11)
444
749
(20)
$ 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 change in fair value of available–for–sale investments
Actuarial gain (loss) on defined benefit pension plans
Total tax effect of components of Other Comprehensive Income
2013
2014
$
$
(184)
62
8
(114)
$
$
124
(55)
(12)
152
209
Page 169
(Unaudited)
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
1 to 5 years
Over 5 years
$
2,347
10,382
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.
Page 170
(Unaudited)
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
Liquidity reserve deposits – Central 1
Cash
Other assets
Fixed assets
Deposits
Accruals and accounts payable
Investment shares
Member shares
Fair market value of net assets acquired
$ 91,348
6,248
2,774
2,717
2,027
(93,670)
(5,754)
(919)
(551)
$ 4,220
The fair market value of net assets acquired was recorded in contributed surplus.
Page 171

FirstOntario Credit Union Limited OFFERING STATEMENT

Transcription

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