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. O. Reg. 237/09, s. 11 (5).
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 25 and, further, may wish to consult a financial or tax advisor
about this investment.
Meridian Credit Union Limited
OFFERING STATEMENT
dated June 26, 2015
MINIMUM $60,000,000 -- MAXIMUM $120,000,000
LET’S GET GROWING - SERIES 15, CLASS A SPECIAL SHARES
(NON-CUMULATIVE, NON-VOTING,
NON-PARTICIPATING, REDEEMABLE SPECIAL SHARES)
(“Let’s Get Growing Class A Investment Shares, Series 15”)
The subscription price for each Let’s Get Growing Class A Investment Share, Series 15 will
be $1.00 per share, with a minimum of 5,000 shares per member which may be subscribed
for $5,000.00, to a maximum of 500,000 shares per member which may be subscribed for
$500,000.00.
There is no market through which these securities may be sold. O. Reg. 237/09, s. 11 (6).
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 Let’s Get Growing Class A Investment Shares, Series 15 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 22 and 23.
THE SECURITIES OFFERED ARE NOT DEPOSITS. THE SECURITIES OFFERED ARE
NOT INSURED. THE DIVIDENDS ON THE SECURITIES ARE NOT GUARANTEED.
TABLE OF CONTENTS
Offering Statem ent, Let’s G et Growing Class A Investm ent Shares, Series 15
OFFERING STATEMENT SUMMARY
Meridian Credit Union Limited (the “Credit Union”)
The Offering
Dividend Policy
Use of Proceeds
Risk Factors
Summary Financial Information
DETAILED OFFERING STATEMENT
The Credit Union
BUSINESS OF THE CREDIT UNION
Our Story
General Description of the Business
Personal Financial Services
Business Banking Services
Lending Services
Personal Loans
Residential Mortgages
Commercial Loans
Institutional Loans
Agricultural Loans
Unincorporated Association Loans
Syndicated Loans
Summary Lending Comments
Our Commitment to Communities
Bond of Association and Membership
Corporate Governance
Business Strategy
The Regulatory Framework
Central 1 Credit Union
Tier I and Tier II Regulatory Capital
Capital Adequacy
Additional Information
CAPITAL STRUCTURE OF THE CREDIT UNION
DESCRIPTION OF SECURITIES BEING OFFERED
Issue
Dividends
RRSP, RRIF and TFSA Eligibility
Rights on Distributions of Capital
Voting Rights
Redemption and Purchase for Cancellation
Restrictions on Transfer
Articles of Amalgamation
Canadian Federal Income Tax Considerations
RISK FACTORS
Enterprise Risk Management
Risks Specific to the Let’s Get Growing Class A Investment Shares, Series 15
Transfer and Redemption Restrictions
Capital Adequacy
Payment of Dividends
i
i
i
ii
ii
iii
iv
1
1
1
1
1
1
2
3
3
3
3
3
4
4
4
4
4
5
5
7
7
8
10
10
11
11
21
21
21
21
21
22
22
23
23
23
25
25
26
26
26
27
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page a
Enterprise Risks of the Credit Union
Credit Risk
Market Risk
Liquidity Risk
Structural Risk
Operational Risk
Member Risk
Strategic Risk
Other Risk Factors
Regulatory Action
Reliance on Key Management
Economic Risk
Competition Risk
Reputation Risk
DIVIDEND RECORD AND POLICY
USE OF PROCEEDS FROM SALE OF SECURITIES
PLAN OF DISTRIBUTION
MARKET FOR THE SECURITIES
SENIOR DEBT (RANKING AHEAD OF LET’S GET GROWING
CLASS A INVESTMENT SHARES, SERIES 15)
AUDITOR, REGISTRAR AND TRANSFER AGENT
DIRECTORS, EXECUTIVE LEADERSHIP TEAM AND OFFICERS
Board of Directors
Executive Leadership Team and Officers
LAWSUITS AND OTHER MATERIAL OR REGULATORY ACTIONS
MATERIAL INTERESTS OF DIRECTORS, OFFICERS AND EMPLOYEES
MATERIAL CONTRACTS
MANAGEMENT DISCUSSION AND ANALYSIS
Fiscal Year Ended December 31, 2014
Fiscal Year Ended December 31, 2013
Fiscal Year Ended December 31, 2012
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION
AUDITOR’S CONSENT
STATEMENT OF OTHER MATERIAL FACTS
BOARD RESOLUTION
CERTIFICATE
GLOSSARY OF TERMS
RELATED FORMS
Let’s Get Growing Class A Investment Shares, Series 15 – Sample Member Subscription Form
Let’s Get Growing Class A Investment Shares, Series 15 – Sample Business Member Subscription
Form
Let’s Get Growing Class A Investment Shares, Series 15 – Sample Conversion Request Form
Let’s Get Growing Class A Investment Shares, Series 15 – Sample Member Authorization to Place
Funds on Hold
Let’s Get Growing Class A Investment Shares, Series 15 – Sample Business Member Authorization
to Place Funds on Hold
Let’s Get Growing Class A Investment Shares, Series 15 – Sample Authorization to Place Funds
in Escrow
SCHEDULE A - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015
SCHEDULE B - AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 2014
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page b
27
27
27
28
29
31
32
33
33
33
33
34
34
35
36
37
38
40
40
41
42
42
43
44
44
45
52
52
74
84
92
93
94
95
96
97
102
103
104
105
106
107
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 beginning on page 97.
Meridian Credit Union Limited (the “Credit Union” or “Meridian”)
The Credit Union as it exists today was formed by the amalgamation, on June 1, 2011, of Meridian
Credit Union Limited and Desjardins Credit Union Inc. Meridian Credit Union Limited was itself the
result of an amalgamation, with effect from April 1, 2005, of Niagara Credit Union Limited and
HEPCOE Credit Union Limited, both of which were themselves the result of a series of purchases
and amalgamations since their original incorporations. Desjardins Credit Union Inc. was
incorporated on November 27, 2002 and began operations on April 1, 2003 when it acquired the
net assets of the Province of Ontario Savings Office. Meridian is now the largest credit union in
Ontario, and the fourth largest credit union in Canada.
The Credit Union serves more than a quarter million members through 68 branches and 7
commercial business centres located in a wide area of Ontario. The Credit Union’s head office is
located at 75 Corporate Park Drive, St. Catharines, Ontario, L2S 3W3, telephone: (905) 988-1000,
fax: (905) 988-9326. In addition, certain corporate office functions are conducted in an office
located in Toronto, Ontario. The Credit Union offers a full range of personal and business financial
products and services. See also “Business of the Credit Union”, on pages 1 through 4.
The Credit Union, as part of its ordinary course of business, from time to time enters into merger
and acquisition discussions with smaller credit unions, financial institutions and providers of other
financial services. However, as of the date hereof, no such discussions have resulted in the
management or Board of the Credit Union giving binding commitments to any third parties to
complete a merger or acquisition.
The Offering
The Credit Union offers for sale to its members, at $1.00 per share, Let’s Get Growing - Series 15,
Class A Special Shares (“Let’s Get Growing Class A Investment Shares, Series 15”), which are NonCumulative, Non-Voting, Non-Participating, redeemable special shares in the capital of the Credit
Union. Let’s Get Growing Class A Investment Shares, Series 15 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 5,000 to a maximum of 500,000
Let’s Get Growing Class A Investment Shares, Series 15. No member will be allowed to purchase,
at time of initial issuance, directly or indirectly through Beneficial Ownership of the shares, more
than the maximum 500,000 Let’s Get Growing Class A Investment Shares, Series 15. Subscription,
purchase and redemption of these shares are exclusively through the Credit Union’s offices. Let’s
Get Growing Class A Investment Shares, Series 15 are not redeemable for five years following their
issuance. All redemption requests after that date are subject to Board approval, which may,
subject to Applicable Law, including regulatory approval if required pursuant thereto, approve or
decline redemption requests. Redemption requests will be considered on a first-come, first-served
basis and are subject to an annual limit in a particular fiscal year of 10% of the number of the Let’s
Get Growing Class A Investment Shares, Series 15 issued and outstanding at the end of the prior
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 Union. Subject to Applicable Law, including
regulatory approval if required pursuant thereto, the Credit Union may, at its option, acquire the Let’s
Get Growing Class A Investment Shares, Series 15, 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 21 to 25.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page i
Subscriptions for the Let’s Get Growing Class A Investment Shares, Series 15 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 120,000,000 Let’s Get Growing Class A
Investment Shares, Series 15, or until the date on which the Board, having received subscriptions
for at least the minimum 60,000,000 Let’s Get Growing Class A Investment Shares, Series 15, but
not for the maximum 120,000,000 Let’s Get Growing Class A Investment Shares, Series 15, 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 Let’s Get Growing Class A Investment Shares,
Series 15 will qualify as Regulatory Capital, to the extent permitted and as defined in the Act.
Dividend Policy
The dividend policy of the Credit Union’s Board, as it relates to Let’s Get Growing Class A
Investment Shares, Series 15, is to apply a disciplined framework for the declaration and payment
of dividends which ensures that the Credit Union meets or exceeds both internal and regulatory
requirements pertaining to capital and liquidity after dividends are paid, while providing a beneficial
return to its members who hold the shares upon which the dividends are paid. The goal of the
policy is to provide a basis for confidence among members, depositors, creditors and regulatory
agencies that the Credit Union will not make a distribution of dividends that would place the Credit
Union’s financial position or ability to meet regulatory requirements in jeopardy. 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 shall consider whether or not a dividend shall be declared, the rate of that
dividend subject to the provisions on page 37 regarding the minimum dividend rate (not less than
4.00% for fiscal years ending on or before December 31, 2019) if such a dividend is declared, and
the manner in which it is paid, including whether in the form of additional Let’s Get Growing Class A
Investment Shares, Series 15, 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 minimum dividend rate will be reset at the final Board meeting in every
fifth fiscal year of the Credit Union after the fiscal year in which the shares are issued at a rate equal
to or greater than a rate which exceeds by 125 Basis Points the yield 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, w w w .bank-banque-canada.ca, for the month immediately preceding
the month in which the final Board meeting of the Credit Union’s fiscal year occurs. This dividend
policy is subject to change or exception at any time, at the Board’s discretion.
Dividends paid on Let’s Get Growing Class A Investment Shares, Series 15 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”.
Use of Proceeds
If fully subscribed, the gross proceeds of this issue will be $120,000,000. The costs of issuing these
securities are not expected to exceed $400,000, and these costs, approximating $328,400 after
applicable tax savings, will be netted against the shares’ value in Members’ Equity. The estimated
maximum net proceeds of this offering are $119,671,600. 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 future growth, development and stability, while maintaining a prudent cushion in the
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page ii
amount of Regulatory Capital above regulatory requirements. For more details about the business
strategy of the Credit Union, including plans for future growth, refer to the discussion beginning on
page 7.
Based on its total assets and regulatory capital as presented in the unaudited interim condensed
consolidated financial statements as at March 31, 2015 attached hereto as Schedule A, the Credit
Union's Leverage Ratio would increase to 6.89% if this offering is minimally subscribed and to
7.48% if fully subscribed. Based upon the Credit Union's March 31, 2015 balance sheet on page 2
of Schedule A, this offering would support additional asset growth of $1.5 billion if minimally
subscribed, and $3.0 billion if fully subscribed, while still maintaining the Leverage Ratio at no less
than 6.31%, well above the regulatory minimum requirement of 4%.
Risk Factors
Investments in the Let’s Get Growing Class A Investment Shares, Series 15 are subject to a
number of risks, including those specific to the Let’s Get Growing Class A Investment Shares,
Series 15 (regulatory redemption restrictions, capital adequacy requirements and the uncertainty of
dividend payments), enterprise risks applicable to the Credit Union (credit risk, market risk, liquidity
risk, structural risk, operational risk, member risk and strategic risk) and other risks (potential
regulatory actions, reliance on key management, economic risk, competition risk and reputation
risk). See “Risk Factors” beginning on page 25.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page iii
Summary Financial Information
This summary financial information should be read in conjunction with the more detailed
consolidated financial statements attached hereto as Schedules A and B, including the notes to
those statements, and the “Management Discussion and Analysis” beginning at page 52.
SUMMARY CONSOLIDATED BALANCE SHEET
As at
March 31, 2015
As at December
31, 2014
As at December
31, 2013
As at December
31, 2012
$
295,244
522
325
835,525
9,008,271
16,063
54,557
12,136
1,889
6,120
29,024
32,137
10,209
10,302,022
$
131,894
1,466
812,847
8,890,745
18,016
54,557
12,148
1,820
7,516
28,867
24,511
9,362
9,993,749
$
$
8,165,516
11,072
18,164
1,437,345
23,725
32,117
6,579
9,694,518
$
7,966,606
22,557
18,469
674
1,317,883
5,840
40,278
6,528
9,378,835
$
ASSETS
Cash and cash equivalents
Receivables
Current income taxes receivable
Investments - other loans and receivables
Loans to Members
Derivative financial assets
Investments available for sale
Investment in associates
Investment in joint venture
Intangible assets
Property, plant and equipment
Deferred income tax assets
Other assets
Total assets
$
$
$
146,260
3,133
770,137
8,100,734
23,984
51,762
19,208
1,849
9,794
26,505
22,085
8,247
9,183,698
$
404,537
3,228
1,455
705,456
7,470,676
22,816
48,983
24,952
1,785
10,885
25,682
16,903
7,991
8,745,349
LIABILITIES
Members' deposits
Borrowings
Payables and other liabilities
Current income taxes payable
Mortgage securitization liabilities
Derivative financial liabilities
Pension and other employee obligations
Membership shares
Total liabilities
$
7,407,479
1,812
38,514
2,197
1,114,852
282
29,439
6,452
8,601,027
$
7,168,152
1,761
42,106
965,648
101
34,313
6,396
8,218,477
MEMBERS' EQUITY
Members' capital accounts
Contributed surplus
Retained earnings
Accumulated other comprehensive (loss) income
Total equity attributable to Members
Total liabilities and Members' equity
$
243,205
104,761
280,900
(21,362)
607,504
10,302,022
$
236,845
104,761
277,709
(4,401)
614,914
9,993,749
$
226,884
104,761
250,516
510
582,671
9,183,698
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page iv
$
217,448
104,761
204,663
526,872
8,745,349
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page v
The following table presents summary financial performance indicators for the three-month period
ended March 31, 2015 and the fiscal years ended December 31, 2014, 2013 and 2012. These
figures are based on the unaudited interim condensed consolidated financial statements as at
March 31, 2015 attached hereto as Schedule A and the audited consolidated financial statements
as at each fiscal year-end. Figures provided as Basis Points (“bps”) are calculated on the basis of
average assets held during the period, calculated using a simple average of the opening and
closing total asset balances.
Financial Performance Indicators
Profitability
Total assets ($ thousands)
Profits attributable to Members ($ thousands)
Profits attributable to Members (annualized bp)
Net interest income (annualized bp)
Provision for credit losses (annualized bp)
Non-interest income (annualized bp)
Non-interest expenses (annualized bp)
Provision for income taxes (annualized bp)
Compliance with Capital Requirements
Risk-Weighted Assets Ratio
Minimum Risk-Weighted Assets Ratio requirement
Leverage Ratio
Minimum Leverage Ratio requirement
Loan Composition
Total gross loans outstanding ($ thousands)
Residential mortgages (% 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
Total Members' deposits ($ thousands)
Average liquidity (% of total deposits and borrowings)
Asset growth (% change)
Total Regulatory Capital ($ thousands)
Regulatory Capital growth (% change)
Three Months
Ended
March 31,
2015
Fiscal Year
Ended
December 31,
2014
Fiscal Year
Ended
December 31,
2013
Fiscal Year
Ended
December 31,
2012
10,302,022
10,346
40
188
8
48
176
4
9,993,749
44,429
46
195
7
47
181
6
9,183,698
56,625
63
197
7
48
171
3
8,745,349
23,801
29
210
41
51
189
2
12.76%
8.00%
6.31%
4.00%
13.16%
8.00%
6.40%
4.00%
13.44%
8.00%
6.61%
4.00%
12.69%
8.00%
6.32%
4.00%
9,046,187
56.97%
11.62%
31.42%
8,926,931
57.56%
11.67%
30.77%
8,138,565
57.26%
12.57%
30.17%
7,516,228
55.69%
12.88%
31.44%
0.42%
0.41%
0.46%
0.61%
8,165,516
11.25%
3.08%
649,436
1.59%
7,966,606
10.06%
8.82%
639,302
5.73%
7,407,479
10.61%
5.01%
604,669
10.59%
7,168,152
10.09%
11.52%
546,749
4.51%
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page vi
DETAILED OFFERING STATEMENT
The Credit Union
Meridian Credit Union Limited, as it exists today (the “Credit Union”), was formed by the
amalgamation, on June 1, 2011, of Meridian Credit Union Limited and Desjardins Credit Union Inc.
Meridian Credit Union Limited was itself the result of an amalgamation, with effect from April 1,
2005, of Niagara Credit Union Limited and HEPCOE Credit Union Limited, both of which were
themselves the result of a series of purchases and amalgamations since their original
incorporations. Desjardins Credit Union Inc. was incorporated on November 27, 2002 and began
operations on April 1, 2003 when it acquired the net assets of the Province of Ontario Savings
Office. Meridian is now the largest credit union in Ontario, and the fourth largest credit union in
Canada.
The Credit Union serves more than a quarter million members through 68 branches and 7
commercial business centres located in a wide area of Ontario. The Credit Union’s head office is
located at 75 Corporate Park Drive, St. Catharines, Ontario, L2S 3W3, telephone: (905) 988-1000,
fax: (905) 988-9326. In addition, certain corporate office functions are conducted in an office
located in Toronto, Ontario. The Credit Union offers a full range of personal and business financial
products and services. See also “Business of the Credit Union”, on pages 1 through 4.
The Credit Union, as part of its ordinary course of business, from time to time enters into merger
and acquisition discussions with smaller credit unions, financial institutions and providers of other
financial services.
However, as of the date hereof, no such discussions have resulted in the
management or Board of the Credit Union giving binding commitments to any third parties to
complete a merger or acquisition.
BUSINESS OF THE CREDIT UNION
Our Story
We exist to grow the lives of our members and improve the communities we live in. Our job
is to always have our members’ back. We put our members' interests first and get to know
them so we can be proactive and inform them of financial solutions that are in their best interest.
Our employees also have the power to make most decisions locally so they don't have to wait for
permission from head office to make a decision that will affect our member’s life.
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 and small businesses include Canadian and U.S.
dollar savings and chequing accounts and a variety of Canadian and U.S. dollar term deposit
products in both long terms of one to five years and short terms of 30 to 364 days.
Investment services include various types of investment vehicles, including mutual funds, equities
and bonds, offered through an arrangement with Credential Financial Inc., outlined at page 48
hereof, and online brokerage services offered through an arrangement with QTrade Investor,
outlined at page 49 hereof. As at March 31, 2015, these arrangements had enabled members of
the Credit Union to invest $1,494,070,747 in these investment vehicles.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 1
Registered investment options include registered retirement savings plans (“RRSPs”), registered
retirement income funds (“RRIFs”), tax-free savings account (“TFSAs”), and registered education
savings plans (“RESPs”). All registered investments are administered, held, and trusteed by the
Credit Union as applicable, with the exception of those plans holding Class A Investment Shares of
the Credit Union, which are being trusteed by Concentra Trust, a wholly owned subsidiary of
Concentra Financial Services Association (“Concentra Financial”), and RESPs, which are
administered and trusteed by Concentra Trust.
The Credit Union leases 91 Automated Banking Machines (“ABMs”) under an agreement with
DirectCash Payment Inc., which are located throughout its branch network. There is at least one
ABM at every Credit Union branch. The Credit Union is also linked to the Interac and Cirrus System
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
and Canada. In addition, members have the option of conducting transactions using the Credit
Union’s internet, mobile and telephone banking channels. For more details about the Credit Union’s
ABM service agreement with DirectCash Payment Inc. see the discussion at page 47 hereof.
The Credit Union offers a MasterCard credit card through an arrangement with CU Electronic
Transaction Services (“CUETS”), outlined at page 48 hereof. The Credit Union does not hold the
accounts receivable owing from its credit card holders.
Business Banking Services
The Credit Union also provides financial products and services to meet the investment and cash
management needs of its business members. Commercial financial products for businesses
include Canadian and U.S. dollar savings and chequing accounts and a variety of Canadian and
U.S. dollar redeemable and non-redeemable term deposit products in both long terms of one to
five years and short terms of 30 to 364 days.
A number of cash management solutions are also offered through the Credit Union such as online
banking platforms for commercial businesses and small businesses, automated funds transfers to
provide members with pre-authorized payments or electronic payroll and wire transfers giving
members the ability to send and manage payments in any major currency worldwide. Dedicated
cash management specialists are available to help implement structured cash management
protocols and products with members. The Credit Union also offers merchant services to its
business members through a partnership with Chase Paymentech, which allows members to
accept MasterCard®, VISA®, American Express® and INTERAC®, enabling them to provide their
customers with a range of payment options.
A payroll processing service is also available to business members through a partnership with
Payworks Canada Inc. Payworks provides a cloud-based workforce management solution that
covers everything from payroll processing to time management and human resource solutions.
The Credit Union offers a business MasterCard credit card through the same arrangement with CU
Electronic Transaction Services (“CUETS”) discussed in the “Personal Financial Services” section at
page 1 hereof. Similarly, the Credit Union does not hold the accounts receivable owing.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 2
Lending Services
The Credit Union, being 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 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 all types of loans.
Personal Loans
Personal Loans consist of instalment loans, demand loans, lines of credit and bridge loans. The
Credit Union’s lending policy prevents it from making aggregate unsecured Personal Loans of
more than 60% of the Credit Union’s Regulatory Capital. As at March 31, 2015, the Credit Union’s
Personal Loan portfolio totalled $622,678,471.
Residential M ortgages
The Credit Union offers Mortgage Loans to its members. It grants Mortgage Loans to individuals
according to conventional mortgage lending standards for residential property. As of March 31,
2015, approximately 48% of the Credit Union’s portfolio of Mortgage Loans consists of
conventional mortgages; the remainder are high-ratio mortgages insured by the Canada Mortgage
and Housing Corporation, Canada Guaranty and Genworth Financial Canada (“Genworth”).
Canada Guaranty and Genworth are fully self-sustaining and maintain assets and capital which
meet and exceed all requirements as regulated by the Office of the Superintendent of Financial
Institutions. These assets are held in Canada for the Canadian mortgage insurance business. Both
insurers are backstopped by a Government of Canada guarantee. As at March 31, 2015, the Credit
Union’s portfolio of Mortgage Loans totalled $5,342,637,674. As at March 31, 2015, the Credit
Union’s members had $1,443,284,790 outstanding in Mortgage Loans, included in the
aforementioned portfolio total, which had been securitized by the Credit Union through the
securitization programs discussed at page 45 hereof.
Com m ercial Loans
Commercial Loans consist of mortgages, term loans and operating lines of credit to small- and
medium-sized businesses, and mortgages that do not meet the definition of a Mortgage Loan
because the property is a non-owner-occupied, multi-unit residential or non-residential property.
Aggregate Commercial Loans to a related group of companies are limited to 14% of the Credit
Union’s Regulatory Capital. The total portfolio of Commercial Loans, Institutional Loans and
Agricultural Loans are limited to the lesser of 600% of the Credit Union’s Regulatory Capital or 42%
of all loans recorded on the Credit Union’s balance sheet. As at March 31, 2015, the Credit Union’s
Commercial Loan portfolio totalled $2,956,420,206.
Institutional Loans
Institutional Loans are loans to the federal or a provincial or municipal government or governmental
agency, a school board, or an entity funded primarily by the federal or a provincial or municipal
government. Institutional Loans are limited to 14% of the Credit Union’s Regulatory Capital
individually, and 100% of the Credit Union’s Regulatory Capital in the aggregate. As at March 31,
2015 the Credit Union’s Institutional Loan portfolio totalled $405,145.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 3
Agricultural Loans
Agricultural Loans consist of mortgages, term loans and operating lines of credit to all types of
agricultural businesses. Aggregate Agricultural Loans to a connected group of companies are
limited to 14% of the Credit Union’s Regulatory Capital. The total portfolio of Commercial Loans,
Institutional Loans and Agricultural Loans are limited to the lesser of 600% of the Credit Union’s
Regulatory Capital or 42% of all loans recorded on the Credit Union’s balance sheet. As at March
31, 2015, the Credit Union’s Agricultural Loan portfolio totalled $92,527,100.
Unincorporated Association Loans
Unincorporated Association Loans consist of any loan made to an unincorporated association.
Unincorporated associations are not recognized legally as persons, and therefore loans to such
associations need to be carefully made and secured. As at March 31, 2015, the Credit Union’s
Unincorporated Association Loan portfolio totalled $868,832.
Syndicated Loans
Syndicated Loans are loans made by the Credit Union along with 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
maximum overall size of a syndication that the Credit Union may participate in is $100,000,000,
unless the syndication is being led by one of the six largest Schedule 1 banks, Caisse Centrale
Desjardins du Quebec or Concentra Financial, in which case the maximum overall size is
$150,000,000, with the Credit Union’s share of the loan being subject to the lending policies
described under Commercial Loans at page 3 hereof. As at March 31, 2015, the Credit Union’s
Syndicated Loan portfolio totalled $239,545,577.
Sum m ary Lending Com m ents
For further information regarding any of these loan portfolios, see the “Management Discussion
and Analysis” beginning on page 52, note 4 in the Credit Union’s interim condensed consolidated
financial statements beginning on page 7 of Schedule A hereto, and also note 8 in the Credit
Union’s audited consolidated financial statements beginning on page 17 of Schedule B hereto.
Our Commitment to Communities
The Credit Union, as a leader of Ontario’s co-operative sector, exists to help lives grow. One of the
ways we help lives grow is through Meridian’s Commitment to Communities. We uphold this
commitment to help build our local communities across Ontario, where we can all grow and have
better, more prosperous lives. As part of our commitment, we will invest at least 4% of our pre-tax
earnings (based on a 5 year rolling average) in money and in-kind resources communities the
Credit Union serves, following London Benchmarking Group (LBG) Canada guidelines.
Under our Commitment to Communities, we are continuously working towards five key goals:
1.
Improving Financial Literacy
2.
Engaging our Employees
3.
Investing in Local Communities
4.
Contributing to a Healthier Environment
5.
Supporting a Strong Co-op Sector
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 4
Bond of Association and Membership
The Act and accompanying Regulations specify a bond of association must exist among
members. Typically, such bonds of association may be community-based, employer-based, or
otherwise based on a group of owners with a form of common association. Currently, the Credit
Union’s bond of association is a broad geographic one, including everyone residing or working in
any Canadian province or territory.
At the annual general meeting of the Credit Union on April 21, 2015, the members of the Credit
Union voted to amend the by-laws of the Credit Union to adopt this new, broader bond of
association, which was previously limited to everyone residing or working in the province of
Ontario. At a time when deposit attraction is critical to the growth of credit unions, the Credit Union
is desirous of being able to gather deposits from across Canada, and this broader geographic
bond of association will enable the Credit Union to continue working towards making this a reality.
The Credit Union’s bond of association also permits a member who once qualified under the bond
of association but no longer does to remain a member. The Credit Union also permits those not
qualifying for membership under its bond of association to become members, but the number of
such members cannot exceed 3% of the membership of the Credit Union, and the admission of all
such members must be approved by the Board. Certain entities (i.e., corporations, partnerships,
and government ministries and agencies) may also become members.
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. The membership by-law currently requires
each member who is a person of the age of 18 years or older to hold 5 five-dollar Membership
Shares of the Credit Union, and each member who is under the age of 18 years to hold two fivedollar Membership Shares of the Credit Union.
At the annual general meeting of the Credit Union on April 21, 2015, the members of the Credit
Union voted in favour of a series of steps that effectively reduce the minimum share capital
required for membership to 1 one-dollar Membership Share of the Credit Union. As the Credit
Union continues to grow its membership base, the required 25 dollars in Membership Shares has
become a barrier to this growth. The Board and senior management of the Credit Union are of the
opinion that effectively reducing the Membership Shares required to one dollar would eliminate a
potential barrier to joining the Credit Union. The reduction in the Regulatory Capital of the Credit
Union as a result of this change will not put it in contravention of any capital adequacy requirements
as set by management, the Board or the Act. The approved corporate steps were submitted to
FSCO, and received approval by said Commission on June 3rd, 2015. The Credit Union is currently
working towards implementing this change.
Corporate Governance
The business of the Credit Union is directed and governed by its Board, a group of 12 individuals
who are elected prior to the annual general meeting of the Credit Union pursuant to a procedure
outlined in the Credit Union’s by-laws, by the members of the Credit Union who have attained the
age of 18 years as of the record date for receipt of notice of the membership meeting at which the
election results will be announced. 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 vote for the Credit Union’s Board.
At the annual general meeting of the Credit Union on April 21, 2015, the members of the Credit
Union voted to amend the articles of amalgamation of the Credit Union as they pertain to the size
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 5
of the Board of Directors from a fixed number of twelve to a range of between seven and eighteen
directors. This change will provide flexibility that at some future time the Board could seek a by-law
amendment to either reduce or increase the size of the Board. The approved changes to the
articles of amalgamation of the Credit Union were submitted to FSCO, and received approval by
said Commission on June 3rd, 2015.
The Board has established committees to assist in its effective functioning and to comply with the
requirements of the Act. All committees with the exception of the Nominating Committee require a
minimum of three Directors, with the Nominating Committee requiring a minimum of four.
The Audit & Finance Committee’s mandate and duties are set out in the Regulations to the Act.
The Audit & Finance 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 Audit & Finance Committee also acts on behalf of the Board to ensure effective
oversight of internal and external audit processes and monitoring the independence of the external
auditor, as well as ensuring that all regulatory compliance issues have been identified and
addressed, while identifying any items that may require further work.
The Governance Committee of the Board is responsible for the effective governance of the Credit
Union, and for ensuring that its governance processes are characterized by a spirit of trust,
teamwork, transparency and professionalism. It is also responsible for assessing the performance
of the Board and its Committees.
The Risk Committee of the Board is responsible for ensuring that robust processes for identifying,
managing and monitoring critical risks in the Credit Union are in place. Oversight of all enterprise
risks (see discussion starting on page 27) to ensure that they are at an acceptable level is also a
responsibility, as well as the establishment of a risk appetite framework and monitoring of same
(see discussion starting on page 62). Restricted party transaction review and approval as required
under the Credit Unions and Caisses Populaires Act, 1994 and related regulations also rests with
this Committee.
The Nominating Committee is responsible for overseeing the director nomination, evaluation,
selection and election process for Board candidates, as well as the oversight of activities
associated with the annual general meeting of members, including the annual report.
The Human Resources Committee is responsible for overseeing the Credit Union’s human
resource policies and programs; ensuring that they are developed, implemented and adhered to
by management in support of the business strategies of the Credit Union; and providing
employees with fair and meaningful employment in a safe and respectful workplace, while
remaining consistent with the Credit Union’s “story” and strategy of being an Employer of Choice.
The Human Resources Committee additionally has oversight of the employee pension plans; the
Chief Executive Officer’s performance and compensation; succession planning for the CEO and
Executive Leadership Team, and oversight of director compensation.
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 it directs the
activities of senior management, to whom it has delegated certain responsibilities according to
Board policies. The Credit Union has an Executive Leadership Team as outlined on page 43 of the
offering statement. The Credit Union has 1,369 employees, consisting of 1,070 full-time and 299
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 6
part-time employees, the part-time employees equating to approximately 211 full-time positions.
For the names, municipality of residence, offices with the Credit Union and the present principal
occupations of the directors, Executive Leadership Team and officers of the Credit Union as of the
date of this offering statement, see “Directors, Executive Leadership Team and Officers”, beginning
on page 42 of the offering statement.
The duties, powers and standards of care and performance for boards of directors, officers and
committee members of credit unions are specified in the Act and the regulations passed pursuant
to it, and include a duty to act honestly, in good faith, and with a view to the best interest of the
credit union, and to exercise the degree of care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances.
Business Strategy
The Credit Union strives to be the leader in member-centric financial services in the Canadian
market. In pursuing this strategy, the Credit Union utilizes two primary planning horizons.
The Credit Union’s ten year vision has a dual focus and dwells on expanding the boundaries of its
business model and markets. The ten year vision is underpinned by the Credit Union’s Corporate
Strategy Map, which was developed in 2012, and establishes a differentiated member experience,
competitive access and competitive awareness as the three “must-haves” to achieve leadership in
member-centric banking.
The Credit Union’s three-year Strategic Plan is rolled forward and refreshed annually by senior
management and the Board. It is based on six medium term strategic objectives that support the
long-term goal of the Credit Union and its ability to deliver on what we call Our Story. These
objectives are as follows:
1.
Deliver a Differentiated Member Experience
2.
Building the Brand
3.
Expanding Member Access
4.
Sustainable Growth
5.
Creating an Ownership Culture
6.
Technology and Information Management
A primary focus over the 2015 – 2017 timeframe is significant investment in the GTA region to
expand the Credit Union’s presence in this key Ontario market. The expectation is to open up to 10
new branches annually over each of the three years in the GTA region. The Credit Union has also
entered into a pilot project with the Co-operators Group Limited which will see a number of the
new GTA branches located side-by-side with Co-operators agencies, providing a differentiated
experience focused on convenience, access, and co-operative values, in an effort to appeal to a
younger, busier, more urban, and time-pressured demographic.
In addition to the more detailed business strategy discussed above, the Credit Union, as part of its
ordinary course of business, from time to time enters into merger and acquisition discussions with
smaller credit unions, financial institutions and providers of other financial services. However, as of
the date hereof, no such discussions have resulted in the management or Board of the Credit
Union giving binding commitments to any third parties to complete a merger or acquisition.
The Regulatory Framework
Ontario credit unions are regulated through a comprehensive regulatory framework which involves
Ontario’s Ministry of Finance, FSCO and the Deposit Insurance Corporation of Ontario (“DICO”).
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 7
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 Ministry of Finance is responsible for developing and establishing the legislative and
regulatory framework under which credit unions must operate. FSCO is responsible for ensuring
that credit unions operate in accordance with the requirements of the Act, particularly with respect
to matters involving market conduct issues relating to members and the general public. DICO is
responsible for overseeing compliance with solvency rules and for providing deposit insurance
protection for deposits held in Ontario credit unions up to prescribed limits. As part of this
responsibility, DICO has the authority to issue by-laws to ensure that insured institutions operate in
accordance with Sound Business and Financial Practices.
Among DICO’s duties under the Act 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. Credit unions that 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. See also “Capital Adequacy” on page 10 hereof.
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 able to impose certain requirements as a
condition of continuing its deposit insurance coverage and, in the event that a credit union fails to
comply and is believed to represent a threat to the deposit insurance fund, it has broader power to
take corrective action. Such corrective action may include placing the credit union under
Supervision or placing the credit union under Administration, should circumstances so warrant. 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. DICO has rated the Credit Union under its differential premium system
based on the Credit Union’s audited December 31, 2014 financial results, enabling calculation of the
Credit Union’s deposit insurance premium, and its insurance is in place and in good standing for
the fiscal year ending December 31, 2015.
Central 1 Credit Union
Each province in Canada has one or more central credit unions that serve their member credit
unions in the province. In Ontario, this role is played by 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 84 member credit unions in Ontario and 43 member credit unions in 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 overdraft facilities, demand loans, and term loans at fixed and
variable rates.
Central 1 also undertakes government relations, economic forecasting, and market research and
planning.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 8
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 of its total assets relative to 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 March 31, 2015, the Credit Union’s membership in
Central 1 is in good standing.
As a pre-condition of the merger to form Central 1, CUCO was required to divest itself of investments
in certain third party asset-backed commercial paper (“ABCP”). The resolution approved the creation
of a limited partnership (the “Partnership”) to acquire these investments funded by member credit
unions in proportion to their share investment in CUCO. As a result, on July 1, 2008, immediately prior
to the merger of CUCO and CUCBC, the excluded ABCP with a total par value of $186,916,000 was
acquired by the Partnership at its estimated fair value of $133,564,000 including accrued interest, net
of expenses, and other assets. As there was no liquid market in these ABCP investments, the fair
values used to determine the acquisition price were provided by Edenbrook Hill Capital Ltd., a firm
engaged by CUCO to provide an independent valuation of these assets underlying the ABCP
investments.
Members of CUCO were required to purchase units in the Partnership based on their proportionate
share ownership in CUCO prior to the date of the merger. As a result, the Credit Union was required to
purchase units in the Partnership with a total fair value of $29,382,743 on the acquisition date.
In January 2009, a 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 18, 2011, a restructuring of CUCO resulted in the discontinuance of CUCO as a
regulated financial institution and its continuance as a cooperative under the Canada Cooperative
Associations Act (the continued entity referred to as “CUCO Co-op”). A second component of that
restructuring was for CUCO Co-op to purchase the RABN investments and certain other assets
and liabilities from the Partnership.
As the Credit Union’s investment in CUCO Co-op is subject to significant influence by the Credit Union,
it is accounted for using the equity method of accounting. CUCO Co-op has designated the RABNs as
held for trading and accordingly they are recorded at fair values which are based on quoted market
prices from a liquid market, wherever possible. In the event a liquid market does not exist, fair values
are obtained through the use of various valuation techniques and models based on reasonable and
supportable assumptions that a third-party market participant would use in making that determination.
As at March 31, 2015 the Credit Union has recorded the equity value of its investment at $12,136,413 in
its unaudited consolidated financial statements, net of past distributions and a permanent impairment
in the value of the RABNs.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 9
Tier I and 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 (i.e., 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 I capital qualifies as
Regulatory Capital under all three definitions (i.e., is permanent, creates no fixed charges against
the credit union’s income, and is subordinate to its members’ deposits). Tier II capital, in general,
meets only two of the three definitions (i.e., it might be permanent, and subordinate to the
members’ deposits, but have a cumulative dividend feature). Included in Tier I capital are the Credit
Union’s Membership Shares, retained earnings, contributed surplus and that portion of the Class A
Shares, 50th Anniversary Series, Series 98, 01, 09 and Let’s Get Growing - Series 15 which are not
eligible to be redeemed in the twelve months following the date of the determination (i.e., 90% of
the 50th Anniversary Series, Series 98, 01, 09 due to the 10% maximum redemption feature and
100% of these Let’s Get Growing – Series 15 due to the five year restriction on redemptions). The
Tier 2 capital of the Credit Union includes the Class A Shares, Series 96, and any Class A Shares,
50th Anniversary Series, Series 98, 01, 09 and Let’s Get Growing - Series 15 which are eligible for
redemption in the twelve months following the date of determination (i.e., 10% of the 50th
Anniversary Series, Series 98, 01 and 09), and a portion of the Credit Union’s non-specific loan loss
allowance. General regulations passed pursuant to the Act prohibit a credit union from including, to
the extent that its Tier II capital exceeds its Tier I capital, the excess Tier II capital as Regulatory
Capital. Since the Credit Union’s Capital Management Policy requires that Tier I capital be, at
minimum, 60% of total capital, both its Tier I capital and also its Tier II 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 Let’s Get Growing Class A Investment
Shares, Series 15, as Regulatory Capital.
Capital Adequacy
As at March 31, 2015 and December 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 vi of the offering statement.
Based on the total assets and regulatory capital as presented in the unaudited interim condensed
consolidated financial statements as at March 31, 2015 attached hereto as Schedule A, the Credit
Union's Leverage Ratio would increase to 6.89% if this offering is minimally subscribed and to
7.48% if fully subscribed. Based upon the Credit Union’s March 31, 2015 balance sheet, on page 2
of Schedule A, this offering would support additional asset growth of $1.5 billion if minimally
subscribed, and $3.0 billion if fully subscribed, while still maintaining the Leverage Ratio at no less
than 6.31%, well above 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
$769,436,000. 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
$19,235,900,000. Subtracting from this level of assets the Credit Union’s total assets as reported
on its unaudited March 31, 2015 balance sheet indicates that the Credit Union could grow by
$8,943,575,000 if this offering is fully subscribed. Of this amount, $3.0 billion is attributable to the
full subscription of these shares and the remaining $5,943,575,000 billion is attributable to current
Regulatory Capital levels in excess of the minimum requirements. The Credit Union’s Leverage
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 10
Ratio in this case will be 7.48%, assuming no growth from the assets reported on the Credit
Union’s unaudited consolidated financial statements as at March 31, 2015.
If this offering is only minimally subscribed, however, the Credit Union will have Regulatory Capital of
$709,436,000. 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
$17,735,900,000. Subtracting from this level of assets the Credit Union’s total assets as reported
on its unaudited March 31, 2015 balance sheet indicates that the Credit Union could grow by
$7,443,575,000 if this offering is minimally subscribed. Of this amount, $1.5 billion is attributable to
the minimal subscription of these shares and the remaining $5,943,575,000 billion is attributable to
current Regulatory Capital levels in excess of the minimum requirements. The Credit Union’s
Leverage Ratio in this case would be 6.89%, assuming no growth from the assets reported on the
Credit Union’s unaudited consolidated financial statements as at March 31, 2015.
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 Let’s Get Growing Class A Investment
Shares, Series 15, as Regulatory Capital, or the minimum required Leverage Ratio and RiskWeighted Assets Ratio.
Additional Information
For more information regarding the Credit Union’s operations, see “Management Discussion and
Analysis” beginning on page 52, the interim condensed consolidated financial statements as at
March 31, 2015 attached hereto as Schedule A, and the audited consolidated financial statements
attached hereto as Schedule B.
CAPITAL STRUCTURE OF THE CREDIT UNION
The Credit Union has four classes of shares in its capital structure: Membership Shares, Class A
Special Shares (the “Class A Shares”), Class B Special Shares (the “Class B Shares”) and a Class C
Special Share (the “Class C Share”), of which the Class A Shares and the Class B Shares are
issuable in series. The Credit Union has created and authorized six series of Class A Shares, called
the 50th Anniversary Series, Series 96, Series 98, Series 01, Series 09 and Let’s Get Growing Series 15 of the Class A Shares (the “Class A Investment Shares, 50th Anniversary Series”, the
“Class A Investment Shares, Series 96”, the “Class A Investment Shares, Series 98”, the “Class A
Investment Shares, Series 01”, the “Class A Investment Shares, Series 09”, and the “Let’s Get
Growing Class A Investment Shares, Series 15”, respectively). The Credit Union does not currently
have any Class B Shares issued or outstanding. The Class C Share was issued as part of the
amalgamation between the Credit Union and Desjardins Credit Union Inc. and was subsequently
cancelled. No additional Class C Shares may be issued by the Credit Union.
The following represents a summary of the rights of the Membership Shares, the Class A
Investment Shares, 50th Anniversary Series, the Class A Investment Shares, Series 96, the Class A
Investment Shares, Series 98, the Class A Investment Shares, Series 01 and the Class A
Investment Shares, Series 09 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, conversion, voting, and treatment of shares as Regulatory Capital. Information on the
Class A Investment Shares, Let’s Get Growing - Series 15 follows on page 21 under the heading
“Description of Securities Being Offered”:
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 11
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 12
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 13
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 14
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 15
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 16
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 17
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 18
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 19
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 20
DESCRIPTION OF SECURITIES BEING OFFERED
Let’s Get Growing Class A Investment Shares, Series 15
Issue
Let’s Get Growing Class A Investment Shares, Series 15, issuable at $1.00 each, will only be issued
to members of the Credit Union, to RRSPs or 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 member must be at least 18 years of age to purchase Let’s Get Growing Class A
Investment Shares, Series 15. For clarity, legal persons (i.e., corporations, partnerships, and trusts)
who are members of the Credit Union may purchase Let’s Get Growing Class A Investment
Shares, Series 15.
Dividends
The holders of Let’s Get Growing Class A Investment Shares, Series 15, are entitled, in preference
to the Class B Shares and to the Membership Shares, but equally with the holders of all other
series of Class A Shares, including the Class A Investment Shares, 50th Anniversary Series, Series
96, Series 98, Series 01 and Series 09, to receive dividends if, as and when declared by the Board.
Holders of the Let’s Get Growing Class A Investment Shares, Series 15, 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 Let’s Get Growing Class A Investment
Shares, Series 15, or in a combination of both, and on such terms as may be determined from time
to time by the Board, subject to Applicable Law. The payment of dividends in additional Let’s Get
Growing Class A Investment Shares, Series 15 shall be permitted even if such payment of
dividends shall result in the holder having Beneficial Ownership of more than 500,000 Let’s Get
Growing Class A Investment Shares, Series 15, which is the maximum number of these shares that
a member may acquire pursuant to this initial offering or in any subsequent purchase of these
shares from another member. Dividends will be paid in whole dollar amounts (rounded up to the
nearest dollar).
For more details about the Credit Union’s dividend policy regarding Let’s Get Growing Class A
Investment Shares, Series 15, see the discussion starting on page 37.
RRSP, RRIF and TFSA Eligibility
Concentra Trust will accept Let’s Get Growing Class A Investment Shares, Series 15, purchased in
this offering to be contributed to a member’s RRSP, RRIF or TFSA. A member holding shares in his
or her RRIF will be responsible for ensuring that there are assets in the RRIF other than the Let’s
Get Growing Class A Investment Shares, Series 15 to satisfy the minimum statutory withdrawal
requirement for the RRIF annually. The proceeds of redemption or transfer of Let’s Get Growing
Class A Investment Shares, Series 15 held in an RRSP, RRIF or TFSA will remain inside that RRSP,
RRIF or TFSA unless the annuitant or holder specifically requests otherwise in writing.
Rights on Distributions of Capital
On liquidation or dissolution, holders of Let’s Get Growing Class A Investment Shares, Series 15, will
be paid the Redemption Amount for each such share held, in priority to the Class B Shares, the
Class C Share and to the Membership Shares, and rateably with the holders of all other series of
Class A Shares, including the Class A Investment Shares, 50th Anniversary Series, Series 96, Series
98, Series 01 and Series 09, but after provision for payment of all the Credit Union’s other debts
and obligations. Holders of Let’s Get Growing Class A Investment Shares, Series 15, shall not
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 21
thereafter be entitled, as holders of Let’s Get Growing Class A Investment Shares, Series 15, 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 B Shares, the Class C Share or
Membership Shares. Distributions regarding Let’s Get Growing Class A Investment Shares, Series
15 held in an RRSP, RRIF or TFSA will remain in that RRSP, RRIF or TFSA unless the annuitant or
holder specifically requests otherwise in writing.
Voting Rights
The Let’s Get Growing Class A Investment Shares, Series 15, 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, 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, the proposed
continuance of the Credit Union as another type of Ontario entity or an entity under the laws of
another jurisdiction, or a proposed resolution which affects the rights attaching to the Let’s Get
Growing Class A Investment Shares, Series 15, the Credit Union shall hold a special meeting of the
holders of Let’s Get Growing Class A Investment Shares, Series 15, which may be held separately
from the special meeting of the holders of any other series of Class A Shares, including the Class A
Investment Shares, 50th Anniversary Series, Series 96, Series 98, Series 01 and Series 09, if their
rights are affected differently from those of the holders of any other series of Class A Shares. The
holders of Let’s Get Growing Class A Investment Shares, Series 15, shall have one vote per Let’s
Get Growing Class A Investment Share, Series 15 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 the
Credit Union’s capital structure, will also be required.
Redemption and Purchase for Cancellation
Holders of Let’s Get Growing Class A Investment Shares, Series 15, may not request that the
Credit Union redeem the shares they hold until six months prior to the fifth anniversary of the Issue
Date. Furthermore, no redemptions may occur until the fifth anniversary of the Issue Date, except
in the case of the death of a holder of the shares or the expulsion of a member from membership,
in which case the executors or personal representatives of the deceased holder or the expelled
member shall be entitled to request redemption. All redemptions are subject to the aggregate
limits detailed below and Applicable Law.
Approval of any redemption request is subject to approval by the Board, and subject to any
approval by a regulator if required pursuant to Applicable Law. 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 Let’s Get Growing Class A Investment
Shares, Series 15, in any fiscal year exceed an amount equal to 10% of the total Let’s Get Growing
Class A Investment Shares, Series 15, outstanding at the end of the previous fiscal year. The Board
will approve redemption requests monthly on a first come, first served basis, as evidenced by the
time and date to be marked on each request when received by the Credit Union, subject to
Applicable Law. Redemption requests not fulfilled during one fiscal year will be carried forward and
considered in the following fiscal year.
At any time after the fifth anniversary of the Issue Date, the Credit Union has the option of
purchasing for cancellation, at the Redemption Amount, all or any portion of the Let’s Get Growing
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 22
Class A Investment Shares, Series 15 then outstanding, subject to Applicable Law, after giving at
least 21 days’ notice of its intent to purchase for cancellation. If the Credit Union purchases for
cancellation only a portion of the Let’s Get Growing Class A Investment Shares, Series 15 then
outstanding, the Credit Union must purchase for cancellation such Let’s Get Growing Class A
Investment Shares, Series 15, pro rata from all holders of such shares at that time. The proceeds of
any purchase for cancellation of Let’s Get Growing Class A Investment Shares, Series 15 held
inside an RRSP, RRIF or TFSA will remain inside the RRSP, RRIF or TFSA unless the annuitant or
holder specifically requests otherwise in writing.
Purchasers of Let’s Get Grow ing Class A Investm ent Shares, Series 15, w ho are
intending to include such shares in an RRSP or RRIF contract should carefully review
the above redem ption and purchase for cancellation provisions before proceeding. A
m em ber holding Let’s Get Grow ing Class A Investm ent Shares, Series 15 i n a RRIF
will be responsible for ensuring there are sufficient other assets in the RRIF to satisfy
the m inim um statutory w ithdraw al requirem ent for the RRIF annually.
Restrictions on Transfer
Let’s Get Growing Class A Investment Shares, Series 15, may not be transferred except to another
member of the Credit Union. Transfers will be subject to the approval of the Board and Applicable
Law. 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. Let’s Get Growing Class A Investment
Shares, Series 15 will be transferred to other members at a price equal to the then current
Redemption Amount. The proceeds of disposition of Let’s Get Growing Class A Investment
Shares, Series 15 held inside an RRSP, RRIF or TFSA will remain inside that RRSP, RRIF or TFSA
unless the annuitant or holder specifically requests otherwise in writing.
No member, through transfers of Let’s Get Growing Class A Investment Shares, Series 15 from
other members, will be permitted to hold, directly or indirectly through Beneficial Ownership of the
shares, more than 500,000 Let’s Get Growing Class A Investment Shares, Series 15, which is the
maximum number of these shares that a member may acquire pursuant to this initial offering.
There is no external m arket for the Let’s Get Growing Class A Investm ent Shares,
Series 15 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 Let’s Get Growing Class A Investment Shares, Series 15 requests
redemption; this procedure will not apply when a holder of Let’s Get Growing Class A Investment
Shares, Series 15, or his or her estate, is required by law to transfer the shares to another member
of the Credit Union (i.e., by the Will of a deceased shareholder).
Articles of Amalgamation
Prospective purchasers of Let’s Get Growing Class A Investment Shares, Series 15 may obtain, on
request at the registered office of the Credit Union, a copy of the articles of amalgamation, and the
Special Resolutions of the members and the resolutions of the Board which amended its articles of
amalgamation. These documents define its share capital structure, including the full terms and
conditions of the Let’s Get Growing Class A Investment Shares, Series 15.
Canadian Federal Income Tax Considerations
The following summary, prepared by management, outlines the principal Canadian federal income
tax consequences applicable to a holder of a Let’s Get Growing Class A Investment Shares, Series
15 who acquires the share pursuant to this offering and who, for the purposes of the Income Tax
Act (Canada) (the “Income Tax Act”), is resident in Canada and holds the share as capital property.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 23
This summary is based on the facts contained in this offering statement and based upon
management’s understanding of the provisions of the Income Tax 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 Income Tax 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 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. I NVESTORS ARE CAUTIONED THAT THIS COM M ENTARY IS OF A GENERAL
NATURE ONLY AND IS NOT INTENDED TO CONSTITUTE ADVICE TO ANY
PARTICULAR INVESTO R. INVESTORS SHOULD SEEK INDEPENDENT ADVICE FROM
THEIR OW N TAX ADVISORS .
Dividends
A holder of a Let’s Get Growing Class A Investment Shares, Series 15, 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 A Investment Share 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 Let’s Get Growing Class A Investment Shares, Series 15, 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 Let’s Get Growing Class A Investment
Shares, Series 15. This interest must be included in computing the income of the holder in
the year of redemption. Due to the redemption features of the Let’s Get Growing Class A
Investment Shares, Series 15, it would be highly unlikely for the redemption proceeds to
exceed the paid-up capital of the share. In this situation, the holder of the shares is
encouraged to seek independent tax advice. 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 Let’s Get Growing Class A Investment Shares, Series 15 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
Let’s Get Growing Class A Investment Shares, Series 15 and reasonable disposition costs.
One-half of the capital gain is included in computing the income of the holder of the Let’s
Get Growing Class A Investment Shares, Series 15 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
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 24
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 20 taxation years.
The Let’s Get Growing Class A Investment Shares, Series 15, 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 until the share is disposed to an
arm’s length person. Interest expense related to shares transferred to an RRSP is not
deductible for income tax purposes.
RISK FACTORS
Enterprise Risk Management
The Credit Union’s activities expose it to a number of risks in all aspects of operations. These risks
are generally shared by all deposit-taking financial institutions. In support of the achievement of
sustainable growth, a balanced approach must be taken between strategic and operational
objectives and the level of risk. This ensures that long-term performance is both sustainable and
consistent. As such, having a disciplined and integrated approach to managing risks is integral to
the Credit Union’s operations. The Credit Union’s Enterprise Risk Management Framework is
intended to provide appropriate and independent risk oversight across the entire enterprise and is
essential to building competitive advantage and stability. The foundation of the Credit Union’s
Enterprise Risk Management Framework is a governance structure that includes a robust
committee structure at the Board of Director, Executive Leadership Team and senior management
levels. For more details about the Credit Union’s Enterprise Risk Management Framework, see the
discussion starting at page 62 herein.
The main drivers of the success of the Credit Union’s risk management program are the
independence of its risk management practices and oversight, and the comprehensiveness of its
risk management framework and approach. The Credit Union considers it critical to regularly
assess its operating environment and highlight top and emerging risks. These are risks with a
potential to have a material effect on the Credit Union and its operations and where the attention of
members of the Senior Leadership Team is focused due to the potential magnitude or immediacy
of their impact. Many of the risks are beyond the Credit Union’s control and their effects, which can
be difficult to predict, could cause the Credit Union’s results to differ significantly from the plans,
objectives, and estimates or could impact its reputation or the sustainability of its business model.
Risks are identified, discussed, and actioned by members of the Senior Leadership Team and
reported quarterly to the Management Risk Committee and the Risk Committee of the Board.
Specific plans to mitigate top and emerging risks are prepared, monitored, and adjusted as
required.
For further information related to the enterprise risk management policy of the Credit Union, refer
to the “Management Discussion and Analysis” beginning on page 52.
The following risk factors should be considered in making a decision to purchase Let’s Get
Growing Class A Investment Shares, Series 15:
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 25
RISKS SPECIFIC TO THE LET’S GET GROWING CLASS A INVESTMENT SHARES,
SERIES 15
Transfer and Redemption Restrictions
There is no m arket through w hich the Let’s Get Growing Class A Investm ent Shares,
Series 15 m ay be sold. Further, it is not expected that any external 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 a redemption, and is therefore not limited as outlined below. See
“Restrictions on Transfer”, on page 23, for a further discussion of transfers of Let’s Get Growing
Class A Investment Shares, Series 15.
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 Let’s Get Growing Class A Investment Shares, Series 15 are not permitted during
the first five years following the Issue Date. Redemptions thereafter are limited in any fiscal year to
10% of the Let’s Get Growing Class A Investment Shares, Series 15 outstanding at the end of the
previous fiscal year and are subject to approval by the Board of Directors, exercising its discretion
under the Act, and subject to Applicable Law, including regulatory approval if required pursuant
thereto. Consequently, holders of Let’s Get Growing Class A Investment Shares, Series 15 may not
be able to sell or redeem their securities when they wish to do so.
M em bers who intend to hold Let’s Get Growing Class A Investm ent Shares, Series 15
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 Leverage Ratio and a Risk-Weighted Assets Ratio
equal to or greater than a percentage stated in the Regulations passed pursuant to the Act. The
Credit Union is 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.
The Credit Union commenced the implementation of an Internal Capital Adequacy Assessment
Process (“ICAAP”) and Stress Testing program in 2014 in line with the requirement for all Class 2
credit unions regulated by DICO. The purpose of the ICAAP is to determine the adequate
capitalization of the Credit Union given its current risks and future risks arising from growth, new
markets and expansion of the product portfolio. Through its assessment of capital adequacy, the
Credit Union will either determine that no additional Regulatory Capital is necessary, or that
additional Regulatory Capital is required above the regulatory minimums, and appropriate plans will
be established. Stress testing forms an integral part of the Credit Union’s ICAAP and is used to
identify severe events or changes in market conditions that could adversely impact the capital
position of the Credit Union.
For further information regarding the Credit Union’s Regulatory Capital adequacy, see “Capital
Adequacy” at page 10 hereof.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 26
Payment of Dividends
There is no record of dividend payments to the holders of Let’s Get Growing Class A Investment
Shares, Series 15, since this is the Credit Union’s first issuance of such shares. The Credit Union
has, however, established a record for the payment of dividends on its Class A Investment Shares,
50th Anniversary Series and Series 96, 98, 01 and 09, in its last five fiscal years, detailed on page 36.
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 Let’s Get Growing Class A
Investment Shares, Series 15 is dependent on the ability of the Credit Union to meet the Regulatory
Capital requirements of the Act, and on the availability of earnings.
Dividends on Let’s Get Growing Class A Investment Shares, Series 15 are taxed as interest and not
as dividends, and are therefore not eligible for the tax treatment given to dividends received by
individuals from taxable Canadian corporations, commonly referred to as the “dividend tax credit”.
The Board has stated a dividend policy for Let’s Get Growing Class A Investment Shares, Series 15,
as outlined beginning on page 37; 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.
ENTERPRISE RISKS OF THE CREDIT UNION
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 Let’s Get Growing Class A
Investment Shares, Series 15 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 3.3 to the audited consolidated financial statements beginning at page 9 of Schedule B
hereto.
Further discussion of the composition of the Credit Union’s loan portfolio, and its allowance and
provision for impaired loans, appears in note 4 to the interim condensed consolidated financial
statements beginning at page 7 of Schedule A hereto, in note 8 to the audited consolidated
financial statements beginning at page 17 of Schedule B hereto, and in the table of financial
performance indicators at page vi.
Market Risk
The Credit Union is also exposed to a risk of loss due to a market value decline in its investments.
The market risk policy of the Credit Union addresses the market risks related to counterparties of
the Credit Union, types of investments of the Credit Union and undue concentration of the
investment portfolio to any one single investment or type of investment. The risk of loss due to
interest rate, foreign exchange, equity or liquidity risks are addressed within the “Structural Risk”
section hereof beginning at page 29, and the “Liquidity Risk” section hereof beginning at page 28.
The investment policy of the Credit Union, approved by its Board, permits the Credit Union to
invest its capital and deposits in financial instruments, revenue producing capital assets and
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 27
income generating businesses so long as such investment is undertaken in the best interests of
members and the Credit Union, and in accordance with strict performance tests and prudent
standards.
The policy permits the Credit Union to invest in deposits with a league, with The CUMIS Group
Limited (“CUMIS”), with Concentra Financial or in a trust required as a condition of securitization; in
treasury bills or other investment-grade paper, unconditionally guaranteed by Canadian
governments with a Dominion Bond Rating Service (“DBRS”) rating of at least R-1 Low, an
equivalent long term rating, or an equivalent rating issued by one of the other bond rating services;
National Housing Act Mortgage-Backed Securities guaranteed by the Canada Mortgage and
Housing Corporation; deposits, acceptances or bonds issued by Schedule I banks, including their
wholly owned subsidiaries, or Schedule II banks with a DBRS rating of at least R-1 Mid, an
equivalent long term rating, or an equivalent rating issued by one of the other bond rating services;
commercial paper issued by Schedule I bank asset backed trusts with a DBRS credit rating of R-1
High or equivalent rating from one of the other bond rating services and “Global Style Liquidity
Lines”; debt or equity investments in corporations that provide services to the Credit Union;
common stocks, preferred stocks, and bonds limited to corporations that have a DBRS rating of at
least R-1 Low, an equivalent long term rating, or an equivalent rating issued by one of the other
bond rating services; investments in subsidiaries; investments in the Co-op Membership Shares
and Co-op Investment Shares of CUCO Co-op; improved real estate in Canada; and other
investments, including joint ventures. The policy restricts the authorized investment dealers from
which the Credit Union can purchase investments, and imposes limits on the amount which can be
invested in any one type of investment, and the maximum term length for each type of investment.
As of March 31, 2015, the Credit Union was in compliance with this investment policy.
Liquidity Risk
Liquidity risk is the risk that the Credit Union will encounter difficulty in meeting its obligations
associated with its financial liabilities. As a Class 2 Credit Union, it is 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 policy provides that it should maintain liquidity between 7.75% and 15%
of total assets. The Credit Union may invest its liquidity portfolio as indicated above under the
heading “Market Risk”. The policy imposes limits on the percentage of the portfolio which can be
invested in any type of asset, and the maximum term for each type of investment. The policy also
imposes limits, expressed as a percentage of all deposits, on the aggregate deposit liability to a
single or connected depositor, and on the aggregate deposits with a term of longer than one year
which mature in a single month. The Credit Union maintained an average liquidity position of
10.06% in its fiscal year ended December 31, 2014, and of 11.25% in the three month period ended
March 31, 2015.
The Credit Union has access to a CDN$650 million credit facility from Central 1 and a CDN$300
million credit facility from a major Canadian chartered bank, which are available to cover shortfalls in
cash resources and for liquidity purposes if warranted. Included in the Central 1 credit facility is a
capital markets line which provides for the exposure in the Canada Mortgage Bond (“CMB”)
securitization program and any derivative exposure the Credit Union has with Central 1. For further
information about the Credit Union’s participation in the CMB program refer to the details of the
contract beginning at page 45, and for further information about the Central 1 credit facility refer to
the details of senior debt beginning at page 40.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 28
As part of its liquidity management practices, the Credit Union regularly securitizes residential
mortgages, the details of which are provided on page 45. Total outstanding securitization liabilities
as of March 31, 2015 are $1,437,345,100. For more discussion about the Credit Union’s
securitization programs and activity, refer to note 20 in the audited consolidated financial
statements, at page 28 of Schedule B hereto.
The Credit Union also sources deposits through a network of brokers as part of its overall funding
strategy. The primary driver of broker deposits is the rate of return offered by the Credit Union,
which is subject to competition in the market and consequently increases in times of broad market
needs for liquidity. Total outstanding broker deposits as of March 31, 2015 are $341,220,771.
Management updates funding requirement levels daily based upon forecasted growth rates and
balances the use of these funding sources so as to ensure both funding diversification and
adequate contingency lines. Within the available balance, early warning limits exist, which trigger
required reporting and action plans from the Asset/Liability Management Committee and reporting
through the Risk Committee and Board of Directors. A detailed discussion of the management of
liquidity risk is provided in note 29.3 of the audited consolidated financial statements beginning at
page 51 of Schedule B hereto.
The Credit Union is also required to maintain and review annually a liquidity contingency plan. As of
March 31, 2015 the Credit Union is in compliance with its liquidity management and funding policy.
Structural Risk
Structural risk is the risk of loss due to changes in market interest rates, foreign exchange rates
and equity prices. The Credit Union’s Structural Risk Management Policy is intended to provide a
disciplined framework that, when applied under ordinary or reasonably expected business
conditions, will allow the Credit Union to measure the structural risk associated with regular
business activities and ensure it is within the Credit Union's structural risk management philosophy
and is managed prudently. The Structural Risk Management Policy of the Credit Union also
governs the use of derivative instruments by the Credit Union.
The Structural Risk Management Policy of the Credit Union addresses each component risk of
overall structural risk as follows:
Interest rate risk
On a monthly basis, the Credit Union measures and reports on the sensitivity of its short-term and
long-term interest rate risk.
Short-term interest rate risk is measured by determining net interest income holding current
interest rates constant into the future (the “Flat Scenario”) and then determining net interest
income, subject to 100 Basis Points and 200 Basis Points immediate and sustained increases and
decreases in interest rates, using static income simulation modelling. The amount of any decrease
in net income represents the earnings at risk for that specific rate shock scenario. Limits are
expressed as earnings at risk over the next twelve calendar months measured against the Flat
Scenario. The Credit Union limits this risk to 6.5% for 100 Basis Points rate shocks and 13.0% for
200 Basis Points rate shocks, calculated as the earnings at risk expressed as a percentage of the
most recent forecast of financial margin presented to the Board.
Long-term interest rate risk is measured by determining the sensitivity of its economic value of
equity, subject to 100 Basis Points and 200 Basis Points immediate and sustained increases and
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 29
decreases in interest rates. The amount of any decrease in economic value of equity measured
against the Flat Scenario is the economic value at risk. Limits are expressed as economic value at
risk measured against the Flat Scenario. The Credit Union limits this risk to 10.0% for 100 Basis
Points rate shocks and 20.0% for 200 Basis Points rate shocks, calculated as the change in
economic value of equity expressed as a percentage of the economic value of equity determined
under the ‘Flat Scenario’.
Such reductions will be maintained within the prudent limits specified in this policy using the
measures, procedures, risk reduction activities, and controls specified within the policy. The Board
may, from time to time, adopt a more restrictive policy.
As at March 31, 2015, the Credit Union is positively exposed to an increase in interest rates of 100
Basis Points, of 1.8% of net interest income and 1.8% of economic value of equity, and negatively
exposed to a decrease in interest rates of 100 Basis Points, of 2.7% of net interest income and
1.4% of economic value of equity. The Credit Union's balance sheet is exposed to falling interest
rates, implying that, when interest rates decrease, the asset side of the balance sheet reprices
faster, and to a greater magnitude, than the liability side of the balance sheet.
In the event that the Credit Union’s exposure to interest rate risk were 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 to mitigate the potential risk.
Foreign Exchange Risk
On a daily basis, the Credit Union will measure and report on the sensitivity of its foreign exchange
risk, measured as the net US Dollar foreign exchange exposure (US Dollar-denominated assets
less US Dollar-denominated liabilities). Foreign exchange exposures in currencies other than the
US dollar are not allowed, other than the position required to provide inventories of foreign
denominated cash for normal member transactions.
The Chief Financial Officer will be able to authorize a net daily USD foreign exchange exposure of
up to 1% of prior year ending Members’ Equity, as reported on the consolidated financial
statements of the Credit Union, without further approval. More restrictive foreign exchange
exposure authorizations exist at various levels below the CFO. US dollar foreign exchange
exposure in excess of the limits specified must be approved, with more senior approval required
based on the magnitude of the exposure. Board approval is required for exposures greater than
1% of prior year Member’s Equity. A plan for the reduction of the position to comply with the limits
specified by a set date must be stipulated.
Management will undertake the use of foreign exchange (FX) derivatives, executed with a
counterparty with a minimum DBRS rating of R-1 Low, an equivalent long-term rating, or an
equivalent rating issued by one of the other bond rating services, for the purpose of managing its
US dollar interest rate risk from forward currency transactions with members. The Credit Union will
not hold any open US dollar forward positions from members’ forward transactions.
As at March 31, 2015 the Credit Union is in compliance with its policy limits pertaining to foreign
exchange risk management.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 30
Equity Risk
Equity risk is the risk that a change in stock market indices will adversely affect assets, liabilities,
capital, income or expense. The Credit Union’s sole exposure to equity risk arises as a result of
product features embedded within its equity index linked term deposits. It is the Credit Union’s
philosophy to eliminate this risk by purchasing equity options in the market that completely offset
any exposure.
The Credit Union currently employs derivative financial instruments to manage its exposure to
interest rate, foreign exchange and equity risk. See page 50 for further information related to the
Credit Union’s use of derivatives.
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 the failure of people,
processes or technology. All of the Credit Union’s business activities are susceptible to operational
risk, including the practices for managing other risks such as credit, structural, market and liquidity.
Although operational risk can never be fully eliminated, it can be managed to create and enhance
member value, successfully execute business strategies, operate efficiently and provide reliable,
secure and convenient access to financial services. The Credit Union is exposed to potential losses
from a variety of operational risks, including process and technology failure, theft and fraud,
regulatory non-compliance, business disruption, information security breaches and damage to
physical assets as a result of internal or outsourced business activities. In order to mitigate these
operational risks, the Credit Union has implemented a number of programs as follows:
i. Information Technology (“IT”) Governance
This program establishes a governance framework to develop and assess the maturity of
all IT functions, including planning for technology requirements consistent with business
strategies and activities, and a well-defined and managed information security program,
including policies and standards aligned to the industry standard security framework.
Technology service delivery, project management and information security practices will
leverage industry proven techniques, best practices, standards and processes to meet
established service standards and availability expectations.
ii. Business Continuity Management and Disaster Recovery
The Credit Union has established a comprehensive program to mitigate the risk of loss
due to the inability of the Credit Union to maintain continuity of service in a timely and
effective manner, and the risk that currently installed operational technology is not
available due to a system outage or shutdown.
iii. Vendor Management Program
The Credit Union has established a number of significant agreements with third parties to
provide a product or service for its operations. While the benefits of leveraging third
parties include access to leading technology, specialized expertise, economies of scale
and operational efficiencies, the risks related to the activity need to be managed and
minimized. This is accomplished through the Vendor Management Program established
and adopted by the Information Technology and Operations departments of the Credit
Union which provides policies, procedures and guidance relative to:
• roles and responsibilities; and
• guidelines and standards for vendor selection, vendor terms and conditions, service
meetings, performance metrics, escalations and contract recordkeeping.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 31
iv.
v.
Fraud Management Program
The Credit Union’s anti-fraud philosophy extends beyond that of a typical employer in that
it is also exposed to greater fraud by way of being a financial institution. Its accountability
is therefore extended to preventing, detecting, and mitigating the misappropriation of
assets and misuse of products and services from both internal and external parties. A
comprehensive and robust fraud prevention framework has been established to ensure
that the Credit Union has policies, procedures, and internal controls to manage and
minimize the financial losses and non-financial impact of fraudulent activities.
Corporate Insurance Program
The Credit Union has established a Corporate Insurance Program to provide a second
level of mitigation of certain operational risk exposures. A comprehensive portfolio of
business insurance is managed to provide the Credit Union with additional protection
from loss.
Complementing the aforementioned programs are policies, procedures, internal controls and
centralized departments, which focus on the enterprise-wide management of specific operational
risks such as financial crime, business continuity/disaster recovery, privacy & confidentiality, vendor
management, project management, and information security & information technology
governance. These departments have developed the specific programs, policies, standards, and
methodologies to support the management of operational risk.
Member Risk
The management of member risk is achieved through ongoing engagement of members and the
development of initiatives which will deepen member relationships and grow the membership.
Member risk is the risk that the Credit Union cannot meet the expectations of its members. This
risk can arise if the Credit Union is not aware of changes in pervasive member needs and/or wants
and can lead to a decline in member confidence regarding its ability to provide a superior or
consistent level of service, resulting in a loss of members or the inability to grow the business.
The responsibility for member risk management resides primarily with the Credit Union’s Delivery
and Marketing teams ,which work together to engage members, determine their wants and needs
and develop the appropriate plans to meet both current and anticipated expectations. Given the
importance of meeting member expectations and providing a superior level of service, initiatives
related to addressing member risk are designated as strategic and awarded a high priority for
completion. Supporting Delivery and Marketing in the management of member risk is the Credit
Union’s Operating Committee and Executive Leadership Team which provide direct oversight to
strategic initiatives.
The Credit Union differentiates itself by providing an exceptional member experience. It is the
responsibility of every employee to help deliver this experience. This process helps create
ownership and buy-in from all groups within the Credit Union.
The Board of Directors provides oversight to the strategic direction of the Credit Union and
therefore approves the strategic plans developed by management which include initiatives which
are developed to manage member risk.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 32
Strategic Risk
Strategic risk is the risk that the Credit Union is not able to implement appropriate business plans
and strategies, or to effectively allocate resources. In addition, this risk may also arise from the
inability to adapt to changes in the business environment.
The Credit Union manages strategic risk through the performance of its comprehensive Enterprise
Strategic Planning process, which encompasses financial and strategic planning at business unit
and enterprise-wide levels. The Credit Union’s Executive Leadership Team, led by the CEO, is
responsible for developing and recommending strategies as well as operational and financial plans
for the Board’s approval, and to report to the Board, in a timely and accurate manner, on the Credit
Union’s performance against stated objectives. In developing its strategic plans, management
engages the Board, as appropriate, at such points in the planning process where perspectives on
member and larger system issues are desired.
The Board of Directors has two key responsibilities: (i) to establish strategic direction, and regularly
review that direction to ensure it responds to the changing business environment in which the
Credit Union operates; and, (ii) to monitor the Credit Union’s performance. In fulfilling these
responsibilities, the Board provides input to, and approves the annual strategic, operational, and
financial plans and regularly reviews the Credit Union’s progress towards achieving the priorities
and performance expectations established in the plan.
This integrated financial, strategic and operational planning process considers business unit
strategies and key initiatives, and ensures alignment between business unit and enterprise
strategies. Following the approval of the strategy by the Board of Directors, performance relative to
the strategic plan is monitored and reported on, including effectiveness and risks.
OTHER RISK FACTORS
Regulatory Action
Under the Act, DICO, as stabilization authority for credit unions and caisses populaires in Ontario,
can place a credit union or caisse populaire 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 management of risks related to non-compliance with regulatory and statutory requirements is
included within the broader operational risk discussion starting on page 31. Generally the Credit
Union applies stricter requirements than those prescribed for credit unions.
Reliance on Key Management
The success of the Credit Union’s business strategy is dependent on the ability of the Credit Union
to attract and 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 also does not carry “key person” life insurance on any of its senior managers.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 33
In May 2014, the former President & Chief Executive Officer of the Credit Union resigned from his
position following a medical leave, and the existing Chief Financial Officer was appointed to the
position following a competitive selection process initiated by the Board of Directors. He had
previously held the Acting President & Chief Executive Officer position since September 2012. The
position of Chief Financial Officer was filled by a new employee of the Credit Union.
The Credit Union has a CEO Absence Policy in place for the emergency replacement of its
President and Chief Executive Officer, and a Succession Planning Policy for the long-term
replacement of the President and Chief Executive Officer as well as other key executive personnel.
Economic 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. This risk is
mitigated to a certain degree by the geographic dispersion of both the personal and commercial
business lines, which are concentrated in Niagara and the Greater Toronto Area but spread from
Windsor in the west to Ottawa in the east.
The Canadian economy as a whole ended 2014 on a positive note, turning in an estimated growth
of 2.5% for the entire year, far surpassing expectations that hovered around 2%. However, that
2.4% growth in the fourth quarter was significantly less than the 3.2% posted in the third quarter of
2014, and early 2015 projections assume a slower growth rate throughout the balance of this year.
From a consumer perspective, unsurprisingly the falling price of oil and the Canadian dollar has led
a majority of Canadians (55%) to respond to a recent survey that they believe the economy is in
decline. This is the first time since November 2009 that a majority of Canadians have felt
pessimistic about the Canadian economy, and as a result many expect household spending to be
cut back as consumers feel “tapped out”.
In January 2015 the Bank of Canada (“BoC”) reduced its overnight rate by 25 basis points (“bps”)
to 0.75%. Yields on long-term government bonds fell following the BoC’s decision to reduce its
overnight rate. The Credit Union’s interest rate risk is subject to extensive risk management
controls and is managed within a framework of policies and limits approved by the Board (see
“Structural Risk” at page 29 herein. Refer to note 29.2 of the Credit Union’s audited consolidated
financial statements beginning on page 48 of Schedule B hereto for further details on the Credit
Union’s exposure to interest rate changes.
Potential purchasers of Let’s Get Growing Class A Special Shares, Series 15 should note that
forecasts can vary widely and are therefore encouraged to consult additional sources as they
deem necessary or prudent..
Competition Risk
The financial services industry is highly competitive and the level of competition directly impacts the
Credit Union’s performance. Competition risk is the risk that the Credit Union is not able to build or
maintain sustainable competitive advantage in a given market or markets. This risk can arise where
changes in opportunities, threats and other conditions in the credit union/financial services industry,
and the capabilities of competitors threaten the Credit Union’s profitability or long-term viability. The
attraction and retention of members is influenced by a number of factors including product/service
offerings, pricing, and service experience, and deterioration in these factors can impact the Credit
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 34
Union’s financial and operational performance. The Credit Union is a full-service financial institution
offering a broad range of financial products and services, has developed strategic objectives which
will enhance its competitive position among all types of financial institutions and utilizes a
comprehensive member satisfaction and brand awareness program to continually understand the
wants and needs of current and prospective members.
Reputation Risk
Reputation risk is the risk that the Credit Union’s reputation, brand or corporate image is not
sufficient to enable it to achieve its vision, mission and goals. This risk may arise if unethical
business practices damage the Credit Union’s reputation and expose it to losses in members,
revenue and the ability to compete or if members and the public do not recognize the Credit Union
as a relationship-based financial services brand.
The Credit Union’s reputation is one of its most valuable assets and protecting and enhancing this
reputation will increase member value and improve employee engagement. Reputation risk can
arise as a consequence of any activity; however, it usually relates to ethics and integrity or quality of
products and services, and frequently arises as a by-product of another risk management control
failure. As a result, reputation risk cannot be managed in isolation from other forms of risk. The key
to effectively protecting and enhancing the Credit Union’s reputation is by fostering a business
culture in which integrity and ethical conduct are core values.
The ongoing low interest rate environment, which originated with the collapse of the US housing
market in 2008 and spread globally in the following years, has created a heightened awareness of
the safety and security of financial markets and institutions in Canada and around the world. The
confidence of depositors is critical to the long-term viability of all financial institutions. The failure of a
major credit union or a large number of credit unions could place the Credit Union at significant
reputational risk.
Reputation risk could result in a reduction of membership or members not taking advantage of
product and service offerings by the Credit Union, which would impact the Credit Union’s
profitability or liquidity. In order to mitigate this risk, the Credit Union maintains robust corporate
governance practices, a Code of Ethics and a risk management framework and exercises prudent
and proactive financial management and sound financial and business practices.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 35
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 36
The dividend policy of the Credit Union’s Board for Let’s Get Growing Class A Investment Shares,
Series 15 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 Let’s Get Growing Class A Investment Shares, Series 15, 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 each year. The Board has defined an
appropriate dividend rate to be 4.00%, for fiscal years ending on or before December 31, 2019.
This rate will be reset at the final Board meeting in every fifth fiscal year of the Credit Union after the
year in which the shares were issued at a rate equal to or greater than a rate which exceeds by
125 Basis Points the yield 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, w w w .bankbanque-canada.ca for the month immediately preceding the month in which the final Board
meeting of the Credit Union’s fiscal year occurs. The dividend, in the fiscal year the Let’s Get
Growing Class A Investment Shares, Series 15 sold pursuant to this offering statement are issued,
shall be pro-rated for the number of days the Let’s Get Growing Class A Investment Shares, Series
15 were issued and outstanding in that fiscal year. Dividends will be issued in whole dollar amounts
(rounded up to the nearest dollar).
Dividends paid on Let’s Get Growing Class A Investment Shares, Series 15 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 of 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 Let’s Get Growing Class A Investment
Shares, Series 15, and on the shares ranking equally with the Let’s Get Growing Class A Investment
Shares, Series 15 (i.e., the Class A Investment Shares, 50th Anniversary Series, Series 96, Series 98,
Series 01 and Series 09), the Board may decide to pay a dividend on shares ranking junior to the
Let’s Get Growing Class A Investment Shares, Series 15, and the other series of Class A
Investment Shares, including 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 future growth, development and stability, while
maintaining a prudent cushion in the amount of Regulatory Capital above regulatory requirements.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 37
PLAN OF DISTRIBUTION
1.
The price to members for each Let’s Get Growing Class A Investment Shares, Series 15 will be
$1.00.
2. There will be no discounts or commissions paid to anyone for the sale of these securities.
3. One hundred percent (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 Let’s Get Growing Class A Investment Shares, Series 15 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 120,000,000 Let’s Get Growing Class A
Investment Shares, Series 15 or until a date, after the Credit Union has received subscriptions for
the minimum 60,000,000 Let’s Get Growing Class A Investment Shares, Series 15, but before the
Credit Union has received subscriptions for the maximum 120,000,000 Let’s Get Growing Class A
Investment Shares, Series 15 and before six months have passed from the date hereof, on which
the Board in its sole and absolute discretion shall determine to close the offering, whichever shall
occur first (the "Closing Date"). Subscriptions will be accepted on a first come, first served basis,
and subscription forms will be marked with the time and date accepted. The Credit Union will
closely monitor subscriptions being received as total subscriptions approach the maximum.
Potential purchasers making subscription requests at that time may not be allowed to subscribe
for the full number or amount of shares they desire, or their subscription request may be refused.
This offering may not be over-subscribed, and subscriptions will not be pro-rated.
If the funds to be used by a subscriber to pay for shares subscribed are on deposit
at the Credit Union, the subscriber will authorize the Credit Union to place these
funds, in an am ount equal to the issue price of the num ber of shares for w hich the
m em ber subscribes, in an interim non-registered, RRSP, RRIF or TFSA holding
account, as appropriate, w hich w ill then be placed “on hold” to guarantee paym ent
of these shares. The interim non-registered, RRSP, RRIF or TFSA holding Account w ill
bear interest at 1.60% per annum . If the offering is com pleted, such hold w ill be
released, and the authorized am ount will be used to pay for the shares for w hich the
m em ber subscribed. Interest earned on funds in the interim non-registered, RRSP,
RRIF or TFSA holding account w ill be deposited as follows:
Interim Holding Account Funds Deposited To
Non-registered
RRSP
RRIF
TFSA
Account Interest Will Be Paid To
Non-registered Demand Deposit Account
RSP Demand Deposit Account
RIF Demand Deposit Account
TFSA Demand Deposit Account
If the offering is w ithdraw n, or if the decision to buy is reversed by the subscriber (as
described on the cover of this offering statem ent), the hold on the funds in the
interim non-registered, RRSP, RRIF or TFSA holding account will be released
im m ediately thereafter and the funds will be transferred to the sam e account as
specified in the table above for the paym ent of interest earned on the holding
account. The m em ber m ay then consider other investm ent options for the released
funds.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 38
If the funds to be used by a subscriber to pay for shares subscribed are com ing from
outside the Credit Union, such funds will be held in Escrow, in accounts to be
trusteed by Concentra Trust, until the offering is com pleted 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 statem ent). If the offering is com pleted, the
proceeds will be released from Escrow and used to pay for the shares for w hich the
m em ber subscribed. If the offering is withdrawn, or if the subscriber reverses the
decision to buy, the proceeds w ill be refunded in full, plus interest calculated at the
rate of 1.60% per annum , pro-rated for the num ber of days the funds w ere in
Escrow, to those w ho subscribed.
The above-noted terms and conditions regarding transfer of funds to an interim non-registered,
RRSP, RRIF or TFSA holding account and holds on these respective deposit accounts and
regarding Escrow accounts are detailed on the Credit Union's Authorization to Place Funds on
Hold form and Authorization to Place Funds in Escrow form for Let’s Get Growing Class A
Investment Shares, Series 15 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, conversion request form and the forms for
authorization of a transfer and hold on funds in deposit accounts and/or placement of funds in
Escrow accounts are printed on pages 102 to 107 herein.
If fully subscribed, the gross proceeds to be derived by the Credit Union from the sale of the Let’s
Get Growing Class A Investment Shares, Series 15 shall be $120,000,000. The costs of issuing
these securities are not expected to exceed $400,000, and these costs, approximating $328,400
after applicable tax savings, will be netted against the shares’ value in Members’ Equity. The
estimated maximum net proceeds of this offering of securities are $119,671,600.
If, after six months from the date of this offering statement, subscriptions received for the Let’s Get
Growing Class A Investment Shares, Series 15 amount to less than $60,000,000 in the aggregate,
this offering for Let’s Get Growing Class A Investment Shares, Series 15 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 $60,000,000 but do not amount to $120,000,000, 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. After the Closing Date,
the shares for which subscriptions have been received will be issued within sixty business days
after the Closing Date (the “Issue Date”).
The Let’s Get Growing Class A Investment Shares, Series 15 will not be sold by underwriters or
other dealers in securities. The minimum subscription per member shall be $5,000 for 5,000 Let’s
Get Growing Class A Investment Shares, Series 15. The maximum subscription per member, either
directly or indirectly through Beneficial Ownership of the shares, shall be $500,000 for 500,000
Let’s Get Growing Class A Investment Shares, Series 15. Shares will only be issued subject to the
full price of such securities being paid.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 39
MARKET FOR THE SECURITIES
There is no external m arket for the Let’s Get Growing Class A Investm ent Shares,
Series 15. These securities may only be transferred to another member of the Credit Union.
SENIOR DEBT (RANKING AHEAD OF LET’S GET GROWING CLASS
A INVESTMENT SHARES, SERIES 15)
The Credit Union has arranged a credit facility with Central 1 totalling $650 million. The facility
includes total liquidity facilities of $300,000,000, consisting of a Canadian-dollar operating line of
credit of CDN $50,000,000, a US-dollar operating line of credit of USD $10,000,000, a demand
loan facility of CDN $120,000,000 and a term loan facility (requiring 30 days’ notice) of CDN
$120,000,000. The facility also includes contingency facilities of CDN $350,000,000, consisting of
CDN $40,000,000 for letters of credit, CDN $270,000,000 for financial guarantees and a CDN
$40,000,000 capital markets line. The purpose of the facility is 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 an assignment of book debts and a general security agreement subject to adjustment for
mortgage collateral pledged against bank borrowings. The credit facility will next be reviewed in
March 2016.
The balance outstanding on the credit facilities of the Credit Union with Central 1 during the three
months ending March 31, 2015 and its fiscal years ending December 31, 2014, 2013 and 2012 is shown
below:
Fiscal
Period
Ended
(millions)
March 31,
2015
December
31, 2014
December
31, 2013
December
31, 2012
Term
Loans
US Dollar
Operating Line
Capital
Markets Line
Letters of
Credit
High
Balance
$
-
Low
Balance
$
-
Canadian
Dollar Operating
Line
High
Low
Balance Balance
$ 30.9
$
-
$ 60.0
$
-
$ 79.2
$
-
$
2.3
$
-
$
6.1
$
2.7
$ 163.0
$ 76.7
$ 55.0
$
-
$ 43.2
$
-
$ 23.5
$
-
$
0.5
$
-
$ 124.9
$ 99.1
$ 145.0
$
-
$ 74.8
$
-
$
$
-
$
0.1
$
-
$ 100.4
$ 73.5
High
Balance
$
-
Low
Balance
$
-
High
Balance
$ 18.5
Low
Balance
$ 18.1
High
Balance
$ 161.6
Low
Balance
$ 131.6
-
The Credit Union has arranged a secondary credit facility with a major Canadian chartered bank totaling
CDN $300 million. The purpose of the facility is for general corporate purposes and to support the Credit
Union in its effective management of liquidity. As security for this credit facility, the Credit Union has
pledged collateral with the lender consisting of mortgages insured by either Genworth or CMHC. The
credit facility will next be reviewed in June 2016.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 40
The balance outstanding on the secondary credit facility of the Credit Union during the three month
period ending March 31, 2015 and its fiscal years ending December 31, 2014, 2013 and 2012 is shown
below:
Fiscal Period Ended
(millions)
March 31, 2015
December 31, 2014
December 31, 2013
December 31, 2012
Term Loans
High
Balance
$ 50.0
$ 250.0
$
1.0
N/A
Low
Balance
$
$
$
N/A
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 Let’s Get Growing Class A Investment Shares, Series 15.
AUDITOR, REGISTRAR AND TRANSFER AGENT
The auditor of the Credit Union is PricewaterhouseCoopers LLP, PwC Tower, 18 York Street,
Suite 2600, Toronto, Ontario, M5J 0B2 (phone 416-863-1133, facsimile 416-365-8215,
website w ww.pwc.com/ca).
The registrars and transfer agents for the Let’s Get Growing Class A Investment Shares, Series 15
are designated staff of the Credit Union.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 41
DIRECTORS, EXECUTIVE LEADERSHIP TEAM AND OFFICERS
Board of Directors
The following table sets forth the Board of Directors of the Credit Union:
Name &
Municipality of
Residence
Principal
Occupation
Position/Office
Don G. Ariss
Mississauga, Ontario
Retired Chartered
Accountant
Ken Bolton
Burlington, Ontario
Retired Director,
Financial Analysis and
Planning – CUMIS
Insurance
CEO – Innovate Niagara
Director; Nominating Committee Chair; Human
Resources Committee Chair; Governance
Committee Member
Director; Audit & Finance Committee Member;
Nominating Committee Member
Jeff Chesebrough
St. Catharines, Ontario
Larry Doran
Markham, Ontario
Karen Farbridge
Guelph, Ontario
Mark Kraemer
Port Elgin, Ontario
Ross Lamont
Port Elgin, Ontario
John Murphy
Toronto, Ontario
Richard Owen
Etobicoke, Ontario
Tamara Paton
St. Catharines, Ontario
Colleen Sidford
Toronto, Ontario
Phoebe Wright
Toronto, Ontario
President & CEO –
Imperium Energy Inc.
President – Karen
Farbridge & Associates
Limited
Entrepreneur
Retired Executive –
Bruce Power
Principal – Lamont &
Associates Consulting
Retired Executive –
Ontario Power
Generation Inc. and
Ontario Hydro
CEO – Trillium Housing
Non-Profit Corporation
Strategic Consultant
Retired VP & Chief
Investments Officer –
Ontario Power
Generation Inc.
President – Wright
Methods Inc.
Director; Audit & Finance Committee Member;
Risk Committee Member
Director; Nominating Committee Member;
Human Resources Committee Member
Director; Governance Committee Member;
Human Resources Committee Member
Director; Audit & Finance Committee Member;
Risk Committee Member
Director; Governance Committee Member; Risk
Committee Member
Chair; Governance Committee Chair; Human
Resources Committee Member
Director; Audit & Finance Committee Chair
Director; Risk Committee Chair; Audit & Finance
Committee Member
Vice Chair; Nominating Committee Member; Risk
Committee Member
Director; Governance Committee Member;
Human Resources Committee Member
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 42
Executive Leadership Team and Officers
The following table sets forth the Executive Leadership Team and officers of the Credit Union:
Name &
Municipality of Residence
Bill Maurin
St. David’s, Ontario
Leo Gautreau
Niagara Falls, Ontario
Gary Genik
Brampton, Ontario
James Millard
Burlington, Ontario
Jennifer Rowe
Toronto, Ontario
Tim Smart
Pickering, Ontario
Sanjit Sodhi
Toronto, Ontario
Bill Whyte
Mississauga, Ontario
Sheryl Wherry
St. Catharines, Ontario
Position/Title
President and Chief Executive
Officer
Senior Vice President and Chief
Risk Officer
Senior Vice President and Chief
Information Officer
Senior Vice President and Chief
People Services Officer
Senior Vice President and Chief
Marketing Officer
Senior Vice President and Chief
Financial Officer
Senior Vice President and Chief
Legal Officer
Senior Vice President and Chief
Member Services Officer
Corporate Secretary
Mr. Maurin was appointed President and CEO of the Credit Union on May 16, 2014. He joined the
Credit Union in 2002 as Senior Manager, Finance, became Vice-President of Finance in 2005 and
served as Chief Financial Officer from 2008 through to 2014. In 2012 he was appointed Acting
President and CEO as a result of a medical leave of the Credit Union’s former President and CEO.
Mr. Gautreau was appointed the Credit Union’s first Chief Risk Officer on February 6, 2014. He first
joined the Credit Union in 1990 and since 1995 has served as Vice President within the Credit
Management, Risk Management, Commercial Services and Corporate Development areas.
Mr. Genik and Ms. Wherry have been employed by the Credit Union or one of its predecessors, in
their current positions, for at least five years preceding the date of this offering statement.
A brief description follows for the other members of the Executive Leadership Team:
• Mr. Millard began employment with the Credit Union on July 29, 2013 and was previously
employed as Senior Vice President, Human Resources within a risk management and
consulting firm.
• Ms. Rowe began employment with the Credit Union on October 9, 2012 and previously held
several senior level marketing and communications positions within the financial services
industry.
• Mr. Smart was appointed to his current position as CFO on June 16, 2014. He joined the
Credit Union on April 8, 2014 as Senior Finance Advisor and previously worked as the Chief
Financial Officer for a number of financial services and technology companies.
• Mr. Sodhi began employment with the Credit Union on November 3, 2014 as its first Chief
Legal Officer and previously practiced law both in Toronto and abroad, with a focus on
advising financial services clients on complex corporate and regulatory matters.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 43
•
Mr. Whyte began employment with the Credit Union on November 22, 2011 and was
previously employed by a major Canadian chartered bank where he held various leadership
roles within their retail and wealth divisions.
LAWSUITS AND OTHER MATERIAL OR REGULATORY ACTIONS
As at March 31, 2015, the Credit Union is not aware of any material pending or contemplated legal
proceedings, including actions that may be used to recover delinquent loans where the Credit
Union is the plaintiff, 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. The Credit Union’s employee benefit program, available to officers and
employees of the Credit Union, includes a financial services program whereby full-time and parttime employees are eligible to receive discounted interest rates on mortgages, personal loans and
lines of credit. With the exception of pricing, the loans to officers and employees are made on the
same terms and conditions as loans are made to the general membership. Regarding mortgages,
the discounted rate equals the Credit Union’s cost of funds. Regarding personal loans and lines of
credit, the discounted rate equals the rate prescribed by the Canada Revenue Agency to calculate
taxable benefits for employees and shareholders from interest-free and low-interest loans. The
program is subject to a $350,000 maximum combined borrowing amount per individual, although
individual borrowing amounts are determined based on the individual’s credit eligibility. Any loans to
officers or employees in excess of the maximum program limit of $350,000 are at conventional
market rates of interest.
The aggregate value of loans in all categories to restricted parties of the Credit Union, as of March
31, 2015, amounted to $3,485,320. In addition, unused lines of credit to restricted parties of the
Credit Union, as of March 31, 2015, amounted to $1,407,016. 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 Let’s Get Growing Class A
Investment Shares, Series 15, should any of such persons wish to do so.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 44
MATERIAL CONTRACTS
The following material contracts have been entered into by the Credit Union during the last three
years, or remain in force but were entered into by the Credit Union or one of its predecessors prior
to that time.
Various Leases for Prem ises and Equipm ent
The Credit Union has various leases in place for most of its branches, commercial business centres
and office locations as well as certain equipment used in its operations. Details of the equipment
leased under finance lease agreements are disclosed in note 14 to the audited consolidated
financial statements at page 25 of Schedule B hereto. Details of the commitments related to
operating leases are disclosed in note 27 of the aforementioned financial statements, beginning at
page 43 of Schedule B hereto.
Credit Union Banking and Credit Services Agreem ent Form of Adhesion with Credit
Union Central of Ontario Lim ited (“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.
General Security Agreem ent w ith Central 1, dated M arch 4, 2010
This agreement is a standard general security agreement to support the Credit Union’s credit
facilities with Central 1. For further details regarding these credit facilities, see the “Senior Debt”
section starting on page 40.
Canada M ortgage & Housing Corporation – M ortgage Backed Security Program
Credit Union Agreem ent w ith Central 1 dated August 26, 2010; Canada M ortgage &
Housing Corporation – Canada M ortgage Bond Credit Union Agreem ent with Central
1 dated August 26, 2010.
The MBS Program Credit Union agreement outlines the services performed by Central 1 related to
the service and administration of mortgage backed securities created by the Credit Union. The
agreement, unless terminated by Central 1 following default, shall continue for any period during
which an MBS issued by the Credit Union remains outstanding. The CMB Program Credit Union
Agreement appoints and retains Central as agent to provide administrative and operational
services in connection with the Credit Union’s participation in the CMB Program. The agreement,
unless terminated by Central 1 following default, shall continue for any period during which a CMB
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 45
issued by the Credit Union remains outstanding. Both agreements require consent from Central 1
prior to the Credit Union granting a security interest in favour of a third party. In the event of default,
Central 1 may refuse to provide services to the Credit Union in respect of either agreement, take
such actions as required by CMHC or enforce any remedy available to Central 1.
M ortgage Insurance Com m itm ent with Genworth Canada, dated February 5, 2014;
Letter of Am endm ent to the M ortgage Insurance Com m itm ent, dated April 20, 2015
(together, the “Insurance Com m itm ent”)
The Insurance Commitment provides the Credit Union with access to mortgage insurance on
residential first mortgages. Among other details set out in the Insurance Commitment, the
insurance coverage is transferrable, provided the Credit Union or another approved lender
continues to service the mortgage. All insured mortgages must meet specified criteria and
requirements.
Also, Genworth may suspend providing insurance under the Insurance
Commitment at any time, subject to providing the Credit Union with at least 90 business days
written notice.
Senior Secured Credit Agreem ent with Canadian Im perial Bank of Com m erce, dated
June 11, 2013; First Am endm ent to the Senior Secured Credit Agreem ent, dated June
11, 2014 (together, the “Credit Agreem ent”).
This Credit Agreement provides the Credit Union with access to a CDN $300 million credit facility
for general corporate purposes and to support the Credit Union in its effective management of
liquidity. For further details regarding these credit facilities, see the “Senior Debt” section starting on
page 40.
Source Code License Agreem ent and Professional Services Agreem ent with Open
Solutions DTS, Inc. (“Open Solutions”), dated Decem ber 28, 2011
These agreements relate to the Credit Union’s banking system software, which was previously
licensed from Open Solutions’ precursor entity, Fincentric Corporation. Under the provisions of the
Source Code Agreement, Open Solutions has granted the Credit Union with an enterprise-wide
perpetual license to install and use the specified software. In addition, the Credit Union and certain
other credit unions (“Co-Payors”) which are parties to the agreement have the right to create
derivative works based on the software and any such modifications thereto. The Credit Union must
provide Open Solutions with a copy of all such derivative works annually beginning on the first
anniversary date of the contract. The Professional Services Agreement ended on December 31,
2012 and provided the Credit Union and the Co-Payors with general technical support, as well as
the resolution of specified bug fixes and other deliverables relating to the integration of the banking
system software with certain software releases by Microsoft.
Software M anagem ent Services Agreem ent with CDSL Canada Lim ited (“CDSL”),
effective M arch 1, 2013
This agreement was entered into jointly by the Credit Union and a group of additional credit unions
who are also Co-Payors under the Source Code License Agreement with Open Solutions. Under
the terms of this agreement CDSL will provide support for the Credit Union’s banking software in
exchange for fees which are payable on a semi-annual basis. The agreement has a term of 61
months.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 46
Connection Services Agreem ent with DirectCash Paym ent Inc. (“DCI”), form erly
Threshold Financial Technologies Inc., dated June 5, 2006
This agreement was initially entered into with Threshold and is for the provision of switching
services. This agreement was originally for a five-year term but now has a term concurrent with the
ABM Services Agreement discussed at page 47 hereto. At least 90 days before expiry, DCI is to
present the Credit Union with a renewal proposal. Either party can terminate the agreement on 90
days’ notice without cause. If a termination is based on a non-monetary breach of the agreement,
the defaulting party must be given notice of the breach within 30 days of the breach occurring, and
has 90 days to remedy the breach; if the breach is not remedied, the non-defaulting party can give
notice of termination, the termination not to occur sooner than the 5th business day after the end of
the 90-day remedial period. 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; however, DCI has no right
to terminate the agreement if DICO places the Credit Union under Administration. If a party is
prevented from performing for longer than 30 days, the non-defaulting party can give notice to
terminate the agreement 60 days later if the defaulting party has not in the meantime resumed
performance. The Credit Union can terminate the agreement if there is a change in control of DCI,
if the Credit Union is reasonably concerned about performance of the agreement after the change
in control.
Effective November 1, 2013, Threshold was acquired by DCI and in accordance with this
agreement the Credit Union provided consent for this change in control. The terms of this
agreement were not impacted by this transaction. Threshold and DCI were subsequently
amalgamated effective January 1, 2014.
ABM Services Agreem ent w ith DirectCash Paym ent Inc., form erly Threshold Financial
Technologies Inc., dated Decem ber 1, 2007
This agreement was initially entered into with Threshold and transferred to Threshold the Credit
Union’s ABMs, thereby transferring to Threshold the obligations to upgrade, monitor, service, and,
in certain cases, provide cash (which remains owned by the Credit Union) and other supplies to the
ABMs. In return, the Credit Union pays Threshold a fee for each ABM transferred to Threshold. The
agreement has a 10-year term, but is terminable by either party for breach on 30 days’ notice, and
for cause immediately. The agreement is not assignable by either party without express written
consent, except on an amalgamation or sale of all or substantially all of the party’s assets.
Effective November 1, 2013, Threshold was acquired by DCI and in accordance with this
agreement the Credit Union provided consent for this change in control. The terms of this
agreement were not impacted by this transaction. Threshold and DCI were subsequently
amalgamated effective January 1, 2014.
M aster Agreem ent for Availability Services with SunGard Availability
(Canada) Ltd. (“Sungard”), dated April 1, 2013; Various Schedules
Services
Through this agreement, the Credit Union initially obtained the services necessary to move its data
centre from its corporate office to a SunGard site in Mississauga, increasing its security, and also
obtained access to a SunGard disaster recovery site in Montreal. The current schedule pertaining
to the Mississauga location has a term of 36 months and is set to expire on March 31, 2016. In
2014, the disaster recovery site in Montreal was moved to a SunGard facility in Markham; the
schedule pertaining to this location has a term of 27 months and is set to expire on August 30,
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 47
2016. The agreements pertaining to both locations can be renewed by the mutual written consent
of both parties at least six months before they expire for an agreed-upon renewal term. The Credit
Union pays fees for services rendered on a monthly basis. The agreement continues as long as
any schedule is in force under it.
Credit Card Service Agreem ent with CU Electronic Transaction Services (“CUETS”),
dated M arch 1, 2006; CUETS Financial Am ending Agreem ent (No. 2) dated July 4,
2008; Custom er Identification Schedule dated Septem ber 26, 2008; CUETS
Enhanced Branch Services – Equipm ent Rental Schedule dated Novem ber 3, 2008
This agreement enables the Credit Union to provide its members with access to MasterCards. The
agreement may not be assigned without the written consent of CUETS; CUETS, however, will
reasonably consent to an assignment of the agreement to a credit union that has acquired all of
the assets of the Credit Union by purchase or amalgamation, or to an affiliate of the Credit Union if
the affiliate is a financial institution and agrees to perform and can reasonably perform all of the
obligations of the Credit Union under the agreement. CUETS can assign the agreement to CUETS
Financial Services Association on notice to the Credit Union. The Credit Union will not directly or
indirectly issue or promote the issue of cards to its members that are not provided by CUETS.
CUETS agrees to meet certain service standards. The agreement has a 10-year term; at expiry, the
agreement automatically renews for further 5-year terms unless ether party gives not less than 1
year’s written notice to the other party prior to expiry of its intent to terminate the agreement at
expiry. The agreement contains particular termination provisions for terminations resulting from a
failure by CUETS to meet service standards, and for the Credit Union terminating because of an
amalgamation or asset sale. The amendment and schedules provide the Credit Union with the
services and equipment necessary to deal with credit cards with embedded microchips. The
Credit Union has notified CUETS that it will not be renewing the contract at the end of the current
contract period and instead will be seeking a month-to-month extension.
Deposit Agency Agreem ent w ith Concentra Financial Services Association, dated
February 23, 2009; Credit Union Shares Registered Plans Agency Agreem ent w ith
Concentra Trust, dated M arch 6, 2012
These agreements enable the Credit Union to offer to its members, as the agent for Concentra
Financial Services Association, various deposit products offered by Concentra Financial 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 Class
A Investment 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. Both agreements are perpetual, continuing until terminated
in accordance with their terms.
Credit Union Participation Agreem ent with Credential Financial Inc. (“CFI”), Credential
Asset M anagem ent Inc. (“CAM ”), and Credential Securities Inc. (“CSI”), dated
January 1, 2003
This agreement provides that CFI, CAM and CSI will be the Credit Union’s supplier of choice for
wealth management services; in the event of a merger, the Credit Union agrees to migrate the
other credit union’s wealth management business to the appropriate Credential entity. Both CAM
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 48
and CSI provide services at the Credit Union’s premises through dually employed licensed
individuals, who receive their salary and variable incentive payments from the Credit Union but are
also paid a nominal sum annually by either CAM or CSI, as appropriate. The Credit Union is
compensated by CAM and CSI for the services provided by the Credit Union to CAM or CSI, as
appropriate. The agreement is for a five-year term, and automatically renews for additional fiveyear terms unless notice of non-renewal is delivered, in the case of the Credit Union, 180 days,
and, in the case of CFI, CAM and CSI, 365 days, before expiry. The agreement can also be
immediately terminated by any party for breach of the agreement.
Operating Agreem ent w ith QTrade Canada Inc. and QTrade Investor Inc. dated
Decem ber 19, 2000; Am endm ent Agreem ent dated April 3, 2002
QTrade Canada Inc. provides online securities trading and related services through its wholly
owned subsidiary, QTrade Investor Inc. QTrade Investor provides online securities trading and
related services to the Credit Union and its members, by providing the Credit Union with a website
which permits the Credit Union’s members to open trading accounts and trade as soon as their
application has been approved by QTrade Investor and sufficient funds have been deposited to
their account. This agreement obliges the Credit Union to link from the home page and the finance
page of its own website to the website provided by QTrade, and QTrade will link to the Credit
Union website from the website it develops for the Credit Union. The agreement requires a sharing
of revenues from members’ trades between QTrade and the Credit Union. The agreement has a
60-month term, and may be renewed for further 12-month terms by mutual agreement. The
agreement is terminable by either party on various notice periods for various breaches of the
agreement. The agreement is in most situations not assignable by either party without prior written
consent.
M eridian Creditor Insurance Program Adm inistrative Agreem ent with CUM IS Life
Insurance Com pany, dated Decem ber 16, 2014
This agreement enables the Credit Union to offer creditor life and disability insurance to its
borrowing members in return for a percentage of the premiums (which varies by product) paid by
its borrowing members. This agreement has an initial term of three years, and will be automatically
renewed for an additional one-year term unless the agreement is terminated or replaced by a
successor agreement. Either party may terminate the agreement at the end of the initial term by
providing at least 180 days prior written notice to the other party.
Insurance Affinity Agreem ent w ith Prim m um Insurance Com pany (“Prim m um ”), dated
Decem ber 16, 2011; Am endm ent #1, dated October 1, 2014
This agreement enables the Credit Union to offer its members home and vehicle insurance. The
Credit Union receives a percentage of the premiums (which varies by product) paid by its
members who choose to obtain insurance from Primmum. The agreement has an initial term of
three years, and thereafter will renew for further three-year terms unless it is terminated by either
party giving notice of termination at least 120 days prior to the end of the term. The amendment
reduced the term of the automatic renewals from 3 years to 1 year. The agreement may also be
terminated on material default.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 49
M icrosoft Volum e Licensing Enterprise Enrollm ent (Direct) – Business with M icrosoft
Licensing, GP (“M icrosoft”), effective January 2, 2015
This agreement procures for the Credit Union all of its licenses to use the various Microsoft
software programs it uses in its business. The agreement has a three-year term, and the licensing
fees are paid in three annual payments.
Ficanex Canadian Exchange Licensee M em bership Agreem ent with Ficanex Services
Lim ited Partnership (“Ficanex”) effective Septem ber 27, 2005
This agreement provides the Credit Union with membership in the Exchange Network, through
which members of the Credit Union can access a network of surcharge-free ABMs within Canada.
The Credit Union pays royalty and transaction fees to the Limited Partnership. The agreement had
an original term of five years and can be renewed by mutual agreement for additional five year
terms provided the Credit Union is not in default. Either party can terminate the agreement
immediately in the event of certain breaches; Ficanex can terminate the agreement immediately if
it has notified the Credit Union of a breach and said breach remains uncorrected after 30 days of
notification. Particular rules apply in the event of a merger between the Credit Union and another
party, 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.
International Sw aps
counterparties
and
Derivatives
(“ISDA”)
M aster
Agreem ents
with
various
The Credit Union is counterparty to several ISDA Master Agreements that allow it to enter into
swap and derivative contracts.
For further information regarding the outstanding derivative instruments of the Credit Union, see
note 5 to the interim condensed consolidated financial statements for the period ended March 31,
2015, beginning on page 8 of Schedule A hereto, and note 9 to the audited consolidated financial,
beginning on page 19 of Schedule B hereto.
M aster Com m unications Agreem ents with Bell Canada (“Bell”), effective February 1,
2010; Various Service Schedules
Bell provides voice telephony and data network services to the Credit Union under the terms of this
agreement, the initial term of which has an expiry date of August 31, 2015. Either party may
terminate the agreement prior to the expiry date in the event of a material default by the other
party. The Credit Union may terminate a service it has requested under a Service Schedule upon
the provision of at least 30 days’ notice and the payment of any applicable termination fees.
Services Agreem ent w ith M ercer (Canada) Lim ited, dated M arch 1, 2009 and
am ended June 1, 2011; and Investm ent Services Agreem ent with M ercer Global
Investm ents Canada Lim ited, dated June 10, 2011
These agreements provide the Credit Union with pension administration, actuarial consulting and
investment management services for its defined benefit registered pension plan. Either party can
terminate these agreements by providing 30 days’ written notice.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 50
Service and Fee Agreem ents w ith M anufacturers Life Insurance Com pany, effective
January 1, 2007
These agreements provide the Credit Union with administration, record keeping and investment
management services for its group retirement savings plan and defined benefit registered pension
plan. Either party can terminate these agreements by providing 30 days’ written notice.
Pilot Program Agreem ent w ith Co-operators General Insurance Com pany (“Cooperators”) dated Decem ber 1, 2014
This agreement outlines in broad form the basis upon which Co-operators and the Credit Union will
pursue a pilot project, the purpose of which is to explore the feasibility of marketing their respective
products and services to the customers of the other party. The project timeline is for a total of four
years and may be terminated by either party upon giving the other party 90 days prior written
notice.
M ortgage Data Agreem ent with Equifax Canada Co. (“Equifax”), dated July 2, 2014
This agreement provides the Credit Union with access to Equifax beacon scores for the purposes
of evaluation a member’s request for credit in return for provision of certain mortgage- and loanrelated information of its members. The agreement also governs the use of the information by
Equifax. The agreement will remain in effect until terminated by either party. Either party can
terminate the agreement immediately in the event of material breach of the agreement, provided
that written notice has been given to the other party requesting correction of the breach and it
remains uncorrected 15 days after such notice , or upon providing the other party with 90 days
written notice. Particular rules apply in the event of a merger between the Credit Union and
another party, 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.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 51
MANAGEMENT DISCUSSION AND ANALYSIS
The following Management Discussion and Analysis for the 2014, 2013 and 2012 fiscal years has been
reproduced in full or in part from the Credit Union’s Annual Reports for those years. The discussion and
analysis is consistent with the financial statements presented for each fiscal year, but readers are
cautioned that the data within has not been restated for any subsequent amendments to the financial
statements after the date of their original approval by the Board of Directors.
Fiscal Year Ended Decem ber 31, 2014
The purpose of this report is to provide readers of the 2014 audited consolidated financial statements
with insight into the Credit Union’s financial performance for 2014, including a review of growth and
profitability and the factors that influenced these. In addition, included is an overview of the key inherent
risks that the Credit Union faces as a financial institution and how those risks are managed and mitigated.
Financial Results
2014 Financial Overview
After a slow start to 2014, economic activity in
Canada picked up in the second quarter of the year
and maintained momentum for the rest of the year.
This was influenced by a weaker Canadian dollar
which supported increased exports, and ongoing low
interest rates. Early in the year, an unseasonably
cold winter kept consumers from shopping but once
conditions improved, low interest rates supported
consumer spending at levels which are considered
unsustainable. Inflationary pressures were muted
due to the persistent slack in the economy which
resulted from operating below full capacity.
Additionally, lower energy costs and the effects of
continued competition in the retail sector offset
other sector-specific price increases. The Bank of
Canada therefore maintained its overnight lending
rate at 1%.
In Ontario, preliminary indicators show that
economic growth expanded at a faster rate than in
2013 driven by exports and household spending.
Exports were favourably impacted by the weaker
Canadian dollar, with increased demand for motor
vehicles and parts. Sales of existing homes grew by
3.7% while new housing starts fell slightly below
2013 starts. Business investment declined due to
weak corporate profits which resulted from low
demand and declines in commodity prices in recent
years.
This
consequently
resulted
in
weak
employment growth compared to 2013. Nonetheless
the increase in employment was sufficient to reduce
the unemployment rate to 7.3%. The public sector
also caused a drag on economic growth as
government spending was restrained in an effort to
rebalance public sector finances.
The economic environment in 2014 presented
opportunities which Meridian took advantage of and
challenges which had to be mitigated. Overall,
Meridian’s operating performance was strong with
significant growth in relationships with members.
Total assets grew by $810.0 million to $10.0 billion
at the end of 2014; driven largely by lending to
members for mortgages and commercial business
activities. Assets under management, which include
off-balance sheet Wealth management assets,
increased by $1.1 billion to $11.4 billion. Wealth
asset
growth
continued
to
be
exceptional,
surpassing the strong growth achieved in 2013.
Despite continued stiff competition among financial
institutions for deposits, Meridian’s deposit growth
recovered in 2014, achieving more than double the
growth realized in 2013. Deposits grew by $559.1
million to total $8.0 billion at the end of 2014.
Meridian continued to operate profitably in 2014;
despite the challenge of a continued low interest
rate environment and significant investment in
initiatives in support of our long-term sustainability.
Meridian generated $50.5 million in pre-tax
earnings, a decrease of $8.9 million over the
previous year. The lower earnings were attributable
to higher long-term strategic expenses, while
interest income continued to be impacted by low
interest rates. These factors contributed to an aftertax return on equity (“ROE”) of 5.8% in 2014
compared to 10.3% achieved in 2013. ROE
represents total comprehensive income as a
percentage of average total equity.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 52
Total revenue, net of provisions for credit losses, was
$11.6 million higher than the 2013 results, totalling
$224.3 million in 2014. The main driver of this increase
was the significant growth in relationships with
members, which resulted in higher net interest and
non-interest income. Net interest income, which is the
difference between the income that is generated by
Meridian’s assets and the cost to attract member
deposits and other borrowings, grew by $10.4 million
to $186.8 million. The strong increase in member
account balances was sufficient to offset the adverse
impact of ongoing margin compression. Non-interest
income from operating activities, excluding profits from
investments in associates and joint ventures, rose by
$4.0 million to $43.4 million, influenced by revenue
from Wealth assets. Non-interest income from
investments in associates and joint ventures declined
by $2.2 million to $1.3 million as our investment
holdings reduced. Non-interest expense was $20.5
million above that of 2013 expenses, totaling $173.8
million. The increase in expenses was largely
attributable to higher expenses associated with our
growth and branch expansion, increased community
investment, marketing spend to build awareness and
investments in strategic initiatives. The 2013 results
also benefited from a one-time $5.7 million reduction
in expenses due to a pension plan curtailment gain.
Meridian’s capital and risk-weighted capital ratios
remained strong at 6.4% and 13.2% respectively
due to strong earnings, well exceeding the minimum
regulatory requirements of 4.0% and 8.0%,
respectively. The ratios declined slightly from 2013
due to strong asset growth.
Meridian’s liquidity ratio declined to 10.5% at the
end of 2014 from 11.1% a year earlier. This ratio
remains well above the minimum operating target of
7.75%, while Meridian optimizes liquidity for
operating activity.
The efficiency ratio is a measure of productivity and is
calculated as non-interest expense divided by total
revenues, expressed as a percentage. Faster growth in
expenses relative to increased revenue, previously
described, resulted in a higher efficiency ratio of 77.5%
in 2014 compared to 72.1% in 2013.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 53
Meridian’s leverage ratio rose to 13.4% reflecting an
increase in mortgage securitizations used to fund
lending to members.
2014 Financial Performance Review
To assess Meridian’s financial performance from core
business operations, earnings have been normalized to
exclude unusual charges and adjustments associated
with Meridian’s amalgamation of Desjardins Credit
Union (“DCU”) in 2011, and unusual items resulting
from changes to defined benefits pension plans.
Normalized pre-tax earnings were $53.3 million in
2014, a decrease of $3.7 million from 2013.
Pre-tax earnings totaled $50.5 million in 2014, down
from $59.4 million in 2013. The reduction in earnings
was driven by higher strategic investment expenses
coupled with restrained revenue growth due to
continued net interest margin compression, brought
about by the low interest rate and competitive
environment.
Items excluded from normalized earnings include:
•
Integration expenses, including legal and banking
system conversion expenses, totalling $0.2 million
and $3.7 million in 2013 and 2012 respectively
•
Expenses related to the amortization of fair value
adjustments recorded as part of the amalgamation
of $2.8 million, $3.1 million and $6.8 million in
2014, 2013, and 2012 respectively
•
Pension plan curtailment gain of $5.7 million in
2013 and $1.1 million in 2012
Total Revenue
Total revenue, which consists of interest and noninterest income before provisions for credit losses,
grew from $219.3 million in 2013 to $231.4 million in
2014. The increase was largely driven by strong
growth in relationships with members. Increased net
interest income was generated from growth in lending
to members and partly offset by the cost of deposits
and other sources used to fund lending. Wealth
management assets grew significantly, both in terms
of sales and market appreciation. This resulted in
higher trailer fee revenue, which was the main
contributor to Meridian’s favourable non-interest
income from operating activities. The combined
positive revenue growth was partly offset by a decline
in revenue from investments in affiliates. Holdings of
asset backed commercial paper (“ABCP”) by Meridian’s
investment affiliate decreased, resulting in lower
profits from increases in market value of the paper
held.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 54
Net Interest Income
loans to members grew significantly in the year,
growth in average total assets was partially offset by
the deployment of cash to fund loan growth.
Net interest income is comprised of earnings on assets
such as loans and securities, including interest income,
less interest expense paid on liabilities, such as
deposits and wholesale funding.
Net interest margin is the ratio of net interest income
to average total assets, expressed as a percentage. In
2014 net interest margin was 1.95%, down 3 basis
points from the prior year. Declining margin, consistent
with 2013, was due to the continued low rate
environment and competition in the financial services
sector for deposits and lending. While interest income
from lending and investments was constrained, little
relief was experienced from deposits and external
borrowing. As outlined in the following table, total
interest expense is growing at almost the same rate as
interest income. In addition the table shows the yearover-year changes in net interest income, net interest
margin, average assets, average liabilities and yields.
Net interest income for the year was $186.8 million, an
increase of $10.4 million or 5.9% over 2013. This was
a result of earnings on assets increasing by $18.9
million or 5.9%, partially offset by interest expense
incurred on liabilities increasing $8.5 million or 5.9%
over 2013.
Meridian’s average total assets increased $665.9
million or 7.5% in 2014, mostly driven by loans to
members. In particular, there was substantial growth
in average mortgage balances, with an increase of
$526.2 million or 11.7% over the prior year due to
strong housing demand and attractive mortgage rates.
The Commercial sector also realized some sizeable
gains in 2014 which is indicated by average loan
growth of $228.6 million or 11.5% over 2013. While
Net interest income
($ millions)
2014
Cash and cash equivalents
Investments
Loans
Lines of credit
20131
Average assets / liabilities
Change
%
($ millions)
2014
2013
Change
%
Net interest margin
(in basis points)
2014
20131
Change
( 40.8)
0.5
2.1
( 76.2)
170.2
297.5
( 42.8)
29.4
70.2
14.9
13.8
8 .0
822.5
805.3
2 .1
181.2
171.5
9 .7
107.3
100.6
6 .7
2,215.1
1,986.6
1 1.5
484.4
506.5
( 22.1)
51.3
50.5
1 .6
1,272.0
1,251.8
1 .6
403.3
403.5
( 0.2)
166.5
154.6
7 .8
5,005.9
4,479.7
1 1.7
332.8
345.1
( 12.5)
107.5
106.5
0 .9
340.5
321.6
5 .9
9,593.2
8,927.4
7 .5
355.0
360.3
( 5.4)
Demands
24.9
22.3
1 1.7
3,225.4
2,990.2
7 .9
77.2
74.6
2 .6
Fixed terms
97.2
98.1
( 0.9)
4,287.3
4,224.4
1 .5
226.7
232.3
( 5.6)
Borrowings
29.1
24.7
1 7.8
1,307.4
991.3
3 1.9
222.6
249.2
( 26.6)
2.5
0.1
2 ,400.0
168.0
160.0
5 .0
148.8
6.3
1 42.6
153.7
145.2
5 .9
8,988.1
8,365.9
7 .4
171.0
173.6
( 2.6)
605.1
561.5
7 .8
9,593.2
8,927.4
7 .5
160.2
162.6
( 2.4)
194.7
197.6
( 2.9)
Mortgages
Other assets
Interest income / total assets
Other liabilities
Interest expense / total
liabilities
Members’ equity
Total liabilities and
Members’ equity
153.7
145.2
5 .9
Total
186.8
176.4
5 .9
Despite significant market competition for deposits,
Meridian was able to generate late year deposit growth
with the re-branding of our market leading high
interest savings product. This re-branding was a key
contributor to total demand balance growth of $235.2
million or 7.9% in the year.
1 Comparative information for the year ended December 31, 2013
has been revised to reflect the reclassification of costs incurred in
the establishment of a securitization issue. A total of $2.7 million in
costs have been recognized in interest expense borrowings for the
year ended December 31, 2013. In prior years these costs were
presented in non-interest income.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 55
Meridian continued to securitize residential mortgages
throughout 2014 to help fund sustainable growth. The
interest expense associated with Meridian’s securitization
activities increased, from 2013, by $4.9 million or 22.1%
to $26.9 million, largely due to incremental issuances of
$247.4 million. Although the mortgage securitization
liability has grown year-over-year, Meridian believes that
the continued use of mortgage securitization as a funding
source is economically advantageous, and continues to
weigh it against alternative funding sources to ensure
funding is being planned in a responsible manner.
Net interest income is also impacted by fluctuations in
capital markets above and beyond what we consider to
be our normal operating activities. As circumstances
warrant, we undertake hedging activities, which may
include the purchase of derivative instruments to
protect Meridian and its members from changes in
external market conditions. These hedging activities, in
turn, generate their own net interest income or loss,
countering the impact on the underlying item.
In December, Meridian executed a bond forward
hedging strategy to lock in the cost of funds for a
portion ($200 million) of 2015 securitization funding. In
addition, in order to match the duration of our shortterm demand deposits with our longer term lending
products, Meridian executed $500 million of pay fix
interest rate swaps in 2014,which consisted of $400
million five year pay fix interest rate swaps and $100
million four year pay fix interest rate swaps. The
notional amounts of our derivatives represent the
amount to which rate or price is applied in order to
calculate the amount of cash that must be exchanged
under the contract. Notional amounts do not represent
assets or liabilities and therefore are not recorded in
our consolidated balance sheet. The fair value of overthe-counter (“OTC”) derivative contracts is recorded in
our consolidated balance sheet. The interest income or
expense associated with quarterly cash settlements are
reflected in profit and loss.
Provision for Credit Losses
The provision for credit losses (“PCL”) was $7.2 million
in 2014, compared to $6.5 million in 2013. The PCL for
the Commercial loan portfolio was $4.9 million ($4.7
million in 2013) and $2.3 million was attributable to
the Retail and Small Business loan portfolios ($1.8
million in 2013). Commercial losses are comprised of a
relatively small number of larger, and sometimes
individually significant, losses. Due to the specialized
nature of the underlying security, it can take several
years to sell properties or realize on the security. There
have been only a few new Commercial impairments
over the past couple of years; however in 2014 the
Commercial
PCL
included
several
significant
impairments dating back to 2010. Of the $4.9 million
of losses on the Commercial portfolio, $5.7 million
resulted from adjustments to security valuations on
pre-2014 impairments and $2.2 million related to new
Commercial impairments. These losses were offset by
a $3.0 million adjustment to the collective provision
reflecting the declining five year average of historical
loss rates on which the provision level is based. The
PCL represented 0.08% of the total loan portfolio in
2014, which was consistent with 2013 results.
Commercial PCL is 0.18% of the Commercial loan
portfolio (0.20% in 2013) and Retail PCL represented
0.04% of the respective portfolio (0.03% in 2013).
Credit Portfolio Quality
Loan loss provisioning is determined in accordance
with an established policy. Management reviews the
loan allowance position monthly with a focus on
updated forecasts for watchlist accounts, impairment
levels and expected net credit losses. Provisioning is
adjusted where necessary to ensure compliance with
policies and to include management’s best estimate
of losses based on currently available information.
Gross impaired loans decreased from $84.7 million
in 2013 to $71.2 million in 2014 representing 0.80%
of the total loan portfolio. The total allowance for
impaired loans, at $36.2 million, was $1.6 million
lower than the prior year. Due to the high exposure
levels and nature of security on many of the
Commercial impairments, impaired accounts can
take in excess of a year or two to close. Several
large Commercial impairments from previous years
remained on the books at year-end resulting in an
allowance significantly higher than the PCL in 2014.
Of the total allowance, $22.7 million was
attributable to specific impairments, with the
remaining $13.5 million attributable to collective
reserves. The collective allowance estimates
incurred losses in the existing credit portfolio that
cannot yet be identified on an individual loan basis.
The total loan allowance as a ratio to total loans was
0.41% in 2014, of which 0.26% represented specific
allowance and 0.15% was collective allowance. The
total collective allowance decreased as a percentage
of total loans by 0.05% from 2013. This was largely
a result of a decline in the Commercial collective
allowance. The Commercial collective allowance was
determined by considering the past five years of
Commercial impairments and applying an average
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 56
default rate to the loan portfolio in 2014. Average
default rates have declined due to favorable loss
experience in recent years, relative to historical
periods.
Asset quality coverage
($ millions)
2014
2013
8,890.7
8,100.7
Gross impaired loans (“GIL”),
December 31
71.2
84.7
Total allowance for impaired
loans, December 31
36.2
37.8
7.2
6.5
0.80%
1.05%
GIL as % of Members’ equity
11.58%
14.54%
Total allowance as % of total
loans
0.41%
0.47%
PCL as % of total loans
0.08%
0.08%
% Better than average
14.8%
15.9%
% Average
68.2%
65.1%
83.0%
81.0%
Total loans, December 31
Provision for credit losses
(“PCL”)
GIL as % of total loans
Commercial loans:
A risk rating system is utilized to assess and monitor
the risk profile of our Commercial loan portfolio. The
model is based on an in-depth assessment of the
borrower’s risk of default which is measured by
industry, business, management, and financial risk
factors, along with the risk of loss given default. The
risk of loss given default is based on an assessment
of security composition and relative historical
recovery experience. The Commercial loan portfolio,
stratified by risk rating ranging from “very low” to
“impaired”, is reviewed monthly. Most of the
portfolio continued to fall into the combined “better
than
average”
and
“average”
categories.
Collectively, these two ratings accounted for
approximately 83.0% of the total Commercial
portfolio, up from 81.0% the previous year. During
2014, the Early Warning System that was piloted in
2013 was fully rolled out for all Commercial
accounts. This comprehensive system considers 17
metrics in a monthly assessment that will identify
accounts where there may be indicators of increase
in risk. This allows for more timely identification of
accounts that require follow up, additional attention
through the adjudication process or an increase in
risk rating to Watchlist status, with the objective of
correcting issues that may otherwise result in future
impairment of the account.
Meridian continues to make significant progress
towards the implementation of the multi-year BBTP.
Initiatives identified at the onset are well underway,
including the enhancement of internal portfolio
credit management practices, the introduction of
continuous
credit
risk
monitoring
and
the
improvement of the member experience through
new automated processes and techniques.
The Commercial Target Operating Model (“TOM”)
has since been fully introduced, yielding significant
operational benefits including an enhanced credit
quality assessment process, improved leadership
development and direction, as well as leveraging
existing employee experience and drive to improve
the member experience and deliver an exceptional
product. The scoping and development of the
Commercial and Small Business Loan Origination
System (“LOS”) is currently in progress. Substantial
credit quality based advances are anticipated in the
form of increased efficiencies and a more stringent
control
environment,
improved
credit
based
analytics and reporting, and an enriched member
experience.
Meridian’s Commercial portfolio is now measured
with a robust set of credit risk monitoring and
reporting techniques designed to improve the
transparency of the credit quality within the
Commercial portfolio. This further empowers
management with sound analytics to support
improved decision making. Specific enhancements
include the implementation of an early risk
identification process, balance and utilization
trending and peer comparative analysis.
Meridian continues to benefit from the significant
improvements regarding credit quality awareness
within the Commercial portfolio as a direct product
of the BBTP.
Non-Interest Income from Operating Activities
Non-interest income from operating activities rose by
$4.0 million or 10.1% to $43.4 million in 2014. This
performance was largely attributable to results from
our off balance sheet wealth portfolio. Mutual fund
revenue accounted for $2.5 million of the increase in
non-interest income, growing by a record 41.0% to
$8.6 million. The results reflect significant growth in
wealth balances due to exceptional sales and market
appreciation. Sales were influenced by an increase in
Meridian’s overall Wealth management workforce and
a growing affinity by members for wealth products that
are capable of yielding higher returns, given the low
interest rate environment. Additionally, Meridian’s
wealth product offering was expanded to include
equities, bonds and ETFs.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 57
Insurance commissions grew by $0.9 million to $5.6
million on account of life insurance sales, as we
encouraged members to engage in their overall estate
planning. Substantial growth was experienced in
Commercial lending in 2014, driving a $0.6 million
increase in income from loan fees to $8.7 million.
Revenue from service fees rose by $0.4 million to
$12.3 million mainly reflecting the annualized impact
of passbook and statement fees that were introduced
in 2013. Service fees also grew as a result of increased
usage of email money transfers, a value added service
that was introduced in 2012 and is gaining popularity
among members.
Interac revenue declined by $0.2 million to $2.0 million
due to continued lower ABM transaction volumes. This
is an ongoing trend in the financial services industry as
alternative electronic means of payment are adopted.
Revenue from foreign exchange also fell by $0.4
million to $3.5 million. This was influenced by the
weaker Canadian dollar which resulted in a decrease in
foreign exchange purchases.
The following table summarizes the composition of
Meridian’s non-interest income.
Non-interest income
2014
2013 1
%
Change
12.34
8.56
11.92
6.07
3.5%
41.0%
Loan servicing fees
8.68
8.07
7.6%
Insurance commission
5.61
4.74
18.5%
Foreign exchange
3.46
3.83
-9.6%
Interac revenue
2.00
2.24
-10.8%
Credit card revenue
1.04
0.89
16.5%
($ millions)
Service fees
Mutual fund revenue
Other
1.69
1.65
Total
43.38
39.41
2.8%
10.1%
Non-Interest Income from Investments in Associates & Joint Ventures
Non-interest income from Meridian’s investments in
associates and joint ventures decreased $2.2 million to
$1.3 million in 2014. This largely reflects a reduction in
third party ABCP held by the CUCO Cooperative
Association, as investments matured or were sold. The
association was created to hold the ABCP of the legacy
Credit Union Central of Ontario on behalf of member
credit unions, following the merger with Credit Union
Central of British Columbia to form Central 1 on July 1,
2008. In the past, gains on the ABCP investments were
significant due to appreciation of market value. In
more recent years, gains have moderated as the
investments move closer to maturity and the risk
profile of the remaining paper decreases.
Non-Interest Expenses
Non-interest expenses rose to $173.8 million in
2014 from $153.3 million in 2013. The 13.4%
increase in expenses was mainly associated with
activities
that
support
Meridian’s
strategic
objectives. Higher spending was related to branch
expansion, community investment, marketing to
build awareness and investments in strategic
initiatives. It should also be noted that the 2013
results were favourably impacted by a one-time $5.7
million pension plan curtailment gain which reduced
personnel expenses. Adjusting for this one-time
gain, expenses increased by $14.8 million or 9.3%
from 2013 to 2014.
Personnel expenses which include all employee
salaries, benefits and incentive compensation
accounted for $15.9 million of the increase in
expenses.
Excluding
the
one-time
pension
curtailment gain in 2013, personnel expenses grew
by $10.2 million. Higher personnel expenses are
largely attributable to incremental employees
required for our expanded network of branches and
to support a significant number of strategic
initiatives. We also strengthened our senior
leadership with key positions that are important to
the long-term success of the Credit Union. Additional
support was provided to our existing Delivery
network, to ensure members could truly be provided
a differentiated experience and that relationships
could be deepened. The increase in variable
incentive compensation partly reflected the growth
in employees but was also attributable to our
employees’ outstanding performance in 2014, which
exceeded targets established by the Board.
Marketing expense, which includes investments into
the communities in which we operate, grew by $2.1
million to $8.3 million. The increase reflected
support for our strategic goal to build brand
awareness and also funding for our Commitment to
Communities program. Through that program, in
addition to time and talent, we invest at least 4% of
our pre-tax earnings. In 2014, brand awareness
activities included investment in traditional and
digital advertising, print, radio, direct mail, outdoor
advertising, wrapped transit shelters, as well as
participation in community events.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 58
Occupancy costs rose by $0.8 million to $13.4
million on account of our expanded branch network.
($ millions)
Meridian’s investment in strategic initiatives doubled
in 2014 to $5.5 million. These investments were
directly related to projects that support Meridian’s
strategic objectives and will enable us to achieve
long-term
sustainability.
Apart
from
branch
expansion, these initiatives included participation in
the Credit Unions of Ontario awareness campaign,
implementation of online banking for Small Business
members, enhancement of our lending processes
and technology, implementation of a digital banking
strategy, implementation of unique member IDs and
implementation of an in-take employee development
program for key strategic roles.
Salaries and benefits
Salaries
Benefits
Variable incentive
Occupancy
Transaction services
Deposit insurance
Marketing
Software and hardware
Depreciation
Amortization
Human resources
Other expenses
Total
2014
2013
103.6
74.3
16.2
13.1
13.4
9.7
5.8
8.3
4.0
6.0
3.5
2.3
17.1
173.8
87.7
69.5
9.4
8.8
12.6
9.6
5.7
6.2
3.8
5.6
3.4
2.5
16.2
153.3
%
Change
18.2%
7.0%
72.5%
48.4%
6.3%
1.2%
1.4%
32.9%
5.6%
7.1%
4.4%
-8.1%
6.0%
13.4%
Dividends
for 2012 to 2014 (previously 6.0%). The dividend
rate paid on the series 01 and series 96 shares was
4.5% for 2012 to 2014 (previously 6.0% for series
01 and 5.75% for series 96), while the dividend rate
paid on the series 09 shares has been 5.75%. The
payment track record is illustrated in the table below
for the last five years.
Meridian’s track record of profitability has enabled
the payment of dividends on its various series of
investment shares. Meridian has declared and paid a
dividend on each series of these shares since
inception, with market leading rates for these types
of investments. The dividend rate paid on the “50th
Anniversary” and the series 98 shares was 4.75%
History of dividends paid during the past 5 years
($ millions)
2014
“50th Anniversary” Class A shares
Series 96 Class A shares
Series 98 Class A shares
Series 01 Class A shares
Series 09 Class A shares
Total
2013
2012
2011
2010
2.8
1.9
0.2
2.4
4.0
2.7
1.8
0.2
2.3
3.8
2.6
1.7
0.2
2.2
3.6
3.1
2.1
0.2
2.8
3.5
2.9
2.0
0.2
2.7
1.0
11.3
10.8
10.3
11.7
8.8
Financial Conditions Review
Balance Sheet Summary
Meridian’s total assets grew by 8.8% to $10.0 billion in
2014, an increase of $810.1 million over the previous year.
Total Assets ($ billions)
2013
2014
$9.2
$10.0
Growth in lending to members was primarily
attributable to the increase in assets. Short-term
investments declined, contributing to a strategic
decrease in liquidity. Longer term investments in
mortgage backed securities and our liquidity reserve
deposits held with Central 1 grew, offsetting the
decrease in short-term investments.
Loans to Members grew by 9.8% or $790.0 million to
$8.9 billion, with Retail mortgages accounting for
60.5% of this growth.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 59
Loans to Members ($ billions)
2013
$8.1
2014
$8.9
Retail mortgages increased by $478.7 million, slightly
above the growth realized in 2013. Growth was
generated across all channels including through the
branch network, mobile mortgage specialists and
mortgage brokers. The “We’ve Got Your Back”
mortgage offer with a competitive interest rate was a
key driver to our success in growing Meridian’s
mortgage portfolio. Growth in Commercial lending
represented 36.8% of total loan growth, while personal
lending accounted for the remainder of the increase in
loan balances.
Member deposits grew by 7.5% or $559.1 million to
$8.0 billion in 2014.
Members' Deposits ($ billions)
2013
2014
$7.4
$8.0
Other than deposits, Meridian’s most significant change
in liabilities was mortgage securitization which grew by
18.2% or $203.0 million. The increase supported
funding for lending to members and contributed to the
rise in Meridian’s leverage ratio.
Meridian’s off-balance sheet assets are its wealth
portfolio which is comprised largely of mutual fund
assets held by members.
Wealth ($ billions)
2013
2014
$1.0
$1.4
Meridian’s wealth portfolio continued to experience
significant growth in 2014. Member balances rose
31.5% or $329.1 million to $1.4 billion. This strong
growth represents net sales of $240.6 million along
with appreciation in the market value of members’
investments, despite market volatility in the fourth
quarter of the year.
Overall, the total member relationships managed by
Meridian which include lending, deposits and wealth
grew by 10.9% to $18.3 billion in 2014.
Total Relationships ($ billions)
Despite continued intense competition for deposits
among financial institutions and an increase in member
preference for potentially higher yielding wealth
products, Meridian’s deposit growth more than doubled
the results from 2013. The fastest growing deposit
product was the Good to Grow high interest savings
account which offers members an opportunity to grow
their savings faster with a market leading interest rate.
The Business Advantage Plus was the account of choice
for business members to grow their deposits. Tax Free
Savings Accounts (“TFSAs”) continued to perform well
in 2014, with balances growing by $95.1 million, while
growth in term deposits was restrained due to the
interest rate environment.
2013
2014
$16.5
$18.3
Growth was diversified across business lines and
across product categories. Wealth grew the fastest, a
clear indicator that members are focused on retirement
and overall financial planning, seeking to maximize
their return with the help of Meridian’s Advisors.
Liquidity Review
Managing liquidity and funding risk is critical to
ensure the safety and soundness of Meridian,
depositor confidence and stability in earnings.
Meridian’s policies ensure that there are sufficient
liquid assets and funding capacity to meet financial
commitments, even in times of stress. Meridian’s
Board policy stipulates the maintenance of a
minimum liquidity ratio of 7.75%, which is
determined by a ratio of cash and cash equivalents
to members’ deposits and borrowings As of
December 31, 2014, Meridian’s liquidity ratio was
10.5% compared to 11.1% at the end of 2013,
situating Meridian’s liquidity comfortably above the
minimum requirement established by the Board.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 60
Meridian’s funding strategy follows a sustainable
growth approach in that the funding of organic
lending growth is primarily accomplished through
organic deposit growth. Meridian maintains a large
and stable base of member deposits that, along with
our strong capital base, is a source of strength. It
supports the maintenance of a sound liquidity
position and reduces our reliance on wholesale
funding. Member deposits include core deposits and
larger Retail and Commercial fixed rate deposits.
Throughout the year Meridian entered into a total of
$500 million of notional 4 and 5-year term pay fix
interest rate swaps to extend the duration of our
variable deposits to match our longer term lending
products. With the volatility present in the markets
today, this derivative strategy provides protection to
our balance sheet.
Securitization remains an attractive funding strategy
for Meridian as it provides stable ready access to
long-term funding at a low cost. This wholesale
funding source increased by 18.2% compared to
2013 as a result of $247.4 million of incremental
securitization issuances in 2014. Diversification of
wholesale funding sources is an important aspect of
Meridian’s overall liquidity management strategy.
Meridian continues to maintain a diversity of funding
sources in the event that future securitization
funding may not be available or may only be
available at significantly higher rates.
Capital Management
Overview
Meridian is committed to a disciplined approach to
capital management and maintaining a strong capital
base to support the risks associated with its business
activities. Maintaining a strong capital position
contributes to safety for our members, promotes
confidence in attracting new members to Meridian,
maintains strong returns to Meridian’s Class A
Shareholders and allows Meridian to take advantage of
growth opportunities.
Meridian’s capital management philosophy is to remain
adequately capitalized at all times and to maintain a
prudent cushion of equity to ensure its on-going
economic stability as well as finance new growth
opportunities.
The principles and key elements of our capital
management framework are outlined in the Board
Capital Management Policy. This policy establishes and
assigns the responsibilities related to capital, and sets
forth both general and specific policy guidelines related
to capital management and the reporting mechanisms.
The Board of Directors and its Risk Committee provide
ultimate
oversight
and
approval
of
capital
management, including the Capital Management Policy
and Annual Capital Plan. They regularly review
Meridian’s capital position and key capital management
activities. The Executive Leadership Team provides
senior
management
oversight
of
the
capital
management process, including review and discussion
of significant capital policies, issues and action items.
The Risk Committee has strategic and operational
oversight of the Capital Management Policy while the
Audit & Finance Committee monitors compliance with
the policy.
Managing and Monitoring Capital
Meridian has a comprehensive risk management
framework to ensure that the risks taken while
conducting business activities are consistent with its
risk appetite. In managing our capital position, close
attention is paid to the cost and availability of the
types of capital, desired leverage, changes in both
assets and risk weighted assets, and the opportunities
to profitably deploy capital.
Capital levels are monitored monthly and compared to
forecasted levels for both capital and risk-weighted
capital. Our monitoring and forecasting procedures
track the expected growth rate in assets relative to
earnings to determine if additional share capital is
required. These projections also take full account of
any future impact of changes in accounting standards.
A detailed discussion of capital management is
provided in note 29.5 of the audited consolidated
financial statements.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 61
Capital Review
Meridian’s regulatory capital ratios are strong and well
exceed the requirements of the Credit Unions and
Caisses Populaires Act, 1994 (the “Act”) which
regulates Ontario Credit Unions and underlies Board
policy
requirements.
These
ratios
underscore
Meridian’s strength and long-term stability and
commitment to a disciplined approach to capital
management that balances the interests and
requirements of members, regulators and depositors.
Meridian’s capital adequacy ratio was 6.4% as of
December 31, 2014 compared to 6.6% at the end of
2013 and well ahead of the 4.0% stipulated in the Act.
Meridian’s risk weighted capital adequacy ratio was
13.2% at the end of 2014, down slightly from 13.4%
in 2013 and significantly higher than the 8.0%
stipulated in the Act. Meridian’s capital quality also
exceeds regulatory minimum requirements. Provincial
regulations require that at least 50% of a credit
union’s capital base be comprised of primary or Tier 1
capital. In order to maintain an appropriate level of
conservatism, our internal capital management
philosophy is to keep our Tier 1 capital as a percentage
of total capital greater than 60%. As of year-end,
88.1% of Meridian’s capital base consisted of Tier 1
capital, an increase of 60 basis points over 2013 and
well in excess of internal and provincial minimums.
Internal Capital Adequacy Assessment Process
Beginning in 2014, Meridian began implementing an
Internal
Capital
Adequacy
Assessment
Process
(“ICAAP”) and Stress Testing program, in line with the
requirement for all Class 2 credit unions (which are
those with assets of $50 million and over) regulated by
the Deposit Insurance Corporation of Ontario (“DICO”).
The purpose of an ICAAP under the Basel II framework
is to determine the adequate capitalization of Meridian
given the risks endured, as well as future risks arising
from growth, new markets and expansion of the
product portfolio. Pillar I of this framework establishes
the minimum capital requirement (a requirement
previously and still in place). Within Pillar II of the
framework, Meridian assesses its own capital adequacy
using an ICAAP which will either determine no
additional capital is needed, or additional capital is
required above Pillar I levels. Incremental stress
testing instills additional capital requirements to
provide a cushion against the impacts of adverse
events.
Risk Management
Overview
Meridian’s activities expose the organization to a
number of risks which could materially impact future
performance. These risks are generally shared by all
deposit taking financial institutions. In support of the
achievement of sustainable growth, a balanced
approach must be taken between business
objectives and the amount of risk.
The main drivers of success of Meridian’s risk
management program are the independence of our
risk management practices and oversight, and the
comprehensiveness of our risk management
framework and approach.
Similar to other financial institutions, Meridian
continually faces challenges in managing risks with
the key challenges being:
•
•
The increasing volume and complexity of
regulatory requirements
The competition to attract and retain
members
•
•
The continued low interest rates
Increasing commoditization of core products
In 2014, a number of activities were undertaken to
enhance Meridian’s risk management. These
included:
•
•
•
•
•
Appointed a permanent Chief Risk Officer
Developed an Enterprise Risk Management
(“ERM”) Strategic Plan, providing a roadmap
for enhancing Meridian’s ERM program
Developed Meridian’s first ICAAP report and
required supporting processes
Completed and initiated the processes to
enable implementation of an Internal RiskAdjusted Return on Capital application for
Commercial lending
Compared risk management to the Office of
the Superintendent of Financial Institutions
(“OSFI”) guidelines to assess current program
against national best practices and guide
continuous improvement plans
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 62
•
•
Redesigned Meridian’s Emerging Risk program
Strengthened commercial credit controls
environment through the addition of a
number of new monitoring tools
•
•
Meridian continues to improve and enhance its risk
management practices and in 2015 the key priorities
will be to:
•
•
Continue to execute on elements of the ERM
Strategic Plan
Enhance Meridian’s ICAAP and related risk
quantification capabilities
•
•
Install / implement / upgrade supporting
technology, including a new Governance,
Risk, and Compliance portal; and upgrades to
our Retail Loan Adjudication system
Develop a Commercial Loan Origination
system for implementation in 2016
Evolve Meridian’s risk appetite framework and
develop and deploy Key Risk Indicators for
Meridian’s six risk categories
Continue to promote a strong risk culture
across the organization through internal ERM
communication, awareness, and training
programs
Risks that may Affect Future Results
Top and Emerging Risks that may Affect Meridian and Future Results
Overview
There are numerous risk factors, many of which are
beyond Meridian’s control and the effects of which can
be difficult to predict, that could cause our results to
differ significantly from our plans, objectives, and
estimates. All forward-looking statements, including
those in this MD&A, are, by their very nature, subject
to inherent risks and uncertainties, general and
specific, which may cause Meridian’s actual results to
differ materially from the expectations expressed in
the forward-looking statements. Some of these factors
are discussed below and others are noted in the
“Caution Regarding Forward-Looking Statements”
section of this MD&A.
Meridian considers it critical to regularly assess its
operating environment and highlight top and emerging
risks. These are risks with a potential to have a
material effect on Meridian and where the attention of
members of the Senior Leadership Team is focused
due to the potential magnitude or immediacy of their
impact. Many of the risks are beyond Meridian’s control
and their effects, which can be difficult to predict,
could cause Meridian’s results to differ significantly
from the plans, objectives, and estimates or could
impact Meridian’s reputation or sustainability of its
business model.
Risks are identified, discussed, and actioned by
members of the Senior Leadership Team and reported
quarterly to the Management Risk Committee and the
Risk Committee of the Board. Specific plans to mitigate
top and emerging risks are prepared, monitored, and
adjusted as required.
Canadian Household Debt
There is increasing vulnerability of Canadians to
negative financial shocks as the debt levels of
Canadian households continue to grow, primarily from
higher levels of mortgage debt driven by rising housing
prices. When interest rates start to rise, the ability of
Canadians to repay their loans may be adversely
affected, creating a risk to the credit quality of the
Retail lending portfolio. Meridian actively manages its
lending portfolios and reviews its credit-granting
policies to minimize the risk of credit losses.
Technology and Information Security
Meridian’s strategic objective of “Expanding Member
Access” includes the development of a comprehensive
online and mobile channel offering which features
secure processing, transmission and storage of
confidential information. The use of the internet and
reliance on digital technologies exposes Meridian, like
all financial institutions, to technology and information
security risks. These risks could include cyber-attacks,
phishing attacks, computer viruses, information
security breaches and malicious software which could
result
in
financial
loss,
business
disruption,
unauthorized access to personal or confidential
information, legal claims, regulatory issues and
reputational damage. Meridian has a comprehensive
information security framework and places a significant
focus on enhancing this framework to detect, prevent
and contain possible threats through enterprise-wide
programs, reviewing industry best practices and
conducting
robust
threat
and
vulnerability
assessments.
Increasing Regulatory Requirements
The introduction of new, and changes to current, laws
and regulations continue to increase Meridian’s
regulatory requirements. These regulatory changes
have the potential to increase Meridian’s operational,
compliance and technology costs, as well as its
reputational risk and hinder the ability to pursue
strategic initiatives or be involved in certain business
activities. Meridian minimizes the potential impacts of
this risk by continually staying abreast of evolving
regulatory changes, expressing its views on proposed
regulatory reform to regulators where the opportunity
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 63
is available and monitoring regulatory requirements to
appropriately plan resources for implementation of
enacted changes.
losses and non-financial impact of fraudulent activities.
Meridian continually implements new capabilities to
combat fraud and strengthen its fraud defences.
Fraud Evolution
Competitive Environment
The various types of fraud that Meridian is exposed to
continue to quickly evolve in their sophistication and
materiality. Meridian’s accountability is to prevent,
detect, and mitigate the misappropriation of assets and
misuse of products and services. Therefore, it has a
fraud prevention framework which ensures policies,
procedures, and internal controls are in place and
effective in managing and minimizing the financial
The financial services industry is highly competitive
and the level of competition directly impacts Meridian’s
performance. The attraction and retention of members
is influenced by a number of factors including
product/service
offerings,
pricing,
and
service
experience, and deterioration in these factors can
impact
Meridian’s
financial
and
operational
performance. Meridian has developed strategic
objectives which will enhance its competitive position
among all types of financial institutions and utilizes a
comprehensive member satisfaction and brand
awareness program to continually understand the
wants and needs of current and prospective members.
Enterprise Risk Management Philosophy
Our enterprise risk management philosophy is to
anticipate risk in all planning and decision making, be
proactive in managing risk, and be accountable for the
impact of our actions.
take responsible risks to derive value for
members and Meridian
Critical to the attainment of the strategic
objectives of Meridian, and as such it is given a
high priority
•
Enterprise risk management is:
•
•
The responsibility of everyone at Meridian,
including the Board of Directors, management,
and all employees
Embodied in the strategic objective of C reating
an Ownership Culture in which employees
This philosophy, combined with the knowledge and
experience of Meridian’s operating management and
risk management teams, ensures that business
strategies and activities are consistent with Meridian’s
risk appetite, which ensures sustainable growth.
Enterprise Risk Management Framework
The enterprise risk management framework:
•
•
•
Provides a basis for confidence among members,
creditors and regulatory agencies that Meridian
will manage risk on a prudent basis through
appropriate mitigations to achieve its business
objectives
Clearly defines the roles and responsibilities for
managing and reporting on risks
Provides reasonable assurance that the risks
associated with achieving business objectives
are well understood and that Meridian responds
appropriately to these risks at all levels within
the organization
The strategic objective of sustainable growth requires a
strong risk management framework. As such, having a
disciplined and integrated approach to managing risks
is integral to Meridian’s operations. Meridian’s ERM
framework is intended to provide appropriate and
independent risk oversight across the entire enterprise
and is essential to building competitive advantage and
stability. It is applied on an enterprise-wide basis and
consists of the following six key elements:
1.
2.
3.
4.
5.
6.
Risk Appetite
Risk Management Structure
Governance and Control
Technology and Tools
ERM Processes
People and Culture
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 64
Risk Appetite
As an integral element of the ERM framework, Meridian
has established and maintains a risk appetite that will:
Enable the Board and management to make better
strategic and tactical decisions based on a riskreward basis
•
Provide the organization with a clear mandate for
the amount and type of risks to accept and the
risks to avoid
•
Facilitate a more considered risk-taking culture in
which decisions about taking on risks reflect the
capacity to manage those risks
•
Result in efficient allocation of risk management
resources and enable the pursuit of business
opportunities that would otherwise be rejected
•
Enable the successful pursuit of business
opportunities that would not otherwise be
considered and capitalized on
Meridian’s risk appetite framework reflects the
business model and enables Meridian to adapt to the
changing economic and regulatory environment in
order to manage new types of risks. The effective
establishment of the risk appetite framework reinforces
a strong risk culture which provides an environment
that is conducive to ensuring that emerging risks that
will have material impact and any risk-taking activities
beyond risk appetite are identified, escalated, and
addressed in a timely manner. The framework consists
of the following four key elements:
•
Enhance Meridian’s brand
Enhance its ability to attract and
retain members through a positive
member experience
•
Meridian has no appetite for non-compliance
with laws and regulations or inappropriate
external reporting (financial or regulatory)
•
As a risk intelligent enterprise, Meridian
approaches risk management not only as a
defensive strategy to manage the negative
impact of risks but also to enhance decision
making to capitalize on profitable opportunities
•
Risks and opportunities are considered both on
an individual basis and in relation to Meridian’s
aggregate risk position for its entire portfolio
•
Meridian’s risk management capabilities must be
considered in establishing risk appetite to ensure
risks are successfully understood and managed
•
Risk appetite should be established for those
areas where Meridian expects to be fairly
compensated for risk-taking
Risk Tolerance Limits facilitate the definition and
communication of risk appetite throughout Meridian
and provide a framework for making decisions and
determining whether decisions are aligned with risk
appetite.
Risk
Tolerance
Limits
are
financial
benchmarks that establish the amount of risk (i.e., a
risk “budget”) Meridian is prepared to accept in specific
risk categories to facilitate value creation for risktaking. Criteria provide supporting guidance for the
development of robust risk appetite statements.
o
o
Key Applications establish where and how the risk
appetite will be embedded and operationalized within
the organization’s strategic and operational processes.
Principles
are
statements
which
reflect
the
organization’s ERM objectives and its risk-taking
philosophy. The Board of Directors have established
the following principles for Meridian’s risk appetite:
•
In pursuit of its vision and
sustainable growth, Meridian
seek and accept only risks
appropriately managed to:
o
Develop the enablers
Plan
achievement of
will proactively
which can be
of its Strategic
Meridian’s risk appetite will be linked to its strategic
and financial plans. Risk appetite will be considered
throughout the strategic planning process as strategic
goals and objectives are set, strategies are formulated,
operations/compliance/reporting
objectives
are
established and decisions are made on how to manage
risks related to the achievement of objectives. Once
the financial plan is established, Management will
validate that the planned results for all risk appetite
metrics do not fall outside of the approved risk
tolerance range.
Governance & Control establishes the protocols that
ensure the risk appetite is subject to appropriate
internal controls. These protocols include roles and
responsibilities, monitoring and reporting and the
actions taken when breaches are identified.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 65
Structure
Meridian’s ERM framework establishes an organizational structure which encompasses employees within individual
business units who follow and seek to enhance processes/procedures/controls in place to manage risk, all the way to the
Board of Directors who has overall responsibility for the establishment and oversight of Meridian’s ERM framework.
A critical element of this structure is the Three Lines of Defence model.
First Line of Defence
Risk Owners
Delivery and Corporate Business Unit Accountabilities
•  Identifies and manages risk in day-to-day activities
•  Designs, implements and maintains effective internal controls
•  Implements risk-based approval processes
Second Line of Defence
Risk Oversight
Governance, Risk & Control Business Unit Accountabilities
•  Establishes enterprise governance, risk ,and control strategies and practices
•  Provides oversight and independent challenge to the First Line through review, inquiry, and discussion
•  Develops and communicates governance, risk, and control policies
•  Provides training, tools, and advice to support policy and compliance
•  Monitors and reports on compliance with risk appetite and policies
Independent Assurance
Third Line of Defence
Internal Audit Services
•  Validates the effectiveness of the First and Second Lines of Defence in fulfilling their mandates and managing risk
•  Independently verifies that the ERM framework is operating effectively
This model recognizes that:
•
Everyone in the organization has a role to play in effective risk management and control; and
•
Without a cohesive coordinated approach, limited risk and control resources may not be deployed
effectively and significant risks may not be identified or managed appropriately.
The foundation of Meridian’s ERM framework is a governance structure that includes a robust committee structure. The
committee structure of the risk governance model is presented below. A description of the responsibilities for each
member in the committee structure follows.
Enterprise Risk Management Framework
Board of Directors
Risk Commit tee
Audit & F inance
Commit tee
President & Chief
Executive Officer
Executive Leadership Team
Management
Risk
Commit tee
Credit
Management
Commit tee
Asset/Liability
Commit tee
Inf ormation
Security
Commit tee
Pension
Commit tee
Senior Leadership Team
C redit
R isk
S tructural
R isk
Liquidity
R isk
O perational
R isk
Me mber
R isk
S trategic
R isk
Risk Management Services
Business Units
Int ernal Audit Services
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 66
The B oard of Directors oversees the strategic
direction of Meridian and has overall responsibility
for the establishment and oversight of Meridian’s
ERM framework. This includes the following:
Ensure management has implemented an
effective system to manage the risks of the
organization
•
Regularly review and discuss the risks with
management
•
Receive information about the organizational
risks, especially the high residual risks, and how
management plans to handle them within the
approved risk appetite
•
Ensure the organization’s ERM policies and
procedures are consistent with the strategy and
are functioning as directed
•
Work with management to promote and actively
cultivate the culture
•
Provide leadership in embedding an ERM culture
•
Review
with
management
the
Board’s
expectations as to the roles, responsibilities,
and expectations for risk, and the management
thereof to ensure a shared understanding
•
Review/approve risk appetite and related risk
limits
•
Develop ownership of ERM at the Board level
•
Review with management the quality, type and
format of risk-related information provided to
directors
•
Review reports from management, independent
auditors, insurers, regulators, and external
experts as appropriate regarding risk the
organization faces, and the ERM function
The Board accomplishes its mandate both directly
and through its Risk Committee and Audit & Finance
Committee, described below.
•
•
•
The R isk Committee is responsible for overseeing
risk management across Meridian and assists the
Board in fulfilling its responsibilities for approving
Meridian’s Risk Appetite and overseeing Meridian’s
risk profile and performance against the defined Risk
Appetite. This includes oversight of policies,
procedures, and limits related to the identification,
measurement, monitoring and control of Meridian’s
critical enterprise risks.
The Risk Committee is accountable for:
•
Reviewing Management’s identification and
mitigation plans for the significant risks of
Meridian
Overseeing the application of the ERM program
and reporting to the Board of Directors on risk
exposure
Monitoring Risk Appetite metrics and reviewing
the Risk Appetite Framework
The A udit & Finance Committee, in addition to
overseeing
financial
reporting,
regulatory
compliance, and internal/external audit, assesses
the adequacy and effectiveness of internal controls,
including controls over relevant risk management
processes.
The P resident & Chief Executive Officer
(“CEO”) leads Meridian’s Executive Leadership Team
in the setting of the long-term business strategy,
the definition of risk appetite, and integration of risk
appetite into the business strategies and plans. The
CEO has ultimate accountability and responsibility
for:
Shaping the culture
Working with Board and leadership to determine
the risk appetite for the organization
•
Ensuring that the leadership understands the
“enterprise” part of ERM
•
Positioning ERM for success
•
Holding leaders accountable for execution
The CEO is supported by Chief Risk Officer (“CRO”)
and five M anagement Committees in the overall
management of Meridian's risk.
•
•
The C RO is responsible for ensuring that Meridian’s
key strategic and tactical business activities are
directed and managed with due regard to
understanding and pro-actively managing all
inherent risk / reward considerations and trade-offs.
The
CRO
has
ultimate
accountability
and
responsibility for:
•
•
•
•
•
Developing
and
implementing
an
ERM
Framework
Providing risk oversight leadership and direction
in respect of the Credit Union’s operations
Acting as Executive Sponsor for the Board Risk
Committee
Evolving a risk aware culture across the
organization
Overseeing Meridian’s anti-money laundering,
fraud management, credit risk management,
operational risk, and internal audit programs
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 67
Management Committees:
The
M anagement
Risk
Committee,
which
comprises select members of the Executive Leadership
Team and Senior Leadership Team, provides risk
oversight and governance at the highest levels of
management through the review and discussion of
significant risk issues and action plans that arise in the
execution of the enterprise-wide strategy. The
Committee is responsible for ensuring that Meridian’s
risk profile is consistent with its strategic objectives
and risk appetite and there are continuous, appropriate
and effective risk management processes. Risk
Management Services supports the Committee in the
performance of these activities.
The Management
accountable for:
•
•
•
•
•
•
•
•
•
•
•
Risk
Committee
is
specifically
Promoting a strong, robust and pervasive risk
management culture which establishes the "tone
at the top" relative to risk management
Acting as risk representatives to ensure emerging
risks are surfaced, encouraging participation in
and
overseeing
risk
quantification
efforts
(including stress testing and scenario analysis)
and providing oversight of function-specific risk
activity
Reviewing annually Meridian's ERM framework and
providing
senior
management
approval
of
additions and changes prior to the review
conducted by the Board Risk Committee
Reviewing at least annually changes to the Risk
Appetite statement and related metrics
Reviewing new or changes to existing risk
management policies
Reviewing significant pronouncement and changes
to regulatory requirements relating to ERM that
apply to Meridian
Reviewing the results of Meridian's stress testing
program
and
Internal
Capital
Adequacy
Assessment Process
Reviewing the quarterly ERM review report
identifying the current and emerging risks, their
risk assessments and status of mitigation plans,
and any new risks identified by senior
management
Assessing
risk
mitigation
plans,
assigning
responsibility for risk mitigation, ensuring internal
control activities are implemented for risk
mitigation and monitoring action taken to mitigate
significant exposures
Reviewing the actual results of Risk Appetite
metrics and approving the action plans provided
by senior management to return the metric within
its stated risk appetite range
Reviewing the results of independent reviews of
the risk management function and ERM Program
Reviewing the results and Management's action
plans and responses relative to the findings and
recommendations of Regulatory reviews conducted
by Regulatory agencies, Internal Audit Services or
third parties contracted by Internal Audit Services
The C redit
Management
Committee, which
comprises the CEO, CRO, Chief Financial Officer
(“CFO”), Chief Member Services Officer (“CMSO”), VP
Commercial Delivery, and VP Credit Management,
reviews Meridian’s overall loan portfolio key indicators
and monitors performance against established Credit
policy. Key activities include reviewing key portfolio
management indicators (sector / connected party
limits, delinquency and impairment trends, and watch
list reports), reviewing pipeline reporting to ensure
lending is managed within established loan targets,
reviewing limit proposals and providing input from a
business
perspective,
annual
review
of
loan
provisioning
policy
and
review/monitoring
of
provisioning status and forecasts throughout the year,
approval of commercial deals from a ‘strategy’
perspective, and review of macro-economic industry
trends that could have systemic impact, positive or
negative, upon all or portions of the loan portfolio.
•
The A sset/Liability Committee is comprised of the
CEO, CFO, CRO, CMSO, Chief Marketing Officer, and
the VP Treasury and Performance Measurement. The
Committee provides strategic direction in the
management of interest rate risk, foreign exchange
risk, liquidity and funding risk, investment portfolio
decisions, and capital management. The Committee is
also accountable for compliance with policies,
guidelines, and regulations relative to investments,
derivatives, and liquidity.
The I nformation Security Committee is comprised
of the Chief Information Officer (“CIO”), CRO, CMSO,
and IT Governance leaders. T he Information
Security
Committee
is accountable for the
governance of Information Security and security of
member information, ensuring that Information
Security policies and activities are integrated and
coordinated across all related business operations, and
providing awareness of Meridian’s information risk
profile, and that information security risks are
mitigated to an acceptable level in accordance with
policy.
The P ension Committee, comprised of the Chief
People Services Officer, CMSO, CFO, and senior leaders
from Finance, Risk Management Services, and People
Services, is responsible for all communications,
investments,
actuarial,
and
funding
and
administration/operations related to Meridian’s defined
benefit pension plan and defined contribution pension /
savings (RRSP) plan.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 68
Management Structure:
Risk management is integrated into the operating
structure of Meridian, ensuring both a robust risk
management capability and the effective consideration
of risk in day-to-day management.
risk identification, measurement, control, monitoring
and
reporting.
Risk
Management
Services
is
independent of Meridian’s Business Units and works
collaboratively with Business Units to:
The S enior Leadership Team is accountable and
responsible for:
•
Identifying new risks
Monitoring existing risks on a continuous basis and
providing status reports to the Management Risk
Committee
•
Obtaining and allocating resources for risk
mitigation
•
Implementing internal controls and mitigation
supporting processes
•
Proposing amendments or enhancements to
Meridian’s risk appetite
•
Managing risk in their portfolio(s)
•
Working with colleagues to ensure that ERM is
integrated across the organization
•
Working with direct reports to establish the culture
of ERM
•
Overseeing the implementation and compliance of
policies and procedures within their portfolio(s)
•
Overseeing the implementation of risk reduction
and mitigation strategies within their portfolio(s)
Business Units, the First Line of Defence, will ensure
that processes, procedures and controls that are in
place to manage risk are being followed and enhanced
where necessary and will implement supporting
processes and internal controls identified through the
risk mitigation process by the Senior Leadership Team.
•
•
Risk Management Services, one of the Second
Lines of Defence, is responsible for the design and
application of Meridian’s ERM framework and provides
independent oversight and governance with respect to
Establish policies, procedures and limits that align
with Meridian’s risk appetite
•
Identify, assess, mitigate and monitor the risks
associated with business activities and strategies
•
Provide education and awareness relative to
Meridian’s ERM framework
Risk Management Services is also accountable for:
Maintaining and refining Meridian’s ERM program
and its related systems
•
Periodically reviewing and recommending changes,
if any, to the ERM and risk appetite frameworks
•
Providing consultation to Management on riskrelated issues
•
Coordinating risk reporting to the Risk Committee,
Audit & Finance Committee and Board of Directors
•
Developing
and
delivering
educational
presentations internally to Management, Board
Committees and the Board of Directors as required
Risk Management Services will develop and submit for
approval to the Management Risk Committee and
Board Risk Committee multi-year strategic plan for
ERM to update and refine the ERM program and will
provide an update at least annually to the Risk
Committee on the status of these plans.
•
Internal Audit Services, the Third Line of Defence,
provides independent assurance to the Board of
Directors, through the Audit & Finance Committee, of
the effectiveness of risk management, control and
governance processes that are in place to manage the
risks that are faced by Meridian.
Governance & Control
This element of the framework establishes the
enterprise risk universe and the policies, processes and
controls that are designed to ensure that risks in that
universe are being appropriately identified and
managed. Board Policies consist of both those risk
management policies required by DICO By-Law No. 5
and other Board policies established by management
for critical functions/activities.
Risk management frameworks and policies establish
the necessity for this framework and its applicability to
the enterprise risks and also include management
policies and procedures to manage risk.
Risk review and approval processes establish approval
responsibilities governed by delegated authorities for
specific categories. They are established based on the
nature, size and complexity of the risks involved. In
general, the process involves a formal review and
approval by an individual or a committee that is
independent
of
the
originator.
The
approval
responsibilities are governed by delegated authorities
based on the following categories:
•
Portfolio transactions
•
Structured transactions
•
Strategic projects and initiatives
•
New products and services
Authorities and Limits act as a key control for
underwriting, investing, hedging, structuring, and
maintaining adequate liquidity. The Board of Directors
maintains overall responsibility for the risks to which
Meridian is exposed. However, the Board delegates the
responsibility of managing specific risks, on a day-to-
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 69
day basis, to certain members of senior management
and/or Executive Committees. The delegation of
responsibility by the Board of Directors is in
accordance with the provisions of a particular Board
policy.
Technology & Tools
This element of the framework encompasses tools to
monitor risk management programs and obtain
relevant risk information. The loss database is a key,
standard element of the resources needed for effective
ERM. The collection and analysis of internal loss data
provides management information which can be fed
back into the ERM and mitigation process. In addition,
the database of internal loss events builds up over
time and provides the basis for quantitative analysis
and the calculation of capital allocation. Meridian
develops financial models to determine the aggregate
risk in our financial portfolios. A variety of techniques
are used to analyze a portfolio and make forecasts of
the likely losses that would be incurred for a variety of
risks and the amount of capital to maintain. Such risks
are typically grouped into credit risk, liquidity risk,
market
risk,
and
operational
risk
categories.
Benchmarking is used to evaluate various aspects of
the ERM processes in relation to both Meridian’s
performance and performance of other external
parties. Benchmarking is be used to develop plans on
how to make improvements or adopt specific best
practices with the aim of increasing some aspect of
performance.
Processes
This element of the framework includes the practices
and techniques which Meridian employs to identify
risks, assess them, measure them, select an
appropriate risk response and provide ongoing
monitoring and reporting.
The
identification
of
risks, including emerging risks, occurs formally through
the quarterly ERM risk review process. Outside of that
process, risk owners reach out directly to Risk
Management Services when a new risk has been
identified. Risk measurement involves the models
established in the Technology and Tools framework
element and stress testing. A robust risk assessment
methodology has been developed which employs
likelihood, impact, velocity, and trend to compute a
final risk score which corresponds to 1 of 4 risk levels.
Meridian’s risk response options include: Avoid
(eliminate), Reduce (mitigation), Transfer (outsource
or insure), or Retain (accept & budget). As part of the
risk response process, Risk Management Services
assesses the effectiveness of the response and ensures
that control activities are an integral part of a risk
response. Monitoring and reporting are critical
components of the framework and operating culture
that help senior management, Committees and the
Board to effectively perform their risk management
and oversight responsibilities.
People / Culture
People and Culture sit at the centre of the ERM
framework, as a robust risk culture is a substantial
determining factor of whether an organization is
able to successfully execute its strategy within its
defined risk appetite. Having processes and controls
in place is not enough to give Boards and senior
management confidence that the established risk
appetite will be adhered to. They must ensure that
all employees are aware of what risks they are
taking, make the right decisions, and raise
objections when necessary. Within Meridian, this is
referred to as Creating an Ownership Culture.
At the core of Meridian’s risk culture are its ERM
philosophy which is established by the Board of
Directors, and its qualitative risk appetite statement.
This philosophy, combined with the knowledge and
experience of Meridian’s operating management and
risk management teams, ensures that business
strategies and activities are consistent with
Meridian’s risk appetite.
Complementing the ERM philosophy is the value
proposition for ERM at Meridian.
Our R isk Governance Structure ensures that the
responsibilities for oversight and control of risk
management are clearly defined. In support of this
structure, Risk Management Services works in
partnership with management to identify, assess,
mitigate and monitor Meridian’s risks. Risk
Management
Services
provides
independent
oversight and governance for all risk management
functions to promote a strong risk management
culture.
Business Unit Management is responsible for the
development and execution of operational plans that
are aligned with Meridian’s strategic plan and its
ERM framework. Management is accountable for
understanding and managing the risks they incur,
and working in partnership with Risk Management
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 70
Services to ensure that their business risks are
thoroughly evaluated and appropriately managed.
Decision-making on strategic risk issues is
centralized through Management Committees, which
are responsible for the review, approval, and
monitoring of transactions and the related risk
exposures. These Management Committees are
comprised of, and led by, one or more members of
the Executive Leadership Team, and include other
members of the Leadership Team from appropriate
cross-functional areas.
Identification and Management of Key Risks
Management has identified six key risk classes to
which specific risks are assigned. Accountability for
each risk class and the related specific risks has
been assigned through the ERM framework. A
discussion of each risk and how it is managed
follows.
Credit Risk
Credit risk is the risk of financial loss when a
member or counterparty to a financial instrument
fails to meet its contractual obligations. This risk
arises principally from the loan portfolio. Meridian’s
lending philosophy is established by its Board
through the Credit Risk Management Policy. The
Credit Risk Management Policy provides direction to
management relative to:
Formulating operational credit policies covering
eligible
purposes
of
loans,
collateral
requirements, credit assessment, risk rating and
reporting, documentary and legal procedures,
and compliance with regulatory and statutory
requirements
•
Establishing a lending authority structure for the
approval and renewal of credit facilities.
Authorization limits are delegated to the CEO,
who further delegates such lending authority to
senior management
•
Reviewing and assessing specific and aggregate
credit risk. The Credit department assesses and
approves, where applicable, all credit exposures
in excess of delegated limits
•
Limits in concentrations of exposure to
counterparties
•
Compliance with agreed exposure limits.
Regular reports are provided to the Risk
Committee of the Board on the credit quality of
the portfolio.
A detailed discussion of the management of credit
risk is provided in note 29.1 of the audited
consolidated financial statements.
•
instruments mature or re-price at various dates. As
interest rates change, net interest income can be
negatively impacted based on the distribution of
these maturity and re-pricing dates. Meridian
assesses the level of interest rate risk on a monthly
basis through the use of a sophisticated income
simulation model. Through this model, Meridian runs
various scenarios based upon expected interest rate
levels and manages risk tolerance levels based upon
a 1% and 2% shock to those rates. The process and
procedures surrounding this are governed by a
defined policy which is approved by the Board of
Directors annually. A detailed discussion of the
management of market risk is provided in note 29.2
of the audited consolidated financial statements.
Liquidity Risk
Liquidity risk arises in the course of managing our
assets and liabilities. It is the risk that Meridian is
unable to meet its financial obligations in a timely
manner and at reasonable prices. Liquidity levels,
prescribed by the Act, state that a class 2 credit
union (a credit union with total assets greater than
or equal to $50 million or a credit union which
makes a commercial loan) shall establish and
maintain prudent levels and forms of liquidity that
are sufficient to meet its cash flow needs, including
depositor withdrawals and other obligations as they
come due. As a member of a liquidity pool, however,
Meridian is compelled to maintain 6% of assets in
liquid investments. In order to maintain an
appropriate level of conservatism, our internal
liquidity management philosophy is to keep our
liquidity level between 7.75% and 15% of deposits
and borrowings, and to ensure that Meridian has
both adequate capacity and diversity of external
funding sources available. Meridian’s external
funding sources consist of:
•
•
Market Risk
Market risk is the risk of loss resulting from changes
in financial market factors, most commonly through
interest rate changes. Interest rate risk is the
sensitivity of Meridian’s financial position to
movements in interest rates. It arises from the fact
that assets, liabilities, and off-balance sheet
•
The
Canada
mortgage
bond
(“CMB”)
securitization program
Two lines of credit with Central 1, a Total Basic
Credit Facility which provides for general
borrowing and letters of credit, and a Capital
Markets Line which provides for the exposure in
the CMB securitization program and any
derivative exposure Meridian has with Central 1
An additional credit facility with a Schedule I
bank which enables management to borrow
both overnight as well as longer-term, to fill
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 71
short-term liquidity fluctuations caused by
seasonal growth patterns, as well as provide the
comfort of longer-term borrowing in the event
that the CMB program was unavailable to
provide necessary funding
•
Deposit brokerage channels
•
Issuance of mortgage-backed securities to
market
Meridian updates funding requirement levels daily
based upon forecasted growth rates and balances
the use of these funding sources so as to ensure
both
funding
diversification
and
adequate
contingency lines. Within the available balance, early
warning limits exist, which trigger required reporting
and
action
plans
from
the
Asset/Liability
Management Committee and reporting through the
Risk Committee and Board of Directors. A detailed
discussion of the management of liquidity risk is
provided in note 29.3 of the audited consolidated
financial statements.
Member Risk
Member risk is the risk that Meridian cannot meet
the expectations of its members. This risk can arise
if Meridian is not aware of changes in pervasive
member needs and/or wants and can lead to a
decline in member confidence regarding Meridian’s
ability to provide a superior or consistent level of
service, a loss of members or the inability to grow
the business.
The responsibility for member risk management
resides primarily with Meridian’s Delivery and
Marketing teams which work together to engage
members, determine their wants and needs and
develop the appropriate plans to meet both current
and anticipated expectations. Supporting Delivery
and Marketing in the management of member risk is
Meridian’s Operating Committee and Executive
Leadership Team which provide direct oversight to
Meridian’s strategic initiatives. Given the importance
of meeting member expectations and providing a
superior level of service, initiatives related to these
objectives are designated as strategic and awarded
a high priority for completion.
Meridian differentiates itself by providing an
exceptional
member
experience.
It
is
the
responsibility of every employee to help deliver this
experience. This process helps create ownership and
buy-in from all groups within Meridian.
The Board of Directors provides oversight to the
strategic direction of Meridian and therefore
approves the strategic plans developed by
management which include initiatives which will
manage member risk.
Strategic Risk
Strategic risk is the risk that Meridian is not able to
implement
appropriate
business
plans
and
strategies, or to effectively allocate resources. In
addition, this risk may also arise from the inability to
adapt to changes in the business environment.
Meridian manages strategic risk through the
performance of its comprehensive Enterprise
Strategic Planning process, which encompasses
financial and strategic planning at business unit and
enterprise-wide
levels.
Meridian’s
Executive
Leadership Team, led by the CEO, is responsible for
developing and recommending strategies as well as
operational and financial plans for the Board’s
approval, and to report to the Board, in a timely and
accurate manner, on Meridian’s performance against
stated objectives. In developing its strategic plans,
management engages the Board, as appropriate, at
such points in the planning process where
perspectives on member and larger system issues
are desired.
The Board of Directors has two key responsibilities.
To establish strategic direction, and regularly review
that direction to ensure it responds to the changing
business environment in which Meridian operates;
and, to monitor Meridian’s performance. In fulfilling
these responsibilities, the Board provides input to,
and approves the annual strategic, operational, and
financial plans and regularly reviews Meridian’s
progress towards achieving the priorities and
performance expectations established in the plan.
This integrated financial and strategic planning
process considers business unit strategies and key
initiatives, and ensures alignment between business
unit and enterprise strategies. Following the
approval of the strategy by the Board of Directors,
performance relative to the strategic plan is
monitored and reported on, including effectiveness
and risks.
Operational Risk
Operational risk is the risk of loss resulting from
inadequate or failed human performance, processes,
or technology. Meridian is exposed to a broad range
of operational risks including talent acquisition,
retention,
performance
and
succession,
technology/systems
failures,
fraud/theft/misappropriation of assets, business
disruption, information/privacy/fiduciary breaches,
failed transaction processing, and non-compliance
with regulatory requirements, legal obligations, or
internal policies. The failure to manage operational
risk can result in direct or indirect financial loss,
reputational impact, regulatory censure, and
penalties or failure in the management of other
risks.
Meridian manages operational risk through extensive
policies, procedures, and internal controls related to
human
resources,
information
technology
development, change management, and business
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 72
operations.
Complementing
these
policies,
procedures, and internal controls are centralized
departments, which focus on the enterprise-wide
management of specific operational risks such as
financial
crime,
business
continuity/disaster
recovery,
privacy
&
confidentiality,
vendor
management, project management, and information
security & information technology governance.
These
departments
have
developed
specific
programs, policies, standards, and methodologies to
support the management of operational risk.
2015 Outlook
Economic prospects in Canada have been dampened
by developments in the energy sector. A decline in oil
prices due to short-term excess supply is expected to
result in a weaker Canadian dollar in 2015. Amidst
these developments and expectations that inflationary
pressure will remain low in 2015, the Bank of Canada
reduced its overnight lending rate to 0.75% in January
2015. Further changes in the Bank’s interest rates will
likely depend on developments in the energy sector. It
is now less likely that the Bank’s overnight lending rate
will move above 1.0% in 2015. In Ontario, the weaker
Canadian dollar is anticipated to result in favourable
exports and, therefore, stronger economic growth.
Continued low interest rates will encourage business to
invest and increase job creation. Demand for housing
is expected to grow, supported by improvements in
employment and low interest rates.
Meridian is well positioned to take advantage of the
opportunities presented by the favourable economic
outlook for Ontario. Strong growth in relationships with
members is anticipated, in line with demand by
businesses to invest and demand by members to
achieve home ownership. The overnight rate decrease
is likely to spur additional lending demand while
potentially limiting member deposit appetite. As such,
Meridian is focused on further diversification of
available funding sources. Given the expected growth
in employment in Ontario, we anticipate deepening our
relationships with existing and new members to help
them achieve their savings goals and plan for
retirement. Growth in wealth balances is expected to
continue to be strong, with an increase in IIROC
certified Senior Wealth Advisors and a continued focus
on supporting members’ overall financial needs.
The anticipated strong growth in relationships is
expected to result in increased income, but the
persistent low interest rate environment will continue
to compress net interest margin. Income from loans
and wealth products will help support investments in
strategic initiatives. These investments are expected to
benefit Meridian in achieving its long-term success but
will impact earnings in the short-term.
Meridian will continue to invest in new branches. These
will include branches in targeted areas outside of the
GTA, as well as branches in the GTA that will be
strategically located alongside The Co-operators
agencies. As these new branches build their portfolio of
members and product balances, over time they will
contribute fully to Meridian’s profitability.
Other key initiatives in 2015 will include continued
efforts
to
build
brand
awareness,
continued
implementation
of
our
Business
Banking
Transformation Program, execution on new product
offerings, evaluation of alternative sources of funding,
assessment of internal technology systems that
support decision making and continuation of our multiyear digital banking strategy.
Capital will be essential to allow Meridian to continue
to invest strategically to support members’ future
needs. Management is committed to implementing
strategies to maintain capital levels that are financially
sound and will employ long-term strategies to further
strengthen Meridian’s capital base.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 73
Fiscal Year Ended Decem ber 31, 2013
The purpose of this report is to provide readers of the 2013 audited consolidated financial statements
with insight into the Credit Union’s financial performance for 2013, including a review of growth and
profitability and the factors that influenced these.
Financial Results & Outlook
2013 Financial Overview
Economic activity in Canada was relatively weak in
2013 as businesses continued to delay investment
while household spending supported growth. The
Canadian dollar remained strong for most of the year
before weakening at the end of 2013. The Bank of
Canada held its policy interest rates fixed at historically
low levels as economic growth was slower than
expected while inflation was stubbornly low. In
Ontario, demand was weak in all sectors of the
economy; government, businesses, and households.
The housing market slowed with sales of existing
homes holding strong, but housing starts declining.
The spring home buying season was slow as
consumers digested policies aimed at curbing
household debt. In the second half of the year,
purchases of existing homes picked up due to fears of
potentially rising mortgage rates.
Despite the weak economic conditions, which resulted
in a more competitive environment, particularly for
Commercial relationships and deposits on the whole,
Meridian’s operational results remained strong. Total
assets grew by $438.3 million to $9.2 billion at the end
of 2013. The majority of this was attributable to an
increase in the mortgage portfolio. Assets under
management, which include off-balance sheet wealth
management assets, rose by $670.3 million to $10.2
billion. Growth in wealth assets was exceptionally
strong, reflecting increased net sales of mutual funds
and market appreciation in the value of wealth
products. Growth in deposits was slightly weaker than
in 2012 due to competition among financial
institutions.
Overall, Meridian’s 2013 operations generated pre-tax
income of $59.4 million, an increase of $34.3 million
over restated 20121 pre-tax earnings. This resulted in
an after-tax return on equity (“ROE”) of 10.3%
compared to a restated2 ROE of 4.6% realized in 2012.
Total revenue net of provisions for credit losses was
$30.5 million or 16.8% higher in 2013. The primary
driver for this increase was a reduction in provision for
credit loss from $34.2 million in 2012 to $6.5 million in
2013. In 2012, Commercial loan losses were comprised
of a relatively small number of large losses. In
particular, two individually significant impairments
contributed to the high credit losses. Net interest
income, which is the difference between the income
that is generated by Meridian’s assets and the cost to
attract member deposits and other borrowings, grew
by $5.3 million or 3.1% from the previous year,
despite continued margin compression. Non-interest
income fell by $2.5 million largely on account of lower
profits from Meridian’s investment in the CUCO
Cooperative Association. Operating expenses were
$3.7 million or 2.4% lower in 2013, attributable largely
to a pension plan curtailment gain of $5.7 million,
amortization adjustments and expense reductions in
certain expense categories which were offset by
increases in others. The lower expenses and higher
revenue resulted in an improvement in Meridian’s
efficiency ratio which declined to 72.1% from 86.2% in
2012. Much of this improvement was driven by the
one-time curtailment gain. The efficiency ratio is a
measure of productivity. It is calculated as non-interest
expense divided by total revenues, expressed as a
percentage.
1 2012 results have been restated on account of a correction to the actuarial valuation
of the 2012 pension plan curtailment gain, a change in the method of amortization of
securitization fees and the implementation of changes in accounting standards (IAS 19)
that affect employee benefits .
2 After-tax ROE was also restated as a result of a revision in accounting standards
affecting presentation of the tax benefit on deductible
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 74
After-Tax Return on Average Equity (Restated)2
11.0%
10.3%
10.1%
6.7%
2009*
*CGAAP
2010
Efficiency Ratio
70.9%
76.4%
82.4%
86.2%
2009*
*CGAAP
2010
2011
2012 1
(restated)
72.1%
4.6%
2011
2012
1
2013
2013
Meridian’s capital base grew stronger in 2013 as earnings growth was strong relative to asset growth. This performance
yielded increased capital ratio and risk weighted capital ratios to 6.6% and 13.4% respectively. Meridian’s capital and
risk weighted capital ratios remained well above the minimum regulatory requirements of 4.0% and 8.0% respectively.
Capital Ratio
8.3%
2009*
*CGAAP
Risk Weighted Capital Ratio
7.1%
6.8%
6.3%
6.6%
2010
2011
2012 1
(restated)
2013
13.4%
12.6%
13.1%
12.7%
13.4%
2009*
*CGAAP
2010
2011
2012 1
(restated)
2013
Meridian’s liquidity ratio, including mortgage-backed securities held for reinvestment that are readily convertible to
cash, declined to 11.1% at the end of 2013 as a result of a strategic decision by management to optimize liquidity
given a strong set of contingency funding sources available. The liquidity ratio remained well above the minimum
operating target of 7.75%. Meridian’s leverage ratio rose to 12.1% reflecting an increase in mortgage securitizations
used to fund lending activity.
Liquidity Ratio
15.2%
11.7%
2009*
*CGAAP
2010
Leverage Ratio
13.7%
2011
13.9%
2012 1
(restated)
15.1%
11.1%
2013
10.0%
2009*
*CGAAP
2010
8.3%
2011
11.0%
12.1%
2012 1
(restated)
2013
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 75
2013 Financial Performance Review
Pre-tax earnings rose to $59.4 million in 2013, an
increase of $34.3 million from 2012. Driving this
significant improvement are a number of factors, with
the most significant being a reduction in the level of
loan loss provisioning required in 2013.
Normalized Pre-tax Earnings
($ millions)
To truly assess Meridian’s financial performance from
core business operations, earnings have been
normalized to exclude one-time gains and other
unusual charges and adjustments associated with the
amalgamation of Desjardins Credit Union (“DCU”) in
2011, and changes to defined benefits pension plans.
Normalized pre-tax earnings increased to $57.0 million
in 2013 from $34.6 million in 2012.
Items excluded from normalized earnings include:
•
Pre-tax gain on business acquisition of $27.5
million in 2011
•
Integration expenses, including legal and banking
system conversion expenses, totalling $0.2
million, $3.7 million and $7.2 million in 2013,
2012, and 2011 respectively
58.6
59.4
42.3
2011
25.1
2012 (restated)
Pre-tax Earnings
•
•
57.0
34.6
2013
Normalized Pre-tax Earnings
Expenses related to the amortization of fair value
adjustments recorded as part of the amalgamation
of $3.1 million, $6.8 million, and $4.1 million in
2013, 2012, and 2011 respectively
Pension plan curtailment gain of $5.7 million in
2013 and $1.1 million in 2012
Total Revenue
Total revenue, which consists of interest and noninterest income before provisions for credit losses,
grew by $2.8 million to $219.3 million in 2013. This
result is attributable to an increase in net interest
income
generated
from
growth
in
member
relationships, coupled with an increase in wealth
management commission revenue, as Meridian’s sales
of wealth products, which are geared towards assisting
members meet their retirement needs, grew
significantly. Offsetting some of these revenue gains
was a reduction in profits from affiliate investments.
The increase in valuation of asset-backed commercial
paper held by Meridian’s investment affiliate slowed in
2013 as notes move closer to maturity. There was a
substantial increase in the valuation of this paper in
2012, higher than in any other year.
Net Interest Income
Net interest income is comprised of earnings on assets
such as loans and securities, including interest income,
less interest expense paid on liabilities, such as
deposits and wholesale funding.
Net interest income for the year was $179.1 million, an
increase of $5.3 million or 3.1% from 2012.
Earnings on our assets increased by $14.7 million or
4.8% from 2012, while interest expense incurred on
our liabilities increased by $9.4 million or 7.1%.
Meridian’s average total assets increased $736.5
million or 9.0% in 2013. There was strong growth in
mortgages, cash, and investments with funds being
deployed from robust growth in fixed term deposits,
and, to a lesser extent, through external borrowings.
Higher year over year balances in cash and
investments was a result of a $133 million
securitization transaction in December to lock in the
cost of funds of a portion of 2014 mortgage funding.
Net interest margin is the ratio of net interest income
to average total assets, expressed as a percentage.
Net interest margin was 2.01%, down 12 basis points
from the prior year, primarily due to the continued
low-rate environment, reduced commercial lending, as
well as significant competition in the financial services
sector for retail mortgages and deposits, which
resulted in lower lending yields without the benefit of
equally reduced deposit yields. Meridian had strong
lending growth in the latter part of the year, allowing
us to meet our retail lending targets, and positioning
us well for 2014. The table that follows summarizes
the year over year changes in our net interest income,
net interest margin, and yields.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 76
Net interest income
($ millions)
2013
Cash and cash equivalents
Investments
Change
2012
%
2.1
1.1
9 0.9
Average assets / liabilities
($ millions)
2013
297.5
Change
2012
%
Net interest margin
(in basis points)
2013
2012
Change
231.6
2 8.5
70.2
46.8
2 3.4
13.8
14.1
( 2.1)
805.3
748.5
7 .6
171.5
188.4
( 16.9)
100.6
99.0
1 .6
1,986.6
1,842.1
7 .8
506.5
537.4
( 30.9)
50.5
49.5
2 .0
1,251.8
1,224.1
2 .3
403.5
404.1
( .6)
154.6
143.2
8 .0
4,479.7
4,041.4
1 0.8
345.1
354.4
( 9.3)
106.5
103.3
3 .1
321.6
306.9
4 .8
8,927.4
8,191.0
9 .0
360.3
374.7
( 14.4)
Demands
22.3
23.3
( 4.3)
2,990.2
2,938.4
1 .8
74.6
79.4
( 4.8)
Fixed terms
98.1
93.3
5 .1
4,224.3
3,782.2
1 1.7
232.3
246.7
( 14.4)
Borrowings
22.1
16.5
3 3.9
991.3
786.6
2 6.0
222.7
208.9
1 3.8
160.0
161.5
( .9)
8,365.8
7,668.7
9 .1
170.3
173.5
( 3.2)
561.5
522.3
7 .5
8,927.4
8,191.0
9 .0
159.6
162.5
( 2.9)
200.7
212.2
(11.5)
Loans
Lines of credit
Mortgages
Other assets
Interest income / total assets
Other liabilities
Interest expense / total
liabilities
142.5
133.1
7 .1
Members’ equity
Total liabilities and
Members’ equity
142.5
133.1
7 .1
Total
179.1
173.8
3.0
Despite significant market competition for deposit
money, Meridian’s 18-month GIC offer encouraged
Members to lock in some of their demand funds,
increased fixed terms as a percentage of the deposit
portfolio, and contributed to the 7.4% growth in total
average deposits from the prior year.
Meridian continued to securitize residential mortgages
throughout 2013, to help fund sustainable growth.
Included in interest income from operating activities is
$33.9 million of interest income on mortgages which
had been securitized, an increase of $7.3 million from
2012. Also included in interest income from operating
activities is $2.1 million generated through the pledge
of mortgage-backed securities (MBS) purchased from
third parties in order to meet any reinvestment
requirements that are not met through the use of MBS
created from Meridian’s own mortgage portfolio.
The interest expense associated with Meridian’s
securitization activities increased, from 2012, by $5.3
million or 31.6% to $22 million, largely due to
incremental issuances of $209.5 million. Although the
mortgage securitization liability has grown year over
year, Meridian believes that the continued use of
mortgage securitization as a funding source is
economically advantageous, and continues to weigh it
against alternative funding sources to ensure funding is
being done in a responsible manner. In June of 2013
Meridian secured a $300 million credit facility with a
Schedule 1 bank to ensure cost effective funding is
available to support future expected growth and ensure
that sufficient contingency funding exits to address
liquidity shortfalls in emergency situations.
Net interest income is impacted by fluctuations in
capital markets above and beyond what we consider to
be our normal operating activities. As circumstances
warrant, we undertake hedging activities, which may
include the purchase of derivative instruments to
protect Meridian and its members from changes in
external market conditions. These hedging activities, in
turn, generate their own net interest income or loss,
countering the impact on the underlying item.
In November, Meridian executed a bond forward
hedging strategy to lock in the cost of funds for the
December securitization transaction. This strategy was
effective in reducing the overall cost of funds of this
issuance. In addition, Meridian executed $100 million of
notional 5-year pay fixed interest rate swaps. The
notional amounts of our derivatives represent the
amount to which rate or price is applied in order to
calculate the amount of cash that must be exchanged
under the contract. Notional amounts do not represent
assets or liabilities and therefore are not recorded in our
consolidated balance sheet. The fair value of over-thecounter (OTC) derivative contracts is recorded in our
consolidated balance sheet as well as the interest
income or expense associated with quarterly cash
settlements.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 77
Provision for Credit Losses
The provision for credit losses (PCL) was $6.5 million in
the current year, down from $34.2 million in 2012. The
PCL for the Commercial loan portfolio was $4.7 million
($31.9 million in 2012) and $1.8 million was
attributable to the Retail loan portfolio ($2.3 million in
2012). Commercial losses are comprised of a relatively
small number of larger, and sometimes individually
significant, losses. This results in volatility from year to
year, and can lead to significant variances from plan
levels which are largely determined based on average
historical loss rates. Two individually significant
impairments in 2012 contributed to record-high credit
losses that year. During 2013, corporate restructuring
and assignment of new security resulted in improved
conditions for two large previously impaired accounts
and the ultimate reversal of $5.5 million of credit
losses in these accounts. The $4.7 million PCL for the
Commercial portfolio in 2013 is net of these reversals.
The PCL represents 0.08% of the total loan portfolio in
2013. Commercial PCL is 0.20% of the Commercial
loan portfolio and the Retail PCL represents 0.03% of
the respective portfolio.
Credit Portfolio Quality
Loan loss provisioning is determined in accordance
with an established policy. Management reviews the
loan allowance position monthly with a focus on
updated forecasts for watchlist accounts, impairment
levels, and expected net credit losses. Provisioning
is adjusted where necessary to ensure compliance
with policies, and to include management’s best
estimate of losses based on currently available
information.
Of the total allowance, $21.8 million is attributable
to specific impairments, with the remaining $16.0
million attributable to collective reserves. The
collective allowance estimates incurred losses in the
existing credit portfolio that cannot yet be identified
on an individual loan basis. The total loan allowance
as a ratio to total loans was 0.47% in 2013. The
improvement of 0.14% over 2012 is a direct result
of the favourable loss experience in the current
year.
Gross impaired loans decreased from $142.9 million
in 2012, to $84.7 million in 2013, representing
1.05% of the total loan portfolio. The total allowance
for impaired loans, at $37.8 million, has decreased
by $7.7 million over the prior year, resulting from
$14.2 million in write-offs and recoveries offset by
$6.5 million in net new impairment. Due to the high
exposure levels and nature of security on many of
the Commercial impairments, impaired accounts can
take in excess of a year or two to close. Several
large Commercial impairments from previous years
remain on the books at year-end, resulting in an
allowance significantly higher than the current year’s
PCL.
Asset quality coverage
($ millions)
2013
2012
Total loans, December 31
Gross impaired loans (“GIL”),
December 31
Total allowance for impaired
loans, December 31
Provision for credit losses
(“PCL”)
GIL as % of total loans
8,100.7
7,470.7
84.7
142.9
37.8
45.6
6.5
34.2
1.05%
1.91%
GIL as % of Members’ equity
Total allowance as % of total
loans
PCL as % of total loans
14.54%
27.13%
0.47%
0.61%
0.08%
0.46%
% Better than average
15.9%
42.9%
% Average
65.1%
41.7%
81.0%
84.6%
Commercial loans:
Although Meridian’s credit risk policies and
methodologies have not changed materially from the
prior year, we continue to further enhance our risk
management processes. Implementation of the new
Commercial risk rating model introduced in
November 2012 was completed. The new model is
more comprehensive than its predecessor and
resulted in the risk rating scale being expanded from
six to nine ratings. It is premised on a more indepth assessment of the borrower’s risk of default,
through measurement of industry, business,
management, and financial risk factors, along with
the risk of loss, given default, based on an
assessment of security composition and relative
historical recovery experience. The Commercial loan
portfolio, stratified by risk rating, is reviewed
monthly. During 2013, the entire Commercial loan
portfolio was reviewed and rated using the new
model. This resulted in a shift between rating groups
as observed in the table above. The shift is the
result of re-aligning the portfolio to a more robust
rating system, and not because of any deterioration
in the quality of the portfolio. Most of the portfolio
continues to fall into the combined “better than
average” and “average” categories. Collectively,
these two ratings account for approximately 81.0%
of the total Commercial portfolio versus 84.6% the
previous year. During 2013, the Early Warning
System was developed for Commercial accounts.
This comprehensive system considers 17 metrics in
a monthly assessment that will identify accounts
where there may be indicators of increased risk. This
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 78
will allow for more timely identification of accounts
that require follow up, additional attention through
the adjudication process, or an increase in risk
rating to Watchlist status, with the objective of
correcting issues that may otherwise result in future
impairment of the account. The system is being
piloted and will be rolled out in 2014.
In 2012, Meridian initiated a multi-year Business
Banking Transformation Project with the objectives
of enhancing portfolio credit management practices
and improving member experience through new
automated
processes
and
other
techniques.
Developments are underway to establish a target
operating model for Commercial lending, and to
expand and enhance the Commercial lending
portfolio analytics and reporting systems. The result
will be more robust processes and risk management
practices appropriate for the ongoing growth in
volume and complexity of Meridian’s Commercial
loan portfolio. Enhancements to credit risk
management processes as noted above, along with
tightening of underwriting practices, are integral
components of this transformation project.
Non-Interest Income from Operating Activities
Non-interest income from operations decreased by
$0.1 million or 0.3% to $36.7 million in 2013
compared to 2012. This performance is largely
attributable to a reduction in Commercial loan
application fee income. The reduction in Commercial
loan application fees of $0.9 million directly reflects
slower growth in Commercial lending. In 2012,
Meridian experienced substantial growth in Commercial
lending, while in 2013, the competitive landscape,
coupled with Meridian’s focus on strengthening the
Commercial banking model through the Business
Banking Transformation initiative, resulted in slower
growth.
Besides loan servicing fees, insurance commissions,
and Interac revenue also put downward pressure on
non-interest income. Insurance commissions declined
by $0.9 million, mainly as a result of higher claim
levels, and Interac revenue continued to fall due to
lower ABM transaction volumes.
Non-interest income was positively impacted by mutual
fund revenue growth of $1.3 million or 27.8%, on
account of exceptional net sales. Sales were influenced
by the integration of Meridian’s Wealth Management
workforce into Retail branches, and by growth in the
overall Wealth management workforce, as well as
favourable market gains on wealth products and the
high skill and knowledge level of Meridian’s Wealth
professionals who are able to provide valuable advice
to members. Revenue from service fees also increased
by $0.4 million or 3.0%, reflecting the value members
place in the Maximiser suite of account packages. A
few new fees were introduced or changed in 2013
following a review of Meridian’s fee structure. These
fees had a positive impact on service fee income while
remaining favourable, relative to fees of other
competitor financial institutions. Fee changes included
the introduction of a passbook fee and changes to
statement fees.
The following table summarizes the composition of
Meridian’s non-interest income.
Non-interest income
($ millions)
Service fees
2013
2012
(restated)
11.92
11.57
%
Change
3.0%
Mutual fund revenue
6.07
4.75
27.8%
Loan servicing fees
5.32
6.22
-14.5%
Insurance commission
4.74
5.61
-15.5%
Foreign exchange
3.83
3.95
-3.0%
Interac revenue
2.24
2.42
-7.4%
Credit card revenue
0.89
0.88
1.1%
Other
1.65
1.37
20.4%
Total
36.66
36.77
-0.3%
Non-Interest Income from Investments in Associates & Joint Venture
Non-interest income from Meridian’s investments in
associates and joint venture declined in 2013 by $2.4
million to $3.5 million. This has been a volatile income
stream as it largely reflects realized and unrealized
gains in the market value of third party asset-backed
commercial paper (ABCP) held by the CUCO
Cooperative Association. This association was created
to hold the ABCP of the legacy Credit Union Central of
Ontario on behalf of member credit unions, following
the merger with Credit Union Central of British
Columbia to form Central 1 on July 1, 2008. In 2012,
gains on the ABCP investment were significantly higher
than other years while in 2013 gains were more
moderate as the paper moved closer to maturity.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 79
Non-Interest Expenses
Non-interest expenses declined in 2013 to $153.3
million, a $3.7 million or 2.4% reduction from the prior
year. One of the primary drivers of this reduction was
a $5.7 million pension plan curtailment gain in 2013
compared to a $1.1 million curtailment gain in 2012.
Another driver was a decline in costs associated with
the amalgamation with Desjardins Credit Union which
declined from $3.7 million in 2012 to $0.2 million in
2013, as the project reached its final stages of
completion. There was an adjustment to the projected
run-off pattern for the core deposit intangible (CDI),
resulting in a lower amortization expense in 2013. The
CDI represents the inherent value in the deposit
portfolio acquired during the DCU amalgamation, as
they were a low-cost source of funding. The core
component of the deposit portfolio is proving to be
larger than expected and therefore the intangible asset
will be amortized at a slower rate to reflect the
extended value. The amortization of the CDI was $2.1
million in 2013 compared to $4.8 million in the
previous year.
As well, the level of spending in software and
hardware, and transaction services was strategically
reduced. Meridian realized the benefits of economies of
scale through the DCU amalgamation and was able to
decrease data storage costs by securing a new
consolidated agreement for this service. Software and
hardware costs fell by $0.6 million or 13.6%. The cost
of transaction related services also declined by $0.3
million or 3.0% as a result of lower statement
expenses. The implementation of new statement fees
in 2013 led to members who place a lower value on
paper statements switching to electronic statements.
Personnel expenses which consist of all employee
salaries and benefits grew by $0.8 million or 0.9% to
$87.7 million. A pension curtailment gain partly offset
some of the increase in personnel expenses. Higher
personnel expenses are attributable to incremental
resources required to implement Meridian’s strategic
objectives. Employee growth was mainly related to the
two new branches, personnel required for the new
Commercial banking delivery model under the Business
Banking Transformation program, the continued
growth of the wealth management team and project
resources who engaged in initiatives to support
Meridian’s strategy. Expenses related to employee
benefits fell by $5.0 million or 34.7% as a result of the
curtailment gain.
Meridian’s marketing expense increased by $0.2 million
or 3.3% in support of building brand awareness.
Marketing expenses were associated with print, radio,
direct mail and outdoor advertising, as well as
community events. Human resource expenses grew by
$0.2 million or 8.7% with higher spending to attract
talent and promote the wellness of employees.
Occupancy costs rose as the branch network was
expanded, while deposit insurance grew with growth in
deposits.
Meridian’s investment in strategic initiatives was in line
with the level of investment in 2012, totalling $2.7
million. These investments were directly related to
projects that support Meridian’s strategic objectives.
They included the Business Banking Transformation
program, implementing the Small Business Banking
offering, building new branches, developing the Agency
model, implementing the new fraud management
system and the enterprise data warehouse.
($ millions)
Salaries and benefits
Salaries
Benefits
Variable incentive
Occupancy
Transaction services
Deposit insurance
Marketing
Software and hardware
Depreciation
Amortization
Human resources
Other expenses
Total
2013
2012
(restated)
%
Change
69.5
9.4
8.8
12.6
9.6
5.7
6.2
3.8
5.6
3.4
2.5
16.2
63.1
14.4
9.4
12.4
9.9
5.2
6.0
4.4
5.3
5.7
2.3
18.9
10.1%
-34.7%
-6.4%
1.6%
-3.0%
9.6%
3.3%
-13.6%
5.7%
-40.4%
8.7%
-14.3%
153.3
157.0
-2.4%
Provision for Income Taxes
During 2013, the Federal government legislated
changes to phase out a credit union tax deduction
that has been available since the 1970’s. The
deduction is being phased out over a five-year
period beginning in 2013. The result is that
Meridian’s Federal effective tax rate will gradually
increase from 11% in 2012 to 15% by 2017. The
provincial credit union tax deduction of 7% is not
impacted by these changes. As such, Meridian’s
provincial effective tax rate will remain at 4.5%.
Meridian’s combined effective tax rate was 15.5% in
2012, 16.1% in 2013 and will gradually increase to
19.5% by 2017.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 80
income at 16.1% plus $2.9 million of current income
tax expense relating to the change in tax strategy.
The net deferred income tax recovery of $5.3 million
in 2013 incorporates changes for current year timing
differences, adjustments as a result of the revised
tax strategy and the impact of increased future tax
rates due to the federal credit union tax deduction
phase out. Combining current and deferred income
taxes, results in a net provision for income taxes of
$2.8 million in 2013.
Given the federal tax changes, Meridian revised its
tax strategy for utilization of its deferred tax assets
in a more tax effective manner, by deferring
utilization of discretionary deductions to future years
when the tax rates will be higher. The change in
strategy, combined with the revaluation of deferred
tax assets at the higher tax rates, resulted in an
income tax gain of approximately $4.3 million being
recorded in 2013. Current income tax expense of
$8.1 million in 2013 reflects the current year taxable
Dividends
2012 and 2013 (previously 6.0%). The dividend rate
paid on the series 01 and series 96 shares was 4.5%
for 2012 and 2013 (previously 6.0% for series 01 and
5.75% for series 96), while the dividend rate paid on
the series 09 shares has been 5.75%. The payment
track record is illustrated in the table below for the last
five years.
Meridian’s track record of profitability has enabled the
payment of dividends on its various series of
investment shares. Meridian has declared and paid a
dividend on each series of these shares since
inception, with market leading rates for these types of
investments. The dividend rate paid on the “50th
Anniversary” and the series 98 shares was 4.75% for
Dividend history for the past 5 years
($ millions)
“50th Anniversary” Class A shares
Series 96 Class A shares
Series 98 Class A shares
Series 01 Class A shares
Series 09 Class A shares
2013
2012
2011
2010
2009
2.7
1.8
0.2
2.3
3.8
2.6
1.7
0.2
2.2
3.6
3.1
2.1
0.2
2.8
3.5
2.9
2.0
0.2
2.7
1.0
2.8
1.9
0.2
2.6
-
Financial Conditions Review
Balance Sheet Summary
Meridian’s total assets grew by 5.0% to $9.2 billion in
2013, an increase of $438.3 million over 2012.
Increased lending to members was the main
contributor to this growth, while the cash and cash
equivalents position declined as liquidity was drawn
down to fund loans and meet the needs of members.
The other significant contributor to asset growth is an
increase in liquidity reserve deposits held with Central
1, one of our key partners.
Loans to Members grew by 8.4% or $630.1 million to
$8.1 billion, with Retail mortgages accounting for
75.3% of this growth. Retail mortgages increased by
$474.5 million or 11.3%. Growth was generated across
all channels including the branch network, through
mobile specialists and the broker channel. Competitive
and innovative products were offered. Niche broker
products in particular were well received and supported
the growth in the mortgage portfolio. Growth in
Commercial lending slowed in 2013 as the Commercial
team focused on developing a new model to better
meet the needs of members and the organization.
Total Assets ($ billions)
2012
$8.7
2013
$9.2
Loans to Members ($ billions)
2012
2013
$7.5
$8.1
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 81
Member deposits grew by 3.3% or $239.3 million
from the previous year to $7.4 billion. Competition
for deposits intensified as economic stimulus slowed
and financial institutions vied for limited consumer
deposit dollars. Registered products were the main
drivers of deposit growth for Meridian, particularly
tax free savings accounts (“TFSA”). TFSA balances
rose 33.7% or $117.1 million, reflecting a member
preference for TFSA term products such as the
special rate Save Happy term product offered during
Meridian’s investment campaign. Non-registered
term deposits grew by 2.0% or $58.7 million while
demand deposit balances increased by 2.2% or
$57.6 million.
Members' Deposits ($ billions)
2012
$7.2
2013
$7.4
Other than deposits, Meridian’s most significant
liability is mortgage securitization which increased
by 15.5% or $149.2 million. The increased mortgage
securitization liability resulted in a change in
Meridian’s leverage ratio from 11.0% in 2012 to
12.1% in 2013.
Meridian’s off-balance sheet assets are largely the
wealth portfolio which is comprised of mutual fund
assets held by members. The wealth portfolio
experienced significant growth in 2013, with account
balances increasing by 32.4% or $256.0 million. This
strong growth represents favourable net sales of
$156.3 million as well as the appreciation of the
market value of members’ investments.
Overall, the total member relationships managed by
Meridian which include lending, deposits and wealth
grew from $15.5 billion in 2012 to $16.5 billion in
2013, a 6.5% increase. Much of this growth was
concentrated in Retail banking through mortgage and
wealth sales while Commercial growth slowed in 2013
due to the competitive environment and a focus on the
business banking transformation program which is
intended to strengthen the Commercial banking model
and member offering.
Wealth ($ billions)
2012
$0.8
2013
$1.0
Total Relationships ($ billions)
2012
2013
$15.5
$16.5
Liquidity Review
Managing liquidity and funding risk is critical to
ensure the safety and soundness of Meridian,
depositor confidence and stability in earnings.
Meridian’s policies ensure that there are sufficient
liquid assets and funding capacity to meet financial
commitments, even in times of stress. Meridian’s
Board policy stipulates the maintenance of a
minimum of 7.75% ratio of cash and cash
equivalents to members’ deposits and borrowings
(liquidity ratio). As of December 31, 2013,
Meridian’s liquidity ratio, including mortgage-backed
securities held for reinvestment, was 11.1%
compared to 13.9% at the end of 2012, situating
Meridian’s liquidity comfortably above the minimum
established by the Board.
Funding Strategy
Meridian’s funding strategy follows a sustainable
growth approach in that the funding of organic
lending growth is primarily accomplished through
organic deposit growth. Meridian maintains a large
and stable base of member deposits that, along with
our strong capital base, is a source of strength. It
supports the maintenance of a sound liquidity
position and reduces our reliance on wholesale
funding. Member deposits include core deposits and
larger retail and commercial fixed rate deposits.
During the last quarter of 2013, Meridian entered
into $100 million of notional 5-year term pay fixed
interest rate swaps to extend the duration of our
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 82
variable deposits to match our longer term lending
products. With the volatility present in the markets
today, this derivative strategy provides protection to
our balance sheet.
Securitization remains an attractive funding strategy
for Meridian as it provides stable ready access to
long term funding at a low cost. This wholesale
funding source increased by 32% compared to 2012
as a result of $210 million of incremental
securitization issuances over 2012.
Diversification of wholesale funding sources is an
important aspect of Meridian’s overall liquidity
management strategy. Meridian continues to
maintain a diversity of funding sources in the event
that future securitization funding may not be
available or may only be available at significantly
higher rates.
Capital Review
Meridian’s regulatory capital ratios are strong and well
exceed the requirements of the Credit Unions and
Caisses Populaires Act, 1994 (Act) which regulates
Ontario Credit Unions and underlies Board policy
requirements. These ratios underscore Meridian’s
strength and long term stability and commitment to a
disciplined approach to capital management that
balances the interests and requirements of members,
regulators and depositors. Meridian’s capital adequacy
ratio was 6.6% as of December 31, 2013 compared to
6.3% at the end of 2012 and 4.0% stipulated in the
Act. Meridian’s risk weighted capital adequacy ratio
was 13.4% at the end of 2013, up from 12.7% in 2012
and significantly higher than the 8.0% stipulated in the
Act. In addition, Tier 1 capital as a percentage of total
assets must be greater than 60.0%. Meridian’s Tier 1
capital is 87.5% of its total capital.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 83
Fiscal Year Ended Decem ber 31, 2012
The purpose of this report is to provide readers of our 2012 audited consolidated financial
statements with insight into Meridian’s financial performance for 2012, including a review of growth
and profitability and the factors that influenced these.
2012 Financial Overview
In 2012, Canada’s economic activity was restrained by a slowdown in global economic growth coupled with the impact of
federal and provincial governments rebalancing their books in the wake of recent economic stimulus. In Ontario,
economic activity kept pace with the previous year, with the support of vehicle manufacturing and growth in residential
construction, particularly condominiums. Concerns over the level of household debt in Canada resulted in changes to
mortgage regulations, making it more difficult for new homebuyers to qualify for mortgages. Conditions remained
favourable for borrowers as the Bank of Canada maintained its low interest rate policy throughout the year. The
strength of the Canadian dollar persisted on account of developments in commodity prices, while equity markets
continued to be volatile but gained strength.
Meridian’s operational results remained strong in 2012 despite the restrictive economic conditions and persistent low
interest rate environment. Total assets grew by $903.7 million to $8.7 billion at the end of 2012, reflecting growth in
Retail mortgages and Commercial lending. Assets under management, which include our off-balance sheet wealth
management portfolio, rose by $939.1 million or 10.9% year-over-year to $9.6 billion. Growth in our Wealth portfolio
was attributable to increased net sales of mutual funds and market appreciation. This strong relationship growth
contributed to Meridian’s pre-tax income of $28.2 million, a decrease of $30.5 million from 2011. It should however be
noted that in 2011 Meridian enjoyed a one-time pre-tax gain on acquisition of $27.5 million due to the amalgamation
with Desjardins Credit Union (“DCU”).
Total operating revenue increased by $6.8 million or 3.9% to $183.1 million, despite being impacted by higher than
usual loan loss provisioning. Provision for credit loss expense rose to $34.2 million in 2012 compared to $14.2 million in
2011, stemming from Commercial loan impairments. Growth in operating revenue is attributable to gains in both net
interest income and non-interest income. Net interest income, which is the difference between the income that is
generated by Meridian’s assets and the cost to attract member deposits and other borrowings, grew by $19.8 million or
12.8% from the previous year to $173.8 million. Non-interest income, inclusive of profits from investments, rose by
$7.0 million to $43.5 million on account of loan fees generated from our strong 2012 Commercial lending volume and
market appreciation of our investment in the CUCO Cooperative Association.
In terms of our balance sheet strength, slower growth in earnings relative to the strong asset growth in 2012 has
resulted in a slight decline in our capital ratio and risk weighted capital ratio to 6.4% and 12.8% respectively. Our
capital ratios however continue to remain above regulatory and Board policy limits. At the end of 2012 Meridian’s
liquidity ratio improved slightly relative to the end of 2011 to 13.9%. This performance is reflective of strong deposit
growth towards the end of the year and a continued conservative approach given the extended economic uncertainty.
Meridian’s leverage ratio rose to 11.0% reflecting an increase in loan securitizations used to fund the strong 2012
lending activity. From a profitability perspective, our after-tax return on average equity declined to 4.8%, with most of
the year over year reduction driven by the significant one time gain on acquisition received in 2011. Our efficiency ratio
increased to 84.6% due to ongoing integration expenses and the impact of higher than anticipated credit losses.
Current and historical performance metrics are depicted in the charts below. Please note that results stated for 2008 and
2009 are reported on a Generally Accepted Accounting Principles (“GAAP”) basis while those for 2010 and beyond are
reported on an International Financial Reporting Standards (“IFRS”) basis.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 84
Risk Weighted Capital Ratio
13.4%
10.6%
12.6%
Capital Ratio
13.1%
12.8%
8.3%
7.0%
2008
2009
2010
2011
2012
2008
IFRS
CGAAP
Stable risk weighted capital ratio
2009
CGAAP
6.4%
2010
2011
2012
IFRS
Leverage Ratio
15.2%
11.7%
13.7%
13.9%
19.6%
15.1%
10.0%
8.2%
2009
2010
CGAAP
2011
2012
2008
2009
2010
CGAAP
IFRS
Strong liquidity position
8.3%
2011
2012
IFRS
After-Tax Return on Average Equity
70.9%
76.4%
82.4%
84.6%
14.2%
10.8%
9.8%
6.5%
2008
11.0%
Increased leverage to fund strong lending
Efficiency Ratio
73.6%
6.8%
Capital ratio above regulatory requirements
Liquidity Ratio
2008
7.1%
2009
CGAAP
2010
2011
IFRS
2012
Higher efficiency ratio, impacted by increased
loan loss provisioning
2008
2009
CGAAP
2010
4.8%
2011
2012
IFRS
Positive return on Member’s equity despite
challenging loan losses
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 85
Financial Performance Review
Following a significant gain on business acquisition in 2011,
as a result of Meridian’s amalgamation with DCU, pre-tax
earnings declined by $30.5 million or 52.0% to $28.2
million in 2012. To assess Meridian’s true financial
performance from core operations, earnings have been
normalized by excluding this one-time gain and other
unusual charges and adjustments associated with the
amalgamation. Normalized pre-tax earnings decreased to
$38.7 million in 2012 compared to $43.3 million in 2011.
The weaker normalized earnings are attributable to higher
than usual loan losses which masks our strong revenue
growth. If loan losses were to have remained at 2011
levels, normalized pre-tax earnings would have been $55.7
million. It should also be noted that 2011 earnings only
reflects seven months amalgamated DCU operations.
Normalized Pre-tax Earnings
($ millions)
58.6
35.1
35.3
2010
Pre-tax Earnings
42.4
28.2
2011
38.7
2012
Normalized Pre-tax Earnings
Items excluded from normalized earnings depicted in the chart include:
•
Pre-tax gain on business acquisition of $27.5 million in 2011
•
Integration expenses including legal and banking system conversion expenses totalling $3.7 million and $7.2
million in 2012 and 2011 respectively
•
Expenses related to the amortization of fair value adjustments recorded as part of the amalgamation of $6.8
million and $ 4.1 million in 2012 and 2011 respectively
Total Revenue
Total interest and non-interest income before provision for credit losses grew by $26.8 million to $217.3 million in
2012. This growth is attributable to income generated from increased overall assets under management coupled with
gains from our affiliate investments. New branches acquired through the DCU amalgamation contributed $12.3 million
to Meridian’s overall revenue in 2012, consisting of $10.8 million in interest related income and $1.5 million in noninterest related revenue.
Net Interest Income
Net interest income is largely comprised of: the difference, or spread, between the interest income generated on our
loan and investment portfolios; net realized or unrealized gains or losses incurred as a result of market valuation of the
derivative portfolio; and the interest expense incurred on both our deposit base and wholesale funding sources. In
2012, net interest income increased by $19.8 million or 12.8% from 2011, despite narrower spreads, primarily due to
strong volume growth in the retail mortgage and commercial lending portfolios as well as a full twelve months of net
interest income from the acquisition of the DCU portfolio on June 1, 2011.
The table that follows summarizes the year-over-year changes in our net interest income, product portfolio mix and yields. It
reflects the following trends:
•
•
•
•
•
•
Stable cash and cash equivalents, a result of successfully managing liquidity despite a competitive deposit market
Higher investment balance as a result of a higher liquidity reserve deposit due to asset growth coupled with shortterm investments held at the beginning of the year which were deployed throughout 2012 to help fund lending
growth
Significant reduction in the interest income earned on all lending products - a continuing function of the
competitive landscape and flat yield curve
Sizeable growth in Commercial demand deposits, due to ongoing focus on new deposit account acquisition
A stabilized member preference between demand and term deposits
An increase in borrowings, primarily a result of higher securitization activity generated to support funding needs
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 86
2012
($ millions)
Average
balance
2011
Interest
Mix
Rate
Average
balance
Interest
Mix
Rate
Cash and cash equivalents
231.6
1.1
2.8%
0.5%
257.6
1.4
3.8%
0.5%
Investments
748.5
14.1
9.1%
1.9%
557.4
9.3
8.1%
1.7%
1,842.1
99.0
22.5%
5.4%
1,665.5
90.9
24.3%
5.5%
4.0%
4.2%
Loans
Lines of credit
1,224.1
49.5
14.9%
1,117.7
47.3
16.3%
Mortgages
4,041.4
143.2
49.3%
3.5%
3,189.9
125.6
46.4%
3.9%
103.2
-
1.3%
0.0%
79.3
-
1.2%
0.0%
Total assets
8,190.9
306.9
100.0%
3.7%
6,867.4
274.6
100.0%
4.0%
Demands
2,938.4
23.3
35.9%
0.8%
2,480.5
20.1
36.1%
0.8%
Fixed terms
3,782.2
93.4
46.2%
2.5%
3,217.5
86.4
46.9%
2.7%
Borrowings
786.6
16.4
9.6%
2.1%
561.3
14.1
8.2%
2.5%
Other
161.4
-
2.0%
0.0%
140.1
-
2.0%
0.0%
7,668.6
133.1
93.6%
1.7%
6,399.4
120.6
93.2%
1.9%
522.3
-
6.4%
0.0%
468.0
-
6.8%
0.0%
8,190.9
133.1
100.0%
1.6%
6,867.4
120.6
100.0%
1.8%
Other
Total liabilities
Members’ equity
Total liabilities and Members’ equity
173.8
154.0
Interest income from operating activities, which excludes the net realized and unrealized gains and losses related to
derivatives and market investments, ended the year at $180.2 million, an improvement of approximately $17.3 million
or 10.6% over 2011.
The low interest rate environment that has persisted since 2010 continued throughout 2012. This effect was
compounded by significant competition in the Canadian financial services sector for retail mortgages and deposits.
These competing pressures resulted in lower overall lending yields without the benefit of equally reduced deposit
yields. As a result, attracting deposits remained a significant challenge throughout 2012. Not only was there
competition in the marketplace for deposit money, but the flat yield curve provided little incentive for members to lock
in their money. In the second half of the year, Meridian introduced a special-priced 18-month GIC offer to both source
deposits and to encourage members to lock in some of their demand funds. The success of this product campaign,
combined with our 3 year Escalator deposit featuring market-leading rates allowed Meridian to hold the percentage of
our deposit book invested in term deposits flat to 2011 as well as exceed our overall 2012 deposit plan.
Meridian continued to securitize residential mortgages throughout 2012 to help fund long-term growth as securitization
remained an attractive funding tool by providing low cost and long-term funding, combined with the benefit of stable
availability. Included in interest income from operating activities is $26.6 million of interest income on mortgages which
had been securitized, an increase of $3.4 million from 2012. Also included in interest income from operating activities
is $2.1 million generated through the pledge of Mortgage-backed securities (“MBS”) purchased from third parties in
order to meet any reinvestment requirements that are not met through the use of MBS created from Meridian’s own
mortgage portfolio.
The interest expense associated with Meridian’s securitization activities increased by $2.8 million or 19.7% from 2011
to $16.7 million, largely driven by increased borrowings partially offset by a decrease in interest rates. Although the
mortgage securitization liability has grown by 48% year over year, Meridian believes that the continued use of
mortgage securitization as a funding source is economically advantageous, and continues to weigh it against
alternative funding sources to ensure funding is being done in a responsible manner.
Additionally, upon amalgamation with DCU in 2011, Meridian commenced servicing a portfolio of mortgages that had
previously been sold by DCU. Meridian recognized $0.2 million in servicing income during 2012 compared to $0.3
million in 2011.
Similar to prior years, our net interest income is impacted by fluctuations in capital markets above and beyond what
management consider to be our normal operating activities. Occasionally, as circumstances warrant, Meridian
undertakes hedging activities which may include the purchase of derivative instruments to protect Meridian and its
members from changes in external market conditions. These hedging activities, in turn, generate their own net interest
income or loss, countering the impact on the underlying item. The net loss on interest rate derivative instruments was
$6.4 million in 2012 and was a result of expenses associated with the amortization of the cost of the index-linked
options held on our balance sheet. These options are purchased to hedge the future interest payout associated with our
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 87
Market Secured GIC products and this loss represents the accretion of the upfront cost of the options. This amortization
should not be viewed as a true hedging loss because the option cost is comparable to the interest expense associated
with other term products of similar duration and effectively replaces the interest expense that would otherwise be
reflected as term deposit interest expense.
Provision for Credit Losses
The total provision for credit losses was $34.2 million of which $31.9 million relates to the Commercial loan portfolio
and $2.3 million to the retail loan portfolio. This reflects an increase of $20.0 million over 2011 levels attributable
almost entirely to an increased level of Commercial loan losses during the year. Commercial losses are comprised of a
relatively small number of larger, and sometimes individually significant, losses. This results in volatility from year-toyear and can lead to significant variances from plan levels which are largely determined based on average historical
loss rates. New Commercial impairments during 2012 account for $27.1 million with two individually significant
accounts making up two-thirds of this amount. Due to the high exposure levels and nature of security on many of the
Commercial impairments, impaired accounts can take over a year to close. Revised estimates for losses on pre-2012
impairments resulted in a net increase in provision levels of $2.4 million.
The following section outlines our credit portfolio quality and management’s response to the high loan losses in 2012.
Credit Portfolio Quality
Loan loss provisioning is determined in accordance with an established policy. Management reviews the loan allowance
position monthly with a focus on updated forecasts for watchlist accounts, impairment levels and expected net credit
losses. Provisioning is adjusted where necessary to ensure compliance with policies and to include management’s best
estimate of losses based on currently available information.
The total allowance for impaired loans, at $45.6 million, has increased by $14.8 million over the prior year. Several
large Commercial impairments from previous years remain on the books at year-end. As a result, the volume of writeoffs for 2012 is lagging behind 2011 levels. This, combined with the higher provision for credit losses as noted in the
previous section, results in a higher allowance balance. Of the total allowance, $32.1 million is attributable to specific
impairments, with the remaining $13.5 million attributable to collective reserves. This latter component is based upon
a detailed analysis of historical retail portfolio delinquency rates and commercial loan risk rating distribution trends.
The total loan allowance as a ratio to total loans increased from 0.46% to 0.61% in 2012. Additional statistics are
provided in the following table.
Asset quality coverage
2012
2011
7,470,676
6,619,455
Provision for credit losses (“PCL”)
34,239
14,225
Loan write offs (net of recoveries)
19,444
33,914
Total allowance for impaired loans, December 31
45,552
30,757
Net impaired loans
32,070
20,146
(thousands of Canadian dollars)
Total loans, December 31
Members’ equity, December 31
531,464
506,270
PCL as % of total loans
0.46%
0.21%
Net loan write-off as % of total loans
0.26%
0.51%
Net impaired as % of total loans
0.43%
0.30%
Net impaired as % of Members’ equity
6.03%
3.98%
142.04%
152.67%
0.61%
0.46%
% Better than average
42.9%
53.6%
% Average
41.7%
32.1%
84.6%
85.7%
Total allowance as % of net impaired loans
Total allowance as % of total loans
Commercial loans:
The Credit Union’s credit risk policies, processes and methodologies have not changed materially from the prior year,
except for the Commercial risk rating model, where the risk rating scale has been expanded from six to nine ratings,
and from primarily two input measurements to a mix of twenty-two questions addressing various components of risk.
The Commercial credit risk rating model is premised on a comprehensive assessment of the borrower’s risk of default,
through measurement of industry, business, management and financial risk factors, along with the risk of loss given
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 88
default based on an assessment of security composition and relative historical recovery experience. The model includes
a standard set of questions and answers that align to an implied level of risk. Questions are given varied weightings
and an overall borrower risk rating is derived from a cumulative weighting of the answers. The Commercial loan
portfolio stratified by risk rating is reviewed monthly. Risk ratings range from “very low” to “impaired”. Most of the
portfolio continues to fall into the “better than average” or “average” categories. Collectively, these two ratings account
for approximately 84.6% of the total Commercial portfolio.
Over the past several years, the Commercial business has achieved significant growth in its loan portfolio. In an effort
to ensure that Meridian proactively manages the credit risk inherent in this portfolio, the Credit Union has initiated a
complete Commercial business transformation program with the objectives of enhancing portfolio credit management
practices and improving member experience through new automated processes and other techniques. This multi-year
project will establish a target operating model for commercial lending and will establish expanded commercial lending
portfolio analytics and reporting systems. It will result in processes and risk management practices appropriate for the
ongoing growth in volume and complexity of Meridian’s Commercial loan portfolio. Management’s intention is to temper
growth in this portfolio in the short-term until the above transformation program initiatives are fully implemented.
Non-Interest Income from Operating Activities
Compared to 2011, non-interest income increased by $1.6 million or 4.5% to $37.7 million in 2012. The primary
contributor was loan servicing fees which totalled $1.0 million more than 2011, reflecting the strong growth in
Commercial lending. Foreign exchange revenue also rose by $0.4 million as members took advantage of the strong
Canadian dollar. Mutual fund revenue improved by $0.3 million despite the volatility in capital markets. Net sales of
wealth products continued to grow as markets gained strength and members required more advanced wealth solutions.
Revenue from service fees rose by $0.3 million, largely representing growth in income from our Maximiser Convenience
Plus product which provides unlimited monthly transactions in addition to a number of free cheque options. Insurance
commissions declined $0.5 million attributable to lower member demand for life insurance policies.
Non-interest income generated by new branches, excluding foreign exchange revenue, decreased from $1.8 million in
2011 to $1.5 million in 2012. Automatic banking machines (“ABM”) of new branches were incorporated into THE
EXCHANGE® network in 2012. This is a surcharge free network of ABMs across Canada which Meridian participates in
to provide more extensive ABM access to members. Interac revenue generated by new branches declined by $0.2
million as transactions by cardholders from other financial institution participating in THE EXCHANGE® network
switched from Interac to THE EXCHANGE® network.
The following table summarizes the composition of Meridian non-interest income.
Non-interest income
2012
($ millions)
Service fees
Income
Mix
% of
average
assets
2011
Income
Mix
% of
average
assets
11.6
30.8%
0.1%
11.3
31.3%
0.2%
Loan servicing fees
7.1
18.8%
0.1%
6.2
17.2%
0.1%
Insurance commission
5.6
14.9%
0.1%
6.1
16.9%
0.1%
Foreign exchange
4.0
10.6%
0.0%
3.6
10.0%
0.1%
Mutual fund revenue
4.8
12.7%
0.1%
4.5
12.5%
0.1%
Interac revenue
2.4
6.4%
0.0%
2.5
6.9%
0.0%
Credit card revenue
0.9
2.4%
0.0%
0.8
2.2%
0.0%
Other
1.3
3.4%
0.0%
1.1
3.0%
0.0%
37.7
100.0%
0.5%
36.1
100.0%
0.5%
Total
Non-Interest Income from Investments in Associates
Non-interest income from our investments in associates grew $5.4 million to $5.8 million in 2012. This significant
increase reflects realized and unrealized gains in the market value of Meridian’s share of third party asset-backed
commercial paper (“ABCP”) held by the CUCO Cooperative Association. The CUCO Cooperative Association was created
to hold the ABCP on behalf of member credit unions, following the merger of Credit Union Central of Ontario and Credit
Union Central of British Columbia to form Central 1 on July 1, 2008. In 2011, gains on the ABCP investment were
contained due to capital market volatility emanating from the Eurozone debt crisis.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 89
Non-Interest Expenses
Non-interest expenses were $154.9 million in 2012, an increase of $9.8 million or 6.7% from the prior year. A key
contributor to this increase is the full-year impact of new branch operation expenses, as only seven months of
operating expenses were incurred for these branches in 2011. Direct expenses related to new branch operations,
excluding corporate expenses, rose by $3.2 million or 41.3% to $11.1 million, reflecting higher personnel and
occupancy costs.
2012
($ millions)
% of
average
assets
2011
Expense
Mix
% of
average
assets
55.8
38.4%
0.8%
0.1%
16.2
11.2%
0.2%
0.1%
10.5
7.2%
0.2%
Expense
Mix
Salaries
63.1
40.7%
0.8%
Benefits
12.3
7.9%
9.4
6.1%
Salaries and employee benefits
Variable incentive compensation
12.4
8.0%
0.2%
11.5
7.9%
0.2%
Transaction services
9.9
6.4%
0.1%
8.6
5.9%
0.1%
Deposit insurance
5.2
3.4%
0.1%
4.3
3.0%
0.1%
Software and hardware
4.4
2.8%
0.1%
3.9
2.7%
0.1%
5.3
3.4%
0.1%
5.3
3.7%
0.1%
Amortization of intangible assets
5.7
3.7%
0.1%
4.7
3.2%
0.1%
Marketing
6.0
3.9%
0.1%
4.7
3.2%
0.1%
Human resources
2.3
1.5%
0.0%
2.0
1.4%
0.0%
Enterprise initiatives
2.6
1.7%
0.0%
4.1
2.8%
0.1%
16.3
10.5%
0.2%
13.6
9.4%
0.2%
154.9
100.0%
1.9%
145.2
100.0%
2.1%
Occupancy
Depreciation
equipment
Other expenses
Total
of
property,
plant
and
Overall, personnel expenses grew by $2.1 million or 2.6% to $84.8 million. The additional expense is attributable to
the temporary incremental staff required to complete the DCU integration and the permanent incremental staff needed
to support our growing business and delivery of services to our expanded member base. Key areas of employee growth
included new branches, wealth management, lending operations and mortgage broker support. Variable incentive
compensation decreased by $1.1 million or 10.5%, reflecting lower earnings results. Employee benefits declined by
$3.9 million or 24.1% due a curtailment gain in the legacy DCU defined benefit pension plan, along with lower
severance expenses.
One of Meridian’s strategic focuses is to improve brand awareness. In support of this objective, marketing expenses
grew by $1.3 million or 27.6%, associated with radio, television, print and online advertising, community events and
implementation of tools to help better understand Meridian’s members and market. Occupancy costs for branches and
offices rose by $0.9 million or 7.8% reflecting the full-year’s cost of operating new branches as well as real estate price
inflation. The increase in other general operating expenses can be largely attributed to higher transactional costs such
as ABM and cheque clearing expenses and the cost of Meridian’s deposit insurance.
Every year Meridian makes strategic investments in enterprise initiatives to ensure we deliver up-to-date financial
services to members, meet regulatory compliance standards and implement new strategies. In 2012 the amount
invested in such initiatives decreased by $1.5 million or 36.9% to $2.6 million. The decline was as a result of limited
personnel capacity due to the focus on the integration.
As part of Meridian’s amalgamation with DCU, the fair value of the DCU assets acquired and liabilities assumed was
recorded in 2011. One of the material entries was the recording of core deposit intangibles (“CDI”) which represent the
inherent value in the deposits acquired, as they are a low-cost source of funding. In 2012 the amortization of the CDI
asset increased by $0.8 million partly on account of early redemption of term deposits coupled with the fact that the
inherent cost savings from this funding source is reduced as term deposits move closer to maturity.
Amalgamation expenses accounted for $3.7 million of total non-interest expense in 2012, a reduction of $3.4 million or
47.8% from the prior year. The majority of expenses in 2012 were associated with professional services, information
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 90
technology and operational activities. These activities included ABM changes, issuing statements and replacing
cheques. Expenses in 2012 were less than anticipated due to lower severance expense than expected and efficiencies
gained in the integration in the areas of information technology, professional services and staff training.
In 2013 amalgamation expenses are expected to total $1.0 million associated with depreciation expenses, pension
related consulting and cheque replacement.
Dividends
Meridian’s track record of profitability has enabled the payment of dividends on its various series of investment shares.
Meridian has declared and paid a dividend on each series of these shares since inception, with market leading rates for
these types of investments. The dividend rate paid on the “50th Anniversary” and the series 98 shares was 4.75% for
2012 (previously 6.0%). The dividend rate paid on the series 01 and series 96 shares was 4.5% for 2012 (previously
6.0% for series 01 and 5.75% for series 96), while the dividend rate paid on the series 09 shares has been 5.75%. The
payment track record is illustrated in the table below for the last five years.
Dividend history for the past 5 years
(thousands of Canadian dollars)
2012
2011
2010
2009
2008
“50th Anniversary” Class A shares
2,582
3,093
2,936
2,784
2,678
Series 96 Class A shares
1,711
2,076
1,971
1,869
1,773
Series 98 Class A shares
152
181
171
162
155
Series 01 Class A shares
2,236
2,831
2,689
2,555
2,427
Series 09 class A shares
3,648
3,493
1,019
-
-
Balance Sheet Strength
Meridian’s total assets grew by 11.5% to $8.7 billion in 2012, an increase of $904 million over 2011. The majority of
this growth was driven by lending accompanied by a smaller contribution from short-term investments with other
financial institutions and other longer term investments. Liquidity reserve deposits with Central 1 grew in tandem with
the Credit Union’s asset growth, as a statutory requirement. National Housing Act mortgage backed securities held in
trust with the Canadian Housing Trust (“CHT”) for reinvestment purposes also increased and the value of third party
asset backed securities managed through the CUCO Cooperative Association rose. The value of Central 1 shares held
by Meridian also increased.
Year-over-year, loans to members grew by 12.9% or $851.2 million. Meridian continued to offer competitive rates on
mortgage products in 2012 in order to grow our mortgage portfolio. Growth was diversified across our branch, mobile
and broker channels. Members continued to take advantage of low interest rates by refinancing mortgages. This
exacerbates Meridian’s financial margin compression but also generates mortgage prepayment income. Other loans
spanned a number of sectors including hospitality, real estate, land development, construction and health care.
Outstanding lines of credit rose 6.9% or $76.9 million in 2012 compared to growth of 6.1% in 2011.
Member deposits grew by 8.7% or $571.1 million from the previous year. Term deposits contributed entirely to this
growth as demand account balances declined. The decrease in demand deposits can be attributed to some attrition of
members from new branches as well as cannibalization by term offerings as members attempted to maximize the
return on their deposits in a prolonged low interest rate environment. Term deposit balances rose 20.5%, influenced by
favourable interest rates offered on two 12 and 18 month product special offers and a strong deposit campaign late in
the year. Mortgage securitization liabilities increased by 47.5% or $311.1 million as Meridian relied on this as an
inexpensive funding source for loan growth due to the slow deposit growth early in the year. Meridian reduced
borrowings from other sources. However, the increased mortgage securitization resulted in the leverage ratio growing
from 8.3% in 2011 to 11.0% in 2012. Our liquidity ratio as at the end of the year remained well above target at
13.9%, an increase of 0.2% from 2011. This liquidity position reflects our strong deposit growth towards the end of the
year and puts Meridian in a solid starting position to fund lending using internal sources in 2013.
Meridian’s off-balance sheet assets include our Wealth portfolio which comprises mutual fund assets held by members.
Our Wealth portfolio grew by 18.5% or $122.8 million year-over-year. This strong growth represent an almost even
split between net sales of products in 2012 and the appreciation of the market value of members’ investments.
Although capital markets remained volatile during 2012, markets strengthened as global risks were lower despite much
uncertainty.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 91
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL INFORMATION
Management is responsible for the preparation, presentation and consistency of the consolidated
financial statements. This responsibility includes selecting appropriate accounting principles
consistent with International Financial Reporting Standards. The preparation of the consolidated
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 & Finance Committee of the Board meets periodically with management and the
external auditor to review the internal accounting controls and the quality of the financial reporting
process. The Committee reviews the financial statements and the management letter (when and if
issued) with management and the external auditor, and reports to the Board on its findings prior to
the Board’s approval of the consolidated financial statements. The Committee then ensures that
appropriate and timely action is taken to address any identified exposures in the management
letter. The Audit & Finance Committee’s role is discussed further at page 6 herein.
The Board is responsible for ensuring that management fulfils its responsibilities for financial
reporting and meets 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 auditor conducts an independent examination of the consolidated 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 auditor has free and
independent access to the Audit & Finance Committee.
Bill Maurin
President & Chief Executive Officer
Tim Smart
Chief Financial Officer
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 92
AUDITOR’S CONSENT
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 93
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.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 94
BOARD RESOLUTION
June 26, 2015
"The Board of Directors of M eridian Credit Union Lim ited approves the issue of Let’s
Get Growing - Series 15, Class A Special Shares (Let’s Get Growing Class A
Investm ent Shares, Series 15), subject to the Articles of Am algam ation of M eridian
Credit Union Lim ited, and as described in the Offering Statem ent to be dated June
26, 2015."
I certify the above to be a true copy of a resolution adopted by the Board of Directors of Meridian
Credit Union Limited at their meeting of May 28, 2015.
_______________________________
Sheryl Wherry, Corporate Secretary
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 95
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 m aterial facts relating to
the securities offered by this O ffering Statem ent as required by Part V of the Credit
Unions and Caisses Populaires Act, 1994, and the regulations thereunder.
Dated at St. Catharines, Ontario, June 26, 2015
__________________________________________
Bill Maurin, President and Chief Executive Officer
___________________________________________
John Murphy, Board of Directors Chair
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 96
GLOSSARY OF TERMS
"Act" - the Credit Unions and Caisses Populaires Act, 1994, with its accompanying regulations and
guidelines, 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 furbearing 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 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, loan officers and credit 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.
“Applicable Law” – any law, statute, regulation, rule or guideline of any governmental or regulatory
body, or other legislative or administrative action of a governmental authority, applicable at
any time to the Credit Union.
"Basis Point" – one-hundredth of one percent (0.01%), commonly referred to as a bp.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 97
“Beneficial Ownership” – the total number of Let’s Get Growing Class A Investment Shares – Series
15 that an individual member of the Credit Union controls, including those shares held
directly by such member and all those shares not held directly by such member but held (i)
in trust with such member as trustee; (b) by a legal person, other than such member of the
Credit Union, whereby such member has the authority to instruct the legal person as to
voting rights assigned to the shares held by it.
"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.
"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 the following, made to any person for any purpose: an
Agricultural Loan; a Bridge Loan; an Institutional Loan; a Personal Loan; a Mortgage Loan; an
Unincorporated Association Loan; a deposit made by the credit union with a financial institution;
a loan fully secured by a deposit with a financial institution (including the credit union making
the loan); a loan fully secured by debt obligations guaranteed by a financial institution other
than the credit union making the loan; a loan that is fully secured by a guarantee of a financial
institution other than the credit union making the loan; 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; an investment in a debt obligation that is widely-distributed; an
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 98
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" - Regulatory Capital divided by total assets.
"Membership Shares" - shares required, according to the 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 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), guaranteed or insured
by a government agency or 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.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 99
"Regulatory Capital" – the amount (if any) of outstanding Membership Shares, Class A Shares, Class
B Shares, Class C Shares, contributed surplus, retained earnings and the allowable portion of
the Credit Union’s non-specific allowance for impaired loans.
“Risk-Weighted Assets” – the absolute value of assets in specified categories is multiplied by a
percentage, varying between 0% and 100% 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” – 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 the
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 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
by-laws for that credit union and amendments to its articles of incorporation.
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 100
“Syndicated Loans” – a loan, or other related credit facility made under a syndicated loan
agreement, where a credit union acts as syndicator and involves one or more of (i) another
credit union or its subsidiary or affiliate; (ii) a league, Central 1, La Fédération des caisses
Desjardins du Québec, La Caisse Centrale Desjardins du Québec or Credit Union Central of
Canada; or (iii) a financial institution other than a securities dealer to make a loan, typically a
Commercial Loan. The syndicator must contribute at least 10% of the loans, including any
related credit facilities, and underwrites, disburses and administers the loan.
"Unincorporated Association Loan" - loan made to an unincorporated association.
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 101
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 102
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 103
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 104
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 105
Meridian Credit Union Limited - Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 106
Meridian Credit Union Limited – Offering Statement, Let’s Get Growing Class A Investment Shares, Series 15
Page 107
Schedule A – Interim Condensed
Consolidated Financial Statements for
the three months ended March 31, 2015
MERIDIAN CREDIT UNION LIMITED
INDEX TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
Interim consolidated balance sheet
2
Interim consolidated statement of comprehensive income
3
Interim consolidated statement of changes in equity
4
Interim consolidated statement of cash flows
5
Notes to the consolidated financial statements:
Note
Nature of operations
1
2
Page
6
Basis of preparation
2.1
Statement of compliance
6
2.2
Use of estimates and judgments
6
Note
8
Pensions and other employee obligations
10
9
Share capital
11
10
Financial risk management
12
10.1
12
Fair value measurement of
3
Significant accounting policies
6
4
Loans to Members
7
11
Events after the reporting period
financial instruments
14
5
Derivative financial instruments
8
12
Authorization of condensed consolidated financial
14
6
Deferred income taxes
7
Borrowings
10
10
statements
11
MERIDIAN CREDIT UNION LIMITED
INTERIM CONSOLIDATED BALANCE SHEET
As at March 31, 2015 with comparative information for December 31, 2014
Note
Unaudited
March 31
December 31
2015
2014
(thousands of Canadian dollars)
ASSETS
Cash and cash equivalents
$
295,244
$
131,894
Receivables
522
1,466
Current income taxes receivable
325
-
835,525
812,847
Investments - other loans and receivables
4
Loans to Members
9,008,271
8,890,745
5
Derivative financial assets
16,063
18,016
Investments available for sale
54,557
54,557
Investment in associates
12,136
12,148
Investment in joint venture
1,889
1,820
Intangible assets
6,120
7,516
Property, plant and equipment
29,024
28,867
Deferred income tax assets
32,137
24,511
Other assets
10,209
9,362
6
Total assets
$
10,302,022
$
9,993,749
$
8,165,516
$
7,966,606
LIABILITIES
Members’ deposits
7
Borrowings
11,072
22,557
Payables and other liabilities
18,164
18,469
-
674
Current income taxes payable
1,437,345
1,317,883
5
Derivative financial liabilities
23,725
5,840
8
Pension and other employee obligations
32,117
40,278
9
Membership shares
6,579
6,528
9,694,518
9,378,835
Members’ capital accounts
243,205
236,845
Contributed surplus
104,761
104,761
Retained earnings
280,900
277,709
Mortgage securitization liabilities
Total liabilities
MEMBERS’ EQUITY
9
Accumulated other comprehensive income (loss)
(21,362)
Total equity attributable to Members
607,504
Total liabilities and Members’ equity
$
10,302,022
(4,401)
614,914
$
The accompanying notes are an integral part of these interim condensed consolidated financial statements
22
9,993,749
MERIDIAN CREDIT UNION LIMITED
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the three months ended March 31, 2015 and March 31, 2014
Unaudited
Note
Three months ended
March 31
March 31
2015
2014
(thousands of Canadian dollars)
INTEREST INCOME
Interest income - loans to Members
$
Interest income - other
82,988
$
78,177
5,752
4,929
88,740
83,106
33,676
30,209
7,670
6,500
Total interest expense
41,346
36,709
Net interest income
47,394
46,397
Total interest income
INTEREST EXPENSE
Interest expense - Members’ deposits
Interest expense - other
4
2,410
Provision for (recovery of) credit losses
(777)
Net interest income after provision for credit losses
44,984
47,174
Non-interest income
11,716
10,217
Share of profits from investment in associates
(11)
Share of profits from investment in joint venture
417
69
75
56,758
57,883
Salaries and employee benefits
26,663
23,692
Administration
11,725
9,438
Occupancy
3,557
3,338
Amortization of intangible assets
1,612
835
Net interest and non-interest income
NON-INTEREST EXPENSES
Depreciation of property, plant and equipment
1,558
1,496
Total non-interest expenses
45,115
38,799
Operating earnings
11,643
19,084
1,297
2,618
10,346
16,466
Income tax expense
Profits for the period attributable to Members
OTHER COMPREHENSIVE INCOME (LOSS)
Items that will not be reclassified to profit or loss
Actuarial losses in defined benefit pension plans
(986)
Related income taxes
5
191
Items that may be subsequently reclassified to profit or loss
Cash flow hedges – effective portion of changes in fair value
Cash flow hedges – reclassified to profit or loss
(1,055)
(20,705)
(2,495)
3,739
Other comprehensive loss for the period, net of income taxes
Total comprehensive income (loss) for the period
attributable to Members
$
(3)
427
(16,961)
(2,071)
(17,756)
(3,126)
(7,410) $
The accompanying notes are an integral part of these interim condensed consolidated financial statements
33
255
(795)
5
Related income taxes
(1,310)
13,340
MERIDIAN CREDIT UNION LIMITED
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the three months ended March 31, 2015 and March 31, 2014
Note
(thousands of Canadian dollars)
Balance as at January 1, 2015
9
Dividends on Members’ capital accounts
9
Members’
capital
$ 236,845
Contributed
surplus
$
104,761
Retained
earnings
$ 277,709
$
(6,360)
Hedging
reserves
Total
equity
(4,401)
$ 614,914
-
-
Shares issued as dividends
6,360
-
Transactions with owners
6,360
-
-
-
-
-
-
-
-
-
-
-
-
-
9,551
(16,961)
(7,410)
104,761
$ 280,900
$ (21,362)
$ 607,504
Contributed
surplus
Retained
earnings
Hedging
reserves
Total
equity
Profits for the period attributable to Members
-
(6,360)
-
6,360
(6,360)
-
-
10,346
-
10,346
-
(795)
-
Other comprehensive income (loss) for the
period, net of income taxes:
5
5
Actuarial losses in defined benefit pension
plans
Cash flow hedges – effective portion of
changes in fair value
Cash flow hedges – reclassified to profit or loss
Total comprehensive income (loss) for the
period attributable to Members
Balance as at March 31, 2015
Note
(thousands of Canadian dollars)
Balance as at January 1, 2014
9
Dividends on Members’ capital accounts
9
5
5
$ 243,205
Members’
capital
$ 226,884
$
$
104,761
(6,969)
-
6,082
(6,969)
-
(887)
-
16,466
-
16,466
-
-
(1,055)
-
(1,055)
-
-
-
(2,068)
(2,068)
-
-
-
(3)
(3)
-
-
15,411
(2,071)
13,340
104,761
$ 258,958
(1,561)
$ 595,124
6,082
-
Transactions with owners
6,082
-
Profits for the period attributable to Members
-
Other comprehensive income (loss) for the
period, net of income taxes:
Actuarial losses in defined benefit pension
plans
Cash flow hedges – effective portion of
changes in fair value
Balance as at March 31, 2014
$ 232,966
$
$
(6,969)
-
$
The accompanying notes are an integral part of these interim condensed consolidated financial statements
44
4
$ 582,671
Shares issued as dividends
Total comprehensive income (loss) for the
period attributable to Members
4
(16,965)
-
-
$ 250,516
(16,965)
510
-
Cash flow hedges – reclassified to profit or loss
(795)
MERIDIAN CREDIT UNION LIMITED
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2015 and March 31, 2014
Unaudited
Three months ended
Note
March 31
2015
(thousands of Canadian dollars)
March 31
2014
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received
$
Interest paid
$
(32,079)
Fee and commission receipts
Other income received
Premiums paid on index-linked option contracts
4
90,061
Recoveries on loans previously written off
(26,342)
9,477
8,169
468
581
(403)
(491)
74
Payments to employees and suppliers
Income taxes paid
Net cash flows from operating activities before adjustments for
changes in operating assets and liabilities
83,995
85
(52,303)
(56,771)
(5,992)
(3,445)
9,303
5,781
Adjustments for net changes in operating assets and liabilities:
Net change in loans to Members
(120,112)
Net change in receivables
(117,395)
944
Net change in other assets and liabilities
2,073
(536)
Net change in Members’ deposits
Net cash flows from (used in) operating activities
(815)
198,731
(89,212)
88,330
(199,568)
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in other investments
(22,484)
Distributions received from investment in associates
71,144
-
Purchase of intangible assets
Purchase of property, plant and equipment
418
(216)
(103)
(1,743)
(1,716)
(24,443)
Net cash flows from (used in) investing activities
69,743
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from securitization of mortgages
112,830
Payment of mortgage securitization liabilities
7
Proceeds from (repayment of) borrowings
5
Payment on settlement of derivatives
9
Dividends paid on Members’ capital accounts
9
Net cash from changes in Membership shares
-
-
(16,906)
(102)
59,844
(2,864)
-
(931)
(887)
51
4
Net cash flows from financing activities
110,846
42,055
Net increase (decrease) in cash and cash equivalents
174,733
(87,770)
Cash and cash equivalents, beginning of period
110,814
146,260
Cash and cash equivalents, end of period
1
$
285,547
$
58,490
The accompanying notes are an integral part of these interim condensed consolidated financial statements
1
March 31, 2015 cash and cash equivalents is comprised of Interim Consolidated Balance Sheet items Cash and cash equivalents and $9,697
(January 1, 2015 -$21,080) of bank overdrafts, due on demand, included within Borrowings.
55
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
1
Nature of operations
Meridian Credit Union Limited (“the Credit Union” or “Meridian”) is incorporated in Canada under the Credit Unions and
Caisses Populaires Act (Ontario) (the “Act”), and is a member of the Deposit Insurance Corporation of Ontario
(“DICO”) and of Central 1 Credit Union (“Central 1”). The Credit Union is headquartered at 75 Corporate Park Drive in
St. Catharines, ON.
The Credit Union primarily is involved in the raising of funds and the application of those funds in providing financial
services to Members. The activities of the Credit Union are regulated by DICO. As at March 31, 2015 the Credit Union
has 67 branches and seven commercial business centres across Ontario.
2
Basis of preparation
2.1
Statement of compliance
The interim condensed consolidated financial statements of the Credit Union have been prepared in accordance with
IAS 34, Interim Financial Reporting.
The interim condensed consolidated financial statements do not include all the information and disclosures required in
the annual financial statements, and should be read in conjunction with Meridian’s annual financial statements as at
December 31, 2014.
Unless otherwise indicated, all amounts except for per share figures are expressed in thousands of Canadian dollars.
2.2
Use of estimates and judgments
The preparation of the interim condensed consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the consolidated balance sheet date and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from such estimates. Estimates and judgments are continually evaluated
and are made based on historical experience and other factors, including expectations of future events that are
reasonable under the circumstances.
The judgments, estimates and assumptions applied in the interim condensed consolidated financial statements,
including the key sources of estimation uncertainty were the same as those applied in preparing Meridian’s annual
consolidated financial statements for the year ended December 31, 2014, with the exception of changes in estimates
that are required in determining the provision for income taxes.
3
Significant accounting policies
The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are
consistent with those followed in the preparation of Meridian’s annual consolidated financial statements for the year
ended December 31, 2014.
Taxes on income in the interim period are accrued using the tax rate that would be applicable to expected total annual
profit or loss.
66
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
4
Loans to Members
March 31
2015
December 31
2014
Residential mortgages
5,153,442
5,138,784
Personal loans
1,050,827
1,041,692
Commercial loans
2,841,918
2,746,455
9,046,187
8,926,931
Allowance for impaired loans
(37,916)
Total net loans to Members
(36,186)
9,008,271
8,890,745
Allowance for impaired loans
Residential
mortgages
Personal
loans
Commercial
loans
Collective
allowance
Total
497
824
21,406
13,459
36,186
3-month period ended March 31, 2015
Balance as at January 1, 2015
Loans written off
-
Recoveries on loans previously written off
3
(483)
(272)
-
(755)
63
9
-
75
(179)
272
1,785
532
2,410
321
676
22,928
13,991
37,916
Residential
mortgages
Personal
loans
Commercial
loans
Collective
allowance
Total
536
625
20,614
16,056
37,831
(110)
(314)
Provision for (recovery of) credit losses
Balance as at March 31, 2015
3-month period ended March 31, 2014
Balance as at January 1, 2014
Loans written off
Recoveries on loans previously written off
Provision for (recovery of) credit losses
Balance as at March 31, 2014
6
77
57
313
489
701
(3)
-
2
-
(684)
19,929
(463)
15,593
(427)
85
(777)
36,712
Loans past due but not impaired
Retail
Commercial
Total as at March 31, 2015
Retail
Commercial
Total as at December 31, 2014
< 30 days
30-59 days
60-89 days
90 days and
greater
162,671
27,626
6,801
-
34,486
18,118
2,858
100
197,157
45,744
9,659
100
< 30 days
30-59 days
60-89 days
90 days and
greater
154,765
21,903
6,700
-
48,085
19,755
96
-
202,850
41,658
6,796
-
77
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
5
Derivative financial instruments
The tables below provide a summary of the Credit Union’s derivative portfolio and the notional value of the financial
assets or financial liabilities to which the derivatives relate.
Maturities of derivatives (notional amount)
Within 1 year
Derivative contracts as at March 31, 2015
Foreign exchange derivatives:
775
Forward contracts
1 to 5 years
Total
400
1,175
Fair value
Derivative
Derivative
instrument
instrument
assets
liabilities
154
150
-
Equity index-linked options:
Purchased equity options
55,316
102,872
158,188
15,909
-
600,000
600,000
-
20,288
100,000
-
100,000
-
3,287
156,091
703,272
859,363
16,063
23,725
Interest rate swaps:
Designated cash flow hedges
Bond forward contracts:
Designated cash flow hedges
Total derivative contracts as at
March 31, 2015
Maturities of derivatives (notional amount)
Within 1 year
Derivative contracts as at December 31, 2014
Foreign exchange derivatives:
1,200
Forward contracts
1 to 5 years
Total
-
1,200
Fair value
Derivative
Derivative
instrument
instrument
assets
liabilities
40
74
-
Equity index-linked options:
Purchased equity options
81,393
112,108
193,501
17,952
-
600,000
600,000
-
5,458
200,000
-
200,000
24
308
282,593
712,108
994,701
18,016
5,840
Interest rate swaps:
Designated cash flow hedges
Bond forward contracts:
Designated cash flow hedges
Total derivative contracts as at
December 31, 2014
Interest rate swaps
As part of its interest rate risk management process, the Credit Union utilizes interest rate contracts in the form of
interest rate swaps, floors and caps, to maintain its interest rate exposure within the preset limits defined within the
Board of Directors’ (the “Board”) approved policy.
Interest rate swap agreements are valued by netting the discounted variable and fixed cash flows. Variable cash flows
are calculated using implied interest rates as determined by current Canadian Dealer Offered Rate (“CDOR”) and swap
interest rates, and term relationships. Fixed cash flows are calculated based on the rates stated in the agreements.
As at March 31, 2015, the fixed interest rate on the Credit Union’s interest rate swaps is between 1.8% and 2.1%
(December 31, 2014 – between 1.8% and 2.1%). Although the interest rate swap portfolio has not changed since
December 31, 2014, a decline in market interest rates during the three month period ending March 31, 2015 has
impacted the variable cash flows, resulting in larger spreads between fixed and variable cash flows, thereby increasing
the derivative liability as at March 31, 2015. Refer to note 10.1 for a discussion of market conditions and market risk
management.
88
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
5
Derivative financial instruments (continued)
Designated cash flow hedges are interest rate swap agreements which qualify as hedging relationships for accounting
purposes under IAS 39, Financial Instruments: Recognition and Measurement. The Credit Union has designated
hedging relationships involving interest rate swaps that convert variable rate deposits to long term fixed rate deposits
as cash flow hedges. The risk management objective of this derivative strategy is to lock in the cost of funding for
similar term, fixed rate mortgages. Unrealized gains (losses) as a result of changes in fair value of these derivatives
are deferred in Other comprehensive income (“OCI”). As actual interest receipts and payments are incurred over the
term of the swap, the net interest amount will be included in profit and loss in Net interest income.
Bond forward contracts
As part of its interest rate risk management process, the Credit Union utilizes bond forwards to hedge against potential
changes in the interest rate on forecasted debt issuances associated with securitization activity. These hedging
relationships are designated as cash flow hedges. Unrealized gains (losses) as a result of changes in fair value of
these derivatives are deferred in OCI. At the time of the related debt issuance, the related bond forwards are
unwound and the profit and loss impact of realized gains (losses) is deferred in OCI and amortized to profit and loss
over the term of the related debt, in accordance with the effective interest rate method.
During March 2015, bond forwards with a notional amount of $100,000 were unwound in conjunction with a new
mortgage securitization.
Results of hedge activities recorded in Net interest income and OCI
For the three months ended March 31, 2015
Net gains
(losses)
included in
Net interest
income
Before-tax
unrealized
gains
(losses)
included
in OCI
Before-tax
realized
gains
(losses)
included
in OCI
After-tax
gains
(losses)
included
in OCI
10
-
-
-
-
(17,841)
(2,864)
(16,965)
(5)
-
5
4
5
(17,841)
(2,859)
(16,961)
Cash Flow hedges
Ineffective portion
Effective portion
Reclassified to income during the period
For the three months ended March 31, 2014
Net gains
(losses)
included in
Net interest
income
Before-tax
unrealized
gains
(losses)
included
in OCI
Before-tax
realized
gains
(losses)
included
in OCI
After-tax
gains
(losses)
included
in OCI
(1)
-
-
-
Effective portion
-
(2,495)
-
(2,068)
Reclassified to income during the period
3
-
(3)
(3)
2
(2,495)
(3)
(2,071)
Cash Flow hedges
Ineffective portion
99
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
6
Deferred income taxes
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax assets
March 31
2015
December 31
2014
35,326
27,366
3,189
2,855
32,137
24,511
The movement in the deferred income tax assets was mainly attributable to the following factors:

A change in tax strategy to defer certain discretionary deductions to years with higher federal income tax
rates resulted in an increase of $3,988 in the deferred tax asset during the period that was recognized in
profit and loss

Hedge accounting activity during the period resulted in an increase of $3,739 in the deferred tax asset that
was recognized in other comprehensive income
7
Borrowings
The following tables show movements in borrowings during the three months ended March 31, 2015 and March 31,
2014:
Balance as at January 1, 2015
22,557
Repayment of Central 1 overdraft
(11,383)
Payments on finance leases
(102)
Balance as at March 31, 2015
11,072
Balance as at January 1, 2014
1,812
Utilization of CIBC credit facility
59,917
Payments on finance leases
(164)
Balance as at March 31, 2014
8
61,655
Pension and other employee obligations
March 31
2015
December 31
2014
Short-term employee benefits payable
11,180
20,187
Retirement benefit obligations
20,937
20,091
Total pension and other employee obligations
32,117
40,278
March 31
2015
December 31
2014
13,081
12,751
7,856
7,340
20,937
20,091
Consolidated balance sheet obligations for:
Pension benefit plans
Post-employment medical benefits
Retirement benefit obligations
10
10
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
8
Pension and other employee obligations (continued)
Three months ended
March 31
2015
March 31
2014
1,111
1,147
152
156
1,263
1,303
Pension benefit plans
552
1,105
Post-employment medical benefits
434
205
986
1,310
Consolidated statement of comprehensive income charge (recovery)
to salaries and employee benefits for:
Pension benefit plans
Post-employment medical benefits
Consolidated re-measurement loss (gain) included in other
comprehensive income for:
9
Share capital
The following table shows movements in share capital during the three months ended March 31, 2015:
“50th
Anniversary”
Class A
shares
Series 96
Class A
shares
61,785
42,949
Shares issued to Members
-
-
Shares issued as dividends
2,647
-
Balance as at March 31, 2015
64,432
Balance as at January 1, 2014
Series 98
Class A
shares
Series 01
Class A
shares
Series 09
Class A
shares
Membership
shares
3,656
55,873
72,582
6,528
-
-
51
165
-
3,548
-
42,949
3,821
55,873
76,130
6,579
59,207
41,237
3,496
53,706
69,238
6,452
Shares issued to Members
-
-
-
-
-
4
Shares issued as dividends
2,578
-
160
-
3,344
-
61,785
41,237
3,656
53,706
72,582
6,456
Balance as at January 1, 2015
Balance as at March 31, 2014
-
1,711,583
Cash dividends paid to Class A share investors during the period are as follows:
Three months ended
Three months ended
March 31, 2015
March 31, 2014
“50th Anniversary” Class A shares
Series 96 Class A shares
Series 98 Class A shares
Series 01 Class A shares
Series 09 Class A shares
286
8
637
232
7
647
Balance at end of period
931
886
11
11
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
10
Financial Risk Management
The Credit Union is exposed to a variety of financial risks: credit risk, market risk (including interest rate risk, foreign
currency risk and other price risk) and liquidity risk.
The condensed interim consolidated financial statements do not include all financial risk management information and
disclosures required in the annual financial statements; they should be read in conjunction with the Credit Union’s
audited 2014 Annual Consolidated Financial Statements.
The Board has overall responsibility for the establishment and oversight of the Credit Union’s risk management
framework. The Board has established the Risk Committee and charged it with the responsibility for, among other
things, the development and monitoring of risk management policies. The Risk Committee reports regularly to the
Board on its activities. The Credit Union maintains policies and procedures relative to capital management so as to
ensure the capital levels are sufficient to cover risks inherent in the business. There have been no changes in the risk
management responsibilities or in any risk management policies since year end.
10.1
Fair value measurement of financial instruments
Interest rate sensitivity is the main cause of changes in the fair values of the Credit Union’s financial instruments.
With the exception of financial assets and financial liabilities recorded at fair value through profit or loss, the carrying
values of financial instruments are not adjusted to reflect the fair value. Changes to the Bank of Canada overnight
rate in January 2015 have impacted the fair value of the Credit Union’s financial assets and liabilities during the period.
The following table provides a comparison of the carrying and fair values for each classification of financial
instruments. Refer to note 29.4 of the Credit Union’s audited 2014 Annual Consolidated Financial Statements for a
description of the valuation techniques and inputs used in the fair value measurement of the financial instruments.
There have been no significant changes to the determination of fair value during the period.
March 31, 2015
Carrying
value
Fair value
December 31, 2014
Fair value
difference
Carrying
value
Fair value
-
Financial assets at FVTPL (*):
Cash and cash equivalents
294,612
294,612
-
132,081
132,081
15,909
15,909
-
17,952
17,952
-
-
-
24
24
154
154
-
40
40
54,557
54,557
-
54,557
54,557
522
522
-
1,466
1,466
835,525
9,008,271
10,209,550
839,794
9,055,648
10,261,196
4,269
812,847
810,594
(2,253)
47,377
8,890,745
8,863,162
(27,583)
51,646
9,909,712
9,879,876
(29,836)
Derivative financial assets
Equity index-linked options
Bond forward contracts
Foreign exchange contracts
Available for sale:
Investments
Loans and receivables:
Receivables
Investments
Loans to Members
Total financial assets
Fair value
difference
12
12
-
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
10.1
Fair value measurement of financial instruments (continued)
March 31, 2015
Carrying
value
Fair value
December 31, 2014
Fair value
difference
Carrying
value
Fair value
Fair value
difference
Financial liabilities at FVTPL (*):
Derivative financial liabilities
Interest rate swaps
Bond forward contracts
20,288
20,288
-
5,458
5,458
-
3,287
3,287
-
308
308
-
150
150
-
74
74
-
Foreign exchange contracts
Other liabilities:
8,165,516
8,200,408
34,892
7,966,606
7,985,954
19,348
Borrowings
9,697
9,697
-
21,080
21,080
-
Payables and other liabilities
6,995
6,995
-
8,158
8,158
-
1,437,345
1,474,923
37,578
1,317,883
1,337,785
19,902
Member’s deposits
Mortgage securitization liabilities
11,180
11,180
-
20,187
20,187
-
Membership shares
6,579
6,579
-
6,528
6,528
-
Total financial liabilities
9,661,037
9,733,507
72,470
9,346,282
9,385,532
39,250
Employee obligations
(*) Fair value through profit or loss
The following table illustrates the classification of the Credit Union’s financial instruments within the fair value
hierarchy:
Fair value as at March 31, 2015
Level 1
Level 2
Level 3
294,612
-
-
Recurring measurements
Financial assets
Cash
Derivative financial assets:
Equity index-linked options
-
15,909
-
Foreign exchange contracts
-
154
-
Investments available for sale
-
21,260
-
294,612
37,323
-
9,697
-
-
-
15,676
-
Interest rate swaps
-
20,288
-
Bond forward contracts
-
3,287
-
Foreign exchange contracts
-
150
-
9,697
39,401
-
Total financial assets
Financial liabilities
Borrowings
Embedded derivatives in index-linked deposits
Derivative financial liabilities:
Total financial liabilities
The fair values of cash and cash equivalents, receivables, payables and other liabilities and employee obligations
approximate their carrying values due to their short-term nature.
The fair value of Central 1 Class E shares, which are classified as investments available for sale and measured at cost,
has been excluded from the above table as they are not quoted in an active market and their fair value cannot be
reliably determined.
13
13
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2015
10.1
Fair value measurement of financial instruments (continued)
Fair value as at December 31, 2014
Level 1
Level 2
Level 3
132,081
-
-
Recurring measurements
Financial assets
Cash
Derivative financial assets:
Equity index-linked options
-
17,952
-
Bond forward contracts
-
24
-
Foreign exchange contracts
-
40
-
Investments available for sale
-
21,260
-
132,081
39,276
-
21,080
-
-
-
17,665
-
Interest rate swaps
-
5,458
-
Bond forward contracts
-
308
-
Foreign exchange contracts
-
74
-
21,080
23,505
-
Total financial assets
Financial liabilities
Borrowings
Embedded derivatives in index-linked deposits
Derivative financial liabilities:
Total financial liabilities
There have been no transfers between level 1 and level 2 of the fair value hierarchy during the periods. There were no
changes in valuation techniques during the periods.
11
Events after the reporting period
On May 26, 2015 the Credit Union announced plans for the curtailment of its post-employment medical benefit plan for
eligible retired employees of the Credit Union’s first defined benefit pension plan, as described in note 21 of the
audited 2014 Annual Consolidated financial statements, effective July 1, 2015. Affected employees will no longer be
eligible for certain health and dental benefits unless they are aged 55 or older as of July 1, 2017. At the time of the
announcement, Meridian recorded a curtailment gain of $1,470,600 in the statement of comprehensive income to
salaries and employee benefits and a corresponding reduction in its post-employment medical benefits liability.
On May 21, 2015 the Credit Union also announced the introduction of a new retirement service award program for all
employees effective July 1, 2015. At the time of the announcement Meridian recorded an expense of $1,430,400 in
the statement of comprehensive income to salaries and employee benefits and a corresponding increase in its postemployment benefits liability.
The net impact of the two announcements is a reduction of $40,200 recorded in the statement of comprehensive
income to salaries and employee benefits.
12
Authorization of condensed consolidated financial statements
The interim condensed consolidated financial statements for the three months ended March 31, 2015 were approved
for issue by the Board of Directors on May 28, 2015.
___________________________________
___________________________________
John Murphy
Chair, Board of Directors
Richard Owen
Chair, Audit & Finance Committee
14
14
Schedule B – Audited Consolidated
Financial Statements for the year ended
December 31, 2014
MERIDIAN CREDIT UNION LIMITED
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014
Independent auditor’s report
2
Consolidated balance sheet
3
Consolidated statement of comprehensive income
4
Consolidated statement of changes in equity
5
Consolidated statement of cash flows
6
Notes to the consolidated financial statements:
Note
Page
1
Nature of operations
2
Basis of preparation
3
4
7
Note
13
Intangible assets
24
14
Property, plant and equipment
25
2.1 Statement of compliance
7
15
Deferred income taxes
26
2.2 Use of estimates and judgments
7
16
Other assets
27
2.3 Regulatory compliance
8
17
Members’ deposits
27
Summary of significant accounting policies
8
18
Borrowings
27
3.1
Basis of consolidation
9
19
Payables and other liabilities
28
3.2
Foreign currency translation
9
20
Mortgage securitization liabilities
28
3.3
Financial assets and financial liabilities
9
21
Pension and other employee obligations
30
3.4
Interest income and expense
11
22
Share capital
36
3.5
Fee and commission income
11
23
Net interest income
39
3.6
Impairment of financial assets
12
24
Non-interest income
40
3.7
Intangible assets
12
25
Income tax expense
40
3.8
Property, plant and equipment
13
26
Related party transactions
41
3.9
Impairment of non-financial assets
13
27
Contingent liabilities and commitments
43
3.10 Leases
13
28
Regulatory information
45
3.11 Provisions
14
29
Financial risk management
46
3.12 Employee benefits
14
29.1 Credit risk
46
3.13 Income taxes
14
29.2 Market risk
48
3.14 Share capital
15
29.3 Liquidity risk
51
Changes in accounting policies
15
29.4 Fair value of financial assets and financial
53
5
Cash and cash equivalents
16
6
Receivables
16
7
Investments - other loans and receivables
16
8
Loans to Members
17
9
Derivative financial instruments
19
10
Investments available for sale
21
11
Investment in associates
22
12
Investment in joint venture
23
liabilities
29.5 Capital management
5
30
Comparative information
57
31
Authorization of consolidated financial statements
58
1
1
March 12, 2015
INDEPENDENT AUDITOR’S REPORT
To the Members of Meridian Credit Union Limited,
We have audited the accompanying consolidated financial statements of Meridian Credit Union Limited and its
subsidiaries, which comprise the consolidated balance sheet as at December 31, 2014, and the consolidated statements
of comprehensive income, of changes in equity and cash flows for the year then ended, and the related notes, which
comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted
our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
Meridian Credit Union Limited and its subsidiaries as at December 31, 2014, and their financial performance and their
cash flows for the year then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
2
2
MERIDIAN CREDIT UNION LIMITED
CONSOLIDATED BALANCE SHEET
As at December 31, 2014 with comparative figures for 2013
Note
December 31
2014
(thousands of Canadian dollars)
December 31
2013
ASSETS
5
Cash and cash equivalents
6
Receivables
7
Investments - other loans and receivables
8
Loans to Members
9
$
131,894
$
146,260
1,466
3,133
812,847
770,137
8,890,745
8,100,734
Derivative financial assets
18,016
23,984
10
Investments available for sale
54,557
51,762
11
Investment in associates
12,148
19,208
12
Investment in joint venture
1,820
1,849
13
Intangible assets
7,516
9,794
14
Property, plant and equipment
28,867
26,505
15
Deferred income tax assets
24,511
22,085
16
Other assets
9,362
8,247
Total assets
$
9,993,749
$
9,183,698
$
7,966,606
$
7,407,479
LIABILITIES
17
Members’ deposits
18
Borrowings
22,557
1,812
19
Payables and other liabilities
18,469
38,514
25
Current income taxes payable
674
2,197
20
Mortgage securitization liabilities
1,317,883
1,114,852
5,840
282
40,278
29,439
9
Derivative financial liabilities
21
Pension and other employee obligations
22
Membership shares
6,528
6,452
9,378,835
8,601,027
Members’ capital accounts
236,845
226,884
Contributed surplus
104,761
104,761
Retained earnings
277,709
250,516
Total liabilities
MEMBERS’ EQUITY
22
(4,401)
Accumulated other comprehensive income
Total equity attributable to Members
510
614,914
Total liabilities and Members’ equity
$
The accompanying notes are an integral part of these consolidated financial statements
3
9,993,749
582,671
$
9,183,698
MERIDIAN CREDIT UNION LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended December 31, 2014 with comparative figures for 2013
Note
2014
(thousands of Canadian dollars)
2013
INTEREST INCOME
Interest income - loans to Members
$
Interest income - other
325,180
$
305,760
15,330
15,876
340,510
321,636
124,601
122,706
29,129
22,534
Total interest expense
153,730
145,240
Net interest income
186,780
176,396
7,156
6,534
179,624
169,862
43,384
39,406
1,001
3,143
Total interest income
INTEREST EXPENSE
Interest expense - Members’ deposits
Interest expense - other
23
8
Provision for credit losses
Net interest income after provision for credit losses
24
Non-interest income
11
Share of profits from investment in associates
12
Share of profits from investment in joint venture
271
314
224,280
212,725
103,633
87,696
Administration
47,243
44,015
Occupancy
13,433
12,633
Net interest and non-interest income
NON-INTEREST EXPENSES
21
Salaries and employee benefits
13
Amortization of intangible assets
3,540
3,391
14
Depreciation of property, plant and equipment
5,971
5,574
173,820
153,309
50,460
59,416
6,031
2,791
44,429
56,625
Total non-interest expenses
Operating earnings
25
Income tax expense
Profits for the year attributable to Members
OTHER COMPREHENSIVE (LOSS) INCOME
Items that will not be reclassified to profit or loss
21
Actuarial losses in defined benefit pension plans
25
Related income taxes
Items that may be subsequently reclassified to profit or loss
Cash flow hedges – effective portion of changes in fair value
Cash flow hedges – reclassified to profit or loss
25
(6,106)
-
1,044
-
(5,062)
-
(5,982)
617
9
Related income taxes
Other comprehensive (loss) income for the year, net of income taxes
Total comprehensive income for the year attributable to Members
(107)
(4,911)
510
(9,973)
$
The accompanying notes are an integral part of these consolidated financial statements
4
4
-
1,062
34,456
510
$
57,135
MERIDIAN CREDIT UNION LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended December 31, 2014 with comparative figures for 2013
Note
(thousands of Canadian dollars)
Balance as at January 1, 2014
Members’
capital
$ 226,884
Contributed
surplus
$
104,761
Retained
earnings
$ 250,516
Hedging
reserves
$
510
$ 582,671
-
(12,174)
-
9,961
22
Dividends on Members’ capital accounts
-
-
22
Shares issued as dividends
9,961
-
Transactions with owners
9,961
-
(12,174)
-
(2,213)
-
-
44,429
-
44,429
-
-
(5,062)
-
(5,062)
-
-
-
-
-
-
-
-
39,367
104,761
$ 277,709
Contributed
surplus
Retained
earnings
Profits for the year attributable to Members
(12,174)
Total
equity
-
Other comprehensive income for the year, net of
income taxes:
Actuarial losses in defined benefit pension
plans
Cash flow hedges – effective portion of
changes in fair value
Cash flow hedges – reclassified to profit or loss
Total comprehensive income for the year
attributable to Members
Balance as at December 31, 2014
Note
(thousands of Canadian dollars)
Balance as at January 1, 2013
22
22
$ 236,845
Members’
capital
$ 217,448
$
$
104,761
$ 204,663
(4,918)
7
$
(4,918)
7
(4,911)
34,456
(4,401)
$ 614,914
Hedging
reserves
Total
equity
-
$ 526,872
-
(10,772)
-
-
Shares issued as dividends
9,436
-
-
9,436
Transactions with owners
9,436
-
(10,772)
-
(1,336)
-
-
56,625
-
56,625
-
-
-
-
-
-
-
-
510
510
-
-
56,625
510
57,135
$ 250,516
510
$ 582,671
Dividends on Members’ capital accounts
Profits for the year attributable to Members
Other comprehensive income for the year, net of
income taxes:
Actuarial losses in defined benefit pension
plans
Cash flow hedges – effective portion of
changes in fair value
Total comprehensive income for the year
attributable to Members
Balance as at December 31, 2013
$ 226,884
$
104,761
The accompanying notes are an integral part of these consolidated financial statements
5
5
(10,772)
-
MERIDIAN CREDIT UNION LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 2014 with comparative figures for 2013
Note
(thousands of Canadian dollars)
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES
$
Interest received
Interest paid
$
(146,461)
Fee and commission receipts
Other income received
Premiums paid on index-linked option contracts
8
345,379
Recoveries on loans previously written off
37,437
32,961
1,692
1,647
(2,062)
(1,838)
356
Payments to employees and suppliers
326,098
(142,665)
398
(180,560)
(153,867)
Income taxes paid
(7,873)
(4,321)
Net cash flows from operating activities before adjustments for
changes in operating assets and liabilities
47,908
58,413
Adjustments for net changes in operating assets and liabilities:
Net change in loans to Members
(798,122)
Net change in receivables
(638,201)
1,667
Net change in other assets and liabilities
96
(1,138)
Net change in Members’ deposits
Net cash flows used in operating activities
1,424
558,424
238,414
(191,261)
(339,854)
(79,482)
(12,163)
34,084
(54,675)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of National Housing Act mortgage backed securities
Net decrease (increase) in other investments
11
Distributions received from investment in associates
12
Distributions received from investment in joint venture
13
Purchase of intangible assets
(1,262)
(2,300)
14
Purchase of property, plant and equipment
(8,338)
(6,397)
(46,637)
(66,398)
Proceeds from securitization of mortgages
247,403
209,456
Payment of mortgage securitization liabilities
(43,549)
(60,252)
Net cash flows used in investing activities
8,061
8,887
300
250
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of (proceeds from) borrowings
(335)
Proceeds on settlement of derivatives
140
Dividends paid on Members’ capital accounts
Net cash flows from financing activities
56
202,452
147,975
(35,446)
Cash and cash equivalents, beginning of year
146,260
(1)
$
(1,336)
76
Net decrease in cash and cash equivalents
Cash and cash equivalents, end of year
-
(1,283)
Net cash from changes in Membership shares
5, 18
51
110,814
(258,277)
404,537
$
146,260
The accompanying notes are an integral part of these consolidated financial statements
(1) End of year cash and cash equivalents is comprised of Consolidated Balance Sheet items Cash and cash equivalents and $21,080
of bank overdrafts, due on demand, included within Borrowings.
6
6
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
1
Nature of operations
Meridian Credit Union Limited (“the Credit Union” or “Meridian”) is incorporated in Canada under the Credit Unions and
Caisses Populaires Act (the “Act”), and is a member of the Deposit Insurance Corporation of Ontario (“DICO”) and of Central
1 Credit Union (“Central 1”). The Credit Union is headquartered at 75 Corporate Park Drive in St. Catharines, ON.
The Credit Union primarily is involved in the raising of funds and the application of those funds in providing financial services
to Members. The activities of the Credit Union are regulated by DICO. The Credit Union has 67 branches and seven
commercial business centres across Ontario.
2
Basis of preparation
2.1
Statement of compliance
The consolidated financial statements of the Credit Union have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) and IFRIC interpretations as issued by the International Accounting Standards Board (“IASB”)
and legislation for Ontario’s Credit Unions and Caisses Populaires.
Unless otherwise indicated, all amounts except for per share figures are expressed in thousands of Canadian dollars.
2.2
Use of estimates and judgments
The preparation of the consolidated financial statements requires management to make estimates and judgments that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the consolidated
balance sheet date and the reported amounts of revenue and expenses during the reporting period. Actual results could
differ from such estimates. Estimates and judgments are continually evaluated and are made based on historical experience
and other factors, including expectations of future events that are reasonable under the circumstances.
The items subject to the most significant application of judgment and estimates are as follows:
Fair value of financial instruments
As described in note 29.4, where the fair value of financial assets and financial liabilities cannot be derived from active
markets, the Credit Union uses valuation techniques that include the use of mathematical models. The inputs to these
models are derived from observable market data where possible, but where observable market data are not available,
judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs, such as
discount rates and prepayment rates.
Management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair
value of financial instruments.
Note 29.4 provides detailed information about the key assumptions used in the determination of the fair value of financial
instruments, as well as the detailed sensitivity analysis for these assumptions.
Impairment losses on loans and advances
The Credit Union reviews its loan portfolio to assess impairment at each consolidated balance sheet date. In determining
whether an impairment loss should be recorded in the consolidated statement of comprehensive income, the Credit Union
makes judgments as to whether there is any objective evidence indicating an impairment trigger followed by a measurable
decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that
portfolio. The assessment takes account of historical loss experience for assets with credit risk characteristics and objective
evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and
assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any
differences between loss estimates and actual loss experience.
The impairment loss on loans and advances is disclosed in more detail in note 3.6 and note 8.
7
7
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
2.
Use of estimates and judgments (continued)
Impairment of intangible assets
The Credit Union performs an assessment of its intangible assets at each consolidated balance sheet date to determine
whether an impairment loss should be recorded in the consolidated statement of comprehensive income. Core deposit
intangibles comprise most of the Credit Union’s intangible assets. The carrying value of core deposit intangibles is
significantly impacted by estimates about the future runoff pattern for the demand deposit portfolio to which the intangible
asset relates as well as estimates used in determining the net cost of servicing the deposits compared to the alternative cost
of borrowing. Management assesses actual runoff patterns on a regular basis to determine the impact on the remaining
runoff estimates.
Further details on impairment of intangible assets are disclosed in note 3.9.
Recognition of securitization arrangements
As part of its program of liquidity, capital and interest rate risk management, the Credit Union enters into arrangements to
fund growth by entering into mortgage securitization arrangements. As a result of these transactions and depending on the
nature of the arrangement, the Credit Union may be subject to the recognition of the funds received as secured borrowings
and the continued recognition of the securitized assets. The determination of the requirements for continued recognition
requires significant judgment.
Further details of securitization arrangements are disclosed in note 20.
Deferred income taxes
Deferred income tax assets are recognized in respect of unused tax losses or deductible temporary differences to the extent
that it is probable that taxable income will be available against which the losses can be utilized. Judgment is required to
determine the amount of deferred income tax assets that can be recognized, based on the likely timing and level of future
taxable profits, together with future tax planning strategies.
Further details on deferred income taxes are included in note 3.13 and note 15.
Retirement benefit obligations
The present value of the retirement benefit obligations depends on a number of factors that are determined on an actuarial
basis using a number of assumptions. The actuarial valuation involves making assumptions about discount rates, expected
rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature
of these plans, such estimates are subject to significant uncertainty. Any changes in these assumptions will impact the
carrying value of the pension obligations.
Note 21 provides detailed information about the key assumptions used in the valuation of retirement benefit obligations, as
well as the detailed sensitivity analysis for these assumptions.
2.3
Regulatory compliance
Regulations to the Act specify that certain items are required to be disclosed in the consolidated financial statements that
are presented at annual meetings of Members. This information has been integrated into these consolidated financial
statements and notes. When necessary, reasonable estimates and interpretations have been made in presenting this
information.
Note 28 contains additional information disclosed to support regulatory compliance.
3
Summary of significant accounting policies
These consolidated financial statements were prepared on a going concern basis, under the historical cost convention, as
modified by the revaluation of financial assets and financial liabilities, including derivative financial instruments, at fair
value.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
These policies have been consistently applied to all of the years presented.
8
8
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
3.1
Basis of consolidation
The financial results of wholly owned subsidiaries of the Credit Union are included within these consolidated financial
statements. All intercompany balances and transactions have been eliminated on consolidation.
Investments in which the Credit Union exerts significant influence but not control over operating and financing decisions are
accounted for using the equity method. Under equity accounting, investments are initially recorded at cost and adjusted for
the Credit Union’s proportionate share of the net income or loss which is recorded in share of profits from investment in
associate and share of profits from investment in joint venture in the consolidated statement of comprehensive income.
Investments in which the Credit Union exercises joint control are initially recognized at cost and subsequently accounted for
using the equity method. The Credit Union’s share of profits from investment in the joint venture is based on financial
statements prepared up to a date not earlier than three months before the date of the consolidated balance sheet, adjusted
to conform to the accounting policies of the Credit Union. The joint venture in which the Credit Union participates operates
an office building, which generates income from leasing of space for commercial use.
3.2
Foreign currency translation
The consolidated financial statements are presented in Canadian dollars, which is the Credit Union’s functional and
presentational currency.
Monetary assets and liabilities denominated in foreign currencies, primarily United States (“U.S.”) dollars, are translated into
Canadian dollars at exchange rates prevailing on the consolidated balance sheet date. Income and expenses are translated
at the exchange rates in effect on the date of the transaction. Exchange gains and losses arising on the translation of
monetary items are included in non-interest income for the year.
3.3
Financial assets and financial liabilities
Financial assets and financial liabilities, including derivative financial instruments, are recognized on the consolidated
balance sheet of the Credit Union at the time the Credit Union becomes a party to the contractual provisions of the
instrument. The Credit Union recognizes financial instruments at the trade date.
All financial assets and financial liabilities are measured at fair value on initial recognition.
Financial assets
There are four categories of financial assets: loans and receivables; fair value through profit or loss; held to maturity; and
available for sale. Management classifies each financial asset to one of these categories at the time of initial recognition. The
classification depends on the purpose for which the asset was acquired.
The category determines how the financial asset will be subsequently measured and whether any resulting income and
expense is recognized in profit or loss or in other comprehensive income.
All financial assets are subject to review for impairment at least at each reporting date. Impairment is recognized when
there is objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine
impairment are applied for each category of financial assets.
The categories of financial assets are described below:
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market (other than investments where the credit union intends to sell in the short-term or where the credit union
may not recover substantially all of the investment, which have been designated as available for sale). The Credit Union has
designated receivables, loans to Members and fixed term deposits with Central 1 as loans and receivables. Financial assets
classified as loans and receivables are initially measured at fair value net of loan fees and direct transaction costs and are
subsequently measured at amortized cost using the effective interest method of amortization less provision for impairment.
(b) Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets that are either classified as held for trading or
that meet certain conditions and are designated at fair value through profit or loss on initial recognition. All of the Credit
Union’s derivative financial instruments fall into this category as well as cash and cash equivalents, except for short-term
investments with less than 100 days maturity from the date of acquisition, which are classified as loans and receivables.
Financial assets at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed
in the consolidated statement of comprehensive income. They are subsequently measured at fair value with gains and
losses recognized in profit or loss.
9
9
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
3.3
Financial assets and financial liabilities (continued)
Derivative financial instruments
Derivative financial instruments are contracts, such as options, swaps and futures, where the value of the contract is
derived from the price of an underlying variable. The most common underlying variables include stocks, bonds,
commodities, currencies, interest rates and market rates. The Credit Union periodically enters into derivative contracts to
manage financial risks associated with movements in interest rates and other financial indices as well as to meet the
requirements to participate in the Canada Mortgage Bond Program (“CMB Program”) for securitization as discussed in note
20. The Credit Union’s policy is not to utilize derivative financial instruments for trading or speculative purposes.
Assets in this category are measured at fair value. Gains or losses are recognized in profit or loss in other interest income,
unless the derivative is designated as a hedging instrument. For designated hedging instruments, the recognition of the gain
or loss will depend on the hedge accounting rules described below. Gains or losses on derivative financial instruments are
based on changes in fair value determined by reference to active market transactions or using a valuation technique where
no active market exists.
Certain derivatives embedded in other financial instruments, such as the embedded option in an index-linked term deposit
product, are treated as separate derivative financial instruments when their economic characteristics and risks are not
closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These
embedded derivatives are separately accounted for at fair value, with changes in fair value recognized in profit or loss.
Hedge accounting
The Credit Union documents at the inception of the transaction the relationship between hedging instruments and hedged
items, as well as the risk management objectives and strategies for undertaking various hedge transactions. The Credit
Union also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivative financial
instruments 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.
In a cash flow hedge, the effective portion of changes in fair value of derivatives that are designated and qualify as cash
flow hedges is recognized in other comprehensive income (“OCI”). The gain or loss relating to the ineffective portion is
recognized immediately in profit or loss within net interest income. Amounts accumulated in OCI are reclassified to profit or
loss in the periods when the hedged item affects profit or loss and are recorded within net interest income. The Credit Union
utilizes cash flow hedges primarily to convert floating rate assets and liabilities to fixed rate.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any
cumulative gain or loss existing in accumulated other comprehensive income (“AOCI”) at that time remains in AOCI and is
recognized in the statement of comprehensive income as the hedged item affects earnings. When a forecasted transaction is
no longer expected to occur, the cumulative gain or loss that was reported in OCI is immediately transferred to the income
statement within net interest income. If a forecasted transaction is no longer highly probable of occurring, but is still likely
to occur, hedge accounting will be discontinued and the cumulative gain or loss existing in AOCI at that time remains in
AOCI and is amortized to net interest income in the statement of comprehensive income at the same time the hedged item
will affect earnings.
Cash and cash equivalents
Cash and cash equivalents comprise balances with less than 100 days maturity from the date of acquisition. Given the
short-term nature, the carrying value of cash and cash equivalents, excluding short-term investments, is a reasonable
approximation of fair value.
(c) Held to maturity financial assets
Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities
that the Credit Union’s management has the positive intention and ability to hold to maturity. The Credit Union has not
classified any of its financial assets as held to maturity investments.
(d) Available for sale financial assets
Available for sale financial assets are those intended to be held for an indefinite period of time, which may be sold in
response to needs for liquidity or changes in interest rates, exchange rates or equity prices and which are not classified as
loans and receivables, fair value through profit or loss or held to maturity. These would include those non-derivative
financial assets that are explicitly designated as such or do not qualify for inclusion in any of the other categories of financial
assets. The Credit Union has designated its equity investments not subject to significant influence as available for sale.
Available for sale financial assets are initially recognized at fair value plus transaction costs. They are subsequently
measured at fair value, with any resultant gain or loss recognized in other comprehensive income, except for impairment
losses which are recognized in profit or loss. Investments in equity instruments that have been designated as available for
sale but that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured, are
recorded at cost. When financial instruments are derecognized, the cumulative gains and losses previously recognized in
accumulated other comprehensive income are recognized in profit or loss.
10
10
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
3.3
Financial assets and financial liabilities (continued)
Interest income earned on available for sale debt instruments is recognized in profit or loss in other interest income.
Dividends received on available for sale equity instruments are recognized in profit or loss in other interest income.
Financial liabilities
There are two categories of financial liabilities: fair value through profit or loss; and other liabilities. Management classifies
each financial liability to one of these categories at the time of initial recognition.
The category determines how the financial liability will be subsequently measured and whether any resulting income and
expense is recognized in profit or loss or in other comprehensive income.
The categories of financial liabilities are described below:
(a) Financial liabilities at fair value through profit or loss
The Credit Union’s derivative financial instruments fall into this category and are described above under financial assets.
(b) Other liabilities
The Credit Union has designated all financial liabilities other than derivative financial liabilities as other liabilities. These
include Members’ deposits, borrowings, mortgage securitization liabilities and trade and other payables.
Other liabilities are initially recorded at fair value and subsequently measured at amortized cost using the effective interest
method.
Derecognition of financial instruments
Financial assets are derecognized when the Credit Union no longer has contractual rights to the cash flows from the asset,
or when substantially all of the risks and rewards of ownership are transferred. If the Credit Union has neither transferred
nor retained substantially all the risks and rewards of ownership, it assesses whether it has retained control over the
transferred asset.
A financial liability is derecognized when it is extinguished, discharged, cancelled or expired.
3.4
Interest income and expense
Interest income and expense for all interest-bearing financial instruments, except those designated as fair value through
profit or loss, are recognized within interest income or interest expense in the consolidated statement of comprehensive
income as they accrue using the effective interest method.
Once a financial asset has been written down as a result of an impairment loss, interest income is recognized using the rate
of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the
expected life of the financial asset or financial liability to its fair value at inception. The effective interest rate is established
on initial recognition of the financial asset or liability and incorporates any fees and transaction costs that are integral to
establishing the contract.
3.5
Fee and commission income
Fee and commission income not directly attributable to the acquisition of financial instruments is recognized when the
related service is provided and the income is contractually due. Fee and commission income is included in non-interest
income on the consolidated statement of comprehensive income. Fee and commission income that is directly attributable to
acquiring or issuing a financial asset or financial liability not classified as fair value through profit or loss, is added to or
deducted from the initial carrying value. Fee and commission income is then included in the calculation of the effective
interest rate and amortized through profit or loss over the term of the financial asset or financial liability. For financial
instruments carried at fair value through profit or loss, transaction costs are immediately recognized in profit or loss on
initial recognition.
11
11
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
3.6
Impairment of financial assets
The Credit Union assesses at each consolidated balance sheet date whether there is objective evidence that a financial asset
or group of financial assets is impaired.
(a) Financial assets carried at amortized cost
A financial asset or group of financial assets are impaired only if there is objective evidence of impairment as a result of one
or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event or events has an
impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The criteria that the Credit Union uses to determine that there is objective evidence of an impairment include delinquency in
contractual payments of principal or interest, financial difficulties experienced by the borrower, breach of loan covenants or
conditions, initiation of bankruptcy proceedings or deterioration in the value of collateral.
The Credit Union completes an assessment to determine whether objective evidence of impairment exists on an individual
and/or collective basis. If the Credit Union determines that objective evidence of impairment does not exist for an
individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics
and collectively assesses the group for impairment. Assets that are individually assessed for impairment and for which an
impairment is identified, are not included in the collective assessment of impairment.
The specific allowance assessed on an individual financial asset is measured as the amount that is required to reduce the
carrying value of the impaired asset to its estimated realizable amount, which is generally the fair value of the security
underlying the asset, net of expected costs of realization. Expected costs of realization are determined by discounting at the
financial asset’s original effective interest rate. The carrying value of the asset is reduced through the use of an allowance
account and the amount of the loss is recognized in the consolidated statement of comprehensive income.
The estimated period between when a loss occurs and its identification is determined by management to be 12 months, on
average, for the purpose of collectively provisioning loans.
For the purposes of the collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk
characteristics. Future cash flows within each group are estimated on the basis of the contractual cash flows of the assets in
the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss
experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect
the period on which the historical loss experience is based and to remove the effects of conditions in the historical period
that do not currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly
by the Credit Union to reduce any differences between loss estimates and actual loss experience.
An impairment loss on an investment carried at amortized cost is reversed if the reversal can be related objectively to an
event occurring after the impairment loss was recognized. The reversal is recognized in the consolidated statement of
comprehensive income.
(b) Financial assets classified as available for sale
When objective evidence of impairment exists, which may include a decline in fair value or recoverable amount of the future
cash flows below the cost that is other than temporary, an impairment loss is recorded.
All impairment losses are recognized in the consolidated statement of comprehensive income. Any decline in fair value of an
available for sale financial asset recognized previously in other comprehensive income that is considered to be impaired is
taken into profit or loss for the year. Impairment losses relating to an available for sale debt instrument are reversed when
in a subsequent period, the fair value of the instrument increases and the increase can be objectively related to an event
occurring after the loss was recognized.
3.7
Intangible assets
Intangible assets acquired separately
Intangible assets acquired separately include computer software, other than software which is considered to be an integral
part of property classified as property, plant and equipment which is included in computer hardware and software, as well
as design plans which will be used in the future construction or renovation of branch locations or commercial banking
centres. Intangible assets acquired separately are recorded at historical cost.
Intangible assets acquired through business combinations
Intangible assets acquired through business combinations include the fair value of contractual rights relating to the mutual
fund portfolios of acquired Members as well as core deposit intangibles representing the cost savings inherent in acquiring a
deposit portfolio with a lower cost of funding versus going into the market for the funds.
Intangible assets with a limited life, except for core deposit intangible assets, are amortized to income on a straight-line
basis over the period during which the assets are anticipated to provide economic benefit, which currently ranges from three
to ten years. An accelerated method of amortization is used for core deposit intangible assets based on the anticipated
runoff pattern over a seven year period.
12
12
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
3.7
Intangible assets (continued)
Intangible assets are subject to impairment review as described in note 3.9.
The Credit Union does not have any intangible assets with indefinite lives.
The Credit Union has not recognized any internally generated intangible assets.
3.8
Property, plant and equipment
Recognition and measurement
Land is carried at cost less impairment losses. Buildings and equipment are measured at cost less accumulated depreciation
and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased
software that is integral to the functionality of the related equipment is capitalized as part of the computer hardware.
Depreciation
Land is not depreciated. Depreciation of other assets commences when the asset is available for use and is calculated using
the straight-line method over the estimated useful lives of the related assets as follows:
Buildings and improvements
Furniture and office equipment
Computer hardware and software
Leasehold improvements
5-40 years
5-10 years
3-5 years
lease term to a maximum of 10 years
Where components of an item of property, plant and equipment have different useful lives, they are accounted for as
separate items of property, plant and equipment.
Residual value estimates and estimates of useful life are reviewed, and adjusted if appropriate, at each consolidated balance
sheet date.
Assets are subject to impairment review as described under note 3.9.
3.9
Impairment of non-financial assets
Non-financial assets that are subject to amortization or depreciation are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized for the
amount by which the asset’s carrying value exceeds its recoverable amount. For non-financial assets with the exception of
core deposit intangible assets, the recoverable amount is the higher of an asset’s fair value less costs to sell and value in
use. For the purpose of assessing impairment, assets are grouped at the branch level. This is considered to be the lowest
level for which there are separately identifiable cash flows (i.e. the cash-generating units). For core deposit intangibles, the
recoverable amount is determined by applying current assumptions about the inherent cost savings and runoff patterns to
the remaining deposit portfolio balance. Non-financial assets that have suffered impairment are reviewed for possible
reversal of the impairment at each reporting date.
3.10
Leases
Leases where the Credit Union assumes substantially all the risks and rewards of ownership are classified as finance leases.
On initial recognition the leased asset under a finance lease is measured at an amount equal to the lower of its fair value
and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in
accordance with the accounting policy applicable to the asset and depreciated using the straight-line method over the term
of the lease. The interest element of the finance cost is charged to profit or loss over the lease period.
Other leases are operating leases and the leased assets are not recognized on the Credit Union’s consolidated balance
sheet. Payments made under operating leases are charged to profit or loss on a straight-line basis over the period of the
lease.
13
13
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
3.11
Provisions
Provisions are recognized when the Credit Union has a present legal or constructive obligation as a result of past events, it
is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be
made. Where the Credit Union expects a provision to be reimbursed, the reimbursement is recognized as an asset only
when the reimbursement is virtually certain. At each consolidated balance sheet date, the Credit Union assesses the
adequacy of its pre-existing provisions and adjusts the amounts as necessary based on actual experience and changes in
future estimates.
Provisions are measured at the present value of the estimated expenditure required to settle the present obligation and are
recorded within operating expenses on the consolidated statement of comprehensive income.
3.12
Employee benefits
(a) Pension obligations
The Credit Union provides post-employment benefits through defined benefit plans as well as a defined contribution plan.
A defined contribution plan is a pension plan under which the Credit Union pays fixed contributions into a separate entity.
The Credit Union has no legal or constructive obligation to pay further contributions after its payment of the fixed
contribution. The contributions are recognized as employee benefit expense when they are due.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on
retirement, usually dependent on one or more factors, such as age, years of service and compensation. The cost of the plan
is actuarially determined using the projected unit cost method pro-rated on service and management’s best estimate of
discount rates, expected plan investment performance, salary escalation, and retirement ages of employees. The plans
include an annual indexation of the lesser of 4% or the increase in the previous calendar year’s Consumer Price Index.
Service cost is the change in the present value of the defined benefit obligation resulting from employee service in either
the current period or prior periods and from any gain or loss on settlement. Net interest is the change in the net defined
benefit liability or asset that arises from the passage of time. Both service cost and net interest are recognized immediately
in salaries and employee benefits.
Re-measurements of the net defined benefit liability include actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions, the return on plan assets excluding amounts included in net interest and changes in
the effect of any asset ceilings. Re-measurements are recognized immediately in other comprehensive income.
The net defined benefit liability or asset recognized in the consolidated balance sheet is the plans’ deficit or surplus at the
balance sheet date, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The plans’ deficit or
surplus is the present value of the defined benefit obligation less the fair value of plan assets.
(b) Other post-retirement obligations
Other post-retirement obligations include health and dental care benefits for eligible retired employees. The expected costs
of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined
benefit pension plans along with management’s best estimate of expected health care costs.
(c) Other short-term benefits
Liabilities for employee benefits for wages, salaries, termination pay and vacation pay represent the undiscounted amount
which the Credit Union expects to pay as at the consolidated balance sheet date including related costs.
3.13
Income taxes
Income tax expense on the consolidated statement of comprehensive income comprises current and deferred income taxes.
Income taxes are recognized in profit or loss, except to the extent that they relate to items recognized directly in other
comprehensive income, in which case they are recognized in other comprehensive income.
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 consolidated balance sheet date, and any adjustment to tax payable in respect of
previous years.
Deferred income taxes are recognized using the liability method, providing for temporary differences between the carrying
values of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of
deferred income tax provided is based on the expected manner of realization or settlement of the carrying value of assets
and liabilities, using tax rates enacted or substantively enacted at the consolidated balance sheet date.
A deferred income tax asset is recognized only to the extent that it is probable that future taxable profits will be available
against which the asset can be utilized. Deferred income tax assets are reduced to the extent that it is no longer probable
that the related tax benefit will be utilized.
14
14
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
3.14
Share capital
(a) Member shares
Shares are classified as liabilities or Members’ equity according to their terms. Where shares are redeemable at the option
of the Member, either on demand or on withdrawal from membership, the shares are classified as liabilities. Residual value
in excess of the face value on Member share liabilities, if any, is classified as equity. Where shares are redeemable at the
discretion of the Credit Union’s Board of Directors, the shares are classified as equity.
(b) Distributions to Members
Dividends on shares classified as liabilities are charged to profit or loss, while dividends on shares classified as equity are
charged to retained earnings. Dividends declared on the Membership shares shall be paid in cash. Members may elect to
receive dividends declared on Class A shares by way of cash or newly issued, fully paid equity shares of the same class.
Dividends payable in cash are recorded in the period in which they are declared by the Credit Union’s Board of Directors.
Dividends payable by way of newly issued shares are recorded in the period in which the shares are issued.
(c) Share issue costs
Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of income taxes,
from the proceeds.
4
Changes in accounting policies
(A) New standards, amendments and interpretations adopted by the Credit Union
The Credit Union has adopted the following new standards and amendments to standards, including any consequential
amendments to other standards, with a date of initial application of January 1, 2014.
(a) IAS 32, Financial instruments: Presentation was amended in December 2011 to provide additional application guidance
on offsetting financial assets and financial liabilities. The amendment did not impact the presentation of the Credit Union’s
financial assets and financial liabilities in the consolidated financial statements.
Other standards, amendments and interpretations which are effective for the financial year beginning on January 1, 2014
are not material to the Credit Union.
(B) New standards, amendments and interpretations not yet adopted
Standards issued but not yet effective up to the date of issuance of the Credit Union’s financial statements are listed below.
This listing is of standards and interpretations issued which are expected to apply to the Credit Union at a future date. The
Credit Union intends to adopt these standards when they become effective.
(a) IFRS 9, Financial Instruments, was issued in July 2014 and incorporates previously issued components of the new
standard. It replaces the existing guidance in IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 retains
but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets:
amortised cost, fair value through OCI and fair value through profit or loss (“FVTPL”). The basis of classification depends on
the entity’s business model and the contractual cash flow characteristics of the financial asset. For financial liabilities there
were no changes to classification and measurement except for the recognition of changes in own credit risk in other
comprehensive income, for liabilities designated at fair value through profit or loss. The Credit Union does not anticipate any
changes to the measurement basis of its financial assets or financial liabilities as a result of these changes in accounting
policy.
IFRS 9 now includes a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39.
The model applies to all financial assets that are not measured at FVTPL, including specified financial guarantees and loan
commitments issued. The model uses a dual measurement approach under which a loss allowance is measured for each
financial asset as either: 12-month expected credit losses; or lifetime expected credit losses. The measurement basis
generally depends on whether there has been a significant increase in credit risk since initial recognition. It is expected that
the changes will result in an increase in the allowance for impaired loans and an earlier recognition of impairment losses in
profit and loss. The Credit Union will undertake a thorough assessment of the new requirements to determine the
implications to current impairment modelling and processes.
IFRS 9 also includes changes to hedge accounting guidance and aims to improve the decision usefulness of the financial
statements by better aligning hedge accounting with the risk management activities of an entity. It has removed or
amended some of the key prohibitions and rules within IAS 39, providing more flexibility to an entity in establishing
relationships that would qualify for hedge accounting. It is not anticipated that any of the Credit Union’s current hedging
relationships will be impacted. The Credit Union will assess the impact of the new requirements as it relates to future
derivative strategies prior to the effective date of implementation.
IFRS 9 is effective for accounting periods beginning on or after January 1, 2018.
15
15
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
4
Changes in accounting policies (continued)
(b) IFRS 15, Revenue from Contracts with Customers deals with revenue recognition and establishes principles for reporting
useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash
flows arising from an entity’s contracts with customers. The standard is effective for annual periods beginning on or after
January 1, 2017. The Credit Union is assessing the impact of IFRS 15 but does not anticipate a material impact as the
amount of revenue generated through the sale of goods and services that would be impacted by this standard is minimal.
5
Cash and cash equivalents
Cash and cash equivalents include cash on hand, current accounts and short-term investments with other financial
institutions.
Cash on hand
Deposits with other financial institutions
Short-term investments
Total cash and cash equivalents
2014
2013
28,426
27,259
103,468
81,140
-
37,861
131,894
146,260
Included in deposits with other financial institutions is $20,793 (2013 – $17,839) held as an unscheduled prepayment cash
reserve, a requirement of the Credit Union’s participation in the National Housing Act Mortgage-Backed Securities (“NHA
MBS”) program. The use of these funds is restricted to those allowed as provided for by the NHA MBS program.
6
Receivables
2014
2013
Other receivables
1,466
3,133
Total receivables
1,466
3,133
Current
1,466
3,133
-
-
2014
2013
612,113
552,180
Non-current
7
Investments - other loans and receivables
Central 1 liquidity reserve deposit
Other interest bearing deposits
National Housing Act mortgage-backed securities
All other loans and receivables
Total investments - other loans and receivables
-
105,666
199,566
111,123
1,168
1,168
812,847
770,137
Central 1 liquidity reserve deposit
The Credit Union is a member of Central 1. As a condition of maintaining membership in Central 1 in good standing, the
Credit Union is required to maintain on deposit an amount equal to 6% of its assets as at each calendar quarter-end. The
deposits bear interest at varying rates, dependent on the terms of the investments.
Other interest bearing deposits
The Credit Union held nil (2013 – two) interest bearing deposits with nil (2013 – one) Canadian financial institutions. These
deposits have a maturity more than 100 days from the date of acquisition.
16
16
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
7
Investments - other loans and receivables (continued)
National Housing Act mortgage-backed securities
The Credit Union held National Housing Act mortgage-backed securities, of which $177,643 (2013 - $90,485) is pledged in
trust with CHT for CMB reinvestment purposes. These securities mature more than 100 days from the date of acquisition.
Under the terms of the CMB program agreement, the Credit Union is not permitted to withdraw the principal held in trust for
any purpose other than the contractual settlement of the mortgage securitization liabilities as disclosed in note 20.
8
Loans to Members
2014
2013
Residential mortgages
5,138,784
4,660,071
Personal loans
1,041,692
1,022,972
Commercial loans
2,746,455
2,455,522
8,926,931
8,138,565
Allowance for impaired loans
(36,186)
(37,831)
Total net loans to Members
8,890,745
8,100,734
Current
2,608,533
2,274,346
Non-current
6,282,212
5,826,388
Residential mortgage loans are repayable in monthly blended principal and interest instalments over a maximum term of
ten years, based on a maximum amortization period of 35 years. Open mortgages may be paid off at any time without
notice or penalty and closed mortgages may be paid off at the discretion of the Credit Union, but are subject to penalty.
Commercial loans and personal loans, including line of credit loans, are generally repayable in monthly blended principal
and interest instalments over a maximum amortization period of 25 years, except for line of credit loans, which are
repayable on a revolving credit basis and require minimum monthly payments.
Allowance for impaired loans
Residential
mortgages
Personal
loans
Commercial
loans
Collective
allowance
Total
536
625
20,614
16,056
37,831
Year ended December 31, 2014
Balance as at January 1
Loans written off
(577)
(1,509)
(7,071)
-
83
257
16
Provision for credit losses
455
1,451
7,847
Balance as at December 31
497
824
21,406
13,459
36,186
Residential
mortgages
Personal
loans
Commercial
loans
Collective
allowance
Total
13,482
Recoveries on loans previously written off
-
(9,157)
(2,597)
356
7,156
Year ended December 31, 2013
Balance as at January 1
Loans written off
420
1,024
30,626
(774)
(1,419)
(12,460)
-
45,552
(14,653)
62
299
37
-
398
Provision for credit losses
828
721
2,411
2,574
6,534
Balance as at December 31
536
625
20,614
16,056
37,831
Recoveries on loans previously written off
17
17
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
8
Loans to Members (continued)
Gross impaired loans
Related security, net of expected costs
Residential
mortgages
Personal
loans
Commercial
loans
Total
16,603
1,616
53,023
71,242
(792)
(31,617)
(48,515)
824
21,406
22,727
(16,106)
Balance as at December 31, 2014
497
Interest income recognized on impaired loans
3,803
Gross impaired loans
Related security, net of expected costs
Balance as at December 31, 2013
Residential
mortgages
Personal
loans
Commercial
loans
Total
16,862
2,068
65,759
84,689
(16,326)
(1,443)
(45,145)
(62,914)
20,614
21,775
536
625
Interest income recognized on impaired loans
4,819
The allowance for impaired loans provided for in the accounts of the Credit Union is in accordance, in all material respects,
with the DICO by-law governing such allowances.
Loans past due but not impaired
Retail
Commercial
Total as at December 31, 2014
Retail
Commercial
Total as at December 31, 2013
< 30 days
154,765
30-59 days
21,903
60-89 days
6,700
90 days and
greater
-
48,085
19,755
96
-
202,850
41,658
6,796
-
< 30 days
30-59 days
60-89 days
90 days and
greater
156,259
27,578
6,525
-
59,918
1,849
2,609
1,164
216,177
29,427
9,134
1,164
The following table illustrates the credit quality of financial assets that are neither past due nor impaired.
Retail portfolio risk rating
(% of portfolio)
Unrated
A+
A
B
C
D
E
Commercial portfolio risk rating
2014
2013
6.5%
35.8%
33.8%
13.1%
6.7%
2.9%
1.2%
7.3%
35.2%
33.1%
13.9%
6.3%
2.8%
1.4%
(% of portfolio)
Unrated
Very low
Low
Better than average
Average
Higher
Watch list
Distressed
2014
2013
0.0%
0.2%
0.8%
14.8%
68.2%
11.8%
4.0%
0.2%
0.2%
0.4%
0.8%
15.9%
65.1%
10.9%
5.8%
0.9%
Refer to note 29.1 - Financial risk management - credit risk for a detailed explanation of the risk rating process for both
portfolios.
18
18
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
8
Loans to Members (continued)
Collateral
There are documented policies and procedures in place for the valuation of financial and non-financial collateral. The fair
valuation of non-financial collateral is performed 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 net realizable amount of the loans.
The amount and type of collateral and other credit enhancements required depend on the Credit Union’s assessment of
counterparty credit quality and repayment capacity. Non-financial collateral is used in connection with both Commercial and
Retail loan exposure. The Credit Union standards for collateral valuation, frequency of recalculation of the collateral
requirement, documentation, registration and perfection procedures and monitoring are in effect. Non-financial collateral
taken by the Credit Union includes vehicles, residential real estate, real estate under development, commercial real estate
and business assets, such as accounts receivable, inventory and fixed assets. The main types of financial collateral taken by
the Credit Union include cash and negotiable securities issued by governments and investment grade issuers, and
assignment of life insurance. Guarantees are also taken to reduce credit exposure risk.
Fair value of collateral held on assets either past due >30 days or
impaired
9
2014
2013
142,732
126,642
Derivative financial instruments
The tables below provide a summary of the Credit Union’s derivative portfolio and the notional value of the financial assets
or financial liabilities to which the derivatives relate.
Maturities of derivatives (notional amount)
Year ended December 31, 2014
Foreign exchange derivatives:
Forward contracts
Fair value
Derivative
Derivative
instrument
instrument
assets
liabilities
Within 1 year
1 to 5 years
Total
1,200
-
1,200
40
74
81,393
112,108
193,501
17,952
-
-
600,000
600,000
-
5,458
200,000
-
200,000
24
308
282,593
712,108
994,701
18,016
5,840
Equity index-linked options:
Purchased equity options
Interest rate swaps:
Designated cash flow hedges
Bond forward contracts:
Designated cash flow hedges
Total derivative contracts as at
December 31, 2014
19
19
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
9
Derivative financial instruments (continued)
Maturities of derivatives (notional amount)
Year ended December 31, 2013
Foreign exchange derivatives:
Forward contracts
Equity index-linked options:
Purchased equity options
Interest rate swaps:
Designated cash flow hedges
Total derivative contracts as at
December 31, 2013
Fair value
Derivative
Derivative
instrument
instrument
assets
liabilities
Within 1 year
1 to 5 years
Total
6,033
-
6,033
293
282
62,688
157,290
219,978
23,258
-
-
100,000
100,000
433
-
68,721
257,290
326,011
23,984
282
The notional amounts are used as the basis for determining payments under the contracts and are not actually exchanged
between the Credit Union and its counterparties. They do not represent credit or market risk exposure.
The Credit Union has credit risk, which arises from the possibility that its counterparty to a derivative contract could default
on their obligation to the Credit Union. However, credit risk associated with derivative contracts is normally a small fraction
of the notional principal amount of the contract. Derivative contracts expose the Credit Union to credit loss where there is a
favourable change in market rates from the Credit Union’s perspective and the counterparty fails to perform. The Credit
Union only enters into derivative contracts with a counterparty that the Credit Union has determined to be creditworthy.
Foreign exchange forward contracts
As part of its ongoing program for managing foreign currency exposure, the Credit Union enters into foreign exchange
forward contracts to purchase U.S. dollars. These agreements function as an economic hedge against the Credit Union’s net
U.S. dollar denominated liability position. The fair value of these contracts as at December 31, 2014 was $(34) (2013 $11). Of this net balance, $40 (2013 - $293) is included in derivative instrument assets and $74 (2013 - $282) is included
in derivative instrument liabilities. Gains/losses on foreign exchange forward contracts are included in non-interest income
(see note 24).
Equity index-linked deposits
The Credit Union has $199,127 (2013 - $221,597) of equity index-linked term deposit products outstanding to its Members.
These term deposits have maturities of up to seven years and pay interest to the depositors, at the end of the term, based
on the performance of various market indices. The Credit Union has purchased equity index-linked options agreements with
various counterparties to offset the exposure to the indices associated with these products. The Credit Union pays a fixed
amount based on the notional amount at the inception of the equity index-linked 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.
The purpose of the options agreements is to provide an economic hedge against market fluctuations. These options
agreements have fair values that vary based on changes in equity indices. The fair value of these options agreements
amounted to $17,952 as at December 31, 2014 (2013 - $23,258). The fair value of the embedded written option in the
equity index-linked term deposit products amounted to $(17,665) as at December 31, 2014 (2013 - $22,880) and is
included as part of Members’ deposits (see note 17). Although hedge accounting is not applied, these agreements continue
to be effective as economic hedges. Gains/losses from interest rate derivative financial instruments are included in profit or
loss as part of interest expense on term deposits (see note 23).
Interest rate swaps
As part of its interest rate risk management process, the Credit Union utilizes interest rate contracts in the form of interest
rate swaps, floors and caps, to maintain its interest rate exposure within the preset limits defined within the Board of
Directors’ (the “Board”) approved policy.
Designated cash flow hedges are interest rate swap agreements which qualify as hedging relationships for accounting
purposes under IAS 39, Financial Instruments: Recognition and Measurement. All other interest rate swaps agreements are
classified as economic hedges. The Credit Union has designated certain hedging relationships involving interest rate swaps
that convert variable rate deposits to fixed rate deposits as cash flow hedges.
20
20
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
9
Derivative financial instruments (continued)
Interest rate swap agreements are valued by netting the discounted variable and fixed cash flows. Variable cash flows are
calculated using implied interest rates as determined by current Canadian Dealer Offered Rate (“CDOR”) and swap interest
rates, and term relationships. Fixed cash flows are calculated based on the rates stated in the agreements. These notional
cash flows are discounted using the relevant points on the zero interest curve as derived from the month-end CDOR and
swap rates. As at December 31, 2014, the fixed interest rates on the Credit Union’s interest rate swaps is between 1.8%
and 2.1% (2013 – 2.0%).
During the year, $16 (2013 - $114) of losses due to hedge ineffectiveness arose and was recorded in profit or loss within
net interest income. Fair value of the interest rate swaps involved in these hedges at the end of the year was $(5,458)
(2013 – $433). The amount of other comprehensive income that is expected to be reclassified to profit or loss over the next
60 months is $(5,329) (2013 – $547).
Bond forward contracts
As part of its interest rate risk management process, the Credit Union utilizes bond forwards to maintain its interest rate
exposure on forecasted debt issuances associated with securitization activity. These hedging relationships are designated 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. Fair values of the bond forwards involved in these hedges that were
unrealized at the end of the year were $(284) (2013 – nil). The amount of other comprehensive gain that is expected to be
reclassified to profit or loss over the next 66 months is $(27) (2013 – $70).
During the year, $38 (2013 - $(1)) of losses due to hedge ineffectiveness arose and was recorded in profit or loss within net
interest income.
10
Investments available for sale
2014
2013
Central 1 Class A shares
33,297
30,502
Central 1 Class E shares
21,083
21,083
177
177
54,557
51,762
Other shares
Total investments available for sale
Shares in Central 1
As a condition of maintaining membership in Central 1, the Credit Union is required to maintain an investment in shares of
Central 1, as determined by the Central 1 Board of Directors. They may be surrendered upon withdrawal from membership
for proceeds equal to the paid-in value, to be received in accordance with a Central 1 by-law providing for the redemption of
its share capital.
Central 1 Class A shares are carried at fair value. These shares are subject to annual rebalancing and the redemption value
is equal to par value. In this circumstance, fair value is considered to be equivalent to par value or redemption value.
Central 1 Class E shares are carried at cost. This class of shares is not subject to annual rebalancing and the redemption
value is not equal to par value. There is no active market for these shares, as they are issued only by virtue of membership
in Central 1, and the fair value cannot be reliably measured.
Other shares
The Credit Union holds an insignificant number of shares in other cooperative entities. The carrying value of these shares is
considered to be a reasonable approximation of fair value. The Credit Union has no intention at present to dispose of these
shares.
21
21
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
11
Investment in associates
The Credit Union has an investment in CUCO Cooperative Association (“CUCO Co-op”), which is owned collectively by
Ontario credit unions and is located in Toronto, ON. CUCO Co-op has a year end of December 31.
CUCO Co-op was formed in 2011, through the restructuring of Credit Union Central of Ontario and ABCP (2008) Limited
Partnership (the “LP”). The assets of CUCO Co-op consist primarily of third party asset-backed commercial paper (“ABCP”)
investments and cash resources. As of December 31, 2014, the Credit Union owned 22% (2013 – 22%) of the voting shares
of CUCO Co-op, maintaining the largest individual shareholding and held one of five positions on the Board. As such, the
Credit Union maintains significant influence over the activities of CUCO Co-op. The activities of CUCO Co-op are not
considered strategic to the Credit Union.
As the market for certain of the investments remains relatively illiquid, valuations for some components of the ABCP were
provided by an independent valuation firm engaged by CUCO Co-op, who employed the use of valuation models. The
balance of the portfolio has been valued based on market bid prices. Due to the judgment used in the determination of the
various assumptions, the fair market value determined will not necessarily be comparable among financial institutions. The
calculation of the estimated fair market value is based on market conditions as at year end and may not be reflective of
future fair market values.
The Credit Union accounts for its investment in CUCO Co-op using the equity method. The change in the investment balance
during the year is as follows:
Balance, beginning of year
Share of comprehensive income
2014
2013
19,208
24,952
1,001
3,143
Distributions received
(8,061)
(8,887)
Balance, December 31
12,148
19,208
2014
2013
334
2,213
54,888
85,086
8
2
55,230
87,301
Accounts payable
77
91
Total liabilities
77
91
Net assets
55,153
87,210
Share of net assets
12,148
19,208
2014
2013
The aggregate amounts relating to CUCO Co-op are as follows:
Cash and cash equivalents
Investment securities
Other assets
Total assets
Interest income
Other revenue
Expenses
643
1,058
4,257
13,662
(356)
(449)
Comprehensive income of the associate
4,544
14,271
Share of comprehensive income
1,001
3,143
22
22
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
11
Investment in associates (continued)
Transactions with CUCO Co-op during the period comprised of distributions of $8,061 (2013 - $8,887) representing a return
of the capital of CUCO Co-op. This has been recorded as a reduction of the investment balance.
The Credit Union has not incurred any contingent liabilities or other commitments relating to its investment in the
partnership.
12
Investment in joint venture
The Credit Union participates in Seventy-Five Corporate Park Drive Limited (joint venture), an incorporated real estate joint
venture located in St. Catharines, ON, with a fiscal year end of October 31. The October 31 year end was established under
a previous ownership structure and was carried over to the new entity when Meridian made its investment and the joint
venture was created. The Credit Union’s ownership percentage is 50%. The investment is structured as a separate legal
entity and provides the Credit Union and the other party to the arrangement with the rights to the net assets of the limited
company under the arrangement. The entity is not restricted from renting to third parties. The activities of the joint venture
are not considered strategic to the Credit Union. The investment meets the requirements for being classified as a joint
venture and is accounted for using the equity method as of December 31.
The change in the investment balance during the year is as follows:
Balance, beginning of year
Share of comprehensive income
2014
2013
1,849
1,785
271
314
Distributions received
(300)
(250)
Balance, December 31
1,820
1,849
2014
2013
Cash and cash equivalents
409
265
Other current assets
297
294
Non-current assets
3,125
3,255
Total assets
3,831
3,814
167
83
24
33
191
116
Net assets
3,640
3,698
Share of net assets
1,820
1,849
2014
2013
1,515
1,657
The aggregate amounts relating to the joint venture are as follows:
Current liabilities
Non-current liabilities
Total liabilities
Revenue
Expenses excluding depreciation and amortization
(697)
(747)
Depreciation and amortization
(174)
(152)
644
758
(103)
(131)
Comprehensive income
541
627
Share of comprehensive income
271
314
Net earnings before income taxes
Income tax expense
23
23
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
12
Investment in joint venture (continued)
Transactions during the year with the joint venture are comprised of rent, common area maintenance, property taxes and
utilities paid to the joint venture in the amount of $1,411 (2013 - $1,402).
The Credit Union has an operating lease with the joint venture for its offices at Seventy-Five Corporate Park Drive in St.
Catharines, ON that expires in 2015. Future minimum lease payments are as follows:
Within 1 year
1 to 4 years
Total
2014
2013
742
885
-
664
742
1,549
The Credit Union has not incurred any contingent liabilities or other commitments relating to its investment in the joint
venture.
13
Intangible assets
Core deposit
intangible
assets
Software
Other
Total
5,912
3,320
562
9,794
-
1,261
1
1,262
Year ended December 31, 2014
As at January 1, 2014, net carrying value
Additions, separately acquired
Amortization
As at December 31, 2014, net carrying value
(1,835)
(1,347)
(358)
(3,540)
4,077
3,234
205
7,516
14,163
11,926
As at December 31, 2014
Cost
451
26,540
(8,692)
(246)
(19,024)
4,077
3,234
205
7,516
Core deposit
intangible
assets
Software
Other
Total
8,044
2,226
615
10,885
-
2,062
Accumulated amortization
(10,086)
Net carrying value
Year ended December 31, 2013
As at January 1, 2013, net carrying value
Additions, separately acquired
(2,132)
Amortization
As at December 31, 2013, net carrying value
(968)
238
2,300
(291)
(3,391)
5,912
3,320
562
9,794
16,601
10,665
3,305
30,571
(2,743)
(20,777)
As at December 31, 2013
Cost
Accumulated amortization
(10,689)
Net carrying value
5,912
24
24
(7,345)
3,320
562
9,794
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
14
Property, plant and equipment
Land
Furniture and
Computer
Building and
office
hardware and
Leasehold
improvements
equipment
software
improvements
Total
Year ended December 31, 2014
As at January 1, 2014, net
carrying value
2,733
8,605
4,391
4,823
5,953
26,505
Additions
-
1,215
2,650
1,590
2,883
8,338
Disposals
-
(5)
-
-
-
Depreciation
-
(1,015)
(1,351)
(2,244)
(1,361)
2,733
8,800
5,690
4,169
7,475
28,867
2,733
21,051
21,369
34,068
22,432
101,653
(12,251)
(15,679)
(29,899)
(14,957)
As at December 31, 2014, net
carrying value
(5)
(5,971)
As at December 31, 2014
Cost
Accumulated depreciation
Net carrying value
2,733
Land
8,800
5,690
4,169
7,475
Furniture and
Computer
Building and
office
hardware and
Leasehold
improvements
equipment
software
improvements
(72,786)
28,867
Total
Year ended December 31, 2013
As at January 1, 2013, net
carrying value
2,733
8,793
3,476
5,649
5,031
25,682
Additions
-
754
2,087
1,496
2,060
6,397
Depreciation
-
(942)
(1,172)
(2,322)
(1,138)
(5,574)
4,391
4,823
5,953
As at December 31, 2013,
net carrying value
2,733
8,605
26,505
As at December 31, 2013
Cost
Accumulated depreciation
Net carrying value
2,733
2,733
19,846
18,718
32,478
19,580
93,355
(11,241)
(14,327)
(27,655)
(13,627)
(66,850)
8,605
4,391
4,823
5,953
26,505
The Credit Union leases equipment under non-cancellable finance lease agreements. The lease terms are between five and
ten years.
Computer hardware includes the following amounts where the Credit Union is a lessee under a finance lease:
Cost - capitalized finance lease
Accumulated depreciation
Net carrying value
2014
2013
2,624
2,624
(1,741)
(1,442)
883
25
25
1,182
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
15
Deferred income taxes
2014
2013
23,215
21,659
4,151
4,081
27,366
25,740
Deferred tax liabilities to be paid after more than 12 months
Deferred tax liabilities to be paid within 12 months
1,176
1,563
1,679
2,092
Total deferred income tax liabilities
2,855
3,655
24,511
22,085
Deferred income tax assets
Deferred tax assets to be recovered after more than 12 months
Deferred tax assets to be recovered within 12 months
Total deferred income tax assets
Deferred income tax liabilities
Net deferred income tax assets
The movement in the deferred income tax account is as follows:
Recognized in
January 1
2014
Non-capital losses available for carry-forward
Allowance for impaired loans
Employee future benefits
Other accrued expenses
Property, plant and equipment
Profit or loss
OCI (*)
December 31
2014
16,534
(487)
-
16,047
3,133
(304)
-
2,829
2,704
510
1,044
4,258
333
(54)
-
279
2,682
(60)
-
2,622
Fair value adjustments on acquisition
(1,524)
532
-
(992)
Deferred expenses
(1,275)
137
-
(1,138)
43
-
(4)
(19)
-
(721)
Financial instruments adjustments
(47)
Mortgage securitization fees
(702)
Cash flow hedges
(107)
Other
Total
-
1,062
955
354
22
-
376
22,085
320
2,106
24,511
(*) Other comprehensive income
Recognized in
January 1
2013
Profit or loss
OCI (*)
December 31
2013
10,095
6,439
-
16,534
2,587
546
-
3,133
3,259
(555)
-
2,704
334
(1)
-
333
3,876
(1,194)
Non-capital losses available for carry-forward
Allowance for impaired loans
Employee future benefits
Other accrued expenses
Property, plant and equipment
-
2,682
Fair value adjustments on acquisition
(1,779)
255
-
(1,524)
Deferred expenses
(1,106)
(169)
-
(1,275)
(44)
(3)
-
(47)
(577)
(125)
-
(702)
Financial instruments adjustments
Mortgage securitization fees
Cash flow hedges
Other
Total
(*) Other comprehensive income
26
26
-
-
258
96
16,903
5,289
(107)
(107)
(107)
354
22,085
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
16
17
Other assets
2014
2013
Deferred securitization fees
3,862
3,886
Prepaid assets
2,918
2,465
Other
2,582
1,896
Total other assets
9,362
8,247
Current
5,415
3,787
Non-current
3,947
4,460
2014
2013
Demand deposits
3,076,939
2,632,992
Term deposits
2,969,525
2,939,466
Registered plans
1,920,142
1,835,021
Total Members’ deposits
7,966,606
7,407,479
Current
2,990,614
4,294,139
Non-current
4,975,992
3,113,340
2014
2013
21,080
-
1,477
1,812
Total borrowings
22,557
1,812
Current
21,490
335
1,067
1,477
Members’ deposits
Term deposits include equity index-linked deposits as described in note 9.
18
Borrowings
Central 1 overdraft
Finance lease liabilities
Non-current
Central 1 borrowings
The Credit Union has established credit and contingency loan facilities at Central 1. Credit facilities from which the Credit
Union has the capacity to borrow amount to $253,900 (2013 – $272,900) of which the balance outstanding was $21,080 as
at December 31, 2014 (2013 – nil). Ancillary contingent credit facilities have been established in the amount of $174,000
(2013 - $155,000).
Assets have been pledged as security for $427,900 (2013 - $427,900) in authorized credit facilities at Central 1 by an
assignment of book debts and a general security agreement subject to adjustment for mortgage collateral pledged against
bank borrowings as noted below.
Bank borrowings
The Credit Union has an overdraft line totaling $240 (2013 - $240) with Caisse Centrale Desjardins (“CCD”). As at
December 31, 2014, the overdraft line had a balance of nil (2013 - nil).
The Credit Union has a settlement risk line totaling $15,000 (2013 - $15,000) with the Bank of Montreal. As at December
31, 2014, the settlement line had a balance of nil (2013 - nil).
The Credit Union has a $300,000 (2013 - $300,000) credit facility with the Canadian Imperial Bank of Commerce (“CIBC”).
As at December 31, 2014, the CIBC credit facility had a nil balance (2013 - nil). The credit facility is secured by eligible
mortgages insured through either CMHC or Genworth.
27
27
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
18
Borrowings (continued)
Finance lease liabilities
2014
2013
Gross finance lease liabilities - minimum lease payments
Within 1 year
1 to 5 years
Over 5 years
574692
679
2,369
1,383
2,071
12
Future finance charges on finance lease liabilities
-
4
2,955
2,075
2,754
(598)
Present value of finance lease liabilities
1,477
(942)
1,812
The present value of minimum lease payments is as follows:
Within 1 year
1 to 5 years
Over 5 years
Present value of finance lease liabilities
19
335
1,473
-
4
1,477
1,812
2014
2013
8,158
28,109
463
682
Payables and other liabilities
Accounts payable and accrued liabilities
Deferred income
682
Cheques and other items in transit
9,848
9,723
Total payables and other liabilities
18,469
38,514
39,018
16,809
36,345
3,088
1,660
2,169
2014
2013
1,317,883
1,114,852
Current
Non-current
20
410
1,067
Mortgage securitization liabilities
Mortgage securitization liabilities
Current
Non-current
220,637
44,604
1,097,246
1,070,248
As part of its program of liquidity, capital and interest rate risk management, the Credit Union enters into arrangements to
fund growth by entering into mortgage securitization arrangements. These arrangements allow the Credit Union to transfer
fully insured residential mortgages to unrelated third parties, generally through the transfer of these assets to multi-seller
conduits which issue securities to investors.
These transactions are derecognized from the consolidated balance sheet when the transaction meets the derecognition
criteria described in note 3.3. In instances where the Credit Union’s mortgage securitizations do not result in a transfer of
contractual cash flows of the mortgages or an assumption of an obligation to pay the cash flows of the mortgages to a
transferee, the Credit Union has not derecognized the transferred asset and has instead recorded a secured borrowing with
respect to any consideration received.
During the year, the Credit Union had outstanding mortgage securitization liabilities pertaining to the use of two
securitization vehicles to access liquidity:
28
28
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
20
Mortgage securitization liabilities (continued)
Under the first securitization vehicle, which was last accessed in 2009 and is closed to further sales, the Credit Union
periodically sold residential insured mortgage loan receivables to Central 1 who in turn packaged these mortgages into
National Housing Act mortgage backed securities (“MBS”). The MBS were then sold by Central 1 to a government-sponsored
special purpose entity, the Canada Housing Trust (“CHT”), through the CMB Program. As of December 31, 2014 the
outstanding balance of mortgage securitization liabilities pertaining to this program is nil (2013 - $35,801).
Under the second securitization vehicle, which was first used in 2010, the Credit Union packages insured mortgage loan
receivables into MBS and in turn sells the MBS to CHT directly through the CMB Program. CHT is financed through the
issuance of government-guaranteed mortgage bonds, which are sold to third party investors. Proceeds of the issuances are
used by CHT to purchase the government-guaranteed MBS from approved Issuers. Under the terms of the CMB Program,
Central 1, on behalf of the Credit Union, acts as counterparty to interest rate swap agreements under which Central 1 pays
CHT the interest due to investors on the government-guaranteed mortgage bonds and receives the interest on the MBS sold
to CHT. The terms of the interest rate swap agreements are mirrored back exactly between Central 1 and the Credit Union,
resulting in the Credit Union ultimately paying CHT the interest due to investors on the government-guaranteed mortgage
bonds and receiving the interest on the MBS sold to CHT. Accordingly, because they prevent derecognition of the securitized
assets, these interest rate swap agreements are not recognized.
As all mortgages securitized by the Credit Union are required to be fully insured prior to sale, they pose minimal to no credit
risk to the Credit Union immediately before or any time after the securitization transaction. As the Credit Union remains
exposed to interest rate risk, timely payment and prepayment risks associated with the underlying assets, the assets,
liabilities, revenues and expenses have not been derecognized and the transactions are accounted for as secured financing
transactions in the Credit Union’s consolidated balance sheet and consolidated statement of comprehensive income.
In addition to securitizing mortgages for liquidity purposes as described above, the Credit Union also packages residential
insured mortgage loan receivables into MBS and in turn utilizes them to meet the reinvestment needs of the CMB Program.
As principal is received on mortgages securitized into the CMB Program through the second securitization vehicle, it is
required to be reinvested in accordance with CMB guidelines. These MBS are transferred to CHT as required to meet these
reinvestment requirements.
Costs incurred in the establishment of a securitization issue are amortized over the life of the issue as part of mortgage
securitization cost of funds included within interest expense – other.
Meridian purchases interests in MBS and interest bearing investments purchased from third parties as part of its
reinvestment strategy. The MBS are issued by CMHC-sponsored securitization trusts and are collateralized by the assets
owned by them. As at December 31, 2014, the carrying value of the purchased MBS (excluding accrued interest) included in
Investments – other loans and receivables in the consolidated balance sheet is $199,232 (2013 - $111,088), of which
$177,643 (2013 - $90,485) has been designated for reinvestment purposes. The Credit Union is exposed to interest rate
risk, as the return on reinvested assets must be sufficient to cover the prepayment exposure. Due to the nature of the
underlying risks, Meridian’s total exposure cannot be reasonably determined. Active management of the securitization
program and the reinvestment portfolio helps to minimize exposure and ensure that sufficient assets are maintained to
meet reinvestment requirements.
29
29
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
20
Mortgage securitization liabilities (continued)
The following summarizes the carrying and fair values of assets of the Credit Union that have been securitized and sold by
the Credit Union to third parties as well as the carrying and fair values of the corresponding mortgage securitization
liabilities:
2014
Securitized mortgages sold via CMB Program
(included in loans to Members)
Carrying
value
Fair
value
Carrying
value
Fair
value
1,119,342
1,118,245
1,002,017
999,796
-
-
7,835
7,906
177,643
179,613
90,485
92,389
20,350
20,350
14,288
14,288
Securitized mortgages sold as NHA MBS
(included in loans to Members)
Purchased MBS held in trust per CMB reinvestment guidelines
(included in investments - other loans and receivables)
Principal receipts to be reinvested in the following month
(included in cash and cash equivalents)
Total designated assets
Mortgage securitization liabilities
1,317,335
1,318,208
1,114,625
1,114,379
(1,317,883)
(1,337,785)
(1,114,852)
(1,116,695)
(548)
(19,577)
(227)
(2,316)
Net amount
21
2013
Pension and other employee obligations
2014
2013
Short-term employee benefits payable
20,187
15,114
Retirement benefit obligations
20,091
14,325
Total pension and other employee obligations
40,278
29,439
The Credit Union provides a number of pension and other retirement benefits to its current and retired employees. These
plans include the following:
Contributory Defined Benefit Pension Plans
The Credit Union has two contributory defined benefit pension plans.
The first defined benefit plan (“DB1”) provides retirement income and related benefits for eligible employees based on
length of credited service and final average earnings. This plan was closed to new members effective January 1, 2005 and
the service and final average earnings were frozen effective December 31, 2014. Members of this plan will become
members of the Credit Union’s defined contribution pension plan starting January 1, 2015.
The most recent valuation of the DB1 Plan for funding purposes was as of June 30, 2013. The next actuarial valuation is
expected to be completed as of June 30, 2016. The Credit Union is responsible for contributing to the DB1 pension fund
such amounts as are required in accordance with, and within the time limits specified in, applicable pension laws. Effective
January 1, 2015, members of the DB1 Plan are neither required nor permitted to contribute to the plan. The DB1 pension
fund is held in trust by CIBC Mellon.
The second defined benefit plan (“DB2”) provides retirement income and related benefits for eligible employees based on
length of credited service and final average earnings. This plan was closed to new members effective June 1, 2011 and the
service and final average earnings were frozen effective December 31, 2012. Members of this plan became members of the
Credit Union’s defined contribution pension plan starting January 1, 2013.
The most recent valuation of the DB2 Plan for funding purposes was as at December 31, 2013. The next valuation is
expected to be completed as at December 31, 2016. The Credit Union is responsible for contributing to the DB2 pension
fund such amounts as are required in accordance with, and within the time limits specified in, applicable pension laws.
Effective January 1, 2013, members of the DB1 Plan are neither required nor permitted to contribute to the plan. The DB2
pension fund is held in trust by Desjardins Financial Security.
30
30
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
21
Pension and other employee obligations (continued)
Both of the defined benefit pension plans are operated under Ontario’s Pension Benefits Act. The Pension Benefits Act is
administered by the Superintendent of Financial Services appointed by the Financial Services Commission of Ontario
(“FSCO”). Plan valuations must be filed with both the FSCO and with the Canada Revenue Agency.
The Pension Benefits Act prescribes the minimum contributions that the Credit Union must make to the plan. The Income
Tax Act (Canada) places a maximum limit on the amount of employer contributions. Responsibility for governance of the
plans, including investment decisions and contribution schedules lies with the Credit Union.
Non-contributory Supplemental Executive Retirement Plan
This plan is a defined benefit pension plan which provides designated employees benefits in excess of the benefits payable
to such employees under the DB1 Plan, under which benefits are restricted by the maximum permitted under the Income
Tax Act (Canada). The benefits payable under the Supplemental Plan are based on the benefit formula under the DB1 Plan.
The Credit Union has established a trust fund, pursuant to a trust agreement between the Credit Union and the trustee, for
the purpose of providing security for the benefits accrued under the Supplemental Plan. A member of this plan will neither
be required nor permitted to make any contribution to this plan.
Defined Contribution Pension Plan and Group Registered Retirement Savings Plan (“RRSP”)
An employee who becomes a member of the Defined Contribution (“DC”) Plan and who accrues benefits under the DC
provisions is not required or permitted to make contributions to the Plan but is required, on fulfilling certain eligibility
requirements, to make contributions to a group RRSP. The Credit Union will contribute each plan year a portion thereof, in
respect of a member who is accruing continuous service in Canada, a percentage of the member’s earnings based on the
member’s completed years of continuous service.
Post-Employment Medical Benefit Plans
The Credit Union also provides certain health and dental care benefits for eligible retired employees of the DB1 Plan.
For financial reporting purposes, the Credit Union measures the benefit obligations and pension plan assets as at December
31 each year.
Components of the net benefit plan expense are as follows:
(a) Service cost is the increase in the present value of the accrued benefit obligation resulting from employee service in the
current period or prior periods and from any gain or loss on settlement.
(b) Net interest cost is the change in the net defined benefit liability or asset that arises from the passage of time.
(c) Remeasurements of the net defined benefit liability include actuarial gains and losses arising from experience
adjustments and changes in actuarial assumptions, the return on plan assets excluding amounts included in net interest
and changes in the effect of any asset ceilings.
2014
2013
12,751
7,915
7,340
6,410
20,091
14,325
Consolidated balance sheet obligations for:
Pension benefit plans
Post-employment medical benefits
Consolidated statement of comprehensive income charge (recovery)
to salaries and employee benefits for:
Pension benefit plans
4,689
Post-employment medical benefits
626
5,315
(1,458)
598
(860)
Consolidated re-measurement loss (gain) included in other
comprehensive income for:
Pension benefit plans
5,573
Post-employment medical benefits
533
6,106
31
31
407
(407)
-
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
21
Pension and other employee obligations (continued)
2014
2013
The amounts recognized in the consolidated balance sheet are
determined as follows:
Present value of funded obligations
Fair value of plan assets
53,582
44,995
(41,646)
(37,833)
Funded plans’ deficit
Present value of unfunded obligations
11,936
7,162
8,155
7,163
Liability recognized in the consolidated balance sheet
20,091
14,325
Defined benefit pensions
The movement in the present value of the
defined benefit obligation over the year is as
follows:
Defined benefit obligation, January 1
Current service cost
2014
2013
2014
2013
45,759
49,790
6,410
6,418
(4,931)
330
345
2,155
1,921
296
252
3,097
(3,010)
626
597
1,817
245
(1,284)
(652)
942
Interest cost
Charge to salaries and employee benefits
Remeasurements:
Actuarial losses from changes in demographic
assumptions
Actuarial losses (gains) from changes in
financial assumptions
Experience losses
241
7,750
Charge to other comprehensive income
Employee contributions
Post-employment medical benefits
11,273
(9,404)
386
747
-
8,377
2,616
533
226
268
-
-
Benefits paid
(3,062)
(3,905)
Defined benefit obligation, December 31
54,397
45,759
7,340
6,410
The movement in the fair value of plan assets
for the year is as follows:
Fair value of plan assets, January 1
37,844
35,820
-
-
1,644
1,194
-
-
1,644
1,194
-
-
2,804
2,626
-
-
2,804
2,626
-
-
2,190
1,841
229
198
Interest income
Decrease to salaries and employee benefits
Remeasurements:
Return on plan assets, excluding amounts
included in interest income
Decrease to other comprehensive income
Employer contributions
Employee contributions
226
268
(229)
(407)
-
(198)
-
Benefits paid
(3,062)
(3,905)
Fair value of plan assets, December 31
41,646
37,844
-
-
Net defined benefit liability
12,751
7,915
7,340
6,410
32
32
(229)
(198)
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
21
Pension and other employee obligations (continued)
Total pension benefits
Post-employment medical benefits
2014
2013
The amounts recognized in the consolidated
statement of comprehensive income charged
to salaries and employee benefits are as
follows:
Defined benefit pension expense (recovery)
1,453
Defined contribution pension expense
3,236
-
Post-employment medical expense
Net benefit plan expense (recovery)
4,689
2014
2013
(4,444)
-
-
2,986
-
-
-
626
598
626
598
(1,458)
Actuarial assumptions:
Total pension benefits
Post-employment medical benefits
2014
2013
2014
2013
The principal actuarial assumptions used were
as follows:
Discount rate
4.00%
4.90%
4.00%
4.70%
Rate of compensation increase
3.50%
3.50%
-
-
Pension growth rate
2.00%
2.00%
-
-
-
-
5.80%
6.10%
Long-term increase in health care costs
Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and
experience in Canada. These assumptions translate into an average life expectancy in years for a pensioner retiring at age
65 as follows:
2014
2013
Male
86.5
87.5
Female
89.0
89.5
Male
87.6
88.4
Female
90.0
90.2
Retiring at the end of the reporting period:
Retiring 20 years after the end of the reporting period:
The weighted average duration of the defined benefit obligation as at December 31, 2014 is 14.2 years (2013 - 13.7 years).
The following shows the expected maturity analysis of undiscounted defined benefit pension and post-employment medical
benefits:
At December 31, 2014
Defined benefit pensions
Post-employment medical benefits
Total
33
33
Within
1 year
2,361
1 to 5
years
9,993
Over 5
years
90,095
Total
102,449
279
1,433
18,542
20,254
2,640
11,426
108,637
122,703
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
21
Pension and other employee obligations (continued)
At December 31, 2013
Within
1 year
2,251
Defined benefit pensions
Post-employment medical benefits
Total
1 to 5
years
9,174
Over 5
years
95,816
Total
107,241
229
1,236
18,630
20,095
2,480
10,410
114,446
127,336
Benefit plan assets
The defined benefit pension plans’ policies are to invest in a diversified portfolio of investments to minimize concentration of
credit risk. The plan assets are primarily composed of equity and fixed income investments. The allocation of the plan assets
by investment category is as follows:
Equity investments
Fixed income investments
Total
2014
%
2013
%
19,690
21,956
41,646
47%
53%
100%
19,136
18,697
37,833
51%
49%
100%
All of the benefit plan assets have a quoted market price in an active market.
The investments of the defined benefit pension plans are managed within an asset-liability matching (“ALM”) framework
that has been developed taking into account obligations under the pension plans. The Credit Union has not changed the
processes used to manage its risks from the previous period. The Credit Union uses dynamic de-risking for DB1, whereby
the allocation to equity investments is gradually decreased and allocation to fixed income investments is gradually increased
when the plan reaches pre-defined trigger points. Derivative financial instruments are permitted for liability hedging
purposes. Investments are well diversified, such that the failure of any single investment within an investment fund would
not have a material impact on the overall level of assets. The current target asset mix for the DB1 Plan is 44% in equities
and 56% in fixed income investments. The target asset mix at the end of the de-risking glidepath is 20% equities and 80%
fixed income. The current target asset mix for DB2 Plan is 50% in equities and 50% in fixed income investments.
Contributions for the upcoming fiscal year are anticipated to be approximately $1,024 (2013 - $2,519) for defined benefit
pension plans, $3,785 (2013 - $3,425) for defined contribution plans and $279 (2013 - $229) for other employee benefit
plans.
34
34
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
21
Pension and other employee obligations (continued)
Sensitivity analysis
The following table outlines the key weighted-average economic assumptions used in measuring the accrued benefit
obligation:
Accrued benefit obligation
Post-employment
Defined benefit pensions
medical benefits
Discount rate
Impact of:
1% increase
1% decrease
Rate of compensation increase
Impact of:
1% increase
1% decrease
Pension growth rate
Impact of:
Life expectancy
Impact of:
2014
2013
2014
2013
(7,198)
8,418
(7,702)
8,916
(924)
1,160
(815)
1,023
N/A
N/A
209
(209)
N/A
N/A
N/AN/A
N/AN/A
N/A
N/A
N/AN/A
N/AN/A
1% increase
1% decrease
5,600
(5,691)
6,332
(6,260)
1 year increase
1 year decrease
1,044
(1,051)
787
(797)
330
(344)
289
(302)
N/A
N/A
1,043
(858)
1,041
(849)
Assumed overall health care cost trend rate
Impact of:
1% increase
1% decrease
N/A
N/A
N/A
N/A
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In
practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the
sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the
defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been
applied as when calculating the pension liability recognized within the consolidated balance sheet.
The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous
period. In 2014 the sensitivity of the defined benefit obligation to a 1% increase or decrease in the rate of compensation is
not significant as Members in neither of the contributory defined benefit plans accrue service after December 31, 2014.
Risks:
Through its defined benefit pension plans and post-employment medical plans, the Credit Union is exposed to a number of
risks, the most significant of which are detailed below:
a)
Equity Risk
The plans hold a significant proportion of equity investments, which are expected to outperform corporate bonds in the
long-term while providing volatility and risk in the short-term.
As the plans mature and their funded status improves, the Credit Union intends to reduce the level of investment risk
by investing more in assets that better match the liabilities. However the Credit Union believes that due to the longterm nature of the plan liabilities, a level of continuing equity investment is an appropriate element of the long term
strategy to manage the plans efficiently.
b)
Changes in bond yields
The plan liabilities are calculated using a discount rate set with reference to corporate bond yields. A decrease in
corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the
plans’ fixed income investments.
35
35
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
21
22
Pension and other employee obligations (continued)
c)
Inflation risk
The majority of the plans’ benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities.
Caps on the level of inflationary increases are in place to protect the plan against extreme inflation. A portion of the
plans’ assets are invested in real return bonds, which are expected to provide some protection against changes in
inflation. However, a significant portion of the plans’ assets are either unaffected by or loosely correlated with inflation,
meaning that an increase in inflation will also increase the deficit.
d)
Life expectancy
The majority of the plans’ obligations are to provide benefits for the life of the member, so increases in life expectancy
will result in an increase in the plans’ liabilities.
Share capital
Par value
per share
2014
2013
5
6,528
6,452
6,528
6,452
61,785
42,949
3,656
55,873
72,582
59,207
41,237
3,496
53,706
69,238
236,845
226,884
Membership shares classified as liabilities
Membership shares
As at December 31
Members’ capital accounts
“50th Anniversary” Class A shares
Series 96 Class A shares
Series 98 Class A shares
Series 01 Class A shares
Series 09 Class A shares
1
1
1
1
1
As at December 31
“50th
Anniversary”
Class A
shares
Series 96
Class A
shares
Series 98
Class A
shares
Series 01
Class A
shares
Series 09
Class A
shares
Membership
shares
56,738,311
39,598,694
3,343,506
51,643,662
66,340,366
1,279,176
-
-
-
-
-
11,160
2,468,164
1,638,507
152,796
2,062,030
3,114,369
-
Issued as at December 31, 2013
59,206,475
41,237,201
3,496,302
53,705,692
69,454,735
1,290,336
Shares issued to (redeemed by)
new Members
-
-
-
-
-
15,276
2,578,611
1,711,583
159,224
2,167,065
3,344,405
-
61,785,086
42,948,784
3,655,526
55,872,757
72,799,140
1,305,612
(number of shares)
Issued as at January 1, 2013
Shares issued to (redeemed by)
new Members
Shares issued as dividends
Shares issued as dividends
Issued as at December 31, 2014
(a) Authorized share capital
The authorized share capital of the Credit Union consists of the following:
(i) an unlimited number of Class A special shares, issuable in series (“Class A shares”);
(ii) an unlimited number of Class B special shares, issuable in series (“Class B shares”); and
(iii) an unlimited number of Membership shares.
Membership shares rank junior to Class A shares and to Class B shares for priority in the payment of dividends and, in the
event of the liquidation, dissolution or winding up of the Credit Union. In addition, Class B shares rank junior to Class A
shares. There are no Class B shares outstanding.
36
36
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
22
Share capital (continued)
(b) Class A shares
“50th Anniversary” Class A shares
The “50th Anniversary” Class A shares are non-cumulative, non-voting, non-participating shares with a minimum dividend
rate adjusted every five years. The new dividend rate for each five-year period will be set by the Board in its absolute
discretion at a rate not less than the chartered bank average five-year GIC rate published by the Bank of Canada Review.
The dividend rate for the five-year period beginning on January 1, 2011 was set at 4.75%.
The holders of the “50th Anniversary” Class A shares are entitled to receive dividends, if and when declared by the Board,
subject to availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 29.5.
Any declaration of dividends for the “50th Anniversary” Class A shares is made by the Board in the fourth quarter of the
fiscal year and the dividends, if and when declared, are payable annually on January 1. These shares are redeemable at the
sole and absolute discretion of the Credit Union’s Board of Directors. Based on these redemption characteristics, these
shares have been recorded within Members’ equity as Members’ capital accounts.
Dividends declared on the “50th Anniversary” Class A shares in 2014 for the year ended December 31, 2014 amounted to
$2,933 (2013 - $2,810), of which $286 (2013 - $232) will be paid in cash and have been recorded in the current year. The
remaining $2,647 (2013 - $2,579) will be paid in the form of newly issued “50th Anniversary” Class A shares and will be
recorded in the following fiscal year when the shares are issued.
Series 96 Class A shares
The series 96 Class A shares are cumulative, non-voting, non-participating shares with a dividend rate adjusted every five
years. The new dividend rate for each five-year period will be set by the Board in its absolute discretion at a rate not less
than 1% above the chartered bank average five-year GIC rate published by the Bank of Canada Review. The dividend rate
for the five-year period beginning September 27, 2011 was set at 4.50%.
The holders of series 96 Class A shares are entitled to receive dividends, if and when declared by the Board, subject to
availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 29.5. Any
declaration of dividends for the series 96 Class A shares is made by the Board in the third quarter of the fiscal year and the
dividends, if and when declared, are payable annually on September 26. These shares are redeemable at the sole and
absolute discretion of the Credit Union’s Board of Directors. Based on these redemption characteristics, these shares have
been recorded within Members’ equity as Members’ capital accounts.
Dividends declared and paid on the series 96 Class A shares in 2014 amounted to $1,856 (2013 - $1,783), of which $145
was paid in cash (2013 - $144) and $1,712 (2013 - $1,639) was paid in the form of newly issued series 96 Class A shares.
The full amount of the series 96 dividend was recorded in the current fiscal year.
Series 98 Class A shares
The series 98 Class A shares are non-cumulative, non-voting, non-participating shares with a minimum dividend rate of the
average of the month-end five-year GIC rates for the period, plus 1%.
The holders of series 98 Class A shares are entitled to receive dividends, as and when declared by the Board, subject to
availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 29.5. Any
declaration of dividends for the Series 98 Class A shares is made by the Board in the fourth quarter of the fiscal year and
the dividends, if and when declared, are payable annually on January 1. These shares are redeemable at the sole and
absolute discretion of the Credit Union’s Board of Directors. Based on these redemption characteristics, these shares have
been recorded within Members’ equity as Members’ capital accounts.
Dividends declared on the series 98 Class A shares in 2014 for the year ended December 31, 2014 amounted to $173 (2013
- $166), of which $8 (2013 - $7) will be paid in cash and have been recorded in the current year. The remaining $165
(2013 - $159) will be paid in the form of newly issued series 98 Class A shares and will be recorded in the following fiscal
year when the shares are issued.
Series 01 Class A shares
The series 01 Class A shares are non-cumulative, non-voting, non-participating shares with a minimum dividend rate
adjusted every five years. The new dividend rate for each five-year period will be set by the Board in its absolute discretion
at a rate not less than 1% above the chartered bank average five-year GIC rate published by the Bank of Canada Review.
The dividend rate for the five-year period beginning on December 12, 2011 was set at 4.50%.
The holders of series 01 Class A shares are entitled to receive dividends, as and when declared by the Board, subject to
availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 29.5. Any
declaration of dividends for the series 01 Class A shares is made by the Board in the third quarter of the fiscal year and the
dividends, if and when declared, are payable annually on December 12. These shares are redeemable at the sole and
absolute discretion of the Credit Union’s Board of Directors. Based on these redemption characteristics, these shares have
been recorded within Members’ equity as Members’ capital accounts.
37
37
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
22
Share capital (continued)
Dividends declared and paid on the series 01 Class A shares in 2014 for the year ended December 12, 2014 amounted to
$2,418 (2013 - $2,325), of which $251 was paid in cash (2013 - $263) and $2,167 (2013 - $2,062) was paid in the form of
newly issued series 01 Class A shares. The full amount of the series 01 dividend was recorded in the current fiscal year.
Series 09 Class A shares
The series 09 Class A shares are non-cumulative, non-voting, non-participating shares with a minimum dividend rate
adjusted every five years. The new dividend rate for each five-year period will be set by the Board in its absolute discretion
at a rate not less than the chartered bank average five-year GIC rate published by the Bank of Canada Review. The dividend
rate was set at 5.75% for dividend payments relating to fiscal years on or before December 31, 2014.
The holders of series 09 Class A shares are entitled to receive dividends, as and when declared by the Board, subject to
availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 29.5. Any
declaration of dividends for the Series 09 Class A shares is made by the Board in the fourth quarter of the fiscal year and
the dividends, if and when declared, are payable annually following each fiscal year end and prior to the annual general
meeting of Members. These shares are redeemable at the sole and absolute discretion of the Credit Union’s Board of
Directors not before the end of the fifth year from the date of issuance. Based on these redemption characteristics, these
shares have been recorded within Members’ equity as Members’ capital accounts.
Dividends declared on the series 09 Class A shares in 2014 for the year ended December 31, 2014 amounted to $4,184
(2013 - $3,992), of which $637 (2013 - $647) will be paid in cash and have been recorded in the current year. The
remaining $3,547 (2013 - $3,345) will be paid in the form of newly issued series 09 Class A shares and will be recorded in
the following fiscal year when the shares are issued.
(c) Membership shares
Par value of one Membership share of the Credit Union is $5. Members under the age of 18 must hold two shares; those 18
and older must hold five shares. There were 266,264 Members at December 31, 2014 (2013 – 263,093).
These shares are redeemable at their issue price only when the Member withdraws from Membership in the Credit Union
subject to:
(i) the Credit Union’s meeting capital adequacy requirements; and
(ii) the discretion of the Board, who may require notice.
Based on the redemption features of these shares, they have been recorded as Membership shares within the liability
portion of the consolidated balance sheet, and have been designated as other liabilities. The residual equity component is
nil.
(d) Dividends
Dividends recognized as distributions to owners during the year are as follows:
“50th Anniversary” Class A shares
Series 96 Class A shares
Series 98 Class A shares
Series 01 Class A shares
Series 09 Class A shares
Balance, December 31
2014
2013
3,097
1,856
174
2,418
4,629
2,693
1,783
159
2,325
3,812
12,174
10,772
Dividends declared during the year that will be paid subsequent to December 31 and which Members have elected to receive
by way of newly issued shares of the same series amount to $6,359 (2013 - $6,968). These dividends will be charged to
retained earnings in the following year when the shares are issued as follows:
38
38
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
22
Share capital (continued)
2014
2013
“50th Anniversary” Class A shares
Series 98 Class A shares
Series 09 Class A shares
2,647
165
3,547
2,810
166
3,992
Balance, December 31
6,359
6,968
No dividends have been declared or paid on Membership shares for the years ended December 31, 2014 or 2013.
23
Net interest income
2014
2013
Interest income
Residential mortgages
Personal loans
Commercial loans
Interest income - loans to Members
Cash and cash equivalents
Investments - other loans and receivables
Investments available for sale
Net loss on interest rate derivative instruments
161,859
39,924
123,397
325,180
549
13,457
1,377
(53)
148,479
38,865
1
118,416
Total interest income
340,510
321,636
Interest expense
Demand deposits
Term deposits
Registered plans
Interest on Members’ deposits
Interest on borrowings
Mortgage securitization cost of funds
22,620
66,587
35,394
124,601
2,259
26,870
16,971
70,646
35,089
122,706
526
22,008
Total interest expense
153,730
145,240
305,760
2,431
13,300
257
(112)
Interest income on institutional loans, agricultural loans, unincorporated association loans and syndicated loans is included
within Commercial loans.
39
39
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
24
Non-interest income
Service fees
2013
12,339
11,916
Mutual fund revenue
8,560
6,070
Loan servicing fees
8,680
8,070
Insurance commissions
5,611
4,737
Foreign exchange
3,463
3,831
Interac revenue
2,001
2,244
Other
1,692
1,647
Credit card revenue
1,038
891
43,384
39,406
2014
2013
Total non-interest income
25
2014
Income tax expense
Current income tax expense
Deferred income tax recovery
Total income tax expense
6,350
8,080
(319)
(5,289)
6,031
2,791
Current income tax expense includes an expense of $99 (2013 – recovery of $199) and deferred income tax expense
includes a charge of $10 (2013 – $52) related to adjustments recognized during the current year that relate to prior years’
provisions.
Note 15 provides information on the Credit Union’s deferred income tax assets and liabilities, including amounts recognized
directly in other comprehensive income.
The tax on the Credit Union’s consolidated operating earnings before income taxes differs from the amount that would arise
using the Canadian federal and provincial statutorily enacted tax rates as follows:
2014
Tax provision
2013
% of Pre-tax
income
Tax provision
% of Pre-tax
income
Operating earnings for the year, before tax
50,460
n/a
59,416
Income tax expense at statutory rates
Credit union rate reduction
Recovery of Ontario corporate minimum tax
13,372
(4,743)
-
26.5%
-9.4%
-
15,746
(6,179)
(92)
26.5%
-10.4%
-0.2%
Deductible dividend payments
(2,165)
-4.3%
(1,734)
-2.9%
Non-deductible expense
Non-taxable income
Adjustment of prior year provision
Impact of future tax rates
Other items
100
0.2%
(453)
-0.9%
0.2%
(55)
-0.1%
-0.3%
(4,391)
-7.4%
(12,079)
Deferred income tax (recovery) expense, recognized
directly in other comprehensive income
(2,106)
40
40
-1.0%
109
6,031
Other comprehensive (loss) income for the year,
before tax
0.1%
(599)
(176)
(13)
Income tax expense
75
n/a
-0.0%
20
0.1%
12.0%
2,791
4.7%
n/a
617
n/a
17.6%
107
17.2%
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
25
Income tax expense (continued)
The amount of income taxes relating to each component of other comprehensive income can be summarized as follows:
Before income
taxes
Net loss on cash flow hedges
Net gain on cash flow hedges transferred to net income
Actuarial losses in defined benefit pension plans
(5,982)
9
(6,106)
Other comprehensive loss
(12,079)
Before income
taxes
26
2014
Income tax
recovery
Net of income
taxes
1,064
(2)
1,044
(4,918)
7
(5,062)
2,106
(9,973)
2013
Income tax
expense
Net of income
taxes
Net gain on cash flow hedges
Net loss on cash flow hedges transferred to net income
650
(33)
(112)
5
538
(28)
Other comprehensive income
617
(107)
510
Related party transactions
The Credit Union’s related parties include its subsidiaries, associates and joint venture, key management personnel and
their close family members as well as any entities that are controlled, jointly controlled or significantly influenced by them,
and the post-employment benefit plans. Unless otherwise noted, transactions with related parties include no special terms
and conditions and no guarantees were given to or received from the related parties. Outstanding balances are usually
settled in cash.
(a) Subsidiaries
2044230 Ontario Inc. and 2044231 Ontario Inc. are both wholly owned subsidiaries of the Credit Union. The extent of
transactions between the Credit Union and the two entities consists of cash deposits held by the Credit Union and the
respective interest paid on the accounts.
(b) Associate
CUCO Co-op, as referred to in note 11, is a related party of the Credit Union.
(c) Joint venture
The joint venture referred to in note 12 is a related party of the Credit Union.
(d) Post-employment benefit plans
The defined benefit plans referred to in note 21 are related parties of the Credit Union.
The assets in the defined benefit plans do not include shares in the Credit Union. The Credit Union’s transactions with the
defined benefit plans include contributions paid to the plans, which are disclosed in note 21. The Credit Union has not
entered into other transactions with the defined benefit plans, neither has it any outstanding balances at the reporting
dates.
(e) Key management personnel
Key management personnel include all members of the Board, officers of the Credit Union and members of the Executive
Leadership Team.
Transactions with related parties
The compensation paid or payable to key management personnel for director or employee services is shown below:
Salaries, retainers, per diems and other short-term employee benefits
Post-employment benefits
Total compensation
41
41
2014
2013
4,415
5,054
95
88
4,510
5,142
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
26
Related party transactions (continued)
During the year, the Credit Union had transactions in the ordinary course of business with related parties. Transactions
include interest bearing loans and advances to related parties as well as cash deposits held by the Credit Union and the
respective interest paid on the accounts.
Key management personnel who are employees of the Credit Union are entitled to receive benefits under the Credit Union’s
employee benefit package. This includes a financial benefits program, whereby full-time and part-time employees are
eligible to receive discounted interest rates on mortgages, personal loans and lines of credit as well as Membership account
banking privileges and improved rates of return on selected investment products. All employee applications are subject to
the same underwriting criteria as applicable to the Members of the Credit Union. All other related party loans have been
advanced on the same terms and conditions as have been accorded to all Members of the Credit Union. Loan facilities held
by related parties include both secured and unsecured loans.
Related party balances and transactions are detailed below:
Loans advanced to related parties
Loan balance as at January 1
Change in loan balances during the year
2014
2013
12,842
12,668
(11,036)
Less: Provision for impairment
Loan balance as at December 31
Total interest revenue earned on loans
174
-
-
1,806
12,842
193
544
Revolving credit facilities granted to related parties
Total value of facilities approved as at January 1
Increase (decrease) in limits granted
2014
2013
2,583
4,667
383
Total value of facilities approved at December 31
2,966
Balance outstanding
(1,222)
Net balance available on facilities as at December 31
Total interest revenue earned on revolving credit facilities
(1,294)
3,373
(790)
1,744
2,583
21
23
Term deposits held for related parties
Deposit balance as at January 1
Net change in deposits during the year
Deposit balance as at December 31
Total interest expense on term deposits
2014
2013
999
189
943
56
1,188
999
32
17
2014
2013
5,209
3,101
44
25
Demand deposit balances held for related parties
Demand deposit balance as at December 31
Total interest expense on demand deposits
Other transactions with related parties
Sales/purchases of goods and services
Key management personnel and parties related to them provided $5 (2013 - $15) of goods and services to the Credit
Union. Related parties are subject to the same internal request for pricing procedures as third party suppliers for material
purchases and contracts for service.
Shares and dividends
As at December 31, 2014 related parties hold share capital valued at $975 (2013 - $1,251). During the year, dividends of
$65 (2013 - $62) were paid on these shares.
42
42
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
26
Related party transactions (continued)
Guarantees and commitments
Commitments on undrawn credit facilities and letters of credit in the amount of $1,888 (2013 - $2,727) have been issued to
related parties.
27
Contingent liabilities and commitments
(a) Legal proceedings
During the normal course of business, the Credit Union enters into legal proceedings primarily relating to the recovery of
delinquent loans. As a result, various counterclaims or proceedings have been or may be instituted against the Credit Union.
The disposition of the matters that are pending or asserted is not expected by management to have a material effect on the
financial position of the Credit Union or on its results of operations.
(b) NHA MBS commitments
The Credit Union is required, as an Issuer of NHA MBS, to remit the NHA MBS principal and interest amounts due on
outstanding securities to Computershare in the following month, who distributes payments to NHA MBS investors on behalf
of CMHC. The total NHA MBS principal and interest amounts due as at December 31, 2014 on NHA MBS that Meridian
retains ownership of, either directly or through participation in the CMB Program, are $25,298 (2013 - $17,743).
The Credit Union will be required in early 2015, as an Issuer of NHA MBS, to fund an additional unscheduled prepayment
cash reserve, calculated based on the outstanding principal balance of all outstanding NHA MBS as at December 31, 2014.
As at December 31, 2014 the expected amount of the cash reserve required is $28,283 (2013 - $20,574). As the obligation
to fund the increased cash reserve will not take effect until 2015, no amount has been recorded in the consolidated financial
statements of the Credit Union as at December 31, 2014 to reflect this commitment.
(c) Collateral
The Credit Union is required, as a participant in the CMB Program, to enter into an agreement, whereby, if required by CHT,
the Credit Union will assign collateral in the event that the net position of the mirrored CHT interest rate swap is outside of a
predetermined range set by CHT. The Credit Union has a nil balance of assigned collateral as at December 31, 2014 (2013 nil).
(d) Commitments for loans to Members
In the normal course of business, the Credit Union enters into various commitments to meet the credit requirements of its
Members. Such commitments, which are not included in the consolidated balance sheet, include documentary and
commercial letters of credit, which require the Credit Union to honour drafts presented by third parties on completion of
specific activities; and commitments to extend credit, which represent undertakings to make credit available in the form of
loans or other financings for specific amounts and maturities, subject to certain conditions. These credit arrangements are
subject to the Credit Union’s normal credit standards, financial controls and monitoring procedures and collateral may be
obtained where appropriate. The contract amounts for these commitments set out in the table below represent the
maximum credit risk exposure to the Credit Union should the contracts be fully drawn, the counterparty default and any
collateral held prove to be of no value. As many of these arrangements will expire or terminate without being drawn on, the
contract amounts do not necessarily represent future cash requirements.
Undrawn overdrafts and credit facilities
Standby and commercial letters of credit
2014
2013
1,539,357
1,833,908
121,627
105,469
31,057
27,222
Loans approved but not funded:
Mortgages
Loans
Commercial
Total Member loan commitments as at December 31
43
43
854
1,913
358,810
254,111
2,051,705
2,222,623
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
27
Contingent liabilities and commitments (continued)
(e) Operating lease commitments
Lessee:
The Credit Union has non-cancellable operating leases for various branches and offices as well as equipment and vehicles.
The terms of the leases are between three to 15 years. The leases have varying terms, escalation clauses and renewal
rights. Future minimum lease payments are as follows:
Within 1 year
1 to 5 years
Over 5 years
Total
2014
2013
6,619
6,289
20,046
16,519
8,218
7,115
34,883
29,923
Total operating lease payments made during 2014 were $6,481 (2013 - $5,686) and are included on the consolidated
statement of comprehensive income within occupancy expenses.
Lessor:
The Credit Union, as the lessor, has entered into non-cancellable operating leases for premises. Future minimum lease
payments due to the Credit Union are as follows:
2014
2013
Within 1 year
116
137
1 to 5 years
186
175
Total
302
312
Total operating lease payments received during 2014 were $142 (2013 - $141) and are included on the consolidated
statement of comprehensive income within non-interest income.
(f) Guarantees
In the normal course of business, the Credit Union enters into agreements that may contain features which meet the
definition of a guarantee under IFRS. The maximum potential amount of future payments represents the amounts that could
be lost to the Credit Union under guarantees if there were a total default by the guaranteed parties, without consideration of
possible recoveries under recourse provisions, insurance policies or from collateral held or pledged.
The Credit Union has, as a participant in Central 1’s Mortgage Pool Purchase and Securitization Program, indemnified
Central 1 for all costs and expenses incurred by Central 1 in respect of the Credit Union’s participation. The indemnification
is considered by management to be in the normal course of business. The amounts that may become payable in future
years are not determinable at this time. Management considers that the costs, if any, are not material.
The Credit Union offers MasterCard and its services through a contract with Credit Union Electronic Transaction Services and
Unified Network Payment Solutions. Where MasterCard credit limits must be fully secured by the Credit Union, a guarantee
of 100% of the approved credit limit for the life of the account, plus up to 90 days’ interest will be made by the Credit
Union. The Credit Union will in turn hold at least an equivalent amount of the credit limit approved for the MasterCard from
the cardholder through an assignment of funds on deposit or a pledge of term deposits. These guarantees are considered by
management to be in the normal course of business. The maximum potential amounts of future payments the Credit Union
could be required to make under the guarantee before any amounts that may possibly be recovered are not readily
determinable. An estimate of the maximum potential amount cannot be estimated as the cardholder balances fluctuate
depending on use. Management considers that the costs are not material as the assignment or pledge of funds is expected
to cover cardholder balances in default.
44
44
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
27
Contingent liabilities and commitments (continued)
(g) Meridian Centre
As part of Meridian’s Commitment to Communities, in 2013 the Credit Union entered into a contract with the City of St.
Catharines to contribute $5,234 over 25 years to the new multi-purpose spectator facility constructed in downtown St.
Catharines, which is named The Meridian Centre. In addition to being given exclusive naming rights, Meridian has been
designated as the official financial services provider during the term of the contract. The contract term is from September 1,
2013 to August 31, 2039. Future payments for the duration of the contract are as follows:
Within 1 year
2014
2013
100
100
1 to 5 years
1,000
900
Over 5 years
3,934
4,134
Total
5,034
5,134
Total payments made during 2014 were $100 (2013 - $100) of which $100 (2013 - $33) is included on the consolidated
statement of comprehensive income within administration expenses.
(h) Meridian Place
As part of Meridian’s Commitment to Communities, in 2014 the Credit Union entered into a 25-year contract with the City of
Barrie to contribute $750 over ten years toward the building of a new town square in the community of Barrie, Ontario. In
exchange for the contribution, Meridian will be granted naming rights for the next 25 years. The public square will be known
as Meridian Place upon completion in 2016. The contract term is from July 1, 2014 to June 30, 2039. Future payments for
the ten years are as follows:
Within 1 year
2014
2013
75
-
1 to 5 years
375
-
Over 5 years
225
-
Total
675
-
Total payments made during 2014 were $75 (2013 - nil) of which $15 (2013 – nil) are included on the consolidated
statement of comprehensive income within administration expenses.
28
Regulatory information
Restricted party transactions
The Credit Union employs the definition of restricted party contained in the Act and regulations. A restricted party includes a
person who is, or has been within the preceding twelve months, a director, officer or auditor of the Credit Union, any
corporation in which the person owns more than 10% of the voting shares, his or her spouse, their dependent relatives who
live in the same household as the person, and any corporation controlled by such spouse or dependent relative.
As at December 31, 2014, the aggregate value of loans issued to restricted parties was $8,846 (2013 - $12,972). These
loans have been advanced on the same terms and conditions as have been accorded to all Members of the Credit Union.
There was no allowance for impaired loans required in respect of these loans.
Directors received $418 (2013 - $388) for annual retainer and per diem and $48 (2013 - $36) for reimbursement of travel
and out-of-pocket expenses.
45
45
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
28
Regulatory information (continued)
Remuneration of officers and employees
The Act requires credit unions to disclose remuneration paid during the year to the officers and employees of the Credit
Union whose total remuneration for the year exceeds $150. If there are more than five officers and employees of a credit
union whose total remuneration for the year was over $150, the five officers and employees with the highest total
remuneration for the year are disclosed. The table below provides this information for the current year:
Monetary value
of benefits
received
Total
salary
received
Total
bonuses
received
Bill Maurin, President & CEO
442,038
425,250
75,658
Jennifer Rowe, Chief Marketing Officer
271,747
229,928
44,964
Bill Whyte, Chief Member Services Officer
271,747
206,584
50,578
Gary Genik, Chief Information Officer
286,811
168,756
53,372
Leo Gautreau, Chief Risk Officer
239,195
168,070
49,304
Deposit insurance
The annual premium paid to DICO for insuring Members’ deposits during the year ended December 31, 2014 was $5,799
(2013 - $5,716). The premium rates are based on relative risk to the insurance fund as measured by an overall composite
risk score encompassing financial and other risk based factors.
Central 1 fees
The total fees paid to Central 1 amounted to $4,193 (2013 - $4,000). These fees were primarily in respect of Membership
dues, banking and clearing, and other services.
29
Financial risk management
The Board of Directors has overall responsibility for the establishment and oversight of the Credit Union’s risk management
framework. The Board has established the Risk Committee and charged it with the responsibility for, among other things,
the development and monitoring of risk management policies. The Risk Committee reports regularly to the Board on its
activities.
29.1
Credit risk
Credit risk is the potential for financial loss to the Credit Union if a borrower or guarantor fails to meet payment obligations
in accordance with agreed terms. Credit risk is one of the most significant and pervasive risks in the business of a credit
union. Every loan, extension of credit or transaction that involves settlements between the Credit Union and other parties or
financial institutions exposes the Credit Union to some degree of credit risk.
The Credit Union’s primary objective is to create a methodological approach to credit risk assessment in order to better
understand, select and manage exposures to deliver stable ongoing earnings. The strategy is to ensure central oversight of
credit risk, fostering a culture of accountability, independence and balance. The responsibility for credit risk management is
organization wide in scope, and is managed through an infrastructure based on:
(i) centralized approval by the Board, of the Credit Risk Management Policy including, but not limited to, the following six
areas:
a. credit
creditrisk
riskassessment,
assessment,including
includingpolicies
policiesrelated
relatedto
tocredit
creditrisk
riskanalysis,
analysis,risk
riskrating
ratingand
andrisk
riskscoring;
scoring;
b. credit
creditrisk
riskmitigation,
mitigation,including
includingcredit
creditstructuring,
structuring,collateral
collateraland
andguarantees;
guarantees;
c. credit
credit
risk
approval,
including
credit
risk
limits
and
exceptions;
risk
approval,
including
credit
risk
limits
and
exceptions;
d. credit documentation focusing on documentation and administration;
e. credit reviews that focus on monitoring of financial performance, covenant compliance and any sign of deteriorating
performance;
f. credit portfolio management, including sectoral, geographic, and overall risk concentration limits and risk
quantification;
(ii) centralized approval by the Vice President Credit Management of the discretionary limits of lending officers throughout
the Credit Union;
(iii) credit adjudication subject to compliance with established policies, exposure guidelines and discretionary limits, as well
as adherence to established standards of credit assessment. A Credit Management Committee (“CMC”) has been
established and is charged with the high level overview of the Commercial portfolio including sectoral exposure and
geographic concentration. The CMC will set or amend credit application processes and specific dollar thresholds in
response to changes in portfolio metrics;
46
46
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.1
Credit risk (continued)
(iv) credit department oversight of the following:
a. the establishment of guidelines to monitor and limit concentrations in the portfolios in accordance with Boardapproved policies governing 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 Commercial credit business;
c. approval of the scoring techniques and standards used in extending, monitoring and reporting of personal credit
business; and
d. implementation of an ongoing monitoring process of the key risk parameters used in our credit risk models.
The Board has delegated to the CEO the authority to establish a lending hierarchy. As such, a procedure for the delegation
of lending authority has been developed and is in active use. The Credit Union employs persons who are trained in
managing its credit granting activities. Staff may be delegated individual authorities based on experience and background.
Designated staff whose primary job accountabilities are to manage the quality and risk of the Credit Union’s portfolio are
granted the authority to use judgment and discretion consistent with policy, in discharging their duties.
Management has the responsibility to:
(i) systematically identify, quantify, control and report on existing and potential credit risks and environmental risks in the
loan portfolio;
(ii) prudently manage the exposure to default and loss arising from those risks; and
(iii) employ and train, as necessary, personnel who can implement risk measurement and credit management techniques,
as required by policy.
Measuring, monitoring and reporting activities on risk position and exposure are maintained and compliance and audit
responsibilities are in place and adhered to. Both the Board and the Board’s Risk Committee receive regular summary
performance measurements of the credit portfolio.
The Credit Union’s credit risk portfolio is primarily classified as “Retail” or “Commercial”, and a different risk measurement
process is employed for each portfolio. Credit risk rating systems are designed to assess and quantify the risk inherent in
credit activities in an accurate and consistent manner.
Credit exposure is assessed along these two dimensions: probability of default, which is an estimate of the probability that
an obligor with a certain borrower risk rating will default within a one-year time horizon, and loss given default, which
represents the portion of credit exposure at default expected to be lost when an obligor defaults.
The Credit Union follows a formal loan granting process that addresses appropriate security documentation, its registration,
the need and use of credit bureau reports and other searches, situations where co-signers or guarantors may be or will be
required, the use of wage assignments and the use of accredited appraisers, lawyers and other professionals.
The Credit Union’s credit risk portfolio is diversified with the objective of spreading risk. Diversification is assessed using
different measures in each portfolio. In the Retail portfolio, diversification areas include authorized loan types, forms of
security and sectoral groupings and/or such other objective criteria that the Board may set from time to time. In the
Commercial loan portfolio, diversification is achieved through the establishment of credit exposure limits for specific industry
sectors, individual borrowers and borrower groups (multiple borrowers grouped together based on shared security and/or
the same income source). Industry rating models and detailed industry analysis are key elements of this process. Where
several industry segments are affected by common risk factors, an exposure limit may be assigned to those segments in
aggregate. Management regularly reviews the above parameters to ensure that acceptable diversification is maintained. The
top five industry sectors represent approximately 68% (2013 - 64%) of the total Commercial loan portfolio.
Credit scoring is the primary risk rating system for assessing Retail exposure risk. Retail exposure is managed on a pooled
basis, where each pool consists of exposures that possess similar homogeneous characteristics. The Retail credit segment is
composed of a large number of Members, and includes residential mortgages, as well as secured and unsecured loans and
lines of credit. Requests for Retail credit are generally processed using automated credit and behavioural decisioning tools.
Standard evaluation criteria may include, but are not limited to: gross debt service ratio, total debt service ratio, and loan to
value ratio. Within this framework, underwriters in branches and corporate office adjudicate within designated approval
limits. Retail exposures are assessed on a pooled basis and measured against an internal benchmark of acceptable risk
penetration levels within each pool. Internal benchmarks are established using “Equifax Beacon score”. Equifax Inc. is a
global service provider of this credit score, which is a mathematical model used to predict how likely a person is to repay a
loan. The score is based on information contained in an individual’s credit report. This information is obtained from credit
lenders from which the consumers have borrowed in the past. The benchmark is measured monthly to ensure that the risk
of the portfolio is managed on an ongoing basis. The risk ratings of the portfolio range from A+, which represents very low
risk, to E, which represents the highest risk.
47
47
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.1
Credit risk (continued)
The Commercial credit risk rating model is premised on a comprehensive assessment of the borrower’s risk of default,
through measurement of industry, business, management and financial risk factors along with the risk of loss given default,
based on assessment of security composition and relative historical recovery experience. The model includes a standard set
of questions and answers that align to an implied level of risk. Questions are given varied weightings and an overall
borrower risk rating is derived from a cumulative weighting of the answers. The Commercial loan portfolio stratified by risk
rating is reviewed monthly.
The Credit Union’s credit risk policies, processes and methodologies have not changed materially from the prior year.
Except as noted, the carrying value of financial assets recorded in the consolidated financial statements, which is net of
impairment losses, represents the Credit Union’s maximum exposure to credit risk without taking into account the value of
any collateral obtained. The Credit Union is also exposed to credit risk through transactions, which are not recognized in the
consolidated balance sheet, such as granting financial guarantees and extending loan commitments. Refer to note 27 for
further details. The risk of losses from loans undertaken is reduced by the nature and quality of collateral obtained. Refer to
note 8 for a description of the nature of the security held against loans as at the consolidated balance sheet date.
29.2
Market risk
(a) Interest rate risk
Interest rate risk is the sensitivity of the Credit Union’s financial position to movements in interest rates. The Credit Union is
exposed to interest rate risk when it enters into banking transactions with its Members, namely deposit taking and lending.
When asset and liability principal and interest cash flows have different payment or maturity dates, this results in
mismatched positions. An interest-sensitive asset or liability is repriced when interest rates change, when there is cash flow
from final maturity, normal amortization, or when Members exercise prepayment, conversion or redemption options offered
for the specific product. The Credit Union’s exposure to interest rate risk depends on the size and direction of interest rate
changes, and on the size and maturity of the mismatched positions. It is also affected by new business volumes, renewals
of loans or deposits, and how actively Members exercise options, such as prepaying a loan before its maturity date.
The Credit Union’s interest rate risk is subject to extensive risk management controls and is managed within the framework
of policies and limits approved by the Board. These policies and limits ensure, among other things, that the Credit Union is
in full adherence to the regulatory requirements prescribed in the Act as well as DICO’s standards of Sound Business and
Financial Practices. Overall responsibility for asset/liability management rests with the Board. As such, the Board receives
regular reports on risk exposures and performance against approved limits. The Board delegates the responsibility to
manage the interest rate risk on a day-to-day basis to the Asset/Liability Committee (“ALCO”), which meets no less
frequently than monthly. ALCO is chaired by the CFO and includes other senior executives.
The key elements of the Credit Union’s interest rate risk management framework include:
i.
guidelines and limits on the structuring of the maturities, price and mix of deposits, loans, mortgages and
investments and the management of asset cash flows in relation to liability cash flows;
ii.
guidelines and limits on the use of derivative financial instruments to hedge against a risk of loss from interest rate
changes; and
iii.
requirements for comprehensive measuring, monitoring and reporting on risk position and exposure management.
Valuations of all asset and liability positions, as well as off-balance sheet exposures, are performed no less frequently than
monthly. The Credit Union’s objective is to establish and maintain a balance sheet and off-balance sheet structure that will
protect and enhance the Credit Union’s net interest income and the value of the Credit Union’s capital during all phases of
the interest rate cycle and varying economic conditions.
The carrying values of interest sensitive assets and liabilities and the notional amount of swaps and other derivative
financial instruments used to manage interest rate risk are presented below in the periods in which they next reprice to
market rates or mature, and are summed to show the interest rate sensitivity gap. Loans are adjusted for prepayment
estimates which reflect expected repayments on other than contractual maturity dates. The prepayment rate applied to the
portfolio is based on experience and current economic conditions. The average rates presented represent the weighted
average effective yield based on the earlier of contractual repricing or maturity dates. Further information related to the
derivative financial instruments used to manage interest rate risk is included in note 9.
48
48
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.2
Market risk (continued)
December 31, 2014
Assets
Cash and cash equivalents
Yield
Investments - other loans and
receivables
Yield
Loans to Members
Yield
Derivative financial assets
Variable
Less than 1
year
1 to 5
years
Over 5
years
Noninterest
sensitive
Total
111,101
20,793
-
-
-
131,894
0.66%
1.35%
-
-
-
0.77%
-
337,226
470,983
-
4,638
812,847
-
1.97%
1.53%
-
-
1.70%
3,141,770
1,266,950
4,400,799
31,629
49,597
8,890,745
3.97%
3.92%
3.54%
4.40%
-
3.73%
18,016
-
-
-
-
18,016
-
-
-
-
-
-
-
-
54,557
54,557
-
-
-
-
-
-
Other assets
-
-
-
-
85,690
85,690
Yield
-
-
-
-
-
-
Total assets
3,270,887
1,624,969
4,871,782
31,629
194,482
9,993,749
Liabilities and Members’ equity
Members’ deposits
2,611,716
2,635,050
1,762,652
84
957,104
7,966,606
1.20%
2.16%
2.38%
2.31%
-
1.64%
21,080
-
-
-
1,477
22,557
Yield
Investments available for sale
Yield
Yield
Borrowings
Yield
Mortgage securitization liabilities
Yield
Derivative financial liabilities
Yield
Other liabilities and Members’ equity
Yield
Total liabilities and Members’ equity
Effect of Interest Rate Swaps
Fixed pay swaps
Yield
Interest sensitivity position 2014
1.75%
-
-
-
-
1.64%
-
219,511
1,097,246
-
1,126
1,317,883
-
2.77%
1.99%
-
-
2.12%
5,840
-
-
-
-
5,840
-
-
-
-
-
-
-
-
-
-
680,863
680,863
-
-
-
-
-
-
2,638,636
2,854,561
2,859,898
84
1,640,570
9,993,749
600,000
-
(600,000)
-
-
-
1.29%
-
1.90%
-
-
-
1,411,884
31,545
1,232,251
(1,229,592)
49
49
(1,446,088)
-
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.2
Market risk (continued)
December 31, 2013
Assets
Cash and cash equivalents
Yield
Investments - other loans and
receivables
Yield
Loans to Members
Yield
Derivative financial assets
Yield
Investments available for sale
Yield
Variable
Less than 1
year
1 to 5
years
Over 5
years
Noninterest
sensitive
Total
108,399
37,839
-
-
22
146,260
0.81%
1.58%
-
-
-
1.01%
-
262,260
503,346
-
4,531
770,137
-
1.84%
1.90%
-
-
1.87%
2,993,165
1,109,055
3,902,825
33,241
62,448
8,100,734
3.98%
4.04%
3.71%
4.42%
-
3.83%
23,984
-
-
-
-
23,984
-
-
-
-
-
-
-
-
-
-
51,762
51,762
-
-
-
-
-
-
Other assets
-
-
-
-
90,821
90,821
Yield
-
-
-
-
-
-
Total assets
3,125,548
1,409,154
4,406,171
33,241
209,584
9,183,698
Liabilities and Members’ equity
Members’ deposits
2,187,565
2,195,093
2,139,107
-
885,714
7,407,479
0.98%
2.36%
2.52%
-
-
1.72%
-
-
-
-
1,812
1,812
-
-
-
-
-
-
-
44,604
1,070,248
-
-
1,114,852
Yield
Borrowings
Yield
Mortgage securitization liabilities
Yield
Derivative financial liabilities
Yield
Other liabilities and Members’ equity
Yield
Total liabilities and Members’ equity
Effect of Interest Rate Swaps
Fixed pay swaps
Yield
Interest sensitivity position 2013
-
1.68%
2.01%
-
-
2.00%
282
-
-
-
-
282
-
-
-
-
-
-
-
-
-
-
659,273
659,273
-
-
-
-
-
-
2,187,847
2,239,697
3,209,355
-
1,546,799
9,183,698
100,000
-
(100,000)
-
-
-
1.22%
-
2.04%
-
-
-
1,096,816
33,241
1,037,701
(830,543)
(1,337,215)
-
The management of interest rate risk against internal exposure limits is supplemented by monitoring the sensitivity of the
Credit Union’s financial assets and financial liabilities to standard interest rate shock scenarios. The key metrics used to
monitor this sensitivity are Earnings at Risk (“EaR”) and Economic Value of Equity at Risk (“EVaR”). EaR is defined as the
change in our net interest income from a predetermined shock to interest rates measured over a 12 month period. EVaR is
defined as the change in the present value of our asset portfolio resulting from a predetermined shock versus the change in
the present value of the Credit Union’s liability portfolio resulting from the same predetermined interest rate shock. The
Credit Union completes various static and dynamic interest rate shock scenarios throughout the year, including a 100 basis
point (“bps”) rate shock. The estimated impact of a 100 bps rate shock on these metrics is presented below. These metrics
have been calculated as at December 31, 2014 using a static structure in the interest-sensitive asset and liability portfolios,
which represents a change compared to the 2013 metrics which were calculated using a dynamic structure. This change was
made to enable management to more accurately analyze the impact of the underlying drivers of interest rate risk. The
metrics also incorporate management estimates of minimum interest rates for certain loan and deposit products,
prepayment assumptions on loan balances as detailed above and forecasted changes in the Credit Union’s prime rate and
the yield curve.
2014
2013
100 bps exposure
(4,604)
(5,451)
EVaR: 100 bps exposure
-0.10%
-6.02%
EaR:
50
50
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.2
Market risk (continued)
(b) Foreign currency risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of
changes in foreign currency exchange rates. The Credit Union is exposed to foreign currency risk as a result of its Members’
activities in foreign currency denominated deposits and cash transactions. The Credit Union’s foreign currency risk is subject
to formal risk management controls and is managed in accordance with the framework of policies and limits approved by
the Board. These policies and limits are designed to ensure, among other things, that the Credit Union 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 regular reports on risk exposures and variances from approved limits. The aforementioned activities that
expose the Credit Union to foreign currency risk are measured, monitored and controlled daily to minimize the adverse
impact of sudden changes in foreign currency values with respect to the Canadian dollar. U.S. dollar denominated liabilities
are hedged through a combination of U.S. dollar investments and forward rate agreements to buy U.S. dollars and net
exposure as measured on a daily basis is limited to 1% of prior year ending Members’ equity. The Credit Union uses forward
foreign currency derivative financial instruments to neutralize its exposure to foreign exchange contracts with Members. As
at December 31, 2014 and December 31, 2013, the Credit Union’s exposure to a 10% change in the foreign currency
exchange rate, which is reasonably possible, is insignificant.
(c) Other price risk
Other price risk is the risk that the fair value on future cash flows of a financial instrument will fluctuate because of changes
in market prices other than those arising from interest rate risk or foreign currency risk. The Credit Union is exposed to
other price risk in its own investment portfolio. The Credit Union adheres to the principles of quality and risk diversification
in its investment practices. The Credit Union’s other price risk is subject to extensive risk management controls and is
managed within the framework of policies and limits approved by the Board. These policies and limits assist in ensuring,
among other things, that the Credit Union 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 regular reports on risk exposures and
performance against approved limits. As at December 31, 2014 and December 31, 2013, the Credit Union has limited
investments subject to other price risk and this exposure is insignificant.
29.3
Liquidity risk
Liquidity risk arises in the course of managing the Credit Union’s financial assets and financial liabilities. It is the risk that
the Credit Union is unable to meet its financial obligations in a timely manner and at reasonable prices. The Credit Union’s
liquidity risk management strategies seek to maintain sufficient liquid financial resources to continually fund its consolidated
balance sheet under both normal and stressed market environments. The Credit Union’s liquidity risk is subject to formal
risk management controls and is managed within the framework of policies and limits approved by the Board. These policies
and limits assist in ensuring, among other things, that the Credit Union 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 regular
reports on risk exposures and performance against approved limits. ALCO provides management oversight of liquidity risk
through its monthly meetings.
The key elements of the Credit Union’s liquidity risk management framework include:
i.
limits on the sources, quality and amount of liquid assets to meet normal operational requirements, regulatory
requirements and contingency funding;
ii.
a methodology to achieve an acceptable yield on the operating liquidity investment portfolio within prudent risk
management bounds;
iii.
prudence tests of quality and diversity where investments bear credit risk;
iv.
parameters to limit term extension risk;
v.
implementation of deposit concentration limits in order to assist in ensuring diversification and stability of deposit
funding; and
vi.
requirements for adequate measuring, monitoring and reporting on risk position and exposure management.
Under DICO regulations, the Credit Union will establish and maintain prudent levels and forms of liquidity that are sufficient
to meet its cash flow needs, including depositor withdrawals and all other obligations as they come due. The liquidity ratio
measures the Credit Union’s liquid assets as a percentage of Members’ deposits and specified borrowings.. The Credit Union
targets to maintain operating liquidity within the range of 7.75% to 15%. The low end of the range has been established in
order to maintain a comfortable cushion beyond minimum operating liquidity needs, even during periods of market
volatility. A cap has been placed on the range in recognition of the fact that too much excess liquidity has a negative impact
on earnings. As at December 31, 2014, the Credit Union’s liquidity ratio was 10.48% (2013 – 11.05%).
51
51
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.3
Liquidity risk (continued)
The table below sets out the period in which the Credit Union’s non-derivative financial assets and financial liabilities will
mature and be eligible for renegotiation or withdrawal. These cash flows are not discounted and include both the contractual
cash flows pertaining to the Credit Union’s consolidated balance sheet assets and liabilities and the future contractual cash
flows that they will generate. In the case of loans, the table reflects adjustments to the contractual cash flows for
prepayment estimates, which reflect expected repayments on other than contractual maturity dates. The prepayment rate
applied to the portfolio is based on experience and current economic conditions. In addition to the cash flows detailed
below, the Credit Union is exposed to potential cash outflows in the form of commitments and contingencies, as set out in
note 27.
Less than 1
month
Financial assets
Cash and cash equivalents
Receivables
Investments - other loans
and receivables
Loans to Members
Investments available for
sale
Total financial assets
Financial liabilities
Members’ deposits
Borrowings
Payables and other liabilities
December 31, 2014
2 to 12
1 to 3
months
years
3 to 5
years
Over 5
years
Not
specified
Total
131,894
1,466
-
-
-
-
-
131,894
1,466
12,590
558,832
334,883
2,788,088
201,419
1,737,065
280,579
4,432,309
102,190
1,167
-
830,638
9,618,484
-
-
-
-
-
54,557
54,557
704,782
3,122,971
1,938,484
4,712,888
102,190
55,724
10,637,039
3,780,377
21,080
44,676
2,519,816
-
668,423
-
1,180,521
-
84
-
-
8,149,221
21,080
44,676
Mortgage securitization
liabilities
312
245,870
281,804
866,167
-
-
1,394,153
Total financial liabilities
3,846,445
2,765,686
950,227
2,046,688
84
-
9,609,130
357,285
988,257
2,666,200
102,106
55,724
1,027,909
3 to 5
years
Over 5
years
Not
specified
Total
Net maturities
(3,141,663)
Less than 1
month
Financial assets
Cash and cash equivalents
Receivables
Investments - other loans
and receivables
Loans to Members
Investments available for
sale
Total financial assets
Financial liabilities
Members’ deposits
Payables and other liabilities
Mortgage securitization
liabilities
Total financial liabilities
Net maturities
December 31, 2013
2 to 12
1 to 3
months
years
126,275
3,133
20,077
-
-
-
-
-
146,352
3,133
12,148
517,675
270,623
2,480,061
338,805
2,953,524
167,624
2,749,707
48,831
1,167
-
790,367
8,749,798
-
-
-
-
-
51,762
51,762
659,231
2,770,761
3,292,329
2,917,331
48,831
52,929
9,741,412
3,174,663
57,200
2,126,165
-
2,034,148
-
202,735
-
-
-
7,537,711
57,200
1,686
64,367
517,672
602,259
-
-
1,185,984
3,233,549
2,190,532
2,551,820
804,994
-
-
8,780,895
580,229
740,509
2,112,337
48,831
52,929
960,517
(2,574,318)
52
52
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.3
Liquidity risk (continued)
The table below sets out the undiscounted contractual cash flows of the Credit Union’s derivative financial assets and
liabilities:
Equity index-linked options
Gross-settled forward exchange
contracts:
Outflow
Inflow
Interest rate swaps
Outflow
Inflow
Bond forward contracts
Total
Equity index-linked options
Gross-settled forward exchange
contracts:
Outflow
Inflow
Interest rate swaps
Outflow
Inflow
Total
Less than
1 month
1,248
December 31, 2014
2 to 12
1 to 3
months
years
7,510
5,740
Over 5
years
-
-
-
(1,240)
1,274
Total
18,119
(291)
309
(949)
965
(710)
-
(2,722)
(284)
(3,907)
-
(430)
1,166
-
-
(7,769)
1,166
(284)
556
4,520
1,833
4,357
-
11,266
December 31, 2013
2 to 12
1 to 3
months
years
12,341
9,438
3 to 5
years
1,502
Over 5
years
-
Total
23,429
-
-
(5,751)
5,740
2,021
-
(1,342)
2,021
3,523
-
24,097
Less than
1 month
148
(1,316)
1,313
(4,435)
4,427
145
(551)
11,782
-
3 to 5
years
3,621
(791)
8,647
Derivative financial assets and liabilities reflect interest rate swaps that will be settled on a net basis and forward exchange
contracts and index-linked equity options that will be settled on a gross basis (see note 9).
The gross inflows/(outflows) disclosed in the previous table represent the contractual undiscounted cash flows relating to
derivative financial assets and liabilities held for risk management purposes and which are usually not closed out before
contractual maturity. The future cash flows on derivative instruments may differ from the amount in the above table as
interest rates, exchange rate and equity market indices change. Cash outflows relating to the embedded written option in
equity index-linked deposits are included with Members’ deposits in the previous table for non-derivative financial assets
and liabilities.
29.4
Fair value of financial assets and financial liabilities
The following table represents the fair values of the Credit Union’s financial assets and financial liabilities for each
classification of financial instruments. The fair values for short-term financial assets and financial liabilities approximate
carrying value. These include accrued interest receivable, accounts payable, accrued liabilities and accrued interest payable.
The fair values disclosed do not include the value of assets that are not considered financial instruments.
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, many of the Credit Union’s financial instruments lack an
available trading market. Consequently, the fair values presented are estimates derived using present value and other
valuation 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.
53
53
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.4
Fair value of financial assets and financial liabilities (continued)
December 31, 2014
Carrying
value
December 31, 2013
Fair value
Fair value
difference
Carrying
value
Fair value
Fair value
difference
132,081
132,081
-
108,227
108,227
-
17,952
17,952
-
23,258
23,258
-
-
-
-
433
433
-
Bond forward contracts
24
24
-
Foreign exchange contracts
40
40
-
293
293
-
54,557
54,557
-
51,762
51,762
-
-
-
-
37,861
37,689
(172)
Financial assets at FVTPL (*):
Cash and cash equivalents
Derivative financial assets
Equity index-linked options
Interest rate swaps
Available for sale:
Investments
Loans and receivables:
Cash and cash equivalents
Receivables
1,466
1,466
-
3,133
3,133
-
812,847
810,594
(2,253)
770,137
768,440
(1,697)
Loans to Members
8,890,745
8,863,162
(27,583)
8,100,734
8,078,100
(22,634)
Total financial assets
9,909,712
9,879,876
(29,836)
9,095,838
9,071,335
(24,503)
5,458
5,458
-
-
-
-
308
308
-
-
-
-
74
74
-
282
282
-
7,966,606
7,985,954
19,348
7,407,479
7,412,757
5,278
21,080
21,080
-
-
-
-
8,158
8,158
-
28,110
28,110
-
1,317,883
1,337,785
19,902
1,114,852
1,116,695
1,843
20,187
20,187
-
15,114
15,114
-
6,528
6,528
-
6,452
6,452
-
9,346,282
9,385,532
39,250
8,572,289
8,579,410
7,121
Investments
Financial liabilities at FVTPL (*):
Derivative financial liabilities
Interest rate swaps
Bond forward contracts
Foreign exchange contracts
Other liabilities:
Member’s deposits
Borrowings
Payables and other liabilities
Mortgage securitization liabilities
Employee obligations
Membership shares
Total financial liabilities
(*) Fair value through profit or loss
Interest rate sensitivity is the main cause of changes in the fair values of the Credit Union’s financial instruments. With the
exception of financial assets and financial liabilities recorded at fair value through profit or loss, the carrying values of the
above financial instruments are not adjusted to reflect the fair value.
The following methods and assumptions were used to estimate the fair value of financial instruments:
i.
The fair value of cash and cash equivalents, excluding short-term deposits with original maturities of 100 days or
less, are assumed to approximate their carrying values, due to their short-term nature. The fair value of short-term
deposits with original maturities of 100 days or less are based on fair market values, which are derived from
valuation models and a credit valuation adjustment is applied to account for counterparty risk.
ii.
With the exception of investments reported using the equity method of accounting, the fair value of investments is
determined by discounting the expected future cash flows of these investments at current market rates and a
credit valuation adjustment is applied to account for counterparty risk.
iii.
The estimated fair value of floating rate loans and floating rate deposits is assumed to be equal to carrying value,
as the interest rates on these loans and deposits reprice to market on a periodic basis. A credit valuation
adjustment is applied to the calculated fair value of uninsured floating rate deposits to account for the Credit
Union’s own credit risk.
54
54
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.4
Fair value of financial assets and financial liabilities (continued)
iv.
v.
vi.
vii.
The estimated fair value of fixed rate deposits and Member entitlements is determined by discounting the expected
future cash flows of these investments, deposits and borrowings at current market rates for products with similar
terms and credit risks. A credit valuation adjustment is applied when determining the current market rates used to
calculate the fair value of uninsured fixed rate deposits to account for counterparty and the Credit Union’s own
credit risk.
The estimated fair value of fixed rate loans is determined by discounting the expected future cash flows of these
loans at current market rates for products with similar terms and credit risks. Historical prepayment experience is
considered along with current market conditions in determining expected future cash flows. In determining the
adjustment for credit risk, consideration is given to market conditions, the value of underlying security and other
indicators of the borrower’s creditworthiness.
The estimated fair value of derivative instruments is determined through valuation models based on the derivative
notional amounts, maturity dates and rates and a credit valuation adjustment is applied to account for
counterparty and the Credit Union’s own credit risk.
The fair values of other liabilities are assumed to approximate their carrying values, due to their short-term nature.
Fair values are determined based on a three level fair value hierarchy that reflects the significance of the inputs used in
making the measurements. The levels of the hierarchy are as follow:
i.
Level 1 - Unadjusted quoted prices in active markets for identical financial assets and financial liabilities;
ii.
Level 2 - Inputs other than quoted prices that are observable for the financial asset or financial liability either
directly or indirectly;
iii.
Level 3 - Inputs that are not based on observable market data.
The following table illustrates the classification of the Credit Union’s financial instruments within the fair value hierarchy.
Fair value as at December 31, 2014
Level 1
Level 2
Level 3
132,081
-
-
Equity index-linked options
-
17,952
-
Bond forward contracts
-
24
-
Foreign exchange contracts
-
40
-
Investments available for sale
-
21,260
-
132,081
39,276
-
21,080
-
-
-
17,665
-
Interest rate swaps
-
5,458
-
Bond forward contracts
-
308
-
Foreign exchange contracts
-
74
-
21,080
23,505
-
Recurring measurements
Financial assets
Cash
Derivative financial assets:
Total financial assets
Financial liabilities
Borrowings
Embedded derivatives in index-linked deposits
Derivative financial liabilities:
Total financial liabilities
55
55
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.4
Fair value of financial assets and financial liabilities (continued)
Fair value as at December 31, 2014
Level 1
Level 2
Level 3
Investments – other loans and receivables
-
810,594
-
Loans to Members
-
-
8,863,162
Member’s deposits
-
(7,960,278)
-
Mortgage securitization liabilities
-
(1,337,785)
-
Membership shares
-
(6,528)
-
Fair values disclosed
The fair values of cash and cash equivalents, receivables, payables and other liabilities and employee obligations
approximate their carrying values due to their short-term nature.
The fair value of Central 1 Class E shares, which are classified as investments available for sale and measured at cost, has
been excluded from the above table as they are not quoted in an active market and their fair value cannot be reliably
determined.
Fair value as at December 31, 2013
Level 1
Level 2
Level 3
108,227
-
-
Recurring measurements
Financial assets
Cash
Derivative financial assets:
Equity index-linked options
-
23,258
-
Interest rate swaps
-
433
-
Foreign exchange contracts
-
293
-
Investments available for sale
-
30,680
-
108,227
54,664
-
-
22,880
-
-
282
-
-
23,162
-
Total financial assets
Financial liabilities
Embedded derivatives in index-linked deposits
Derivative financial liabilities:
Foreign exchange contracts
Total financial liabilities
Fair value as at December 31, 2013
Level 1
Level 2
Level 3
-
Fair values disclosed
Cash equivalents
-
37,689
Investments – other loans and receivables
-
768,440
-
Loans to Members
-
-
8,078,100
Member’s deposits
-
(7,389,877)
-
Mortgage securitization liabilities
-
(1,116,695)
-
Membership shares
-
(6,452)
-
There have been no transfers between level 1 and level 2 of the fair value hierarchy during the year.
56
56
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
29.5
Capital management
The Credit Union maintains policies and procedures relative to capital management so as to ensure the capital levels are
sufficient to cover risks inherent in the business.
The Credit Union’s objectives when managing capital are:
(i)
to ensure that the quantity, quality and composition of capital needed reflects the inherent risks of the entity and to
support the current and planned operations and portfolio growth;
(ii) to provide a safety net for the variety of risks to which the entity is exposed in the conduct of its business and to
overcome the losses from unexpected difficulties either in earnings or in asset values;
(iii) to provide a basis for confidence among Members, depositors, creditors and Regulatory agencies;
(iv) to form a solid foundation for business expansion and ongoing reinvestment in business capabilities, including
technology and process automation and enhancement; and
(v) to establish a capital management policy for the entity appropriate for current legal and economic conditions, including
compliance with regulatory requirements and with DICO’s standards of Sound Business and Financial Practices.
The Act requires credit unions to maintain minimum regulatory capital, as defined by 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
weighted percentages, as prescribed by the Act, to various asset categories, operational and interest rate risk criteria. The
prescribed risk weights are dependent on the degree of risk inherent in the asset.
Tier 1 capital, otherwise known as core capital, is the highest quality. It is comprised of retained earnings, contributed
surplus, Members’ capital accounts, and Member entitlements with the exception of the series 96 Class A shares. Of the
“50th Anniversary”, series 98, series 01 and series 09 Class A shares that have been included within Members’ capital
accounts, only 90% are allowable as Tier 1 capital due to specific features of these shares. Tier 1 capital as at December 31,
2014 was $563,504 (2013 - $528,811).
Tier 2 capital, otherwise known as supplementary capital, contributes to the overall strength of a financial institution as a
going concern, but is of a lesser quality than Tier 1 capital relative to both permanence and freedom from charges. It is
comprised of the series 96 Class A shares and the 10% portion of the “50th Anniversary”, series 98, series 01 and series 09
Class A shares that are not admissible as Tier 1 capital. It also includes the eligible portion of the total collective allowance
for credit losses. Tier 2 capital as at December 31, 2014 was $75,798 (2013 - $75,858).
The Act requires credit unions to maintain a minimum capital ratio of 4% and a risk weighted capital ratio of 8%. The Credit
Union has a stated policy that it will maintain at all times capital equal to the minimum required by the Act plus a prudent
cushion. The current minimum ratios per Board policy are a capital ratio of 6% and a risk weighted capital ratio of 9%. The
Credit Union’s internal policy also dictates that the ratio of Tier 1 capital to total capital will be a minimum of 60%. These
internal limits are increased by the Board in tandem with significant increasing risk detected in the economic environment of
the Credit Union. The Credit Union is in compliance with the Act as indicated by the table below:
Regulatory capital
2014
2013
30
Capital leverage ratio
Risk weighted capital
Minimum
Actual
Minimum
Actual
639,302
4.00%
6.40%
8.00%
13.16%
604,669
4.00%
6.61%
8.00%
13.44%
Comparative information
Comparative information for the year ended December 31, 2013 has been revised to reflect the reclassification of costs
incurred in the establishment of a securitization issue. A total of $3,141 in costs has been recognized in interest expense –
other for the year ended December 31, 2014 (2013 - $2,749). In prior years these costs were presented in non-interest
income. This reclassification did not have any impact on the opening figures presented as of January 1, 2013. It is
management’s practice to include the fees within the mortgage securitization cost of funds when evaluating the profitability
of securitization transactions and as such the amounts have been reclassified to enhance the usefulness of these financial
statements.
Certain other comparative information has been revised to conform to the presentation adopted in these current year
financial statements and accompanying notes.
57
57
MERIDIAN CREDIT UNION LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2014 with comparative figures for 2013
31
Authorization of consolidated financial statements
The consolidated financial statements for the year ended December 31, 2014 were approved by the Board of Directors on
March 12, 2015.
Amendments to the consolidated financial statements subsequent to issuance are not permitted without Board approval.
___________________________________
Don Ariss
Chair, Board of Directors
___________________________________
Richard Owen
Chair, Audit & Finance Committee
58
58
meridiancu.ca
™Trademarks of Meridian Credit Union Limited.