annual 2016 report - dico · 2017-07-04 · 2 deposit insurance corporation of ontario annual...

ANNUAL REPORT

2016

DEPOSIT INSURANCE COVERAGE

To be insured, your deposits must be held in an Ontario credit union or caisse populaire that is insured by DICO. All credit unions and caisses populaires incorporated in Ontario are insured by DICO.

WHAT’S COVERED? Canadian currency deposits payable in Canada including: Non-Registered DepositsEligible deposits are insured up to the prescribed statutory limit of $100,000 per depositor for each of the following:

• savings and chequing accounts; term deposits, including index-linked term; deposits and GICs, money orders,andcertifiedchequesetc.;and

• deposits held in one name• deposits held in joint names• deposits held in trust

Registered PlansAll eligible Canadian deposits in each type of registered plan are fully insured:

• Tax Free Savings Account (TFSA)• Registered Retirement Savings Plan (RRSP)• Registered Retirement Income Fund (RRIF)• Registered Education Savings Plan (RESP)• Registered Disability Savings Plan (RDSP)

WHAT’S NOT COVERED? DICO does not insure any of the following:

• member shares and investment shares issued by the credit union

• mutual funds• stocks, bonds and debentures• treasury bills• foreign currency deposits• contents of safety deposit boxes• securities held for safekeeping

Throughout this document: the term “credit union” also refers to “caisse populaire”.

The term “sector” refers to the credit union sector.

CONTACT USDICO is dedicated to answering your questions about

deposit insurance. You can reach us at: Deposit Insurance Corporation of Ontario

4711 Yonge Street, Suite 700 Toronto ON M2N 6K8

Toll-free telephone service: 1-800-268-6653Website: www.dico.comE-mail: [email protected]: (416) 325-9722

CONTENTS

01 Mandate, Mission, Vision, Values

02 Message from the Chair

04 Corporate Governance

05 Board of Directors

06 Board Committees

07 Message from the CEO

08 Ombudsman’s Report

09 DICO’s Business Model 2017

10 DICO’s Strategic Plan 2017-2019

11 Risk Management

12 Highlights of Key Programs and Activities

15 Looking Forward

16 Performance Against Plan

18 Management’s Discussion and Analysis

21 Financial Performance Analysis

27 Management’s Responsibility for Financial Statements

28 Independent Auditors’ Report

29 Financial Statements

34 Notes to Financial Statements

51 FulfillingAgencyMandateExpectations

52 List of Credit Unions, Caisses Populaires and Leagues

PROTECTION, SECURITY, STABILITY 1

M ISSIONTo protect depositors and contribute to the stability of the sector.

VISIONWe will contribute to the soundness, stability and success of the sector by being an effective solvency regulator and deposit insurer.

VA LUESIn fulfilling our mandate and pursuing our Vision and Mission, we will live by the following values:

Excellence and ProfessionalismDICO will maintain a highly skilled and diverse workforce that promotes excellence and professionalism in how it conducts its affairs.

Respect and FairnessEmployees will treat everyone with mutual respect and fairness. DICO will act and support employees in a fair and consistent manner.

Integrity and TrustworthinessEmployees will adhere to the highest ethical standards in performing their duties and responsibilities including maintaining the confidentiality of sensitive information.

Communications and TeamworkEmployees will maintain open communications and work cooperatively amongst themselves and with partners towards the achievement of DICO’s mandate.

Financial StewardshipDICO will act as a responsible agency that continuously strives to manage its operations efficiently and effectively for the benefit of all stakeholders.

MANDATE

The Deposit Insurance Corporation of Ontario (DICO) is responsible for administering and ensuring compliance with the rules set by the Ontario Government related to the solvency of credit unions, promoting standards of sound business and financial practices, providing insurance against the loss of deposits, and promoting and contributing to the stability of the Ontario credit union sector with due regard to its need to compete.

2 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

In 2016, DICO continued to successfully deliver on its mission to protect depositors and contribute to the stability of the sector, since there were no credit union failures or deposit insurance claims. In fact, in DICO’s 39-year history, no member has ever suffered any loss of deposit funds. Also, of note is DICO does not receive funding from the Ontario Government as its operations are funded entirely through deposit insurance premiums paid by credit unions. The premiums also help to build and maintain the Deposit Insurance Reserve Fund (DIRF) which protects eligible insured deposits of credit union members against loss.

As the financial services sector continues to evolve and increase in complexity, the expectations placed on prudential supervisors and deposit insurers to ensure safety and soundness continue to grow. During the year, DICO continued to enhance its regulatory

oversight processes aimed at improving the prudential supervisory regime by ensuring credit unions adhere to high standards of governance, capital levels and risk management. We are confident these policies, processes and service standards have strengthened the protection of deposits, and are grateful for the ongoing support of the sector for these enhancements.

As part of our ongoing efforts to foster proactive communication with the sector, DICO continued to interact with its key stakeholders in several different ways: through publication of guidance, tools and other helpful materials, presentations to Boards of individual credit unions, and consultations with sector leaders. This past year, the Board hosted special events with area credit unions’ Boards and management. In addition, to maintain currency in risk oversight best practices and innovations, we participated in national and international industry conferences. These outreach activities are an essential component of the effective communication between DICO and the sector.

During 2016 DICO participated in the development of revised legislation to support the implementation of the recommendations resulting from the 2015 review of the Credit Union and Caisses Populaires Act, 1994 (CUCPA). It is expected that this work will continue throughout 2017.

Additionally, the Government announced in late 2016 that it will be moving forward with the creation of the Financial Services Regulatory Authority of Ontario (FSRA). This change came as a result of review of the mandates of DICO, the Financial Services Commission of Ontario (FSCO) and the Financial Services Tribunal (FST). The management of the multi-phased transition to FSRA has been assigned to the newly established Financial Services Regulation Modernization Secretariat. While the timing of the transition and the precise impact on DICO’s mandate and operations is largely unknown at this time, we believe it will be significant. We look forward to providing assistance to the Secretariat in this important initiative, which is aimed at modernizing and strengthening the regulation of financial services and pensions, as well as improving consumer, investor and pension plan beneficiary protection.

I would like to take this opportunity to express my sincere appreciation to all of the Directors for their dedication and professionalism in providing exceptional oversight to the organization. The diverse skill sets of the board members provide outstanding value to DICO, its stakeholders and the management team.

During the past year we said farewell to Andy Poprawa, who retired from DICO after 23 years as President and CEO. Under Andy’s strong leadership, DICO evolved from a stabilization authority and deposit insurer for over 500 credit unions with assets in excess of $12 billion dollars to becoming the prudential solvency regulator and deposit insurer for 99 credit unions with $51.9 billion in assets and a well-funded DIRF. On behalf of the Board and staff I would like to express our deep appreciation to Andy for his outstanding contribution and tireless dedication to DICO and the sector. We wish Andy and his family the very best in retirement.

MESSAGE FROM THE CHAIR


I would also like to express my sincere appreciation to Guy Hubert for his leadership and hard work since his appointment in September as Acting President and CEO. Special thanks to the staff and executive team who are commended for their commitment and dedication.

Finally, we thank our colleagues in the Ministry of Finance for their support and direction. We are also grateful to the many stakeholders that we have worked with over the past year and we look forward to their continued contributions to the ongoing success of the credit union sector in Ontario.

On behalf of the Board of Directors,

Steve Blakely, ICD.DChair of the Board


DICO is a “Board-Governed” Agency of the Province of Ontario established in 1977 and operates under the CUCPA. The CUCPA sets out DICO’s objects, powers and duties, as well as general terms for deposit insurance and other governing parameters. DICO functions within the legal framework established by the CUCPA, the Agency and Appointments Directive issued by Management Board of Cabinet, and other applicable directives and laws. DICO is accountable to the Minister of Finance for the conduct of its affairs.

The CUCPA requires DICO’s Board of Directors (the Board) “manage the affairs or supervise the management of the affairs of the Corporation…”. The Board is composed of up to nine persons all of whom are appointed by the Lieutenant-Governor-in-Council. A robust Board appointment process is followed to ensure the best-qualified people are recruited. DICO refers candidates who possess the appropriate skills and experience for consideration by the Minister to recommend appointment to the Lieutenant-Governor-in-Council.

In addition to a position description for Directors, a skills profile has been developed. DICO has also established a gender, experience and geographic representation profile for the Board as a whole to ensure it maintains an appropriate balance of these attributes.

The criteria for consideration of candidates for Board membership include:

• Experience in the financial services industry and in particular, financial cooperatives;

• Understanding of credit union principles, sector structure and methods of operation;

• Board experience, director training or a background in business or academia;

• Understanding of business concepts, operations and financial reports;

• Effective communications skills;

• Strategic thinking skills; and

• Decision-making skills using sound judgment.

Best practices are followed in corporate governance including:

• Formal Director orientation process;

• Continuous individual Director and Board development;

• Board succession planning;

• Annual Board and peer assessment and feedback;

• Regularly scheduled board meetings and in-camera sessions; and

• An annual strategic planning session.

The Board also establishes annual objectives for itself and measures its performance against those stated objectives. These include strategies for governance, risk management, communication with stakeholders, executive management and management reporting and control.

DICO is a member and active participant of the Institute of Corporate Directors and other organizations that provide governance advice. These affiliations provide insights into best and emerging practices for achieving excellence in governance.

CORPOR ATE GOVERNANCE


BOARD OF DIRECTORS A S AT D EC EM B ER 31, 2 016

From L to R Top Row:

Jim Houston

Appointed: July 1, 2015

Term Expiry: July 1, 2019

Helen Young

Appointed: March 11, 2015

Term Expiry: March 11, 2019

Steve Blakely (Chair)

Appointed: September 11, 2013

Term Expiry: July 1, 2019

Monique Tremblay

Appointed: April 18, 2011

Term Expiry: April 19, 2019

John Ferreira



More information about the Board and individual

Directors can be found at www.dico.com.

From L to R Bottom Row:

Gail Di Cintio

Appointed: May 4, 2011

Term Expiry: May 5, 2019

Carmen Rossiter



Don Dalicandro




Audit & Finance Committee

This committee considers and makes recommendations to the Board on audit, finance and other related matters including the review of all financial statements. It oversees the external and internal audit processes, reviews the Annual Report and makes recommendations to the Board for the approval of the business plan and budget. The committee reviews the investment policy and strategy and the risk management activities related to the committee’s area of responsibility.

Composition: Carmen Rossiter (Chair), John Ferreira, Jim Houston, Monique Tremblay, Helen Young, Steve Blakely (ex-officio)

Governance & Human Resources Committee

This committee considers and makes recommendations to the Board regarding governance and human resources matters. It reviews the structure of Board committees, the composition and skill profiles required from Board members and the human resource policies that impact the corporate governance of the Corporation. It also reviews succession planning related to senior personnel, compensation policies and pension plan, and oversees stakeholder relationships and communication strategies.

Composition: Don Dalicandro (Chair), Gail Di Cintio, Jim Houston, Monique Tremblay, Helen Young, Steve Blakely (ex-officio)

Risk Oversight Committee

This committee considers and makes recommendations to the Board regarding functions and duties related to deposit insurance, risk management, and regulatory matters. This committee monitors risk policies, reviews and authorizes the exercise of powers of the Corporation, reviews the DIRF and model assumptions, supervises legal actions, reviews and makes recommendations for the approval of the information systems’ strategic plan, and approves financial assistance requests from credit unions.

Composition: Gail Di Cintio (Chair), Don Dalicandro, John Ferreira, Carmen Rossiter, Steve Blakely (ex-officio)

Attendance at Board and Committee Meetings 2016*

DICO Board Audit & Finance Governance & Human Resources Risk Oversight

Number of Meetings held 7 5 13 6Total number of members 8 5 5 4

Total scheduled attendance 56 25 65 24Total actual attendance 48 22 58 20

% of attendance 86% 88% 89% 83%

*Does not include S. Blakely, ex-officio, for Committee meetings, and MOF Observer.

BOARD COMMIT TEES


The challenging economic environment and low interest rates continue to fundamentally impact the Ontario financial services sector. Ontario credit unions have responded to these challenges by reducing operating expenses and increasing revenues in order to improve overall profitability, which increased to 33 basis points (bps) from 27 bps in 2015. The sector continued to grow its assets in 2016 to $51.9 billion, an 11.2% increase over the previous year resulting from robust growth in the mortgage and commercial loans portfolios. Sector capital levels, as measured on a leverage basis, remained strong at 7.0%, albeit slightly lower than the 7.3 % recorded in 2015. Aggregate liquidity in the sector continues to be adequate at 11.26%, and remained virtually unchanged from 2015 levels (11.20%).

The sector continued to consolidate in 2016, with the number of credit unions decreasing by 11 to 99. Each of the institutions that ceased operations during the year combined with other

credit unions. In every case, all depositors were protected from any loss of their insured deposits as the business combination and transition was seamless, resulting in public confidence in the credit union being maintained. This consolidation trend is expected to continue, creating larger and, in many cases, more complex institutions. To continue to provide effective oversight to a rapidly changing sector, DICO remains committed to enhancing its processes, programs and skill sets.

DICO had another positive year from a financial standpoint. The DIRF reached $226 million, or 79 bps of total insured deposits, on the basis of slightly higher premium income and continued prudent expense management. We continue to expect to meet our target DIRF goal of 100 bps of total insured deposits in 2022.

One core element of DICO’s mandate is to ensure that depositors are protected from the loss of their insured deposits. This is accomplished by ensuring credit unions are financially and operationally sound through proactive risk-based prudential oversight, which includes a robust on-site examination program and comprehensive off-site monitoring processes. During 2016, a total of 57 examinations were conducted by our staff and agents. Credit unions which do not meet our stringent standards can be placed on a Watchlist or face other regulatory action, including being placed under Supervision or Administration. As of December 31, 2016, no credit union was under Supervision or Administration.

As part of standard setting process, DICO publishes Guidance Notes, advisories and tools to clarify expectations for credit union risk management practices and support their efforts to achieve compliance. In 2016, in addition to enhancing the web-based reporting tool, DICO consulted on the development of Liquidity and Stress Testing Guidance, and published updated Directors’ and Audit Committee Handbooks. Looking forward, DICO expects to publish guidance on Liquidity Risk Management, Securitization, Cybersecurity and Lending and Loan Provisioning as it continues to address emerging risks in the sector. In addition, the credit union reporting system will be enhanced to provide DICO with additional data granularity to support increased stress testing protocols.

DICO strives to work effectively with all stakeholders and maintains Memoranda of Understanding (MOU) with key interested parties. One of the ways this is achieved is through several advisory committees comprised of senior executives in the sector, the Ministry of Finance and FSCO. We work together with organizations in other jurisdictions across Canada and around the world in developing sound regulatory and depositor protection principles for co-operative financial institutions in the pursuit of effective regulation and supervision of the sector. We regularly review and enhance our governance and management processes to ensure DICO is accountable, transparent and fair in all of its dealings with credit unions, key stakeholders and the public.

In 2016, we said farewell to Andy Poprawa as President and CEO after 23 years. I appreciate the Board’s expression of confidence in appointing me as his replacement on an acting basis, as well as the wise counsel, advice and support that I receive from the Board under the leadership of Steve Blakely. I would like to express my appreciation to my senior leadership team and our talented employees, an extremely dedicated group of professionals that represents the major source of DICO’s corporate strength. We look forward to continuing our commitment to credit unions and their depositors throughout 2017.

MESSAGE FROM THE CEO

Guy Hubert, President & CEO (Acting)


The Office of the Ombudsman investigates complaints and recommends solutions. More specifically, the Ombudsman assists in resolving problems by helping the complainant to define options and recommends actions to the parties involved. The Ombudsman cannot, at any time, decide on matters in dispute or advocate the position of the complainant, DICO or other parties.

Complaints must relate to regulatory issues between credit unions and DICO, or to disputes between depositors or borrowers of credit unions that are being liquidated that cannot be resolved at the operational level. The Ombudsman may also make recommendations to the Board for systemic changes to deal with recurring problems revealed through investigations. Confidential information used for the purposes of an investigation will not be disclosed outside of the Office of the Ombudsman. The

Ombudsman reports directly to the Board and is independent from operational programs.

DICO’s website (www.dico.com) provides full details about the complaint resolution process, including management contacts and specific instances where this Office has no jurisdiction, such as matters involving an order for administration or liquidation, in litigation, or a member’s consumer complaint towards a credit union.

During 2016, there were three interactions: two with members and one from the business community:

1. A member requested assistance with a matter related to a specific request to a credit union that had not been fulfilled. The matter was referred to management who immediately followed up with the credit union to resolve the issue;

2. A complaint was received against a credit union and, therefore, outside the jurisdiction of this Office. The member was advised to contact FSCO if the matter could not be resolved at the credit union level; and

3. The owner of a money services business (MSB) wished to discuss DICO’s Operational Risk Advisory related to MSB accounts. The matter was referred to management to follow up with the individual.

This Office continues to receive the full support and co-operation of the Board, management and staff, for which I am grateful.

Respectfully submitted,

Beryl Roberto, OmbudsmanTel: 416-325-9446Email: [email protected]

OMBUDSMAN’S REPORT


DICO has developed a business model to encapsulate the way in which business is conducted within the context of its legislative mandate and overall regulatory environment. This business model reflects DICO’s position as an integral part of Ontario’s financial safety net.

DICO’S BUSINESS MODEL 2017

Ontario’s Credit Unions and Caisses Populaires - Regulatory / Supervisory SystemMinistry of Finance, Financial Services Commission of Ontario, Deposit Insurance Corporation of Ontario

Legislative Environment

Governance

Other Legislation, Statutory Requirements and Directives, including

• Management Board of Cabinet Directives• Other Acts, i.e. French Language Services Act,

Employment Standards Act, etc.

Credit Unions and Caisses Populaires Act,1994DICO’s Business ObjectivesFor the Benefit of Depositors:

• Prudential Standards and Solvency Regulation• Promote Standards of Sound Business and

Financial Practices• Provide Deposit Insurance

Board of DirectorsStrategic and Policy Direction

Audit and Finance Committee

Governance & Human Resources Committee

Risk Oversight Committee

Corporate AffairsEnterprise Risk Management

Strategic PlanningHuman Resources

ComplianceCorporate Operations

Board Support

DICO Management Activities

CEO

Credit Union RegulationRisk MonitoringExaminations

Risk Assessment Risk ManagementPolicy & Research

Corporate Finance & Information Systems

Accounting & FinanceInformation SystemsDIRF Management

Failure Resolution Management


D ICO’S STR ATEGIC PL AN 2017-2019

STRATEGIC GOALS

KEY STRATEGIC OBJECTIVES

MAJOR INITIATIVES /PRIORITIES

Stress TestingEnhance

preparedness for Complex Resolutions

Strong Partnerships

Sound Corporate

Governance(DICO)

Effective Public

& Stakeholder

Awareness

Act Review Guidance Notes

Website Outreach

Meet DIRF TargetsAttract / Retain Required Skills

Complementary StrategiesCentral 1,

Desjardins, Other

ENABLING STRATEGIES

Implement Segmentation Strategy - Very large, Large, Mid-size, Small Credit Unions

Enhance Operational Capacity – People, Resources, Technology

Promote Regulatory Culture & Improve Credit Union/Sector Performance

Establish standards and guidelines to help credit unions manage

risk

Proactive Reactive

To Protect Depositors and Contribute to the Sector’s StabilityDICO MANDATE

Proactive

Reactive

Proactive & Balanced Risk

Based Regulation& Risk

Management

Use regulatory and other powers to reduce losses


R ISK MANAGEMENTRisks are managed in the context of DICO’s Enterprise Risk Management (ERM) Framework. This framework includes a well-defined set of Board-approved risk management policies and practices, and a clearly defined risk appetite, to ensure the Board, Risk Oversight Committee and management understand and respond to the risks to which DICO is exposed. DICO’s ERM is reviewed in detail annually, and is a primary driver in the development of strategic and operational business plans and budgets.

Rating Outlook

Deposit Insurance and Regulatory Risks

Risk Assessment Risk: The risk that DICO does not promptly or systematically identifycredit unions that pose an unacceptable level of insurance risk. Moderate Stable

Risk Management Risk: The risk that DICO cannot or does not take appropriate action with respect to an unacceptable level of insurance risk posed by credit unions. Sub-category risks include Risk Management Risk, Capital Adequacy Risk, Systemic Risk, Public Confidence Risk and Liquidity Risk.

Moderate Stable

Failure Resolution Risk: The risk that appropriate action is not taken to manage credit unions under Administration or Liquidation resulting in increased financial loss. Sub-category risks include Failure Resolution Risk, Loss Management Risk, Bonding Insurance Risk and Litigation Risk.

Moderate Stable

Regulatory Risk: The risk that responsibilities as prudential solvency regulator are not fulfilled. Sub-category risks include Prudential Standards Risk, Failure to address credit union’s Non-Compliance Risk, and DICO’s Non-Compliance Risk.

Low Stable

Corporate Risks

Strategic Risk: The risk that policies and/or tools to address system weaknesses are not implemented in a timely manner. Sub-category risks include External Influence Risk, Strategic Direction Risk, Reputation Risk, Communication Risk and Public Policy Risk.

Low Stable

Operational Risk: The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Sub-category risks include Liability/Litigation Risk, Health & Safety Risk, Business Continuity Risk, Social Media Risk, Outsourcing Risk and Human Resources Risk.

Moderate Stable

Financial Risk: The risk that assets and liabilities are not managed appropriately resulting in financial loss. Sub-category risks include Adequacy of the DIRF Risk, Adequacy of DICO’s Loss Provisions Risk, Liquidity Risk, Investment / Market Risk and Internal Controls Risk.

Low Stable

Compliance Risk: The risk of failure to comply with all applicable legislation, directives and policies. Sub-category risks include Legislation Risk, Income Tax Act Risk, Directive Risk and Policy Risk.

Low Stable

Technology Risk: The risk that DICO’s technical systems are not effective in ensuring the complete, accurate, valid, timely, confidential and secure collection and processing of data to support operations. Sub-category risks include Technology Support Risk, Technology Risk and Information Security Risk.

Moderate Stable

Overview of DICO’s Assessment of Significant Risks as at December 31, 2016


DICO’s strategic initiatives are aligned with and support the achievement of key Government priorities and objectives for enhanced accountability, efficiency and value for money in the delivery of services, evidence-based decision-making and policy development, and minimizing the administrative burden on credit unions.

The Board approved the following strategic objectives for 2016 to ensure:

• Credit unions comply with the CUCPA, Regulations and Sound Business and Financial Practices;

• Corporate governance practices continue to be enhanced;

• Information is transparent and accessible; and

• Strong relationships are maintained with and feedback obtained from key stakeholders.

During 2016, DICO successfully fulfilled its mandate through the delivery of programs in the following areas:

ENSURING MEMBERS’ DEPOSITS ARE PROTECTEDproactive and balanced risk-based regulation and risk management

DICO continually makes enhancements in all areas of its prudential solvency operations to ensure:

• Sector risks are appropriately managed and mitigated;

• Credit unions comply with legislation and implement strategies to meet DICO’s articulated expectations surrounding Sound Business and Financial Practices;

• Members’ eligible deposits are protected to legislated deposit insurance limits;

• Stability of the sector is effectively promoted; and

• Public confidence in the sector is maintained.

Several preventative measures, listed below, were implemented to identify potential risk and reduce the likelihood of losses:

• Enhanced the existing credit union web-based reporting systems that provide access to key information to effectively monitor and analyze risk trends and enable DICO to address issues with credit unions at an earlier stage or, where appropriate, take other action;

• Implemented Internal Capital Adequacy Assessment Process (ICAAP) and Stress Testing requirements for credit unions’ with assets in excess of $500 million (credit unions with assets in excess of $1 billion were required to implement these programs in 2014) to enable DICO to assess whether risk management, business planning and capital and liquidity management practices are appropriate;

• Required credit unions to complete a self-assessment readiness survey to gain a better understanding of preparations and potential impacts from the implementation of IFRS 9, and assist in considering revisions to existing guidance on Lending and By-Law No. 6: Reserves and Monthly Provision for Doubtful Loans; and

• Clarified DICO’s expectations by issuing updated versions of the Directors’ and Audit Committee Handbooks.

HIGHLIGHTS OF KEY PROGR AMS AND ACTIVITIES


ACHIEVING OUR MANDATE AND STRATEGIC OBJECTIVESsound corporate governance

Sound corporate governance is essential for the progress and prosperity of any organization. Good corporate governance allows for achievement of an appropriate balance of power among managers, stakeholders and boards. It ensures that the board and auditors are independent and helps in achieving greater fairness and transparency. Also, it ensures stakeholders are provided with tools and channels to express their views and provide suggestions, and protects the long-term strategic objectives of the organization.

During 2016, DICO continued to strengthen its corporate governance practices through the following activities:

• Conducted an annual review of services provided by both the internal and external auditors;

• Ensured the Corporation was materially compliant or making progress toward substantive compliance with all relevant Acts, Government guidance and Corporate Policies, which included:

• A plan to achieve material compliance with the Archives and Recordkeeping Act in 2018; and

• Policies to comply with the Open Data Directive;

• Completed an annual review of DICO’s ERM Framework and all Corporate Policies;

• Realigned roles and responsibilities at the executive level to ensure clear lines of sight to the Board and appropriate segregation of accountabilities;

• Engaged third-party consultants to:

• Conduct a review of IT strategy and platform;

• Assist with complying with the Executive Compensation Framework Regulation; and

• Review and advise on DICO’s Human Resources Framework; and

• Successfully renegotiated DICO’s premises lease.

ENSURING TRANSPARENCY AND ACCOUNTABILITYeffective public and stakeholder awareness

DICO believes that constructive open dialogue with stakeholders and public awareness of deposit insurance coverage are critical success factors in the achievement of its mandate.

During 2016, DICO continued to strengthen its transparency and accountability practices through the following activities:

• Developed and implemented a comprehensive Communication Plan;

• Reviewed and updated website content and deposit insurance advertising materials to ensure they remained current and relevant;

• Maintained a toll-free telephone information service to respond to queries from credit union staff, members and the public, thereby ensuring dissemination of accurate information regarding deposit insurance coverage;

• Provided opportunities for the Board to engage with credit union stakeholders;

• Attended credit unions’ annual general meetings and sector events; and

• Provided a dispute resolution process through the Ombudsman’s Office.


CONSTRUCTIVE WORKING RELATIONSHIPSstakeholder partnerships

Strong working relationships provide a framework for coordination and communication among regulatory authorities and stakeholders, and help foster prudence in the governance of credit unions not only in Ontario, but nationally and internationally. They encourage effective risk management and capital planning, and assist in promoting adoption of best practices while recognizing the unique cooperative structure of credit unions.

During 2016, DICO continued to strengthen its stakeholder partnerships through the following activities:

• Maintained MOU with various organizations that have an interest in ensuring risk at Ontario credit unions is monitored, managed and supervised effectively. DICO maintains MOUs with the Ministry of Finance, Central 1, Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), British Columbia Financial Institutions Commission (BC FICOM), Fédération des caisses populaires de l’Ontario (FCPO), and L’Alliance des caisses populaires de l’Ontario and the Investment Industry Regulatory Organization of Canada (IIROC);

• Continued to work with staff at the Ministry of Finance and FSCO on the ongoing review of the CUCPA and associated Regulations by providing input and information;

• Offered full support and cooperation while the Government considered the recommendations of the Expert Panel as they pertain to the mandate of DICO and the potential transfer of prudential solvency responsibilities to FSRA;

• Consulted with sector leaders on matters of common interest through various advisory committees; and

• Participated in provincial, national and international working groups, such as the Credit Union Prudential Supervisors Association and the International Credit Union Regulators’ Network.


DICO will continue to be guided by the above noted corporate strategies over the next year.

The following key strategic initiatives are planned for 2017:

• Publishing Guidance Notes on Liquidity Risk Management, Stress Testing, Securitization, Lending and Loan Provisioning;

• Continuing to enhance credit union web-based reporting;

• Issuing an Advisory on mortgage lending practices;

• Finalizing estates of three credit unions in liquidation;

• Developing and implementing an enhanced Human Resources Framework and succession plan;

• Working with the Financial Services Regulatory Modernization Secretariat to implement recommendations arising from the review of DICO’s mandate in accordance with the Government’s decision;

• Ensuring compliance with the Executive Compensation Framework Regulation within the established time frame;

• Continuing to make substantive progress to comply with the Archives and Recordkeeping Act; and

• Exceeding the interim DIRF target of 75 bps of insured deposits and continuing to build it toward the long-term target of 100 bps to ensure members’ eligible deposits continue to remain adequately protected.

LOOKING FORWARD


PERFORMANCE AGAINST PLANThe following table sets out 2016 performance against planned targets. Where achievement of target was delayed, an overview of corrective action to be taken is provided.

Key Strategy Initiatives Status Update

Strategic Objective: Proactive and Balanced Risk-Based Regulation and Risk ManagementDICO must continually stay alert to indicators of risk and the emergence of new risks so that it can respond quickly to manage insurance risk. The Corporation is focused on continuing to build strength in risk assessment, risk management, loss management and regulatory oversight.

Effective Credit Union Risk Assessment p

• Fifty-seven examinations conducted in 2016. • Risk Assessment Profiles updated for all credit unions. • High-risk credit unions and instances of non-compliance identified

within the five-day standard.• Enhanced credit union web-based reporting solution introduced

providing information for risk-based monitoring and assessment.

Risk Management p• Appropriate resolution strategies developed for those credit unions

exhibiting higher risk exposure. • No compliance orders required to be issued.

Effective Sector Risk and Regulatory Compliance

Assessmentu

• Publication of updated Liquidity and Stress Testing Guidance was delayed. Publication is anticipated in early 2017.

• Three liquidity tools and completion guides sent for stakeholder consultation.

• Continued research into impact on existing guidance from proposed changes to CUCPA and Regulations.

Regulatory Actions p

• Sixteen regulatory applications received. Thirteen applications were approved, with three pending at year end.

• Three orders and one variation and exemption issued. • No administrative penalties issued. • All service standards were met.

Failure Resolution p • No failures in 2016.

Depositor Payouts and Liquidations p

• No deposit insurance payouts made.• Final Liquidator meetings held for four credit unions and final

payouts of residual assets made.

Strategic Objective: Sound Corporate GovernanceTo maintain stakeholder and public confidence, DICO must demonstrate that it is governed and managed in an efficient and effective way. To achieve this DICO will maintain sound governance, manage its significant risks (ERM) and work to ensure the DIRF is sufficient to protect depositors.

Sound Governance p

• The Board met seven times with an average attendance of 86% and expeditiously dealt with all matters brought forward. Increased activity at committee meetings to provide oversight on specific critical projects and matters.

Compliance with Acts and Directives u

• With exception of the Archives and Record Keeping Act, in full compliance with relevant Acts and Directives. Plan to be substantially compliant with the Archives and Record Keeping Act in 2018.

• All Ombudsman complaints promptly resolved.

Effective Enterprise Risk Management (ERM) p

• Annual review of ERM completed.• Emerging risks identified and mitigation strategies developed as

necessary.

LEGEND

p Planned progress on schedule and within budget

u Slippage in terms of time to completion and/or budget variances

q Cancelled or deferred


Key Strategy Initiatives Status UpdateAdequate Deposit

Insurance Reserve Fund p• DIRF ahead of plan by $3.3 million. • On track to attain DIRF target of 100 bps of insured deposits in 2022.

Strong Corporate Resources Support p

• Renegotiated DICO premises lease. • Review of IT Strategy and Platform completed with certain

recommendations in process of being implemented in 2017.

Strategic Objective : Effective Public and Stakeholder AwarenessDICO must ensure that the public and other stakeholders have ready access to deposit insurance information, and a clear and transparent understanding of DICO’s role, standards and actions.

Communications p

• Sector Outlook, Financial Statistics, Sector Releases, updated Directors’ and Audit Committee Handbooks published.

• Broadcast of announcements & consultations. • Bilingual toll-free enquiry line received more than 250 calls, mostly

related to deposit insurance. • Comprehensive Communications Plan developed to ensure

transparent and accessible information provided to the public and stakeholders.

Strategic Objective: Strong PartnershipsTo have the most expertise and impact, DICO needs to work effectively with the Government, sector/stakeholder representatives and other national and international deposit insurers.

Strategic Alliances p• Maintain/renewed MOU with strategic partners.• Continued involvement in established advisory committees.

Stakeholder Relations p

• Provided information and submissions to Mandate Review Panel and participated in working group for review of CUCPA.

• Worked with various associations, working groups and committees with shared interests, both nationally and internationally.

LEGEND

p Planned progress on schedule and within budget

u Slippage in terms of time to completion and/or budget variances

q Cancelled or deferred


MANAGEMENT’S D ISCUSSION AND ANALYSIS

DICO fulfills its mandate to ensure the stability of the credit union sector in a complex, dynamic and highly competitive environment. Sustained low interest rates and ever-increasing competition made 2016 a challenging year for profitability for many credit unions. Tightening of mortgage lending rules by the Federal Government in October 2016, meant to stabilize Canada’s housing market and control growing household debt levels, has increased the rigour required by credit unions when qualifying their members for loans. The impact of these factors on the performance and ongoing viability of credit unions is closely monitored on a monthly basis.

While the sector experienced further consolidation, assets grew at a healthy pace (11.2%) led by growth in residential mortgage loans (12.2%) and commercial loans (13.2%) while personal loans decreased (2%). The resulting stronger credit unions formed benefit from enhanced synergies and larger economies of scale. The 99 credit unions at the end of 2016 ranged in size from $2.7 million to $13.1 billion with an average asset size of $524 million, with 11 credit unions each holding $1 billion or more in assets.

Due to poor profitability or losses as the result of thin margins, future viability of some credit unions continues to be a concern which has resulted in increased monitoring. However, the sector remains stable and plays an important role in the financial and economic landscape by offering members access to more products and services while striving to provide a cost-effective banking alternative.

The sector is relatively well capitalized at an average aggregate leverage ratio of 7.0%, down slightly from 7.3% in 2015. The average aggregate risk weighted capital ratio was 13.6%. All credit unions met the prescribed statutory minimum capital requirements as at December 31, 2016.

Profitability

Profitability during 2016 increased to 33 bps from 27 bps in 2015. The low interest rate environment continued to reduce income from loans and investments by 12 bps, which was offset by lower interest and dividend expenses paid to members (6 bps), loan costs (3 bps) and lower operation expenses (10 bps).

Thirteen credit unions experienced operating losses during 2016. All are being carefully monitored to ensure that appropriate resolution strategies are being implemented and sufficient capital is maintained to support their continued viability.

Ontario Credit Union Sector Profile at a Glance($ billions) 2016 2015* % Change# of Credit

Unions 99 110 (10.0%)

Total Assets $51.9 $46.6 11.2%Total Deposits $41.2 $37.6 9.6%

Insured Deposits $28.6 $26.4 8.3%

Insured Deposits (% of Total Deposits)

69% 70% (1.4%)

Regulatory Capital

(Leverage Ratio)

7.0% 7.3% (4.1%)

Loan Costs 0.06% 0.09% (33.3%)Profitability 0.33% 0.27% 21.4%

* 2015 numbers may differ slightly from prior annual report to reflect 2014 audited financial information received from credit unions.

Dynamic and Challenging Environment

2006 2008 2010 2012 2014 2016 0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

ROA (R)Financial Margin (L)

Profitability Measures


Loan Costs and Delinquencies

The sector’s aggregate credit risk as measured by delinquency and loan costs is holding at relatively stable levels. Total delinquency was 0.68%, a significant improvement over 2015 and much lower than post-recession figures (2009: 1.54%). Commercial loan delinquency improved to 1.07% from 1.5% in 2015. Overall loan costs improved to 0.06% from 0.09% in 2015.

Insured Deposits

Eligible non-registered deposits are insured up to $100,000 per account and on an unlimited basis for registered accounts. During 2016, insured deposits grew to $28.6 billion, but continued to represent a declining percentage of total deposits at 69%.

More details regarding the coverage available for all eligible deposits can be found on DICO’s website (www.dico.com).

DICO’s Differential Premium Determination System

Deposit insurance premium rates are calculated on a continuous scale from a minimum of $1.00 to $1.75 per $1,000 of insured deposits with a $3.00 rate for credit unions not meeting minimum capital and governance requirements.

The average premium rate improved to $1.04 in 2016 from $1.06 in 2015 as credit unions improved their corporate governance practices and strengthened capital positions. Fifty-nine credit unions holding a total of $22.5 billion in assets paid a deposit insurance premium rate of $1.00 per $1,000 of insured deposits. The highest rate paid was $1.60. Average deposit insurance premium rates have decreased by almost 10% from 2012.

Examinations and Monitoring

DICO assesses insurance risk through its examination and monthly monitoring and analysis programs. Credit unions’ adherence to DICO’s By-Law No. 5 - Standards of Sound Business and Financial Practices, which outlines DICO’s expectations for credit unions regarding corporate governance and risk management is measured through examinations. Examination frequency, which can range from 15 to 30 months, is determined by the risk and size of the institution. In 2016, 57 examinations were conducted.

Average Premium Rate2016 1.04

2015 1.06

2014 1.102013 1.122012 1.15

0.5%

0.7%

0.9%

1.1%

1.3%

1.5%

1.7%

0.05%

0.07%

0.09%

0.11%

0.13%

0.15%

0.17%

0.19%

0.21%

0.23%

2007 2010 2013 2016

Delinquencies (L) Loan Costs (R)

Loan Performance Measures

0 10 20 30 40 50

2012

2013

2014

2015

2016

$ BillionsInsured Deposits Uninsured Deposits


DICO collects and analyzes financial and non-financial data received from credit unions on a monthly basis to assist in assessing risk and compliance in the sector. The risk assessment process contemplates the quantitative and qualitative risks, as well as the quality of risk management at the credit union. This is then adjusted by capital and earnings results to determine the insurance risk rating of the institution. The rating may be adjusted at any stage of the monitoring process due to significant events, new findings, observations, changes in business activities and/or economic conditions.

In 2016, 90% of credit unions had an insurance risk rating of Moderate or better. Year over year results show insurance risk has deteriorated somewhat with 10% of sector assets rated as moderate-high or high (4% in 2015) due to the addition of two large credit unions that hold 4% of sector assets to the moderate-high and high risk tiers. DICO has been monitoring these credit unions closely and has determined these temporary situations will be rectified during 2017.

Higher risk credit unions are placed under an increased level of scrutiny through a Watchlist program where enhanced reporting is required from the credit unions that enables DICO to monitor the progress of issue resolution strategies. In addition, DICO performs in-depth analysis on an ongoing basis and regularly meets with credit unions to ensure any weaknesses noted are corrected in a timely manner.

Regulatory Activities

To protect consumers and enhance public confidence in the sector, DICO takes appropriate regulatory action in situations where a credit union is in non-compliance with the CUCPA and Regulations. Consistent with DICO's commitment to transparency, fairness and responsiveness, details of all orders and other regulatory activities are available on our website.

During 2016, DICO received a total of sixteen applications for approval, five relating to asset purchases and sales and eleven to acquire or establish subsidiaries. Thirteen applications were approved and three remained pending at the end of the year. In addition, there were three orders and one variation and exemption issued. No administrative monetary penalties were issued.

Additional information regarding DICO’s regulatory powers and activities, including criteria, guides and service standards, is available on our website at www.dico.com.

Summary of Regulatory ActivitiesCategory 2016 2015 2014 2013 2012Applications 16 9 6 11 6

Orders 3 0 0 0 0Variations & Exemptions 1 0 0 0 2

Administrative Penalties 0 0 0 0 0

Total 20 9 6 11 8

Sector Assets by Insurance Risk Category (000s)2016 2015 2014 2013 2012

Low 10,012 9,303 8,115 7,483 6,114Low-Moderate 6,646 18,060 7,141 6,630 7,467

Moderate 30,136 17,353 22,659 20,653 17,555Moderate-High 2,567 1,701 4,302 3,673 3,391

High 2,491 209 208 553 611


F INANCIAL PERFORMANCE ANALYSIS

This section provides management’s analysis of DICO’s financial performance for the fiscal year ended December 31, 2016. It should be read in conjunction with the 2016 audited financial statements and related notes.

Financial Highlights

• The DIRF increased by $20.5 million to $226.0 million (79 bps of total insured deposits). The favourable variance of $3.3 million when compared with budget was primarily attributable to there being no need for an increase in the loss provision versus the budgeted amount of $3 million.

• Premium income was $27.1 million, a slight increase of $0.5 million (1.9%) when compared to the previous year. The growth of insured deposits held at credit unions was offset by the decrease in the average premium rate charged to credit unions in 2016 due to improved risk assessments ($1.04 vs $1.06 in 2015).

• Investment and other income was $1.8 million, marginally higher than last year.

• No new loss provisions were required during 2016, rather a recovery of losses of $0.018 million for existing liquidations was realized.

• Total operating expenses, net of recoveries, were $8.5 million, $0.3 million (3.6%) less than budgeted due to prudent expense management.

Financial HighlightsActual Budget

For the period ended December 31 2016 2015 Change 2016 Change(C$ thousands unless indicated) $ $ $ % $ $ %

Deposit Insurance Reserve Fund (DIRF) 226,048 205,559 20,489 10.0 222,737 3,311 1.5

Estimated Sector Insured Deposits ($ billions) 28.6 26.4 2.2 8.3 27.7 0.9 3.2

DIRF as % of Sector Insured Deposits 0.79 0.78 - 0.01 0.80 - (0.01)

Premium Income 27,134 26,623 511 1.9 27,800 (666) (2.4)Other Income 1,807 1,708 99 5.8 1,164 643 55.2Operating Expenses 8,470 8,134 336 4.1 8,786 (316) (3.6)Net Provision (Recovery) for losses (18) (249) 231 92.8 3,000 (3,018) (100.6)Investments 229,390 204,357 25,033 12.2 217,108 12,282 5.7

Summary of Key Financial Performance


Deposit Insurance Reserve Fund (DIRF)

Pursuant to the CUCPA, DICO is required to maintain a DIRF that may be used to pay its operating and related insurance costs, including providing financial assistance to credit unions. To ensure the DIRF is sufficient to cover its insurance risks, DICO evaluates the adequacy of the fund and its liquidity requirements on a regular basis.

DICO uses several models to assess the appropriate size, range and growth of the fund based on historical experience and expense projections, including a model developed by a firm of actuaries. A number of principles, assumptions and other factors were identified and used throughout these models to determine loss incidence, severity and risk rating drifts to assist in the determination of growth projections for the fund. This data is updated regularly to account for changes in the economic conditions and interest rates, the risk profile and growth of the sector, and DICO’s premium revenues, loss experience, recoveries and expense projections.

As at December 31, 2016, the DIRF had reached $226.0 million, up $20.5 million or 10% from 2015 and represented 79 bps of the sector’s estimated insured deposits at current coverage levels. The increase is the aggregate result of premium income ($27.1 million) and investment and other income ($1.8 million), offset by operating expenses ($8.5 million). DICO’s strategy is to continue to build the DIRF to 100 basis points of total insured deposits.

Per

cent

age

$ M

illio

ns

1994 2000 2005 2010 2016

DIRF ($ Millions)

DIRF as a % of insured deposits

DIRF Projections ($ Millions)

DIRF Projections as % of insured deposits

Fund Deficit

-200

-150

-100

-50

0

50

100

150

200

250

300

350

400

450

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2022


R1 (high) 64%

R1 (mid) 9%AAA 21%

AA (low) 6%

Statement of Financial Position

Assets

DICO’s total assets grew by 8.9% to $238.1 million as at December 31, 2016. DICO’s total investment portfolio represents 96% of total assets. The remaining 4% is comprised of cash and cash equivalents, premiums receivable, prepaid expenses and other receivables, deposit insurance advances recoverable, and property plant and equipment.

Investments

DICO has an agreement with the Ontario Financing Authority (OFA) to manage its investment portfolio. This portfolio is the primary source of funds to meet potential deposit insurance claims from depositors of credit unions. The investment policy adopts a conservative investment strategy to ensure funds can be readily available to pay out insured depositors when warranted. It has been formulated based on three key objectives:

1. Preserving capital and limiting credit and market risk;

2. Providing necessary liquidity to pay claims and ongoing operating expenses; and

3. Striking a balance between obtaining a reasonable return within policy guidelines and risk tolerance.

All investments must be made in compliance with the requirements of the provisions of the Income Tax Act and Regulation 237/09 of the CUCPA. Investments may consist of Government-issued securities, bankers acceptances with a minimum rating of A or higher, and commercial paper and short-term debt that has a minimum rating of R1 (middle). These investments are considered to be of a superior credit quality with a high capacity for the payment of short-term financial obligations as they fall due and are unlikely to be significantly vulnerable to future events.

Current Investments

Eighty percent or $182.2 million of the investment portfolio was invested in current investment vehicles consisting of highly liquid and secure Canadian Federal and Provincial Government securities and bankers’ acceptances of Canadian chartered banks with credit ratings of AA (low) and R-1 (mid) or higher with a term of one year or less.

($ in thousands) 2016 2015 ChangeCurrent investments 182,168 162,413 19,755 12%

Non-current investments 47,222 41,944 5,278 13%Total 229,390 204,357 25,033 12%


Non-current Investments

Non-current investments consisted of Government bonds laddered from 6 months to a maximum of 3.25 years valued at $46.9 million and $0.3 million of asset-backed commercial paper acquired from liquidated member institutions to facilitate the final closing of operations. The laddered bonds portfolio are all Canadian Federal and Provincial Government bonds with credit ratings ranging from A (high) to AAA.

DICO’s exposure to market and credit risk is minimal due to this conservative position and relatively short duration. Interest rate risk exists due to the nature of the investment portfolio. The weighted average number of days to maturity increased to 194 days from 182 days in 2015.

Deposit Insurance Advances Recoverable

DICO is responsible under the CUCPA to pay deposit insurance claims from depositors up to statutory limits when a credit union is no longer able to meet its obligations to depositors. Circumstances may arise where a credit union does not have sufficient funds on hand to meet their current financial obligations or pay depositors. When this situation occurs, DICO puts the credit union into the Administration program and advances funds to cover the credit union’s shortfall and pay depositors. This makes DICO a creditor of the credit union and the advance is recorded as an asset on DICO’s books.

Over time, these advances are offset by:

• Loss provisions estimated based on the difference between what is realistically expected to be received from this process and what was advanced; and

• Recoveries resulting from the sale of assets and payments received from members of liquidated credit unions and settlements from legal actions.

No new credit unions were placed into Administration or Dissolution programs in 2016. Net deposit insurance recoveries during the year were $3.9 million. As at December 31, 2016, Deposit Insurance Advances Recoverable fell to $6.3 million as compared to $10.1 million in 2015. The number of credit unions in liquidation has fallen steadily over the years with four more wound up in 2016. At the end of December 2016, a total of six credit unions remained in the Dissolution program.

Liabilities

Total liabilities decreased by $0.8 million (6%) to $12.3 million as at December 31, 2016. The decrease in total liabilities was primarily due to lower deferred premium income in 2016. Deferred premium income is recognized for portions of premiums received in the year from the credit unions whose fiscal years straddle DICO’s fiscal year end, which is December 31. During 2016, several large credit unions changed their fiscal year ends to December 31st resulting in a reduction in deferred income. Liabilities consist mainly of accruals for deposit insurance claims (24%) and employee benefits (51%). The remaining liabilities (25%) represent payables and deferred premium income.

AAA 23% A (high) 23%

AA (high) 15%

AA (low) 35%

R-1 (mid) 2%

AA 2%


Accrual for Deposit Insurance Claims

The accrual for deposit insurance claims represents an estimate for losses recorded during the year and in previous years, which have not yet been advanced at the end of the year. It includes a provision for both specific and general insurance losses.

The specific provision for insurance losses is estimated and recorded in the period in which the loss conditions exist. As there were no new credit unions placed into liquidation in 2016 and no credit unions where significant losses were expected, no new specific accruals were required.

General provisions are estimated and recorded at the end of the year. The general accrual for losses reflects management’s best estimate of losses on insured deposits arising from the inherent risk in credit unions based on factors such as current market and economic conditions, the likelihood of losses and the application of historic loss experience. As of December 31, 2016, total accrual for losses amounted to $3 million, which completely comprised the general provision.

Employee Benefits

All eligible employees and retirees are provided with a defined contribution pension plan and future non-pension post-employment benefit plan. Supplemental pension benefits and retention plans exist for key management personnel. The accrued non-current employee benefits increased by $405 thousand during the year to $6.24 million as at December 31, 2016.

Statement of Operations

Premium Income

DICO’s operations are funded by deposit insurance premiums assessed and collected from credit unions annually. Each year, the adequacy of premium rates is reviewed and a recommendation made to the Minister for consideration. The Differential Premium Score Determination system (DPSD) calculates a credit union’s premium score which is then used to calculate an annual premium rate on a continuous scale based on a range between $1.00 to $3.00 per $1,000 of insured deposits. For further details of the premium rate determination, please refer to the document entitled “DICO Differential Premium Score Determination” as published in The Ontario Gazette, Date April 12, 2014, and Ontario Regulation 120/14 made on May 1, 2014, amending O.Reg 237/09.

Total 2016 premium income increased marginally by $0.5 million or 1.9% to $27.1 million. There was no change in the premium rates in the calculation of 2016 premiums. Insured deposits increased to $28.6 billion as at December 31, 2016, from $26.4 billion as at December 31, 2015, an increase of 8%. This was offset by the overall improvement in capital levels and corporate governance practices by credit unions. The average premium rate billed in the year was $1.04 per thousand of insured deposits compared to $1.06 in 2015. Premium income for the year was lower than the budgeted amount of $27.8 million by $0.7 million, because of the lower than anticipated insured deposit base and average premium rate.

($ in thousands) 2016 2015 Change 2016 Budget

Premium Income 27,134 26,623 511 1.9% 27,800Average premium rate (per $000 of insured deposits)

1.04 1.06 (0.02) (1.9%) 1.05


Other Income

Other income is composed mostly of investment income earned on DICO’s investment portfolio. Total investment yield exceeded budget by $0.6 million as a result of increased portfolio size. The low interest rate environment persisted in 2016. As at December 31, 2016, the weighted effective yield of the current investments was 0.67%, the same as in 2015, while the yield for the non-current investments was 1.13%, down from 1.20% in 2015. This resulted in the overall weighted average effective yield falling to 0.96% from 1.03% in 2015.

Operating Expenses

In 2016, total expenses (net of recoveries) were $8.5 million, $0.3 million (4.1%) more than last year and 3.6% less than the 2016 budget. Salaries and benefits were $114 thousand lower than in 2015 and $81 thousand lower than budget due to slightly lower than anticipated staffing levels in 2016. Major operating expenses in 2016 include depreciation (25%), occupancy (21%), professional services (11%), IT maintenance and support (9%), travel costs (8%), consulting (3%), legal (2%), on-site examinations by third parties (2%) and all other general administrative costs (19%).

Operating expenses before recoveries were $2.3 million, $0.3 million or 13.3% more than last year. The variance was largely the result of the accelerated amortization of an intangible asset, which represents a reporting system that was replaced with a software tool developed by internal resources. Operating expenses were $0.2 million or 7.6% lower than budget. This favourable variance was a result of prudent cost management, especially in areas of travel, legal and professional services. Cost savings were also realized in the area of third-party examinations through the utilization of DICO’s internal examination staff instead of outside accounting firms. In addition, DICO regularly reviews all contracted services and tailors these arrangements to ensure that value for money is obtained from all providers and service standards are met.

Recovery of operating expenses in 2016 consisted mainly of administrative costs of managing the estates of credit unions in liquidation. Total recoveries were $185 thousand lower than last year primarily due to the decrease in the number of credit unions in liquidation.

Net provision (recovery) for deposit insurance losses

Changes in the estimates for the accrual for specific and general provisions and recoveries are recorded during the year. Management provided a budget estimate for potential losses for specific credit unions of $3 million for 2016. This provision was not required as the credit unions in question have taken action to remain viable in the short term. The general accrual for insurance losses remained unchanged at the end of 2016 as the risk in the sector remained relatively stable.

The total net recovery of deposit insurance losses of $18 thousand was recorded in 2016 compared with the net recovery of $249 thousand in 2015. No new provisions for losses were warranted in 2016 and only six credit unions remained under the dissolutions program at the end of the year compared with ten credit unions last year.

($ in thousands) 2016 2015 Change 2016 Budget

Salaries and benefits 6,478 6,592 (114) (1.7%) 6,559Operating expenses 2,253 1,988 265 13.3% 2,424

Recovery of operating expenses (261) (446) 185 41.5% (197)

Net total expenses 8,470 8,134 336 4.1% 8,786


The Deposit Insurance Corporation of Ontario’s management is responsible for the integrity and fair presentation of the annual financial statements and all other information included in the annual report. The financial statements have been prepared in conformity with International Financial Reporting Standards.

The Corporation maintains systems of internal accounting controls of high quality consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is accurate and reliable and that the Corporation’s assets and liabilities are adequately accounted for and assets safeguarded.

The financial statements have been reviewed by the Corporation’s Audit and Finance Committee and have been approved by its Board of Directors. In addition, the financial statements have been audited by KPMG LLP, whose report follows.

Guy HubertPresident & CEO (Acting)

Richard DaleVice President, Corporate Affairs

Karen YuleVice President, Finance and Chief Financial Officer

Toronto, CanadaMarch 30, 2017

MANAGEMENT’S RESPONSIB IL ITY FOR F INANCIAL STATEMENTS


KPMG LLPChartered Professional Accountants, Licensed Public Accountants

March 30, 2017Toronto, Canada

To the Board of Directors of Deposit Insurance Corporation of Ontario

We have audited the accompanying financial statements of Deposit Insurance Corporation of Ontario, which comprise the statement of financial position as at December 31, 2016, the statements of operations and changes in the deposit insurance reserve fund, comprehensive income, accumulated other comprehensive income (loss), changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the 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 financial statements.

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

OpinionIn our opinion, the financial statements present fairly, in all material respects, the financial position of the Deposit Insurance Corporation of Ontario as at December 31, 2016, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

INDEPENDENT AUDITORS’ REPORT


Deposit Insurance Corporation of OntarioSTATEMENT OF FINANCIA L POSITION

(in thousands of dollars) Notes 2016 2015ASSETSCurrent assets Cash and cash equivalents $ 1,216 $ 1,970

Investments 5 182,168 162,413

Premiums receivable 637 1,081

Prepaid expenses and other receivables 399 391 Total current assets 184,420 165,855

Non-current assets Investments 5 47,222 41,944 Deposit insurance advances recoverable 6 6,255 10,145 Property, plant and equipment 7 252 403 Intangible assets 8 - 377 Total non-current assets 53,729 52,869

Total Assets $ 238,149 $ 218,724

LIABILITIESCurrent liabilities Payables and accruals $ 1,273 $ 1,279 Deferred premium income 4 781 2,053 Total current liabilities 2,054 3,332

Non-current liabilities Payables and accruals 979 954 Employee benefits 9 6,243 5,838 Accrual for deposit insurance claims 6 3,000 3,000 Total non-current liabilities 10,222 9,792

Total Liabilities $ 12,276 $ 13,124

EQUITYAccumulated other comprehensive income (loss) $ (175) $ 41 Deposit Insurance Reserve Fund 226,048 205,559

Total Equity $ 225,873 $ 205,600

Total Liabilities and Equity $ 238,149 $ 218,724

See accompanying notes to financial statements.

On behalf of the Board:

As at December 31,

Director Director


Deposit Insurance Corporation of OntarioSTATEMENT OF OPER ATIONS AND CHANGES IN THE DEPOSIT INSUR ANCE RESERVE FUND

(in thousands of dollars) Year ended December 31, Notes 2016 2015

INCOME Premium income 4 $ 27,134 $ 26,623 Other income 1,807 1,708

28,941 28,331

EXPENSES Salaries and benefits 6,478 6,592 Operating expenses 2,253 1,988 Recovery of operating expenses (261) (446)

8,470 8,134

Excess of income over operating expenses 20,471 20,197

Net (recovery) for insurance losses 6 (18) (249)

Excess of income over total expenses 20,489 20,446

Deposit Insurance Reserve Fund, beginning of year 205,559 185,113

Deposit Insurance Reserve Fund, end of year $ 226,048 $ 205,559



Deposit Insurance Corporation of OntarioSTATEMENT OF COMPREHENSIVE INCOME(in thousands of dollars) Year ended December 31,

2016 2015Excess of income over total expenses $ 20,489 $ 20,446

Other comprehensive income: Unrealized gains (losses) on available-for-sale investments arising during the year (127) 195 Unrealized gains (losses) on available-for-sale investments acquired from liquidated credit unions arising during the year

(41)

21

Actuarial gains (losses) on post-employment, non-pension benefits arising during the year (48) 54

Total other comprehensive income (loss) (216) 270

Comprehensive income $ 20,273 $ 20,716

STATEMENT OF ACCUMUL ATED OTHER COMPREHENSIVE INCOME (LOSS) (in thousands of dollars) Year ended December 31,

2016 2015Accumulated other comprehensive income (loss), beginning of year

$ 41

$ (229)

Sale of available-for-sale investments from opening balance of accumulated other comprehensive income (146) (125)

Unrealized gains on available-for-sale investments arising during the year

19

320

Unrealized gains (losses) on available-for-sale investments acquired from liquidated credit unions arising during the year

(41)

21

Actuarial gains (losses) on post-employment, non-pension benefits arising during the year

(48)

54

Net change during the year (216) 270

Accumulated other comprehensive income (loss), end of year

$ (175)

$ 41



Deposit Insurance Corporation of OntarioSTATEMENT OF CHANGES IN EQUIT Y(in thousands of dollars) Year ended December 31,

2016 2015

Deposit Insurance Reserve Fund Balance at beginning of year $ 205,559 $ 185,113 Excess of income over total expenses during the year 20,489 20,446 Balance at end of year 226,048 205,559

Accumulated other comprehensive income on available-for-sale investments Balance at beginning of year 431 215 Unrealized gains (losses) on available-for-sale investments . arising during the year (168) 216 Balance at end of year 263 431

Accumulated other comprehensive income on post-employment, non-pension benefits Balance at beginning of year (390) (444)

Actuarial gains (losses) on remeasurement of post-employment, . . non-pension benefits arising during the year (48) 54

Balance at end of year (438) (390)Total accumulated other comprehensive income, end of year (175) 41

Total Equity $ 225,873 $ 205,600


Deposit Insurance Corporation of OntarioSTATEMENT OF CASH FLOWS(in thousands of dollars) Year ended December 31,

Notes 2016 2015Cash flows from / (used in) operating activities:Excess of income over total expenses $ 20,489 $ 20,446

Adjustments for: Recovery of losses (18) (249) Loss on disposal of property, plant and equipment 2 - Unrealized gains (losses) on available-for-sale investments arising during the year (168)

216

Actuarial gains (losses) on post-employment, non-pension benefits arising during the year (48) 54 Depreciation of property, plant and equipment 7 199 169 Amortization of intangible assets 8 377 150

20,833 20,786Changes in: Premiums receivable 444 146 Prepaid expenses and other receivables (8) 320 Payables and accruals 19 320 Deferred premium income (1,272) (235) Employee benefits 405 (152)

(412) 399

Net deposit insurance recoveries 6 3,908 6,552

24,329 27,737Cash flows from / (used in) investing activities: Interest received 1,637 1,851 Purchase of investments held at year end (229,390) (204,357) Proceeds on sale of investments 202,720 174,683 Purchase of property, plant and equipment 7 (50) (168)

(25,083) (27,991)

Net decrease in cash and cash equivalents (754) (254)

Cash and cash equivalents, beginning of year 1,970 2,224

Cash and cash equivalents, end of year $ 1,216 $ 1,970

Cash and cash equivalents comprise cash and short-term investments.



Deposit Insurance Corporation of Ontario

NOTES TO FINANCIA L STATEMENTS Y E A R EN D ED D EC EM B ER 31, 2 016

1. REPORTING ENTITYThe Deposit Insurance Corporation of Ontario (DICO or the Corporation) is a “Board-Governed” Agency of the Province of Ontario established without share capital under the provisions of the Credit Unions and Caisses Populaires Act, 1994 (CUCPA).

The statutory objects of the Corporation under the CUCPA are to:

• Provide insurance against the loss of part or all of deposits with credit unions;

• Promote and otherwise contribute to the stability of the credit union sector in Ontario with due regard to the need to allow credit unions to compete effectively while taking reasonable risks;

• Pursue the objects set out in the above clauses for the benefit of persons having deposits with credit unions and in such manner as will minimize the exposure of the Corporation to loss;

• Collect, accumulate and publish such statistics and other information related to credit unions as may be appropriate;

• Perform duties provided under the CUCPA or the regulations or do anything the Corporation is required or authorized to do under the CUCPA or the regulations; and

• Carry out such other objects as the Minister may specify in writing or as may be prescribed.

The CUCPA empowers the Corporation to assess its credit unions deposit insurance premiums to meet the Corporation’s requirements for insurance funding and administrative costs. The premium rates are set out in the regulation to the CUCPA. The Corporation reviews the adequacy of the premium rate annually and advises the Government accordingly.

The Minister of Finance approved a $400 million revolving credit facility agreement with the Ontario Financing Authority (OFA) for the purpose of ensuring the Corporation’s capacity to address systemic difficulties in the credit union system that may require resources above those in the Deposit Insurance Reserve Fund (DIRF). The agreement is effective January 1, 2014 and expires on December 31, 2018. Under the revolving credit facility arrangement, interest cost on any outstanding debt obligation is charged at an annual rate equal to the province’s cost of funds for borrowings with a three month term, determined by the OFA at the time of the borrowing, plus an additional 0.575 percent per annum.

DICO Mandate Review

In November 2016, the Government announced it will be moving forward with the creation of the Financial Services Regulatory Authority of Ontario (FSRA) resulting from the review of a three-member Expert Advisory Panel of the mandates of DICO, Financial Services Commission of Ontario and the Financial Services Tribunal. Subsequent to the announcement, the Government introduced and passed legislation establishing the initial parameters for FSRA, demonstrating its commitment to modernizing and strengthening the regulation of financial services and pensions, and to improving consumer, investor and pension plan beneficiary protection. In December 2016 the Ministry of Finance established the Financial Services Regulation Modernization Secretariat (Secretariat). The head of the Secretariat, who was appointed in January 2017, and her team is tasked with managing/supporting the multi-phased transition to FSRA, including any possible changes to DICO’s mandate which may have significant impact on DICO’s regulatory prudential solvency responsibilities and activities. The timing and nature of the implementation is currently unknown.


2. BASIS OF PREPARATION(a) Statement of complianceThe financial statements have been prepared in accordance with International Financial Reporting Standards(IFRS), and were approved by the Board of Directors on March 30, 2017.

(b) Basis of measurementThe Corporation’s financial statements have been prepared on the historical cost basis, except for the financial instruments classified as available-for-sale, which are measured at fair value.

(c) Functional and presentation currencyThese financial statements are presented in the Corporation’s functional currency which is the Canadian dollar. All financial information presented in Canadian dollars has been rounded to the nearest thousand.

(d) Use of estimates and judgmentsThe preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

The most significant areas of assumptions and judgments are disclosed in provisions for losses (note 6) and measurements of accrued benefit obligations in relation to future non-pension post-employment benefits (note 9).

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESTo facilitate a better understanding of our financial statements, the Corporation has disclosed its significant accounting policies as summarized below. These policies have been applied consistently to all periods presented in the financial statements unless otherwise indicated.

(a) Premium income: Premiums are based on the Differential Premium Score Determination System, as defined by regulation, and applied to insured deposits held by credit unions. Premium income is calculated based on the Annual Information Return submitted by each credit union which is due 75 days after its fiscal year end. Premium income is recognized when earned.

(b) Provision for losses:The provision for losses includes specific allowances against deposit insurance advances to credit unions in liquidation, which have been offset against the advances recoverable, and an accrual for losses for which advances have not been made at the date of the Statement of Financial Position, which is shown as a liability.

Funds advanced in respect of deposit insurance and loans to credit unions are initially recorded at cost. Deposit insurance advances recoverable are presented on the Statement of Financial Position, net of specific allowances thereon.

The accrual for deposit insurance claims includes both provisions for specific losses and a general accrual for losses. Specific provisions for losses in respect of insured deposits are estimated by management and recorded when conditions exist, in management’s opinion, that will likely result in losses to the Corporation.

The general accrual for loss reflects management’s best estimate of losses on insured deposits arising from the inherent risk in credit unions. The provision is established by assessing the aggregate risk in credit unions based on current market and economic conditions, the likelihood of losses and the application of historic loss experience. Future economic conditions are not predictable with certainty and actual losses may vary, perhaps substantially, from management’s estimates. Management applied the methodology which evaluates all credit unions with the highest risk score under our current prospective risk rating system.


The methodology incorporates various iterations and key assumptions, such as historical probabilities of failures (from the Deposit Insurance Reserve Fund model) and actual probabilities of failure when possible. The model also categorizes the credit unions based on asset size and discounts the estimated loss to the next 12 month period. Model results are then considered along with the level of the existing allowance, as well as management’s judgment regarding economic and market conditions to come to a final determination of what the general accrual for loss should be.

Changes in the provision for insurance losses that result from quarterly reviews are recognized as an adjustment to the provision for insurance losses in the period in which the estimated changes occur.

(c) Employee benefits:

(i) Defined contribution pension plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into an independent entity and will have no legal or constructive obligation to pay further amounts. DICO’s defined contribution pension plan covers all of DICO’s regular, non-contractual employees. As well, there are supplemental arrangements which provide pension benefits for income in excess of registered pension plan limits. Earnings are charged with the cost of pension benefits earned by employees as service is rendered. Pension expense is determined by a fixed percentage of the employees’ income plus the matching of the employees’ contribution to a maximum of 4%. The Corporation assumes no actuarial or investment risk.

(ii) Defined non-pension post-employment benefits

The Corporation provides future non-pension post-employment benefits which are related to DICO’s extended health, dental and life benefits for both active employees for whom a full eligibility date was determined and existing qualified retirees. The Corporation accrues obligations under these plans as the employees render the service necessary to earn the future benefits and the benefit is discounted to determine its present value. There are no assets set aside to fund the benefits. The accrued benefits obligation is calculated annually by a qualified actuary using the Projected Unit Credit method. All actuarial gains and losses that arise in calculating the present value of the defined benefit obligation are recognized in full in the Statement of Other Comprehensive Income (OCI), and all projected defined benefit costs are expensed in the Statement of Operations. Additional disclosures are provided in Note 9(ii).

(iii) Other long-term employee benefits

The Corporation’s other obligation in respect of long-term employee benefits is the amount of retention benefits accrued for some key employees. The plans are designed to ensure the retention of key personnel to provide sufficient time for effective succession planning. Acceptance of the benefits is voluntary and the probabilities of acceptance are estimated at the end of the reporting period. The benefits are discounted to their present value if they are payable more than 12 months after the reporting period. All existing plans have been accepted and recorded.

(iv) Short-term employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. The Corporation recognizes the unused entitlement of compensated vacations that has accumulated at the end of the reporting period as accrued short-term benefits.

(d) Financial instruments:DICO’s investments are non-derivative financial assets and are classified, based on management’s intentions, as available-for-sale. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, are recognized in OCI and presented within equity. When an investment is derecognized/sold, the cumulative gain or loss in OCI is transferred to the Statement of Operations.


(e) Property, plant and equipment:

(i) Recognition and measurement

Items of property, plant and equipment are measured at cost less accumulated amortization and impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the assets and any other costs directly attributable to bringing the assets to a working condition for their intended use, including the borrowing costs on qualifying assets for which the commencement date for capitalization is on or after January 1, 2010. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized on a net basis within the other income category. Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.

(ii) Depreciation

Depreciation is calculated on the depreciable amount, which is the cost of an asset less its residual value, if any. Depreciation of furniture and equipment is calculated using the diminishing-balance method at the rate of 20% per annum. Computer and related equipment and software are amortized over three years on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the term of the lease.

(f) Intangible assets:Definite-life intangible assets are amortized to income on either a straight-line or an accelerated basis over a period not exceeding 7 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.

(g) Lease payments:Payments made under operating leases are recognized in the Statement of Operations on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.

(h) Income taxes:Income tax expense is comprised of current and deferred tax. Current tax and deferred tax are recognized in the Statement of Operations and Changes in the Deposit Insurance Reserve Fund except for items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but the intent to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.


A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

The Corporation’s main source of income is premiums received from credit unions which are not taxable pursuant to subsection 137.1(2) of the Income Tax Act. As a result the Corporation has been generating non-capital losses for tax purposes since its inception.

(i) Standards issued but not yet mandatorily effective:

The Corporation is assessing the potential impact of the following new and revised IFRS amendments on its financial statements. The impact is not determined at this time.

IFRS 9 Financial Instruments

In July 2014 the IASB issued the complete IFRS 9 Financial Instruments (IFRS 9). The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. IFRS 9 introduces new requirements for the classification and measurement of financial assets.

Under IFRS 9, financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management.

This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. The Corporation intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2018.

IFRS 15 Revenue from Contracts with Customers

In May 2014 the IASB issued IFRS 15 Revenue from Contracts with Customers (IFRS 15). The new standard is effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted. IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue – Barter Transactions Involving Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs.

IFRS 16 Leases

In January 2016, the IASB issued IFRS 16 Leases (IFRS 16), which replaces IAS 17 – Leases (IAS 17) and related interpretations. IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, unless the lease term is 12-months or less or the underlying asset has a low value. IFRS 16 substantially carries forward the lessor accounting in IAS 17 with the distinction between operating leases and finance leases being retained. IFRS 16 will be applied retrospectively for annual periods beginning on or after January 1, 2019. Early adoption is permitted if IFRS 15 has also been applied.


4. PREMIUM INCOME

Differential premiums are calculated based on the amount of each credit union’s insured deposits at the end of its fiscal year and on various risk criteria which generate a risk rating based on a points system. Effective January 1 2015, the Corporation implemented a new differential premium score determination system (DPSD). The system determines a DPSD score based on a credit union’s reported regulatory capital level (64% weighting) and its corporate governance score as determined by the results of its most recent on-site examination (36% weighting). The score is measured on a continuous scale based on the existing premium rate range ($1.00 to $3.00 per $1,000 of insured deposits). The effective rates (per $1,000 of insured deposits) are determined as follows:

At December 31, 2016 DICO has deferred premium income of $781,000 (2015 - $2,053,000), which represents the balance of pro-rated premiums for the credit unions whose fiscal year straddles DICO’s fiscal year end.

DPSD Score Premium Calculation

Greater than or equal to 90 points $1.00Greater than 0 points and less than 90 points $1.75 -(DPS Score/90 x $0.75)0 points $3.00

($000) 2016 2015

27,134 26,623


5. INVESTMENTS

The Corporation’s current and non-current investments are classified as available-for-sale and are measured at fair value with unrealized gains and losses recorded in the Statement of Accumulated Other Comprehensive Income until the investment is sold. As of December 31, 2016, the current, highly liquid investments have a weighted-average yield of 0.67% (2015: 0.67%). The non-current investments are primarily laddered Government bonds with a remaining weighted average term to maturity of greater than one year. The weighted average yield of these investments was 1.13% (2015: 1.20%). The Corporation has contracted with the OFA to manage its investment portfolio. The composition of DICO’s investments reflects the nature of the Corporation’s potential insurance obligations and is structured to comply with the requirements under both the Income Tax Act, the CUCPA and Regulation 237/09.

Included in the total non-current investments are the CUCO Co-op Class B shares purchased from 19 credit unions in liquidation, mainly for the purpose of winding down their business. As of December 31, 2016, these investments were valued at $314,000 (2015: $355,000). During the year, a total of $48,000 (2015: $0) of return of capital distributions were received from the CUCO Cooperative Association.

December 31, 2016 December 31, 2015

Amount ($ thousands)

Weighted Average Effective

Yield

Weighted Average Days to Maturity

Amount ($ thousands)

Weighted Average Effective

Yield

Weighted Average Days to Maturity

Bankers’ acceptances / Bank deposit notes 73,847 0.81% 59 64,553 0.81% 40

Treasury bills - Canada and Provincial 59,993 0.50% 87 55,600 0.53% 96

Canada Housing Trust floating rate bond 38,288 0.70% 103 32,212 0.79% 75

Province of Ontario floating rate bond 10,040 0.72% 265 10,047 0.73% 148

Total current investments 182,168 0.67% 89 162,413 0.67% 73

Laddered Government bonds 46,908 1.13% 604 41,589 1.20% 607

CUCO Co-op Class B investment shares (acquired from liquidated credit unions) 314

355

Total non-current investments 47,222 41,944

Total Investments 229,390 204,357


Available-for-sale financial assets

($ thousands) 2016 2015

Level 1 229,076 204,002Level 2 314 355Level 3 - -Total 229,390 204,357

Fair value hierarchy:

The Corporation uses a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. As of December 31, 2016 and 2015, the Corporation’s financial instruments were valued as follows:

The different levels have been defined as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

No investments have moved between hierarchy levels during the year.


6. DEPOSIT INSURANCE ADVANCES RECOVERABLE AND ACCRUAL FOR DEPOSIT INSURANCE CLAIMS

The provision for losses includes specific provisions for known or likely losses resulting from specific credit union failures and a general accrual for losses not identified with specific credit unions. That portion of the provision for losses recorded in the year and in previous years which has not yet required payment by the Corporation is shown in liabilities on the Statement of Financial Position as “Accrual for deposit insurance claims”. When funds advanced in respect of deposit insurance claims are in excess of the estimated loss provision at the end of the reporting period, the balance is reported as “Deposit insurance advances recoverable” on the Statement of Financial Position. Specific provisions for losses in respect of insured deposits are estimated by management and recorded when conditions exist, in management’s opinion, that will likely result in losses to the Corporation.

The general accrual for losses included in “Accrual for deposit insurance claims” remains at $3,000,000 at December 31, 2016 (2015 - $3,000,000) and is calculated in accordance with the methodology as described in note 3(b).

2016 2015

($ thousands)

Deposit Insurance Advances

Recoverable

Accrual for deposit insurance

claims

Net

Deposit Insurance Advances

Recoverable

Accrual for deposit insurance

claims

Net

Balance at beginning of year 10,145 (3,000) 7,145 16,688 (3,240) 13,448Reduction in general accrual for the year - - - - - -Net change in specific recoveries for prior years’ losses booked and advanced 18 - 18 9 240 249Total net recovery for insurance 18 - 18 9 240 249Total cash paid in connection with loans purchased from liquidated credit unions 337 - 337 321 - 321Total cash recoveries for prior years’ losses (4,245) - (4,245) (6,873) - (6,873)Net deposit insurance (recoveries) (3,908) - (3,908) (6,552) - (6,552)Total net change (3,890) - (3,890) (6,543) 240 (6,303)Balance at end of year 6,255 (3,000) 3,255 10,145 (3,000) 7,145


($ thousands) Furniture and Fixture

Office Equipment

Computer and Related Equipment Software Leasehold

Improvement Total

Cost or deemed cost

Balance at January 1, 2015 538 69 1,918 826 528 3,879

Additions 4 - 147 17 - 168

Disposals (2) - (14) - - (16)

Balance at December 31, 2015 540 69 2,051 843 528 4,031


Additions - - 37 14 - 51

Disposals (11) - (15) - - (26)


Depreciation


Depreciation for the year 14 2 59 36

57 169

Disposals (2) - (13) - - (15)



Depreciation for the year 12 2 93 35

57 199

Disposals (9) - (14) - - (23)


Carrying amount

At January 1, 2015 74 11 98 74 147 404

At December 31, 2015 63 9 185 56 90 403

At December 31, 2016 49 7 129 34 33 252

7. PROPERTY, PLANT AND EQUIPMENT


8. INTANGIBLE ASSETS

($ thousands) Development Costs

CostBalance at January 1, 2015 1,050

Additions -Disposals -Balance at December 31, 2015 1,050Balance at January 1, 2016 1,050Additions -Disposals -Balance at December 31, 2016 1,050

AmortizationBalance at January 1, 2015 524Amortization for the year 150Balance at December 31, 2015 674Balance at January 1, 2016 674Amortization for the year 376Balance at December 31, 2016 1,050

Carrying amountsAt January 1, 2015 527At December 31, 2015 377At December 31, 2016 -

Prior to 2016 the internally developed web-based software tool for electronic filing of financial data by the credit unions was recorded as an intangible asset. The capitalized development expenditure was measured at cost less accumulated amortization and any accumulated impairment losses. Amortization was recognized in the Statement of Operations on a straight-line basis over the estimated useful life of the asset.

The amortization of the software was accelerated during the year to reduce the net book value to zero as at December 31, 2016 as the software tool was replaced by another web-based reporting system designed to improve the robustness and flexibility of the Corporation’s on-line reporting solution. The new reporting tool was developed by internal staff and the cost was fully recognized in the Statement of Operations in the year.


9. EMPLOYEE BENEFITS

(i) Pension planThe Corporation operates a defined contribution pension plan for all eligible employees. In addition, DICO accrues benefits to a Supplemental Pension Plan and an Auxiliary Pension Plan (both non-registered). The Supplemental Pension Plan provides the same benefit as the registered plan on that portion of an employee’s income in excess of the registered plan limits. The Auxiliary Pension Plan provides an additional defined contribution amount for the former CEO on his base salary. The total pension expense for the Corporation charged to the Statement of Operations and Changes in the DIRF in 2016 was $501,000 (2015 - $519,000). Total accrued pension plan benefits as at December 31, 2016 amounted to $1,790,000 (2015 - $1,683,000).

(ii) Future non-pension post-employment benefits The Corporation accounts for the current value of future non-pension post-employment benefits which relate to DICO’s extended health, dental and life benefits plan. The most recent full actuarial valuation of the defined benefit plan was completed as of December 31, 2014, by an independent actuary. A full triennial valuation will be undertaken later in 2017 for fiscal 2017 year-end reporting. The valuation of the benefit obligations are estimated using the Projected Unit Credit method. The accrued benefit liability as at December 31, 2016, as actuarially determined, is $3,409,000 (2015 - $3,184,000). The annual benefit cost, including current service cost and interest cost amounted to $252,000 (2015 - $242,000).

The assumptions used in the actuarial valuation of the future benefits obligations consisted of: discount rate of 4.00% ( 2015 - 4.10%), rate of compensation increase of 3.0% (2015 - 3.0%) and immediate trend rate in health care costs of 4.97% (2015 - 5.00%), grading down to 4.5 % per annum by 2032. The Corporation measures its accrued benefit obligations as at December 31st.


Change in non-pension post-employment benefit obligation ($ thousands) December 31, 2016 December 31, 2015

Benefit obligation at beginning of year 3,184 3,056Current service cost 124 120

Interest cost 129 122Benefit payments (76) (60)Re-measurements of effect of changes in assumptions included in OCI 48 (54)

Benefit obligation at end of year 3,409 3,184

Sensitivity analysis: ($ thousands) December 31, 2016 December 31, 2015

1. Present value of defined benefit obligation

Discount rate - 25 basis points 3,567 3,331

Discount rate + 25 basis points 3,261 3,047

Health care cost trend rates - 100 basis points 2,843 2,684

Health care cost trend rates + 100 basis points 4,140 3,827

Mortality assumption - 1 year life expectancy 3,241 3,033

Mortality assumption + 1 year life expectancy 3,582 3,341

2. % impact on the defined benefit obligation

Discount rate - 25 basis points 4.64% 4.61%

Discount rate + 25 basis points -4.34% -4.31%

Health care cost trend rates - 100 basis points -16.61% -15.71%

Health care cost trend rates +100 basis points 21.46% 20.17%

Mortality assumption - 1 year life expectancy -4.93% -4.76%

Mortality assumption + 1 year life expectancy 5.1% 4.92%

3. Change in the defined benefit obligation

Discount rate - 25 basis points 158 147

Discount rate + 25 basis points (148) (137)Health care cost trend rates - 100 basis points (566) (500)

Health care cost trend rates + 100 basis points 732 642

Mortality assumption - 1 year life expectancy (168) (152)

Mortality assumption + 1 year life expectancy 174 157

4. Weighted average duration of defined benefit obligation (in years)

Discount rate - 25 basis points 18.16 18.03

Discount rate + 25 basis points 17.77 17.65


The Corporation has also implemented a human resources retention plan for key management personnel for the purpose of ensuring effective transition and succession planning. Total accrued retention benefits were $1,044,000 at December 31, 2016 (2015 - $971,000).

Summary of employees accrued benefit liabilities (non-current):

($ thousands) December 31, 2016 December 31, 2015Employee pension benefits 1,790 1,683Employee future non-pension post-employment benefits 3,409 3,184

Retention benefits for key management personnel 1,044 971

Total 6,243 5,838

10. OPERATING LEASESThe non-cancellable annual operating lease payments for the Corporation are summarized as follows:

Under the operating lease for its premises the Corporation is required to pay property taxes and common area maintenance costs which are currently approximately $340,000 per annum.

The current occupancy lease of the main office is due to expire on August 5, 2018 with an option to renew for 1 year with the same terms and conditions.

($ thousands) 2016 2015Less than 1 year 71 -Between 1 and 5 years 223 306More than 5 years - -


11. INCOME TAXESIncome tax expense reported in the Statement of Operations and Changes in the Deposit Insurance Reserve Fund is as follows:

Recognition of effective tax rate

($ thousands) 2016 2015Profit before income tax 20,489 20,446Income tax using the combined statutory rate 26.5% 5,430 5,418

Income not included for tax purposes (7,260) (7,157)Current year losses for which no deferred tax asset was recognized 1,636 1,741

Other, net 194 (2)Provision (recovery) - -

Deferred tax assets and liabilitiesUnrecognized deferred tax assets

Deferred tax assets have not been recognized in respect of the following items:

($ thousands) 2016 2015Deductible temporary differences 4,180 3,979Tax benefit of loss carry-forwards 14,130 12,473

18,310 16,452

Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Corporation can utilize the benefits.

At December 31, 2016, $53,321 of income tax losses included with the above unrecognized deferred tax assets will expire between 2027 and 2036 (2015 - $47,066 between 2026 and 2035).

12. RELATED PARTIESTransactions with key management personnel

Directors and key management personnel compensation

During the year the Directors received an aggregate remuneration of $157,000 (2015 - $120,000). Total Directors' expense claims were approximately $30,000 (2015 - $41,000).

Under the public Sector Salary Disclosure Act 1996, DICO publishes the name, title, salary and taxable benefits for all employees who earned $100,000 or more during 2016. The information is available on the Ministry of Finance website at www.fin.gov.on.ca/en/publications/salarydisclosure.

In addition to their salaries, the Corporation provides human resources retention plans for key management personnel for the purpose of ensuring effective transition and succession planning. The terms of the plans vary with individuals and the acceptance is voluntary. Other benefits include DICO’s contributions to the pension plan and future non-pension post-employment benefits in which all employees of DICO are entitled to participate when they meet the qualification criteria.


Key management personnel compensation included:

($ thousands) 2016 2015Short-term benefits 32 43Post-employment benefits 161 178Other long-term and termination benefits 55 265Total 248 486

13. CONTINGENCYWhen acting in the capacity of administrator or liquidator of a credit union, the Corporation may be exposed to various legal actions in the normal course of business. As of December 31, 2016, there were no legal claims pending against the Corporation.

14. RISKS ARISING FROM FINANCIAL INSTRUMENTS

(a) Credit risk Credit risk is the risk of financial loss to the Corporation if a customer or counter party to a financial instrument fails to meet its contractual obligations, and arises principally from the Corporation’s investment securities. The Corporation minimizes its credit risk by investing in high quality financial instruments and by limiting the amount invested in any one counter party. All investments in the DIRF are limited to those permitted by legislation, by the terms of the line of credit agreement with the OFA and to any limits made by the Corporation’s investment policy. For details of the composition and credit risks of investments, please refer to note 5 Investments. As a deposit insurer under the CUCPA, the Corporation may at times obligated to make payments to insured depositors in the event of a credit union failure which results in deposit insurance advances recoverable by the Corporation. Realization on its claims is largely dependent on the credit quality or value of assets held within the estates of failed credit unions. DICO is directly involved in the asset realization process of these credit unions in liquidation in order to mitigate credit risk and minimize any potential loss to the Corporation.

(b) Liquidity risk Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations to depositors as they fall due. The Corporation’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Corporation’s reputation.

Typically the Corporation ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 90 days, including the servicing of financial obligations, if any; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In addition, 80 percent of the Corporation’s investments are held in highly liquid short-term instruments. Further, the Corporation maintains a line of credit approved by the Minister of Finance of $400 million that can be drawn down to provide liquidity to DICO as deposit insurer of credit unions in the Province of Ontario. The terms of the line of credit require DICO to liquidate its DIRF investments before it can borrow above $20 million. The revolving credit facility has a 5-year term effective from January 1, 2014 to December 31, 2018. Interest would be payable at an annual rate equal to the province’s cost of funds for borrowings for a three month term, plus an additional 0.575 percent, as determined by the OFA at the commencement of each three month period.

(c) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect income or the value of the holdings of financial instruments. The Corporation does not have any dealings with foreign currency. Investments in equity are limited to $314,000 in CUCO Co-op Class B shares. DICO’s primary investment objective is to preserve capital and provide necessary liquidity to pay claims and ongoing operating expenses.


(d) Fair value sensitivity analysis for fixed rate instruments The Corporation accounts for its fixed rate financial assets as available-for-sale. Therefore, a change in interest rates at the reporting date would not affect net income with respect to these fixed rate instruments. A change of 1 percent in interest rates for the investments at December 31 would have increased or decreased equity by $2,107,000 (2015 - $1,974,000).

(e) Capital management

One of the Corporation’s mandates is to enhance the financial soundness of the credit union sector. As of December 31, 2016, the Corporation has a DIRF of $226.0 million, which represents 79 basis points of the sector’s estimated insured deposits. The Corporation will continue to build the DIRF to its target of 100 basis points in 2022 in order to ensure that it continues to be adequate to enable the Corporation to protect depositors.

15. FAIR VALUE DISCLOSUREThe fair value of financial assets and liabilities which include cash and cash equivalents, premiums receivable, payables and accruals, employee benefits and accrual for deposit insurance claims, approximate their carrying amounts.


FULFILLING AGENCY MANDATE E XPECTATIONS

In 2016, the Minister of Finance did not issue an agency mandate letter to DICO due to its ongoing mandate review. In the interim, DICO continues to fulfill its original mandate of administering and ensuring compliance with the rules set out by the Ontario Government related to the solvency of credit unions, promoting standards of sound business and financial practices, providing insurance against the loss of deposits, and promoting and contributing to the stability of the Ontario credit union sector with due regard to its need to compete.


CREDIT UNIONS Adjala Credit Union LimitedAirline Financial Credit Union LimitedAlterna Savings and Credit Union LimitedAuto Workers Community Credit Union LimitedBay Credit Union LimitedBayshore Credit Union Ltd.Buduchnist Credit Union LimitedCCB Employees’ Credit Union LimitedCity Savings & Credit Union LimitedCommunication Technologies Credit Union LimitedCopperfin Credit Union LimitedCreative Arts Savings & Credit Union LimitedDUCA Financial Services Credit Union Ltd.Dundalk District Credit Union LimitedDurham Educational Employees’ Credit Union LimitedEducation Credit Union LimitedEnergy Credit Union Limited (The)Equity Credit Union Inc.Estonian (Toronto) Credit Union LimitedFinnish Credit Union LimitedFirstOntario Credit Union LimitedFort York Community Credit Union LimitedFrontline Financial Credit Union LimitedGanaraska Credit Union Ltd.Golden Horseshoe Credit Union LimitedHamilton Municipal Employees’ Credit Union LimitedHealth Care Credit Union LimitedHeritage Savings & Credit Union Inc.Italian Canadian Savings & Credit Union LimitedKawartha Credit Union LimitedKindred Credit Union LimitedKingston Community Credit Union LimitedKorean (Toronto) Credit Union LimitedKorean Catholic Church Credit Union LimitedL.I.U.N.A. Local 183 Credit Union LimitedLatvian Credit Union LimitedLibro Credit Union LimitedLondon Fire Fighters’ Credit Union LimitedLuminus Financial Services & Credit Union LimitedMainstreet Credit Union LimitedMember Savings Credit Union LimitedMemberOne Credit Union LimitedMeridian Credit Union LimitedMomentum Credit Union LimitedMotor City Community Credit Union LimitedMoya Financial Credit Union LimitedNorthern Credit Union LimitedOntario Educational Credit Union LimitedOntario Provincial Police Association Credit Union Ltd.Oshawa Community Credit Union LimitedOttawa Police Credit Union LimitedPace Savings & Credit Union LimitedParama Lithuanian Credit Union LimitedPenFinancial Credit Union LimitedPolice Credit Union Limited (The)QuintEssential Credit Union LimitedRapport Credit Union LimitedResurrection Credit Union LimitedSmiths Falls Community Credit Union LimitedSouthwest Regional Credit Union Ltd.

St. Stanislaus-St. Casimir’s Polish Parishes Credit Union Ltd.Sudbury Credit Union LimitedTaiwanese - Canadian Toronto Credit Union LimitedTalka Credit Union LimitedTandia Financial Credit Union LimitedThorold Community Credit Union LimitedToronto Municipal Employees’ Credit Union LimitedUkrainian Credit Union LimitedUnited Employees’ Credit Union LimitedUtilities Employees’ (Windsor) Credit Union LimitedVictory Community Credit Union LimitedWindsor Family Credit Union LimitedYour Credit Union LimitedYour Neighbourhood Credit Union Limited

CAISSES POPULAIRES Caisse populaire Cochrane - Témiskaming LimitéeCaisse populaire d’Alban LimitéeCaisse populaire d’Alfred LimitéeCaisse populaire de Bonfield LimitéeCaisse populaire de Cornwall Inc.Caisse populaire de Hawkesbury LimitéeCaisse populaire de Hearst LimitéeCaisse populaire de Kapuskasing LimitéeCaisse populaire de la ValléeCaisse populaire de Mattawa LimitéeCaisse populaire de Mattice LimitéeCaisse populaire de Noëlville LimitéeCaisse populaire de Timmins Limitée (La)Caisse populaire de Verner LimitéeCaisse populaire North Bay LimitéeCaisse populaire Nouvel-Horizon Inc.Caisse Populaire Pointe-aux-Roches-Técumseh Inc.Caisse Populaire Rideau-Vision d’Ottawa Inc.Caisse Populaire St. Charles LimitéeCaisse populaire Sturgeon Falls LimitéeCaisse populaire Trillium Inc.Caisse populaire Vallée Est LimitéeCaisse populaire VermillonCaisse populaire Voyageurs Inc. Caisse populaire Welland Limitée

LEAGUESL’Alliance de caisses populaires de l’Ontario Inc.La Fédération des caisses populaires de l’Ontario Inc.

DEPOSIT INSUR ANCE CORPOR ATION OF ONTARIO’S CREDIT UNIONS, CAISSES POPUL AIRES AND LE AGUES as a t Dec ember 31, 2016

annual 2016 report - dico · 2017-07-04 · 2 deposit insurance corporation of ontario annual...

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