annual report 2017 - dico · experience in the financial services industry and, in particular,...

2017 ANNUAL REPORT

b DICO | Annual Report 2017

VisionDICO will inspire confidence in the Ontario credit union sector by demonstrating leadership, excellence and best practices in solvency regulation and deposit insurance.

MandateDICO fulfills its objects by:1. Providing insurance against the loss of part or all of deposits;2. Promoting standards of sound business and financial practices;3. Ensuring compliance with legislative and regulatory provisions related to

the solvency of credit unions; and4. Promoting the stability of the Ontario credit union sector with due regard

to its need to compete while taking reasonable risks.

In fulfilling its mandate, DICO strives to be transparent in its operations and achieve a fair and appropriate balance among the interests and perspectives of stakeholders. This ensures regulatory activities support the economic viability of the sector, while maintaining public confidence.

ValuesIn fulfilling DICO’s mandate and pursuing its vision, DICO lives 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.

Deposit Insurance CoverageTo 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 $250,000 per depositor for each of the following:

� savings and chequing accounts; term deposits, including index-linked term; deposits and GICs, money orders, and certified cheques etc.; 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

DICO | Annual Report 2017 i

Table of Contents1 Message from the Chair

2 Corporate Governance

3 Fulfilling Agency Mandate Expectations

4 Board of Directors as at December 31, 2017

5 Board Committees

6 Message from the CEO

7 DICO’s Senior Management Team

8 Ombudsman’s Report

9 DICO’s Business Model

10 Overview of Programs and Activities

13 Performance Against Plan

17 Risk Management and Assessment

18 DICO’s 2018-2020 Strategic Plan Overview

19 Looking Forward

20 Management’s Discussion and Analysis

24 Financial Performance Analysis

25 Statement of Financial Position

29 Statement of Operations

31 Management’s Responsibility for Financial Information

32 Independent Auditor’s Report

33 Statement of Financial Position

34 Statement of Operations and Changes in the Deposit Insurance Reserve Fund

35 Statement of Comprehensive Income

35 Statement of Accumulated Other Comprehensive Income (Loss)

36 Statement of Changes in Equity

37 Statement of Cash Flows

38 Notes to Financial Statements

53 Historical Highlights

54 Credit Unions, Caisses Populaires and Leagues

ii DICO | Annual Report 2017

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.com E-mail: [email protected]: (416) 325-9722

DICO | Annual Report 2017 1

Message from the ChairIn 2017, DICO celebrated 40 years of service to the Ontario credit union and caisses populaires sector. Through those 40 years of evolution, consolidation and tremendous asset growth of the sector, DICO has continued to successfully execute its primary mandate of contributing to the stability of the sector and protecting depositors from loss of their funds placed with Ontario’s credit unions and caisses populaires. I am pleased to report that in 2017, there were no credit union or caisses populaires failures or new deposit insurance claims made. DICO is proud to confirm that during its history, no member has lost any deposits due to the failure of a member institution.

DICO’s Board of Directors strives to be a model board for all insured institutions, and its activities focus on important aspects of governance and oversight; for example, strategy, succession planning, risk management and reporting. In 2017, DICO undertook a number of significant strategic initiatives, such as the re engineering of its strategic planning process, a review of its organizational structure, an assessment of its cybersecurity readiness and a refresh of its Human Resources performance management program and processes. These initiatives contributed to the continuous enhancement of DICO’s regulatory oversight and risk management processes to ensure credit unions and caisses populaires continue to adhere to high standards of governance, capital levels and risk management, thereby strengthening the protection of members.

During 2017, DICO continued to support the government’s implementation of the recommendations from the 2015 review of the Credit Union and Caisses Populaires Act, 1994 (CUCPA). This resulted in several changes to the legislation and regulations, which became effective on January 1, 2018. DICO expects these changes to further enhance the sustainability of the sector.

Work has continued on the Financial Services Regulatory Authority of Ontario (FSRA), a new independent and flexible regulator that will regulate a number of financial services sectors, including the credit union and caisses populaires sector. DICO supports this important initiative, and, as a result, has developed its 2018-2020 Business Plan to ensure DICO continues to fulfill its mandate while remaining flexible to adapt to any changes to its responsibilities once FSRA is operationalized.

As DICO evolves to meet the challenges of a rapidly growing and changing sector, it is essential that it maintains proactive communication with the sector’s key stakeholders. We appreciate the positive working relationships DICO has nurtured with credit unions, caisses populaires, local, national and international industry organizations, and with the Ministry of Finance.

I would like to take this opportunity to express my sincere appreciation to my fellow Directors for their dedication and professionalism in providing insightful counsel and oversight to the organization. Their diverse skill sets provide outstanding value to DICO, its stakeholders and the management team.

I would also like to express my gratitude to our President and CEO, Guy Hubert, for his leadership and dedication. Special thanks to the staff and executive team who are commended for their commitment and professionalism in maintaining DICO as an effective and proactive regulator and deposit insurer.

On April 30th, 2018, I will be stepping down from DICO’s Board after almost five years of services. I am proud to have enjoyed the privilege of serving on this Board, and I am confident that DICO will continue to be recognized as an exemplary regulatory and deposit insurer.

On behalf of the Board of Directors, Steve Blakely, ICD.D Chair of the Board

2 DICO | Annual Report 2017

Corporate GovernanceDICO is a Board-Governed Agency of the Province of Ontario established in 1977. 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 comprised of up to nine persons, all of whom are appointed by the Lieutenant-Governor-in-Council. A defined 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, and/or training 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.

DICO follows generally accepted practices in corporate governance; for example:

� 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.


Fulfilling Agency Mandate ExpectationsIn 2017, the Minister of Finance did not issue an agency mandate letter to DICO due to the uncertainty relating to its future as a result of the recommendations of an Expert Panel that reviewed the mandates of the Financial Services Commission of Ontario (FSCO), DICO and the Financial Services Tribunal. 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.


Board of Directors as at December 31, 2017

From L to R Top Row:

Don Dalicandro, (Vice Chair)First Appointed: March 23, 2011Term Expiry: March 24, 2019

Gail Di CintioFirst Appointed: May 4, 2011Term Expiry: May 5, 2019

Steve Blakely (Chair)First Appointed: September 11, 2013Term Expiry: July 1, 2019

John FerreiraFirst Appointed: March 11, 2015Term Expiry: March 11, 2019

Jim HoustonFirst Appointed: July 1, 2015Term Expiry: July 1, 2019

From L to R Bottom Row:

Helen YoungFirst Appointed: March 11, 2015Term Expiry: March 11, 2019

Carmen RossiterFirst Appointed: March 11, 2015Term Expiry: March 11, 2019

Monique TremblayFirst Appointed: April 18, 2011Term Expiry: April 19, 2019

More information about the Board and individual Directors can be found at www.dico.com.


Board CommitteesAudit & Finance CommitteeThis 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; it also reviews the Deposit Insurance Reserve Fund (DIRF) and model assumptions.

Composition: Carmen Rossiter (Chair), Monique Tremblay (Vice-Chair), John Ferreira, Gail Di Cintio, Helen Young, Steve Blakely (ex-officio)

Governance & Human Resources CommitteeThis 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 resources 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), Helen Young (Vice-Chair), Gail Di Cintio, Jim Houston, Monique Tremblay, Steve Blakely (ex-officio)

Risk Oversight CommitteeThis 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, supervises legal actions, reviews and makes recommendations to the

Board for the approval of the information systems’ strategic plan and financial assistance requests from credit unions.

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

Attendance at Board and Committee Meetings 2017*

DICO Board Audit & Finance Governance & Human Resources Risk Oversight

Number of meetings held 8 7 10 5

Total number of members 8 5 5 5

Total scheduled attendance 64 35 50 22

Total actual attendance 58 34 46 22

% of Attendance 91% 98% 92% 100%

*Does not include S. Blakely, ex-officio, for Committee meetings or Ministry of Finance (MOF) Observer.


Message from the CEOThe Ontario credit unions and caisses populaires sector continued to grow in 2017. Aggregate sector assets increased by 10.3% year over year to reach $57.2 billion as at December 31, buoyed by robust growth in retail mortgage (15.3%) and commercial loan (9.3%) portfolios. Profitability increased to 39 bps, from 32 bps in 2016, on the strength of increasing interest rates and continued improvement in non-interest expenses. Sector capitalization remained adequate, with an average aggregate leverage ratio of 7.15% and an average aggregate risk weighted asset ratio of 13.75%.

As at year end, DICO’s Deposit Insurance Reserve Fund was $248.8 million, which represented approximately 82 bps of insured deposits. Due to the increase in coverage to $250,000 for insurable deposits, it is anticipated the objective of 100 bps of insured deposits coverage will be achieved by 2024.

The consolidation trend observed for the past few years continued in 2017, with the number of institutions in the sector decreasing by 6 to 93. Consolidation creates stronger insured institutions who benefit from enhanced synergies and economies of scale and are usually more complex in terms of products, services and business lines. As well, a number of credit unions have implemented strategies to increase diversification of their revenue sources. To ensure continued effective oversight of these activities, DICO regularly reviews and updates critical processes, programs and capabilities.

During the year under review, significant progress was achieved on a number of important initiatives. An updated Liquidity and Stress Testing Guidance Note was published, which included requirements for implementation of the Liquidity Coverage Ratio, Net Stable Funding and Net Cumulative Cash Flow metrics. A Securitization Guidance Note was drafted and submitted to the sector for consultation, reflecting the growing importance of securitization as a funding mechanism for insured institutions. DICO revised the electronic monthly and annual financial reporting system for credit unions and caisses populaires to provide additional data granularity, which will enhance current capabilities in monitoring and analysis and support increased stress testing protocols. An IT Survey was also published and the data provided by the sector will assist DICO’s work on an IT Governance Guidance Note, which will be presented to the sector for consultation in 2018. Also to ensure DICO’s processes remain industry best practices, the examination program was benchmarked against similar programs of other credit union provincial regulators resulting in a limited number of improvements to be implemented in 2018.

DICO reviews and assesses significant internal risks annually. All risks were rated either Low or Moderate, with the outlook rated as Stable in all cases for 2017. From a sector standpoint, while a small number of institutions face challenging circumstances, overall the risk assessment of the sector remains stable. This is a significant accomplishment by all of our insured institutions considering the increasing relevance of global risks impacting the sector.

Looking ahead to 2018, some of the more significant strategic initiatives include the development of recovery frameworks for credit unions and caisses populaires, the enhancement of current resolution strategies, the review of our retail mortgage guidance to incorporate updated best practices and the further development of DICO’s data analytics capabilities. As well, the Ministry


of Finance has released a Consultation Paper on a Proposed Capital Adequacy Framework for public comment, which outlines a proposal for more closely aligning Ontario’s capital adequacy requirements for credit unions with internationally accepted Basel III principles. Work on finalizing the framework will continue throughout 2018.

In 2017, we welcomed 2 new members to the Senior Leadership Team. Each executive brings enthusiasm, a wealth of experience and a robust skill set to their position, which will serve DICO and all stakeholders extremely well going forward.

I would like to express my appreciation to our talented employees, who are an extremely dedicated group of professionals that represents the primary source of DICO’s corporate strength. I also appreciate the wise counsel and support provided by Steve Blakely and the Board during the year. Steve’s strong leadership, commitment and knowledge of the credit union sector will be dearly missed. We wish him well in his future endeavours.

Guy Hubert, President & CEO

DICO’s Senior Management TeamGuy HubertPresident & CEO

Brian MullanVice President,Credit Union Regulation

Randy NanekVice President,CFO

Michelle SéguinVice President,Corporate Affairs and Chief Risk Officer


Ombudsman’s ReportThe Office of the Ombudsman for DICO investigates complaints and recommends solutions. More specifically, the Ombudsman assists in resolving problems by helping the complainant to define options and recommending 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 and 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 DICO Management contacts and specific instances where this Office has no jurisdiction, such as matters involving an order for administration or liquidation; in litigation; and a member’s consumer complaint towards a credit union.

During 2017, there were two interactions with members that required referrals to FSCO, as the matters were related to complaints against credit unions, therefore, outside the jurisdiction of this Office.

This Office continues to receive the full support and cooperation of the Board, Management and Staff.

Respectfully submitted,

Beryl Roberto, OmbudsmanTel: 416.325.9446Email: [email protected]


DICO’s Business ModelDICO’s business model encapsulates the way in which DICO conducts its business 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.

Ontario’s Credit Unions and Caisses Populaires - Regulatory / Supervisory SystemMOF, FSCO, DICO

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,1994

DICO’s Business Objectives

For 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 AffairsBoard Support

Strategic Planning

Privacy and Legal Counsel

Enterprise Risk Management

Compliance

Communication

Human Resources

Policy & Research

Corporate Operations

President & CEO

Credit Union RegulationRisk Monitoring

Examinations

Risk Assessment

Risk Management

Corporate Finance & Information Systems

Accounting & Finance

Information Systems

DIRF Management

Investments

Failure Resolution

Management

DICO Management Activities


Overview of Programs and ActivitiesPrudential OversightThe focus of DICO is to protect depositors and contribute to the soundness, stability and success of the sector by being an effective solvency regulator and deposit insurer.

DICO exercises prudential oversight guided by a comprehensive regulatory framework found in the CUCPA and regulations. DICO’s powers include the examination and monitoring of Ontario credit unions, the approval of specific business activities undertaken by credit unions and the issuance of orders for non-compliance with the CUCPA and regulations.

As illustrated, DICO employs a comprehensive range of processes and programs in its regulatory oversight of the Ontario credit union sector to ensure stability and soundness.

Policy and Research DICO’s Policy and Research department supports the Government on the development of appropriate legislation to support the mandate of protecting members’ deposits. Currently, the MOF is implementing the recommendations from the review of the CUCPA, the governing legislation of the Ontario credit union sector. The review was completed in November 2015 and is part of a statutory five-year review requirement. DICO provided support to the MOF during the review and is currently collaborating in rewriting the CUCPA and regulation to implement the resulting recommendations.

The Policy and Research function within DICO also defines minimum expectations and develops guidance and standards for the sector on specific risk management activities such as Corporate Governance and Liquidity Risk Management. These typically align with internationally recognized standards and reflect globally accepted best practices advocated by the Basel Committee on Banking Supervision and other recognized regulatory bodies or committees. All such publications are available on the DICO website.

Credit Union Regulation The Credit Union Regulation Division is responsible for regulation and risk management functions, which include: Relationship Management, Regulation and Monitoring and Examinations. DICO takes a proactive approach

in the management of risks in the sector, and collects monthly and annual financial filings through the monitoring group, which are then reviewed and analyzed by a cross-functional team of risk analysts and relationship managers

CollectData

CorrectDeficiencies

Examine

AssessRisk

MonitorStandards

and SetGuidance


as part of a comprehensive risk assessment process for each credit union.

Based on the risk assessment of each credit union, an examination is scheduled, which includes both off-site and on-site reviews by a team of examiners. The final examination report identifies areas of improvement, which the relationship management team tracks to completion on an individual basis with each credit union.

The relationship management team is the predominant outward-facing element of DICO’s structure as they meet with the management

and boards of credit unions regularly to review performance and provide guidance as needed.

When a credit union requires regulatory approval, such as an application for a subsidiary or a purchase of the assets of another credit union, the application is coordinated by the Regulation and Monitoring Department, which draws together a cross-functional team to review the application from a regulatory compliance and risk perspective. This has been an area of significant growth in recent years as credit unions seek to diversify their revenue sources.

Examinations and Monitoring DICO assesses the insurance risk that each credit union poses to the DIRF through two programs: the examinations program and monthly monitoring and analysis program.

The examination process measures the level of compliance with DICO’s By-Law No. 5, Standards of Sound Business and Financial Practices, and other guidance publications, which outline DICO’s expectations for good corporate governance and risk management. The frequency of examinations can range from 15 to 30 months and is determined by the risk profile and size of the credit union.

The monitoring and analysis program collects and analyzes financial and non-financial data received from credit unions monthly reporting 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 and governance at the credit union. This is then adjusted by capital and earnings results to determine the insurance risk rating of the credit union. 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 2017, 84% of credit unions had an insurance risk rating of Low to Moderate. Year-over-year results show that DICO’s assessment of insurance risk has increased slightly with 16% of sector assets rated as moderate-high or high versus 10% in 2016. This is due to the addition of three large credit unions that hold 4% of sector assets from the moderate to moderate-high tier. DICO has been monitoring these credit unions closely and has determined that these are temporary situations and will be rectified during 2018.

Sector Assets by Insurance Risk Category

Risk Category 2017 2016 2015 2014 2013

Low 20% 19% 20% 19% 19%

Low-Moderate 7% 13% 39% 17% 17%

Moderate 57% 58% 37% 53% 53%

Moderate-High 15% 5% 4% 10% 9%

High 1% 5% 0% 0% 1%


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, which 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 ActivitiesTo protect consumers and enhance public confidence in the sector, DICO takes appropriate regulatory action in situations where a credit union is not in 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.

The CUCPA requires credit unions to apply to DICO for approval of a number of business activities, including:

� Creating a group capital agreement; � Borrowing from another credit union; � Acquiring or establishing a subsidiary; � Investing in another credit union; and � Purchasing or selling assets in excess of 15%

of the assets of a credit union.

In addition, credit unions must apply to DICO for a temporary exemption or variation under the CUCPA regarding prescribed limits, such as:

� Capital and liquidity requirements; � Guarantees and Exemptions to aggregate

limits for guarantees; � Lending limits; � Divestment period for securities; � Variation from allowable prescribed

subsidiaries; � Deviation from prescribed investment rules;

and � Acceptance of unauthorized securities and

other assets obtained upon amalgamation.

During 2017, DICO received a total of seven applications: five related to asset purchases and sales and two to acquire or establish subsidiaries. Four applications were approved, one was withdrawn and two remained pending at the end of the year. No orders or variations and exemptions or administrative monetary penalties were issued.

Summary of Regulatory Activities

Category 2017 2016 2015 2014 2013

Applications 7 16 9 6 11

Variations & Exemptions 0 1 0 0 0

Orders 0 3 0 0 0

Administrative Penalties 0 0 0 0 0

Total 7 20 9 6 11

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


Performance Against PlanHighlights of Key Strategic Priorities and Accomplishments for 2017DICO’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 while minimizing the administrative burden on credit unions.

DICO Strategic Objectives for 2017To protect depositors and contribute to the sector’s stability, DICO’s four strategic objectives for 2017 were:

� Proactive and Balanced risk-based regulation and risk management;

� Sound corporate governance; � Effective public and stakeholder awareness;

and � Strong partnerships.

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;

� Compliance with 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.


The following table sets out 2017 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 Management

DICO 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

� Completed 50 examinations.

� Enhanced data analytics.

� Reviewed and updated DICO’s Risk Assessment Profiles (RAP) for 86 credit unions.

� Placed credit unions on Watchlist where necessary and implemented corrective actions to remedy deficiencies.

Risk Management

� Started the review of the examination methodology; this work will be completed in 2018.

� Embarked on the development of guidance for Credit Union Resolution Strategies. This project was more complex than originally anticipated and will be completed in 2018.

� 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 Assessment

Published Guidance Notes, Advisories and Bulletins on emerging risks and related business activities, including:

� Revised the Liquidity and Stress Testing Guidance Notes to include Liquidity Coverage Ratio, Net Stable Funding Ratio, and Net Cumulative Cash Flow. Ratio to improve liquidity management and enhance stress testing of liquidity.

� Issued market advisories related to mortgage lending practices to bring attention to the changing lending environment.

� Issued a consultation paper on the Securitization Guidance Note, involving representatives of the credit union sector throughout the development of the Guidance Note, and obtained comments from the sector. DICO targeted having this Guidance Note issued by December 31, 2017. However, the credit union sector requested that the consultation period be extended. As a result, this Guidance Note will be issued by March 31, 2018.

� Researched the implementation of an IT Governance Guidance Note. As part of gathering information, DICO issued a survey to credit unions on IT Governance. This Guidance Note is anticipated to be completed in 2018.

� Aligned By-law No. 6 with International Financial Reporting Standards (IFRS).

� Revised By-law No. 5 and all other relevant publications to reflect removal of class 1 and class 2 rules effective January 1, 2018.

� Revised By-law No. 3 to reflect changes to regulations related to the increase in the deposit insurance coverage level to $250,000 (from $100,000) on deposits held in non-registered accounts.

Regulatory Actions

� DICO received a total of seven applications: five related to asset purchases and sales and, two to acquire or establish subsidiaries. Four applications were approved, one was withdrawn and two remained pending at the end of the year. No orders or variations and exemptions or administrative monetary penalties were issued.

� No administrative penalties issued.

� All service standards were met.

Failure Resolution � No failures in 2017.

Depositor Payouts and Liquidations

� No deposit insurance payouts made.

� Final Liquidator meetings held for three credit unions.

Legend:

Planned progress on schedule and within budget

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

Cancelled or deferred



Strategic Objective: Sound Corporate Governance

Sound corporate governance ensures that the board of directors, external auditors and internal auditors are independent and helps in achieving greater fairness and transparency. It also allows for the achievement of an appropriate balance amongst managers, stakeholders and boards. 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.

Sound Governance

� The Board met eight times with an average attendance of 91% and expeditiously dealt with all matters brought forward. Increased activity at committee meetings to provide oversight on specific critical projects and matters.

� Developed a new Strategic Plan for 2018 – 2020 including a 2018 Tactical Plan.

Compliance with Acts and Directives

� Internal audit performed an internal review of DICO’s substantive compliance with all relevant Acts, Government guidance and Corporate Policies to support the Annual Attestation to the Minister of Finance. Four exceptions noted in the 2017 Annual Attestation. All are underway to be resolved in 2018.

� No complaints received by the Ombudsman in 2017.

Effective Enterprise Risk Management (ERM)

� Annual review of ERM completed.

� Emerging risks identified and mitigation strategies developed as necessary.

Adequate Deposit Insurance Reserve Fund

� Met the annual DIRF projection; the balance of the DIRF increased to $248.8 million, representing approximately 82 bps of insured deposits.

� On track to attain DIRF target of 100 bps of insured deposits during 2024.

Strong Corporate Resources Support

� Renegotiated DICO premises lease.

� Conducted a review of the security of the IT systems. Recommendations in process of being implemented in 2018.

� Update DICO’s Performance Management Program strengthening the link between staff’s performance plans and DICO’s strategic priorities.


Strategic Objective: Effective 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.

Communications

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

� Broadcast of announcements & consultations.

� Bilingual toll-free enquiry line received 386 calls, mostly related to deposit insurance.

� Revised all publications, including pamphlets and decals, and DICO’s website to reflect the increase in deposit insurance coverage level on deposits held in non-registered accounts from $100,000 to $250,000 effective January 1, 2018.

� Attended credit unions’ annual general meetings and sector events.

Legend:Planned progress on schedule and within budget





Strategic Objective: Strong 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. These relationships encourage effective risk management and capital planning and assist in promoting adoption of best practices while recognizing the unique cooperative structure of credit unions.

Strategic Alliances

� Maintained MOU with various organizations that have an interest in ensuring risk at Ontario credit unions is monitored, managed and supervised effectively.

� Continued involvement in established advisory committees.

� Consulted with sector leaders on matters of common interest through various advisory committees.

� Continued to work with staff at the MOF and FSCO on the review of the CUCPA and associated regulations by providing input and information.

� Supported and cooperated with the MOF as the Ontario Government continues its work to establish the new FSRA.

� Participated in provincial, national and international working groups, such as the Credit Union Prudential Supervisors Association (CUPSA) and the International Credit Union Regulators’ Network (ICURN).

Stakeholder Relations

� 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:

Planned progress on schedule and within budget




Risk Management and AssessmentDICO’s Enterprise Risk Management (ERM) was a primary driver in the development of the 2018 – 2020 Strategic and Business Plans. Risks are managed in the context of DICO’s ERM Framework, which includes a well-defined set of

Board-approved risk management policies and practices, and a clearly defined risk appetite, to ensure DICO understands and responds to the risks identified. DICO’s ERM is reviewed in detail annually.

Overview of DICO’s Assessment of Significant Risks as at December 31, 2017

Rating Outlook

Deposit Insurance and Regulatory Risks

Risk Assessment Risk: The risk that DICO does not promptly or systematically identify credit 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 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 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.

Moderate 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


DICO’s 2018-2020 Strategic Plan Overview

� Within the GO and MOR, DICO is known as responsive to the MOF needs and Government of Ontario’s strategic priorities

� Within the CU sector, DICO is viewed as knowledgeable, diligent and fair

� Depositors have access to current and accurate information

� Employee performance and variable pay are linked to DICO’s strategic plan

� Ensure that DICO recruits staff with the appropriate skills and experience needed and staff are satisfied with their career development

� Provide effective input in the shaping of new governance framework and ensure, if applicable, the transition of DICO into FSRA is seamless

� Ensure DICO’s interests are reflected in the new regulation

� Enhance DICO’s risk management practices, data collection and analysis

� Ensure that the examination program includes all relevant areas of risk and incorporates best practices

� Ensure Guidance Notes clearly articulate DICO’s expectations of credit unions

� Ensure IT systems support DICO’s business needs and that all systems are secure

� As part of Readiness Strategy, update DICO’s Resolution Strategy

� As part of Readiness Strategy, ensure that the credit unions have recovery plans in place and reviewed

� Establish a project management discipline within DICO

� Continuously improve DICO’s processes

� Ensure the effective use of funds

� Maintain the DIRF as tool to pay out depositors in the event of a credit union failure

Stakeholder Management

Continuously enhance relationships with key stakeholders: the Government of Ontario and Ministry of Finance; the Credit Union Sector; and Depositors.

Strategic Priorities

Mandate

Vision

People Management

Enhance HR processes and ensure that employees have the skills and competencies needed to succeed in today’s sophisticated client environment.

Process ManagementBe an effective contributor in shaping Ontario’s regulatory changes and the new FSRA governance framework, improve key organizational processes, and update and consolidate its Readiness Strategy to ensure DICO’s continued strength and stability.

Financial Management

Maintain effective financial stewardship and ensure continued adequate protection by building the DIRF.


Looking ForwardStemming from DICO’s new 2018 – 2020 Strategic Plan is a 2018 Tactical Plan that details the initiatives to be undertaken and metrics to track their status. The following highlights key strategic initiatives planned for 2018 by strategic priority:

Stakeholder Management � Working with MOF to implement any

changes necessary in the establishment of FSRA

� Continuing to enhance credit union web-based reporting

� Issuing stakeholder surveys to track relationships with DICO’s stakeholders

People Management � Implementing a new Executive

Compensation Framework Regulation as required by legislation

Process Management � Developing a resolution strategy and a crisis

communication plan � Publishing Securitization Guidance Note � Reviewing B-20 and analyzing its potential

implications on the credit union sector � Developing and issuing for consultation an

IT Governance Guidance Note � Developing a Recovery Framework for credit

unions � Completing the review of examination

methodology

� Improving data collection and analysis to enhance risk management practices

� Launching a new Performance Management Program, and developing and implementing talent management and succession plans

� Continuing the implementation of the Archives and Recordkeeping Act and Accessibility for Ontarians with Disability Act

Financial Management � Continuing to build the DIRF to meet the

target of 100 bps to ensure members’ eligible deposits continue to remain adequately protected

� Reviewing the strategy and refining the stress testing of the DIRF


Management’s Discussion and AnalysisDynamic And Challenging EnvironmentDICO fulfills its mandate to ensure the stability of the credit union sector in a complex, dynamic and highly competitive environment by closely monitoring the impact of changing environmental factors on the performance and ongoing viability of credit unions.

Sustained low interest rates since 2009 and ever-increasing competition led to another challenging year for profitability for many credit unions. As a result of thin margins in this low interest rate environment, some credit unions continue to warrant increased monitoring.

On a positive note, assets within the credit union sector grew at a pace of 10.3% (11.2% in 2016) led by growth in residential mortgage loans of 15.3% (12.2% in 2016) and commercial loans of 9.3% (13.2% in 2016) while personal loans continued to decrease.

In addition, in 2017 the sector experienced further consolidation resulting in stronger credit unions who benefit from enhanced synergies and larger economies of scale. There were 93 credit unions at the end of 2017 (down from 99) ranging in size from $2.7 million to $14.7 billion with an average asset size of $615.5 million ($524 million in 2016), with 14 credit unions each holding $1 billion or more in assets (11 in 2016).

The Bank of Canada (BOC) increased the prime interest rate from 0.5% in June 2017 to 1.25% in January 2018. At the same time, the Federal Government tightened mortgage lending rules requiring an increased rigour when qualifying potential borrowers for loans by all federally-regulated lenders and provincial credit unions that use federal programs. Other credit unions are not affected by these rules, therefore, the impact of the increase in Bank of Canada rates and the tightening of mortgage lending rules are

anticipated to have a moderating effect on loan growth and may result in increased financial margins within the credit union sector.

During 2017, to enhance capital levels to support continued growth, credit unions raised an additional $260 million in capital through new investment share offerings. As at December 31, 2017, the sector is well capitalized with an average aggregate leverage ratio of 7.15%, up slightly from 7.02% in 2016; the minimum regulatory capital requirement is 4%. All credit unions met the prescribed statutory minimum risk-weighted capital requirements, with an average aggregate risk weighted capital ratio for the sector of 13.75% (13.59% in 2016); currently, the minimum regulatory risk-weighted capital requirement is 8%.

The stability of the sector 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 alternative to federally regulated banks.

0

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275

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45.0

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Trend in Asset Growth and Number of Credit Unions

Assets - $billions (L) # of Credit Unions (R)


Ontario Credit Union Sector Profile at a Glance (in $ billions)

2017 2016* % Change

# of Credit Unions 93 99 (6%)

Total Assets $57.2 $51.9 10.3%

Total Deposits $45.5 $41.2 10.4%

Insured Deposits $30.5 $28.6 6.6%

Insured Deposits (% of Total Deposits) 67% 69% (3%)

Regulatory Capital (Leverage Ratio) 7.15% 7.02% 1.9%

Loan Costs 0.04% 0.06% (33%)

Profitability 0.39% 0.32% 22%

* 2016 numbers may differ slightly from prior annual report to reflect 2016 audited financial information received from credit unions.

ProfitabilityProfitability during 2017 increased to 39 bps from 32 bps in 2016. Interest rates began to increase during the year resulting in a slight increase in net interest and investment income. While interest revenue received from loans fell by 4 bps, it was more than offset by an increase of 6 bps in interest and investment income. On average, the sector continued to experience an improvement in non-interest expenses of 8 bps. The rise in interest rates may result in increased financial margins.

Eight credit unions experienced operating losses during 2017. All are being carefully monitored to ensure that appropriate resolution strategies are being implemented and sufficient capital is maintained to support their continued viability.

Loan Costs and DelinquenciesThe sector’s aggregate credit risk, as measured by delinquency and loan costs, is holding at relatively stable levels. Total delinquency greater than 30 days was 0.67%, a slight improvement over 2016 and much lower than post-recession figures (2009: 1.54%). Commercial loan delinquency improved to 0.93% from 1.07% in 2016. Overall loan costs improved to 0.04% from 0.06% in 2016. As interest rates rise, members who have variable rate loans may find it increasingly difficult to continue to make their payments, which could result in an increase in delinquencies and loan costs.

0.00%

0.10%

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0.40%

0.50%

0.60%

0.00%

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1.00%

1.50%

2.00%

2.50%

3.00%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Profitability Measures

Financial Margin (L) ROA (R)

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.50%

0.70%

0.90%

1.10%

1.30%

1.50%

1.70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Loan Performance Measures

Delinquencies (L) Loan Costs (R)


Protection of Insured DepositsTo ensure the protection of insured deposits, DICO has access to five sources of liquidity in the event a credit union fails:1. the credit union’s internal liquidity; 2. the credit union’s credit facilities;3. the DIRF;

4. DICO’s credit facilities with the Ontario Financing Authority (OFA); and

5. an increase in deposit insurance premium rates and/or a special levy pursuant to s. 262 (1)(d) of the CUCPA, if approved by the Minister of Finance.

Insured DepositsIn 2017, eligible non-registered deposits were insured up to $100,000 and on an unlimited basis for registered accounts. During 2017, total deposits increased by 10.4% (9.6% in 2016) to $45.5 billion, however, the insured portion of $30.5 billion continued to represent a declining percentage of total deposits at 67%. Beginning January 1, 2018, the deposit insurance limit has been increased to $250,000 for deposits held in non-registered accounts and will remain unlimited for deposits held in registered accounts. This will result in a greater percentage of deposits being insured.

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

Deposit Insurance Reserve Fund (DIRF)Pursuant to the CUCPA, DICO is required to maintain a DIRF with the key purpose of reimbursing depositors and funding DICO’s operating and related insurance costs, which includes 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, 2017, the DIRF had reached $248.8 million, up $22.8 million or 10.1% from 2016, and represented 82 bps (79 bps in 2016) of the sector’s estimated insured deposits at the $100,000 coverage level. The increase is the aggregate result of premium income ($30.2 million) and investment and other income ($2.2 million), offset by operating expenses ($9.3 million) and provision for insurance losses ($0.3 million).

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2013 2014 2015 2016 2017

$ Bi

llions

Total vs. Insured Deposits

Insured Deposits Uninsured Deposits


-0.80%

-0.60%

-0.40%

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

-200

-150

-100

-50

0

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100

150

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250

300

350

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450

1995 2000 2005 2010 2015 2020 2024

DIRF ($) DIRF as a % of Insured Deposits

$ m

illio

ns

Perc

enta

ge

Nov 2009

DICO becomes

solvency regulator

The deposit insurance coverage level for deposits held in non-registered accounts increased to $250,000 effective January 1, 2018, which will have a temporary downward impact on the DIRF ratio as a percentage of insured deposits as a larger portion of total deposits will be insured. The increase in coverage will also increase deposit insurance premium revenue due to the larger insured deposit base. As a

result of increasing coverage and premiums, DICO anticipates the DIRF will now reach the 100 bps target during 2024 assuming premium revenues, loss experience and operating expenses do not significantly deviate from the current model assumptions.

DICO is reviewing the strategy and refining the stress testing of the DIRF.

DICO’s Differential Premium Determination System

Year Average Premium Rate

2017 1.07

2016 1.04

2015 1.06

2014 1.10

2013 1.12

DICO collects premiums from Ontario credit unions to fund for its operating costs and build the DIRF so that it has access to an appropriate level of liquidity to cover the potential cost of any liquidated or restructured credit unions in a timely manner.

Deposit insurance premium rates are calculated on a continuous scale based on the existing premium rate range of $1.00 to $3.00 per $1,000 of insured deposits.

The average premium rate increased slightly to $1.07 from $1.04 in 2016, reflecting the decrease in capital levels in 2016 to support growth. DICO expects the average premium rate to decrease slightly in 2018 as credit unions raised an additional $260 million in capital through new share offerings in 2017. There are currently 55 credit unions with a total of $23.9 billion in assets that paid a deposit insurance premium rate of $1.00 per $1,000 of insured deposits. The highest rate paid was $1.61.


Financial Performance Analysis This section provides management’s analysis of DICO’s financial performance for the fiscal year ended December 31, 2017. It should be read

in conjunction with the 2017 audited financial statements and related notes.

Summary of Key Financial Performance

Actual Budget

For the period ended December 31 2017 2016 Change 2017 Change

(C$ thousands unless indicated) $ $ $ % $ $ %

Deposit Insurance Reserve Fund (DIRF) 248,840 226,048 22,792 10.1 247,780 1,060 0.4

Estimated Sector Insured Deposits

($ billions)30.5 28.6 1.9 6.6 33.1 (2.6)

(7.9)

DIRF as % of Sector Insured Deposits 0.82 0.79 - 0.03 0.75 - 0.07

Premium Income 30,208 27,134 3,074 11.3 33,100 (2,892) (8.7)

Other Income 2,248 1,807 441 24.4 2,247 (2.0) -

Operating Expenses 9,330 8,470 (860) (10.2) 9,875 545 5.5

Provision (Recovery) for losses 334 (18) (352) - 3,000 2,666 88.9

Investments 253,981 229,390 24,591 10.7 251,100 2,881 1.1

Financial Highlights � The DIRF increased by $22.8 million to

$248.8 million and is now at 82 bps. The favourable budget variance of $1.1 million was attributable to lower than expected general loss provisions. This was offset by less premium income than budgeted, due to the delay of the insured deposit coverage increasing to $250,000.

� Premium income was $30.2 million for the year, an increase of $3.1 million or 11.3% due to a higher level of insured deposits and an increase in the average premium rate charged to credit unions of $1.07, from $1.04 in 2016.

� Other income, comprised primarily of interest income was, $2.2 million, a 24.4% increase over 2016, due to the higher interest rates and asset growth.

� Operating expenses, net of recoveries, were $9.3 million, $0.9 million over the previous year due to increased salaries and benefits accruals for transition, skills upgrade and other costs of $0.6 million, legal fees of $0.2

million and professional fees of $0.1 million. A favourable budget variance of $0.5 million (5.5%) was due to examinations expense being under budget by $0.4 million and professional fees being under budget by $0.1 million.

� Provision for losses was $0.3 million due to an assessment of collectability on various DICO held loans based on factors such as a borrower payment history and security held. The specific provision had a favourable budget variance of $2.7 million or 88.9%, which was due to favourable credit conditions at reporting date.

� DICO’s Investment portfolio was $254 million, an increase of $24.6 million due to increased DIRF funds invested throughout the year. The favourable budget variance of $2.9 million was due to the growth in the investment portfolio and investment income.


Statement of Financial PositionAssetsDICO’s total assets as at December 31, 2017, grew by 9.9% to $261.7 million, an increase of $23.5 million over the previous year. The majority of DICO’s assets are its investment portfolio, which represent 97% of the total

assets. The remaining 3% is comprised of cash and cash equivalents, premiums receivable, prepaid expenses and other receivables, deposit insurance advances recoverable, and property, plant and equipment.

InvestmentsDICO has an agreement with the 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; and3. 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 assessed 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 adverse market conditions.

($ in thousands) 2017 2016 Change

Current investments 185,987 182,168 3,819 2.1%

Non-current investments 67,994 47,222 20,772 44.0%

Total 253,981 229,390 24,591 10.7%


Current InvestmentsThe current investments in the portfolio are valued at $186.0 million, 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. The Money Market portfolio outperformed the benchmark by 7 bps for the last quarter, and 33 bps for the 12-month period.

Non-current Investments

AA (low),44%

AA (high),7%AA,

4%

AAA,17%

A (high),28%

The non-current investments consisted of Government bonds laddered from 6 months to a maximum of 3.3 years, and Government floating rate notes for up to 2 years, valued at $68.0 million with credit ratings ranging from A (high) to AAA. The Government Bond Laddered investments for the last quarter outperformed

the benchmark by 11 bps, and 42 bps for the 12-month period.

The portfolio will continue to be invested 100% in benchmark T-bills, non-benchmark Provincial Treasury bills and Floating rate notes issued by Canadian Federal and Provincial Government bonds with allocation to bank paper issued by five major Canadian Banks. The OFA continues to evaluate and alter the risk/return qualities based on market conditions to appropriately balance between security, liquidity and yield.

The fund’s exposure to credit and market risk are minimal due to high-quality Government Bond holdings. The bond portfolio’s short duration reduces fluctuations from interest rate risk. Interest rate risk exists due to the nature of the investment portfolio. The weighted average number of days to maturity increased to 243 days from 194 days in 2016.

R-1 (mid),24%

AA (low),24%

R-1 (high),52%


Performance Comparison

Year ended 2017

Year ended 2016 Change

Portfolio Return1 (Money Market) 0.89% 0.70% 0.19%

Benchmark (Money Market) 0.56% 0.51% 0.05%

Value Added (Money Market Portfolio) 0.33% 0.19% 0.14%

Portfolio Return1 (Government Bond Laddered) 1.15% 1.13% 0.02%

Benchmark Return2 (Government Bond Laddered) 0.73% 0.82% -0.09%

Value Added (Government Bond Laddered Portfolio) 0.42% 0.31% 0.11%

Total Portfolio Return 0.94% 0.79% 0.15%

FTSE TMX Short Term All Government Index -0.38% 0.35% -0.73%

Note 1: Performance is calculated by the Risk Control Division and is gross of fees. The MM portfolio is benchmarked to the FTSE TMX 91 Day T-Bill index. The bank’s cash balance in the Money Market Portfolio was $273.33 as of December 31, 2017.

Note 2: The Benchmark is a laddered Government bond benchmark with equal weights assigned to 0.5, 1.0, 1.5, 2, 2.5 and 3-year Government of Canada Bonds.

Note 3. Fees are 0.03% per annum for the Money Market Portfolio and 0.04% for the Government Bond Laddered Portfolio.

Deposit Insurance Advances RecoverableDICO 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 Liquidation programs in 2017. Net deposit insurance recoveries during the year were $1.6 million, as compared to $3.9 million in 2016. As at December 31, 2017, Deposit Insurance Advances Recoverable declined to $4.7 million as compared to $6.3 million in 2016. The number of credit unions in liquidation has fallen steadily over the years with three wound up in 2017 as compared to four in 2016. At the end of December 2017, a total of three credit unions remained in the Dissolution program.


LiabilitiesTotal liabilities increased by $1.1 million (9.2%) to $13.4 million as at December 31, 2017. The increase was primarily due to increased payables, accruals for salaries and benefits, and deferred premium income in 2017. Deferred premium income is recognized for portions of premiums received in the year from the credit

unions whose fiscal years straddle DICO’s December 31, fiscal year end. Total liabilities consist mainly of accruals for deposit insurance claims (23%) and employee benefits (47%). The remaining liabilities (30%) represent payables and deferred premiums.

Accrual for Deposit Insurance ClaimsThe 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. A specific accrual of $0.3 million was recorded to write down loans held by the Corporation, after management’s review of various factors such as collection history, borrower’s ability to repay, security held, remaining term to maturity and the

geographic location of the credit union placed into liquidation.

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 loss and the application of historic loss experience.

As of December 31, 2017, the general provision for losses amounted to $3.0 million, unchanged from 2016.

Employee BenefitsAll 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 obligation increased by $0.1 million during the year to $6.3 million as at December 31, 2017.


Statement of Operations Premium IncomeDICO’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 used to calculate an annual premium rate on a continuous scale based on a range between

$1.00 and $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 section 105 of O. Reg 237/09. An updated DPSD system will be published in early 2018 to reflect the removal of class 1 and class 2 rules.

($ in thousands) 2017 2016 Change 2017 Budget

Premium Income 30,208 27,134 3,074 11.3% 33,100

Average premium rate (per $1,000 of insured deposits)

1.07 1.04 0.03 2.9% 1.04

Total 2017 premium income revenue increased by $3.1 million or 11.3% to $30.2 million. Premium rate calculation methodology remained unchanged in 2017. Insured deposits increased $1.9 billion or 6.6% to $30.5 billion as at December 31, 2017, compared to $28.6 billion a year ago. Premium revenue for 2017 was $2.9 million less than the budget of $33.1

million as the 2017 premium budget was based on the new insured deposit level of $250,000 limit being effective in 2017. The average premium rate billed in 2017 was $1.07 per thousand of insured deposits as compared to $1.04 in 2016, due to the higher premiums paid by large credit unions.

Other Income Other income is composed mostly of investment income earned from DICO’s investment portfolio. Total investment yield exceeded budget by $0.4 million as a result of the growth of the portfolio. Bond returns increased as the BOC raised overnight rates by 25 bps to 1.25% in 2018.

It is expected that the overnight rate will rise again as per indications from the BOC. The OFA monitors the market conditions and assesses

the risk/return qualities of the investments to create value for the portfolio. As at December 31, 2017, the Money Market portfolio’s cumulative 12-month return was 0.89% up from 0.70% in 2016, and the Government bond laddered portfolio’s 12-month return was 1.15% up from 1.13% in 2016. The combined Money Market and Laddered portfolio’s annualized yield for 2017 was 0.94%, compared to 0.79% in 2016.

Operating ExpensesIn 2017, total expenses (net of recoveries) were $9.3 million, $0.9 million (10.2%) more than last year and 5.5% less than the 2017 budget.

Salaries and benefits were $0.8 million (11.9%) higher than in 2016 due to additional accruals for transition, skills upgrade and other costs.


Salaries and benefits were $0.2 million higher than budget due to related accruals and was offset by other new positions hired later than budgeted and unfilled positions being deferred to 2018.

Major operating expenses in 2017 included occupancy (22%), professional services

(15.6%), travel costs (9.9%), legal (9.6%), IT maintenance and support (7.3%), depreciation (7.2%), consulting (4.6%), on-site examinations by third parties (3.8%) and all other general administrative costs such as insurance, printing, translation, telephone, directors’ expenses, staff training, office supplies, couriers, dues and fees (20.0%).

($ in thousands) 2017 2016 Change 2017 Budget

Salaries and benefits 7,247 6,478 769 11.9% 7,070

Operating expenses 2,245 2,253 (8) - 2,903

Recovery of operating expenses (162) (261) 99 37.9% (98)

Net total expenses 9,330 8,470 860 10.2% 9,875

Operating expenses before recoveries were $2.2 million, similar to the previous year, and $0.7 million or 22.7% lower than budget. This was partly due to an intangible asset being retired, as there was no future benefit expected to arise from the continued use of the asset, reducing carrying value and amortization expense by $0.4 million.

In addition, a reporting system used by the credit unions was replaced with a software tool developed by internal resources. Examinations were $0.4 million under budget as cost savings were realized through the utilization of DICO’s internal examination staff instead of engaging outside accounting firms. Legal fees increased to $0.2 million, $0.1 million over budget due to The Freedom of Information and Protection

of Privacy Act (FIPPA) requests and other matters. Professional services were under budget by $0.1 million due to the deferral of recruitment fees and audit expenses to 2018. This favourable variance is the result of prudent cost management, specifically the area of IT Maintenance and Support. 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 2017 consisted mainly of the administrative costs of managing the assets of credit unions in liquidation. Only three credit unions were in liquidation in 2017, compared to six in the previous year.

Net Provision (Recovery) For Deposit Insurance Losses Changes in the estimates for specific and general loss provisions and recoveries are recorded during the year. Management provided a budget estimate for potential losses for specific credit unions of $3 million in 2016 and maintained this in 2017. The provision for specific losses were $0.3 million due to an assessment of certain DICO owned loans for impairment based on loan history and borrower’s ability to pay. The specific provision was $2.7 million less than budget due to favourable credit conditions. The general accrual for insurance losses remained unchanged at the end of 2017 as the risk in the sector remained relatively stable.


Management’s Responsibility for Financial InformationThe Deposit Insurance Corporation of Ontario’s management is responsible for the integrity and fair presentation of the financial statements and all other information presented in the Annual Report. The financial statements have been prepared by management in conformity with IFRS, and, where appropriate, include amounts based on management’s best estimates and judgments.

Management is also responsible for developing and maintaining systems of internal control that provide reasonable assurance that financial information is reliable, that all financial transactions are properly authorized, that assets are safeguarded, and the Corporation adheres to legislation and regulatory requirements. These systems include the communication of policies and the Corporation’s code of ethics and business conduct throughout the organization.

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

Randy NanekVice President & Chief Financial Officer

Toronto, CanadaMarch 28, 2018


Independent Auditor’s ReportTo the Board of Directors of Deposit Insurance Corporation of OntarioWe have audited the accompanying financial statements of Deposit Insurance Corporation of Ontario, which comprise the statement of financial position as at December 31, 2017, 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 StatementsManagement 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’ ResponsibilityOur 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 Deposit Insurance Corporation of Ontario as at December 31, 2017, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

KPMG LLPChartered Professional Accountants, Licensed Public Accountants

March 28, 2018Toronto, Canada



Statement of Financial Position

As at December 31,

(in thousands of dollars) Notes 2017 2016

ASSETS

Current assets

Cash and cash equivalents $ 1,527 $ 1,216

Investments 5 185,987 182,168

Premiums receivable 594 637

Prepaid expenses and other receivables 653 399

Total current assets 188,761 184,420

Non-current assets

Investments 5 67,994 47,222

Deposit insurance advances recoverable 6 4,699 6,255

Property, plant and equipment 7 225 252

Total non-current assets 72,918 53,729

Total assets $ 261,679 $ 238,149

LIABILITIES

Current liabilities

Payables and accruals $ 2,050 $ 1,273

Deferred premium income 4 989 781

Total current liabilities 3,039 2,054

Non-current liabilities

Payables and accruals 1,024 979

Employee benefits 9 6,339 6,243

Accrual for deposit insurance claims 6 3,000 3,000

Total non-current liabilities 10,363 10,222

Total Liabilities $ 13,402 12,276

EQUITY

Accumulated other comprehensive income (loss) $ (563) (175)

Deposit Insurance Reserve Fund 248,840 226,048

Total Equity $ 248,277 225,873

Total Liabilities and Equity $ 261,679 238,149

See accompanying notes to financial statements

On behalf of the Board:

Director Director



Statement of Operations and Changes in the Deposit Insurance Reserve Fund

Year ended December 31


Income

Premium Income 4 $ 30,208 $ 27,134

Other Income 2,248 1,807

32,456 28,941

Expenses

Salaries and benefits 7,247 6,478

Operating expenses 2,245 2,253

Recovery of operating expenses (162) (261)

9,330 8,470

Excess of income over operating expenses 23,126 20,471

Provision (recovery) for insurance losses 6 334 (18)

Excess of income over total expenses 22,792 20,489

Deposit Insurance Reserve Fund, beginning of year 226,048 205,559

Deposit Insurance Reserve Fund, end of year $ 248,840 $ 226,048




Statement of Comprehensive Income

Year ended December 31,

(in thousands of dollars) 2017 2016

Excess of income over total expenses $ 22,792 $ 20,489

Other comprehensive income:

Unrealized gains (losses) on available-for-sale investments arising during the year (70) (127)

Unrealized gains (losses) on available-for-sale investments acquired from liquidated institutions arising during the year 56 (41)

Actuarial gains (losses) on post-employment, non-pension benefits arising during the year (374) (48)

Total other comprehensive income (loss) (388) (216)

Comprehensive income $ 22,404 $ 20,273

Statement of Accumulated Other Comprehensive Income (Loss)



Accumulated other comprehensive income (loss), beginning of year $ (175) $ 41

Sale of available-for-sale investment from opening balance of accumulated other comprehensive income (126) (146)

Unrealized gains on available-for-sale investments arising during the year 112 19

Unrealized gains (losses) on available-for-sale investment acquired from liquidated institutions arising during the year - (41)


Net change during the year (388) (216)

Accumulated other comprehensive income (loss), end of year $ (563) $ (175)




Statement of Changes in Equity

For the year ended December 31


Deposit Insurance Reserve Fund

Balance at beginning of year $ 226,048 $ 205,559

Excess of income over total expenses during the year 22,792 20,489

Balance at End of Year 248,840 226,048

Accumulated other comprehensive Income on Available-for-sale investments

Balance at beginning of year 263 431


Balance at End of Year 249 263

Accumulated other comprehensive Income on post-employment, non-pension benefits

Balance at beginning of year (438) (390)

Actuarial gains (losses) on remeasurement of post-employment, non-pension benefits arising during the year (374) (48)

Balance at End of Year (812) (438)

Total Accumulated Other Comprehensive Income, End of Year (563) (175)

Total Equity $ 248,277 $ 225,873


Statement of Cash Flows



Cash flows from / (used in) operating activities:

Excess of income over total expenses $ 22,792 $ 20,489

Adjustments for:

Provision (recovery) for insurance losses 334 (18)

Loss on disposal of property, plant and equipment - 2



Depreciation of property, plant and equipment 7 163 199

Amortization of intangible assets 8 - 377

22,901 20,833

Changes in:

Premiums receivable 43 444

Prepaid expenses and other receivables (254) (8)

Payables and accruals 822 19

Deferred premium income 208 (1,272)

Employee benefits 96 405

915 (412)

Net deposit insurance recoveries 6 1,222 3,908

25,038 24,329

Cash flows from / (used in) investing activities:

Interest received 1,934 1,637

Purchase of investments held at year end (253,981) (229,390)

Proceeds on sale of investments 227,456 202,720

Purchase of property, plant and equipment 7 (136) (50)

(24,727) (25,083)

Net increase (decrease) in cash and cash equivalents 311 (754)

Cash and cash equivalents, beginning of year 1,216 1,970

Cash and Cash Equivalents, End of Year $ 1,527 $ 1,216

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




Notes to Financial Statements Year ended December 31, 2017

1. Reporting Entity

The 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 obligations 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 as stipulated under CUCPA or its regulations; and

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

On January 1, 2018, the following amendments were made to the General Regulation (Ontario Regulation 237/09) under CUCPA:

� setting the deposit insurance limit for insurable deposits held in non-registered accounts at $250,000 (unlimited deposit insurance for the full amount for insurable deposits held in registered accounts will be maintained);

� removing differentiated rules for small credit unions; and

� permitting credit unions to establish or acquire a corporation that is an insurance agent or a registered insurance broker.

Extra-provincial credit unions are now able to participate in syndicated loans in Ontario and must be registered with FSCO. Ontario credit unions may participate in, but not lead syndicated loans outside of Ontario, and also meet the conditions of the General Regulation.

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% per annum.


DICO MandateIn November 2016, the Ontario Government announced the creation of the Financial Services Regulatory Authority of Ontario (FSRA) resulting from the review of an Expert Advisory Panel of the mandates of DICO, the Financial Services Commission of Ontario and the Financial Services Tribunal. In 2017, the Government introduced Bill 177, which enacted amendments to the governance and structure of the Financial Services Regulatory Authority of Ontario Act, 2016 (FSRA Act), demonstrating its commitment to modernizing

and strengthening the regulation of financial services and pensions, and to improving consumer, investor and pension plan beneficiary protection. The Financial Services Regulation Modernization Secretariat (Secretariat) at the Ministry of Finance, established in Fall of 2017, is tasked with managing/supporting the multi-phased transition to FSRA, which may have implications for DICO’s role. The timing and nature of FSRA’s implementation is currently unknown.

2. Basis Of Preparation

(a) Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and were approved by the Board of Directors on March 28, 2018.

(b) Basis of measurement

The 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 currency

These financial statements are presented in the Corporation’s functional currency, which is the Canadian dollar. All financial information is presented in Canadian dollars and has been rounded to the nearest thousand.

(d) Use of estimates and judgements

The preparation of the financial statements in conformity with IFRS requires management to make judgements, 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 judgements are disclosed in the accrual for deposit insurance claims (note 6) and measurements of accrued benefit obligations in relation to future non-pension post-employment benefits (note 9).

3. Summary Of The Significant Accounting PoliciesTo facilitate a better understanding of the 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. Premiums are invoiced annually, and income is recognized when earned by amortizing the premium over the credit union’s fiscal year.

(b) Provision for losses:

The provision for losses includes specific allowances against deposit insurance advances to credit unions in liquidation, as well as an accrual for losses for which advances have not been made at the date of the Statement of Financial Position.


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 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 applies this methodology to evaluate all credit unions with the highest risk scores 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 judgement 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. The corporation’s defined contribution pension plan covers all of the organization’s regular, non-contractual employees.

As well, there are supplemental arrangements, which provide pension benefits for income in excess of registered pension plan limits to certain employees. Earnings of the Corporation 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 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 employee benefits

The Corporation also provides for 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) The Corporation’s Financial instruments:

The Corporation’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 amortization over their useful lives 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 into working condition for their intended use, including the borrowing costs on qualifying assets. 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 the estimated useful lives of the assets. 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. Any changes to useful life, based on management’s best estimate would affect the future carrying value and amortization of the asset.

(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 revenue 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) Summary of New Accounting Standards:

The impact to the Corporation is isolated to the acceleration of loss recognition on the Corporation’s loans purchased from liquidated credit unions.

IFRS 9 Financial Instruments:

In July 2014, the IASB issued the complete version of IFRS 9, which brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (IAS 39). As a result, the Corporation is required to adopt IFRS 9 on January 1, 2018, for the new classification and measurement and impairment requirements by adjusting our Balance Sheet

on January 1, 2018, with no restatement of comparative period financial information.

Classification and measurement

IFRS 9 introduces a principles-based approach to the classification of financial assets. All financial assets are measured at fair value through profit or loss (FVTPL), fair value through OCI (FVOCI) or amortized cost based on the nature of the cash flows of the assets and the entity’s business model. Financial liabilities follow the requirements of IAS 39. IFRS 9 introduces an expected credit loss impairment model with three stages, which differs significantly from the incurred loss model under IAS 39 and is expected to result in the earlier recognition of credit losses.

The model has three stages: � (1) on initial recognition, a loss allowance is

recognized for 12 months of expected credit losses.

� (2) is based on whether an instrument’s credit risk as at the reporting date has significantly increased relative to the date it was initially recognized, and a loss allowance is recognized for lifetime expected credit losses.

� (3) occurs when a financial asset is considered as credit impaired based on loss events; and the loss allowance reflects lifetime expected credit losses and interest revenue is based on the carrying amount of the asset net of loss allowance.

Financial assets can move in both directions through the three stages of the impairment model. If an asset is in Stage 2 and is no longer considered as a significantly increased credit risk compared to its initial recognition in a subsequent reporting period, it may move back to Stage 1. Similarly, an asset that is in Stage 3 may move back to Stage 2 if it is no longer considered to be credit-impaired.

The IFRS 9 list of loss events used to determine if an asset is credit impaired are: significant financial difficulty of the issuer or the borrower, breach of contract, such as a default or past due event, the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that


the lender(s) would not otherwise consider, it is becoming probable that the borrower will enter bankruptcy or other financial reorganization, the disappearance of an active market for that financial asset because of financial difficulties, and the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

For assets that are recognized as credit-impaired on purchase origination, the Effective Interest Rate is calculated by considering the initial lifetime Expected Credit Loss in the estimated cash flows with no additional 12-month expected credit loss allowance.

Forward-looking information

The estimation and application of forward-looking information requires considerable judgment in using information about past events and current conditions, as well as reasonable and supportable forecasts of future events and economic conditions to determine significant increases in credit risk. Loss rates used in collectively-assessed Stage 3 allowances are adjusted based on the forward-looking macroeconomic scenarios.

Expected life

For instruments in Stage 2 or Stage 3, loss allowances will cover expected credit losses over the expected remaining lifetime of the instrument. For most instruments, the expected life is limited to the remaining contractual life, adjusted as applicable for expected prepayments. The expected life for these mortgage loans is the contractual maturity (after considering extension options, if any), and the expected life of the unsecured loans is based on the Corporation’s historical experience.

Definition of default

The definition of default used in the measurement of expected credit losses and the assessment of qualitative indicators to determine the movement between stages will be consistent with the definition of default used for internal credit risk management purposes. IFRS 9 does not define default but contains a rebuttable presumption that default has occurred when an exposure is greater than 90 days past due.

Transition

To manage the transition to IFRS 9, in 2017, the Corporation completed an initial assessment on the scope of IFRS 9, reviewed the classification of financial assets, financial and economic impacts, resource requirements, and key accounting interpretations. During fiscal 2017, the Corporation reviewed credit risk management practices in relation to the recognition and management of estimated credit losses, based reporting on quantitative and qualitative information, continued to provide training to internal stakeholders; and prepared external disclosures to be provided on transition to IFRS 9 and going forward at each reporting date to reflect changes in credit risk since initial recognition.

Loans

The Corporation holds a portfolio of credit-impaired loans purchased from credit unions under liquidation, with unsecured and secured property, which are recognized at fair value upon acquisition from credit unions under liquidation.

Management has reviewed the purchases and valued them at Net Realizable value, $0.50 on the dollar for unsecured loans, or $1.00 on impaired loans, whichever was greater based on the loss events. Once the loans were purchased, collection activities were carried out to recover outstanding balances according to the agreed upon contractual terms with the borrowers. At year-end $969,054 of impaired loans were assessed for objective evidence of collectability, which included indications such as the following: the borrower is experiencing continuous and significant financial difficulty, is bankrupt, has undergone other financial reorganization, has defaults or delinquency of payments, or a measurable decrease has been seen in the estimated future cash flows evidenced by adverse changes in the payment history of the borrower, or the local economic conditions are associated with default.

Loans valued at $667,148 were reassessed for collectability and based on management’s judgement of current evidence for reduced collectability, a net provision of $333,574 was taken at December 31, 2017. Management’s assumptions and estimates over loan history


have been used for the individual assessment of loans, may change over each reporting period and may significantly affect the organization’s operating results.

IFRS 15 Revenue from Contracts with Customers:

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (IFRS 15). IFRS 15 sets out principles for the nature, amount, timing, and uncertainty of revenue and cash flows arising from the corporation’s contracts with customers. The model features a principle based five-step model for revenue recognition, with exceptions for financial instruments, insurance contracts and leases which fall under the scope of other IFRSs. Premium and other revenue including interest income is not expected to be impacted. IFRS 15 is effective from January 1, 2018.

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 accountingmodel, 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.

IFRS 17 Insurance Contracts

In May 2017, the IASB issued IFRS 17 to establish a comprehensive global insurance standard, which provides guidance on the recognition, measurement, presentation and disclosures of insurance contracts. IFRS 17 requires entities to measure insurance contract liabilities at their current fulfillment values using one of three approaches. This new standard will be effective for the Corporation on January 1, 2021 and will be applied retrospectively with restatement of comparatives unless impracticable.

4. Premium IncomePremium income was $30.2 million for theyear ended December 31, 2017, compared to$27.1 million for 2016. Differential premiumsare calculated based on the amount of eachcredit union’s insured deposits at the end of itsfiscal year and on various risk criteria whichgenerate a risk rating based on a points system.Effective January 1, 2015, the Corporationimplemented a new differential premium scoredetermination system (DPSD). The DPSD

system determines a 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:

DPSD Score Premium Rate Calculation

Greater than or equal to 90 points $1.00

Greater than 0 points and less than 90 points $1.75 -(DPS Score/90 x $0.75)

0 points $3.00

At December 31, 2017, DICO reported deferred premium income of $989,000 (2016 - $781,000), which represents the balance of pro-rated premiums for the credit unions whose fiscal year straddles the Corporation’s fiscal year end.


5. InvestmentsThe 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 (Loss) until the investment is sold or assessed as impaired. As of December 31, 2017, the current highly liquid investments have a weighted-average yield of 0.96% (2016: 0.67%). The non-current investments are primarily laddered Government bonds and Government floating rate notes with a

remaining weighted average term to maturity of greater than one year. The weighted average yield of these investments was 1.34% (2016: 1.13%). The Corporation has contracted with the Ontario Financing Authority to manage the investment portfolio. The composition of the Corporation’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 Credit Unions and Caisses Populaires Act, 1994 and Regulation 237/09.

December 31, 2017 December 31, 2016

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 61,462 1.31% 36 73,847 0.81% 59

Treasury bills - Canada and Provincial 92,249 0.97% 78 59,993 0.50% 87

Canada Housing Trust floating rate bond - - - 38,288 0.70% 103

Province of Ontario floating rate notes 32,276 0.88% 337 10,040 0.72% 265

Total current investments 185,987 0.96% 109 182,168 0.67% 89

Laddered Government bonds 51,808 1.39% 610 46,908 1.13% 604

Province of Ontario floating rate bond (up to two years) 16,186 1.19% 603 - - -

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

- 314

Total non-current Investments 67,994 1.34% 608 47,222

Total Investments 253,981 229,390

Included in the total non-current investments for 2016 were the CUCO Co-op Class B shares purchased from 19 credit unions in liquidation due to winding down their businesses. In 2017, the Board of CUCO Cooperative Association received approval from its members to wind up the affairs of the company by the end of 2017. The Co-op’s investment shares were

redeemed during the year and distributed to shareholders in the form of return of capital and dividends on shares. The Corporation has received such redeemed distributions in the amount of $304,000 and has taken a permanent impairment charge on the CUCO Class B shares of $10,000.


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, 2017, and 2016, the Corporation’s financial instruments were valued as follows:

Available-for-sale financial assets

($ thousands) 2017 2016

Level 1 253,981 229,076

Level 2 - 314

Level 3 - -

Total 253,981 229,390

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 provision for losses not identified with specific credit unions. The 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, 2017 (2016 - $3,000,000), and is calculated in accordance with the methodology as described in note 3(b).

2017 2016

($ thousands)

Deposit Insurance Advances

Recoverable

Provision for deposit insurance

claims

Net


Recoverable

Provision deposit

insurance claims

Net

Balance at beginning of year 6,255 (3,000) 3,255 10,145 (3,000) 7,145

Reduction in general accrual for the year - - - - - -

Net change in specific provision for prior years’ losses booked and advanced (334) - (334) 18 - 18

Total net recovery for insurance (334) - (334) 18 - 18

Total cash paid in connection with loans purchased from liquidated credit unions 1,016 - 1,016 337 - 337


2017 2016

($ thousands)


Recoverable

Provision for deposit insurance

claims

Net


Recoverable

Provision deposit

insurance claims

Net

Total cash recoveries for prior years’ losses (2,238) - (2,238) (4,425) - (4,425)

Net deposit insurance (recoveries) (1,222) - (1,222) (3,908) - (3,908)

Total net change (1,556) - (1,556) (3,890) - (3,890)

Balance at end of year 4,699 (3,000) 1,699 6,255 (3,000) 3,255

7. Property, Plant and Equipment

($ thousands) Furniture and Fixture

Office Equipment

Computer and Related Equipment

Software Leasehold Improvement Total

Cost or deemed cost

Balance at January 1, 2016 540 69 2,051 843 528 4,031

Additions - - 37 14 - 51

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

Balance at December 31, 2016 529 69 2,073 857 528 4,056

Additions 2 - 98 36 - 136

Disposals (1) - (16) - - (17)


Depreciation

Balance at January 1, 2016 477 60 1,865 788 438 3,628

Depreciation for the year 12 2 93 35 57 199

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


Depreciation for the year 10 2 88 30 33 163

Disposals (1) - (16) - - (17)


Carrying amount

At December 31, 2016 49 7 129 34 33 252

At December 31, 2017 41 5 139 40 - 225

8. Intangible AssetsThe intangible asset, a web-based software tool used by the credit unions for the electronic filing of financial data, was fully amortized in 2016. The software was replaced by another web-based reporting system designed to improve the robustness and flexibility of the Corporation’s online reporting solution. The new reporting tool was developed by internal staff and the

cost was fully recognized in the Statement of Operations in 2016.


9. Employee Benefits(i) Pension plan

The Corporation operates a defined contribution pension plan for all eligible employees. In addition, the organization 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 the 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 of the Corporation. The total pension expense for the Corporation, charged to the Statement of Operations and Changes in the Deposit Insurance Reserve Fund in 2017 was $487,000 (2016 - $501,000). Total accrued pension plan benefits as at December 31, 2017, amounted to $1,845,000 (2016 - $1,790,000).

(ii) Future non-pension post-employment benefits

The Corporation accounts for the current value of future non-pension post-employment benefits related to the extended health, dental and life benefits plan.

A full triennial valuation of the defined benefits plan was completed by an independent actuarial firm in 2017. The triennial valuation resulted in an overall net loss of $373,000 (demographic gains of $312,000, financial losses of $610,000 and experience losses of $76,000). The valuation of the benefit obligations is estimated using the Projected Unit Credit method. The accrued benefit liability as at December 31, 2017, as actuarially determined, was $3,924,000 (2016 - $3,409,000). The annual benefit cost, including current service cost and interest cost amounted to $266,700 (2016 - $252,000).

The assumptions used in the Actuarial valuation report as at December 2017, for the future benefits obligations, consisted of the following: discount rate of 3.50% (2016 - 4.00%), rate of salary increases of 2.60% (2016 - 3.00%) and immediate trend rate in health care costs of 5.26% (2016 - 4.97%), grading down to 4.5% per annum by 2032. Mortality improvement scale MI-2017 was adopted for 2017. The Corporation measures its accrued benefit obligations as at December 31st.

Change in defined benefit obligation

($ thousands)December 31, 2017 December 31, 2016

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

Current service cost 132 124

Interest cost 134 129

Benefit payments (125) (76)

Re-measurements of the effect of changes in assumptions included in OCI 374 48

Defined benefit obligation at end of year 3,924 3,409


Sensitivity analysis:

($ thousands)December 31, 2017 December 31, 2016

1. Present value of defined benefit obligation

Discount rate - 25 basis points 4,113 3,567

Discount rate + 25 basis points 3,748 3,261

Health care cost trend rates -100 basis points 3,315 2,843

Health care cost trend rates +100 basis points 4,710 4,140

Mortality assumption – 1-year life expectancy 3,733 3,241

Mortality assumption + 1-year life expectancy 4,123 3,582

2. % impact on the defined benefit obligation

Discount rate - 25 basis points 4.82% 4.64%

Discount rate + 25 basis points -4.50% -4.34%

Health care cost trend rates -100 basis points -15.53% -16.61%

Health care cost trend rates +100 basis points 20.01% 21.46%

Mortality assumption – 1-year life expectancy -4.86% -4.93%

Mortality assumption + 1-year life expectancy 5.08% 5.1%

3. Change in the defined benefit obligation

Discount rate - 25 basis points 189 158

Discount rate + 25 basis points (177) (148)

Health care cost trend rates -100 basis points (610) (566)

Health care cost trend rates +100 basis points 785 732

Mortality assumption – 1-year life expectancy (191) (168)

Mortality assumption + 1-year life expectancy 199 174

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

Discount rate - 25 basis points 18.83 18.16

Discount rate + 25 basis points 18.42 17.77

The Corporation has also implemented a human resources retention plan to ensure effective transition and succession planning is in place for key management personnel. Total accrued retention benefits were $570,000 at December 31, 2017 (2016 - $1,044,000).

The summary of employee accrued benefit liabilities (non-current) are as follows:

($ thousands) December 31, 2017 December 31, 2016

Employee pension benefits 1,845 1,790

Employee future non-pension post-employment benefits 3,924 3,409

Retention benefits for key management personnel 570 1,044

Total 6,339 6,243


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

($ thousands) 2017 2016

Less than 1 year 157 71

Between 1 and 5 years 68 223

More than 5 years - -

Under the operating lease for premises the Corporation is required to pay property taxes and common area maintenance costs, which are recognized as an expense and are approximately $291,000 per annum. The current occupancy lease of the main office is due to expire on August 5, 2019.

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

($ thousands) 2017 2016

Profit before income tax 22,792 20,489

Income tax using the combined statutory rate 26.5% 6,040 5,430

Income not included for tax purposes (8,048) (7,260)

Current year losses for which no deferred tax asset was recognized 1,938 1,636

Other, net 70 194

Provision (recovery) - -

Unrecognized deferred tax assets

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

($ thousands) 2017 2016

Deductible temporary differences 4,308 4,180

Tax benefit of loss carry-forwards 16,017 14,130

Total unrecognized deferred tax assets 20,325 18,310

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, 2017, $60,443 of income tax losses included with the above unrecognized deferred tax assets will expire between 2027 and 2038 (2016 - $53,321 between 2027 and 2036).


12. Related Parties

Transactions with key management personnel

Directors and key management personnel compensationDuring the year the Directors received an aggregate remuneration of $188,000 (2016 - $157,000). Total Directors’ expense claims were approximately $38,000 (2016 - $30,000). Compensation for the Chair is $500 for each per diem plus an annual retainer of $12,000. The per diem rate for all other Board members is $400 plus an annual retainer of $3,500.

Under the Public Sector Salary Disclosure Act, 1996, the Corporation publishes the name, title, salary and taxable benefits for all employees who earned $100,000 or more during 2017.

The information is available on the Ministry of Finance website at www.fin.gov.on.ca/en/publications/salarydisclosure.

Other benefits for key management personnel include the organization’s contributions to the pension plan and future non-pension post-employment benefits in which all employees are entitled to participate when they meet the qualification criteria. All new key management personnel who joined the organization in 2017 are contractual employees and do not meet the qualification criteria for these benefits.

Key management personnel compensation included:

($ thousands) 2017 2016

Short-term benefits 26 32

Post-employment benefits 95 161

Other long-term and termination benefits - 55

Total 121 248

13. Contingency

The Corporation may be exposed to various legal actions in the normal course of business and includes when acting in the capacity of

administrator or liquidator of a credit union. As of December 31, 2017, 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 be 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. The Corporation 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% 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.

The terms of the line of credit require the Corporation to liquidate its investments before it can borrow above $20 million. The revolving credit facility has a five-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%, 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. The 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% in interest rates for the investments at December 31 would have increased or decreased equity by $2,128,000 (2016 - $2,107,000).

(e) Capital management

One of the Corporation’s mandates is to enhance the financial soundness of the credit union sector. As of December 31, 2017, the Corporation has a DIRF of $248.8 million, which represents 82 basis points of the sector’s estimated insured deposits. The Corporation will continue to build the DIRF to its target of 100 basis points during 2024 assuming premium revenue, loss experience and operating expenses do not significantly deviate from the current assumptions.

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.


164.7 185.1 205.6 226.1 248.8

25.6 26.5

26.6 27.1

30.2

-

50.0

100.0

150.0

200.0

250.0

300.0

2013 2014 2015 2016 2017

DIRF and Premium Revenue ($ in millions)

DICO’s Premium Revenue Deposit Insurance Reserve Fund (DIRF)

6,4066,912

6,592 6,478

7,247

1,774 1,303 1,542 1,992

2,083

-

1,500

3,000

4,500

6,000

7,500

9,000

2013 2014 2015 2016 2017

Expenses ($ in thousands)

Salaries and Benefits Other Expenses

164.7 185.1 205.6 226.1 248.8

25.6 26.5

26.6 27.1

30.2

-

50.0

100.0

150.0

200.0

250.0

300.0

2013 2014 2015 2016 2017

DIRF and Premium Revenue ($ in millions)

DICO’s Premium Revenue Deposit Insurance Reserve Fund (DIRF)

6,4066,912

6,592 6,478

7,247

1,774 1,303 1,542 1,992

2,083

-

1,500

3,000

4,500

6,000

7,500

9,000

2013 2014 2015 2016 2017

Expenses ($ in thousands)

Salaries and Benefits Other Expenses

Historical Highlights Ontario Credit Union Sector Profile 2008-2017 10-year Financial and Statistical Summary

For the year ending December 31 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

Total Regulated Credit Unions 93 99 110 117 127 143 152 167 186 198

Total Deposits Held by Credit Unions ($billions) $ 45.5 $ 41.4 $ 37.6 $ 35.1 $ 33.0 $ 31.3 $ 29.4 $ 27.9 $ 26.4 $ 24.9

Total Insured Deposits ($billions) $ 30.5 $ 28.6 $ 26.4 $ 25.3 $ 24.3 $ 23.1 $ 22.3 $ 21.5 $ 20.6 $ 19.3

Insured Deposits (% of total Deposits) 67.1% 69.1% 70.2% 72.1% 73.6% 73.8% 75.9% 77.1% 78.0% 77.5%

Growth rate of insured deposits (%) 6.7% 8.3% 4.3% 4.1% 5.2% 3.6% 3.7% 4.4% 6.7% 4.3%

DICO’s Premium Revenue (in thousands) $30,208 $27,134 $26,623 $26,541 $25,626 $25,193 $24,342 $21,196 $19,947 $18,229

Average Premium rate (per $000 of insured deposits) $ 1.07 $ 1.04 $ 1.06 $ 1.10 $ 1.12 $ 1.15 $ 1.14 $ 1.03 $ 1.03 $ 0.98

Deposit Insurance Reserve Fund (DIRF) ($millions) $ 248.8 $ 226.1 $ 205.6 $ 185.1 $ 164.7 $ 147.5 $ 113.2 $ 94.6 $ 81.5 $ 97.0

DIRF as a % of Sector Insurance deposits 0.82% 0.79% 0.78% 0.73% 0.68% 0.64% 0.51% 0.44% 0.40% 0.50%

Permanent employees at credit unions (numbers) 6,373 7,059 6,897 6,813 6,606 6,652 6,473 6,297 6,205 6,252


Credit Unions, Caisses Populaires and LeaguesAs at December 31, 2017

CREDIT UNIONSAdjala Credit Union Limited

Airline Financial Credit Union Limited

Alterna Savings and Credit Union Limited

Auto Workers Community Credit Union Limited

Bay Credit Union Limited

Buduchnist Credit Union Limited

CCB Employees’ Credit Union Limited

City Savings & Credit Union Limited

Comtech Fire Credit Union Limited

Copperfin Credit Union Limited

Creative Arts Savings & Credit Union Limited

DUCA Financial Services Credit Union Ltd.

Dundalk District Credit Union Limited

Education Credit Union Limited

Energy Credit Union Limited (The)

Equity Credit Union Inc.

Estonian (Toronto) Credit Union Limited

Finnish Credit Union Limited

FirstOntario Credit Union Limited

Fort York Community Credit Union Limited

Frontline Financial Credit Union Limited

Ganaraska Credit Union Ltd.

Golden Horseshoe Credit Union Limited

Health Care Credit Union Limited

Healthcare and Municipal Employees’ Credit Union Limited

Heritage Savings & Credit Union Inc.

Italian Canadian Savings & Credit Union Limited

Kawartha Credit Union Limited

Kindred Credit Union Limited

Kingston Community Credit Union Limited

Korean (Toronto) Credit Union Limited

Korean Catholic Church Credit Union Limited

L.I.U.N.A. Local 183 Credit Union Limited

Latvian Credit Union Limited

Libro Credit Union Limited

Luminus Financial Services & Credit Union Limited

Mainstreet Credit Union Limited

Member Savings Credit Union Limited

Meridian Credit Union Limited Momentum

Credit Union LimitedMotor City Community Credit Union Limited Moya Financial Credit Union Limited Northern Credit Union LimitedOntario Educational Credit Union Limited Ontario Provincial Police Association Credit

Union LimitedOshawa Community Credit Union Limited Ottawa Police Credit Union LimitedPace Savings & Credit Union Limited Parama Credit Union Limited PenFinancial

Credit Union Limited

Police Credit Union Limited (The)

Quinte First Credit Union LimitedRapport Credit Union Limited Resurrection Credit Union Limited

Smiths Falls Community Credit

Union Limited

Southwest Regional Credit Union Ltd.

St. Stanislaus-St. Casimir’s Polish Parishes

Credit Union Limited

Sudbury Credit Union Limited

Taiwanese - Canadian Toronto Credit Union

Limited

Talka Credit Union LimitedTandia Financial Credit Union Limited Thorold Community Credit Union Limited Toronto Municipal Employees’ Credit Union

Limited

Ukrainian Credit Union LimitedUnited Employees Credit Union Limited Utilities Employees’ (Windsor) Credit Union

Limited

Windsor Family Credit Union Limited

Your Credit Union Limited

Your Neighbourhood Credit Union Limited

CAISSES POPULAIRESCaisse populaire Cochrane-Témiskaming Limitée

Caisse populaire d’Alban Limitée

Caisse populaire d’Alfred Limitée

Caisse populaire de Bonfield Limitée

Caisse populaire de Cornwall Inc.

Caisse populaire de Hawkesbury Limitée

Caisse populaire de Hearst Limitée

Caisse populaire de Kapuskasing Limitée

Caisse populaire de la Vallée

Caisse populaire de Mattawa Limitée

Caisse populaire de Mattice Limitée

Caisse populaire de Noëlville Limitée

Caisse populaire de Timmins Limitée (La)

Caisse populaire de Verner Limitée

Caisse populaire North Bay Limitée

Caisse populaire Nouvel-Horizon Inc.

Caisse Populaire Rideau-Vision d’Ottawa Inc.

Caisse Populaire St. Charles Limitée

Caisse populaire Sturgeon Falls Limitée

Caisse populaire Sud-Ouest Ontario Inc.

Caisse populaire Trillium Inc.

Caisse populaire Vallée Est Ltée.

Caisse populaire Vermillon

Caisse populaire Voyageurs Inc.

LEAGUESL’Alliance des Caisses populaires de l’Ontario Limitée

La Fédération des Caisses populaires de l’Ontario Inc.

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