Summary Results 4Q14

/ Ontario Credit Unions and Caisses PopulairesSECTOR OUTLOOK 4Q14
February 2015
In This Issue

Summary Results….Page 1
Sector Financial

Highlights………….Page 5

Sector Financial Statements………..Page 6
Selected Performance

Trends …… ……...Page 8
The information presented in this report has been prepared using a variety of sources, including unaudited reports submitted to DICO by Ontario’s credit unions and caisses populaires. While DICO believes that the information contained in this report would be useful to readers, and considers the financial statements to be reliable, their accuracy and completeness cannot be guaranteed.
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NOTE:
Income Statement results are based on aggregate year to date annualized information for each institution. Comparative results may not always agree with previously reported information for the same period as a result of additional information received after the reporting date.
Results are based on the latest available information as at February 6, 2015. /

Summary Results 4Q14

Selected Aggregate Sector Performance Indicators / As at December 31
2014 / 2013
Total Assets Class 1 Institutions (millions) / $437 / $453
Total Assets Class 2 Institutions (millions) / $42,013 / $38,503
Total Sector Assets (millions) / $42,450 / $38,957
Number of Class 1 Institutions / 22 / 24
Number of Class 2 Institutions / 95 / 103
Total Number of Insured Institutions / 117 / 127
Number of Members (000’s) / 1,553 / 1,563
Regulatory Capital (Aggregate Leverage Ratio) / 7.00% / 7.17%
Number not meeting minimum regulatory capital level / 0 / 0
Class 1 Institutions (Leverage) / 8.48% / 8.41%
Class 2 Institutions (Leverage) / 6.98% / 7.15%
Class 2 Institutions (BIS) / 13.47% / 13.69%
Liquidity – Class 1 Institutions / 27.01% / 27.12%
Liquidity – Class 2 Institutions / 10.29% / 11.11%
Asset Growth / 8.97% / 6.59%
Total Loan Delinquency (greater than 30 days) / 0.95% / 1.07%
Commercial Loan Delinquency (greater than 30 days) / 1.55% / 1.80%
Year to Date (annualized)
Net Interest Income (Financial Margin) / 2.21% / 2.28%
Other Income / 0.56% / 0.59%
Return on Average Assets (ROAA) Class 1 Institutions / 0.41% / 0.32%
ROAA Class 2 Institutions / 0.34% / 0.45%
Total Sector ROAA / 0.35% / 0.43%
Return on Regulatory Capital / 4.88% / 6.27%
Efficiency Ratio (before dividends & interest rebates) / 81.4% / 80.8%
Unless stated otherwise, all figures reported are as at 4Q14.
Capital
Aggregate regulatory sector capital decreased to7.00% or $2.96 billionfrom 7.20% at 4Q13 as growth continues to outstrip earnings in this low interest rate environment. Retained earnings representedapproximately 62% ($1.84 B) of regulatory capital, investment and patronage shares accounted for 35% ($1.04B) with the balance beingmembership shares of 3% ($73 million).Year over year, retained earnings grew 7.9%. While credit unionswith $1 billion or more in assets are expected to stress test their capital under various risk scenarios to determine the impact on capital levels, institutions with assets greater than $500 million are encouraged to consider including stress testing as part of their annual planning process. The changes in the economic environment over the last 3 months with lower oil prices and the collateral effects on the Canadian economy for the short and long term require credit unions to investigate how these stresses will affect their institution and then re-evaluate the levels of capital required to remain viable.
Growth
Sector consolidation continued over the last twelve months, with the number of credit unions decreasing by 10 to 117 and resulting in the average size increasing to approximately $363 million. The number of Class 1 institutions declined by 2 to 22and theaverageasset size increased from $19 million to $20 million. Class 2 credit unions consolidated by 8 to 95 resulting in anaggregate assetgrowth of approximately 9.1%withaverage total assets per institutionof $442 million.
Total sector assetsgrew byalmost 9.0%to $42.5 billion,largely due togrowth in residential mortgage loans (10.9%), agricultural loans (10.4%), and commercial loans (12.1%).The following table outlines the changes in the number and average size of loans from 2012 to 2014. The average size of agricultural loans has increased by 16.2% over the past 2 years, commercial loans by 20.2% and residential loans by 11.6%. As the size of loans increases, institutions are reminded that prudent underwriting practices should be used when pricing loans, including testing the impact of increases in loan rates on the borrower’s ability to pay.
Number of Residential Loans / Average Size of Residential Loans / Number of Commercial Loans / Average Size
of Commercial Loans / Number of Agricultural Loans / Average Size
of Agricultural Loans
2014 / 159,093 / $ 136,628 / 31,224 / $ 338,546 / 8,836 / $ 170,906
2014 / 151,780 / $ 129,098 / 30,592 / $ 308,279 / 8,501 / $ 160,860
2012 / 145,184 / $ 122,403 / 30,421 / $281,524 / 8,441 / $ 147,022
Year over year, total deposits grew by6.4% higher thanthe fiveyear historical deposit growth trend of 5.8%.The annual growth rate in demand deposits increased from 6.2% to 9.7% quarter over quarter while the growth rate in term deposits decreased from 5.4% to 4.6% quarter over quarter.
Insured deposits were estimated at $25.3 billion or 72% of total deposits in contrast to the banking sector with insured deposits of 31% ($665 billion) as reported by CDIC. Further details are provided in the “Liquidity and Borrowing” section in this report.
Profitability
The low interest rate environment continued to constrain financial margin and is expected to persistin 2015 as the Bank of Canada decreased the prime interest rate by 0.25% in January 2015 (see “Credit Risk” section below for a discussion of the effects of this rate decrease) with the possibility of a further cut. Five credit unions experienced losses during 2014 ranging from 6 to 103 bps. Interest and investment income decreased by 2 bps on a year over year basis while interest and dividend expenses increased by 5 bps for the total sector. The impact of these market conditions was to reduce ROAA for the sector to 35 bps. This is made up of a 10 bps increase for Class 1 institutions to 41 bpsand a 9 bps decrease for Class 2 institutionsto 34 bps over the last 12 months.
The efficiency ratio deteriorated slightly to 81.4% from 80.8% in 4Q13.
Credit Risk
Loan costs were the same as 4Q13 at9 bps. Gross loan delinquencygreater than 30 days was 0.95% of total loans, down 12 bps from 1.07%in 4Q13,continuing the downward trend from the highof 1.61% reached during the 2008recession.Delinquencies were down in all categories, most notably in commercial loans, whichdeclined to1.55%from1.78%.However, the reported total amount of impaired commercial loanshas increased by 7.2% to
$189 million since 4Q13.Agricultural loan delinquency increased year over year from 0.76% to 1.22% due largely to an increase in 30 – 89 days delinquencies at four institutions.
The 0.25% rate decrease in the prime lending rate by the Bank of Canada in early January and a forecasted additional 0.25% decrease later in 2015 would bring the lending rate down to 0.5%. In late 2014, economists were projecting that rates would begin to increase late in 2015 with a total increase of 0.75% bringing the lending rate to 1.75% by late 2016 or early 2017. Instead of preparing for higher interest rates and the effects on the credit unions portfolios and ability of borrowers to pay the higher rates, credit unions must continue to operate in a low(er) interest rate environment for the foreseeable future. While the lower rates provide an opportunity for members to increase their borrowings and therefore stimulate the economy, there is a risk that borrowers may become overextended and therefore unable to make their payments when interest rates begin to rise. Credit unions need to revisit their stress testing and liquidity management models to ensure the decrease in interest rates is appropriately reflected.
Loan Mix and Yields
Personal loansdecreasedslightly by $12 millionyear over year, to$2.91 billion andcontinue to represent a declining portion of the loan mix (down from 8.7% to 7.9% of the total loan portfolio) as other loan categories experience substantial growth. In contrast, residential mortgage loansgrew at 10.9% and commercial loans at 12.1%.
The following chart illustrates the current loan portfolio mix and yields versus the values from 4Q13 and their impacts on gross interest revenues.The increase in earnings from higher loan yields in the past year is estimated at $13.5 million and is due to higher yieldsin mortgage loans largely offset by decreases in all other loan categories. The notional impact of the change in portfolio mix on gross interest revenues is estimated to be a decrease of $4.2 million.
Loan
Product / % of portfolio / Change
($ M) / Change
(%) / Yield
4Q 2104 / Yield
4Q 2013 / Notional impact (in millions) on gross interest revenues due to changes in
2014 / 2013 / portfolio mix / interest rates
Personal / 7.9% / 8.8% / $ (12) / -0.4% / 6.17% / 6.49% / $ (17.9) / $ (8.7)
Mortgage / 59.0% / 58.7% / $2,142 / 10.9% / 3.88% / 3.69% / $ 5.0 / $ 38.4
Commercial / 28.7% / 28.2% / $1,141 / 12.1% / 4.77% / 4.92% / $ 8.2 / $ (14.7)
Agricultural / 4.4% / 4.3% / $ 161 / 11.8% / 4.08% / 4.18% / $ 0.5 / $ (1.5)
Total / 100.0% / 100.0% / $ (4.2) / $ 13.5
The year over year increase in mortgage yields was the firstincrease since 2008 and was positive for credit unions as mortgage interest comprises a large portion of revenue. Demand for new mortgages remains strong and is expected to continue in the near future as a result of the reduction in the Bank of Canada prime rate. However, yields will remain under pressure with increased competition in the mortgage lending space.Credit unions conduct stress testing on their mortgage loan portfolio to determine the effects on the performance of these loans in the event of lower yields and a possible correction in residential housing prices.
Liquidity and Borrowings
Year over year borrowings increased36%due largely to securitization of residential mortgages.Securitizations have increased by 22.5% since 4Q13 to $2.61 billion. Although holdings of liquid assets increasedby $26 million to $4.06 billion, the liquidity ratio decreasedto 10.46%from 11.30% in 4Q13.In comparison, liquidity of Canada’s banks was estimated to be approximately 11%. The following chart shows how liquidity has reduced across all asset size categories except the $100 to $250 million. The movement of assets into less liquid assets couldreduce an institution’s ability to meet their obligations. To ensure sufficient fundingexists, credit unions are encouraged to conduct liquidity stress testing under various scenarios.
Institution by Total Assets / Liquidity (%)
December 31, 2014 / December 31, 2013
Less than $50 million / 24.24 / 25.44
$50 million to $100 million / 14.96 / 15.92
$100 million to $250 million / 13.65 / 12.14
$250 million to $500 million / 10.57 / 11.62
$500 million to $1 billion / 8.70 / 9.03
Greater than $1 billion / 8.69 / 10.69