SYSTEM OUTLOOK 2Q2003. September 2003 INSIDE. Ontario Economic Highlights...Page 1. Focus on Interest Rates...Page 2

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1 September 2003 SYSTEM OUTLOOK 2Q2003 INSIDE Ontario Economic Highlights Page 1 Focus on Interest Rates Page 2 System Highlights: System Assets Surpass $20 billion page 3 A Regional Breakdown Page 4 Off-balance Sheet Activity Page 5 On-Site Verification (OSV) Findings Page 6 System Financial Statements Pages 7, 8 & 9

2 Electronic Publication: The System Outlook is available in PDF format (portable document file format), which can be read using Adobe Acrobat Reader. It can be downloaded from the Member Institution section on DICO's Web site at or you can subscribe for an electronic copy by ing us at 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. Ce document est également disponible en français.

3 ONTARIO ECONOMIC HIGHLIGHTS Ontario economy suffers from weak exports and tourism The growth forecast for 2003 has been further revised downward to 1.6% from the previous projection of 2.7%. This latest revision reflects the impact of the weakness in the U.S economy, the strong Canadian dollar, and SARS % Ontario Real GDP Growth With this latest downturn, Ontario's job market is expected to suffer, with little or no employment growth in After strong gains in 2002 and into 2003, employment growth has now stalled. Service sector employment slowed significantly primarily due to the impact of SARS. Furthermore, employment in manufacturing continued its downward trend due to declines in transportation equipment, computers and electronics, and the food processing sector. In contrast, employment in the construction industry posted growth of 1.3% as a result of the strong housing market and residential investment. Much of the current weakness is due to the decline in exports and continued weakness in the auto and tourism sectors. In contrast, domestic demand remains strong, with a projected increase of 3.1% in 2003 and 3.6% in 2004 compared to 2.6% in Low interest rates and fairly stable employment conditions will continue to sustain the housing sector and big-ticket items. The housing market remains buoyant and is likely to benefit further from the recent interest rate reduction announced by the Bank of Canada for the remainder of 2003 and early into Although rates are expected to increase moderately in 2004 and beyond, rates are likely to remain relatively low and are not expected to lead to any significant slowdown in housing starts in the near term. Actual Forecast Implications for credit unions Notwithstanding the short term impact from weak exports and tourism, conditions in Ontario are likely to provide further opportunities for continued asset growth and lending opportunities. In summary: Demand for mortgages is likely to moderate slightly in 2004 as interest rates are gradually increased; Delinquency and loan impairment are likely to remain relatively low due to stable employment conditions; Financial margins are still expected to remain stable or decline marginally as a result of the recent decrease in interest rates. Forecast increases in interest rates are likely to provide some relief in the second half of Note: Economic data is provided by the Conference Board of Canada. 2Q03 - System Outlook, September

4 FOCUS ON INTEREST RATES Slowdown Puts Rate Hikes on Hold In the first half of the year, worries about an overheating economy prompted the Bank of Canada to increase interest rates on two separate occasions. However, economic growth slowed in the second quarter and is likely to remain stalled in the third quarter. The Bank indicated that the recent weakness reflects the impact of a number of factors, including the lingering effects of SARS, "mad cow disease", the power outage in Ontario, and the forest fires in western Canada. Although exports grew by 0.6% during the second quarter after declining in the previous two quarters, this was tempered by a decline in GDP of 0.3% on an annualized basis. Slower growth has clearly quieted inflation fears. This was manifested in the bond market, which saw yields at the long end slide enough to prompt cuts in longer term mortgage interest rates. Recent CPI growth has fallen below the Bank of Canada's expectations in both the headline and core indexes. Despite the current weakness, the Bank expects economic growth to strengthen toward the end of 2003 and through 2004 and will likely hold rates steady while the economy improves in the wake of renewed U.S. growth. Accordingly, 3- month T-bill rates are anticipated to be relatively flat over the forecast period. After averaging 2.6% in 2002, they are expected to average 3% in 2003 and 2.9% in Dollar Weakens in 2004 The Bank of Canada's rate cut in July stemmed our dollar's recent appreciation, causing it to retreat to the U.S. $0.715 cent level. As U.S. GDP growth gains momentum, the Federal Reserve Board is expected to begin withdrawing the considerable monetary stimulus that has been present since late A small increase in Canadian rates by the end of 2004 will only mildly dampen the convergence in Canada-U.S. rates. As such, the spread on key policy rates, 175 basis points (bp) in the first quarter of next year, is expected to all but vanish as the year unfolds, weakening the loonie to U.S. $0.68 by the end of T-bill rate (%) T-bill rate: Canada vs. U.S to 4Q02 actual: 2003 forecasts Q00 3Q00 1Q01 3Q01 Canada 1Q02 3Q02 U.S. 1Q03 3Q03 Long-term Forecasts 2003/2004 (2002 actual results) Month Treasury Bill Yield 2.6% 3.0% 2.9% Chartered Bank Prime Lending Rate year GIC Rate year Mortgage Rate year and Over GOC Bond Rate Focus on Interest Rates and forecasts are provided by the Conference Board of Canada. Forecasts as at August Q03 - System Outlook, September

5 SYSTEM HIGHLIGHTS System Assets Surpass $20 Billion Ontario system assets increased by $2.61 billion during 2Q03 and now stand at $20.8 billion. This latest increase reflects the assets of Desjardins Credit Union Inc. which purchased the Province of Ontario Savings Office effective April 1, Over the past five years, system assets have increased by more than $7 billion or 54%. During the past quarter deposits increased by $2.5 billion, while loans increased a further $369 million. Over the latest twelve months, total loans to members have increased by $1.1 billion, or 8.1%. While personal loans have increased by $52 million (1.9 %), commercial and agricultural loans have grown by $402 million (13.2 %) and residential mortgages have increased by $588 million (7.7 %). Commercial loans now represent almost 20 % of total system loans compared to less than 15% in In contrast, personal loans represent 20% of total loans compared to almost 25% in Mortgages continue to represent the largest loan category and currently account for 56% of total loans. Earnings increased by 2 bp in 2Q03 to 36 bp due primarily to lower non-interest expenses. Net interest income remained stable while other income declined marginally. As a result of strong asset growth in the latest quarter, aggregate system capital has declined marginally to 6.7% compared to 6.8% in 2Q2002. Total gross loan delinquency (over 30 days) has declined from 1.06% to 1.01% during 2Q03. This was primarily the result of an improvement in personal loan delinquency, which declined to 1.36% from 1.42 percent at 1Q03, and residential mortgage loan delinquency which declined to 0.74% from 0.83% 1Q03. In contrast, commercial loan delinquency increased marginally to 1.61% from 1.49% at 1Q03. Loan costs remained constant at 12 bp for the past 2 quarters compared to 16 bp at 2Q02. Total loan allowances decreased marginally in the quarter to 0.40% from 0.46% in 1Q03. Total loan allowances as at 2Q03 were $84.2 million. This includes $41.0 million in non-specific provisions reflecting an increase of $3.4 million from 1Q03. Percentage Loan Delinquency : 4Q00 to 2Q03 Percentage Loan Costs and Loan Allowances as a % of Total Assets: 1Q01 to 2Q03 0 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 0 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 Total Delinquency Commercial Loan Delinquency Loan Costs Loan Allowances 2Q03 - System Outlook, September

6 FINANCIAL HIGHLIGHTS 2Q03 Regional Distribution of Assets, Earnings and Delinquency For comparison purposes, member institutions have been segregated into five main regions. The GTA region includes Oakville, Ajax and Newmarket. The Central region extends from Niagara Falls to Oshawa, and North to Barrie, but excludes the GTA. The South Western region includes London, Windsor, St. Thomas and Sarnia. The Eastern region includes Peterborough, Cornwall, Kingston and Ottawa. The Northern region extends from Barrie, and includes North Bay, Sudbury, Thunder Bay and Kenora. The following table provides a regional breakdown including the distribution of assets and earnings: Distribution of Assets and Earnings by Region as at 2Q03 Region # of Member Institutions 1 Assets ($million) 1 % of System Assets 1 Net Interest and Other Income (basis points) 2 Non Interest and Other Expenses (basis points) 2 ROA (basis points) 2 Eastern 39 3,533 16% Northern 45 2,551 12% Central ,153 30% Greater Toronto 73 5,116 25% South Western 66 3,489 17% Total (System) , % System ROA is 36 bp, although there are significant differences in operating results across the various regions. Of particular note are: Higher net interest and other income in the Northern region; Lower operating expenses in the Greater Toronto and South Western regions; Higher ROA in most regions except for the GTA region. The following table provides a regional breakdown of delinquency (as a percentage of loans) and loan costs (as a percentage of assets): Distribution of Delinquency and Loan Costs by Region as at 2Q03 Region Loans Delinquent over 30 Days Loans Delinquent Between 30 and 90 Days Loans Delinquent over 90 Days Loan Costs (basis points) Eastern 1.07% 0.59% 0.48% 12 Northern 2.04% 0.76% 1.28% 18 Central 0.63% 0.42% 0.21% 7 Greater Toronto 0.78% 0.31% 0.47% 10 South Western 1.03% 0.55% 0.48% 17 Total (System) 1.01% 0.49% 0.52% 12 Total system delinquency is approximately 1.01% and loan costs average 12 bp, although loan costs and delinquency levels continue to be substantially higher in the Northern region. 1Includes Desjardins Credit Union Inc. 2 Excludes Desjardins Credit Union Inc. 2Q03 - System Outlook, September

7 FINANCIAL HIGHLIGHTS 2Q03 Off-balance Sheet Highlights The following table summarizes the volume of non-interest income producing activities that are not reported on the credit union's balance sheet, as well as the level of related income generated at 2Q03.This information is compared to results at 1Q03. Highlights include: Total off-balance sheet activity increased by $159 million or 9.7% during 2Q03 The balance of administered loans has increased $56.1 million or 24% from 1Q03. Net mutual fund balances have increased marginally by $17.4 million or 1.7% from 1Q03. Credit card receivables managed by credit card providers increased $7.0 million or 15.9% from 1Q03. Off-balance Sheet Activity 2Q03 ($ 000) 2Q03 % of total 1Q03 ($ 000) Balance of administered loans at the end of the period 282,898 16% 226,819 Net mutual funds sold through mutual fund alliances 1,039,995 58% 1,022,652 Credit card receivables managed by credit card providers 51,611 3% 44,606 Other (incl. letters of credit and guarantees) 430,043 24% 351,263 Total off-balance sheet activity 1,804, % 1,645,340 Total system assets and off-balance sheet activity 22,646,414 19,873,788 Income earned on off-balance sheet activity 11,806* 10,551 Off-balance sheet income as a % of total other income 7.8%* 6.9% *Excludes data of Desjardins Credit Union Inc. 2Q03 - System Outlook, September

8 FINANCIAL HIGHLIGHTS 2Q03 On-Site Verification (OSV) Findings The following table provides a summary of the current OSV ratings, including comparative ratings for 2001 and As indicated, there has been noticeable improvement in overall ratings for most risk management categories over the past three years. Of particular note is the significant improvement in credit management, where 59% of member institutions are now rated effective compared to 32% in 2001 and 21% in OSV Ratings by Asset Groups as at July 31, 2003 Asset Group (M's) > to to to 30 3 to 10 1 to 3 > 1 Total Number of MIs Total Assets per Group ($M's) 11,451 3,819 4,117 1, ,841 Risk Management Practices % of MIs that Received an Effective Rating % of Total Corporate Governance Capital Management Credit Management Investment Management A/L Management Liquidity Management Internal Controls % in 2002 % in 2001 Rated effective in Investment and Credit Management Rated effective on all modules inspected Summary of Corporate Governance (Management) Scores DPS Points 2Q03 2Q02 # of Member % of Assets # of Member % of Assets Institutions Institutions % 74 38% % 19 3% % 67 31% % 44 8% % 81 20% Total % % The general improvement in OSV results is reflected in the latest distribution of Corporate Governance (Management) scores. As at 2Q03, 76% of member institutions (89% of assets) had 10 or more points compared to 56% (71% of assets) at 2Q02. 2Q03 - System Outlook, September

9 FINANCIAL HIGHLIGHTS 2Q03 Dollars are expressed in millions Percentages are % of average assets 1 2Q03 1Q03 2Q02 Total Number of Member Institutions Number of Member Institutions below 5% Capital Regulatory Capital (as per Ont Reg 76/95) $1,389 $1,246 $1,166 (as a percentage of net assets) 6.69% 6.84% 6.73% Net Interest and Investment Income $533 $524 $501 (Income from lending and investment activities) 2.97% 2.98% 3.00% Loan Costs $22 $22 $ % 0.12% 0.16% Gross Delinquency greater than 30 days $149 $151 $183 (as a percentage of total loans) 1.01% 1.06% 1.38% Gross Delinquency greater than 90 days $76 $80 $98 (as a percentage of total loans) 0.52% 0.56% 0.74% Other (non-interest) Income $151 $154 $153 (Fees and Commission Income) 0.84% 0.88% 0.92% Total Income $662 $656 $627 (Net Interest, Investment and Other Income) 3.70% 3.73% 3.76% Total Non-Interest Expenses $577 $575 $556 (Costs of Operations-excluding loan costs) 3.22% 3.27% 3.33% Net Income/(Loss) before Taxes and $85 $81 $70 Non-recurring & Extraordinary items 0.47% 0.46% 0.43% Net Income/(Loss) $65 $60 $ % 0.34% 0.29% Gross Liquidity as per Sections of Ont Reg.76/ % 16.99% 17.71% Average Assets per member institution $77.5 $66.8 $57.3 Median Assets $23.6 $24.0 $20.3 DPS Rating of MIs at 2Q03 MIs with assets of $100 M and over MIs with assets from $10 M to $100 M MIs with assets below $10 M SYSTEM DPS Tier Scores within DPS Tier Number % of Number % of Number % of Number % of Assets Assets Assets Assets 1 From 85 to % 27 21% 7 12% 40 11% 2 From 70 to % 69 51% 32 43% % 3 From 55 to % 28 23% 27 22% 69 34% 4 From 40 to % 6 4% 22 16% 29 7% 5 From 0 to % 2 1% 6 8% 8 0% Total % % % % 1. Average assets do not include off-balance sheet items. Totals may not agree due to rounding. 2Q03 - System Outlook, September

10 SYSTEM BALANCE SHEET 2Q03 Percentage of Total Assets 1 2Q03 2Q02 2Q03 2Q02 ($000) ($000) ASSETS Cash and Investments 5,701,120 3,448, % 19.9% Personal Loans 2,834,883 2,783, % 16.0% Residential Mortgage Loans 8,220,705 7,632, % 44.0% Commercial Loans 2,893,009 2,558, % 14.7% Institutional Loans 158,252 58, % 0.3% Unincorporated Association Loans 8,844 5, % 0.0% Agricultural Loans 561, , % 2.8% Total Loan Allowances (84,188) (81,581) (0.4%) (0.5%) Capital (Fixed) Assets 305, , % 1.7% Intangible & Other Assets 242, , % 0.9% Total Assets 20,841,868 17,355, % 100.0% LIABILITIES Demand Deposits 6,426,175 5,255, % 30.3% Term Deposits 7,197,379 5,246, % 30.2% Registered Deposits 5,079,601 5,043, % 29.1% Other Deposits 227, , % 1.2% Borrowings 151,369 87, % 0.5% Other Liabilities 371, , % 1.9% Total Liabilities 19,454,328 16,172, % 93.2% MEMBERS' EQUITY & CAPITAL Membership Shares 84,584 86, % 0.5% Retained Earnings 861, , % 4.6% Other Tier 1 & 2 Capital 441, , % 1.7% Total Members' Equity & Capital 1,387,540 1,183, % 6.8% Total Liabilities, & Members' Equity & Capital 20,841,868 17,355, % 100.0% Average Assets 18,191,042 16,683, Totals may not agree due to rounding. Balance Sheet includes data of Desjardins Credit Union Inc. at 2Q03. 2Q03 System Outlook, September

11 SYSTEM INCOME STATEMENT 2Q03 (WITH INDUSTRY COMPARISON) ONTARIO SYSTEM 3 Canadian Chartered Banks 2 Percentage of Average Assets 1 12 Months to 2Q03 2Q02 2Q03 2Q02 2Q03 ($000) ($000) Interest and Investment Income Loan Interest Income 882, , % 5.28% 2.99% Investment Income 106, , % 0.73% 1.02% Total Interest and Investment Income 989,284 1,002, % 6.01% 4.00% Interest Expense Interest Expense on Deposits 418, , % 2.81% 1.55% Other Interest Expense and Dividends 38,495 33, % 0.20% 0.51% Total Interest Expense 456, , % 3.01% 2.07% Net Interest & Investment Income 532, , % 3.00% 1.94% Loan Costs 21,764 27, % 0.16% 0.41% Net Interest & Investment Income after Loan Costs 510, , % 2.84% 1.52% Other (non-interest) Income 151, , % 0.92% 1.74% Net Interest, Investment & Other Income 662, , % 3.76% 3.26% Non-Interest Expenses Salaries and Benefits 290, , % 1.65% 1.39% Occupancy 48,485 45, % 0.27% Computer, office & other equipment 68,144 64, % 0.39% Advertising & Communications 38,224 36, % 0.22% Member Security 26,540 25, % 0.15% Administration 66,282 64, % 0.39% Other 39,181 44, % 0.26% 1.21% Total Non-Interest Expenses 576, , % 3.33% 2.60% Net Income/(Loss) Before Taxes and Non-recurring 85,035 70, % 0.43% 0.66% & Extraordinary items Non-recurring & Extraordinary gains/(losses) (14) (2,561) (0.00%) (0.02%) 0.00% Taxes 19,678 18, % 0.11% 0.15% Minority Interests 0.04% Net Income/(Loss) 65,342 49, % 0.29% 0.47% Average Assets -$000 17,913,830 16,683,723 1,611,790, Totals may not agree due to rounding. Ontario figures exclude leagues. 2. Source: Canadian Bankers Association, Detailed Financial Statistics. Consolidates all subsidiaries, such as investment dealers. 3. For comparative purposes, Income Statement figures exclude data of Desjardins Credit Union Inc. at 2Q03. 2Q03 - System Outlook, September