D E P O S I T I N S U R A N C E C O V E R A G E C O N T E N T S. W H AT S C O V E R E D? Canadian currency deposits payable in Canada including:

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1 ANNUAL REPORT 2016

2 C O N T E N T S 01 Mandate, Mission, Vision, Values 02 Message from the Chair 04 Corporate Governance 05 Board of Directors 06 Board Committees 07 Message from the CEO 08 Ombudsman s Report 09 DICO s Business Model DICO s Strategic Plan Risk Management 12 Highlights of Key Programs and Activities 15 Looking Forward 16 Performance Against Plan 18 Management s Discussion and Analysis 21 Financial Performance Analysis 27 Management s Responsibility for Financial Statements 28 Independent Auditors Report 29 Financial Statements D E P O S I T I N S U R A N C E C O V E R A G E To be insured, your deposits must be held in an Ontario credit union or caisse populaire that is insured by DICO. All credit unions and caisses populaires incorporated in Ontario are insured by DICO. W H AT S C O V E R E D? Canadian currency deposits payable in Canada including: Non-Registered Deposits Eligible deposits are insured up to the prescribed statutory limit of $100,000 per depositor for each of the following: savings and chequing accounts; term deposits, including index-linked term; deposits and GICs, money orders, and certified cheques etc.; and deposits held in one name deposits held in joint names deposits held in trust Registered Plans All 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) W H AT S N O T C O V E R E D? 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 34 Notes to Financial Statements 51 Fulfilling Agency Mandate Expectations 52 List of Credit Unions, Caisses Populaires and Leagues Throughout this document: the term credit union also refers to caisse populaire. The term sector refers to the credit union sector. C O N TA C T U S DICO 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: Website: info@dico.com Fax: (416)

3 M A N D AT E The Deposit Insurance Corporation of Ontario (DICO) is responsible for administering and ensuring compliance with the rules set by the Ontario Government related to the solvency of credit unions, promoting standards of sound business and financial practices, providing insurance against the loss of deposits, and promoting and contributing to the stability of the Ontario credit union sector with due regard to its need to compete. M ISSION To protect depositors and contribute to the stability of the sector. VISION We will contribute to the soundness, stability and success of the sector by being an effective solvency regulator and deposit insurer. VA LU ES In fulfilling our mandate and pursuing our Vision and Mission, we will live by the following values: Excellence and Professionalism DICO will maintain a highly skilled and diverse workforce that promotes excellence and professionalism in how it conducts its affairs. Respect and Fairness Employees will treat everyone with mutual respect and fairness. DICO will act and support employees in a fair and consistent manner. Integrity and Trustworthiness Employees will adhere to the highest ethical standards in performing their duties and responsibilities including maintaining the confidentiality of sensitive information. Communications and Teamwork Employees will maintain open communications and work cooperatively amongst themselves and with partners towards the achievement of DICO s mandate. Financial Stewardship DICO will act as a responsible agency that continuously strives to manage its operations efficiently and effectively for the benefit of all stakeholders. PROTECTION, SECURITY, STABILITY 1

4 M ES SAG E FRO M THE CHAIR In 2016, DICO continued to successfully deliver on its mission to protect depositors and contribute to the stability of the sector, since there were no credit union failures or deposit insurance claims. In fact, in DICO s 39-year history, no member has ever suffered any loss of deposit funds. Also, of note is DICO does not receive funding from the Ontario Government as its operations are funded entirely through deposit insurance premiums paid by credit unions. The premiums also help to build and maintain the Deposit Insurance Reserve Fund (DIRF) which protects eligible insured deposits of credit union members against loss. As the financial services sector continues to evolve and increase in complexity, the expectations placed on prudential supervisors and deposit insurers to ensure safety and soundness continue to grow. During the year, DICO continued to enhance its regulatory oversight processes aimed at improving the prudential supervisory regime by ensuring credit unions adhere to high standards of governance, capital levels and risk management. We are confident these policies, processes and service standards have strengthened the protection of deposits, and are grateful for the ongoing support of the sector for these enhancements. As part of our ongoing efforts to foster proactive communication with the sector, DICO continued to interact with its key stakeholders in several different ways: through publication of guidance, tools and other helpful materials, presentations to Boards of individual credit unions, and consultations with sector leaders. This past year, the Board hosted special events with area credit unions Boards and management. In addition, to maintain currency in risk oversight best practices and innovations, we participated in national and international industry conferences. These outreach activities are an essential component of the effective communication between DICO and the sector. During 2016 DICO participated in the development of revised legislation to support the implementation of the recommendations resulting from the 2015 review of the Credit Union and Caisses Populaires Act, 1994 (CUCPA). It is expected that this work will continue throughout Additionally, the Government announced in late 2016 that it will be moving forward with the creation of the Financial Services Regulatory Authority of Ontario (FSRA). This change came as a result of review of the mandates of DICO, the Financial Services Commission of Ontario (FSCO) and the Financial Services Tribunal (FST). The management of the multi-phased transition to FSRA has been assigned to the newly established Financial Services Regulation Modernization Secretariat. While the timing of the transition and the precise impact on DICO s mandate and operations is largely unknown at this time, we believe it will be significant. We look forward to providing assistance to the Secretariat in this important initiative, which is aimed at modernizing and strengthening the regulation of financial services and pensions, as well as improving consumer, investor and pension plan beneficiary protection. I would like to take this opportunity to express my sincere appreciation to all of the Directors for their dedication and professionalism in providing exceptional oversight to the organization. The diverse skill sets of the board members provide outstanding value to DICO, its stakeholders and the management team. During the past year we said farewell to Andy Poprawa, who retired from DICO after 23 years as President and CEO. Under Andy s strong leadership, DICO evolved from a stabilization authority and deposit insurer for over 500 credit unions with assets in excess of $12 billion dollars to becoming the prudential solvency regulator and deposit insurer for 99 credit unions with $51.9 billion in assets and a well-funded DIRF. On behalf of the Board and staff I would like to express our deep appreciation to Andy for his outstanding contribution and tireless dedication to DICO and the sector. We wish Andy and his family the very best in retirement. 2 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

5 I would also like to express my sincere appreciation to Guy Hubert for his leadership and hard work since his appointment in September as Acting President and CEO. Special thanks to the staff and executive team who are commended for their commitment and dedication. Finally, we thank our colleagues in the Ministry of Finance for their support and direction. We are also grateful to the many stakeholders that we have worked with over the past year and we look forward to their continued contributions to the ongoing success of the credit union sector in Ontario. On behalf of the Board of Directors, Steve Blakely, ICD.D Chair of the Board PROTECTION, SECURITY, STABILITY 3

6 CORPOR ATE GOV ER N A N C E DICO is a Board-Governed Agency of the Province of Ontario established in 1977 and operates under the CUCPA. The CUCPA sets out DICO s objects, powers and duties, as well as general terms for deposit insurance and other governing parameters. DICO functions within the legal framework established by the CUCPA, the Agency and Appointments Directive issued by Management Board of Cabinet, and other applicable directives and laws. DICO is accountable to the Minister of Finance for the conduct of its affairs. The CUCPA requires DICO s Board of Directors (the Board) manage the affairs or supervise the management of the affairs of the Corporation. The Board is composed of up to nine persons all of whom are appointed by the Lieutenant-Governor-in-Council. A robust Board appointment process is followed to ensure the best-qualified people are recruited. DICO refers candidates who possess the appropriate skills and experience for consideration by the Minister to recommend appointment to the Lieutenant-Governor-in-Council. In addition to a position description for Directors, a skills profile has been developed. DICO has also established a gender, experience and geographic representation profile for the Board as a whole to ensure it maintains an appropriate balance of these attributes. The criteria for consideration of candidates for Board membership include: Experience in the financial services industry and in particular, financial cooperatives; Understanding of credit union principles, sector structure and methods of operation; Board experience, director training or a background in business or academia; Understanding of business concepts, operations and financial reports; Effective communications skills; Strategic thinking skills; and Decision-making skills using sound judgment. Best practices are followed in corporate governance including: Formal Director orientation process; Continuous individual Director and Board development; Board succession planning; Annual Board and peer assessment and feedback; Regularly scheduled board meetings and in-camera sessions; and An annual strategic planning session. The Board also establishes annual objectives for itself and measures its performance against those stated objectives. These include strategies for governance, risk management, communication with stakeholders, executive management and management reporting and control. DICO is a member and active participant of the Institute of Corporate Directors and other organizations that provide governance advice. These affiliations provide insights into best and emerging practices for achieving excellence in governance. 4 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

7 BOA R D O F DIRECTO RS A S AT D EC E M B E R 31, From L to R Top Row: From L to R Bottom Row: Jim Houston Appointed: July 1, 2015 Term Expiry: July 1, 2019 Gail Di Cintio Appointed: May 4, 2011 Term Expiry: May 5, 2019 Helen Young Appointed: March 11, 2015 Term Expiry: March 11, 2019 Carmen Rossiter Appointed: March 11, 2015 Term Expiry: March 11, 2019 Steve Blakely (Chair) Appointed: September 11, 2013 Term Expiry: July 1, 2019 Don Dalicandro Appointed: March 23, 2011 Term Expiry: March 24, 2019 Monique Tremblay Appointed: April 18, 2011 Term Expiry: April 19, 2019 John Ferreira More information about the Board and individual Directors can be found at Appointed: March 11, 2015 Term Expiry: March 11, 2019 PROTECTION, SECURITY, STABILITY 5

8 BOA R D COMMIT TEES Audit & Finance Committee This committee considers and makes recommendations to the Board on audit, finance and other related matters including the review of all financial statements. It oversees the external and internal audit processes, reviews the Annual Report and makes recommendations to the Board for the approval of the business plan and budget. The committee reviews the investment policy and strategy and the risk management activities related to the committee s area of responsibility. Composition: Carmen Rossiter (Chair), John Ferreira, Jim Houston, Monique Tremblay, Helen Young, Steve Blakely (ex-officio) Governance & Human Resources Committee This committee considers and makes recommendations to the Board regarding governance and human resources matters. It reviews the structure of Board committees, the composition and skill profiles required from Board members and the human resource policies that impact the corporate governance of the Corporation. It also reviews succession planning related to senior personnel, compensation policies and pension plan, and oversees stakeholder relationships and communication strategies. Composition: Don Dalicandro (Chair), Gail Di Cintio, Jim Houston, Monique Tremblay, Helen Young, Steve Blakely (ex-officio) Risk Oversight Committee This committee considers and makes recommendations to the Board regarding functions and duties related to deposit insurance, risk management, and regulatory matters. This committee monitors risk policies, reviews and authorizes the exercise of powers of the Corporation, reviews the DIRF and model assumptions, supervises legal actions, reviews and makes recommendations for the approval of the information systems strategic plan, and approves financial assistance requests from credit unions. Composition: Gail Di Cintio (Chair), Don Dalicandro, John Ferreira, Carmen Rossiter, Steve Blakely (ex-officio) Attendance at Board and Committee Meetings 2016* DICO Board Audit & Finance Governance & Human Resources Risk Oversight Number of Meetings held Total number of members Total scheduled attendance Total actual attendance % of attendance 86% 88% 89% 83% *Does not include S. Blakely, ex-officio, for Committee meetings, and MOF Observer. 6 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

9 M ES SAG E FRO M THE CEO The challenging economic environment and low interest rates continue to fundamentally impact the Ontario financial services sector. Ontario credit unions have responded to these challenges by reducing operating expenses and increasing revenues in order to improve overall profitability, which increased to 33 basis points (bps) from 27 bps in The sector continued to grow its assets in 2016 to $51.9 billion, an 11.2% increase over the previous year resulting from robust growth in the mortgage and commercial loans portfolios. Sector capital levels, as measured on a leverage basis, remained strong at 7.0%, albeit slightly lower than the 7.3 % recorded in Aggregate liquidity in the sector continues to be adequate at 11.26%, and remained virtually unchanged from 2015 levels (11.20%). The sector continued to consolidate in 2016, with the number of credit unions decreasing by 11 to 99. Each of the institutions that ceased operations during the year combined with other credit unions. In every case, all depositors were protected from any loss of their insured deposits as the business combination and transition was seamless, resulting in public confidence in the credit union being maintained. This consolidation trend is expected to continue, creating larger and, in many cases, more complex institutions. To continue to provide effective oversight to a rapidly changing sector, DICO remains committed to enhancing its processes, programs and skill sets. DICO had another positive year from a financial standpoint. The DIRF reached $226 million, or 79 bps of total insured deposits, on the basis of slightly higher premium income and continued prudent expense management. We continue to expect to meet our target DIRF goal of 100 bps of total insured deposits in One core element of DICO s mandate is to ensure that depositors are protected from the loss of their insured deposits. This is accomplished by ensuring credit unions are financially and operationally sound through proactive risk-based prudential oversight, which includes a robust on-site examination program and comprehensive off-site monitoring processes. During 2016, a total of 57 examinations were conducted by our staff and agents. Credit unions which do not meet our stringent standards can be placed on a Watchlist or face other regulatory action, including being placed under Supervision or Administration. As of December 31, 2016, no credit union was under Supervision or Administration. As part of standard setting process, DICO publishes Guidance Notes, advisories and tools to clarify expectations for credit union risk management practices and support their efforts to achieve compliance. In 2016, in addition to enhancing the web-based reporting tool, DICO consulted on the development of Liquidity and Stress Testing Guidance, and published updated Directors and Audit Committee Handbooks. Looking forward, DICO expects to publish guidance on Liquidity Risk Management, Securitization, Cybersecurity and Lending and Loan Provisioning as it continues to address emerging risks in the sector. In addition, the credit union reporting system will be enhanced to provide DICO with additional data granularity to support increased stress testing protocols. DICO strives to work effectively with all stakeholders and maintains Memoranda of Understanding (MOU) with key interested parties. One of the ways this is achieved is through several advisory committees comprised of senior executives in the sector, the Ministry of Finance and FSCO. We work together with organizations in other jurisdictions across Canada and around the world in developing sound regulatory and depositor protection principles for co-operative financial institutions in the pursuit of effective regulation and supervision of the sector. We regularly review and enhance our governance and management processes to ensure DICO is accountable, transparent and fair in all of its dealings with credit unions, key stakeholders and the public. In 2016, we said farewell to Andy Poprawa as President and CEO after 23 years. I appreciate the Board s expression of confidence in appointing me as his replacement on an acting basis, as well as the wise counsel, advice and support that I receive from the Board under the leadership of Steve Blakely. I would like to express my appreciation to my senior leadership team and our talented employees, an extremely dedicated group of professionals that represents the major source of DICO s corporate strength. We look forward to continuing our commitment to credit unions and their depositors throughout Guy Hubert, President & CEO (Acting) PROTECTION, SECURITY, STABILITY 7

10 O M BUDSMAN S REPORT The Office of the Ombudsman investigates complaints and recommends solutions. More specifically, the Ombudsman assists in resolving problems by helping the complainant to define options and recommends actions to the parties involved. The Ombudsman cannot, at any time, decide on matters in dispute or advocate the position of the complainant, DICO or other parties. Complaints must relate to regulatory issues between credit unions and DICO, or to disputes between depositors or borrowers of credit unions that are being liquidated that cannot be resolved at the operational level. The Ombudsman may also make recommendations to the Board for systemic changes to deal with recurring problems revealed through investigations. Confidential information used for the purposes of an investigation will not be disclosed outside of the Office of the Ombudsman. The Ombudsman reports directly to the Board and is independent from operational programs. DICO s website ( provides full details about the complaint resolution process, including management contacts and specific instances where this Office has no jurisdiction, such as matters involving an order for administration or liquidation, in litigation, or a member s consumer complaint towards a credit union. During 2016, there were three interactions: two with members and one from the business community: 1. A member requested assistance with a matter related to a specific request to a credit union that had not been fulfilled. The matter was referred to management who immediately followed up with the credit union to resolve the issue; 2. A complaint was received against a credit union and, therefore, outside the jurisdiction of this Office. The member was advised to contact FSCO if the matter could not be resolved at the credit union level; and 3. The owner of a money services business (MSB) wished to discuss DICO s Operational Risk Advisory related to MSB accounts. The matter was referred to management to follow up with the individual. This Office continues to receive the full support and co-operation of the Board, management and staff, for which I am grateful. Respectfully submitted, Beryl Roberto, Ombudsman Tel: ombudsman@dico.com 8 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

11 D I C O S B U S I N E S S M O D E L 2017 DICO has developed a business model to encapsulate the way in which business is conducted within the context of its legislative mandate and overall regulatory environment. This business model reflects DICO s position as an integral part of Ontario s financial safety net. Ontario s Credit Unions and Caisses Populaires - Regulatory / Supervisory System Ministry of Finance, Financial Services Commission of Ontario, Deposit Insurance Corporation of Ontario Legislative Environment 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 Other Legislation, Statutory Requirements and Directives, including Management Board of Cabinet Directives Other Acts, i.e. French Language Services Act, Employment Standards Act, etc. Governance Board of Directors Strategic and Policy Direction Risk Oversight Committee Governance & Human Resources Committee Audit and Finance Committee CEO DICO Management Activities Corporate Affairs Enterprise Risk Management Strategic Planning Human Resources Compliance Corporate Operations Board Support Credit Union Regulation Risk Monitoring Examinations Risk Assessment Risk Management Policy & Research Corporate Finance & Information Systems Accounting & Finance Information Systems DIRF Management Failure Resolution Management PROTECTION, SECURITY, STABILITY 9

12 DICO S ST R ATEG IC PL A N STRATEGIC GOALS Proactive Establish standards and guidelines to help credit unions manage risk Proactive Reactive Reactive Use regulatory and other powers to reduce losses DICO MANDATE To Protect Depositors and Contribute to the Sector s Stability KEY STRATEGIC OBJECTIVES Proactive & Balanced Risk Based Regulation & Risk Management Sound Corporate Governance (DICO) Effective Public & Stakeholder Awareness Strong Partnerships MAJOR INITIATIVES / PRIORITIES Stress Testing Enhance preparedness for Complex Resolutions Meet DIRF Targets Attract / Retain Required Skills Act Review Guidance Notes Website Outreach Complementary Strategies Central 1, Desjardins, Other Implement Segmentation Strategy - Very large, Large, Mid-size, Small Credit Unions ENABLING STRATEGIES Enhance Operational Capacity People, Resources, Technology Promote Regulatory Culture & Improve Credit Union/Sector Performance 10 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

13 RISK MANAG EM ENT Risks are managed in the context of DICO s Enterprise Risk Management (ERM) Framework. This framework includes a well-defined set of Board-approved risk management policies and practices, and a clearly defined risk appetite, to ensure the Board, Risk Oversight Committee and management understand and respond to the risks to which DICO is exposed. DICO s ERM is reviewed in detail annually, and is a primary driver in the development of strategic and operational business plans and budgets. Overview of DICO s Assessment of Significant Risks as at December 31, 2016 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 Risk Management Risk, Capital Adequacy Risk, Systemic Risk, Public Confidence Risk and Liquidity Risk. Moderate Stable Failure Resolution Risk: The risk that appropriate action is not taken to manage credit unions under Administration or Liquidation resulting in increased financial loss. Sub-category risks include Failure Resolution Risk, Loss Management Risk, Bonding Insurance Risk and Litigation Risk. Moderate Stable Regulatory Risk: The risk that responsibilities as prudential solvency regulator are not fulfilled. Sub-category risks include Prudential Standards Risk, Failure to address credit union s Non-Compliance Risk, and DICO s Non-Compliance Risk. 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 Low Stable Stable Operational Risk: The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Sub-category risks include Liability/Litigation Risk, Health & Safety Risk, Business Continuity Risk, Social Media Risk, Outsourcing Risk and Human Resources Risk. Moderate Stable Financial Risk: The risk that assets and liabilities are not managed appropriately resulting in financial loss. Sub-category risks include Adequacy of the DIRF Risk, Adequacy of DICO s Loss Provisions Risk, Liquidity Risk, Investment / Market Risk and Internal Controls Risk. Low Stable Compliance Risk: The risk of failure to comply with all applicable legislation, directives and policies. Sub-category risks include Legislation Risk, Income Tax Act Risk, Directive Risk and Policy Risk. Low Stable Technology Risk: The risk that DICO s technical systems are not effective in ensuring the complete, accurate, valid, timely, confidential and secure collection and processing of data to support operations. Sub-category risks include Technology Support Risk, Technology Risk and Information Security Risk. Moderate Stable PROTECTION, SECURITY, STABILITY 11

14 HIGHLIGHTS O F K E Y PRO G R A M S A N D ACTIVITIES DICO s strategic initiatives are aligned with and support the achievement of key Government priorities and objectives for enhanced accountability, efficiency and value for money in the delivery of services, evidence-based decision-making and policy development, and minimizing the administrative burden on credit unions. The Board approved the following strategic objectives for 2016 to ensure: Credit unions comply with the CUCPA, Regulations and Sound Business and Financial Practices; Corporate governance practices continue to be enhanced; Information is transparent and accessible; and Strong relationships are maintained with and feedback obtained from key stakeholders. During 2016, DICO successfully fulfilled its mandate through the delivery of programs in the following areas: ENSURING MEMBERS DEPOSITS ARE PROTECTED proactive and balanced risk-based regulation and risk management DICO continually makes enhancements in all areas of its prudential solvency operations to ensure: Sector risks are appropriately managed and mitigated; Credit unions comply with legislation and implement strategies to meet DICO s articulated expectations surrounding Sound Business and Financial Practices; Members eligible deposits are protected to legislated deposit insurance limits; Stability of the sector is effectively promoted; and Public confidence in the sector is maintained. Several preventative measures, listed below, were implemented to identify potential risk and reduce the likelihood of losses: Enhanced the existing credit union web-based reporting systems that provide access to key information to effectively monitor and analyze risk trends and enable DICO to address issues with credit unions at an earlier stage or, where appropriate, take other action; Implemented Internal Capital Adequacy Assessment Process (ICAAP) and Stress Testing requirements for credit unions with assets in excess of $500 million (credit unions with assets in excess of $1 billion were required to implement these programs in 2014) to enable DICO to assess whether risk management, business planning and capital and liquidity management practices are appropriate; Required credit unions to complete a self-assessment readiness survey to gain a better understanding of preparations and potential impacts from the implementation of IFRS 9, and assist in considering revisions to existing guidance on Lending and By-Law No. 6: Reserves and Monthly Provision for Doubtful Loans; and Clarified DICO s expectations by issuing updated versions of the Directors and Audit Committee Handbooks. 12 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

15 ACHIEVING OUR MANDATE AND STRATEGIC OBJECTIVES sound corporate governance Sound corporate governance is essential for the progress and prosperity of any organization. Good corporate governance allows for achievement of an appropriate balance of power among managers, stakeholders and boards. It ensures that the board and auditors are independent and helps in achieving greater fairness and transparency. Also, it ensures stakeholders are provided with tools and channels to express their views and provide suggestions, and protects the long-term strategic objectives of the organization. During 2016, DICO continued to strengthen its corporate governance practices through the following activities: Conducted an annual review of services provided by both the internal and external auditors; Ensured the Corporation was materially compliant or making progress toward substantive compliance with all relevant Acts, Government guidance and Corporate Policies, which included: A plan to achieve material compliance with the Archives and Recordkeeping Act in 2018; and Policies to comply with the Open Data Directive; Completed an annual review of DICO s ERM Framework and all Corporate Policies; Realigned roles and responsibilities at the executive level to ensure clear lines of sight to the Board and appropriate segregation of accountabilities; Engaged third-party consultants to: Conduct a review of IT strategy and platform; Assist with complying with the Executive Compensation Framework Regulation; and Review and advise on DICO s Human Resources Framework; and Successfully renegotiated DICO s premises lease. ENSURING TRANSPARENCY AND ACCOUNTABILITY 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. During 2016, DICO continued to strengthen its transparency and accountability practices through the following activities: Developed and implemented a comprehensive Communication Plan; Reviewed and updated website content and deposit insurance advertising materials to ensure they remained current and relevant; Maintained a toll-free telephone information service to respond to queries from credit union staff, members and the public, thereby ensuring dissemination of accurate information regarding deposit insurance coverage; Provided opportunities for the Board to engage with credit union stakeholders; Attended credit unions annual general meetings and sector events; and Provided a dispute resolution process through the Ombudsman s Office. PROTECTION, SECURITY, STABILITY 13

16 CONSTRUCTIVE WORKING RELATIONSHIPS stakeholder partnerships Strong working relationships provide a framework for coordination and communication among regulatory authorities and stakeholders, and help foster prudence in the governance of credit unions not only in Ontario, but nationally and internationally. They encourage effective risk management and capital planning, and assist in promoting adoption of best practices while recognizing the unique cooperative structure of credit unions. During 2016, DICO continued to strengthen its stakeholder partnerships through the following activities: Maintained MOU with various organizations that have an interest in ensuring risk at Ontario credit unions is monitored, managed and supervised effectively. DICO maintains MOUs with the Ministry of Finance, Central 1, Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), British Columbia Financial Institutions Commission (BC FICOM), Fédération des caisses populaires de l Ontario (FCPO), and L Alliance des caisses populaires de l Ontario and the Investment Industry Regulatory Organization of Canada (IIROC); Continued to work with staff at the Ministry of Finance and FSCO on the ongoing review of the CUCPA and associated Regulations by providing input and information; Offered full support and cooperation while the Government considered the recommendations of the Expert Panel as they pertain to the mandate of DICO and the potential transfer of prudential solvency responsibilities to FSRA; Consulted with sector leaders on matters of common interest through various advisory committees; and Participated in provincial, national and international working groups, such as the Credit Union Prudential Supervisors Association and the International Credit Union Regulators Network. 14 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

17 LO O K I N G FO RWA R D DICO will continue to be guided by the above noted corporate strategies over the next year. The following key strategic initiatives are planned for 2017: Publishing Guidance Notes on Liquidity Risk Management, Stress Testing, Securitization, Lending and Loan Provisioning; Continuing to enhance credit union web-based reporting; Issuing an Advisory on mortgage lending practices; Finalizing estates of three credit unions in liquidation; Developing and implementing an enhanced Human Resources Framework and succession plan; Working with the Financial Services Regulatory Modernization Secretariat to implement recommendations arising from the review of DICO s mandate in accordance with the Government s decision; Ensuring compliance with the Executive Compensation Framework Regulation within the established time frame; Continuing to make substantive progress to comply with the Archives and Recordkeeping Act; and Exceeding the interim DIRF target of 75 bps of insured deposits and continuing to build it toward the longterm target of 100 bps to ensure members eligible deposits continue to remain adequately protected. PROTECTION, SECURITY, STABILITY 15

18 P E R F O R M A N C E A G A I N S T P L A N The following table sets out 2016 performance against planned targets. Where achievement of target was delayed, an overview of corrective action to be taken is provided. Key Strategy Initiatives Status Update Strategic Objective: Proactive and Balanced Risk-Based Regulation and Risk 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 Risk Management Effective Sector Risk and Regulatory Compliance Assessment Regulatory Actions p p u p Failure Resolution p No failures in Depositor Payouts and Liquidations p Fifty-seven examinations conducted in Risk Assessment Profiles updated for all credit unions. High-risk credit unions and instances of non-compliance identified within the five-day standard. Enhanced credit union web-based reporting solution introduced providing information for risk-based monitoring and assessment. Appropriate resolution strategies developed for those credit unions exhibiting higher risk exposure. No compliance orders required to be issued. Publication of updated Liquidity and Stress Testing Guidance was delayed. Publication is anticipated in early Three liquidity tools and completion guides sent for stakeholder consultation. Continued research into impact on existing guidance from proposed changes to CUCPA and Regulations. Sixteen regulatory applications received. Thirteen applications were approved, with three pending at year end. Three orders and one variation and exemption issued. No administrative penalties issued. All service standards were met. No deposit insurance payouts made. Final Liquidator meetings held for four credit unions and final payouts of residual assets made. Strategic Objective: Sound Corporate Governance To maintain stakeholder and public confidence, DICO must demonstrate that it is governed and managed in an efficient and effective way. To achieve this DICO will maintain sound governance, manage its significant risks (ERM) and work to ensure the DIRF is sufficient to protect depositors. Sound Governance Compliance with Acts and Directives Effective Enterprise Risk Management (ERM) p u p The Board met seven times with an average attendance of 86% and expeditiously dealt with all matters brought forward. Increased activity at committee meetings to provide oversight on specific critical projects and matters. With exception of the Archives and Record Keeping Act, in full compliance with relevant Acts and Directives. Plan to be substantially compliant with the Archives and Record Keeping Act in All Ombudsman complaints promptly resolved. Annual review of ERM completed. Emerging risks identified and mitigation strategies developed as necessary. LEGEND p Planned progress on schedule and within budget u Slippage in terms of time to completion and/or budget variances q Cancelled or deferred 16 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

19 Key Strategy Initiatives Status Update Adequate Deposit Insurance Reserve Fund Strong Corporate Resources Support p p DIRF ahead of plan by $3.3 million. On track to attain DIRF target of 100 bps of insured deposits in Renegotiated DICO premises lease. Review of IT Strategy and Platform completed with certain recommendations in process of being implemented in Strategic Objective : Effective Public and Stakeholder Awareness DICO must ensure that the public and other stakeholders have ready access to deposit insurance information, and a clear and transparent understanding of DICO s role, standards and actions. Communications p Sector Outlook, Financial Statistics, Sector Releases, updated Directors and Audit Committee Handbooks published. Broadcast of announcements & consultations. Bilingual toll-free enquiry line received more than 250 calls, mostly related to deposit insurance. Comprehensive Communications Plan developed to ensure transparent and accessible information provided to the public and stakeholders. Strategic Objective: Strong Partnerships To have the most expertise and impact, DICO needs to work effectively with the Government, sector/stakeholder representatives and other national and international deposit insurers. Strategic Alliances Stakeholder Relations p p Maintain/renewed MOU with strategic partners. Continued involvement in established advisory committees. Provided information and submissions to Mandate Review Panel and participated in working group for review of CUCPA. Worked with various associations, working groups and committees with shared interests, both nationally and internationally. LEGEND p Planned progress on schedule and within budget u Slippage in terms of time to completion and/or budget variances q Cancelled or deferred PROTECTION, SECURITY, STABILITY 17

20 M A N A G E M E N T S D I S C U S S I O N A N D A N A LY S I S Dynamic and Challenging Environment DICO fulfills its mandate to ensure the stability of the credit union sector in a complex, dynamic and highly competitive environment. Sustained low interest rates and ever-increasing competition made 2016 a challenging year for profitability for many credit unions. Tightening of mortgage lending rules by the Federal Government in October 2016, meant to stabilize Canada s housing market and control growing household debt levels, has increased the rigour required by credit unions when qualifying their members for loans. The impact of these factors on the performance and ongoing viability of credit unions is closely monitored on a monthly basis. While the sector experienced further consolidation, assets grew at a healthy pace (11.2%) led by growth in residential mortgage loans (12.2%) and commercial loans (13.2%) while personal loans decreased (2%). The resulting stronger credit unions formed benefit from enhanced synergies Ontario Credit Union Sector Profile at a Glance ($ billions) * % Change # of Credit Unions (10.0%) Total Assets $51.9 $ % Total Deposits $41.2 $ % Insured Deposits Insured Deposits (% of Total Deposits) Regulatory Capital (Leverage Ratio) $28.6 $ % 69% 70% (1.4%) 7.0% 7.3% (4.1%) Loan Costs 0.06% 0.09% (33.3%) Profitability 0.33% 0.27% 21.4% * 2015 numbers may differ slightly from prior annual report to reflect 2014 audited financial information received from credit unions. and larger economies of scale. The 99 credit unions at the end of 2016 ranged in size from $2.7 million to $13.1 billion with an average asset size of $524 million, with 11 credit unions each holding $1 billion or more in assets. Due to poor profitability or losses as the result of thin margins, future viability of some credit unions continues to be a concern which has resulted in increased monitoring. However, the sector remains stable and plays an important role in the financial and economic landscape by offering members access to more products and services while striving to provide a cost-effective banking alternative. The sector is relatively well capitalized at an average aggregate leverage ratio of 7.0%, down slightly from 7.3% in The average aggregate risk weighted capital ratio was 13.6%. All credit unions met the prescribed statutory minimum capital requirements as at December 31, Profitability Measures 3.5% 0.6% 3.0% 0.5% 2.5% 0.4% 2.0% 0.3% 1.5% 0.2% 1.0% 0.5% 0.1% 0.0% % Financial Margin (L) ROA (R) Profitability Profitability during 2016 increased to 33 bps from 27 bps in The low interest rate environment continued to reduce income from loans and investments by 12 bps, which was offset by lower interest and dividend expenses paid to members (6 bps), loan costs (3 bps) and lower operation expenses (10 bps). Thirteen credit unions experienced operating losses during All are being carefully monitored to ensure that appropriate resolution strategies are being implemented and sufficient capital is maintained to support their continued viability. 18 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

21 Loan Costs and Delinquencies The sector s aggregate credit risk as measured by delinquency and loan costs is holding at relatively stable levels. Total delinquency was 0.68%, a significant improvement over 2015 and much lower than post-recession figures (2009: 1.54%). Commercial loan delinquency improved to 1.07% from 1.5% in Overall loan costs improved to 0.06% from 0.09% in Insured Deposits Loan Performance Measures 1.7% 1.5% 1.3% 1.1% 0.9% 0.7% 0.5% Delinquencies (L) Loan Costs (R) 0.23% 0.21% 0.19% 0.17% 0.15% 0.13% 0.11% 0.09% 0.07% 0.05% Eligible non-registered deposits are insured up to $100,000 per account and on an unlimited basis for registered accounts. During 2016, insured deposits grew to $28.6 billion, but continued to represent a declining percentage of total deposits at 69%. More details regarding the coverage available for all eligible deposits can be found on DICO s website ( $ Billions Insured Deposits Uninsured Deposits DICO s Differential Premium Determination System Deposit insurance premium rates are calculated on a continuous scale from a minimum of $1.00 to $1.75 per $1,000 of insured deposits with a $3.00 rate for credit unions not meeting minimum capital and governance requirements. The average premium rate improved to $1.04 in 2016 from $1.06 in 2015 as credit unions improved their corporate governance practices and strengthened capital positions. Fifty-nine credit unions holding a total of $22.5 billion in assets paid a deposit insurance premium rate of $1.00 per $1,000 of insured deposits. The highest rate paid was $1.60. Average deposit insurance premium rates have decreased by almost 10% from Average Premium Rate Examinations and Monitoring DICO assesses insurance risk through its examination and monthly monitoring and analysis programs. Credit unions adherence to DICO s By-Law No. 5 - Standards of Sound Business and Financial Practices, which outlines DICO s expectations for credit unions regarding corporate governance and risk management is measured through examinations. Examination frequency, which can range from 15 to 30 months, is determined by the risk and size of the institution. In 2016, 57 examinations were conducted. PROTECTION, SECURITY, STABILITY 19

22 DICO collects and analyzes financial and non-financial data received from credit unions on a monthly basis to assist in assessing risk and compliance in the sector. The risk assessment process contemplates the quantitative and qualitative risks, as well as the quality of risk management at the credit union. This is then adjusted by capital and earnings results to determine the insurance risk rating of the institution. The rating may be adjusted at any stage of the monitoring process due to significant events, new findings, observations, changes in business activities and/or economic conditions. In 2016, 90% of credit unions had an insurance risk rating of Moderate or better. Year over year results show insurance risk has deteriorated somewhat with 10% of sector assets rated as moderate-high or high (4% in 2015) due to the addition of two large credit unions that hold 4% of sector assets to the moderate-high and high risk tiers. DICO has been monitoring these credit unions closely and has determined these temporary situations will be rectified during Higher risk credit unions are placed under an increased level of scrutiny through a Watchlist program where enhanced reporting is required from the credit unions that enables DICO to monitor the progress of issue resolution strategies. In addition, DICO performs in-depth analysis on an ongoing basis and regularly meets with credit unions to ensure any weaknesses noted are corrected in a timely manner. Regulatory Activities Sector Assets by Insurance Risk Category (000s) Low 10,012 9,303 8,115 7,483 6,114 Low-Moderate 6,646 18,060 7,141 6,630 7,467 Moderate 30,136 17,353 22,659 20,653 17,555 Moderate-High 2,567 1,701 4,302 3,673 3,391 High 2, To protect consumers and enhance public confidence in the sector, DICO takes appropriate regulatory action in situations where a credit union is in non-compliance with the CUCPA and Regulations. Consistent with DICO's commitment to transparency, fairness and responsiveness, details of all orders and other regulatory activities are available on our website. During 2016, DICO received a total of sixteen applications for approval, five relating to asset purchases and sales and eleven to acquire or establish subsidiaries. Thirteen applications were approved and three remained pending at the end of the year. In addition, there were three orders and one variation and exemption issued. No administrative monetary penalties were issued. Summary of Regulatory Activities Category Applications Orders Variations & Exemptions Administrative Penalties Total Additional information regarding DICO s regulatory powers and activities, including criteria, guides and service standards, is available on our website at 20 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

23 F I N A N C I A L P E R F O R M A N C E A N A LY S I S This section provides management s analysis of DICO s financial performance for the fiscal year ended December 31, It should be read in conjunction with the 2016 audited financial statements and related notes. Financial Highlights Actual Budget For the period ended December Change 2016 Change (C$ thousands unless indicated) $ $ $ % $ $ % Deposit Insurance Reserve Fund (DIRF) Estimated Sector Insured Deposits ($ billions) DIRF as % of Sector Insured Deposits Summary of Key Financial Performance 226, ,559 20, ,737 3, (0.01) Premium Income 27,134 26, ,800 (666) (2.4) Other Income 1,807 1, , Operating Expenses 8,470 8, ,786 (316) (3.6) Net Provision (Recovery) for losses (18) (249) ,000 (3,018) (100.6) Investments 229, ,357 25, ,108 12, Financial Highlights The DIRF increased by $20.5 million to $226.0 million (79 bps of total insured deposits). The favourable variance of $3.3 million when compared with budget was primarily attributable to there being no need for an increase in the loss provision versus the budgeted amount of $3 million. Premium income was $27.1 million, a slight increase of $0.5 million (1.9%) when compared to the previous year. The growth of insured deposits held at credit unions was offset by the decrease in the average premium rate charged to credit unions in 2016 due to improved risk assessments ($1.04 vs $1.06 in 2015). Investment and other income was $1.8 million, marginally higher than last year. No new loss provisions were required during 2016, rather a recovery of losses of $0.018 million for existing liquidations was realized. Total operating expenses, net of recoveries, were $8.5 million, $0.3 million (3.6%) less than budgeted due to prudent expense management. PROTECTION, SECURITY, STABILITY 21

24 Deposit Insurance Reserve Fund (DIRF) Pursuant to the CUCPA, DICO is required to maintain a DIRF that may be used to pay its operating and related insurance costs, including providing financial assistance to credit unions. To ensure the DIRF is sufficient to cover its insurance risks, DICO evaluates the adequacy of the fund and its liquidity requirements on a regular basis. DICO uses several models to assess the appropriate size, range and growth of the fund based on historical experience and expense projections, including a model developed by a firm of actuaries. A number of principles, assumptions and other factors were identified and used throughout these models to determine loss incidence, severity and risk rating drifts to assist in the determination of growth projections for the fund. This data is updated regularly to account for changes in the economic conditions and interest rates, the risk profile and growth of the sector, and DICO s premium revenues, loss experience, recoveries and expense projections. As at December 31, 2016, the DIRF had reached $226.0 million, up $20.5 million or 10% from 2015 and represented 79 bps of the sector s estimated insured deposits at current coverage levels. The increase is the aggregate result of premium income ($27.1 million) and investment and other income ($1.8 million), offset by operating expenses ($8.5 million). DICO s strategy is to continue to build the DIRF to 100 basis points of total insured deposits $ Millions Percentage Fund Deficit DIRF ($ Millions) DIRF Projections ($ Millions) DIRF as a % of insured deposits DIRF Projections as % of insured deposits 22 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

25 Statement of Financial Position Assets DICO s total assets grew by 8.9% to $238.1 million as at December 31, DICO s total investment portfolio represents 96% of total assets. The remaining 4% is comprised of cash and cash equivalents, premiums receivable, prepaid expenses and other receivables, deposit insurance advances recoverable, and property plant and equipment. Investments DICO has an agreement with the Ontario Financing Authority (OFA) to manage its investment portfolio. This portfolio is the primary source of funds to meet potential deposit insurance claims from depositors of credit unions. The investment policy adopts a conservative investment strategy to ensure funds can be readily available to pay out insured depositors when warranted. It has been formulated based on three key objectives: 1. Preserving capital and limiting credit and market risk; 2. Providing necessary liquidity to pay claims and ongoing operating expenses; and 3. Striking a balance between obtaining a reasonable return within policy guidelines and risk tolerance. All investments must be made in compliance with the requirements of the provisions of the Income Tax Act and Regulation 237/09 of the CUCPA. Investments may consist of Government-issued securities, bankers acceptances with a minimum rating of A or higher, and commercial paper and short-term debt that has a minimum rating of R1 (middle). These investments are considered to be of a superior credit quality with a high capacity for the payment of short-term financial obligations as they fall due and are unlikely to be significantly vulnerable to future events. ($ in thousands) Change Current investments 182, ,413 19,755 12% Non-current investments 47,222 41,944 5,278 13% Total 229, ,357 25,033 12% Current Investments R1 (mid) 9% AAA 21% AA (low) 6% Eighty percent or $182.2 million of the investment portfolio was invested in current investment vehicles consisting of highly liquid and secure Canadian Federal and Provincial Government securities and bankers acceptances of Canadian chartered banks with credit ratings of AA (low) and R-1 (mid) or higher with a term of one year or less. R1 (high) 64% PROTECTION, SECURITY, STABILITY 23

26 Non-current Investments Non-current investments consisted of Government bonds laddered from 6 months to a maximum of 3.25 years valued at $46.9 million and $0.3 million of asset-backed commercial paper acquired from liquidated member institutions to facilitate the final closing of operations. The laddered bonds portfolio are all Canadian Federal and Provincial Government bonds with credit ratings ranging from A (high) to AAA. DICO s exposure to market and credit risk is minimal due to this conservative position and relatively short duration. Interest rate risk exists due to the nature of the investment portfolio. The weighted average number of days to maturity increased to 194 days from 182 days in Deposit Insurance Advances Recoverable AAA 23% AA (low) 35% R-1 (mid) 2% A (high) 23% AA 2% AA (high) 15% DICO is responsible under the CUCPA to pay deposit insurance claims from depositors up to statutory limits when a credit union is no longer able to meet its obligations to depositors. Circumstances may arise where a credit union does not have sufficient funds on hand to meet their current financial obligations or pay depositors. When this situation occurs, DICO puts the credit union into the Administration program and advances funds to cover the credit union s shortfall and pay depositors. This makes DICO a creditor of the credit union and the advance is recorded as an asset on DICO s books. Over time, these advances are offset by: Loss provisions estimated based on the difference between what is realistically expected to be received from this process and what was advanced; and Recoveries resulting from the sale of assets and payments received from members of liquidated credit unions and settlements from legal actions. No new credit unions were placed into Administration or Dissolution programs in Net deposit insurance recoveries during the year were $3.9 million. As at December 31, 2016, Deposit Insurance Advances Recoverable fell to $6.3 million as compared to $10.1 million in The number of credit unions in liquidation has fallen steadily over the years with four more wound up in At the end of December 2016, a total of six credit unions remained in the Dissolution program. Liabilities Total liabilities decreased by $0.8 million (6%) to $12.3 million as at December 31, The decrease in total liabilities was primarily due to lower deferred premium income in Deferred premium income is recognized for portions of premiums received in the year from the credit unions whose fiscal years straddle DICO s fiscal year end, which is December 31. During 2016, several large credit unions changed their fiscal year ends to December 31 st resulting in a reduction in deferred income. Liabilities consist mainly of accruals for deposit insurance claims (24%) and employee benefits (51%). The remaining liabilities (25%) represent payables and deferred premium income. 24 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

27 Accrual for Deposit Insurance Claims The accrual for deposit insurance claims represents an estimate for losses recorded during the year and in previous years, which have not yet been advanced at the end of the year. It includes a provision for both specific and general insurance losses. The specific provision for insurance losses is estimated and recorded in the period in which the loss conditions exist. As there were no new credit unions placed into liquidation in 2016 and no credit unions where significant losses were expected, no new specific accruals were required. General provisions are estimated and recorded at the end of the year. The general accrual for losses reflects management s best estimate of losses on insured deposits arising from the inherent risk in credit unions based on factors such as current market and economic conditions, the likelihood of losses and the application of historic loss experience. As of December 31, 2016, total accrual for losses amounted to $3 million, which completely comprised the general provision. Employee Benefits All eligible employees and retirees are provided with a defined contribution pension plan and future non-pension post-employment benefit plan. Supplemental pension benefits and retention plans exist for key management personnel. The accrued non-current employee benefits increased by $405 thousand during the year to $6.24 million as at December 31, Statement of Operations Premium Income DICO s operations are funded by deposit insurance premiums assessed and collected from credit unions annually. Each year, the adequacy of premium rates is reviewed and a recommendation made to the Minister for consideration. The Differential Premium Score Determination system (DPSD) calculates a credit union s premium score which is then used to calculate an annual premium rate on a continuous scale based on a range between $1.00 to $3.00 per $1,000 of insured deposits. For further details of the premium rate determination, please refer to the document entitled DICO Differential Premium Score Determination as published in The Ontario Gazette, Date April 12, 2014, and Ontario Regulation 120/14 made on May 1, 2014, amending O.Reg 237/09. ($ in thousands) Change 2016 Budget Premium Income 27,134 26, % 27,800 Average premium rate (per $000 of insured deposits) (0.02) (1.9%) 1.05 Total 2016 premium income increased marginally by $0.5 million or 1.9% to $27.1 million. There was no change in the premium rates in the calculation of 2016 premiums. Insured deposits increased to $28.6 billion as at December 31, 2016, from $26.4 billion as at December 31, 2015, an increase of 8%. This was offset by the overall improvement in capital levels and corporate governance practices by credit unions. The average premium rate billed in the year was $1.04 per thousand of insured deposits compared to $1.06 in Premium income for the year was lower than the budgeted amount of $27.8 million by $0.7 million, because of the lower than anticipated insured deposit base and average premium rate. PROTECTION, SECURITY, STABILITY 25

28 Other Income Other income is composed mostly of investment income earned on DICO s investment portfolio. Total investment yield exceeded budget by $0.6 million as a result of increased portfolio size. The low interest rate environment persisted in As at December 31, 2016, the weighted effective yield of the current investments was 0.67%, the same as in 2015, while the yield for the non-current investments was 1.13%, down from 1.20% in This resulted in the overall weighted average effective yield falling to 0.96% from 1.03% in Operating Expenses In 2016, total expenses (net of recoveries) were $8.5 million, $0.3 million (4.1%) more than last year and 3.6% less than the 2016 budget. Salaries and benefits were $114 thousand lower than in 2015 and $81 thousand lower than budget due to slightly lower than anticipated staffing levels in Major operating expenses in 2016 include depreciation (25%), occupancy (21%), professional services (11%), IT maintenance and support (9%), travel costs (8%), consulting (3%), legal (2%), on-site examinations by third parties (2%) and all other general administrative costs (19%). ($ in thousands) Change 2016 Budget Salaries and benefits 6,478 6,592 (114) (1.7%) 6,559 Operating expenses 2,253 1, % 2,424 Recovery of operating expenses (261) (446) % (197) Net total expenses 8,470 8, % 8,786 Operating expenses before recoveries were $2.3 million, $0.3 million or 13.3% more than last year. The variance was largely the result of the accelerated amortization of an intangible asset, which represents a reporting system that was replaced with a software tool developed by internal resources. Operating expenses were $0.2 million or 7.6% lower than budget. This favourable variance was a result of prudent cost management, especially in areas of travel, legal and professional services. Cost savings were also realized in the area of third-party examinations through the utilization of DICO s internal examination staff instead of outside accounting firms. In addition, DICO regularly reviews all contracted services and tailors these arrangements to ensure that value for money is obtained from all providers and service standards are met. Recovery of operating expenses in 2016 consisted mainly of administrative costs of managing the estates of credit unions in liquidation. Total recoveries were $185 thousand lower than last year primarily due to the decrease in the number of credit unions in liquidation. Net provision (recovery) for deposit insurance losses Changes in the estimates for the accrual for specific and general provisions and recoveries are recorded during the year. Management provided a budget estimate for potential losses for specific credit unions of $3 million for This provision was not required as the credit unions in question have taken action to remain viable in the short term. The general accrual for insurance losses remained unchanged at the end of 2016 as the risk in the sector remained relatively stable. The total net recovery of deposit insurance losses of $18 thousand was recorded in 2016 compared with the net recovery of $249 thousand in No new provisions for losses were warranted in 2016 and only six credit unions remained under the dissolutions program at the end of the year compared with ten credit unions last year. 26 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

29 M A N A G E M E N T S R E S P O N S I B I L I T Y F O R F I N A N C I A L S TAT E M E N T S The Deposit Insurance Corporation of Ontario s management is responsible for the integrity and fair presentation of the annual financial statements and all other information included in the annual report. The financial statements have been prepared in conformity with International Financial Reporting Standards. The Corporation maintains systems of internal accounting controls of high quality consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is accurate and reliable and that the Corporation s assets and liabilities are adequately accounted for and assets safeguarded. The financial statements have been reviewed by the Corporation s Audit and Finance Committee and have been approved by its Board of Directors. In addition, the financial statements have been audited by KPMG LLP, whose report follows. Guy Hubert President & CEO (Acting) Richard Dale Vice President, Corporate Affairs Karen Yule Vice President, Finance and Chief Financial Officer Toronto, Canada March 30, 2017 PROTECTION, SECURITY, STABILITY 27

30 I N D E P E N D E N T A U D I TO R S R E P O RT To the Board of Directors of Deposit Insurance Corporation of Ontario We have audited the accompanying financial statements of Deposit Insurance Corporation of Ontario, which comprise the statement of financial position as at December 31, 2016, the statements of operations and changes in the deposit insurance reserve fund, comprehensive income, accumulated other comprehensive income (loss), changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Deposit Insurance Corporation of Ontario as at December 31, 2016, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. KPMG LLP Chartered Professional Accountants, Licensed Public Accountants March 30, 2017 Toronto, Canada 28 DEPOSIT INSURANCE CORPORATION OF ONTARIO ANNUAL REPORT 2016

31 Deposit Insurance Corporation of Ontario STAT EM ENT OF FI N A N CI A L POSITION (in thousands of dollars) Notes ASSETS Current assets As at December 31, Cash and cash equivalents $ 1,216 $ 1,970 Investments 5 182, ,413 Premiums receivable 637 1,081 Prepaid expenses and other receivables Total current assets 184, ,855 Non-current assets Investments 5 47,222 41,944 Deposit insurance advances recoverable 6 6,255 10,145 Property, plant and equipment Intangible assets Total non-current assets 53,729 52,869 Total Assets $ 238,149 $ 218,724 LIABILITIES Current liabilities Payables and accruals $ 1,273 $ 1,279 Deferred premium income ,053 Total current liabilities 2,054 3,332 Non-current liabilities Payables and accruals Employee benefits 9 6,243 5,838 Accrual for deposit insurance claims 6 3,000 3,000 Total non-current liabilities 10,222 9,792 Total Liabilities $ 12,276 $ 13,124 EQUITY Accumulated other comprehensive income (loss) $ (175) $ 41 Deposit Insurance Reserve Fund 226, ,559 Total Equity $ 225,873 $ 205,600 Total Liabilities and Equity $ 238,149 $ 218,724 See accompanying notes to financial statements. On behalf of the Board: Director Director PROTECTION, SECURITY, STABILITY 29