Question 1 (40 Marks)
Please review the financial statements for Stonebridge Credit Union and answer the following questions:
Identify and briefly outline your concerns with this credit union (18 marks);
Outline any additional questions you would need to ask the Board or Management and any additional information from Stonebridge Credit Union you would require confirming the extent of the concerns identified in a) above; (12 marks);
Prepare a supervisory letter addressed to Stonebridge Credit Union identifying your major concerns and their impact on the institution’s risk profile, providing any recommendations to reduce the impact / (10 marks).
Question 2 (20 marks)
The town of Timber Ridge has enjoyed a stable business environment with the region’s main employer, Fastlink Timber Mills able to renew softwood lumber contracts with buyers in Alberta and the United States. Sales distribution is 20% within Canada and 80% to the US. Work force is just under 5,000.
The Timber Ridge Credit Union (TRCU) operates 3 branches in the town serving the surrounding communities (population 23,250). TRCU is the predominant retail and commercial financial institution with over $2.0 billion in loans outstanding related to residential mortgages, personal lines of credit and business loans.
As part of the US Federal Government’s shift in trade policy, soft wood lumber tariffs have been proposed on products originating in Canada to a level that ongoing profitable export to 80% of Fastlink Timber Mills US clients is in question.
Provide a description of the current and potential risks affecting TRCU as a result of any disruption to US exports. Include in the description how earnings, capital, liquidity, treasury and operational functions at TRCU will be impacted. Also provide possible risk mitigation considerations for discussion with TRCU management.
Stonebridge Credit Union
Balance Sheet
December 31
(‘000)
2017
2016
Assets
Cash Resources (note 1)
86,743
135,222
Investments (note 2)
247,378
255,458
Member Loans (note 3)
2,425,612
2,064,405
Property & Equipment
11,168
12,437
Other
6,953
8,812
2,777,854
2,476,334
Liabilities and Equity
Member Deposit s (note 4)
2,027,463
1,868,667
Securitizations
535,709
434,559
Borrowing (note 5)
34,500
—
Payables
8,052
6,756
Other Liabilities
4,094
8,799
Equity Shares
82,023
84,256
Retained Earnings
85,013
73,297
2,777,854
2,476,334
Stonebridge Credit Union
Statement of Profit and Loss and Retained Earnings
December 31
(‘000)
2017 2016
Interest Income
Interest on Member Loans
89,613
84,559
Other Interest
3,978
3,194
93,591
87,753
Interest Expense
Interest on Member Deposits
36,745
35,424
Borrowing & Securitization
8,786
7,149
45,531
42,573
Net Interest Income
48,060
45,180
Other Income
8,650
7,386
Net Interest & Other Income
56,710
52,566
Provision for credit losses
(417)
2,363
Operating Expenses
38,896
36,984
Patronage Return
1,179
1,164
Income Taxes
4,079
(815)
Net Income Attributable to Members
12,973
12,870
Retained Earnings, beginning of year
73,297
60,427
Retained Earnings, end of year
85,013
73,297
Notes to the Financial Statements
Note 1 Cash Resources
2017
2016
Cash
42,237
27,963
Deposit maturing within 3 months
Schedule 1 Bank
17,420
35,003
Central 1
27,086
72,256
86,743
135,222
Note 2 Investments
2017
2016
Central 1 Reserve Deposit
153,917
141,913
T-bills & BAs
9,565
76,795
Central 1 Discount Deposit
23,040
24,052
Mortgage Backed Securities
41,631
—
Fair Value Adjustments
19,225
12,698
247,378
255,458
Note 3 Member Loans
2017
2016
Residential Mortgages
Uninsured
824,944
583,593
Insured by CMHC
72,662
46,194
Insured by Genworth or Canada Guaranty
537,986
499,606
Personal Loans
13,576
13,779
Commercial Loans
972,901
923,676
Fees & Allowances for Credit Losses
3,543
(2,443)
Net Loans to Members
2,425,612
2,064,405
Note 4 Member Deposits
2017
2016
Demand Deposits
627,479
495,641
Term Deposits
801,803
820,801
Registered Deposits
536,589
515,425
Foreign Currency Deposits
46,352
21,120
Accrued Interest payable
16,481
17,029
Unamortized broker fees
(1,241)
(1,349)
2,027,463
1,868,667
Note 5 Borrowing (O/S balances)
2017
2016
Line of Credit with a Schedule 1 Bank
—
—
Central 1
12,000
—
Desjardin
22,500
—
34,500
—
