Question 1 (40 Marks)
Please review the financial statements for Stonebridge Credit Union and answer the following questions:
a) Identify and briefly outline your concerns with this credit union (18 marks);
b) 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);
c) 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 / risk. (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. The Timber Ridge Credit Union (TRCU) has three locations in the town, all of which serve the areas in the immediate vicinity (population 23,250). With more than $2.0 billion in outstanding loans relating to home mortgages, personal lines of credit, and business loans, TRCU is the preeminent retail and commercial financial institution in the area.
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 —
