Question 1 (40 Marks)
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 | — | |